Business World, 15 March 2016


The overall state of public infrastructure in the Philippines is dismal. The World Bank and the World Economic Forum ranked the Philippines as the worst among ASEAN-5 economies in terms of overall state of public infrastructure — road network, airports, seaports, railroads, telecommunications, power, and others.

Among 144 economies, the World Economic Forum (WEF) ranked the Philippines 95th in terms of overall infrastructure. Singapore was ranked 5th, Malaysia 20th, Indonesia 72nd and Thailand 76th.

The Philippines’ airports are horrendous. In terms of the quality of air transport infrastructure, the Philippines ranked 108th, Singapore ranked first, Malaysia ranked 19th, Thailand 37th and Indonesia 108th.

What happened? It’s a truism that it is not possible to produce something out of nothing. And it’s a fact that all post-EDSA 1 presidents, including the incumbent, have underinvested in public infrastructure.

Given the current state of public infrastructure, the Philippine government should strive to spend a minimum of 5.0% of GDP for public infrastructure annually for the next 10 years.

But from the first Aquino administration to the second Aquino administration, the country invested, on average, 2.3% of gross domestic product (GDP) for ‘public infrastructure and other capital outlays (OCO)’.

The term ‘public infrastructure and other capital outlays’ overstates slightly the level of infrastructure spending as percent of GDP. This expanded category of expenditures includes other items such as motor vehicles (for civilian, military, and police), military aircraft and naval ships, fire trucks, office buildings, and equipment as so on. Strictly speaking, public infrastructure expenditures are those that increase the capacity of the economy to grow.

But certainly the impact on the economy of higher spending for military hardware (aircraft or naval ship) is different from say constructing a new line of urban railway system or new airport. The impact on the economy of a mammoth government building is different from constructing better ports that would connect the country’s more than 7,000 islands.

In the first Aquino administration, public infrastructure as percent of GDP was only 2.2%. But public infrastructure spending was constrained at that time. The tax effort, defined as taxes as percent of GDP, was low during the first half of Mrs. Aquino’s term. At that time, the 1986 tax reform program has yet to generate more resources.

The focus of the first Aquino regime was fiscal stability since more than half of the national budget goes to servicing the huge inherited public debt. This was exacerbated by the high costs of financing the budget: foreign and domestic costs of borrowing money to finance public infrastructure were extremely high.

Fast forward: the performance of the second Aquino administration was a major disappointment. The low infrastructure spending of his predecessors has made the substandard state of public infrastructure a major binding constraint for future fast, sustainable growth.

Worse, President Aquino III failed to move forward whatever plan he has to make up for past neglect at a time when global and domestic interest rates were at rock-bottom levels.

The London interbank (LIBOR) rate averaged 0.5% from 2011-14, compared to 7.1% during the first Aquino term; the 364-day Treasury bill rate averaged 1.7% from 2011-2014, compared to 18.8% during the first Aquino term.

With foreign and domestic interest rates so low, and with low public debt-to-GDP ratio, financing socially worthwhile public infrastructure projects is a no-brainer. Mr. Aquino failed to tap cheap loans to finance the government’s infrastructure program. What a major missed opportunity!

Mr. Aquino’s flagship program — the public-private partnership (PPP) — is a major failure. Only three of some 50 PPP projects are likely to be completed before he exits from Malacañang, and these three projects are the least costly of all identified PPP projects.

Why didn’t Mr. Aquino move forward relentlessly to elevate the Philippine state of infrastructure at a competitive level?

Is it the poor absorptive capacity of the bureaucracy? Is it Mr. Aquino’s incompetent Cabinet men and women? Is it the fear of making mistakes that would lead them to ending behind bars, or expensive legal cases, after the end of Mr. Aquino’s term? Is it poor budgeting practice which involve putting in the President’s annual budget projects that are not ready yet for implementation (President Ramos calls these projects with no completed staff work (CSW)? Or, is it all of the above?

There are many lessons to be learned from the errors and bumbling of the present administration. But I’ll have more on these next time.