Business World, 14 February 2012


The government’s failure to spend about two-thirds of it public infrastructure budget last year has been partly to blame for the economy’s disappointing economic growth — 3.7%, down from 7.6% in 2010. The final 2011 national government cash disbursement outcomes have yet to be released, but once released, they would demonstrate the slow pace of public construction last year.

Actual public spending in the final quarter of 2011 might even be “overstated,” masking the size of government’s failure to implement authorized infrastructure projects. The surge in spending in the fourth quarter did not all go to hard infrastructure; a big chunk went to unplanned but quick-disbursing financial support to Land Bank, key public housing agencies, and favored local governments.

Total public infrastructure program was P165 billion in 2010, an election year. This was reduced to P145 billion in 2011, the first full year under President Aquino III. Hence, under the best possible scenario, that is, assuming that funds were fully released and projects fully completed, the contribution of public construction to national output would still be negative.

But, in fact, a big part of the 2011 public infrastructure program was not completed; part of which was frozen, not funded and not started. I estimate that only about one-third of the total infrastructure has been funded, started, completed and paid for in 2011. That’s P47.2 billion, which means about P97.8 billion will be funded, completed and paid for in 2012.

This explains why public construction plunged by 26.9% in 2011. Think of the foregone output from construction and related activities. Think of the jobs not created. These are the opportunity costs of frugality.

The positive spin is that the long delays in project implementation was due to the review process and the task of making future projects graft-free. Accepted, but cleaning up the list of projects and clearing up the rules shouldn’t take more than a year.

Can the Aquino III administration guarantee graft-free project implementation from here on? That remains to be seen. Some large, legitimate contractors remain skeptical; some continue to avoid working with the government like a plague.

The economy faces formidable challenges this year. Consumers will continue to spend cautiously because of high unemployment and uncertain future. Private investors will continue to postpone future expansion for as long as plant capacity remains under-utilized. Exports will continue to sputter as the global economy struggles. Unavoidably, the task of perking up the economy rests with the government.


The government has to ramp up public infrastructure spending. It should learn from its past mistakes (overly optimistic growth forecast, underspending). And apparently it did. The President asked, and Congress agreed, to raise total infrastructure spending to P182 billion this year. Not big enough but better than another year of spending compression. Add to this the unspent capital budget of P97.8 billion last year, and that would bring the total infrastructure program this year to P280 billion.

But is P280 billion sizable enough to move the economy forward? If the government were able to execute the projects — completed rather than authority to spend released — within the next two quarters, then it could make a difference. How big a difference? Probably small rather than big: P280 billion is only 2.5% of planned GDP (P11.0 trillion).

Here are three reasons why public construction may not have the big impact on economic activity as what government planning authorities would like us to believe. First, the likelihood that all projects will be completed during the first half of the year is nil. Public works authorities claim that 80% of the public works budget has been released. But there is a huge difference between budget released and project completed. Nonetheless, this is a big improvement compared to last year’s performance.


Second, the boost in public sector spending is likely to be offset by a slowing private construction. But public construction accounts for about one-fifth of total construction. Private construction has started to decelerate. From a vigorous growth rate of 21.6% in the first quarter, slowed to 19.0% in the second quarter, turned negative at -7.8% in the third quarter, and finally to 1.4% in the fourth quarter. A weak private construction, which accounts for four-fifths of total construction, could easily offset a strong public construction.

Third, actual implementation will depend on the behavior of fiscal authorities in the event of a revenue shortfall? This scenario is not far-fetched. Revenue collections might be lower than target if the economy grew at less than planned levels (5.5 to 6.5%) and if the reforms at the Bureau of Customs do not take roots.

How would fiscal authorities behave if actual revenues lag behind the official revenue targets and the prospect of a deficit in excess of P300 billion looms? Will the budget authorities stick to the expanded infrastructure spending program and accept a bigger deficit? Or will they start calibrating budget releases to meet their self-imposed deficit target of P286 billion (roughly 2.6% of GDP)?

In a conflict between those who advocate strict adherence to a smaller deficit and those who advocate inclusive growth and investing for the future, my own guess is that the fiscal conservatives would prevail. But I would be glad to be proven wrong.