Woeful infrastructure

In a previous column, I mentioned that we made a study and conducted a workshop on the barriers to the entry of foreign investments in the Philippines. I’ll expound further on one topic we took up—infrastructure—and our recommendations on how to get more investments into the sector.

All of the presidential candidates with any chance of winning declare they’ll lift the masses from poverty if they are elected, without stating exactly how they are going to do it. Here’s a real poverty-busting policy they should unreservedly commit to—spend on infrastructure.

The Philippines is not just in a state of power crisis, or water crisis, it’s in a state of infrastructure crisis. It is not just the blackouts and lack of water the next president should worry about. It’s everything else—deteriorating roads, major railways not being built, a nautical highway that has one of the world’s worst safety record (more than 200 maritime accidents every year), and an international airport that is a national embarrassment—to put it mildly. And one that’s been so for eight long, unnecessary years (anyone who has traveled abroad know what I am talking about).

The 2009 Global Competitiveness Report published by the World Economic Forum ranks the Philippines 98th out of 133 countries in terms of quality and quantity of infrastructure. The Philippines’ ranking was the second worst in the Southeast Asian region, faring better only when compared to Timor Leste. Even Cambodia, which had a per capita of $602 in 2007 compared to the Philippines’ $1,624 has a higher infrastructure ranking.

The water supply and sanitation sector continues to be hampered by water supply interruptions, significant water pressure fluctuations, and poor quality of drinking water. Metro Manila’s water supply is also highly vulnerable to El Niño, thanks to the lack of alternative sources other than Angat Dam.

Less than 50 percent of the country’s roads are in good condition, and only 10 percent of the Philippines’ total road length are paved. Existing road networks are plagued by high levels of congestion, inadequate connectivity, and lack of maintenance.

The government is boasting near 100 percent nationwide electrification coverage, yet many households live in the dark with candles and oil lamps so I don’t know where they get the “almost 100 percent”. The country’s electric transmission and distribution network suffers from high levels of system losses and technical inefficiency. And the Philippines has one of the highest electricity prices in Asia.

Over the past 5 years, spending on infrastructure was less than 3 percent of the gross domestic product, but the World Bank estimates that the Philippines needs to be spending at least 5 percent of GDP just to rehabilitate and modernized existing facilities. To catch up with the infrastructure spending of our Southeast Asian neighbors, we would need to spend at least 9.5 percent per year. The less than 3 percent spending is insufficient to maintain existing assets let alone provide for new projects.

The government has plans to increase infrastructure spending. In the National Economic and Development Authority’s (NEDA) Comprehensive Integrated Infrastructure Program for 2009-2014, the government plans to pursue various projects amounting to P3.4 billion or about 6.5 percent of GDP over the next 6 years. But if history is any guide, most of this planned spending won’t happen. The government simply does not have the money. In large part because of low tax collection efficiency and too much corruption. And the regulatory environment is just too risky for private investors in infrastructure.

In 1990, private sector investments in the infrastructure sector amounted to $68 million. This rose to $12.7 billion in 1997 and reached 6 percent of GDP in 1998. But by 2008, private investment in infrastructure fell to just 2 percent of GDP or $3.2 billion. These numbers showed the lack of investor confidence and is manifested in the difficulty of the government in trying to sell its power assets as part of the reform efforts in the Electric Power Industry Reform Act. The government also can’t get more investors to build power plants, even though the gap in demand indicates great opportunity.

A business sector unwilling to put up new business when economics clearly shows potential profit is a telltale sign that a country has reached rock bottom in terms of attractiveness to investors. If the next president is really serious about ending poverty, he should have a clear policy on how to re-build investor confidence. Especially for build-operate-transfer projects that investors have lost interest in. Thanks largely to what happened to BOT projects such as NAIA-3 and MRT-3, and the forced re-negotiation of power contracts in 2002.

You build investor confidence by taking down the barriers to investments we have identified in our research: the Behind-the-Border-Barriers (BBBs) of corruption, contract sanctity violation, Supreme Court decisions against business, arbitrary interpretation of government regulations, etc.; and addressing industry specific barriers such as the restriction on foreign investments in ownership and management of public utilities.

We’re not saying that once we take down these barriers, investments in infrastructure will immediately increase. Yes, interest will revive but it must be accompanied by reforms like (1) implementing a vigorous and credible fiscal reform program; (2) amending the BOT law to address problems with unsolicited proposals; (3) providing incentives and technical assistance to local government units to raise more revenues and improve performance; (4) strengthening and re-orienting agencies such as National Economic and Development Authority, the Department of Finance, the Department of Budget and Management, and inter-departmental committees to improve planning, prioritization, and monitoring of national government resources; and (5) implementing an adequate and stable institutional, legal and regulatory framework for infrastructure investments.

Private proponents must be provided with an appropriate set of incentives for investments, and among the most important incentives is the assurance that policies are consistent, fair and not changed on a whim.

Budding infrastructure is a challenge. Our estimates show that annual infrastructure spending of at least 5 percent of GDP translates into P462 billion or $9.6 billion in investments per annum, and at a more desirable 9.5 percent an estimated P712 billion ($16 billion). And unless government can massively clean up its act and generate these funds (an unlikely scenario) the bulk of this will have to come from the private sector. The Filipino companies involved have done a pretty good job but will have difficulty in raising capital of this magnitude, so foreign capital will be needed. But will it come? How will a new president revive confidence that his government will act fairly and honestly?

This is the challenge to the presidential candidates: investor confidence has been lost, how will you get it back, what will you do? –Peter Wallace, Manila Standard Today

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