Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Infrastructure President (Part 1)

           Given the enormous requirements for infrastructures in the next six years, it would not be an exaggeration to expect President Rody Duterte to be remembered by posterity as the Infrastructure President.  Together with a bigger inflow of Foreign Direct Investments (FDIs), massive investments in infrastructures can make the difference between the mediocre 6 to 7 percent that we have been experiencing over the last five years and the 8 to 10 percent annual growth that China and other tiger economies of the past had been able to register as they were in the same stage of development in which we are today.  As I have written many times, although 6 to 7 percent may seem impressive given the slowdown in global growth today, such an increase is highly insufficient for us to generate the needed resources to liberate 25 million Filipinos from abject poverty.  Only an 8 to 10 percent growth together with the appropriate state intervention in the development of agriculture, basic education, health services and public utilities in the rural areas (where 75 percent of the poor are) will enable us to achieve sustainable and inclusive growth.

          To help the Duterte Cabinet, especially those occupying the DPWH and DOT portfolios, I am working with an informal group headed by Dr. Ricardo Barcelona, a top financial executive and energy expert (he heads an Energy Research Institute in one of the leading business schools of Europe), to come out with a road map for this challenge of infrastructure development over the next six years.  We have identified the five major areas where poor infrastructures inhibit economic growth:

          1.  Urban congestion that causes serious traffic jams, particularly in Metro Manila, Cebu and similar major urban centers.  Lost hours impact productivity and increases socio-economic costs to commuters.

          2.  Slow internet speed and poor communications systems, while not yet impairing the growth of business processing outsourcing (BPOs), could limit the development of higher-value IT-enabled services.

          3. Weak power distribution systems that result in high distribution losses, financially weak electric cooperatives, and high power prices.  Consequently, manufacturing and development of industries are constrained by high power costs.

           4. Poor and inefficient logistics and interconnectivity that push up freight rates and prices, isolate communities because of poor farm-to-market roads, and result in under-developed regions that are unable to develop their full potentials as food producers and tourism destinations.

          5. Unreliable access to potable water impacts health and livelihood in rural areas. 

          From the experiences of the outgoing Administration, many of these problems arise from poor execution and inactions by the government.  In 2015 alone, 35 percent of the budget for infrastructure spending was not disbursed.  On the other hand, the Philippine financial market is experiencing excess liquidity and low interest rates.  Longer duration financing is readily available making it possible to fund large capital investments such as infrastructures.  This is very visible in the numerous power plants that are being financed by private capital.  If we can accelerate economic growth to 8 to 10%, the demand for infrastructures, such as communications, transportation, power and water is secured.  There is ample evidence among the nations that have preceded us in attaining sustainable and inclusive growth that the supply of modern infrastructures is the principal constraint to achieving higher GDP growth.  This combination of poor infrastructures, secure demand because of a growing economy, and favorable funding environment, converts the problem of underdeveloped infrastructures into an opportunity for government to tap into private investments for the solution.

          By 2022, we should have infrastructures that are sufficiently modernized to allow us to compete with our peers in the ASEAN.  This means that major regional centers, especially in Mindanao that is the nation’s food basket, are interconnected; communications systems and services are fast and reliable; there are secure energy and water supplies and decongestion in urban centers.  These can be achieved if we allocate a minimum of 5 percent of GDP yearly to infrastructure modernization, with an option to increase to 7 percent, given our demonstrated ability to keep our fiscal deficit at much less than 4 percent of GDP annually.  In annual spending, this is estimated at about $14.2 billion to $19.88 billion annually.  These amounts can be generated by the increase of GDP growth from the 6 to 7 percent in the recent past to the 8 to10 percent targeted growth for the next six years.  The value of closing the growth gaps is estimated at $8.5 billion to $11.36 billion (our current GDP is $284 billion).  The yearly required investments in infrastructures of $14.2 billion to $19.88 billion are equivalent to two years worth of foregone GDP.  It follows that infrastructure investments can pay for themselves.

          To achieve infrastructure modernization, the following flagship programs must be put in place:

          1.  Roads, rail, maritime and air transport upgrades:  Major regional centers are interconnected through building of ports and airports in growth areas and global markets, with extensive farm-to-market roads integrated with provincial road-building programs.

          2.  Access and interconnectivity enhanced:  Upgraded infrastructures reduce bottlenecks, reduce urban congestion by creating alternative growth centers to Metro Manila, and increased migration to regions with the rise of regional economies.  These would prepare the nation to a possible move towards a federal form of Government.

          3.  Cyber highway to raise internet speed to ASEAN levels:  A broadband network is built as the communications backbone using fiber optics and advanced technologies.

          4.  Electricity and water distribution rationalized:  isolated systems or grids, are interconnected nationally, thereby providing flexibility to rebalance supplies, and expanded access to safe and potable water supplies.

          The government focuses on regulation, permitting and rights of way, and as investor in missionary or rural areas.  Private investment is relied upon to provide project management, operations, and capital in exchange for just rewards to compensate their risk-taking in regions and sectors that can attract private capital.  As a preferred approach, the government relies on build-operate-transfer (BOT) scheme under Swiss challenge.  This approach has the advantages of expanding private capital participation, deploying private sector capabilities in project and operational management, and allows government to focus on regulation and facilitate resolving bureaucratic obstacles that infrastructure projects normally encounter.  (To be continued.)