In an effort to sustain economic growth, the Philippine government is turning to infrastructure development with its bold P9 trillion “Build, Build, Build” program. The buildup is expected to bolster job creation and address constraints in mobility and connectivity.
Gridlock in Metro Manila cost the capital region an estimated P3.5 billion in lost productivity per day in 2017, according to JICA. Congestion reduces quality of life by entrapping millions of residents in time-wasting black holes. In the countryside, the archipelagic nature of the country limits ground, sea, and air connectivity, costing missed economic opportunities to address poverty.
The outlook is promising. In what is a rare, opportune occasion in Philippine history, the massive undertaking of Build, Build, Build is being pursued when it’s needed most, and when the nation’s fiscal position is healthy enough to help support it.
The Philippines has recently embarked on two of its largest projects yet—a 38-kilometer stretch of train tracks and an overhaul of Manila’s Metro Rail 3. As with all projects, they are backed by a mix of tax revenues, sovereign bond issuances, official development assistance (ODA), foreign and domestic loans, and public-private partnerships (PPPs).
The government scored a critical victory when it enacted the first package of its landmark Tax Reform for Acceleration and Inclusion Act this year in a bid to raise around P786 billion in additional revenues over five years, 70 percent of which will be allocated to infrastructure development. The Philippines also secured P389 million in credit and pledges from China and another P480 million from Japan.
To support the infrastructure agenda, other kinds of investments need to be considered. Beyond the money, some of the most important investments to be made now are soft ones to strengthen policies and institutions. As project pipelines and capital needs expand, the Philippines will increasingly require a more conducive environment to infrastructure investment from a very liquid private sector.
Broadly, this entails having a clear, long-term vision for infrastructure development and a cohesive plan with national and local stakeholders on board. For this plan to be effective, it needs to be binding—transcending the six-year term that a single administration holds, and carrying a nonpartisan, long-term mandate.
Second, an ideal implementation framework addresses investor concerns on transparency, investor asset ownership, right-of-way, and fairness. Predictability helps build investor confidence. This means that the enforcement of contracts awarded in transparent, competitive processes needs to be respected and protected from undue interference from any branch or level of government.
Investors also appreciate consistency and clarity of plans – both regarding the strategy for high-profile assets (e.g., the overall airport strategy for Metro Manila) and the method of implementing projects through competitive bidding, whether proposals are solicited or unsolicited, and whether they are from foreign contractors participating in an ODA project.
Encouraging competition and maintaining a level playing field will ensure the government gets the most bang for its buck, while potentially lowering user fees and improving the quality of services. It is therefore important to foster genuine competition within the private sector for infrastructure development.
Third, continue improving our procurement processes. Beyond standardizing contracts and permits, the key challenge is finding the right balance between the speed of implementation and maximizing value for money. For example, concerns regarding the glacial pace of project approval and cumbersome procurement steps under the PPP framework need to be addressed by reforming these very rules and processes, and not by totally abandoning the framework as a viable method of implementation.
Procurement laws are worth revisiting. The practice of doing preventive maintenance is painfully restrictive in the public sector, and so are rules mandating the purchase of the least-cost instead of the best-value products. Again, finding the balance between prudence and value in making infrastructure investments is key.
Fourth, private capital isn’t enough by itself. Private expertise and skills are critical to the delivery of better quality public goods and services. By enhancing PPP frameworks, for example, the country can better facilitate the transfer of private-sector expertise, management, and technology to the public sector.
Beyond training and exposure, exceptions to the Salary Standardization Law for highly technical positions in government should be explored, as it only makes sense to incentivize talent in the public sector commensurate with the private sector. With these exceptions, the ability of government agencies to package and execute big projects can be improved over time.
Fifth, look at financial tools to attract private-sector investment and participation in the infrastructure push. These can include providing better fiscal incentives such as government funding for canceled or delayed projects, as well as credit enhancements for the private-sector undertaking of development risks.
These are some of the initial insights the Milken Institute gathered from a workshop on infrastructure finance with stakeholders. The government is acting on initiatives that address them.
For the infrastructure program to succeed, the private sector and civil society need to collaborate on these opportunities in a proactive and constructive manner.
Hard and soft investments go hand in hand with building a path towards a golden age of infrastructure development. As the Philippines carries on with these ambitious plans, there is no better time to build, build, build better policy and stronger institutions than now.
*Cesar Purisima is an Asia Fellow at the Milken Institute. He previously served as the Philippines secretary of finance and secretary of trade and industry. Caitlin MacLean is the senior director of innovative finance at the Milken Institute.