Jun 16, 2013

Philippines - On sustaining growth, poor infrastructure

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Can the Philippines sustain strong growth while underspending in public infrastructure? Impossible.

Rated as having the poorest, or at least second poorest, state of public infrastructure in the ASEAN-5 region, the Philippines has to spend more than half a trillion pesos annually for public infrastructure in the next few years.

The Philippine public infrastructure -- airports, seaports, highways, power plants, water systems, irrigation facilities, school buildings, and so on -- is bursting at the seams. It has failed to cope with the rapidly growing population, increasing urbanization, and rising demand for public services brought about partly by rising incomes of families of overseas Filipino workers.

Metro Manila urban dwellers have to deal with this brutal reality on a daily basis. Commuters are caught in massive traffic gridlock as they travel from their homes to their places of work and back. In the meantime, the number of new cars, both legitimately purchased and smuggled, kept on multiplying. Yet, the stock of urban roads remained the same.

As the President and the Executive Department analyze to death the situation in search of a permanent solution, one gets the feeling that things are going to get worse before they get better.

Yes, the country has achieved investment grade status. Yet, the flow of foreign direct investments (FDIs) has remained low and spotty. In fact, FDI inflows fell in March 2013 compared to March last year.

The inconvenient truth is that the Philippines has remained uncompetitive with the rest of its ASEAN-5 peers.

For one, the Philippines’ state of public infrastructure has been rated the poorest or if not second to the poorest. It has lagged behind Malaysia, Indonesia, Thailand, and, occasionally, Vietnam, in terms of the quality of its road network, airports, sea ports, and power supply.

I’ve done a lot of traveling lately, and I’ve experienced the poor state of public infrastructure first hand. In Mindanao, the dwindling power supply has sapped its economic dynamism. Inadequate and uncertain power supply is the island’s most serious problem. One can’t have rapid economic growth without sufficient and reliable power supply, and to think that Mindanao accounts for about 40% of total national agricultural output.

Sadly, Mindanao has yet to recover from the killer typhoon Pablo which devastated a large part of the region in early December of 2012. Climate change has altered the future of Mindanao. Before, the island had been immune from harsh weather disturbances. Lately, it has been visited by harsh typhoons which led to severe floods in urban and rural communities.

On a national scale, the government’s energy development plan suggests that about 600 MW of new power supply capacity is needed to support the 6% to 7% growth target. But what’s the government doing about this?

The air transport system is in an epic mess. The airport facilities are inadequate. Let’s start with the nation’s premier airport -- the Ninoy Aquino International Airport(NAIA) Terminal One. It’s crowded, its comfort rooms are poorly maintained, and its air-conditioning system is down most of the time. Not surprisingly, it’s been rated as one of the worst airports in the world.

The failure to resolve the legal disputes associated with NAIA 3, after four presidents, is a monumental case of bureaucratic inefficiency. As far as foreign investors are concerned, NAIA-3 is the symbol of what’s wrong in this country.

After three years in office, President Aquino should have a clear and feasible plan on what to do with the three unconnected airports in Manila and the one in Clark. If such a plan exists, it would help if an official announcement from the Palace can be made as soon as possible.

The deteriorating state of airports is not limited to Metro Manila. This is partly because of the increasing air traffic and the government’s failure to meet the increasing demand for airport facilities.

What new airport has the Aquino administration initiated and completed? The Iloilo International Airport was initiated by Mr. Estrada (one of those funded under the Obuchi Plan), but was completed under Mrs. Arroyo’s watch. The Laguindingan International Airport in Cagayan de Oro was also initiated by Mr. Estrada under the Obuchi Plan, was completed recently, but has yet to open.

The increase in air traffic is not hard to explain. Traveling by air has become less expensive compared to traveling by sea. The growing unattractiveness of sea versus air travel is due to the weak regulatory framework and the non-competitive characteristic of the sea transport industry. For example, a ferry ride from Cebu to Bohol is more expensive that a budget air fare from Cebu to Manila.

Except for a few ports, the state of port facilities has worsened.

In the meantime, the demand for air travel has grown with the rising population and increasing wealth of many Filipinos, partly due to the rising OFW remittances.

The government has failed to keep up with the rising demand for air transport. This has resulted in delayed and worst, cancelled, trips. The air commuters are mad. They have the right to ask what is the government doing to improve air transport facilities. And they also have the right to ask: Where have all the airport fees gone?

All these suggest that the government has to invest more heavily in public infrastructure -- not only to make up for past neglect but to build for the future. The best time, and relatively less expensive way, to build is when the right-of-way (ROW) acquisition is cheap; the worst time is when houses, businesses, and permanent structures have already been established along the ROW properties.

In this sense, I wonder why C-6, the proposed highway that passes through the fringes of Laguna de Bay, and which links the South to the North without going through EDSA and C-5, has yet to be started? By the way, C-5 which was planned during the Marcos years, was prematurely opened during the final days of the Ramos regime, yet to date has remained unfinished.

After two years of underspending for public infrastructure, the Aquino administration has set aside some 3% of gross domestic product (GDP) for public capital formation in 2013. That’s a pittance.

If President Aquino is serious in achieving strong, sustainable and inclusive growth, he has to spend more for public infrastructure now. No doubt, the incremental spending for public infrastructure will increase the deficit-to-GDP ratio by one percentage point. But not to worry -- it is money well spent not only for the present but also for the future.

Benjamin Diokno

Business & Investment Opportunities Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Health care and Life Science with expertise in ASEAN 's area. We are currently changing the platform of www.yourvietnamexpert.com, if any request, please, contact directly Dr Christian SIODMAK, business strategist, owner and CEO of SBC at christian.siodmak@gmail.com. Many thanks.

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