Infrastructure — boom or bust?
August 4, 2011 at 08:03
This is an article repost.
The state of Philippine public infrastructure is dismal and deteriorating. The country ranked 57 out of 59 countries covered in the recent IMD International Competitiveness Yearbook 2011, a notch lower than the year before. In the last 10 years, actual spending for public infrastructure, as percent of GDP, was less than half the benchmark set by the World Bank.
A World Bank report estimates that “middle income countries in East Asia will, on average, need to spend over 5% of GDP on infrastructure to meet their needs.” But for the last 10 years, public spending for hard infrastructure averaged less than 2.5% of GDP.
“We aim to attain that benchmark,” wrote President Aquino in his 2012 President’s Budget Message (p. 36). But what’s the real score?
The total public sector infrastructure budget — the sum of the infrastructure budgets of the national government, public corporate sector and local government — as percent of GDP was 2.54% in 2010, estimated at 2.33% in 2011, and proposed to be 2.41% in 2012. But that’s not even half of the benchmark!
The proposed budget for DPWH will increase from P95.0 billion this year to 109.4 billion next, or by 15.1%. But this came after a sharp decline from P131.3 billion in 2009 to P95.0 this year, or by -27.6%. The infrastructure budget for the Department of Agriculture will nearly double from P20.4 billion this year to P38.8 billion next year. The budget for school buildings and other facilities for the Department of Education will rise from P12.7 billion this year to P19.0 billion next year, or by 49.1%.
Yet, one gets the sense that the actual spending numbers may be overstated — if one takes into account the part of the infrastructure budget that is stolen, and the flawed project selection process that put a higher premium on politics rather than economics, and one that favors highly visible projects with low social benefits to low-visible ones with high social benefits.
How much of the funds appropriated for public infrastructure has been spent for real construction and how much has been lost through corruption? Actual figures are hard to come by. But anecdotal evidence suggests that, in recent years, the proportion lost through corrupt practices was large and rising.
Here’s another source of overstatement. A big chunk of the total infrastructure budget is attributed to the 20% share of local governments from internal revenue allotment (IRA). The Local Government Code of 1991 provides that 20% of the IRA shall be spent by local governments — provinces, cities, municipalities, and barangays — for development projects.
This IRA share for development projects is sizable. For 2010 it was equivalent to P53.1 billion; for 2011, P57.4 billion; and for 2012, P 54.7 billion.
In practice, a big part of the 20% IRA share for economic development goes to construction of local government capitols, beautification of the public plaza, and other “soft” projects. These projects are not public investment in a real sense, since they do not necessarily expand the productive capacity of the economy.
If the contribution of local government units to public infrastructure is netted out, the public infrastructure spending as percent of GDP for 2010, 2011 and 2012 will be 1.94%, 1.75%, and 1.92%, respectively.
To be fair, Interior and Local Government Secretary Robredo has acted to limit the misuse of the 20% IRA fund for development projects. Last December 2010, Robredo issued Memorandum Circular 2010-138 enjoining local chief executives and councilmen to use the 20% IRA fund for “meaningful and rooted development.”
Local officials are enjoined not to use the fund for the following: administrative expenses such as cash gifts, bonuses, food allowance, medical assistance, uniforms, supplies, meetings, communication, water and light, petroleum products and the like; salaries, wages or overtime pay; traveling expenses, whether domestic or foreign; registration or participating fees in training, seminars, conferences or conventions; construction, repair or refinishing of administrative offices; purchase of administrative office furniture, fixtures, equipment or appliances; and purchase, maintenance or repair of motor vehicles or motorcycles, except ambulances.
This long negative list of expenditure items suggests the extent of abuses in the past in the use of the 20% IRA fund. DILG’s initiative to limit the use of the fund should be welcomed. Its effectiveness remains to be seen, however.
The Aquino administration’s aspirational goal of 7 to 8% growth is contingent on its ability to close the infrastructure gap. But that task is formidable, though not impossible.
The Philippines is starting with a huge handicap: our ASEAN-5 counterparts have far superior infrastructure; worse, they are outspending us in infrastructure development.
The consensus benchmark for public infrastructure is 5% of GDP. That is equivalent to P560 billion annually. Now the 2012 proposed total public infrastructure program, assuming that the 20% IRA will be totally dedicated to “hard” infrastructure, is P269.9 billion — slightly less than half of the benchmark level.
The optimists might say that the difference between the benchmark level and what has been appropriated in the 2012 budget would be made up by projects financed through public-private partnership (PPP) arrangements. Really now?
The stark reality is that none of the 10 PPP projects announced in 2010 for implementation in 2011 has taken off the ground — and none is expected to break ground before the end of the year. But can we look forward to a better performance in 2012?
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By: Benjamin E. Diokno
Source: Business World, Aug. 3, 2011
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