Fiscal myopia

But not only is the government under-funding public infrastructure, what little amount has been authorized for public infrastructure spending is not implemented on time. Last year, clearly a much better year than 2011, only about half of the “hard” infrastructure budget has been disbursed as of end-November 2012.

Now, the government is making another promise. The government is keen on hiking infrastructure spending to ₱698 billion or 5% of gross domestic product (GDP) in 2016, according to NEDA Deputy Director-General Rolando Tungpalan in his presentation at the Arangkada Philippines Forum on Tuesday, Feb. 26. Seriously? Why in 2016 and not now?

A promise is less credible when it is supposed to be delivered on one’s final days. By then the citizens would be looking forward to the incoming president. The promises of the outgoing one would soon be forgotten.

MISSING SENSE OF URGENCY
In an attempt to rationalize the slow pace of project identification and implementation, Tungpalan said: “We need to strengthen our planning and implementation. What agencies do throughout the year is carry on what they think are ready-to-go products unmindful of their synergy.”

“We need to adopt a coherent transport road map. We will pursue institutional and policy reform in policy development and implementation. After this, the most important step is to fast-track implementation,” he added.

Good grief! What has NEDA done during the past half century? Where’s this administration’s sense of urgency?

We need to spend the equivalent of 5% of GDP for public infrastructure now because we’re already way behind our Asian neighbors, and because that’s what the economy needs to sustain growth. We need higher spending for public infrastructure now so more jobs can be created, helping ease the worsening joblessness problem.

We need to build roads and bridges now so links between the farms and the marketplace can be established sooner rather than later. We need to build school buildings now because the shortage of classrooms has reached crisis proportion, as more children are entering new classes every year. We need to build new and modern airports because the Ninoy Aquino International Airport has become a national disgrace.

The sooner a worthwhile projects is done, the sooner benefits are enjoyed, and the higher its social profitability.

Economists agree that the poor state of public infrastructure has been, and remains to be, a critical constraint to economic growth. The evidence is overwhelming. In the most recent World Economic Forum’s Global Competitiveness Report 2012-2013, the Philippines continues to lag behind its ASEAN-5 neighbors in terms of the supply and quality of public infrastructure.

Of the 144 economies included in the report and among ASEAN-5 countries, Malaysia ranked the highest (30th with a score of 4.97 out of perfect score of 7), followed by Thailand (46th, 4.6), then Indonesia (78th, 3.7), and then Vietnam (95th, 3.3). The Philippines ranked the lowest — 98th with a rating of 3.2.

The Philippines rated poorly in the quality of port infrastructure (ranked 120th out of 144 economies), quality of air transport infrastructure (ranked 112th) and the quality of electricity supply (ranked 98th).

As an island-republic with more than 7,100 islands, the country needs better seaports and infrastructure that links major islands.

As a way to create a lot of decent jobs, policy makers recognize the need to revive the stagnating and shrinking manufacturing industry. But in order to expand factory outputs, there is a need to increase power supply capacity, make electricity less costly and more reliable, and improve the country’s various modes of transportation.

But policy makers should be realistic. Strong and sustained growth can’t be achieved without heavy investment in public infrastructure. Most of the investment in public infrastructure will have to be provided through the public sector budget. Public-private partnership (PPP) initiatives might help, but not in all cases, and certainly not when they are slow-moving.

The fact that PPP projects have not taken off the ground, almost three years after they have been announced, suggests some problems with the rules of engagement and legal policy framework.

INVEST MORE, CHOOSE WELL
In order to make up for past neglect and to create a lot of jobs along the way, the consensus is that the Philippines should invest the equivalent of 5% of GDP. In current pesos, this means ₱487 billion in 2011, ₱528 billion in 2012, and ₱608 billion in 2013. Yet, the total infrastructure budgets for the national government, government corporations, and local governments were ₱233 billion in 2011, ₱258 billion in 2012, and ₱328 billion in 2013.

Our fiscal managers have allocated only about half of what Philippine society needs in order to achieve strong, sustained and inclusive growth.

I realize that the government can’t spend what it doesn’t have. I know that its tax-to-GDP ratio remains mediocre. Revenue generation remains a huge problem. I know that despite the fiscal managers’ brave words, the two major tax collecting agencies — the Bureau of Customs and the Bureau of Internal Revenue — continue to miss their revenue targets.

The harsh reality is that all the talks about having a “robust” fiscal space are delusional. The truth is that fiscal space exists only because: (a) implementing agencies are too slow in using authorized public funds, either because agency heads have low absorptive capacity or they are simply inept, and (b) budget planners refuse to allocate enough resources for essential public needs. I think it’s both (a) and (b).

But the lack of resources now should not be an excuse for not spending enough for public infrastructure. First, the level of budget deficit remains below the manageable level. Another ₱100 to ₱200 billion spending is warranted. Second, the cost of capital is at its historic low. Applying the Golden Rule — invest in projects who’s social rate of return exceed the cost of capital — it makes a lot of sense for economic managers to argue for a bigger public infrastructure budget.

A deficit-to-GDP ratio of 3%, instead of 2%, can easily be justified if the extra ₱100 billion will be disbursed for socially worthwhile project such as for example (C-6 Expressway and Metro Manila Flood Control Master Plan). By the way, the estimated budget for the comprehensive Metro Manila Flood Control Master Plan is ₱352 billion; only ₱15.8 billion was authorized in the 2013 budget. After the Ondoy massive flood, nothing has been done.

I’m not arguing for higher government spending for the sake of more spending. I’m arguing for a greater sense of urgency, a focused, speedier “catch-up” public infrastructure spending plan. The choice of infrastructure projects should be done carefully. Each public infrastructure project chosen should help make the Philippines more competitive when world growth is restored. Each project should satisfy the Golden Rule.

Sadly, while the lack of adequate and reliable public infrastructure has long been identified as a major constraint to growth and investor confidence, the Aquino III administration continues to under-spend for public infrastructure. That’s fiscal myopia.