FINANCING

DR. ALVIN P. ANG

FINANCING
INCLUSIVE
INFRASTRUCTURE
DR. ALVIN P. ANG
 Copyright © 2018 by Albert Del Rosario Institute
for Strategic and International Studies

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Stratbase ADR Institute
The Stratbase Albert del Rosario Institute (ADRi) is an independent international
and strategic research organization with the principal goal of addressing the issues
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Victor Andres “Dindo” C. Manhit

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BOARD OF TRUSTEES
Ambassador Albert del Rosario
was the Secretary of Foreign Affairs of the Philippines from 2011 to 2016. He also served as
Philippine Ambassador to the United States of America from 2001 to 2006.

Manuel V. Pangilinan
is CEO and managing director of First Pacific Company Limited. He is also the chairman of
MPIC, PLDT, Meralco, and Smart Communications, among others.

Edgardo G. Lacson
is an honorary chairman of the Philippine Chamber of Commerce and Industry (PCCI). He
is the Chairman of the Employers Confederation of the Philippines.

Benjamin Philip G. Romualdez

is the former president of the Chamber of Mines of the Philippines.

Ernest Z. Bower
is senior adviser for Southeast Asia at the Center for Strategic and International Studies
(CSIS). He is CEO of BowerGroupAsia (BGA), and a leading expert on Southeast Asia.

Renato C. de Castro, Ph. D

is a full professor of international studies at De La Salle University – Manila (DLSU). He
holds the Charles Lui Chi Keung Professorial Chair in China Studies.

Judge Raul C. Pangalangan, Ph. D

is a judge of the International Criminal Court. He was previously a dean of the University of
the Philippines College of Law and publisher of the Philippine Daily Inquirer.

Epictetus E. Patalinghug, Ph. D

is a professor emeritus at the Cesar E.A. Virata School of Business, University of the
Philippines (UP), Diliman.

Francisco A. Magno, Ph. D

is the executive director of the Jesse M. Robredo Institute of Governance and former
President of the Philippine Political Science Association. He is a professor of political
science at DLSU.

Carlos Primo C. David, Ph. D

is a professor of Geology and Environmental Science in UP Diliman.
 CONTENTS

Executive Summary viii

Introduction 1

The BUILD, BUILD, BUILD PROGRAM 3

Projects under BUILD, BUILD, BUILD 5
Projects under PDP Infrastructure 7

Relating Infrastructure to Inclusivity 8

The Status of Infrastructure Projects 10

Overview of Projects financed via PPP 15
Projects and Programs financed via ODA 19
Analysis on Sustainable Funding Alternatives
for Infrastructure – ODA or PPP? 21

Sustainability of Financing 25

Conclusion 28

References 32

Acknowledgments

About the Author

 EXECUTIVE SUMMARY
The Duterte administration has launched a massive infrastructure program called
the “Build, Build, Build.” This program is expected to put the Philippines closer
in infrastructure capacity with its Southeast Asian neighbors. Moreover, the
infrastructure program is also aimed at improving the connectivity and logistics
efficiency of the archipelago. This program originated from the original 10-point
socio-economic agenda that the administration presented upon assumption in July
2016. One of the elements of the agenda proposes to accelerate annual infrastructure
spending to 5% of Gross Domestic Product until 2022. The Philippine Development
Plan 2017-2022 provided details to this agenda with the Build, Build, Build
providing the centerpiece infrastructure projects. Build, Build, Build has a total of
70 flagship projects composed mainly of roads, airports and railways around the
country. Nonetheless, the bulk of these projects are still in Luzon and NCR, with
some projects around the urban centers of the country. In terms of financing, about
20% will be locally funded, while multilateral agencies such as World Bank and ADB
and the Japanese government will fund another 20% each. The rest is distributed
among China, Australia, Korea and through Public and Private Partnerships (PPP).
At present, some of the projects are already completed particularly those that
started during the Arroyo administration. During the Aquino administration, the
projects utilized PPP heavily in financing. Seven major projects are currently under
construction, while the rest are in their pre-construction stages. The main challenges
of these projects are a range of issues from the different stages involving feasibility
study, development, procurement and implementation. With each stage requiring
different levels of capacities of all stakeholders and owing to the nature of the project
itself, each project is unique in regard to timeline and financing. Thus, different
stage issues are hampering the timeline of the projects. These imply that the Duterte
administration needs to make some more adjustments in execution and avoid the
delays that were faced by the past administration. In particular, the challenge of
right of way continues to hound present projects. The President also noted the slow
process under the PPP that he called for a shift in strategy by making government
rely more on public funding and official development assistance (ODA). This made
the recent passage of Package 1 of the Comprehensive Tax Reform Program (CTRP)
or TRAIN law critical. ODA projects are now increasing vis-à-vis PPP projects.
The challenge nonetheless of this shift in strategy is that it requires government
to carefully manage its finances in a sustainable manner. Using ODA will require
government to borrow from abroad, while local financing will require higher and
sustained revenue generation. The timing of this policy shift will take advantage of
the investment grade ranking of the country. With a relatively good fiscal position,
meaning a manageable deficit, the government can fund the projects without
increasing interest rates and affecting overall economic growth. It is, however,
necessary for government to pass the other remaining packages of the CTRP
since Package 1 thereof will only net less than what was originally expected. At the
moment, the challenge is in the execution and implementation of the infrastructure
projects, rather than its financing.
 
viii
Financing
Inclusive Infrastructure
ALVIN P. ANG, PH.D

T he Global Competitiveness Report for 2017-18 revealed that the Philippines

is in 56th position out of 137 countries included in the report. As an annual
report on the competitiveness of nations, the Philippines has already made
significant improvements since the inception of the report in the early 2000s when
it ranked 76th out of 103 countries. The National Competitiveness Council (NCC)
of the Philippines monitors the country’s performance in the report. From 2010
to the present, the country has seen weak improvements in three out of twelve
indicators, namely: institutions, infrastructure and business sophistication. In fact,
the latest report puts the inefficient government bureaucracy, inadequate supply of
infrastructure and corruption as the most problematic factors for doing business
in the country. These three barely changed in the last ten years. In the 2018 Doing
Business Report, the Philippines slipped further to 113th from 99th position in the
2017 report, last among ASEAN countries and overtaken even by relatively smaller
economies such as Laos and Cambodia. Other relevant comparative reports, such
as the World Bank’s Logistic Performance Index (LPI), put the Philippines at the
71st rank out of 160 countries. This ranking, done every two years, has shown a
consistent decline in Philippine logistics performance from 44th in 2010 to the 71st
rank in 2016. The current rank puts the country at 7th place or the lowest rank
among participating ASEAN countries.
1
2 FINANCING INCLUSIVE INFRASTRUCTURE

The Philippine government, past and present, are not unaware of these challenges.
The race to boost investments, both local and international, has brought the need
to put these agenda as priorities. Riding on the crest of a sustained economic
momentum, the Philippines has outdone itself in terms of breaching its generational
economic growth rate of 4% to now growing by more than 6% annually. Basic fiscal
reforms and prudent fiscal management have allowed the country to finally reach
investment grade status in 2013. However, this growth spurt has not been able to
translate to a faster decline in the poverty rate, which remained above 20% in 2015.
When the Duterte administration assumed office in July 2016, it presented a
10-point socio-economic agenda which aims to bring down poverty further to
13-15% by 2022. This will be accomplished following massive investments in
infrastructure by increasing spending from about 2.5% in 2015 to 7.4% of the gross
domestic product (GDP) in 2022. Dubbed as the “Build, Build, Build” program, it
is expected that investments in infrastructure will help generate local and foreign
investments and eventually create employment and lower poverty rates.
More than a year into the Duterte administration, observable progress of key
FINANCING INCLUSIVE INFRASTRUCTURE 3

infrastructure projects has remained slower than expected. This perceived delayed
implementation is further aggravated by the worsening traffic conditions in Metro
Manila and other major cities of the country. The challenge, therefore, is to come
up with a realistic assessment of how the Build, Build Build program will actually
be implemented and how it will be funded in light of current and forecasted fiscal
conditions.
This paper will be organized into the following sections: The Build, Build, Build
Program; Inclusivity and Infrastructure; Tax Reform and Financing Infrastructure;
and then it concludes.

The BUILD, BUILD, BUILD Program

Upon assumption in office in July 2016, the Duterte administration presented its
10-point socio-economic agenda. The first five elements of the agenda focus on
pushing economic growth faster, with the government playing a more significant
role, particularly in making growth more inclusive. The second to fourth elements
are interrelated programs that need to work to improve poverty levels and increase
employment. They are as follows:

• Institute progressive tax reform and more effective tax collection, and
indexing taxes to inflation.

• Increase competitiveness and the ease of doing business.

• Accelerate annual infrastructure spending to account for 5% of GDP,

with Public-Private Partnerships playing a key role.

Drawing from the agenda, the government formalized them into the 2017-
2022 Philippine Development Plan (PDP). The PDP has five major components:
Enhancing the Social Fabric; Inequality-Reducing Transformation; Increasing
Growth Potential; Enabling and Supportive Economic Environment; and
Foundations for Sustainable Development. Infrastructure development falls as a
cross-cutting element of the component strategies.
4 FINANCING INCLUSIVE INFRASTRUCTURE

The PDP recognizes the spatial requirements of the economy and the need
to respond to a long-term vision. This is why it incorporates the findings of the
AmBisyon Natin 2040 Survey done in 2015. This survey essentially summarizes the
aspirations of the Filipino family for the year 2040 and the standard of living they
wish to achieve. The spatial requirements of the PDP, meanwhile, is summarized as
the National Spatial Strategy building on these three elements: focusing on cities as
engines of economic growth and poverty reduction; strengthening of transportation
and communication; and reduction of country’s vulneabilities to natural disasters.
These strategic elements have all considered the importance of putting emphasis
and prioritizing infrastructure as a key policy focus. This has led to the formulation
of the Duterte administration’s infrastructure program known as Build, Build,
Build (BBB) program. In November 2016, the government released the details of
the program. Spearheaded by the National Economic and Development Authority
(NEDA), Department of Transportation (DOTr), Department of Public Works and
Highways (DPWH) and the Bases Conversion Development Authority (BCDA),
the program was launched focusing on three components: a) more railways, urban
mass transport, seaports and airports; b) more bridges and roads; and c) new and
better cities. The program was launched together with the website--http://www.
FINANCING INCLUSIVE INFRASTRUCTURE 5

build.gov.ph/--which allows for public monitoring of the status of the projects

identified therein. The program also provided specific details of the timeline
process and forecasts completion of identified projects within the term of President
Duterte.

Projects under BUILD, BUILD, BUILD

There is a total of seventy flagship projects under this program. Some of the
projects are already in the implementation stage, while others are still in the
feasibility stage. The different stages of the projects mean that some of them
have started conceptualization under previous administrations. The estimated
total value of the projects is about PhP 8 to 9 trillion from 2017 to 2022. The
breakdown of the projects by sector and region are as follows:

Meanwhile, it is also critical to consider projects outside the BBB program.

In particular, the PDP also provides a framework where infrastructure can play
a broader role in sustaining economic growth. The figure below provides that
framework.
6 FINANCING INCLUSIVE INFRASTRUCTURE

The framework says that other supporting infrastructure sectors are as

important to the economy. These sectors beyond transport are water resources,
energy, ICT and social infrastructures. Among the key strategies beyond
FINANCING INCLUSIVE INFRASTRUCTURE 7

increasing government spending on infrastructure are encouraging private sector

participation, formulation of roadmaps, linking planning and implementation, and
minimization of implementation delays.

Projects under PDP Infrastructure

The targets of the infrastructure subsectors give us a perspective on the expected

contribution of each towards attaining the 7.4% of GDP infrastructure spending by
2022. These are the sectoral PDP targets:

1. Transport
a. Road transport (significant quality improvement)
b. Rail transport (relatively unchanged)
c. Air transport passenger (increased by 29%)
d. Air cargo (increased by 23%)
e. International flights (increased by 32%)
f. Domestic flights (increased by 17%)
g. Ship calls (increased by 3.4%)
h. Sea passengers (increased by 35%)
i. Cargo shipped (increased by 40%)
j. Container traffic (increased by 54%)
k. No. of vehicles carried by RORO (increased by 81%)

2. Water
a. Percentage of households with access to safe water (increased by 11%)
b. Percentage of households with access to basic sanitation (increased by 3%)
c. Ratio of irrigated area for agricultural development (increased by 14%)

3. Power
a. Power requirements (to be maintained above 100% with 20% reserve)
i. Luzon (120)
ii. Visayas (96)
iii. Mindanao (121)
b. Available Capacity (increased by 44%)
i. Luzon (increased by 40%)
ii. Visayas (increased by 30%)
iii. Mindanao (increased by 90%)
c. 100% households with electricity from 90% in 2016
8 FINANCING INCLUSIVE INFRASTRUCTURE

4. Social Infrastructure
a. Education – maintain classroom to pupil ratio
b. Health – double number of health stations and health centers
c. Housing – increase in socialized housing units by 357%

Relating Infrastructure to Inclusivity

The objectives of the different frameworks, programs and projects related to

infrastructure clearly point to the desire to uplift the lives of the majority. In
particular, there is a need to clearly point out that the current growth spurt is
reaching its limits due to the infrastructure gaps. In turn, these gaps are preventing
a larger segment of the population to benefit from the growth. Consider the latest
poverty statistics and their regional levels. It is clear that much of the economic
activities are concentrated mostly in Luzon. Hence, it is critical that the current
administration must do two things: expand and facilitate current infrastructure
for further growth in Luzon and work on specific infrastructure in the Visayas and
Mindanao areas. It would seem that the balance of the seventy BBB projects follow
these two imperatives. Forty-six projects or 66% of the total are in Luzon and the
balance are in the Visayas and Mindanao.
FINANCING INCLUSIVE INFRASTRUCTURE 9

Consider the chart (see Figure 3) on the regional shares to GDP and share to
government budget. It is clear that there is significant investment needs in other
regions in order for growth to be inclusive.
  The figure above (see Figure 4) shows the heavy concentration of economic
activities in National Capital Region (NCR) and Calabarzon. Other regions are
converging around PhP 75,000 per capita income. Hence, it is imperative that these
growth outcomes be supported by an infrastructure program to sustain them and
help other regions catch up with NCR and Calabarzon to decongest and distribute
growth across the country.
10 FINANCING INCLUSIVE INFRASTRUCTURE

Considering Table 3 on the BBB projects by region, it would seem that

a significant portion still are in NCR, Central Luzon and Calabarzon. It is
understandable as these projects aim to facilitate the movement of people, goods
and services. Likewise, there are projects being lined up in other regions with
emphasis on the faster growing ones such as Region VII, X and XI.
Meanwhile, the Investment Coordinating Committee (ICC) of the NEDA
Board, the main clearing house for major government projects, has approved a
total of 35 projects totaling PhP 1.2 trillion as of end- September 2017. In terms of
regional breakdown, the bulk of the projects will be implemented in NCR, Central
Luzon, Cebu, Calabarzon and Bicol. The rest of the regions will have at least one
major project. Of the total 35 projects, most projects (19) are related to transport
and road infrastructure, followed by social investments, and, finally, by water- and
agriculture-related infrastructure. These projects are fully supportive of the need for
inclusivity, while at the same time, providing support for the major infrastructure
requirements of the country. The source of financing for these projects are as
follows: a) local financing – 10; b) Asian Development Bank (ADB)/ World Bank
(WB) – 9; c) Japan International Cooperation Agency (JICA) – 8; d) China – 3; e)
Australia – 2; f) Public Private Partnership (PPP) -2; g) Korea – 1; and h) Asian
Infrastructure Investment Bank (AIIB) - 1. It can be noted that the Philippine
government is considering various options in financing with a significant portion
to be funded by internally generated funds. Among the key projects approved
were the Clark Airport Expansion, Metro Manila Bridges, the Bus Rapid Transit in
Manila and Cebu, Clark Railway, Philippine National Railways (PNR) South Rail
and Mindanao Railway, among others.

The Status of Infrastructure Projects

As the Duterte administration moves toward its two-year mark, people are looking
at two things: First, how has the BBB program has progressed so far? Second, is
there a sustainable source of funding that can meet both the government’s promise
of expansion and inclusivity?
Let us first consider the progress of the projects. Presently, most projects that
have been completed and enjoyed by the population are projects implemented and
FINANCING INCLUSIVE INFRASTRUCTURE 11

started during the Arroyo administration and completed under the Aquino and
Duterte administrations. These projects were mostly done using the PPP financing
formula. Among the projects completed were: Muntinlupa-Cavite Expressway,
NAIA Expressway, Automatic Fare System in trains and the School Infrastructure
Project. The construction of seven projects are currently on-going, including the
Skyway extension and MRT 7, while four projects are under pre-construction
stage. Relatedly, the NEDA announced in early January 2018 an updated status of
the flagship programs. While the BBB website maintains that there are 70 flagship
projects, the NEDA has said that there are 75 projects. Thirty-four of these projects
are already scheduled for groundbreaking and roll out. A total of sixteen projects
have been rolled out in 2017, another ten projects for 2018 and four scheduled in
2020. Among the key projects scheduled in 2018 are the construction of twelve
bridges around Metro Manila crossing the three major rivers in the metropolis.
The rail projects in Mindanao, revival of the North and South railways and the
Metro Manila subway are some of the projects included for roll out this year. What
is notable in this update by the NEDA is the extended timeline of some of the
flagship projects, some of which will now extend beyond President Duterte’s term.
The BBB website provides the following status of the flagship projects as
of January 2018, as follows: a) Project Implementation Stage – 26; b) Project
Development Stage – 32; c) Project Procurement Stage – 8; and d) Feasibility Study
Stage – 4. Based on the PPP Project Development Process, only less than half are
in the implementation stage, the rest are generally still in the development stage
which will still undergo a significant amount of time depending on the quality
and preparedness of all stakeholders to reach the bidding stage. After which, the
process goes to awarding and then project implementation.
Figure 5 provides us with a perspective on how the Duterte administration
has so far used its resources in meeting the country’s infrastructure needs. In
particular, consider the public sector contribution to total construction. It can be
seen that from the time the Duterte administration has assumed office, it has not
yet matched the growth rates during the last quarters of the Aquino administration.
Furthermore, this slowdown in public construction growth is mirrored by the
significant slowdown of the private sector construction as well. In fact, the fourth
quarter of 2017 GDP results showed the weakest private construction growth
in the last twelve quarters (this is a crucial element, which we will discuss later,
12 FINANCING INCLUSIVE INFRASTRUCTURE

that may have to do with policy than implementation). Similarly, in the broader
GDP results, the contribution of government expenditures to total output has
remained relatively small. Based on Figure 6 below, it can be seen that the blue
bars representing government expenditures have not increased significantly under
the Duterte administration and has largely remained at the same levels with that of
the Aquino administration.
FINANCING INCLUSIVE INFRASTRUCTURE 13

The relatively unchanged government expenditures including the “unimpressive”

growth in infrastructure spending can be observed by looking at the 2017
Disbursement Report of the Department of Budget and Management (DBM). In
the said report, government consumption increased by 9.4% for the first eleven
months of 2017. This is faster than the 7% growth in government expenditures
reported in the full 2017 GDP results. However, these are still much slower than
the double-digit expansions during the Aquino administration which averaged
about 11%. Infrastructure spending, on the other hand, increased to about 13%
for the first eleven months of 2017. As seen in Figure 5, the slow growth of the first
and second quarter of 2017 shows significant challenges in fully implementing the
infrastructure program. This is in fact considered a slowdown compared to the
full year growth of 47% for 2016. Thus, there is indeed a serious need to look into
challenges that are delaying the full implementation of the infrastructure plan. It
can be said that at this level, it is already respectable but not enough to put in place
a stronger spending performance to result to positive spillovers.
Based on these data, there is still a lot of adjustments needed by the Duterte
administration to make the BBB program fully workable. Some of the challenges
have already been identified by the government. Specifically, many of the challenges
in implementing infrastructure has to do with the right of way challenges. This
is the same issue raised by the President during his second State of the Nation
Address last July 2017. He also pointed out that this challenge is one that affects
all the branches of government with particular emphasis on the judiciary. This
right of way challenge is also an issue of capacities and learning curve. Majority
of the projects identified are transportation-related. Since the DOTr is a newly
reconstituted agency, it does not have enough legal manpower to deal with this
issue. It is mainly staffed by technical engineers who need to be versed in legal
issues. The DPWH has already started transferring technology to DOTr by sharing
capacities and lending some of its lawyers since it is the DPWH which implements
the construction of these transportation-related projects.
Another issue that may have led to slowing public and private construction is the
change in policy with regards to government infrastructure projects. The Duterte
administration announced a significant shift in policy at its onset. It veered away
from the PPP strategy utilized by the Aquino administration as the primary mode
of financing infrastructure projects. The shift of strategy will now mean that the
14 FINANCING INCLUSIVE INFRASTRUCTURE

government will rely more on public funding and official development assistance
(ODA). It will also implement what is known as a “hybrid” model in which the
government or ODA will jumpstart the construction and will eventually allow the
private sector to operate and maintain the completed projects.
Recently, President Duterte expressed his desire for government infrastructure
projects to skip competitive bidding and instead use the Swiss challenge approach.
The President is apparently frustrated by the slow infrastructure development
despite the availability of resources. The procurement process currently in place
requires competitive bidding in which the lowest bidder is awarded the project.
This has apparently led to corruption among implementing agencies and collusion
among participating bidders. The Swiss challenge, on the other hand, is an approach
provided for in Republic Act 7718, “that unsolicited proposals for projects may
be accepted by any government agency or local government unit on a negotiated
basis, provided… the government agency or local government unit has invited
by publication, for three consecutive weeks in a newspaper of general circulation,
comparative or competitive proposals and no other proposal is received for a period
of 60 working days; provided, further, that in the event another proponent submits
a lower price proposal, the original proponent shall have the right to match that
price within 30 working days…”. Nonetheless, it was clarified by the Presidential
Spokesperson that the Swiss challenge will apply only for infrastructure projects
and will be implemented initially in the rebuilding of Marawi City.
Beyond the issues mentioned, other anecdotal evidences of delay and lack
of coordination are observable by ordinary people. Consider the various
groundbreakings that have been made in the last year but have not started, e.g.
the common MRT-LRT station in North Avenue. Other issues seem to stem from
the lack of manpower or equipment to implement the large projects. Majority of
the skilled construction workers are actually working overseas. As pointed out by
columnist Boo Chanco, there now appears to be a large shortage of construction
workers as evidenced by the delay in many private construction projects. The
Philippines is not the only country in an infrastructure boom mode. Our ASEAN
neighbors are also in a push to significantly improve their infrastructure and
logistics capacity. More importantly, our single most important donor, Japan, is
in the thick of preparations for the 2020 Tokyo Olympics. All of these countries
can bid up the price of construction workers, engineers and specialists. Likewise,
FINANCING INCLUSIVE INFRASTRUCTURE 15

they could lead to lack of available equipment for the number of projects involved.
Finally, it is also possible that the capacities of local construction companies are
now overstretched with the huge number of public and private projects being lined
up and implemented. For big ticket government projects, there may be a need
to open up the construction sector to foreign construction companies, otherwise,
further delays are expected.
The following subsections review the projects financed via PPP and via ODA.
This will help us further appreciate the status of the different infrastructure projects.

Overview of Projects Financed via PPP

As of January 2018, sixteen PPP projects have been awarded contracts with a total
project cost of PhP 318.04 billion (see Table 4). Out of the sixteen, only a quarter
of these have been deemed completed and operational, while the bulk of these
projects are still either under construction, under pre-construction, or in the case of
the expansion of the Clark International Airport, the contract is still up for signing
despite already being awarded. The DOTr has the most projects under construction
and pre-construction when it comes to both number and cost of projects, mainly
due to the construction of the MRT 7, which connects San Jose, Bulacan to MRT
3 in North Avenue, Quezon City and the LRT 1 Cavite extension, which connects
the Baclaran station to the future Niyog station in Bacoor, Cavite. Together, these
two projects account for 40% of the total cost for awarded projects, with the MRT
7 costing PhP 62.70 billion and the LRT 1 extension costing PhP 64.90 billion,
becoming the largest projects under construction and pre-construction respectively.
Among the partner firms, the Megawide group has the most project involvements
(projects awarded to a firm or a consortium of bidders that a firm belongs to) that
involve partnerships with the Department of Education (DepEd), DOTr, BCDA,
and DPWH. These projects include both Phase I and Phase II of the PPP For School
Infrastructure Project, the Mactan-Cebu International Airport Passenger Terminal
Building, the Southwest Integrated Transport System (ITS) Project, the Cavite
– Laguna (CALA) Expressway, and the Clark International Airport Expansion
Project. The Metro Pacific group trails the Megawide group with one less award, at
five project involvements, followed by the Ayala group with three.
16 FINANCING INCLUSIVE INFRASTRUCTURE

On the other hand, there are fifteen projects currently in the pipeline undergoing
different levels of approval and evaluation leading to an awarded PPP contract.
It is also important to note that even after these projects have successfully passed
the approval of the NEDA Board and have been awarded, the actual execution of
these projects can be delayed or deferred for several years. The MRT 7 is a prime
example of this as the contract was awarded and signed in 2008, yet, construction
only took off eight years later in 2016. Aside from the MRT 7, the only other
project with an indicative project cost is the Phase II of the Road Transport IT
Infrastructure Project, which is the only project in the current pipeline that has
been approved by the NEDA Board and is currently undergoing procurement in
the bidding stage as of this writing.
The three next closest projects to being awarded a contract are all pending
approval from the ICC - these are the Manila Bay Integrated Flood Control and
Costal Defense and Expressway Project, the East-West Rail Project, and the New
Manila International Airport. Meanwhile the Operations and Maintenance of LRT
2 and the LRT 6 project are still being evaluated by the DOTr before they are sent
to the ICC for further evaluation. Aside from these projects, there are eight other
projects in the pipeline that are still under development, which means these projects
are either undergoing feasibility studies or requesting Project Development and
Monitoring Facility (PDMF) support. Table 5 and 6 summarizes these.
FINANCING INCLUSIVE INFRASTRUCTURE 17
18 FINANCING INCLUSIVE INFRASTRUCTURE

With the change in policy in developing and funding infrastructure projects,

it is expected that the pipeline for PPP projects will no longer be added with new
ones. Nonetheless, the remaining pipeline projects will still require a significant
amount of time and effort before they can be fully implemented and this will still
FINANCING INCLUSIVE INFRASTRUCTURE 19

make the PPP Center full of activities as at least five more large projects require
NEDA Board approval before they can even be considered for bidding.

Projects and Programs financed via ODA

Based on the 2016 NEDA Annual Report on ODAs, JICA has the largest ODA
share among the country’s top development partners. With 22 loans and a total
ODA amount of USD 5.6 billion, it has a 36% share, followed by the WB with 20%
(USD 3.12 billion), the ADB with 19% (USD 2.98 billion), and the US-led partners
from the US Agency for International Development - Millennium Challenge
Corporation (USAID-MCC) with pure grant ODA contributing 9% (USD 1.34
billion). These four top development partners contribute 84% of the total ODA
amount of USD 15.56 billion. Despite the large contribution of the Japanese, the
Japanese Yen (JPY) still trails the US Dollar by an equivalent amount of roughly
USD 850 million. At 32 loans and USD 6.4 billion in ODA loans committed, the
US dollar accounts for more than half of the total loan amount of USD 12.2 billion.
Among the country’s top development partners, only the USAID-MCC and the
Australian Department of Foreign Affairs and Trade (DFAT) provide ODAs purely
in grants versus being a mixture of mostly loans and relatively small grants that the
JICA, WB, and ADB provide.
20 FINANCING INCLUSIVE INFRASTRUCTURE

In contrast to the projects financed via PPP that are mostly region-specific,
nationwide projects and programs have the largest share of the total active ODA
Portfolio with 43% (USD 6 billion), while multiregional and regional-specific
projects account for 37.81% and 19.47% respectively.
FINANCING INCLUSIVE INFRASTRUCTURE 21

Meanwhile, the regions that received the most significant shares of the country’s
ODA portfolio in the same year were: Region III (17.40%), NCR (16.50%), Region
X (16.02%), Region VII (12.66%) and Region VI (9.66%). For the grant component
of the portfolio, 95% of the total cost was focused on projects outside Luzon, with
almost 70% focused on Region VIII and half of the remaining grants taken up by
Region VII and ARMM.

Analysis on Sustainable Funding Alternatives

for Infrastructure – ODA or PPP?

During the general membership meeting of the Management Association of the

Philippines (MAP) last May 30, 2017, NEDA Deputy Director General Rolando
Tungpalan announced that PhP 4.7 trillion or about 66% of the investment
requirement during the six years of the Duterte administration will be achieved
through local financing, with only up to 18% financed through PPPs. The NEDA
official cited that out of 28 PPP projects approved by the NEDA Board between
2010 to 2016, 50% or 14 projects were either discontinued, terminated, or are still
awaiting implementation (that may never take place). He then compares this figure
to the ODA and locally financed projects in the same period wherein at least 80%
are currently ongoing or have been completed. His announcement came after the
DOTr and Civil Aviation Authority of the Philippines (CAAP) have chosen to
pivot from a PPP to an ODA mode in financing the development, operations, and
maintenance for five regional airport projects, namely the Davao, Iloilo, Bacolod-
Silay, Laguindingan, and Panglao regional airports. All of this is consistent with
the administration’s expressed desire to shift away from financing infrastructure
through PPP towards local funding or through ODA loans with the belief that the
latter modes are more efficient and less costly. However, the said shift also entails
a preference for using tax revenue to fund infrastructure projects, with local
financing relying on current taxpayers and ODAs relying on future taxpayers to
shoulder the cost of the loans from the multilateral development groups providing
them. This is contrary to how PPPs have a user-pay principle where only those
who benefit from the infrastructure or consume its services will shoulder the cost
for maintenance and construction. Notably, this highlights one inherently negative
22 FINANCING INCLUSIVE INFRASTRUCTURE

reality in the ODA model where, for instance, taxpayers in the Mindanao area will
be burdened to service the cost of construction, operations, and maintenance of
tollways in Luzon that they may never use in their lifetime. As this is only one of the
many cases where negative features or circumstances arise because of the structure
of a financing alternative, a review of the projects financed by both modes should
allow us to better understand the risks involved in moving away from PPP towards
local and ODA financing, as well as some of the advantages of each alternative.
Aside from the renowned Japan-ODA-financed Pan-Philippine Highway
that serves as the country’s principal transport backbone, another example of a
successful ODA project would be the Chinese-funded Angat Water Utilization
and Aqueduct Improvement Project that was operational eight months before the
expected completion date of the project without spending more than the projected
budget. As the citizens today benefit from the improved Metro Manila water
security, we see that one overlooked benefit of the ODA is the harnessing of the
comparative advantage of source countries in terms of transfer of technology and
technical expertise to the loaning country. In this case, it was both the application of
new technologies, such as the use of collapsible steel forms in lieu of conventional
wooden forms for the pouring of the final concrete lining of the tunnels, and the
Chinese firm’s ability to increase manpower complement and number of equipment
without incurring additional cost (offset by the decrease in implementation period).
However, the main argument against ODA financing being the more sustainable
and inclusive alternative would be the fact that borrowing externally exposes the
economy to significant foreign exchange risks, which potentially outweighs the
argument that the NEDA official made during MAP general membership meeting
wherein he cited that compared to commercial lending, ODAs have favorable
financing terms that better match the needs of infrastructure projects that require
long-term financing. Usec. Tungapalan cites the case of Japanese ODA financing
in Table 9 below:
FINANCING INCLUSIVE INFRASTRUCTURE 23

Even if these rates are low and long maturity periods are highly concessional
compared to commercial lending, they should not be compared directly to the
model of PPPs which do not primarily involve loans, but rather, contracts that share
risks (costs) and rewards (revenues) from infrastructure projects. Hence, the better
argument should come from a comparative analysis of these risks and rewards of
two projects in the same industry wherein one is financed via ODA and the other
via PPP. In this light, let us consider the case of the New Iloilo Airport Development
Project versus the Mactan Cebu International Airport (MCIA) Project, with the
former being financed via ODA, and the latter via PPP.
MCIA terminal (65,000 sqm) is almost five times the size of the New Iloilo
Airport’s terminal (13,700 sqm), but was nearly finished in half the time. Despite
the fact that the airport terminal in Cebu was delayed for 18 months and cost
overruns are to occur, under the PPP structure, these risks will all be shouldered
by the private sector, unlike the airport terminal in Iloilo where the cost overruns
resulted in an additional 42% higher than approved cost for the government. This
24 FINANCING INCLUSIVE INFRASTRUCTURE

shows that aside from exposing taxpayer funded projects to currency risks through
loans in the ODA structure, there are also inherent risks due to potential project
delays that will cost the government.
In terms of rewards, MCIA operations has contributed to 11% of Megawide
Construction Corp.’s consolidated earnings with remarkable revenue earnings
owing to an 80% jump in net income from PhP 501 million in 2014 to PhP 902.5
million in 2015. Although one may attempt to build a case revolving around the
opportunity cost to the government for the foregone profits that could have gone
straight to government had they financed this locally or via ODA, the counter
argument is that, even if these revenues can lead to a short payback period for the
complete return on investments, there is no assurance that the project would have
been completed with at least the same level of quality and speed that have led to the
higher revenues earned by Megawide Construction Corp. in the first place.
Another similar PPP versus ODA case would be the PPP-financed Tarlac-
Pangasinan-La Union Expressway (TPLEX) and the ODA-financed Subic-
Clark-Tarlac Expressway (SCTex). The SCTex took seven years from approval to
completion with a two-year delay while nearly costing twice its approved budget
at USD 32.8 billion, leading to a per km cost of PhP 341 million. On the other
hand, the PPP- funded TPLEx only cost PhP 61 million per km, which is five times
cheaper.
These examples do not prove that PPPs are the superior alternative over ODAs,
as various PPPs have also encountered major setbacks and challenges, such as the
earlier example of the eight year delayed MRT 7 where a large portion of the delays
were due to prolonged negotiations with the private sector stakeholders. Other
big-ticket examples include the PhP 125 billion Laguna Lakeshore Expressway
Dike project, where none of the three pre-qualified bidders ended up submitting
their bids, or the Modernization of the Philippine Orthopedic Center wherein the
government could not deliver the project site, leading to the exit of the private
sector partner involved. In essence, the key takeaway from the examples of the ODA
versus PPP cases for the airports and the expressways above is that PPPs are not
necessarily the slower, less effective, and more expensive alternative. Perhaps, given
the learning curve that the public and private sectors have undergone in the many
PPP projects of the Aquino administration, projects that may be as successful as the
MCIA are well within the current pipeline. Despite NEDA statistics showing that
FINANCING INCLUSIVE INFRASTRUCTURE 25

PPPs have been abandoned or discontinued at a much higher rate than ODAs since
2010, the examples above should indicate that there is still much to gain from an
infrastructure financing mode like the PPP that allows the government to leverage
on the strengths and abundant resources of the private sector, while still being able
to re-allocate funds that would otherwise be used for a specific project to finance
other initiatives or priorities. Either way, whether it is financing locally, via ODA,
via PPP, or a hybrid of these, the risks and rewards will vary on a case to case basis
across different industries, project types, economic conditions and external factors,
including the uncertain effects of the passing of the Tax Reform for Acceleration
and Inclusion (TRAIN) law.

Sustainability of Financing

The discussions above point to the different challenges being faced by the
infrastructure program. These are issues of absorptive capacities, legal bottlenecks,
corruption, stakeholder acceptability, and finding the right financing mix, among
others. At present, the government is seen to have enough resources to fund the
infrastructure projects. In the near future, as the administration fully adapts and
learns from the environment, it will now be requiring a significant amount of
funding to be ready to meet future demand. In particular, the government has
already allocated approximately USD 160 billion to fund infrastructure for the next
five years. In the chart from NEDA below, this is equivalent to more than 5%
of GDP, increasing up to 7.3% of GDP, by the end of the Duterte administration.
This is monumental and requires significant and sustainable finances in order to be
implemented.
The previous section discussed the two main sources of financing of the NEDA-
approved infrastructure projects. Clearly, the government is veering away from
PPP. About half of what has been approved at the NEDA Board needs to be funded
through local financing or through government-raised funds. The others will be
funded through ODA or through loans from Japan, China and other multilateral
institutions. The recent trips of President Duterte to Japan and the hosting of the
ASEAN Summit in Manila already secured funding for many of the commitments
of Japan and China. However, we are only looking at the big-ticket infrastructure
26 FINANCING INCLUSIVE INFRASTRUCTURE

projects. There are still a number of projects lined up in the Three Year Rolling
Infrastructure Plan (TRIP) for 2018 to 2020. Based on the PDP 2017-2022, there
are a total of 4,895 projects valued at PhP 3.6 trillion. This is broken down as
follows: a) 239 nationwide projects valued at PhP 824.47 billion; b) 158 inter-
regional projects valued at PhP 1.848 trillion; and c) 4,498 region-specific projects
valued at PhP935.55 billion. About one-third of the projects will be done in five
regions with the highest poverty rates, i.e., ARMM, CARAGA, Eastern Visayas,
Soccsksargen, and Northern Mindanao.
What is more challenging is how the government will be able to sustain and
ascertain the funds for local financing, considering the huge bill that it proposes
to carry. The Department of Finance (DOF) initially expected about PhP 157
billion from the passage of the TRAIN, or the first package of the government’s
comprehensive tax reform program. However, the signed version is only estimated
to yield a revenue gain of about PhP 90 billion. Even if 70% of the revenue is
earmarked for infrastructure, there is still a significant gap that needs to be raised.
FINANCING INCLUSIVE INFRASTRUCTURE 27

It is therefore important that other packages are also passed on time for the next
years to ensure that there are enough local funds.
Meanwhile, the shift to ODA or even foreign borrowing seems to be a good
option as of the moment. Firstly, the Philippines has achieved a debt to GDP ratio of
a low 40% in 2017, declining from 75% in 2004. Among the ASEAN economies, the
Philippines actually has the lowest debt to GDP ratio, making it the least vulnerable
from global downturn due to a debt crisis. Second, while it has regularly incurred
a budgetary deficit, the country has been able to maintain its budgetary deficit to
less than 2% of GDP in the last six years. The critical level is about 3% of GDP.
This provides room for further deficit spending of about 1% of GDP. Third, unlike
the 1980s and 1990s when the economy was severely dependent on foreign debt to
finance its imports, the country’s export and other foreign exchange earners, such
as workers’ remittances, tourism and foreign direct investments (FDI), are now
regularly contributing to the economy. Foreign exchange reserves have reached
a peak of more than USD 80 billion in 2016, which is equivalent to about eight
months of imports. This is a far cry from the less than four months of imports
28 FINANCING INCLUSIVE INFRASTRUCTURE

that led to severe devaluations in the 1980s and 1990s. All these good indicators
have led to the Philippines being upgraded into an investment grade economy.
As an investment grade country, the Philippines has a leeway in accessing the
international market for better rates. As it is, the Philippine’s borrowing rates now
has the lowest interest rate spread among Asian countries making it very close to a
US treasury (see Figure 11).
These factors should help the TRAIN revenues to support infrastructure
financing. The timing is good in accessing the global market for additional
funds at lower rates. In any case, the DOF is certainly aware of these as DOF
Secretary Dominguez himself said that three-fourths of the capital needed for the
infrastructure projects will be sourced through ODA or a combination of different
financing methods.
Nonetheless, it is critical for government to ensure that the reforms in revenue
collection continue, even as expenditures due to infrastructures are also expected
to increase due to the long gestation period of projects. It is hoped that the
revenue measures will be coupled with increasing revenue collection, so that more
people and corporations under the tax net will come in due to the lower rates and
facilitative processes being introduced with the TRAIN law. The sustainability of
the reforms and the effectiveness of the TRAIN law is most important to ensure
that the country maintains or even improves its investment grade rating so that it
can access and negotiate lower interest rates in the international market.

Conclusion

The infrastructure program indeed is a critical element to sustain the current

growth path and also the way to expand economic and social reach to a larger
segment of the population. With a good perspective and well-planned strategy,
this is the first time that a Philippine government has consciously put significant
amount of resources and organization in developing an infrastructure plan. Taking
advantage of the political capital and political will of the President can help many
of the projects come into reality sooner than planned.
The challenge, however, is not in the plan itself, but in how to execute and
finance these projects. In terms of execution, the nature of the projects involved are
FINANCING INCLUSIVE INFRASTRUCTURE 29

Image credit: lrmc.ph

30 FINANCING INCLUSIVE INFRASTRUCTURE

unique and cannot be expected to be processed and implemented in a standard way.

Because of this, projects will either be completed early or will be delayed. However,
what we have seen and observed in the past continues to hound the infrastructure
program as a whole. Most, if not all, projects are delayed. This perennial challenge
has led to the President trying to shorten the process by avoiding the bidding
process altogether and instead, pushing for the Swiss challenge. However, bidding
is only part of the process. The whole infrastructure delivery system can be subject
to different kinds of issues and delays that are not easy to resolve.
Comparing the ODA review of NEDA for 2010 and 2016, we find that almost
the same issues remain. These are right of way, procurement, budget bottlenecks
and a whole range of issues that can be aggregated as poor knowledge management.
This means that despite the experiences through these years, the government is still
having difficulty overcoming serious challenges brought about by these parameters
of the infrastructure delivery system. This is not so different with the issues related
to doing business in the country, which appears as the perennial reason why foreign
investors are not coming in. We need to improve governance at different levels,
whether business - or infrastructure - related.
Consider the Light Rail Transit 1 extension to Bacoor Cavite. The project broke
ground in May 2017, but the government has not been able to clear the right of way
issues up to now. At the rate the government is moving, it can only hope to start the
project by mid-2018 and to complete it by the end of 2021. Hence, at the moment,
execution issues are a bigger challenge to achieving inclusivity. On the other hand,
issues on financing, as discussed in the previous section, is not as challenging as the
execution bottlenecks. This is primarily due to the country’s good fiscal condition
and better economic structure, which ensures that the country will have enough
resources to finance its infrastructure needs. Besides, the investment grade of the
country allows it with much more elbow room to access funds in the international
market at lower and negotiable rates.
This is not to say that the country will just go on a borrowing binge without
considering its future capacity to pay. There is just too much pressure for the
finance and economic managers to ensure that financing infrastructure should not
lead to a serious financial challenge that could lead the Philippines to losing its
investment grade standing. Thus, this is not an issue of whether PPP or ODA is
better. It is ultimately an issue of whether the Philippines can address the myriad
FINANCING INCLUSIVE INFRASTRUCTURE 31

execution issues discussed earlier. These issues will apply to both PPP, ODA, or to
any other form of financing. The faster these issues are addressed in an organized
manner, the certainty of funding availability and better borrowing rates will be
applicable to the Philippines. It will be critical that the first half of 2018 will reflect a
much-improved infrastructure spending and faster implementation of programs as
people expect movement and not just press releases. This same source of political
capital might be eroded sooner when people’s expectations are not met.
32 FINANCING INCLUSIVE INFRASTRUCTURE

References

Build, Build, Build: The Duterte Administration Infrastructure Plan (2017), Presentation by DOTr, DPWH and
BCDA
Chanco, B. (29 January 2018). Labor Gap. The Philippine Star. Retrieved from: http://www.philstar.com/
business/2018/01/29/1782277/labor-gap
CNN Philippines. (28 January 2018). Duterte wants ‘Swiss challenge’ for gov’t projects, not public bidding.
Retrieved from: http://cnnphilippines.com/news/2018/01/28/president-rodrigo-duterte-swiss-challenge-
harry-roque-procurement-public-bidding.html
Dedace, S. and Fullon P. (2015), DAP and Infrastructure – Public Finance Class Report, Ateneo School of
Government
Department of Budget and Management (2016), National Government Disbursement Performance
Department of Budget and Management (2017), National Government Disbursement Performance
Department of Finance (2017), Presentation on the TRAIN Impact to the Economy Package 1
De Vera, B. (19 January 2018). 34 of 75 Flagship Infra Projects to Start in ’18. Philippine Daily
Inquirer. Retrieved from: http://business.inquirer.net/244404/34-75-flagship-infra-projects-start-
18?utm_s ource=Arangkada+Ne ws+Clips&utm_campaign=6a729aa2b3-Arangkada_Ne ws_
Clips_01_10_2018&utm_medium=email&utm_term=0_08e85a2ab1-6a729aa2b3-45568065
GMA News. (1 February 2018). LRT1 operator says Cavite extension works to start mid-2018. Retrieved from:
http://www.gmanetwork.com/news/money/companies/641795/lrt1-operator-says-cavite-extension-works-
to-start-mid-2018/story/
National Economic and Development Authority (2010), ODA Performance Review
National Economic and Development Authority (2016), ODA Performance Review
National Economic and Development Authority (2017), NEDA Board Approved Project as of September 2017
National Economic and Development Authority (2017) Infrastructure Chapter, Philippine Development Plan
2017 – 2022
PDP Results Matrix 2017-2022, Chapter 19 Accelerating Infrastructure Development
Presentation of Megawide CFO Oliver Tan, BusinessWorld Economic Forum - May 2017
World Economic Forum (2017), The Global Competitiveness Report 2017-2018
 ACKNOWLEDGMENTS

ADR Institute gratefully acknowledges all those who have extended their support,
cooperation, and commitment in the development of this project. This publication
would not have materialized without their help.

We are fortunate enough to engage with insightful persons from different

sectors, namely: the academe, public and private sectors, as well as civil society
organizations, who have shared their expertise and have actively contributed to
discussions in various fora.

We would also like to thank Prof. Victor Andres ‘Dindo’ Manhit, President of
the ADR Institute, for his leadership, vision, and guidance in making this endeavor
possible.

Last but not the least, we would like to thank the following for their hard work
and dedication, and for working tirelessly towards the completion of this project:

Executive Director Atty. Katrina Clemente-Lua, and Senior Research Associate,

Ms. Weslene Uy, who both served as the editorial staff;

Our design consultant, Ms. Carol Manhit, for the publication lay-out and cover
design;

And the rest of the ADRi team, Deputy Executive Director for Programs, Ms.
Ma. Claudette Guevara, Program Associate, Ms. Vanesa Lee, and External Affairs
and Social Media Associate, Ms. Krystyna Dy.

The author would like to thank Nelberto Nicolas M. Quinto from the Ateneo
Center for Economic Research and Development for his research assistance.
 ABOUT THE AUTHOR

Dr. Alvin P. Ang has more than 20 years of professional

experience in both public and private sectors. He started
his Economist experience with the National Economic
and Development Authority (NEDA) where he developed
his skills in Development Planning, Policy Formulation
and Analysis. He also worked in Investment Research
and Economic Forecasting with his stints at the Philippine
National Bank and All Asia Capital as Chief Corporate
Planner and as Economist, respectively.
He joined the academe full time after completing his
Master in Public Policy at the National University of
Singapore as a Scholar of the Singapore Government. He went on to complete
his Ph.D. in Applied Economics at Osaka University as a Japanese Government
Scholar.
He has published in journals such as the Review of Development Economics,
Asian Social Science, Asia Pacific Social Science Review, among others. His
publications include, “How are APEC members faring in ease of doing business?”;
“Progress of the Implementation of Recommendations adopted at the 3rd-6th
ASEAN Forum on Migrant Labour Meetings”; “Gender-sensitive Remittances and
Asset Building in the Philippines”; and “Gender, Migration abd Development in
the Philippines.”
His research fields are in Regionalism, Local Governance, Migration,
Development Economics and Competition. His researches on Remittances and
Economic Growth in the Philippines have been widely circulated. His recent
work on the indicators of economic development in localities has been used by the
National Competitiveness Council (NCC) as basis for the Cities and Municipalities
Competitiveness Index (CMCI) rankings of cities and municipalities in the
Philippines. He has been regularly consulted by international agencies such as
USAID, World Bank, World Health Organization, Asian Development Bank
and the International Labor Organization (Philippines and Bangkok) and the
Philippine Government on policy matters. He won first prize (together with
Jeremaiah Opiniano) in the Outstanding Research for Development in the 2011
Global Development Awards (besting 400 entries worldwide) held in Bogota,
Colombia. He is a lifetime member of the Philippine Economics Society where he
was President in 2013.
He was Director of Research for Culture, Education and Social Issues and
Professor of Economics at the University of Santo Tomas. He has since moved to
the Ateneo de Manila University’s Department of Economics where he is currently
a Professor and Senior Fellow of Eagle Watch, the School’s Macroeconomic
Forecasting Unit. He is presently Director of the Ateneo Center for Economic
Research and Development (ACERD).
He is a sought-after Economics commentator on TV, radio and newspapers and
is favourite lecturer in Economics in the corporate and government settings. He
wants to be called as Your Everyday Economist.