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Philippines: Ready for the Future?
The Quantity and Quality of Infrastructure
Investment
Joachim von Amsberg
Country Director, Philippines
The World Bank
January, 2007
Outline
2007: A unique window of opportunity
for Philippines to join rapidly
developing East Asia
 Why infrastructure matters to the
Philippines
 An agenda for reviving infrastructure
investment in the Philippines

2007: A unique window
of opportunity for the
Philippines to join
rapidly developing
East Asia
The Philippine Paradox:
Great Assets and Potential…
Great neighborhood: East Asia
booming
 Educated, entrepreneurial, Englishspeaking people
 Rich natural resources
 Strength in dynamic sectors:
electronics, business services,
tourism, remittances

…But Modest Development
Outcomes
Modest growth driven by remittances
and consumption rather than by
investment or productivity
 Slow poverty reduction due to low
growth and high inequality

Growth has been below potential
Per Capita GDP Growth Rates 1966-2004
8
7.00
7
6
5.77
4.79
5
4.77
4.03
3.95
4
3
2
1.28
1
0
EAP
China
Source: World Bank WDI
Indonesia
Thailand
Philippines
Malaysia
Vietnam
Investment Lagging Behind
the Region
Gross Capital Formation (% of GDP)
50
45
40
35
China
Hong Kong, China
30
Indonesia
Japan
25
Malaysia
Philippines
Taiwan, China
20
Thailand
Vietnam
15
10
5
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
The Obstacles to Investment
Seen By Business
Important investment constraints (% of firms surveyed)
40
35
30
25
20
Macroeconomic Instability
Corruption
Electricity
Tax rates
Regulatory Policy uncertainty
Crime, theft, disorder
Tax administration
15
Labor regulations
10
Anti-competitive practices
5
0
Cost of financing
Customs and trade regulations
Transportation
A Window of Opportunity
Created by Fiscal Reforms …
NG and CPS deficit (% of GDP)


Addressing
biggest
obstacle to
investment
Increasing
fiscal space
for public
investment
110
100
90
80
70
60
50
-1
-2
-3
-4
-5
-6
2000 2001 2002 2003 2004 2005 2006
/p
CPS deficit
2000 2001 2002 2003 2004 2005 2006
/p
Consolidated non-financial public sector debt
National government debt
NG deficit
Source: DOF
Source: DOF
NG Expenditure
Revenue and Tax Efforts
16.0
15.0
14.0
13.0
12.0
11.0
10.0
2000 2001 2002 2003 2004 2005 2006
/p
Revenue
Source: DOF
NG and NFPS debt (% of GDP)
Tax revenue
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2000 2001 2002 2003 2004 2005 2006
/p
Capital
Interest
Primary
Source: DOF, World Bank estimates
… and by international
liquidity
Philippines: EMBIGLOBAL Monthly Spreads
800
700
600
500
400
300
200
100
0
2000
2001
2002
2003
2004
2005
2006
Why Infrastructure
Matters for the
Philippines
Infrastructure Matters for
Growth and Competitiveness
Infrastructure deficiency a top
impediment to business environment
and investment climate
 Philippines: GDP and Total Infra
Expenditure correlation: 85%
 Infra investment has a positive impact
on GDP; infra capital stock has a
long-term impact on GDP

Infrastructure Matters More
with Economies of Scale



East Asia trade increasingly driven by intraindustry trade and vertical specialization
Components trade and intra-industry trade have
grown rapidly – regional production networks
Export growth in sectors with high economies of
scale




Vertical specialization becomes critical driver
Traditional comparative advantages (low wages)
less important
Transport/logistics and consistent policy
environment (investment climate) more critical
Small policy changes can have big impacts on
trade
East Asian Exports Grow in
Sectors with Scale Economies
Inst r ument s
Elect r ical machiner y
scale elast icit y >1
Non- elect r onics machiner y
Ir on and st eel
Phar maceut icals
Wood pr oduct s
Foot wear
scale elast icit y =1
Leat her
Appar el
Text iles
-4.0
-2.0
0.0
2.0
4.0
change in expor t shar e 1994- 2004
6.0
Infrastructure Matters for
Competition
Dynamic competition and churning of
enterprises contributes to productivity
growth and competitiveness
 Less of that in the Philippines
 Infrastructure is good for competition

Small enterprises cannot self-provide
 Transport costs lower—location
matters less

Infrastructure Matters for
Poverty Reduction
Access to basic infrastructure
Percent of Population
100
80
60
Electricity
Telephone
Piped drinking water
Own flush toilet
40
20
0
Poorest Second Middle
Fourth Richest
Quintile
Source: Gawtkin, Davidson R. Shea Rustein, Kiersten Johnson, Rohini Pande, and Adam Wagstaff.
2000. “Socio-economic Differences in Health, Nutrition, and Population in the Philippines.” World Bank,
Washington D.C.
Source: World Development Indicators, 2004; IEA 2003; Connecting East Asia: A New Framework for Infrastructure, The World Bank
Service Access (Bars in blue = outcomes above low and middle income country average)
Thailand
China
0
Samoa
25
Malaysia
50
Indonesia
75
Fiji
0
Timor
0
Tonga
25
Vietnam
25
Vanuatu
50
Philippines
50
Micronesia
75
Lao PDR
75
Mongolia
100
PNG
100
Cambodia
Telephone access (subscribers / 100 inhabitants)
Myanmar
Solomon
Cambodia
Timor
Vanuatu
Kiribati
Lao PDR
Micronesia
PNG
Indonesia
Palau
Philippines
Fiji
Vietnam
Thailand
Tonga
Mongolia
Samoa
Malaysia
China
Marshall
Tonga
Samoa
Thailand
Malaysia
Vanuatu
Philippines
Palau
Indonesia
China
Myanmar
Solomon
Mongolia
Lao PDR
Vietnam
Cambodia
PNG
Water supply access (%)
Solomon
Myanmar
PNG
Solomon
Lao PDR
Cambodia
Kiribati
Vanuatu
Vietnam
Marshall
Indonesia
Samoa
Tonga
Micronesia
Mongolia
Fiji
Philippines
Palau
China
Thailand
Malaysia
State of Infrastructure:
Reasonable but Uneven Access
Electricity access (%)
Percentage paved roads
100
75
50
25
0
Infrastructure Quality: Quality ranking
World Competitiveness Report 2006-2007
Philippines: Low quality of services has emerged as a key impediment to the economic competitiveness
Overall Infrastructure Quality
Malaysia
Thailand
China
Indonesia
Vietnam
Philippines
Singapore
Hong Kong
Korea
Taiwan
Japan
0
1
2
3
4
5
6
7
Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
Telephones and Electricity Supply: Quality ranking
World Competitiveness Report 2006-2007
Telephones
Electricity Supply
Malaysia
Malaysia
Thailand
Thailand
China
China
Indonesia
Vietnam
Indonesia
Vietnam
Philippines
Philippines
Singapore
Hong Kong
Singapore
Hong Kong
Korea
Korea
Taiwan
Taiwan
Japan
Japan
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
8
Roads and Railroads: Quality ranking
World Competitiveness Report 2006-2007
Roads
Railroads
Malaysia
Malaysia
Thailand
Thailand
China
China
Indonesia
Vietnam
Indonesia
Vietnam
Philippines
Philippines
Singapore
Hong Kong
Singapore
Hong Kong
Korea
Korea
Taiwan
Taiwan
Japan
Japan
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
7
Ports and Air Transport: Quality ranking
World Competitiveness Report 2006-2007
Ports
Air Transport
Malaysia
Malaysia
Thailand
Thailand
China
China
Indonesia
Vietnam
Indonesia
Vietnam
Philippines
Philippines
Singapore
Hong Kong
Singapore
Hong Kong
Korea
Korea
Taiwan
Taiwan
Japan
Japan
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
8
80
Philippines: state of infrastructure has not
kept up with rapid population growth and
urbanization
Thousands100,000
90,000
Percent
60,000
50,000
60
% of
population
residing in
Metro Manila
70,000
% of population residing
in urban areas
Urban
40
80,000
40,000
30,000
20
Rural
20,000
10,000
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
0
0
Philippines: “Boom-Bust” Infrastructure Cycle
Infrastructure Investments as a share of GDP,
1985-2005
10
Percent
8
6
Total
Private
Public
4
2
0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Capital outlays only.
Sources: Department of Budget and Management; Department of Finance; Commission on Audit; Maynilad
Water Services, Inc.; Manila Water Corporation, Inc.; Optel Ltd.; and World Bank.
Philippines: Need to increase infrastructure
spending from 3% of GDP to at least 5%, and
increase the efficiency of infrastructure
spending in the meantime
Expenditure on Infra (% of GDP)
18
15.4
16
14
9.9
12
10
Private
7.2
Public
8
6
2.7
3.3
4
2
0
China
Indonesia
Philippines
Thailand
Vietnam
Source: World Bank Connecting East Asia (2005); Philippines data updated.
Private Sector Participation


Private flows in the
Philippines declined
since the Asian
Financial Crisis
Most investments are
greenfield projects
with guaranteed offtake from public
companies
PPI Investments in US $ million,
1990-2005
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1990
1993
Transportation
1996
1999
Water/Sanitation
2002
Telecom s
2005
Energy
Sources: PPI Database, MWCI and MWSI for Water, NTC for Telecoms.
PPI Investment by Type, 1990-2005
in US$ billion
Lease and Mgmt
contract
0.002
9.9
Concession
Divestitutre
Greenfield
24
Source: World Bank-PPIAF PPI Database
2.3
Many Opportunities for Improving Quality
and Efficiency of Spending: The Case of
the Philippine Road Sector


Administration of the Special Road Fund
subject to external pressures
“Pork Barrel” in DPWH budget:




About 22.5% of DPWH budget between 1997-2001
(close to P50 billion)
Outweighs funds allocated for maintenance on all
local roads
Inefficient maintenance practices
Low labor productivity at DPWH:


Philippines: 1 employee : 1.3 km. of national roads
Indonesia: 1 employee : 10 km. of national roads
An Agenda for
Revitalizing
Infrastructure
Investment in the
Philippines
Prerequisites
Policy and Planning
Deregulation and Regulation
Finance
Basic Prerequisites

Sustaining and deepening fiscal
reforms


Increase tax/GDP ratio
Improving economic governance
Rule of Law and credibility of contract
agreements
 Control of corruption
 Competition policy
 Transactions costs and red tape

Policy and Planning

Continue and implement policy
reforms in key areas


Power, roads, water, PPP/BOT
framework
Improve investment programming and
prioritization
Technical capacity for planning and
prioritization within fiscal framework
 Political process for coordination and
decision making

Policy and Planning (cont’d)

Project preparation
Technical and financial design
 Good project preparation is key for
effective competitive bidding

Deregulation and Regulation

Deregulate where competition is possible



Establish and enforce clear rules of the game
and regulate where competition is not possible



Yesterday’s telecoms deregulation allowed BPO
boom
Today’s airlines and ports deregulation could
unleash tourism and agriculture boom
Strengthen regulatory agencies, their technical
skills and independence, and protect from
politics
Environmental management
Well designed and planned competitive bidding
for projects (risk of unsolicited bids)
Finance



Cost recovery and tariffs
 Continued power tariff adjustments
 Clarification and enforcement of costrecovery regulations for water and sanitation
sector
 Adherence to agreed toll rate adjustments
for toll roads
Leveraging private investments by public
resources
 PPP
 Proper risk sharing (guarantees)
Effective ODA use
Public Private Partnership: Manila
East Concession



Significant performance improvements since privatization
(1997-2004):
 24 hour access to drinking water increased from 26%
to 84%
 Served population increased from 3.0 million to 5.1
million
 Staff per thousand connections reduced from 8.5 to
2.8
 Non-revenue water reduced from 63% to 43%
Lessons:
 Competitive and transparent bidding
 Good partners - right risk balance between public and
private
World Bank Group support:
 IFC provides debt and equity finance for water supply
improvements
 IBRD provides loans for sewerage improvements
From Agenda to Action



Many Good Policies in Place
Few Structural Obstacles to Rapid Progress
Implementation – One Step at a Time





Power sector reforms implemented
New showcases of good PPP projects
Competition in Air and Port services (e.g.
open skies)
Planning and Programming improved
Infra spending 5-8% of GDP by 2010?
Two Philippines Scenarios
for 2010

Two possible scenarios:
Muddle-through
 Take-off


Strong policy signals and credibility
followed by real investment
distinguish the two scenarios
Maraming Salamat Po
MABUHAY!