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October 2006 ER-04-06

2006 2nd QUARTER ECONOMIC REPORT:


INFRASTRUCTURE SPENDING AND
PHILIPPINE DEVELOPMENT

Sustaining its robust growth in the Table 2. GDP and GDP Grow th Rates
By Industry and Expenditure Sha re (At Constant Prices)
previous quarters, the domestic
Q2 First Ha lf
economy expanded by 5.5 percent in 2005 2006 2005 2006
the second quarter of 2006. The first Gross na tiona l product 5.8 6.6 5.3 6.5
quarter gross domestic product (GDP) Gross dome stic product 5.4 5.5 4.8 5.6
was revised upwards, from 5.5 percent Ne t fa ctor incom e from a broa d 9.4 18.3 11.0 16.8
By Industry
to 5.7 percent, bringing the first
Agriculture & fishe ry a nd Fore stry 2.1 6.7 0.7 5.2
semestral growth to 5.6 percent. Not Agriculture & fishery 2.2 6.7 5.1 8.0
only does this make the government’s Forestry -10.6 10.0 -33.0 22.4
5.5 percent-6.1 percent full year Industry 5.8 4.5 4.7 5.1
forecast look much more achievable, Mining & quarrying 13.6 3.5 4.8 2.7
Manufacturing 5.8 6.5 5.4 6.4
it also makes the Philippines’ growth
Construction 4.5 -3.8 2.3 -0.4
more comparable to other Asian Electricity, gas & water 3.2 3.4 2.7 4.0
economies. Se rvice 6.4 5.7 6.7 6.1
Table 1. Gross Domestic Product
Transportation, comm. & storage 7.0 4.1 8.7 5.4
Grow th Rates of Asian Nations, 2006
Trade 5.9 5.2 5.8 5.2
GDP
Finance 11.7 10.0 12.1 12.2
Country Ownership of dwellings & real estate 3.9 5.8 5.3 4.7
Q1 Q2 Average
China 10.3 11.3 10.8
Private services 6.8 6.0 5.8 6.5
Singapore 10.6 8.1 9.4
Government services 2.7 4.4 3.2 3.8
Hong Kong 8.2 5.2 6.7 By Ex pe nditure Sha re
South Korea 6.1 5.3 5.7 Pe rsona l consum ption 4.8 5.2 4.9 5.4
Philippines 5.7 5.5 5.6 Gove rnm e nt consum ption 12.4 0.4 7.5 3.9
Malays ia 5.3 5.9 5.6
Ca pita l form a tion -4.1 -5.8 -6.6 -3.8
Fixed capital -2.5 -5.4 -5.3 -2.7
Thailand 6 4.9 5.5
Construction 2.1 -5.2 -0.1 -2.1
Indones ia 4.6 5.2 4.9
Pub lic -1.6 2.1 -6.0 6.2
Taiwan 4.9 4.6 4.8
Source: The Economist Private 4.9 -10.5 3.9 -7.1
Durab le equipment -7.6 -6.2 -10.2 -3.3
Breeding stock & orchard dev't 2.5 -1.7 1.1 -1.5
The second quarter growth was Ex ports 1.6 22.3 1.5 17.5
mainly characterized by the strong Merchandise exports 1.9 21.8 2.5 16.8
performance of agriculture, better Non-factor services 0.2 25.2 -3.6 21.9
manufacturing, healthy finance and real Im ports 2.6 4.0 0.3 2.5
Merchandise imports 2.0 4.3 -0.5 2.4
estate, surging OFW remittances, and
Non-factor services 15.9 -2.2 17.0 4.2
the remarkable turnaround of exports. S ource: National Statistical Coordination Board

1
Revitalized agriculture. Agriculture bounced Industry’s overall performance was adversely
back in the second quarter of 2006, surging to 6.7 affected by a weak construction subsector, both
percent this year from 2.1 percent in the same public and private. Private construction suffered a
period in 2005. Palay and corn production contraction of 10.5 percent from the 4.9-percent
increased by 10.3 percent and 49.2 percent, growth in the second quarter of 2005. Similarly,
respectively, as a result of better irrigation, favorable government construction grew by a mere 2.1 percent
weather, continued technical assistance from the in the second quarter, a significant deceleration from
government and the availability of improved variety. its 14.0-percent growth in the first quarter of this year.
During the quarter, palay production yield reached It is, however, an improvement from the 1.6-percent
3.9 tons per hectare. The year 2006 was also decline posted in the second quarter of last year.
favorable for corn growers as corn production yields
increased to an average of 2.6 tons per hectare. Healthy finance and real estate. The services
Ta ble 3 . P a la y a nd Corn Yie ld sector was still a major source of growth, contributing
2 0 0 5 a nd 2 0 0 6 (yie ld/he c ta re , in tons ) 2.8 percentage points to GDP in the second quarter
Ite m
Ja n-M a r Ap r-Ju n Ja n-Jun of 2006 but its subsectors grew at a slower rate.
2006 2005 2006 2005 2006 2005
P alay
Transportation, communication and storage, in
A verage 3.5 3.4 3. 9 3.8 3.7 3.6 particular, slipped to a 4.1-percent growth in the
Irrigat ed 4.0 3.9 4. 2 4.1 4.1 4.0 second quarter of this year from 7.0 percent last year,
Rainfed 2.4 2.3 2. 6 2.4 2.5 2.3 a result of the escalating oil prices. Stiff competition
Corn
among mobile service providers and the already
A verage 2.6 2.3 2. 5 2.1 2.6 2.2
W hite 1.6 1.4 1. 8 1.5 1.7 1.4 saturated market slowed down the communication
Y ellow 3.6 3.2 3. 4 3.0 3.5 3.2 sector from 15.9 percent in the second quarter of
Source: Bureau of Agricultural Statistics 2005 to 8.4 percent in the second quarter of 2006.
Better manufacturing. Among the subsectors of
industry, only manufacturing fared better in the The increases in finance and real estate, however,
second quarter of 2006. Manufacturing growth compensated for the decline in the other subsectors.
increased to 6.5 percent from 5.8 percent in 2005, Finance registered a healthy growth of 10 percent
the highest since the fourth quarter of 2004. Food owing to the remarkable growth of the non-banks
manufactures, which comprise 40.6 percent of the subsector. Non-banks, which include financial
subsector’s gross value added expanded by 7.6 services from investment companies, security dealers,
percent. Also notable was the growth in products of brokers and pawnshops, grew vigorously at 104
petroleum and coal (22 percent) which has been percent in the second quarter of this year, from 1.4
steadily picking up, likewise those of leather and percent last year. This was primarily attributed to the
leather products (178 percent), textile manufactures strong performance of the stock market and credit
(20 percent) and basic metals (33percent). card companies. The Philippine stock index
Ta ble 4. Ma nufa cturing Grow th Ra te s increased from 1,793.7 points in the first half of 2005
Se cond Qua rte r 2005 a nd 2006 (in pe rce nt) to 2,201.6 points this year, which translates to a 22.7
Q2 2005 Q2 2006 percent growth from last year. Credit card companies,
Le a ders
Leather & leather products -39.10 177.90
meanwhile, cashed in on the increasing number of
Basic metal industries 4.90 33.40 higher paying jobs, particularly in call centers and
Publishing & printing -2.10 25.60 other business process outsourcing (BPO) companies.
Products of petroleum & coal 32.80 22.20
Textile manufactures 11.50 20.50 Ownership of dwellings and real estate, likewise,
La ggards accelerated to 5.8 percent from 3.9 percent in the
W ood & cork products -41.40 -35.40 previous year. The growth was spurred by the
Tobacco manufactures 4.00 -27.50
increased sales from residential projects, strong
Transport equipment 37.30 -26.90
demand for business offices from the BPO sector as
Non-metallic mineral products -9.60 -18.50
well as higher rental and leasing operations from
Rubber products 5.40 -18.20
Source: National Statistical Coordination Board
newly opened malls.
2
Surging OFW remittances. OFW remittances ores, 416.6 percent; bars and rods of copper, 30
from January to June 2006, grew by 15.4 percent percent.
over the same period last year. This, in turn, drove
up private consumption to 5.2 percent from 4.8 The demand for semiconductors and electronic
percent in the same period last year. The presence microcircuits in the second quarter was driven by
of high disposable income from OFW remittances the rising global demand for mobile phones, digital
was evident in the high consumption of food, cameras, digital music players and laptop
transportation and household operations. computers. Meanwhile, the growth of gold from
Figure 1. OFW Remittances copper ores soared to 416.6 percent as the prices
January-June 2003-2006 (in billion US$) of gold in the international market remained high.
5.96
6 5.16 It should be noted that despite the slowdown of
5 4.02
the US economy, exports to the US grew by 17.9
3.68 percent to US$2 billion in the second quarter of
4
in B US$

2006.
3

2
Exports of non-factor services likewise expanded
1 by 25.2 percent, from a marginal 0.2 percent same
0 period last year. This is largely attributed to IT-
January-June January-June January-June January-June
2003 2004 2005 2006 enabled services like contact centers, medical
Source: Bangko Sentral ng Pilipinas
transcription and software development.

OFW remittances also accounted for the Given the strong exports, total imports expanded
remarkable growth of the net factor income from by 4.0 percent from last year’s expansion of only
abroad (NFIA). NFIA grew 18.3 percent in the 2.6 percent. There was healthy growth of
second quarter of 2006 or almost double that of last merchandise imports such as electrical machinery
year’s 9.4 percent. This resulted in a higher gross (19.3 percent), textile yarns (15.9 percent), and
national product (GNP) of 6.6 percent in the second artificial resins and plastics (13.4 percent). Mineral
quarter. fuel imports, on the other hand, fell by 7 percent,
an effect of rising oil prices in the global market.
Remarkable turnaround of exports. Exports
recovered, from 1.6 percent in the second quarter Prospects for the rest of the year
of last year to 22.3 percent this year. In particular,
merchandise exports grew by 21.8 percent, bringing The 5.5-percent GDP growth in the second
its first semester average growth to 16.8 percent, or quarter indicates that the full year growth projection
twice the targeted 8 percent growth for the year. The of 5.5 percent to 6.1 percent is likely to be reached.
second quarter growth was led by increased exports However, there are challenges to contend with.
of finished electrical machinery at 31.2 percent;
semiconductors and electronic microcircuits, 16 For one, the havoc wreaked by typhoon Milenyo
percent; garments, 23.8 percent; gold from copper is expected to have a negative impact on growth.
Ta ble 5. Top 5 Me rcha ndise Ex ports Whether it will be minimal or substantial is yet to be
Se cond Qua rte r, 2006 (in pe rce nt) known though. As of October 4, the National
Contributor to grow th
Q2 2006 Contribution
Disaster Coordinating Council estimates the
(a t consta nt to e x port
price s) grow th damaged properties at P2.93 billion, with the farm
Finished elect’l machinery 31.20 3.25 sector suffering the most. Agricultural losses are
Semicon & electronic s 16.00 2.51 pegged at P1.84 billion while infrastructure damages
Garments 23.80 1.97 are at P970 million. Earlier, it was projected that
Gold from copper ores 416.60 1.43
with the end of La Niña, agriculture will help pull
Bars, rods of copper 30.00 0.55
Source: National Statistical Coordination Board up the second half growth.
3
the US key interest rate at 5.25 percent, but it warned
Ta ble 6. Estim a ted Da m age to Properties
that rates could go up again if inflation carried on.
of Typhoon M ilenyo as of October 4, 2006
Total Dam age
2,927,463,602 Balancing these threats are some favorable
Properties
A griculture 1,838,694,871 developments in the global environment such as the
Infrastructure: 970,032,280 current upturn of the European Union’s economy
S chool B uildings 118,736,450 and the economic recovery of Japan.
Sourc e: National Dis as ter Coordinating Counc il

On top of these, seasonal factors in the 3rd and


Apart from the damage to properties, the 4th quarters add to the optimism that better growth
typhoon also downed power and telephone lines is in the offing. For instance, the second half ushers
causing the financial markets to temporarily shut in the Christmas season where OFW remittances
down, telecommunication services to be interrupted normally pour in by the buckets. The high
and most commercial establishments to close shop. remittance inflows normally result in a stronger peso,
On the positive side though, the power outage which in turn, lower the cost of imported inputs used
caused hotels in the metro to be fully booked, while in export goods such as semiconductors and
the increased government spending to repair the electronics. More stable input prices are expected
damages is expected to be a factor in the second to buoy up manufacturing activities. Higher
half growth. demand for consumables like food, beverage,
textile, footwear and other household basics is also
On the international front, the volatility in the expected to rise during the holiday season.
world price of oil remains to be a threat. Dubai crude
is currently priced at US$54.92 per barrel,1 2.3 In addition, firms usually replenish their
percent lower from last month’s US$68.56/bbl. Yet inventories in the third quarter, implying an increase
despite the recent decline, oil prices are expected in the demand for exports, particularly electronics.
to remain unstable as the precarious geopolitical The Semiconductor and Electronics Industries in the
situation in the Middle East and the tight demand- Philippines, Inc. forecasts at least 10 percent growth
supply situation continue to propel the volatility of in electronics for 2006.
oil prices.
The growth in the next two quarters will be
The moderation in the growth of the US market further boosted as the fiscal position of government
is also an imminent threat. The US economy grew continues to improve. The January to August 2006
slowly in the second quarter at 2.6 percent after deficit only reached P34.2 billion, lower than the
expanding 5.6 percent in the first quarter.2 This was targeted deficit for the period. If revenues continue
brought about by the lukewarm housing market, to increase, government can spend more on
rising energy prices and higher interest rates that infrastructure and social services.
affected consumer spending. The US economy is
expected to grow by only 3.4 percent for the whole This better fiscal position likewise will allow the
of 2006, and even slower at 2.9 percent in 2007 government to address the remaining bottlenecks
(World Economic Outlook, IMF September 2006). which hinder the country from achieving higher
If this sluggish trend will continue, it will have an growth. Foremost of these is the decline in capital
adverse impact on the Philippine economy as the formation. Capital formation has shrunk from 23.9
US remains to be one of its largest trading partners. percent in 2000 to -4.3 percent in 2005, a major
aspect of which is the poor state of infrastructure in
There is also a recurrent concern that the US the country. Government infrastructure spending as
Federal Reserve may resume increasing interest a percentage of GDP has substantially declined from
rates. The US Federal Reserve is, at present, holding 3.54 percent in 2000 to 2.22 percent in 2005.
1
September 25, 2006 price
2
US Burea u of Economic Analysis, https://bea.gov/bea /newsrel/
gdpnewsrelease.htm
4
Compared to other ASEAN countries, the potentials of the country. In particular, infrastructure
Philippines’ infrastructure spending is substantially affects a country’s economic development in the
lower. following ways:

Figure 2. Gross Capital Formation — Good infrastructure improves a country’s


2000 to 2005 (in percent)
growth prospects by strengthening its
30.0
23.9 investment climate thereby making it
25.0
attractive to foreign investors (World Bank
20.0
15.0
2005);
9.5 — Infrastructure lowers cost of production and
in %

10.0
5.0 1.5 significantly increases industrial productivity
0.0 (Erquiga 2006, World Bank 2005, Sridhar
-5.0
-4.3 -4.3 and Sridhar 2004); and
-10.0 -7.3 — Infrastructure, in particular, information
2000 2001 2002 2003 2004 2005
year communication technology, helps people
Source: National Statistical Coordination Board
access prices, markets and job opportunities
(Sridhar and Sridhar 2004).

INFRASTRUCTURE SPENDING AND PHILIPPINE Notably, the presence of good infrastructure


DEVELOPMENT assists the activities of major economic sectors. For
instance, Erquiaga (2006) cited the importance of
The link between investments in infrastructure infrastructure facilities in the sectors of tourism and
and economic growth is well established in the agriculture. The absence or lack of transportation
literature. Various studies reveal that there is a (roads and bridges), water (quality water and
positive correlation between infrastructure, sanitation) and energy facilities may result in a
economic growth and, ultimately, poverty paralysis of activities in these industries.
reduction. In the Philippines, the World Bank
estimates an 85 percent correlation between GDP Infrastructure and Poverty Reduction
growth and infrastructure expenditures. Further, it
has been identified that “safe, reliable and cost Infrastructure likewise plays a role in poverty
effective infrastructure is an important contributor alleviation as higher economic growth leads to
to raising living standards, thereby improving the poverty reduction. According to the World Bank
quality of life.” In a report of the Organisation for (2005), the following economic growth indicators
Economic Cooperation and Development (OECD) and their subsequent poverty reduction effects may
in 2001, it was similarly noted that public be realized through infrastructure spending: (a)
investments in transport, communication and increases in average income means people have
infrastructure enhance private sector innovation and more money to spend; (b) increased employment;
productivity. and (c) greater public revenues allowing
government to spend more on social services, such
Impact of Infrastructure in Development as health and education.

Infrastructure and Economic Development In an ADB study done by Chatterjee et al. (2004),
investments in infrastructure facilities were proven
The role infrastructure plays in economic to have significant impacts on poverty reduction in
development cannot be understated. According to several countries in the Asia and the Pacific region.
studies, investment in infrastructure does not Citing two infrastructure subsectors, roads and
necessarily ensure growth but it nevertheless energy, the study found that they have positive
contributes to the realization of the economic effects in reducing income and non-income poverty.

5
In terms of transportation, the following were The gravity of the situation can be further grasped
found to be the main effects to reduce income when the Philippines’ ranking is compared with the
poverty: infrastructure ranking of other countries in Asia.
Except for Indonesia which placed last in terms of
— Access to roads reduced prices under infrastructure, the Philippines fared worse compared
conditions of competitive transport services with the rest of its neighbors. In 2006, Malaysia was
provision; ranked 31st and Thailand 48th.
— Mobility was increased;
— The poor were able to find better paying work; Ta ble 7. S e le cte d Asia n Co untrie s’ Infra structure Ra nk
W orld Com pe titive n e ss Re port 2004-2006
and
C ountry 2004 2005 2006
— Better transportation allowed production and C hina 41 42 37
marketing of higher-value cash crops and Indones ia 60 60 61
supply of cheaper agricultural inputs. K orea 27 23 24
Malays ia 30 34 31
P hilippines 59 55 56
With regard to the impact of power infrastructure,
Taiw an 20 18 20
the ADB study found the following: Thailand 50 47 48
Sourc e: W orld C ompetitivenes s Yearb ook , various years

— Rural electrification helped stimulate the rural


economy and increased opportunities for off- While the country performed quite well with
farm employment of the poor; regard to technological infrastructure, owing to its
— Use of television led to improved information high percentage of high-tech exports, investment in
on crops and contributed to improved farm telecoms and mobile telephone costs, it ranked very
productivity; low in terms of all other infrastructure subcategories.
— Lighting allowed longer work hours and It even ranked last among the 61 countries in basic
higher productivity. infrastructure which includes the country’s roads,
air and water transport systems, as well as the energy
As for the impact on non-income poverty, it infrastructure.
should be noted that the provision of roads in these
countries “reduced travel time and provided better Table 8. Philippines’ Ranking in Infrastructure
Subcategories, 2006
access to basic education and health services.” The
Subca tegorie s Rank
provision of electric power, meanwhile, resulted in Basic Infrastructure 61
(a) longer time for studies and years of schooling; Technological Infrastructure 37
(b) increased safety and security; and (c) better Scientific Infrastructure 58
medical services in the rural areas. Health and environment 53
Education 57
Status of Philippine Infrastructure Sourc e: W orld Competitivenes s Yearb ook , 2006

The quantity and quality of Philippine Power. In terms of access to electricity, the
infrastructure have generally failed to keep pace with Philippines performs quite adequately. By the end
the growing demands of the population. Results of of 2002, 89.1 percent of the population had access
the World Competitiveness Rankings would indicate to electricity, less than that of Malaysia and Thailand
that the state of Philippine infrastructure has been but comparably better than that of Indonesia and
slipping in recent years. In 2002, the Philippines Vietnam. In terms of barangay electrification, the
ranked 47th out of 61 countries and territories in Philippines has also been experiencing steady
terms of infrastructure. In 2006, its ranking fell to growth, improving from 83.04 percent in 2000 to
the 56th place. 93.7 percent by the end of 2005 (see Figure 3).
However, the problem lies in the quality of service.

6
On a scale of 1-7, with seven being the highest, country’s being tagged as the text capital of the
the Philippines scored only 3.7 for quality of service. world, its density of mobile subscribers, which had
Transmission and distribution losses in the country grown substantially from 27.8 percent at the end of
were also among the worst in the region. At 16.3 2003 to 41.3 percent at the end of 2005, is
percent in 2002, it is even less efficient than considered by the World Bank to be just average
Vietnam and Indonesia. This national average also for the region.
masks the wide diversity between the losses of
distribution utilities in major metropolitan areas (e.g. Table 10. Status of Telecoms Infrastructure
Meralco and Davao Light and Power) and those of Selected Countries, 2003
electric cooperatives. Mobile
Mainlines per
Country subscribers per
Table 9. Status of Power Infrastructure 100 people, 2003
100 people, 2003
Selected Countries, Various Years
Korea 53.83 70.09
Singapore 45.03 85.25
Electrification Quality of Transmission China 20.90 21.48
a Electric and Malaysia 18.16 44.20
Rate, (%)
Supply, Distribution Mongolia 5.62 12.98
2003/2004 Losses, 2002 Thailand 10.49 39.42
2000 2002 (scale 1-7) b (%) c Philippines 4.12 27.80
Korea 100 100 6.1 5.99 Viet Nam 5.41 3.37
Singapore 100 100 6.7 8.52 Sri Lanka 4.90 7.27
China 98.6 99 4.2 7.12 Indonesia 3.94 8.74
Malaysia 96.9 97.1 5.9 5.55 India 4.63 2.47
S o urc e: P hilippines - M eet ing Inf ras t ruc t ure C hallenges , Wo rld B ank 2006
Mongolia 90 90 nd nd
Thailand 82.1 91.1 5.3 7.26
Philippines 87.4 89.1 3.7 16.33 Ta ble 1 1 . P hilippine s ' Te le de ns ity
Viet Nam 75.8 79.6 3.4 14 2 0 0 0 -2 0 0 5 (in pe rc e nt)
Indonesia 53.4 52.5 3.6 16.16 Ye a r Fix e d Line M obile
Sources: a. International Energy Agency. World Energy Outlook 2004; Subscribe rs
b. World Economic Forum. Global Competitiveness Report 2003-2004;
c. World Bank. World Development Indicators 2006; 2000 4.0 8.5
2001 3.8 15.6
Figure 3. Barangay Electrification Status 2002 4.2 19.4
Philippines, 2001-2005 (in percent)
2003 4.1 27.8
40,000 39,301 96.00% 2004 4.2 39.8
39,000
38,763 94.00% 2005 4.0 41.3
38,000 86.92% 37,761 93.70% 92.00% S ourc e : Philippine Sta tistic a l Ye a rbook 2005
92.41%
90.00%
37,000 36,457 88.00%
83.04% 90.03%
36,000 86.00%
34,833 84.00%
35,000
82.00% Water and sanitation. Access to improved water
34,000

33,000
80.00% sources3 in the country is relatively high at 85
78.00%
32,000 76.00%
percent of the population in 2002. But it has shown
2001 2002 2003 2004 2005 signs of slipping, down from 87 percent coverage
Source: National Electrification Administration in 1990. This could indicate that the infrastructure
coverage has not kept up with the population
Telecommunications. Access to fixed telephone growth. Furthermore, the national average also does
lines is also quite low in the Philippines although not reflect the disparity in access across regions with
this is mitigated by the substantially higher level of
access to mobile telephones. Fixed line access is Improved drinking water sources, as defined by UNICEF and the
3

WH O, a re : household connec tion, public sta ndpipe , bore hole ,


among the lowest in the region, with only 4.1 lines prote cte d dug w ell, protec te d spring , or ra inwa ter c ollec tion.
per 100 people at the end of 2003. This had dropped Unimprove d drinking wa ter sources include: unprotec te d w ell,
unprotected spring, rivers or ponds, vendor-provided water, bottled
to 4 percent at the end of 2005. Despite the water and tanker truck water.
7
ARMM having only 29 percent access compared the length of paved roads per sq.km. is quite low
to 97 percent for Central Luzon. Access to improved however at 0.06 km./sq.km. in 2002.
sanitation facilities,4 which was at 73 percent in
2002, is relatively better than other Asian countries’. Public spending for infrastructure. The poor state
of the country’s infrastructure can be partly blamed
Table 12. Access to Drinking Water and Sanitation on the low expenditures in this area. Public
Selected Countries, 1990 and 2002 (in percent)
infrastructure expenditure declined from 3.5 percent
Access to Improved Access to in 2000 to 2.2 percent in 2005. The World Bank
Country Year drinking water Improved sanitation
estimates that countries such as the Philippines need
Total Urban Rural Total Urban Rural
to spend a minimum of 5 percent of GDP on
China 1990 70 100 59 23 64 7
infrastructure to meet their needs over the next 10
2002 77 92 68 44 69 29 years.
Indonesia 1990 71 92 62 46 66 38
Figure 4. Public Spending for Infrastructure
2002 78 89 69 52 71 38 2000-2005 (in percent)
Philippines 1990 87 93 82 54 63 46 20
2002 85 90 77 73 81 61 18
16
Malaysia 1990 n/d 96 n/d 96 94 98
14
2002 95 96 94 n/d n/d 98 12
Vietnam 1990 72 93 67 22 46 16 10

2002 73 93 67 41 84 26 8
6
Source: Philippines- Meeting Infrastructure Challenges, World Bank 2005
4
2
Roads. The Philippines compares favorably in 0

terms of road density, at 2.5 kilometers/1000 people 2000 2001


% of GDP
2002 2003 2004
% of Budget
2005

in 2001, with its regional neighbors. The national Source: Congressional Planning and Budget Department
data though fail to indicate the large regional
variations in road density in the country. Metro
Manila ranks lowest in terms of kilometers per The NG and state-owned enterprises (SOEs) are
population with 0.5 km. per 1000 people while CAR largely responsible for providing transportation and
ranks highest with 6.4 km. per 1000 people. The other infrastructure like housing and solid waste (see
quality of the road network, measured in terms of Table 14). The private sector has been an important
partner of the government in providing
T a ble 13. Roa d Ne tw ork a nd P a ve d Roa ds
S e le cte d Co untrie s, 2001 a nd 2002
telecommunications and energy infrastructure.
T otal road Pav e d roads However, private sector participation has declined
ne twork, 2001 pe r land in recent years particularly in the power sector.
C ountry
(km./1000 are a, 2002
pe ople ) (km./sq.km.) Government’s Thrust in Increasing Infrastructure
Korea 1.8 0.55
Singapore 0.8 4.67 Spending
C hina 1.4 nd
Malays ia 2.9 0.15 President Gloria Macapagal Arroyo’s (PGMA’s)
Mongolia 20.1 < .010 2006 State of the Nation Address (SONA) provided
Thailand 3.1 0.11
Philippine s 2.5 0.06
a detailed list of current and future infrastructure
Viet Nam 1.2 nd investment projects to enhance the competitiveness
Sri Lanka nd nd of the country’s four natural “super regions” namely
Indones ia 1.7 0.12 North Luzon Agribusiness Quadrangle, Metro
India 3.2 nd
Source: Philippines- Meeting Infrastructure Challenges, World Bank 2005 Luzon Urban Beltway, Central Philippines, and
Mindanao (see Table 15). In addition to the four
4
Improved sanitation facilities, based on the UNICEF and WHO
definition, are as follows: connection to a public sewer, connection to “super regions”, a Cyber Corridor, traversing Baguio
a septic system, pour-flush latrine, simple pit latrine and ventilated City to Zamboanga, would focus on information and
improved pit latrine. Unimproved sanitation facilities include the
following: public or shared latrine, open pit latrine or bucket latrine. communications technology (ICT)-related
8
Table 14. Infrastructure Finance in the Philippines
By Source of Funding, 1998-2003 (As Percent of GDP)
NG LGU SOE Private Philippines
1998 2003 1998 2003 1998 2003 1998 2003 1998 2003
Infrastructure 1.2 1.0 0.2 0.3 1.3 1.1 2.9 1.2 5.6 3.6
Trans portation 1.0 0.6 0.2 0.2 0.2 0.3 0.0 0.1 1.4 1.2
Power 0.0 0.0 0.0 0.0 0.9 0.6 1.9 0.5 2.8 1.1
Telecom m unications 0.1 0.0 0.0 0.0 0.0 0.0 1.0 0.6 1.1 0.6
Water and Sanitation 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.1
Others 0.1 0.4 0.0 0.1 0.1 0.1 - - 0.2 0.6
S o urc e: A as ian D ev elo pm ent B ank (2005)

investment such as business process outsourcing. the national government (NG) and P848.6 billion
These infrastructure investment projects are will be sourced from the private sector and
estimated to cost P372 billion (BusinessWorld government-owned and controlled corporations
September 9, 2006) and is part of the (GOCCs). Local government units (LGUs), through
Comprehensive and Integrated Infrastructure the financing schemes offered by Land Bank of the
Program (CIIP). Philippines and Development Bank of the
Philippines, would shoulder 2 percent of the total
The CIIP has identified priority infrastructure infrastructure spending.
projects in the Philippines which are estimated to
Figure 6. Comprehensive and Integrated Infrastructure
reach P1.7 trillion5 for the period 2006-2010. More Program Financing Sources, 2006-2010
than half, or around P889.2 billion, would go to
transportation-related projects and P361.1 billion LGUs
OTHERS
2%
would fund power and electrification programs. The PSP 4% NG-ODA
rest of the investments would be channeled to 27% 44%

projects related to water resources, social


NG-ODA
GOCCs

infrastructure, support to agrarian reform PSP


LGUs
communities (ARCs), and communications. Twenty OTHERS

percent or P337.4 billion worth of these


infrastructure projects has already been started with GOCCs
23%
the rest still in the pipeline. Source: National Economic Development Authority, 2006

Figure 5. Comprehensive and Integrated Infrastructure Given that about P935 billion of the
Program Investment Requirement by Sector, 2006-2010
infrastructure investment program will be sourced
Power and outside the national budget, the government
Electrification
21%
Water proposes to adopt a project financing and
Resources
15% assistance scheme as follows:

Communications — Seeking official development assistance


Transportation
52%
1%
through World Bank, ADB, JBIC, China
Support to ARCs
Social Eximbank; and
1%
Infrastructure
10%
— Raising funds from the National Savings Pool
Water Resources Communications Social Infrastructure
through issuance of bonds to Government
Support to ARCs Transportation Power and Electrification Social Insurance System, Social Security
Source: National Economic Development Authority, 2006 System, Home Development Mutual Fund,
Development Bank of the Philippines, Land
Forty-four percent or around P775.3 billion of Bank of the Philippines, private banks, equity
the total infrastructure spending would come from market and the bond market.
5
Based on the presentation of NEDA at the Congressional Planning
and Budget Department Workshop on August 18, 2006
9
Both schemes will lend funds to the Philippine will directly improve the welfare of the poor. With
Infrastructure Corporation of the National regard to spending on water resources, it should
Development Company to spearhead the proposed consider spending more on irrigation to improve
infrastructure program. The Department of Finance farmer income and water supply which will improve
through the Philippine Export-Import Agency will health outcomes.
guarantee these loans worth $3.5 billion. The
Figure 7. Comprehensive and Integrated Infrastructure
Department of Finance has granted earlier this year Program, Transport Investment Requirement, 2006-2010
sovereign guaranty to the proposed NDC’s P20 Roads and
Urban / Rail
41%
billion bond flotation (The Philippine Star 2006). Bridges
43% PhP 364.59 B
PhP 388.19 B

For project non-financing support, government


agencies such as the Public Estates Authority, the
Department of Public Works and Highways,
Department of Environment and Natural Resources,
Department of Agriculture, Department of Agrarian
Reform and the private sector are expected to Air Transport
Water Transport
4%
12%
provide assistance in the areas of land identification PhP 104.53 B
PhP 31.89 B

and provision and land development, road Source: National Economic Development Authority, 2006
construction and technical and social services.
The infrastructure program of the government
Composition of Infrastructure Projects seems to be in the right track in terms of improving
the welfare of the poor. Nonetheless, the details of
Another major factor to consider in the course these projects, where they are located, who will
of implementing an infrastructure program is the directly benefit and what type of project will be
choice of infrastructure. While it has been undertaken, need to be monitored to balance its
established that infrastructure favorably impacts on impact on the economy as a whole and its direct
economic growth and consequently reduce poverty, impact on poverty reduction.
there are projects that can directly benefit the poor.
Spending on rural infrastructure directly reduces Issues and Challenges for Infrastructure
poverty by providing opportunities for livelihood, Development
enhancing productivity of assets of the poor and
increasing their incomes (ADB). PGMA’s infrastructure-led development strategy
comes after the implementation of new tax measures
Many studies have identified which that increased government revenues and averted
infrastructure project directly impact on the poor. what could have been a fiscal crisis. These tax
These are summarized in a study of the ADB, JBIC reforms and improved efficiency of revenue-
and WB, “Connecting East Asia: a New Framework generating agencies are expected to result in a
for Infrastructure,” as shown in Table 15. balanced budget by 2008, allowing for more room
for infrastructure and social services spending. For
The study reveals that roads, particularly rural the year 2007, budget for infrastructure will amount
roads, have high impact on poverty reduction. The to P83.8 billion.
infrastructure program of the government will spend
an estimated PhP889.2 billion on transport Financing of Infrastructure Projects
infrastructure and 43 percent of this will go to roads
and bridges. If the government wants to have greater A huge part of the infrastructure program is
impact on poverty reduction, then it should spend intended to be funded from the increase in revenues.
more on roads and bridges in the rural areas. The An estimated one to two percent of GDP in
decision to spend 41 percent on urban/rail project additional revenues annually will be needed to

10
Table 15. Potential Positive Impacts of Infrastructure Services on the Poor
Sector Direct impact on the poor Indirect impact on the poor
Electricity • Mainly for lighting,TV, radio at low • Reduced energy costs for
levels of income. enterprises encouraging
employment creation across wide
• Heating, cooking, appliances for self- range of activities
employment at higher levels of
income • Improved health and other
services (refrigeration, lighting,
and so on)

• Improved ICT access


Piped Gas • Limited impact at low-income levels • Reduced energy costs for
enterprises encouraging
• Heating, cooking at higher levels of employment creation (limited
income range of activities)
Roads • Access to employment and markets • Reduced transport costs and
improved market access for
• Access to services (health, enterprises and service providers,
education) lowering the costs of serving
remote communities
Railways • Limited • Reduced costs and improved
market access for enterprises
Urban Mass • Access to employment opportunities • Employment creation from more
Transit efficient labor markets
Ports • Limited • Reduced transport costs for
enterprises encouraging
employment creation (for
example, bulk commodities like
agriculture)
Airports • Limited • Reduced transport costs for
enterprises encouraging
employment creation (high-value,
low-bulk commodities and
services)
Information and • Better communication access aiding • Employment creation through
Communication migration, information on improved knowledge of markets,
Technology opportunities, access to knowledge, reduced management
and potential engagement in wider supervision costs, access to
communities wider knowledge base
Water Supply • Improved health outcomes; time • Limited
savings; lower costs
Sanitation • Improved health outcomes • Improved health outcomes (for
example, reduce pollution by non-
poor households and others)
Source: Jones 2004a.

finance the P775.3 billion NG requirement for the ending up with huge contingent liabilities in the
next five years. Revenues as a percent of GDP are future. Government policy should include cost
projected to rise to 16.3 percent in 2006 and 16.7 recovery in the delivery of infrastructure services and
percent in 2007 from 15.1 percent in 2005. As of allowing competition where applicable, to avoid the
first semester of this year, the Philippines’ revenue fiscal risks that huge infrastructure projects may
effort has risen to 16.3 percent of GDP, indicating pose. These policies should also improve the
that the country is on track in achieving its revenue efficiency of the projects.
target. Further, the proposed financing strategy will
utilize off budget financing. There is a need for The Build-Operate-Transfer Law, the centerpiece
greater transparency in these projects and closer program for public-private partnership in
monitoring of loan guarantees to avoid government infrastructure development, needs to be reviewed
11
to win back their participation in infrastructure could be used to evaluate the appropriate level of
development. Several unclear provisions of the BOT government spending for particular projects. In the
Law include the roles of implementing agencies, absence of a database of cost benchmarks for
costs related to transfer of ownership of BOT facilities; infrastructure projects, it is worthwhile to look at
and handling of residual claims (World Bank 2005). private sector practices for similar projects as these
Other related issues to BOT Law that need to be are generally considered to be more efficient and
addressed are the level of direct government less prone to corruption. For instance, experiences
guarantees and prohibition on contract revisions of the Filipino-Chinese Chamber of Commerce in
after it was granted. school building construction projects indicate a
benchmark of P200,000 per classroom.
Implementation of Infrastructure Projects Examination of Department of Education (DepEd)
budgets, on the other hand, indicates that it costs
Another major challenge that has to be faced is the government on the average P436,734 per
improving the implementation of the infrastructure classroom- more than double the benchmark level.
projects. Implementation of infrastructure in the
Philippines has long been hampered by problems Transparency and accountability systems should
of inefficiency, corruption and patronage. A study be strengthened in the implementation of
by Azfar et al. 2002, estimated that 20 to 40 percent infrastructure projects. There are a number of things
of public works resources are misused. It is also that should be ensured:
noted that in certain procurement and infrastructure
projects, regional directors are said to get a 10 1. The application of the Procurement Act of
percent commission while officers of the Department 2003, which provides standards for competitive
of Budget and Management (DBM), which controls bidding and greater transparency in the process
the flow of funds, get 15 percent. Hence, the issue and strengthens the accountability system of the
of reducing corruption in infrastructure delivery has process, should be ensured.
to be addressed.
2. There should be stronger oversight over the
The use of benchmarking as a practical tool for implementation of the projects from the
improving performance in the implementation of Commission on Audit and Congress.
infrastructure projects should be considered.
Benchmark indicators are derived by learning from 3. The stakeholders and the community must
best practices and understanding the processes by increase their participation in the planning and
which they are achieved. Examining benchmark monitoring of projects, and be allowed to access
figures, for instance in terms of infrastructure costs, information on the projects.

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This paper was prepared by the Economic Section The views and opinions expressed herein are
under the supervision of its section head and SEPO those of the SEPO and do not necessarily reflect
Director General. those of the Senate, of its leadership, or of its
individual members.

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