Understanding the ‘Build, Build, Build’ program

Productivity depends on many factors, including our workforce’s knowledge and skills and the
quantity and quality of the capital, technology and infrastructure that they have to work with, said
American economist Janet Yellen.

The Philippines suffers from unemployment and poverty because of poor infrastructure.

In a report by academic Richard Javad Heydarian for Forbes Magazine, the Japan International
Cooperation Agency (Jica) found that traffic congestion in Manila, caused mainly by poor
infrastructure, led to losses of about P2.4 billion in 2012, and could triple by 2030.

“Since 2011, the Philippines has broken out of its historically mediocre growth pattern to feature
among the fastest growing nations in the [Southeast Asian] region,” said Heydarian. “But the
country’s growth has been shallow and far from comprehensive, leaving high levels of
unemployment, poverty and hunger relatively untouched.”

“Infrastructure is clearly the country’s Achilles’ heel.”

Thus, President Duterte initiated the “Build, Build, Build” (BBB) Program, which seeks to accelerate
infrastructure spending and develop industries that will yield robust growth, create jobs and improve
the lives of Filipinos. Public spending on infrastructure projects is targeted at P8 to 9 trillion from
2017 to 2022.

Key infrastructure projects under the BBB Program include: (a) the Subic-Clark Railway; (b) the
North-South railway projects connecting Los Baños, Laguna to Tutuban, Manila and Clark Freeport
in Pampanga; and (c) a 1,500-hectare industrial park in Clark, Pampanga; and (d) an expanded Clark
International Airport also in Pampanga.

Other projects were: (a) four energy facilities; (b) 10 water resource projects and irrigation systems;
(c) five flood control facilities; and (d) three redevelopment programs.

Finance Undersecretary Grace Karen Singson said that proposals for public-private partnerships to
implement infrastructure projects, particularly unsolicited proposals from the private sector, are most
welcome.

Unsolicited proposals should involve projects that: (a) address public need; and (b)(i) involve a new
concept or technology; or (ii) are not included in the government’s list of priority projects. These
proposals are subject to comparative bidding or the Swiss Challenge, wherein the original proponent
exercises his right to match the subsequent offers of other proponents for the same project.

In this regard, in Asia’s Emerging Dragon Corp. v. DTC, the Supreme Court recognized the Swiss
Challenge under the implementing rules and regulations of the Build-Operate-Transfer Law, in which
the original proponent exercises his right to be awarded the project should it be able to match the
lowest or most advantageous proposal within 30 working days from notice.
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Furthermore, an unsolicited proposal entails a new concept or technology when: (a) it demonstrates
its ability to, among others, significantly reduce implementation of construction costs, accelerate
project execution, improve safety or reduce costs of facility maintenance and operations; (b) it
involves a process for which the proponent or any member of the proponent consortium possesses
exclusive rights, either worldwide or regionally; or (c) it involves a design, methodology, or
engineering concept for which the proponent or member of the proponent consortium or association
possesses intellectual property rights.

Meanwhile, solicited PPPs, which are projects in the government’s priority list, must comply with the
public bidding process and receive government support not exceeding 50 percent of the total project
cost.

The Supreme Court held in Lagoc v. Malaga that competitive public bidding aims to: (a) protect the
public interest by giving the public the best possible advantages through open competition; and (b)
avoid suspicion of favoritism and anomalies in the execution of public contracts. It abides by three
principles, namely: (a) offer to the public; (b) an opportunity for competition; and (c) a basis for an
exact comparison of bids.

“Human rights to me means giving Filipinos, especially those at the society’s fringes, a decent and
dignified future through social and physical infrastructures necessary to better their lives,” Duterte
said in his State of the Nation Address on July 23.

Much, however, remains to be seen with regards to the progress of his BBB Program.

Senator Sherwin Gatchalian filed Senate Resolution No. 759, seeking to review the status,
sustainability and risks of the BBB Program. Said Gatchalian: “There is a need to closely monitor the
debt obligations and modes of financing incurred and adopted by the Duterte administration… to
ensure transparency, accountability and prudent use of loans and other financing methods utilized by
the government.”
PRRD's 'Build, Build, Build' to benefit from
China's BRI
BELT AND ROAD INITIATIVE. (From left) China Public Diplomacy Association Vice President Hu Zhengyue,
former president Gloria Macapagal-Arroyo, and Communication Secretary Martin Andanar attend the Belt and Road
Initiative (BRI) Forum held at the Sofitel Hotel in Pasay City on Friday (July 26, 2019). Arroyo said the BRI coincides
with the Duterte administration’s “Build, Build, Build” program. (Photo courtesy of Radyo Pilipinas)

MANILA -- Former president Gloria Macapagal-Arroyo said Friday that China’s Belt and Road Initiative (BRI)
coincides with President Rodrigo R. Duterte’s “Build, Build, Build (BBB)” program.

In her speech at The Belt and Road China-Philippines Forum in Pasay City, Arroyo explained that the initiative suits
BBB projects, noting that “the Philippines is geographically located at the 21st century maritime silk road.”

“These (projects) will open up more opportunities not only for investment but also the flow of trade. The main thing
to focus now is on the implementation side,” she said.

Citing that China has proven to be a partner for development, Arroyo said the Philippine government appreciates the
increase in capital and technological resources it provides.

“Recognizing that other Asian countries are small developing countries, China has provided financing platforms
promoting infrastructures, resources development, and financial and industrial cooperations,” she added.

The former House of Representatives Speaker noted that the BRI forums, which aim to promote people-to-people
exchange, will further strengthen the country’s ties with China. (PNA)

Economic risks of the Build Build Build program

CROSSROADS (Toward Philippine Economic and Social Progress) - Gerardo P. Sicat (The Philippine Star) -
July 11, 2018 - 12:00am
Even if there were no external and political risks facing the Build Build Build program of infrastructure,
economic risks present themselves in several forms.

“Economic risk.” The chance that an economic factor or variable turns out be to be different from its usual
expected behavior essentially describes what we call economic risk. The management of risk is important for
the nation not only to control cost but also to achieve the potential benefits.

I single out several likely economic risks at present: (1) inflation; (2) exchange rate changes; (3) interest rate
changes; (4) the contractor choice; and (5) absorptive capacity.

Other economic risks could be elaborated with any of the above. For instance, under more strained economic
conditions, a balance of payments crisis or a debt crisis could be discussed.

“Inflation, or rising prices.” Rising prices threaten the cost of projects and could lead to the rearrangement of
priorities. Changes in priorities might arise from an effort to curtail the inflationary spiral within a
macroeconomic framework.
In general, inflationary rates such as what we currently experience – the recent surge in prices around four to
five percent per year – might not yet be due cause for alarm. But higher rates of inflation would induce stronger
anti-inflation counter-measures.

Such concerns could initiate cutbacks in fiscal spending, or of reduction of overall credit. When spending cuts
are in order, the priorities of spending become more important, requiring a trade-off between current programs
(consumption) and investment. Which wins depends on the strength of society’s needs.

Also, it might become a trade-off among specific projects. Which ones proceed, which ones get postponed,
reduced or chopped off.

“Exchange rate: the peso’s external value.” The peso exchange rate could be the channel for the risk. The peso’s
fall in value – a depreciation – could also induce other outcomes, some not wanted, others wanted. Under
current conditions, a depreciation of the peso is more likely than an appreciation since large expenditure
activities tend to create additional demand.

Undesired consequence would be rising domestic prices. Unwanted too would be an increase in the value of
foreign debts that are incurred or to be paid: depreciation means more pesos to pay a given foreign dollar.

A depreciation of the peso however could also trigger a rise in export incomes as the value of exports to
foreigners fall. This would be a positive development. Another impact is that depreciation of the peso raises the
cost of imports, also a positive development if imports need to be reduced.

(Recent experience in Indonesia and Vietnam has seen impressive growth of exports in the presence of the
depreciations in their currencies and the high rates of domestic inflations they have experienced. These
developments propped up their balance of payments position.

(Such expansions of their exports have been triggered by high inflows of foreign direct investments in their
export sectors. Relatively, they have less restrictive regulations covering direct foreign investments than ours.
Moreover, this channel of relief might not be as certain today, given that there is a global cloud of trade war.)

“Interest rate increases.” Rising interest rates are more likely to happen in the present scenario. During the last
few years, interest rates have been low globally, thanks to the effort to spur economic recovery after the great
recession of 2008. The immediate problem now involves a a program of rising interest rates foreseen as a
natural adjustment in the US for the return to economic growth.

The Philippine program of interest rate adjustments, which echo or follow those taken by other central banks, is
a defensive measure undertaken by our central bank to protect the economy from investment outflows, thus
creating counter-measures to make investments at home less vulnerable.

A major consequence of rising interest rates is to increase project costs directly for borrowed funds. This
changes the incentive patterns for many economic development projects, since they are mostly often financed
partly from debt.

In fact, most development projects in infrastructure are financed from debt. The blend of current funds to debt is
heavily in favor of borrowed money. When TRAIN, package 1, generated a lot of revenues to help finance the
Build-Build-Build program, it mainly improved the capacity of the government to backstop its borrowing
program for economic development.

“Contractor risk.” There is always the possibility that a project could have higher cost or incur some failure of
delivery of the original objectives because of the wrong choice of contracting parties. This could happen
whether the source of financing is official development assistance or some private contracts, as in PPP (public-
private partnership) projects.

Corruption contributes to the prevalence of poor implementation of projects because of contractor failure. Ill-
prepared government agencies could become sources of poor governance of contracts.

Political culture in the nation’s governance might be a big contributor to the cases of poor outcomes in
contractor choices in the past. There is a nexus between corruption and political culture. But this is not to say
that the move toward a better system is not happening.

In the course of time and experience, the nation has learned from some of the big mistakes. Also, there has also
grown a larger community of contractors for government projects, especially in the public works area. The
vigilance of society also improving.

But so far, most of the big PPP projects currently under implementation have been dominated mainly by current
big business groups in the country. There have been no big projects in which reputed outside, foreign groups
with high reputation have been heavily involved.

The best way to improve the contracting system is to allow greater participation of more bidders for government
contracts, to include of course the most important infrastructure projects of the government. Improving the rules
of contracting would encourage a wider list of potential contractors to the government.

“Absorptive capacity.” An important factor that abets poor choices of contracting as well as poor performance
in the implementation of big projects is the problem of absorptive capacity.

We have too many obstacles in regulatory framework, in procurement processes, and in labor force regulations
that restrict absorptive capacity. One important need is to acquire these skills through s more open framework of
economic liberalization.

I have made an attempt to address this issue in one column in the past. See Crossroads, Feb. 27, 2013, “A
nation’s absorptive capacity and its current relevance.”

Build, Build, Build's 'painful' side effects temporary —

report
MANILA, Philippines — President Rodrigo Duterte’s promise to bring a “golden age” of infrastructure has some “painful
side effects” that should be temporary, London-based Capital Economics said.

“The big push to update the Philippine’s infrastructure has led to a number of painful side effects, including a worsening
external position, a falling currency and an increase in inflation,” Alex Holmes, Asia economist at Capital Economics,
wrote in a research note Tuesday.

“However, these problems should prove temporary and improving the nation’s woeful infrastructure is desperately
needed,” Holmes added.

Widely known as the “Build, Build, Build” program, the government plans to ramp up infrastructure spending to 7.3
percent of the country’s gross domestic product by the end of Duterte’s term in 2022, and supercharge economic
growth to 7-8 percent. Data from the Department of Finance show 10 of the 75 flagship infrastructure projects of the
Duterte administration are set to begin implementation in the latter half of this year.
However, the infrastructure boom has been fueling demand for imports of capital goods, leading to a wider trade gap
and reversal of the country’s current account surplus to a deficit, pressuring the peso.

The weaker peso, one of Asia’s worst-performing currencies so far this year, has made imports more expensive, pushing
up inflation. Meanwhile, higher excise levies on fuel imposed by the Duterte administration’s tax reform law—which
aims to partly fund the Build, Build, Build initiative—have been adding upward pressure on prices. The central bank has
responded by introducing back-to-back rate hikes.

According to Holmes, inflation will likely ease next year.

He also stressed that the Philippines’ current account deficit is still below alarming levels, adding that a far bigger
concern is the “deteriorating political situation” in the country due to Duterte’s “crass and erratic” leadership style.

READ: ‘Duterte’s erratic, crass leadership putting off investors’

“That all said, while higher inflation and the shift in the current account into the red are a worry, they should prove
temporary. The impact of indirect tax hikes will drop out of the annual comparison at the start of next year,” Holmes
said.

“Oil and food price inflation should also drop back over the coming months. We expect inflation to fall back to 4.0
percent by the beginning of 2019,” he added. “The current account should also come back to balance as infrastructure
improvements boost prospects for growth in the country’s manufacturing and export sectors.”

Case Study about the Effects of the government's

Build, Build, Build program to the Philippine
Economy
IntroductionIn the past years, the government has handled numerous complex and large-scale infrastructure
projects and not all have gone well. Because of some incompleteplanning, rushed preparation, and insufficient
funding, these big projects are sloweddown or ended poorly. However, as President Rodrigo Duterte, ruled the
presidency, heramps up the “Build, Build, Build” project as an infrastructure investment.
Now,government agencies are changing the way they do business to make sure projectshappen on time and on
budget. The administration commits to boost public spending forinfrastructure from the current 5.1 percent to
7.4 percent of gross domestic product byend of his term.The big scenario in the status quo is the effect of the
said project to the ever-changing economy of the Philippines. Primarily now that a big percentage of the
budgetwill come from the GDP. In addition to this, the government sees
infrastructuredevelopment as the solution to job generation, transportation and traffic woes, and highprices of
goods and services. From wherever aspect we look, the Philippine economy isat stake with this
project.ContentThe current administration under the set of the socioeconomic
policies,“Dutertenomics,” the development of infrastructure and industries is one of the majorpriorities to be
accomplished. Many projects are already approved to be completedsoon following the major projects
that ensued the outline of the policy from thepreceding years. It is a big spring of hope not
only for the government to implement suchpromising projects but also for the people because it will
generate and give many jobsand source of income to the families. In his own words, Duterte believes it will
bringabundance to the economy of the country. He said in his latest State of the Nation’sAddress, "We will
make the next few years the golden age of infrastructure in thePhilippines to enhance our mobility and
connectivity, and thereby spur developmentgrowth." To make that happen, the Duterte administration has
diversified its funding toinclude significant loans from Japan and China along with multilateral lenders like
theAsian Development Bank, World Bank and the new Asian Infrastructure InvestmentBank. Discussion of
ContentBuild, Build, BuildThis is the program under the Duterte administration designed to modernize
thecountry’s infrastructure backbone by rolling out 75 flagship projects worth a combinedtotal of $36 billion in
investments. This is in keeping with the government’s goal tosustain rapid growth, attract investments and
attain economic inclusion for all Filipinos.

OPINION: ‘Build, build, build’ borrowings can

weaken economy
In moving to load up on large amounts of foreign debt to finance an overwhelming number of big-ticket infrastructure
projects, the economic managers of the Duterte administration seem to be making the same mistakes committed by the
Marcos dictatorship in the 1970s that eventually drove the economy into bankruptcy in the early 1980s.

The Marcos regime incurred huge amounts of foreign debt for its envisioned legacy infrastructure and big industrial
projects, along with the development of local energy sources, by securing loans from Official Development Assistance
(ODA) and the world capital markets, which at the time were overflowing with cheap “petrodollars” from oil exporting
countries.

Never mind if domestic consumer prices were steadily increasing and the peso was nursing a period of devaluation, the
dictatorship racked up foreign debts that pushed up total obligations from just $2.1 billion in 1970 and $3.8 billion in 1975
to an unprecedented $25 billion by 1983.

Crippling effects of a fallout from the 1982-83 Latin American debt crisis—when that region’s top economies Brazil,
Argentina and Mexico started to default on the foreign debts they had secured in the 1970s to finance major infrastructure
and industrialization projects—and from political tremors triggered by the assassination of opposition leader Benigno
Aquino Jr. while in government custody, sent the Philippine economy into a severe recession.

Government as builder

Today, the Duterte economic team is aggressively pushing for a “Build, Build, Build” program that is estimated to be
bankrolled by external borrowings of around $157 billion, the bulk of which is expected to come from China through its
aid-giving Export-Import Bank. Japan is also being tapped for substantial amounts of ODA for this program.

As in the case of the Marcos debt-driven infrastructure program, the Duterte government will be securing the ODA and
foreign loans for the planned projects. Until two months ago, major infrastructure projects were auctioned off to private
investors under Public-Private Partnership arrangements. In the new scheme, the government will take care of building the
roads, bridges, airports and railways and later bidding completed projects to private investors for their operation and
maintenance.

In adopting the new strategy, labelled as a “hybrid PPP” approach, economic managers say this will speed up the
construction of the projects in the “Build, Build, Build” program. Traditional PPP projects, they argue, take 29 months
before work can start.

Still, under the hybrid strategy, it will still be the government that will take care of securing right-of-way clearances—the
biggest challenge that usually confronts infrastructure projects—before the contractor breaks ground.

The hybrid scheme is described by economic managers as a strategy to sustain high economic growth that will create
more jobs. But current plans also call for farming out the construction of the projects to foreign contractors that will be
selected by governments that extend the ODA, and the hiring of laborers also from the countries that provide the ODA.

Finance Secretary Carlos Dominguez has disclosed that the China Eximbank will select the contractors that will build
projects that it will finance. Budget Secretary Ben Diokno has also indicated that the government is “open” to hiring
technical people and construction workers from China for these China-financed projects.
How “excluding” local contractors and labor tallies with the Duterte government’s pledge to make economic growth
“inclusive” will need to be explained by the economic managers. Such a direction for “hybrid PPP” undertakings could
dampen the spirit of entrepreneurship that is now undoubtedly fueling growth in many sectors of the economy.

Perhaps the Duterte economic managers can pick up a few pointers from Thailand on how to deal with China’s demands
on the selection of project contractors and workers. Thailand officials announced this week they were able to get China to
agree that in the case of a $5.5 billion railway project that will link Bangkok with a province in the kingdom’s northeast,
Thai companies will handle the construction and hire local labor while China will provide railway technology, signal
systems and technical training.

Lessons from crises past

Twenty years ago this month, economies in Asia got clobbered by a devastating financial crisis that resulted from a
sudden increase in interest rates on loans that these countries had incurred previously.

Reflecting their dire financial positions, Southeast Asia’s economies at the time were recording larger current-account
deficits in relation to their aggregate output (measured by the gross domestic product). Foreign funds were already
financing these revenue shortfalls.

Prior to that situation, Southeast Asian economies were built up largely with the help of large pools of domestic savings
(except the Philippines which relied on foreign funding). As these economies incurring large external payment shortfalls
that needed to be financed with more foreign credit, international investors got unnerved and started to dump stocks and
currencies from these nations.

During that time, however, the Philippines had just come from its own domestic financial crisis of 1983-85, which
prevented it from further getting more foreign financing. It was under an austerity program while its neighbors were
feasting on cheap foreign credit. Some analysts were saying at the time that the Philippines survived the 1997 Asian crisis
relatively unscathed—mainly because it was already badly wounded in the mid-1980s crisis.

These days, analysts are getting antsy about potential difficulties when interest rates on funds secured from the world
capital markets take a sharp upturn from their present “cheap” levels.

Indeed, the newly minted governor of the Bangko Sentral ng Pilipinas, Nestor Espenilla, has issued an alert about “the
seemingly imminent wind-down of ultra-easy monetary policies in advanced economies.” In a speech upon his installation
as head of the Philippines’ central monetary authority, Espenilla noted that in 2016, “unexpected global events” escalated
the level of monetary policy uncertainty and market volatility.

“We need to be mindful of such events and their potentially far-reaching consequences since these could undermine our
economic performance and disrupt our carefully-laid plans,” he stressed.

Meanwhile, the Philippine peso exchange rate continues to show weakness. Against the US dollar, the peso now stands at
levels last touched by the currency about 11 years ago. Stock prices remain volatile although footloose investments find
their way into the local bourse from time to time.

The current account slipped into negative balance in the first quarter of this year, registering a deficit of $318 million as of
March compared to a high surplus of $730 million a year ago. Also, increased outflows from the Bangko Sentral’s foreign
exchange operations reduced the country’s international reserves marginally to $81.4 billion in June.

Still, the Philippine economy in general remains fundamentally strong—but weaknesses persist. Any surge in external
borrowings to levels beyond the absorptive capacity could choke growth sectors and lead to serious issues similar to what
the country experienced under Marcos