philippines: ready for the future? the quantity and quality of infrastructure investment

Joachim von AmsbergCountry Director, PhilippinesThe World BankJanuary, 2007

Philippines: Ready for the Future?The Quantity and Quality of Infrastructure

Investment

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, English-speaking 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

Source: World Bank WDI

Per Capita GDP Growth Rates 1966-2004

5.77

7.00

4.03

4.79

1.28

3.95

4.77

0

1

2

3

4

5

6

7

8

EAP China Indonesia Thailand Philippines Malaysia Vietnam

Investment Lagging Behind the Region

Gross Capital Formation (% of GDP)

0

5

10

15

20

25

30

35

40

45

50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

China

Hong Kong, China

Indonesia

Japan

Malaysia

Philippines

Taiwan, China

Thailand

Vietnam

The Obstacles to Investment Seen By Business

Important investment constraints (% of firms surveyed)

0

5

10

15

20

25

30

35

40 Macroeconomic Instability

Corruption

Electricity

Tax rates

Regulatory Policy uncertainty

Crime, theft, disorder

Tax administration

Labor regulations

Anti-competitive practices

Cost of financing

Customs and trade regulations

Transportation

A Window of Opportunity Created by Fiscal Reforms …

Addressing biggest obstacle to investment

Increasing fiscal space for public investment

NG and CPS deficit (% of GDP)

-6-5-4-3-2-1

2000 2001 2002 2003 2004 2005 2006/p

CPS deficit NG deficit

Source: DOF

Revenue and Tax Efforts

10.011.012.013.014.015.016.0

2000 2001 2002 2003 2004 2005 2006/p

Revenue Tax revenue

Source: DOF

NG Expenditure

0.02.04.06.08.0

10.012.014.016.0

2000 2001 2002 2003 2004 2005 2006/p

Capital Interest Primary

Source: DOF, World Bank estimates

NG and NFPS debt (% of GDP)

5060708090

100110

2000 2001 2002 2003 2004 2005 2006/p

Consolidated non-financial public sector debtNational government debt

Source: DOF

… and by international liquidity

Philippines: EMBIGLOBAL Monthly Spreads

0

100

200

300

400

500

600

700

800

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 intra-

industry 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

-4.0 -2.0 0.0 2.0 4.0 6.0

Textiles

Apparel

Leather

Footwear

Wood products

Pharmaceuticals

Iron and steel

Non-electronics machinery

Electrical machinery

Instruments

scale elasticity > 1

scale elasticity = 1

change in export share 1994-2004

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-provideTransport costs lower—location

matters less

Infrastructure Matters for Poverty Reduction

0

20

40

60

80

100

Poorest Second Middle Fourth Richest

Quintile

Access to basic infrastructurePercent of Population

Electricity

Telephone

Piped drinking water

Own flush toilet

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.

State of Infrastructure: Reasonable but Uneven Access

Service Access (Bars in blue = outcomes above low and middle income country average)

0

25

50

75

100

PNG

Cam

bodi

a

Viet

nam

Lao

PDR

Mon

golia

Solo

mon

Mya

nmar

Chi

na

Indo

nesia

Pala

u

Philip

pine

s

Vanu

atu

Mal

aysia

Thai

land

Sam

oa

Tong

a

Water supply access (%) Electricity access (%)

0

25

50

75

100

Mya

nmar

Solo

mon

Cam

bodi

aTi

mor

Vanu

atu

Kirib

ati

Lao

PDR

Micr

ones

iaPN

GIn

done

siaPa

lau

Philip

pine

sFi

jiVi

etna

mTh

aila

ndTo

nga

Mon

golia

Sam

oaM

alay

siaC

hina

Mar

shal

l

Telephone access (subscribers / 100 inhabitants) Percentage paved roads

0

25

50

75

Mya

nmar

PNG

Solo

mon

Lao

PDR

Cam

bodi

aKi

ribat

iVa

nuat

uVi

etna

mM

arsh

all

Indo

nesia

Sam

oaTo

nga

Micr

ones

iaM

ongo

lia Fiji

Philip

pine

sPa

lau

Chi

naTh

aila

ndM

alay

sia

0

25

50

75

100

Solo

mon

Cam

bodi

a

PNG

Mon

golia

Lao

PDR

Micr

ones

ia

Philip

pine

s

Vanu

atu

Viet

nam

Tong

a

Tim

or Fiji

Indo

nesia

Mal

aysia

Sam

oa

Chi

na

Thai

land

Source: World Development Indicators, 2004; IEA 2003; Connecting East Asia: A New Framework for Infrastructure, The World Bank

Infrastructure Quality: Quality ranking World Competitiveness Report 2006-2007

Overall Infrastructure Quality

0 1 2 3 4 5 6 7

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia

Philippines: Low quality of services has emerged as a key impediment to the economic competitiveness

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

0 1 2 3 4 5 6 7 8

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia

Electricity Supply

0 1 2 3 4 5 6 7 8

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia


Roads and Railroads: Quality ranking World Competitiveness Report 2006-2007

Roads

0 1 2 3 4 5 6 7 8

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia

Railroads

0 1 2 3 4 5 6 7

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia


Ports and Air Transport: Quality ranking World Competitiveness Report 2006-2007

Ports

0 1 2 3 4 5 6 7 8

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia

Air Transport

0 1 2 3 4 5 6 7 8

Japan

Taiwan

Korea

Hong Kong

Singapore

Philippines

Vietnam

Indonesia

China

Thailand

Malaysia


Philippines: state of infrastructure has not kept up with rapid population growth and urbanization

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

020

4060

80

Percent

Thousands

% of population residing in urban areas% of

population residing in Metro Manila

Rural

Urban

0

2

4

6

8

10

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Total

Private

Public

Philippines: “Boom-Bust” Infrastructure CycleInfrastructure Investments as a share of GDP, 1985-2005

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.

Per

cen

t

Philippines: Need to increase infrastructure spending from 3% of GDP to at least 5%, and increase the efficiency of infrastructure spending in the meantime

Source: World Bank Connecting East Asia (2005); Philippines data updated.

Expenditure on Infra (% of GDP)

0

2

4

6

8

10

12

14

16

18

China Indonesia Philippines Thailand Vietnam

Private

Public7.2

2.7 3.3

15.4

9.9

Private Sector Participation Private flows in the

Philippines declined since the Asian Financial Crisis

Most investments are greenfield projects with guaranteed off-take from public companies

PPI Investments in US $ million, 1990-2005

0500

1,0001,5002,0002,5003,0003,5004,0004,500

1990 1993 1996 1999 2002 2005

Transportation Water/Sanitation Telecoms Energy

9.9

2.324

0.002Concession

DivestitutreGreenfield

Lease and Mgmt contract

PPI Investment by Type, 1990-2005 in US$ billion

Source: World Bank-PPIAF PPI Database

Sources: PPI Database, MWCI and MWSI for Water, NTC for Telecoms.

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 reformsIncrease tax/GDP ratio

Improving economic governanceRule of Law and credibility of contract

agreementsControl of corruptionCompetition policyTransactions costs and red tape

Policy and Planning

Continue and implement policy reforms in key areasPower, roads, water, PPP/BOT framework

Improve investment programming and prioritizationTechnical capacity for planning and

prioritization within fiscal frameworkPolitical process for coordination and

decision making

Policy and Planning (cont’d)

Project preparationTechnical and financial designGood project preparation is key for

effective competitive bidding

Deregulation and Regulation

Deregulate where competition is possible Yesterday’s telecoms deregulation allowed BPO

boom Today’s airlines and ports deregulation could

unleash tourism and agriculture boom Establish and enforce clear rules of the game and

regulate where competition is not possible 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 cost-recovery

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-throughTake-off

Strong policy signals and credibility followed by real investment distinguish the two scenarios

Maraming Salamat Po

MABUHAY!

philippines: ready for the future? the quantity and quality of infrastructure investment

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