More than throwing money at a problem

Heads of state and representatives of countries around the world trooped to Beijing the other weekend to participate in this year’s Belt and Road Summit. The summit, intended to highlight the promise of China’s One Belt, One Road initiative, succeeded in getting the entirety of Asia thinking about how interstate cooperation can bridge the gap between countries with intense infrastructure needs (e.g., the Philippines and many other countries) and one country with excess capacity (China). This cooperation will benefit the Philippines most if it keeps its focus on meeting clear and present needs.

Thankfully, the country has no shortage of important projects. The Duterte administration has good reason to focus on infrastructure through the “Build, Build, Build” program. Given the rate at which infrastructure projects proceeded in the past, the country has plenty of room just to catch up with our counterparts in Southeast Asia. At present, we are reaping the result of decades of underinvestment, at under 3 percent of GDP. Properly targeted and channeled, the Duterte administration’s planned increase in infrastructure spending to P8.2 trillion over the next five years could go a long way in boosting the economy.

This particular subject is discussed in “Infrastructure and Economic Growth: The Philippine Experience,” a special study authored by Dr. Epictetus E. Patalinghug and published by the Stratbase ADR Institute this year.

Hard and soft infrastructure. In his special study, Patalinghug summarizes the debate on the link between infrastructure and economic growth and examines the Philippine experience on the relationship between these two factors. He notes that while infrastructure has, overall, a positive effect on economic growth, this effect is uneven depending on the type of infrastructure built, its location, and the time period involved. As a result, uneven benefits across possible projects could mean that “…investment in maintenance may actually have a higher rate of return than new investment.”

Put another way, we should add “Maintain, maintain, maintain” to our roster of mantras.

Keeping this in mind, there is still plenty of room for the government to make important investments. How it will do so, however, is a second consideration. Learning from our history, we should also consider the reasons for previous underinvestment. Beyond the lack of money is the lack of investment in the government’s own capacities—the “soft” side of project management and administration that keeps projects moving through the pipeline.

Patalinghug points out: “One of the reasons for the infrastructure underinvestment in the country was the occurrence of economic crisis, as well as years characterized by macroeconomic instability that did not provide a fiscal space to invest at least 5% of GDP for infrastructure. During these years, capital investments bore the burden of fiscal adjustment: infrastructure outlay is usually one of the first items to be subjected to budgetary cuts. After the value-added tax reform in 2005 (increasing the value added tax from 10% to 12%) the fiscal space improved, but the share of infrastructure spending to GDP remained below 3% (it was only 1.8% in 2010) due to the lack of institutional and absorptive capacity in the various government agencies to plan, design, and implement projects on time.”

Making infrastructure work. The Philippines’ strong economic growth has created the fiscal space for the administration to approach infrastructure development with a more strategic, long-term perspective. While the task of building roads and bridges is essential, this task also includes the challenge of building them well. Finally, returning to One Belt, One Road, the promise of new financial cooperation can only be fulfilled if the administration learns from previous experience. In the case of infrastructure, there is much more to it than throwing money at the problem.

Dindo Manhit is president of Stratbase ADR Institute.