Private funds for inclusive growth

Manila’s selection as the venue of the 45th annual meeting of the Asian Development Bank gave tourism a boost. Half of some 4,300 registered delegates came from overseas. But beyond the body count, the ADB event focused the attention of decision-makers from business, government, and official development agencies on the Philippines.

Finance Secretary Cesar Purisima got the chance to address early arrivals on April 30 as the keynote speaker at a pre-meeting Forum on Asia Finance and Risk Mitigation, jointly convened by the ADB and the Asian Institute of Management’s Jose B. Fernandez Jr. Center for Banking and Finance.

The Philippines, like the rest of the region, faces the problem raised by the forum theme: “Catalyzing Private Capital for Investment and Trade.” The ADB estimated that Asia needed at least $750 billion a year until 2020 for infrastructure alone. No government can deploy a budget big enough to bear these costs. Governments have to bring in the private sector.

Discarding a prepared text, Secretary Purisima presented the principles that guided the Aquino administration in promoting Philippine development. First, the government decided to focus on the issues it could control. Though of obvious significance, the tsunami in Japan, the floods in Thailand, and the Arab Spring were black swans that could not have been predicted.

Second, illustrative of what it could control, the government had to reestablish its credibility with stakeholders and regain their confidence. Offering investors many projects was not enough. Individually, projects had to be technically sound. They also had to make economic sense. Road projects, for instance, had to form part of a network plan that supported development objectives.

It took the government 15 months to launch its first public-private partnership projects, out of the 10 it thought it could start. But the shortest cycle in the past had been 24 months for power projects, accomplished with special legislation, and five years following standard processes. Secretary Purisima said he hoped to have eight PPP projects within a year.

Third, the government had to look toward long-term, sustainable and inclusive growth. This required investing in fundamentals. It meant building capacity in government agencies to develop and oversee the implementation of sound projects. It also involved investing in changing the political culture to break the bonds among bureaucratic gate-keepers, predatory politicians, and crony capitalists, so as to establish public accountability and reverse the pattern of impunity.

To achieve this objective, the government had to provide adequate budgetary resources for the justice system, including the investigative, law-enforcement, and prosecutorial agencies. The impeachment case filed against Chief Justice Renato Corona demonstrated President Aquino’s willingness to invest his own political capital to support his administration’s flagship anticorruption program.

Secretary Purisima’s keynote address, the presentation of ADB chief economist Changyong Rhee on Asian economic trends, and the day’s five discussion panels underlined the timeliness of the theme chosen by the ADB for its 45th annual meeting: Inclusive Growth through Good Governance and Partnerships.

Changyong Rhee presented data showing that the region had witnessed in the last couple of decades not only sustained economic growth but also rising inequality. More equitable growth could have lifted an additional 240 million people above the poverty line. Opinion surveys in the ’60s indicated that the public saw growth as the priority, even if its fruits were not equally shared. More recent surveys showed greater resistance to the pattern of more growth mainly benefiting the rich.

Speakers from the private banking and finance sectors confirmed that their institutions had the funds and the willingness to partner with government in supporting projects that would address the goal of inclusive growth. They gave examples of how they were already investing in long-term water and energy projects that would benefit communities at the bottom of the pyramid.

They wanted to do more. But they needed greater clarity about the terms of government projects and the rules of the game and greater confidence in the government’s capacity to enforce them fairly. They noted the lack of projects backed by adequate engineering economic feasibility studies that the private sector could consider.

While they could assess the projects’ market and financial risks, they expressed the need for guarantees to protect them from political risks. They needed assurance that local government commitments would be honored beyond the tenure of the contracting mayor or governor and that Congress would permit multi-year budget items to support multi-year projects.

What appeared to hold back the flow of private capital into projects for public goods was precisely the set of critical reforms that Secretary Purisima had described as the foundation of its development strategy: capacity-building for government agencies, a focus on doables, and the investment in building a platform for good governance to regain the trust of stakeholders. The challenge is to do enough in the short term to entrench long-term goals.

Edilberto C. de Jesus is president of the Asian Institute of Management.