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The second P in PPP

IT INCREASINGLY appears that regaining the 6- to 7-plus percent growth enjoyed by the Philippine economy in recent years may be much harder than some believe. It will certainly take much more than simply ramping up public expenditures, the commonly cited culprit for the first-quarter slowdown. It will be hard enough even just to ramp up government spending, for two reasons.

First, one hears of widespread fears among government bureaucrats of auditors’ scrutiny and court sanctions, in the wake of controversies surrounding pork barrel funds and the Disbursement Acceleration Program. This has supposedly prompted much greater spending caution, translating to bureaucratic delays in executing government projects.

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Second, government agencies are said to be unaccustomed to much higher levels of activity now made possible by government’s largely successful efforts to plug massive corruption leaks of the past.

More than government spending, our weak infrastructure now looms large among the traditional barriers to higher economic growth in the Philippines. Four were highlighted in a 2007 Asian Development Bank study: (1) tight government finances due to weak revenues, (2) inadequate infrastructure, especially in electricity and transport, (3) weak investment due to poor governance and political instability, and (4) a small and narrow industrial base due to various market failures. The first and third have since seen much improvement, while the fourth is changing due to a surge in manufacturing since 2010, with China quickly losing its status as “factory to the world.” But it is in the second where in spite of high-profile completed and oncoming projects, the gap, both with our neighbors and with respect to our own urgent needs, has grown uncomfortably large.

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Anyone living or working in Metro Manila knows how harrowing an experience it has lately become to travel within the city, whether by public transport or private vehicle, at any time of the day. Those of us who depend heavily on Internet and telecommunications facilities for our work constantly find ourselves cursing our slow, erratic and unreliable communication links. Those in parts of the country with limited electric power capacity suffer from intermittent power outages that impair business operations, not to mention the discomfort and occasional damage suffered by all. All these severely weigh down on everybody’s productivity, and add up to stunted economic growth, held well below what our economy should potentially be capable of given solid fundamentals and strong domestic demand.

For nearly three decades now, the popular prescription has been: If government can’t do it, then let the private business sector step forward. At the outset, the impetus behind public-private partnerships, particularly in the provision of infrastructure facilities, was lack of government finances in the face of tremendous needs. For decades, we’ve lagged well behind our dynamic neighbors in energy, water, transport and telecommunications facilities. Government’s hands used to be tied with a heavy debt burden, weak revenue collections, and a deficit that constantly tested the threshold levels imposed by the country’s official creditors.

But things are very different now. Government can now afford to spend a lot more than it ever could before. Still, our infrastructure gaps have grown so huge that this newfound fiscal space is nowhere near enough to provide the hundreds of billions of pesos we will need to close them.

Apart from limited taxpayer money, where else could the money come from? It can conceptually come from our large pool of savings held by banks and other financial institutions, all looking for ways to invest the huge sums in their hands.

China, Korea, Malaysia and Singapore have made good use of infrastructure bonds, debt instruments with which government borrows money from the public. Through the stock market, private savers can also invest directly in publicly listed infrastructure firms (the Manila Water Co. is an example), which may also borrow directly from banks. The modern financial system has found various ways, from simple loans to complex derivatives, by which savings of large and small savers alike may be channeled to fund large infrastructure projects. These are usually built by private entities that must inevitably step in, given the formidable obstacle of lack of government funds, even through the longer term. And as recent experience shows, an equally formidable obstacle is government’s inability to execute, operate and maintain such projects at the required magnitudes. Private partnership is vital to fill not only the financing gap, but the implementation gap as well.

A major difficulty remains: Persisting constitutional restrictions on foreign investment in public utilities keep the field of potential private players too narrow. This is a problem because (1) even the largest locals will be unable to muster the financial muscle needed to fill the huge needs, and (2) we are getting to a situation where too few entities practically own (hence control) the country, private and public facilities alike. What we need, then, is to open more opportunities for ordinary Filipinos to take part in funding our infrastructure, including effective ways to harness overseas remittances and personal savings (the way postal savings have been a major financial force in Japan, for example). And for practical reasons, we also need to open the door wider so foreigners can expand the pool of private sector partners who can help take us out of our massive infrastructure backlog—and fast.

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