The government should spend at least P24 trillion until 2030 to meet the country’s growing demand for roads, bridges and other public infrastructure, according to the Organisation for Economic Co-operation and Development (OECD).
In its biennial economic outlook report, the OECD estimated the Philippines’s funding requirement at between P23.7 trillion and P27 trillion to bridge the so-called infrastructure gap and sustain the country’s economic growth.
“However, meeting the demand for infrastructure in the Philippines, in line with the average annual economic growth rate of 7 percent that the government is targeting from 2017 to 2022, will require considerable capital, and a more efficient utilization of the available financial resources,” the OECD said in its report, titled “Economic Outlook for Southeast Asia, China and India 2018.”
The OECD based its estimates on the Asian Development Bank’s earlier forecast that between 2016 and 2030, Southeast Asia will need to raise between $2.76 billion and $3.15 billion to meet domestic demand for infrastructure in four key areas alone: power, water and sanitation, transport and telecommunications.
“Assuming that these regional projections hold true for the Philippines, and based on 2015 prices, the government would need to raise between P17.2 trillion and P19.6 trillion from 2017 to 2030, or around $340.7 billion to $391.8 billion,” the OECD report read.
“In terms of current prices, this would rise to between P23.7 trillion and P27 trillion, or around $473.6 billion to $540 billion,” it added.
The government has earlier announced that it is planning to spend at least P8 trillion until 2022 to usher in the “golden age of infrastructure.”
The Paris-based organization noted that the Philippines’s “shallow” pool of funds poses a challenge for the country in meeting its infrastructure demands by 2030.
“This kind of infrastructure spending may be a tall order for the Philippine government at this point. Government revenue collection has been a little less than 15 percent of GDP on average from 2011 to 2016,” the report read.
“Moreover, capital markets are not deep in the Philippines. Nonetheless, the country’s current administration is keen on narrowing the infrastructure gap through reforms in fiscal policy, partnership with the private sector and official development assistance,” it added.
The OECD said the government could explore venturing into the bond market to finance its long-term infrastructure projects as public-private partnership schemes may not be sustainable in the long run.
“But, in the absence of deep long-term fund pool, private project developers bear higher cost of credit owing to revenue-cost maturity mismatch. This scheme can also be potentially risky if unsettling market disturbances happen midway through the project cycle,” it said.
“Infrastructure projects have long gestation periods [from the preconstruction phase to the operations phase] and should ideally be funded by long-term financial instruments. This means at least 10 years, and maybe as long as 15 years,” it added.
However, the OECD pointed out that it is “imperative” for the government to improve the quality infrastructure projects it would roll out as it sees the public sector shouldering most of the country’s infrastructure spending in the short run.
“In the short run, the public sector will continue to shoulder most of the burden in terms of infrastructure spending. Thus, it is imperative to improve the quality of how the government spends money on such projects, which means greater discipline in the prioritization of projects, a more streamlined project cycle, and also a rigorous insistence upon post-construction audit,” the report read.
To raise funds, the Philippine government could consider “levies that capture the appreciation in land value that results from the infrastructure built in the area to raise revenues.”
“Another measure worth considering would be the specific allocation of infrastructure-user fees to pay for maintenance costs,” the OECD report read.
“In addition, the government should evaluate the possibility of becoming a party in funded cross-currency swap agreements with multilateral development institutions, or highly-rated private financial enterprises, to finance infrastructure,” it added.
Over the medium to long term, it would be “prudent” for the Philippine government to follow up on its capital market development plan for 2013 to 2017, according to the OECD.
“Incidentally, capital market development issues are not discussed in detail in the Philippine Development Plan 2017-2022, and delivery of progress reports on the capital market development plan seems, according to information on the website of the Securities and Exchange Commission, to have ceased in December 2014,” the report read.
“Although the Central Bank helps harness more bank resources for this purpose through its regulations [as mentioned earlier], traditional bank loans will not considerably close the funding gap unless domestic loan syndication activity gains traction. Domestic bond and equity markets in the Philippines need at least to catch up in terms of depth with the country’s regional peers,” it added.
Image credits: Nonie Reyes