The National Economic and Development Authority (Neda) is looking into other mechanisms, such as the issuance of infrastructure bonds, to bankroll the Duterte administration’s massive infrastructure program and, in the process, reduce the country’s reliance on concessional loans.
President Duterte has been saying that he is not keen on accepting foreign aid that carry conditions, which tend to impinge on the country’s sovereignty.
Neda Undersecretary Rosemarie G. Edillon said the government is exploring the possibility of issuing infrastructure bonds that could be held by certain investors for a period of time and would not cause “much deviation” from the current treasury market.
“Of course, private contractors can always raise their own funds. What is important is that we maintain our investment-grade credit rating, better yet, improve it some more,” Edillon told the BusinessMirror.
Former Socioeconomic Planning Secretary Romulo L. Neri said the government can consider creating a sovereign wealth fund to finance more infrastructure projects so it could avoid taking out long-term loans.
“The Bangko Sentral ng Pilipinas [BSP] has over $80 billion in reserves, most of which are invested in the US Treasury bonds. A poor country like the Philippines effectively finances the deficit of a rich US government,” Neri told the BusinessMirror.
“Those funds are better used to finance badly needed local infrastructure via a sovereign wealth fund of about $50 billion,” he added. Neri said creating a sovereign wealth fund can even spur the development of a local capital market for infrastructure securities that will provide liquidity to the fund.
Given that the BSP’s current charter does not allow it to create the fund, Neri said the BSP can form a council of financial experts that can help manage the sovereign wealth fund. Former Philippine Economic Society President Alvin Ang said such a fund will be “a good way” to finance the country’s infrastructure projects, as long as it is used only for such purpose.
Ang added creating the fund will be “a test” of the country’s investment-grade credit rating more than a means to lessen the country’s dependence on overseas development assistance because the Philippines is not dependent on concessional loans and grants for its infrastructure needs.
“The fund should only be used for the purpose it is set up. This also avoids bilateral or commercial borrowing and puts to test our investment grade in the market,” Ang said. “We are no longer dependent on overseas development assistance [ODA]. Our infrastructure [projects] are [financed by] loans that are planned.”
University of Asia and the Pacific School of Economics Dean Cid Terosa and Edillon, however, said now is not the time to create the sovereign wealth fund.
According to Terosa, the Philippine capital market is still developing and lacked the “complementary institutions” needed to set up the fund. Edillon added the market for long-term instruments, such as the creation of a fund that will pave the way for a local capital market for infrastructure securities, was still “thin.”
Kicker bonds
A few months ago the Asian Development Bank Institute (ADBI) proposed
the use of “kicker bonds” to boost infrastructure revenues in developing countries, including the Philippines.
ADBI Dean Naoyuki Yoshino and Legal Advisor Grant Stillman said the infrastructure needs of developing countries like the Philippines cannot be borne solely by the government.
Yoshino and Stillman said tapping private-sector funds, such as through the issuance of kicker bonds, can provide the much-needed resources to finance trillions-worth of infrastructure needs. Economists interviewed by the BusinessMirror agree that the Philippine government will not have sufficient resources to finance all the country’s infrastructure needs. Terosa said ODA loans and grants are considered “key components” of the country’s funding sources. The aid from various countries, such as China and Japan, helps bridge financing gaps.
Philippine Institute for Development Studies President Gilberto M. Llanto said ODA financing from China and Japan, though massive, are not sufficient to cover the country’s infrastructure spending until 2022.
Llanto added that, while a sovereign wealth fund is a “good idea,” what would be more interesting is how the government can tap remittances from overseas Filipino workers for development financing.
“[The] combined China and Japan funding will not be enough. The government proposes trillions of pesos worth of funding in the next five to six years. The donors can provide a substantial amount, but these won’t be enough,” Llanto said.
The ADB said the 45 developing member-countries must invest $26.166 trillion until 2030. This translates to $1.744, trillion, or 5.9 percent, of the region’s GDP annually.
The ADB added Southeast Asian economies need to invest 5.7 percent of GDP until 2030. This means investing a total of $3.147 trillion between 2016 and 2030 using 2015 prices and an annual investment of $210 billion until 2030.
In the Philippines, the Neda said funds are most needed in paving provincial roads. Government data showed that only 10,353.53 kilometers out of the 36,075 kilometers of provincial roads have been paved.