INFRASTRUCTURE AND

ECONOMIC GROWTH:

Dr. Epictetus E. Patalinghug

INFRASTRUCTURE AND
ECONOMIC GROWTH:
THE
PHILIPPINE
EXPERIENCE
Dr. Epictetus E. Patalinghug
 Copyright 2017 by Albert Del Rosario Institute
for Strategic and International Studies

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BOARD OF TRUSTEES
Ambassador Albert del Rosario
was the Secretary of Foreign Affairs of the Philippines from 2011 to 2016. He also served as
Philippine Ambassador to the United States of America from 2001 to 2006.

Manuel V. Pangilinan
is CEO and managing director of First Pacific Company Limited. He is also the chairman of
MPIC, PLDT, Meralco, and Smart Communications, among others.

Edgardo G. Lacson
is an honorary chairman of the Philippine Chamber of Commerce and Industry (PCCI). He
was the former president of the Employers Confederation of the Philippines.

Benjamin Philip G. Romualdez

is the president of the Chamber of Mines of the Philippines since 2004. He is also the vice
president for Industry of the PCCI.

Ernest Z. Bower
is senior adviser for Southeast Asia at the Center for Strategic and International Studies
(CSIS). He is CEO of BowerGroupAsia (BGA), and a leading expert on Southeast Asia.

Renato C. de Castro, Ph. D

is a full professor of international studies at De La Salle University Manila (DLSU). He
holds the Charles Lui Chi Keung Professorial Chair in China Studies.

Judge Raul C. Pangalangan, Ph. D

is a judge of the International Criminal Court. He was previously a dean of the University of
the Philippines College of Law and publisher of the Philippine Daily Inquirer.

Epictetus E. Patalinghug, Ph. D

is a professor emeritus at the Cesar E.A. Virata School of Business, University of the
Philippines (UP), Diliman.

Francisco A. Magno, Ph. D

is the executive director of the Jesse M. Robredo Institute of Governance and President of
the Philippine Political Science Association. He is a professor of political science at DLSU.

Carlos Primo C. David, Ph. D

is a professor of Geology and Environmental Science in UP Diliman. He heads the Philippine
Council for Industry, Energy and Emerging Technology Research and Development.
 CONTENTS

Executive Summary viii

Introduction 1

The Infrastructure-Growth Debate 2

While a consensus exists that infrastructure positively affects economic
growth, the impact is not as big as some suggest. The magnitude of
effects tends to be higher for less developed countries

The Philippine Infrastructure Situation 4

Due to decades of underinvestment, the countrys infrastructure is
characterized by low quality and insufficient capacity relative to demand.
The greatest challenge will be restructuring the functions and
mandates of regulatory agencies defined by statute

The Philippine PPP Experience 10

PPPs are potentially advantageous compared to traditional procurement,
but they have historically been more expensive and hounded by bureaucratic,
legal, right-of-way, and pricing problems. It would be desirable for a
government that is not financially challenged to build catch-up
infrastructure but utilize the managerial expertise of the
private sector to operate and maintain the projects

Conclusions 19

References 21

Acknowledgements

About the Author

 EXECUTIVE SUMMARY
Infrastructure positively affects economic growth, although its impact differs across
regions and sectors. Improving infrastructure services increases factor productivity
and lowers production costs. The higher profitability encourages investments and
boosts potential GDP growth, which in turn increases income.
However, it is unclear how much infrastructure, which infrastructure, and when
infrastructure matters to output. When capital efficiency is low, maintaining existing
structures before generating new investments could potentially yield a higher rate
of return. The efficiency of infrastructure investments also depends on the countrys
political economy, as well as its institutional and regulatory frameworks.
The Philippines quality of infrastructure lags behind its ASEAN counterparts
due to decades of underinvestment and inefficiency in resource utilization. To
address this, the Duterte administration promised to invest PHP 8.2 Trillion over
the next 6 years. Despite the higher budget allocation, the government has not
elaborated on how it intends to address the technical deficit in the implementing
agencies. With the ambiguous delineation in the policy and planning, regulatory,
and operational functions of different infrastructure-related agencies, there is still
a wide scope for introducing institutional reforms.
The PPP infrastructure projects are dominated by big business groups simply
because the bidding rules can only be satisfied by big companies with huge
resources and they are the only ones that can attract well-known foreign firms
in the same infrastructure business. However, the rise of oligopolistic structures
in some industries is not necessarily due to government-linked or government-
favored business groups, but it can also be attributed to government policies
that intentionally or unintentionally provided fiscal incentives favorable to big
businesses or implemented regulatory rules that can only be complied by big
businesses. While the administration aims to ensure connectivity and geographical
convergence, it must not risk its infrastructure program to the procedural, legal,
and bureaucratic delays surrounding the PPP. Pursuing a hybrid PPP is preferable,
since it strengthens the governments capacity to build projects on time, while it
harnesses the private sectors comparative advantage in managing and operating
projects.

viii
Infrastructure and Economic Growth:
The Philippine Experience
EPICTETUS E. PATALINGHUG, PH.D

I nfrastructure capital or the so-called economic infrastructure (roads, railroads,

seaports, airports; water and waste water treatment facilities; electricity
generation, transmission, and distribution facilities; and telecommunications) is
positively related to growth (Esfahani and Ramirez, 2003; Aschauer, 1989; Calderon
and Serven, 2004; and Sahoo, Dash, and Nataraj, 2010). Although the relationship
has always been viewed by economists and policy makers as a key ingredient for
economic development and is supported by accumulated evidence, it is still subject
to considerable debate and uncertainty. The link between infrastructure and
growth is not particularly clear from the data (Straub and Terada-Hagiwara, 2010
and Straub, 2011). The World Bank (2004) identifies the challenges developing and
transition economies face in restructuring, encouraging private participation, and
establishing new approaches to regulation in infrastructure. World Bank (2005)
analyzes the challenges facing Philippine economic infrastructure sectors.
The objective of the paper is twofold. First, it summarizes the debate on the
link between infrastructure and growth. Then, it examines data on the Philippine
experience to analyze the link between infrastructure and growth.
The rest of the paper is organized as follows. The next section provides an
overview of infrastructure-growth debate. Section III describes the Philippine
infrastructure situation. Section IV analyzes the Philippine experience with public-
private partnerships (PPPs) in infrastructure. And Section V concludes.
1
2 INFRASTRUCTURE AND ECONOMIC GROWTH

The Infrastructure-Growth Debate

Infrastructure matters because the quantity and quality of services reduce mobility
costs, improve access to different markets, and decrease income inequality (Calderon
and Serven, 2004; and Larde and Sanchez, 2014). The positive infrastructure-
growth mechanism (see Figure 1 below) states that improving infrastructure
services increases factor productivity and lowers production costs. The increased
profitability encourages investment and increases potential GDP growth. Increased
growth in turn increases income (Perrotti, 2011). However, what is not clearly
settled is how much infrastructure, which infrastructure, and when infrastructure
matters to output.
The latter issue is concerned with whether the stage of development affects the
effectiveness of infrastructure. The evidence on this issue is mixed. There is still
no consensus on whether large productivity differences between developed and
developing countries are due to the shortage of capital.
Another issue is how infrastructure is defined. Core or economic infrastructure
(rather than public capital) may have a greater impact on economic growth.
Furthermore, debates on the proper econometric modeling have dominated the
disagreements among researchers on how much infrastructure matters to growth.
This includes how to address endogeneity sources of infrastructure, such as reverse
causality and unobserved effects. Similarly, the definition of output in the regression
matters. Specifications using output level as dependent variable give a more
supportive positive effect than specifications using output growth or productivity
(Straub, 2011 and Estache and Garsous, 2012).
In countries where the efficacy of capital is low, a more desirable course of action
is to raise it through the maintenance of existing structures before generating
new investments (Pritchett, 1996). In countries undertaking massive catch-ups
in building infrastructure, once basic infrastructure is in place, investment in
maintenance may actually have a higher rate of return than new investment (Hulten,
1996).1 Moreover, the efficiency of infrastructure investments likewise depends
on the differences in the nature and efficiency of the regulatory framework, the
quality of contracts, the political economy of the process, the quality of the local
bureaucracy, and the level of corruption (Straub, 2011).
INFRASTRUCTURE AND ECONOMIC GROWTH 3

Figure 1. Infrastructure Development and Economic Growth

Improvements, Infrastructure and Investments

Investment
multiplier

Effects on services Network access

Improved Primary benefits in

well-being quality and quantity of services

External factors Spatial redistribution of activity

Financial factors Externalities of allocation

Agglomeration of companies, decrease in

production costs, spatial and organizational changes
Reduction of relative prices Network of Labour market
services

Increased productivity and competitiveness

External market
Imports and Exports Economic growth

Source: Perrotti (2011)

In a review of literature on the infrastructure-development link, Straub (2011,

p. 702) concludes that this literature faces two related problems: First, it often fails
to lay down clearly the relevant theoretical questions to be addressed. Second, it
also tends to ignore the fact that most relevant answers, from a policy point of view,
cannot be meaningfully addressed with the type of data available.
The bottom line of this debate is that, while a consensus exists that infrastructure
positively affects economic growth, the impact is not as big as some studies have
reported. The impact differs across countries, regions, and sectors; and the larger
the infrastructure stock and the higher its quality, the lower will be the impact of
additions to this stock (Romp and de Haan, 2005; Straub, 2011). However, Pereira
and Andraz (2013) observe, after reviewing the international body of literature,
that there is little consensus that emerges from the literature about the magnitude
of the effects of public investment in infrastructures. Although there is consensus
that the effects are positive, these are substantially smaller than earlier estimates,
and the magnitude of the effects tends to be substantially higher for less developed
countries.
4 INFRASTRUCTURE AND ECONOMIC GROWTH

At the same time, while infrastructure has a positive effect on growth, the issue
of financing has not been addressed: Is tax-financing preferable to debt-financing?
Does the use of the public-private partnership (PPP) affect the outcome? It is
observed that public investment affects long-term private-sector performance in
an unbalanced way across industries and regions, and this outcome contributes to
the concentration of economic activity in the largest sectors and regions (Pereira
and Andraz, 2013).
Finally, it is suggested that the relevant challenge is to move away from past
research that tried to estimate the link between infrastructure and growth, and
instead concentrate on how the political economy, institutional quality, and
regulatory frameworks have affected the delivery and efficiency of infrastructure
services in the different sectors (Straub, 2008).

The Philippine Infrastructure Situation

The countrys economic infrastructure gap poses a major stumbling block to

sustainable growth. The efficient and timely provision of this infrastructure has a
positive effect on economic growth, and growth has a negative effect on poverty.
The quality of the countrys economic infrastructure is ranked the lowest among
the ASEAN-6 (see Table 1).
Insufficient capacity relative to demand and low quality characterizes the state
of the countrys infrastructure, due to decades of underinvestment (less than
3% of GDP) and also due to inefficiency and waste in the utilization of limited
infrastructure resources. For instance, corruption causes a diversion of managerial
efforts away from factor coordination and consequently increasing the factor
requirements of firms (Dal Bo and Rossi, 2007). Roads and railways are not built
to reduce traffic jams: they are built essentially to get politicians reelected (Cadot,
Roller, and Stephan, 2006, page 28).
Increasing public infrastructure investment in the Philippines results in
sustained gains in output and the effects of improving public investment efficiency
are substantial (Komatsuzaki, 2016). 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
INFRASTRUCTURE AND ECONOMIC GROWTH 5

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.
Recently, the Duterte Administration promises to implement a Golden Age of
Infrastructure by allocating Php 8.2 trillion infrastructure budget over the next
six years. Table 2 shows the infrastructure outlays for 2015, 2016, and 2017 which
indicates that the infrastructure budget is increasing from Php 575.67 billion in 2015
to Php 860.65 billion in 2017; in terms of percentage of infrastructure spending as a
proportion of GDP, it increases from 4.3% in 2015 to 5.4% in 2017.

Table 1. Global Infrastructure Competitiveness Ranking of ASEAN-6

Indicator Indonesia Malaysia Philippines Singapore Thailand Vietnam

Quality of Roads 80 15 97 3 51 93

Quality of Railroads 43 13 84 8 78 48

Quality of Ports 82 16 103 2 52 76

Quality of Airports 66 21 98 1 38 75

Quality of Electric
86 36 89 3 56 87
Supply
Fixed Telephone
80 73 108 29 88 100
Connectivity
Mobile Telephone
49 24 76 14 31 28
Connectivity

Overall 81 16 106 4 71 99

Source: World Economic Forum, The Global Competitiveness Report 2015-2016

6 INFRASTRUCTURE AND ECONOMIC GROWTH

Table 2. Infrastructure Outlays: 2015-2017

(In Billion Pesos)

2015 2016 2017

Road Networks 223.48 298.08 328.18

Seaport Systems 2.65 1.81 2.67
Airport Systems 12.25 9.58 5.71
Flood Control Systems 48.33 69.01 75.82
School Buildings 72.47 91.29 124.62
Hospitals and Health
9.45 19.21 10.03
Centers
Irrigation Systems 26.53 23.59 26.03
Other Infrastructure Assets 131.37 170.42 224.53
Total 575.67 756.44 860.65
Percent of GDP 4.3% 5.1% 5.4%

Source: Department of Budget and Management

How does the Duterte government plan to push for its infrastructure programs
and projects and address the slow bureaucratic process? The Department of Budget
and Managements (DBM) press release promises a 24/7 construction schedule
for major infrastructure projects, the strengthening of project monitoring by geo-
tagging, the streamlining of the approval process for major infrastructure projects,
the simplification of the implementing rules and regulations of the government
Procurement Reform Law, and the revitalization of the PPP program.
The lack of adequate infrastructure in rural areas has also been pointed out.
Public and private investments are disproportionally concentrated in urban areas
and in National Capital Region (NCR), CALABARZON2, and Region 3 (Central
Luzon). In 1992, an average region would have an economic infrastructure of only
31.67% compared to that of the NCR. The latters economic infrastructure was 6.5
times greater than the worst-equipped region of ARMM (Serafica, 2002).3
This infrastructure investment disparity has negative effect on economic growth
INFRASTRUCTURE AND ECONOMIC GROWTH 7

because rural infrastructure raises agricultural productivity, which in turn induces

growth in the rural areas (Llanto, 2012). However, a contrarian view argues to avoid
allocating infrastructure resources evenly across regions as a means of reducing
social welfare disparities, because social equity does not follow spatial equity and
the latter may even be counterproductive to public welfare (Corpuz, 2016, page
22). This reasoning is based on the goal of maximizing the effect of infrastructure by
avoiding to dissipate scarce resources across locations and low-impact projects. The
bottom line is to ensure consistency, connectivity and geographical convergence
among infrastructure projects by integrating them into metropolitan-regional
plans (Corpuz, 2016, page 22). Using this framework to evaluate the Duterte
administrations infrastructure plan, the plan gives the semblance of connectivity
and geographical convergence by including the Manila-Clark Railway, Iloilo-
Guimaras-Negros-Cebu Link Bridge, Mindanao Railway, and the South Line Rail
Project (connecting Manila to Sorsogon).
However, the same bureaucrats that underspent during the Daang Matuwid
Era (2010-2016) are given the responsibility to ramp up infrastructure spending in
the Operation Tokhang Era (2016-2022). How does the Duterte administration
address the lingering technical deficit in the project planning, implementing, and
monitoring agencies? For instance, an effective implementation of the PPP strategy
requires the government to have the following institutional capabilities: (1) to set
overall policy and strategy for PPPs, (2) to identify suitable PPP projects, (3) to
analyze individual projects, (4) to undertake transaction management (it involves
the following: notice of procurement, issuance of prequalification documents,
evaluation of prequalification applications, short-listing of 3-6 firms that meet
pre-qualification criteria, issuance of request for proposals with procurement
documents, iterative process of question and answer between bidders and the
government, submission of bids by a fixed deadline, evaluation of bids, notification
of the winning bidder, and final negotiation and signing of the PPP contract), and
(5) to perform contract management, monitoring and enforcement, covering the
activities required after contract signature and before the end of the term of the
contract (World Bank, 2007).
The recent state visits of President Rodrigo Duterte to China and Japan,
respectively, won pledges from Chinese and Japanese investors to invest in specified
projects in the country. If these pledges are transformed to real investments, how
8 INFRASTRUCTURE AND ECONOMIC GROWTH

is the government able to incorporate these projects in the 6-year development

plan? How does it plan to re-establish the government capability to create and
implement this potential pipeline of infrastructure projects? The fiscal space given
by the controversial Disbursement Acceleration Program (DAP) of the Aquino
Administration since 2012 was never fully and effectively disbursed as intended
because it did not successfully address the technical deficit in the bureaucracy,
particularly in the planning, coordinating, implementing, and monitoring agencies.
The infrastructure road map of the Duterte Administration promises to pour
the required resources to address the infrastructure deficit, but it does not explicitly
explain how it plans to address the technical deficit in the bureaucracy that is
mandated to efficiently plan, manage, coordinate, implement, and monitor these
projects.
The emergence of new technology and the entry of the private sector in the
infrastructure sector also pose some challenges for the regulatory agencies. They
need to retool in terms of acquiring policy and institutional capacity commensurate
with the demands of the present situation. The policy reforms of opening the
infrastructure sector to competition must be met with regulatory reforms such
as re-engineering and restructuring the regulatory bureaucracy, enhancing its
management information system, and training/recruiting staff members with legal,
accounting, financial, economic, and technical expertise.
The greatest challenge facing government is how to implement an institutional
restructuring of functions and mandates of regulatory agencies defined by a
statute that has for a long time been irrelevant. Restructuring or rationalization
of the regulatory bureaucracy requires the separation of policy, regulatory, and
operational functions. Table 3 shows the existing institutional arrangements for
each sector. In the electricity sector, the Department of Energy (DOE) is the policy
and planning agency, the Energy Regulatory Commission (ERC) is the regulatory
agency, and the National Power Corporation (NPC), the National Electrification
Administration (NEA), and the private electric utilities operate, finance, produce,
and market electricity services. In addition, some local government units (LGUs)
operate power plants to serve their localities. However, the Electric Power Reform
Act of 2001 (EPIRA) mandates that NPC must sell its power plants, except those in
Mindanao, to the private sector. In the telecommunications sector, the Department
of Information and Communication Technology (DICT) does the policy and
INFRASTRUCTURE AND ECONOMIC GROWTH 9

planning function, while the National Telecommunications Commission (NTC)

takes care of the regulation function; none of these agencies is actually operating a
telecommunication companythat function is relegated to the private sector.
In the water sector, the National Water Resources Board (NWRB) is tasked to
undertake the policy and planning function, while the Metropolitan Waterworks
and Sewerage System (MWSS) does the regulatory functions for two private water
firms (Manila Water Company and Maynilad Water Services, Inc.) in Metropolitan
Manila.4 In contrast, the Local Water Utilities Authority (LWUA) and the LGUs
regulate local water districts; the latter does both operation and regulation at the
local level because many LGUs operate water utilities. In road transportation,
the Department of Transportation (DOTr) takes care of the policy and planning
function for toll roads, and the Department of Public Works and Highways (DPWH)
handles the policy and planning function for public roads. Land Transportation
Franchising and Regulatory Board (LTFRB), Land Transportation Office (LTO),
and Toll Regulatory Board (TRB) are handling the regulation function.
In contrast, the rail transportation sector has agencies that assume both the policy,
planning, and implementation functions such as the Light Rail Transportation
Authority (LRTA) and Philippine National Railways (PNR), but DOTr still handles
the policy and planning function in the rail sector. In the aviation sector, DOTr,
Civil Aviation Authority of the Philippines (CAAP), Manila International Airport
Authority (MIAA), and National Economic and Development Authority (NEDA)
are involved in the policy and planning function, while CAAP and Civil Aviation
Board (CAB) take care of the regulation function.
Lastly, in the maritime sector, there is a clear distinction between policy and
planning agencies such as DOTr and NEDA; regulatory agencies, such as Maritime
Industry Authority (MARINA), Philippine Ports Authority (PPA), and Philippine
Coast Guard (PCG); and business operators such as the private shipping companies,
private port concessionaires, and private arrastre and stevedoring firms. However,
LGUs, which operate ports in their localities, are likewise assuming the regulatory
functionsa classic case of conflict of interest.
Thus, there is a wide scope for instituting institutional reforms, through the
legislative process, to effect a separation of the policy and planning, and regulatory
functions from the operational aspects of the different infrastructure-related
agencies.
10 INFRASTRUCTURE AND ECONOMIC GROWTH

Table 3: Policy and Regulatory Structure: Philippines

Project
Policy Regulation Implementation
Planning

Electricity DOE ERC DOE Private

Congress Private NPC
NEA NEA
LGUs

Telecommunications DICT NTC DICT

Congress Private

Water NWRB LWUA NWRB Private

LGUs MWSS MWSS LGUs
RO DPWH
NWRB Private
LGUs

Transportation

- Roads DPWH DPWH DPWH DPWH

NEDA DOTr Private Private
RDCs TRB LGUs LGUs
DOTr LTO
LTFRB
- Railways DOTr DOTr DOTr DOTr
NEDA PNR PNR PNR
LRTA LRTA LRTA
Congress Private Private
- Aviation DOTr DOTr DOTr CAAP
CAAP CAAP CAAP Private
MIAA CAB Private
NEDA Congress
- Maritime DOTr DOTr DOTr Private
NEDA PPA PPA PPA
PPA MARINA Private LGUs
PCG LGUs
Congress

The Philippine PPP Experience

The private provision of infrastructure services in the Philippines is attributed to

two factors: (1) disappointment with public provision, and (2) lack of fiscal space
within the governments resources. The Build-Operate-Transfer (BOT) Law was
passed in July 1990 (R.A. 6957) and later repealed by Congress in May 1994 (R.A.
INFRASTRUCTURE AND ECONOMIC GROWTH 11

7718) whose implementing rules and regulations (IRR) were only finalized and
implemented in October 2012. Governments use PPPs because they may offer
value for money, provide opportunity to transfer risk, are politically attractive, and
may address the governments budget constraints (Webb and Pulle, 2002).
PPPs are potentially advantageous compared to traditional procurement
because by bundling project development and operations and maintenance, they
induce the developer to internalize cost savings at the operations stage that are
brought about by investment at the construction stage. However, internalization
may be undesirable because of developer risk aversion or because of collusion and
manipulation of accounts between the operator and the regulator to the detriment
of the developer. PPP contracts need to be carefully reviewed by independent
authorities that can expose hidden rent backloading (Maskin and Tirole, 2002,
page 17), but this also makes PPPs have higher transaction costs than traditional
unbundled procurement contracts. The DOF should warn the government and the
users of the likely impact of PPPs. The Philippine experience in utilizing BOT in
infrastructure projects is reviewed in Llanto (2010).
This section looks at the broader interpretation of the BOT Law as a vehicle
or legal cover to undertake other modes of public-private partnership (PPP) in
infrastructure.5 The BOT Law was invoked as the PPP Law in practice during the
Benigno Aquino III administration. The same issues identified in the original BOT
Law still need to be dealt with, despite the liberal interpretation of the IRR to R.A.
7718.6 For instance, the competitive bidding procedures remain to be replaced by
unsolicited proposals in major projects such as the NLEX-SLEX Connector Road
Project and the proposal to build an alternative Manila International Airport. One of
the recommendations of Llanto (2010) is for the PPP Law to express the governments
preference for competitive bidding. It argues that unsolicited proposals should not
be part of the approach to infrastructure provision because they create incentives
for nontransparent and dubious back-of-the-room negotiations and cutting deals
between the proponent and potential implementing agency (page 127).
The government indeed created the PPP Center, a unit attached to NEDA,
to handle project identification, preparation of project proposals, review of PPP
contracts, and approve projects and contracts. Likewise, it is tasked to build capacity
with other government agencies for project design, technical analysis, contract
review, and monitoring the implementation of PPP projects; and to coordinate
12 INFRASTRUCTURE AND ECONOMIC GROWTH

with the PPP units established in various agencies such as in DOTr, DPWH, and
other implementing agencies. In practice, the PPP Center was mired in turf battle
with its mother agency, NEDA, particularly with NEDAs Investment Coordination
Committee (ICC) group.
The Philippine Infrastructure Workshop in March 1, 2006 claimed that public-
private partnership (PPP) would be the only viable option for key infrastructure
development in the short-term, given the fiscal conditions of the Philippine
Government (Llanto, 2010, page 7). In advising the economic rebirth of Sri Lanka
after the civil war, Noble Laureate Joseph Stiglitz of Columbia University advised
Sri Lanka not to embrace the PPP route because he asserts that such partnerships
usually entail the government bearing the risk, while the private sector takes the
profits. Typically, the implicit cost of capital obtained in this way is very high.7
At the height of PPP excitement at the beginning of the Benigno Aquino III
government, SMC President Ramon Ang urged the government to drop all state
guarantees for projects under the PPP program (such as the viability gap funding,
VGF, mechanism) and just ensure that the bidding process is fair and square.8
Stiglitz point is dramatized by the resort to the PPP mode by the Department of
Education (DepEd) in its School Infrastructure Project (Phase I and Phase II) at the
time when the government had excess liquidity and had the capacity to borrow at
lower interest rate than the private proponents for project financing. In the end, the
projects turned out to be too expensive.
Another case is the Daang Hari-SLEX Road, which was on the verge of being
completed by DPWH. It was auctioned to the Ayala Group as a message by the
Aquino government of its serious commitment to pursue the PPP strategy. It
was completed way behind schedule with a 17% guaranteed rate of return for the
proponent and a duration of 30 years for a road stretching only 4 kilometers.
The new DBM Secretary Benjamin Diokno proposed a hybrid PPP in the
first 100 days of the Duterte Administration to exploit the complementarities
between the government and the private sector. The former builds because it has
the capacity to negotiate right-of-way with private property owners and has access
to concessional or low-interest fund such as the official development assistance
(ODA) and, after completing the project, it has the capacity to bid its operations
and maintenance (O&M) to the private sector, which has a comparative advantage
in efficiently performing these tasks at the operational level. This makes sense if the
INFRASTRUCTURE AND ECONOMIC GROWTH 13

government wants to avoid the lengthy approval process of projects under the PPP
option. Unfortunately, the build, build, and build euphoria under the Golden
Age of Infrastructure pronouncement leaves out any mention of the hybrid PPP
approach.
The influence of big business groups in the Philippines is shown in Table 4,
which presents data on the winning business groups in the bidding of public-private
partnership (PPP) infrastructure projects since 2012. Ayala Group has captured 4
out of 13 PPP projects with a worth of Php 74.05 billion (two of these projects are
joint ventures with the Metro Pacific Group which won one PPP tollway project
worth Php 35.43 billion). The indicated project costs are the amount of respective
winning bids for these projects. The most successful business group in the PPP
infrastructure market is the SMC Group which cornered 3 PPP projects worth
Php 111.44 billion, excluding the Caticlan Airport Project won in 2009. The most
successful PPP bidder, in terms of number of successful awards, is the Megawide
Corporation, which is not affiliated with any local business group. Megawide
cornered 5 of the 13 PPP projects worth Php 48.66 billion, including two public
school infrastructure projects. However, Megawide withdrew from the Php 5.61
billion Philippine Orthopedic Center Modernization Project due to lack of interest
of the implementing agency (Department of Health) to implement the project within
the agreed timelines. However, Megawides PPP projects are mostly short-duration
projects, except for the Southwest Integrated Transport System Project. The Ayala
(except for the Automatic Fare Collection System Project), SMC, and Metro Pacific
PPP projects are concentrated in the long-duration projects. Evidently, the latter
groups dominate the PPP awarded projects in terms of both value and duration.
Looking further at the influence of the business groups in power plant
privatization, Table 5 shows the information on major power plants privatized, the
cost of the project (winning bid), the installed capacity of each project in megawatt
(MW), and the winning business group. In category A: outright privatization of
government-owned power plants, Aboitiz Group and Lopez Group captured most
of hydroelectric and geothermal power plants. In category B: privatization of the
administration of power purchase agreements with independent power producers,
the SMC group, followed by the Aboitiz group, are the clear winners. And category
C: privatization of the concession contract of the monopoly electricity transmission
network, the SM group won this lucrative business.
14 INFRASTRUCTURE AND ECONOMIC GROWTH

Table 4. Business Groups and Public-Private Partnership Projects

Project Cost Winning Group Duration

Daang Hari-SLEX Link

1. Road Php 2.23 B Ayala 30 years
NAIA Expressway, Phase
2. II Php 17.73 B SMC 30 years
School Infrastructure - BF Corp./Megawide
3. Phase I Php 9.89 B Corp. 10 years
School Infrastructure - Build-Transfer
4. Phase II Php 13.14 B Megawide Mode
Modernization of
Philippine Orthopedic
5. Center Php 5.61 B Megawide 25 years
Automatic Fare Collection
6. System Php 1.72 B Metro Pacific/Ayala 10 years
Mactan-Cebu International
Airport Passenger
7. Terminal Building Php 17.52 B GMR/Megawide 25 years
LRT Line 1 Cavite
Extension and Operation
8. and Maintenance Php 64.9 B Metro Pacific/Ayala 32 years
Southwest Integrated
9. Transport System Php 2.5 B Megawide 35 years
Cavite-Laguna
10. Expressway Php 35.43 B Metro Pacific 35 years
South Integrated
11. Transport System Php 5.2 B Ayala 35 years
Bulacan Bulk Water
12. Supply Php 24.41 B SMC 30 years
13. MRT 7 Php 69.3 B SMC 28.5 years

Source: Public-Private Partnership Center

INFRASTRUCTURE AND ECONOMIC GROWTH 15

Table 5. Business Groups and Power Asset Privatization

A. Ownership Privatization

Power Plant Cost Winning Group Capacity

Power Barges 101, 102, & 103 $ 9.31 M Phinma 96 MW
Angat Hydroelectric Power Plant $ 440.88 M Korea Water Corp. 218 MW
Naga Power Plant $ 30.71 M SPC Power Corp. 153.1 MW
Bacon-Manito Geothermal Power
Plants $ 28.25 M Lopez 150 MW
Power Barges 117 & 118 $ 30 M Aboitiz 200 MW
Limay Combined Cycle Power
Plant $ 13.5 M SMC 620 MW
Calaca Coal-Fired Power Plant $ 361.71 M Consunji 600 MW
Palinpinon-Tongonan Geothermal
Power Plants $ 220 M Lopez 305 MW
Tiwi-Makban Geothermal Power
Plants $ 446.89 M Aboitiz 747.53 MW
Panay-Bohol Diesel Power Plants $ 5.86 M SPC Power Corp. 168.5 MW
Ambuklao-Binga Hydroelectric
Power Complex $ 325 M Aboitiz 175 MW
Masinloc Coal-Fired Power Plant $ 930 M AES Corp. 600 MW
Magat Hydroelectric Power Plant $ 530 M Aboitiz 360 MW
Pantabangan-Masiway
Hydroelectric Power Plants $ 129 M Lopez 112 MW

B. Privatization of the Administration of Power Purchase Agreements with

Independent Power Producers

Power Plant Cost Administrator Capacity

Mt. Apo Geothermal Power
Plants Php 128 M Filinvest 92.52 MW
Unified Leyte Geothermal Power Php
Plant 4.663/kWh Phinma 200 MW
Ilijan Combined Cycle Power
Plant $ 870 M SMC 1,200 MW
Bakun Mini Hydro Plant $ 145.47 M Aboitiz 70 MW

C. Privatization of the Concession Contract of the Transmission Network

Power Plant Cost Business Group Duration

National Transmission
Corporation $ 3.95 B SM 25 years

Source: Power Sector Assets and Liabilities Management Corporation

16 INFRASTRUCTURE AND ECONOMIC GROWTH

As documented in other countries by Khanna and Palepu (2000) and Khanna and
Yafeh (2007), we have demonstrated that diversified business groups also dominate
in the Philippines, and that business groups benefitted from privatization-related
programs of the government in industries dominated by few major players (e.g.
infrastructure, power, airlines, and telecommunications).
Privatization programs implemented after 1986, but before the implementation
of the PPP program in 2012, produced a more oligopolistic industrial structure
in most industries such as telecommunications (Metro Pacific Group versus
Ayala Group), port terminal services (Razon Group versus Tanco Group), power
distribution (Metro Pacific Group monopoly in Metro Manila, and Aboitiz
Group monopoly in Metro Cebu and Metro Davao), water distribution (Ayala
Group versus Metro Pacific Group in Metro Manila), airlines (Lucio Tan Group
versus Gokongwei Group), shopping mall (SM Group versus Gokongwei Group)
and supermarkets (SM Group versus Lucio Co Group). The rise of oligopolistic
structures in some industries is not necessarily due to government-linked or
government-favored business groups, but it can also be attributed to government
policies that intentionally or unintentionally provided fiscal incentives favorable to
big businesses or implemented regulatory rules that can only be complied by big
businesses. Furthermore, policy-induced entry barriers are reinforced by a lack of
competition policy in the country.9
The Department of Finance (DOF) is bracing for the likelihood of
unprogrammed payments to private companies due to court rulings favoring
private contractors involved in PPP projects that dragged the government to court
to billions of pesos in claims. The Supreme Court ruled last April 19, 2016, and
upheld in a follow-up resolution on June 21, 2016, that the government must pay
Philippine International Air Terminal Company (PIATCO)the contractor to
build the Ninoy Aquino International Airport Terminal 3 (NAIA 3)USD 326.93
million in just compensation. The government may have to shell out money to
compensate other PPP contractors such as Maynilad Water Services, Inc. (MWSI)
and Maynilad Water Company (MWC) which filed separate arbitration cases
against the Metropolitan Waterworks and Sewerage System (MWSS) before the
International Chamber of Commerce (ICC) International Court of Arbitration in
Singapore in 2013, claiming that MWSS did not act on their toll rate hike petitions,
as provided for in their 1997 concession agreements with the government. MWSI
INFRASTRUCTURE AND ECONOMIC GROWTH 17

is seeking Php 3.44 billion in foregone revenues, and MWC is claiming Php 79
billion for projected total losses from 2015 to 2037. In addition, the Manila North
Tollways Corporation (MNTC) (operator of North Luzon Expressway or NLEX)
has filed a case against the Toll Regulatory Board (TRB) before the United Nations
Commission on International Trade Law (UNCITRAL) in Geneva, and the Cavite
Infrastructure Corporation (CIC) did a similar move before the Permanent Court
of Arbitration in New York for TRBs inaction on their proposed toll fee hikes
during the Benigno Aquino III AdministrationMNTC claims Php 2.44 billion in
foregone revenues in 2012 and 2014, while CIC seeks to recover Php 877 million
in losses.10
These cases illustrate why the PPP option in infrastructure, especially a badly-
designed PPP project, is an inappropriate strategy for an infrastructure catch-up
strategy because, in these cases, access to basic infrastructure services is priced at
the contractors pass-on costs (cost-plus pricing) and not based on the consumers
willingness and ability to pay (demand-based pricing).
Delays in the rolling out projects for tender and the shortcomings of the BOT/
PPP Law in dealing with competition, regulation, coordination, and operation or
implementation problems still remain (Navarro and Llanto, 2014). For instance,
SMCs PPP project to build the Caticlan airport started in 2009 and remains
unfinished, and its NAIA Expressway Project (targeted to be completed in October
2014) is just half-finished. Finally, the SMC-Citra Skyway Project has targeted the
following milestones, which are consistently missed:

Segments Construction Period Status

Buendia to Plaza Dilao April 2014-April 2016 Target missed

Plaza Dilao to Aurora Blvd. April 2014-April 2017 Not likely to be

achieved

Aurora Blvd. to Quezon Ave. April 2014-April 2016 Target missed

Quezon Ave. to Balintawak April 2014-December Target missed

2016
18 INFRASTRUCTURE AND ECONOMIC GROWTH

In sum, the PPP option is more expensive and hounded by bureaucratic, legal,
right-of-way, and pricing problems. It would be desirable for a government that
is not financially challenged to build catch-up infrastructure by sticking to its
traditional role of infrastructure provision, while utilizing the managerial expertise
of the private sector to operate and maintain the projects. In other words, the O&M
PPP mode (or its narrower version called management contract) can be utilized
as the preferred and dominant option. This mode is actually similar to what Sec.
Diokno labeled as hybrid PPP.
INFRASTRUCTURE AND ECONOMIC GROWTH 19

Conclusions

There is indeed a consensus in the empirical literature on the positive effect of

infrastructure on growth. Depending on the type of infrastructure, the time period,
and the region or location, its effect varies from negligible to moderate. In countries
where the efficacy of capital is low, investment in maintenance may actually have a
higher rate of return than new investment.
The Philippines quality of economic infrastructure lags behind its ASEAN
neighbors due to decades of underinvestment at less than 3% of GDP. Recently, the
Duterte administration raises the stake by announcing an infrastructure investment
of Php 8.2 trillion over the next six years. While the intention is admirable, it raises
questions on how it plans to address the capabilities gap within the bureaucracy.
The euphoria over the PPP option for infrastructure development is based on
an expectations contradicted by actual practice. Besides, the inadequacies of the
BOT/PPP Law, the incentive problem facing this option remains beyond repair
over a short span of time given the governments intention to complete the catch-
up projects. It is not simply procedural, legal, and bureaucratic delays. The PPP
incentive to earn a target rate of return gives it an inherent bias to propose solicited
or unsolicited projects in densely and highly populated areas where financial
viability is assured. Infrastructure programs that aim to ensure connectivity and
geographical convergence must not risk its infrastructure program by depending
on the PPP mode, given the uncertainty and problems connected with PPP modes
that transfer the design and build components to the private partners.
The win-win PPP mode is the O&M type, which strengthens the governments
capacity to build projects on time complemented by the private sectors comparative
advantage in managing, operating, maintaining, and marketing the project.
20 INFRASTRUCTURE AND ECONOMIC GROWTH

1
World Bank (1994) points out that inadequate maintenance imposes large and recurrent capital costs.
2
Region IV-A covering the provinces of Cavite, Laguna, Batangas, Rizal, and Quezon.
3
Autonomous Region for Muslim Mindanao.
4
MWSSs corporate office (CO) manages the concession fees paid by the private water concessionaires,
while MWSSs regulatory office (RO) regulates the private water concessionaires. Before 1997, MWSS was both an
operator and regulator in the water sector.
5
PPP is defined as an agreement between a government and a private firm under which the private firm
delivers an asset, a service, or both, in return for payments contingent to some extent on the long-term quality or
other characteristics of outputs (World Bank, 2007, page 2).
6
R.A. 7718 identifies only nine (9) possible PPP contractual arrangements such as build-and-transfer (BT),
build-lease-and-transfer (BLT), build-operate-and-transfer (BOT), among others. But the IRR of R.A. 7718
specifies that other schemes or variations may be undertaken as long as they are approved by the President.
7
Joseph Stiglitz, Sri Lankas Rebirth, Philippine Daily Inquirer, February 4, 2016, page A12.
8
Gil Cabacungan, Jr., End Project Guarantees, Government Urged, Philippine Daily Inquirer, January 24,
2011, page A1.
9
The Philippine Competition Act (R.A. 10667) was signed into law by Pres. Benigno Aquino III on July 21,
2015. The five Commissioners of the Philippine Competition Commission (PCC) were appointed in January 2016.
The implementing rules and regulations (IRR) of R.A. 10667 were issued on June 3, 2016 to take effect on June 18,
2016. However, San Miguel Corporation sold its telecom assets, such as 20 megahertz in the 700 band (used for
4G/LTE), for Php 70 billion to Globe Telecom and PLDT/Smart on May 30, 2016. PCC is undertaking a full review
of this transaction to determine whether it substantially changes the market structure and its potential impact on
public welfare. Globe Telecom and PLDT/Smart are challenging the authority of PCC to review the transaction
on the assumption that PCCs Memorandum Circular 16-001 (issued on February 12, 2016 and which took effect
on February 27, 2016) requires only the concerned parties for mergers and acquisitions worth over Php 1 B and
implemented before the effectivity of the IRR to formally notify the PCC and shall be deemed approved. But
PCC asserts that PCC Memorandum Circulars are transitory in nature and do not dilute the authority of PCC to
conduct substantive review under R.A. 10667, especially where national interest and public policy require it. On
July 12, 2016, PLDT/Smart and Globe sued the PCC at the Court of Appeals for launching a review and sought a
temporary restraining order or a writ of preliminary injunction. On August 26, 2016, the Court of Appeals issued
a writ of preliminary injunction which indefinitely stopped the PCC from reviewing the deal between SMC and
PLDT-Globe.
10
Department of Finance, Duterte Administration May Pay for More Sins of the Past, http://www.dof.gov.
ph.
INFRASTRUCTURE AND ECONOMIC GROWTH 21

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 ACKNOWLEDGMENTS

Dr. Patalinghug is grateful to Evelyn Ulpindo, who provided excellent research

assistance for this paper. This study would not have been possible without her
support.

ADR Institute gratefully acknowledges all those who have extended their
support, cooperation, and commitment in the development of this project. This
publication would not have materialized without their help.

We are fortunate enough to engage with insightful persons from different

sectors, namely: the academe, public and private sectors, as well as civil society
organizations, who have shared their expertise and have actively contributed to
discussions in various fora.

We would also like to thank Prof. Victor Andres Dindo Manhit, President of
the ADR Institute, for his leadership, vision, and guidance in making this endeavor
possible.

Last but not the least, we would like to thank the following for their hard work
and dedication, and for working tirelessly towards the completion of this project:

Deputy Executive Director for Research, Ms. Angelica Mangahas, and Senior
Research Associate, Ms. Weslene Uy, who both served as the editorial staff;

Our design consultant, Ms. Carol Manhit, for the publication lay-out and cover
design;

And the rest of the ADRi team headed by Executive Director, Atty. Katrina
Clemente-Lua, Deputy Executive Director for Programs, Ms. Ma. Claudette
Guevara, Program Associate, Ms. Vanesa Lee, and External Affairs and Social
Media Associate, Ms. Krystyna Dy.
 ABOUT THE AUTHOR

Dr. Epictetus E. Patalinghug is the convenor

for ADRis Trade, Investment, and Global
Economy program. He is Professor Emeritus
of Economics and Finance at the Cesar E.A.
Virata School of Business of the University of
the Philippines. He teaches macroeconomics
and the financial system, managerial economics,
international finance, financial sector regulation
and ethics, financial research, industrial
organization, competitive and industry analysis,
and government regulation and public policy.
Dr. Patalinghug obtained his Ph.D. in
Economics at the University of Hawaii at Manoa and taught at their College of
Business Administration before joining UP in 1981. He was a Member of the Tariff
Commission in 1996-1997 and participated in the formulation and discussion of
competition policy for the APEC member economies. He was the past Director of
CBAs Business Research and Publications Program and Director of its Doctoral
Program.
He served as the editor of the Philippine Review of Economics and Business
and the Philippine Management Review and as a consultant to the Board of
Investments, which is in charge of granting investment incentives and in the
formulation of the Countrys Investment Priorities Plan. He was awarded the
Outstanding Achievement Award in the Social Sciences by the National Research
Council of the Philippines in 2009. He also managed several consulting projects
funded by USAID (US Agency for International Development), ADB, Japan Bank
for International Cooperation, and the World Bank.
Dr. Patalinghug has published several books and articles on competition policy,
privatization, productivity and competitiveness, electric power industry regulation,
retail trade industry liberalization, relationship between crime and unemployment
and the prospects of the East ASEAN Growth Area, among others.