Philippines: Ready for the Future? The Quantity and Quality of Infrastructure Investment

1. Philippines: Ready for the Future?The Quantity and Quality of Infrastructure Investment Joachim von Amsberg Country Director, Philippines The World Bank January, 2007

2. Outline • 2007: A unique window of opportunity for Philippines to join rapidly developing East Asia • Why infrastructure matters to the Philippines • An agenda for reviving infrastructure investment in the Philippines

3. 2007: A unique window of opportunity for the Philippines to join rapidly developing East Asia

4. The Philippine Paradox:Great Assets and Potential… • Great neighborhood: East Asia booming • Educated, entrepreneurial, English-speaking people • Rich natural resources • Strength in dynamic sectors: electronics, business services, tourism, remittances

5. …But Modest Development Outcomes • Modest growth driven by remittances and consumption rather than by investment or productivity • Slow poverty reduction due to low growth and high inequality

6. Growth has been below potential Source: World Bank WDI

7. Investment Lagging Behind the Region

8. The Obstacles to Investment Seen By Business Important investment constraints (% of firms surveyed)

9. A Window of Opportunity Created by Fiscal Reforms … • Addressing biggest obstacle to investment • Increasing fiscal space for public investment

10. … and by international liquidity

11. Why Infrastructure Matters for the Philippines

12. Infrastructure Matters for Growth and Competitiveness • Infrastructure deficiency a top impediment to business environment and investment climate • Philippines: GDP and Total Infra Expenditure correlation: 85% • Infra investment has a positive impact on GDP; infra capital stock has a long-term impact on GDP

13. Infrastructure Matters More with Economies of Scale • East Asia trade increasingly driven by intra-industry trade and vertical specialization • Components trade and intra-industry trade have grown rapidly – regional production networks • Export growth in sectors with high economies of scale • Vertical specialization becomes critical driver • Traditional comparative advantages (low wages) less important • Transport/logistics and consistent policy environment (investment climate) more critical • Small policy changes can have big impacts on trade

14. East Asian Exports Grow in Sectors with Scale Economies

15. Infrastructure Matters for Competition • Dynamic competition and churning of enterprises contributes to productivity growth and competitiveness • Less of that in the Philippines • Infrastructure is good for competition • Small enterprises cannot self-provide • Transport costs lower—location matters less

16. Infrastructure Matters for Poverty Reduction Source: Gawtkin, Davidson R. Shea Rustein, Kiersten Johnson, Rohini Pande, and Adam Wagstaff. 2000. “Socio-economic Differences in Health, Nutrition, and Population in the Philippines.” World Bank, Washington D.C.

17. Service Access (Bars in blue = outcomes above low and middle income country average) Water supply access (%) Electricity access (%) Telephone access (subscribers / 100 inhabitants) Percentage paved roads State of Infrastructure: Reasonable but Uneven Access Source: World Development Indicators, 2004; IEA 2003; Connecting East Asia: A New Framework for Infrastructure, The World Bank

18. Infrastructure Quality: Quality ranking World Competitiveness Report 2006-2007 Philippines: Low quality of services has emerged as a key impediment to the economic competitiveness Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars). Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.

19. Telephones and Electricity Supply: Quality ranking World Competitiveness Report 2006-2007 Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars). Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.

20. Roads and Railroads: Quality ranking World Competitiveness Report 2006-2007 Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars). Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.

21. Ports and Air Transport: Quality ranking World Competitiveness Report 2006-2007 Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars). Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.

22. Philippines: state of infrastructure has not kept up with rapid population growth and urbanization Thousands Percent % of population residing in urban areas % of population residing in Metro Manila Urban Rural

23. Philippines: “Boom-Bust” Infrastructure CycleInfrastructure Investments as a share of GDP, 1985-2005 Percent Capital outlays only. Sources: Department of Budget and Management; Department of Finance; Commission on Audit; Maynilad Water Services, Inc.; Manila Water Corporation, Inc.; Optel Ltd.; and World Bank.

24. Philippines: Need to increase infrastructure spending from 3% of GDP to at least 5%, and increase the efficiency of infrastructure spending in the meantime 15.4 9.9 7.2 3.3 2.7 Source: World Bank Connecting East Asia (2005); Philippines data updated.

25. PPI Investment by Type, 1990-2005 in US$ billion Lease and Mgmt contract Concession Divestitutre Greenfield Source: World Bank-PPIAF PPI Database Private Sector Participation • Private flows in the Philippines declined since the Asian Financial Crisis • Most investments are greenfield projects with guaranteed off-take from public companies Sources: PPI Database, MWCI and MWSI for Water, NTC for Telecoms.

26. Many Opportunities for Improving Quality and Efficiency of Spending: The Case of the Philippine Road Sector • Administration of the Special Road Fund subject to external pressures • “Pork Barrel” in DPWH budget: • About 22.5% of DPWH budget between 1997-2001 (close to P50 billion) • Outweighs funds allocated for maintenance on all local roads • Inefficient maintenance practices • Low labor productivity at DPWH: • Philippines: 1 employee : 1.3 km. of national roads • Indonesia: 1 employee : 10 km. of national roads

27. An Agenda for Revitalizing Infrastructure Investment in the Philippines Prerequisites Policy and Planning Deregulation and Regulation Finance

28. Basic Prerequisites • Sustaining and deepening fiscal reforms • Increase tax/GDP ratio • Improving economic governance • Rule of Law and credibility of contract agreements • Control of corruption • Competition policy • Transactions costs and red tape

29. Policy and Planning • Continue and implement policy reforms in key areas • Power, roads, water, PPP/BOT framework • Improve investment programming and prioritization • Technical capacity for planning and prioritization within fiscal framework • Political process for coordination and decision making

30. Policy and Planning (cont’d) • Project preparation • Technical and financial design • Good project preparation is key for effective competitive bidding

31. Deregulation and Regulation • Deregulate where competition is possible • Yesterday’s telecoms deregulation allowed BPO boom • Today’s airlines and ports deregulation could unleash tourism and agriculture boom • Establish and enforce clear rules of the game and regulate where competition is not possible • Strengthen regulatory agencies, their technical skills and independence, and protect from politics • Environmental management • Well designed and planned competitive bidding for projects (risk of unsolicited bids)

32. Finance • Cost recovery and tariffs • Continued power tariff adjustments • Clarification and enforcement of cost-recovery regulations for water and sanitation sector • Adherence to agreed toll rate adjustments for toll roads • Leveraging private investments by public resources • PPP • Proper risk sharing (guarantees) • Effective ODA use

33. Public Private Partnership: Manila East Concession • Significant performance improvements since privatization (1997-2004): • 24 hour access to drinking water increased from 26% to 84% • Served population increased from 3.0 million to 5.1 million • Staff per thousand connections reduced from 8.5 to 2.8 • Non-revenue water reduced from 63% to 43% • Lessons: • Competitive and transparent bidding • Good partners - right risk balance between public and private • World Bank Group support: • IFC provides debt and equity finance for water supply improvements • IBRD provides loans for sewerage improvements

34. From Agenda to Action • Many Good Policies in Place • Few Structural Obstacles to Rapid Progress • Implementation – One Step at a Time • Power sector reforms implemented • New showcases of good PPP projects • Competition in Air and Port services (e.g. open skies) • Planning and Programming improved • Infra spending 5-8% of GDP by 2010?

35. Two Philippines Scenarios for 2010 • Two possible scenarios: • Muddle-through • Take-off • Strong policy signals and credibility followed by real investment distinguish the two scenarios

36. Maraming Salamat Po MABUHAY!