Infrastructure and economic growth

BusinessWorld Online
MANILA, PHILIPPINES | Monday, February 7, 2005

Infrastructure and economic growth

By LIEZL EILLEN C. ANTONIO, Researcher

The country's poor state of infrastructure is perhaps one of the saddest facts about the Philippine economy. It is often cited as the culprit why the country's investment climate is rated poorly. In a competitiveness ranking by the World Economic Forum in 2001, the Philippine economy landed only 54 out of 75 countries in the world. Its overall infrastructure quality, in particular, ranked 8th from the bottom.

A recent business survey conducted jointly by the Asian Development Bank and World Bank highlighted this lack of adequate infrastructure in the country, particularly in transportation and power sectors, as one of the four areas of primary concern among investors. On the availability of electricity, the survey estimated that losses due to power failures amount on average to 8% of production.

In a paper, Gilberto M. Llanto, vice-president of the Philippine Institute for Development Studies (PIDS), highlighted how the country's poor infrastructure has been a "bottleneck" to economic growth.

His study pointed out that the government's budgetary constraint prompted it to rely on the private sector for infrastructure investments, particularly in energy, power and transport sectors. "Unfortunately, private sector participation in infrastructure seems to have waned as an aftermath of the 1997 Asian financial crisis and the lack of confidence in the economy. Thus, the inadequacy of infrastructure has become a bottleneck to growth and development," Mr. Llanto wrote.

To address the infrastructure problem, he emphasized the need to raise substantial revenues in order to address the deficit and have sufficient funds for projects. It is also necessary to make government-owned and -controlled corporations (GOCCs), which have been the largest contributor to the deficit, financially self-sufficient.

It is also crucial to have more efficient implementation of projects, with focus on addressing cost overruns, faulty design, poor quality of infrastructure, poor project implementation and the inefficient utilization of official development assistance.

In addition, given the government's very limited budget, it must carefully evaluate which infrastructure projects should be prioritized based on certain criteria, such as economic and financial returns. Mr. Llanto cited as an example the plans of putting up the 32.14-kilometer-long phase 1, section 1 of the North Rail project (from Caloocan to Malolos) when an important segment of the Metropolitan Rail Transit (MRT) Line 3 (from North Avenue, QC to Balintawak), which is a mere 5.12-km stretch, remains unfinished. "It can ill afford to start many projects at the same time when it cannot even provide sufficient funding to finish what have been previously started... Why should government think big when it cannot even efficiently discharge smaller responsibilities?"

Capital markets must also be developed in order to cut reliance on foreign borrowings to finance infrastructure needs. "Policymakers have to understand the serious implications of a currency mismatch in infrastructure projects that use foreign loans to finance long-lived assets which yield returns in pesos," Mr. Llanto stated. Finally, a clear and adequate regulatory framework must be established in order to boost investor confidence in the sector.

In another paper, Ponciano S. Intal, Jr. (1997) said infrastructure investment is one key area where the country must improve in order to compete effectively in the global market. He emphasized the need to improve the policy environment for infrastructural development, which involves "adoption of more realistic, depoliticized and market-oriented user charges that would encourage the private provision of infrastructural facilities."

By this, he means that there should be a redirection of government infrastructural investments such that "a greater percentage of the infrastructural investments in growth areas where the private sector is interested in and willing to undertake can or should be shouldered largely by the private sector. The government, meanwhile, could give special focus on the infrastructural needs of areas where the private sector is not keen on investing like in poor regions and sanitation projects."

-- PIDS Policy Notes No. 2004-02 "Bottleneck to Growth: Inadequate Infrastructure" by Gilberto M. Llanto
-- PIDS Policy Notes No. 1997-05 "Improving Industrial Relations and Reducing Adjunct Costs of Production and Trading: Steps Toward Improved International Competitiveness" by Ponciano S. Intal, Jr.
-- PIDS Policy Notes No. 1997-05 "Improving Industrial Relations and Reducing Adjunct Costs of Production and Trading: Steps Toward Improved International Competitiveness" by Ponciano S. Intal, Jr.