Speech for BDO Nomura Market

Posted on October 24, 2016

(BDO-Nomura Market Outlook Forum, 24 October 2016, Conrad Manila Hotel Grand Ballroom). 24 October 2016

Good afternoon!
It is in the best interest of everyone that the public and private sectors would dialogue to ensure appropriate infrastructure development in the country. Infrastructure is not only a tool to enhance economic efficiency, but a good or service that benefits all.

This is why infrastructure development is central to the Duterte administration’s development agenda. It significantly affects national productivity, employment generation, investment inflows, ease of doing business, among other economic variables. It also improves the mobility of people and the accessibility of basic services.

Aside from improving economic efficiency, infrastructure development will enable us to achieve growth that is less unequal and beneficial to all Filipinos.

All of these pronouncements are backed by the policies of this Administration. The Proposed Budget for 2017, which has already been approved in record time by the Lower House – approved in seven weeks without any amendments – allocates P860.7 billion for infrastructure. This is just for next year and is equivalent to 5.4 percent of our Gross Domestic Product (GDP).

Still, we intend to increase infrastructure spending from 5.4 to 7.2 percent of GDP in 2022. So I estimate that we will be spending around P8.2 trillion, or $180 billion, in the next six years.

Transport infrastructure will be pursued to address the traffic crisis costing us, as a JICA estimate 3 years ago, P2.4 billion pesos daily. We will link rural sectors to growth centers. Lagging regions will be made more accessible to spur economic activity and tourism all throughout the archipelago. The poor, who are vulnerable to natural calamities like floods, will benefit from structural mitigation measures.

Transport infrastructure is a priority with road networks alone receiving P328 billion next year. The Mindanao Logistics Infrastructure Network is a big-ticket project and it will cost more than P30 billion to improve trade and transport in Mindanao. A key factor to unlocking the potential of Mindanao is upgrading its infrastructure. Unfortunately, this hasn’t been prioritized for so long.

Next, school buildings and health facilities will have respective allocations of P125 billion and P10 billion. This is consistent with our thrust for human capital development. Flood control systems will also have P76 billion to protect our citizens, especially the poorest of the poor. Irrigation systems will have P26 billion to support rural development. This is essential to our promise of pursuing growth in lagging regions.

Our infrastructure budget is unlike previous infrastructure budgets – when we say we will spend P8.2 trillion for infrastructure, we mean real infrastructure not fudge infrastructure data. Because in previous years, the government will include, on top of the infrastructure data, things like nice offices, aircraft, cars for the police, etc. So the apparent data is not real infrastructure. In this case, when we say public infrastructure we mean roads, bridges, airports, seaports, irrigation systems and so forth.

The increased funding will allow us, because we asked for a bigger deficit from 2 percent to 3 percent of GDP, with allowance to make up for the past neglect on infrastructure. Believe it or not, the Philippines has the worst infrastructure in this part of the world.
For perspective, infrastructure spending in the Philippines had fallen short of the ideal level of 5 percent of GDP. It has only averaged 2.9 percent from 2010 to 2016 , and this is the fudge infrastructure data of 2.9 percent. This has led to the dismal quality of infrastructure despite our decent and sustained economic growth in more than a decade.

The insufficient funding has also been aggravated by frequent delays in procurement, deficiencies in project design, poor coordination during execution among other implementation inefficiencies.

But now that we have secure funding for infrastructure, the next question is absorptive capacity – is this doable? The short answer is yes. Let me explain.

Implementation and policy reforms will complement our aggressive infrastructure spending. We will change the way we implement projects.

First, construction work for major public infrastructure projects in urban areas – Metro Manila, Cebu, Davao – will go on 24 hours a day, 7 days a week, non-stop. This has been done in other places like Hong Kong, Singapore and Japan. This is unlike today where projects stop at 5 o’clock in the afternoon on weekdays and there is no work during weekends, the days when it is most convenient to construct.

Second, project monitoring will be strengthened by geo-tagging projects using modern technology – Google Maps and drones.

Third, the government has already started streamlining the approval process of major public infrastructure projects. Recently, in less than 60 days of this administration, the National Economic Development Authority (NEDA) Board approved nine (9) projects worth a P171.3 billion pesos. Eight (8) of these projects are infrastructure projects amounting to P161 billion pesos. Among these include the NAIA PPP Project, the Metro Manila Bus Rapid Transit and the Metro Manila Flood Management Project.

We also adjusted the economic hurdle rate. We reduced it from 15% to 10% due to the improved economic conditions. We expect that more infrastructure projects will be approved in the future, especially projects outside Metro Manila given the reduced hurdle rate. If we can borrow money at 5% or less, then it’s worthwhile to fund projects with a 10% rate of return on investment.

Finally, and this gives me a lot of confidence that we can do it, Cabinet Secretaries and senior officials will also be capacitated to ensure the timely and efficient utilization of public funds. The marching order from the President is very clear: use it or lose it. Meaning, use your budget or lose your job. He won’t tolerate incompetence.

On the policy front, the Implementing Rules and Regulations (IRR) of the Government Procurement Law has already been simplified within the first 100 days of this administration. It has been cited as a reason for delays in project implementation. So that we, in response to the criticisms, we have revised the IRR of the Public Procurement Law.

Now on PPP. We will continue the PPP program and it will be energized to fully tap the potential of the private sector. As of September 2016, 13 PPP projects are under implementation worth P292.3 billion. Forty (40) more projects are in the PPP pipeline for a total of P1.14 trillion. Among the big-ticket projects are the P170.7 billion North-South Railway Project and the P122.8 billion Laguna Lakeshore Expressway Dike Project.
Other projects include the operation, maintenance, and development of the New Bohol Airport, Davao Airport, Iloilo Airport, and the operation and maintenance of LRT Line-2.

By the end of 2017, we aim to roll out seventeen (17) PPP projects worth an estimated P580 billion. This is on top of the P8.2 trillion that I already mentioned.

We have also changed the rules of the PPP. We now entertain unsolicited proposals, subject to Swiss challenge. And we, the economic managers, have resolved that we will not use PPP as a way of raising revenues for the government. We feel that this is taxation without representation. So we will do away with the kind of PPP where the company that gives the highest premium wins. This will ensure that user fees will remain affordable to the common man.

We also prefer what we call Hybrid PPPs, where the government takes care of the financing and the construction, while the operations will be entrusted to the private sector. This way, the government can take advantage of lower borrowing rates through development assistance. At the same time, it will allow the private sector to efficiently manage operations of PPP projects.

Ultimately, we intend to cut the average timetable of PPP projects – from 29 months to 18-20 months. Different agencies of the national government are coordinating and instituting reforms to make this a reality.

Indeed, we will usher in the Golden Age of Infrastructure for this country. We are confident that this is achievable given careful planning and decisive implementation. As we embark on this exciting quest, we look forward to the support and participation of the private sector.

Thank you very much.