PRE The Philippine Review of Economics

Vol. LIV No. 2, December 2017 pp. 61-87

Philippine policy reforms and infrastructure development:

a historical account

Dante B. Canlas*
University of the Philippines School of Economics

Following the restoration of democratic political institutions in 1986, the

Philippine government, under a succession of political administrations,
has pursued a structural policy reform program on several fronts, both
economic and non-economic. This paper assesses some policy reforms in
the government’s infrastructure development program and the institutional
arrangements aimed at implementing such reforms. Some progress
has been achieved under the leadership of the National Economic and
Development Authority and oversight of the various inter-agency neda
Board committees, such as the infrastructure, investment coordination,
and development budget coordination committees. The enactment of the
Build-Operate-Transfer Law, for instance, has broadened and deepened
the participation of the private sector in the infrastructure program. At this
juncture, however, closing the infrastructure gap, particularly in transport,
continues to be a formidable challenge. Major improvements, among other
concerns, in procurement and implementation capacities of implementing
government agencies, fair allocation of public-private risk bearing in
contracts, and elimination of corruption in the approval process at all levels
of government, national and local, are indicated.

JEL classification: O18, H54

Keywords: policy reforms, infrastructure development, Philippine history

1. Introduction

I am delighted to be a contributor to this special volume of The Philippine

Review of Economics in honor of Dr. Amado Castro, the first dean of the up
School of Economics. It gives me an opportunity to revisit policy reforms and
the institutional arrangements for implementing those reforms. These themes
had engaged Dean Castro during his tenure as a professor of economic history.
I had the chance to witness some of the economic policy reforms and obstacles

* The author is a professor emeritus at the U.P. School of Economics.

62 Canlas: Philippine policy reforms in infrastructure development

to implementation while I was on special detail at the National Economic and

Development Authority (neda)—where I served as a deputy director-general
in 1992-1998 and as director-general, concurrently the secretary of economic
planning, in 2001-2002.
This paper provides a historical account of a number of important policy
reforms geared to infrastructure development in the Philippines over the period
1986-2017. It also discusses issues in implementing those reforms. The public
infrastructure program spans several sectors, including transport, water, power and
energy, and solid-waste management. Since 1986, six political administrations
have in succession committed to sustained economic growth and equitable
development, currently referred to as inclusive development. In this regard,
infrastructure development is a critical task in the Medium-Term Philippine
Development Plan (mtpdp) that every administration in the government issues.
All administrations have been conscious of the importance of broadening
and modernizing the infrastructure base of the country. To achieve the goal
of inclusive growth, every president upon election commits to carry out a
comprehensive package of policy and institutional reforms aimed at enhancing
the country’s infrastructure facilities. The reforms have been anchored on two
major approaches: strengthen tax policy and tax administration to enable the
government to increase significantly its infrastructure spending; and strengthen
private provision of infrastructure. Actual outcomes over the years have
been mixed.
Some seventeen years into the new millennium, much progress has been made.
But at this juncture, the country still suffers from a wide infrastructure gap. This
has not gone unnoticed. For instance, in 2005, the World Bank in the Philippines
published a report entitled Philippines: meeting infrastructure challenges. The
report was a comprehensive review and underscored the failure of infrastructure
development to keep pace with population growth and urbanization. The
government acknowledged these inadequacies and high priority was accorded to
investment in modernizing the transport system in the mtpdp 2004-2010. That
was consistent with the goal of the government to decongest, for instance, Metro
Manila and improve access to major tourism destinations all over the country.
Yet in spite of the efforts under the mtpdp 2004-2010 to add several kilometers
to the national road system, the neda [2010] reported that more investments in
roads were called for. As of April 2010, some 22,888 kilometers of national roads
had been paved, but that figure represented only 77 percent of total requirements.
The succeeding administration under President Benigno Aquino III (Aquino
II), recognizing the limitations of the country’s infrastructure, made “accelerating
infrastructure development” a vital element of its plan. Like the previous plan, the
latter emphasized the importance of expanding access to tourism destinations and
decongesting Metro Manila. There was obviously a need to continue improving
the transport system. Furthermore, in line with the plan’s goal of inclusive growth,
affirmative action was emphasized. Examples included infrastructure investments
The Philippine Review of Economics, Volume LIV No. 2, December 2017 63

aimed at achieving peace and development in Mindanao and the further expansion
of the roll on–roll off inter-island shipping in the Visayas.
While the three political administrations since the publication of the 2005 World
Bank report have responded favorably to the issues and concerns of infrastructure
development, the latter remains a challenge. That challenge is dictated by
economic growth itself, accompanied by rising population and urbanization. A
growing population imposes the need to build new roads and to invest in their
maintenance. In addition, growth ushered in by technological progress triggers
a greater demand for electricity and energy more generally. Sustaining growth
also requires the integration of buyers, sellers, traders, and financiers in real time,
thereby necessitating further investments in telecommunications and information
technology.
In 2016, Rodrigo Duterte won the presidency and promised to ease the
traffic problems in Metro Manila that had become serious under the previous
administration. Unfortunately, after nearly two years under the Duterte
administration, the traffic situation in Metro Manila has if anything taken a turn
for the worse.
This paper is an account of the important policy reforms and institutional
arrangements designed to promote infrastructure development. It tries to identify
constraints to implementation and suggests measures to overcome them. Several
factors lie behind the observed gaps in infrastructure, none of which involves a
lack of understanding or want of effort on the part of the government. The mtpdp
associated with every president has a chapter on infrastructure development.1 The
mtpdp enunciates the main development objectives of the country. Table 1 shows
the various presidents since 1986 and the mtpdp associated with each one.

TABLE 1. Medium-term Philippine development plan, 1987-2016

President Time period

Corazon C. Aquino 1987-1992
Fidel V. Ramos 1993-1998
Joseph E. Estrada 1998-2004
Gloria M. Arroyo 2004-2010
Benigno S. Aquino 2011-2016
Rodrigo Duterte 2017-2022

The inter-agency committee responsible for infrastructure development

consists of the secretaries and senior officials from key agencies, such as the

1
The five presidents since 1986 have each issued a development plan. The National Economic and
Development Authority (neda), whose head, the director-general, sits in the cabinet as the secretary of
socio-economic planning, leads and coordinates the preparation of the mtpdp.
64 Canlas: Philippine policy reforms in infrastructure development

Departments of Public Works and Highways (dpwh), Transportation (dotr),

and Energy (doe). Participants from the private sector include heads of private
organizations, such as the Makati Business Club and the Philippine Chamber
of Commerce and Industry. The chairs of federations of non-governmental
organizations and civil society groups are also invited to participate in plan
formulation.
This paper examines some of the technical, financial, administrative, legal,
and judicial risks that hamper the implementation of infrastructure projects.
Implementation delays mean that potential beneficiaries incur welfare losses.
Meanwhile, addressing the infrastructure gaps has gained urgency. One compelling
factor stems from globalization, which has been one of the fundamental changes
in the economic environment over the past three decades.
The Philippines is now integrated with the rest of the world economy
through trade not only in commodities and services but also in securities and
national monies. The country is an active participant in global and regional trade
arrangements, such as the World Trade Organization, Asia-Pacific Economic
Cooperation, and the asean Free Trade Area. By 2015, asean would have
realized its commitment to integrate as a single market under the asean
Economic Community agreement. This has led to a clamor, in particular from
private industries, to strengthen further cooperation among country trading
partners in many areas of concern, including infrastructure development.

2. Public and private provision of infrastructure

Infrastructure’s contribution to a country’s economic growth and social

development is widely understood. As the country gets integrated through roads,
bridges, ports, and airports, the buyers, sellers, and other market agents become
linked, resulting in mutually beneficial exchanges. Infrastructure supports private
production by facilitating the distribution of goods and services. Similarly,
it accelerates the industrialization drive of the government. As agricultural
productivity is enhanced, supplies of raw materials and intermediate products
from agriculture increase, raising the capacity utilization of plants and factories
in the cities and other urban areas. Firms in the center get connected to small
enterprises in the periphery. Moreover, people residing in the periphery are able
to access facilities like schools and health clinics in the center, enhancing social
mobility and living standards. Promoting private provision of infrastructure is
well advised [Canlas 2006].

2.1. Public provision

Infrastructure facilities are illustrative of commodities with public-good

dimensions. They are part of society’s social overhead capital. Free markets
are not able to provide infrastructure facilities in quantities commensurate with
The Philippine Review of Economics, Volume LIV No. 2, December 2017 65

society’s total needs. No single agent has an incentive to build them without
being fully compensated for the effort. This is true, for instance, in the case of a
highway or bridge, both critical in the distribution of commodities. Unless tolls
can be collected, it is not in the interest of a private entity to build them. Society,
however, demands that they be built. And so the government takes the lead in
building these infrastructure using tax-and-spending schemes.
Government spending, however, has to observe a budget constraint. Revenues
stem mainly from taxes, particularly, personal and corporate income taxes. The
government also levies indirect taxes, such as value-added tax, and excise taxes
on some selected commodities like tobacco, cigarettes, and alcoholic beverages.
Infrastructure spending is discretionary and competes—with other legitimate
public services in health, education, and social security—for budget funds of the
government.
There is a growing recognition that the government does not have to be the
sole provider of infrastructure. There are cases where the pricing of a unit of
service from a specific facility is possible, thereby permitting private provision,
and easing the tight budget constraint of the government.

2.2. Private provision

Faced with a tight budget constraint, the government welcomes private

provision of infrastructure facilities. This is possible under certain conditions. If
user charges can be imposed on an infrastructure service and customers unwilling
to pay the price of the service can be excluded, the private builders can recover
costs and earn normal profits. Under these conditions, the private sector has an
incentive to participate in infrastructure provision. This is the case with toll roads
and bridges, as well as terminal fees in ports and airports. Private participation in
water utilities and electric power generation and distribution is also feasible, since
both pricing and exclusion are feasible.

2.3. Policymaking

Public policy in support of infrastructure development is largely legislated.

Tax measures, for example, emanate from Congress. Similarly, private provision
of infrastructure calls for legislation. Some projects require a franchise that
only Congress has the power to grant. Consider electricity distribution: it is a
public utility covered by a franchise. A franchise yields monopoly powers to the
holder over a fixed period of time, enabling cost recovery. In addition, private
participation in infrastructure is governed by contracts. The rights and obligations
of counterparties are defined in the contract. If contractual disputes emerge and
are filed in the courts for resolution, the legal and judicial system assumes a key
role. A contractual dispute may go all the way up to the Supreme Court. With the
legal framework in place, the executive branch leads the implementation process
66 Canlas: Philippine policy reforms in infrastructure development

in the entire project cycle. The executive branch designs rules and procedures
that evolve and undergo refinements over time. The upshot: all three branches of
government have a hand in policymaking for infrastructure development.

2.4. Role of official donors, banks, and creditors

Other agents, such as financing agencies handling official development

assistance (oda), along with private banks and creditors, also get involved
in policymaking for infrastructure provision. oda donors, whether bilateral
or multilateral, have conditionality practices that are in the nature of structural
policy reforms; they become part of policy once the government signs on. The
Asian Development Bank and the World Bank are multilateral agencies engaged
in infrastructure finance. In designing projects, they often have conditionality
practices attached to their oda loans. For example, a highway project typically
has resettlement policy conditions that are human-rights based. oda funding
agencies also attach some loan covenants, say, for water supply and power
generation projects. They incorporate performance indicators for reducing non-
revenue losses. Further drawdowns from the loan are contingent on achieving
specific targets.
Bank loans normally account for at least 70 percent of project costs, while the
remaining 30 percent is equity. No loan, no project. Private creditors, typically
a consortium of banks, are concerned, for one, about the proper allocation of
risk bearing. Once the private proponent of a project accepts a risk-allocation
scheme that creditors approve of, that risk sharing is written into the contract and
becomes policy. For a toll road project, for example, the creditors may insist on
putting in the contract a parametric formula for automatic price adjustments over
the period of cooperation. In addition, creditors are also concerned about judicial
risk. The country’s legal and judicial framework may be perceived as saddled
with infirmities. And so creditors ask for international arbitration outside the court
system to be spelled out in the contract, which becomes policy.
Once implementation starts, the executive branch takes over. It institutes
rules and procedures to make sure that desired outcomes and benefits from a
project are realized. In this connection, it is vital to monitor and evaluate project
implementation.

3. Infrastructure development: a historical-political perspective

With the restoration of democratic political institutions under the 1987

Constitution came the urge for policy reforms and new institutional arrangements
geared to inclusive growth. In infrastructure, the government, for instance,
cannot close the book after building expressways and airports. It must also build
secondary roads that link communities to the main highways and airports, as well
as roads that connect farms to markets. The enactment of the Local Government
The Philippine Review of Economics, Volume LIV No. 2, December 2017 67

Code in 1994, which provides for decentralization, is worth noting.

Many of the poor in the Philippines are in rural areas, engaged in subsistence
agriculture. Poverty elimination requires as a first task raising productivity in
agriculture and modernizing that sector. But as agricultural productivity increases,
some workers are rendered redundant. To find jobs in non-agriculture, the latter
must grow at a sufficiently rapid pace so that new jobs are created and workers
released from agriculture find gainful employment therein. Physically integrating
rural agricultural and urban industrial areas through infrastructure is critical; a
network of all-weather rural roads is most useful in this regard.
Upon assuming the presidency in 1986, Mrs. Aquino started mending the
shattered fiscal position of the government by introducing a value-added tax to
replace the traditional sales tax. Her administration also succeeded in simplifying
the personal income tax system.
Strengthening the internal tax system is essential in view of the reforms in
foreign trade policy anchored on import liberalization and tariff reduction,
together with the enactment of the Local Government Code, which provides for
internal revenue allotments to local government units (lgus) at various levels
based on a distribution formula.
Tariffs on imported goods and other customs duties had been, since the
postwar era, a significant source of government revenues. Tariff reduction meant
foregone earnings at the border that the Bureau of Customs collected. Meanwhile,
the internal revenue allotments that the lgus would get meant an erosion of tax
revenues in the short run for the national government. In 1985, for instance, the
share of customs revenues to total revenues was 28 percent, compared to the 70
percent share of internal revenues. By 1997, the share of customs revenues had
gone down to 23 percent, while the share of internal revenues rose to 75 percent
[Canlas 1998]. Hence, it was an imperative to keep increasing the collection
of internal revenues to offset forgone taxes of the national government from
sustained tariff reduction and cash transfers to lgus.
For long-run measures that impact on infrastructure, the Aquino administration
caused the enactment of a Foreign Investments Act, which opened several areas
of the economy to 100 percent foreign ownership. The areas where full foreign
ownership was not allowed were explicitly enumerated in Negative Lists A, B,
and C of the law. The Foreign Investments Act was subsequently amended to
open up more areas for a 100 percent foreign ownership. The reforms permitted
the entry of advanced managerial techniques and production technology from
abroad. Furthermore, foreign savings could be tapped for infrastructure financing.
In 1992, Mr. Ramos took over as president. He continued the reform process
that Mrs. Aquino started. He expanded the coverage of the value-added tax law and
got the comprehensive tax reform program enacted into law, focusing on reforms
in personal income and corporate income taxes. During his term, the national
government managed to post a surplus in the budget. The tax effort, which is the
68 Canlas: Philippine policy reforms in infrastructure development

ratio of tax collection to gdp, increased to 17 percent, an achievement that has

not been equaled by any of the succeeding administrations.
Mr. Ramos accelerated import liberalization and tariff reduction. He also
reduced the number of industries in the Negative Lists of the Foreign Investments
Act, thereby expanding the number of industries eligible for 100 percent foreign
ownership. He privatized water utilities in the Metro Manila area. He opened
up long-distance and mobile telephone telecommunications to new entrants. By
mandating interconnection among mobile phone providers, the sector grew and
expanded.
Mr. Ramos rallied the citizenry around “Philippines 2000”. The basic notion
was the willingness of the Philippines to be a part of the increasing globalization
and be internationally competitive. The Philippines acceded to the World Trade
Organization, and actively participated in the Asia-Pacific Economic Cooperation
and in the asean Free Trade Area. Negotiations with Australia and New Zealand,
as well as with Western Europe for preferential trading arrangements were also
undertaken.
In infrastructure, faced with an electric power crisis at the beginning of his
term in 1992, he got the Electric Power Crisis Act enacted in Congress, which
allowed the entry of private independent power producers, thus paving the way
for the eventual dissolution of the monopoly wielded by the National Power
Corporation (npc) over power generation and transmission. This ushered in the
privatization of the electric power industry.
In 1994, the economy recovered from the electric power crisis, which at
its height in 1992-1993, brought brownouts lasting 11 hours each day. The
entry of independent power producers ended that power crisis. The economic
recovery gained strength from 1995 to 1996. But the Asian financial crisis that
was triggered by the sharp depreciation of the Thai baht intervened in 1997.
The Philippine economy dodged that crisis as real gdp still managed to grow
at about five percent in that year. The policy reforms of the Aquino and Ramos
administrations had infused resiliency into the economy.
To sum up, the wide-ranging policy reforms that the Aquino and Ramos
administrations implemented helped the economy recover and gain strength
from 1986 to 1997, allowing a marked increase in infrastructure spending by
government.
Following the completion of the terms of the Aquino and Ramos
administrations, hopes were high for a continuation of the reform process. There
was a presidential election in 1998, wherein Mr. Estrada emerged as winner.
However, in January 2001, these hopes were dashed as the then president, with
less than three years in office, was ousted, having been involved in an illegal
numbers game. Mrs. Arroyo, then vice president, took over, rekindling some
hopes that the infrastructure-related reforms that started in the late 1980s would
get back on track and deliver good results.
The Philippine Review of Economics, Volume LIV No. 2, December 2017 69

The Arroyo administration issued mtpdp 2001-2004, which served as the

development plan in the remaining years of the unfinished term of Mr. Estrada.
The plan committed, for one, to accelerate infrastructure development. It
stressed, for instance, the need to stimulate the tourism industry with supporting
infrastructure, decongest Metro Manila through new roads and other transport
systems that included railways, ports, and airports, and to expand access of every
citizen to schools and hospitals.
The international economic environment did not inspire confidence at the time
Mrs. Arroyo assumed the presidency. The information technology sector had
experienced a shakedown in the US and in the developed countries in Western
Europe; that meant a slowdown in the exports of electronics and computer parts,
products that accounted for a major proportion of the country’s manufactured
exports. The shock of 9/11 in 2001 intervened, threatening a further slowdown
of the economy. Later on, a public health shock in the form of the severe acute
respiratory syndrome hit some countries in East and Southeast Asia, which
adversely affected travel and tourism, again with adverse effects on economic
growth in the country.
Nonetheless, the Arroyo administration had an auspicious start. In the
economic front, real gdp recovered in 2001 from the previous year’s deep
slowdown. In May of the following year, however, there was an attempted coup
d’état that Estrada loyalists instigated. Though the attempted putsch failed, it
generated uncertainty that did not help the economy at all.
One of the important policy and institutional reforms the Arroyo administration
succeeded in getting through Congress was the dismantling of the monopoly
wielded by the npc over power generation and transmission. Republic Act 9136,
known as the Electric Power Industry Reform Act (epira) of 2001, provides for
the privatization of the electric power industry.
Epira was initially filed in Congress during the Ramos administration; it was
finally enacted after being bottled up in Congress for about 11 years, or nearly
four congresses. Success in getting the epira law enacted during the first year of
the Arroyo administration inspired confidence about her commitment to structural
policy reforms. Implementation of epira, however, was very much delayed,
particularly the auctioning through competitive bidding of the power generation
plants eligible for privatization. That raised doubts about her administration’s
commitment to reforms.
Oda financing agencies supported epira. The npc had been dependent
on oda loans for project financing. The loans came mainly from major oda
donors, like the Japan Bank for International Cooperation (which has been
renamed the Japan International Cooperation Agency), World Bank, and the
Asian Development Bank. However, the npc consistently failed to meet its loan
covenants with oda donors about improving the agency’s fiscal position. In view
of those repeated failures, oda donors advocated the privatization of npc.
70 Canlas: Philippine policy reforms in infrastructure development

Mrs. Arroyo was re-elected president in 2004. Infrastructure development was

still a major challenge. The infrastructure plan, however, suffered a setback after
she caused the voiding of a government contract with a private consortium that had
built Terminal 3 of the Ninoy Aquino International Airport. Under her leadership,
the government filed a case with the Supreme Court seeking nullification of that
contract. The government won the case. But it was not costless. The court ordered
the government to pay the consortium just compensation for the structure it had
built. In addition, the commitment of the government to the principle of sanctity
of contracts was dented, with dampening effects on foreign direct investments.
The voiding of the contract for the Terminal 3 project plus the delays in the
payment of just compensation to the private consortium have rankled relationships
with the government of Germany. One of the biggest partners in the consortium is
Fraport, a German company.
Furthermore, allegations of corruption hounded other infrastructure projects
of the Arroyo government, such as those involving the North Rail (a rail transport
project from Manila to the Clark industrial zone in Pampanga) and nbn-zte (a
national broadband information-technology project of the national government).
For the North Rail project, the Philippine government obtained a loan from
China. The project was far from finished even if the Philippines had drawn
down the full value of the loan. After the presidential election of 2010, which
Benigno Aquino III won, the project was cancelled. China forthwith asked the
Philippines to repay the loan immediately, invoking the government guarantees
the Philippines had extended to the project.
The economy recovered in 2001 and gained strength up to 2007. In 2008, the
global financial crisis, triggered by the collapse of the sub-prime housing loan
market in the US, broke out. That crisis caused a worldwide economic slowdown
and recessions in many developed industrial countries. Philippine growth was flat
in 2008, which the Arroyo administration tried to counter with a fiscal stimulus
plan in 2009. The budget deficit as a ratio of gdp ballooned to 3.9 percent, and a
fiscal crisis loomed. To forestall such a crisis, the reformed value-added tax law
was enacted. The law raised the tax rate from 10 percent to 12 percent.
In 2010, Mr. Aquino won the presidency, campaigning on a platform of good
governance, specifically, fighting corruption in government. Before he could
embark on his infrastructure program, his administration undertook a massive
review of infrastructure contracts signed during the Arroyo administration. His
infrastructure program took off and began to accelerate only in 2012.
The Aquino II administration suffered a setback in relation to government
spending for infrastructure and other services. The Department of Budget and
Management (dbm) pooled unutilized amounts or surpluses from various
government projects in the General Appropriations Act and packaged them
into a fiscal stimulus program called the Disbursement Acceleration Program.
Petitioners went to the Supreme Court, and asked that the Disbursement
The Philippine Review of Economics, Volume LIV No. 2, December 2017 71

Acceleration Program be declared unconstitutional. The Supreme Court obliged,

declaring unconstitutional some of the program’s spending, particularly those
that were deemed cross-jurisdictional transfers, such as those from the executive
branch to the legislative branch.
In any event, the payoffs from good governance seem evident. Real gdp
growth averaged about seven percent in the first two years under the Aquino II
administration. In 2014, despite a spate of natural disasters, real gdp growth
averaged six percent. In the annual report of the World Economic Forum entitled
Global competitiveness report 2014-2015, the Philippines ranked 52nd out of
144 economies, compared to 59th out of 144 economies in the previous year. The
report highlighted the fact that the Philippines had leapfrogged in the fight against
corruption since 2010, one of the measures of international competitiveness.
Furthermore, sovereign debt gained investment grade in 2013. The government
budget constraint eased as the risk premium on sovereign debt declined. Debt
servicing of the government decreased as a result.
Rodrigo Duterte was elected and assumed the presidency in June 2016. He
promised during the campaign period to solve the traffic congestion in Metro
Manila in three months. He has been in office for about 18 months, but the traffic
problem is still unsolved. He announced a significant increase in infrastructure
spending, but his original tax reform bill to support the spending is not likely to
be enacted. A dampened version can only be expected.
Summing up, the Philippines has implemented, under a succession of political
administrations, a significant number of economic and social policy reforms
since 1986. The weakest link has been in fighting corruption and instituting good
governance, which has hampered infrastructure development. It seems clear,
however, that good governance must extend beyond the national government.
Under devolution, the lgus play an important role in infrastructure development
and other services. Many lgus are notorious for delayed issuance of building
permits, for instance, a concern crying out for reforms.

4. Legislation for infrastructure development

The body of legislation that Congress has enacted in support of infrastructure

development includes specific tax measures and private participation through
Build-Operate-Transfer (bot) and its variants.
The economic rationale for tax reform emanates from traditional principles of
public finance. The first principle is in pursuit of efficiency. A simple tax system
is preferred to facilitate collection. If the tax structure is cumbersome, it opens
up opportunities for evasion. The wealthy hire accountants and are able to reduce
their tax burden considerably.
One preferred strategy rests on broadening the tax base to obviate the need to
raise tax rates. A low tax rate lessens the incentive to evade taxes. To the extent
72 Canlas: Philippine policy reforms in infrastructure development

that more individuals are encouraged to pay taxes willingly, opportunities to

reduce tax rates open up, in particular, for personal income and corporate income
taxes in the case of direct taxes.
For indirect taxes, raising tax rates for specific products is advisable provided
the inelastic portions of the demand for the products are not exceeded. As a
manufacturer shifts the tax to the selling price of the product, the percentage
decline in quantity demanded falls short of the percentage increase in the price
from the tax increase, resulting in greater tax collection.
Discussion of tax measures generally brings up issues of equity, whether
vertical or horizontal. Vertical equity refers to how people in different income
groups should be taxed. The tax measure is often based on ability to pay, resulting
in progressive tax rates. That is, marginal tax rates tend to increase as income
increases. Horizontal equality is well understood. Similarly situated individuals
are subjected to the same marginal tax rate.
Enhancing government revenues through the tax system is often a lengthy
and trying process. Under the Philippine Constitution, all tax measures must
emanate from the House of Representatives. Since tax increases repel voters,
members of House of Representatives are not very enthusiastic when it comes to
tax-enhancement measures for fear of losing votes come election time. To help
hasten enactment, tax bills filed in Congress are often administration-certified.
Meanwhile, enterprises frequently oppose increases in indirect tax rates, such as
the value-added-tax rate, if the new rates result in an increase in the relative price
of their products. This was seen, for instance, during the public hearings for the
bill adjusting the excise taxes on cigarettes and alcoholic beverages.
In addition to specific tax measures, to help ease the budget constraint
for infrastructure projects, the government looks to private provision as a
complementary measure. In 1989, Congress enacted Republic Act 6957, popularly
referred to as the bot Law. This law was amended in 1993 by Republic Act 7718,
which expanded the opportunities for implementing bot-type projects. The
amended bot law has since becom e the legal framework for private provision of
public infrastructure projects.
There is another important economic consideration for private provision of
public infrastructure. The marginal cost of public funds in the Philippines has
been greater than one. This means that it costs society more than a peso to raise a
peso of tax money. Both direct and indirect factors are at work herein. According
to Laffont [1994], citing World Bank figures, the marginal cost of public funds in
the Philippines is 2.48. Society pays ₱2.48 to raise a peso of tax money, arising
from deadweight losses and other distortions caused by taxation.
One example of a sector-specific law that enhances private provision is the
epira, the law that restructures the electric power industry. One of the intensely
debated issues during public hearings focused on whether or not vertical
integration of power generation and distribution was to be allowed. It was
The Philippine Review of Economics, Volume LIV No. 2, December 2017 73

allowed, but the law puts a cap on ownership of power generating plants by power
distribution utilities.
Furthermore, Republic Act 9184 gathered in one place the procurement
activities of the government. The law is described as the “Government
Procurement Reform Act”, an act providing for the modernization and regulation
mainly of the procurement activities of the government. It adheres to transparency
and competitiveness, among other principles of good governance. The law seeks
to eliminate ambiguity and loopholes in government procurement of goods and
services and minimize corruption, but it has not been fully successful in this regard.

5. Implementation and institutional arrangements

Although the Philippines has made significant progress on the fiscal front since
1986, the country’s infrastructure base at this juncture still lags behind those of
some of its neighbors in the asean region. The situation has been noted (World
Bank [2005]; Llanto [2010]). And so the Philippines is still in a catch-up mode.
In this connection, the executive branch has to address many implementation
challenges that have hampered infrastructure development. Problems have been
encountered at the technical, financial, administrative, legal, and judicial levels.
At the technical level, for instance, many implementing agencies of government
lack the expertise to formulate projects, and as a result, often depend on private
agents for feasibility studies. This opens up conflict-of-interest issues since these
private agents tend to participate later on in bidding for the right to construct. The
situation offers advantage over other bidders who have had no involvement in pre-
construction activities.
One capacity that implementing agencies have to develop is contract writing.
Ambiguous contract provisions can lead to contractual disputes that delay
implementation. A contractual dispute opens up opportunities for the court
system to intervene, which can be a lengthy process. To avoid court proceedings,
contracting parties insert arbitration provisions. But this is usually a very
expensive process; fees paid to arbitrators are high and quite burdensome to
governments of low- to middle-income countries.
With a legal framework and policies in place, the executive branch formulates
the institutional arrangements for implementation, along with the procedures for
screening and approving projects. The respective roles of the neda Board (nb),
neda Secretariat (ns), and the nb inter-agency committees are critical with
regard to choosing project priorities, screening and approval.2
The neda is the socio-economic planning agency of the national government.
It plays a coordinative role in fiscal planning and infrastructure development
through the various inter-agency nb committees. Central to these major functions

2
This section draws heavily from Canlas [2014].
74 Canlas: Philippine policy reforms in infrastructure development

are the Development Budget Coordination Committee (dbcc), Investment

Coordination Committee (icc), and the Infrastructure Committee (Infracom).
The Philippine president is the chairman of the nb. The director-general is
head of the ns and sits concurrently as secretary of socio-economic planning
in the cabinet. The implementing agencies that are nb members include the
Department of Agriculture, Department of Trade and Industry, dpwh, doe, and
dotr. The key oversight agencies, namely, the Department of Finance, dbm, and
neda are all in the dbcc and icc. The dbcc is chaired by the dbm, while the
icc is chaired by the Department of Finance and co-chaired by the neda. The
neda chairs the Infracom.
In 1987, Pres. Corazon Aquino reorganized the neda through Executive
Order 230, also known as “The Reorganization Act of the National Economic
and Development Authority”. This executive order mandated neda to be the
coordinating body for economic and social policies. Under martial law, the Office
of the President exercised much of the decision making on socio-economic
policies, with minimal delegation of authority to national government agencies.
The neda reorganization in 1987 was designed to strengthen the various nb
inter-agency committees, and raise the capacity of the ns to undertake technical
analysis in aid of decision-making at the level of the nb committees. Moreover,
it was to end the monopoly of the Office of the President over policymaking and
systematize project evaluation, a task that was assigned to the ns.
The ns recommends policies to the President. It has a trilogy of functions:
policy and planning; investment programming; and project evaluation and
monitoring. In line with these functions, it is responsible for the preparation of
three documents: the mtpdp and the socio-economic report of the President.
The Medium-Term Public Investment Program is a companion document of
the mtpdp and spells out the priority sectors and sub-sectors—such as education,
health, and infrastructure—where the government has a legitimate role to play.
Fund allocations to these sectors and subsectors are indicative in the Medium-
Term Public Investment Program.
The socio-economic report of the president is a monitoring device; it is
published annually, tracking annual performance in relation to the targets spelled
out in the mtpdp. In case actual figures show performance lagging behind targets,
mid-term corrections are introduced to try to get the economy back on track. The
ns coordinates various policies of the national government aimed at ensuring that
short-run macroeconomic policies do not compromise long-run growth objectives.

5.1. Development Budget Coordination Committee

The dbcc is responsible for formulating the annual budget submission of

the Chief Executive to Congress. The dbm chairs this committee. The dbcc
is supported by a technical board composed of senior officials drawn from the
The Philippine Review of Economics, Volume LIV No. 2, December 2017 75

dbm, Department of Finance, neda, and the Bangko Sentral ng Pilipinas.3 The
cabinet secretaries in the dbcc are the first to be called by Congress once budget
deliberation in Congress starts. The president’s budget message articulates the
priority spending and revenue raising activities of the national government.

5.2. The Investment Coordination Committee

The icc is another important inter-agency committee of the nb. Its main task
is to coordinate fiscal, monetary, and exchange-rate policies of the government
and to prevent debt crises similar to what hit the Philippines in 1983 when it
defaulted on its foreign debt.
The Department of Finance chairs the icc cabinet committee, with a technical
board headed by an ns undersecretary. The public investment staff in the ns
provides secretariat support to the icc. A major task of the icc is to evaluate large
capital projects of the government such as infrastructure projects. Projects subject
to icc review are those costing at least us$5 million. All foreign-assisted projects
are subject to icc review.
The objective of an icc review is to ensure that public projects are socially
efficient. Implementing agencies of the government, such as the dpwh and doe,
submit their major projects to the ns for review. Having done the project evaluation,
including cost-benefit analyses and feasibility studies, the task of the icc is to
confirm the technical studies that the implementing agencies submit to the ns.

5.3. The Infrastructure Committee

The Infracom endorses to the icc all priority infrastructure projects of the
national government. The biggest infrastructure agencies like the dpwh, dotr,
and doe are asked to submit their master plans. All proposed projects must be
consistent with the master plans. The dpwh, for instance, submits a master plan
for arterial roads traversing the country north-to-south and east-to-west. The dotr
has master plans, for instance, for airports and ports.
It is widely agreed that the Philippines needs to raise its public spending
for infrastructure development to support long-run economic growth. Many
observers point out that the Philippines allocates only about 2.5 percent of its
gdp for infrastructure; most other countries in asean are already spending about
five percent.
In many instances, the national government at various levels is expected to
provide infrastructure in several sectors, including, transport, telecommunication,
and electric power. With devolution, the lgus take care of secondary and rural

3
In the presidential system of the Philippine government, the head of a cabinet department has the title of
secretary; next in rank are the undersecretaries and the assistant secretaries.
76 Canlas: Philippine policy reforms in infrastructure development

roads. The dotr devolves municipal ports to lgus. Electric power generation
and distribution is privately provided. The npc is responsible only for small
power generating units.
Recognizing that private provision is a genuine option, the government has
enacted a bot Law as an incentive to the private sector to participate in the
infrastructure program of the government. bot projects are covered by contracts
that spell out the period of cooperation between the government and the private
partners. During the period of cooperation, private investors are expected to
recover the amount they invested with normal profits. At the end of the cooperation
period, the facilities are turned over to the government.
Subsequently, the bot was amended to expand the coverage, adding even
social projects like school buildings and public food markets to the list of eligible
projects. Unsolicited bot projects were also included, in which a private group
can propose projects to the government, but it must be willing to have the projects
subjected to a competitive bid challenge.
The bot Law and its amended version have permitted projects that include
light railway mass transits, airports, and expressways, and water and power
utilities. bot represents one form of a public-private partnership (ppp) that is
helping the government advance its infrastructure program. Since infrastructure
projects are capital intensive, they absorb much of the discretionary amounts
in the national government budget. The trend towards the use of ppp has
been helpful in easing the tight budget constraint besetting the government’s
infrastructure program.
The neda director-general is the chair of the Infracom. A technical board
also assists it. The infrastructure staff of the ns provides secretariat support. The
secretaries of doe, dpwh, and dotr are represented in the Infracom. All bot
projects, meanwhile, are to be subjected to icc review and approval process.
While policies in support of infrastructure development have moved
forward significantly, one form of risk continues to pester. All infrastructure
projects, whether by bot or its variant, are covered by contracts. In this regard,
contractual disputes may arise, bringing the courts into the process. Several
integrity-related questions have been raised about the courts. To this day, there is
lingering doubt about the fairness of the judicial process designed to adjudicate
contractual disputes.
To raise the success rate of the infrastructure program of the government,
judicial reforms are likewise essential. Judicial impediments have included
the penchant of some judges to issue a temporary restraining order sought by
disgruntled losing bidders. Some judges do this despite an order that has been
issued by the Supreme Court forbidding lower courts from issuing such temporary
restraining orders.
The Infracom has progressed a great deal as a collegial body that reviews and
approves major infrastructure projects. But unless efforts to reform the judiciary
succeed, delays in implementation of major projects are bound to occur.
The Philippine Review of Economics, Volume LIV No. 2, December 2017 77

Similarly, bidding procedures consistent with the law on government

procurement must be instituted at the lgu level. Any success at the Infracom
level must be replicated at the sub-national government level.

5.4. Setting project priorities

With government revenues posing a binding constraint on choice of

infrastructure projects to implement, a system of prioritization is vital. In
reviewing a project for possible implementation, the first question the icc asks
the implementing agency pertains to the development rationale for the project. In
other words, what social objective stipulated in the mtpdp is being served? For
example, a road project may be in the service of “decongesting Metro Manila”,
a major output in the performance contract with government of cooperating
agencies like the dpwh and dotr.
In addition, if the project is to be regarded as a public investment, the next
question relates to where it lies in the priority sector or sub-sector of the Medium-
Term Public Investment Program. For instance, in view of rapid urbanization,
where people have to be moved in bulk on a daily basis, the priority accorded to a
rail project may exceed that of a road project.
Furthermore, the icc asks whether the project is to be implemented as a purely
government undertaking or as a ppp. A bot project or its variant is admissible
under ppp. The importance of a ppp mode of implementation to complement
internal financing through the national government budget has been noted above.
In this connection, the icc asks the implementing agencies to submit their
estimates of the private and social rates of return of the project. If the private
exceeds the social rate of return, then the project is a viable candidate for bot;
otherwise, the project is recommended as a project of the government. The
government then taps oda loans if it decides to internally finance the project via
the government budget. oda loans have concessional, not commercial, rates, and
have a longer tenor with a grace period for repayment.
Lastly, the icc asks whether the agency has accommodated the proposed
project in its budget ceiling. The last query determines whether the project gets
into the National Expenditure Plan, which is the annual spending portion of the
General Appropriations Act that Congress enacts. The General Appropriations Act
governs the spending and disbursements of all agencies under the direction of the
dbm, and it also states the revenue program of the government. If expenditures
exceed revenues, the General Appropriations Act spells out the financing of the
resulting deficit, typically through national treasury borrowings from the public,
whether domestic or foreign.

6. Illustrations from the 2001-2004 and 2011-2016 programs

In choosing sectors and sub-sectors, this section illustrates the prioritization

and implementation procedures described above starting with the mtpdp 2001-
78 Canlas: Philippine policy reforms in infrastructure development

2004, which the Arroyo administration released as its development plan for the
unfinished term of Mr. Estrada [neda 2001]. Unlike other plans, it incorporated
both the mtpdp and Medium-Term Public Investment Program, and listed some
specific projects in some sectors, such as transport.
The sector and subsector priorities in mtpdp of the previous Aquino II
administration remains the same since the gaps in them take several years to
narrow down and complete. A single administration cannot hope to complete
all priority infrastructure projects. This is where the institutional arrangement
under neda is useful. Continuity is maintained through the various inter-agency
committees of the neda Board.
The infrastructure program covers several sectors and sub-sectors, such
as transport, which includes land, sea, and air. One other sector is energy and
power, a major program in which is the development of natural gas, following the
successful implementation of the Malampaya deep water gas-to-power project.
Another key sector is water resource development, with sub-sectors that cover
water supply, sewerage, and sanitation, irrigation, and flood control.

6.1. Land transport

The drive for international competitiveness is a constant motivation to improve

road quality. According to dpwh figures [neda 2001: Table 6.1, page 84], in
asean, the Philippines paved road ratio, defined as the length of paved roads
over the total length of roads, was only .21 in 2000. It lagged behind the road
ratios (in parentheses) of Vietnam (0.35), Indonesia (0.47), Malaysia (0.74), and
Thailand (0.82). This is a major factor for giving priority to road projects.
The Philippines has a total road network of 171,956 kilometers, and about 85
percent of this total constitutes provincial, city, municipal, and barangay roads.
Under the Local Government Code, lgus are responsible for these local roads.
The paved road ratio for local roads is only about 15 percent compared to 0.21 for
the national roads.
In view of rapid urbanization, the government places high priority on transport
that addresses urbanization concerns. For instance, in the major urban areas of
Manila, Cebu, and Davao, traffic congestion continues to irk motorists. Traffic
jams mean foregone productivity and earnings. Hence, in urban areas, particularly,
Metro Manila, rail gets priority over road transport. Rail beats road in moving
people in bulk. And so in Metro Manila, part of the plan is to complete the light
railway transit lines.
But some road projects in Metro Manila, such as expressways in major
thoroughfares are still in the priority list. In this connection, smart traffic signal
facilities are to be installed. Some interchanges are to be constructed where use of
traffic signals unduly delays the flow of traffic.
In order to spread progress from the center to the periphery, the government
lists priorities for rural and secondary roads. A network of farm-to-market roads
The Philippine Review of Economics, Volume LIV No. 2, December 2017 79

is identified in support of agricultural modernization. Interregional roads are also

prioritized to support tourism development in the countryside.

6.2. Water transport

Water transport, however, is nothing to sneeze at. The Philippines is an

archipelagic country. The government encourages private operators of inter-island
vessels to re-fleet in line with quality improvements. Re-fleeting is a private sector
undertaking. One incentive is to put up relending facilities in government banks
for lending to the private sector engaged in fleet improvement. Under this scheme,
the government taps oda funds, courses the funds to a government financial
institution, such as the Land Bank and the Development Bank of the Philippines,
which relend through participating banks that retail the loans to private operators
of inter-island vessels.
The government identifies in the plan the list of ports to be developed with the
help of the Philippine Ports Authority, a government corporation engaged in both
provision and regulation. Examples of such ports are the Manila North and South
Harbors, and in the province, there is the Batangas port in Southern Luzon. The
government also incentivizes the construction of new ports by offering private
port operators some technical and financial assistance in preparing master plans
and feasibility studies.
The implementing agency for roads, highways, and bridges is the dpwh. One
of the major obstacles is securing right-of-way, particularly in urban areas where
informal settlers abound. Rapid migration from rural to urban areas has created
squatter colonies. To move these settlers out, the law requires the government
to look for suitable relocation sites and to give disturbance allowance during
resettlement.
For rail and water transport, the dotr and its attached government corporations
like the Light Rail Transit Authority in Metro Manila and the Philippine
Ports Authority are in charge. Rail transport frequently confronts similar
right-of-way problems.

6.3. Energy projects

The mtpdp 2001-2004 emphasized self-reliance, that is, increasing the share
of indigenous fuel and renewable energy sources. The task included enacting
relevant laws, which occurred in the middle of the 2000s. The Biofuel Act and the
Renewable Energy Act were enacted. Price support to renewable energy sources,
such as wind and solar, was to be achieved through feed-in tariffs intended to hold
over a definite period of time. Feed-in tariffs are designed for cost recovery with
normal profits.
Concern about the high cost of electricity in the Philippines compared to those
in many of the East and Southeast Asian countries gave priority to energy projects
80 Canlas: Philippine policy reforms in infrastructure development

that would reduce the generation and transmission costs. For energy, the doe is
in charge of projects.
Exploration for new sources of natural gas was a priority, since gas-fired power
plants now account for 1,700 mw in Luzon. The Malampaya gas is scheduled to
run out in 2023. In the works would be liquid natural gas import terminals with
regasification and storage facilities.
The doe is responsible for the development of energy projects in partnership
with the private sector. The main challenge emanates from the high development
costs. For example, oil exploration is assigned to the Philippine National Oil
Corporation, a government corporation attached to doe. This type of exploration
has a high set-up cost with low probability of a successful discovery. Designing
the proper set of fiscal and other incentives is critical in “crowding in” the
private sector.

6.4. Water resources

A priority sub-sector is water supply, sewerage, and sanitation. The focus areas
are Metro Manila and provincial areas, whether rural or urban.
In Metro Manila, which is served mainly by the Metropolitan Waterworks
and Sewerage System (mwss), the task is to institute policy refinements that
ensure smooth implementation of the privatization of water supply that was won
by two private concessionaires: Maynilad Water and Manila Water. Meanwhile,
the government continues to support development of water basins, such as the
Laguna Lake Development Authority, that would serve Metro Manila.
In irrigation, priority was to be given to projects that promote the goals of the
Agriculture and Fisheries Modernization Act. The emphasis on inclusive growth,
growth whose benefits are within reach of every Filipino, has put irrigation
projects in the front burner.
The government agencies responsible here are the dpwh and cooperating
agencies like Local Water Utilities Administration, together with the local water
districts, the Department of Interior and Local Government, and the Department
of Health. The authorities responsible for water-basin development are also in
the loop.
Implementation challenges have included right of way, financing of water
districts, and contract writing with water concessionaires as well as regulation of
the latter’s operations, such as those based on return-on-rate base regulation.
The Philippine Review of Economics, Volume LIV No. 2, December 2017 81

6.5. Rate of return criteria for implementation

The rate of return on an infrastructure project serves as a guide in determining

whether the project is to be implemented by the government or tendered to the
private sector. If the social rate of return exceeds the private rate of return, then
the government takes the lead for the project. But in the opposite case, a bot
or its variant may be tapped. The private sector normally invests only up to the
private rate of return, that is, what it is able to capture. If the social rate of return
is higher than the private rate of return, then underinvestment is likely, since the
private sector is not compensated for benefits that the rest of society captures.
The icc thus requires the implementing agency to estimate both private and
social rates of return of a proposed project. The icc secretariat exercises oversight
by ascertaining that the methodology used by the proponent agency in estimating
these rates of return is proper.

6.6. Market vs. non-market provision

The work of the various inter-agency committees of the neda Board is driven
by the absence of market prices to guide choice of projects. Project evaluation
based on shadow prices of project inputs and estimation of costs and benefits are
resorted to in order to estimate financial and social rates of return.
Since government has social objectives, such as a clean environment, it
estimates costs and benefits for projects with environmental implications using
shadow prices. The government has to integrate social objectives in project
evaluation since it is well understood that people are interested not only in
monetary income but also in, say, clean air and water supply.

6.7. Other criteria for project approval

In addition to project evaluation and cost-benefit analysis that yield private

and social rates of return and cost-benefit ratios, the icc also asks for a Certificate
of Social Acceptability, an endorsement from the Regional Development
Council, and an Environmental Compliance Certificate from the Department of
Environment and Natural Resources.
A major implementation risk is the presence of informal settlers or indigenous
peoples on project sites. The Certificate of Social Acceptability seeks to find out
whether there are right-of-way issues that may delay implementation. Once time
overruns occur, cost overruns are bound to follow. The latter could delay project
implementation in so far as the implementing agency needs to go back to the icc
for the authority to get some supplemental budget.
The Regional Development Council sees to it that proposed projects are
consistent with local development plans of lgus sitting in the council. The
council also wants to find out if national government aid is warranted for some
82 Canlas: Philippine policy reforms in infrastructure development

projects. For example, a road may traverse a number of jurisdictions with positive-
externality effects. It may petition the national government for financial support
as a result.
The Environmental Compliance Certificate is required under the principle of
sustainable development. A proposed project is not approved unless it satisfies
air, water, and land emission standards. The Philippines has established some
environmental standards, such as those in the Clean Air Act, and has acceded to
some un Conventions on the Environment. The certificate is intended to monitor
compliance with these standards.

6.8. Private provision

bot infrastructure projects, whether solicited or not, are evaluated by the icc.
Clearly, the private rate of return must be high enough to exceed its weighted
average cost of capital. Otherwise, the private sector will not be interested.
The private proponent may ask for some government undertaking, say,
the civil works for a rail project. The Department of Finance looks at this
request and must approve it. If the project is solicited, then it is subjected to
competitive bidding. Once the winning bidder is issued a notice-to-proceed,
it has to seek financial closure with its creditors. Once this is achieved, then
implementation begins.
One government undertaking is right-of-way. The government has powers of
eminent domain. Still it has to observe existing laws on right-of-way that have
been passed, such as provisions for relocation of informal settlers and indigenous
people with ancestral domain rights. Government financial guarantees to a project
are sometimes given, but this is on a case-to-case basis.
Unsolicited bot projects refer to those that are not in the priority list of the
government. To be considered they must not ask for any guarantee, direct or
indirect. The icc may accept these projects, but they have to be subjected to a
bid challenge. The original proponent is accorded the right to match the bid of
the challenger.

7. Evaluation and monitoring

This section discusses the outcomes of some projects that illustrate some of
the difficult challenges encountered with the policy reforms for infrastructure
development. Most of the problems encountered are related to private
participation. The downside is that expected outputs and benefits from the project
are not realized within the time frame envisioned for the completion of the project.
The agencies involved in evaluation and monitoring are the implementing
agencies in charge of the project and oversight agencies like the dbm and neda.
During the approval process for a particular project, timelines with milestones
are spelled out. Both physical and financial accomplishments are monitored
The Philippine Review of Economics, Volume LIV No. 2, December 2017 83

by the implementing agency. The neda and dbm, in pursuit of their oversight
functions, also track physical and financial accomplishments for which indicators
exist. The neda conducts an annual review of oda-funded projects.
Recently, there has been an upsurge of interest on whether projects are
delivering on their intended benefits to target clients. This has given rise to impact
evaluation, with indicators for improving human welfare.

7.1. Monitoring infrastructure projects

One of the major tasks of the neda is project monitoring, including financial
disbursements and physical accomplishments. In this task, the project monitoring
staff of the ns is the lead. It works closely with the neda regional offices in
monitoring outcomes of projects. The neda regional offices are secretariat to the
Regional Development Councils, which consist of local government executives.
In this connection, the ns has been getting a lot of support from oda
donors since 2005, after donor and client countries acceded to the Paris
Declaration for Aid Effectiveness. The latter stresses country ownership and
mutual accountability, among other principles, for foreign aid-assisted projects,
infrastructure and otherwise.

7.2. Water supply

One of the important accomplishments of the Ramos administration is the

privatization of water supply, sewerage, and sanitation in the Metro Manila area.
The mwss has long been a government corporation providing water supply
services in Metro Manila. Its service delivery had been inferior, with water supply
coverage lasting only a few hours in a day in many of the concession areas. It was
a losing company, drawing net credit and advances from the national treasury
to tide it over. Financing of its projects came largely from oda loans. In view
of mwss’s recurrent losses, donors forged loan covenants in which mwss
committed to reduce its system losses and its so-called non-revenue water. mwss
failed in meeting the performance indicators in these covenants.
Two private concessionaires won the right to operate water supply service in
Metro Manila: Manila Water and Maynilad Water. In 1997, the Asian financial
crisis broke out. The peso depreciated significantly. The two water concessionaries
had taken over the foreign debt of mwss; the peso depreciation raised their foreign
debt obligations in peso terms substantially. The government allowed accelerated
recovery of their foreign exchange losses with some contractual amendments.
The problem that the two concessionaires faced was an external one—the
Asian financial crisis. With government help, through a reopening of the contracts
with concessionaires, Manila Water was able to overcome the challenge. The
new owners of Maynilad at this point seem to be doing well financially, too. The
financial crisis hampered the capital improvements and delayed realization of the
84 Canlas: Philippine policy reforms in infrastructure development

benefits to stakeholders. Nonetheless, the problem of limited service coverage has

been solved. Most areas in Metro Manila are now getting 24-hour coverage, to the
satisfaction of clients, both households and business enterprises.
The mwss, meanwhile, is no longer engaged in water supply provision.
It is mainly an oversight body monitoring the two concessionaires and setting
standards for the service. It also supervises the regulatory agency that has been
established after privatization. It leads in the conduct of rate rebasing, which is
done every five years as stipulated in the concessionaires’ agreements.

7.3. Terminal 3 of the Ninoy Aquino International Airport

This was an unsolicited proposal under the amended bot law. It started
during the Ramos administration. A group of Filipino-Chinese taipans proposed
it. During the Estrada administration, it was subjected to a bid challenge from a
consortium that included Fraport, an airport company from Frankfurt. The bid
challenger won. The taipans had the right to match but declined to do so. And so
the new consortium called piatco that had Fraport as a partner was given the
notice to proceed.
piatco was able to complete construction of Terminal 3, but during the time of
the Arroyo administration, the government sought to have its contract voided and
won the case in the Supreme Court. The latter, however, ordered the government
to pay piatco just compensation, which has not been settled because the parties
sought arbitration at a substantial cost to the government in legal fees.
On July 31, 2014, the Aquino II administration was able to convince major
airlines like Delta, Cathay, and Singapore Air to finally transfer to Terminal 3. It
is hoped that the Terminal 3 case is finally over, and the expected full benefits to
stakeholders would finally be realized after a delay of about 17 years.
The risk in this case was a judicial one. The voiding of piatco’s contract
delayed the project unduly with profound losses to the government.

7.4. EPIRA

The epira law ended the monopoly of npc over power generation and
transmission, and essentially privatized the electric power industry. The power
generating assets of npc were turned over to the Power Sector Assets Liabilities
Management, which has been auctioning the npc power plants. After some
delays, the institution got on track and was able to bid out the major power plants.
Transmission continues to be a public utility, but it could be assigned to a
private concessionaire through competitive bidding. A consortium of local and
Chinese investors runs the National Grid Company of the Philippines today.
Just like mwss, npc experienced long years of losses, and its creditors, mainly
oda donors, advocated privatization of npc. Under epira, npc is limited to
operating small power generating plants.
The Philippine Review of Economics, Volume LIV No. 2, December 2017 85

epira has succeeded in Luzon. The benefits, however, for Mindanao are still to
be realized. Mindanao was exempted temporarily from epira. The npc continues
to run large hydroelectric power plants there. Maintenance of the hydroelectric
plants is, however, costly; the npc as a result has not been able to maintain these
power plants properly. Mindanao continues to experience brownouts nowadays.
The risk to electric power supply in Luzon emanates from the delays in adding
generating capacity on account of protests from environmental groups, not to
mention the judicial risk. In Mindanao, stakeholders must realize that cheap
electricity from hydropower is not permanent. They must accept the fact that
additional generating capacity from new power plants like coal-fired ones will
end their brownout problems, provided they are willing to pay more for electricity
than what they are paying now.

7.5. DBM and project monitoring

In 2007, the dbm rolled out its Organizational Performance Indicator

Framework. This is a framework for results-based budgeting, in which sector
and societal outputs are to be linked. Are infrastructure agencies of government
delivering outputs that benefit society in the large? The dbm works with neda
and the Commission on Audit (coa) in promoting the framework.
The dpwh, for instance, submits a logical framework that starts at the top with
a societal output, say, inclusive growth. Its programs and projects are supposed
to serve the societal output. The dpwh, for example, commits under its road
program to improve access to production areas and markets.
The dotr, meanwhile, commits to integrate its land, sea, and air transport
program to integrate markets in various regions of the country. Buyers and
suppliers are able to carry out transactions efficiently, contributing to mutually
beneficial trades and growth.

7.6. NEDA and project monitoring

The neda as the dialogue partner of oda donors conducts an annual

monitoring and review of oda-funded projects. The review identifies problems
that tend to delay implementation. Road projects, for instance, often encounter
right-of-way problems. In addition, during times of tight budgetary constraints,
the dbm is not able to raise the budget ceiling of infrastructure agencies to be able
to accommodate all oda-funded projects. Furthermore, ancestral domain issues
often delay projects like reforestation.
To address problems that hinder implementation, the neda conducts regular
dialogues with oda donors together with the dbm so that agencies can, for one,
be allocated funds for right-of-way, especially the dpwh. The neda and dbm
also undertake prioritization exercises intended to see if foreign-funded projects
are better prepared for implementation compared to locally funded projects.
86 Canlas: Philippine policy reforms in infrastructure development

In 2005, several countries and oda donors signed the Paris Declaration for
Aid Effectiveness. Several principles are included in the declaration, including
country ownership and mutual accountability. This document seeks to improve
project outcomes, especially oda-funded ones.

8. Concluding remarks

Policy reforms for infrastructure development in the Philippines have been

evolving since 1986. The political administrations have in succession underscored
the importance of infrastructure development in the mtpdp.
Important progress has been made, but the infrastructure gap, especially in
transport, is a formidable challenge. The capacity of many implementing agencies
must be raised constantly over every stage of the project cycle. The legal and
judicial framework needs to be revisited to minimize the risks in this regard.
Government revenues from taxes need to be enhanced to finance the planned
increase in infrastructure spending. Government procurement for goods and
services cries out, both at the national and local government levels, for reforms
aimed at avoiding delays.
The Philippines has made much progress with the policy reforms for
infrastructure development. It has opened up an important role for the private
sector, not only in bidding to construct facilities but to actually operate them.
Public-private partnership for infrastructure must be pursued with vigor. Pursuit
of good and effective governance, such as eliminating corruption in government
procurement, is by no means complete at this point.

Acknowledgments: The first draft of this paper was presented in the 2014 kri-kdi
special workshop on “Build a new platform for national development: sharing experiences
between Southeast Asia and Korea”, that was held in Yangon, Myanmar. I thank, without
implicating for any remaining errors, the late Prof. Chung-Sok Suh, who was the lead
organizer of the workshop, and participants in the 11.5 pt workshop for many helpful
comments. Since then, the paper has been evolving; several colleagues, too many to be
cited here, have commented on various drafts of the paper.

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