Is the Philippines Spending Too Much on Infrastructure? And How Much is Too Much?

Is the Philippines spending too much on infrastructure?

We all know that the entire country is sorely lacking in infrastructure. All one has to do is step outside into the streets and experience the unbearable traffic not just in Manila but everywhere. In many cases, traffic is so slow, it's faster to go on foot, were it not so hot and humid. The productivity loss in traffic alone is massive - at least 21% of Metro Manila's GDP in 2017. That was then. I'm sure it's a lot higher now.

But traffic congestion alone is not the only infrastructure problem holding the Philippines back. The Philippines also faces a water and power crisis. These are long-running structural problems with no quick solution.

To counter this, the Duterte administration has launched a massive Php 8 trillion infrastructure program, much of it financed by China, as part of its 2017 to 2022 Philippine Development Plan, ushering in what the administration calls a "golden age of infrastructure."

The sheer size and scale of the "Build, Build, Build" infrastructure program ($156 billion) represented a daunting 50% of the $314 billion economy at the time it was launched in 2017. The last time this happened was during the Marcos years, which promptly ended in tears. External debt skyrocketed, peaking at 94% of GDP in 1986.

When the government lacked the dollars to pay off the loans, a debt "moratorium" - and not default - ensued. Whether it was an actual default or something else, the end result was the same: a political and economic crisis. The Marcoses were booted out of power, leaving the first Aquino government to deal with the aftermath.

As a result of the debt hangover, debt became a bad word for the Aquino government and succeeding administrations. It became something to be avoided as much as possible. What then transpired was a considerable underinvestment in infrastructure, both public and private, for the next four decades. Gross Capital Formation (GCF) as a percentage of GDP averaged only 21.04% from 1986 to 2017, considerably below that of our peers. The ASEAN historical average for the same period was 28.22%, more than 7% of GDP higher than the Philippine average. The only time GCF was above the ASEAN average was during the Marcos years.

Singapore, Thailand, Malaysia, and Indonesia averaged much higher than the ASEAN historical average. As a consequence, their economies boomed and we were left behind.

The gap between between what we were spending and what we should have been spending grew ever larger. If measured from 1960, this infrastructure "gap" be stood at $196 billion or 63% of GDP in 2017. If measured from 1986, the gap is even bigger: $285 billion or 93% of GDP in 2017.

The Duterte's Build, Build, Build Program will double Public Construction as a percentage of GDP from 2.8% Pre-Duterte to around 5.5% during the Duterte administration.

If Private Construction follows suit (as it usually does), Gross Capital Formation as a percentage of GDP will once again be slightly above the ASEAN historical average.

And the infrastructure gap? The infrastructure gap will decline from 93% of GDP to just 58% of GDP, using the ASEAN historical average from 1986 to 2017, at the worst case.

At best, it will decline from 63% of GDP to just 29% of GDP, using the 1960 to 2017 historical average.

This all presumes that infrastructure spending will yield a net positive to the economy and that the government does not waste money on corruption-riddled white elephants. According to NEDA, all the infrastructure projects have an economic cost benefit ROI of at least 10% or higher. For our sake, let's hope that's true. If not, we may have fallen into a China Debt Trap.