'Noynoying,' Slowly, on Philippine Infrastructure

When Benigno S. Aquino III took office as Philippine president on June 30, 2010, almost his first act was to cancel billions of dollars of public-private partnership established by the outgoing Arroyo administration, raising fears that he was taking a sledgehammer to crony contracts for political reasons despite the overwhelming need for infrastructure investment.

The decision to hold back on public spending backfired to some extent, with critics accusing Aquino both of being indecisive and for having a double-standard by urging multinational investors to come in while stalling the projects they were to bid on. That led to the term "Noynoying," a play on the president's nickname, meaning to do nothing.

At first glance, the decision to halt the projects was a mistake. The Philippines has some of the worst infrastructure in Southeast Asia, a legacy of three decades of inadequate expenditure that began as the administration of former dictator Ferdinand Marcos was crumbling in the 1980s. Urgency is a necessity if the country is to build on its recent healthy GDP growth, which has been running above 6 percent for the past several quarters.

Weak governance and widespread corruption have caused private infrastructure investment to plummet from 15.5 percent of GDP in 1997 - the last year of President Fidel Ramos's term - to 2.1 percent during the presidencies of Joseph Estrada and Gloria Macapagal Arroyo, according to the Asian Development Bank. Eventually everybody seemed to give up -- both the government and domestic and international investors, the latter having lost confidence in the government.

Today, however, Noynoying may have taken on a different meaning. The government has won plaudits from most observers after it became clear that many of the big-ticket cancellations were necessary to clean up the bid process and make it more transparent - and to restart the process in an atmosphere of endemic corruption.

For example, in December, the International Finance Corp, the private sector financing arm of the World Bank group, announced that it plans to invest up to US$$400 million in 2013 double that allocated for 2012, in a heartening indication that Aquino's investment plans are finally getting on track.

"The reforms undertaken by the Philippine government in infrastructure finance and improving the business environment through the anti-corruption initiatives are the reasons why British companies are keen to be engaged in the Philippines' infrastructure program," British Ambassador Stephen Lillie told an investment conference in Manila in November.

Despite considerable initial doubt, the government met its 2012 goal of eight projects involving school infrastructure, highways, light rail, airports and particularly the North Luzon-South Luzon Expressway Connector, a major bottleneck snarling Manila's chaotic traffic.

As much as US$5.2 billion in projects has been earmarked through 2013, includingUS$3.1billion in key transport projects such as rail, airports, ports and roads, and US$2.1 billion in other projects such as cold-chain systems, water cleanup, a vaccine self-sufficiency project and others. Against all odds, multinationals appear to be taking interest.

The IFC said it would focus on the financial sector, particularly working on distressed assets, clearing up balance sheet and other problems including the implementation of Basel 3, the global reform of international accounting standards.

The funding is long overdue. Delays, inefficiencies and graft have meant, for instance, that the road network is near collapse. A World Economic Forum Global Competitiveness report for 2011-2012 rates the Philippines dead last in Southeast Asia in overall infrastructure quality and even worse in road quality. In Metro Manila, where 50 percent of all foreign investment is concentrated, the road system "is largely second-rate and is not optimally integrated into an efficient network linking business district, residential areas and entertainment centers and major transport terminals," according to a report by Pacific Strategies and Investments, a Manila-based country risk firm.

The Philippines has only 205,000 km of roads, with national highways and provincial roads making up at least 30 percent of the network. Driving up the Aguinaldo Highway from Manila south to the highlands of Lake Taal means a trip of between two and three hours to traverse only 50 km. Of the total highway system, only 23 percent of roads are paved. The country also has nearly 8,000 bridges, 35 percent of which - roughly1,600 - are classified as in poor or bad condition, hardly encouraging in a country subject to continuing earthquakes and typhoons across much of its 7,000 islands.

That isn't to say there won't be problems, the biggest of which is corruption. One architect who bid on a project in a local province told Asia Sentinel that the provincial governor had demanded a bribe amounting to 50 percent of the cost of the project. The architect turned it down.

The opportunity costs of such practices are huge and are replicated across a long string of enterprises that enrich the powerful and lead to growing anger among the poor and growing frustration on the part of the country's talented professionals, who seek contracts and jobs overseas.

The architect's experience is borne out by a 2011 World Bank report on corruption and collusion in the road sector which claimed that 40-50 percent of the total project costs of bridges were lost to bribery and kickbacks at the national level, with another 10 percent lost to local government offices responsible for inspection and issuance of construction clearances and permits.

If Aquino's commitment to rooting out corruption really goes beyond just taking down the cronies of his predecessor, just getting started cleaning out this system will probably take longer than the remaining four and a half years he has left in office.