Planning, Budgeting, Policy Coordination and Infrastructure Development in the Philippines Felipe M. Medalla University of the Philippines

Presentation is Part of Case Study for Philippines. OUTLINE OF STUDY Introduction and Overview Infrastructure, the Macroeconomy and the Fiscal Crisis Policy Coordination and Infrastructure Planning Managing Reforms Summary and Conclusion

Managing Reforms Increasing Government Revenue Decentralization and Devolution: Reforming Inter-Governmental Fiscal Relations Towards Smarter Subsidies (Better Management of Subsidies and Guarantees and Movement Towards Incentive-Compatible Cost- Recovery Pricing) Making Power Industry and Water Supply Reforms Work Privatization: Enhancing Competition (e.g., unbundling) and Strengthening Regulation

Infrastructure, the Macroeconomy and the Fiscal Crisis

Significant part of the growth in government debt is due to off-budget expenditures

But the fiscal crisis is also due to a significant decline in the tax effort after the Asian Financial Crisis

NON-MANDATORY SPENDING WAS CUT AND INFRASTRUCTURE TOOK THE BIGGEST SHARE IN THE CUTS NATIONAL GOVERNMENT SPENDING AS A % OF GDP INFRASTRUCTURE 3.2%2.6%2.1%2.3%1.2% EDUCATION HEALTH

PRIVATE SECTOR PARTICPATION IN INFRASTRUCTURE DEVELOPMENT ALSO SUFFERS SOVEREIGN CREDIT RISKS RATINGS ARE IMPORTANT BECAUSE BOT CONTRACTS REQUIRE GOVERNMENT TO COMPENSATE INVESTORS FOR REVENUE LOSSES RESULTING FROM POLITICAL INTERFERENCE WITH TARIFF SETTING INVESTORS IN PHILIPPINE BOT PROJECTS ADD 400 TO 500 BASIS POINTS TO THE WEIGHTED AVERAGE COST OF CAPITAL DUE TO SOVEREIGN CREDIT RISKS (PLUS 400 TO 500 POINTS FOR PROJECT, JUDICIAL AND REGULATORY RISKS)

Planning, Budgeting and Policy Coordination

Medium and Long-Term Plans National Physical Framework Planning and, Long-Term and Development Planning have long been established practices of the government of the Philippines. In addition, there are sector and infrastructure plans (Energy Plan, Infrastructure and Road Network Plans, Transportation Plans and Strategies,Civil Aviation Plan, Port development plans,etc).

Medium-Term Development and Public Investment Plans The Medium-Term Development Plans define the macroeconomic and sectoral targets and the general thrust of economic policies (e.g., macro-economic stability, growth with equity, reduction of tariffs and trade barriers) The Medium-Term Public Investment Plans contain the projects that must be undertaken to achieve the plan targets

Weaknesses of the Planning Process Since the restoration of democracy, legislative branch has never officially accepted a single development plan submitted by the executive branch The sector or department level plans are not spatially integrated or coordinated Public investment plan more like a shopping list than a plan Resources are thinly spread over all the congressional districts Budget preparation is essentially an exercise in funding continuing activities and division of resources by legislative districts

Weak Link (continuation) Sequencing of infrastructure investments gets no legislative support because political coalitions may not last very long (a small share of the pie now is always preferred to promises of a much larger share in the future) Synergy and scale economies are not achieved because resources are scattered. It is very hard to fund and implement area-based strategic projects even in cases where such projects can play a catalytic role.

Weak Link (continuation) Except for ODA-funded projects, a huge chunk of the national infrastructure budget actually finances thousands of small local projects. Due to rivalry between legislators and local government officials, nationally funded local projects may not be the priority projects of local governments and the regional development councils Unless funded by ODA, It is virtually impossible to find financing for projects that cut across political boundaries

Area-Based Coordination of Infrastructure Spending Essentially Failed National Council for Integrated Area Development (NACIAD) “Super Ministries” under Mrs. Marcos Regional Development Councils Metro-Manila Development Authority (coordinating 18 local governments and at least three departments of national government) Conclusion: Weak Political and Economic Incentive to for LGUs and Government Departments to Cooperate

DEPENDENCE ON DONORS AND PRIVATE INVESTORS ON THE FINANCING OF DESIGN AND ENGINEERING STUDIES Budgetary appropriations for studies have little chance of surviving congress Much of design and engineering studies are funded by donors (e.g., JICA) Private sector provides financial modelling, design and engineering studies through unsolicited BOT projects, but such studies do not necessarily mesh well with overall infrastructure plan and network

The Budget Process The budget process is myopic because much of the budget is for mandatory expenditures like salaries, interest payments and grants to local governments Legislative actions that allocate resources are outside the budget process After mandatory and continuing expenditures are taken into account, the budget process is largely a “division game.” In fact, the game occassionally breaks down and no budget is passed, resulting in “re-enactment” of previous year’s budget (e.g., budgets for 2002 and 2004) Thus far, over-sight agencies attempts to introduce discipline through a multi-year expenditure framework has gained little ground

Devolution and the Budget 40% of internal revenue are automatic block grants to local governments The block grant formulas totally ignore geographic differences in infrastructure stocks and tax bases Except for budgetary appropriations for the Metro- Manila Development Authority, there are no budgetary allocations for grants to LGUs for co- financing projects that cut across political boundaries Direct national government spending on local projects would be better spent if they are used for co-financing projects chosen by local government units (rather than by legislators) for projects that cut across political boundaries or address basic needs

Need for More Explicit, Targeted, Disciplined and Results-Oriented Subsidy Policy Present subsidy policy is implicit, reactive, ad hoc and costly (e.g., huge assumed liabilities and lending to government corporations) A fraction of the assumed liabilities and subsidies could have done much more for infrastructure and the poor For water and electricity, there is need to find (a) a medium-term program for transition towards cost recovery pricing for the non-poor and (b) tariff unbundling and a regulatory regime that attracts private capital and gives stronger efficiency incentives

Tariff Setting: Curent Situation Water tariffs in Metro-Manila do not include cost of raw water and environmental cost. Increase in population and service coverage will require new and expensive investments in sewerage and raw water supply. Water tariffs outside Metro-Manila barely exceed unit operating expenditures Except for water supply in Manila, real tariffs fall during periods of high inflation Tariff-adjustment follows political calendar Weak regulation and judicial activism increases unpredictability of tariff adjustments Bottom Line: Not enough private investments will be attracted

Reform Issues Increasing tax effort by 4% to 5% of GDP Changing the LGU block grant formulas to reflect geographic differences in local tax bases and infrastructure stocks Changing the devolution of funds to local governments to improve the financing and coordination of projects that cut across political boundaries Making the budget process more disciplined and more forward looking Moving towards cost recovery pricing (except for the poor) Moving towards explicit subsidy policy that is both results-oriented and pro-poor