THE BLOG
05/23/2014 05:21 pm ET | Updated Jul 23, 2014

Philippines' Infrastructure Conundrum: Prematurely Hosting the World Economic Forum?

With the Philippines emerging as one of the economic bright spots of Asia, it came as little surprise that Manila was chosen as the host of the 2014 World Economic Forum (WEF) on East Asia, bringing together leading policy-makers, businessmen, academics and journalists from around the world. The event formalized the Philippines' status as the new toast of the town among global investors, demonstrating growing international confidence in the leadership of the Aquino administration. In conjunction with the WEF, I had the privilege to be among the discussants in the 2014 Bloomberg Leadership Forum, which focused on two inter-related questions: Is the Philippines' recent economic boom sustainable -- and is the country poised to become Asia's next tiger economy?

After a lengthy discussion on the various dimensions of the Philippine economy, and the necessity for sustained reforms, one issue stood out in my exchanges with other panelists, who were executives from leading businesses, banks and government agencies in the country. Without a doubt, we shared a deep concern with the "infrastructure deficit" in the country.

Despite several years of above-average economic growth, the Philippines has hardly reduced its double-digit poverty and underemployment rates. Lack of inclusive development is a huge concern, and inequality levels are increasing. Without proper infrastructure, the Philippines will continue to struggle to attract high-quality investment from abroad, which is crucial to sustaining its current growth trajectory and creating well-paying employment opportunities for a larger section of the society. Infrastructure is also crucial to enhancing the living standards of the ordinary citizens, and demonstrating the ambition and capabilities of the country.

The Ticket to Fame

Traditionally, emerging powers announce their arrival on a world stage by launching big-ticket infrastructure projects and/or hosting major sporting events such as the Olympics and the World Cup. In recent decades, countries such as Japan, South Korea, China, Brazil, South Africa and Russia have gone through such rituals -- with varying levels of success. The aim is to demonstrate your technological prowess and national ambition before the world audience, most especially the global investors.

For smaller countries, which can't afford to match the resources and ambitions of the bigger players, the optimal approach to impressing the world audience is to focus on the most symbolic, eye-catching infrastructure projects. Malaysia, for instance, provides an excellent template for this strategy, when Prime Minister Mahathir Mohamad focused on the construction of the Petronas Towers and, even more importantly, the $3.5 billion Kuala Lumpur International Airport in the early-1990s. While some criticized those projects for being too ostentatious, the glittering structures, nevertheless, cemented Malaysia's reputation as a promising emerging market. And despite all the political gridlock and economic stagnation in post-Mahathir Malaysia, those structures continue to (a) reflect the stubborn ambition of the country to become an economic powerhouse and (b) attract millions of tourists from around the world.

As the Philippines packages itself as the new rising tiger of Asia, it seems quite bizarre, if not scandalous, that the country continues to have one of the world's worst airports, as authoritative surveys consistently suggest. The shabby, decrepit NAIA I Airport is, at the very least, underwhelming, especially when compared to world-class airports in neighboring Singapore, Thailand and Malaysia. Located in a congested area of Metro Manila, the airport gives a terrible first impression to visitors.

One must note how airports are the symbolic gateway to a country. The NAIA I, in many ways, reflects the Philippines' regulatory crisis: the inability of its government to be decisive and efficient in pushing ahead with much-needed infrastructural projects.

Good Governance 2.0

Given the depth of corruption in the Philippines, the notion of "good governance" has been generally understood as anti-corruption crackdown. But good governance is also about timely and effective implementation of strategic projects.

For decades, the Philippines has struggled to secure a new, technologically-advanced and more spacious alternative airport, due to continuous legal squabbles over the ownership of the newly-constructed branches of NAIA. Meanwhile, domestic private-owned airline companies were able to monopolize the more decent NAIA II and III branches for years. Only recently has the government managed to transfer more international flights to other branches of NAIA.

But the best alternative, perhaps, is to simply decommission -- complete overhaul could be very expensive and impractical -- NAIA I, making it a domestic airport instead, while transferring all the international flights to NAIA III and/or build a whole new international airport complex outside Metro Manila. So far, it seems the government is trying to renovate NAIA I, while slowly transferring international flights to other branches. The Plan for developing the Clark International Airport has, so far, been disappointing.

But participants in this year's WEF in Manila were obviously underwhelmed by the NAIA I Airport. As renowned economists such as J.M. Keynes have correctly observed, markets are largely driven by psychological factors and "animal spirits." NAIA I could dampen inflated expectations among international observers, leaving a sobering impression on foreign visitors.

But the infrastructure drama goes beyond NAIA I, as the traffic jam, the rushed and half-finished road projects, the absence of world-class public transportation infrastructure, the vision of ordinary citizens crammed into small public utility vehicles, and the despicable pollution of Manila demonstrate. They reflect weak city planning, underdeveloped physical infrastructure, and, in short, ineffective governance.

In terms of ICT, the Internet speed in the Philippines is among the slowest in East Asia, almost comparable to countries like Myanmar. And this is despite the fact that there are at least three giant, highly profitable telecommunication companies in the country. Foreign observers have been quick to point out the seeming lack of intra-industry competition, allowing few private companies to make huge profits on relatively dismal services.

The Infrastructure Imperative

For ordinary citizens, commuting in the Philippines is a daily struggle, especially during rush hours, hot summers and rainy seasons. Recent months have witnessed the breakdown of the Metro Rail Transit (MRT) and long hours of traffic due to many roadblocks and rushed road projects. With government officials and the elite enjoying comfortable private transport options, you can imagine how frustrated many ordinary citizens can be. And resentment is building up. Many hope that the transport issue will become a key policy discussion point in the upcoming 2016 presidential elections.

The publicly-subsidized MRT, and some branches of the Light Rail Transit (LRT), are poorly maintained, with the air-conditioning systems sometimes shutting down in the middle of a hot summer day. Proposed privatization schemes have been undermined by bidding anomalies and excessive delays. Cabs are not exactly a good alternative, since they are expensive and sometimes even unsafe, with many reports of cab driver abuse against passengers. In short, Metro Manila -- the economic engine of the Philippines -- is among the least desirable capitals among the emerging markets in terms of transport infrastructure. Commuting has been a harrowing, day-to-day experience for the greater majority of the Filipinos.

Fresh into office, the Aquino administration announced more than a dozen Private-Public-Partnership (PPP) projects to overhaul the dismal infrastructure in the country. But regulatory uncertainty and sloppy bidding procedures have prevented the conclusion of even a single one to date. The situation has been further complicated by the explosion of corruption scandals, which have put many executive agencies on the defensive, further delaying and complicating the conclusion of major projects.

For foreign investors, in turn, there is no assurance that any major investment commitment will not suddenly become embroiled in a corruption scandal, whether evidence-based or purely driven by innuendos. The Philippines' infrastructure spending as a share of Gross Domestic Product (GDP) is among the lowest in Asia, consistently below 3 percent in recent years. Geopolitical tensions over disputed territories in the South China Sea have also deprived the Philippines of prospective investments from China, which has emerged as a key source of infrastructure development and cheap loans for many developing countries around the world.

The Aquino administration hopes to double infrastructure spending by 2016, and that is why it has been rushing many road projects in places such as Metro Manila. There are, however, two problems with this approach. First, the sudden rush of projects has led to massive traffic jams, and, in some cases, sloppy construction. Second, while smaller projects may have pushed forward, the big-ticket PPP projects, which are pivotal to the Philippines' attraction as an investment destination, are still in limbo.

There is also the unfolding political crisis. Recent revelations allege that major figures within or allied to the Aquino administration may have been involved in large-scale corruption schemes. The evidence may not be strong, but the ensuing political infightings and non-stop investigations could dampen the momentum for sustained infrastructure development, if not disrupt some proposed/ongoing projects. In short, the Aquino administration is confronting mammoth bureaucratic, temporal and political roadblocks in realizing its infrastructure development plans.

Nonetheless, many ordinary Filipino citizens still hope that the Aquino administration will fulfill its promises in its twilight years in office, paving the way for more sustained infrastructural development under succeeding administrations.