‘Dutertenomics’ envisions a golden age for the Philippines

Philippine President Rodrigo Duterte holds his glasses as he speaks to reporters at the presidential palace in Manila, Philippines April 28, 2017. Photo: Reuters/Erik De Castro

The Philippines has announced ambitious new infrastructure spending plans, an unprecedented fiscal push President Rodrigo Duterte’s champions are referring to as “Dutertenomics.”

The plan, described by socioeconomic planning secretary Ernesto Pernia as a coming new “golden age of infrastructure”, has earmarked 3.6 trillion pesos (US$73 billion) over the next three years, the bulk of which will go towards transportation projects in Metro Manila and other major cities.

Duterte’s economic planners say they aim to spend 8.6 trillion pesos (US$173 billion) on 64 big ticket projects, ranging from new roads, bridges, railways, airports and seaports, over the course of his six-year term, spending they say is necessary to boost competitiveness and ensure future fast economic growth.

The populist leader, under local and international fire for his controversial lethal drug war, has claimed the building will help to catapult the Philippines to high-income country status by 2040.

The turbo-charged spending will if executed mark a sharp contrast from the previous Benigno Aquino administration, which in dogged pursuit of corruption-busting measures took what some analysts and many opponents saw as an overly cautious approach to infrastructure development.

Aquino’s prudence earned sovereign and credit rating upgrades that helped to reduce the country’s cost of borrowing and renewed investor confidence in a country long known as the “sick man” of Southeast Asia. It also caused delays in his similarly ballyhooed public-private partnership (PPP) projects, few of which were completed because of the deals’ complexity and risk-sharing.

Slow work: Filipino laborers work on a “skyway” along an expressway in Metro Manila on November 15, 2010 built under ex-premier Benigno Aquino. Photo: Reuters/Erik de Castro

Critics in Duterte’s camp say that resulted in further decay of the country’s already creaky infrastructure, witnessed in frequent breakdowns of elevated passenger railways in Manila, massive congestion on major roads and the dubious distinction in one international ranking as home to the world’s worst capital city airport.

Duterte’s initial three-year rolling infrastructure program, if disbursed as planned, will see more outlays than the 2.4 trillion pesos (US$48 billion) spent under Aquino’s entire six-year term. In fact, Duterte’s initial three-year plan aims to exceed the total amount spent on infrastructure of the previous five administrations combined.

The transportation sector is scheduled to get 65% of allocations under the initial three-year plan. This year, the government aims to spend 5.4% of gross domestic product (GDP) on infrastructure, a percentage scheduled to rise to 7.4% of GDP by the end of Duterte’s six-year term.

His budget secretary, Benjamin Diokno, has said all the spending will also help to reduce poverty from nearly 22% of the population now to 14% by 2022.

The biggest outlays will go to build the country’s first subway, long-delayed north-south railway projects, development of a so-called ‘New Clark City’ situated at a former major military base and major improvements to Davao City airport in Duterte’s hometown.

Popular support: A fan of President Rodrigo Duterte during presidential election campaigning in Metro Manila on April 27, 2016. Photo: Reuters/Erik De Castro

To be sure, big infrastructure spending plans have been announced and not realized by similarly ambitious governments. But Duterte has the unique opportunity to push through the spending with his tremendous popular support. Moreover, the savings accrued under Aquino have gifted Duterte a strong fiscal position with public debt around 27% of GDP, one of the lowest such ratios in Asia.

Finance Secretary Carlos Dominguez has said in recent public addresses that the spending is contingent on the success of revenue-raising measures, including comprehensive tax reform that would make evasion a crime akin to money-laundering. Around 80% of the infrastructure spending is scheduled to be financed locally, while 20% of the financing will come from foreign sources.

The tax reform package aims to lower personal income taxes, currently the highest in Southeast Asia, while broadening collection by expanding value-added taxes and hiking excise taxes for vehicles and petroleum products, changes that will put the government at loggerheads with influential transport and consumer lobby groups.

The reforms are now being debated in Congress, but strongly opposed views could mean they won’t pass as originally targeted by June. Nor is it clear that Duterte fully supports the reforms, which he earlier chidingly referred to as “Sonny’s (Finance Secretary Dominguez’s nickname) package”, a less than ringing endorsement that could allow the president to distance himself from any uproar over the measures.

Taxman: Philippine Finance Secretary Carlos Dominguez in Beijing, China, January 23, 2017. Photo: Reuters/Damir Sagolj

Even if the reforms are passed and revenues raised, many observers doubt the bureaucracy, namely the Department of Transportation (DoT) and the Department of Public Works and Highways (DPWH), has the capacity or leadership to efficiently execute the massive spending plans.

Dominguez has said financing will also come from overseas development assistance and commercial loans, mostly from China and Japan. While the projects are expected to create as many as one million new jobs, Diokno has suggested that he would not mind if China imports and uses its own workers, a likely condition for concessionary loans, so long as the projects are quickly completed.

There are other questions on the need, cost and risk of certain projects, including the 25-kilometer subway, the most expensive of the budgeted schemes at 227 billion pesos (US$4.7 billion). The subway will involve massive underground drilling in an earthquake-prone area that some analysts estimate will push up the cost of construction and maintenance beyond commercial viability.

Nor is it clear the government’s modified build-operate scheme, which bogged down badly under Aquino, will appeal any more to private sector operators, particularly if state-led building is perceived as shoddy or prone to potential high maintenance costs.

Light oversight: Laborers install steel beam at a construction site in Metro Manila. Photo: Reuters/Erik de Castro

There are also legitimate concerns that massive infrastructure spending will beget massive corruption, especially in sight of apparent plans to speed approval processes by skipping steps put in place for due diligence purposes.

Despite Duterte’s and his deputies’ assurances of transparency, including the use of surveillance drones to monitor projects’ progress, his administration already has a track record of cozying up to business personalities with checkered pasts.

Critics warning of potential conflict of interests note that DPWH Secretary Mark Villar hails from the family that owns Vista Land Group, while DoT Secretary Art Tugade was formerly a senior executive with leading property developer Ayala Land.

While the Philippines clearly needs a new “golden age of infrastructure”, the government – as with previous administrations – will be hard-pressed to realize the rich economic expectations it is promoting as “Dutertenomics.”