OPINION: Teka-teka vs. Bara-bara: Assessing the Governance of Build-Build-Build

A little over a year ago, the Duterte administration unveiled Build, Build, Build (BBB), an initiative dubbed as "the boldest infrastructure development program in recent Philippine history."

Pledged to usher a "golden age of infrastructure," the government’s infrastructure drive aims to invest an immense P8.44-trillion across nearly five thousand projects in the next 4 years (including in 75 mega-sized flagship ventures), forming the single biggest surge in Philippine infrastructure spending in the past 3 decades.

BBB has received widespread support, since the sordid state of Philippine infrastructure is one of the critical constraints to the country’s development. As of 2017, the Japan International Cooperation Agency has even estimated that the economic toll of Metro Manila congestion was already P3.5-billion daily— or around 11 percent of GDP.

Whether in Manila’s transport woes, or in Mindanao’s dilapidated road networks, this pervasive infrastructure bog has imposed a considerable toll on the lives of millions and on the Philippine economy.

Yet BBB has not been immune from controversy. The program has come under fire for reasons ranging from its unprecedented shift towards debt-taking in its preferred financing modes, its macroeconomic drawbacks on the trade balance and exchange rates, its choice of projects, to its geopolitical implications, especially with Chinese financing.

The risks of botching BBB’s implementation have also been compared to Ferdinand Marcos’ mega-infra spending spree in the 1970s— a period that ended with a debt crisis and a protracted economic stagnation that hobbled the country for 2 decades.

A bold effort is direly needed to fix the Philippines’ infra dilemmas in the years ahead. But one year onwards, what has become increasingly clear is the need for strengthening governance safeguards and project development capacity.

Here, the Duterte administration, in its determination to realize its "golden age of infrastructure" has given mixed signals. In its efforts to depart from the perceived slow pace of infrastructure roll-out under the past administration, the Duterte government, it seems, has put a premium on speed. As we will explain, this has potential governance trade-offs.

'TEKA-TEKA' AND UNDERSPENDING

Following the Arroyo administration, which was plagued by infrastructure scandals such as the NBN-ZTE controversy, the Aquino government overhauled infrastructure development along good governance lines, as part of its overarching anti-corruption drive.

Early in the administration, an exhaustive due diligence review of projects that had been awarded under anomalous conditions, including several big-ticket, foreign-funded ventures, led to numerous suspensions (and a few cancellations) of infrastructure ventures until they had passed through competitive tendering.

Major reforms in public works procedures also took place, with the DPWH obtaining international accreditation by 2015 for being fully compliant with global best practices in infrastructure quality management.

As part of these good governance reforms in infrastructure, Aquino prominently championed a PPP model whose rules were "fair, clear, and equally applicable to all."

While PPPs were hardly new at the time, the former Build-Operate-Transfer (BOT) center of the government was reorganized and expanded into a full-fledged PPP Center to serve as the lead player for facilitating the development of PPP projects in line with transparency, accountability, and international best practices.

There is no question that these reforms catalyzed substantial dividends in the governance of public sector projects— though it is true that allegations of anomalies persisted in some important instances (e.g. MRT operations and maintenance contracts; some pet projects for legislators funded by the Disbursement Acceleration Program or DAP).

As a result of procurement, bidding, and administrative reforms, the Department of Public Works and Highways was reputed to generate more than P48-billion in cost-savings from July 2010 to May 2015— a far cry from the agency’s previous reputation as a den of overpriced, anomaly-ridden projects.

Likewise, through the latter half of the Aquino government, the PPP program has been lauded as one of the best-performing of its kind in Asia, and has been touted by the World Bank as a model for other Asia-Pacific countries to emulate.

In particular, the program drew acclaim for the rigor of its project preparation procedures and the robustness of its transparency and fair bidding policies.

Yet while curbing infrastructure corruption, the "Dang Matuwid" (Straight Path) did not readily translate into greater speed in the roll-out of projects. For all the accolades it garnered, the PPP program exasperated many in terms of its actual outputs.

Though 53 projects were lodged in the PPP pipeline in 2010, only 12 of these ventures were awarded to contractors by the end of Aquino’s term. And of these 12, only 3 were actually completed.

Chronic delays over the years, driven by uneven agency capacity for processing projects, a long preparation timeframe, and an inflexible framework, dashed hopes for PPPs serving as a fast route for addressing yawning infra gaps.

The government’s focus on prudence in public works also ran at odds with the need to escalate public spending in infrastructure. As shown by chart 1, though the Aquino administration raised the level of public infrastructure spending to 2.9 percent of GDP on average, this remained below the 5 percent threshold that the World Bank and other observers had long urged as a government target.

This "underspending" quandary has been attributed to a confluence of challenges, ranging from structural bottlenecks (e.g. coordination weaknesses, delays in documentary requirements), the suspension of DAP in 2014, and even typhoons and peace-and-order problems.

But the slowdown could also be partly attributed to an "overcautious" attitude to spending that may have been inadvertently inculcated by the administration’s good governance reforms.

Ironically, an unintended effect of stronger anti-corruption and transparency measures in infrastructure was to embed a pervasive "teka-teka" mentality among civil servants.

Rather than proactively seizing opportunities for infrastructure development, the risk of being taken to task for any action that might be linked to corruption spurred bureaucrats to ensure that project activities would either stand legal and public scrutiny, or would provide the greatest possible benefits to the government and the public— even to the extent of delaying infrastructure development.

No less than President Aquino himself recognized— and actively espoused— such attitudes. Responding to criticisms concerning PPP delays, Aquino expressly stated in his 5th State of the Nation Address, "It doesn’t matter if I am unable to preside over the groundbreaking or the ribbon-cutting. What is important is that these projects are well-planned and legal… the quality of the structure will withstand anyone’s scrutiny."
 
The unfortunate result: even as overall infrastructure governance improved, what resulted was a missed historical opportunity to decisively plug the Philippines’ critical infrastructure gaps.

FROM PRUDENCE TO AGGRESSIVE ACCELERATION

Eschewing the cautiousness that typified Aquino administration infrastructure projects, the Duterte government has, since assuming power in 2016, escalated the pace and ambition of infrastructure development as the hallmarks of its BBB program.

As part of this shift, the Duterte administration has steered away from Aquino’s PPP program, in favor of an infrastructure funding portfolio slanted towards local financing and borrowing, as well as official development assistance from foreign governments.

Even PPPs were recalibrated towards the administration’s new "hybrid PPP model," which will see public sector-led construction of infrastructure projects followed by private sector-led operations and maintenance.

It is claimed that this approach will be faster than PNoy-era PPPs, even as some wonder about the feasibility of off-loading the operation and management of complex projects to private sector firms that were not involved in construction.

But this policy pivot has also been supplemented by other measures meant to fast-track the creation of projects. Some well-publicized reforms include a streamlined "3-in-1" approval process for foreign-funded projects; the front-loading of counterpart budget allocations, right-of-way, and land resettlement efforts earlier in project stages; and the establishment of a specialized task force and project monitoring offices dedicated to facilitating the approval and implementation of BBB projects, especially its 75 big-ticket priority ventures.

How have these reforms and shifts fared? As table 1 shows, there has been a dramatic acceleration in infrastructure spending: from modest-to-moderate infrastructure spending levels during the Aquino years, public infrastructure expenditure rose to 5.1 percent of GDP in 2016, climbing further to 6.1 percent in 2017, surpassing even the government’s earlier target of 5.3 percent. 

If we are to take DBM data as a given, underspending has also been trimmed. In 2015, shortfalls in the spending of the entire government’s programmed budget (net of interest payments) was at a high 12.6 percent, with infrastructure-related agencies such as DPWH and the then-DOTC leaving more than 20 and 40 percent respectively of their obligated budgets unspent. Since then, underspending in government has reportedly been slashed to only 2.4 percent as of 2017.

But what about corruption and the risk of churning out "white elephant" project failures?

BARA-BARA: SKEWED PROCUREMENT AND TRANSPARENCY DEFICIT

Duterte’s technocrats have given their personal assurance that the implementation of BBB would also be corruption-free. A more careful review of policies that have so far been adopted by the administration reveals a more ambivalent record, however.
 
Since the beginning of 2018, to give an example, President Duterte himself has favored moving away from the public bidding system for infrastructure prescribed by the procurement law, augmenting this instead with a Swiss challenge process (i.e. where private groups can submit unsolicited project proposals, which third parties can thereafter match or surpass).

The intended goal is to accelerate infrastructure rollout while reducing corruption in big-ticket infra development. His first major statement to this end followed nearly 2 months after it was announced that the reconstruction of Marawi City would be conducted in Swiss challenge fashion.

But past experiences with Swiss challenges in the Philippines show that they are hardly free from corruption risks, and completion delays.

Indeed, a 2017 World Bank review outright discouraged the use of Swiss challenge methods, given that such approaches tend to inherently skew procurement in favor of the original project proponents due to the unequal possession of information. And particularly in the Philippines, there is also often insufficient time for other parties to prepare competing proposals.

According to the BOT law (R.A. 7781), third parties in Swiss challenge projects only have a period of 60 working days to submit competing proposals, despite World Bank findings that bid-preparation times below 6 months in duration undermines the competitiveness of procedures.

Unsurprisingly, as the review found, from 1994-2006, only one project out of ten under this Swiss Challenge mode in the Philippines was awarded to another party other than the original proponent. That lone project was NAIA Terminal 3— a scandal-ridden project where the original consortium for the project, involving several of the country’s most prominent taipans, were beaten by a third party later alleged to have engaged in corruption.

If plans for Marawi’s reconstruction are a harbinger of things to come, the trends are not encouraging. From an already problematic 60 working days, the challenge period has been shortened to three weeks.

Said to speed up the rehab process, the move, in reality, further skews the playing field to the benefit of whichever party will be granted the status of project’s "original proponent."

While the Chinese-led Bagong Marawi Consortium has recently been found to be ineligible for being awarded such status, due to its failure to submit necessary documents, the potential replacement for the consortium has nonetheless remained a Chinese government-owned corporation— the Power Construction Corporation of China.

The Duterte administration’s transparency record for infrastructure projects also does not inspire confidence. While the administration deserves credit for its landmark executive order on freedom of information (FOI) as well as its online FOI portal, the application of such disclosure measures in practice has been uneven.

Strikingly, a recent investigation of transparency in public procurement in the Duterte administration has highlighted major gaps in the disclosure of critical documents related to public works contracting.

A case-in-point is BBB’s purported "project of the century" — the P356.96-billion Metro Manila Subway Project (Phase 1), which was approved by the board of the National Economic Development Authority (NEDA) last September 12, 2017.

Unfortunately, hardly any official documents assessing the project’s proposed alignment under the Duterte administration are publicly available at present, and the Department of Transportation itself has stated that the project’s final feasibility study was still being conducted as of June 2018.

It is highly unusual that the project has already been greenlighted by NEDA, given that NEDA operations manuals emphasize that full feasibility studies are a mandatory documentary requirement for the evaluation of major infrastructure projects.

How might such procedural glitches affect the public? For one, a metropolitan subway system is not only expensive to develop, but also to operate — in fact, it is well-known that most subway systems around the world function at a loss, and require vast subsidies to keep them afloat.

While much remains uncertain as to the projected costs of the Metro Manila Subway Project due to the unavailability of public documents, various transport experts whom we have consulted have suggested that the mega-project’s full operating cost could reach up to P500 per ride on average, and that government intends to set fares at only around P100 per ride.

At an estimated daily ridership of 350,000 people, this could imply a staggering P49.8-billion in annual subsidies for just one transport project.

Note that this is simply an illustrative figure – given the lack of public information, it is still unclear what the project’s true implications on riders and taxpayers will be.

But this is a discussion and debate that is better had, prior to the implementation of the project, to ensure stronger buy-in, greater financial sustainability, and clarity on the measures needed to lessen and share the long-term burden of such projects on the public.

POOR SCREENING IN CHINA-LINKED INFRASTRUCTURE

Moreover, since April 2017, a significant number of FOI requests related to BBB and its priority projects have not been fulfilled for reasons ranging from the unavailability of such information online to confidentiality grounds.

Invoking confidentiality is especially worrisome, since there are indications that China-funded infrastructure projects could be prone to greater irregularities— despite special guidelines adopted by NEDA for processing China-assisted projects, as well as a $100-million technical assistance loan being extended by the Asian Development Bank to strengthen project preparation efforts by the government.

In fact, according to various infrastructure experts, it appears that the reception of NEDA’s special guidelines for China projects have been mixed: some deem them as an additional layer of “due diligence”, while others consider them as the complete opposite— “express lanes” meant to favor and expedite Chinese proponents.

Various episodes from 2016 to 2018 have made it clear, however, that major flaws remain in the government’s screening of such firms and projects.

For one, several Chinese firms listed in multi-billion peso deals signed during Duterte’s October 2016 state visit to China were found to have been blacklisted by the World Bank.

Subsequent investigative research by the Philippine Center for Investigative Journalism in 2017 also unearthed serial irregularities in the Filipino counterparties to such deals.

Indeed, PCIJ found that of the 22 such businesses, 8 had capitalization of less than P15-million, 7 had not reaped a profit in the past 2 years, and 3 had even reported their annual statements under accounting rules for small and medium enterprises.

Most recently, 2 of the Chinese firms in the 9-firm consortium previously poised to bag the Marawi reconstruction effort were discovered to have been again barred by the World Bank in 2009, for their involvement in large-scale collusion and corruption in Philippine road projects.

While it remains to be seen whether the Power Construction Company of China’s activities in the Philippines will also be marked by such anomalies, it is worth noting that senior officials of the state-owned firm have been stripped of their positions in the past due to their implication in graft and corruption.

In a similar vein, controversy has engulfed the administration’s Mindanao railway project, with one assistant transport secretary having been fired for claiming that fellow transport officials were allegedly "derailing" the project by attempting to favor Chinese financiers and contractors.

These trends in the Duterte administration’s governance of infrastructure projects make it clear that while government has succeeded in fast-tracking infrastructure development, risks of rent-seeking and of undertaking poorly-conceived ventures remain.

Recent scandals in various agencies—e.g. Department of Tourism, Department of Justice, the Bureau of Customs— also signal a possible deterioration in governance.

Under an opaque environment, it is easy to imagine increased opportunities for rent-seeking in the development and design of these projects— a possible regression to the anomaly-ridden periods, which partly explains dampened ambitions in the past for dramatically improving infrastructure in the country.

the big question, as BBB proceeds, is whether reformists in the administration will curtail such “bara-bara” governance episodes from recurring, or whether we are just seeing the tip of the iceberg of an ongoing re-politicization of Philippine infrastructure development.

Now is the time for Filipinos to demand full disclosure of the details of BBB projects— especially those financed through loans by foreign governments, which will be shouldered by Filipino taxpayers in the longer run.

Only through a "golden age of transparency" can the public be completely assured that Duterte’s "golden age of infrastructure" will not end like the one during the Marcos period— a parade of unviable debt-driven ventures, dragging down our country’s fortunes, and resulting in two lost decades of growth and development. 

(Ronald U. Mendoza, PhD and Jerik Cruz are economists with the Ateneo Policy Center. The views expressed by the authors do not necessarily reflect those of the Ateneo de Manila University.)