Growth and Distributive Impacts of Public Infrastructure Investments in the Philippines

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1 Growth and Distributive Impacts of Public Infrastructure Investments in the Philippines ADB, Manila, Philippines / June 19, 2013 / 14th Annual Global Development Conference / Erwin Corong, Lawrence Dacuycuy, Rachel Reyes, Angelo Taningco

2 Contents Philippine infrastructure trends Government policy agenda Methodology Policy simulations Insights and policy recommendations

3 Background The Philippine government continues to implement reforms aimed at: Promoting economic development Expanding infrastructure Improving public education system Uplifting the country s standard of living

4 Infrastructure Trends (Philippines) Global Competitiveness Report of the World Economic Forum s (WEF) Executive Opinion Survey 3.2 score out of a possible 7 points 113th out of 139 countries 97th in railroad infrastructure, 101st in quality of electricity supply, 112th in air transport infrastructure, 114th in road infrastructure, 131st in port infrastructure.

5 Transport Indicators, Air transport Ports Railroads Roads Source: World Economic Forum, Global Competitiveness Report, various issues

6 Power Generation/Consumption (in gigawatt hours), ,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Source of basic data: Department of Energy, Republic of the Philippines

7 Access to Water Source, % National Urban Rural Source of basic data: The World Bank's World Development Indicators Database.

8 Government Expenditure Program (by sector, ) (Proposed) 1,434,146 1,540,600 1,645,000 Social Services Education, Culture, and Manpower Development Health Social Security, Welfare and Employment Housing and Community Development Land Distribution Other Social Services Subsidy to Local Government Units Economic Services Agriculture and Agrarian Reform Natural Resources and Environment Trade and Industry Tourism Power and Energy Water Resource Development and Flood Control Communications, Roads, and Other Transport Other Economic Services Subsidy to Local Government Units Defense Debt Service (Interest Payments) Total Source: 2010 Philippine Statistical Yearbook, National Statistical and Coordination Board

9 Government s Infrastructure Policy Synergy between public and private investments Comprehensive and Integrated Infrastructure Program (CIIP) Public Private Partnerships (PPP) Build-Operate-Transfer Build-Own-Operate Build-Lease-Transfer

10 Comprehensive and Integrated Infrastructure Program Breakdown of Philippine Infrastructure Investment By Sector (PHP billion) Sector Beyond 2013 Transportation Power Water Telecommunications Social Infrastructure Support to ARCs Re-lending programs Total ARCs = Agrarian reform communities. Source: National Economic Development Authority (NEDA). Due to fiscal constraints, requires private sector financing Transportation 214,389 Water 112,285 Communications 3,500 Social 70,721 Infrastructure Total (in millions 400,894 PHP) 10

11 Objectives of the Study Analyze how increased public spending on (broad) infrastructure will affect the Philippine economy immediate, short-run, and long-run Industries, firms, government Household, inequality and poverty Provide inputs to policymakers Potential effects Impacts of alternative financing mechanisms Infrastructure investment and its link to growth and poverty 11

12 Policy-focused Methodology Use an economy-wide model of Philippine economy Policy laboratory to run simulations Account for externality-effect of public investment in infrastructure Trace and understand the transmission channels How increased spending on public infrastructure filters through the economy 12

13 Model Dynamic computable general equilibrium (CGE) model (Dissou and Didic, 2011) Top-down micro-simulation ( Cockburn et al., 2011) Production Structure 13

14 Policy Simulations Stay within attainable government policies Simulations: 25% increase in the ratio of public infrastructure expenditure to GDP (PIE-GDP) Financing Mechanism 1: International financing Financing Mechanism 2: Production tax financing 14

15 Macro Effects International Production Tax Financing First Year Longrun First Year Longrun Real GDP Total Consumption Investment Exports Imports Real exchange rate Public Spending to GDP Production Tax International Borrowing Wage rate Capital Stock Public Capital Stock Private Capital Stock

16 GDP Effects (demand side) International Financing Tax Financing Real GDP Consumption Investment Exports Imports Growth rate (% deviation relative to baseline) Real GDP Consumption Investment Exports Imports

17 Effects on Sectoral Output International Financing Tax Financing CropsLvstck OthAgr FoodAlcTbc Mining PaperWood PetChem TexGrmnt HeavyMfg LightMfg OthManuf OthServices CropsLvstck OthAgr FoodAlcTbc Mining PaperWood PetChem TexGrmnt HeavyMfg LightMfg OthManuf Public OthServices

18 Key Findings Positive supply-side effects of higher public investment expenditure manifest over time 3.5 Higher capital accumulation effects and improved productivity Higher public infrastructure investment to GDP Brings about positive real GDP effects Reduction in poverty and inequality in the short- and long-run International Financing Tax financing 18

19 Change in Poverty and Inequality (percentage points from base) 1.0 Poverty Headcount 0.5 Gini Coefficient 0.0 First Short run Long run First Short run Long run 0.5 Foreign financing Tax financing Base Poverty headcount = 29% Gini Coefficient=

20 Contribution to changes in poverty headcount (percentage points) First Short run Long run First Short run Long run Foreign financing Tax financing Poverty Headcount Wage Self employment Own consumption Consumer prices

21 Growth and Re-distribution component (changes in poverty headcount, percentage points) First Short run Long run First Short run Long run 0.5 Foreign financing Tax financing Redistribution Component 2.0 Growth Component 21

22 Summary Relatively low Philippine public expenditure on physical infrastructure (transport and utility) and public education Based on the simulations, higher public infrastructure investment-to-gdp ratio brings positive GDP effects and reduces poverty and inequality in both the short and long run. International financing scenario appear to increase GDP and reduce poverty and inequality with greater intensity Due to the absence of higher production taxes that slightly hinder competitiveness of domestic producers 22

23 Policy Recommendations Since higher investments in infrastructure Create job opportunities Generate higher productivity Improves welfare Philippine government needs to be more proactive in finding ways to finance increased public investment expenditure Attempt to source additional international financing at concessional rates Devise measures to broaden the tax base to finance public investments Study and explore the possibility of domestic financing 23

24 Policy Recommendations Fast track implementation of public and private partnerships (PPP) Adopt a better framework for granting guarantees: accurate pricing mechanism for more efficient allocation of government resources 24

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