Philippine Investment Banking

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					Philippines: Ready for the Future?
The Quantity and Quality of Infrastructure
               Investment




          Joachim von Amsberg
          Country Director, Philippines
          The World Bank
          January, 2007
Outline

 2007: A unique window of opportunity
  for Philippines to join rapidly
  developing East Asia
 Why infrastructure matters to the
  Philippines
 An agenda for reviving infrastructure
  investment in the Philippines
2007: A unique
window of opportunity
for the Philippines to
join rapidly developing
East Asia
The Philippine Paradox:
Great Assets and Potential…

 Great neighborhood: East Asia
  booming
 Educated, entrepreneurial, English-
  speaking people
 Rich natural resources

 Strength in dynamic sectors:
  electronics, business services,
  tourism, remittances
…But Modest Development
Outcomes

 Modest growth driven by remittances
  and consumption rather than by
  investment or productivity
 Slow poverty reduction due to low
  growth and high inequality
       Growth has been below potential
                            Per Capita GDP Growth Rates 1966-2004

8
                    7.00
7
    5.77
6
                                                  4.79                                4.77
5
                                      4.03                                 3.95
4

3

2
                                                              1.28
1

0
    EAP            China            Indonesia   Thailand   Philippines   Malaysia   Vietnam

           Source: World Bank WDI
Investment Lagging Behind
the Region
                                 Gross Capital Formation (% of GDP)


50


45


40


35
                                                                                       China
                                                                                       Hong Kong, China
30                                                                                     Indonesia
                                                                                       Japan
25                                                                                     Malaysia
                                                                                       Philippines
20                                                                                     Taiwan, China
                                                                                       Thailand
                                                                                       Vietnam
15


10


5


0
     1996   1997   1998   1999    2000       2001       2002      2003   2004   2005
     The Obstacles to Investment
     Seen By Business
       Important investment constraints (% of firms surveyed)

40                                                      Macroeconomic Instability

35                                                      Corruption
                                                        Electricity
30                                                      Tax rates

25                                                      Regulatory Policy uncertainty
                                                        Crime, theft, disorder
20                                                      Tax administration
15                                                      Labor regulations
                                                        Anti-competitive practices
10
                                                        Cost of financing
5                                                       Customs and trade regulations
                                                        Transportation
0
     A Window of Opportunity
     Created by Fiscal Reforms …
                          NG and CPS deficit (% of GDP)                  NG and NFPS debt (% of GDP)
                                                               110
                   -1
                                                               100
   Addressing     -2
                   -3
                                                                90
                                                                80
                   -4
    biggest        -5
                   -6
                                                                70
                                                                60
                                                                50

    obstacle to         2000 2001 2002 2003 2004 2005 2006
                                                       /p
                                                                      2000 2001 2002 2003 2004 2005 2006
                                                                                                     /p

    investment                  CPS deficit     NG deficit
                                                                      Consolidated non-financial public sector debt
                                                                      National government debt
                          Source: DOF
                                                                Source: DOF
   Increasing
                            Revenue and Tax Efforts                            NG Expenditure
    fiscal space   16.0                                        16.0
                                                               14.0
                   15.0
    for public     14.0
                   13.0
                                                               12.0
                                                               10.0
                                                                8.0

    investment     12.0
                   11.0
                                                                6.0
                                                                4.0
                   10.0                                         2.0
                          2000 2001 2002 2003 2004 2005 2006    0.0
                                                         /p            2000 2001 2002 2003 2004 2005 2006
                                                                                                      /p
                                Revenue       Tax revenue               Capital   Interest    Primary

                          Source: DOF                           Source: DOF, World Bank estimates
 … and by international
 liquidity
         Philippines: EMBIGLOBAL Monthly Spreads

800
700
600
500
400
300
200
100
  0
  2000    2001   2002   2003   2004   2005   2006
Why Infrastructure
Matters for the
Philippines
Infrastructure Matters for
Growth and Competitiveness
 Infrastructure deficiency a top
  impediment to business environment
  and investment climate
 Philippines: GDP and Total Infra
  Expenditure correlation: 85%
 Infra investment has a positive impact
  on GDP; infra capital stock has a
  long-term impact on GDP
Infrastructure Matters More
with Economies of Scale
   East Asia trade increasingly driven by intra-
    industry trade and vertical specialization
   Components trade and intra-industry trade have
    grown rapidly – regional production networks
   Export growth in sectors with high economies of
    scale
       Vertical specialization becomes critical driver
       Traditional comparative advantages (low wages)
        less important
       Transport/logistics and consistent policy
        environment (investment climate) more critical
       Small policy changes can have big impacts on
        trade
East Asian Exports Grow in
Sectors with Scale Economies
                                                              Inst r ument s


  scale elast icit y >1                                       Elect r ical machiner y

                                                              Non- elect r onics machiner y

                                                              Ir on and st eel

                                                              Phar maceut icals

                                                              Wood pr oduct s


                                scale elast icit y =1         Foot wear

                                                              Leat her

                                                              Appar el

                                                              Text iles


  -4.0       -2.0         0.0       2.0       4.0       6.0
               change in expor t shar e 1994- 2004
Infrastructure Matters for
Competition
 Dynamic competition and churning of
  enterprises contributes to productivity
  growth and competitiveness
 Less of that in the Philippines

 Infrastructure is good for competition
     Small enterprises cannot self-provide
     Transport costs lower—location
      matters less
Infrastructure Matters for
Poverty Reduction
                       Access to basic infrastructure
                          Percent of Population

100

80

60
                                                                               Electricity
40                                                                             Telephone
                                                                               Piped drinking water
20                                                                             Own flush toilet

 0
      Poorest Second Middle               Fourth Richest
                            Quintile
  Source: Gawtkin, Davidson R. Shea Rustein, Kiersten Johnson, Rohini Pande, and Adam Wagstaff.
  2000. ―Socio-economic Differences in Health, Nutrition, and Population in the Philippines.‖ World Bank,
  Washington D.C.
                                                                                                                                                                                                                                         0
                                                                                                                                                                                                                                              25
                                                                                                                                                                                                                                                        50
                                                                                                                                                                                                                                                              75
                                                                                                                                                                                                                                                                                                                                        0
                                                                                                                                                                                                                                                                                                                                            25
                                                                                                                                                                                                                                                                                                                                                 50
                                                                                                                                                                                                                                                                                                                                                      75
                                                                                                                                                                                                                                                                                                                                                           100
                                                                                                                                                                                                                         Myanmar
                                                                                                                                                                                                                                                                                                                              PNG
                                                                                                                                                                                                                               PNG
                                                                                                                                                                                                                           Solomon                                                                                     Cambodia
                                                                                                                                                                                                                          Lao PDR                                                                                         Vietnam
                                                                                                                                                                                                                        Cambodia                                                                                        Lao PDR
                                                                                                                                                                                                                             Kiribati
                                                                                                                                                                                                                                                                                                                                                                 Water supply access (%)
                                                                                                                                                                                                                                                                                                                         Mongolia
                                                                                                                                                                                                                           Vanuatu
                                                                                                                                                                                                                                                                                                                         Solomon
                                                                                                                                                                                                                            Vietnam
                                                                                                                                                                                                                           Marshall                                                                                     Myanmar
                                                                                                                                                                                                                         Indonesia                                                                                           China
                                                                                                                                                                                                                             Samoa                                                                                      Indonesia
                                                                                                                                                                                                                             Tonga
                                                                                                                                                                                                                                                                                                                             Palau
                                                                                                                                                                                                                        Micronesia




                                                                                                                                                                                                                                                                    Telephone access (subscribers / 100 inhabitants)
                                                                                                                                                                                                                          Mongolia                                                                                     Philippines
                                                                                                                                                                                                                                  Fiji                                                                                    Vanuatu
                                                                                                                                                                                                                        Philippines                                                                                      Malaysia
                                                                                                                                                                                                                              Palau
                                                                                                                                                                                                                                                                                                                         Thailand
                                                                                                                                                                                                                              China
                                                                                                                                                                                                                                                                                                                           Samoa
                                                                                                                                                                                                                           Thailand
                                                                                                                                                                                                                          Malaysia                                                                                          Tonga




                                                                                                                                                                                                                                         0
                                                                                                                                                                                                                                             25
                                                                                                                                                                                                                                                   50
                                                                                                                                                                                                                                                         75
                                                                                                                                                                                                                                                              100
                                                                                                                                                                                                                                                                                                                                        0
                                                                                                                                                                                                                                                                                                                                            25
                                                                                                                                                                                                                                                                                                                                                 50
                                                                                                                                                                                                                                                                                                                                                      75
                                                                                                                                                                                                                                                                                                                                                           100




                                                                                                                                                                                                                          Solomon                                                                                       Myanmar
                                                                                                                                                                                                                        Cambodia                                                                                          Solomon
                                                                                                                                                                                                                                                                                                                                                                 Electricity access (%)




                                                                                                                                                                                                                                                                                                                       Cambodia
                                                                                                                                                                                                                               PNG
                                                                                                                                                                                                                                                                    Percentage paved roads




                                                                                                                                                                                                                                                                                                                             Timor
                                                                                                                                                                                                                         Mongolia                                                                                         Vanuatu
                                                                                                                                                                                                                         Lao PDR                                                                                            Kiribati
                                                                                                                                                                                                                        Micronesia                                                                                       Lao PDR
                                                                                                                                                                                                                                                                                                                                                                                    State of Infrastructure:




                                                                                                                                                                                                                                                                                                                       Micronesia
                                                                                                                                                                                                                        Philippines
                                                                                                                                                                                                                                                                                                                              PNG
                                                                                                                                                                                                                          Vanuatu                                                                                       Indonesia
                                                                                                                                                                                                                           Vietnam                                                                                           Palau
                                                                                                                                                                                                                             Tonga                                                                                     Philippines
                                                                                                                                                                                                                                                                                                                                 Fiji
                                                                                                                                                                                                                              Timor
                                                                                                                                                                                                                                                                                                                           Vietnam
                                                                                                                                                                                                                                 Fiji                                                                                     Thailand
                                                                                                                                                                                                                         Indonesia                                                                                          Tonga
Source: World Development Indicators, 2004; IEA 2003; Connecting East Asia: A New Framework for Infrastructure, The World Bank




                                                                                                                                                                                                                          Malaysia                                                                                       Mongolia
                                                                                                                                                                                                                            Samoa                                                                                           Samoa
                                                                                                                                                                                                                                                                                                                         Malaysia
                                                                                                                                 Service Access (Bars in blue = outcomes above low and middle income country average)




                                                                                                                                                                                                                             China
                                                                                                                                                                                                                                                                                                                             China
                                                                                                                                                                                                                                                                                                                                                                                    Reasonable but Uneven Access




                                                                                                                                                                                                                          Thailand                                                                                        Marshall
Infrastructure Quality: Quality ranking
World Competitiveness Report 2006-2007
Philippines: Low quality of services has emerged as a key impediment to the economic competitiveness


                                   Overall Infrastructure Quality

     Malaysia
     Thailand
         China
   Indonesia
      Vietnam
 Philippines
  Singapore
 Hong Kong
         Korea
       Taiwan
         Japan

                    0              1              2              3              4             5              6              7


   Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
   Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
              Telephones and Electricity Supply: Quality ranking
              World Competitiveness Report 2006-2007

                            Telephones                                                                Electricity Supply

  Malaysia                                                                     Malaysia
  Thailand                                                                     Thailand
     China                                                                         China
 Indonesia                                                                    Indonesia
   Vietnam                                                                      Vietnam
Philippines                                                                  Philippines
 Singapore                                                                   Singapore
Hong Kong                                                                   Hong Kong
     Korea                                                                        Korea
   Taiwan                                                                        Taiwan
    Japan                                                                         Japan
              0      1      2     3      4     5      6     7      8                       0      1      2      3      4      5      6      7     8



                  Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
                  Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
              Roads and Railroads: Quality ranking
              World Competitiveness Report 2006-2007

                               Roads                                                                      Railroads

  Malaysia                                                                     Malaysia
  Thailand                                                                     Thailand
     China                                                                        China
 Indonesia                                                                    Indonesia
   Vietnam                                                                      Vietnam
Philippines                                                                 Philippines
 Singapore                                                                   Singapore
Hong Kong                                                                   Hong Kong
     Korea                                                                        Korea
   Taiwan                                                                        Taiwan
    Japan                                                                         Japan
              0   1        2     3      4     5      6      7     8                       0       1        2       3       4       5       6          7



                      Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
                      Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
                  Ports and Air Transport: Quality ranking
                  World Competitiveness Report 2006-2007

                                Ports                                                                     Air Transport

  Malaysia                                                                       Malaysia
  Thailand                                                                       Thailand
     China                                                                           China
 Indonesia                                                                      Indonesia
   Vietnam                                                                        Vietnam
Philippines                                                                    Philippines
 Singapore                                                                      Singapore
Hong Kong                                                                      Hong Kong
     Korea                                                                          Korea
   Taiwan                                                                          Taiwan
    Japan                                                                           Japan
              0    1        2     3      4     5     6      7     8                          0      1      2      3       4     5      6      7        8



                       Note: Rankings are shown for developing East Asian economies (darker bars), and advanced East Asian economies (lighter bars).
                       Vertical line is the average for all 125 surveyed countries, both within and outside of East Asia.
          Philippines: state of infrastructure has not
          kept up with rapid population growth and
          urbanization




                                                                                                                                               80
Thousands100,000
          90,000
                                                                                                                                 Percent
          80,000                                          % of population residing




                                                                                                                                               60
                                   % of                   in urban areas
          70,000
                                   population                                    Urban
          60,000                   residing in
                                   Metro Manila




                                                                                                                                               40
          50,000

          40,000
          30,000
                          Rural




                                                                                                                                               20
          20,000
          10,000

              0




                                                                                                                                               0
                   1950

                            1955

                                     1960

                                            1965

                                                   1970

                                                           1975

                                                                  1980

                                                                         1985

                                                                                1990

                                                                                       1995

                                                                                              2000

                                                                                                     2005

                                                                                                            2010

                                                                                                                   2015

                                                                                                                          2020

                                                                                                                                 2025

                                                                                                                                        2030
          Philippines: “Boom-Bust” Infrastructure Cycle
          Infrastructure Investments as a share of GDP,
          1985-2005


            10



             8
Percent




             6
                                                                                                    Total
                                                                                                    Private
             4                                                                                      Public



             2



             0
                 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005



           Capital outlays only.
           Sources: Department of Budget and Management; Department of Finance; Commission on Audit; Maynilad
           Water Services, Inc.; Manila Water Corporation, Inc.; Optel Ltd.; and World Bank.
     Philippines: Need to increase infrastructure
     spending from 3% of GDP to at least 5%, and
     increase the efficiency of infrastructure
     spending in the meantime
                          Expenditure on Infra (% of GDP)

18
                                                  15.4
16

14

12                                                               9.9

10    7.2                                                                          Private
 8                                                                                 Public

 6
                                   3.3
                    2.7
 4

 2

 0
       China        Indonesia      Philippines     Thailand       Vietnam


       Source: World Bank Connecting East Asia (2005); Philippines data updated.
         Private Sector Participation
                                                   PPI Investments in US $ million,
   Private flows in the                                      1990-2005
                              4,500
    Philippines declined      4,000
                              3,500

    since the Asian           3,000
                              2,500
                              2,000
    Financial Crisis          1,500
                              1,000
                                500

   Most investments are          0
                                      1990            1993          1996            1999              2002        2005

    greenfield projects                           Transportation     Water/Sanitation      Telecom s         Energy



    with guaranteed off-   Sources: PPI Database, MWCI and MWSI for Water, NTC for Telecoms.



    take from public                        PPI Investment by Type, 1990-2005
                                                      in US$ billion
    companies                                Lease and Mgmt
                                             contract       0.002
                                                                                               9.9     Concession



                                                                                                           Divestitutre
                              Greenfield                                                             2.3
                                             24

                            Source: World Bank-PPIAF PPI Database
Many Opportunities for Improving Quality
and Efficiency of Spending: The Case of
the Philippine Road Sector
   Administration of the Special Road Fund
    subject to external pressures
   ―Pork Barrel‖ in DPWH budget:
       About 22.5% of DPWH budget between 1997-2001
        (close to P50 billion)
        Outweighs funds allocated for maintenance on all
        local roads
   Inefficient maintenance practices
   Low labor productivity at DPWH:
       Philippines: 1 employee : 1.3 km. of national roads
       Indonesia: 1 employee : 10 km. of national roads
An Agenda for
Revitalizing
Infrastructure
Investment in the
Philippines
Prerequisites
Policy and Planning
Deregulation and Regulation
Finance
Basic Prerequisites

   Sustaining and deepening fiscal
    reforms
       Increase tax/GDP ratio
   Improving economic governance
     Rule of Law and credibility of contract
      agreements
     Control of corruption
     Competition policy
     Transactions costs and red tape
Policy and Planning

   Continue and implement policy
    reforms in key areas
       Power, roads, water, PPP/BOT
        framework
   Improve investment programming and
    prioritization
     Technical capacity for planning and
      prioritization within fiscal framework
     Political process for coordination and
      decision making
Policy and Planning (cont’d)

   Project preparation
     Technical and financial design
     Good project preparation is key for
      effective competitive bidding
Deregulation and Regulation
   Deregulate where competition is possible
       Yesterday’s telecoms deregulation allowed BPO
        boom
       Today’s airlines and ports deregulation could
        unleash tourism and agriculture boom
   Establish and enforce clear rules of the game
    and regulate where competition is not possible
       Strengthen regulatory agencies, their technical
        skills and independence, and protect from
        politics
       Environmental management
   Well designed and planned competitive bidding
    for projects (risk of unsolicited bids)
Finance
   Cost recovery and tariffs
      Continued power tariff adjustments
      Clarification and enforcement of cost-
       recovery regulations for water and sanitation
       sector
      Adherence to agreed toll rate adjustments
       for toll roads
   Leveraging private investments by public
    resources
      PPP
      Proper risk sharing (guarantees)
   Effective ODA use
Public Private Partnership: Manila
East Concession
   Significant performance improvements since privatization
    (1997-2004):
      24 hour access to drinking water increased from 26%
       to 84%
      Served population increased from 3.0 million to 5.1
       million
      Staff per thousand connections reduced from 8.5 to
       2.8
      Non-revenue water reduced from 63% to 43%
   Lessons:
      Competitive and transparent bidding
      Good partners - right risk balance between public and
       private
   World Bank Group support:
      IFC provides debt and equity finance for water supply
       improvements
      IBRD provides loans for sewerage improvements
From Agenda to Action

   Many Good Policies in Place
   Few Structural Obstacles to Rapid Progress
   Implementation – One Step at a Time
       Power sector reforms implemented
       New showcases of good PPP projects
       Competition in Air and Port services (e.g.
        open skies)
       Planning and Programming improved
       Infra spending 5-8% of GDP by 2010?
Two Philippines Scenarios
for 2010
   Two possible scenarios:
     Muddle-through
     Take-off

   Strong policy signals and credibility
    followed by real investment
    distinguish the two scenarios
Maraming Salamat Po

    MABUHAY!

				
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