Commentary: Red flags on government debts

By: Eduardo C. Tadem - @inquirerdotnet

The Philippine government is to go on a borrowing binge from 2017 onward to fund a massive infrastructure program estimated to cost $167 billion (P8.5 trillion) over 10 years. This raises the specter of a debt bondage reminiscent of the Marcos years.

China, as part of its One Belt, One Road program, leads all donors with a pledge of $15 billion for large-scale infrastructure projects and a $3-billion credit facility from the Bank of China. Japan has offered $8.1 billion in official loans and private investments. Not to be outdone, the Asian Development Bank dangled a $100-million loan for feasibility studies on infrastructure projects and, in May, pledged $770 million for water-related projects.

To allay fears, Budget Secretary Benjamin Diokno argued that only 20 percent of the infrastructure budget would come from foreign borrowings while the rest will be coursed through domestic loans. But 20 percent is still $33.4 billion or P1.65 trillion. This would bring the Philippines’ total foreign debt to P3.81 trillion, a 76.4-percent increase from the December 2016 figure. The domestic debt component would drive up the total debt stock to P15 trillion (before interest), a 146-percent jump from the December 2016 total of P6.09 trillion. This excludes new loans not related to infrastructure.

Incurring debts, of course, is not necessarily bad if it ultimately benefits the poor and marginalized sectors of the population. Otherwise, debts that privilege only the rich and propertied classes can be deemed illegitimate transactions. It is thus essential to raise a number of red flags with respect to government loans, and foreign aid in particular. These are based on the country’s long experience of dependence on foreign aid including official development assistance and on loans in general.

What safeguard mechanisms are in place relative to the social and environmental impact of loan projects that could result in forced dislocations of affected communities or widespread ecological harm? Will loan conditionalities impinge on sovereign rights or tie the Philippine government to fiscal restraints that will prevent the allocation of funds for social protection? Will loan contracts effectively grant firms from donor countries the right to extract our natural resources to feed their economies?

Will the loans be tied or untied? Tied loans typically end up in the hands of the donor country through feasibility studies, consultancies, procurement, and actual project construction. The aid is thus rechanneled back into the donor country’s economy.

The impact on the government budget should also be considered. Under the automatic appropriations law, debt service has the first cut of the budget before any other item. This debilitating law has prevented the government from allocating more funds for social development such as health, education, and housing. It has first to be repealed. Foreign-loan-funded projects also normally require local counterpart funding costing billions of pesos. Delays in implementation could also add to the debt service due to the imposition of commitment fees.

Unless these debt-related issues are addressed properly, the country might just end up with billions of dollars in illegitimate debts that only bleed public coffers. The Indian government, for one, in boycotting the recent Beijing Belt and Road Summit, warned that China’s Silk Road initiative could impose an “unsustainable debt burden” for recipient countries as they may “struggle to pay back loans for huge infrastructure projects” funded by China.

Furthermore, Forbes magazine estimates that, within 10 years, even at a minimum concessional interest rate of 5 percent, the Philippines would be saddled with an additional debt of P13.75 trillion from the infrastructure program alone. By then, the country’s debt-to-GDP ratio will hit 136 percent, a quantum leap from the current ratio of 42.1 percent. At this point, the Philippines could ignominiously reenter a period of debt peonage.

Eduardo C. Tadem, PhD, is president of the Freedom from Debt Coalition and professorial lecturer in Asian studies at the University of the Philippines Diliman.

No Free Lunch: The unfolding revolution

By: Cielito F. Habito - @inquirerdotnet

Philippine Daily Inquirer

The Fourth Industrial Revolution has begun, and economies and societies are changing at breathtaking speed. We need to keep in step with it. Technological advancements—in artificial intelligence, robotics, self-driving vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage, quantum computing and the Internet of Things—are changing the entire social order. If we fail to account for it in our plans for the future, the world could pass us by, and our people will be the worse off for it.

The First Industrial Revolution, usually traced to the period from 1760 to around 1830, came with the discovery of how to use water and steam power to mechanize production. Mechanized textile production was considered the flagship of this era. The Second, from 1870 up to around 1920, came with large-scale production of iron and steel, and use of petroleum and electric power to make mass production a reality. Henry Ford’s invention of the assembly line to mass-produce cars was its flagship. The Third, which started in the 1990s and is still ongoing, is marked by the use of electronics and information technology to automate production. A Fourth Industrial Revolution is now building on the Third and rapidly taking it to new heights. Its distinguishing feature is the fusion of technologies across the physical, digital and biological spheres.

An anonymous piece on “The Nearing Future” has been making the email rounds, describing the shape of things to come in the wake of this new revolution which, unlike its precedents that proceeded at linear pace, is zooming at exponential speed. It is also changing a wide range of industries, and transforming entire systems of production, management and governance. Here’s a tiny sampling of the article’s predictions:

The first self-driving cars will appear for the public in 2018 and by 2020 the complete industry will start being disrupted. People will eventually no longer need to own a car; they can use their phone to call one, and it will come and drive them where they want (rendering irrelevant the average Filipinos’ “Ambisyon 2040” aspiration of owning a car). Most traditional car companies will go bankrupt, as tech companies like Tesla, Apple, and Google take over with the revolutionary approach of building computers on wheels.

Electricity will become cheap and clean, as solar energy’s exponential growth over the last 30 years continues. Last year, more solar energy was installed worldwide than fossil. While power companies desperately try to limit access to the grid to prevent competition from home solar installations, the technology is unstoppable. And with cheap electricity comes cheap and abundant water, as desalination of salt water now only needs 2kWh per cubic meter, and falling.

By 2027, one-tenth of everything that’s being produced will be 3D printed. The cheapest 3D printers dropped from $18,000 to $400 within 10 years, and became 100 times faster. All major shoe companies have started 3D printing shoes. Airplane parts are already 3D printed in remote airports. Smart phones will have 3D scanning capability by next year, allowing you to 3D scan your feet and print your perfect shoe at home. China has already 3D printed and built houses and a complete 6-story office building.

More rapid developments are transpiring, including in healthcare and agriculture. With these, 70-80 percent of present jobs are projected to disappear in 20 years, including in our business process outsourcing industry (leading many to call for planning for the “post-BPO era”). The revolution will create new kinds of jobs, but it’s unclear if these could offset the massive displacement. In his recent commencement speech at Harvard, Facebook creator Mark Zuckerberg called for a new economic order to ensure that everyone has a sense of purpose in life—and proposed the radical idea of a universal guaranteed basic income for all, impliedly funded by multibillionaires like him.

Economics is indeed going through a serious rethink, and a revolution in the discipline may yet be in the offing, to keep in step with the Fourth Industrial Revolution now unfolding before us.

cielito.habito@gmail.com

 

Hybrid PPP scheme worries businessmen

MOSCOW – Filipino businessmen are quietly raising concerns over the government’s proposed hybrid approach for public-private partnership (PPP) infrastructure projects which President Duterte is expected to present during his official visit here.

Some members of the Philippine business delegation in the Russia state visit said the new PPP route raises questions.

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Under the hybrid approach, the government will build the projects and later on bid out the operations and maintenance to the private sector.

Funding for the projects to be developed by the government will come from a mix of sources such as bilateral loans, official development assistance and government funds.

This, however, potentially takes away some business opportunities for Filipino businessmen, some of whom already got all excited with the Duterte administration’s vow to usher in the so-called golden age of infrastructure in the country and its move to welcome unsolicited proposals.

“That hybrid approach will take time and when that happens, the golden age of infrastructure may not happen,” said a businessman involved in the infrastructure business, who declined to be named.

“The question really is can the government build the projects fast enough?” the source added.

The businessman noted for instance that this year, there is only a very short window to jumpstart infrastructure projects due to the coming rainy season.

Another businessman involved in the power sector said the hybrid approach would also entail debt for the government, which would ultimately be shouldered by taxpayers.

 “Even our grandchildren will have to pay for that,” the businessman said.

In a forum in Manila last week, tycoon Manuel V. Pangilinan said the hybrid approach may indeed pose problems.

 “The government has decided to adopt the hybrid PPP approach to infrastructure to make it more expeditious. Government will build projects and bid out operations and management. Now, this hybrid approach has started communication within the business community.” Pangilinan said.

He said the first concern is whether the government has the capacity to execute these large projects.

 “The second concern is that a good portion of this spending will be financed by debt. Debt eventually will have to be paid.”

In the same forum, Megawide Construction Corp chief financial officer Oliver Tan said in financing PPP projects, ODA-funded infrastructure could take time and thus cost more because of interest that goes up when the project is delayed, whereas private sector-led initiatives are faster.

He cited the company’s experience in the Mactan-Cebu International Airport which has a delivery period of only three-and-a-half years, comparing this with the ODA-funded New Iloilo Airport, which took nine years and two months.

Last month, the government’s economic team announced the administration’s preference for hybrid PPP deals under its Dutertenomics program.

Officials said this is the fastest approach as the traditional PPP project usually takes 29 months before it takes off while unsolicited proposals would at least require a 20-month lead-time.

Furthermore, officials said the government can borrow at lower rates through grants and concessional loans and later on harness the private sector’s expertise in managing, operating and maintaining such infrastructure projects.

Dutertenomics is an P8-trillion plan focused on improving infrastructure in the country.

Despite the concerns of the business community, the Duterte administration continues to trumpet Dutertenomics with its slogan “Build, Build, Build.”

source:  The Philippine Star