31782 hallengesC turec Infrastru hilippinesP Meeting PUBLIC-PRIVATE The World Bank Group in the Philippines INFRASTRUCTURE ADVISORY FACILITY Supporting Islands of Good Governance The World Bank Group in the Philippines: Supporting Islands of Good Governance The World Bank Group seeks to help the Philippines improve the lives of its citizens through sustainable economic growth and greater social inclusion. Fiscal stability and public institutions that serve the common good are critical to these objectives. Our strategy is to support Islands of Good Governance in those government agencies, local governments, and dynamic sectors in the Philippines that demonstrate how improved accountability and service delivery will lead to better economic and social outcomes. We want to help expand these successful experiences and thus stimulate a virtuous cycle of more effective public institutions, fiscal improvements, economic growth, poverty reduction, and greater social inclusion. Our dream is that the Philippines will become the Islands of Good Governance. CASINSIDECOVER.indd 1 12/6/2005 8:04:03 AM Philippines Meeting Infrastructure Challenges WorldBankInfra.indb 1 12/6/2005 8:40:05 AM ©2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 09 08 07 06 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. Neither the World Bank nor PPIAF guarantees the accuracy of the data included in this publication or accepts responsibility for any consequence of their use. 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WorldBankInfra.indb 2 12/6/2005 8:40:06 AM Philippines Meeting Infrastructure Challenges Infrastructure Sector Department East Asia and Pacific Region The World Bank PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY WorldBankInfra.indb 3 12/6/2005 8:40:06 AM iv Philippines: Meeting Infrastructure Challenges Contents Foreword xi Acknowledgments xii Acronymsandabbreviations xiii Executive Summary MeetingInfrastructureChallenges:KeyFindings,Conclusions,and Recommendations xvii Background: Is there an infrastructure crisis? xvii Key issues xix The way forward xxiii Expected outcome xxvi Chapter 1 InfrastructureinthePhilippines 1 Introduction 1 Infrastructure and living standards 1 The growth, poverty reduction, and infrastructure nexus 3 Current and future infrastructure needs: What is driving them? 8 Introducing the key cross-sectoral issues 10 Chapter 2 TheBusinessEnvironmentforInfrastructure 15 Inadequate cost recovery 15 Corruption 17 Insufficient competition 18 Low credibility of institutions 21 Suggested actions 24 Chapter 3 InfrastructurePlanning,Coordination,andFinancing 33 Introduction 33 Infrastructure policy planning and coordination 33 Infrastructure financing 43 Suggested actions 46 Chapter 4 MaximizingtheBenefitsofPrivateSectorParticipation 55 Introduction 55 Potential of private involvement and role of the public sector 57 Reasons for decline in private sector interest 59 Suggested actions 68 WorldBankInfra.indb 4 12/6/2005 8:40:06 AM v Chapter 5 TheWayForward 73 Building on strength and success 73 Prioritizing reforms: Key considerations 74 The way forward: Key recommendations 78 Chapter 6 Power 83 Overview 83 Legal and institutional framework 85 Sector structure and ownership 85 Investment needs and financing 88 Sector performance 89 Main issues 94 Recommendations 98 Chapter 7 WaterSupplyandSanitation 107 Overview 107 Policy and institutional framework 109 Market structure and ownership of assets 110 Investment needs and financing 116 Sector performance 119 Main issues 123 Recommendations 129 Chapter 8 Roads 139 Overview 139 Policy and institutional framework 140 Sector structure and ownership 144 Road expenditures and financing 146 Sector performance 150 Main issues 156 Recommendations 159 Chapter 9 Telecommunications 167 Overview 167 Policy and institutional framework 168 Sector structure and ownership 170 Sector investment and financing 172 Main issues 175 Findings and recommendations 178 WorldBankInfra.indb 5 12/6/2005 8:40:06 AM vi Philippines: Meeting Infrastructure Challenges Appendixes 185 Appendix 1 CorrelationversusCausation:DoesInfrastructureCauseGrowthinthePhilippines? 185 Appendix 2 SpatialEffectsofInfrastructure 186 Appendix 3 FrameworkforLocalGovernmentAccesstoFinancinganditsImplementationProgress 188 Appendix 4 ResultsofPrivatizationPerceptionSurvey 190 Appendix 5 CostsandBenefitsofSectorReforms 194 Power 194 Water supply 197 Road transport 199 Telecommunications 202 Appendix 6 KeyLegislationRelevanttoWaterSupplyandSanitationinthePhilippines 207 Appendix 7 PrincipalAgenciesInvolvedinWaterSupplyandSanitationPolicyFormulationand Implementation 209 Appendix 8 EstimatedInvestmentRequirementsinWaterSupplyandSanitation 210 Appendix 9 OwnershipStructureandSelectedFeaturesofExisting/PlannedExpressways 212 Index 213 WorldBankInfra.indb 6 12/6/2005 8:40:06 AM vii Tables 1.1 Economist Intelligence Unit competitiveness risk scores 5 1.2 Business environment indicators 6 1.3 Overall competitiveness rankings, 2003 6 2.1 Approved tariff increases in the Metropolitan Waterworks and Sewerage System concession areas, average tariff (P per cubic meter) 15 2.2 Summary of economic regulators in infrastructure sectors 22 3.1 Selected key measurable targets under the Medium-Term Philippine Development Plan 2001­ 2004 37 3.2 Funds for local infrastructure in Department of Public Works and Highways budget, 1997­2001 (P billion) 38 3.3 Local government infrastructure investment as a share of GDP, 1985­2002 (%) 41 3.4 Internal Revenue Allotment as a share of local government income 42 3.5 Distribution of official development assistance commitments, December 2003 46 5.1 International comparisons of infrastructure 74 5.2 Competitiveness and business environment comparisons 75 5.3 Estimates of consumer surplus from reforms 76 6.1 National Power Corporation generation by type of plant, 1998­2003 86 6.2 Comparison of access and other performance measures 89 6.3 Transco unserved energy and lost system minutes, 2002­2003 90 6.4 National Power Corporation financial highlights, 1996­2003 91 6.5 Summary matrix of potential reform measures for a three- to five-year period 100 7.1 Market shares, urban and rural populations by primary source 111 7.2 Water districts by category, 2003 112 7.3 Sample characteristics of local government-managed water supply systems 113 7.4 Local government expenditures on water supply and sanitation, 1990­2002 (P million) 117 7.5 Local Water Utilities Administration capital expenditures, 1992­2003 (P million) 118 7.6 Manila water concessionaire capital expenditures, 1997­2003 (P million) 118 7.7 Access to drinking water and sanitation: Cross-country comparison 119 7.8 Access to water supply and sanitary toilets, by income stratum, 1998, 1999, and 2002 120 7.9 Access to sanitation and sewerage, 2000 120 7.10 Performance indicators of the Manila water concessionaires, 1997­2003 121 7.11 Efficiency indicators of selected water service providers, 2002 122 7.12 Approved tariff increases in the Metropolitan Waterworks and Sewerage System concession areas, average tariff (P per cubic meter) 123 7.13 Subsidies to the Local Water Utilities Administration, 1992­2003 (P million) 127 7.14 Summary of recommended actions 135 8.1 Main legal and regulatory provisions 141 8.2 Allocation of responsibilities/mandates 143 8.3 Classification of existing non-toll road network, 2000 144 8.4 Regional distribution of roads, population, and vehicles 145 8.5 Motor vehicles by category, 1990­2002 147 8.6 Expenditures by government on roads (P billion, nominal, unless otherwise indicated) 148 8.7 Proposed Medium-Term Public Investment Program, 2004­2009 (P million, nominal) 149 8.8 Indicative projections of local road expenditures (P billion, nominal) 150 8.9 Projected expenditures, estimated needs, and financing gap (P billion, nominal, unless otherwise indicated) 151 8.10 Key measurable targets under the 2001­2004 MTPDP 151 8.11 Road network coverage, six Asian countries 153 8.12 Length and paved share of national roads, four Asian countries 153 8.13 Length and paved share of national roads, Philippines, selected areas, 2000 153 8.14 Change in length and paved share of roads by road class 153 WorldBankInfra.indb 7 12/6/2005 8:40:06 AM viii Philippines: Meeting Infrastructure Challenges 8.15 Average roughness for a proportion of the national road network, 2004 154 8.16 National cost of traffic accidents, 2002 154 8.17 Length of expressway network, three Asian countries 155 8.18 Intercity passenger transport and freight costs, three Asian countries 155 8.19 Gasoline prices, selected Asian economies, November 2004 156 8.20 Road sector recommendations 161 9.1 Telecommunications industry structure 170 9.2 Market shares in local exchange, inter-exchange carrier, and international gateway facility services (%), 2002 170 9.3 Local exchange carrier lines capacity, 2003 170 9.4 Call costs, selected regional countries (US cents a minute), 2003 171 9.5 Cumulative investments in telecommunications, 1992­2000 173 9.6 Capital expenditures ($) 173 9.7 Access to fixed and mobile line telephone services, selected indicators, 2001 173 9.8 Access to information and communications technology services, selected indicators, 2001 174 9.9 Teledensity distribution, 2003 174 9.10 Comparison of teledensity figures in the region, 1995 and 2003 175 9.11 Proposed road map for government action (in order of priority) 181 Appendixtables A2.1 Uneven regional development and uneven infrastructure access 186 A2.2 Rank correlation coefficients: Total net shift values and infrastructure development indicators, 1987­2000 187 A3 Local government borrowings, 1985­2002 189 A4.1 Opinion on private sector participation (investment and operation) in infrastructure services 190 A4.2 Opinion on profits and losses 191 A4.3 Knowledge on whether price of service controlled by government 191 A4.4 Perceived function of the Energy Regulatory Commission 192 A4.5 Perception on the trade-off between quality and price 193 A5.1 Tariff paths at nominal prices (P/kWh) 195 A5.2 Electricity consumption, 2003 (GWh) 195 A5.3 Net change in consumer surplus due to changes in tariffs, lower bound (high price elasticity, stranded cost recovery, $ million) 196 A5.4 Net change in consumer surplus due to changes in tariffs, upper bound (low price elasticity, no stranded cost recovery, $ million) 196 A5.5 Net benefits of increasing level 3 access over seven years 197 A5.6 Inputs and assumptions: Level 3 providers 198 A5.7 Net changes in consumer surplus 199 A5.8 Maintenance expenditure, national road network (P billion) 200 A5.9 Estimated generic vehicle operating costs (P/km) 200 A5.10 Road conditions, by region 200 A5.11 Vehicle-kms traveled, by region, 2004 201 A5.12 Cost-benefit analysis, 2004­2009 201 A5.13 Inputs and assumptions 203 A5.14 Telecom build-out plan and users during initial construction period 204 A5.15 Individual gains in consumer surplus 205 A5.16 Total number of telecenters and payphones in operation, and in minutes 205 A5.17 Benefits, costs, and net economic flows of the build-out plan ($ million) 206 A6.1 Legislation relevant to water supply 207 A6.2 Legislation relevant to sanitation 208 A8.1 Estimated investment requirements for water supply, 2004­2009 210 A8.2 Investment requirements for urban and rural sewerage and sanitation 211 WorldBankInfra.indb 8 12/6/2005 8:40:07 AM ix Figures 1 Infrastructure investment as a share of GDP, selected countries xix 2 Corruption Perceptions Index for five East Asian countries, 1995­2004 xx 3 Infrastructure expenditures as a share of GDP, 1985­2002 xxi 4 Private and public expenditures on infrastructure as a share of GDP xxi 5 National government tax revenues as a share of GDP, 1985­2003 xxii 1.1 Access to and quality of basic infrastructure services, selected countries 2 1.2 Access to basic infrastructure, 1998 3 1.3 GDP growth rate, 1970­2003 4 1.4 GDP per capita growth, selected countries, 1985­2003 4 1.5 Growth and infrastructure trends 7 1.6 Share of firms evaluating constraints as major or very severe in the Philippines 8 1.7 Average annual rate of change of total, urban, and rural population, 1950­2030 8 1.8 Urban and rural population, 1950­2030 10 1.9 National government fiscal position as a share of GDP, 1985­2003 11 1.10 Infrastructure investment as a share of GDP, selected countries 11 2.1 Municipal service cost recovery 17 2.2 Corruption Perceptions Index for five East Asian countries, 1995­2004 17 3.1 Infrastructure expenditures as a share of GDP 35 3.2 Local government own-source revenue as a share of GDP 39 3.3 Local government Internal Revenue Allotment transfers as a share of GDP 40 3.4 Local government current operations as a share of GDP, 1985­2001 44 3.5 Local government revenues as a share of GDP, 1985­2002 44 4.1 Cumulative private sector investment in infrastructure, 1990­2003 55 4.2 Private sector participation in infrastructure, 1990­2002 56 4.3 Private investment in infrastructure, selected ASEAN countries, 1990­2003 56 4.4 Private investments in infrastructure (controlled for income), selected ASEAN countries, 1990­2003 56 4.5 Range of private sector options in delivery of infrastructure services 57 4.6 Private investments in infrastructure, by type, 1990­2003, $ billion 57 4.7 Official exchange rate (P/$, period average) 59 4.8 International Country Risk Guide composite risk ratings, 1986­2004 (100 = most risky) 60 4.9 Economist Intelligence Unit risk scores, 1998­2004 (100 = most risky) 60 4.10 Economist Intelligence Unit composite country risk score, March 2004 (100 = most risky) 60 4.11 International Country Risk Guide risk assessment, January 2004 (100 = most risky) 61 4.12 Foreign direct investment net inflows as a share of GDP 61 4.13 Attractiveness of countries, 2004 61 6.1 Electricity market structure, 2004 86 6.2 New wholesale electricity market structure 87 6.3 Forecasts of maximum peak demand in Luzon 89 6.4 Electricity prices in Association of Southeast Asian Nations countries 92 7.1 Market share by type of provider 111 7.2 Capital expenditure per connection, selected Asian cities, 2001/2002 116 7.3 Water sector capital expenditures 117 7.4 Sewerage access, selected Asian cities, 2001/2002 119 7.5 Average tariffs, selected Asian cities, 2001/2002 122 8.1 Investment in national roads as a share of GDP, 1993­2009 149 8.2 International toll rates 156 9.1 National long-distance traffic and revenue trends, 2000­2005 171 9.2 Regional cellular phone market forecasts, 1998­2005 171 WorldBankInfra.indb 9 12/6/2005 8:40:07 AM x Philippines: Meeting Infrastructure Challenges Appendixfigures A2 Total net shift analysis of gross regional domestic product, 1987­2000 187 A4.1 Ownership of utility 190 A4.2 Price vis-à-vis the cost of provision 192 A4.3 Present quality 192 A4.4 Quality compared to 5 years ago 192 A5 Demand curve for water from level 3 connections 198 Boxes 1.1 Environmental and health impacts of inadequate infrastructure 4 1.2 Roads, lighting, schooling, and the poor 5 1.3 Role of transport and logistics in trade 7 1.4 Infrastructure and the Mindanao conflict 9 1.5 To what extent do rural areas drive infrastructure needs? 10 1.6 The fiscal impact of infrastructure 12 2.1 Judicial decisions with implications for the business environment for infrastructure 24 2.2 Subsidies in infrastructure sectors 25 2.3 Citizens' action in monitoring public works projects 27 2.4 The Naga City case: Making the public procurement system work 28 2.5 Benchmark competition in the United Kingdom water sector 29 2.6 Sensitizing the judiciary to infrastructure regulatory issues in South Asia 29 3.1 Infrastructure Planning and Coordination in East Asia 34 3.2 Cebu Port Authority seeks halt to project by local government unit 41 3.3 A successful example of interjurisdictional cooperation 48 3.4 Municipal Infrastructure Investment Unit, South Africa 49 3.5 Examples of infrastructure funds 51 4.1 Matching options to objectives: Metropolitan Waterworks and Sewerage System water concessions 58 4.2 How do private sector participants in infrastructure projects view the existing business environment for infrastructure? 62 4.3 Results of the World Bank-Social Weather Stations Privatization Perception Survey 64 4.4 How not to do a BOT project: The Casecnan project 65 4.5 Pilot output-based subsidy schemes in the Philippines 66 4.6 Guaranteeing input supply risk: The Casecnan and Metropolitan Waterworks and Sewerage System cases 67 4.7 How do private sector participants in infrastructure projects view the BOT Law and its implementing rules and regulations? 69 4.8 Measuring, budgeting, and accounting for guarantees 70 4.9 Improving policies for unsolicited bids in the Philippines 71 6.1 Energy Regulatory Commission: New responsibilities under reforms 84 6.2 International comparisons of lifeline tariffs 93 7.1 Amalgamation of water districts: The case of a water district in Laguna 112 7.2 Amalgamation of BWSAs: The case of three barangays 113 7.3 The Manila water concessions 114 7.4 Lessons from the Manila water concessions for the design of future private sector contracts 115 7.5 Reforms of the tariff-setting process in Chile 131 7.6 Ecuador's merit-based government transfers to water service providers 134 8.1 Southern Tagalog Arterial Road: The two-in-one public-private partnership model 146 8.2 Road Information and Management Support System 152 WorldBankInfra.indb 10 12/6/2005 8:40:07 AM xi Foreword T he Philippines enjoys tremendous endowments The report concludes that, in order to ease infra- of natural and human resources that provide structure constraints, the Philippines needs to achieve great potential for economic development and a gradual increase in infrastructure investments to poverty reduction. However, overall development at least 5% of GDP and an increase in the efficiency outcomes over the last decades have fallen short of of spending. Attaining these targets in a relatively potential. The gap can be largely attributed to weak short time is a formidable but feasible task, with performance of public institutions in providing strong leadership. Significant advantages that the Phil- services to citizens, which leads to a vicious cycle of ippines enjoys include the presence of agreed policy weak public services, lack of trust in the government, frameworks that are important for infrastructure devel- and unwillingness on the part of citizens to provide opment, critical sector reforms that have already been adequate resources to the government. The key devel- initiated, and a public broadly supportive of private opment challenge, therefore, is to reverse the cycle sector participation in infrastructure provision. to one of virtuous development where increased The key challenge for the Philippines is to government revenue translates into improved service implement the agreed frameworks rapidly and consis- delivery and greater public trust in the government. tently. The report suggests that the way forward for Infrastructure plays an important role in this devel- sustained development in infrastructure requires opment process. Insufficient infrastructure has been instigating a rigorous fiscal reform program; pursuing a major constraint to economic growth and poverty continued reforms in key sectors--particularly power, reduction in the Philippines. Though the country has roads, and water--to improve cost recovery, compe- relatively high access levels to water, sanitation, and tition, and institutional credibility, and to sharply electricity, service levels have failed to keep up with reduce corruption; improving central oversight of rapid population growth and urbanization. The high the planning and coordination of investments; and access levels also conceal the low quality of infra- making a few focused investments through public- structure services, which has significantly undermined private partnership to address key bottlenecks and the Philippines' global competitiveness. Infrastructure achieve quick gains in service delivery. investment has dropped since the 1997 Asian financial The World Bank is privileged to work in part- crisis, from a peak of 8.5% of gross domestic product nership with the government on this report. We are (GDP) in 1998 to only about 3% of GDP in 2002. Infra- also grateful to insightful comments and suggestions structure development in the country is hampered by received throughout the study process. The keen a poor business environment; weaknesses in planning, interest in the report shown by all the stakeholders, coordination, and financing; and a decrease in private ranging from national and local government agencies, sector involvement in infrastructure provision. academics, nongovernmental organizations, the private The report Philippines: Meeting Infrastructure sector, and development partners demonstrates the Challenges has been written in close collaboration importance that the public attaches to infrastructure with the government of the Philippines to present a development. We hope that the conclusions and road map which, we hope, will help spur the expansion recommendations of the report reflect the wisdom and improvement of infrastructure services and move of these people and agencies. The World Bank also the country into a virtuous circle of growth and stands ready to support efforts in implementing the development. Philippine infrastructure reform agenda. Joachim von Amsberg Christian Delvoie Country Director, Philippines Director, Infrastructure Department East Asia and Pacific Region East Asia and Pacific Region WorldBankInfra.indb 11 12/6/2005 8:40:08 AM xii Philippines: Meeting Infrastructure Challenges Acknowledgments T his report is the result of the joint efforts of a James Villafuerte, Jonathan Walters, Junhui Wu; as large team from various sectors led by Ming well as our colleagues from the Asian Development Zhang. Team members who contributed to Bank--Yongping Zhai and Shihiru Date; the Japan the writing of the report include: Apurva Sanghi, Bank for International Cooperation--Mayumi Endoh Michel Kerf, Dirk Sommer, Baher El-Hifnawi, Selina and Floro Adviento; and the International Finance Shum, Eric Groom, Mariles Navarro, Tenzin Norbhu, Corporation--Jesse Ang. Stuart McPherson, Arvind Gupta, Gilbert Llanto, The report is being published jointly by the World Hope Gerochi, Christopher Pablo, Philip Lam, Elisa Bank and the Public-Private Infrastructure Advisory Muzzini, and Maria Rosanna Martin. The report was Facility (PPIAF). PPIAF is a multi-donor technical written under the guidance of Christian Delvoie, assistancefacilityaimedathelpingdevelopingcountries Director, Infrastructure Department, East Asia and improve the quality of their infrastructure through Pacific Region and Joachim von Amsberg, Country private sector involvement. For more information on Director, Philippines. Background papers for the the facility please see the website: www.ppiaf.org. report were contributed by Felipe Medalla, Rosario This report was developed in close collaboration Manasan, Jhiedon Florentino, and an Almec team with the National Economic and Development led by Shizuo Iwata. Hope Gerochi provided research Authority (NEDA), specifically the Infrastructure Staff assistance for the study, Teresita Angelica Plata served and Public Investment Staff. We would especially like as program assistant to the team, Jonathan Aspin was to thank NEDA Assistant Director-Generals Ruben editor for the entire report, and Anissa Tria advised Reinoso and Rolando Tungpalan for their invaluable on report production. partnership and advice. We would also like to recognize The report benefited from consultation and advice the very helpful contribution of participants in a series from numerous reviewers including: Richard Scurfield, of consultation meetings--some on the entire report, Christine Kessides, Manuel Schiffler, Jordan Schwartz some on the specific sectors--which helped shape the (aspeerreviewers),ReyAncheta,YolandaAzarcon,Aldo report. A draft version of the report was presented at Baietti, Mark Baird, Joven Balbosa, Jitendra Bajpai, Ma. the Philippines Infrastructure Conference on May 23, Bella Tumaliwan-Belizario, Sally Burningham, Songsu 2005, and conference participants provided valuable Choi, Sanjay Dhar, Nina Masako Eejima, Elisea Gozun, feedbacks. The draft report was provided to various Christopher Hoban, John T. Hodges, Susan Hume, government agencies and nongovernmental experts John Irving, Hiroichi Kawashima, William Kingdom, for comments after the conference, and also placed Lloyd McKay, Bill Paterson, Anthony Pelligrini, Janelle on the World Bank's Philippines website to receive Plummer, Salvador Rivera, David Satola, Sethaput public feedback. We would like to thank all the people Suthiwart-Naruepu, Jemima Sy, Luiz Tavares, Alan and agencies who provided comments, which we have Townsend, Caroline Van Den Berg, Keshav Varma, tried to include during the final revision. Vice President Jemal-ud-din Kassum Country Director Joachim von Amsberg Sector Director Christian Delvoie Team Leader Ming Zhang WorldBankInfra.indb 12 12/6/2005 8:40:08 AM xiii Acronyms and abbreviations BOT Build-operate-transfer BWSA Barangay water services association CICT Commission on Information and Communications Technology CMTS Cellular mobile telephone system DBCC Development Budget Coordinating Committee DBM Department of Budget and Management DBP Development Bank of the Philippines DENR Department of Environment and Natural Resources DILG Department of Interior and Local Government DOE Department of Energy DOF Department of Finance DOTC Department of Transportation and Communications DPWH Department of Public Works and Highways EO Executive order EPIRA Electric Power Industry Reform Act ERC Energy Regulatory Commission GDP Gross domestic product GFI Government financial institution GOCC Government owned and controlled corporation GPRA Government Procurement Reform Act GSIS Government Service Insurance System GWh Gigawatt-hour ICC NEDA Investment Coordination Committee IGF International gateway facility IPP Independent power producer IRA Internal Revenue Allotment IRI International Roughness Index IRR Implementing rules and regulations ISP Internet service provider JICA Japan International Cooperation Agency kV Kilovolt kWh Kilowatt-hour LGC Local Government Code LGU Local government unit LGUGC Local Government Unit Guarantee Corporation LTFRB Land Transportation Franchising and Regulatory Board LWUA Local Water Utilities Administration MCTE Manila­Cavite Toll Expressway MDFO Municipal Development Fund Office MTPDP Medium-Term Philippine Development Plan MTPIP Medium-Term Public Investment Program MVUC Motor Vehicle User's Charge MW Megawatt MWCI Manila Water Company, Inc. MWSI Maynilad Water Services, Inc. MWSS Metropolitan Waterworks and Sewerage System WorldBankInfra.indb 13 12/6/2005 8:40:08 AM xiv Philippines: Meeting Infrastructure Challenges NEDA National Economic and Development Authority NLEX North Luzon Expressway NPC National Power Corporation NPL Nonperforming loan NSO National Statistics Office NTC National Telecommunications Commission NWRB National Water Resources Board O&M Operation and maintenance ODA Official development assistance P Peso PCO Public calling office PD Presidential decree PEMC Philippine Electricity Market Corporation PLDT Philippine Long Distance Telephone Company PNCC Philippine National Construction Corporation PNR Philippine National Railways PPA Philippine Ports Authority PSALM Power Sector Assets and Liabilities Management Corporation RA Republic Act RDC Regional development council RIMSS Road Information Management Support System RWSA Rural water supply association SAS Service Area Scheme SLEX South Luzon Expressway SRF Special Road Fund SSIP Small-scale independent provider STAR Southern Tagalog Arterial Road TELOF Telecommunications Office Transco National Transmission Corporation TRB Toll Regulatory Board TSC Transitional supply contract WESM Wholesale electricity spot market WPEP Water Supply and Sanitation Performance Enhancement Project Currency and exchange rates Currency Unit: Philippine Peso Exchange Rate (as of October 18, 2005): P55.8 = US$1 WorldBankInfra.indb 14 12/6/2005 8:40:08 AM xv WorldBankInfra.indb 15 12/6/2005 8:40:08 AM Joel Nito/Agence France-Presse WorldBankInfra.indb 16 12/6/2005 8:40:11 AM Executive Summary Meeting Infrastructure Challenges: Key Findings, Conclusions, and Recommendations T he Philippines has attained important various levels of government clearly demonstrate achievements in infrastructure provision, and that where political will and strong leadership exist, access to basic infrastructure services tends to infrastructure provision can indeed be sustainable. be higher than that of its neighbors. The government The key to achieve sustained improvement lies in has also been undertaking critical reforms, such rapid and consistent implementation. as promotion of private sector participation and Over the next few years, it is important to achieve power sector restructuring, which are among the results on three interrelated fronts: (a) strong fiscal most progressive in Asia. However, infrastructure adjustment; (b) a gradual increase in infrastructure deployment has not kept up with high population investments--they were only 2.8% of gross domestic growth and rapid urbanization, with serious conse- product (GDP) in 2002--to at least 5%; and quences for the country's competitiveness and in (c) increased efficiency of infrastructure spending. particular for its growth and poverty reduction To achieve these results in a relatively short time is a targets, including the Millennium Development formidable but feasible task. Priorities should be given Goals. The 2004­2010 Medium-Term Philippine to the implementation of (a) a rigorous fiscal reform Development Plan (MTPDP), as published by the program; (b) reforms in key sectors--particularly government, recognizes the importance of removing power, roads, and water supply--to improve cost infrastructure bottlenecks as a matter of priority in recovery, competition, and institutional credibility, order to achieve a more rapid development pattern, and to sharply reduce corruption; (c) improved and lays out the broad reform agenda. central oversight of the planning and coordination of Accelerating progress in infrastructure provision investments;and(d) afewfocusedinvestmentsthrough will require actions to address the key business public-private partnership to address key bottlenecks environment issues--the "four Cs": inadequate cost and achieve quick gains in service delivery. recovery, corruption, insufficient competition, and Success on these different fronts would help low credibility of institutions. Equally important will restore citizens' trust in public institutions' ability be measures to improve public sector planning and to use public resources efficiently. And this, in turn, coordination for infrastructure provision, to mobilize would enhance the public's willingness to provide additional resources, and to increase the benefits of adequate resources to the state, thus reestablishing private participation. a virtuous circle of development. While much needs to be done, a large part of the framework for action is already in place. The government has embarked on a fiscal reform program Background: and plans to accelerate the needed fiscal adjustment. Is there an infrastructure crisis? The importance of improving the business envi- ronment for infrastructure is increasingly being The Philippines has attained important achievements recognized, as evidenced by specific steps that are in infrastructure development, particularly in terms being taken toward combating corruption, and by of access to infrastructure services by the general some progress toward cost recovery. Examples at population. Overall access rates to electricity (80%), WorldBankInfra.indb 17 12/6/2005 8:40:11 AM xviii Philippines: Meeting Infrastructure Challenges improved water supply (86%), sanitation (83%), as demand increases. In addition, the government has and telephones (31%, including cellular) are all taken the first steps toward containing the deficit of relatively high compared with those in developing NPC by increasing generation tariffs by about P1.4 East Asian countries. The total road network length per kilowatt-hour over June to November 2004, and (2.6 kilometers per 1,000 people) also compares additional increases are being considered. These favorably. In addition, the government has undertaken increases will enable NPC to cover its operating some important reform measures in the sector, costs in 2005. particularly in terms of private sector participation: In the water sector, official access data suggest that the Philippines passed the first build-operate-transfer after a decade of modest growth in coverage, access (BOT) law in the East Asian region as well as the levels for water supply have been slipping. Access to most ambitious power sector reform legislation; it safe drinking water for the entire population dete- implemented the largest water concession at the time; riorated from 81.4% in 1999 to 80% in 2002. Access and it established the first road fund in the region. for the poorest segment of the population declined These measures resulted in significant private sector from 71.5% in 1999 to 70.2% in 2000. An even lower investments in infrastructure, on average contributing access figure to services has been reported by inde- more to infrastructure investments than the public pendent surveys, with only 63% of the population sector over 1992­2002. having access to any of the formal levels in 2000, with the rest relying on self-provision. In addition, Deteriorating quality of infrastructure official data conceal poor service quality in terms Despite these achievements, the overall state of of service continuity and bacteriological content of infrastructure in the country has not kept up with potable water, such that even where there is access rapid population growth and urbanization, and has to piped water, these services often fail to meet the emerged as a key impediment to the Philippines' standards set by the government. economic competitiveness. Competitiveness rankings Matters are even worse in sanitation and solid underscore the importance of infrastructure to the waste where high official access data obscure the fact Philippines' investment climate. The country slid that effluents from ubiquitous septic tanks commonly to 52 (from 49) in the 2004 World Competitiveness drain into uncovered drainage systems, leaving the Yearbook, with its infrastructure ranking slipping to majority of the population, especially in urban 59 from 56 (out of 60 countries). In 2004, the World areas, exposed daily to raw sewage. As a result of Economic Forum ranked the country 89 out of 102 inadequate services, contaminated drinking water countries for overall infrastructure quality--well and waterborne diseases remain a prevalent public below both Indonesia (51) and Vietnam (76). A World health concern, accounting for more than 500,000 Bank investment climate assessment of about 715 morbidity and 4,200 mortality cases a year, and with private firms found that infrastructure, in particular avoidable health costs alone estimated at P3.3 billion power, is a major concern. annually. Sector-specific data, too, attest to the deterio- High levels of congestion, the poor condition rating state of infrastructure and its impact on the of large parts of the road network, and inadequate quality of life. The relatively high access levels mask connectivity have reduced the efficiency of the road the underlying poor quality of services. In the power network in promoting growth. The cost of congestion sector, electrification rates, at about 80%, are above in Metro Manila alone was estimated at around the regional average, though the sector's financial P100 billion a year in 1996 prices, or 4.6% of GDP. situation is alarming. Electricity shortages in the early Less than 50% of national roads can be considered 1990s prompted the government to overcontract with to be of good quality. The poor quality of roads has numerous independent power producers. As a result, resulted in high vehicle operating costs, with intercity there has been substantial overcapacity, an issue that freight rates more than 50% higher than in Thailand was exacerbated by the leveling-off of electricity or Vietnam. demand following the 1997 Asian crisis, and elec- Telecommunications is one sector where much tricity production costs in the Philippines are among progress has been made. Teledensity is growing the highest in the region. Retail tariffs that have been (currently at 19 telephone mainlines per 100 set below cost for years contributed to a ballooning population). However, one important target-- deficit at the National Power Corporation (NPC). extending distribution to 100% of municipalities The situation will, however, progressively improve (originally by 1997)--has yet to be achieved. WorldBankInfra.indb 18 12/6/2005 8:40:11 AM Executive Summary Meeting Infrastructure Challenges xix Key issues Figure 1 Low current spending on infrastructure Infrastructure investment as a share of GDP, The World Bank estimates that middle-income selected countries countries in East Asia will, on average, need to spend 10 over 5% of GDP on infrastructure to meet their needs over the next 10 years. While the situation will vary by 8 country, the Philippines' most recent infrastructure t 6 expenditures (2.8% of GDP in 2002) were well below Private 4 this 5% benchmark, and were also low compared with encerP Public other countries (figure 1). In addition, this low level 2 of resources has often been spent less than efficiently, 0 and is insufficient to maintain the existing stock of hstan assets and expand networks. PhilippinesIndonesiaAlbania Russia CambodiaKazak China Inefficient use of existing resources Note: No breakdown for China, figures are 1991­2000 average. Philippines and Indonesia are 2002 figures, Albania and Russia 2000, In power, overinvestment in generation, insufficient and Cambodia 2001. expansion of transmission, and lack of investment in Sources: World Bank Private Participation in Infrastructure Database; distribution have caused excess generation capacity World Bank Public Expenditure Reports; China Statistical Yearbook (various years). in Luzon but sporadic shortages in the Visayas and Mindanao. In water, nonrevenue water remains high for all service providers, with systems run by will enable recovery of operating costs. In water and local government units (LGUs) faring the worst on sanitation, tariffs barely cover operation and main- efficiency criteria. The efficiency of the road program tenance costs in most systems, let alone significant is also affected, by overstaffing; high procurement capital costs for service expansion. In roads, tax costs coupled with low quality; and fragmentation revenues earmarked from the fuel levy are far from over a multitude of small projects. meeting the requirements for road maintenance Such underperformance in infrastructure stems expenditures. In ports, the setting of low tariffs by the from the following factors: a poor business envi- Philippine Ports Authority (PPA) discourages private ronment; unsatisfactory performance in long-term entrants, and among those that enter, the quality of infrastructure planning and coordination and in services is low. In the background is the country's resource mobilization; and, largely as a consequence critical fiscal situation, which has led to the need of these two elements, a decrease in private sector to cut overall spending and significantly increased involvement. Moreover, each of these constraints is the cost of capital. This has made cost recovery further exacerbated by the critical fiscal situation. The both more important and more difficult. There is following paragraphs discuss the underlying causes also significant room to improve the targeting of of these factors. government subsidies toward cost recovery, which are present in almost all infrastructure sectors. Poor business environment Corruption perceptions for the Philippines While the Philippines' business environment for are high (figure 2). Corruption has emerged as infrastructure comprises important strengths, such a top bottleneck to doing business in the 2004 as an overall supportive framework for private sector World Bank investment climate assessment. Infra- participation, it is also seriously undermined by a structure agencies (the Department of Public number of major impediments, particularly the four Works and Highways in particular) rank among Cs--inadequate cost recovery, corruption, insufficient the worst in the public's perception of corruption, competition, and low credibility of institutions. as reported by independent perception surveys. Cost recovery provides the financial foundation An own-government estimate of "potential leakage for sector development but it remains an elusive goal in combined public-private transactions, which except in telecommunications. In power, significant included purchases for BOT projects" for 2001 was financial loss was incurred in 2003­2004 due in large P74 billion. The government has been undertaking part to tariff adjustment delays. Recent progress on numerous measures, such as procurement reform, tariffs, though still not achieving full cost recovery, "lifestyle checks," strengthened supervision, and WorldBankInfra.indb 19 12/6/2005 8:40:12 AM xx Philippines: Meeting Infrastructure Challenges Figure 2 service institutions. SSIPs, however, continue to Corruption Perceptions Index for five East Asian operate in an unfavorable business climate, often countries, 1995­2004 having to resort to bribing officials. Lack of stability 6 due to unpredictable political interference, limited Malaysia 5 access to credit, and insufficient information about future planning, further discourage investment. 4 Philippines t Thailand The low credibility of regulatory and judicial encerP 3 institutions is another major element contributing 2 Vietnam to the poor business environment. Regulatory Indonesia credibility is undermined in some sectors because 1 of lack of insulation for the regulatory authorities 0 from short-term political pressures, and in other 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 sectors because of conflicts of interest arising from Year inadequate separation between policy, regulatory, Note: Higher score means less corrupt. and operational functions. Effective regulatory deci- Source: Transparency International (www.transparency.org). sionmaking is further constrained, in all sectors, by limited regulatory capacity and experience, and, outside civic group monitoring. These efforts need in transport and telecoms, by insufficient coordi- to be sustained and scaled up quickly in order to nation among regulatory agencies. The lack of clarity reverse the overall negative perceptions. in the regulatory framework, particularly in the The full benefits of competition are yet to be regulatory­judicial interface, has resulted in repeated realized in most infrastructure sectors. In the interventions by the Supreme Court on tariff setting power sector, the government has launched an and contractual issues in the power, solid waste, and ambitious reform program that will--if imple- airport sectors. mented successfully--lead to a truly competitive As noted above, the high debt servicing burden power market. As a result, there are already signs in the Philippines raises the direct cost of capital, of renewed interest from private operators. In roads, and makes cost recovery less attainable. In addition, the lack of a strong governance framework results in the very fragile fiscal situation--in 2002, the national suboptimal procurement practices and reduces the government deficit stood at 5.2% of GDP, compared quality of road construction, which in turn reduces with 1.7% in Indonesia, 1.4% in Thailand, and efficiency and adds significantly to the cost of road 3.5% in Vietnam--continues to increase investors' provision. assessments of country risk and to weaken the In ports, PPA regulates entry of the private sector, prospects of the Philippines as an investment which is likely to compete with PPA's own ports, destination. and sets the port dues that private ports charge for handling non-own cargo. By setting charges at low Unsatisfactory public sector performance rates (among the lowest in the region), PPA can Lack of long-term planning and coordination insulate itself from competition. In shipping, despite for infrastructure deregulation, the industry remains highly concen- Major efforts by the government to provide infra- trated with only five shipping lines accounting for structure have often been a reactive response to 90% of the passenger and cargo markets and almost crises rather than a proactive input into effective all of the primary and secondary shipping routes. long-term infrastructure planning. Figure 3 shows In telecoms, the sector is dominated by regional the infrastructure "boom-bust" cycle over 1985­2002. duopolies, each with its own chosen domestic, Total infrastructure expenditures experienced sharp and international, long-distance connections. An declines after each peak period with the highest inadequate regulatory framework prevents resale by peaks in 1990, 1993, and 1998 following the energy value-added service providers, further discouraging and water distribution crises. This boom-bust cycle competition and innovation. reflects, to a large extent, the failure to devise and Among small-scale independent providers (SSIPs), implement a long-term infrastructure plan. Clearly, a direct competition is prevalent, particularly in the combination of insufficient central oversight; lapses in water and transport sectors; they are filling a critical coordination among agency plans and projects; and and growing gap created by the failure of formal failure to insulate infrastructure planning, prioriti- WorldBankInfra.indb 20 12/6/2005 8:40:12 AM Executive Summary Meeting Infrastructure Challenges xxi Figure 3 infrastructure provision, though there Infrastructure expenditures as a share of GDP, 1985­2002 have been examples of strong performance 10 since decentralization in 1991. Overall LGU expenditures as a share of GDP 8 have doubled since decentralization, but t 6 LGUs' infrastructure expenditure share encerP has remained largely unchanged, despite 4 the LGUs' much-expanded mandate 2 under the 1991 Local Government Code (LGC). Key reasons for this are (a) unclear 0 LGC, which permits an ambiguous two- 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 track delivery system under which both Year central agencies and LGUs can initiate Total infrastructure Total private Total public devolved activities and which undermines incentives to mobilize own-source Note: Infrastructure expenditures reflect capital outlays only. Sources: Department of Budget and Management; Department of Finance; Commission on revenues; (b) the short termism inherent in Audit; Maynilad Water Services, Inc.; Manila Water Corporation, Inc.; Optel Ltd. and World Bank. the local political economy, for instance, the three-year political tenure of elected zation, and implementation from political intrusion local officials that creates poor incentives for long- is hampering infrastructure development. term planning and budgeting; and (c) low capacity A key issue resulting from weak central oversight for infrastructure investment preparation and imple- has been the proliferation of small projects and mentation at the local level. appropriations, further exacerbated by political inter- vention and decentralization, leading to a vicious Lack of a healthy framework for suitable financing downward circle. Rebuilding the credibility of the opportunities for infrastructure public sector central agencies is at the core of rees- As figure 4 shows, at 2.8% of GDP in 2002, overall tablishing a social compact between the government current spending on infrastructure is low, with the and its citizens where the government can efficiently private sector and GOCC share in infrastructure utilize resources provided by the public to serve the investment showing a decreasing trend. Consequently, common good. the government needs to mobilize resources for infra- The public sector remains a major provider in structure development. The four main sources for most infrastructure sectors. Most government owned and controlled corporations (GOCCs) in the power, water, and transport sectors have posted sustained Figure 4 deficits, constraining their ability to expand services Private and public expenditures on infrastructure as a share of GDP or make them more efficient. National agencies, such as the Department of Public Works and Highways 8 and the Telecoms Office, suffer from low produc- tivity as a result of overstaffing. Governance of public 6 service providers is weak, as reflected in arbitrary t appointment of the board and executives of public utilities and weak performance accountability for encerP 4 utility management. Regional infrastructure has 2 suffered both because plans for the regions have few champions at the central level and because 0 1992 1997 2002 revenues do not match devolved responsibilities at the Year provincial level. This has resulted in underinvestment Private NG GOCCs LGU in regional infrastructure, such as solid and toxic GOCC = government owned and controlled corporation; NG = national waste disposal, transport systems, and wastewater government; LGU = local government unit. and watershed management, creating a "missing Note: Infrastructure expenditures reflect capital outlays only. middle" in infrastructure service. Sources: Department of Budget and Management; Department of Finance; Commission on Audit; Maynilad Water Services, Inc.; Manila LGUs too have yet to rise to the challenge of local Water Corporation, Inc.; Optel Ltd.; and World Bank. WorldBankInfra.indb 21 12/6/2005 8:40:12 AM xxii Philippines: Meeting Infrastructure Challenges raising finance are: reinvesting user charges--for both Figure 5 public and private utilities; government own-revenue National government tax revenues as a share of GDP, financing--at the national, provincial, and local levels; 1985­2003 raising funds in the financial markets--domestic 20 and international, debt and equity; and external official development assistance (ODA)--grants and 15 concessional loans. t User charges. Typically, user charges are the main source of much infrastructure financing. In mature, encerP 10 private utilities elsewhere, internally generated funds 5 can account for up to 70% of funds for investment. However, user charges in the Philippines are below 0 cost recovery for most sectors with the exception of 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year telecoms. As emphasized in the section "Poor business Source: Bureau of Treasury. environment" (above), increasing user charges to cost- recovery levels remains a key factor in generating important part in infrastructure financing. In 2003, much-needed infrastructure financing. annual ODA disbursements for infrastructure projects Government own-revenue financing. The weak implemented by national government agencies fiscal situation is constraining the government constituted 37% of national government capital from channeling much-needed public funds into expenditure on infrastructure. Lack of budget space infrastructure. With a 14.6% revenue effort (i.e. the has seriously squeezed ODA utilization in recent share of government revenue in GDP) in 2003, the years. There is, however, significant room to achieve Philippines ranks the lowest among its Southeast more leverage and synergy of ODA with private sector Asian counterparts. Low net revenue efforts stem investment in infrastructure. from declining tax revenue collections (figure 5). The resulting budget crunch has a disproportional Decrease in private sector involvement impact on infrastructure, as capital spending was cut The private sector has been a pillar of the Phil- more severely than other expenditures. Generating ippines' infrastructure strategy since the early 1990s. additional public resources from improving tax However, from a peak of 6% of GDP in 1998, private revenues and ensuring their proper usage can go a infrastructure commitments declined to 1% in 2002. long way to increasing spending on infrastructure. While this coincided with a global decline in private Raising funds in financial markets. The country's investment in infrastructure, the decrease is primarily financial markets are largely in private hands attributed to the poor business environment and the and commercial considerations dominate lending inability of the public sector to provide a suitable decisions, directing funding to those sectors or enabling framework that allows for easy private entry activities where returns are attractive on a risk-adjusted and exit, or the right incentives for operation. In basis. For many of the reasons cited in the sector- addition, a vital element of the enabling framework-- specific chapters--such as price controls, regulatory the landmark Build-Operate-Transfer (BOT) Law of uncertainty, insufficient commercial demand, and 1990--remains surrounded by controversies related political and social unwillingness to accept free and to vagueness over unsolicited bids, where the scope unfettered pricing flexibility--the risk-return trade-off for corruption becomes considerable. Indeed, most does not favor infrastructure investments. Moreover, of the controversial infrastructure projects in the the nonbank financial sector is small, parts of it are Philippines started as unsolicited proposals. Other underperforming and, at least in the short to medium important issues include the definition of government term, it cannot grow rapidly enough to support a high guarantees, the role of implementing agencies in level of infrastructure financing. contract revision, and slow progress in overall sector Overall, in contrast to its East Asian neighbors, reforms. An important lesson is that private sector the savings rate in the Philippines is low, limiting participation does not substitute for public sector the level of domestic finance available and leading reforms. In fact, sustaining private sector investments to relatively high reliance on foreign savings through requires an active and well-performing public sector private investments and ODA. that provides the right incentives to maximize the Official development assistance. ODA plays an benefits of private sector participation. WorldBankInfra.indb 22 12/6/2005 8:40:13 AM Executive Summary Meeting Infrastructure Challenges xxiii The way forward and national levels. The positive experience of some progressive LGUs in infrastructure development and Tackling the above issues--the poor business envi- governance improvements can be replicated. And ronment, unsatisfactory public sector performance, while there are factors that impede its development, and the decrease in private sector involvement--is progress has been made in LGU access to loan and undeniably challenging. However, much of the bond financing. For example, the Local Government framework for action is already in place. The Phil- Unit Guarantee Corporation was created in March ippines has the benefit of having existing institutions 1998 to guarantee debt issues of LGUs when these that can be utilized to address these issues, as well issues are financed from private sources. It is the as technical expertise at these institutions. Major first privately managed local government guarantee reform measures in the power, water, transport, corporation set up in a developing country of Asia. and telecoms sectors have already been initiated. Therefore, the usually arduous process of searching Priorities for solutions can be cut short--the key lies in deter- In order to optimally plan for, and provide, infra- mination and consistency in implementation. Though structure in a decentralized, market-driven, and yielding mixed results, the private sector-led infra- often politicized setting, the central challenge for structure development strategy has been one of the Philippines is to reestablish the credibility of the most progressive in the region, and has been a public sector institutions and restore the "social pillar of infrastructure investment. Moreover, public compact" between the government and its citizens perceptions of private sector participation in basic for effective service delivery. This can be achieved infrastructure services are generally positive: more through consistent implementation of: (a) a rigorous than half of 300 respondents to a survey seemed to fiscal reform program; (b) key sector reforms in think that it would benefit the country. Finally, private infrastructure; (c) proactive planning and coordi- sector investors are familiar with and interested in nation of investments instead of reacting to changing the sector, provided that the conditions are right. For circumstances in a "boom-bust" manner; and (d) a example, measures such as recent tariff hikes in the few focused investments in the short term through power sector, combined with a strong commitment public-private partnership to address key bottlenecks toward maximizing competition and attracting the and achieve quick gains in service delivery. In the private sector, are beginning to bear fruit. This was aggregate, reducing the inherent short termism in seen in the government's successful conclusion, in infrastructure policymaking and improving the poor December 2004, of the first major privatization of a business environment can be expected to increase the power plant (Masinloc), with privatization proceeds performance of both the public and private sectors. of $560 million considerably exceeding expectations Resolving ambiguities in the BOT Law, and improving (though the financing for this transaction still needed the selection and preparation of projects of interest to to be closed as of February 2005). potential investors, can further renew private sector The Philippines is also experimenting with interest. The tasks are demanding but achievable: innovative ways, such as output-based aid, to improve experience in other countries shows that, through efficiency of subsidy delivery in power, as well as in clear direction and consistent implementation, a waterandsanitation.Thepassageoftheanticorruption turnaround in public perception and actual results Government Procurement Reform Act of 2002, the can be achieved over the short to medium term. establishment of the Office of the Ombudsman under Republic Act 6770 (otherwise known as the Cross-sectoral priorities Ombudsman Act of 1989), and involvement of The two key immediate cross-sectoral priorities are civil society organizations as observers in bidding as follows: to improve the business environment--in processes, are encouraging developments that are particular, to take steps toward implementing cost- vital for increasing transparency and accountability, covering tariffs (subsidies, where justified, could and for reducing costs and delays in the public be used as part of the cost-recovery equation); and procurement process for infrastructure projects. In to implement a rigorous and credible fiscal reform addition, successful experience with community- program. Moving or continuing to move toward driven development in effectively and transparently cost recovery, particularly in the power, water, and providing community infrastructure can be scaled transport sectors, will have a direct and positive up to introduce better accountability at the local effect on the fiscal situation. Likewise, improving the WorldBankInfra.indb 23 12/6/2005 8:40:13 AM xxiv Philippines: Meeting Infrastructure Challenges fiscal situation will increase the resources available international financial markets to step up invest- for public and private infrastructure projects by ments. Contingent liabilities from infrastructure freeing budgetary resources, reducing the cost of programs should be carefully accounted for and capital, and improving investors' perceptions of managed: guarantees should be used judiciously, country risk. Improving the business environment based on a clear rationale and appropriate risk requires continuing and accelerating reforms in the allocation. key sectors, particularly in power, roads, and water supply and sanitation. The government can also · Foster cost recovery by aligning infrastructure start immediately to address key bottlenecks and tariffs with costs in an economically coherent tap private investment by proactively helping resolve manner, and in a way that minimizes the negative issues surrounding some of the stalled private sector impact of price increases, specifically for the investment projects, and by improving the way in poor. The key measures consist of continued which pipeline projects are prepared and competi- power tariff adjustments according to accepted tively tendered. rules, including adequate and timely approval Over the short to medium term, the two key of the universal charge for the Power Sector cross-sectoral priorities will be (a) to strengthen the Assets and Liabilities Management Corporation policy planning and coordination environment, (PSALM) to recover stranded costs; clarification which is directly and indirectly affecting infra- and enforcement of cost-recovery regulations for structure provision at all levels (particularly at the the water and sanitation sector to enable service regional level vis-à-vis the "missing middle"); and expansion; an increase in the fuel levy for road (b) to maximize the benefits of decentralization to maintenance expenses; and adherence to agreed improve the way in which infrastructure is delivered toll rate adjustments for toll road rehabilitation at the local level. Both of these priorities will require and expansion. Consumer surplus analysis of the the government to address difficult but significant required cost-recovery measures shows that the political-economy issues so as to reduce undue priority in tariff adjustments should be given to political intervention in planning, prioritization, power, followed by water tariffs, and then the fuel coordination, and delivery. levy increase. Subsidies can be used as part of the cost-recovery equation but only where valid Sector-specific priorities for equity or efficiency reasons. Better targeting As far as sector-specific priorities are concerned, the and management of subsidies can, in effect, chapters covering power, water supply and sanitation, increase public resources that could be used for roads, and telecommunications (chapters 6­9) make cost-recovery purposes. Good examples in the specific recommendations. International comparisons country, such as the "lifeline" power tariff and of performance in these various sectors, estimates ongoing experimentation with output-based aid, of the impact of some of the proposed reforms on can be scaled up. consumer surplus, and an analysis of the govern- ment's own priorities as laid out in the 2004­2010 · Improve governance and further step up anticor- MTPDP point to three key objectives that warrant ruption efforts by vigorously implementing the urgent attention: (a) addressing the financial deficits 2002 Government Procurement Reform Act and of the power sector; (b) reversing the recent decline in complementing it with financial management access to water services; and (c) addressing congestion reforms. Other specific actions include strength- on roads in the main cities. ening the monitoring and enforcement capabil- ities of the key anticorruption oversight agencies; Cross-sectoral recommendations insisting on consistent disclosure and verification The following paragraphs summarize the main cross- of assets by public officials; accelerating the infor- sectoral recommendations put forward in the present mation-transparency aspects of procurement report. reform, including civil society monitoring and · timely posting of bid invitation and award results; Implement a vigorous and credible fiscal reform and initiating an aggressive effort on simplifi- program. A credible and sustained period of fiscal cation of government transaction procedures, so reforms--in particular, increasing tax revenues-- as to rapidly reduce the number of steps involved will convince participants in both domestic and and discretionary powers. Corporate governance WorldBankInfra.indb 24 12/6/2005 8:40:13 AM Executive Summary Meeting Infrastructure Challenges xxv of public utilities should also be improved by government can also explore the possibility of appointing qualified and experienced corporate establishing a dedicated infrastructure fund, and board members and executives; providing more means to better leverage ODA funds with private operational autonomy to corporate management investments. while establishing clear performance targets based on which the management may be rewarded or · Strengthen and reorient central agencies, such penalized; regular disclosure of utility perfor- as the National Economic and Development mance; and involving the public in monitoring Authority, Department of Finance, Department the service levels of public utilities. of Budget and Management, and interdepart- · mental committees, to improve planning, priori- Engage private investment in a competitive manner tization, and monitoring of national government and resolve issues surrounding stalled private sector resources. The focus of oversight responsibilities projects. The benefits of private sector participation can shift from a detailed project-level approval can be greatly improved and the problems can be process to a broader and more forward-looking greatly reduced if projects that entail private sector role for reform championship, strategy formu- participation in the Philippines are carried out lation, and policymaking. The oversight agencies on a transparent and competitive basis, instead should consider taking a more proactive role in of through unsolicited bids. The target should be initiating, promoting, and monitoring systemic that the majority of transactions be competitive, reforms for the infrastructure sector, and should rather than the opposite. In the meantime, with address important policy issues that can guide the government's proactive measures, private the decisionmaking process for projects and sector transactions that have been suspended or transactions cutting across sectors. Ensuring delayed for several years may move forward and planning and its implementation in a decen- translate into visible results quickly. A number tralized and often politicized environment is a of toll roads are in such status, all of which are very challenging task. Effective instruments to critical for relieving the key bottlenecks and are implement plans, such as the use of incentive- largely financially viable. For the water sector, based intergovernmental fiscal transfers and quick resolution of the financial rehabilitation targeted subsidies, and wide reliance on perfor- of the troubled concessionaire, Maynilad Water mance benchmarking, should be carefully Services, Inc., is critical for investments to be made studied and consistently implemented. It is also for service expansion, sanitation improvement, important to ensure extensive stakeholder partic- and new bulk water sources. ipation during the strategy development and · planning process to secure wide public support Improve planning and preparation of private sector of the outputs. participation in infrastructure. The government can maximize the benefit of private investors' · Provide incentives and technical assistance to interest and avoid the disadvantages of unso- LGUs to raise more revenues and improve perfor- licited bids by adequately preparing promising mance. This will entail benchmarking LGU projects for competitive tendering. The rela- financial and institutional performance, and tively small amount of funding spent on such introducing performance-based criteria to the preparation work will enable wider interest by national government's fiscal transfer programs investors and allow the government to secure to LGUs to incentivize revenue mobilization better terms, as a result of both wider compe- and performance enhancements. Technical tition and reduced uncertainty for potential assistance to LGUs, in revenue mobilization investors. As privatization of the Manila water and infrastructure investment planning and concession has demonstrated, such expense can preparation, is also important. The national indeed be recovered quickly, at the financial government should also strengthen ongoing closure of the transactions. Quick preparation efforts in advancing local interjurisdictional and tendering of the most critical infrastructure cooperation by providing more authority to projects in this way can result in visible improve- the regional development councils and giving ments in a relatively short time. To maximize higher priority to the province level, with regard the benefits of private sector participation, the to intergovernmental fiscal transfers. WorldBankInfra.indb 25 12/6/2005 8:40:13 AM xxvi Philippines: Meeting Infrastructure Challenges Sector-specific recommendations sector participation should be encouraged, and The priority actions for sector-specific reform and should be conducted through well-prepared and development include the following. structured competitive tendering processes. Addressing the financial deficit and implementing Maintaining and expanding the road network reforms in the power sector · · Governance and accountability of spending at Achieving and sustaining the financial viability the Department of Public Works and Highways of NPC/PSALM is a major priority. This would and the Special Road Fund should be improved entail increasing cost recovery in charges and by establishing accountability for results of road ensuring that the privatization program is care- spending at the district and regional levels. Staffing fully managed to achieve the expected sales values levels should be reduced and performance-based · and the financial turnaround. outsourcing increased to improve efficiency. It is important to ensure successful implemen- · Greater reliance on user charges is needed for the tation of market restructuring initiated under the upkeep and development of the road network. Key Electric Power Industry Reform Act, including measures include expanding toll road coverage, the full operationalization of the wholesale elec- charging appropriate toll fees, and increasing user tricity spot market (WESM). The prompt reso- charges through the fuel levy. lution of the questions related to price, conditions, · Private sector interest in road improvements can and coverage of the transitional supply contracts be more effectively utilized if the government and the bilateral contracts that follow the start can proactively resolve issues of stalled toll road · of WESM operations will be crucial. concessions, address right-of-way delays, and use The Energy Regulatory Commission needs to open competition for project selection. be strengthened to be able to undertake the task of price regulation as well as the regulation of distribution companies. It should be authorized Expected outcome to retain part of its revenues for its operations to be able to attract staff with the necessary skills Addressing the formidable infrastructure challenges and experience. is vital for reducing poverty and establishing a more rapid development pattern. Preliminary analysis Expanding coverage and quality of water supply and indicates that in the Philippines there is indeed a sanitation services · strong relationship between infrastructure and GDP, It is vital to raise the overall tariff level to allow for and that growth of the infrastructure capital stock system expansion and improved service quality. has a positive and long-term impact on level of GDP An important first step is to issue clear guidelines, (appendix 1). Its underperformance is therefore in the form of an executive order, on charging a concern with real implications for the country's cost-recovery water tariffs, and to articulate clear growth and poverty reduction prospects. Moreover, · policies on sanitation service tariffs. preliminary estimates show that effective implemen- To overcome current sector fragmentation, key tation of the infrastructure reforms identified in the steps include: operationalizing and strengthening present study could increase consumer surplus by the Inter-Agency Oversight Committee for water more than 3% of GDP per year over the next few sector reform; implementing Executive Order 279 years (appendix 5). These estimates are likely to be on Local Water Utilities Administration reform very conservative as they do not measure indirect or and water utility financing; and enhancing the spillover benefits that could be realized, for example, capacity of the National Water Resources Board by reducing the estimated 4.6% of GDP lost through · in economic regulation. congestion in Metro Manila alone or the 1.4% of GDP A nationwide program for public utility reform lost because of water pollution. and performance enhancement should be Progress in the various areas listed above would carried out. Requiring formal corporatization go a long way toward rebuilding citizens' confidence of all public utilities, establishing appropriate in public institutions and establishing a virtuous governance structure and corporate accounting circle of enhanced service delivery performance, systems, and benchmarking all public utilities greater revenue collection by the public sector, and will help instill management discipline. Private increased investments. WorldBankInfra.indb 26 12/6/2005 8:40:14 AM Executive Summary Meeting Infrastructure Challenges xxvii WorldBankInfra.indb 27 12/6/2005 8:40:14 AM Joel Nito/Agence France-Presse WorldBankInfra.indb 28 12/6/2005 8:40:16 AM Chapter 1 Infrastructure in the Philippines Introduction actions. The overall road map and priority actions I are presented in chapter 5, followed by chapters 6­9, nfrastructure is an economy's backbone. Power which provide sector-specific assessments of and supply, water and sanitation, transport networks, recommendations for power, water supply and and telecommunications are all important sanitation, roads, and telecommunications. Due to elements in a country's quest for improving the lack of time for in-depth studies, the report does not quality of life of its citizens and increasing growth, cover some other important infrastructure sectors, hence contributing to poverty reduction. This is such as ports, airports, railways, and solid waste. particularly relevant for the Philippines, where 40% of the population are still estimated to live on less than $2 a day and growth rates are among the lowest Infrastructure and living standards in the East Asia region. Even though the country has made impressive strides over the last three decades or Providing safe, reliable, and cost-effective infra- so in improving infrastructure provision, it continues structure services is an important contributor to to lag behind its competitors. raising living standards, thereby improving quality The first part of the report (chapters 1­4) identifies of life. This section benchmarks the Philippines' and analyzes cross-sectoral issues and related trends performance in terms of access to basic infrastructure that link the Philippines' infrastructure provision to services against other countries, and describes the its broader development agenda. It begins by assessing linkages between, on the one hand, infrastructure the importance of infrastructure for the Philippines' provision and, on the other, living standards; overall growth and development goals. Chapter 1 asks regional development; and education, health, and the question: What role does infrastructure play in the environment. improving living standards and in enhancing growth in the Philippines? It then proceeds to identify broad Infrastructure access and service delivery trends--rapid urbanization and population growth-- As figure 1.1 shows, in terms of access to basic that affect current and future infrastructure needs in services, the Philippines performs quite well the country, and asks the question: How can these compared with other countries at similar devel- needs be met? It concludes with identifying three opment levels. A relatively high proportion of the cross-sectoral issues. population has access to basic services: about 80% Chapters 2, 3, and 4 delve into the details of to power, 83% to safe drinking water, and 86% to these three cross-sectoral issues--improving the adequate sanitation. overall business environment; enhancing infra- However, it is possible that official access data structure planning, coordination, and financing; may be overstated. For example, in the water sector, and maximizing the benefits of private sector independent surveys find much lower access levels participation--that affect infrastructure provision to formal services than official statistics, with only in the Philippines. They also present specific recom- less than half the population and only about 20% of mendations for immediate and future government the rural population having access to piped water WorldBankInfra.indb 1 12/6/2005 8:40:16 AM Philippines: Meeting Infrastructure Challenges Figure 1.1 Access to and quality of basic infrastructure services, selected countries Electrification rates, 2000 Quality of electric supply, 2003 100 CHN MYS KOR AUS 7 SGP tion SGP 80MNG THA 6 MYS KOR AUS PHL VNM 5 THA popula 60 LKA CHN oft IDN 4 IDN 40 caleS PHL encerP IND 3VNM LKA 20 IND 2 0 1 0 5,000 10,000 15,000 20,000 25,000 30,000 0 5,000 10,000 15,000 20,000 25,000 30,000 GDP per capita, PPP (US$) GDP per capita, PPP (US$) Sources: International Energy Agency; Philippines National Source: World Economic Forum. Global Competitiveness Report 2003-2004. Electrification Administration; estimates for Korea and Australia. Telephone mainlines, 2003 Mobile subscribers, 2003 100 60 SGP KOR AUS 80 50 KOR AUS SGP 60 people 40 people MNG MYS 100 30 VNM 100 40 THA erP 20 LKA CHN VNM PHL IDN MYS erP 20 MNG CHN 10 IND THA IDN PHL LKA IND 0 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 GDP per capita, PPP (US$) GDP per capita, PPP (US$) Source: International Telecommunication Union (www.itu.int). Source: International Telecommunication Union (www.itu.int). Access to improved sanitation, 2002 Access to improved water, 2002 100 THA SGP AUS 100 SGP AUS LKA IND PHL KOR THA 80 80 IDN tion PHL tion CHN LKA 60 MNG 60 MNG VNM popula IDN popula oft 40 CHN VNM oft 40 encerP IND 20 encerP 20 0 0 0 5,000 10,000 15,000 20,000 25,000 30,000 0 5,000 10,000 15,000 20,000 25,000 30,000 GDP per capita, PPP (US$) GDP per capita, PPP (US$) Source: World Development Indicators 2004. Source: World Development Indicators 2004. Total road network, 2000 Paved roads per land area, 2002 25 5 SGP 20 MNG 4 people 15 mk 3 10 2 VNM m/sqk m/1,000k 5 IND PHLTHA 1 MYS IDN THA KOR KOR PHL MYS 00 SGP 0 5,000 10,000 15,000 20,000 25,000 30,000 0 5,000 10,000 15,000 20,000 25,000 30,000 GDP per capita, PPP (US$) GDP per capita, PPP (US$) Note: As of 2002 except for Vietnam, Malaysia (1999), and Korea (2001). Note: As of 2002 except for Malaysia (1999) and Korea (2001). Source: World Development Indicators 2004. Source: World Development Indicators 2004. AUS = Australia; CHN = China; GDP = gross domestic product; IDN = Indonesia; IND = India; KOR = Korea, Rep. of; LKA = Sri Lanka; MNG = Mongolia; MYS = Malaysia; PHL = Philippines; PPP = purchasing power parity; SGP = Singapore; THA = Thailand; VNM = Vietnam. WorldBankInfra.indb 2 12/6/2005 8:40:17 AM Chapter 1 Infrastructure in the Philippines supply and household connections.1 Recent household service levels vary widely by income. Less than 10% of surveys conducted by the government indicate that the poorest income quintile have access to adequate access to sanitary toilet facilities increased by 0.3% infrastructure services. This implies that the poor to 86.1% in 2002 from 85.8% in 1999.2 Yet other are receiving little or no service, and are therefore estimates show a declining trend--to 74.2% in 2000 likely to be benefiting less than middle- and upper- from 74.9% in 1991.3 For sewerage, it is estimated income groups from national government programs that only about 4% of the population nationwide had and subsidies. access as of 2000 and about 3% (mostly rural) have acceptable on-site treatment and disposal facilities.4 Intangible impact of infrastructure Moreover, access to sewerage networks outside Metro Over and above the direct effects on living standards, Manila is practically nonexistent with the sewerage infrastructure can positively affect the quality of life systems in Baguio, Vigan, and Zamboanga cities through indirect means. This is readily apparent when serving less than 3% of their respective service area one perceives that, at the household level, the demand populations.5 In the road sector, the underreporting of for infrastructure is also a derived demand, i.e. a road accidents varies according to the severity of the demand for inputs for other goods and outputs such injury. A study by Sigua (2004) suggests that fatalities as health, education, security, and convenience--all are 5.5 times the reported figures, and serious and of which lead to increasing living standards. Box 1.1 minor injuries are respectively over 50 and 100 times demonstrates the negative impact that unsatisfactory the reported figures.6 infrastructure provision can have on the environment, Additionally, official access data mask the and the enormous health and economic costs in the underlying poor quality of coverage, indicated Philippines. Box 1.2 illustrates the complementarities by interrupted supply, significant water pressure that exist between roads, lighting, and educational fluctuations, and reported difficulties in abiding opportunities in rural Philippines. Both examples in by drinking-water quality standards. Waterborne this box underscore the derived-demand aspect of diseases are among the top 10 causes of mortality infrastructure on education. and morbidity in many towns with systems managed by local government units (LGUs).7 Matters are worse in sanitation and solid waste where high official access The growth, poverty reduction, and data obscure the fact that effluents from ubiquitous infrastructure nexus septic tanks commonly drain into uncovered drainage systems, leaving the majority of the population across The discussion in the preceding section highlighted the country exposed to raw sewage. the importance of infrastructure for improving living In the road sector, of the 11,000 kilometers of standards. This section assesses the importance of paved national roads for which reliable data on growth for poverty reduction in the Philippines, quality exist, less than 50% of the total length is considered to be in good condition.8 The poor road Figure 1.2 surface translates into higher vehicle operating costs Access to basic infrastructure, 1998 per kilometer. On average these have doubled since 100 1999, while the consumer price index has increased by only 20%.9 80 tion Although the power sector has improved over the 60 past few years, the reliability of the National Trans- popula mission Corporation system is well below interna- oft 40 tional standards. Both the frequency and duration encerP 20 of interruptions are significantly greater than its 0 counterparts in, for example, Thailand. Unserved Poorest Second Middle Fourth Richest energy increased by 50% (year on year) in 2003 in Quintile the Visayas, underlining the increasing difficulties of Electricity Piped drinking water providing reliable supply in that region. Telephone Own flush toilet Not only is access to infrastructure services Source: Davidson Gwatkin, Shea Rustein, Kiersten Johnson, Rohini Pande, and Adam Wagstaff. 2000. "Socio-economic Differences in inadequate in the Philippines, but the poor bear the Health, Nutrition, and Population in the Philippines." World Bank, brunt of deficient infrastructure. As figure 1.2 shows, Washington, D.C. WorldBankInfra.indb 3 12/6/2005 8:40:17 AM Philippines: Meeting Infrastructure Challenges Box 1.1 Environmental and health impacts of inadequate infrastructure I nadequate infrastructure, losses due to water pollution alone Unpaved roads and pavements, especially as a result of rapid amount to $1.3 billion a year. widespread burning of garbage, urbanization as in the case of the Only a handful of households are and vehicular pollution from diesel- Philippines, adversely affects the connected to a sewerage system, engine vehicles, such as jeepneys, quality of the environment, leading and sanitation-related health out- trucks, and buses, have led to an to deteriorating living conditions breaks and deaths are reported to alarming increase in particulate and an overall decline in productive be on the rise. Sewage discharged matter emissions in Metro Manila. capacity. directly into the sea degrades the Annual health costs in the four Approximately 31% of illnesses water quality of coastal waters, major urban areas of Metro Manila, monitored in 1996­2000 can be which in turn causes a decline Cebu, Davao, and Baguio are now attributed to waterborne sources. in tourism--a strong revenue estimated to be over $400 million Municipal and commercial fish generator for the Philippines. For a year. yields are also reported to have instance, in 1997, Boracay island declined by 30% and 5% due to experienced a 60% decline in occu- Sources: World Bank. 2002 and 2003. sedimentation and silt pollution, pancy from the previous year due Philippines Environment Monitor 2002 respectively. Overall, economic to reported high levels of coliform. and 2003. Manila. Figure 1.3 and the role that infrastructure has in GDP growth rate, 1970­2003 the process. 10 As figures 1.3 and 1.4 show, the Phil- 8 ippines is one of the slowest-growing 6 economies in the region. From 1985 to 4 2003, per capita gross domestic product t encerP 2 (GDP) increased only by about 0.7% per 0 year, well below the 3.7% average of neigh- -2 boring countries (Indonesia, Malaysia, -4 -6 Myanmar, Thailand, and Vietnam). -8 Indeed, it was in the 1970s that the 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 economy last experienced a sustained Year period of rapid growth. As tables 1.1, 1.2, Source: National Statistical Coordination Board. and 1.3 show further, when compared with its competitors and neighbors, the country remains at the bottom of the list Figure 1.4 of overall competitiveness rankings and GDP per capita growth, selected countries, 1985­2003 various business environment indicators. 15 The consistently poor rankings of 10 the Philippines are a cause for concern 5 for growth, trade, and competitiveness. t 0 But how important is growth for poverty encerP -5 reduction in the Philippines, and in that -10 context, what role does infrastructure play? -15 -20 To what extent does growth 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year reduce poverty? Indonesia Malaysia Philippines While it is unlikely that there will ever Thailand Vietnam Myanmar be a definitive piece of work establishing whether economic growth is sufficient Source: World Development Indicators 2004. for poverty reduction, there is a qualified WorldBankInfra.indb 4 12/6/2005 8:40:18 AM Chapter 1 Infrastructure in the Philippines Box 1.2 Roads, lighting, schooling, and the poor I nfrastructure, such as roads, significant. A 1% increase in road The major conclusion of the facilitates access to markets, to access combined with schooling study was that the benefits of off-farm employment, and to social is directly associated with a 0.11% electricity flow from a variety of services such as education. Using increase in income of the poor. sources, and the total benefit provincial panel data (from five Another quantitative study of providing electricity to a years in the 1980s and 1990s, and measured the benefits of rural typical, nonelectrified Philippine from 72 provinces), estimates for electrification in the Philippines household ranges from $81 to the effect of roads on the incomes across a wide range of activities, $150 a month. of the poorest quintile of the popu- including increasing literacy, lation reveal that provision of roads, reducing time spent performing Sources: Arsenio Balisacan and Ernesto complemented with human capital household chores, increasing Pernia. 2002. "Probing Beneath Cross- such as schooling, has a favorable entertainment possibilities, National Averages: Poverty, Inequality effect on the well-being of the raising business productivity, and and Growth in the Philippines." ERD poor. By itself, schooling did not improving health. The study was Working Paper Series No. 7, Asian Devel- seem to have a direct impact on based on survey data from four opment Bank, Manila; Energy Sector the welfare of the poor. However, predominantly rural provinces in Management Assistance Programme. 2002. Rural Electrification and Devel- when schooling was interacted Luzon. The table summarizes the opment in the Philippines: Measuring with the roads variable, the coef- benefits of a typical household in the Social and Economic Benefits. May. ficient becomes positive and rural Philippines. UNDP/World Bank, Washington, D.C. Benefit category Benefit value ($) Unit (per month) Less expensive and expanded use of lighting 36.75 Household Less expensive and expanded use of radio and television 19.60 Household Improved returns on education and wage income 37.07 Wage earner Time savings for household chores 24.50 Household Improved productivity of home business 34.00a 75.00b Business a. Current business. b. New business. Source: Energy Sector Management Assistance Programme. 2002. Rural Electrification and Development in the Philippines: Measuring the Social and Economic Benefits. May. UNDP/World Bank, Washington, D.C. emerging consensus that growth in average incomes a specific country would, naturally, depend upon a is good for raising the incomes of the poor. The number of country-specific factors such as its initial exact magnitude of poverty elasticity of growth for conditions, quality of institutions and policies, and the initial share of the poor in Table 1.1 national income. Economist Intelligence Unit competitiveness risk scores Conceptually, the channels Country 1998 1999 2000 2001 2002 2003a 2004b through which economic growth Singapore 10 12 9 9 9 11 17 can be linked to poverty include Korea, Rep. of 28 28 27 26 23 42 31 (a) increases in average incomes Malaysia 27 27 30 37 26 45 37 Thailand 37 39 40 38 35 53 40 (and corresponding increases in India 44 42 37 36 37 51 42 spending on non-income poverty- China 42 49 44 43 38 56 50 reducing goods such as nutrition Vietnam 43 50 53 62 60 49 53 intake and education); (b) increased Philippines 45 44 46 53 61 66 61 employment; and (c) greater public Indonesia 51 53 47 55 64 11 17 revenues (which allow for general Philippines rank (out of 8) 7 7 7 7 7 4 7 increases in public goods and a. September 2003. b. March 2004. services, as well as for more targeted Source: International Institute for Management and Development (IMD) World Competitiveness programs for the poor). Yearbook 2003, Economist Intelligence Unit (EIU) Risk Wire (http://riskwire.eiu.com). Empirically in the Philippines, WorldBankInfra.indb 5 12/6/2005 8:40:18 AM Philippines: Meeting Infrastructure Challenges Table 1.2 Business environment indicators Helpfulness of Helpfulness of Efficiency of local Govt. takes into Corruption as Frequency of Country local govt. in doing local govt. in govt. in delivering account voice of constraint to irregular additional business in 2000a doing business in operation and growth payments to get 1997a servicesb businessc of businessd things donee Singapore 2.0 2.2 1.8 3.2 1.3 5.8 Cambodia 2.2 2.2 -- 4.2 -- 3.5 Malaysia 2.2 2.4 2.9 4.2 1.9 4.6 Thailand 2.3 2.5 3.3 3.8 3.5 2.8 China 2.6 2.8 2.9 3.8 2.0 -- Philippines 2.6 2.7 3.4 3.6 3.1 3.6 Indonesia 3.0 3.2 3.8 4.5 2.6 2.8 Philippines rank 5 out of 7 (equal) 5 out of 7 5 out of 6 2 out of 7 5 out of 6 3 out of 6 -- = not available. a. 1 very helpful, 6 very unhelpful. b. 1 very efficient, 6 very inefficient. c. 1 always, 6 never. d. 1 no obstacle, 4 major obstacle. e. 1 always, 6 never. Source: World Bank. "World Business Environment Survey 2000." Washington, D.C. growth is indeed found to be the major proximate countries; it has the lowest capital stock per worker determinant of poverty incidence. The growth among market economies in Southeast Asia; and elasticity of poverty in 1985­2000 was just above 0.5, private consumption (relative to investment or implying that while income growth does not translate government spending) constitutes a high 80% of into a one-for-one increase in the welfare of the poor, current growth. Given the linkages between growth the poor still benefit to a degree from economic and poverty reduction in the Philippines, the growth.10 In 1995­1997, the growth elasticity was importance of promoting growth cannot therefore high, as growth in services and construction facil- be overstated. But to what extent does infrastructure itated the transfer of labor to more advanced sectors. contribute to growth? Between 1997 and 2000, poverty increased due to lower growth, especially in labor-absorbing activities How important is infrastructure for growth? such as construction.11 Intuitively, good infrastructure improves a country's Despite the poverty-reduction impact of growth growthprospectsthroughstrengtheningitsinvestment in the Philippines, per capita GDP growth has rarely climate. Safe, reliable, and cost-effective infrastructure been above 3% (with only 2% average per capita GDP can have a significant effect on industrial productivity growth rates over the last few years). Moreover, there and costs, and thus on investment, employment, are concerns about the future growth path given that and export earnings--all growth-enhancing factors. the Philippines has one of the lowest investment-to- Box 1.3 illustrates the importance of the role that GDP ratios (at about 20%) among Southeast Asian logistics and transport infrastructure can play in a country's development. Table 1.3 There is also a close correlation between GDP and Overall competitiveness rankings, 2003 total infrastructure spending in the Philippines. In Growth Business 1985­2002, the numerical correlation stood at 85%. Country Competitiveness Index Competitiveness Figure 1.5 depicts the trends in growth rates, infra- Ranking Ranking structure spending, and the infrastructure capital (out of 102 countries) (out of 102 countries) stock as proxied by gross fixed capital formation in Singapore 6 8 the economy.12 Malaysia 29 26 Correlating infrastructure expenditures with Thailand 32 31 China 44 46 GDP, however, is only a proxy for the infrastructure- India 56 37 growth linkage since correlation does not neces- Philippines 66 64 sarily imply causation. Appendix 1 presents the Indonesia 72 60 results from a series of preliminary analyses of the Source: World Economic Forum. Global Competitiveness Report Philippine data that test whether infrastructure 2003­2004 (http://weforum.org). actually causes growth. WorldBankInfra.indb 6 12/6/2005 8:40:19 AM Chapter 1 Infrastructure in the Philippines Box 1.3 Role of transport and logistics in trade E mpirical studies indicate that wedge between the price paid Mechanisms currently available a 1% rise in the trade-to-GDP by consumers and that received for disseminating market infor- ratio can increase income per by producers, as well as reduce mation are constrained by the poor person by at least 0.5%. Better inventory-holding costs. A World quality of telecommunications access to coasts alone can raise Bank study in 2002 focusing on services in Mindanao. Transport incomes by 20%. The Philippines export of agricultural commodities services are often limited to has a natural geographic advantage from Mindanao found several carabao-drawn carts and jeepneys, of port-cities, a key for export-ori- major logistics bottlenecks: and, moreover, cause damage to ented growth. However, inadequate commodities in transit and during roads, ports, and logistics are · Limited market information transfer to larger vehicles for undermining the country's growth available to farmers and traders; delivery to market. prospects. · Limited transport services in Finally, the monopoly power The cost of land access to ports many parts of Bukidnon and granted to the Philippine Ports accounts for a high proportion other farmland areas; Authority limits entry of new of the overall cost of getting · Inefficient interisland shipping; shipping lines to interisland products to market. Reducing and services. these costs hinges to a large · Cumbersome government regula- extent on improving logistics. tions and public monopolies that Source: John Arnold. 2002. "Philippines Improved transport infrastructure increase the cost of interisland Logistics Study." World Bank, Wash- and logistics can narrow the transport. ington, D.C. A number of other surveys and studies for the The Philippines Development Policy Update13 Philippines have also consistently pointed out that recognizes the need for removing infrastructure infrastructure deficiency is among the top imped- bottlenecks in roads, interisland transport, water and iments to the business environment and investment sanitation, and power, in order to strengthen the overall climate. Findings from a recent investment climate environment for investment in the country. The report assessment of 716 private firms in the Philippines, recognizes that the social impact of poor infrastructure conducted by the World Bank in conjunction with contributes to persistent unemployment and deterio- the Asian Development Bank, indicate that infra- ration in access to basic infrastructure services. structure, in particular power, is a major element in The above findings, including preliminary the cost of doing business (figure 1.6) analysis of sector-specific data, attest to the close linkages between (a) infrastructure and growth, and Figure 1.5 (b) growth and poverty reduction. Another recent Growth and infrastructure trends study14 provides an empirical assessment of infra- 30 structure development on economic growth and 25 income distribution for over 100 countries spanning 20 the years 1960­2000. The two robust results of this t 15 encerP 10 study are that (a) infrastructure assets positively affect 5 growth, and (b) income inequality declines with 0 higher infrastructure quality and quantity. Under- -5 performance of the Philippines' infrastructure sectors -10 is therefore a concern with real implications for the 198519861987198819891990199119921993199419951996199719981999200020012002 Year country's growth and poverty reduction prospects. Gross fixed capital formation (% of GDP) Infrastructure spending (% of GDP) Spatial effects of infrastructure GDP growth rate Lack of access to adequate infrastructure services is Note: Infrastructure spending reflects capital outlays only. also correlated with uneven development between Sources of basic data: National Statistical Coordination Board; Department of Budget and Management; Department of Finance; regions in the Philippines. Existing empirical evidence Commission on Audit; Maynilad Water Services, Inc.; Manila Water indicates that wide income disparities among regions Corporation, Inc.; Optel Ltd.; and World Bank. can be attributed, in part, to regional differences in WorldBankInfra.indb 7 12/6/2005 8:40:19 AM Philippines: Meeting Infrastructure Challenges Figure 1.6 Population and urbanization Share of firms evaluating constraints as major or very severe in the Philippines At 2.36% a year between 1995 and 2000, the Philippines had Macroeconomic instability Corruption one of the highest population Electricity growth rates in the world, and Tax rates the highest in East Asia. As in Regulatory policy uncertainty most other East Asian countries, Crime, theft, and disorder Tax administration rural population growth, at less Cost of financing than 1%, is expected to slow Labor regulations and peak in 2010, with the Anticompetitive practices remaining incremental growth Customs and trade regulations occurring in urban areas.16 Transport Access to land Indeed, the total and urban Access to financing population average annual rate Licensing and permits of change is expected to remain Workers' skills and education positive. Figure 1.7 shows the Telecommunications historical and projected average 0 5 10 15 20 25 30 35 40 annual rate of change for the Percent population--total, urban, and Source: Asian Development Bank. 2003. "Improving the Investment Climate in the Philippines." Manila. rural--between 1950 and 2030. It is clear that the Philippines the level of infrastructure development.15 Appendix 2 is experiencing an emerging transformation of rural summarizes the linkages between infrastructure settlements into cities, with the bulk of the population and regional development. These linkages are most expected to reside in urban areas. More than half of readily seen in the case of Mindanao. Though that the total population is already residing in urban areas region holds a comparative advantage in agricultural and, as figure 1.8 shows, this share is expected to production, its development is severely hampered by reach 75% by 2030. For the Philippines, this implies limited access to efficient product markets and poor a rank of 17 out of the 28 countries that will account infrastructure. Box 1.4 describes the relationship for 75% of the world urban population. As early as between infrastructure and insecurity there. 2015, Metro Manila, with a current population of 10 million inhabitants and already classified as a megacity (defined as an urban area with 10 million Current and future infrastructure needs: inhabitants or more) is expected to rank 15 out of What is driving them? 21 megacities. At current urban growth rates of about 3%, It is apparent from the preceding discussion that over 1 million people are expected to be added to infrastructure has a critical role to play in the Phil- ippines' development. Current infrastructure needs Figure 1.7 are already high and future requirements are growing. Average annual rate of change of total, urban, Two broad interrelated trends are determining these and rural population, 1950­2030 needs and requirements: a growing population and 6.0 rapid urbanization. Put together, these trends imply a 5.0 high current and projected future demand for infra- 4.0 structure services in urban areas. Moreover, not only t 3.0 will infrastructure be required to meet the needs encerP 2.0 of growing numbers of people in urban areas, but 1.0 its adequate provision will also be critical for posi- 0.0 tioning urban areas as engines of economic growth, -1.0 and hence poverty reduction. This section analyzes 1950­1955 1965­1970 1980­1985 1995­2000 2010­2015 2025­2030 Period the population and urbanization trends, and assesses Urban Total population Rural their broad impact on infrastructure provision in the Philippines. Source: UN Population Division. World Urbanization Prospects: 2002 Revision (http://www.un.org/esa/population/unpop.htm). WorldBankInfra.indb 8 12/6/2005 8:40:19 AM Chapter 1 Infrastructure in the Philippines Box 1.4 Infrastructure and the Mindanao conflict C enturies of conflict in Mindanao As a consequence of persistent ARMM access rates to basic infra- are heavily rooted in its dis- armed struggles, instability stifled structure are the lowest among the tinct social, political, and religious economic activity and discouraged provinces in the table. In fact, the structures. Starting as an ethnic investment. access ranking for ARMM has con- struggle over land ownership in Destruction of vital infrastructure tinued to deteriorate over the years: the early years of the Spanish rule, and disruption of delivery of basic whereas in 1970 ARMM's provinces the Mindanao conflict later evolved services exacted its toll on the ranked somewhere in the middle, into a struggle to be an inde- welfare of the people of Mindanao. by 1990 and 2000 they ranked at pendent entity that stemmed from Since 1970, indicators of access to the very bottom. the grievances and aspirations of piped water and electricity have ethnic groups unified by an Islamic attested to the poor quality of life in Sources: Amina Rasul. 2003. "Poverty and Armed Conflict in Mindanao" in ideology. The conflict escalated Mindanao's provinces. More recent Amina Rasul, ed. The Road to Peace and during the martial law years (1972­ data on the Autonomous Region in Reconciliation: Muslim Perspective on the 1981) when an armed solution was Muslim Mindanao (ARMM), which Mindanao Conflict. Makati: Asian Institute imposed on the "Moro problem." was created in 1990, show that of Management; and World Bank staff. Share of households with access to piped water and electricity, selected Mindanao provinces, 1970­2000 Access to piped water Access to electricity 1970a 1990a 2000b 1970a 1990a 2000b Rank in Rank in Rank in Rank in Rank in Rank in % of HH 67 pro- % of HH 76 pro- % of HH 79 pro- % of HH 67 pro- % of HH 76 pro- % of HH 79 pro- vinces vinces vinces vinces vinces vinces Autonomous Region in Muslim Mindanao Lanao del Sur 19.6 28 11.0 54 22.1 77 3.7 58 34.9 44 39.5 72 Sulu 15.5 37 11.0 53 30.4 76 6.7 38 9.4 74 19.9 78 Maguindanao 12.0 52 40.8 74 25.8 60 46.2 68 Tawi-Tawi 4.1 76 18.1 78 10.0 73 35.8 74 Neighboring provinces Basilan 10.7 55 47.5 72 19.4 68 41.0 70 Lanao del Norte 19.7 27 19.3 22 82.9 35 14.4 20 48.0 26 72.1 27 Zamboanga del Sur 19.0 31 17.4 28 66.7 62 10.0 28 40.2 38 54.5 56 Zamboanga del Norte 7.9 49 6.1 71 55.5 67 3.9 55 22.8 65 52.6 60 North Cotabato 6.0 54 8.6 59 77.5 45 6.4 41 26.4 57 58.5 50 South Cotabato 3.0 60 8.3 62 85.0 30 9.3 29 45.4 29 73.9 25 Sultan Kudarat 5.2 74 84.1 34 34.6 46 61.6 45 Saranggani 66.9 61 HH = households. Sources: a. Amina Rasul. 2003. "Poverty and Armed Conflict in Mindanao" in Amina Rasul, ed. The Road to Peace and Reconciliation: Muslim Perspective on the Mindanao Conflict. Makati: Asian Institute of Management. b. 2000 data from the National Statistics Office. urban areas annually. As noted in the 2003 World Given the capital-intensive nature of urban infra- Bank study carried out for the National Economic structure, investment requirements, though not as and Development Authority (NEDA) on national sensitive to population levels, are highly sensitive to urban development,17 taking the average 1960­1995 population growth rates in urban areas. In the Phil- urban growth rate of 5.1% (one of the highest in the ippines, unusually high urban growth rates are already world), an additional 16 million people would have putting a severe strain on infrastructure provision in to be accommodated in urban areas between 2000 urban areas, and pose a significant competitive threat and 2010. In simple terms, this is akin to more than vis-à-vis competitor urban systems in neighboring adding, every year, the current population of Metro countries. Hyper-urbanization can therefore only Cebu (1.4 million), the second largest metropolitan be expected to raise the demand for infrastructure area of the country, into the urban system. investments to unprecedented levels. WorldBankInfra.indb 9 12/6/2005 8:40:19 AM 10 Philippines: Meeting Infrastructure Challenges In addition to creating an absolute Figure 1.8 demand for infrastructure, because of the Urban and rural population, 1950­2030 difference in economic activities between 100, 000 80 urban and rural areas, rapid urbanization 90,000 in the Philippines is also changing the 80,000 60 70,000 nature of the infrastructure that will be 60,000 t needed in order to meet the demand. 50,000 40 The transformation of rural settlements housandsT40,000 encerP into cities implies denser settlements and 30,000 20 20,000 shifting economic activities that have 10,000 greater infrastructure requirements. For 0 0 example, sanitation needs to be better 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 provided; power and water supplies Year need to be more reliable for industry and Urban (left axis) Share of urban population residing in Metro Manila services uses; transport modes need to Rural (left axis) Share of population residing in urban areas offer more variety and choice; and the Source: UN Population Division. World Urbanization Prospects: 2002 Revision (http://www. environmental implications of infra- un.org/esa/population/unpop.htm). structure, such as solid waste disposal and storm water drainage, require greater attention. riorating state of infrastructure and its impact on Even though most of the future growth will be the quality of life. Demand is growing but resources in urban areas, as box 1.5 illustrates, the Philippines are limited. Overall public finances are very weak. cannot ignore its rural infrastructure needs. As figure 1.9 shows, the national government deficit--total revenues less expenditures18--has been worsening almost consistently since 1997; in 2002, it Introducing the key stood at a high 5.2% of GDP. This is relatively high cross-sectoral issues compared with peer countries such as Indonesia (1.7%), Thailand (1.4%), and Vietnam (3.5%). Only Is the Philippines heading toward an infrastructure two countries in the region have posted higher crisis? Various rankings underscore the importance deficits: Malaysia (5.6%) and Cambodia (6.5%). If the of infrastructure to the economy's investment government could possibly strengthen its financial climate, and sector-specific data attest to the dete- situation by increasing revenues and reducing expen- Box 1.5 To what extent do rural areas drive infrastructure needs? W hile the primary driver of tunities in urban areas--explicitly areas (enhanced through better future infrastructure invest- attempting to slow it is not good telecommunications and migration) ments is clearly high urban popu- policy. However, infrastructure is likely to result in higher returns lation growth, it will still take about investments in rural areas are still to physical infrastructure such 50 years before the rural to urban required for two reasons. First, as roads, wholesale markets, and transition is completed. The Philip- it is important that the Philip- truck terminals. Urban dwellers can pines cannot therefore afford to pines be able to create an envi- benefit from better access to rurally ignore infrastructure needs in rural ronment in which all of its citizens produced commodities and labor, areas, especially given that just can enjoy basic living standards. and rural dwellers can benefit from over one-third of the total popu- Second, investing in infrastructure the technology, market knowledge, lation and almost one-half of the in rural areas would have overall and capital in urban areas. rural population live below the positive returns to both urban poverty line. and rural dwellers through better Source: Douglas Webster, Arthur Corpuz, Because rural to urban migration rural­urban ties. For instance, the and Christopher Pablo. 2003. "Towards is essentially a positive behavior-- increasing use of mobile phones a National Urban Development Framework for the Philippines: Strategic people responding rationally to in rural areas, in conjunction with Considerations." Report prepared for the information and economic signals, the development of business net- National Economic and Development such as higher wages and oppor- works between rural and urban Authority. September. WorldBankInfra.indb 10 12/6/2005 8:40:20 AM Chapter 1 Infrastructure in the Philippines 11 Figure 1.9 faring the worst on efficiency criteria. In roads, funds National government fiscal position as a share of GDP, have reportedly been used to finance labor-intensive 1985­2003 employment-generation programs, which can cost as 2 much as five times competitively procured contracts. 1 At the local level, the use of discretionarycongressional 0 funds--also called "pork barrel" funds--allocated by t -1 encerP -2 congressmen and senators is a principal contributor -3 to inefficiency. These funds--amounting to almost -4 P18 billion in 2001 or 0.48% of GDP--are spent with -5 little oversight, and often on small projects, resulting -6 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 in fragmented and isolated projects and loss of scale Year economies. Source: Department of Finance. What are the key common factors--i.e. cross- sectoral factors--that explain the wide-ranging ditures, there might be resources available to meet underperformance of infrastructure sectors in the priority infrastructure needs. However, both revenue Philippines? Three broad cross-sectoral themes mobilization and expenditure management remain would seem to account for this underperformance: weak. And while the weak fiscal position of the (a) an overall poor business environment for infra- Philippines implies fewer aggregate public resources structure; (b) insufficient infrastructure policy available for infrastructure, the causation also runs planning and coordination, and inability to mobilize the other way: huge losses at infrastructure-related adequate infrastructure financing; and (c) failure to government owned and controlled corporations maximize the benefits of private sector participation (GOCCs) are contributing significantly to the fiscal in infrastructure. crisis (box 1.6), with large unaccounted-for and It should be recognized that the cross-sectoral mismanaged contingent liabilities further endan- diagnostics (as discussed in chapters 2, 3, and 4), as gering the fiscal situation. well as the resulting recommendations, while holding As figure 1.5 above shows, in recent years, infra- across all sectors, vary by sector. For example, it is structure expenditures have been at near-historical much easier to attract the private sector to telecoms lows; they are also low compared with other than to water. Likewise, some infrastructure sectors countries. The World Bank estimates that middle- are more susceptible to corruption than others. income countries in East Asia will, on average, Such variations are acknowledged, and are noted need to spend over 5% of GDP on infrastructure to throughout the study. Chapters 6­9 provide sector- meet their needs over the next 10 years.19 While the specific diagnosis. situation will vary by country, the Philippines' most recent current infrastructure expenditures (2.8% of Figure 1.10 GDP in 2002) are well below the 5% benchmark and Infrastructure investment as a share of GDP, are low compared with other countries (figure 1.10).20 selected countries Recently, the government has announced that it 10 intends increasing its annual public infrastructure 8 spending to, at the minimum, P100 billion annually, i.e. to at least 5% of GDP. t 6 While the purported increase in infrastructure encerP Private 4 spendingisanencouragingsign,thegovernmentneeds Public 2 to ensure that expenditures are made judiciously. The record so far indicates that existing resources have 0 not been utilized efficiently. For instance in power, hstan overinvestment in generation, insufficient expansion PhilippinesIndonesiaAlbania Russia CambodiaKazak China of transmission, and lack of investment in distri- Note: No breakdown for China, figures are 1991­2000 average. bution have caused excess generation capacity in the Philippines and Indonesia are 2002 figures, Albania and Russia 2000, Luzon grid but sporadic shortages in the Visayas and and Cambodia 2001. Mindanao grids. In water, nonrevenue water remains Sources: World Bank Private Participation in Infrastructure Database; World Bank Public Expenditure Reports; China Statistical Yearbook high for all service providers, with LGU-run systems (various years). WorldBankInfra.indb 11 12/6/2005 8:40:20 AM 1 Philippines: Meeting Infrastructure Challenges Box 1.6 Infrastructure GOCC deficit/surplus as a share of GDP, The fiscal impact of infrastructure 1985­2003 A s the top right figure liabilities of NPC and other 1.0 shows, almost all GOCCs, the poor perfor- t 0.5 government owned and mance of infrastructure- encerP-0.5 0.0 controlled corporations related GOCCs and the (GOCCs) in the infra- constant need of the -1.0 structure sectors of power, national government to water, and transport have guarantee GOCC debt is -1.5 posted sustained deficits also leading to contingent -2.0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 since 1989. liabilities (bottom right Year As a result of high figure). Transportation Power Infrastructure GOCCs GOCC losses, in particular, Even though Note: 2003 figures as of September. those stemming from the Republic Act 4860 sets Source: Department of Finance. National Power Corpo- a $7.5 million ceiling on ration (NPC), the state- outstanding government National Power Corporation contribution to nonfinancial public sector deficits, 1997­2004 owned generation and guarantees for foreign transmission company, GOCC loans, most of the 50 the Consolidated Nonfi- infrastructure-related 0 nancial Public Sector Debt GOCCs such as LRTA, -50 reached an alarmingly MWSS, National Devel- billionP-100 high level of 103% of GDP opment Company, NEA, -150 in 2003. PNOC, and PNR are -200 As the middle right explicitly exempted from -250 1997 1998 1999 2000 2001 2002 2003 2004 figure shows, the NPC this ceiling. Moreover, cash deficit has gone guarantees on various Non-NPC NPC from almost nothing in types of risks in BOT Source: Chapter 6. 1999 to about P73 billion projects--for example, Contingent liabilities, July 2002 (P billion) ($1.57 billion or 1.9% of revenue guarantees for GDP) in 2003, with pro- the Casecnan Irrigation- Domestic 12 (2%) jected losses of $2.2 billion Power project and the or P121 billion (2.5% of Metro Rail Transit--are Other foreign Infrastructure- related GDP) in 2004. further aggravating the 206 (41%) 288 (57%) Beyond the direct situation. Note: Infrastructure-related GOCCs are as follows: NPC = National Power Corporation; PNOC = Philippine National Oil Company; NEA = National Electrification Administration; LRTA = Light Rail Transit Authority; PNR = Philippine National Railways; PPA = Philippine Ports Authority; LWUA = Local Water Utilities Administration; MWSS = Metropolitan Waterworks and Sewerage System; NHA = National Housing Authority. Source: Bureau of Treasury, as cited in the Congressional Planning and Budget Office "An Analysis of the President's Budget 2003." Endnotes 1 The Filipino Report Card on Pro-Poor Services reports that only of a government interagency committee composed of oversight 63% of the population had access to any of the formal levels of and water sector agencies under the leadership of the National service in 2000, with the rest relying on self-provision (World Water Resources Board. Bank, Manila, 2001). 4 World Bank. 2003. Philippines Environment Monitor 2003. 2 National Statistics Office. Annual Poverty Indicators Survey, Manila. various years. 5 Water Supply and Sanitation and Performance Enhancement 3 Water Supply and Sanitation Thematic Paper for the National Project (WPEP). 2003. "Urban Sewerage and Sanitation: Lessons Water Forum, prepared in December 2003, under the supervision Learned from Case Studies in the Philippines." June. WorldBankInfra.indb 12 12/6/2005 8:40:20 AM Chapter 1 Infrastructure in the Philippines 1 6 Ricardo G. Sigua. "Scale, Characteristics and Costs of Road Makati: Philippine Institute for Development Studies; and Accidents in the Philippines." Presentation in the 12th Annual L.Q. Basilio and D.M. Gundaya. 1997. "The Impact of Collective Transport Science Society of the Philippines Conference, July Public Infrastructure on Regional Income Disparities." Under- 23­24, 2004. University of the Philippines, Diliman. graduate thesis, University of the Philippines. April. 7 Based on socioeconomic reports of the LGUs in more than 100 16 It should be noted that a redefinition of what constitutes urban feasibility studies for towns prepared under the World Bank and rural is also a factor in the urban population growth rates. LGU-UWSP (Urban Water Supply Project). 17 Douglas Webster, Arthur Corpuz, and Christopher Pablo. 2003. 8 As measured by the International Roughness Index (IRI) of 5 or "Towards a National Urban Development Framework for the less. Philippines: Strategic Considerations." Report prepared for the 9 DPWH-Project Management Office Feasibility Study. 2003. National Economic and Development Authority. World Bank, DPWH, Manila. Manila. September. 10 Arsenio Balisacan. 2003. "Poverty and inequality." In Arsenio 18 The financing deficit/surplus is calculated as internal cash genera- Balisacan and Hal Hill. The Philippine Economy: Development, tion (or total receipts minus current expenditures) less capital Policies and Challenges. New York: Oxford University Press. expenditures. 11 World Bank. 2003. Philippine Development Policy Update. 19 The World Bank, in the recently launched East Asia and Pacific September. Manila. Regional Infrastructure Study being carried out in cooperation 12 Gross fixed capital formation includes land improvements with the Japan Bank for International Cooperation and Asian (fences, ditches, drains, and so on); plant, machinery, and equip- Development Bank, estimates that infrastructure investment ment purchases; and the construction of roads, railways, and needs for middle-income countries in the East Asia region over the like, including schools, offices, hospitals, private residential 5 years are about 3.6% of GDP. However, this estimate does not dwellings, and commercial and industrial buildings (World Bank incorporate (a) decisions to invest in infrastructure ahead of Data and Statistics technical notes, http://www.worldbank.org/ demand; (b) decisions to increase access for the poor in line data/working/def7.html). with the Millennium Development Goals or other targets; and 13 World Bank. 2003. Philippine Development Policy Update. (c) ports, airports, bridges, secondary roads, urban transport, or September. Manila gas grids. Accounting for these factors would put infrastructure 14 César Calderón and Luis Servén. 2004. "The Effects of Infra- investment needs closer to about 5% of GDP. structure Development on Growth and Income Distribution." 20 The Philippines' own estimates of annual investment needs in Policy Research Working Paper No. 3400. World Bank, Wash- power are about $1.9 billion over the next 10 years. Annual ington, D.C. investment needs estimates in water and sanitation (currently 15 See Mario B. Lamberte, Rosario G. Manasan, and Gilberto M. averaging P3 billion­4 billion, and almost exclusively for the Llanto. 1993. Decentralization and Prospects for Regional Growth. water sector) are about $0.7 billion. WorldBankInfra.indb 13 12/6/2005 8:40:21 AM Manila North Tollways Corporation WorldBankInfra.indb 14 12/6/2005 8:40:39 AM Chapter 2 The Business Environment for Infrastructure W hile the Philippines' business environment this end has been limited. Tariffs of water districts for infrastructure has important strengths, are designed based on full cost recovery and use of such as an overall supportive framework increasing block rates. However, politicians intervene for private sector participation, it is also seriously in tariff increases, either objecting to or delaying undermined by a number of major impediments. implementation, resulting in water districts defaulting The "four Cs"--inadequate cost recovery, corruption, on their loans and being unable to secure sufficient insufficient competition, and low credibility of funds to serve as equity in order to access loans for regulatory and judicial institutions--are affecting their expansion projects. In sanitation, cost recovery both public and private sector performance. remains minimal. For the two large Manila-based private conces- sionaires--Maynilad Water Services, Inc. (MWSI), Inadequate cost recovery the concessionaire for the west zone, and Manila Water Company, Inc. (MWCI), the concessionaire Most infrastructure sectors suffer from low cost for the east zone--tariffs have steadily increased since recovery. The ability to recover costs and earn privatization, to cover inflation, foreign exchange reasonable rates of return is critical for sustainable fluctuations, and investment costs. Table 2.1 shows infrastructure investment and operation: cost recovery the trend in water tariff levels. However, despite is important if the resources for new investments and maintenance are to Table 2.1 be generated from within the sector. Approved tariff increases in the Metropolitan Waterworks and Sewerage However, in the Philippines, cost System concession areas, average tariff (P per cubic meter) recovery through efficient pricing has MWCI MWSI Inflation, % not been the norm. The main reason Charging period (east zone) (west zone) (average for for poor cost recovery is political inter- year)a vention, with tariffs based on social Pre-1997 8.56 8.56 and political considerations rather 1997­1998 2.32 4.96 9.7 than on commercial ones. 1999 2.61 5.80 6.7 2000 2.76 6.13 4.3 2001 2.95 6.58 6.1 Water and sanitation Provisional implementation, April 2001 3.22 The core constraint for expanding Accelerated EPA, October 2001 4.22 10.79 sustainable investment in the water 2002 4.51 11.39 3.1 and sanitation sector--whether public Foreign currency depreciation 6.75 15.46 or private--is the low level of cost adjustment, 2002 recovery. This is undermining the EPA = extraordinary price adjustment; MWCI = Manila Water Company, Inc.; development of the sector, and despite MWSI = Maynilad Water Services, Inc. repeatedly stated policy objectives of a. Base year is 1994. Source is National Statistics Office data as of March 2004. cost recovery, actual progress toward Source: Metropolitan Waterworks and Sewerage System Regulatory Office. WorldBankInfra.indb 15 12/6/2005 8:40:39 AM 1 Philippines: Meeting Infrastructure Challenges marked increases, current tariff levels do not reflect completed. Until the first half of 2004, rates failed to investments required to assure sufficient bulk supply keep pace with costs, and have steadily fallen in US to the Manila distribution networks, which remain the dollar terms since 1996. Owing to overcontracting by responsibility of the Metropolitan Waterworks and the National Power Corporation (NPC) with inde- Sewerage System (MWSS). This indicates that current pendent power producers in the early 1990s and tariff levels do not yet reflect full cost recovery. At the the slowdown in demand growth that followed the same time, MWSI remains in bankruptcy and rene- Asian financial crisis, NPC has increasingly relied on gotiations as to the restructuring of the concession foreign-denominated borrowings to meet its rising are ongoing. financial commitments, which subsequently led to a For water districts, tariffs are determined by the vicious circle of too much foreign debt. NPC was hard Local Water Utilities Administration (LWUA) to hit by the crisis and its condition continued to worsen achieve recovery of cash expenditures--operation as it has not been allowed to adjust tariffs to reflect and maintenance (O&M) costs and debt service--but the subsequent depreciation of the peso and, most they fail to generate sufficient revenues to accumulate recently, the steep increase in fuel prices to fully cover reserves (for example, through depreciation charges) its foreign exchange exposure with regard to fuel- to fund any expansion and to attract financing at purchase and financial obligations. As a result, NPC commercial terms. As a result, service coverage is has essentially absorbed insufficient pass-through as only 50­60% of water districts' franchise populations. a loss each year. Moreover, smaller water districts fail to achieve even Moreover, automatic rate adjustment mechanisms this level of cost recovery. Political interventions to have been replaced with mechanisms that require avoid or delay tariff increases are not uncommon, Energy Regulatory Commission (ERC) review and and are--together with management failures--often approval of adjustments before they can be passed on at the core of water districts' defaulting on loan to customers. But in practice, the new mechanisms obligations. and associated procedures mean that there will be For LGU-managed systems, tariffs do not recover considerable lags between when the increased costs even O&M costs, as the need for ongoing operational are incurred and when those costs can be recovered subsidies indicates. As a result, these systems remain from customers. dependent on local government subsidies to augment Retail tariffs that have been set below cost for revenues for O&M costs and capital expenditures. years have contributed to NPC's ballooning deficit. Tariff structures for LGU systems vary widely-- The situation will, however, progressively improve as increasing block rates, decreasing block rates, or flat demand increases. In addition, the government took rates--given that many LGU systems provide for no the critical step toward containing the NPC deficit by or only partial metering of household connections. increasing generation tariffs by about P1.4 per kWh LGUs typically charge connection fees, although over June to November 2004, and additional increases they do not often recover full connection costs. For are being considered. These increases will enable NPC lower service levels managed by community-based to cover its operating costs in 2005. organizations under LGU supervision, tariffs are virtually nonexistent in the majority of cases, with Roads local governments and politicians providing for the The setting of toll rates is heavily influenced by costs of replacement and maintenance. noneconomic factors, and adjustment tends to be Theinabilitytoexpandformalwatersupplyservices, delayed. Despite the establishment of the Toll Road largely as a result of low tariff levels, has resulted in Board and a Special Road Fund under the Motor a high cost of water for poor families not connected Vehicle User's Charge Law, cost recovery is low to the to the formal water systems. In Metro Manila, poor extent that even regular road maintenance is being families, dependent on buying water from vendors at compromised. As a consequence, most maintenance around $20 a month for 6 cubic meters, spend as much activities have been limited to routine works and as 20% of their income on water. some urgent repairs of badly deteriorated sections, though at a high cost. The deficiency will therefore Power aggravate an already existing maintenance backlog. With the passage of the Electric Power Industry Maintenance effectiveness, measured in terms of Reform Act (EPIRA) in 2001, tariffs have been expenditures against needs, is only about 33% on unbundled, but full implementation has yet to be national roads. WorldBankInfra.indb 16 12/6/2005 8:40:39 AM Chapter 2 The Business Environment for Infrastructure 1 Ports The Transparency International findings are The Philippine Ports Authority (PPA) sets the port supported by other independent surveys. Research dues that private ports charge for handling non-own by the World Business Environment Survey in cargo and collects 50% of these dues in taxes. Low 20003 ranked the Philippines five out of six among port charges are likely to discourage investment by its peers based on various business environment the private sector in ports. Even when private ports indicators. Corruption is also emerging as among do exist and compete, it is difficult for them to offer the top bottlenecks to doing business, according to high-quality services due to the low tariffs and the a recent investment climate survey conducted by high tax rate. the World Bank and Asian Development Bank (see Figure 2.1 is an indication of low overall cost figure 1.6 in chapter 1). It is clear from these surveys recovery in infrastructure sectors in the Philippines. that corruption is a pressing economic development Cost-recovery percentages for three cities in the issue in the Philippines. Figure 2.1 Infrastructure business climate Municipal service cost recovery By their very nature, infrastructure 300 projects are prone to corruption in various 250 aspects of the project cycle, from identifi- tion 200 cation to implementation. And while the Philippines is not unique, corruption in popula 150 oft its infrastructure sectors has been widely 100 encerP reported. Even though it is difficult to 50 obtain detailed information because of the 0 Melbourne Seoul Suva Phnom Penh Mandaluyong intrinsically covert nature of corruption, Naga Hanoi Cebu Ulaanbaatar Hohhot there is indeed strong informal evidence-- Water supply Electricity Solid waste through numerous studies, regular articles Sewerage/Wastewater Telephone in the media, independent surveys, and interviews--that corruption within Source: Asian Development Bank. 2001. Urban Indicators for Managing Cities. Manila. the country's infrastructure sectors is negatively affecting the business climate. country--Cebu, Mandaluyong, and Naga--are Recently released results of the June 2004 Social compared with other cities in the region. While there Weather Stations4 Enterprise Survey revealed that the is significant variation among these three cities, as the public's perception of the efforts of the Department figure shows, average cost recovery in the Philippines is of Public Works and Highways (DPWH) to combat generally lower than in the other countries. Addressing corruption is one of the worst for public agencies, and cost recovery is especially important in the current had further worsened over the previous two years. fiscal environment where the national government has very limited resources for infrastructure spending. Figure 2.2 Corruption Perceptions Index for five East Asian countries, 1995­2004 Corruption 6 Malaysia 5 Overall business climate Despite government efforts at combating corruption, 4 Philippines t Thailand as figure 2.2 shows, overall perceptions of corruption as measured by Transparency International's encerP 3 2 Vietnam Corruption Perceptions Index have increased for Indonesia the Philippines in recent years.1 The country is now 1 losing ground to peers in the region (below Thailand 0 and closer to Vietnam and Indonesia).2 The contrast 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 is starker, when the Philippines, ranked 102 in 2004, Year is compared to Singapore (ranked 5), Hong Kong, Note: Higher score means less corrupt. China (16), and China (71). Source: Transparency International (www.transparency.org). WorldBankInfra.indb 17 12/6/2005 8:40:39 AM 1 Philippines: Meeting Infrastructure Challenges A study on governance issues in public service · The use of an approved budget allocation for the delivery in the Philippines estimated that for infra- contract as the ceiling on bid prices in lieu of structure in particular, the misuse of resources bracketing in evaluating bid prices. in public works was between 20% and 40%.5 The · Increased transparency of the procurement same study noted that on certain procurement and process. infrastructure projects, regional directors of central · Professionalization of procurement officials. agencies are said to receive a 10% commission, and Department of Budget and Management officers, 15%. Government efforts in addressing graft and An own-government estimate of "potential leakage corruption in public procurement have been laudable. in combined public-private transactions, which The passage of the GPRA was a positive development, included purchases for BOT projects" for 2001 was and is vital both for increasing transparency and P74 billion.6 accountability, and for reducing costs and delays At the local level, the use of discretionary "pork in the public procurement process for goods and barrel" funds allocated by congressmen and senators services related to infrastructure projects. Ongoing is a principal contributor to inefficiency. These nationwide training programs on the GPRA for both congressional funds--which amounted to almost LGUs and national government agencies are providing P18 billion in 2001 or 0.49% of GDP--are spent with for a common interpretation of its provisions and little oversight. They are typically channeled through intent. The involvement of civil society organizations national agencies, such as DPWH and LWUA, but in the bidding process as observers in the Bids and there is little transparency and accountability in Awards Committee is encouraging. how projects are chosen for support, how funds are Furthermore, other initiatives and reforms are actually used, and what impacts and outcomes are being undertaken to promote transparency: widening achieved. Allegations of corruption and inefficiency the use of e-procurement in the bidding process; with regard to the use of congressional funds remain developing guidelines for value-engineering, which commonplace, causing concern as to the quality of are to be mandatory for infrastructure projects costing public expenditure on infrastructure. at least P50 million; and encouraging alternative bids Corruption is increasingly being recognized for design to ensure cost-efficient project design and as a drain on the performance of the Philippines' to avoid overpricing of projects. infrastructure sectors. To streamline the public Still, the drive against corruption needs to be procurement process and minimize corruption, the sustained and further stepped up, and there is scope government has made some important progress, in for additional progress, as listed in the "Suggested terms of enacting the Government Procurement actions" section of this chapter, below. Reform Act (GPRA, Republic Act 9184), which was passed in 2002. With the intent of harmonizing procurement processes across all national line Insufficient competition agencies and LGUs, the key provisions of the law are as follows: While certain segments of infrastructure network · utilities remain naturally monopolistic (particularly Procurement by electronic means to facilitate the in the "pipes and wires" business, i.e. bulk supply and · process. distribution), other segments (such as production and Advertisement of invitations to apply for eligibility retail supply) have become increasingly competitive in to bid, posted on the website of the concerned recent years with changes in technology and economic offices and in the government's electronic thinking.8 Essentially, competition should be pursued · procurement system to ensure transparency. where feasible (and where it is not, regulation confined Standardization of the procurement process and to the naturally monopolistic segments). Competitive · forms. pressures can be used to improve performance in A shift in emphasis from prequalification to infrastructure provision. Although some progress simple eligibility screening and strengthened has indeed been made to promote competition in · post-qualification to remove discretion. the Philippines, the economy has yet to reap its A shift to the "lowest calculated responsive bid full benefits. Insufficient competition among both and the highest rated responsive bid"7 as the public and private infrastructure providers, and an criteria for award. uneven playing field for public and private operators, WorldBankInfra.indb 18 12/6/2005 8:40:40 AM Chapter 2 The Business Environment for Infrastructure 1 is affecting sector performance and preventing lines accounting for about 90% of passenger and much-needed efficiency gains from materializing. As cargo markets and almost all of the primary and discussed in the following paragraphs, competition secondary shipping routes. Coupled with unregulated can be of two kinds--direct and indirect. fares, this is likely to result in high shipping charges for cargo owners. Direct competition In the power business, direct competition is Typically, competition in most product markets is also possible in the generation segment ("wholesale head-to-head (or direct) competition, also known competition"), although it should be recognized as competition in the market. This means that that because of the peculiarities of the power sector, numerous suppliers compete with each other to supply designing competitive power markets is a complex consumers, who can choose among them. The scope task. For instance, a competitive market in generation for competition in the infrastructure market varies requires well-defined market rules, the technical from sector to sector, and is highest in telecoms. capacity to manage system operations and financial On the surface, competition in the Philippines' arrangements, and a robust transmission system. It telecoms sector would seem to be thriving, as there also needs: strong and sustained political commitment are many operators in the market--11 international to reform; financially viable market participants; gateway operators for instance, and three significant a sufficient number of participants who are well wireless players operating nationally. However, the prepared to participate; a competitive environment Service Area Scheme, which requires operators for generators and suppliers; commercially focused to provide local exchange lines to unserved and market participants without common ownership; underserved areas including parts of Metro Manila, development of financial markets for managing risk; actually created a series of regional duopolies, each and clear and sound market supervision. with its own chosen domestic, and international, The Philippines has an ambitious program for long-distance connections. As a result, users cannot simultaneously privatizing generation and intro- exercise choice of long-distance provider as in truly ducing wholesale competition and, over time, retail competitive markets, and choice at the local service competition in the power sector. A well-functioning level is almost nonexistent. competitive wholesale market will play an important There is some competition in the deregulated role in improving the performance of the power private line and data markets, which benefits business sector. Indeed, the current situation in the country has users in urban centers. Until the recent entry of a third several positive factors. For example, the government national wireless operator, rates for mobile services has shown a strong level of commitment to estab- were largely identical. In short, competition exists lishing the wholesale market, and the Philippine Elec- to a degree, but dynamic competition in the sector tricity Market Corporation is now making substantial requires more effort. Carrier preselection for long- progress in its implementation. On current plans, distance access is long overdue, and interconnection there will be adequate generation and transmission rules need to be enforced to ensure that entrants capacity at market commencement. The proposed actually have a fair chance in the marketplace. restructuring and privatization of the generation Competition is also curtailed by cumbersome sector should, therefore, provide a sound basis for market entry rules and requirements. Every service generation competition. provider requires a congressional franchise and However, there are substantial risks in this further certification by the National Telecommuni- strategy and key questions remain about imple- cations Commission (NTC), both of which processes mentation. Past delays mean that the timetable are politically influenced, slow, and costly. Until more for the establishment of the wholesale market is open market-entry arrangements are in place, the compressed, casting real doubts as to whether this market is likely to remain an oligopolistic domain timetable can be achieved. The creditworthiness of for a few major economic players, and will not gain some electric cooperatives will be a major issue, as the full benefits of competitive discipline. they will struggle to meet the necessary prudential Likewise, in shipping, another sector where direct requirements. There are also concerns about the competition is possible, deregulation more than preparedness of market participants, especially in doubled the number of shipping companies--from view of the small size of many electric cooperatives 223 in 1997 to 585 in 2001. However, the industry and the concurrent process of restructuring and remains highly concentrated, with only five shipping privatizing the generating companies. WorldBankInfra.indb 19 12/6/2005 8:40:40 AM 0 Philippines: Meeting Infrastructure Challenges Direct competition is most prevalent among small- bring them under an appropriate legal and regulatory scale independent providers (SSIPs). In urban areas, umbrella, without stifling their entrepreneurial and SSIPs in the water sector are a diverse group of water competitive character. Moreover, the government operators serving both poor and affluent customers. should consider steps to actively promote compe- They include real estate developers, homeowners' tition to ensure that such competitive pressures associations, local entrepreneurs, and mobile water are maximized. For example, in the power sector, truckers and haulers. Most operate without recog- EPIRA has set a general framework for SSIPs and has nition from local authorities or the water utility, and announced a policy of opening up unserved areas develop their business in a competitive environment. to new entrants. However, actual implementation is SSIPs in urban areas may serve anywhere between not running as fast as originally hoped. 100 and 3,200 water connections. In Metro Manila alone, it was estimated that 30% of the population Indirect competition in 1996 depended on SSIPs. Indirect competition can be of two kinds: compe- Post-MWSS privatization, SSIPs are known to tition for the market and benchmark competition. buy bulk water from the private concessionaires and invest in tertiary lines to serve poor urban Competition for the market settlements, but they charge a higher tariff than that For the naturally monopolistic segments in infra- paid by people directly connected to the system. Some structure, even though direct competition is not SSIPs invest in deep wells. In most cases, SSIPs serve possible, benefits of competition can be used to poor urban settlements where households cannot select operators by requiring them to compete for afford connection fees.9 In rural areas, SSIPs take the market. And even after a monopoly provider is the form of "backyard" water vendors, who invest in place, requiring periodic rebidding of the right to in pushcarts or pedicabs (bicycles with sidecars) and serve the market can lengthen the benefits of such usually source their water from public taps or private competition for the market. connections. Water vendors augment water supplies The Philippines has had some positive experience, of households with private wells or where the water for example, in the formal water sector, where the source is at such a distance that households prefer Manila water concessions were awarded competi- to buy water rather than spend time fetching it or tively. Competitive bidding for these concessions standing in line for it. led to a substantial reduction in the initial tariffs: In the transport sector, various SSIPs provide the winning bid for the east zone was 26% of the informal transport services. In the crowded streets prevailing tariff of MWSS at that time, and for the of Metro Manila, tricycles (motorcycles with sidecars) west zone, 57%.10 However, other opportunities for and pedicabs provide transportation services through capitalizing on benefits brought by competition for narrow streets and routes where jeepneys and other the market have been forgone through numerous public vehicles are not allowed to operate. Vans and unsolicited and directly negotiated infrastructure microbuses carry more passengers than these, and contracts, most notably in power and transport. The charge less (a flat rate per head) than taxis. The Land cost of uncompetitive practices remains high. Transportation Franchising and Regulatory Board In an aggressive campaign to attract new has estimated that out of approximately 7,000 public investment to power generation as a result of the utility vehicles operating in Metro Manila, in 2002 power crisis in the 1990s, the Philippine government there were about 3,000 vehicles operating without assured payments to private generators, in hard appropriate franchises, thereby creating free entry currencies, under numerous take-or-pay contracts (and exit) in the market. with the independent power producers. Initial tariffs With free entry and exit, and as a result, were high because of the unsolicited and opaque competitive prices, SSIPs are filling a critical unmet nature of most transactions. The combination of gap. However, they operate in an unfavorable assured payments and high initial tariffs, coupled business climate, often having to bribe officials. with the unanticipated fall in demand subsequently, Lack of stability due to unpredictable political led to significant excess capacity in the system and interference, limited access to credit, and insuf- created substantial stranded costs. ficient information about future planning further In roads and other public works projects, there discourage investment. The challenge is how to is a perception that collusion is widespread and has validate SSIPs as legitimate service providers and resulted in higher costs, but such practices are very WorldBankInfra.indb 20 12/6/2005 8:40:40 AM Chapter 2 The Business Environment for Infrastructure 1 difficult to prove. The majority of private sector partici- Low credibility of institutions pation projects have been implemented through unso- licited bids, instead of competitive tendering. Such Risks of investing in infrastructure projects are high practices are likely to reduce the benefits accruing to for three reasons: infrastructure investments tend to the government and the public, and increase oppor- be asset-specific and immobile; they are typically for tunities for rent seeking. the long term; and, since most infrastructure services The creation of an uneven public-private playing are perceived to be public goods, infrastructure tariffs field also minimizes competition. For example, in become inherently political. Therefore, governments the ports sector, PPA regulates entry of the private have to credibly commit to a set of rules and a system sector through the issuance of permits to construct to implement these rules, so as to minimize these and operate ports, and sets the port dues that private risks and allow infrastructure investors to earn ports charge for handling non-own cargo. However, reasonable returns. Some of the services still need by setting charges at low rates (among the lowest in to be provided by the government or public utilities. the region), and charging unreasonably high taxes, In the Philippines, however, the credibility of rules PPA disincentivizes new (private) entry, thereby and the associated system--particularly of regulatory insulating itself from competition. and judicial institutions and public providers--is being damaged, thereby undermining infrastructure Benchmark competition performance. Another form of indirect competition used in the Because certain aspects of infrastructure absence of direct competition is benchmark compe- provision remain naturally monopolistic, economic tition. It is based on comparisons of performance regulation--a set of rules and procedures that governs and efficiency (such as tariffs and quality of service tariffs and monitoring of quality standards--is needed criteria) of similar service providers, and forces to protect consumers from abuse of monopoly power. underperforming providers to improve their Regulatory institutions are needed to implement performance relative to that of other firms (or an these rules and procedures. industry average). Such competition has been exten- Regulation can be implemented through a series sively used in the United Kingdom for infrastructure of tightly specified rules (for example, on detailed utilities in water, sewerage, and power distribution cost-based formulas for tariff adjustments) that (box 2.5, below), and more recently, in Latin America. attempt to foresee various contingencies. However, Benchmark competition has also been used to resolve the cost of such rules makes it difficult for the system disputes between competing telecoms providers in to adjust to unexpected changes (such as changing Morocco and Botswana.11 In East Asia, Vietnam has technologies or market conditions) that require embarked upon an impressive program in its water continuous revision of the rules. The alternative is to and sanitation sector that has begun benchmarking, provide discretionary powers to the regulatory entity, among other things, capital costs of over 30 provincial but the cost of this is the risk that the regulator could water service companies. abuse these powers--thereby increasing regulatory To realize the full benefits of benchmark compe- risk, the cost of capital, and, ultimately, tariffs. tition, two requirements have to be met. First, The Philippines has tried both approaches. The providers must not be able to collude. Second, there MWSS water privatization entailed an attempt to has to be a minimum level of homogeneity among regulate the two private concessionaires through service providers, i.e. they must operate in similar a series of tightly specified rules ("regulation by enough environments so that their cost, pricing, and contract" with limited discretion). In most other other performance criteria are comparable enough to sectors, the regulatory approach is to provide more make comparisons meaningful. discretion to sector-specific regulators, but then The Philippines has not fully experimented with attempt to manage the discretion to minimize risk benchmark competition. In the water sector, splitting of abuse ("regulation by generally applicable law"). Metro Manila's service area into two zones during Either approach can be made to work, provided the MWSS concessioning process laid the grounds for that basic regulatory decisionmaking is shielded from such competition. However, benchmark competition regulatory capture by politicians, consumer lobbies, between the two concessionaires failed to materialize and/or regulated utilities. The issue is not really one in the absence of any systematic effort to actually of independence per se: the key is to have a credible determine an efficiency frontier. regulatory decisionmaking process--one that is WorldBankInfra.indb 21 12/6/2005 8:40:40 AM Philippines: Meeting Infrastructure Challenges guided by the need to balance public interest (i.e. P1.25/kWh to P0.40/kWh. (The adjustment was an the combined interest of consumers and investors) automatic mechanism that allowed NPC to pass and that errs toward implementing and enforcing key through to customers costs associated with its US rules rather than formulating them. In practice, the dollar independent power producer obligations.) amount of discretion given to regulatory authorities depends upon factors such as the level of regulatory Lack of separation between policy, regulatory, and capacity, and the legitimacy and maturity of these operational functions authorities. Political intrusion can also take place if policy and Table 2.2 outlines the progress that the Phil- regulatory functions are not well delineated. This is the ippines has made in establishing economic regulators. case in the water sector. In 2002, the National Water Sector-specific regulators have been established in Resources Board (NWRB) was reorganized through power, transport, and telecoms. Executive Order 123 and its board was restructured to Creating economy-wide regulators, however, is replace member agencies having direct claims in water not sufficient. Most regulatory institutions suffer resources with representatives from the private sector from a lack of credibility, which thereby increases and civil society. NWRB was also moved from being regulatory risk. The four main factors that hurt an attached agency of DPWH to the Department of regulatory credibility are: lack of insulation from Environment and Natural Resources to address the short-term political pressures; limited regulatory conflict of interest between NWRB's rules on water capacity; lack of regulatory coordination; and judicial resources planning, management, and regulation, intervention in infrastructure decisions. and the development function of a public works department. The nature of the relationship between Lack of insulation from NWRB and the river-basin institutions, however, is short-term political pressures still unclear. In the same executive order, pending Undue political intervention creation of a national water regulator, NWRB was In the power sector, the ERC was established as an also made responsible for economic regulation of independent regulator, and provided with a distinct water districts (with LWUA reviewing tariffs of water legal mandate under EPIRA. However, since the districts under its jurisdiction). This was intended ERC's establishment, short-term political inter- to address an immediate issue of conflict of interest ference has still been observed in the regulation in that LWUA was both a financier and regulator of process. For instance, a presidential directive was water districts. However, the transfer of responsibility issued (May 2002, affirmed by the ERC on September has yet to be operationalized. 2002) to reduce the power purchase adjustment from Likewise, in the transport sector, the key transport Table 2.2 Summary of economic regulators in infrastructure sectors Sector Does a well-defined regulatory system exist? Regulator Year established Power Yes Energy Regulatory Commission 2001 Water Proposed Local Water Utilities Administration for water districts 1973 Metropolitan Waterworks and Sewerage System for 1971; regulatory office established Manila water concessions in 1997 National Water Resources Board--proposed Transport Airports Yes Air Transportation Office Its precursor, the Civil Aeronautics Administration, 1947; renamed 1987 Roads Yes Toll Regulatory Board 1977 Ports Yes Philippine Ports Authority 1975 Rail Yes Philippine National Railways 1984 Telecoms Yes National Telecommunications Commission 1979 Source: Compiled by World Bank staff. WorldBankInfra.indb 22 12/6/2005 8:40:40 AM Chapter 2 The Business Environment for Infrastructure infrastructure agencies of the national government whereas under EPIRA all of them should have been are DPWH and the Department of Transportation completed in 2002. and Communications (DOTC), two of several line In water, while the responsibility for economic agencies reporting to the president. Regulatory bodies regulation was transferred from LWUA to NWRB, are attached to either of these two agencies or located the latter still does not have the capacity to undertake in the Office of the President, making them vulnerable such a role. to short-term political influence. In telecommunications, the NTC does not have the In the ports sector, separation of policy, regulatory, capacity to conduct independent and comprehensive and operational functions of PPA has yet to take place. financial audits; neither does it have the expertise Because of the conflict of interest arising from this, and resources to monitor performance standards.12 tariff charges as established by PPA are not aligned The NTC's inability to provide appropriate financial with the actual costs of usage of port facilities. incentives, and its lack of financial independence, have prevented it from hiring appropriate technical Weak corporate governance for public utilities expertise. The ownership structure of water districts is very vague; their identity as government owned and Lack of regulatory coordination controlled corporations was only established Another factor that constrains effective regulatory through a Supreme Court ruling, instead of through decisionmaking is the lack of regulatory coordi- a clear pronouncement in their charter. Even for nation among various sectoral agencies. In transport, those utilities that have a clear corporate identity, three different agencies regulate the sector: PPA for weaknesses in corporate governance can be prevalent. ports, Philippine National Railways for rail, and For instance, board members may be selected without the Toll Regulatory Board for roads. Often, these relevant experience, and executives of the utilities agencies have different reporting requirements and may be selected based mainly on political consider- standards, thereby inhibiting efficient movement of ations rather than on qualifications and experience. goods across different modes. A single transport There is also lack of performance monitoring and regulator that consolidates different standards and evaluation of public utilities, either by their board, reporting requirements, and establishes some degree the oversight agencies, or the public. Management of uniformity, could be one solution. The government is therefore neither rewarded nor penalized for its should also promote an integrated framework for performance. It is clear that neither public corpo- developing main transport and trade corridors, with rations nor government infrastructure agencies can appropriate modal interfaces. withstand frequent political intrusion, as reflected in tariff decisions, project selection and prioriti- Judicial intervention in infrastructure decisions zation, and staffing. Poor civil service pay is another The lack of clarity in the regulatory­judicial interface important element in poor performance. is often fraught with misinterpretation. This is because regulatory bodies are typically neither administrative Limited regulatory capacity bodies nor judicial authorities, yet have elements of Effectiveregulatorydecisionmakingisalsoconstrained each. In the highly technical field of infrastructure by limited regulatory experience and capacity. regulation, court involvement should, in general, In power, because of its evolution from the be limited to procedural, rather than technical, predecessor Energy Regulatory Board, the ERC has matters. benefited from some institutional continuity and is The frequency with which the apex judicial today an agency of close to 200 employees. However, it institution--the Supreme Court--involves itself in is charged with a large number of tasks ranging from traditional regulatory affairs, such as tariff setting regulation of NPC and 139 distribution companies, and other basic issues in a range of infrastructure to oversight of the Philippine power market. As a sectors, is contributing to the perception of an result, the ERC has been overwhelmed, and is conse- activist judiciary (box 2.1). This reflects a weakness quently unable to adhere to the deadlines for, among of resolving contractual disputes at lower levels, or other things, unbundling generation from other through other means. In addition, such cases unduly facets of electricity provision as set down in EPIRA. add to the workload of the Supreme Court, an insti- For instance, as of February 2004, only about half tution already overburdened with a large backlog of of some 140 unbundling decisions had been issued, civil and criminal cases. WorldBankInfra.indb 23 12/6/2005 8:40:41 AM Philippines: Meeting Infrastructure Challenges Box 2.1 Judicial decisions with implications for the business environment for infrastructure V arious decisions, some of which tricity distribution company, not government contract won by have explicitly reversed regu- to implement the provisional pur- Cyber Bay Corp. to reclaim land latory decisions, could have adverse chased power adjustment that in Manila Bay. Cyber Bay, which implications for the business envi- was earlier granted by the Energy has foreign investors, had already ronment for infrastructure. They Regulatory Commission (January invested around $1.7 billion (May include the following: 2004). 2003). · The Supreme Court upheld its · The Supreme Court ordered · The Court of Appeals ordered the earlier decision to nullify all the Meralco to refund P28.15 billion Energy Regulatory Commission to contracts signed by the gov- to customers for overcharges review its approval in 2003 of a ernment with Philippine Interna- from 1994 to 1998 (April 2003). Meralco petition for a 17 centavo tional Air Terminals Co., Inc. for per kilowatt-hour rate increase construction of Ninoy Aquino (July 2004). International Airport Terminal 3 · Sources: BusinessWorld. July 30, 2004; The Supreme Court ordered (May 2003). January 15, 2004; May 6, 2003; May 8, Meralco, the largest private elec- · The Supreme Court voided a 2003; April 11, 2003. Manila. Suggested actions In roads, cost recovery has not been achieved even for road maintenance, although the annual The Philippine government needs to take immediate motor vehicle registration charges have been revised action toward addressing the four Cs of inadequate upward and the proceeds earmarked for four special- cost recovery, corruption, insufficient competition, purpose funds. Since the passage of the Motor Vehicle and low credibility of regulatory and judicial User's Charge Law in 2000, only about 46% of the institutions. proceeds earmarked for national road maintenance have been released by the Department of Budget and Fostering cost recovery Management. More efficient utilization of the Special Cost recovery should be fostered by aligning infra- Road Fund and unblocking institutional issues could structure tariffs with costs in an economically help achieve cost recovery. coherent manner, and in a way that minimizes the negative impact of price increases specifically for the Cost recovery through subsidies poor, and by providing subsidies where justifiable. Almost all of the Philippines' infrastructure sectors receive some level of subsidy--either direct or Cost recovery through raising user fees indirect (box 2.2). Direct subsidies could be in the With the exception of telecoms, most sectors are far form of cash subsidies given to utilities (for example, from attaining full cost recovery. The situation is to LWUA in the water sector) or end consumers. arguably the most dire in the water and sanitation Indirect subsidies could be in the form of uncalled sector, where tariffs barely cover O&M costs, let alone government guarantees, or as in the case of MWSI, a significant capital costs. taxpayer-assisted bailout for the utility's past incurred In power, it is not clear that recovering full costs debts. However, the rationale for these subsidies is not through a tariff increase is the right policy. This is always clear, and they are often not targeted. because the high costs in the sector are largely a result Generally, subsidies can be legitimately part of the of past inefficient contracting. The economic rationale cost-recovery equation for three reasons: the "natural for raising power tariffs to cover these overcontracted monopoly" reason,13 the "public good" reason,14 and costs is not compelling since these costs are not user affordability concerns. Subsidies may be justified on charges but, rather, a tax. A better option would be equity grounds if an across-the-board increase in tariffs to achieve cost recovery through a combination of a for all sectors is not feasible because of the adverse tariff increase and government direct assumption of impact that such an increase would have on afford- a portion of NPC debt to be funded by a tax increase ability, especially for the poor. In the Philippines, there and/or refinancing. (This option is covered in more is mixed evidence that affordability is a real concern, detail in chapter 6.) as discussed in the following paragraphs. WorldBankInfra.indb 24 12/6/2005 8:40:41 AM Chapter 2 The Business Environment for Infrastructure Box 2.2 Subsidies in infrastructure sectors I n power, the National Power Cor- counterpart funds for development Construction Company net loss in poration (NPC), through its Small projects of water districts. LWUA 2000 was P418 million. Power Utilities Group, received used to receive additional gov- In addition, infrastructure about P1.34 billion subsidy in ernment subsidies amounting to projects are also subsidized 2003 for missionary electrification. a total of P2 billion as the gov- through direct Internal Revenue Moreover, the direct liabilities ernment counterpart for its foreign Allotment cash transfers to local incurred by NPC as a result of loans. LWUA has stopped receiving governments, as well as through guaranteeing the capacity pay- government budget allocations in congressional funds. ments also constituted an indirect recent years. subsidy. In transport, the net losses in Sources: Rosario G. Manasan. 2004. In water, the government used 2002 for the Philippine National "Infrastructure and Decentralization." to appropriate subsidies for the Railways, Light Rail Transit line 1, May. World Bank, Manila; Almec Inc. Local Water Utilities Adminis- and Metro Rail Transit line 3 were 2004. "Urban Transport." World Bank, Manila; and Castalia Strategic Advisors. tration (LWUA) in the amount of P857.9 million, P2,585 million, and 2004. "Philippines Rural Electrification P200 million­P300 million annually P4,461 million, respectively. For Regulatory Framework: Draft Final from 1992 to 2002 to be used as tollways, the Philippine National Report." Manila. Congressional funds for local infrastructure in DPWH budget, 2000­2001, P billion 2000 2001 Total 2000­2001 Total DPWHa 42.33 48.96 91.29 of which: Congressional funds:b 8.1 17.56 25.66 Various infrastructure projects 8.1 17.29 25.39 Project Development Assistance Fund 0.0 0.27 0.27 Sources: a. Basic data from DPWH. b. Estimates by Rosario G. Manasan. 2004."Infrastructure and Decentralization." In the water sector, a government survey15 showed meters.18 Improving water service affordability for that an average of 1% of total household expenditure poor households will, therefore, depend primarily is spent on water, with little variation between low- on better access of households to network services, income and high-income groups or across regions. A rather than on lower network tariffs. July 2004 survey among low-income Metro Manila In the power sector, affordability does not seem residents16 tested perceptions as to the fairness to be a major problem in the many cities served by of prices charged by the two concessionaires. Its investor-owned utilities. Evidence suggests strongly respondents revealed that they: spend an average of that customers of electric cooperatives are willing and 4.3% of income on water from the network; consider able to pay, provided that they receive good service. that amount appropriate (12% considered the price Affordability studies carried out in the context of the "below the cost of service" and another 53% "only Rural Power Project financed by the World Bank and fair"); and are generally positive about the quality of Global Environment Facility suggested that levels of water they receive from the network (very good 7%, around P15/kWh, or $0.30/kWh, represent the lower good 43%, fair 25%). Other studies point to more end of alternatives available to unconnected rural significant affordability constraints. Poor households populations (most of whom live in areas that are not serviced by the networks pay considerably more relatively remote and therefore more expensive to for water supply. For example, low-income consumers serve). Tariffs above P15/kWh are generally considered of SSIPs reportedly spend up to 16% of household beyond the means of poor rural households, and income.17 For Metro Manila, expenditure on clean current government policy is focused on ensuring water may account for as much as 20% of household that subsidies are available so that rates do not exceed income for those who do not enjoy 24-hour piped this level. water supply and who depend on buying water In the future, electricity prices are likely to be from vendors at around $20 per month for 6 cubic affected by a number of changes resulting from a WorldBankInfra.indb 25 12/6/2005 8:40:41 AM Philippines: Meeting Infrastructure Challenges probable increase in NPC generation tariffs, removal actually reduced from a range of P17­34 in December of intra-grid and inter-grid subsidies, and imple- 1999 to P9.5­15 in 2000, where they remain. mentation of the wholesale electricity spot market. Overall, at the present time, affordability does Overall, residential users, especially outside Luzon not seem to be a major issue. While subsidies are and outside the areas in Luzon served by Meralco, prevalent in infrastructure, apart from lifeline rates in are likely to see a substantial increase in rates. In power they are often poorly targeted. Better targeting percentage terms, the increase is likely to be greatest and management of subsidies can go a long way to in Mindanao, since this is where electricity prices are increasing public resources that could be used for the lowest at present. cost-recovery purposes. Subsidies should, though, be While tariffs are politically sensitive and general used as part of the cost-recovery equation only where economic woes have hit many segments of the urban justified on equity or efficiency grounds. population in recent years, balancing these factors has been the function of generous "lifeline" rates, which Minimizing corruption protect electricity users in the Philippines: users whose Corruption in infrastructure projects--both public electricity consumption remains below a certain level and private--is increasingly being reported in the benefit from reduced rates. Individual distribution media. An August 2004 article highlighted how even companies set the maximum levels (typically between children--based on a successful model applied in the 50 kWh and 100 kWh per month). The schedules of city of Bangalore in India where school children reductions also vary between individual distribution through surveys monitor road performance and companies. Meralco's lifeline rates are generous by have held their local politicians accountable--can international standards: users who consume less that stop corruption in infrastructure.21 Another article 50 kWh per month benefit from a discount of 50%; highlighted innovation in fighting corruption in those who consume between 51 kWh and 70 kWh infrastructure projects at the community level: per month, 35%; and those who consume between on small-scale infrastructure projects, such as the 71 kWh and 100 kWh per month, 20%. component projects in the Kalahi-CIDSS project,22 In the roads sector, affordability of toll rates is the presence of women in the administrative and mixed. A 2003 study estimated the benefits of toll auditing functions in road projects has "discouraged roads to users and determined that a toll rate for people from shaving off `any 10%' from the actual urban expressways of P4/car-km is likely to leave road budget."23 Also, a handful of citizen groups and the user with significant savings in time and vehicle nongovernmental organizations have taken up the operating costs.19 Based on this benchmark, the toll crusade against graft and corruption (box 2.3). These rate for both the South Luzon Expressway (SLEX) and groups approach their role in a variety of ways: some North Luzon Expressway (NLEX) (P0.33/car-km), as engage in watchdog activities (e.g. Volunteers Against of June 2004, is too low, while the toll rate for the Crime and Corruption, Negros People's Graft Watch elevated Skyway is high (P8.1/car-km). Toll rates at in Bacolod City, and the Concerned Citizens of Abra other links (P0.72/car-km for the Southern Tagalog forGoodGovernment),someundertakeresearchwork Arterial Road; P2.8 for Skyway at grade; P3.27 for to understand the problems and the ill-societal effects the Manila­Cavite Toll Expressway or MCTE) are of graft and corruption (e.g. Procurement Watch), more or less reasonable for users. Generally, toll rates while others simply draw attention to issues and help for intercity expressways are about one-third to one- correct society's perception that people are powerless quarter of those for urban expressways, correlating to do anything about irregularities in procurement to a reasonable toll rate for intercity expressways of and in infrastructure projects (e.g. Walang Ku- about P1.0­1.3/car-km. Corrupt, Kilosbayan).24 For urban public transport, fares (as of June 2004) In public-private infrastructure projects, the in Metro Manila are very low. The first 4 km on the scope for corruption becomes considerable with the ordinary or non-aircon bus costs P6.00, while that acceptance of unsolicited bids. Most of the contro- on a jeepney is P5.50. A bus passenger survey20 found versial infrastructure projects in the Philippines that the majority of respondents (68%) considered the started as unsolicited proposals, notably the Ninoy bus fare to be fair. For Light Rail Transit (LRT) 1, a Aquino International Airport Terminal 3 in Manila fixed fare of P12 is charged for up to eight stations and the Caliraya-Botocan-Kalayaan (CBK) hydro- and P15 for more than that, covering a distance of up electric power BOT project. Commendably, the to 15 km. Fares on Metro Rail Transit (MRT) 3 were Philippines is the only country in the region (and WorldBankInfra.indb 26 12/6/2005 8:40:41 AM Chapter 2 The Business Environment for Infrastructure Box 2.3 Citizens' action in monitoring public works projects A fter the Edsa I revolution, the and Employment Development CCAGG continues to monitor Aquino administration started Program including their locations infrastructure projects and has to implement the Community and the implementing agencies. brought attention to quality and and Employment Development The Department of Budget and design defects as well as inefficient Program through the National Management provided the infor- operations of contractors for public Economic and Development mation on total project costs and roads. In October 2002, the Com- Authority (NEDA). Through this, schedule of fund releases. mission on Audit (COA) enlisted small public works projects (i.e. After visiting project sites, CCAGG's help in testing the first- farm-to-market roads, health clinics, matching planned budgets and ever participatory audit. It was school building, irrigation systems, work program with actual dis- pilot-tested in Abra Province on 23 and barangay roads) were allotted bursement, purchases, physical road projects of DPWH and com- to communities and whose ben- operations, and output, the CCAGG munity projects of the Department eficiaries were to be employed by brought charges against 11 engi- of Environment and Natural the projects to help augment their neers of the Department of Public Resources. Later, the participatory meager farm income. Works and Highways (DPWH) Abra audit was replicated in Mountain One unique feature of the district office for dishonest, and fal- Province with the Social Action program is that it necessitates sification of, public documents. The Development Center and in Cama- the involvement of nongovern- accused claimed to have completed rines Norte with the Urban Poor mental organizations to monitor 20 infrastructure projects financed Assembly. COA and CCAGG were project implementation. The Con- through district funds, when in permanent audit team members. cerned Citizens of Abra for Good truth some had not even been The COA Central Office later Government (CCAGG)--a group started. An audit team investigated launched a book in January 2003 of former NAMFREL (election and they corroborated CCAGG's out of this experience to help insti- watchdog) volunteers during the findings. Administrative charges tutionalize participatory audits. 1986 presidential snap elections-- were filed and the 11 engineers seized the opportunity to commit were found guilty and punished Sources: S. Coronel and L. Kalaw-Tirol, themselves to monitor the projects accordingly. Shortly thereafter, eds. 2002. Investigating Corruption: A under the program. Pursuant to the the DPWH regional office issued a Do-It-Yourself Guide. Manila: Philippine Center for Investigative Journalism; Con- memorandum of agreement, NEDA memorandum to its district office cerned Citizens of Abra for Good Gov- provided CCAGG with training on in Abra requiring a CCAGG moni- ernment presentation in the Citizens project monitoring and listings toring report before contractors Against Corruption Conference: Com- of projects under the Community were paid. bating Corruption, September 21, 2004. among a handful globally) to pass a BOT Law with the procurement process, and encouraging qualified a stated policy toward minimizing unsolicited bids. entities to take part in the selection process. The essence of this policy is to make competitive an Since procurement reform is often a lengthy uncompetitive/unsolicited bid by allowing challengers process, more can be done by vigorous implementation to compete with the incumbent bid under specified of the 2002 GPRA and complementing it with financial rules and procedures. However, there are ambiguities management reforms. Other specific actions include surrounding the BOT Law, as well as the rules and strengthening the monitoring and enforcement capa- procedures. These relate to unnecessary preconditions bilities of the key anticorruption oversight agencies for a challenge; an unrealistic time frame for deci- such as the Government Procurement Policy Board, sionmaking; and an impractical counter-proposal the Office of the Ombudsman, and the Commission policy (see box 4.9 in chapter 4 for more details). on Audit; insisting on consistent disclosure and verifi- Creatingpositiveincentivesforreducingcorruption, cationofassetsbypublicofficials;acceleratingtheinfor- by rewarding best practice projects for example, or mation transparency aspects of procurement reform, by systematically recognizing activities that adhere including civil society monitoring and timely posting to or surpass guidelines, deserves more exploration. of bid invitation and award results; and initiating an Box 2.4 highlights the case of Naga City, which has aggressive effort on simplifying government trans- made its procurement process work by building an action procedures, so as to reduce both the number enabling environment, improving transparency of of steps involved and discretionary powers. WorldBankInfra.indb 27 12/6/2005 8:40:41 AM Philippines: Meeting Infrastructure Challenges Box 2.4 The Naga City case: Making the public procurement system work N aga City government's pro- of activities on budget and pro- ernment, and civil society groups, curement practices have curement--under such topics as whose objective, among others, is resulted in significant cost reduc- what is being procured, how much to observe, vote on, and participate tions and the timely delivery of the is it being procured for, to whom in the deliberation, conceptual- city's purchases of infrastructure it has been awarded, and at what ization, implementation, and evalu- projects, as well as supplies and price--in a local paper's section ation of programs and projects of equipment. Improving transparency called "Naga City Procurement the city government, including its in the public procurement process Watch" without cost to the city procurement process. This process ensures wider participation of government. helps ensure transparency. qualified providers and increases The city government conducts The Naga City case exemplifies the accountability of government. an informal canvass prior to actual the importance of leadership at Naga has institutionalized several procurement for supplies and the highest level for procurement measures to ensure greater trans- equipment in order to have an idea reforms to take place. It also high- parency in the process, as follows. of the prevailing market price. Naga lights the phased, long-term, and Wider dissemination of bid benchmarks its budget for projects continuous process of reforms. notices and contract awards has on private sector estimates. Further, it stresses the need for greatly helped increase trans- Transparency has also been information dissemination, moni- parency. They are disseminated not bolstered by nongovernmental toring by an independent body, only through posting on electronic organization participation. In 1997, and an effective feedback mech- bulletin boards and through news- the Empowerment Ordinance of anism for the operationalization of papers, but also in announcements the City of Naga was passed to reforms. on radio and television. Recently, establish the Naga City People's Source: World Bank. 2003. "Political the city government worked with Council. This is composed of rep- Economy of Public Procurement in the a local publisher to print details resentatives from industry, gov- Philippines." World Bank, Manila. Maximizing competition · Appointing regulators for fixed terms and Competition can be maximized by removing barriers protecting them against arbitrary removal. to entry and exit; resolving conflicts of interest by · Exempting regulatory institutions from civil separating policy, regulatory, and operational roles; service salary rules, which make it difficult for reducing the monopoly power of public providers; them to retain qualified staff or hire staff at and more fully experimenting with benchmark market pay scales. (Most regulators are capacity- competition (box 2.5). For SSIPs, the government constrained, partly for these reasons.) can take steps to better adapt regulation to SSIPs, and therefore enhance the competitive pressures that Preventing political interference and building they can bring. regulatory capacity are not mutually exclusive, and can be reinforcing measures: sound regulatory Increasing institutional credibility decisions based on application of technical expertise The Philippine government can enhance regulatory can prove to be an effective barrier against political credibility by shielding regulatory decisionmaking interference. from short-term political pressures, building TheGovernmentcanimprovecorporategovernance regulatory capacity, and consolidating and coordi- of public utilities by appointing qualified and expe- nating certain regulatory tasks. Specifically, some rienced corporate board members and executives; formal safeguards against undue political interference providing more operational autonomy to corporate are: management while establishing clear performance · targets based on which the management may be Providing regulatory institutions with a reliable rewarded or penalized; establishing benchmarking source of funding, preferably from fees imposed systems for similar utilities in the country (e.g. on regulated firms or consumers. Currently, for water districts) and widely publicizing bench- neither the ERC nor the NTC seems to have marking results so that nonperforming utilities can fiscal autonomy. be exposed; and more closely involving the public and WorldBankInfra.indb 28 12/6/2005 8:40:42 AM Chapter 2 The Business Environment for Infrastructure Box 2.5 Benchmark competition in the United Kingdom water sector B enchmark competition pro- exist under cost-plus regulation.) firm's efficient cost. Often, however, vides an option for regulators Furthermore, it limits the tendency differences in costs cannot be fully to create indirect competition for prices to far exceed costs under explained statistically. among local regional distribution traditional rate-cap regimes. Given this limitation, one of the monopolies. Through benchmark However, differences in average most sensible methods for realizing comparisons, regulators pressure costs among firms are explained the benefits of benchmark com- utilities to match the efficient by numerous factors other than petition has been by the United performance of their lowest-cost efficiency, including differences in Kingdom water regulator, the Office neighbors. Benchmark costs are economies of scale, the cost envi- of Water Services. It has estimated also particularly useful for rate- ronment (e.g. land topography, capital and operating cost func- setting purposes. Regulators may weather), and quality of the ser- tions for various water subservices, utilize a form of benchmark compe- vices provided. These differences and used the resulting predicted tition by setting a firm's rate cap in prevent regulators from using just efficient cost as one of several reference to the costs incurred by one cost parameter to set rates for factors into its rate-setting deci- other firms in the same business. all providers. These factors can be sions, rather than applying a rigid This rate-setting methodology partially controlled for using statis- formula (such as formal yardstick creates incentives that limit costs. tical methods, and an industry-wide competition employs). (These same incentives do not cost function can determine each Source: World Bank staff. consumer groups in monitoring the service levels of the short term, making the judiciary better aware public utilities. of infrastructure regulatory issues (and the appro- Confidence in legal institutions can be restored priate government roles in proceedings) can go a by sensitizing the judiciary to distinctive issues long way toward minimizing the judiciary's current related to infrastructure regulation and governance, negative perceptions. A similar approach has been and by exploring alternative dispute resolution used in South Asia where the judiciary and infra- mechanisms for resolving high-profile infrastructure structure regulators were brought together to better contractual disputes. While discussing reforms of understand each other's roles and responsibilities the judiciary is beyond the scope of this study, in (box 2.6). Box 2.6 Sensitizing the judiciary to infrastructure regulatory issues in South Asia V arious South Asian countries The concept of private provi- lution mechanisms in infrastructure have embarked on reform sioning of infrastructure services is regulation. of their infrastructure sectors. also new to the judicial authorities The workshop provided a much- Key components of this are the in the region. needed public forum for regulatory introduction of competition, priva- Against this background, both and judicial experts from the tization of existing public sector regulators and judicial officials region, and went a long way to dis- service providers, and the creation recognized the need to better pelling the apprehension that they of specialized regulatory agencies. understand each other's roles were working at cross-purposes. The region has more than 25 and responsibilities, and for a Subsequently, a number of judges autonomous regulatory bodies different kind of sensitization of have referred to, and incorporated, already in place in the infra- judicial issues arising from regu- the findings from the workshop in structure sectors, and prices for lation and private provisioning of their court proceedings. infrastructure services have long infrastructure. been regulated. However, eco- As a result, a two-day workshop Source: Proceedings of the South Asia nomic regulation by independent was organized in August 2002 with Forum for Infrastructure Regulation bodies, separated from government the objectives of understanding and the Public Private Infrastructure departments and operating on various legal aspects of regulation; Advisory Facility Workshop, "Legal Aspects of Regulation in South Asia," principles of transparency and cost- examining alternative regulatory held in Dhaka, Bangladesh, August 3­4, reflective pricing, is relatively new processes; and examining the rel- 2002 (http://www.safir.teri.res.in/wkshp/ in South Asia. evance of alternative dispute reso- legalproceed.pdf). WorldBankInfra.indb 29 12/6/2005 8:40:42 AM 0 Philippines: Meeting Infrastructure Challenges Endnotes 1 Transparency International (www.transparency.org) rankings are Josef Yap, ed., The Philippines Beyond 2000: An Economic based on surveys completed by business people, academics, and Assessment. Makati City: Philippine Institute for Development risk analysts. Studies. 2 It should be recognized that corruption works both ways: while 13 There is a valid economic rationale for providing subsidies to the weak accountability of public institutions leads to poor gover- extent that the (socially desirable) objective of setting prices at nance, weak accountability of private institutions also leads to marginal cost causes a natural monopoly to become unprofit- poor governance. able. Thus, the government, through taxation, picks up the losses 3 World Bank. "World Business Environment Survey 2000." Wash- inherent in marginal-cost pricing. ington, D.C. 14 There might be a public-good argument for subsidizing provi- 4 Conducted from November 2003 to January 2004 (www.tag.org. sion of certain services. For example, provision of safe water ph/survey/default.htm). and adequate sanitation and sewerage treatment has well-known 5 Omar Azfar et al. 2000. "Decentralization and Governance: An public health benefits. Similarly, there may be external benefits Empirical Investigation of Public Service Delivery in the Philip- arising from more education and a cleaner environment as a pines." IRIS Center, University of Maryland, College Park. result of improved access to electricity. 6 Philippine Daily Inquirer. 2002. March 6. Manila. 15 National Statistics Office. 2000 Family Income and Expenditure 7 The former applies to bids for procurement of goods and infra- Survey. structure projects, which entails lowest calculated prices. The 16 World Bank and Social Weather Stations. 2004. Privatization latter applies to bids for consulting services, which entails evalu- Survey. July. (See appendix 4, this document.) ation of short-listed bidders' experience, performance, quality of 17 L. Cleofas and J. Sy. 2004. "Face-off: Utility Sub-concessions personnel, price, and methodology. and local private providers in Metro Manila." Paper presented 8 For example in telecoms, the advent of mobile telephony has at Water Week, February. World Bank. improved services substantially across the world, while in elec- 18 Arthur C. McIntosh. 2003. Asian Water Supplies: Reaching the tricity, the introduction of combined-cycle generation plants has Urban Poor. Manila: ADB. reduced fixed costs in power generation, lowering the minimum 19 Japan International Cooperation Agency (JICA). "The Devel- efficient scale for electricity production, and spurring new entry opment of the PPP Technique for the Metro Manila Urban and further competition. Expressway Network." 2003. 9 See chapter 7. 20 D.L. Guarino Jr., P.C. Cal, and H.S. Lidasan. 2001. "A Study into 10 The MWSS tariff was P8.56 per cubic meter at the time of priva- the Viability of Consolidating Bus Companies Operating in tization. The bid for the east zone was P2.32 per cubic meter and Metro Manila." Journal of the Eastern Asia Society for Transpor- that for the west zone P4.97 per cubic meter. tation Studies, Vol. 4, No.1. 11 The Moroccan telecoms regulator resolved an interconnection 21 "Even children can stop corruption in infrastructure." 2004. Phil- dispute between Maroc Telecom (the fixed line incumbent) and ippine Daily Inquirer, August 2. Meditelecom (a mobile service provider) through international 22 A World Bank-supported community-driven development benchmarking and analysis of cost models used by the operators. project, which uses many of the core elements of the Compre- A similar technique was used to settle an interconnection dispute hensive and Integrated Delivery of Social Services (CIDSS), a in Botswana. Ioannis Kessides. 2004. Reforming Infrastructure. community development program. World Bank, Washington, D.C. 23 "Women cited for checking graft in infra projects." 2004. Philip- 12 J. Gavino Jr. 1992. "A Critical Study of the Regulation of the pine Daily Inquirer, June 24. Telephone Utility: Some Options for Policy Development". 24 S. Coronel and L. Kalaw-Tirol, eds. 2002. Investigating Corrup- Ph.D. dissertation, University of the Philippines; and Ramonette tion: A Do-It-Yourself Guide. Manila: Philippine Center for Inves- Serafica. 2002. "An Assessment of Infrastructure Policies," in tigative Journalism. WorldBankInfra.indb 30 12/6/2005 8:40:42 AM Chapter 2 The Business Environment for Infrastructure 1 WorldBankInfra.indb 31 12/6/2005 8:40:42 AM Gabriel M Covian/Getty Images WorldBankInfra.indb 32 12/6/2005 8:40:53 AM Chapter 3 Infrastructure Planning, Coordination, and Financing Introduction The section after this introduction identifies and T elaborates the reasons for the lack of planning and he public sector plays a vital role in the coordination, and the implications for infrastructure provision of infrastructure in four areas: provision. It discusses why the Philippines needs better providing services directly, facilitating services long-term institutional planning and coordination, provided by the private sector, policy planning and and the related role of central and local governments. coordination, and ensuring adequate financing It identifies a "missing middle" in the provision of opportunities. secondary or regional infrastructure. And it discusses Despite moves in recent years toward priva- the reasons why, even though the Philippines was one tization of infrastructure services, the Philippine of the first countries in the region to decentralize, government remains the major player in providing decentralization has not fully realized its potential services directly in the power, water, road, and ports in terms of local infrastructure provision. sectors. In the power sector, state-owned National The subsequent section discusses the need for Power Corporation (NPC) is the major generator, mobilizing resources for infrastructure, and the power purchaser, transmission provider, and system shortcomings of the prevailing financing framework. operator. Privatization of NPC assets is ongoing, It should be emphasized that even though resources though progress has been slower than planned under may be mobilized via nonpublic channels, the respon- the Electric Power Industry Reform Act (EPIRA). In sibility for establishing such a framework remains in the water sector, 70% and 75% of the population in public hands. urban and rural areas, respectively, are served by The final section discusses suggested actions for public utilities--water districts and LGU-managed the government to consider. systems. In the road sector, the central government is the dominant provider through the Department of Public Works and Highways, with LGUs playing Infrastructure policy planning and a secondary role. coordination Performance issues in the power, water, and road sectors, as discussed in chapter 1, suggest that Planning and coordination are critical for infra- public infrastructure service has not been satisfactory. structure developments, as required investments are Causes of the problems are primarily related to the often "lumpy" and capital intensive, involve many poor business environment for infrastructure--the players, span over many years, and are inevitably four Cs discussed in chapter 2. political as they serve public needs. Visionary The public sector's role in facilitating services infrastructure strategies anticipate growth and the provided by the private sector will be discussed in demand for infrastructure, or react rapidly and stra- detail in chapter 4. The present chapter therefore tegically to constraints as they begin to emerge. As focuses on the role of the public sector in long-term the East Asia experience has demonstrated (box 3.1), planning and coordination at all levels of government, the challenges for planning and coordination are and in ensuring adequate financing opportunities. multiple: WorldBankInfra.indb 33 12/6/2005 8:40:53 AM Philippines: Meeting Infrastructure Challenges Box 3.1 Infrastructure Planning and Coordination in East Asia T he East Asia experience demon- political influence in promoting cratic technocracy to greater par- strates compellingly the impor- infrastructure development at the ticipation and decentralization. On tance of planning and coordination central level and are focal points the other hand, in China, though in infrastructure development. for interagency coordination in authority has been extensively The presence of strong central policy making and implemen- decentralized to local levels, agencies to oversee and coordinate tation. As these economies priori- the center remains strong and infrastructure development is a tized improving (or maintaining) has become more strategic and common feature of the region's competitiveness and attracting flexible; market forces are playing now-developed economies of investment, they emphasized effi- an increasingly important role. In Hong Kong, China; Japan; Republic ciency in project implementation Thailand, planning and coordi- of Korea; Singapore; and Taiwan, and service delivery. nation have remained strong, even China and the most advanced The planning and coordination though there has been a shifting developing economy--Malaysia. mechanisms in East Asia evolved of the key planning responsibilities Central coordination also played over time, with the transformation from technocrats to politicians. a very important role in China and of the economic and political Thailand and contributed to their systems in each economy. Indo- Source: Asian Development Bank, Japan Bank for International Cooperation, and rapid infrastructure development. nesia, for example, saw its planning the World Bank. 2005. Connecting East In fact, their respective planning apparatus largely dismantled Asia: A New Framework for Infrastructure. agencies enjoyed considerable during the transition from auto- Manila, Tokyo, and Washington, D.C. · How to balance infrastructure investments with of infrastructure planning and implementation, · other development priorities? namely: How to link planning and financing in order for · plans to become a reality? · Lack of policy planning and coordination at the How to coordinate different agencies involved in national level · infrastructure development? · Weak central oversight by the National Economic How to coordinate activities in a market economy, and Development Authority (NEDA) and the where the location and timing of growth and Department of Budget and Management (DBM), · demand are uncertain? as well as insufficient coordination among infra- How to plan and coordinate activities in a decen- structure agencies tralized environment where local governments · Intensive political intrusion and subsequent are mandated to provide local (and some regional) constant shifting of priorities. · infrastructure services? How to plan and coordinate in a political envi- Boom-bust infrastructure cycles ronment where the political interests of various Figure 3.1 shows infrastructure expenditures by stakeholders are often in conflict with each different entities over 1985­2002. The most obvious other? feature of spending over this period is the "boom- bust" cycle. Total infrastructure expenditures reached This section provides assessments of the Phil- peaks in 1990, 1993, and 1998 but experienced sharp ippines' infrastructure planning and coordination declines after each one. Private participation, concen- at the national, regional, and local levels. trated in energy (1993­1994) and telecommunications (1998), was largely responsible for these peaks. What is National infrastructure provision and issues of noticeable is that private investments in infrastructure policy planning and coordination were preceded by crises in power and water, with the While the Philippines has a well-delineated infra- government providing overly generous incentives in structure planning framework, a closer look at the some cases for private participation to resolve them. framework, and a better understanding of actual The major efforts to provide or improve infrastructure experiences and practices on the ground, point seem to have been reactive responses to crisis, and to three main factors that constrain the efficiency not the result of effective long-term policy planning WorldBankInfra.indb 34 12/6/2005 8:40:54 AM Chapter 3 Infrastructure Planning, Coordination, and Financing Figure 3.1 projects--given that most infrastructure Infrastructure expenditures as a share of GDP agencies are motivated by the avail- 10 ability of funding and the preferences of potential donors--rather than by the 8 implementation of a well-thought-out infrastructure strategy. t 6 encerP4 Planning and coordination 2 Policy planning and coordination differ across sectors according to how the 0 infrastructure is financed. On the one hand, for infrastructure services that 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year are provided free of charge and mainly Total infrastructure Total private Total public rely on government funding, the annual GOCCs National government LGUs budgeting process plays a critical role in Note: Infrastructure expenditures reflect capital outlays only. development and investment planning. GOCC = government owned and controlled corporation; LGU = local government unit. Resource allocation and efficiency are Sources: Department of Budget and Management; Department of Finance; Commission on results of decisions that involve the Audit; Maynilad Water Services, Inc.; Manila Water Corporation, Inc.; Optel Ltd.; World Bank. president, the oversight agencies, the line agencies of government, and the two and coordination. The Build-Operate-Transfer (BOT) chambers of Congress. On the other hand, Law passed in 1990 was amended in 1994 to spur infrastructure services provided by either GOCCs more private interest in power investments, while or private corporations, at least partially financed the National Water Crisis Act was passed in 1995 throughuserfees,relyonmuchlessgovernmentbudget to provide the government with special powers to support. They may involve government subsidies, reorganize the water sector agencies, encourage which can be explicit, implicit, or contingent. The role greater private sector participation, and improve of oversight agencies in such cases is quite different. the overall institutional environment in the water In general, oversight agencies are not consulted unless sector. A major accomplishment arising from the the government corporations borrow and require latter Act was the privatization of the operation and sovereign guarantees or enter into BOT contracts (or management of water distribution and sewerage their variants) with the private sector. More important services in Metro Manila. roles are played by the boards of these corporations, Infrastructure expenditures by the public sector, as well as their regulators, than when infrastructure though not nearly as volatile as by the private sector, services are provided free of charge. declined in the 10 years to 2002, with a particularly NEDA is the main government agency responsible sharp decline in spending by government owned for the formulation of the country's development and controlled corporations (GOCCs), reflecting plan and for providing executive advice on economic worsening performance by public utilities. Spending policy. NEDA takes overall charge of infrastructure on infrastructure by LGUs also remained stagnant, planning, assisting the infrastructure agencies in despite a significant increase of revenue transfers identifying and prioritizing projects. Within NEDA, to them since the enactment of the 1991 Local a committee of the NEDA board--the Infrastructure Government Code (LGC). Committee (Infracom)--assumes oversight respon- The boom-bust infrastructure cycle is reflective of sibilities for the infrastructure program of the the government's failure to foster an integrated and government, and is responsible for preparing an well-coordinated infrastructure plan. This failure is integrated infrastructure program. The Investment exacerbated by the fact that there is little assurance Coordination Committee (ICC) of the NEDA board that a current government's infrastructure plan is the gatekeeper, recommending to the NEDA board will be an integral part of a future government's projects for financing, particularly projects funded infrastructure plan because of the political oppor- via BOT and official development assistance (ODA). tunism that lies at the core of the factors working The board of NEDA is chaired by the president, with against efficient infrastructure planning. In addition, a subset of the cabinet as members. The chair of the infrastructure provision remains largely driven by ICC is the secretary of finance. WorldBankInfra.indb 35 12/6/2005 8:40:54 AM Philippines: Meeting Infrastructure Challenges The Medium-Term Philippine Development Plan implications, by the ICC: GOCCs and LGUs are (MTPDP) pronounces the country's long-term devel- left on their own to make investment decisions on opment goals, and often coincides with the term of projects (other than those requiring major capital the presidency. The Medium-Term Public Investment expenditure by the government).3 Program (MTPIP) makes the MTPDP operational. In theory, the MTPDP and MTPIP provide the guidance Linkages between budget and development plans and desired allocation of investment resources among The balancing of macroeconomic with long-term sectors and regions. In reality, commitment to the development objectives is the primary responsi- MTPDP is prone to change during the course of its bility of NEDA's Development Budget Coordinating implementation, and the targets set by the MTPDP Committee (DBCC), chaired by the secretary of tend to be too ambitious. DBM. Its other members are the secretary of finance, A comparison of the results of the previous the governor of the central bank, and the director- MTPDP with its targets shows that while several general of NEDA and the executive secretary. The important targets were achieved or nearly achieved, DBCC decides on the macroeconomic parameters many of the intended outcomes for infrastructure that determine the size of the budget to be submitted were not achieved, or at most partially achieved to Congress. (Congress can change the allocations (table 3.1). The MTPIP process often translates into within the budget but cannot increase the total size a mere wish list of projects and activities presented by of the budget.) sectoral agencies in the absence of well-coordinated The annual budget process often results in discon- and consistent infrastructure plans and in the face nection with the official development plans. The need of hard budget constraints. Recently, the government to satisfy every legislator--as the budget has to be has tried to rectify this by linking investment plans approved by Congress--spreads resources thinly, more closely to agency budgets and segregating the which means that low priority is given to investments priority projects that fall within an agency's budget that are critical to the entire infrastructure network. ceiling from those that do not. It is also making As a result, the budget process has become a division efforts to shift from a sector-based MTPIP process game that has a strong tendency to finance thousands to a thematic approach, forcing planners to prioritize of small projects and neglect investments that are along intra- and intersectoral lines. required to increase the efficiency of the whole In terms of project approval, in addition to the network. Local governments, for their part, in spite usual ICC process where proposed projects from of the substantial allocation for development funds agencies go through reviews by NEDA staff, the in the Internal Revenue Allotment (IRA), have also ICC technical board, and ICC cabinet level, oversight shown a tendency to have a short planning horizon, agencies can ask the entity submitting a project to and rarely pool resources for projects that benefit undergo a sector effectiveness and efficiency review several of them. (SEER)1 process, and to adhere to the "scrap-and- DBM is the main agency responsible for budgeting build"2 policy applied to all government agencies. and finding the funding source for approved projects While the SEER process has helped government listed in the MTPDP, and, as part of public expen- agencies in prioritizing their activities, in the absence diture management reforms, it began the agency of a more systematic and empirical basis for prioriti- performance review process. This evaluates three zation, it can become a superficial exercise where an areas of infrastructure agencies: physical, financial, agency can easily justify the inclusion (or exclusion) and income accomplishments. Under the physical of projects in its list of priorities. component, DBM compares work targets vis-à-vis Although the GOCCs and LGUs may have to the works accomplished by the agency concerned. The coordinate with some line agencies, so as to, for agency is asked to explain any variance or deviation example, obtain environmental clearance certificates from the target. A similar process is followed for in order to implement their respective projects, there assessing financial and income accomplishments. is a lack of effective coordination in planning and DBM is also pursuing the implementation of the Orga- guidance to ensure that regional and local infra- nization Performance Indicator Framework for budget structure projects accord well with national priorities. allocation, with the intention of focusing on agency Only those infrastructure projects that require a major effectiveness and efficiency of service delivery. While capital outlay or funding support are evaluated for some results are achieved through these methods, financial viability, social desirability, and budgetary further improvement is needed to strengthen the way WorldBankInfra.indb 36 12/6/2005 8:40:54 AM Chapter 3 Infrastructure Planning, Coordination, and Financing Table 3.1 Selected key measurable targets under the Medium-Term Philippine Development Plan 2001­2004 MTPDP 2001­2004 Sector Actual 2000 Actual 2004 Target Roads Paved share of national roads (%) 62 79 (as of end-2003)a 70 Lineal share of permanent bridges (%) 89 95 (as of end-2003)a 92 Expressways A total of 271 km of build-operate-transfer Only NLEX rehabilitation was implemented interurban roads: NLEX rehabilitation (widening (83 kms)a of existing facilities), STAR 2, South Expressway (widening and extension to Lucena), and Subic- Clark-Tarlac Expressway Power Number of barangays served (%) 80.1 95 (as of July 2004)b 91.27 Installed generating capacity (MW) 13,196 15,479 (as of 2003)b 15,132 Energy self-sufficiency (%) 45 52 (as of 2003)b 53.9 Reduction of system losses (%) Decrease in loss to: Average distribution system losses: Private utilities 9.5 Private utilities 10.67 Electricity 14.0 Electricity cooperatives 15.08b Effective implementation of power · Retail competition and open access · Wholesale electricity spot market not sector restructuring established no later than 2004 implemented (as of February 2002) · Removal of cross subsidies · One-third of intraregional subsidy reduced (as of September 2002)b Water MWSS service areas (population served, million) MWCI 2.5 6.0 (as of 2002)c 3.4 MWSI 3.4 8.4 (as of 2002)c 5.2 Legislative agenda · Clean Water Act · Clean Water Act signed, March 22, 2004 · Water Regulatory Commission Act to establish · EO 123 (2002) consolidated responsibility for single agency for economic regulation of economic regulation for both water districts piped water supply and sewerage systems and LGU-managed systems in NWRB · Amendment in Presidential Decree 198; seek · EO 279 (February 2004)--LWUA reform; focus increase LWUA capitalization on water districts that are unable to access private credit but have potential of becoming creditworthy Telecommunications Telephone density As of 2002 (NTC):e (installed) 9.05d 12.73 (installed) 8.7 (subscribed) 3.72 (subscribed) 4.17 Ports Modernization and privatization · Major port development projects to be · Both projects pursued but suffered delays due of ports pursued: Batangas Port Dev't Project to right-of-way problemsf (Phase II), Southern Philippine Ports Development Package · Strong Republic Nautical Highway (Western · The Pan-Philippine Highway Ferry Terminals Seaboard Intermodal Transport Project) Privatization and the Western Seaboard launched in 2003g Intermodal Transport Project EO = executive order; LGU = local government unit; LWUA = Local Water Utilities Administration; MTPDP = Medium-Term Philippine Development Plan; MW = megawatt; MWCI = Manila Water Company, Inc.; MWSI = Maynilad Water Services, Inc.; MWSS = Metropolitan Waterworks and Sewerage System; NLEX = North Luzon Expressway; NWRB = National Water Resources Board; NTC = National Telecommunications Commission. Sources: a. Infrastructure Development, University of the Philippines 3rd Lecture Series 2004, presented by Department of Public Works and Highways. b. MTPDP 2004­2010. c. MWSS Regulatory Office Information Kit--based on official number of water service connections. d. Computed from MTPDP 2001­2004. e. NTC as cited in chapter 9. f. BusinessWorld. "Batangas port to meet capacity by 2008" (October 28, 2003) and http://www.ufs.ph/tinig/mayjun03/05060321.html. g. http://www.dotc.gov.ph/actioncenter/articles/march/articles_03312003.htm. WorldBankInfra.indb 37 12/6/2005 8:40:54 AM Philippines: Meeting Infrastructure Challenges in which performance of the line agencies is evaluated, accountability, further weakening infrastructure the utilization of the performance review in budget planning and coordination efforts of the government preparation, and the monitoring and validation of (table 3.2).4 Thus, some 22% of the DPWH budget agency accomplishments. in 1997­2001 was on account of local infrastructure The oversight agencies have tried to make the projects, which were typically funded out of the budget process less myopic by introducing a multiyear pork barrel of legislators under various rubrics, expenditure framework. During hard times, however, such as the Project Development Assistance Fund, when macroeconomic considerations take precedence Countrywide Development Fund, Rural/Urban over predictability of the size of future years' budgets, Development Infrastructure Fund, Food Security both the line agencies and Congress have no incentive Program Fund, and various local infrastructure to use such a framework. projects. (The use of discretionary congressional funds amounted to almost P18 billion, or 0.48% of Political intervention GDP, in 2001.) Technocratic policymaking in the Philippines is As discussed in chapter 2, politically motivated not insulated from political influences. Because decisions also directly affect the financial stability changes in political administration percolate through and efficiency of agencies. For example, the order multiple tiers of the civil service, they reduce the to limit the tariff increase that NPC could impose likelihood of policy and program continuity and on its customers stymied the company's efforts to introduce instability of policies and infrastructure set full-cost recovery tariffs, contributing to the plans. Even priority projects are often delayed for already substantial NPC deficit. Thus, short-sighted indefinite periods or canceled altogether, according political concerns sacrifice the long-term efficiency to the predilection of politicians. Political influence and viability of infrastructure provision. is also prevalent even without leadership or personnel A key result of political influence is the short changes. Efforts by legislators to insert pet projects time horizon. Policies and public choices are into the infrastructure program of the government often driven either by narrow interest groups or have resulted in fragmented utilization of scarce fiscal by populism. Because of social divisions and high resources. income inequality, reforms that require short-term Another consequence of a personalistic political pain are unlikely to be accepted unless there is system is seen in discretionary congressional funds already a crisis. National and local politics are both projects (also known as "pork barrel" projects) in strongly influenced by narrow and well-organized which congressmen and senators are allocated constituencies, rent seeking, campaign finance, and budgets to choose pet projects. This system has little the separation of powers among the three branches Table 3.2 Funds for local infrastructure in Department of Public Works and Highways budget, 1997­2001 (P billion) 1997 1998 1999 2000 2001 Total 1997­2001 Totala 49.05 38.25 42.65 42.33 48.96 221.24 of which: Congressional fundsb 14.17 3.04 6.83 8.10 17.56 49.70 Various infrastructure projects 13.68 2.84 0.32 8.10 17.29 42.23 Project Development Assistance Fund 0.00 0.00 0.00 0.00 0.27 0.27 Countrywide Development Fund 0.50 0.20 0.00 0.00 0.00 0.70 Rural/Urban Development Infrastructure Fund 0.00 0.00 5.36 0.00 0.00 5.36 Food Security Program Fund 0.00 0.00 1.14 0.00 0.00 1.14 Memo items Congressional funds to DPWH budget (%) 28.89 7.95 16.01 19.13 35.87 22.46 Congressional funds to LGU infrastructure 198.47 51.83 89.23 85.36 197.01 127.24 investment (%) DPWH = Department of Public Works and Highways; LGU = local government unit. Sources: a. Basic data from DPWH. b. Estimates by Rosario G. Manasan. 2004. "Infrastructure and Decentralization." May. World Bank, Manila. WorldBankInfra.indb 38 12/6/2005 8:40:55 AM Chapter 3 Infrastructure Planning, Coordination, and Financing of government. There is also a lack of political Negotiating water source rights outside their admin- constituency for fiscal responsibility and policies or istrative boundary can prove to be extremely difficult projects that have gestation periods longer than the for water-deficit LGUs. It was reported that Cebu City political electoral cycle. Although this situation is had great difficulty convincing other jurisdictions to seen in many other countries, the effects of short- supply water to the water-starved city because of such sighted choices and policies that pander to narrow border issues. interest groups have likely done far more damage National government agencies attempt to perform in the Philippines because its economy is poorer, a coordinating role with regard to the missing its institutions are more vulnerable (bureaucracy, middle--the ICC, for example, provides guidelines regulatory agencies, judiciary, and media), and on cost sharing between the national government political accountability is weaker (no real political and LGUs for regional projects. The Department of parties, expensive elections).5 Interior and Local Government has been designated "the lead government agency to oversee/administer Regional infrastructure provision and the national government assistance to LGUs in the "missing middle" implementation of devolved infrastructure programs The national government is responsible for primary and projects."6 However, the mechanisms by which infrastructure provision, such as national backbone the central government can direct assistance to transmission grids for power and primary road LGUs are not specified. The prevailing framework networks, while cities and municipalities are therefore leads to both national government and responsible for tertiary infrastructure provision, LGUs initiating devolved activities, whereby both the such as roads and water, within those LGUs. There national government and LGUs fail to take primary is a problem, though, with secondary (i.e. inter-LGU/ responsibility for such projects. regional) networks that serve more than one local Provinces, which in principle are responsible government. for provincial networks, suffer from an acute lack For example, in secondary road networks and of resources compared with cities and munici- utilization of common resources such as river basins, palities. This is largely due to decentralization, it is unclear who is responsible for policy planning which has strengthened cities and municipalities and coordination for development. The outcome is through expanded taxing powers relative to those poorer provision of infrastructure at the regional of provinces (figure 3.2).7 Provincial governments' level, resulting in a "missing middle." Underinvestment in regional infrastructure has imposed huge social and economic costs on the Figure 3.2 Local government own-source revenue country. As discussed in chapter 1, regions with good as a share of GDP infrastructure have achieved higher economic growth, 0.9 leaving behind those with a severe lack of infra- 0.8 structure. Such underinvestment is seen in regional 0.7 Cities road systems, solid and toxic waste processing, trans- t 0.6 encerP0.5 Municipalities portation systems planning, parks, wastewater, and 0.4 watershed management. To take one example: the 0.3 status of provincial roads is much worse not only 0.2 0.1 Provinces than national roads, but is even worse than those of 0.0 city and municipal roads; in 2000, although 62% of 198519861987198819891990199119921993199419951996199719981999200020012002 national roads were paved, only 21% of provincial Year roads were, a rate much lower than city roads (77%) Source: Commission on Audit. and even municipal roads (34%). Another example is the problem of water resources own-source revenue, as a share of GDP, has expe- management that affects several LGUs sharing the rienced a long-term declining trend, especially in the same river basin. Inter-LGU river basin planning and post-1991 LGC years. Provincial governments' share management, water rights allocation, and regulation of the IRA, though significantly higher after LGC, of pollution can be sources of friction and inaction, was lower than that of municipalities and about the given that LGUs pollute a common water source and same as the cities (figure 3.3). allow uncontrolled tree cutting along watersheds. Even though an important objective of NEDA in WorldBankInfra.indb 39 12/6/2005 8:40:55 AM 0 Philippines: Meeting Infrastructure Challenges Figure 3.3 efforts (which act as a secretariat to RDCs) to commu- Local government Internal Revenue Allotment transfers nicate regional and national plans to LGUs, LGUs, as a share of GDP seldom, if ever, take into consideration the regional 1.2 development plans formulated by RDCs.10 1.0 Municipalities t 0.8 Local infrastructure provision and failure to encerP Provinces 0.6 maximize benefits of decentralization Cities 0.4 The decentralization and devolution under the 1991 0.2 LGC gave extensive powers to local governments 0.0 in terms of service provision and delivery, revenue 198519861987198819891990199119921993199419951996199719981999200020012002 imposition and collection, and fund raising. In Year particular, LGUs were expected to develop local infra- Source: Commission on Audit. structure given the growth-enhancing and poverty- reducing impacts of infrastructure. With the passage of the LGC, the expectation was that local autonomy implementing the MTPIP is to harmonize sectoral would result in rapid development, particularly in plans with "geographic strategies," various geograph- nonurban and low-income areas. However, despite ically focused attempts have failed. This is because the the LGC's enabling policy and legal framework, coordinating agencies that were set up to encourage growth in local infrastructure has been sluggish, if integration at the local level had little control over not stagnant, even though the Philippines was among budgets and resources, and no political influence the first countries in the region to decentralize. over the agencies with direct control of resources. Overall LGU expenditures as a share of GDP Regional development councils (RDCs), composed of have doubled since decentralization but LGUs' local government officials, the directors of regional infrastructure expenditure share has remained offices of the line agencies, and representatives of civil largely unchanged. And even though total infra- society, have the potential to coordinate and integrate structure investment of all LGUs combined grew by local infrastructure plans and to link them with the 8% annually between 1990 and 2001 (in real terms), country's overall infrastructure plans as defined in the share of total LGU infrastructure spending to the MTPDP.8 However, the majority of RDCs are total LGU capital outlays stayed unchanged while weak and ineffective when it comes to infrastructure their total capital outlays grew by 12.5%. Nonetheless, planning and coordination.9 LGU infrastructure investment rose from 0.15% of Regionalization of the departments of the national GDP in 1985­1991 to 0.39% in 1992­2002 (table 3.3), government was much more successful in bringing though the expenditure level declined after 1995. public administration and the bureaucracy to the Wide disparities are apparent across the various levels regions than it was for policy planning and coor- of local government, with cities spending more on dination. Overall, fiscal resource allocation in the infrastructure than the more cash-poor provinces and country has been heavily sector-based as opposed to municipalities. In particular, while under the LGC the region-based. While the sectoral departments have mandates of provincial and municipal governments in been regionalized, resource allocation decisions are infrastructure provision have widened significantly, still made in Manila and are much more responsive their actual investment level in infrastructure has to the preferences of legislators (who have the power declined when measured as a share of GDP. to approve or disapprove line agency budgets) than This inadequate local infrastructure provision to the preferences of RDCs. Except for the Metro stems from the poor incentives facing local decision- Manila Development Authority, RDCs have prac- makers, which have resulted from changes in the legal tically no budget allocation and very little influence and institutional framework defining national-local on the national budget. As a result, the planning of relations in the post-LGC period. The poor incentives, tax-financed infrastructure has always been plagued in turn, are primarily due to the following factors: by the inability to take into account the fact that unclear LGC and lack of incentives for LGUs to infrastructure investments, especially in transpor- mobilize their own resources; mismatches between tation, must be seen as part of a network. Cities and revenue transfers and expenditure responsibilities; municipalities typically act in terms of their spatially short termism inherent in the local political economy; bounded interests. Despite NEDA regional offices' and capacity constraints. WorldBankInfra.indb 40 12/6/2005 8:40:55 AM Chapter 3 Infrastructure Planning, Coordination, and Financing 1 Table 3.3 Local government infrastructure investment as a share of GDP, 1985­2002 (%) 1985­1991 1993­2002 1990 1995 2000 2002 All LGUs 0.15 0.39 0.17 0.36 0.34 0.23 Provinces 0.05 0.07 0.06 0.05 0.07 0.04 Municipalities 0.04 0.08 0.06 0.08 0.06 0.04 Cities 0.05 0.24 0.05 0.23 0.21 0.15 LGU = local government unit. Note: Mostly based on the estimates of Rosario G. Manasan. 2004. "Infrastructure and Decentralization." May. World Bank, Manila; water sector figures adjusted to include 4% of the Local Development Fund based on eight sample LGUs. Source of basic data: Commission on Audit. Unclear LGC and lack of incentives to raise own resources higher level of government from the LGU to "provide At first regard, Section 17(b) of the LGC clearly or augment the basic services and facilities assigned delineates functions across levels of government, to a lower level of local government unit when such except perhaps in the area of environment and services or facilities are not made available or, if made natural resource management.11 However, Section available, are inadequate to meet the requirements 17(c) allows national government agencies to continue of its inhabitants." The prevailing practice has effec- to implement devolved public works and infra- tively permitted the existence of a two-track delivery structure projects as well as other facilities, programs, system where both national government agencies and and services provided that these are "funded by the LGUs can initiate devolved activities.12 The ill-effects national government under the annual General of this system are illustrated by a recent incident of Appropriations Act, other special laws, pertinent a frustrated attempt of two LGUs to invest in their executive orders, and those wholly or partially funded own port (funded by own resources) because of from foreign sources." the opposition of another government body that is In line with this, Executive Order 53 mandates supposed to be in charge of port development in the national government agencies to retain management area concerned (box 3.2). control over all foreign-assisted projects and/or nationally funded projects even if they involve Mismatch between revenue transfers and devolved activities. Unfortunately, the LGC and its expenditure responsibilities implementing rules and regulations do not define the There is a mismatch between the revenue means mechanism through which the national government and expenditure needs of various levels of local can direct assistance to LGUs under Section 17(f), government. Under the LGC, most of the revenue- which allows the central government or the next productive taxes are reserved for the national Box 3.2 Cebu Port Authority seeks halt to project by local government unit T he Daan Bantayan municipality expected to improve transport ser- territorial jurisdiction." Any port and the Cebu provincial gov- vices between Malapascua island development in Cebu should have ernment are constructing a wharf and Cebu mainland. prior written approval from CPA, in Barangay Maya, Daan Bantayan. The Cebu Port Authority (CPA) according to the general manager. The wharf will serve as a jumping- has asked the Cebu regional trial CPA has asked for P250,000 in off point for Malapascua island, a court to stop the construction of damages and litigation expenses. small resort island off the coast of the P15 million wharf over juris- For his part, the Cebu governor Daan Bantayan. Malapascua island dictional issues. According to the invokes the Local Government is frequented by British tourists general manager of CPA, "under Code, which he said empowers and is envisaged by local officials its charter only CPA has the sole local government units to construct for development into a world- authority to manage, administer, municipal ports. class resort in the same league as operate, maintain, improve and Source: BusinessWorld. January 26, 2004. Boracay island. The wharf is also develop port activities within its Manila. WorldBankInfra.indb 41 12/6/2005 8:40:55 AM Philippines: Meeting Infrastructure Challenges government and are off limits to LGUs. Most of the hampered by inconsistency in implementation. A 11 different taxes that LGUs are authorized to levy cost-sharing scheme was developed in 1998 and have narrow bases and limited yield prospects, with used by some ODA-financed projects, but was not the exception of the real property tax and the local enforced consistently. Most of the programs still business tax. The LGC also limits LGUs' power to transfer funds to LGUs on a pure grant basis, while set local tax rates. those funds channeled through the government Mismatches between assignment of revenues financial institutions (GFIs) are on a pure loan and of expenditures for all LGUs in the aggregate basis. Existing grant programs, channeled through and across different levels of local government are various sector departments, tend to be fragmented, compensated for by the mandated increase in the with a multitude of allocation criteria even within share of LGUs in national taxes (the IRA).13 The a sector. There is very little performance incentive contribution of the IRA to total LGU income in the in the grants, and almost nothing for overall LGU aggregate surged from 36% in 1985­1991 to 63% in governance improvement. 1999­2002 for all LGUs combined (table 3.4). The government has recognized the issue and has already taken important steps to address it. A Table 3.4 new financing mix for devolved functions was estab- Internal Revenue Allotment as a share of local government income lished in 2002, which tightened the use of grants and covered a wider scope of LGU functions. Facing an Period All local government units (%) extremely serious fiscal situation, the government is 1991 39.8 in the process of further tightening the matching 1995 61.9 grant framework. 2000 64.5 2002 66.2 Short termism inherent in local political economy Average 1985­1991 36.4 The local political economy creates a disincentive 1992­2002 62.5 to put in place long-term, multiyear infrastructure Source of basic data: Commission on Audit. projects, because of the three-year political tenure of elected local government officials and the risk that The IRA distribution formula is based on factors the succeeding administration might not support such as land area, population, and equity (rather than those projects to completion.14 Budgeting and proper performance-based indicators). The formula cannot management of local infrastructure projects remain match the revenue transfers with the expenditure weak. The lack of accountability engendered by responsibilities devolved to the different LGUs. inadequate revenue and tax decentralization, together Therefore, while the increase in the IRA share of with the short period of office, create poor incentives some LGUs is too small to finance the devolved for planning and budgeting. Thus, governors and functions (particularly provinces), other LGUs mayors tend to have short-term planning horizons (particularly cities) have received resources beyond with concomitant adverse effects on LGU infra- their requirements. Lack of concrete performance- structure investment.15 based measures has resulted in many LGUs failing In addition, the short-term tenure of local to fully utilize their revenue-raising authority, partly officials often leads to their choosing questionable due to the disincentivizing effect of the IRA distri- development priorities. While there are indeed bution formula. The adverse effects of the fiscal gap LGUs with local executives who are more appre- at the local level is even more pronounced in the ciative of the critical role of infrastructure in local infrastructure sector since the propensity (if not development, there are others who devote their 20% the ability) of LGUs to finance devolved activities is IRA allocation toward, for example, building more more constrained in this sector. This occurs because basketball courts, launching barangay beautification LGUs are left with no choice but to pay the salaries projects, and engaging in other similar projects that of devolved personnel in the other sectors. are reported as "development projects" but that do In terms of grant support to LGUs, matching not necessarily contribute to local development. The grants are an important instrument in any inter- short period of local chief executives also creates poor governmental fiscal transfer system for achieving incentives for raising local revenues, with many LGUs efficiency and equity. However, the government's continuing to depend on IRA transfers from the policy on grants to LGUs has been seriously national government. WorldBankInfra.indb 42 12/6/2005 8:40:56 AM Chapter 3 Infrastructure Planning, Coordination, and Financing Short termism at the local level, in conjunction Infrastructure financing with the politicization of local development plans, severely hampers proper planning and implemen- The combination of high population growth, rapid tation of infrastructure projects. LGUs typically urbanization, and the continued need for development prepare a local development plan (LDP) with a local in rural areas where the majority of the poor live development investment plan (LDIP). The LDIP is a implies a substantial demand for both current and multiyear listing of programs and projects with cost future infrastructure in the Philippines. The question estimates and sources of financing, and is the trans- facing the government is where the resources will lation of the policies and strategies laid out in the LDP come from, both for maintenance of existing infra- into specific programs and projects. In this context, structure and for new investments. On the basis of an annual investment plan (AIP), the current-year 2002 expenditures on infrastructure of 2.8% of GDP, slice of the LDIP, is then prepared. and an average 5% benchmark, a financing gap in the However, in most cases the preparation of the order of over 2% of GDP is indicated. AIP is a "political" process, and is done indepen- Four main sources of raising finance for infra- dently of the LDP and LDIP. The programs and structure development are: reinvesting user charges projects in the AIP, therefore, bear little resemblance (for both public and private utilities); government to those in the LDP and LDIP.16 Closer scrutiny of financing (at national and subnational levels); raising the LDPs, the LDIPs, and the AIPs in five sample funds in financial markets (domestic and interna- provinces shows that there is an imperfect match tional, debt and equity); and external ODA. between the projects listed in the LDPs/LDIPs, on the one hand, and those listed in the AIPs, on the User charges other.17 Of these five provinces, the share of the User charges are typically the main source of much projects listed in the 2002 provincial AIP that can infrastructure financing in the Philippines. In the be found in its LDP ranged from a high of 61% mature, private utilities, internally generated funds to a low of 4% in one province, highlighting the can account for around 70% of funds for investment. irrelevance of the LDP in preparing the AIP. A big However, as chapter 2 indicates, user charges are gap, therefore, exists between plan formulation and below cost recovery for most public utilities. implementation. In addition to generating financing directly, adequate user charges also establish the "funda- Capacity constraints mentals" of a financially viable project that private When, under dynamic local leadership or local public investors will be willing to finance--a predictable pressure, LGUs do adopt a progressive development stream of cash flow. A stronger commitment to agenda, including that for infrastructure, they are appropriate levels of user charges reduces uncertainty often seriously constrained in their capacity to plan, about future cash flow, therefore also lowering the prepare, and implement the programs. Many LGU return on capital that a private investor would require infrastructure projects, for instance, suffer from slow for a particular project. implementation, as LGUs find it difficult to produce the needed feasibility studies, detailed designs, and Government financing bidding documents, or to secure the capacity to At the national level, overall public finances are very supervise construction and maintain assets once weak. Nonfinancial public sector debt as a share of they are built. GDP, at around 100% in 2004, is already very high. Much sector expertise still lies with the central Interest payments alone are close to 30% of total government's line agencies, instead of being decen- expenditures, and any rapid increase in debt financing tralized to LGUs. The issue is further complicated would only exacerbate the problem. The government by the fragmented nature of the local government has determined to accelerate fiscal adjustment and system in the Philippines, where the size of LGUs achieve a balanced budget by 2009. Overall, however, is quite small, making it difficult for them to there is extremely limited fiscal space for increasing attract and retain relevant expertise. In addition, national government financing for infrastructure over the different capacity assistance programs to LGUs the next few years. through various line agencies and international At the subnational level, the overall financial development partners suffer from a lack of coordi- position of LGUs remains weak. As figure 3.4 nation and synergy. indicates, LGUs have generally run surpluses in their WorldBankInfra.indb 43 12/6/2005 8:40:56 AM Philippines: Meeting Infrastructure Challenges Figure 3.4 LGUs declined from 58% in 1989­1991 to 55% in Local government current operations as a share of GDP, 1992­2000. The continued low own-resource mobili- 1985­2001 zation effort leaves limited room for LGUs to expand 4.5 infrastructure investments from their own income. 4.0 3.5 3.0 Raising funds in financial markets t 2.5 encerP 2.0 The Philippines' financial market is largely in private 1.5 hands and commercial rate-of-return considerations 1.0 dominate lending decisions. The infrastructure sector 0.5 0.0 has to compete with other sectors for the hearts and -0.5 wallets of private lenders. Private lenders will lend 1985 1989 1993 1997 2001 Year to private borrowers in those sectors and activities Income and receipts where returns are attractive on a risk-adjusted Expenditures basis. For many of the reasons cited elsewhere Excess (deficit) of income over expenditures in this report (such as price controls, regulatory Note: Excludes transfers and surplus adjustments. Source: Commission on Audit. uncertainty, uncertain commercial demand, and political and social unwillingness to accept free and unfettered pricing flexibility) the risk-return trade- operations,18 but these have remained low and stable off does not favor infrastructure investments. Thus, at best. Moreover, as figure 3.5 shows, the bulk of the the current exposure to the infrastructure sector receipts are transfers from the national government (excluding commercial real estate) is less than 7% in the form of the IRA, which makes up nearly two- of the P2 trillion of outstanding gross loans (as of thirds of LGUs' total income. LGUs' own revenue March 2004).20 A significant increase in the share (outside the IRA) has, however, remained constant at of infrastructure loans is unlikely because it takes around 1.5% of GDP, despite much expanded revenue time to build up confidence in the sector, establish collection authority assigned to LGUs under the relationships, develop project appraisal skills, and LGC. Not many LGUs (fewer than 40%) have revised acquire familiarity with the sector. their local tax codes since 1992, although the rate of The banking sector (i.e. universal and commercial some local taxes is not indexed to inflation. Conse- banks, thrift banks, and rural banks), which quently, revenues from these taxes are continually dominates the domestic financial system, offers being eroded. Many provinces and cities (some 60%) limited possibilities for infrastructure financing.21 have undertaken a general revision of the schedule This is because the need to restructure balance sheets of market values of real property only once since has made banks risk averse and has imposed limits 1991, thus resulting in declining collections in real on acquisition of additional risk assets. Capital- terms.19 Real property tax collection efficiency of all adequacy constraints--caused by high degrees of nonperforming loans (NPLs), at 16% of outstanding Figure 3.5 loans, and nonperforming assets, at 13% of gross Local government revenues as a share of GDP, assets, as well as inadequate provisioning, at 51% for 1985­2002 NPLs and 31% for real and other properties owned 4.5 and acquired--make it unlikely that the banks will 4.0 seek new lending opportunities, especially in the 3.5 relatively more risky infrastructure sector. In fact, t 3.0 encerP 2.5 real growth of credit in the banking system was less 2.0 than 1% in 2002 and 2003. 1.5 The ability of any single bank to fund large 1.0 private infrastructure projects is limited by prudential 0.5 0.0 exposure limits and by the small size of its capital base. Consortium lending is an uncommon feature because 198519861987198819891990199119921993199419951996199719981999200020012002 Year of a lack of standardization among lenders in loan IRA Property taxes Other tax revenues Nontax revenues documentation and preference for lending mainly to entities within the conglomerate (leading to unwill- Note: Excluding extraordinary receipts. Source: Commission on Audit. ingness to share information with lenders outside the WorldBankInfra.indb 44 12/6/2005 8:40:56 AM Chapter 3 Infrastructure Planning, Coordination, and Financing conglomerate). Moreover, the narrow depositor base infrastructure projects from the insurance sector are limits scope for long-term infrastructure lending since likely to be limited. banks have to hold a significant portion of their assets Other sources of institutional funds such as in relatively liquid and short-term assets.22 Banks' mutual funds, company pension programs, and ability in term transformation is constrained by the common trust funds are still small. They are privately lack of exit options for their loans via debt markets. owned and are often parts of conglomerates. Data In terms of portfolio exposure, banks are already on these institutions are limited but indications are significant financiers to the public sector--domestic that they are not inclined toward infrastructure currency claims on the government and nonfinancial projects; they prefer investing in government bonds sector account for about 30% of total assets of deposit or equities, or extending loans to companies in the money banks. conglomerate. Capacity and enforcement issues are also The domestic bond market, though of a significant restricting bank lending to the infrastructure sector. size,24 is overwhelmingly dominated by government There is a capacity constraint within the economy bond issuances. Government bonds account for more and in the public sector to identify and develop a than 95% of the outstanding stock of bonds; corporate pipeline of commercially viable projects. Skills in and infrastructure bond issuances are rare. Moreover, project appraisal and project risk analysis in most 60% of outstanding government bonds have a tenor banks are also limited. Banks are used to lending on of less than four years, 34% have a tenor of between a short-term basis against familiar forms of collateral, five and 10 years, and fewer than 6% are over 10 years. and are ill-prepared for undertaking cash-flow and The main reasons for the bleak prospects for issuance business risk analysis, especially in complicated infra- of corporate bonds to finance infrastructure projects structure operating structures. Banks would need are high rates on government paper (which tends to be supported by specialized investment banking to make issuances by other entities more expensive) and risk management services. A cumbersome loan- and high issuance costs (as much as 5% of the issue enforcement regime, in which it would take three amount). to four years to enforce security interests or push The Philippines is an active issuer in interna- through restructuring and reorganization, further tional bond markets, and investors are familiar with limits bank lending for infrastructure. paper from the Philippines. But this advantage of The nonbank financial sector--accounting for experience and familiarity is being eroded by investor approximately 18% of financial system resources--is concerns over the fiscal situation. The government small, parts of it are underperforming and, at least cost of borrowing overseas is increasing and debt in the short to medium term, it cannot grow rapidly service considerations will limit the extent to which enough to support a high level of infrastructure it can raise external resources for infrastructure financing.23 investments. Access to foreign debt finance is thus While pension funds and the insurance companies likely to be constrained and costly because of sub- have increased their investable funds at a compound investment grade rating and concerns over sovereign annual growth rate of about 10­15% during the debt default risk. last few years, various structural and performance Equity markets have not been very active in features limit the extent to which they can deploy supplying risk capital to infrastructure.25 Noninfra- these funds into infrastructure. For example, pension structure companies in the banking, real estate, and funds are limited by law with regard to investments food and beverage sectors dominate the exchange. in private long-term bonds, loans, and equities. Thus, Within infrastructure, until recently only the the amount of incremental funds available from the telecoms companies and Meralco had been successful pension funds for allocation to the infrastructure in raising capital from the equity markets, though one sector is likely to be small. Pension funds such as recent notable development was the successful listing the Government Service Insurance System and the of MWCI on the Philippine Stock Exchange on March Social Security System also face problems of unfunded 18, 2005. While this represents a very encouraging liabilities, high levels of NPLs from members, and movement, overall it is unlikely in the medium term uncertain and poor investment returns. In the case that equity markets will become of a sufficient size of insurance companies, their portfolio composition and credibility to enable infrastructure companies is unlikely to change significantly in the medium to mobilize resources in large amounts. term, and incremental resources available for private In terms of actual fund raising from the financial WorldBankInfra.indb 45 12/6/2005 8:40:57 AM Philippines: Meeting Infrastructure Challenges market for infrastructure, the ability of the national channeled into infrastructure, which had received 110 government is seriously constrained because of the loans with an aggregate commitment of $6.9 billion or high debt level and fiscal deficits. For their part, local 69% of the total ODA loans portfolio as of December governments have so far done very poorly in accessing 2003.26 Within infrastructure, transportation was the financing from the market. LGU borrowing made largest recipient, followed by water resources, and up less than 4% of their income during 1992­2002. energy, power, and electrification. Disbursement from LGUs' low level of access to financing is partly due the infrastructure portfolio was $630 million in 2003, to the difficulty with such access, attributable to up from $606 million a year earlier. ODA plays a various factors including: low capacity in investment very important part in infrastructure financing. In planning and project preparation; lack of partici- 2003, annual ODA disbursements for infrastructure pation by private financial institutions; lack of reliable projects implemented by national government information about LGU financial situations; and agencies constituted 37% of national government cumbersome procedures of GFIs. (More details on capital expenditure on infrastructure, and ODA- the status of the situation of LGU access to financing funded projects implemented by GOCCs accounted are presented in appendix 3.) for about 39% of GOCC capital expenditure on infrastructure. External official development assistance ODA commitments, however, decreased over As table 3.5 shows, the bulk of external ODA is 2001­2003, from a peak of $13.3 billion in 2000. The key issue facing ODA project implementation Table 3.5 in the last few years has been the lack of budget cover. Distribution of official development assistance This is required not just for counterpart funding, but commitments, December 2003 also for loan proceeds of ODA projects of national Commitments government agencies. With fiscal tightening, budget Sector/Subsector No. of loans$ million % allocation for projects is often insufficient to cover Agriculture, agrarian reform, 41 1,753 17.3 the planned expenditures. Other problems include and natural resources procurement delays,27 right-of-way acquisition and Agriculture and agrarian 34 1,465 14.5 resettlement, and slow processing with LGU relending reform facilities. Environment and natural 7 288 2.8 resources Industry and services 3 498 4.9 Suggested actions Infrastructure 110 6,941 68.5 Communications 2 41 0.4 The government faces a challenging policy and insti- Energy, power, and 13 781 7.7 tutional reform agenda, and to tackle the acute lack electrification of infrastructure the following actions on planning Social infrastructure 12 276 2.7 and coordination, and on mobilizing financing for Solid waste management 1 17 0.16 infrastructure, can be taken up. Transportation 57 4,896 48.3 Water resources 25 930 9.2 Improving policy planning and coordination Social reform and 30 937 9.3 · Strengthen and reorient central agencies, such as development NEDA, Department of Finance, DBM, and inter- Education and manpower 11 393 3.9 departmental committees such as Infracom, ICC, development and DBCC, to improve long-term planning, prior- Health, population, and 6 74 0.7 itization, and monitoring of national government nutrition resources. The focus of oversight responsibilities Social welfare and 10 248 2.5 community development can shift from a detailed project-level approval General social 3 222 2.2 process to a broader and more forward-looking role for reform championship, strategy formu- Total 184 10,130 100.0 lation, and policymaking. The oversight agencies Note: Projects only, does not include program loans. Exchange rate can play the critical role of champions of sector used: $1 = Y118. Source: National Economic and Development Authority project reforms, as the reform initiatives in specific monitoring staff. sectors may be hampered by fragmentation, WorldBankInfra.indb 46 12/6/2005 8:40:57 AM Chapter 3 Infrastructure Planning, Coordination, and Financing vested interests, or inertia. It therefore falls to the Ultimately, resisting excessive political inter- oversight agencies to proactively initiate, promote, vention will require strong political will and prioritize, and monitor systemic reforms. It is also leadership. At the local level, issues such as their role to focus on important policy issues that extending the short three-year tenure of local cut across the various infrastructure sectors (e.g. elected officials are difficult political-economy subsidy policies, guarantee framework, inter- issues, and are unlikely to be resolved in the governmental cost-sharing policies) to guide short term. However, specific steps, for example the decisionmaking process for specific projects reviewing and amending the way discretionary and transactions. Clear pronouncement of such congressional funds (the pork barrel funds) are important policy issues will help facilitate the currently used, should be taken to better align development process of specific projects and funding usage with local and regional devel- reduce uncertainty. To ensure coordinated opment plans and priorities. Better coordination planning, all agencies should be subjected to and understanding between the executive and a rigorous performance review process, which legislative branches of national and regional in fact the government has already initiated. priorities, as well as vigilance by civil society Similarly, there may be a need to include in the and other interest groups, may also help reduce annual budget call of DBM a statement that the short termism in projects and activities. government will fund only projects that undergo performance reviews. The oversight agencies, line · Provide means and incentives for RDCs both to agencies, and Congress need to agree on how coordinate more effectively with LGUs and to the performance of the line agencies should be reflect LGU priorities in their plans (and vice evaluated and how the review of performance versa). At the minimum, RDCs can participate will be used to prepare the budget. more actively in the agency budget development · process, which DBM started to promote during Ensure extensive stakeholder participation during the 2005 budget cycle. In addition, funding can be the strategy development and planning process. earmarked for interjurisdictional infrastructure Responsibility for planning goes far beyond development where RDCs make decisions on technocrats, and wide public participation is funding usage based on agreed principles spec- critical both to reflect the concerns and issues ified by the national government. Higher priority that can be easily neglected by "planners" and could be given to provinces in the intergovern- to ensure that the final documents represent the mental fiscal transfer system, as this is the level views and commitments by the broad population with the most serious imbalance between revenue and stakeholders. This would in turn establish and expenditure responsibilities. As box 3.3 greater legitimacy of these plans and enable them shows, interjurisdictional cooperation can be to better withstand short-term intervention. More achieved, usually under energetic local leaders. extensive stakeholder participation will also help Such efforts need to be recognized and promoted insulate the decisionmakers from undue political more systematically. pressures. Such a procedure should be applied at both the national and local levels. There may be · Resolve ambiguities in the 1991 LGC, which a need for national and local development strat- currently allows for a two-track delivery system egies and plans to be debated and approved by at the local level whereby both central agencies the corresponding legislative bodies. and LGUs can initiate devolved activities, · but with neither being fully accountable. The Reduce excessive political intervention by national government can review the implemen- insulating technocratic decisionmaking from tation process of decentralizing government undue political influences for short-term gains. functions to the local level; and, when the func- Measures may include strengthening technical tions are to be devolved, the national government capacity at infrastructure agencies to better agencies should have a clear timetable in with- withstand external, politically motivated influ- drawing from actual implementation and instead ences; corporatizing certain services to reduce reorient themselves to focusing on providing political interference; and establishing auton- technical assistance to LGUs in fulfilling their omous regulatory agencies in other sectors. mandates. WorldBankInfra.indb 47 12/6/2005 8:40:57 AM Philippines: Meeting Infrastructure Challenges Box 3.3 A successful example of interjurisdictional cooperation T he construction of a circum- respective contributions and obli- and from their understanding of ferential road for Cabanatuan gations with regard to the project. the positive externality generated City and adjacent municipalities is The toll road, financed by contri- by a cooperative approach to a good example of cooperation in butions from LGUs, is expected solving the problem of rising urban investment planning and project to generate revenues once it is congestion and traffic jams. implementation among LGUs. operational. Cabanatuan City entered into a The interjurisdictional coop- Sources: World Bank. 2004. "East Asia: memorandum of agreement with eration benefited from the strong Decentralization of Basic Services." the municipalities of San Leonardo leadership exhibited by the local December; Consultant's field interview, and Santa Rosa to define their chief executives in the three LGUs 2004. · Develop and more effectively utilize instruments, ments whenever feasible. One such example is such as matching grants and subsidies as well the Municipal Infrastructure Investment Unit in as performance incentives, to implement plans South Africa (box 3.4). In addition, LGUs need and achieve better coordination between to be assisted in their strategic planning process, national government and local infrastructure which should provide the basis for their infra- in a decentralized and market-driven envi- structure development activities. ronment. Matching grants can be used to provide an appropriate incentive structure to Enhancing financial mobilization elicit consistent and well-coordinated infra- · Allow increases in user charges to ensure structure plans from the infrastructure agencies, commercial viability of infrastructure projects. including GOCCs and LGUs. In addition, a As discussed in chapter 2, cost recovery is key, commonly accepted national performance and establishing a tariff level that allows a assessment system to facilitate benchmarking reasonable, risk-adjusted rate of return for infra- for comparing performances across LGUs--as structure projects is fundamental for attracting the basis for national government support, financing. If infrastructure cannot offer project matching grants, and subsidies, especially for yields comparable to those attainable in other provinces--can be developed. The planning- sectors, voluntary lending will be limited. The budgeting-accountability linkages can also be more the government clarifies sector policy, enhanced by strengthening the performance supported by credible regulatory regimes that budgeting process. allow prices to be set at levels covering investors' · costs (including the cost of capital) through a Provide targeted technical assistance to LGUs in transparent and credible process, the more likely infrastructure project development and imple- are financial market players to accept financing mentation. The difficulties faced in the implemen- risks in infrastructure projects instead of seeking tation of the numerous LGU lending operations credit enhancements from the government. The by both GFIs and the Municipal Development public, likewise, should be informed and educated Fund Office demonstrate the importance of on why user charges should be on a cost-recovery enhancing the capacity of LGUs in infrastructure basis. (These issues are covered in more detail in project planning, preparation, and implemen- chapter 2.) tation. If the demand side of LGU financing is At the intersection of general tax and user weak, any improvement of efficiency in funding charges are targeted or earmarked tax schemes supply will have little impact. An LGU project where taxpayers will be able to see the impact development facility needs to be established, of additional tax payments more directly. Such which will help LGUs develop project ideas into schemes include, for example: fuel and motor implementation packages, including assistance vehicle registration tax increases that are chan- on feasibility studies, procurement planning, and neled through a special fund for road mainte- other implementation requirements. This facility nance and expansion, which will directly benefit should also help LGUs tap private sector invest- taxpayers through lower vehicle operating costs WorldBankInfra.indb 48 12/6/2005 8:40:58 AM Chapter 3 Infrastructure Planning, Coordination, and Financing Box 3.4 Municipal Infrastructure Investment Unit, South Africa T wenty percent of South Africa's Infrastructure Investment Unit · Assist local authorities in the population have no access to (MIIU) in 1998 to facilitate access process of hiring private sector water and nearly 50% have no by municipalities to private sector consultants, where necessary. proper sanitation facilities. Local investment. Initially, MIIU was · Assist local authorities with the own-source revenues and inter- envisaged as a five-year inter- management of contracts with governmental grants are already vention to develop a market for private sector service providers, insufficient to meet development technical assistance for project where necessary. goals, and private banks can rarely preparation in municipal infra- provide affordable loans to munici- structure and services, and to These activities are offered to palities. The lack of borrowing encourage and optimize private local authorities that are devel- capacity among municipalities sector investment at the local level, oping projects involving the private greatly constrains them from though subsequently its lifespan sector, such as private sector putting up capital for infrastructure was extended by the government financing of municipal debt; con- such as water and sanitation until 2006. Staffed by South African tracting out the management of systems. Private sector participation and international experts, MIIU is ongoing services and concessions; in infrastructure services is one specifically mandated to: contracts requiring the private avenue for filling the infrastructure sector to design, build, finance, gap. However, an established · Provide technical assistance and and operate assets to deliver local market of informed local authority grant funds to municipalities services; and privatization of assets clients, private sector advisors, in the preparation of service and services. investors, and service providers is delivery solutions involving MIIU has worked with over 100 undeveloped, if not absent. municipal service partner- municipalities and has more than Recognizing these shortcomings ships (from conception to 70 active projects. in municipal financing and local implementation). authorities' capacity to deal with · Assist municipalities in carrying Source: Municipal Infrastructure the private sector investors, the out on-balance sheet borrowing Investment Unit (http://www.miiu.org. government set up the Municipal and project finance. za, December 2, 2004). and reduced travel time; a special tax for urban all borrowers and improve the overall business areas, such as Metro Manila, for investment in environment. Fiscal reform efforts will therefore improving urban transportation; a development have high payoffs. impact fee that can be charged by LGUs to reflect the cost of providing additional infrastructure · Strengthen the financial markets for longer-term for new developments; and adjustments in infrastructure financing. From the perspective of real property assessment values (and therefore providing longer-term financing for infrastructure property tax) immediately following major development, key reform areas include: infrastructure improvements in the area. These taxes have many features of a user fee. Once the (a) Strengthening the banking system. For the government can credibly demonstrate that the foreseeable future, banks will continue to additional taxes lead to infrastructure and service dominate the financial system. They have improvements, collecting such taxes will be less been risk averse because of a legacy of bad difficult to justify politically. debts and easy earnings via government bond · investments. They also need to increase their Implement a vigorous and credible fiscal reform capital base. Unfortunately they have not faced program. A sustained period of credible fiscal sufficient regulatory or competitive pressures reforms, in particular increasing tax revenues, to address their problems. The good news is will persuade financial market participants to that the actions required for establishing a step up investments. Accelerated turnaround in competitive and strong banking system and the fiscal situation will not only enable higher for restoring intermediation capabilities have government spending on infrastructure; equally been extensively researched and documented. important, it will lower the cost of financing for The challenge is quick implementation. WorldBankInfra.indb 49 12/6/2005 8:40:58 AM 0 Philippines: Meeting Infrastructure Challenges (b) Enabling securitization so that banks and data collected by the Bureau of Local Govern- others have exit options in infrastructure loans. ment Finance, and benchmarking LGU finan- Banks will be willing to originate long-term cial performance, so that the public and other loans in the infrastructure sector if a method stakeholders can assess and compare LGU and venue for exit are available. Typically this revenue collections. The national govern- could be by way of packaging and securitizing ment may consider introducing performance- pools of infrastructure loans for placement in based criteria to its fiscal transfer program to debt markets. A Securitization Bill is pending LGUs to provide more incentives for LGUs in the legislature, and its passage would estab- to increase revenue mobilization. Technical lish a sound legal basis for use of securitiza- assistance to LGUs in such mobilization, e.g. tion methods by banks. improving local revenue codes, and estab- lishing and improving local real property and (c) Implementing recommendations to improve business tax systems, is also important for the conditions for domestic debt markets. The LGUs' efforts in increasing their revenues. Bankers Association of Philippines has pre- pared a comprehensive proposal for setting up (b) Removing barriers to private banks' participa- a fixed-income exchange. Other bodies have tion in the LGU credit market. The current also made recommendations for deepening system in which almost all the funds lent domestic debt markets. The required actions to LGUs are from government sources is are by and large known, including a strong unhealthy and potentially risky. Removing and independent securities and exchange the bottlenecks to participation by private commission; a strong legal system and bank- financial institutions in the LGU credit ruptcy procedures; internationally acceptable market should be given high priority. Key accounting and disclosure regimes; and reso- actions include: allowing selected private lution mechanisms incorporated into stan- financial institutions to be depository banks dard bond indentures, including collective for LGUs and giving them some access to the action clauses as well as advanced payment, IRA intercept mechanism as loan collateral; settlement, and custodial systems. Prompt establishing an information system of LGU action in this area is required. financial situations that is accessible to all interested parties (ideally, over the medium (d) Strengthening the supply of long-term funds term, an LGU credit-rating system can be through reforms of the pension system. Pension established and maintained by an indepen- funds have a natural preference for long-dated dent credit-rating agency); and substantially securities. Professionally managed pension recapitalizing the Local Government Unit funds not only deepen bond markets but also Guarantee Corporation (which was created play a critical role in screening and moni- to guarantee debt issues of local governments toring issuers of bonds. By performing the when these issues are financed from private latter function, they enable others to invest sources) and establishing a bond pooling in bonds. The government-owned pension system to further promote LGU bonds. system in the Philippines is in need of sig- nificant policy and institutional reforms. (c) Simplifying procedures of LGU access to loans. Reforming and professionalizing it could well The current lending windows to LGUs for increase the supply of funds to the infrastruc- long-term financing, mostly ODA programs ture sector. established through the GFIs or the Municipal · Development Fund Office, have fairly com- Facilitate LGU access to infrastructure financing. plicated procedures. Multiple approval steps Key measures include: and controls, complex technical requirements, and slow responses by project implementation (a) Providing incentives and technical assistance units to LGU requests can significantly slow to LGUs to raise more revenues and improve loan processing. LGU leaderships have a term performance. This will entail utilizing and of three years, and politically they cannot publishing the results of the LGU financial afford delays in preparing and implementing WorldBankInfra.indb 50 12/6/2005 8:40:58 AM Chapter 3 Infrastructure Planning, Coordination, and Financing 1 priority investments. The procedures should ence of the GFIs in lending to LGUs could be simplified, and the project implementing provide a basis for the GFIs to develop a units should be more responsive in helping market in LGU loans. The GFIs could, for LGUs access funding. instance, securitize the existing portfolio of profitable LGU loans. This approach would (d) Improving capacity of LGUs to raise own- enable GFIs to mobilize resources to supple- source revenues. The IRA has remained the ment ODA financing. It would also famil- most important revenue source for local gov- iarize investors in debt markets with LGUs ernments, making up around 62% of LGU and LGU credit risk. The GFIs also need to revenue in 1995­2001. The high level of increase the application of market principles dependence on the IRA is a source of concern, in their own lending decisions. To date, they because this lessens LGU officials' account- have not differentiated among borrowers in ability to their constituents for revenue and the same way that private debt and equity expenditure decisions. The dependence may investors would. The same cost of capital, also impair the development of local govern- usually with little or no risk premium, is ment capital markets because loans to LGUs charged to all borrowers. have been made largely on the basis of the security given by the IRA intercept. There is · Explore the establishment of a dedicated infra- thus a need to review and update local tax structure fund to be managed by reputable inter- codes,pursueregulargeneralrevisionofassess- national and domestic private fund managers. ments, and collect more own-source revenues The government could consider seeking interna- to improve the fiscal capacity of LGUs. tional fund managers to construct and manage dedicated infrastructure funds to increase the (e) Using GFIs to promote the development of supply of equity and debt funds. Examples of domestic debt markets. The positive experi- such infrastructure funds are given in box 3.5. Box 3.5 Examples of infrastructure funds V ia the LDC Infrastructure Fund, Besides financial-economic per- of the investments are in infra- the Netherlands Development formance, the projects are carefully structure development and oper- Finance Company (FMO) supports scrutinized in terms of corporate ating companies. the development and improvement governance, and of environmental The India Infrastructure Fund is of socioeconomic infrastructure in and social policies and practices promoted by AMP Capital Investors least developed countries (LDCs). to ensure the sustainability of the from Australia. It is a closed-end The LDC Infrastructure Fund pro- investment. In evaluating proposals, fund with a life of 10 years, and has vides equity financing (minority FMO considers the investment plan, recently invested in Indian private holdings only) and quasi-equity a market analysis, a due diligence companies operating in telecoms, financing with a view to stimulating study, the expected returns, and gas supply, and ports. private investors to invest in private the commitment of management The Infrastructure Finance or public-private infrastructure and cofinanciers. Corporation of South Africa is pri- projects by lowering risk for other The Lombard Asian Partners vately promoted by First National financiers, which should thus cat- Investment Fund (LAPIC) takes a Bank Group. It consists of an alyze additional private funds. The significant minority stake of about infrastructure debt fund financed LDC Infrastructure Fund finances 20­49% in investee companies, from local and international capital infrastructure projects that con- requiring one or two seats on the markets and is now issuing junior tribute to the development and/or board, and working closely with subordinated debt. It also invests improvement of socioeconomic the management to reform and in public sector infrastructure infrastructure (power, telecoms, modernize the companies. LAPIC projects at the local and regional water, transport, environmental, or is cosponsored by California Public levels. social infrastructure). In order to be Employees Retirement System, eligible for funding, a project must which is very active in promoting meet FMO's standard criteria. good corporate governance. Some Source: World Bank staff. WorldBankInfra.indb 51 12/6/2005 8:40:58 AM Philippines: Meeting Infrastructure Challenges Such managers bring a range of benefits: they infrastructure investments is demand risk. have extensive and diverse investment experience; Reaching break-even point in terms of capacity they can be large equity and debt investors and utilization takes time. In many instances it thus can reduce complexity and cost of financial should be possible to reduce this lead time structuring and closure; they are acceptable to and spur higher utilization of the commercial local promoters because they do not seek majority infrastructure with the public sector investing control; through board representation, they can in public infrastructure that enables higher provide valuable financial and strategic advice, as user access. For example, the viability of well as guidance based on experience in similar toll roads could be increased if more users investments in other markets; they tend to take had access to the toll road via feeder roads, a long-term view--typically maturities of up to but such roads are not generally "bankable" 10 years; and their portfolio approach reduces propositions--only governments can fund risks through diversification and enables them their construction and maintenance. But if to create public bond offerings large enough to feeder roads are connected to a main highway, be liquid. For all these reasons, it may be useful then the highway may have enough traffic to encourage formation of joint ventures between volume to warrant private financing. Thus, leading and respected local companies and inter- it may be useful for the government to plan national institutional investors. and coordinate public infrastructure invest- · ment with a view to stimulating demand for Improve the use of ODA funding. Over the near those portions of infrastructure where user term, ODA will remain an important financing charges could be levied on volumes sufficient source for infrastructure development in the enough to service commercial loans. Philippines. The government should therefore continue its current efforts in improving the (b) Exploring means of utilizing ODA funding to implementation of ODA projects, proactively support private investors in infrastructure in addressing issues such as procurement delay accessing long-term financing. With limited and right-of-way acquisition. In addition, to capacity from the domestic financial market better leverage ODA funding, the government and a generally unfavorable global sentiment can consider the following: for private infrastructure investments, inves- tors are experiencing difficulties in accessing (a) Increasing the viability of privately financed long-term, low-cost financing. While ODA infrastructure investments by using budget funding has such benefits, it usually requires and ODA funds in complementary and sup- government sovereign guarantees. The gov- portive infrastructure. At present, ODA proj- ernment can explore how favorable terms ects and private sector participation projects of ODA financing can be utilized by private are usually separated from each other. Better sector investors, but with the benefits accruing synergy can be explored to make private to the end users, and without the government sector participation work better. A key risk undertaking unnecessary risks that should be that private financiers face in funding private borne by private parties. Endnotes 1 The SEER exercise is a tool used by oversight agencies to elicit outputs and sector outcomes and to "build" a new activity that better prioritization of projects and activities by the different would achieve the desired major final outputs and outcomes. agencies. It is part of a tool kit to improve public expenditure 3 The ICC reviews and evaluates any public project, grant, or loan management. that amounts to at least P500 million or a foreign borrowing of at 2 Under the "scrap-and-build" policy, government agencies can least $5 million; and all projects with private sector participation request funding for a new activity (or project) on the condition through BOT schemes and its variants. that the new one is implemented at the expense of an existing 4 Section 17 of the 1991 LGC provides congressmen with access one. They would have to "scrap" an old activity that presumably to discretionary congressional funds. The General Appropria- does not contribute to the attainment of the agency's major final tions Act ordains that monies from such funds can only be WorldBankInfra.indb 52 12/6/2005 8:40:58 AM Chapter 3 Infrastructure Planning, Coordination, and Financing released for "projects identified by members of Congress." This 2004. "Assessment of the Information Systems and Information has resulted in pork barrel funding of projects and a coordina- and Communications Technology (ICT) Resources of Regional tion failure between Congress and local government officials. and Local Planning Agencies/Bodies in the Visayas." Report William Loehr and Rosario G. Manasan. 1999. "Fiscal Decen- submitted to NEDA. tralization and Economic Efficiency Measurement and Evalu- 17 Cariño et al (2004) as cited in Manasan (2004). ation." Consulting Assistance on Economic Reform II Discussion 18 Figure 3.4 reflects a simple surplus/deficit of current income Paper No. 38. over current expenditure and does not reflect transfers or other 5 Felipe M. Medalla. 2004. "Private Sector Participation in Infra- adjustments. In 2002, the Commission on Audit implemented a structure in the Philippines: Lessons from Selected Case Studies new government accounting system, so rendering updated 2002 and Interviews with Private Sector Participants." October. World figures incomparable with earlier data. Bank, Manila. 19 The LGC mandated that LGUs are to conduct a general revision 6 NEDA Board Resolution No. 6. March 6, 1996. of market values once every three years, with the first one in 7 For example, provinces do not collect local business tax, one of 1994. the two LGU taxes--along with real property tax--that account 20 A large part of the infrastructure lending of the banking system for the bulk of LGU own-source revenue. Provinces can tax real is accounted for by two GFIs--the Land Bank of the Philippines property at the rate of 1%, while cities can charge 2%. In addition, and the Development Bank of the Philippines. the share of provinces in the proceeds of real property tax (35%) 21 According to Bangko Sentral ng Pilipinas (BSP) data, as of is smaller than those of cities (70%) and municipalities (40%). May 2004, banks (including state-owned development banks) 8 There are nine RDCs, including those in the Cordillera Admin- accounted for close to 82% of the P4.8 trillion resources deployed istrative Region and the Autonomous Region in Muslim in the financial system. Mindanao. 22 As of June 2004, according to data from the Philippine Deposit 9 Gilberto M. Llanto and Joel Lasam. 2003. "Report on the Forum Insurance Corporation, deposit liability of the banking system on Planning, Programming and Monitoring." Report submitted was around P2.5 trillion. About 85% of these deposits were held to NEDA and GTZ. by only 6% of account holders. Further, time deposits accounted 10 However, when the mayor/governor can access funding for a for less than 10% of total deposits. Finally, about 31% of the local project that is also of some interest to the RDC, he or she deposits were denominated in foreign currency. may give priority to the project even if it is not in consonance 23 The nonbank financial sector as defined by BSP includes invest- with local priorities. ment houses, finance companies, investment companies, secu- 11 The LGC gives to municipalities the responsibility for imple- rities dealers/brokers, pawnshops, lending investors, non-stock menting community-based forestry and watershed projects, savings and loan associations, mutual building and loan associa- but allows DENR to retain supervision and control over such tions, leasing companies, and private and government insurance projects. companies, including three government-owned pension funds, 12 Eduardo T. Gonzalez et al. 1996. "Developing an Action Plan for i.e. the Government Service Insurance System, the Social Security the Financing of Local Government Projects With Social and System, and the Armed Forces of the Philippines Retirement Environmental Objectives." School of Economics, University of and Separation Benefits System. These three pension funds alone the Philippines. account for about 50% of the nonbank financial sector, and insur- 13 The LGC provided that the share of LGUs in national taxes should ance companies another 25%. be equal to 40% of the actual collections of the Bureau of Internal 24 The domestic bond market was equivalent to about 28% of GDP Revenue (BIR) in the third year prior to the current year. Under as of end-2003. the previous legislation, the IRA was set at a maximum of 20% 25 The stock exchange listed 234 companies with a market capital- of BIR collections. ization of about $25 billion as of end-July 2004. 14 Interviews with LGU officials held in 2004. 26 NEDA. 12th Annual ODA Portfolio Review (http://www.neda. 15 Rosario G. Manasan. 2004. "Infrastructure and Decentralization." gov.ph/../progs_prj/12th%20oda/12th_odamain.htm). May. World Bank, Manila. 27 NEDA's review of 138 contracts in 2003/4 reveals that on average, 16 Benjamin V. Cariño et al. 2004. "Preparatory Work for the award of civil works took 9.5 months, consultancy services 9.3 Proposed Technical Assistance on Strengthening Provincial months, and goods 7.9 months, from submission of bids to Planning and Expenditure Management." ADB, Manila; GTZ. issuance of notice to proceed. WorldBankInfra.indb 53 12/6/2005 8:40:59 AM Jay Directo/Agence France-Presse WorldBankInfra.indb 54 12/6/2005 8:41:02 AM Chapter 4 Maximizing the Benefits of Private Sector Participation Introduction demand and take-or-pay contracts with high prices T for the capacity charges have contributed to high he Philippines has a rich history of involving industrial and commercial electricity prices. the private sector in financing, operating, and maintaining infrastructure. The shift Water in government policy to rely on the private sector The privatization of the Metropolitan Waterworks and for infrastructure development began as a result of Sewerage System (MWSS) in 1997, the largest water the power crisis in the late 1980s and early 1990s, privatization in the developing world, has resulted in which led the Aquino government (1986­1992) to twodrasticallydifferentoutcomes.Oneconcessionaire, adopt a private sector policy. The passage of the Manila Water Company, Inc. (MWCI), performed Build-Operate-Transfer (BOT) Law in 1990, the satisfactorily and became profitable, whereas the other, first of its kind in the region, signaled the govern- Maynilad Water Services, Inc. (MWSI), incurred ment's recognition of private sector expertise and significant losses, defaulted on the concession fee, and resources in infrastructure provision. The BOT Law declared the suspension of its concession contract (see succeeded in opening the door to private partici- boxes 7.3 and 7.4, in chapter 7). pation in infrastructure by establishing a transparent and competitive process for BOT schemes. The first Solid waste privately financed BOT power project, the Navotas The key project for Metro Manila, the San Mateo Gas Turbine Power Plant, was implemented during Landfill, was stalled, resulting in the absence of any the latter stages of the Aquino administration. major solid waste disposal facilities in the metro- As a result of the government's sustained drive politan region. to attract the private sector, various private infra- structure projects have been undertaken in the power, Figure 4.1 water, toll road, port, airport, and telecommuni- Cumulative private sector investment in infrastructure, 1990­2003 cations sectors. These projects ranged from green- fields to concessions and a few divestitures. Figure 4.1 Power summarizes the cumulative private flows into various infrastructure sectors over 1990­2003. Telecoms However, results from a number of transactions Transportation have been mixed and are much less than expected. Water Power 0 2 4 6 8 10 12 14 16 While the numerous contracts with independent $ billion power producers that the government signed in the Note: No data available for telecoms in 2003. early 1990s--a period of continual power outages-- Sources: World Bank Private Participation in Infrastructure Database; enabled rapid expansion of generation capacity in International Telecommunication Union; Optel Ltd.; National Telecommunications Commission; Manila Water Company, Inc.; a relatively short time, a combination of declining Maynilad Water Services, Inc. WorldBankInfra.indb 55 12/6/2005 8:41:02 AM Philippines: Meeting Infrastructure Challenges Figure 4.2 Figure 4.3 Private sector participation in infrastructure, 1990­2002 Private investment in infrastructure, selected ASEAN 5.0 countries, 1990­2003 4.0 12,000 3.0 10,000 billion$ 2.0 8,000 1.0 6,000 million$ 0.0 4,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2,000 Year 0 Note: No data available for telecoms in 2003. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Sources: World Bank Private Participation in Infrastructure Database; Year International Telecommunication Union; Optel Ltd.; National Indonesia Malaysia Philippines Telecommunications Commission; Manila Water Company, Inc.; Thailand Vietnam Maynilad Water Services, Inc. Source: World Bank Private Participation in Infrastructure Database. Toll roads While a few transactions were successfully concluded, for almost all the years in question (figure 4.4). there have been serious delays in actual implemen- However, as discussed later, most of these investments tation. Most of the toll roads have been stalled, the were for greenfield projects with guaranteed offtake only exception being the North Luzon Expressway, from public companies. Such arrangements do not which was completed in early 2005 after delays. maximize incentives for private sector efficiency. Do these stalling on and voidance of contracts, Airports and decline in private sector interest for infrastructure The BOT contract for the Ninoy Aquino Interna- projects, imply that the Philippines can no longer rely tional Airport (NAIA) Terminal 3 in Manila was on the private sector? What are the reasons behind declared void by the government, a move subse- these controversies, either in the way these trans- quently validated by the country's Supreme Court actions were designed and executed, or the enabling for its allegedly onerous provisions. So, even though environment in which they took place? And what can most of the construction is complete, the new airport the government do to reverse the waning of private terminal stands idle. sector interest? This chapter is divided into three parts. The first Ports briefly summarizes the potential benefits of private Two major ports in Manila (Manila International Container Terminal and the Manila South Harbor) Figure 4.4 are operated by the private sector under long-term Private investments in infrastructure (controlled for income), selected ASEAN countries, 1990­2003 concessions and have manifested efficiency gains. However, private participation continues to be 3.5 inhibited by the Philippine Ports Authority's dual 3.0 operator-regulator role. 2.5 Moreover, as figure 4.31 shows, as with other 2.0 countries in Southeast Asia, private flows declined substantially as a result of the Asian financial crisis, million$ 1.5 1.0 from a peak of $7 billion in 1997 to a low point of $0.03 billion in 2003, and are yet to recover from 0.5 the impact of the crisis. In contrast, Vietnam's 0.0 private investment flows in more recent years have 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year increased. Controlling for income, the Philippines' Indonesia Malaysia Philippines precrisis investment flows showed a relatively good Thailand Vietnam performance vis-à-vis its neighbors, and in fact, the Sources: World Bank Private Participation in Infrastructure Database; country had higher investment levels than Malaysia World Development Indicators 2004. WorldBankInfra.indb 56 12/6/2005 8:41:03 AM Chapter 4 Maximizing the Benefits of Private Sector Participation participation in infrastructure, and the appropriate Choosing the right option will often depend upon role of the public sector in exploiting them. The second the specific situation--whether the objective is to tap part identifies and analyzes the main reasons for the into technical expertise or to attract investments decline in private sector interest in infrastructure in bulk production. In the Philippines, private projects in the Philippines. These are both external involvement in infrastructure has been strong, with factors (global and macro) such as the recent global a range of options being chosen to match specific downturninprivateinfrastructureinvestmentsandan objectives. For example, concessions were let for the increase in general country risk; as well as the deterio- operation of MWSS (box 4.1); closure was reached rating business environment for infrastructure in the for a number of greenfield projects, especially for Philippines; weaknesses in planning, preparing, and bulk power generation; electricity distribution executing private infrastructure projects; an unclear was privatized; and leasing arrangements of water rationale and ineffective guidelines for providing facilities attracted the private sector in small towns. fiscal support to private infrastructure projects; and An influx of private investment took place in the certain ambiguities in the BOT policy, with sector- transportation and telecoms sectors as well: Interna- specific gaps in the enabling framework. tional Container Terminals and the Asian Terminals The third part concludes with concrete steps that Inc. assumed operation of two of the country's major the government can take to maximize the public ports (Manila International Container Terminal and benefits of private sector participation. Manila South Harbor, respectively), and various private operators entered the shipping and civil aviation industry. Opening up the telecommuni- Potential of private involvement and cations sector to more private players has resulted role of the public sector in an impressive increase in telephone density and improved services. Involving the private sector in infrastructure provision can have many benefits, including stronger incentives Figure 4.6 for more efficient performance; more access to capital Private investments in infrastructure, by type, (technical, financial, and managerial); and newer 1990­2003, $ billion technologies that could not only be cheaper, but Management also cleaner, than older ones. The presence of the and lease contracts 0.002 private sector also imposes, to some extent, tariff and other disciplines on public authorities. (This is Concessions because such discipline has to be present to attract the 8.2 Greenfield private sector in the first place, and once the private projects sector is in, it lobbies the authorities to maintain such 20.3 discipline.) Divestitures Private participation options 1.6 Figure 4.5 summarizes the broad spectrum of private participation options in the delivery of infrastructure services. In general, the more risk and responsibility passed to the private sector, the more powerful its incentives to improve services. Source: World Bank Private Participation in Infrastructure Database. Figure 4.5 Figure 4.6 shows private infrastructure Range of private sector options in delivery of investments in the Philippines, by type. infrastructure services In 1990­2003, more than half of the private sector investments were greenfield BOT and Build- Management Leasing concession operate- Divestiture projects (67%), followed by concession contracts (stricto sensu) own by license arrangements (27%), while divestitures and management and lease contracts accounted for about 5% of investments.2 Source: World Bank. 1995. Public Policy for the Private Sector. Note 59. October. The dominance of greenfield projects WorldBankInfra.indb 57 12/6/2005 8:41:03 AM Philippines: Meeting Infrastructure Challenges Box 4.1 Matching options to objectives: Metropolitan Waterworks and Sewerage System water concessions I n 1997, the Philippine gov- At the time that it was imple- guarantee). The debt remained ernment granted concessions mented, the transaction was the on MWSS' books, but concession for the operation of the Metro- largest private water sector project payments that the two operators politan Waterworks and Sewerage in the world. Key features of the made to MWSS were set to System (MWSS), the operator for transaction were: include the cost of debt servicing Metro Manila and the neighboring as well as the cost of the residual province of Cavite. MWSS was one · The MWSS system was split into functions of MWSS and the new of the oldest and largest water two concession zones to be regulatory office. utilities in Southeast Asia, serving operated by separate conces- a population of around 11 million. sionaires. This was intended to Despite the severe financial Prior to the concession agreement, provide a form of quasi-compe- problems of one of the two con- MWSS relied on regular injections tition, by allowing benchmarking cessionaires, water supply service of funding from the government to between the two operators. The levels improved in both zones operate and maintain its network, concession for the west zone, the from the preconcession period. supplemented by a series of loans larger of the two, was awarded to Between 1997 and 2002, the total from multilateral lending institu- Maynilad Water Services, Inc. population receiving water services tions. By 1997, it had accumulated · The concession agreement increased by about 1.7 million. Total debt in the order of $800 million. incorporated a set of aggressive combined water sales increased The intention of the MWSS service improvement and by 28% while almost 200,000 new transaction was to improve service investment targets. Over the water connections were added. quality, expand coverage, and 25-year term of the agreement, Other details of the Manila con- eliminate the fiscal drain on the the two concessionaires were cession, including lessons learned, government by transferring the expected to invest around are summarized in boxes 7.3 and financial burden to the private $7 billion in the system. 7.4 of chapter 7. sector. In addition, the government · The concessionaires assumed expected that efficiency improve- responsibility for servicing the Sources: World Bank staff; and Irwin ments would result in price reduc- existing MWSS debt (although, as and Erhardt. 2004. "Avoiding Cus- tomer and Taxpayer Bailouts in Private tions for customers. Given the the debt was originally incurred Infrastructure Projects: Policy toward objectives, a concession option was by the state-owned MWSS, it Leverage, Risk Allocation, and Bank- chosen as the optimal one. remained subject to sovereign ruptcy." World Bank. April. shows that private participation was sought for new Specifically, in the Philippines context, the public investments, rather than for improving the efficiency sector has two main roles. The first is to provide an of existing assets. appropriate enabling environment--a framework of laws, rules, and institutions--that enables private Public sector role in private provision sector entry and exit, and provides the right Effective private sector participation poses many incentives for its operation. The government has challenges for governments as they seek to transform worked to provide such an environment for private their role from exclusive financiers, owners, and participation in infrastructure. The policy framework operators of services to facilitators and regulators is enshrined in the Medium-Term Philippine Devel- of services provided by private firms. Private opment Plan. Specific measures such as the BOT Law, participation, however, does not mean the retreat and subsequent amendments to the Law, indicate the of the public sector. On the contrary, good facili- government's commitment to tapping private sector tation and regulation are essential to maximize the expertise and resources in infrastructure. Republic benefits of private participation. For those infra- Act 8974 of 2000 provides the legal framework and structure segments that are not competitive and basis for expropriation proceedings in infrastructure contain monopolistic elements, the private sector's projects, the manner of compensation and relocation high-powered profit-seeking incentives have to be of squatters, and right-of-way acquisition, among complemented with strong and effective regulation, others. Republic Act 8975 of 2000 prohibits lower to prevent potential monopoly abuse and possible courts from issuing temporary restraining orders to declines in quality standards. stop or delay the implementation of certain infra- WorldBankInfra.indb 58 12/6/2005 8:41:03 AM Chapter 4 Maximizing the Benefits of Private Sector Participation structure projects. The National Water Crisis Act of · Public support for private infrastructure projects 1995 provided the government with special powers can improve economic efficiency by correcting to reorganize sector agencies, induce greater partici- for market failures or mitigating political and pation of the private sector, and improve the overall regulatory risks. For example, internalizing the institutional environment in the water sector. positive spillover health effects from increased A major accomplishment arising from this Act was access to sewerage systems can be a rationale for the privatization of the operation and management public support. of water supply and sanitation provision in Metro Manila. More recently, the Electric Power Industry The government has a range of public support Reform Act of 2001 (EPIRA) opened the way for instruments, such as direct and indirect subsidies, greater private participation in the electric power subsidized capital contributions, guarantees, in-kind industry. Moreover, new regulatory institutions have grants, and tax breaks, to meet its objectives. The key been established in the power and telecoms sectors, is to first clarify the rationale for public support, and such as the Energy Regulatory Commission and the then identify the right instrument for such support. Commission on Information and Communications The Philippines is indeed providing public support for Technology (to address regulatory issues with the a number of private projects using a combination of advent of technological convergence), to regulate instruments, in particular, subsidies and guarantees. private providers. However, the reasons for providing this support have However, while the basic enabling framework to not always been clear, thereby often leading to the encourage private participation has been laid down, selection of incorrect instruments with unsatisfactory much more remains to be done in terms of credible results. This is highlighted in the next section. implementation of the laws, rules, and regulations to improve the environment for private sector partici- pation in infrastructure. There are gaps to be filled Reasons for decline in in the BOT implementing rules and regulations private sector interest and there is much to be desired from the existing regulatory institutions. As figure 4.2 above showed, private flows to infra- The second main role of the public sector is structure declined substantially after the Asian to clarify the rationale and identify appropriate financial crisis. The crisis led to a fall in demand and instruments for public support toward private infra- sparked depreciation of the peso (figure 4.7). This had structure projects. Given the public-good nature of implications for private infrastructure projects, such infrastructure services, in many cases it is unlikely as the MWSS water concessions and various inde- that the private sector will come in without any form pendent power producer projects, in which payments of public support. Varying degrees of public support were assured in hard currencies but revenues in are needed to attract the participation of the private pesos. While the overall damage inflicted on the sector, the rationale for which is warranted on three Philippines as a result of the crisis was short-lived basic grounds--political, equity, and efficiency. and less severe than in Indonesia or Thailand, private · Because of the general perception that infra- structure is a public good, raising user tariffs Figure 4.7 to full-cost recovery levels is not always politi- Official exchange rate (P/$, period average) cally feasible. However, below-cost tariffs, in 60 general, are a major deterrent to private sector 50 participation. Therefore, by providing some public 40 support that keeps tariffs low can allow private 30 projects to go ahead and reduce the overall burden 20 · on the taxpayer. On equity grounds, public support to private 10 infrastructure projects may also be provided to 0 subsidize consumption of infrastructure services 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Year by poor segments of society, in cases where income support through social safety nets is not feasible. Source: World Development Indicators 2004. WorldBankInfra.indb 59 12/6/2005 8:41:04 AM 0 Philippines: Meeting Infrastructure Challenges infrastructure flows suffered substantially (figures 4.3 Figure 4.9 and 4.4, above). Economist Intelligence Unit risk scores, 1998­2004 In addition to global factors, waning private (100 = most risky) sector interest in infrastructure in the Philippines 100 can be attributed to the following key factors: 75 ·· High general country risk. Deteriorating business environment for infra- 50 · structure. Weaknesses in planning, preparing, and executing 25 · private infrastructure projects. Unclear rationale and ineffective guidelines for 0 providing fiscal support to private infrastructure Indonesia Malaysia Philippines Singapore Thailand Vietnam 1998 1999 2000 2001 2002 2003 2004 · projects. Ambiguous BOT policy and sector-specific gaps Note: Figures for 2003 and 2004 are as of September and March, in the enabling framework. respectively. Sources: IMD World Competitiveness Yearbook 2003; EIU Risk Wire (http:// riskwire.eiu.com). High general country risk Figures 4.8 and 4.9 show the trend in composite that the Philippines, along with Indonesia, breaches risk ratings since 1986. As these illustrate, the Phil- the 50-point mark on the Economist Intelligence Unit ippines was perceived to have a risky environment composite country risk score, implying a relatively through the early 1990s. It improved subsequently. risky environment. In the business environment However, as shown, compared with other countries category of the International Country Risk Guide in the region, the Philippines remains characterized 2004 risk assessment, the Philippines was ranked 35 by high country risk. of 60 globally, and 10 of 16 regionally.3 Figure 4.11 In fact, the Philippines is characterized by a illustrates how the Philippines fared compared to its number of risks that are negatively affecting overall neighbors. private sentiment. These include financial, political, One consequence, stemming from high country and economic risks. Figures 4.10 and 4.11 benchmark risk, is seen in declining foreign direct investment the country against others in the region, and show that (FDI) net inflows since 1998. While most Southeast the Philippines has significantly higher financial and Asian economies show a declining trend after 1998 economic risks for investors, ranking among one of owing to the Asian financial crisis, the Philippines the riskiest countries in the region. Figure 4.10 shows had one of the lowest FDI inflows, almost always third to the last in the period 1999­2002 (figure 4.12). Figure 4.8 Therefore, the perception that the Philippines International Country Risk Guide composite risk ratings, is a high-risk destination for private investment in 1986­2004 (100 = most risky) general has spilled over to private investment in infra- 100 structure sectors. In particular, high domestic and 80 Figure 4.10 60 Economist Intelligence Unit composite country risk score, March 2004 (100 = most risky) 40 India 20 China Vietnam 0 Thailand 1986 1990 1995 2000 2004 Singapore Year Philippines Indonesia Malaysia Philippines Thailand Malaysia Indonesia Note: Re-indexed; original has higher score to represent less perceived 0 25 50 75 100 risk. Source: International Country Risk Guide (www.icrgonline.com). Source: EIU Risk Wire (http:// riskwire.eiu.com). October 2004. WorldBankInfra.indb 60 12/6/2005 8:41:05 AM Chapter 4 Maximizing the Benefits of Private Sector Participation 1 Figure 4.11 Poor business environment for infrastructure International Country Risk Guide risk assessment, A poor business environment--i.e. the four Cs of January 2004 (100 = most risky) inadequate cost recovery, corruption, insufficient 100 competition, and low credibility of institutions, as discussed fully in chapter 2--for infrastructure 75 operations and investments is raising risks. Risks in private infrastructure projects are high for three main 50 reasons: infrastructure investments tend to be asset- specific and immobile; they are typically of long-term 25 duration; and, since most infrastructure services are perceived to be public goods, infrastructure tariffs 0 become inherently political. Therefore, governments Political risk Financial risk Economic risk Composite risk have to credibly commit to a set of rules, and a system Indonesia Malaysia Philippines Singapore Thailand Vietnam China India to implement these rules, to minimize these risks and to allow private investors to earn reasonable Note: Re-indexed; original has higher score to represent less perceived returns. However, the four Cs are raising the risks risk. Source: International Country Risk Guide (www.icrgonline.com). for private infrastructure projects. (As the analysis underlying the poor business environment is covered in chapter 2, it is not repeated here.) external public financing requirements have driven Box 4.2 presents some findings from interviews spreads upward and increased risk premiums for the with key private sector participants in six BOT country. Emerging Market Bond Index spreads for the projects under way in the country. Philippines stand at about 500 basis points (as of early In another recent survey of 50 private sector 2005). This has inevitably raised the cost of private companies active in infrastructure projects, when investment in infrastructure. In order to attract the asked to rate the attractiveness of countries for private sector to infrastructure (and other sectors), investment in East Asia and Pacific countries, the the government will therefore have to take steps to Philippines received a wide range of reactions from reduce the general country risk. respondents, some quite positive, but most quite In addition to the country risks that are negative (figure 4.13).4 Only a few respondents common to all sectors, private infrastructure flows considered the Philippines one of the most attractive to the Philippines have suffered from various infra- places to invest in the region. Positive aspects of structure-related risks, prime among them being the general deterioration in the business climate for Figure 4.13 infrastructure. Attractiveness of countries, 2004 20 Figure 4.12 16 Foreign direct investment net inflows as a share of GDP tions 12 20 men of 8 15 Number4 t 10 encerP 0 5 ChinaThailand ndonesia Others I VietnamMalaysiaPhilippines LaoPDR 0 Notes: Others include Mongolia, Fiji, and Cambodia. The responses -5 were in reply to the question: "Which two countries do you consider e the most attractive in terms of investment in East Asia and the China India Pacific?" Not all of the 50 respondents provided two answers. The IndonesiaMalaysiaPhilippinesSingaporThailandVietnam question was open-ended. Some answers reflect the respondents' experience in just one country. The data show the number of times 1998 1999 2000 2001 2002 that a country was mentioned by all respondents. Note: Figures for 2003 and 2004 are as of September and March, Source: World Bank. 2004. "East Asia & Pacific Private Investors in respectively. Infrastructure: Perception Survey" (http://lnweb18.worldbank.org/eap/ Source: World Development Indicators 2004. eap.nsf/Attachments/survey/$File/Investors_Report.doc). WorldBankInfra.indb 61 12/6/2005 8:41:06 AM Philippines: Meeting Infrastructure Challenges Box 4.2 How do private sector participants in infrastructure projects view the existing business environment for infrastructure? A s part of this study, key asks for detailed information the lack of expertise in Philippine private sector participants in a regarding the plans and financial courts and among lawyers in number of build-operate-transfer projections of the project. complex technical and financial (BOT) projects implemented in infrastructure issues (such as the use the Philippines were interviewed. Inadequate tariffs of the special-purpose vehicles that They were selected from various Interviewees cited the trend of are typically used for BOT projects). sectors (water, rail, toll roads, and setting low tariffs that lead to inad- The respondent also felt that many information technology), with the equate cost recovery, which in turn people in the government, particu- primary objective of gathering their undermines the financial viability of larly the judiciary, do not have a full views on any concerns related to private infrastructure projects. They understanding of project finance, their respective BOT projects. pointed to the setting of electricity and this could affect their decisions. Because of the small sample, rates by the Energy Regulatory Related to the institutional these findings should not be Commission that are less than the regime governing the project, generalized too much. However, generating cost. In toll roads, there respondents pointed out the high the responses shed some light was concern related to an absence uncertainty related to recourse on concerns common to private of rational guidelines for setting in case of a breach of contract infrastructure projects in the Philip- tolls in private toll roads. stemming from the government. pines. Key findings are as follows. Compounding the problem of For instance, a contract can stipulate low tariffs is the absence of peso- that an investor can get relief if the Overall business climate denominated loans for infrastructure parametric formula is not followed. The main problems related to projects. Foreign exchange risks However, the budget allocation for private sector participation concern are only partially mitigated via a such types of recourse depends the lack of a credible policy envi- pass-through of the devaluation upon congressional approval, which ronment. Policies are inconsistent effects to consumers since tariff takes time and creates yet another and unpredictable, which raises increases that exceed the domestic uncertainty that disturbs private costs, makes private participation rate of inflation may result in lower investors' cash flows. less politically palatable to the demand for the services, which adds general public, and incurs delays to the project risk. Competition and corruption in project implementation. For While the respondents did not instance, some respondents felt Credibility of institutions directly refer to lack of competition that renegotiation might occur with Interviewees pointed out that the and high corruption as factors every change in administration. The success of private infrastructure affecting the business environment stumbling blocks, which are mainly projects is heavily dependent on the for infrastructure, they did point political and institutional in nature, presence of a competent regulator. out flaws and inconsistencies in are present in the executive and However, they also felt that there is the BOT Law and its implementing the judiciary, and at the local level. no competent regulator currently rules and regulations, which are Some of those interviewed and/or there is a high risk that the important elements in these two expressed concern about the high regulator's decisions will be over- factors. implementation and transaction turned by the courts when the regu- costs, such as those related to lator makes correct but unpopular Source: Felipe M. Medalla. 2004. "Private obtaining "first pass" approval from decisions. Most interviewees Sector Participation in Infrastructure in the Philippines: Lessons from Selected National Economic and Devel- expressed concern about excessive Case Studies and Interviews with opment Authority's Investment judicial action in their projects. One Private Sector Participants." October. Coordination Committee, which respondent specifically alluded to World Bank, Manila. the country, from an infrastructure investment otherseriousconcerns:politicalinstability;widespread standpoint, included: respect for contracts during corruption; cronyism; lack of transparency; poor legal the Asian financial crisis; a relatively well-educated, protection; poor overall record of honoring contracts English-speaking consumer/labor base; high-quality, during the crisis, along with ongoing contract diffi- low-cost labor force; and a regulated infrastructure culties; terrorism threats; and lack of clarity regarding system. However, these were easily outweighed by the future direction of the country. WorldBankInfra.indb 62 12/6/2005 8:41:06 AM Chapter 4 Maximizing the Benefits of Private Sector Participation Many respondents reported that the envi- indication of priority accorded to the project. In a ronment for foreign infrastructure investment in situation in which funding for identified investments the Philippines has actually worsened rather than is not forthcoming, the unsolicited route becomes stabilized or improved in recent years, an obser- the usual resort as the government agency allows vation that distinguished the country from the other the private sponsor to pay for the feasibility study countries that were more commonly mentioned as and even the design, on the understanding that the attractive for investment. project will be accorded high priority by the agency. There is also sentiment among potential investors One way of dealing with the dearth of ready projects that the 40% cap on foreign equity ownership of would be to use official development assistance funds public utilities seems to constrain greater private for feasibility studies and detailed designs. Another sector participation in infrastructure provision and would be to create an agency or a corporation, and reduces the attractiveness of the Philippines as a give to it--or assign to an existing body--the task foreign investment destination. of providing financial, legal, and technical services There has been scant information available on to assist agencies prepare projects that are ready the average Filipino's views on the role of the private for competitive bidding. This will likely increase sector in the provision of basic infrastructure services. the number of bidders and make the process more As part of this study, and in order to complement the transparent. detailed interviews with private sector participants In line with the latter solution, the Philippine (box 4.2), a survey among 300 people on the level Infrastructure Corporation (PIC), a subsidiary of the of public acceptance of privatization of basic infra- National Development Company--a GOCC under structure services was conducted in July 2004 (box 4.3) the Department of Trade and Industry--was estab- by the World Bank and Social Weather Stations (a lished to provide assistance in preparing private sector nonprofit social research organization based in the participation-type projects and coordinate with line Philippines). Details of the survey methodology and agencies involved. It is proposed that PIC finance results are contained in appendix 4. preinvestment activities, with its costs reimbursable by the project company upon award of the private Weaknesses in planning, preparing, and sector contract. This model will facilitate the infusion executing private infrastructure projects of much-needed resources and expertise for careful The multiplicity of unsolicited bids for infrastructure project preparation to attract private investment in projects demonstrates that the public sector has ample infrastructure. room to improve its planning and preparation of The procedures for contract approvals and private infrastructure projects. It is indeed vital that amendments are also a concern. Some agencies sign private sector participation is led by the public sector contracts without considering ICC guidelines (e.g. according to the latter's master plans and priorities, the NAIA Terminal 3 project and the San Mateo and not led by the private sector. Unfortunately, this landfill project). As experience shows, contracts can has often not been the case. The absence in the past be challenged before the courts and this puts project of a credible overall infrastructure investment plan implementation on hold. In other cases, even if the encouraged the key infrastructure agencies to identify contracts signed adhere to the ICC guidelines, they infrastructure projects in a highly fragmented way. are immediately amended to suit the arrangements Appropriate methodology and criteria for selecting later decided on by the proponent government agency projects for private sector participation are lacking. The and the investor. As a result, potential private sector result is ad hoc identification of individual projects, participants are increasingly feeling that contracts often backed by strong private sector proponents. tend to be renegotiated. In an extreme case, the Project prioritization could be facilitated by the contract is not clear enough on the time frames for availability of projects with completed feasibility specific deliverables. For example, financing by the studies, or at least preinvestment studies that provide project proponent for the Southern Tagalog Arterial a solid basis for determining the need for, and viability Road (STAR) toll road has not been mobilized as the and implementation options of, projects. However, investor lacked the capital; implementation has been this is rarely seen in most agencies. In practice, prein- unduly delayed with no definite timetable for putting vestment studies are usually prepared once financing up the desired financing. The resolution of issues that for eventual implementation is assured. Preparation revolve around tariffs, subsidies, government financial of the studies is, for many people, itself an implicit exposure, and the like is left to the judiciary. WorldBankInfra.indb 63 12/6/2005 8:41:06 AM Philippines: Meeting Infrastructure Challenges Box 4.3 Results of the World Bank-Social Weather Stations Privatization Perception Survey T he survey asked respondents these service providers are pri- is also low, with the majority of about their awareness of private vately run. One possible reason respondents responding that the sector providers in basic infra- for the low awareness generally government controls the prices structure services, and gauged their is that the differing degrees of set by the utilities. perception about the quality and government involvement in price of services offered by private arrangements for private sector Public awareness of price (and providers. It also sought to estimate participation are often unclear, quality) varies by sector and private their awareness of institutions that for example, the Philippine provider: the majority of the users regulate private providers. The National Construction Corpo- of toll roads and urban rail systems, main results are as follows: ration's involvement as a GOCC and of the consumers of MWCI in the NLEX and SLEX toll road and MWSI, believe that the price · Public perceptions of private concessions. they pay is just right relative to sector participation in basic infra- · Public perceptions of profits the (perceived) cost of providing structure services are generally made by private providers do not the service. For Meralco customers positive: more than half of the reflect reality: an overwhelming however, the majority believes that respondents seemed to think majority believe that agencies it is paying a price that is higher that it would benefit the country. such as NPC, MWSS, NLEX, and than the cost of providing elec- · Public awareness of the private SLEX are posting profits, and that tricity. For the Skyway, which is an sector's involvement seems to service providers are more than extension of the SLEX built under a be low as the majority of the capable of shouldering the cost BOT contract with the Citra Metro respondents regard infrastructure of any activity to improve quality. Manila Tollways Corporation, users utilities as wholly government- They thus have no basis for are somewhat split on whether owned. Meralco, MWCI, and passing the cost on to consumers they are paying enough, or more MWSI are exceptions--more by increasing user charges. than enough. than half of those who have · Public awareness of institutions used their services are aware that that regulate private providers Source: World Bank staff. Unclear rationale and ineffective guidelines on be accommodated because they require some form fiscal support to private infrastructure projects of subsidies or guarantees to become viable. A clear AsembodiedintheBOTLaw,subsidiesandguarantees policy is needed on the type and extent of subsidies can only be given to solicited BOT projects, i.e. and guarantees that can be provided vis-à-vis the kind those that emanate from the investment programs of risks that are being taken. In the case of unsolicited of infrastructure agencies and local governments. proposals, the key is to maximize competition (rather Preparation, development, and design of these project than totally dismissing these proposals) along with proposals, including determination of the nature and clear subsidy and guarantee guidelines. level of subsidies, rest with the proponent government The rationale for public support to projects agencies. Unfortunately, most lead agencies lack the in which the private sector participates should be skills and resources to make timely proposals that can provided at the project identification and devel- lend themselves to a competitive bidding process. This opment stages. The experience with the Casecnan spawns unsolicited proposals that tend to be accorded irrigation and hydroelectric project (box 4.4) illus- higher priority in the investment decisionmaking trates the importance of proper project selection and process. Processing unsolicited proposals invariably appropriate risk allocation. It further demonstrates means that the government deals with only a single the political vulnerability of the decisionmaking proponent, who, in turn, is likely to adopt a "take it process in terms of identifying the project that should or leave it" stance. This bargaining equation has an be supported and the subsidy that should be extended adverse bearing on how the risks (and therefore public to a risky project. sector support) are allocated in a contract. On the The decision to provide public support requires other hand, an intolerant, "no direct guarantee" policy careful consideration of objectives, identification of on unsolicited proposals could also lead to the govern- appropriate instruments, and cost-benefit analysis of ment's missing out on important projects that cannot using each instrument. WorldBankInfra.indb 64 12/6/2005 8:41:07 AM Chapter 4 Maximizing the Benefits of Private Sector Participation As discussed in Irwin,5 the first and most Cash subsidies and output-based schemes important step is deciding whether private projects Cash subsidies to private infrastructure projects in should receive any fiscal support. It is possible that the Philippines are rare; however, almost all infra- through a policy change, the government could structure sectors receive direct or indirect cash bring about private sector participation with no subsidies. These subsidies are often to public insti- fiscal implications. For example, in the water sector, tutions, but they rarely achieve their objective of water districts are constrained in engaging the helping the poor. Resources for inefficient subsidies private sector because current policies require that to public institutions could perhaps be better directed the districts obtain Local Water Utilities Adminis- and used to attract the private sector. Indeed, there are tration (LWUA) waivers to access financing from new techniques in subsidy delivery, such as output- elsewhere. A policy change of removing the LWUA based aid, that can both meet intended development lending monopoly would greatly facilitate private objectives and involve the private sector. sector financing and operations. Typically, public resources in the Philippines If nonfiscal policy changes cannot achieve are provided for subsidizing inputs of production. objectives at no cost, the most promising instrument, However, results have been disappointing and subsi- considering its targeting and transparency, needs dizing inputs of service providers has not translated to be identified. The Philippines has experimented into increased access by the poorest. Output-based with a number of instruments for providing fiscal subsidy mechanisms, by linking the payment of support to private projects such as direct subsidies, subsidies to a third-party provider to the "output" guarantees, tax breaks, subsidized capital contri- actually delivered (such as increased access to water butions, and various in-kind contributions. Some of or electricity), provide strong incentives to third- these instruments have stimulated and maximized party service providers. the benefits of private sector participation, while The design and implementation of output-based others have not. schemes are in their early stages but if done properly, The most relevant instruments in the Philippines such schemes have the potential to involve the private are cash subsidies, including output-based schemes, sector in areas traditionally considered not viable for and guarantees. private service delivery, while enhancing account- Box 4.4 How not to do a BOT project: The Casecnan project T he Casecnan multipurpose licited and the government was The tragedy in this under- irrigation and hydroelectric dealing with only one possible con- taking is that the shortcomings BOT project was submitted to the tractor, the framework for giving were already obvious from the National Economic and Devel- subsidies and guarantees was very beginning to the ICC both at opment Authority's Investment flawed both on legal and economic the technical working group and Coordination Committee (ICC) in grounds. technical board levels, and yet the 1994. The ICC evaluation found that Yet the government decided project was approved. A senate the project was not viable given to extend the subsidies and guar- inquiry soon ensued and one the hydrologic risks and that it antees anyway and used a very senator said that the project was had dubious economic, social, and strained interpretation of the BOT indeed a bad project, and had been financial value. Law's prohibition on subsidies and approved because it had backers The government had many direct guarantees to projects that at the highest level of government. times in the past looked at various are awarded through competitive The project showed the vulner- approaches to the implementation bidding. Since the project was not ability both of the BOT process of the project through official financially viable unless the gov- and the ICC as a "gatekeeper" in development assistance financing ernment absorbed most of the risks granting subsidies and guarantees. but had decided not to undertake embedded in the project, including it. When the government eventually hydrologic risks, the mere fact that Source: Felipe M. Medalla. 2004. "Private decided to carry out the project the proponent agreed to proceed Sector Participation in Infrastructure in the Philippines: Lessons from Selected through the BOT Law, it decided to was already an indication that the Case Studies and Interviews with negotiate with only one company. government was absorbing too Private Sector Participants." October. Since the BOT project was unso- much risk. World Bank, Manila. WorldBankInfra.indb 65 12/6/2005 8:41:07 AM Philippines: Meeting Infrastructure Challenges ability in the use of public resources. Box 4.5 describes incentives to the private provider to expand access the Philippines' experimentation with output-based would be preferable over a guarantee scheme that subsidy schemes in infrastructure sectors. guaranteed demand for services to be provided. However, an output-based subsidy scheme might Guarantees not be appropriate for insuring against broader Guarantees are a popular instrument for providing political or regulatory risks. Clarifying the rationale public support to private infrastructure projects since is therefore the first step toward evaluating whether they typically incur no immediate cash cost and only a guarantee is required. the possibility of liabilities in the future. Because If a guarantee is identified as the preferred investing in infrastructure projects is intrinsically instrument, it is important not to "over-guarantee" risky, investors insist on guarantees, especially in a risks. As much as possible, guarantees should be climate such as the Philippines, which is characterized used only for those risks that cause the greatest by high country risk and lack of a credible legal and concern to the investor. For example, if a toll road regulatory framework. As a result, infrastructure investor's concern is that the government will build investors in the country have been guaranteed against a competing free road after the private toll road various types of risks by the government, such as is built, rather than insuring the investor against changes in the political and regulatory regime; low all causes of revenue loss, the government should revenues, tariffs, and demand; and fluctuations in compensate the investor for lost revenues only if a exchange rates. competing free road is in fact built.6 Moreover, by When should guarantees be used? The answer over-guaranteeing risks, guarantees could have the depends on the objective and nature of the risk perverse effect of leaving private investors with little being guaranteed. For example, if the objective was incentive to select commercially viable projects or to to expand access to infrastructure services, then an manage them efficiently, and even encourage them to output-based subsidy scheme that provided stronger take excessive risks. In the Philippine power sector, Box 4.5 Pilot output-based subsidy schemes in the Philippines T he provincial government of La incentives to attract private oper- electricity cooperatives indicate Union in Luzon is embarking on ators to invest in these commu- they cannot serve within three a program that aims to connect all nities, the provincial government is years, and therefore waive their residents in its urban and urban- considering provision of subsidies franchise rights. Most of these izing areas to safe and reliable directly to private service providers opportunities will be relatively piped water supply systems by on a per connection basis. In effect, small, greenfield, mini-grid devel- involving the private sector. The an output-based subsidy will be opments in remote areas, but they province consists of 19 munici- provided for the capital costs asso- will be eligible for electrification palities and one city, four of which ciated with building connections to subsidies funded by the universal (including San Fernando City) are the poorer communities. charge. The Department of Energy part of one provincial water dis- The scheme is intended to is considering output-based trict. Residents in the remaining 16 extend coverage of the existing subsidy approaches, under which municipalities are served either by network by around 40,000 new a subsidy would be committed to LGU-managed water utilities that household connections, about fund a portion of connection costs, are generally inefficient, or by self- double the total number of existing with all or most of the subsidy provision, which is unacceptable connections. Output payments paid only after the connections are to the poor and further exposes would be made only once the con- made and verified. A number of them to serious health risks. These nections are functioning (these issues are yet to be resolved for the 16 municipalities have relatively connections would be heavily scheme to be implemented. small economic bases that make it frontloaded in the first few years). difficult for residents to afford the The project is currently in the Sources: World Bank staff; and Chiaki full-cost recovery tariffs required prequalification stage. Yamamoto and Catherine Hunt. 2005. "Output-based Aid in the Philippines: by current financing policies gov- Another initiative in the power Harnessing Political Will to Deliver erning water districts. sector invites private parties--qual- Water to the Poor." OBA Approaches. In order to provide sufficient ified third parties--into areas that Note 004. WorldBankInfra.indb 66 12/6/2005 8:41:07 AM Chapter 4 Maximizing the Benefits of Private Sector Participation guarantees and other assurances were actively sought charters provide for automatic guarantees from the by private producers of power (and given to them) national government. This weakens the discipline to compensate them for the political risk of selling of DOF's vetting of guarantee applications, thereby power to a single, state-owned incumbent. However, reducing the approval process to a procedural one. the proper and quick implementation of the wholesale electricity spot market in the power sector should Ambiguous BOT policy and sector-specific gaps alleviate this specific investor concern. in the enabling framework7 The Philippines has taken steps toward The landmark BOT Law has been successful in paving controlling indiscriminate use of guarantees. For the way for major infrastructure projects in the Phil- example, Republic Act 4860 sets a $7.5 million ippines. However, a number of controversies surround ceiling on outstanding government guarantees for the Law, particularly in relation to vagueness over foreign loans to GOCCs. However, most of the infra- unsolicited bids, definition of government guarantees, structure-related GOCCs, such as Light Rail Transit and other possible deficiencies related to the role of Authority, MWSS, National Development Company, implementing agencies in contract revision. National Electrification Administration, National The current version of the BOT Law and its imple- Irrigation Administration, Philippine National Oil menting rules and regulations (IRR), which allows for Company (PNOC), and Philippine National Railways unsolicited bids for BOT projects, has led to a number are explicitly exempted from this ceiling. Moreover, of scandals. Most of the controversial projects started guarantees on various types of risks in BOT projects, as unsolicited proposals, notably the NAIA 3 airport for example, revenue guarantees for the Casecnan terminal and the Caliraya-Botocan-Kalayaan (CBK) irrigation and power project and the MRT 3, are hydroelectric power BOT projects. As box 4.7 illus- further aggravating the situation. trates, one of the shortcomings of the BOT Law and Identifying the right guarantee is often tricky its IRR is the lack of clarity for the process of dealing (box 4.6) and the types of guarantees made by the with unsolicited proposals. For instance, the Law's government are often problematic. In the case of IRR require that all unsolicited proposals should go MRT 3, it is unclear whether the proponent absorbs through the ICC. However, proponents of unsolicited any demand risk. The risk guaranteed by the proposals such as NAIA 3 and CBK have bypassed government is the ridership and this is problematic the ICC, and instead, directly sought the approval of since the BOT contractor can influence ridership by the Office of the President. This has been achieved influencing where to locate stations, escalators, etc. because of the gray area in the IRR provision related Given that performance monitoring is weak and that to whether the Office of the President should approve MRT 3's contractor receives payments on the basis the project concept or the entire project itself. So of delivered capacity, it is likely that the contract while safeguards for unsolicited proposals exist, this monitoring will report anything but serious shortfalls ambiguity in the law and its IRR needs to be resolved. in delivery. Requiring all projects to be first cleared by the ICC Currently, the Department of Finance (DOF) before they reach the Office of the President could reviews and approves requests of GOCCs for national be one way of achieving this. government guarantees. However, certain GOCC Under the original BOT Law, no guarantees, Box 4.6 Guaranteeing input supply risk: The Casecnan and Metropolitan Waterworks and Sewerage System cases E xamples of the tricky issue having water supply for distribution dependent on water). The hydrologic of identifying what risk to be is not an option in the MWSS case risk in Casecnan is therefore purely a guaranteed can be gleaned in the since the alternative would be to commercial risk, a risk that the gov- Casecnan BOT project and the Met- let households dig wells or stop ernment should not bear. ropolitan Waterworks and Sewerage drinking water. In the Casecnan System (MWSS) concessions. In both project, in contrast, which aims Source: Felipe M. Medalla. 2004. "Private cases, the government bears the to provide irrigation services and Sector Participation in Infrastructure in risk of not having the main input electricity, there are other sources the Philippines: Lessons from Selected in the project: water. This is the of electricity, and the farmers can Case Studies and Interviews with appropriate policy for MWSS but also get water from other sources Private Sector Participants." October. the wrong policy for Casecnan. Not (or go into activities that are not too World Bank, Manila. WorldBankInfra.indb 67 12/6/2005 8:41:07 AM Philippines: Meeting Infrastructure Challenges either direct or indirect, could be extended to BOT infrastructure. Private involvement per se is not neces- projects. However, as a way out for a cash-strapped sarily the goal, and plenty of global evidence shows government, the BOT Law was subsequently amended that private sector participation in infrastructure, to disallow only "direct" government guarantees. without good policy and regulatory frameworks, may Nonetheless, vagueness surrounds what constitutes not improve sector performance.8 a direct government guarantee, which needs to be The record of private infrastructure partici- better defined. For example, there is still a controversy pation in the Philippines itself shows both setbacks surrounding the CBK power project as to whether or and successes. However, given its ever-growing not the project was granted a government guarantee, infrastructure requirements, the country has little and if so, whether it was direct or indirect. In the choice but to attempt to minimize these setbacks and absence of implementation of the IRR, the amendment to build on the successes. In the context of fewer to the Law remains open to many interpretations. public resources for infrastructure, large-scale private Several other unclear provisions exist in the current sector investments will, indeed, have to be mobilized version of the BOT Law and need to be reviewed: to ensure that infrastructure services are provided · sustainably and affordably, especially for the poor. The roles of the implementing agency and the ICC Furthermore, the country cannot afford to in the awards of BOT contracts are unclear. If a dispense with the numerous small-scale independent contract is revised, the revised contract is merely providers who constantly meet the needs of those submitted to the ICC for information only, and urban and rural poor who are not reached by formal the ICC has little say in the process. Explicitly providers. Recognizing and strengthening the role of allowing the ICC to approve contract changes, such small-scale providers will be vital if the country and to ensure compliance of implementing is to meet the Millennium Development Goals for agencies with ICC reporting requirements, should improving access to basic services. · be considered. Various factors are adversely affecting private The law is silent over whether projects can be sector sentiment in the Philippines. While some · built on private land. risk factors are exogenous and beyond its control, Thelawisunclearaboutcostsrelatedtothetransfer the government can, however, undertake the of ownership of BOT facilities to the government following actions to reignite private sector interest · upon expiration of a BOT contract. in infrastructure: A recurring issue in BOT contracts is how residual claims are handled in case the contract is termi- · Attempt to reduce general country risk, particularly nated. Proper delineation between government fiscal risk, as much as possible. Doing so would claims and creditor claims is important in cases improve both the overall investment climate and where the government takes over the facility (as in the business environment for infrastructure. The Philippine International Air Terminals Co., which government is already making efforts in this area. was awarded the contract for the construction of The deteriorating business environment for infra- NAIA Terminal 3 but whose contract was later structure is affecting the performance of both nullified by the Supreme Court when construction public and private infrastructure investments. of the terminal was almost complete). Chapter 2 contains detailed recommendations for improving that environment. The government has set up a BOT-IRR committee to provide recommendations on possible amendments · Strive to attract private investments on a trans- on the IRR of the BOT Law; recommendations are parent and competitive basis instead of through expected to be completed by 2005. unsolicited bids. The current situation of near dominance of unsolicited bids in private sector engagement has resulted in a project identifi- Suggested actions cation process largely driven by the private sector instead of determined by the public interest. The Given the magnitude of its infrastructure needs and nontransparent nature of unsolicited bids gives requirements, the Philippine government cannot rely much more room to legal challenges and to exclusively on the private sector. However, it can take corruption. The lack of competition will most steps to increase meaningful private involvement in likely lead to the result that public-sector benefits WorldBankInfra.indb 68 12/6/2005 8:41:07 AM Chapter 4 Maximizing the Benefits of Private Sector Participation Box 4.7 How do private sector participants in infrastructure projects view the BOT Law and its implementing rules and regulations? I n the private sector interviews the government's stance with pletely with unsolicited BOT introduced in box 4.2, respondents regard to the provision of subsidies projects because, in addition to the stated that many of the problems for unsolicited BOT proposals. constraint that many government associated with private sector par- Current rules create a contradiction agencies face in preparing com- ticipation had little to do with the when projects require subsidies or petitive BOT projects, unsolicited BOT Law and its implementing rules guarantees. These can only be given projects offer greater room for cre- and regulations (IRR), and more to solicited BOT projects, with the ativity and innovativeness of private to do with the overall business government agencies preparing sector involvement. environment. Indeed, a majority of the projects and determining the The key is not to do away with the interviewees said that the BOT required subsidy. Unfortunately, unsolicited projects, but maximize Law is a good law that the country many government agencies, espe- competition even in unsolicited can be proud of. However, they cially LGUs, do not have the skills projects. The important point in did point out various issues in the or resources to prepare the project unsolicited BOT projects is to distin- BOT Law and its IRR that they felt up to the point where it can be the guish between what is proprietary needed improvement. The over- subject of a bidding contest. With (and therefore cannot be revealed arching problem identified was the strict implementation of the rule on to the challenger) and what is not. vagueness surrounding the inter- unsolicited BOT proposals (no direct pretation of the BOT Law and its subsidy provision), they felt that Source: Felipe M. Medalla. 2004. "Private Sector Participation in Infrastructure in IRR, particularly related to its policy projects that require subsidies or the Philippines: Lessons from Selected toward unsolicited bids. guarantees might never take off. Case Studies and Interviews with Interviewees were particularly Respondents felt that it might Private Sector Participants." October. concerned about the need to clarify not be possible to do away com- World Bank, Manila. are not maximized. To establish the credibility of tainty to be faced by potential investors. As the private sector participation in infrastructure, it is Manila water concession has demonstrated, such vital that this situation be reversed. The benefits expense can indeed be recovered from private of such participation can be greatly improved and sector participation proceeds. the problems can be greatly reduced if projects in the Philippines that entail the participation · Clarify the rationale for public support for private of the private sector are carried out on a trans- infrastructure projects, and identify and use parent and competitive basis, instead of through appropriate instruments to meet development unsolicited bids. The target should be that the objectives. Where cash subsidies are warranted, majority of transactions be competitive, rather output-based mechanisms should be explored to than the opposite. achieve better targeting and subsidy efficiency · (box 4.5 above). For subsidies in the form of guar- Budget sufficient resources for preparing quality antees, the exemption of infrastructure-related preinvestment studies for projects that are likely to GOCCs of the $7.5 million ceiling on outstanding attract private investors. Good project preparation government guarantees for foreign loans to work--including feasibility studies, engineering GOCCs needs to be reviewed. Guarantees should design, and financial packaging--will enable the be used judiciously, based on careful analysis as government to more effectively tender projects for to which parties are best equipped to deal with competition. Current funding constraints limit specific risks. There will almost always be risks the government's ability to do this, and have been that the government is better able to control or one of the main reasons for unsolicited proposals manage than private operators. By providing for private sector participation, as the proponents private operators with a guarantee against such finance such studies. This should not be the case, risks, the government can reduce overall project since the limited resources spent on such studies costs. The challenge, however, is to identify and will enable wider interest by investors and allow precisely define those risks and to evaluate the government to secure better terms, as a result and account for the cost to the government of of both wider competition and reduced uncer- providing such guarantees. WorldBankInfra.indb 69 12/6/2005 8:41:07 AM 0 Philippines: Meeting Infrastructure Challenges · Require a central unit such as DOF to evaluate · Improve the public's perceptions of private sector all guarantee applications, in the event that guar- infrastructure providers. The public does not antees have to be provided. DOF should establish seem to be averse to private involvement in an appropriate guarantee framework for infra- infrastructure, but holds several misconceptions structure projects, including clear and transparent about private provision, as well as the institu- criteria for project selection, public support, and tions that regulate private provision, such as the proper accounting of the fiscal costs and risks of Energy Regulatory Commission and the Toll these investments. Box 4.8 highlights some steps Regulatory Board. A targeted public information that other countries have taken with regard to guar- campaign using various media outlets is likely · antees and the resulting contingent liabilities. to go a long way in reducing these misconcep- Strengthen the enabling policy framework by tions. The objective would be to engender better improving the BOT Law and its IRR, particularly public appreciation of the project process and the in the way unsolicited bids are dealt with. Box 4.9 role of private sector finance in infrastructure highlights ways in which the policies for dealing provision, which can facilitate more rational with unsolicited bids could be strengthened. tariff setting. Box 4.8 Measuring, budgeting, and accounting for guarantees T o make informed decisions tively straightforward techniques: ments, however, these systems are about which risks it should in cases where a government has cash-based. Although it is both assume, a government needs to issued a large number of similar possible and desirable to note consider how to measure risks and guarantees for many years and has guarantees and other noncash incorporate them in its accounts recorded information on defaults, items in what are essentially cash- and budgets. Otherwise, it may be the expected cost of the guar- based accounts and budgets, fully courting financial disaster. antees can be estimated actuarially incorporating them requires a shift in the same way as, for example, away from cash-based systems. Identifying and listing guarantees car insurance premiums are calcu- Cost-based budgeting, though, The first and simplest step that lated. In other cases, techniques is not easy to implement, and in governments can take to improve developed to value financial deriva- addition to estimating default the monitoring and management tives (such as options, futures, and risks, requires a shift to accrual of risks is to compile and publish swaps) can also be used to value accounting. Despite the fact that a list of their contingent liabilities guarantees. Extending a credit the Philippine accounts and budget and the maximum amounts they guarantee, for example, is equiv- systems are not well equipped, stand to lose. The New Zealand alent to the government's selling-- this should be a long-term goal government presents this infor- at zero prices--a put option to the for the government for better mation in its statement of con- lender, which can be valued using management of guarantees. tingent liabilities published on the option-pricing techniques. Such Internet (http://www.treasury.govt. techniques are being used to value Sources: Mateen Thobani. 1999. "Private nz). guarantees in Colombia and the Infrastructure and Public Risk." Devel- United States. opment and Finance. 1999. Volume Calculating expected losses 36, No. 1. March. International Mon- While helpful, the listing of guar- Incorporating expected losses in etary Fund, Washington, D.C.; Timothy antees and possible maximum accounts and budgets Irwin. 2003. Public Money for Private losses does not indicate what Expected losses, once they are Infrastructure: Deciding When to Offer Guarantees, Output-Based Subsidies, losses a government should expect. reliably calculated, should be incor- and Other Forms of Fiscal Support. The calculation of expected losses porated in government accounts Washington, D.C.: World Bank. July; and is sometimes feasible using rela- and budgets. For most govern- World Bank staff. WorldBankInfra.indb 70 12/6/2005 8:41:07 AM Chapter 4 Maximizing the Benefits of Private Sector Participation 1 Box 4.9 Improving policies for unsolicited bids in the Philippines A lthough the Philippines is one guity in the event of a challenge the option of matching the of the few countries that has a since the original proponent can price offered by the challenger. policy for dealing with unsolicited always claim a new concept. This This can be a disincentive to bids, the only successful challenge precondition could deter possible challengers if the original pro- to an unsolicited proposal has been challengers, and therefore may ponent can readily match the the NAIA terminal 3 bid by Asia's not be required. challenger's price. Emerging Dragon Corporation (AEDC). Other countries have had a · Unrealistic time frames for deci- With experience, most other greater number of successful chal- sionmaking. As the table shows, countries have changed their lenges--in Chile approximately half it would appear that the Philip- policies on unsolicited proposals of all unsolicited projects are chal- pines is relatively quick in making for infrastructure projects. Pos- lenged successfully; in Korea one- decisions (about 8 months). sible ways for the Philippine gov- third are challenged, and about However, there are only 30 days ernment to improve its current half of these successfully. Possible from when a project is published approach include changing the reasons for the lack of successful in which a counter-proposal can existing policy so that there are challenges in the Philippines are: be submitted--a deadline that more challenges; putting out to is enforced. But, because of the bid all unsolicited proposals, with · Unnecessary preconditions for complexity involved in infra- no advantage to the original pro- a challenge. Among the three structure bids, this is likely an ponent; and adequately compen- conditions allowing unsolicited additional deterrent to potential sating the original proponent for projects, the first states that an challengers. legitimate project development unsolicited bid is allowed if "...the costs if the challenge is successful. project involves a new concept · An impractical counter-proposal Sources: John T. Hodges. 2003. "Unso- or technology and/or is not part policy. Under the current policy, licited Proposal." Public Policy for the of the list of priority projects." if a challenger submits a bid, Private Sector. Note 258. World Bank, This lays the ground for ambi- the original proponent is given Washington, D.C.; and World Bank staff. Time frames in decisionmaking, selected countries (months) Preliminary Call for open Challenge/ approval Final approval tenders Counter-proposal Additional time Total Chile 7.0 12 12 Approx. 2­4 -- 33­35 Philippines 2.0 3 Undetermined 2 1a 8 + South Africa 1.0 9 3 2 2b 17 Korea, Rep. of 0.5 4 Undetermined Approx. 2­4 -- 6.5­8.5+ -- = not available. a. To counter match. b. To evaluate. Source: John T. Hodges. 2003. "Unsolicited Proposal." Public Policy for the Private Sector. Note 258. World Bank, Washington, D.C. Endnotes 1 For comparability across countries, only estimates from the 4 World Bank. 2004. "East Asia & Pacific Private Investors in Infra- World Bank's Private Participation in Infrastructure Database structure: Perception Survey," (http://lnweb18.worldbank.org/eap/ for the Philippines were used for this figure. eap.nsf/Attachments/survey/$File/Investors_Report.doc). 2 By number, there are 48 projects under the greenfield type, 17 for 5 Timothy Irwin. 2003. Public Money for Private Infrastructure: concessions, and one each for management and lease contracts Deciding When to Offer Guarantees, Output-Based Subsidies, and and for divestitures. Other Forms of Fiscal Support. Washington, D.C.: World Bank. 3 For the International Country Risk Guide risk index, out of 22 6 Ibid. countries, the Philippines ranked 13 in the political risk category; 7 This section is based on interviews with various government 16 in the financial risk category; 14 in the economic risk category; officials and planning agencies. and 13 in the composite risk category. For the Economist Intel- 8 For a recent global review of privatization, regulation, and compe- ligence Unit composite country risk score, on a scale of 1 to 100 tition in infrastructure, see Ioannis Kessides. 2004. Reforming (with 100 being most risky), the Philippines scored 53. Infrastructure. Washington, D.C.: World Bank. WorldBankInfra.indb 71 12/6/2005 8:41:08 AM Edwin Huffman/World Bank WorldBankInfra.indb 72 12/6/2005 8:41:16 AM Chapter 5 The Way Forward Building on strength and success The Philippines is also experimenting with T innovative ways, such as output-based aid, to improve ackling the issues discussed in the previous efficiency of subsidy delivery in power, and in water chapters--improving the business envi- and sanitation. The passage of the anticorruption ronment; enhancing planning, coordination, Government Procurement Reform Act of 2002, and financing; and maximizing the benefits of private the establishment of the Office of the Ombudsman sector participation--is undeniably challenging. The under Republic Act 6770, otherwise known as strategy for going forward should be firmly anchored the Ombudsman Act of 1989, and involvement of in the Philippines' strengths and the reforms that civil society organizations as observers in bidding have already been initiated by the government in the processes, are encouraging developments that are various infrastructure sectors. The Philippines has the vital for increasing transparency and accountability, benefit of existing institutions that can be utilized to and for reducing costs and delays in the public address these issues, as well as technical expertise at procurement process for infrastructure projects. these institutions. Successful experiences with community-driven devel- Major reform measures in the power, water, opment in effectively and transparently providing transport, and telecoms sectors have already community infrastructure, such as the Kapit-Bisig been initiated, and the key to achieve sustained Laban sa Kahirapan--Comprehensive and Integrated improvement lies in rapid and consistent implemen- Delivery of Social Services (Kalahi-CIDSS), can be tation. Though yielding mixed results, the private scaled up to introduce better accountability at the sector-led infrastructure development strategy has local and national levels. The positive experience been one of the most progressive in the region, and of progressive LGUs in infrastructure development has been a pillar of infrastructure investment. and governance improvements can be replicated. Moreover, public perceptions of private sector And while there are factors that impede its devel- participation in basic infrastructure services are opment, progress has indeed been made toward generally positive: more than half of 300 survey enhancing LGU access to loan and bond financing. respondents seem to think that it would benefit the For example, the Local Government Unit Guarantee country, as detailed in chapter 4 and appendix 4. Corporation was created in March 1998 to guarantee Finally, private sector investors are familiar with and debt issues of LGUs when these issues are financed interested in the sector, provided that conditions are from private sources. It is the first privately managed right. For example, measures such as recent tariff local government guarantee corporation set up in a hikes in the power sector, combined with a strong developing country of Asia. commitment toward maximizing competition and These strengths, success stories, and ongoing attracting the private sector, are beginning to bear reform initiatives provide a broad base for a strategy fruit. This was seen in the government's successful to tackle the remaining and increasingly serious conclusion, in December 2004, of the first major challenges that, in aggregate, have resulted in further privatization of a power plant (Masinloc), with infrastructure deterioration. Moving forward to privatization proceeds of $560 million considerably achieve results, however, would inevitably require exceeding expectations.1 more difficult measures on various fronts. Strategic WorldBankInfra.indb 73 12/6/2005 8:41:16 AM Philippines: Meeting Infrastructure Challenges considerations should be given to the evaluation of may be done in many ways, with key considerations various trade-offs among the different approaches and including: international comparisons that illustrate how to prioritize and sequence reforms. the areas in which the Philippines lags behind its competitors; comparing the estimates of the overall economic impact of the proposed reforms; and the Prioritizing reforms: Key considerations government's current priorities in medium-term development. While none of these criteria would The preceding cross-sectoral chapters, as well as the give the "right" answer, taken in conjunction, they following sector-specific chapters, propose a detailed provide indicative inputs to help policymakers menu of reforms. It is clear, however, that not all of the prioritize reforms. This chapter tries to suggest some proposed reforms can be carried out simultaneously. priorities based on evaluation of multiple criteria. This is primarily due to financial, political, and Even then, the objective of this chapter is not to capacity constraints. Some of the proposed reforms provide definitive "answers" but to provide inputs require increases in public expenditures, but public to the decisionmaking processes of the authorities funding is limited, especially given the current fiscal in the Philippines. situation. Other reforms are politically challenging to implement, such as increases in tariffs to achieve International comparisons cost recovery, and measures that would require legis- Philippine infrastructure should be on a par with lative actions. Prioritization is needed also because that of its regional competitors to ensure business government capacity to carry out multiple reforms competitiveness and sufficient living standards. Inter- at the same time is greatly constrained. Lastly, trade- national comparisons are useful in this regard, but offs between different policy measures need to be should not be made without consideration of the local recognized and carefully evaluated. context. Each country has location-specific charac- Given this reality, it is important to provide a teristics that limit data comparability and hence the framework that attempts to prioritize the proposed basis for resulting policy decisions. reforms to make the trade-offs more explicit. This Table 5.1 helps identify the areas in which the Table 5.1 International comparisons of infrastructure Power Telecoms Water and sanitation Roads Quality of Trans- Pop w/access Electrification electric mission and Mainlines per Mobile sub- to improved Pop w/access Total road Paved roads rates (%)a supply (Scale distribution 100 peoplec scribers per sanitation to improved network per land area 2000 1­7)b losses (%)c 2003 100 peoplec (%)c water (%)c (km/1,000 (km/sq. km)c 2003/04 2002 2003 2002 2002 people)c Australia 100 6.7 6.64 54.23 71.95 100 100 -- -- Korea 100 6.1 5.99 53.83 70.09 -- 92 1.8 0.55 Singapore 100 6.7 8.52 45.03 85.25 100 100 0.8 4.67 China 98 4.2 7.12 20.90 21.48 44 77 1.4 -- Malaysia 96 5.9 5.55 18.16 44.20 -- -- 2.9 0.15 Mongolia 90 -- -- 5.62 12.98 59 62 20.1 .. Thailand 82 5.3 7.26 10.49 39.42 99 85 3.1 0.11 Philippines 80 3.7 16.33 4.12 26.95 73 85 2.5 0.06 Vietnam 75 3.4 14.00 5.41 3.37 41 73 1.2 -- Sri Lanka 62 3.2 18.11 4.90 7.27 91 78 -- -- Indonesia 53 3.6 16.16 3.94 8.74 52 78 1.7 0.12 India 43 3.0 26.21 4.63 2.47 30 86 3.2 -- Philippines 5 of 11 rank 8 of 12 8 of 11 9 of 11 11 of 12 6 of 12 5 of 10 (equal) 6 of 12 6 of 12 -- = not available; .. = less than .01; km = kilometer; sq. km = square kilometer; pop. = population; w/ = with. Note: For road indicators, figures are as of 2002 except for Vietnam and Malaysia (1999) and Korea (2001). Sources: a. International Energy Agency. World Energy Outlook 2002; Philippines National Electrification Administration; estimates for Korea and Australia; b. World Economic Forum. Global Competitiveness Report 2003­2004; c. World Bank. World Development Indicators 2004. WorldBankInfra.indb 74 12/6/2005 8:41:16 AM Chapter 5 The Way Forward Philippines lags behind its competitors. It is clear scenarios and rely on less than perfect data. They also that the country does not perform particularly well exclude the benefits of reforms that are particularly in most areas. Broadly speaking, the area of most difficult to measure, including reducing corruption concern is power, as it consistently ranks in the lower and improving regulation. Results should therefore half of the comparison countries based on measures be considered as broad estimates. More compre- of access, quality of service, and technical efficiency. hensive, detailed analyses would be needed to refine Fixed telephone line access is also a serious concern the numbers and consider additional, more complex from the figures, though the Philippines ranks better reform measures. Used with caution, however, such on cellular phone access. In terms of water supply and analyses can provide broad indications as to which sanitation access, the country performs reasonably reforms are likely to have the largest overall economic well, but as elaborated in chapters 7 and 8, the impact. relatively high access data for water and sanitation, Consumer surplus analyses were carried out to as well as the relatively high road density, conceal provide rough estimates of the overall economic the poor quality of services. impact of certain proposed reforms. Appendix 5 Cross-country comparisons, as shown in table 5.2 discusses these analyses in greater detail. The reform and discussed extensively in chapter 1, demonstrate scenarios and results of the analyses are summarized that the competitiveness of the Philippine economy in table 5.3. in Asia has been undermined by the deterio- rating business environment and low public sector Power performance, particularly with regard to governance. The reforms in the power sector have resulted, These factors are also particularly relevant for infra- and will continue to result, in significant changes structure in terms of prioritizing the key actions. in end user tariffs, particularly due to increases in National Power Corporation (NPC) tariffs, and the Estimated impact of certain reforms implementation of the wholesale electricity spot Comparing estimates of the overall economic impact market (WESM). Using standard consumer surplus of proposed reforms can also be a useful input in analysis, the model calculates the change in consumer prioritization. Simple analyses to estimate consumer surplus resulting from these tariff changes to be in the surplus, i.e. the net gains to consumers if proposed range of $2.4 billion­3.2 billion over five years. These reforms are undertaken, were carried out for each economic gains are also accompanied by significant of the four infrastructure sectors included in this financial gains. In the short term (until 2006), given report. It is important to note that the analyses continued implementation of the energy reform consider only a limited number of sector reform program--including tariff increase, reduction of Table 5.2 Competitiveness and business environment comparisons Growth Business Corruption Competitiveness Competitiveness Helpfulness of local Efficiency of local as constraint Frequency of Index Ranking Ranking gov't. in doing gov't. in delivering to operation irregular additional (out of 102 (out of 102 business in 2000a servicesb and growth of payments to get countries) countries) businessc things doned Singapore 6 8 2.0 1.8 1.3 5.8 Malaysia 29 26 2.2 2.9 1.9 4.6 Thailand 32 31 2.3 3.3 3.5 2.8 China 44 46 2.6 2.9 2.0 -- Philippines 66 64 2.6 3.4 3.1 3.6 Indonesia 72 60 3.0 3.8 2.6 2.8 Cambodia -- -- 2.2 -- -- 3.5 Philippines rank 5 of 6 6 of 6 5 of 7 (equal) 5 of 6 5 of 6 5 of 6 -- = not available. Sources: World Economic Forum. Global Competitiveness Report 2003­2004 (http://weforum.org); World Bank. "World Business Environment Survey 2000." Washington, D.C. a. 1 very helpful, 6 very unhelpful. b. 1 very efficient, 6 very inefficient. c. 1 no obstacle, 4 major obstacle. d. 1 always, 6 never. WorldBankInfra.indb 75 12/6/2005 8:41:16 AM Philippines: Meeting Infrastructure Challenges Table 5.3 Estimates of consumer surplus from reforms Sector Reform Cost/Benefit ($) Cost/Benefit (% of GDP) Power · Increase NPC generation tariffs by · Short-term (until 2006) · Short-term (until 2006) P1.4­1.6/kWh from their levels at start consumer surplus loss of $300 consumer surplus loss of of 2004 (partially achieved) million 0.1% of GDP over 3 years ···Remove cross subsidies · Short-term consolidated NPC/ · Short-term consolidated Implement WESM PSALM/Transco financial gain NPC/PSALM/Transco financial Reduce NPC operating costs by of $4.258 billion gain of 2.3% of GDP over 3 P6 billion · Long-term (until 2008) years · Privatize Transco and NPC generation consumer surplus gains · Long-term (until 2008) assets by 2006 ranging from $2.4 billion to consumer surplus gains in ·· Recover stranded costs $3.2 billion range of 0.5­0.7% of GDP Reduce capital spending by P5 billion over 5 years and P7 billion in 2005 and 2006, respectively · National government assumes P194 billion of debt and related repayments and interest Water supply ·· Increase level 3 utility tariffs by 35% · $8.843 billion over 7 years, with · 1.3% of GDP over 7 years Improve level 3 utility efficiency by $24 million in first year and 20% over 4 years $1.97 billion in seventh year · Use additional profits to increase · Average of $1.263 billion a year level 3 connections over 7 years Road transport · Scale up road maintenance · Average of $140 million a year · 0.1% of GDP over 6 years expenditures to average of P16.2 billion over 6 years up to 2009 Telecom- Install 1,500 municipal telecenters $123 million over 12 years · 0.02% of GDP over 12 years munications ·· Install 8,000 barangay payphones ··Average of $10 million a year over 12 years kWh = kilowatt-hour; NPC = National Power Corporation; PSALM = Power Sector Assets and Liabilities Management Corporation; Transco = National Transmission Corporation; WESM = wholesale electricity spot market. Source: Appendix 5. NPC operating costs, National Transmission Corpo- figures also ignore the broad economic impact of the ration (Transco) and NPC generation asset privati- changes brought about by power reform. zation, stranded cost recovery, capital expenditure reductions, and government debt absorption--the Water supply total decrease in consolidated losses of NPC, the Rough estimates of the net benefits of increasing Power Sector Assets and Liabilities Management access to individual household connections (level 3) Corporation (PSALM), and Transco is $4.3 billion through raising water tariffs by 35% and gradually (2.3% of GDP) over 2005 and 2006 compared with the improving efficiency by 20%, total $8.8 billion (1.3% status quo. This short-run financial gain is significant of GDP) over seven years. The analysis calculates and would increase if projected out until 2008. The separate changes in consumer surplus for both Philippines has made significant progress in power inside and outside the National Capital Region. It sector reforms over 2004­2005. Continued progress first determines the increase in profit (compared on the overall reform program will ensure that the with the case in which no reforms take place) due full benefits as quantified by the model are realized. to the increase in tariffs and efficiency, and then These figures are the result of numerous assumptions calculates the number of new level 3 connections that on an uncertain future, and must therefore be can be built from those additional profits. Next, it considered with caution. In particular, assumptions estimates the net change in consumer surplus from on elasticities, electricity consumption, tariff paths, increasing current level 3 tariffs and providing and the speed and elements of market reform were level 3 connections to households currently using required, limiting the reliability of the figures. The level 2 (communal faucets and shared connections), WorldBankInfra.indb 76 12/6/2005 8:41:17 AM Chapter 5 The Way Forward level 1 (point sources), and self-provisioning as their They do not take into account increased access to main water source. In total, 8.96 million people gain computers and the Internet, which the telecenters access to level 3 connections, with approximately 90% will also include. Neither do they consider the oppor- of the net gain in consumer surplus coming from tunity cost of the build-out plan. In addition, broad outside the National Capital Region. The model does assumptions on average prices, quantities, costs, not take into account improvements in water quality municipalities, and barangays limit the reliability of or, as an individual gains a level 3 connection, the the figures. The figures used in the analysis are best reductions in time taken to collect water. In addition, estimates of "representative" figures. the model requires numerous nationwide averages on tariffs, expenditures, and consumption, which Stated government priorities limit the significance of the results, particularly at The government's latest plans for dealing with devel- the local level. opment challenges are laid out in the Medium-Term Philippine Development Plan (MTPDP) 2004­2010, Road transport released in November 2004. Developed with close The exercise determines the net benefits of scaling involvement of the president and wide participation up maintenance expenditures for the national road of government agencies, the MTPDP is based on a network to an average of P16.2 billion until 2009. number of pillars that cover sector reforms and cross- Doing so would make up for a backlog of preser- cutting issues. The key challenges that the MTPDP vation works and reverse declining road conditions. tries to address include, in President Macapagal- The net benefits are approximately $140 million on Arroyo's own words, "a still untamed fiscal deficit, average until 2009, or 0.1% of GDP. These benefits insufficient infrastructure, rapid urbanization that are extremely conservative, given the limits of the has congested our cities, especially Metro Manila, model: the reform scenario analyzed here focuses on the growing number of jobless Filipinos, and the inef- increased maintenance exclusively (i.e. it does not ficient delivery of basic services." A major focus of 3 include targeted expansions of the network); it does the MTPDP is infrastructure development. Of the not include estimates of reductions of nonmarket president's "10-point agenda" that forms the core benefits costs, stemming from reduced travel time of the MTPDP, four points are directly associated (and costs of congestion in Metro Manila alone were with infrastructure: decentralization of development estimated at 4.6% of GDP in 1996) or increased road across the country through transport network and safety; and it does not include estimates of benefits digital infrastructure; provision of water and energy from increased vehicle travel due to economic growth. to all barangays; decongesting Metro Manila; and Additionally, the model also employs numerous development of the Subic and Clark areas. Some of assumptions regarding the status quo scenario and the measures highlighted in the MTPDP for infra- price elasticity that further underestimate the benefits structure development are: of increased maintenance expenditures. · Improve public-private partnerships in infra- Telecommunications structure provision (e.g. review the Build- To increase telephone access, the report "Extending Operate-Transfer Law and its implementing rules Access to Communication and Information: Recom- and regulations, particularly in energy, ports, and mended Approach and Implementation Plan"2 calls aviation). for an expansion of service to underserved munici- · Create the Philippine Infrastructure Corporation, palities and barangays over five years through the through which the government can provide seed installation of 1,500 municipal telecenters and 8,000 money to attract or revitalize private sector barangay payphones. The model estimates that the participation in infrastructure. approximate net economic benefit resulting from this · Generate more infrastructure with minimal expansion plan totals $123 million (0.02% of GDP) budget cover or contingent liabilities. over 12 years. The benefits include the additional · Develop a "user pays" culture where road users operating revenues and added consumer surplus will pay at least for the maintenance of the roads; resulting from the new services. The plan for rural allow strategic allocation of public resources, with access would result in over 1 million more telephone the hierarchy of priority activities as maintenance users who had no previous access. Due to lack of data, of existing assets, rehabilitation, improvement and these estimates are based on numerous assumptions. widening of roads, and expansion of new roads. WorldBankInfra.indb 77 12/6/2005 8:41:17 AM Philippines: Meeting Infrastructure Challenges · Pursue power sector reform with successful priva- priorities, in terms of both cross-sectoral issues and tization of NPC assets, government absorption of sector-specific strategies, and in most cases further NPC debt, adopting the right pricing policy, estab- develop the broad policy statements of the MTPDP. lishment of WESM, and strengthening of electric In order to optimally plan for, and provide, cooperatives; Energy Regulatory Commission infrastructure in a decentralized, market-driven, processes will be streamlined and performance and often politicized setting, the central challenge · will be assessed. for the Philippines is to reestablish the credibility Fully implement Executive Order 279 (institution- of public sector institutions and restore the "social alizing reforms in water financing and rational- compact" between the government and its citizens izing the Local Water Utilities Administration) for effective service delivery. This can be achieved and Executive Order 123 (reconstituting the through consistent implementation of: a rigorous National Water Resources Board, to carry out fiscal reform program; key sector reforms in infra- economic and resource regulation mandates); structure; proactive planning and coordination provide potable water to the entire country with of investments instead of reacting to changing continued capacity-building programs for water circumstances in a "boom-bust" manner; and a service providers; and promote private or public few focused investments in the short term through sector investment to provide water in waterless public-private partnership to address key bottlenecks barangays and municipalities. and achieve quick gains in service delivery. In the aggregate, reducing the inherent short termism in Other important policies pronounced by the infrastructure policymaking and improving the MTPDP that are closely related to infrastructure business environment can be expected to increase the include: performance of both the public and private sectors. · Resolving ambiguities in the Build-Operate-Transfer Balance the national government budget in six Law, and improving the selection and preparation of years with a combination of revenue measures projects of interest to potential investors, can further · and disciplined, efficient public spending. renew private sector interest. Strengthen the Investment Coordination The tasks are demanding but achievable. Committee process of the National Economic Experience in other countries shows that, through · and Development Authority board. clear direction and consistent implementation, a Implement the government agency rationalization turnaround in public perception and actual results · and reorganization plan. can be achieved over the short to medium term. Improve the performance of government owned · and controlled corporations. Cross-sectoral priorities Make anticorruption one of the key reform The two key immediate cross-sectoral priorities are as packages through measures such as improving follows: (a) to improve the business environment--in and simplifying agency processes, strength- particular, to take steps toward implementing cost- ening procurement reforms, assuring wide covering tariffs (subsidies, where justified, could public scrutiny of projects, strengthening life- be used as part of the cost-recovery equation); and style checks, strengthening of the Office of the (b) to implement a rigorous and credible fiscal reform Ombudsman, and implementing effective pros- program. Moving or continuing to move toward ecution and conviction. cost recovery, particularly in the power, water, and transport sectors, will have a direct and positive effect on the fiscal situation. Likewise, improving the fiscal The way forward: Key recommendations situation will increase the resources available for public and private infrastructure projects by freeing The above analyses, while not pointing directly budgetary resources, reducing the cost of capital, to definitive answers, provide useful guidance in and improving investors' perceptions of country answering the question of prioritization. In fact, risk. Improving the business environment requires there is overall consistency between the government's continuing and accelerating reforms in the key sectors, latest priorities and the results of the analyses. The particularly in power, water supply and sanitation, and recommendations, as summarized in this section, roads. The government can also start immediately to are generally in line with the government's stated address key bottlenecks and tap private investment by WorldBankInfra.indb 78 12/6/2005 8:41:17 AM Chapter 5 The Way Forward proactively helping resolve issues surrounding some manner, and in a way that minimizes the of the stalled private sector investment projects, and negative impact of price increases, specifically for improving the way in which pipeline projects are the poor. The key measures consist of continued prepared and competitively tendered. power tariff adjustments according to accepted Over the short to medium term, the two key cross- rules, including adequate and timely approval sectoral priorities will be: (a) to strengthen the policy of the universal charge for PSALM to recover planning and coordination environment, which is stranded costs; clarification and enforcement directly and indirectly affecting infrastructure of cost-recovery regulations for the water and provision at all levels--particularly at the regional sanitation sector to enable service expansion; level vis-à-vis the "missing middle" (see the section an increase in the fuel levy for road mainte- "Regional infrastructure provision and the `missing nance expenses; and adherence to agreed toll middle' " in chapter 3); and (b) to maximize the rate adjustments for toll road rehabilitation and benefits of decentralization, so as to improve the way expansion. Consumer surplus analysis of the in which infrastructure is delivered at the local level. required cost-recovery measures shows that the Both of these priorities will require the government priority in tariff adjustments should be given to to address difficult but significant political-economy power, followed by water tariffs, and then the issues so as to reduce undue political intervention in fuel levy increase. Subsidies can be used as part planning, prioritization, coordination, and delivery. of the cost-recovery equation but only where valid for equity or efficiency reasons. Better Sector-specific priorities targeting and management of subsidies can, in As far as sector-specific priorities are concerned, the effect, increase public resources that could be following sector-specific chapters covering power, used for cost-recovery purposes. Good examples water supply and sanitation, roads, and telecom- in the country, such as the lifeline power tariff munications make recommendations. International and ongoing experimentation with output-based comparisons of performance in these various sectors, aid, can be scaled up. estimates of the impact of some of the proposed reforms on consumer surplus, and an analysis of · Improve governance and further step up anticor- the government's own priorities as laid out in the ruption efforts by vigorously implementing the MTPDP point to three key objectives that warrant 2002 Government Procurement Reform Act and urgent attention: addressing the financial deficits complementing it with financial management of the power sector, reversing the recent decline in reforms. Other specific actions include strength- access to water services, and addressing congestion ening the monitoring and enforcement capa- issues in the main cities. bilities of the key anticorruption oversight agencies; insisting on consistent disclosure and Cross-sectoral recommendations verification of assets by public officials; accel- The following paragraphs summarize the main cross- erating the information-transparency aspects sectoral recommendations put forward in the present of procurement reform, including civil society report. monitoring and timely posting of bid invitation · and award results; and initiating an aggressive Implement a vigorous and credible fiscal reform effort on simplification of government trans- program. A credible and sustained period of fiscal action procedures, so as to rapidly reduce the reforms--in particular, increasing tax revenues-- number of steps involved and discretionary will convince participants in both domestic and powers. Corporate governance of public utilities international financial markets to step up invest- should also be improved by appointing qualified ments. Contingent liabilities from infrastructure and experienced corporate board members and programs should be carefully accounted for and executives; providing more operational autonomy managed: guarantees should be used judiciously, to corporate management while establishing based on a clear rationale and appropriate risk clear performance targets based on which the allocation. management may be rewarded or penalized; · regular disclosure of utility performance; and Foster cost recovery by aligning infrastructure involving the public in monitoring the service tariffs with costs in an economically coherent levels of public utilities. WorldBankInfra.indb 79 12/6/2005 8:41:17 AM 0 Philippines: Meeting Infrastructure Challenges · Engage private investment in a competitive manner resources. The focus of oversight responsibilities and resolve issues surrounding stalled private sector can shift from a detailed project-level approval projects. The benefits of private sector partici- process to a broader and more forward-looking pation can be greatly improved and the problems role for reform championship, strategy formu- can be greatly reduced if projects that entail such lation, and policymaking. The oversight agencies participation in the Philippines are carried out should consider taking a more proactive role in on a transparent and competitive basis, instead initiating, promoting, and monitoring systemic of through unsolicited bids. The target should be reforms for the infrastructure sector, and should that the majority of transactions be competitive, address important policy issues that can guide the rather than the opposite. In the meantime, with decisionmaking process for projects and transac- the government's proactive measures, private tions cutting across sectors. Ensuring planning sector transactions that have been suspended or and its implementation in a decentralized and delayed for several years may move forward and often politicized environment is a very chal- translate into visible results quickly. A number lenging task. Effective instruments to implement of toll roads are in such status, all of which are plans, such as the use of incentive-based intergov- critical for relieving the key bottlenecks and are ernmental fiscal transfers and targeted subsidies, largely financially viable. For the water sector, and wide reliance on performance benchmarking, quick resolution of the financial rehabilitation should be carefully studied and consistently of the troubled concessionaire, Maynilad Water implemented. It is also important to ensure Services, Inc., is critical for investments to be made extensive stakeholder participation during the for service expansion, sanitation improvement, strategy development and planning process to and new bulk water sources. secure wide public support of the outputs. · Improve planning and preparation of private sector · Provide incentives and technical assistance to LGUs participation in infrastructure. The government to raise more revenues and improve performance. can maximize the benefit of private investors' This will entail benchmarking LGU financial and interest and avoid the disadvantages from unso- institutionalperformance,andintroducingperfor- licited bids by adequately preparing promising mance-based criteria to the national government's projects for competitive tendering. The rela- fiscal transfer programs to LGUs to incentivize tively small amount of funding spent on such revenue mobilization and performance enhance- preparation work will enable wider interest by ments. Technical assistance to LGUs, in revenue investors and allow the government to secure mobilization and infrastructure investment better terms, as a result of both wider competition planning and preparation, is also important. and reduced uncertainty for potential investors. The national government should also strengthen As privatization of the Manila water concession ongoing efforts in advancing local interjurisdic- has demonstrated, such expense can indeed be tional cooperation by providing more authority recovered quickly, at the financial closure of the to the regional development councils and giving transactions. Quick preparation and tendering higher priority to the province level, with regard of the most critical infrastructure projects in to intergovernmental fiscal transfers. this way can result in visible improvements in a relatively short time. To maximize the benefits of Sector-specific recommendations private sector participation, the government can The priority actions for sector-specific reform and also explore the possibility of establishing a dedi- development include the following. cated infrastructure fund, and means to better leverage ODA funds with private investments. Addressing the power sector financial deficit and · implementing reforms Strengthen and reorient central agencies, such · Achieving and sustaining the financial viability as the National Economic and Development of NPC/PSALM is a major priority. This would Authority, Department of Finance, Department entail increasing cost recovery in charges and of Budget and Management, and interdepart- ensuring that the privatization program is care- mental committees, to improve planning, priori- fully managed to achieve the expected sales values tization, and monitoring of national government and the financial turnaround. WorldBankInfra.indb 80 12/6/2005 8:41:17 AM Chapter 5 The Way Forward 1 · It is important to ensure successful imple- capacity of the National Water Resources Board mentation of market restructuring initiated in economic regulation. under the Electric Power Industry Reform Act, · A nationwide program for public utility reform including the full operationalization of WESM. and performance enhancement should be The prompt resolution of the questions related carried out. Requiring formal corporatization to price, conditions, and coverage of the transi- of all public utilities, establishing appropriate tional supply contracts and the bilateral contracts governance structure and corporate accounting that follow the start of WESM operations will systems, and benchmarking all public utilities · be crucial. will help instill management discipline. Private The Energy Regulatory Commission needs to be sector participation should be encouraged, and strengthened to be able to undertake the task of should be conducted through well-prepared and price regulation as well as regulate distribution structured competitive tendering processes. companies. It should be authorized to retain part of its revenues for its operations to be able Maintaining and expanding the road network to attract staff with the necessary skills and · Governance and accountability of spending at experience. the Department of Public Works and Highways and the Special Road Fund should be improved Expanding coverage and quality of water supply and by establishing accountability for results of road sanitation services · spending at the district and regional levels. Staffing It is vital to raise the overall tariff level to allow for levels should be reduced and performance-based system expansion and improved service quality. outsourcing increased to improve efficiency. An important first step is to issue clear guidelines, · Greater reliance on user charges is needed for the in the form of an executive order, on charging upkeep and development of the road network. cost-recovery water tariffs, and to articulate clear The key measures include expanding toll road · policies on sanitation service tariffs. coverage, charging appropriate toll fees, and To overcome current sector fragmentation, key increasing user charges through the fuel levy. steps include: operationalizing and strengthening · Private sector interest in road improvements can the Inter-Agency Oversight Committee for water be more effectively utilized if the government sector reform; implementing Executive Order 279 can proactively resolve issues of stalled toll road on Local Water Utilities Administration reform concessions, address right-of-way delays, and use and water utility financing; and enhancing the open competition for project selection. Endnotes 1 As of February 2005, the financing for this transaction still Department of Transportation and Communications, February needed to be closed, however. 21. PPIAF and World Bank, Manila. 2 Björn Wellenius. 2002. "Extending Access to Communication 3 National Economic and Development Authority. 2004. "Medium- and Information: Recommended Approach and Implementa- Term Philippine Development Plan 2004­2010." Foreword. tion Plan." Report submitted to the Republic of the Philippines Manila, Philippines. WorldBankInfra.indb 81 12/6/2005 8:41:17 AM Northwind Power Development Corporation WorldBankInfra.indb 82 12/6/2005 8:41:27 AM Chapter 6 Power Overview Electric Power Industry Reform Act (EPIRA), approved in June 2001, provided the framework The long-standing liquidity problem of the National for sector reform and the restructuring, recapital- Power Corporation (NPC), the state-owned generation ization, and privatization of NPC assets. While the company,1 is mainly attributable to its undercapital- target dates set for implementation were challenging ization and inadequate tariff adjustments. Since 2002, and have not in fact been met, substantial progress NPC's large and growing deficits have been a major is now being achieved in the establishment of the element in the country's worsening fiscal position wholesale electricity spot market (WESM) and in and debt levels. The financing gap2 of NPC increased the separation of network operations into generation sharply from P16.1 billion in 1999 to P84.2 billion and retail supply of electricity to end users. After in 2003. This, in turn, contributed to the ballooning a very slow start, the privatization program is public sector deficits of the country. now showing positive results. The winning bid of The government is aware that NPC's heavy $562 million for the first sale of a major generating reliance on foreign debt finance is unsustainable in plant (the 600 MW coal-fired Masinloc plant) the long run. Since June 2004, substantial progress exceeded expectations.3 has been made toward the financial recovery of NPC, Successful implementation of WESM--its design including increases in the generation tariff that are is based on functioning markets in Australia and New expected to allow NPC to cover fully its operating Zealand--will be critical to the overall success of the costs in 2005; and government absorption of about reforms, but much remains to be done to ensure this. P200 billion of NPC debt. However, given the high Many prospective market participants appear poorly level of its debt, the Consolidated Power Sector Assets prepared for the market and some (the electric coop- and Liabilities Management Corporation (PSALM), eratives) may not have the financial resources or skills including NPC and the National Transmission Corpo- to meet the requirements of the market and properly ration (Transco), will remain technically bankrupt in manage their risk exposure. The poor credit standing the absence of adequate additional measures. Given of some private investor-owned distribution utilities that PSALM does not have the resiliency to cope with and of many electric cooperatives will be a barrier downside risks, its evolving financial recovery action to full participation of existing suppliers in WESM. plan should include a contingency plan and other risk Resolution of the creditworthiness issue will be an mitigation measures based on rigorous risk analysis. important step for a successful market launch. As a last resort, further debt relief by the government Sustainable market reform also requires adequate would be required to enable Consolidated PSALM management of the key risks common to other similar to self-finance all of its financial obligations and to competitive energy market reforms: sustain financial viability. In order to bring about a sustainable financial · Ensuring that there is adequate investment and recovery in the power sector, however, additional security of supply structural reforms are needed, and the government · Managing price volatility risks by avoiding has launched an ambitious reform agenda. The excessive market power WorldBankInfra.indb 83 12/6/2005 8:41:27 AM Philippines: Meeting Infrastructure Challenges · Ensuring that there are adequate means of managing the exposures to price risks. Box 6.1 Energy Regulatory Commission: New responsibilities under reforms In principle, WESM can provide price signals for investment in new generation capacity, but there are · Enforce the implementing rules and regulations of concerns that adequate investment may not be seen the Electric Power Industry Reform Act without some form of government guarantee due to · Promulgate and enforce a national grid code and the perceived political and market risks. Improvement a distribution code in the investment climate should be a top priority · Enforce the rules and regulations governing the for policy. In the short term, additional mechanisms operation of the wholesale electricity spot market · Establish and enforce methodologies for trans- are likely to be needed to ensure security of supply mission tariffs and unbundle distribution and or manage the risks associated with new investment retail tariffs in generation. Adequate transmission investment will · Eliminate cross subsidies within three years of the be important during the early stages of a competitive passage of the Electric Power Industry Reform Act wholesale market to limit market power and to avoid · Monitor and take measures against excessive localized price volatility without dampening anticompetitive behavior desirable signals for investment in generation. In a mature market, medium- to long-term contracts for power supply are likely to provide the for managing risk is critical. Specific measures aimed basis for most new generation. However, the markets at ensuring security of supply, adequate market for these contracts may take time to develop. In the monitoring, and implementation of TSCs are some interim, the successful implementation of transi- of the components of such a strategy. tional supply contracts (TSCs), initially with a high Beyond this, the government might want to level of coverage of energy bought and sold, will be consider, on a transitional basis, requiring that the essential both to manage market and price risks, and weakest suppliers enter into a price stabilization to provide a more predictable revenue stream for the scheme that would protect these suppliers against assets to be privatized. EPIRA requires suppliers to spot price fluctuations for the power purchases that purchase at least 10% of the energy through WESM at such suppliers will need to make through WESM in spot market prices. This is a higher level of exposure order to serve their captive customers. In addition, than suppliers are usually willing to bear in other the pace of some reforms may well need to be slowed, electricity markets, such as, for example, Australia. especially with regard to the introduction of retail In the absence of adequate protection mechanisms, it competition for residential and small business users. would result in suppliers (and/or end users) bearing Finally, there need to be clear provisions as to what substantial financial risks. happens if a distributor or supplier fails: How is Competition and the restructuring of the continuity of supply to end users assured? Who sector create demanding new tasks for the Energy assumes the previous supplier's responsibilities and Regulatory Commission (ERC; see box 6.1). Yet at what price? Each of these elements will increase the ERC is struggling with its current tasks, which the complexity of the ERC's tasks, highlighting include regulating 141 distinct distribution companies the need both for its independence and for proper (including 119 consumer-owned electric cooperatives) resourcing and support. on a case-by-case basis. Better ERC performance is It has to be recognized that implementation essential for the success of the reform program. To of substantial reforms in the power sector is an achieve this, the ERC needs to be able to attract and eminently political process and that, in particular, retain highly qualified staff, rationalize its processes, the increase in electricity prices necessary to restore and, in particular, develop a streamlined approach to the financial viability of NPC will be politically chal- regulating the electric cooperatives. It will take time to lenging. For industrial users, the removal of cross overcome the perception, felt by investors and others, subsidies mandated under EPIRA may partially offset that there is a high risk of political or judicial inter- these increases in average prices. For residential vention and a bias toward consumers' interests. users though, the price increases to remove these Given the ambitious nature of the reform program cross subsidies will come on top of the increases in and the risks involved in any transition toward average prices. "Lifeline" rates are, however, generous competitive electricity markets, an effective strategy by regional standards and relatively well targeted (see WorldBankInfra.indb 84 12/6/2005 8:41:27 AM Chapter 6 Power the section "Affordability," below). An effective public advice and operating guidelines to electric cooper- information campaign will be essential to highlight atives, which serve about 55% of all customers in this and to explain convincingly the benefits that the country, or over 6 million customers in a total can be expected from successful implementation of of 31,459 barangays (out of 41,999 nationwide). The the reform process. Philippine Electricity Market Corporation (PEMC) was established in November 2003 as the governing body of WESM, including the retention by contract Legal and institutional framework of an independent market operator. PEMC is jointly owned by the prospective participants in WESM. Main laws, regulations, and institutions EPIRA and the accompanying implementing rules and regulations are the key legal documents governing Sector structure and ownership the power sector. EPIRA provided for:4 · Current market structure Unbundling the sector into generation, trans- The Philippines' electricity market is dominated mission, distribution, and supply; the generation by two large companies: NPC, which is the major and supply businesses are intended to be open generator and power purchaser, transmission · and competitive provider, and system operator; and Manila Electric Creation of Transco to assume the transmission Company (Meralco), the distributor in Metro · assets and functions of NPC Manila. Meralco is a listed company traded on the Creation of PSALM to own Transco and other Philippine stock exchange; the government holds a NPC assets and assume all the liabilities of 26% share. NPC, with a mandate to privatize the Transco The country has three high-voltage grids in Luzon, concession and to dispose of other assets (mostly Visayas, and Mindanao. Transco is the transmission · generation assets) service provider and system operator and its regional Creation of WESM (expected to be launched in grids in Luzon and in the Visayas are interconnected. · Luzon by end-2005) NPC, through its Small Power Utilities Group, also A universal charge for recovery of stranded costs supplies 41 electric cooperatives that are off the main for power purchase5 and NPC stranded debt grid in islands and remote areas (figure 6.1). beyond government absorption of NPC debt6 In 2003, NPC's own plants and contracts with inde- · (to be set after WESM is launched) pendent power producers (IPPs) accounted for around Promotion of rural electrification and provision 70% of total electricity generation in the country. Most of a subsidy mechanism for missionary of the balance was produced by IPPs selling to Meralco. · electrification7 Table 6.1 shows the main trends in NPC generation in Replacement of the Energy Regulatory Board 1998­2003: flatter demand following the Asian crisis (ERB) with the ERC. in 1997­98; the growing importance of natural gas since the Ilijan IPP started in 2002; and the fall in The Department of Energy (DOE) is the lead NPC power sales as Meralco reduced purchases of policy agency and its Electric Power Industry NPC power in favor of its own IPP supplies. Management Bureau is the policy development and NPC supplies 286 customers in total; 91% of implementation arm. power sales are for distribution utilities, while 9% The ERC evolved from its predecessor, the are for direct sales to a range of industrial and ERB, which had been the sector regulator since commercial users, and miscellaneous customers 1987. With around 200 employees, the ERC faces (universities, army camps, etc.). Meralco accounted daunting challenges. The task of regulating NPC, for 49% of sales in 2002 and the amount of generation Transco, and distribution utilities is becoming more that Meralco has under contract with its own IPPs complex due to market reforms, and it has taken on limits NPC's opportunity to increase sales in Luzon a role in the oversight of behavior in the competitive in the short term. wholesale market. In addition to Meralco, there are 17 private The National Electrification Administration is investor-owned distributors connected to Transco's responsible for implementing the government's rural transmission (138­500 kV) or subtransmission electrification policy, including provision of technical (mostly 69 kV) systems. There are 119 electric WorldBankInfra.indb 85 12/6/2005 8:41:27 AM Philippines: Meeting Infrastructure Challenges Figure 6.1 Electricity market structure, 2004 Gas supply to Ilijan IPP Non-NPC IPPs (incl. Meralco's NPC NPC-IPPs NPC-SPUG 2,260 MW) generation 200 MW National Transmission Corporation (Transco) // 140 direct-connect customers Luzon-Visayas interconnection Meralco Luzon (6,454 MW) Visayas (1,006 MW) Mindanao (1,049 MW) 41 non-grid- (including Meralco) distribution utilities (4), distribution utilities (4), connected distribution utilities (9), electric cooperatives electric cooperatives electric electric cooperatives, cooperatives LGU-owned distributors (2) IPP = independent power producer; LGU = local government unit; NPC = National Power Corporation; SPUG = Small Power Utilities Group. Note: NPC-SPUG plants are not connected to the transmission network. Source: World Bank staff. cooperatives and two municipal systems (owned Proposed market reforms by two small LGUs in Luzon). Most of the electric The introduction of the competitive wholesale market cooperatives are supplied from the grid through is at the core of the Philippine reform program in the Transco's radial subtransmission circuits grouped power sector. Its structure is outlined in figure 6.2. in about 15 contiguous supply areas. Collectively, The market is an energy-only one modeled on the these distributors account for less than 45% of markets in Australia and New Zealand. Dispatch is total sales, with electric cooperatives accounting determined by bids from generators where generator for about 15%. bids cover all the energy they wish to supply (i.e. Table 6.1 National Power Corporation generation by type of plant, 1998­2003 1998 1999 2000 2001 2002 2003 GWh % GWh % GWh % GWh % GWh % GWh % Hydro 4,997 13 7,617 19 7,349 18 7,035 16 6,530 17 7,812 20 Oil thermal 7,207 18 5,392 14 2,550 6 3,527 8 941 2 4,718 12 Coal thermal 9,384 24 11,276 29 15,607 39 16,881 39 14,018 37 12,067 31 Diesel 5,333 13 2,270 6 1,976 5 3,397 8 2,497 7 0 0 Geothermal 8,915 22 10,638 27 11,331 28 10,458 24 9,974 26 9,822 25 Gas turbine 622 2 52 .. 36 .. 64 .. 37 .. n.a. n.a. Gas­CCGT 3,192 8 2,083 5 1,521 4 1,801 4 3,709 10 4,505 12 Total NPC and IPP 39,650 100 39,328 100 40,370 100 43,163 99 37,706 99 38,924 100 IPP 18,262 46 18,532 47 20,141 50 22,885 53 21,345 57 n.a. n.a. .. = less than 1%; n.a. = not applicable; CCGT = combined-cycle gas turbine; GWh = gigawatt-hour; IPP = independent power producer; NPC = National Power Corporation. Source: www.transco.ph/so/gen_mix.asp. WorldBankInfra.indb 86 12/6/2005 8:41:28 AM Chapter 6 Power it is gross bidding).8 In effect this means that all9 Distributors and generators will manage the risks physical flows of energy are transacted through a associatedwiththevolatilepoolpricesthroughfinancial mandatory pool. While the overall balance of supply contracts. Under WESM they will have the option and demand will be an important factor in the level of settling these contracts through the market ("net and volatility of pool prices, another key factor will be settlement," in which contracted amounts are netted off the capacity of the transmission system. Where there transactions through the pool) or outside the market are constraints on power transmission, spot energy (i.e. gross settlement for the pool). If the Philippine prices will be set by the local balance of supply and market follows the development of other similar demand rather than the system-wide position. If the markets, a range of financial contracts will emerge market functions well, the average spot price should as tradable risk management instruments.11 Impor- approximate the average cost10 of new generation tantly, the availability and price of these medium-term capacity in the long term. But there may be sustained financial contracts with creditworthy counterparties periods when prices are consistently above or below will be critical for investment in new generation. the cost of new generation capacity. Prices in the Market trials are due to commence in mid-2005 spot market will also be highly volatile. For example, and the market is expected to start operation in in Australia the 0.3% of the year (around 24 hours) Luzon by December 2005. A date for the extension when prices are highest accounts for around 15% of of the market to the Visayas has not yet been declared. total energy costs through the pool. Extension of the market to Mindanao is likely to be later still. WESM is Figure 6.2 currently engaged in an New wholesale electricity market structure information and training program with potential Independent gencos PPA terminated market participants. created from current (mutually agreed) If PPA not NPC power plants and paid o . This terminated PSALM is also to IPP sells directly to IPPs IPPs appoint administrators for Sellers in pool PPA trader the current IPP contracts. pool acts in pool as Under EPIRA, PSALM a genco, and ful lls PPA must group the contracts New gencos Other gencos PPA trader obligations in a manner that will toward IPP promote the viability of the generating companies, ensure the efficient Financial Transco/System operator operation of the market, bilateral and optimize the govern- contracts ment's financial position. Private participation Disco Retail tari (regulated) PSALM is managing the sale of former NPC trans- Retail access Noneligible mission and generation Buyers in customer pool assets. If successful, priva- Eligible tization of Transco through customer a concession is expected to help reduce PSALM's con- solidated debt to more sus- tainable levels, bring about new private investments Disco = distribution company; genco = generating company; PPA = power purchase agreement. by the concessionaire, and Notes: Eligible customers are customers who can choose their suppliers; noneligible customers are captive lead to greater operational customers of distribution companies. Experience in other markets demonstrates that all but a few of the very efficiency. Similarly, the large customers will wish to purchase through an intermediary rather than directly from the wholesale market. Source: World Bank staff. privatization of generation assets is expected to help WorldBankInfra.indb 87 12/6/2005 8:41:28 AM Philippines: Meeting Infrastructure Challenges sustain the financial recovery and yield operational tization. PSALM sold five small hydropower plants efficiencies. It will also provide a better climate for for $5.16 million, and in November 2004 announced new investments by reducing the perceived risk of the successful bid for its first major power plant noncommercial pricing when there are government- (Masinloc) for $562 million, 40% of which must be owned generators. Overall, successful implementation paid upfront, with the rest due within seven years. of the planned privatization program in the power (The financing for the transaction still has to be sector should substantially reduce the country's closed, however.) This exceeded expectations and public sector deficits. PSALM is scheduled to sell a total of 5,815 MW A potential impediment to successful implemen- during 2004­2006, including 1,460 MW of decom- tation is poor investor sentiment. In recent years, inter- missioned plants. PSALM currently plans to sell national investor interest in developing-country power some 830 MW without TSCs15 as merchant plants, assets in general has fallen,12 and there is investor which has already raised concerns among some of the concern about the regulatory environment in the Phil- interested investors. PSALM hopes to raise $2 billion ippines (discussed in more detail in chapter 2). (at present value), with 50% paid upfront. The proposed Transco concession privatization Uncertainties will be reduced through the would be in the form of a 25-year lease, renewable conclusion of TSCs with offtakers and the launch for 25 years, under which the concessionaire would of WESM. The TSCs will determine the amount finance,operate,maintain,rehabilitate,andexpandthe of energy to be purchased by offtakers from each nationwide transmission system (high-voltage grids in power plant. Once WESM is established, offtakers Luzon, Visayas, and Mindanao). Transco would retain will have to purchase at least 10% of their energy title to transmission assets. PSALM expects to select needs at the spot market price through WESM. At a concessionaire by 2006, and it previously estimated that time, TSCs will, by prior agreement, convert into that the total value of the concession fee would reach bilateral contracts covering up to 90% of offtakers' $2 billion (at present value), with $500 million to be energy needs. Depending on their design, term, and paid upfront and the balance of $1.5 billion to be paid price, the TSCs may add value to the sale of the assets. within the contract period. In any case, the reduced uncertainties and risks are A delayed start to the process of privatizing the likely to help PSALM attract more, higher-quality Transco concession may have increased perceptions bidders. TSCs and bilateral contracts will therefore of political and regulatory risk. Two biddings secure the bulk of the generators' revenues for the were held in 2003 to select a concessionaire. Both medium term and will be the primary determinant times, only one party submitted a proposal and the of the value of the generators. biddings were declared failures. Subsequently, PSALM According to the provisions of EPIRA, up to 90% began direct negotiations with four bidding groups. of energy sold and bought can be covered by TSCs While the level of interest and reported bids were or bilateral contracts. However, the current level of in line with, or above, expectations, the process was coverage of these contracts is still extremely limited terminated because of the complex and unique nature as PSALM has encountered protracted delays in of the conditions attached to each offer. PSALM has negotiating a TSC with Meralco and TSCs or supple- announced that the concession contract will now be mentary agreements with other distribution utilities. awarded through a process of public bidding based So far, only three utilities (out of 78) have signed a on a revised, and standardized, package. supplementary agreement and only two (out of 48) Privatization of generation assets involves the sale have signed a TSC. These documents have been filed of NPC power plants with a combined capacity of with the ERC for its consideration of approval. some 5,800 MW by 2006, through bidding, free of debt (i.e. PSALM will absorb all NPC debt). Generic transaction documents for thermal plants and specific Investment needs and financing documents for hydropower plants and geothermal plants13 have been prepared. Thirty-two interested DOE's latest Philippine Energy Plan (2005­2014) parties, largely local investors14 with existing power includes the following indicative investments: assets in the Philippines, received a preliminary · Additional peaking capacity of 50 MW and information memorandum issued in October 2003. 100 MW in 2005 and 2006, respectively, in PSALM has hired an independent third party to Mindanao, and additional base-load capacity of update the valuation of generating company priva- 100 MW in 2007 WorldBankInfra.indb 88 12/6/2005 8:41:28 AM Chapter 6 Power · Additional peaking capacity of 100 MW in the also value more highly projects with shorter lead · Visayas in 2008 times (such as refurbishment of existing plants), Additional peaking capacity of 150 MW and and smaller increments to capacity (such as standby 450 MW in Luzon in 2008 and 2009, respectively, capacity, cogeneration, and other forms of distributed and mid-range capacity of 600 MW in 2009. generation). Though these uncertainties are real, the latest Forecasts for capacity requirements, such as forecastsprovideavaluableguidetopossibleinvestment these, have an important role to play in signaling needs. These forecasts suggest that total indicative investment needs even after a competitive wholesale investment needs for power generation over the next market has been established. However, such forecasts 10 years may be around P360 trillion (about $7 billion). must be treated cautiously because they depend upon Together with indicative investments for transmission assumptions of highly uncertain variables, such as and distribution, estimated at about P150 trillion (about future economic growth and the prospects for energy- $2.8 billion) and P90 trillion (about $1.7 billion), the intensive industries. The tendency toward overesti- total investment requirements for the power sector mation of demand shown in figure 6.3 is common are currently estimated at about P600 trillion (about to many countries. $11 billion) over the next 10 years. New investment in Mindanao will need to be committed to, and constructed, prior to the launching of a competitive wholesale market. In the case of Sector performance Luzon, potential projects that can provide much of the mid-range capacity have been identified, but the Access projects are not yet committed. Decisions to commit By end-2003, about 90% of barangays and 80% of to new capacity in Luzon may need to be taken shortly households were electrified in the country. This is after the scheduled start of market operation. This less than in some other comparable countries such as adds to uncertainty for investors, as the outcomes Malaysia and Thailand, but better than Vietnam or with a competitive market may be different from Indonesia (table 6.2). Of the remaining communities those with a traditional "planning" approach. A to be electrified--3,970 barangays--DOE projects that competitive wholesale market will value the avail- ability of generation in peak periods highly and may encourage more efficient or intensive operation of Table 6.2 Comparison of access and other performance measures existing plant, including standby generation. It may Electrification Quality of Transmission electricity supply and distribution Figure 6.3 Country rates (%)a (scale of 1­7)b losses (%)c Forecasts of maximum peak demand in Luzon 2000 2003­2004 2002 16,000 Australia 100 6.7 6.64 14,000 Singapore 100 6.7 8.52 Korea, Rep. of 100 6.1 -- 12,000 China 99 4.2 7.12 ttsaw 10,000 Malaysia 97 5.9 5.55 8,000 Mongolia 90 -- -- Giga Thailand 82 5.3 7.26 6,000 Philippines 80 3.7 16.33 4,000 Vietnam 76 3.4 14.00 2,000 Sri Lanka 62 3.2 18.11 Indonesia 53 3.6 16.16 0 India 43 3.0 26.21 1990 1992 1994 19961998 2000 2002 2004 20062008 2010 2012 2014 Philippines Year rank 8 out of 12 8 out of 11 8 out of 10 Actual demand PDP 1993 PDP 1996 (high) PDP 1997 (low) -- = not available. PDP 1999 (low) PDP 2000 PDP 2001 (low) PDP 2002 (low) PDP 2003 (low) PDP 2004 (low) Sources: a. International Energy Agency. World Energy Outlook 2002; Philippines National Electrification Administration; estimates PDP = peak demand projection. High and low refer to the scenarios in for Australia and Republic of Korea. b. World Economic Forum. previous development plans. Global Competitiveness Report 2003­2004. c. World Bank. World Source: Department of Energy. Development Indicators 2004. WorldBankInfra.indb 89 12/6/2005 8:41:29 AM 0 Philippines: Meeting Infrastructure Challenges about two-thirds (2,762) will be connected via grid ruption time by nearly three-quarters from 2000 to extension and the balance of 1,208 using isolated 2002. Visual evidence of the status of the distribution systems. Under current plans, full barangay electri- networks in Manila, and its high loss levels, testify fication is targeted for completion by end-2008 and to the fact that Meralco, along with all of the larger 90% household electrification by 2017. distributors, could do a lot more. Quality of service Efficiency In 2003, there were about 3,310 minutes of system Power system losses are a significant problem, interruptions16 with unsupplied energy of 137.5 GWh, especially at the distribution level. Transco's reported spread over the three grids (table 6.3). While Transco losses averaged 2.89% in 1998­2002 in the Luzon measures the cost in terms of lost generation sales it grid, although losses may be understated because of Table 6.3 Transco unserved energy and lost system minutes, 2002­2003 Region 2002 2003 Unserved energy SISI Unsupplied energy SISI (GWh) (minutes) (GWh) % Change (minutes) % Change Luzon 120.4 670 75.9 -37.0 598 -10.7 of which Meralco 82.4 39.9 -51.6 Visayas 21.3 1,100 32.2 51.2 1,770 60.9 Mindanao 29.9 1,663 29.4 -1.7 942 -43.4 Total 171.6 3,433 137.5 -19.9 3,310 -3.6 Loss of salesa 7,586,257 5,781,580 -23.8 GWh = gigawatt-hour; SISI = system interruption severity index. a. Estimated using National Power Corporation per kilowatt-hour rates of P2.4897 (Luzon), P2.6737 (Visayas), and P1.2634 (Mindanao). Source: Transco. does not take into account the value of the lost distri- the inadequate metering in place at NPC generating bution margins, nor the even greater economic losses stations. Losses of 4.53% in the Visayas and 4.26% incurred by customers. Although it has improved in Mindanao were due, in part at least, to the over the past few years, the reliability of Transco's lower volume transmitted over greater distances. system is well below international standards. Many Private investor-owned distributors operate under a of the problems within Transco's control relate to regulatory cap of 9.5% system losses but many lose poor maintenance scheduling, or other minor main- more than 12%, although better performance has tenance issues (tree clearing, faults in operation of been demonstrated (e.g. Davao Light & Power's 8% protection systems, etc.) which could be improved losses). Meralco lost 9.3% in Metro Manila in 2002, at relatively low cost. and 14% in its service territory outside Metro Manila. Reliability at the distribution level is reportedly System losses of consumer-owned electric cooper- mixed. Both private distributors and electric coop- atives averaged 14.8% in 2003, despite a declining eratives suffer from weaknesses in the transmission trend from 16.9% in 1999. The national average masks and subtransmission networks, which results in a high degree of diversity among these cooperatives. power delivered below acceptable voltage ranges17 and In 2003, they were allowed a regulatory loss cap of subject to frequent interruptions. Most distribution 14% but 56% of them exceeded this cap, and 13% networks suffer from serious underinvestment, which lost more than 20%, which in turn contributed to results in high losses, poor voltage regulation, and low their precarious finances. DOE is aware of the need reliability. And many distributors, especially many to reduce losses and has set a target for electric coop- electric cooperatives, are simply not that well run, eratives' losses of below 10% by 2010. with the result that customers must endure frequent power outages. On the upside, improvements are being Financial performance made by some of the larger distributors. Meralco, NPC has been faced with very serious financial for example, reduced its non-Transco-related inter- problems, mainly attributable to its undercapitalization WorldBankInfra.indb 90 12/6/2005 8:41:29 AM Chapter 6 Power 1 and inadequate tariff adjustments. To cope with the by steep increases in fuel prices. However, its power power crisis in the early 1990s, which called for massive generation tariff had failed to keep pace with costs, investments, NPC had incurred huge liabilities which, having fallen in US dollar terms from 1996. Conse- in turn, exposed it to a heavy foreign debt service quently,forthefirsttimeinitsrecentoperatinghistory, burden, including financial obligations to IPPs. As NPC reported a net operating loss of P5.3 billion a result of this high financial risk, even before the in 2003. As a key indicator of its financial health, Asian financial crisis in 1997­98, NPC had undergone its debt service coverage ratio deteriorated sharply two financial crises, and had to be bailed out by the from 1.29 times in 1996 to merely 0.18 times in 2003, government. Financial highlights of NPC over the which in turn perpetuated the cycle of unsustainable period 1996­2003 are summarized in table 6.4. debt financing of its deficits. Despite such remedial The Asian financial crisis triggered a rapid dete- measures as renegotiations of IPP contracts, NPC has rioration of finances at NPC. It has been particularly remained technically bankrupt; its aggregate long- hard hit by the sharp devaluation of the peso as it term liabilities reached P1.2 trillion, including IPP has not been allowed to adjust tariffs to cover fully financial lease obligations, and the company had a its foreign exchange exposure in fuel purchase and negative net worth of P423 billion (excluding noncash financial obligations. NPC's own financial crisis has revaluation surplus) by end-2003. been exacerbated by excess generation capacity over SinceJune2004,substantialprogresshasbeenmade the medium term in Luzon, while capacity charges toward financial recovery of NPC, including increases for IPPs are fixed (under take-or-pay provisions in the inaveragegenerationtarifftoaboutP3.927(about$0.07) power purchase agreements). Consequently, NPC had per kWh in 2005, thus allowing NPC to avert another to increasingly rely on external borrowings to cover operating loss in 2005; and government absorption of its rising debt service requirements, thus perpetuating about P200 billion of NPC debt. In addition, Consol- the vicious circle of over-reliance on foreign debt. idated PSALM is projecting privatization proceeds More recently, NPC was also particularly hard hit amounting to some P24 billion in 2005. As a result, Table 6.4 National Power Corporation financial highlights, 1996­2003 1996 1997 1998 1999 2000 2001 2002 2003 Operating sales, GWh 33,381 36,442 37,321 36,987 37,320 39,948 34,369 34,397 Net utility revenues, P million 63,635 77,144 86,611 89,686 100,119 115,698 116,433 119,179 Average selling rate, P/kWh 1.96 2.15 2.58 2.65 3.12 2.9 3.39 3.46 US cents/kWh 7.5 7.3 6.3 6.8 7.1 5.7 6.6 6.4 Average exchange rate P/$ 26.21 29.58 40.89 39.09 44.19 50.99 51.60 54.00 Operating expenses, P million 50,317 65,520 79,696 81,196 94,682 108,861 115,911 124,527 Operating income or loss, P million 13,318 11,624 6,915 8,489 5,437 6,837 522 -5,348 Net income or loss, P milliona 5,543 3,054 -3,617 -5,953 -12,964 -10,377 -33,735 -117,015 Debt service, P millionb 16,852 25,297 34,315 47,289 68,648 69,305 77,911 88,534 Capital expenditures, P million 21,446 30,200 25,312 12,314 14,212 18,502 16,625 6,1406 Total long-term liabilities, P millionb 300,877 442,400 446,152 646,479 780,209 799,301 973,758 1,183,553 Equity, P millionc 36,253 37,971 34,095 29,670 15,329 -2,285 -34,966 -422,998 Liquidity/financial risks a. Debt service coverage ratio (times) 1.29 1.17 1.18 0.92 0.7 0.96 0.40 0.18 b. Self-financing ratio (%) 35 0 6 0 0 0 0 0 Capital structure a. Debt/equity ratio (%) (excluding 89 92 93 96 98 100 104 156 unrealized appraisal surplus) Profitability a. Rate of return (%) 8.20 7.20 3.20 3.37 2.22 2.89 0.22 -2.35 b. Operating ratio (times) 0.79 0.85 0.92 0.91 0.95 0.94 1.00 1.04 GWh = gigawatt-hour, kWh = kilowatt-hour. a. Including noncash foreign exchange loss. b. Including independent power producer lease obligations. c. Excluding appraisal surplus. Source: National Power Corporation. WorldBankInfra.indb 91 12/6/2005 8:41:29 AM Philippines: Meeting Infrastructure Challenges Consolidated PSALM is expected to avert a serious removalofcrosssubsidies,theequalizationoftaxes liquidity crisis in the same year, as indicated by the and royalties applied to indigenous or renewable improvement of its projected debt service coverage ratio sources of energy vis-à-vis imported fuels, and from 0.24 times in 2004 to about 0.7 times in 2005. an environmental charge for management and/or However, as elaborated below, given the high level of rehabilitation of watershed areas. As noted above, PSALM debt, its financial recovery is not sustainable this will be extended to cover NPC's stranded in the absence of additional remedial measures. costs and debt after the launch of WESM. Prices and affordability Comparisons of charges The Philippine electricity sector performs compara- Comparisons of price structures raise two broad tively well on affordability criteria--at the expense areas of concern. First, commercial and industrial of price distortions, cross subsidies, and rising debts tariffs are high relative to residential tariffs in the of NPC and government. Philippines and to commercial and industrial tariffs in other countries, reducing the competitiveness of Composition of prices Philippines businesses. Second, the variations in The regulated retail tariffs comprise the following charges between regions do not reflect costs. components: Industrial users normally expect to pay much less · than residential users because they have better load Generation charges. The total charges include a factors and use little of the distribution system. Cost- basic rate plus adjustments for delayed recovery reflective prices for commercial users will generally of fuel and power purchases as well as exchange fall between these two groups. In the Philippines there · rate fluctuations. is very little difference among the three groups. The Transmission wheeling rates. This component is average residential price in Luzon is P5.75/kWh (about governed by the ERC's transmission wheeling $0.10/kWh) compared with P5.23 for industrial users rate guidelines, which establish a revenue cap and P6.09 for commercial users. This is not unique to · mechanism governing Transco's rates. the Philippines, as figure 6.4 shows, but it does raise Distribution and retail margins. The ERC has set concerns. Although the special pricing arrangements separate distribution wheeling and retail margins in the economic zones soften the impact, industrial based on a review of costs for each of the 141 tariffs in the Philippines are the fourth highest in distribution utilities that has filed its rate unbun- Association of Southeast Asian Nations countries. · dling application. Current residential tariffs and household incomes Universal charge. In accordance with EPIRA, this are highest in Luzon, followed by the Visayas and charge presently covers missionary electrification, Mindanao. On average, households in Luzon and Figure 6.4 Electricity prices in Association of Southeast Asian Nations countries Residential Industrial 18 16 16 14 -hourttaw 14 12 12 -hourttaw 10 ilo 10 ilo 8 ts/k 8 ts/k enc 6 enc 6 US 4 US 4 2 2 0 0 e e PDR PDR Lao ndonesia ThailandVietnam Brunei I PhilippinesMalaysiaMyanmar SingaporCambodia Lao Indonesia ThailandSingaporMalaysia PhilippinesBrunei VietnamMyanmarCambodia = price range = midpoint = price range = midpoint Notes: Retail prices as of June 2004. Excludes price increases in the Philippines since June 2004. Source: www.aseanenergy.org. WorldBankInfra.indb 92 12/6/2005 8:41:30 AM Chapter 6 Power the Visayas spend 3.2% of their household income Affordability on electricity, while the corresponding figure in Evidence suggests that most power customers are Mindanao is 2.9%. Electricity expenditure as a share willing and able to pay, provided that service quality of income is highest at 3.5% in the National Capital is maintained. However, tariffs are politically sensitive Region, where Meralco's residential rate of P5.79/kWh and general economic woes have hit many segments is the highest in Luzon. of the urban population in recent years. In addition, Future electricity prices are likely to be affected the tariff reforms mentioned above will affect afford- by several changes: ability and make well-targeted assistance measures · more important. The pass-through of higher NPC generation Such measures appear to be in place at present. · tariffs. Low-income electricity users are protected by a system Under EPIRA, cross subsidies in generation and of "lifeline" rates: users whose electricity consumption retail prices must be removed. The interregional remains below certain levels benefit from these lower cross subsidies18 were removed by September 2002 rates, which are cross-subsidized by other consumers and intraregional cross subsidies19 in generation within an individual franchise area of the distribution prices are being phased out by October 2005. utility. The maximum levels are set by individual Interclass cross subsidies20 also have to be phased distribution companies. The levels tend to be set at out and the ERC has mandated that Meralco must 100 kWh a month in the large franchise areas and at phase out these cross subsidies between customer between 15 kWh and 40 kWh a month in the electric classes by October 2005. Interclass cross subsidies cooperatives and some of the small distribution · will be phased out by 2009. utilities. The schedule of rate reductions also varies After WESM becomes fully operational, wholesale between individual distribution companies. Meralco's rates should, on average and over time, approach lifeline rates are rather generous and well targeted by · the new entrant costs. international standards (box 6.2): users who consume With competition and WESM there will be a less that 50 kWh a month benefit from a discount greater shift to time-of-use pricing in the compet- of 50%; those who consume between 51 kWh and itive segments. 70 kWh a month benefit from a discount of 35%; and those who consume between 71 kWh and 100 kWh Overall, residential users, especially outside Luzon a month benefit from a discount of 20%. A more and outside the areas in Luzon served by Meralco, are detailed analysis would be needed to ascertain the likely to see an increase in rates. In the absence of extent to which existing social protection mechanisms explicit subsidy mechanisms, the increase is likely to meet their objectives in the power sector,21 especially be greatest in Mindanao, since this is where electricity given the substantial differences in the lifeline rates prices are the lowest at present. offered in each service area. Box 6.2 International comparisons of lifeline tariffs A n examination of international threshold are not eligible for the However, while international com- lifeline mechanisms shows benefits. parisons are useful, each country that the current lifeline scheme Even among those countries has individual factors that may in the Philippines is unique. The that target lifeline benefits, the make comparisons misleading, overwhelming majority of electric Philippines is unique in that its including demographics, climate, utilities in the world currently have lifeline is based on percentage dis- stage of development, and elec- standard increasing block tariffs counts rather than fixed amounts. tricity consumption patterns. in place, in which all consumers Also, the lifeline threshold among A more thorough analysis of the enjoy the lifeline benefits no matter distribution companies in the Philippines' social protection mech- how much they consume. The country is above subsistence levels anisms is needed to properly assess Philippines, on the other hand, spe- of consumption. For these reasons, the lifeline scheme's targeting, cifically targets the lifeline benefit it appears that the Philippines' errors of exclusion and inclusion, by limiting it to customers who social protection mechanisms are impact, and generosity. consume under a lifeline threshold. better targeted than those in other Those who consume more than the countries and are fairly generous. Source: World Bank staff. WorldBankInfra.indb 93 12/6/2005 8:41:30 AM Philippines: Meeting Infrastructure Challenges Main issues Intheory,theuniversalchargecouldallowConsol- idated PSALM to reach a debt service coverage ratio Many of the challenges facing the Philippine power of 1. However, in practice, ERC approval for timely sector are not unusual. There is a need to ensure and adequate cost recovery under the universal charge that the sector better meets the community's needs is subject to considerable uncertainty. Thus, PSALM's by providing a better environment for investment, future cash inflows are subject to major uncertainties improving sector efficiency, and ensuring access to and high volatility. Similarly, PSALM's annual cash affordable energy. However, the precarious finances outflows are expected to be volatile. Through 2010, its of NPC, and therefore PSALM, are the key drivers in debt service payments (before government absorption determining the priority and urgency of the responses and IPP lease obligations) in a typical year are around required. In addition, while the introduction of $1 billion, but in 2006, 2009, and 2010, certain bonds a competitive electricity market can substantially mature and the related bullet payments cause debt improve resource allocation and efficiency, it might service in those years to nearly double. Given that also subject stakeholders to the risks associated with PSALM does not have the resiliency to cope with a high degree of price volatility. downside risks, its evolving financial recovery action In this context, the outstanding challenges for plan should include a contingency plan and other risk the government are to: mitigation measures based on rigorous risk analysis. · As a last resort, further debt relief by the government Achieve and sustain financial viability for NPC would be required to allow Consolidated PSALM ·· and PSALM. to self-finance its financial obligations. Similar Ensure new investment. government actions for debt relief have successfully Introduce a competitive wholesale market while enabled the recent financial recovery of the state- managing suppliers' and end users' exposure to owned power utility, PLN, in Indonesia. Indeed, NPC ··· price risks. has not been considered creditworthy on its own and, Increase private participation. in recent years, the government has been borrowing Improve regulation. directly, in its own name, over $1 billion annually to Reform prices and ensure competitiveness and help service NPC debt. affordability. In the future, one option is for the government to onlend these funds to PSALM with annual repayment Achieving and sustaining financial viability for obligations limited to its ability to self-finance such NPC and PSALM obligations, thus effectively allowing PSALM to Asnotedabove,therehasbeenasubstantialturnaround achieve annual debt service coverage ratio of at least in the financial prospects of PSALM due to the better 1. This is a good indicator of PSALM's financial health outlook for NPC in 2005 following the increases in and lays the ground for PSALM borrowing in its regulated generation charges. However, Consolidated own name without a high premium over government PSALM (including NPC and Transco) will remain borrowing. The onlending arrangements between technically bankrupt in the absence of additional the government and PSALM have no impact on the remedial measures. Even in the best-case scenario, consolidated public sector deficits, which eliminate Consolidated PSALM remains highly vulnerable to such internal transfers. In the next few years, compre- shocks, notably high and rising oil prices and interest hensive liability management at PSALM will be an rate risks. In addition, critical factors include: the important part of the government's public debt and timing and amount of privatization proceeds; the risk management. market share of NPC relative to Meralco's IPPs; the volatility of spot power prices once WESM is launched; Ensuring new investment and related timeliness and adequacy of the universal There is no immediate risk of countrywide elec- charge for recovery of stranded NPC contract costs tricity supply shortages of the kind experienced and debt (as yet to be approved by the ERC). The ERC in the early 1990s, but the government's responsi- believes that the stranded contract cost component can bilities for funding capital expenditures and taking only be filed one year after the wholesale electricity on industry risk must be reduced. There is also an spot market becomes operational. NPC or PSALM urgent need to improve the business environment can, however, file for the stranded debt component in the power sector to ensure that adequate private of the universal charge. investment will meet future capacity needs in a timely WorldBankInfra.indb 94 12/6/2005 8:41:30 AM Chapter 6 Power manner. Specifically, financial commitment may be · Strong and sustained political commitment to required by 2006­2007 if new capacity is to come on- reform line by 2009­2010. The competitive wholesale market · A competitive environment for generators and may well encourage a variety of responses, such as suppliers demand responses, extension of generation asset lives, · Commercially focused, financially viable, and greater utilization of existing capacity, and growth in well-prepared market participants smaller-scale capacity that may, for a while, provide · Development of financial markets for managing alternatives to new base-load investment. Even so, risk new investment in base-load capacity will be needed, · Clear and sound market supervision. and the necessary preparation and commitments are required soon. The challenge of maintaining the commitment to Avoiding unnecessary additions to the already reform is integral to the reform process and is not substantial burden on the government's fiscal position unique to the Philippines. There are a number of is a priority. Privatization of the government's elec- positive factors in the current situation in the country. tricity businesses will significantly reduce these The government is strongly committed to establishing financial obligations, but the remaining government- a competitive wholesale market and PEMC is now funded capital expenditures must also be carefully making substantial progress in its implementation. scrutinized. The proposed restructuring and privatization of the Under EPIRA, responsibility for new investments generation sector should provide a sound basis for rests with private parties. Clearly, a substantial competition in that sector.22 improvement of the business environment, better However, maintaining the commitment to reform price signals, greater regulatory certainty, and is more difficult when the reform process entails improvement in credit standing of sector offtakers are greater risk. In this context, several important needed. In addition, suppliers, independent retailers, physical and technical obstacles and risks must be or users of large loads must have the capacity and overcome or managed better. For example, the credit- willingness to enter into long-term financial contracts worthiness of distributors will be a major issue as for energy. Given the current financial situation many of them will struggle to meet the necessary of the sector and the path-breaking nature of the prudential requirements to be allowed to participate in reform program, the question arises as to whether the the market. The preparedness of market participants government needs to offer some form of guarantee or also raises concerns: many of the electric cooperatives to take other specific steps to encourage new private are very small and the NPC generation units may be investment in generation. focused at present on the ongoing process of restruc- turing and privatization. It is also important that Introducing a competitive wholesale market "safety nets," such as obligations for retail suppliers A well-functioning competitive wholesale market will of last resort and a price ceiling for the wholesale play an important role in improving the performance market,23 are put in place. of the power sector. However, there are substantial Two key concerns that are common across the risks in this strategy and key questions remain about experience of different countries in the introduction implementation and investment in new generation of competitive markets are: in the market. The government is implementing an ambitious · Price volatility in the wholesale market, and the program that involves simultaneously privatizing financial risks and retail price implications of generation and introducing wholesale competition this volatility and, over time, retail competition. While other · Security of supply and investment in new gener- countries have achieved similar reforms, this is a ation and network capacity. daunting task with strong interlinkage between the different reform components. Pricevolatilityisanimportantpartofacompetitive The successful establishment of competitive wholesale market because it is through such volatility energy markets requires: that better signals can be provided for energy use and · production. However, the volatility entails financial Careful design and implementation of trading risks for market participants and retail price risks for systems, market rules, and operation systems consumers, and these need to be managed. WorldBankInfra.indb 95 12/6/2005 8:41:30 AM Philippines: Meeting Infrastructure Challenges The Australian and New Zealand markets, upon indicated that competition for customers above 1 MW which the Philippine market design is based, show a in Luzon will start on July 1, 2006 and be extended higher level of volatility than other market designs, to customers above 750 kW from July 1, 2008.) The such as the PJM market24 in the US. This does not timetable for the phasing in of competition beyond automatically mean that the Philippine wholesale 750 kW is even more uncertain. The extension of market will be relatively volatile, because other individual choice to small business and residential factors--such as the diversity of generation sources, customers is foreshadowed but no timetable has been generator market power, and detailed market rules-- set. There are very great doubts as to whether the also affect market volatility. However, it does suggest benefits would exceed the costs (such as metering caution and a need to carefully examine the means or load profiling costs) and whether there would be of managing this potential volatility. strong interest from potential retailers. Another key priority is to ensure that the market In practice there is likely to be an extended period environment supports the necessary investment in when wholesale energy prices will be determined in new generation capacity. In principle, WESM can the market but when retail prices for many customers provide good price signaling for new capacity to will need to be regulated. This is likely to be a difficult come into the market. There are concerns, however, challenge for the regulator and one that will require that it may be difficult for new plants to write the a careful balancing between incentives and financial long-term financial contracts needed to underpin risks for the distributor, on the one hand, and price new investment in a new market, especially given stability for the end user, on the other.26 Even under the concerns about the creditworthiness of coun- automatic cost pass-through arrangements, the terparties and the perceived risks of political inter- residual exposure to spot prices can create significant vention. Addressing these concerns may require cash-flow risks for distributors. It also can create a reconsideration of some elements of the current significant price volatility in end-user prices. market design (e.g. the absence of capacity obli- gations) and careful attention to the details of the Increasing private participation market and regulatory rules to ensure that there are Successful completion of the government's plans no obstacles to enhanced demand responses and to increase private participation is critical for the smaller-scale generation. These options will also affect reduction of public debt levels and the introduction of the level of price volatility in the market and need to competitive markets. However, previous timetables for be considered from that perspective as well. the Transco concession and sale of NPC power plants If these issues are not addressed, the government have not been followed. The government's decision to will face considerable pressure to underwrite new award the Transco concession through competitive investments in generation. The financial crises of bidding is a step in the right direction, though political NPC clearly demonstrate the risks to the government and regulatory risks could affect the attractiveness of providing loans and guarantees when capacity and therefore the value of this concession. costs are not adequately passed on to users. Security Successful privatization of the Transco concession of supply is, however, a critical issue and, while would, in turn, provide an important positive signal improving the investment climate should be given for the privatization of major generation assets. The priority, there may be a need for a "backstop" current plan, under which PSALM will sell most of mechanism, in the short term at least. the generation plants in Luzon by end-2006, appears Retail competition can strengthen competition optimistic. TSCs27 and subsequent bilateral contracts in the wholesale market25 and focus suppliers more are still to be arranged. The design, price, length, and clearly on customers' needs. However, experience coverage of these contracts will have an important with the costs and benefits of retail competition effect on the value of the assets, but each of these suggests that a clear, but cautious, approach should elements remains uncertain. Indeed, setting the be taken. The EPIRA timetable for retail competition volume covered by the contracts is made more difficult depends on a number of conditions, most impor- by the uncertainty in the timing of the introduction tantly the progress in the privatization of generation of retail contestability. In the absence of the TSCs, assets. This creates uncertainty about the timetable, the future revenue stream for the generators will be which the ERC has recently sought to address in part. more uncertain. This is likely to significantly affect (Given expected progress on implementation of the the quality of the bidders, the prices and conditions market and sale of generation assets, the ERC has offered, and the risk of future operators' failure. The WorldBankInfra.indb 96 12/6/2005 8:41:30 AM Chapter 6 Power design and level of coverage of the TSCs will also perceived regulatory risk and strengthen the ERC's have a significant effect on the bidding behavior of capacity. Stakeholders have pointed to the fact that the generators and prices in WESM. ERC has not met the deadlines set in EPIRA. Addi- A higher level of coverage under financial tionally, there is a perception that the ERC has used contracts will help reduce the extent of market power the unbundling of rates or pass-through of foreign and lower average pool prices28 but the impact also exchange or fuel cost changes to reduce rates or defer depends on the design of the contracts. Both theory necessary increases. While more prompt handling and experience suggest that the use of two-way of the cases is desirable, the deadlines, particularly hedges (or contracts for differences), which remove in regard to the unbundling of all the distribution entirely the price risk for the volumes covered, will utilities and electric cooperatives, may have been lead to lower wholesale market prices than alter- unrealistic. Furthermore, regulatory processes native contracts such as price cap contracts. The depend upon the submission of timely, accurate, and drop in market prices in Singapore following the complete claims which the ERC then has a duty to introduction of two-way hedge contracts to cover carefully review--a duty that has been reinforced the bulk of purchases illustrates this. A comparison through the decisions of the Supreme Court on of the early price outcomes in the interconnected appeals to ERC decisions. Although the ERC has Queensland, New South Wales, and Victoria markets been developing more professional capabilities and in Australia also illustrates the impact of contract is now focusing on the importance of balancing the design. Queensland used a range of contract forms, interests of consumers and service providers alike, including price cap contracts, whereas the other states changing this perception will be difficult. used two-way hedges for the vesting contracts. Each The regulation of retail tariffs for those customers state started with a high level of contract cover but who are not contestable may become more challenging there was not the same initial move to very low with the introduction of a competitive wholesale wholesale prices in the Queensland market. market. In addition, clear procedures will be needed This highlights that while a high level of contract for handling the transition and managing customer coverage is essential for risk management, the details risks in the event that a distributor failed. of the design of these contracts are very important. The market supervision role will be particularly The choices in the design and level of coverage are challenging for the ERC (and PEMC). The skills and likely to have a significant impact on the viability knowledge required--and the frame of reference to of existing and new generators. While initial high be used--are very different from those necessary for prices driven by market power should be avoided, price regulation. Excessive intervention to eliminate a short-term collapse of wholesale prices should rents could be highly detrimental to the operation also be avoided, if possible. The design of these of the market and the incentives to invest. There is contracts requires a very sound understanding of also potential for overlap and confusion between the their potential impacts and, ideally, the capacity to roles of the ERC and PEMC. model these impacts The privatization program does not include the Reforming prices and ensuring sale of the Government's 26% interest in Meralco. The affordability and competitiveness policy purpose of this interest is not clear, especially Ensuring that access to a basic electricity service once the energy market becomes competitive and remainsaffordabletopoorhouseholdswhileaddressing the decision on whether to sell or retain this interest the relatively high prices paid by the commercial and is essentially a financial matter. However, the sale industrial sectors will be a major challenge. could be achieved relatively quickly to provide an It is difficult to judge whether the current average early contribution to improving the financial position price of electricity is too high or low relative to of the government. long-run benchmark costs. Clearly, it is insufficient to cover current costs, but these costs are inflated Improving regulation by the present excess capacity and inefficiencies The ERC's performance must improve if the sector is within the sector. Residential prices are comparable to be put on a sustainable footing and, critically, if it to those in several similar countries in the region, is to attract new private sector investment. but commercial and industrial prices are high, both Investors, government officials, and other stake- relative to other countries and to residential prices. holders have highlighted the need to reduce the Rebalancing prices between customer classes may WorldBankInfra.indb 97 12/6/2005 8:41:30 AM Philippines: Meeting Infrastructure Challenges require significant increases in residential prices. The these areas (e.g. supplier of last resort obligations elimination of regional cross subsidies will further and WESM market caps). However, there has been impact users outside Luzon (e.g. Mindanao residential no detailed analysis either of the existing powers charges are 40% below those in Luzon). for implementing these recommendations or of the In this context, subsidies to ensure affordability of extent to which changes in legislation, regulations, basic services will need to be designed and targeted or market rules would be required. Clearly such a carefully. Currently the lifeline, regional, and electri- review would be the first step in the implementation fication subsidies appear relatively generous, and are of these recommendations. better targeted than in many other countries. Improving financial performance Significant progress is now being made toward Recommendations restoring the financial prospects of the sector. However, success is not assured. The privatization The government has committed itself to measures to program will be critical but, beyond this, the meet the challenges discussed in the previous section. requirements to ensure that this progress is sustained For example, steps have been taken to privatize are as follows: generation and transmission and to introduce wholesale and retail competition. While substantial · Adequate and timely approval of the universal benefits can be reaped from these reforms, the risks charge for PSALM to recover stranded contract are also substantial and a carefully thought-through costs and stranded debt. Calculation of the risk management strategy is required. stranded costs of the eligible existing power The key risks arise from: purchase agreements may not be an easy task · because it may require a forecast of future market Flawed design or implementation of the main prices. However, given the current costs under reform measures resulting in insufficient these contracts, the calculated stranded costs may investment to guarantee security of supply; high be significant and the allocation of the burden of and/or volatile prices; or supplier failure due to these contracts may need careful consideration. · a lack of creditworthiness. · Careful control of capital and other expenditures Strong public opposition to the reform program in those areas that remain, for the time being, due to negative social impacts or concern at price under government ownership or regulation. outcomes. · Successful introduction of the competitive wholesale market supported by a high level of contracting The government can take certain steps to manage that secures the revenue stream for generators these risks. First, the timetable for reform needs to and protection against excessive price risks for be clear, realistic, and properly sequenced. Second, it the distributors/end users. cannot be assumed that the reforms and structures · Further reduction of uncertainty, in particular working in one country will also necessarily work in through conclusion of well-designed TSCs, to the Philippines. The risks need to be identified and the maximize the benefits of privatization. experience of a range of other countries drawn upon · A regulatory regime that provides an opportunity in fine-tuning the current design, ensuring both that for the regulated sectors to recover reasonable appropriate regulatory safeguards are in place, and that costs. alternative strategies are available to address problems that may arise in implementation of the reforms. These Focusing investments on key priorities steps, plus well-designed social safety nets, will help Current plans for committed and funded trans- reduce the risk that the reforms might be derailed. The mission investment should substantially eliminate management of these risks is central to the recommen- existing network bottlenecks. The government should dations listed below (summarized in table 6.5). carefully review, prioritize, and minimize investment The proposed recommendations have regard commitments beyond this. In addition, the expansion to the broad powers under EPIRA and the IRR, investment in the proposed Small Power Utilities and the capacity of PEMC to modify the WESM Group program should be scrutinized very closely market rules. The recommendations also have regard and alternative means of meeting electrification to the work that has already begun in a number of goals considered by striking a balance between WorldBankInfra.indb 98 12/6/2005 8:41:31 AM Chapter 6 Power economic efficiency and social equity. The cost to the supported by experts with operational experience in government of this program needs to be contained competitive energy markets. within the budget provided by the universal charge Fourth, elements of the wholesale market design for missionary electrification in order to avoid further may need to be reviewed to reduce the risk of the unsustainable drain on the budget. failure of the market due to price volatility and/or TheinvestmentclimateunderWESMneedscareful insufficient investment. The government should: consideration (see next section). Additional progress can be achieved, prior to market commencement, (a) Seek a further increase in generation and retail through the introduction of mandatory time-of-use prices as a benchmark for future wholesale generation prices and, possibly, a limited additional contracts. increase in average generation prices. (b) Ensure that a large fraction of electricity sales and purchases (as close as possible to the maximum Implementing successful market restructuring 90% allowed) is covered under the TSCs and The ambitious government reform program entails bilateral contracts for the medium to long significant risks. Hence the government's strategy term. Ninety percent contract cover is still low must focus on efforts to manage the policy and compared to the level of contract cover commonly operational risks associated with the introduction of sought by retail suppliers in other competitive WESM. This involves the following main elements. markets--especially in those markets that exhibit First, a mechanism must be found to reduce higher levels of price volatility (such as the market the high credit risk of many of the offtakers. in Australia with which the Philippine market WESM's proposal for twice-monthly billing with shares a number of common design principles). shorter payment periods will help. However, other The vesting contracts can comprise a portfolio mechanisms, such as a backstop credit insurance of contracts of different types and duration. The arrangement, are likely to be required. Other options period of the contracts can also be linked to the could include aggregation--and perhaps contracting phase-in of retail contestability, as was done in out--of trading for those distributors that cannot meet Australia, to avoid the risk of overcontracting the these requirements. In effect, these options transfer existing retail suppliers. The uncertainty of the the trading responsibilities and hence prudential timetable for retail competition (see below) makes requirements for the market to another, more cred- this more difficult in the current circumstances in itworthy party. While solutions must be found, care the Philippines. As noted above, the details of the must be taken not to dilute too much the pressures design of the TSC/bilateral contracts are impor- on the electric cooperatives and other offtakers to tant and need to be supported by a sound under- reform and consolidate. standing of the expected market outcomes and Second, additional technical and policy support an evaluation of the impact of the design of the should be provided to WESM and the ERC. M-Co contracts on market outcomes. It is not possible, and ABB are currently providing technical support a priori, to advise on such details without having to WESM. Substantial progress has been made in the undertaken this sort of analysis. implementation, and the need for technical support (c) Establish default mechanisms to help the weakest will shift to monitoring the performance of the market retail suppliers manage trading risks. Even with and the ongoing fine-tuning and modification of the substantial TSC coverage, the residual price risk market rules and processes, especially as the scope of for the weakest suppliers (and/or the degree of retail competition expands. WESM and the ERC are price volatility for end users) might be substan- likely to need support in developing the skills and tial and electric cooperatives, for example, are processes required for the new market supervision unlikely to have the resources or skills to manage role. The recommendations below on the modification their power purchases with an acceptable degree and development of the market will require further of risk. Competitive electricity markets are among technical support if they are to be implemented. the most volatile markets in the world because of Third, the government and WESM must ensure the need to constantly match demand and supply that participants are adequately prepared for partici- in circumstances where there is limited storage pation in the market when it commences. WESM capacity and traditionally little real-time flexibility or the government must embark on a substantial in demand. At times, prices in the market can training and education program for participants, be 30 to 300 times the "normal" price.29 Partial WorldBankInfra.indb 99 12/6/2005 8:41:31 AM 100 Philippines: Meeting Infrastructure Challenges Table 6.5 Summary matrix of potential reform measures for a three- to five-year period Potential milestones Critical issues Outcomes By year 1 By years 2­3 By years 3­5 NPC/PSALM ·NPC average generation ·Additional tariff · NPC/PSALM stranded · No additional drain financial selling rate increased increase and NPC costs recovered on national gov- performance ··· sufficiently to at least debt transferred to through universal ernment budget Inadequate tariffs eliminate NPC's operating national government, charge and additional other than rural Debt overhang loss (achieved for 2005) if needed to enable actions, if needed, electrification NPC financial ·P200 billion in NPC PSALM to achieve to enable PSALM to deficits debt transferred to gov- DSCR of 1 by 2009 achieve DSCR of at ernment (achieved) least 1 by 2009 ·Credible action plan ensuring consolidated PSALM's annual DSCR is at least 1, by 2009 Investment ·Capital expenditures of ·Assess investment · Investments appro- program · NPC and Transco limited commitments and priately timed and Insufficient focus to key priority invest- security of supply designed to ensure · on priorities ments only risks prior to final- security of supply at Insufficient ·Introduction of TOU tariffs izing 2006­2007 lowest cost demand for generation investment plans management Market ·Strengthen program to ·WESM fully opera- · Review of first year · Efficient, competitive restructuring enhance market pre- tional in Luzon of operation of bulk power market · WESM/TSC paredness of generators ·Announcement of WESM and report on in place implementation and distributors firm timetable for contract coverage, ·Transition supply con- retail competition price outcomes and tracts and supplementary beyond first two security of supply agreements approved tranches · Confirmed timetable and minimum coverage ·Backstop mechanism for extension of achieved in place to enable WESM beyond Luzon ·Completion of paper trials participation of small for WESM electricity coopera- ·WESM price cap set tives in WESM ·Protocols for market monitoring established continued on next page exposure to these prices for even a few hours of electricity to customers who are captive to when the system is at critical capacity can be a the existing supplier, either because they do not substantial burden on the retail supplier. Manage- have the option of choosing an alternative retail ment of these risks typically requires consider- supplier or because there is limited retail competi- able skills and resources. For example, trading tion in that part of the market. Such schemes can and risk management systems have to be estab- also be adjusted to incorporate contracting with lished and the matching of contract positions to new generators as well as purchases at spot prices expected demand constantly monitored and the or contracting with existing generators. This can positions adjusted. Price stabilization schemes provide a basis for investment by private genera- that shield offtakers against the risks of spot tors in new capacity. price fluctuations--such as the power-purchase (d) Ensure that there is well-designed system of retail funds established in Australia (New South Wales) supplier of last resort. In a competitive retail and Argentina--might therefore deserve consid- market there is a risk that a retail supplier may eration as transitional protection mechanisms. fail or pull out of the market at short notice. In Often these schemes are focused on the supply these circumstances it is important that there are WorldBankInfra.indb 100 12/6/2005 8:41:31 AM Chapter 6 Power 101 Potential milestones Critical issues Outcomes By year 1 By years 2­3 By years 3­5 ERC regulatory · ERC authorized to retain · Determination of · Simplification of · Effective, trans- performance part of its revenues Transco revenue regulation for electric parent, efficient, · ERC makes ICERA and cap consistent with cooperatives and autonomous GRAM review ex post TWRG (i.e. implement · Implementation of regulation automatic adjustment performance-based PBR for distributors (achieved for distribution regulation) utilities) · Publication of pro- · Review of ERC functions tocols and guidelines to ensure it is focused on for market moni- price regulation toring by ERC and · ERC publishes issues PEMC papers for TWRG and · Clear requirements DWRG (achieved) for default supply · Government advises on (retailer of last scope to strengthen "lock- resort) established in" of TWRG and related regu- lation enabling cost recovery by the utilities concerned Consumer · Launch of social pro- · Elimination of intra- · Elimination of inter- · Ensuring that cus- protection tection reviewing existing grid cross subsidies in class cross subsidies tomers are given consumer protection network pricing · Implementation of better price signals mechanisms to ensure · Implementation of recommendations · Protection of afford- that they provide recommendations and monitoring ability of electricity adequate protection to and monitoring instruments called for poor users poor users (examining in instruments called for in the social pro- particular potential need for in the social pro- tection TA for monitoring efficacy tection TA of existing measures and · Transitional pro- for taking additional mea- tection provided sures to protect poorest for contestable residential users) customers · Launch of effective public information campaign on the rationale for reforms Private · Publication of priva- · Some part of PSALM · Substantial part of · Substantial injection participation tization strategy and generation sold PSALM generation of new equity and · High debt development of public sold reduction in gov- and funding information strategy on ernment debt constraints for privatization · Greater pressure for government · Transco concession con- improved efficiency · Weaker incentives tract awarded and reduction in and governance costs in publicly owned utilities DSCR = debt service coverage ratio; DWRG = distribution wheeling rate guidelines; ERC = Energy Regulatory Commission; GRAM = generation rate adjustment mechanism; ICERA = incremental exchange rate adjustment; PBR = performance-based rate setting; PEMC = Philippine Electricity Market Corporation; PSALM = Power Sector Assets and Liabilities Management Corporation; TA = technical assistance; TOU = time-of-use; TSC = transitional supply contract; TWRG = transmission wheeling rate guidelines; WESM = wholesale electricity spot market. Source: World Bank staff. arrangements for the quick transfer of the obliga- ensure that there is continued supply to the end tion to supply the customers of that supplier to users and that there is no residual exposure for an alternative retail supplier. This is necessary to WESM or the other market participants arising WorldBankInfra.indb 101 12/6/2005 8:41:31 AM 10 Philippines: Meeting Infrastructure Challenges from the continued supply of electricity to end and projected supply-demand balances can help users. These arrangements are often called retailer provide a better basis for future investment and is (or supplier) of last resort and are a common a common feature of other competitive markets. feature of most competitive electricity markets. The current DOE projections can form the basis The ERC has begun to consider this issue. The of the forecasts. key concerns are: Who is to be the retailer of last (g) Incorporate medium-term capacity-contracting resort? How is the obligation to be assigned? and obligations,31 or other similar options, within What price will the retailer of last resort charge the market. Capacity-contracting obligations the end user? require retail suppliers to contract for enough (e) Establish a cap on the WESM price. Other elec- generation capacity (in megawatts) to meet the tricity pools have established caps to provide peak demand requirements of their end users. greater certainty and to limit extreme use of These requirements are a feature of a number market power. Such caps must be set at very high of Latin American markets and the New York, levels to allow the market to work. As noted above, New England, and PJM markets in the US. The the ERC is currently considering whether to set a capacity market operates in parallel with the cap on wholesale prices.30 At times some genera- energy market and reduces some of the pressure tors in some locations on the network may simply on the latter.32While the capacity obligations may have to run in order to ensure that supply is main- only be short term, they provide an additional tained. If so, there may be very few constraints stream of income for generation that is directly on the price at which the generator could bid based on available capacity rather than the sched- into the market. The challenge is that while the uling of plants. need to limit prices in these circumstances is (h) Review current security of supply arrangements generally well accepted, the temptation to set too to ensure that there is a backstop mechanism that close a cap should be resisted. In an energy-only hasminimalimpactontheoperationofthemarket market, such as the Philippines market, the peak and that limits the fiscal risks to be assumed by the prices play a very important role in sending the government. A key objective of establishing new signals for new generation. If the cap is set too electricity markets is to have market participants low it may deter new investment in generation. make investment decisions based on competi- PJM, which is an energy and capacity market, tive market price signals of the value of new has a cap of US$1,000 on wholesale market prices capacity, rather than planning processes. Hence but it also requires cost-based bidding in some policymakers should be wary of assuming market circumstances to limit market power. In the Irish failure and establishing nonmarket mechanisms and Australian markets, which are both energy- for new generation investment. However, in prac- only markets, the caps were set at 7,200 and tice most governments have not been prepared A$10,000, respectively, based on an assessment of to rely solely on market price signals, even where the value of lost load to consumers. This is a proxy these are supported by the information disclosure for the point at which a consumer would choose programs, such as forecasts of energy demand not to consume. In practice the value at which a and capacity under (f). This may require a review consumer would choose not to consume is likely of the range of mechanisms used in other coun- to vary substantially between customers. Hence tries, such as contractor of last resort, fast-track another important related program of work is to approvals, government-sponsored bidding, or incorporate demand responses more fully into the information programs. If additional mechanisms market. These responses can, in principle, greatly are put in place, the entity (e.g. DOE, PEMC, increase the efficiency of the market and reduce or the distributors) on which the obligations fall the market power of generators. But this is also needs to be clearly identified, together with the an area that other competitive electricity markets mechanisms for ensuring security of supply. have found challenging. (i) Examine the option of using cost-based bids as (f) Identify all potential sources of new capacity, a transition mechanism, as was done in several including demand responses, distributed genera- South American countries, such as Argentina tion, and plant rehabilitation, and remove any and Chile. Cost-based bidding has long-term obstacles to these options. The disclosure of efficiency costs but it can mitigate market power information on alternative sources of supply and reduce price volatility. Given that the invest- WorldBankInfra.indb 102 12/6/2005 8:41:31 AM Chapter 6 Power 10 ment program is likely to reduce substantially the on from these contracts. An assessment of the legal transmission constraints and that the infrastruc- basis for each of the other recommendations is clearly ture for a bid-based system is largely in place, it an important first step. There is also a strong need to is not recommended that WESM move to cost- ensurethattheinterconnectionsbetweenthesevarious based bids as the standard "bidding" mechanism. strategies are recognized and that adequate resources However, the performance of the market should and expert technical assistance are available. be monitored and the option of moving to cost- based bids in some circumstances may need to Maximizing benefits from private participation be considered if there is excessive market power. The benefits of greater private participation will be Some markets, such as PJM, use price-based maximized, and the problems created by unrealized bidding in most circumstances for most genera- expectations minimized, if greater certainty on tors but define circumstances--such as when a key market features, such as the phase-in of retail generator is a "must-run" generator--in which competition beyond 750 kW, the level of contracting, a generator may be required to bid on the basis wholesale market price caps, and the regulatory of cost. The ERC has published for discussion a regime, is provided. With regard to the Transco proposal for cost-based bidding. concession, this requires: (j) Review the timetable and strategy for introducing retail competition. This is discussed further below, Finalization of the proposed regulatory regime. but uncertainty about the rate at which the market ·· Review of the transmission investment framework will be opened up beyond the first two tranches to ensure both that it is flexible enough to cope affects incentives of retail suppliers to contract with changing circumstances and that it provides with new generation capacity. The absence of certainty to market participants that essential a known timetable makes it difficult for retail infrastructure will be put in place in time. This suppliers to forecast their future supply commit- may require a review of responsibilities for trans- ments that will need to be backed by medium- mission planning and/or a narrowing of regu- and long-term wholesale contracts. In particular, latory discretion through transparent and legally a clear statement that retail competition--in the binding instruments. form of individual customer choice--will not be extended to the residential and small business The current high level of market and political risk sectors for a clearly specified period would help must be reduced urgently if the benefits of privati- the reform process. zation of the generation assets are to be maximized. The steps required with regard to the wholesale The recommendations (b)--(e) are aimed market have been set out in the previous section. primarily at better managing the pool price risk while In addition, the prompt resolution of the questions not eliminating the important price signals provided related to price, conditions, and coverage of the TSCs through the market for wholesale electricity supply. and the bilateral contracts that follow the start of Recommendations (a) and (f)--(j) seek to create a WESM operations will be crucial. PSALM should better climate for new investments in generation. seek technical support on the design of the TSCs Taken together, the implementation of these measures and bilateral contracts in view of the complexity of is likely to reduce the risk that the reform process the task and importance of their design.33 could be derailed by market shocks and unexpected outcomes during the transition period. A detailed Improving regulatory performance review of the existing legal instruments and powers The ERC, assisted by independent experts, should has not been undertaken to determine the extent to undertake a strategic review of its functions, which these recommendations can be pursued within structure, capacity, and resources. This review will the existing powers. However, it is noted that action provide a basis for the government to proceed with has already begun on a number of these issues. For legislation to give the ERC greater fiscal independence example, the ERC and WESM are aware of the need by allowing it to retain part of the revenues that it to set a wholesale market price cap and the ERC has generates. While the ERC should not be allowed to started examining the retailer of last resort obligation. determine its own budget, the government should PSALM is also working on the development of the give it greater medium-term budget certainty by TSCs and the bilateral contracts that should follow ensuring that legislative instruments contain rules WorldBankInfra.indb 103 12/6/2005 8:41:31 AM 10 Philippines: Meeting Infrastructure Challenges or guidelines to establish minimum requirements. In requirements, and processes for carrying out this other regimes, regulators are often funded through task. They also need to agree on a memorandum of transparent levies on the regulated businesses. The understanding to clarify their respective roles. overall budget may still be subject to approval by, e.g. Parliament, but this can provide greater budgetary Ensuring adequate consumer and certainty for the agency. The ERC should review its industry protection remuneration structure to ensure that it can attract The reforms being implemented by the government staff with the necessary skills and experience. The and the requirements set out above will result in ERC does not need to recruit many new staff--indeed substantial changes in price levels and structures following the review it may need fewer people--but and, at least in the short term, an increase in the it does need a few very highly skilled staff. average level of charges. Residential customers are In assessing its current regulatory practices, the likely to see more substantial price increases than ERC should give substantial weight to the objective of other customers. Even where consumer research may increasing regulatory certainty and the timeliness of indicate customers should be "willing to pay" the its processes. An important step will be to streamline higher electricity prices (i.e. the value to the customers its regulatory activities, where possible, such as by of electricity is still greater than the proposed price), adopting a standardized approach to the regulation rapid increases in prices can cause concern and of distribution companies rather than by carrying customer resistance that can be a barrier to reform. out individualized price reviews for each company. A This concern arises because expectations as to what practical constraint may be that the current legislative is a fair price may be set by past prices, and a rapid framework and its interpretation by the Supreme increase in the price does have a real income effect for Court place an obligation on the ERC to examine the household. Hence for the process of price reform individually the circumstances of each distribution to be sustainable the government should: utility and electric cooperative. The ERC has recently published guidelines and issues papers that specify · Carry out a forceful, and professionally managed, in detail how it intends to regulate network charges. public information campaign in order to explain It should look to extend this approach to reduce why price increases and market reforms are uncertainty. essential, to highlight the relatively generous The ERC will need to designate--and specify the social protection mechanisms that are in place regulatory regime applicable to--a supplier of last (such as lifeline rates), and to point out that over resort, responsible for ensuring continued supply in the past few years prices have in fact decreased case a distributor or supplier defaults on its obli- in dollar terms. gations to its captive customers (and to its contestable · Finalize the elimination of cross subsidies in customers who did not choose another supplier). order to provide better price signals and improve Finally, responsibility for monitoring behavior the competitiveness of industrial users. in the competitive wholesale market is to be shared · Reviewexistingsocialprotectionmechanismsinthe between WESM and the ERC, with the ERC power sector and determine whether such mecha- responsible for taking action on anticompetitive nisms can be improved, for example by ensuring behavior. WESM and the ERC should seek expert better targeting on the poorest or by enhancing assistance to establish monitoring protocols, data incentives for efficient service delivery. Endnotes 1 NPC supplies bulk power from its own plant and independent 5 I.e. the excess of the contracted cost of electricity under eligible power producers with which it has long-term power purchase contracts over the actual selling price of the contracted energy agreements. output of such contracts in the market. 2 Including loan repayment and capital expenditures, before 6 I.e. any NPC unpaid financial obligations, not liquidated by the external financing. proceeds of the sales and privatization of NPC assets. 3 ThewinningbidwasannouncedinNovember2004.Thefinancing 7 Missionary electrification is the provision of basic electricity for the transaction still remains to be closed, however. services in unviable areas. 4 Unless otherwise indicated, the changes came into effect in June 8 There are also provisions for offtakers to bid in demand 2001. reductions. WorldBankInfra.indb 104 12/6/2005 8:41:32 AM Chapter 6 Power 10 9 There are some exceptions; for example, renewable generators 23 The level at which the price ceiling is set is critical. Often the do not have to bid into the pool to be dispatched. temptation is to place relatively low price cap on the wholesale 10 This is the average cost across a mix of generators--base load, market to prevent the exercise of market power. However, this mid-merit order, and peaking capacity. can be counterproductive because it can discourage new invest- 11 Typically, these will be contracts for differences where the ment. A price cap is necessary to prevent potentially destabilizing generator and distributor will compensate each other for differ- price volatility, especially in the early period of the market devel- ences between the pool price and the strike price in the contract. opment but it should be a very `loose' price cap. The price cap However, there are many variations likely to develop such as in the PJM market in the US is US$1,000/MWh and the cap in one-way hedges, cap and collar contracts, or pure price caps. Australia is around US$7,500/MWh. 12 US and European investors are currently selling their power 24 The PJM market was originally for wholesale supply in Pennsyl- assets in Asia, some of which have been purchased by regional vania-New Jersey-Maryland but has expanded to include other investors but others have not identified willing purchasers. In areas in northeast US. addition, Asian developing country power projects would need 25 This is because it strengthens the incentives on suppliers to to compete with projects in countries with high credit ratings manage their bulk electricity purchases more efficiently. It can such as Australia and Singapore, and many regional investors also reduce the market power of an incumbent with a dominant wonder why they have to invest in non-investment grade coun- share of the retail market--as is the case with Meralco. tries with underdeveloped legal and regulatory frameworks for 26 See B. Arizu et al. 2004. "Pass Through of Power Purchase Costs: similar returns. Regulatory Challenges and International Practices." Energy and 13 Exploration of natural resources (e.g. geothermal steam and water Mining Sector Board Discussion Paper No. 10. World Bank. resources) is subject to minimum Filipino ownership of 60%. February. 14 EPIRA encourages Philippine participation in generation. 27 These contracts are expected to be contracts for difference, which 15 Including Masinloc, which was initially planned to be sold with serve as commodity swaps to help both generators and distribu- TSCs but was sold as a merchant plant. tors hedge against the volatility of electricity market prices. 16 System interruption severity index minutes--the system inter- 28 See for example, Frank Wolak. 2003. "Designing Competitive ruption severity index is computed on the basis of the sum of Wholesale Electricity Markets for Latin American Countries." outage times weighted according to the estimated loss of sales. IADB/OECD. April. Care is needed in interpreting annual changes due to the vari- 29 PJM and the Australian market provide examples of this vola- ability from year to year in system interruptions. tility but even in these cases the level of volatility is constrained 17 Transco's average voltage limit compliance from 2000 to 2002 through caps on wholesale market prices, as mentioned. was only 74.7%. 30 The market rules provide for ERC to set a price cap if the market 18 The amount included in NPC rates charged to customers located is suspended however the circumstances in which the market in viable regional grids to reduce the charges of those located in may be suspended and the level of the price cap are not clear at less viable regional grids. this stage. 19 The amount included in NPC rates charged to distributors 31 Capacity-contracting obligations require the distributors/retailers and non-utilities with higher load factors or delivery voltages to contract for enough generation capacity (in megawatts) to to reduce the rates of those with poorer load factors or lower meet the peak demand requirements of their end users. These delivery voltages. requirements are a feature of a number of Latin American 20 The amount charged by distributors to industrial and commer- markets and the PJM market in the US. The capacity market cial end users to reduce the rates of other customers, such as operates in parallel with the energy market and reduces some residential end users and hospitals. of the pressures in the latter. 21 One would, for example, need to determine what constitutes an 32 See, for example, W. R. Hughes and A. Parece. 2002. "The adequate level of subsistence power consumption for the Philip- Economics of Price Spikes in Deregulated Power Markets." pines, analyze the poor's consumption patterns, and evaluate the Charles River and Associates. impact on power affordability of protection measures that may 33 There are a range of options for the design of these contracts (e.g. be in place outside the power sector. contracts that provide protection against both high and low spot 22 Too few generators or common ownership of strategically located prices, contracts that provide protection against high spot prices generators (either physically or on the load curve) can create only, and contracts that provide exposure to spot prices within a market power, while retention of significant public ownership can band). The design and coverage of these contracts will affect the increase perceived political risks and deter private investment. price certainty for both generators and suppliers, but will also PSALM's current plans address these concerns. affect outcomes in the spot market. WorldBankInfra.indb 105 12/6/2005 8:41:32 AM Joel Nito/Agence France-Presse WorldBankInfra.indb 106 12/6/2005 8:41:33 AM Chapter 7 Water Supply and Sanitation Overview drainage canals, exacerbating public health problems. M Even when collected, improper disposal practices for ajor efforts will be needed in the Philippines both septic tank sludge and solid waste contribute to to achieve the Millennium Development severe environmental degradation of water bodies Goal of increasing formal access to water throughout the country, and undermine economic supply to 90% by 2010. Official data on coverage show activity and growth in various sectors, including that only very modest growth has occurred over the tourism. past decade and that access levels for water supply As a result of inadequate services, contaminated have slipped. Access to safe drinking water for the drinking water and waterborne diseases remain a entire population deteriorated from 81.4% in 1999 to prevalent public health concern, accounting for more 80% in 2002. Access for the poorest segment of the than 500,000 morbidity and 4,200 mortality cases a population declined from 71.5% in 1999 to 70.2% in year with avoidable health costs alone estimated at 2000. An even lower access figure to formal services P3.3 billion annually. Avoidable economic losses due has been reported by independent surveys, with only to water pollution alone are estimated at an annual 63% of the population having access to any of the average of P17 billion in fishing industries and up to formal levels in 2000, with the rest relying on self- P47 billion in tourism.1 provision. Even more worrisome, official data mask the underlying poor quality of coverage. Though Modest sector investment and public data show fairly high formal water supply weak fundamentals access rates, less than half of the population and only Over the last two decades, capital expenditures in the about 20% of the rural population have access to water and sanitation sector have fluctuated at around piped water supply and household connections. But P3 billion­4 billion a year, almost entirely allocated where there is access to piped services, the quality to water. This is far from the estimated investment of such services in terms of continuity and bacterio- requirements for water supply of around P6 billion­ logical quality of drinking water often does not meet 7 billion a year to achieve a 90% access rate to formal the standards set by the government. services by 2010 (one of the Millennium Development For sanitation and solid waste, matters are even Goals). Furthermore, implementing the provisions of worse. It is in fact estimated that only about 4% of the Clean Water Act, which was passed in February the population nationwide had access to sewerage as 2004, will require additional annual expenditures of of 2000 and that, of the vast majority of households an estimated P35 billion.2 with septic tanks, only about 3% (mostly rural) had Clearly, the current investment levels are acceptable on-site treatment and disposal. Effluent inadequate to keep up with growing demand and from ubiquitous septic tanks usually drains into service targets. While investment figures indicate uncovered drainage systems, which leaves the majority an uptrend in 2002 and 2003, the vast majority of of the population across the country exposed to raw this investment was undertaken by two government sewage. Solid waste collection is ineffective, and large owned and controlled corporation (GOCCs)--the quantities of such waste often accumulate and block Metropolitan Waterworks and Sewerage System WorldBankInfra.indb 107 12/6/2005 8:41:33 AM 10 Philippines: Meeting Infrastructure Challenges (MWSS) and the Local Water Utilities Adminis- successfully. An effective mid-level coordination body tration (LWUA)--both of which are in severe financial for inter-LGU conflicts is missing. distress. Without major reforms in the sector, it is Coordination between the various national likely that capital expenditures will fall below even government agencies involved in the sector also the low average levels of the last decade. remains weak. Recent initiatives, such as the reform Generally, low tariffs constitute a core constraint of LWUA, strengthening of the National Water undermining the development of the entire sector. Resources Board (NWRB), and the Clean Water They are not even sufficient for the majority of Act provide an opportunity to better align sector service providers to recover recurrent costs, let responsibilities and agencies, but at the same time alone to accumulate sufficient reserves to fund new they present significant challenges to the sector to capital investments. Despite repeatedly stated policy implement such reforms seamlessly. objectives of cost recovery, actual progress toward this end has been minimal. In addition, the small scale of Lack of robust and coherent many individual service providers contributes to low regulatory framework efficiency and low skill levels of management. Critical for sector development is a robust regulatory For sanitation, users' low willingness to pay framework that could provide for a credible and operating costs, much less capital costs, has made it effective tariff adjustment mechanism insulated from difficult for the government to expand investments. short-termpoliticalintrusion.Aregulatoryframework Currently, local governments attach a higher priority is also crucial to make service providers accountable to water supply investments to bridge the significant to consumers. However, such a framework is still not gap in unserved demand for safe and reliable water in place. Perhaps the strongest indication that it is than to sanitation investments. missing is the lack of reliable and publicly available benchmarking information on the sector. The absence Severe fragmentation of policy and of consistent sector data and baseline figures on the institutional framework extent and quality of coverage not only undermines The water supply and sanitation sector is highly the credibility of the regulatory process but also fragmented, with numerous small providers that hampers any efforts to improve sector planning or have neither sufficient operational scale nor the to strengthen accountability of national government necessary autonomy from political interference agencies in the sector. to be efficient providers. Various local providers In addition, the sector's regulatory oversight coexist, but operate under different regulatory and is highly fragmented, with regulatory functions financing regimes, thus blurring accountability controlled by different entities. This makes it difficult of individual providers for expanding both water to build the necessary technical capacity and has led supply and sanitation services. More than a decade to variance in regulatory rules and their enforcement since the provision of certain services was decen- across different groups of service providers. For tralized, LGUs remain ill-equipped to provide them. publicly owned or community-based water districts, Similarly, the majority of water districts remain too regulatory oversight has now shifted to NWRB to small to attract skilled staff to effectively institu- address LWUA's conflicting role as both financier tionalize technical advice provided by LWUA. The and regulator for water districts. However, NWRB relationship between LGUs and water districts has so far been unable to build capacity to effectively remains ambiguous, hampering the incentives for face the challenges brought by its new mandate. One LGUs to provide loan collateral on behalf of water particular challenge for NWRB will be to change districts to attract more funding. the regulatory process from one narrowly focused Among the LGU levels, the vast majority of water on ensuring the financial viability of the sector to providers have been established at the barangay level one also ensuring the achievement of expansion and (the lowest administrative level in the Philippines). service goals. As a result, coordination and cooperation among Nor is a tangible regulatory framework in place barangay water suppliers, for example to develop for tariff setting at the LGU level--despite guidance bulk sources, have often been difficult and tainted from the National Economic and Development by local politics and political rivalries. In some cases, Authority (NEDA)--and the role of NWRB vis-à- higher-level LGUs, e.g. provincial administrations, vis LGUs remains unclear. In the absence of NWRB's have tried to facilitate in this area but not always effectiveness in enforcing tariff adjustments, efforts to WorldBankInfra.indb 108 12/6/2005 8:41:33 AM Chapter 7 Water Supply and Sanitation 10 strengthen LGU tariff policies need to be embedded water supply and sewerage investments and technical in a comprehensive program to reinforce public advisory services. Third was the Water Code of the finances and accountability for public services at Philippines, enacted in 1976, which established the the local level. framework for management of water resources as well as NWRB as the responsible lead agency. The Public Prioritizing a sector reform program Service Law, Presidential Decree 1206 (1977), gave to The government undertook pioneering sector reforms NWRB the mandate for supervision of water utilities, in 1997 with the privatization of the Metro Manila including the regulation of water tariffs (except those water system. Since then reform has slowed, partly falling under the jurisdiction of MWSS and LWUA), as a result of the Asian financial crisis in 1997­98 and to act as an appeals body on tariff disputes arising and general deterioration in private sector interest between water districts and LWUA. in infrastructure investment. In 2002­2004, the TheLocalGovernmentCode(LGC)of1991shifted government issued important policy directives to responsibility for public services to local governments further sector reform and consolidation. It is critical in their areas. Local governments at all levels-- that these initiatives be implemented with a sense of provinces, cities, municipalities, and barangays--were urgency. The sector reform program should include made responsible for basic service delivery, including (as outlined in the Recommendations section, below) water supply and sanitation services. The BOT Law of the following elements: implementing adequate cost- 1990 sought to provide the enabling framework for recovery tariffs, establishing an integrated sector private sector participation in infrastructure devel- framework, carrying out a public utility reform and opment, including water supply. Finally, the National performance enhancement program, enhancing Water Crisis Act of 1995 provided the government sector financing and rationalizing subsidies, and with special powers to reorganize sector agencies and expanding sanitation and sewerage coverage. pursue private sector participation. In particular, this Act facilitated the privatization of water supply and sanitation in Metro Manila. Policy and institutional framework Since 1995, successive governments have pursued their policy objectives through executive orders issued Policy goals for the water supply and sanitation by the president rather than laws passed by Congress. sector are formulated in the Medium-Term Philippine This may partly be a matter of expediency in imple- Development Plan (MTPDP) 2001­2004. The broad menting sector reforms, but also signals the lack of pillars of the sector policy have not changed over broad political consensus over whether, and how, to recent years3 and include, on the government's promote ambitious reforms in the water sector. part, a strong commitment to cost recovery in the In September 2002, NWRB was restructured sector; endorsement of the adoption of commercial through Executive Order 123, and was entrusted principles, including private sector involvement in the with responsibility for economic regulation of water management and financing of services; and a strong districts. Implementation has not yet made much commitment to decentralization of responsibilities progress and the implementing rules and regulations to local governments. However, the government has have yet to be finalized. Executive Order 279 issued struggled to make these policies work, and the insti- in February 2004 outlined substantial reforms in tutional framework for implementing its policies has the financing of the sector, particularly with regard remained weak and fragmented. to the role of LWUA in providing finance to water districts, by pursuing more actively the "graduation" Main laws and regulations of water districts and other water service providers The main pieces of legislation (appendix 6) defining to the private capital market. the institutional setup of the sector were enacted in With regard to sanitation, the standards for the 1970s. First was the legislation creating MWSS in air and water quality, and guidelines for land use 1971. Then came the Provincial Water Utilities Act management, natural resources, groundwater, and of 1973. This authorized the formation of local water waste management were established by the Philippine districts in provincial centers outside Metro Manila Environmental Code, 1977, through Presidential and the creation of LWUA as a specialized lending Decree 1152. The Clean Water Act of 2004 defines institution to assist in the promotion and devel- the policies for pursuing economic growth within the opment of water districts by providing financing for framework of sustainable development in the aspect of WorldBankInfra.indb 109 12/6/2005 8:41:34 AM 110 Philippines: Meeting Infrastructure Challenges water quality management of all water bodies, as this controlled by different entities. The Regulatory Office impacts on water supply, public health, and ecological of MWSS is entrusted with regulation of the two protection. The Department of Environment and private concessionaires for Metro Manila. Regulatory Natural Resources (DENR) has the main responsi- provisions affecting other private firms are largely bility for implementing the provisions of the Act. contained in individual contract agreements, in some cases administered by a dedicated contract adminis- Allocation of responsibilities for tration unit or regulatory panel. This was a pragmatic policymaking and regulation solution chosen at the time of the transactions in Responsibilities for sector policymaking, planning, the absence of a more institutionalized framework and regulation are severely fragmented, spread across to review service quality and tariffs that would have different government tiers and various national been acceptable to investors. government agencies. Until 2002, LWUA was, in effect, regulating MWSS is responsible for the provision of water water districts, and NWRB private providers supply and sanitation services to the cities and munic- serving residential developments. After attempts to ipalities of Metro Manila. The services are currently establish a dedicated regulatory authority for the provided, on the basis of concession contracts, by two sector stalled, in 2002 the government consolidated private concessionaires, Manila Water Company, Inc. economic regulation for both LGUs and water (MWCI) and Maynilad Water Services, Inc. (MWSI). districts, assigning this mandate to NWRB through LWUA and the Water Supply and Sanitation Project an executive order. NWRB also has the mandate to Management Office of Department of Interior and regulate LGU systems; this mandate appears to be Local Government (DILG), through their respective somewhat in conflict with the LGC and may well be funding activities, define and enforce specific quality subject to challenge by LGUs in the future. and performance standards of service for water districts and LGU-managed systems, respectively. They also assist service providers through capacity Market structure and building and technical assistance. LWUA's support, ownership of assets in particular, extends beyond technical assistance to actual involvement of LWUA staff in execution of Despite the government's efforts to foster amalga- individual water district projects and the governance mation of providers, the market for water supply and of water districts. Local governments at all adminis- sanitation remains highly fragmented. While concise trative levels retain de facto responsibility for policy, figures are difficult to obtain, public water supply planning, and regulatory functions specific to their services are provided by about 5,000 service providers, jurisdictions. This includes choosing financing and broken down into about 3,100 barangay water services management options, deciding on tariffs, providing associations (BWSAs), up to 1,000 systems managed investment and funding support, and setting directly by LGUs, about 580 water districts, about performance standards. 500 rural water supply associations (RWSAs), about NEDA defines the institutional roles and respon- 200 cooperatives, and nine private firms, including sibilities of sector agencies; sets broad coverage targets the two Metro Manila concessionaires. forthecountry;anddefinesbroadpolicies,particularly These are the results of policies over recent regarding access of low-income groups to services, decades that have promoted, in successive waves, cost recovery to support sustainability, incentives specific provider models. Adoption of these models to improve operational efficiency, and mechanisms was commonly a precondition for local governments for private sector involvement. The Department of and communities to obtain government and donor Finance (DOF), for its part, sets and implements funding. A dedicated national agency was typically policies on the use of grants and guarantees from establishedtochannelfundsandtechnicalassistanceto the national government and official development beneficiaries: advocacy for water districts started in the assistance (ODA). early 1970s, with technical and financial support from Appendix 7 discusses the main agencies involved LWUA; this was followed by the formation of RWSAs in water supply and sanitation policy formulation with support from the Rural Waterworks Development and implementation. Corporation; the promotion of cooperatives under the The sector's regulatory oversight also remains auspices of the Cooperative Development Authority; highly fragmented, with regulatory functions, if at all, and, since the early 1980s, the formation of BWSAs WorldBankInfra.indb 110 12/6/2005 8:41:34 AM Chapter 7 Water Supply and Sanitation 111 and other LGU-managed systems with technical and Table 7.1 financial support facilitated through DILG. Since the Market shares, urban and rural populations early 1990s, the government has pursued a policy of by primary source promoting private involvement in the sector, most Type of provider Urban (%) Rural (%) notably through the award of concessions in Metro LGUs/CBOs 40 65 Manila. A significant share of households with no Water districts 30 10 or inadequate access to public services either resorts Private operators 10 -- to self-provision or is catered to by small-scale inde- SSIPs 15 10 pendent providers (SSIPs), including water vendors, Households (self-supply) 5 15 private borehole operators, and staff at real estate Total 100 100 subdivisions operating small discrete networks that -- = not available; CBO = community-based organization; LGU = serve private properties. local government unit; SSIP = small-scale independent provider. As a consequence, various types of public Sources: Estimates based on official government figures provided providers representing different governance models in the Medium-Term Philippine Development Plan 2001­2004, and coexist today. The vast majority of these providers data from the World Bank-funded Filipino Report Card on Pro-Poor Services (2001). remain very small, frequently with under 1,000 active connections. Only about 80 water districts, and five private water providers outside Metro Manila, serve Water districts are formed at the initiative of more than 5,000 household connections. Despite the local government. A consent5 from LWUA is individual success cases, broader efforts to integrate or needed to conclude the formal establishment and amalgamate small providers into larger, viable entities entitle the water district to technical support and have not come to fruition. financing from LWUA. Water districts enjoy legal exclusivity for services in the LGU, and any interested Market shares of provider groups third party wanting to provide water supply services Estimates for market shares across the different has to secure a waiver from the water district. New providers are summarized in figure 7.1. Table 7.1 formation of water districts has slowed significantly provides a breakdown of estimated market shares since the early 1990s. across urban and rural areas. Water districts are GOCCs6 and own the assets they operate. As such, water district boards and staff Water districts are subject to civil service rules, government compen- Water districts are the dominant service providers sation policies, and auditing rules. While the water for urban areas outside Manila (table 7.2). As of 2003, district model secures some autonomy from the local water districts were serving 15.3 million people in government in day-to-day utility management and almost 700 cities and municipalities out of the more operations,theappointingauthorityforboardmembers than 1,500 in total, and were providing services to remainswiththelocalgovernment.Boardmembersare about 68% of the population in their respective often selected on the basis of political considerations franchise areas of water districts.4 rather than on specified professional credentials. As a result, political interference, particularly in matters Figure 7.1 Market share by type of provider regarding tariff setting, is common. LWUA plays an important role for water districts. Access to formal levels of service: 79% No access: 21% In addition to its role as lender, LWUA staff assume Level 3: Level 2: Level 1: Private wells specific responsibilities for management activities 44% 10% 25% Tankered/ where LWUA judges water districts to be insuffi- vended water Piped supply ciently capable of exercising these functions to its WDs: POs: LGUs/CBOs: LGUs/CBOs: SSIPs and/or satisfaction. Such involvement may even include 14% 10% 20% 35% self-provision representation on the water district board.7 As a by households lender, LWUA retains step-in rights8 in case a water Complementary services provided by SSIPs and/or self-provision district defaults on loan obligations. CBO = community-based organization; LGU = local government unit; Only about 10% of water districts serve multiple PO = private operator; SSIP = small-scale independent provider; LGUs, and few of them have amalgamated (box 7.1), WD = local water district. Levels 1, 2, and 3 are defined in endnote 20. even though LWUA has encouraged this among those Source: As Table 7.1. with contiguous service areas, whenever economically WorldBankInfra.indb 111 12/6/2005 8:41:34 AM 11 Philippines: Meeting Infrastructure Challenges Table 7.2 Water districts by category, 2003 Water district category Luzon Visayas Mindanao Total Small (less than 100 to 4,500 connections) 161 68 62 291 Average (between 1,500 and 7,500 connections) 26 13 14 53 Medium (between 2,300 and 14,000 connections) 35 7 6 48 Big (between 3,500 and 27,000 connections) 28 3 9 40 Large (between 15,000 and 58,500 connections) 4 2 3 9 Very large (between 19,000 and 135,000 connections) 2 2 1 5 Total operational water districtsa 256 (23) 95 (14) 96 (13) 447 (50) Nonoperational water districtsb 64 64 28 127 Grand total 320 130 124 574 a. Numbers in parentheses refer to metropolitan water districts with service areas that cover more than one local government unit (LGU). b. Nonoperational water districts are those without a board or without a system to operate having been denied financing by the Local Water Utilities Administration (LWUA) after being determined "nonviable" according to LWUA standards. These areas eventually revert to LGU responsibility. Source: Philippine Association of Water Districts, Inc. 2003­2004 Directory of Water Districts. governments, these community- Box 7.1 based organizations (CBOs) often Amalgamation of water districts: rely on local government support for The case of a water district in Laguna capital outlays and, to some extent, L os Baños, a large town south of palities on the water district board, operation and maintenance (O&M) Manila and already constituted as all directors of the new water expenses, including for represen- as a water district, in 1982 in effect district continued to be from Los tations to politicians for allocation annexed the water supply opera- Baños (representing about 75% of from congressional or "pork barrel" tions of two smaller municipalities. the total consumer base), which funds (e.g. the Project Development Both municipalities transferred raised suspicions as to the "fair" Assistance Fund). Barangay networks their existing assets to the water allocation of new investment pro- are typically very small--the number district, and one obtained financial grams. Before the amalgamation, compensation (the assets of the tariffs were dissimilar; a uniform of service connections ranges from other were unusable at the time). tariff was subsequently introduced. less than 100 to 500 (table 7.3). Problems emerged due to the lack Despite their small size, amalga- of representation of both munici- Source: World Bank staff. mation of BWSAs is rare (box 7.2 gives an example). Inmostcases,directmanagement feasible. There are strong disincentives for individual by LGUs serves as the "option of last resort," when board members and local politicians to agree to mergers LWUA has determined the area as "nonviable" with other districts, as the appointment authority of for establishing a water district. In general, water waterdistrictboardmembersforawaterdistrictserving utilities under direct LGU management are poorly multiple LGUs shifts to the provincial governor. operated because of the lack of technical, financial, While water districts are responsible for the and management capabilities, as well as the lack of implementation of sanitation and sewerage in their autonomy from political interference in management respective service area, very few actually provide decisions. Tariff setting is commonly subject to short- sanitation services. term political considerations. Systems managed by BWSAs and RWSAs are Local governments and community-based organizations mostly designed to provide shared "communal" In addition to forming water districts, LGUs can taps rather than individual household connections. either directly provide services through their Typically, the original facilities are constructed municipal or city engineering department or facilitate with support from national government agencies or services through BWSAs and RWSAs and coop- nongovernmental organizations, and provided to the eratives.9 While formally autonomous from local communities for modest levels of contribution, on WorldBankInfra.indb 112 12/6/2005 8:41:34 AM Chapter 7 Water Supply and Sanitation 11 Table 7.3 Sample characteristics of local government-managed water supply systems Local No. of connections government Operating body No. of water supply No. of households No. of people served (metered and level systems served unmetered) Province Provincial LGU department 3 500­900 2,500­5,000 <1,000 City RWSA 1a 2,700 15,000 2,700 Municipality Municipal LGU department 99 7­6,500 35­56,000 <5,000 RWSA 59b 125­4,000 600­23,000 125­2,200 Barangay BWSA 18c 65­700 300­3,600 50­700 BWSA = barangay water services association; LGU = local government unit; RWSA = rural water supply association. a. Operating in an area with a water district. b. One of the systems is operating in an area with a water district. c. Five of these systems are operating in areas with water districts. Source: Japan International Cooperation Agency and GTZ-assisted provincial master plans for water supply and sanitation prepared for 32 provinces between 1998 and 2003. the condition that they form BWSAs or RWSAs and competitivelyawardedthroughconcessionagreements register them as legal entities. Such systems are often to two private companies in 1997--MWCI and MWSI. later "converted" to level 3 systems, i.e. modified by Compared with the performance of MWSS prior to users by attaching rubber hoses to deliver water to the agreements, both concessionaires have improved individual household yards, emulating level 3 service and expanded services. Both have made significant standards. Both BWSAs and RWSAs provide for a investments over the years, improved the quality of governing board with between five and nine members, water supply, and provided access to network water to who also retain responsibilities for management and over 200,000 new households, including many among operations functions. the poor. Yet one of the concessionaires is currently In sanitation, there are only three sewerage in bankruptcy and, overall, several of the ambitious systems operating outside Metro Manila; all are targets of the original contracts have not been managed by local government departments. Some achieved (box 7.3). Various factors have contributed local governments have financed neighborhood to this and may provide valuable lessons with regard sanitation systems that are managed by users' asso- to future policy approaches involving the private ciations. The only exception is Metro Manila, where sector, the design of future similar agreements, and private operators have assumed the responsibility for the government's need to strengthen the sector's managing and operating sewerage assets, yet without regulatory framework (box 7.4). assuming investment obligations in sanitation. Efforts and policies to broaden private sector involvement beyond Manila have had little success. Private operators Given the uncertainties and controversy surrounding Prompted by a water supply crisis in the capital theflagshipconcessionsinthecapital,localgovernments region,10 water supply and sewerage services were and operators have been cautious in pursuing deals, which is hardly surprising with Box 7.2 the lack of cost recovery that is Amalgamation of BWSAs: The case of three barangays symptomatic for most providers, T coupled with the small scale of most hree barangays--Nena, Cam- "federated" BWSA to discuss and pidham, and Libas--in San solve common issues. The fed- operations. Examples of private sector Julian Municipality, Eastern Samar, erated BWSA services nearly 6,000 participation in the water sector share one spring source (about people in the three barangays. outside Manila include a partial 4 kilometers from barangay Nena), privatization in Subic Bay in the form transmission lines, and a storage of a joint venture, and a joint venture Source: ADB Project Innovations and tank, and developed a water dis- Good Practices Rural Water Supply and arrangement in Tagbilaran City in tribution system in each barangay. Sanitation Sector Project (http://www. Bohol province. Several LGUs have Each of the three formed a BWSA, adb.org/water/actions/PHI/RWSS- tendered design-build-lease contracts, and the BWSAs in turn formed a samar-case-study.asp). which have attracted bidders, but have been beset by contractual problems. WorldBankInfra.indb 113 12/6/2005 8:41:35 AM 11 Philippines: Meeting Infrastructure Challenges Box 7.3 The Manila water concessions T he largest and best-known zone concession. Since the start of increased by 135% while that for example of private sector the concessions, there has been MWCI increased by 110%. MWSS involvement in the sector is the an increasing divergence in the also confirmed its option under privatization of the Metropolitan financial performance of the two the concession agreement to Waterworks and Sewerage System concessionaires. While both ini- implement a general rate rebasing (MWSS) in 1997 that involved tially struggled, MWCI has been as of January 1, 2003. $7 billion-worth of investment com- profitable since 1999, though Despite tariff increases, the mitments over a 25-year concession only modestly, while MWSI has financial position of MWSI con- period, and a service population never made a profit (and is now in tinued to deteriorate and the of 12 million. The privatization was bankruptcy). company maintained its suspension competitively conducted with the Water supply service levels have of payment of the concession fee following key features: improved in both zones compared (which by early 2004 totaled about with the preconcession period. P8 billion). In February 2003, MWSI · Require Filipino investors to form Between 1997 and 2002, the total issued notification that it had ter- consortia with international water population receiving water services minated the concession. The ter- operators increased by about 1.7 million. Total mination was contested by MWSS · Award the concession to the combined water sales increased before an international arbitration qualified bidder that offers the by 28% while almost 200,000 new panel, which ruled in November lowest tariffs water connections were added. 2003 that no ground for early · Split the concession area into Improvements in MWSI's zone termination existed, and allowed two, not allowing a single firm to have been more limited than MWSS to draw on a performance win both concession areas, and those in MWCI's zone, and non- bond. In response to the ruling, accept tariff differentials that may revenue water levels have actually MWSI sought protection from a result from the bidding increased. Sewerage and sanitation rehabilitation (i.e. bankruptcy) court · Split the debt service require- improvements have been very on November 13, 2003. Agreement ments of MWSS using a 9:1 ratio limited and the agreed targets set was still to be reached between between west and east, based on out in the concession agreement MWSI, MWSS, and the various the utilization of loans between have not been met. In the initial creditors on the rehabilitation as of the two zones rebasing of tariffs, which the con- February 2005. · Exclude Laiban dam (an addi- cession agreement provides for In contrast, MWCI has expanded tional bulk water source) in every five years, these targets were access to services by increasing the contract but include the revised substantially downward. connections and is performing well raw water supply contract for In March 2001, MWSI suspended financially. Between 1997 and 2004, 300 million liters a day in the con- payment of its concession fee. This the serviced population increased tract for the west has threatened the financial via- from 3.0 million to 5.1 million, staff · Establish a tariff adjustment bility of MWSS, which, in order to per connection fell from 8.5 to 2.8, framework and a regulation meet its financial obligations, has and nonrevenue water was reduced system within the concession taken out short-term debt. MWSS from 63% to 43%. On March 18, agreement. agreed to amend the concession 2005, MWCI was listed on the Phil- agreements in October 2001. ippine Stock Exchange, in the first The Manila Water Company, This amendment incorporated initial public offering in the country Inc. (MWCI) was awarded the con- adjustment mechanisms to recover since 1997. cession for the east zone while foreign exchange losses. As a result, Maynilad Water Services, Inc. between October 2001 and January (MWSI) was awarded the west 2002, the average MWSI water tariff Source: Compiled by World Bank staff. Small-scale independent providers developers, homeowners' associations, local entre- In urban areas, SSIPs have stepped in to fill the preneurs, and mobile water truckers and haulers. gap left by the slow expansion of public providers. Most operate without recognition from local SSIPs comprise a diverse group of water operators authorities or the water utility and develop their that serve different groups of customers, some business in a competitive environment. Individual affluent and others poor. They include real estate SSIPs in urban areas may serve between 100 and WorldBankInfra.indb 114 12/6/2005 8:41:35 AM Chapter 7 Water Supply and Sanitation 11 Box 7.4 Lessons from the Manila water concessions for the design of future private sector contracts Treatment of clear that a contract amendment incentives to do this so as to foreign exchange risks was unavoidable, the absence of increase sales and revenues, as well Exchange rate risks in the original explicit legislative backing for the as unit operating costs. The con- contract were shifted quite regulatory process and regulatory tract also committed MWSS to pro- aggressively to the private firms. decisions opened the regulatory viding substantial additional bulk Mitigation was provided only by process to legal challenges. supply at no cost to the conces- extraordinary price adjustments, sionaires and offered to bidders a and recovery of exchange rate Unsuitable dispute resolution and chance to pass through high oper- losses was allowed only over the appeal mechanisms ating costs to consumers at price remaining life of the contract Concession contracts provided for reviews. With hindsight, the incen- rather than through more fre- international arbitration in the case tives provided to reduce water quent, automatic, and steeper where conflicts between the regu- losses were not strong enough to rate adjustments. This mechanism latory office and either of the con- induce the concessionaires to direct proved insufficient for investors cessionaires could not be resolved significant investments toward that to cope with the unexpected amicably, but did not specify ami- objective, and might have been volatility of the peso since 1997. cable dispute resolution or trans- enhanced significantly by a bulk Lessons from private infrastructure parent appeal mechanisms short of water surcharge levied on the con- projects in emerging markets international arbitration. As a result, cessionaires with a pass-through have brought about a new appre- there have been several cases of to consumers only for water sold. ciation of foreign exchange risks. costly and lengthy arbitration. The 2003 rate rebasing targets Future attempts to attract private introduced key performance indi- financing--even for public water Managing conflicts of interest cators, which include targets for providers--will therefore likely Under the concession contracts, nonrevenue water. This has pro- require more immediate and MWSS retained responsibilities vided stronger incentives for the credible mechanisms to mitigate directly affecting the performance concessionaires. currency risks. of the concessionaires, including the supply of bulk water. Several Market structure Regulatory framework of these projects were delayed Splitting the MWSS service At the time of the concession in execution or canceled due to area into two zones allowed for agreement, the government set insufficient MWSS funds, creating benchmarking between the two up a regulatory office within the conflicts of interest for the board of providers during regulatory reviews. Metropolitan Waterworks and Sew- trustees, and tainting the credibility The ability to compare performance erage System (MWSS), accountable of the regulatory process. and the presence of a possible to the MWSS board of trustees, "replacement operator" have and to establish regulatory rules Transparency and public strengthened the government in largely within the contract. In the dissemination the ongoing dispute with Maynilad absence of a dedicated regulatory Absent a mandate, the necessary Water Services. Another benefit can authority, this was a pragmatic resources, and accountability, the be seen in the fact that, although choice, though the last few years regulatory office has been unsuc- water providers often insist on and have revealed the shortcomings of cessful in developing a transparent are granted exclusivity for providing this approach. regulatory process, including services in concession areas, in this wide public participation and case the government allowed small- Regulatory process regular dissemination of mean- scale independent providers (SSIPs) The new and relatively inexperi- ingful performance measure- to continue serving consumers enced regulatory office arguably ments and benchmarks for the while providing incentives to the could have responded more quickly concessionaires. concessionaires to cooperate with to the need to renegotiate the incumbent SSIPs. This has triggered relevant contract, even though Incentives for reducing innovative partnership initiatives it might not have been legally unaccounted-for water that have had a big impact on obliged to do so. Although swifter The concession contracts did not providing new connections to low- action might have been able to specify explicit targets to reduce income households. limit the repercussions of the water losses. The design assumed peso's depreciation once it became that bidders would have natural Source: World Bank staff. WorldBankInfra.indb 115 12/6/2005 8:41:35 AM 11 Philippines: Meeting Infrastructure Challenges 3,200 connections.11 In rural areas, SSIPs take the limit consumption from the water supply system for form of water vendors, who invest in pushcarts or drinking and cooking purposes, and rely on wells and pedicabs (bicycles with sidecars) and usually source surface water for bathing and laundry. Many high- their water from public taps or private connections. income households invest in private wells to mitigate Water vendors augment water supplies of households the water utilities' poor service. Sanitation (i.e. toilets from private wells or where the water source is at and septic tanks) is treated by government policies a distance. as primarily a private responsibility. The presence The overall market size of SSIPs is unknown and of a septic tank is commonly a requirement of local very difficult to estimate, but likely to be sizable as building codes, and both construction and main- a substantial portion of the population does not tenance of these facilities are carried out by private have access to sufficient formal levels of service. In households. Metro Manila alone, it is estimated that 30% of the population depended on SSIPs in 1996;12 similarly in Cebu, about 30% of the 1.5 million population Investment needs and financing are served by SSIPs.13 It is difficult to estimate to what extent Manila water privatization has impacted To achieve the Millennium Development Goal of 90% SSIPs. One feature of the concession contracts is that access to formal services by 2010, the investment need neither concessionaire was awarded an exclusive right for water supply is estimated to be around P6 billion­ to provide services. Both were given incentives to 7 billion a year. The cost of implementing the Clean cooperate with SSIPs, as services provided by SSIPs Water Act, passed in February 2004, is estimated at were accounted for when assessing conformance up to P35 billion a year (appendix 8). with coverage targets as stipulated by the concession Actual investment in water supply and sanitation contracts. As a result, a number of innovative part- over the last two decades has been far below these nerships between concessionaires and incumbent required levels. Total investment has fluctuated SSIPs have developed, in some cases with SSIPs as at around P3 billion­4 billion a year. Out of this, offtakers buying for resale to customers. capital expenditures on sanitation--largely public While not specifically geared toward low-income investments in the Metro Manila area--amounted households, some SSIPs target and serve low-income to about P500 million a year. Investments have been urban settlements where households cannot afford heavily skewed toward Manila, yet compared with connection fees or where tenure disputes prevent the capital expenditure per connection for other water concessionaires from offering individual household supply systems in Asian cities,15 even these are at the connections.14 Local entrepreneurs also play a large very low end (figure 7.2). role in providing sanitation services, particularly for Investment figures (figure 7.3) indicate an uptrend desludging of septic tanks in many urbanized LGUs. For Metro Manila Figure 7.2 alone, about 75 firms offer such tank- Capital expenditure per connection, selected Asian cities, 2001/2002 cleaning services. Tashkent Karachi Self-provision by households Colombo Households without access to any Kathmandu Manila formal level of service resort to Shanghai Vientiane self-provision, using either shallow Jakarta wells if they are poor or deep wells Ho Chi Minh Delhi if they have higher incomes. An Seoul estimated 20­30% of the population Hong Kong Dhaka rely on self-provision, both as their Kuala Lumpur main source of water supply and Chengdu Phnom Penh in combination with other sources. Osaka Many households use several sources Ulaanbaatar 1,980 0 50 100 150 200 250 of water even when connected to a US$ public distribution system. In lower- Source: Asian Development Bank. 2004. Water in Asian Cities: Utilities Performance and Civil income households, people tend to Society Views. Manila. WorldBankInfra.indb 116 12/6/2005 8:41:35 AM Chapter 7 Water Supply and Sanitation 11 Figure 7.3 flows in the coming years. Therefore, in the absence Water sector capital expenditures of major reforms in the sector, it is likely that capital 7 expenditures will fall below even the low average 6 levels of the last decade. es) Total expenditures National government. Since 1991, the government pric 5 4 has facilitated public investments through three (1994 GOCCs main avenues: onlending of funds to national sector 3 Private agencies, in particular LWUA and MWSS; onlending billionP 2 NG to LGUs, through the government financial insti- 1 LGUs tutions (GFIs) and the Municipal Development 0 Fund Office; and grants for community-driven 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 initiatives. In addition, congressional funds remain Year an important source of funding for water projects. GOCC = government owned and controlled corporation; LGU = local government unit; NG = national government. In 2000 and 2001, it is estimated that P247 million Note: For 2003, GOCC data are as of September; private sector data are and P747 million, respectively, of such funds were unaudited and LGU data are unavailable. obligated for water supply investments.16 Congres- Sources: Department of Budget and Management; Department of sional funds for water projects are charged against Finance; Commission on Audit; Maynilad Water Services, Inc.; Manila Water Corporation, Inc.; and National Statistical Coordination Board. the budgets of national agencies, predominantly DPWH and to a lesser extent LWUA, and imple- mented by these agencies. over 2002­2003, but this is unlikely to be sustainable. Local governments. LGU financial records The majority of public investment is channeled indicate expenditure levels of about P400 million through MWSS and LWUA, which show significant a year (table 7.4), but spending has been largely in increases in expenditures and disbursements in 2002 support of recurrent expenditures. and, in the case of LWUA, in 2003. They accounted MWSS. In Metro Manila, MWSS has continued for 76% of total investment in 2003, and 53% of total to make significant financing available to the sector sector investment in the last 10 years. However, both since awarding the concessions. However, its ability are facing acute financial distress. Private investments to channel financing into the sector even at the have become very significant over the last years, same low levels as the last few years is in jeopardy. predominantly in Metro Manila, and investments MWSS capital outlays dropped significantly from by MWCI and MWSI have been equivalent to about about P2.9 billion in 2001 and P1.9 billion in 2002 to 50% of total sector investments over the last five years about P0.7 billion in 2003, and sanitation investments (1999­2003). Yet the uncertainties surrounding the dropped to about P100 million­250 million a year, financial collapse of MWSI and the ongoing rene- indicating the severe financial distress brought about gotiations will almost certainly depress investment by the default of MWSI. Without major financial Table 7.4 Local government expenditures on water supply and sanitation, 1990­2002 (P million) 1990 1994 1998 2002 Operation of waterworks system: Total expenditures 86.0 157.0 277.0 246.0 Personnel services 29.0 58.0 123.0 108.0 Maintenance and other operating expenses 29.0 43.0 102.0 81.0 Capital outlay 27.0 56.0 52.0 57.0 Local Development Fund 30.0 1,036.0 1,684.0 1,433.0 Share of WSS in Local Development Funda 1.2 41.4 59.8 57.3 Estimated total of LGU resources spent on WSS 87.0 198.0 337.0 303.0 Estimated total capital outlay of LGUs for WSS 28.0 97.0 112.0 114.0 LGU = local government unit; WSS = water supply and sanitation. a. Own estimate based on own LGU record samples, assuming that LGUs allocate about 4% of their Local Development Fund to WSS projects. Source: Commission on Audit. WorldBankInfra.indb 117 12/6/2005 8:41:36 AM 11 Philippines: Meeting Infrastructure Challenges restructuring, it is highly unlikely that MWSS will Private investment. Private financing of be able to sustain investment levels. investment in the sector has taken on significant LWUA. LWUA has been the main conduit of loans dimensions since 1997, but has been largely concen- provided by the national government and interna- trated in Metro Manila. The two concessionaires in tional finance institutions to the water sector. Since the capital have incurred a total of about P16 billion the late 1990s, LWUA has had difficulties disbursing ($286 million) of capital expenditures since 1997 ODA loans due to lack of counterpart funding on its (about P2 billion a year), over half of which has behalf as well as the inability of the water districts to been privately financed (table 7.6). Outside Metro raise equity contributions. However, disbursements Manila, private financing and investment in water over the past few years have improved markedly, utilities have been limited. Investment through SSIPs from an average of about P700 million a year during is believed to be significant, but information on exact the late 1990s to about P1.6 billion in 2003 (table 7.5). figures is very limited.17 Investments by private It is unlikely, though, that LWUA will be able to households, either to upgrade communal facilities sustain this performance. Indeed, there has been or to drill private wells, are significant, conserva- almost no new loan commitment to LWUA for the tively estimated at about $4.3 million (P235 million) past few years. annually.18 Table 7.5 Local Water Utilities Administration capital expenditures, 1992­2003 (P million) Item 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Capital expenditures 478 341 471 687 740 761 852 748 747 732 1,215 1,645 Sources of financing Foreign financing 111 36 145 324 348 414 418 438 301 485 825 1,093 Domestic borrowings n.a. n.a. n.a. n.a. n.a. 61 78 40 19 1 67 403 Internal cash generation 4 17 14 10 10 6 20 45 32 29 52 35 National government subsidy 290 235 268 247 298 216 280 194 126 138 257 99 Congressional funds -- 10 35 86 81 60 46 24 29 24 9 6 Special funds 74 43 9 20 3 4 10 5 1 4 n.a. n.a. Lingap para sa Mahirap n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 233 43 n.a. n.a. Water district equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3 6 9 5 9 -- = not available; n.a. = not applicable. Note: Lingap para sa Mahirap (Care for the Poor) was the poverty alleviation program of the Estrada administration (1999­2001). Source: Local Water Utilities Administration. Table 7.6 In the absence of sewerage Manila water concessionaire capital expenditures, 1997­2003 (P million) services, the majority of urban households have built Item 1997 1998 1999 2000 2001 2002 2003a Total their own sanitation facilities, Manila Water Company, Inc. 350 842 588 654 865 1,406 1,804 6,509 most commonly flush toilets Concessionaire financing 253 579 357 308 586 734 1,316 4,133 Concession fee projectsb connected to private septic 97 263 231 346 279 672 488 2,376 tanks. In Metro Manila alone, Maynilad Water Services, Inc. -- 808 1,234 3,003 1,702 1,727 983 9,457 more than a million such Concessionaire financing -- 90 294 1,568 492 1,094 738 4,276 systems are in use. Many Concession fee projectsb,c -- 718 940 1,435 1,210 633 245 5,181 private housing developments Total 350 1,650 1,822 3,657 2,567 3,133 2,787 15,966 now have small independent sewer networks and connect -- = not available. to a communal septic tank. a. Unaudited. b. Covers payments made from Metropolitan Waterworks and Sewerage System loans and local counterpart support provided by the concessionaires. c. Figures are inclusive of 10% The total investment by private value-added tax and do not include the concessionaire's overhead, engineering, supervision, and households in these systems consultancy costs, nor materials supplied from the concessionaire's in-house inventory of supplies. is difficult to estimate, but Sources: Manila Water Company, Inc.; Maynilad Water Services, Inc. significant. WorldBankInfra.indb 118 12/6/2005 8:41:36 AM Chapter 7 Water Supply and Sanitation 11 Sector performance Figure 7.4 Sewerage access, selected Asian cities, 2001/2002 Information on the performance of the sector is Vientiane difficult to obtain and can be gleaned in most cases Jakarta Manila only from sector studies that cover a limited sample Ho Chi Minh City of service providers at a given time. It is therefore Kathmandu Dhaka difficult for the government and for users of services Colombo to assess critical aspects such as the efficiency of Phnom Penh Ulaanbaatar services provided and the quality of services. The Karachi lack of such vital information makes it difficult for the Delhi Shanghai government to formulate policies, track progress over Kuala Lumpur time, or hold agencies and service providers more Tashkent Chengdu accountable. Seoul Osaka Hong Kong Access 0 20 40 60 80 100 There are various estimates--not fully consistent--as Percent to access of the population to water supply services Source: Asian Development Bank. 2004. Water in Asian Cities: Utilities and sanitation facilities. Data from the World Health Performance and Civil Society Views. Manila. Organization (WHO) and the United Nations Children's Fund (UNICEF) indicate that overall now indeed slipping. Access to safe drinking water access to improved water sources in the Philippines deteriorated from 81.4% in 1999 to 80% in 2002 for as of 2002 was 85%, with 90% and 77% access in the entire population, while for the lowest 40% of the urban and rural areas, respectively (table 7.7). These population in income terms, access declined from figures compare favorably with other economies 71.5% to 70.2% over this period (table 7.8). Across in the region, but also reveal a downward trend in regions, there are wide disparities in access: the coverage over the last decade, while all other neigh- Autonomous Region in Muslim Mindanao has only boring economies have improved their access levels 29% of its households with access compared with significantly. 97% in Central Luzon.19 Recent government data, based on household Independent surveys show overall lower access surveys, show slightly different estimates but confirm levels: survey data from the Filipino Report Card on that only very modest growth has occurred over the Pro-Poor Services published in 2001 reports that only past decade and that access levels for water supply are 64% of the population had access to any of the formal Table 7.7 Access to drinking water and sanitation: Cross-country comparison Improved drinking water coverage (%) Improved sanitation coverage (%) Country Year Total Urban Rural Total HH conn. Total HH conn. Total HH conn. Total Urban Rural China 1990 70 49 100 80 59 37 23 64 7 2002 77 59 92 91 68 40 44 69 29 Indonesia 1990 71 10 92 26 62 3 46 66 38 2002 78 17 89 31 69 5 52 71 38 Philippines 1990 87 21 93 37 82 6 54 63 46 2002 85 44 90 60 77 22 73 81 61 Malaysia 1990 -- -- 96 -- -- -- 96 94 98 2002 95 -- 96 -- 94 64 -- -- 98 Vietnam 1990 72 11 93 51 67 1 22 46 16 2002 73 14 93 51 67 1 41 84 26 -- = not available; HH conn. = household connections. Source: World Health Organization/United Nations Children's Fund. 2004. Meeting the MDG Drinking Water and Sanitation Target: A Mid-Term Assessment of Progress. WorldBankInfra.indb 119 12/6/2005 8:41:36 AM 10 Philippines: Meeting Infrastructure Challenges Table 7.8 Access to water supply and sanitary toilets, by income stratum, 1998, 1999, and 2002 1998 1999 2002 All Lowest Highest All Lowest Highest All Lowest Highest families 40% 60% families 40% 60% families 40% 60% Total no. of families (`000) 14,371 5,748 8,623 14,746 5,898 8,847 15,925 6,370 9,555 With access to water supply (%) 78.1 66.2 85.9 81.4 71.5 88.0 80.0 70.2 86.6 With access to sanitary toilets (%) 80.4 65.7 90.2 85.8 73.9 93.9 86.1 73.1 94.8 Source: Annual Poverty Indicators Survey, National Statistics Office, various years. levels of service in 2000, with the rest relying on self- NationalStandardsforDrinkingWater(PNSDW);and provision. Of the 64% with access, only about 39% hydraulic pressure of at least 7 meters and 11 meters, reportedly were connected to level 3 systems, with for residential and commercial establishments, 25% being served by level 1 and 2 facilities.20 respectively. LWUA reports that the majority of water Household surveys conducted by the government districts have attained these performance levels. Yet, indicate that access to sanitary toilet facilities on the basis of data gathered for 64 water districts increased slightly--by 0.3 percentage points to 86.1% of various sizes, as well as anecdotal evidence, many in 2002 from the 1999 rate,21 while other government water districts do not in fact meet these standards. estimates show a slightly declining trend--to 74.2% For example, water availability in a sample of 38 small in 2000 from 74.9% in 1991.22 While these figures water districts ranged from 10 to 24 hours a day. compare favorably with other countries in the region, For LGU-managed systems, based on a limited they represent access to sanitary toilets, and not neces- sample of 30 LGUs, over 50% reported interrupted sarily to satisfactory sanitation. It is in fact estimated supply or did not have data. Only 14 LGUs reportedly that only about 4% of the population nationwide had comply with water quality standards. Other studies access to sewerage as of 2000 (table 7.9) and that, of reveal even worse service levels. Water availability the vast majority of households with septic tanks, is often less than an hour a day, pressure low and only about 3% (mostly rural) had acceptable on-site uneven with households in the extremities of the treatment and disposal.23 Outside Metro Manila, access to sewerage networks is practically nonex- Table 7.9 istent with only three sewerage Access to sanitation and sewerage, 2000 systems--in Baguio, Vigan, and Population Population served Share of population Zamboanga--which serve less than (million) (million) served (%) 3% of their respective service area Sanitation facilities populations.24 MWSS service areas Maynilad Water Services, Inc. 8.0 0.0 0.0 Quality of service Manila Water Company, Inc. 5.3 1.2 22.00 Quality of service information is Rural and other urban areas 62.9 55.4 88.00 neither published nor monitored Total 76.2 56.6 74.00 systematically across the sector. Sewerage systems Indications are that most small MWSS service areas systems have interrupted supply Maynilad Water Services, Inc. 8.0 0.5 0.06 and significant pressure fluctuations, Manila Water Company, Inc. 5.3 1.2 0.22 and so face difficulty in abiding by Outside MWSS areaa 0.4 0.0 0.00 drinking-water quality standards. Total 13.7 0.6 4.10 For water districts, LWUA standards MWSS = Metropolitan Waterworks and Sewerage System. require that level 3 facilities should a. Baguio City and Zamboanga City only. be able to provide 120 liters per Note: Population calculated from number of household connections. A household comprises capita per day (lpcd); 24 hours of six persons. water availability a day; drinking Sources: National Economic and Development Authority; 2000 Census of Population, National water quality according to Philippine Statistics Office. WorldBankInfra.indb 120 12/6/2005 8:41:37 AM Chapter 7 Water Supply and Sanitation 11 system commonly without water, and water quality across the country: about 90% of domestic wastes below government standards because of inadequate are not properly collected, treated, and disposed of, disinfection25 and infiltration due to interrupted and thus contribute immensely to water pollution. At supply. Waterborne diseases are among the top 10 the national level, it is estimated that about 50% of causes of mortality and morbidity in many towns organic wastes discharged into water bodies are from with LGU-managed systems.26 domestic sources. Domestic wastewater is the main In Metro Manila, the quality of service has contributor to biochemical oxygen demand pollution generally improved since privatization, though of 1.1 million metric tons generated in 2000 from there appears to be a downward trend for the west about 15 million households. Furthermore, approx- zone as MWSI grapples with its financial problems imately 58% of groundwater sampled is contam- (table 7.10). inated with coliform bacteria, an indication of fecal For SSIPs, making a conclusive judgment on contamination.28 service quality levels is difficult, as the quality of service differs naturally with the type of SSIP, and Efficiency comprehensive information is not available. Based Reliable data on the efficiency of services remain on the sample SSIPs surveyed under a World Bank- particularly difficult to obtain, and direct comparisons supported study,27 cooperatives that use deep wells across provider categories are rarely meaningful due provide two to four hours a day of water supply, to the vastly different scale of operations, e.g. between often at low water pressure. Local entrepreneurs or Manila and small urban or rural systems. subdivision owners buying bulk supply from the Levels of nonrevenue water remain extremely concessionaires can provide 24-hour-a-day service high in Manila and high for all service providers, and and acceptable levels of water pressure. should be a priority concern (table 7.11). Neither of the Access data for sanitary toilets obscure the fact concessionaires in Manila has been quite successful that only about 4% of all households are connected in reducing network losses to benchmark levels to sewer systems, and that wastewater largely goes and in fact, network losses have been increasing, in untreated. Effluent from septic tanks commonly particular for MWSI, from already high levels. LWUA drains into uncovered drainage systems, which leaves reports that water districts, overall, have lowered the majority of the population across the Philippines water losses to 31% but this figure--as an average exposed to raw sewage every day. Solid waste collection over a vast range of providers--needs to be inter- in most urban areas is ineffective and large quantities preted with caution, not least because many (of the of solid waste tend to coalesce and block drainage smaller) water districts do not have production meters canals, exacerbating public health problems. to allow them to accurately measure these data. The Even when collected, improper disposal practices same caveat applies to LGU systems. Staffing levels for both septic tank sludge and solid waste contribute for all but the small providers seem in line with to severe environmental degradation of water bodies acceptable international benchmarks. Table 7.10 Performance indicators of the Manila water concessionaires, 1997­2003 Indicator 1997 1998 1999 2000 2001 2002 2003 Manila Water Company, Inc. 24-hour water availability (% of service area population) 26.0 -- -- -- 56.0 83.0 83.0 Water pressure (pounds per square inch) -- -- -- -- 8.0 8.0 9.6 Water quality (%)a 97.0 98.5 99.1 100.0 99.6 100.0 100.0 Maynilad Water Services, Inc. 24-hour water availability (% of service area population) -- -- -- -- 79.0 66.0 60.0 Water pressure (pounds per square inch) -- -- -- -- 8.0 7.0 7.0 Water quality (%)a 95.0 95.0 95.0 95.0 95.0 95.0 95.0 -- = not available. a. Philippine National Standards for Drinking Water require the absence of total coliform in at least 95% of samples of large quantities (more than 100 ml) taken during any sampling month. Sources: Manila Water Company, Inc.; Maynilad Water Services, Inc. WorldBankInfra.indb 121 12/6/2005 8:41:37 AM 1 Philippines: Meeting Infrastructure Challenges Table 7.11 of 50% of the household water bill and Efficiency indicators of selected water service providers, 2002 a service connection fee; in addition, Service provider Nonrevenue Operating Staff per 1,000 all water customers, even without a water (%) ratio (%)a connections sewerage connection, must pay a 10% Privateb environmental surcharge. Manila Water Company, Inc. 53 79 4.1 For water districts, tariffs range Maynilad Water Services, Inc. 69 119 4.2 from P215 to P240 for 10 cubic meters Water districts 31c 74d 7.14d monthly household consumption, the Local government units 70c 56e 21.30f minimum monthly charge. In addition a. Defined as operating expenses before debt service over operating revenues. b. Sources: to tariffs, water districts typically Manila Water Company, Inc., Maynilad Water Services, Inc. c. As of end-2000; source: ADB. charge connection fees--currently 2001. Water Supply and Sanitation Profile. d. 2002 water district industry average; source: about $100--and usually require them Local Water Utilities Administration. e. Only for LGU-operated systems; based on audited financial reports of all provinces, cities, and municipalities, but excluding barangays; source: to be paid upfront, which is certainly Commission on Audit 2002; operating ratio is 0.65 for municipalities and 1.2 for provinces. a barrier for lower-income groups to f. Based on a sample of four LGUs; source: Water Supply and Sanitation Performance access piped water services. Few water Enhancement Project. 2003. "Management Models for Small Towns Water Supply." districts levy sanitation surcharges or sewerage tariffs on their consumers. Information is least available on LGU-run or Metro Zamboanga water district, which manages a community-based systems and is generally based on public sewerage system, assesses a sewerage charge of very small samples. LGU systems are often quite small, 50% of the water bill and has a 99% collection rate. and as a result they frequently have low managerial Tariff structures for LGU systems as well as and technical capability, and staff face probably weak community-based systems vary widely, including incentives and constraints to operate more efficiently. increasing block rates, decreasing block rates, or flat Among the service providers, the private utilities rates, as many LGU systems provide no or only partial and water districts are performing reasonably well metering of household connections. LGUs typically financially, compared with community-based systems charge connection fees although they do not usually facilitated by LGUs, such as BWSAs or RWSAs. recover full connection costs. Most community-based systems providing service levels 1 or 2 charge nothing Tariffs for water and sanitation or only nominal tariffs (i.e. flat monthly rates of P5­10), Tariff levels, tariff structures, and tariff-setting meth- with local governments and politicians meeting the odologies differ across individual service providers, costsofmaintenanceandreplacement.LGUsmanaging and comprehensive information on tariff levels or sewerage facilities charge flat (or even zero) sewerage structures is not publicly available. charges, and do not recover their costs. Domestic tariffs in Manila are structured in increasing blocks Figure 7.5 with an initial lifeline block of Average tariffs, selected Asian cities, 2001/2002 10 cubic meters, and connection Tashkent fees of $40­60 are charged to Vientiane new consumers. The privatization Dhaka Karachi broughtaboutasubstantialreduction Delhi in the initial tariffs; the bid for the Kathmandu Shanghai east zone was 26% of the prevailing Manila tariff of MWSS at that time, and Chengdu Ho Chi Minh City for the west zone, 57%. Tariffs have Ulaanbaatar Colombo since steadily increased, mainly to Phnom Penh cover inflation and foreign exchange Jakarta Kuala Lumpur fluctuations. However, despite Hong Kong the nominal increases since 1997, Seoul Osaka 1.37 tariffs in Manila remain fairly low 0.0 0.1 0.2 0.3 0.4 0.5 compared with other Asian cities US$ per cubic meter (figure 7.5). Both concessionaires Source: Asian Development Bank. 2004. Water in Asian Cities: Utilities Performance and Civil levy sewerage charges in the order Society Views. Manila. WorldBankInfra.indb 122 12/6/2005 8:41:37 AM Chapter 7 Water Supply and Sanitation 1 Among SSIPs, water rates differ. Table 7.12 Tariffs range from P15 per cubic Approved tariff increases in the Metropolitan Waterworks and Sewerage meter for a community-owned water System concession areas, average tariff (P per cubic meter) facility, P45.31 per cubic meter for a MWCI MWSI Inflation, % piped customer of a local entrepreneur Charging period (average for using an intermediary (water tender), (east zone) (west zone) year)a P80 per cubic meter for a water Pre-1997 8.56 8.56 customer using a water hose, to as 1997­1998 2.32 4.96 9.7 high as P187.35 per cubic meter for 1999 2.61 5.80 6.7 water bought from a water tanker. 2000 2.76 6.13 4.3 Tariff structures include increasing 2001 2.95 6.58 6.1 Provisional implementation, April 2001 3.22 block rates, decreasing block rates, or Accelerated EPA, October 2001 4.22 10.79 uniform rates. Most SSIPs also charge 2002 4.51 11.39 3.1 connection fees but are often cheaper Foreign currency depreciation 6.75 15.46 and have more flexible payment adjustment, 2002 arrangements than the incumbent EPA = extraordinary price adjustment; MWCI = Manila Water Company, Inc.; formal water utilities.29 MWSI = Maynilad Water Services, Inc. While tariffs charged by SSIPs in a. Base year is 1994. Source is National Statistics Office data as of March 2004. Manila are higher than the regulated Source: Metropolitan Waterworks and Sewerage System Regulatory Office. tariffs of the concessionaires, this is largely reflective of their cost structure. For example, good 7%; good 43%; fair 25%) and still spend an one of the larger SSIPs in Manila, Inpart Engineering, additional 3.7% of household income on water from which serves predominantly low-income urban other sources, including bottled water. households, receives bulk supply from MWCI at the Other studies point to more significant afford- commercial rate of about $0.39 per cubic meter rather ability constraints. The survey for the Filipino than lifeline rates of $0.15­0.25 charged to residential Report Card on Pro-Poor Services carried out in customers. Tariffs charged to Inpart customers with 2000 showed that water accounts for up to 9% of a piped connection (but no connection fee) corre- monthly household expenditures (including the spondingly range from $0.90 to $1.60, but still boiling of water for drinking purposes, etc.) of compare well with rates charged by water haulers low-income households. For example, low-income ($3.70). consumers of SSIPs such as Inpart Engineering reportedly spend up to 16% of household income on Affordability water, but are still better off than purchasing water Affordability concerns are typically presented as the from tankers.32 For Metro Manila, expenditure on key justification and the main political argument for clean water may account for as much as 20% of not raising water tariffs or for not levying charges for household income for those not enjoying 24-hour sanitation. Yet there is little comprehensive evidence piped water supply and dependent on buying water that tariffs charged by water utilities pose an afford- from vendors at around $20 a month for 6 cubic ability problem to large parts of the population in meters.33 These figures demonstrate that improving the Philippines. Based on a government survey,30 an affordability will depend primarily on better access average of 1% of total household expenditure is spent of households to network services rather than on on water, with little variation between lower-income lower network tariffs. and higher-income groups and across regions. A July 2004 survey among low-income Metro Manila residents31 tested respondents' perceptions as Main issues to the fairness of prices charged by the two conces- sionaires. Respondents revealed that they spend an Institutional fragmentation average of 4.3% of income on water from the network, Development of the water supply and sanitation sector consider that amount appropriate (12% considered in the Philippines has been seriously undermined the price "below the cost of service" and another by the high level of fragmentation, both at the local 53% "only fair"), and are generally positive about the service provider level and at the national government quality of water they receive from the network (very level. The key symptoms of fragmentation include: WorldBankInfra.indb 123 12/6/2005 8:41:37 AM 1 Philippines: Meeting Infrastructure Challenges ·Proliferation of different service provider models, Sector-wider consolidation is needed for the operating under different managerial regimes, long-term growth of the sector. There is an urgent regulatory frameworks, and financing constraints. need to promote and speed up amalgamation at the The models include water districts, direct LGU local level, and to establish strong leadership at the management, BWSAs, RWSAs, cooperatives, national level. private firms, and SSIPs. The results of such proliferation are blurred accountability of indi- Low cost-recovery level vidual providers for expanding both water supply The core constraint that undermines the development and sanitation services, and extreme difficulty for of the entire sector is the low tariff level, which is regulation and oversight. not even sufficient for service providers to recover · recurrent costs, let alone to accumulate sufficient The very small sizes of individual service providers. reserves to fund new capital investments. Despite About 5,000 entities provide water supply services repeatedly stated policy objectives of cost recovery, in the country. Among them, up to 2,000 provide actual progress toward this end is minimal. level 3 services, and only about 80 water districts For LGU-managed systems, tariffs are too low to and five private water providers outside Metro recover even O&M costs. As a result, they continue Manila serve more than 5,000 household connec- to be dependent on the local government to augment tions. The majority of these entities are too small, their revenues. The quality and coverage of their with neither sufficient operational scale nor the service suffer significantly as a result. While water necessary autonomy from political interference districts as a whole achieve higher cost-recovery levels, to be efficient providers, making it extremely and recover their cash expenses (O&M costs and debt difficult to improve service efficiency. Among the service), they still fail to generate sufficient revenues LGU levels, the vast majority of water providers to accumulate reserves (for example, through depre- have been established at the barangay level; as ciation charges) to fund any expansion or to attract a result, coordination and cooperation among financing on commercial terms. barangay water suppliers, for example to develop Water tariffs are short of the cost-recovery level, bulk sources, is often difficult and tainted by local even in Metro Manila. The fact that one of the politics and political rivalries. concessionaires incurred losses while the other made · a modest income indicates that tariff revenues are Fragmentation of oversight responsibilities at currently inadequate to cover costs, including the national level. Oversight responsibilities for concession fees owed to MWSS. And while MWSS the sectors are divided among several agencies: retained investment obligations under the concession MWSS for Manila, LWUA for water districts, and contract for bulk supply to the system, current tariffs DILG for LGU systems. NWRB and DENR both do not allow for this. play important roles with regard to planning, Finally, most systems have no sewerage tariff. regulation, water resource allocation, and sani- Even in Manila, where the concessionaires charge tation improvement. In addition, DOF and the 50% of the water tariff for sewerage and a connection Municipal Development Fund Office, as well as fee, there is a disincentive to connect, as households GFIs (e.g. Development Bank of the Philippines, are only charged if they are connected to the sewerage Land Bank of the Philippines) are involved in system. formulating grant policies and credit lending to Ironically, low tariff levels charged by utilities the sector. Without a national government agency have become the most important factor in the issue responsible for overall sector policy, planning, of affordability for low-income households, as the and reform, coordination between the various poor have to resort to much more expensive alter- national government agencies also remains natives for water supply. From a service expansion weak and lacking in consistency. Recent initia- perspective, the current level and structure of water tives, such as the reform of LWUA, strengthening tariffs also have the following shortcomings: of NWRB, and the Clean Water Act provide an opportunity to better align sector responsibilities · Discouraging service expansion. Current tariffs and agencies, but at the same time they present constrain the ability of providers, including many significant challenges to the sector in terms of of the water districts, to grow more rapidly and implementing such reforms seamlessly. expand water supply systems more aggressively. WorldBankInfra.indb 124 12/6/2005 8:41:38 AM Chapter 7 Water Supply and Sanitation 1 For providers to be able to not only add connec- Among the public water service providers, the tions but also trunk infrastructure and new bulk category with the worst performance is also the most supply, tariff increases are necessary. Households numerous: the BWSAs, RWSAs, and cooperatives. not at present connected to the network therefore For example, a 1998 review by LWUA of RWSAs have a stake in the regulatory process, including indicated that out of 354 RWSA systems actually reviewing tariffs, but they are rarely involved. established, 160 were nonoperational. Only 194 · were operational, out of which 173 were still RWSAs. Discouraging connecting residential users. Under Only 29 of these remaining RWSAs were servicing the present tariff structure in Manila and in many outstanding debt. Similarly, water services provided water districts, tariffs for the initial consumption by cooperatives under the supervision of the Coop- block (or flat rates) are below the average price erative Development Authority suffer from lack of of water; given the constraints imposed on water technical or managerial capacity. Sponsoring agencies supply both by the lack of new bulk water and often compete among themselves in facilitating the high network losses, specifically in Manila, this formation of RWSAs and cooperatives, to allow for limits the incentives for concessionaires to connect disbursements of government programs to go ahead, residential users. Reforms of the tariff structure, but often with little regard to demand responsiveness including the "flattening" of block tariffs or the and sustainability. Given their small size, these adoption of uniform volumetric tariffs, might utilities are commonly unable to retain skilled staff correct the situation. or absorb the technical assistance given. · Water utilities under direct LGU management are High cost for SSIP users. In Metro Manila, in general also poorly operated because of the lack of allowing the concessionaires to sell water to SSIPs, technical, financial, and management capabilities, and which in turn sell water to the users outside the the lack of autonomy with regard to political inter- current coverage area, has a significant impact on ference in management decisions. More than a decade improving affordability for those not connected after decentralization, LGUs remain ill-equipped to to the system. However, affordability for house- provide water supply and sanitation services. Water holds served by SSIPs can be further improved districts overall perform better than LGU-managed if residential rates, instead of commercial rates, systems, with more competent management and high are charged to such SSIPs. cost-recovery levels. But there are wide variations. The majority of water districts remain too small to attract On a positive note, the Manila concessionaires skilled staff to effectively institutionalize technical and SSIPs have developed innovative approaches to advice provided by LWUA. Indeed the majority of increase access to low-income and low-consumption the water districts, particularly the small ones, cannot households, without subsidies, by allowing customers to be classified as creditworthy. A key problem with pay connection fees in installments or through a higher water districts is service coverage, with piped water water tariff, by reducing connection costs through supply reaching less than half of the population of sharing meters, and by using low-cost approaches their service areas. Finally, private service providers such as hoses for establishing individual connections in do not necessarily perform satisfactorily either, as informal settlements. Many of these approaches could demonstrated in the case of MWSI. be adopted by water districts, but they lack both the While operating water services along commercial capacity and flexibility from the regulatory authorities, lines is official government policy (NEDA Board primarily LWUA, to allow for such innovation, partic- Resolution No. 4 of 1994), in reality it is not practiced. ularly in terms of technical standards. Most of the LGU-run systems are part of local government, with no separate corporate identity, Unsatisfactory performance by utilities and are not registered with the Securities and Overall, water service providers do not perform satis- Exchange Commission, a basic step for establishing factorily. Among the approximately 5,000 providers in any corporate or nonprofit organization in the Phil- the country, viable operators are the exception rather ippines. The legal standing (as commercial entities) of than the rule. The common issues are slow service water districts is unclear, and their status as GOCCs expansion and low coverage, low service quality, was only established through a Supreme Court high nonrevenue water levels, and requirements for ruling in 1991.34 However, it remains unclear if that subsidies by the majority of service providers. actually implies an ownership role for LGUs. LGUs WorldBankInfra.indb 125 12/6/2005 8:41:38 AM 1 Philippines: Meeting Infrastructure Challenges retain a significant role in the corporate governance it difficult for public participation and for holding of water districts, through the appointment of the service providers and local politicians accountable water district supervisory board, which the water for service improvements. The lack of credible districts and LWUA regard as a channel for political benchmark information also makes it difficult for interference. utility management and local politicians alike to build LWUA retains a dominant influence over water credible arguments for tariff increases where services districts. This includes determining service levels; have improved. playing a major role in planning, design, and While gathering and disclosing information for implementation of individual investments; and, for the sector and establishing meaningful benchmarking practical purposes, setting tariffs. LWUA also has systems are slow processes, there is at present no strong step-in rights. Many LGUs view this influence sector agency entrusted with these tasks, nor is there as counter to the spirit of the LGC, and it continues a legal obligation for most providers to disclose such to generate tensions among LGUs, water districts, and information. The mandate of collating sector data LWUA. The ambiguous relationship between LGUs may well be best assigned to NWRB as part of its and water districts also hampers the incentives for new regulatory role. Starting to fill this immediate LGUs to provide collateral on behalf of water districts and important gap should receive high priority. to attract more funding. In 2002, after earlier attempts to establish a Attempts by local governments to pursue private dedicated regulatory authority for the sector by sector participation to replace existing water districts legislation had stalled, the government opted to have encountered significant legal hurdles, as this consolidate economic regulation of water districts requires the dissolution of the water district or the with that of the other service providers, and assigned de-annexation of a municipality or city from a metro- this mandate to NWRB by issuing Executive Order politan water district. Such a process can be slow. In 123. This institutional arrangement, while providing addition, LWUA has required that any outstanding for cautious progress toward much-needed consoli- obligations of the water districts be fully paid in the dation of regulatory functions, is not without its event of a restructuring involving a private operator. concerns: However, Executive Order 279 calls for stronger incentives for water districts to achieve financial · Given the ambiguous legal framework, it remains self-sufficiency, for mergers among service providers, to be seen what role NWRB can play in practical for greater accountability of service providers vis-à- terms in setting tariffs for LGUs, in view of the lack vis their consumers, and for increased pooling of of any strong incentives for LGUs to submit tariff resources among LGUs and water districts to facilitate proposals to NWRB.35 Without effective leverage, access to financial markets. Implementing Executive NWRB is unlikely in the medium term to ensure Order 279 is a high priority, and an important tariff adjustments for LGU operations or RWSAs. challenge. To increase the impact that NWRB may have, the government may want to pursue efforts to Weak and fragmented regulatory framework strengthen LGU tariff policies as part of a broader Critical for achieving the policy objective of higher and comprehensive program to reinforce public levels of cost recovery is a regulatory framework finances and accountability for public services that would provide for a credible and effective tariff at the local level, drawing on NWRB technical adjustment mechanism insulated from short-term guidance in this matter. One possibility would be political intrusion. A robust framework is crucial to to ensure that recipients of national government hold service providers accountable to consumers for funding in the sector, across all provider types, the efficient use of revenues. adhere to NWRB guidelines in setting tariffs and For practical purposes, the sector's regulatory disclosing regulatory information. oversight remains highly fragmented, with regulatory functions controlled, if at all, by different entities. · Private sector providers are to remain under A symptom of the serious lack of a much-needed regulatory arrangements specified in individual regulatory framework is the lack of sector infor- contracts, hampering opportunities both to build mation at the service provider level. The lack of and use regulatory skills more effectively and to transparency as to sector performance and bench- ensure consistency of regulatory principles across marking information for individual providers makes different provider models. It remains unclear to WorldBankInfra.indb 126 12/6/2005 8:41:38 AM Chapter 7 Water Supply and Sanitation 1 what extent LGUs entering into private sector out of the contractual arrangements. Outside Manila arrangements will move to NWRB regulation (or and Subic Bay, smaller private sector participation regulatory assistance through the MWSS Regu- arrangements have struggled, and ultimately failed, latory Office), if such an option is more credible to make regulatory commitments work, based on the to private operators than contractual regulation contractual provisions alone. by individual LGUs directly. Reform of the Local Water Utilities Nevertheless, these latest reforms could still Administration contribute enormously to reducing the fragmentation LWUA plays a critical role in the establishment, of economic regulation and to mitigating conflicts of operation, and expansion of water districts. Until interest that marked LWUA's role in setting tariffs. recently, its mandates included financing, regulating, Yet, two years into the issuance of the executive and providing technical assistance to water districts, order, little progress has been made in making the presenting clear conflicts of interest. Given the small new arrangements effective, and NWRB has not, number of creditworthy water districts, LWUA has given its budget constraints, been able to establish struggled to balance the need for sound banking capacity and broaden its geographic presence to effec- practices and the goal of providing credit to service tively assume its role in regulating tariff setting for providers who would not otherwise be able to obtain water districts. In this vacuum, LWUA in practice it. LWUA's track record highlights the difficulties maintains regulatory authority over water district in striking the right balance: in the early 1990s, tariffs.36 LWUA suffered from low collection rates and a high One particular challenge for NWRB will be ratio of nonperforming loans as a consequence of to change the regulatory process from one that is indiscriminate lending to a large number of credit- narrowly focused on ensuring the financial viability constrained water districts. of water districts toward one that ensures that Since NEDA directed LWUA to lend only to expansion and service goals are well defined, funded, viable water districts in the mid-1990s in order to and met. In tariff hearings, for example, it is not improve its financial performance, LWUA's loan only current consumers who need to be involved portfolio has been concentrated on the larger water but also consumers who are not currently benefiting districts. As of December 2001, out of 431 water from network services. In the future, to ensure districts that had taken loans from LWUA, 20 water sufficient funding of NWRB's regulatory functions, districts (i.e. medium to very large) accounted for the government may want to explore securing funds 60% of the value of these loans, with loans of at least not only through budget allocations but also through P100 million each.37 Between 1996 and 2002, only 45 direct access to revenues from "regulatory surcharges" on water Table 7.13 tariffs, a solution that is common Subsidies to the Local Water Utilities Administration, 1992­2003 (P million) practice internationally and one that has also been applied to fund the National Year government Congressional Special fundsLingap para sa Total MWSS Regulatory Office. subsidies funds Mahirap Regulatory provisions affecting 1992 290 n.a. 74 n.a. 364 private firms are largely contained in 1993 235 10 43 n.a. 288 concession agreements, a pragmatic 1994 268 35 9 n.a. 312 solution chosen at the time the 1995 246 86 20 n.a. 352 agreementwasmadeintheabsenceof 1996 298 81 3 n.a. 382 a more institutionalized framework 1997 216 60 4 n.a. 280 to review service quality and tariffs 1998 280 46 10 n.a. 336 that would have been acceptable to 1999 194 24 5 n.a. 223 investors. Yet even for the Manila 2000 126 29 1 233 389 concessions, where capacity has 2001 138 24 4 43 209 been less of a concern, a transparent 2002 257 9 n.a. n.a. 266 regulatory process, including regular 2003 99 6 n.a. n.a. 105 monitoring and public disclosure of n.a. = not applicable. actual service levels, has not evolved Source: Local Water Utilities Administration. WorldBankInfra.indb 127 12/6/2005 8:41:38 AM 1 Philippines: Meeting Infrastructure Challenges water districts, i.e. less than 10% of all water districts, functions and financial assistance, and technical were provided with new loans. This concentration assistance to water districts. It remains to be seen in lending, however, substantially improved LWUA's how this new policy will be implemented. It carries collection efficiency, from 35­40% in the early 1990s significant challenges: to 88% in 2002.38 Despite these improvements in its loan portfolio · The potential failure of LWUA to graduate water and collection, LWUA's financial situation remains districts, to mitigate credit risks, and to maintain fragile. The practice of passing on funds on more a portfolio of sufficient quality to attract donor favorable terms than those LWUA obtained from funding. its creditors39 has undermined its financial viability. · "New" regulatory risks in terms of the future As a result, LWUA is facing difficulties in renewing performance of NWRB, as LWUA will lose its its financing facilities by international finance insti- current leverage and discretion to enforce tariff tutions, and new loan commitments to water districts adjustments where water districts default on their have dropped to about P0.5 billion, or roughly the obligations. same size as its own operating expenditures. While · The need to carefully manage the incentives for the government continues to appropriate subsidies water districts to actually strive toward credit- for LWUA of P200 million­300 million annually worthiness, even though this implies the loss of to be used as counterpart funds for development concessional finance. projects of water districts, appropriations made in · The ability of GFIs and private banks to develop 1998 and 1999 were disbursed only in 2000 and finance products geared toward water districts 200140 and the government, in light of the worsening and the ability of water districts deemed to be budget deficit, has not disbursed any appropriations creditworthy by LWUA to actually access credit since 2001. markets. In addition, the continuing rise in the cost of servicing its foreign debt has made it difficult for Financial distress of the Metropolitan LWUA to generate counterpart funding. In 2002, it Waterworks and Sewerage System borrowed P500 million from the Land Bank of the Since MWSI, the concessionaire for the west zone, Philippines to fund its counterpart obligations,41 defaulted on its concession fees in 2001, MWSS which helps explain the improved disbursement has borrowed heavily to cover the resulting losses figures, but also implies increasing off-balance- and to service its own outstanding debt. But with sheet liabilities for DOF. Without any improvement MWSS unable to service this commercial short- in revenue mobilization by LWUA, this practice is term debt, the national government has taken over clearly unsustainable. its servicing. Given the ongoing renegotiation of the Executive Order 279 issued in February 2004 MWSI concession, it remains unclear to what extent outlines substantial reforms in the financing of the MWSS will be able to generate sufficient revenues to sector, in particular with regard to the role of LWUA cover its exposure on existing loans or even to recover in providing finance to water districts, by pursuing arrears for past concession fees. It seems that a funda- more actively the "graduation" of water districts and mental restructuring of financial obligations assumed other water service providers to the private capital by MWSS will have to become one of the immediate market. LWUA is to focus on water districts that priorities for the government, pending a final renego- are unable to access private credit but have the tiation settlement. Such restructuring will likely have potential to become creditworthy. Creditworthy to feature a partial transfer of current MWSS debt water districts would be forced to seek financing obligations to the government as well as additional from GFIs and private banks, while water districts water tariff surcharges assigned to MWSS to finance classified by LWUA as non-creditworthy would revert its contractual obligations. It is highly unlikely that to the control of LGUs. According to this executive MWSS will be able to sustain financing levels without order, LWUA, which in the long run would be such restructuring. overseen by DOF more closely, would reorganize A fast resolution of MWSS' financial distress is into separate units, to differentiate better between not only important to immediately improve water the three main services it currently provides: insti- supply and sewerage services in the west zone; it tutional development and the classification of water also has an impact on the east zone, as the current districts according to their creditworthiness, lending situation prevents MWSS from channeling low-cost WorldBankInfra.indb 128 12/6/2005 8:41:38 AM Chapter 7 Water Supply and Sanitation 1 financing to MWCI. Even more important, there is Recommendations an urgent need to develop new bulk water sources for Metro Manila, which remain the responsibility Reform of the Philippine water supply and sanitation of MWSS. The current MWSS financial situation sector made groundbreaking progress with the priva- does not allow it to enter into any financial trans- tization of the Metro Manila water system. Since then actions (either as a borrower or as a sponsor for BOT progress has slowed, with the sector witnessing dete- projects) for the needed investments, rendering the riorating access levels and only modest investments. government ill-prepared to deal with a looming water The stakes are high. The country continues to shortage in Metro Manila. experience rapid population growth, at a rate of 2.2% a year. All of the net increase in the population will be Underinvestment in sanitation and sewerage in the urban areas because of rural-urban migration, Effluent from septic tanks across the country often resulting in a much higher urban growth rate. The drains into uncovered drainage systems, which current status of the sector will not allow it to provide leaves the majority of the population exposed to expanded quality services for the growing urban raw sewage. Solid waste collection is ineffective and population. In Metro Manila for example, shortages large quantities of solid waste can mass and block of water sources are projected to occur in only a few drainage canals, exacerbating public health problems. years if new bulk water supply is not implemented. Even when collected, improper disposal practices for Similar situations are seen arising in other urban both septic tank sludge and solid waste contribute to areas such as Cebu. In the meantime, increasing water severe environmental degradation of water bodies and solid waste pollution is not only undermining across the country and undermine economic activity the country's economic competitiveness and long- and growth in various sectors, including tourism. term sustainability, but is also having a direct health As a result of inadequate services, contaminated impact on the population, especially the poor, and drinking water and waterborne diseases remain a has potentially very serious consequences. prevalent public health concern, accounting for more The government has given a very high priority than 500,000 morbidity and 4,200 mortality cases a to improving water supply and sanitation, listing year with avoidable health costs alone estimated at it on the "10-Point Agenda" or action plan of the P3.3 billion annually. Avoidable economic losses due president for the period of her administration. In solely to water pollution are estimated at an annual the last three years, the government has undertaken average of P17 billion in fishing industries and up to important steps in sector consolidation and restruc- P47 billion in tourism.42 turing, with the issuance of two executive orders (123 Investment in off-site sanitation and sewerage is and 279) that consolidate regulatory functions and grossly inadequate; untreated human and solid wastes initiate reforms of LWUA and sector financing. It clog canals and water bodies in all urban centers, is important now to focus on implementing these further degrading water resources. Although the new initiatives and on putting the sector onto a footing Clean Water Act set ambitious targets for water quality for long-term sustainable development. improvements, the investments needed to achieve the Key actions for the government fall into the areas targets are hard to make. Very few LGUs or utilities of: implementing adequate cost-recovery tariffs; estab- charge sewerage tariffs, and neither national nor lishing an integrated sector framework; carrying out local governments have large fiscal resources for a public utility reform and performance enhancement subsidies. Between water supply and sanitation, local program; enhancing sector financing and ratio- governments have favored the former with virtually nalizing subsidies; and expanding sanitation and no investment in off-site sanitation. There is generally sewerage coverage. These actions are now discussed low motivation and political support for sanitation in greater detail. investment, with low public awareness of the health and environmental impact of water pollution. There Implementing adequate cost-recovery tariffs is a need to revisit the policy of national government Raising the overall tariff level is a priority for the grants for "brown" investments to extend application sector to allow for system expansion and improved of grants to cities as well, and to consider the "decen- service quality. This is extremely important given tralized" approach in developing a sanitation strategy the tight fiscal conditions of the national and local in the medium term to prevent further environmental governments. Key actions to be taken in this area degradation. include: WorldBankInfra.indb 129 12/6/2005 8:41:39 AM 10 Philippines: Meeting Infrastructure Challenges ·Issue clear guidelines on charging cost-recovery with the water tariff. A sanitation tariff should be water tariffs to achieve an appropriate return on charged on water bills, and the revenue should go assets. While NEDA Resolution No. 4 of 1994/ to a special fund for sanitation service expansion. IRR specifies the principle of cost recovery for Evenhouseholdsthatarenotconnectedtoaformal water tariffs, the current policy guidelines remain sewer system can be required to pay a sanitation ambiguous as to what constitutes an adequate tariff, provided that credible investment plans are level of cost recovery, in particular an adequate in place to utilize the special fund. Where water return on assets for public providers and to districts collect water tariffs, they should also be what extent the policy actually applies to LGUs. responsible for putting the sanitation tariff on the It also remains silent as to how the transition water bill, with the water districts receiving an from highly subsidized tariffs to full cost recovery appropriate collection charge. may be achieved in practice and how such a tran- sition can best be monitored. Lastly, it omits many · Review and quickly act on requirements at MWSS practical details on the tariff-setting process and for tariff surcharges to fund bulk water investments vests NWRB with considerable discretion as to in the Manila area. These surcharges should be how to implement its regulatory functions in a enacted quickly to address the looming water practical way. Given its nascent regulatory role, shortage in the capital region. An early tariff limited capacity and skills, and susceptibility decision will also help potential investors gain to political influence, NWRB may not yet be confidence, and ultimately lower the financing able yet to manage such an ambiguous mandate cost of investments. effectively. International experience shows that newly estab- · Strengthen incentives for LGUs to adopt cost- lished regulatory agencies are more successful recovery tariffs. The lack of incentives among when their mandate is more clearly defined LGUs to charge user fees commensurate with (box 7.5) and more firmly prescribed by primary the cost of services needs to be addressed more legislation than is currently the case in the Phil- forcefully than can be reasonably expected from ippines. NWRB's regulatory mandate could be NWRB alone. Strengthening such incentives significantly strengthened (see below), if the could include making subsidies to LGUs condi- government were to spell out its policies on tional on tangible achievements regarding public these questions in much more detail and provide utility reform and performance enhancement, a stronger legal basis for NWRB to implement including progress in achieving cost recovery this more detailed mandate. NWRB, given the for water services. broad representation of government agencies and its responsibility to implement such policy, Establishing an integrated sector framework is well placed to develop recommendations both Executive orders 123 of September 2002 and 279 of to the Office of the President and to Congress. February 2004 outlined the key steps for moving One option, short of legislative measures that toward an integrated sector framework, consolidating may be difficult to pass in the short term, would the functions vested in various agencies to the extent be to frame these more detailed policies in an possible as allowed by the actions of the executive. executive order as a key measure for the 10- The immediate priority is to quickly implement these Point Agenda. The new executive order should two orders. Over the medium term, there is a need for further clarify the notion of cost-recovery tariffs, legislative action to further consolidate the responsi- explicitly requiring them to account for the bilities of the agencies in the sector and establish an need to expand coverage. Implementation and independent regulator. Discussions on the legislative monitoring strategies should also be well designed agenda should start soon. and highlighted in this executive order, along with measures for generating wider public awareness · Operationalize and strengthen the Inter-Agency of the importance of cost recovery. Oversight Committee for water sector reform. · The committee was established under Executive Articulate clear policies on sanitation service tariffs, Order 279, and is made up of DOF (chair), NEDA and on the responsibilities of water districts and (vice chair), DBM, DILG, Office of the President, LGUs for collecting sanitation surcharges jointly and LWUA. In the absence of a sector oversight WorldBankInfra.indb 130 12/6/2005 8:41:39 AM Chapter 7 Water Supply and Sanitation 11 Box 7.5 Reforms of the tariff-setting process in Chile I n the late 1980s Chile began an were promulgated in 1990 under and prudent levels of operating overhaul of its water and sani- Supreme Decree 453. It spells out and capital expenditure on the tation sector. Before the reforms, in great detail the process of tariff firms to meet service levels. The water tariffs covered less than 50% adjustment, and steps for resolving regulatory agency is required by of costs, and only 20% in regions eventual discrepancies and dis- law to respond specifically to com- where production costs were high. putes between regulated firms and ments received within a set period Tariffs were not indexed to inflation the regulatory agency, the Super- and prior to hiring advisors. This and increases were ad hoc, by intendencia de Servicios Sanitarios. allows both parties subsequently to the Ministry of Economy, issued This regulatory framework applies pursue tariff studies independently, as presidential decrees. Hence, an equally to all firms operating in yet based on a common framework important focus of the reforms the sector, ensuring a consistent and parameters, reducing dis- was a new institutional framework approach to tariff setting across the crepancies and facilitating better for tariff setting aimed at raising sector and different providers. The comparison of tariff submissions by water prices to the true cost of specificity of the law limits regu- firms and studies conducted for the the services while accommodating latory discretion and shields the regulator. legitimate affordability concerns regulatory agency from political Not later than five months through more targeted subsidies. interference and thus reduces prior to the expiry of valid tariffs, Broader reforms went beyond this, markedly the perception of regu- the regulatory agency and the however, and included the reorga- latory risks in the sector. It has also regulated firms exchange their nization of service providers, par- substantially increased the level of respective studies, which takes ticularly a shift from autonomous transparency associated with tariff place formally in the presence of entities constituted under public setting, both with regard to the a public notary. Both have 30 days law toward state-owned corpora- public at large and private investors to identify disagreements and for- tions established under private in the sector. mally present diverging findings commercial law, partially privatized Tariffs are set for a period of five as supported by relevant studies. providers, or service concessions years with automatic indexation to If within 15 days after the presen- awarded to private operators. inflation within that period. Twelve tation of the discrepancies, there is Overall, the reforms contributed months prior to expiration of valid no agreement between the regu- to the emergence of a regulatory tariffs, the regulatory agency for- latory agency and the company, regime that is widely viewed as the mally launches the tariff review the disputes are resolved by referral most robust in Latin America. This process by publishing the detailed to a three-member domestic arbi- has provided comfort to foreign terms of reference under which tration panel appointed by both investors who have invested heavily outside advisors will make recom- parties. The opinion of the panel in the sector over the last decade, mendations to the agency as to is definitive and mandatory for and triggered a remarkable turn- appropriate investment and tariff both parties. Not later than 30 around in the performance even levels for the forthcoming five-year days before expiration of the appli- of public utilities operating in the period. cation of the current tariff formulas, sector. Regulated firms and the general the Ministry of Economy finally One particular feature of the public are given an opportunity to approves and publishes the new regulatory regime and of the comment--for 60 days--on the tariff. tariff-setting process in particular terms of reference and the specific is the high level of detail that is methods suggested for estab- Source: World Bank staff; and Gabriel Bitran and Pamela Arellao. 2005. "Regu- prescribed by law. The Law of lishing service quality levels, for lating Water Services." Public Policy for Tariffs was passed in 1988 and calculating the applicable cost of the Private Sector. Note 286. March. associated operative regulations capital, and for assessing efficient World Bank, Washington, D.C. agency, this committee should be strengthened financing and to strengthen LWUA in its new and made operational to supervise sector reform role of transforming potential creditworthy water and coordinate government policies. supply providers to be able, eventually, to access · the capital market. The implementing rules and Implement Executive Order 279, to achieve a regulations for Executive Order 279 should be better alignment of GFIs and LWUA in providing developed to address the remaining issues with WorldBankInfra.indb 131 12/6/2005 8:41:39 AM 1 Philippines: Meeting Infrastructure Challenges regard to the implementation of the policies in an important role in the oversight of the imple- the order, and the business plans for the three mentation of the sector master plans in their LWUA business units--the Water Development jurisdiction. Group, the Water Development Financier, and the Technical Assistance Group, as spelled out in · Enact legislative action to consolidate sector over- Executive Order 279--should be developed and sight responsibilities and set up a dedicated regu- executed. In view of DILG's role in promoting the latory agency. While early implementation of the development of viable LGU systems, the business legislative action cannot reasonably be expected plans for the three LWUA business units, in soon, the roles of DPWH, DILG, LWUA, MWSS, particular the Technical Assistance Group, should NWRB, DENR, DOF, and NEDA in the over- pinpoint and explore possible synergies between sight of the water supply and sanitation sector DILG and LWUA. should be reviewed, and proposals for consoli- · dation and realignment should be developed and Enhance NWRB capacity in economic regulation, debated. In the medium term, establishment of a as it takes on an expanded mandate for economic dedicated regulatory agency is critical for sector regulation of water districts, LGU-managed development, and this will also require legislative systems, and, potentially, private providers action. Draft legislation on establishing an inde- currently regulated through their contracts. For pendent water regulatory commission should be NWRB to be able to build the necessary capacity tabled for public consultations and debate in and credibility in this area, it should have suffi- Congress. cient resources. Given the current tight fiscal situation this may be difficult, but the current Carrying out a public utility reform and budget may be realigned between the agencies performance enhancement program to strengthen NWRB staffing, including trans- Reform of public utilities, in particular the water ferring staff from LWUA, DENR, and DILG. districts and LGU-managed systems, is needed to Overall, strengthening the economic regulatory improve accountability, professional management, framework at NWRB should be seen as building and efficiency. A nationwide program for public institutional capacity toward an independent utility reform and performance enhancement should regulatory body with a legislative mandate in be carried out under the supervision of the Oversight the medium term (see below). As such, NWRB, Committee. Key elements of the program should with increasing capacity, can be afforded greater include: autonomy in its exercise of regulatory powers or leveraging regulatory and renegotiation expertise · Require formal corporatization and registration residing within MWSS for private sector partic- with the Securities and Exchange Commission of ipation arrangements and those of smaller all public utilities having the appropriate gover- LGUs. nance structure. As a first step, the water districts · and systems directly managed by LGUs should Update the national and provincial water supply, be corporatized and registered with the Securities sanitation, and sewerage plans. The current andExchangeCommission.Accountingstandards national plan, drafted in 1988 with a target appropriate for a corporation should be adopted year of 2000, is outdated. An updated plan for these utilities. The governance structure for can serve as a valuable platform to determine these utilities should be carefully studied and tangible objectives and performance indicators specified, with a competent board structure and for national and local government agencies, to sufficient accountability and autonomy for the undertake implementation and to strengthen management. accountability of each agency for results. The updated plan should include both physical and · Strengthen incentives for mergers of various public institutional reform targets. service providers to attain scale economies and In addition, planning at the provincial level financial viability, and to plan and develop water should be strengthened and include monitoring supply and sanitation systems cutting across indicators and targets specified at the utility and municipalities. This does not mean that munici- LGU level. Provincial governments should play palities and even barangays should stay out of any WorldBankInfra.indb 132 12/6/2005 8:41:39 AM Chapter 7 Water Supply and Sanitation 1 involvement in the delivery of water supply and Enhancing sector financing and sanitation services. But in order to overcome the rationalizing subsidies fragmentation of the sector, higher-level LGUs · Develop and implement a strategy for the financial should facilitate regionalized solutions to water restructuring of both LWUA and MWSS. Both supply and sanitation problems and need to be institutions, in particular MWSS, are in dire need equipped with strong incentives to achieve buy- of reestablishing their financial viability. MWSS in from lower-level LGUs. Province-level water is contractually obliged to invest in bulk supply and sanitation plans should propose amalga- for the Metro Manila area and a failure to address mation scenarios for both water districts and the financial needs of doing this would only delay LGU systems, and incentives (e.g. subsidies, debt further necessary investments and undermine the restructuring, investment financing) should be viability of the two private concessions. MWSS' provided if the local service providers agree to financial restructuring will depend to a large mergers. extent on the renegotiations with MWSI, which · should be concluded as soon as possible. For Promote private sector participation for public util- LWUA, it has become very difficult to attract ities that have in place sound fundamentals. For donor financing and without financial restruc- the majority of public utilities, corporatization, turing, it might not be able to fulfill its mandate amalgamation, and establishment of sufficient as a financier for water districts that have not tariffs need to be implemented before they can achieved creditworthiness. The internal reorgani- attract any private sector investment or borrow zation of LWUA has been well articulated under funds from commercial lenders. Nevertheless, Executive Order 279 and needs to be elaborated selected water districts and LGU-run systems through its implementing rules and regulations have in place sound financial fundamentals, and and put into effect. National government financial involving the private sector can help improve injection is likely to be needed for both cases after service expansion and efficiency. Lessons learned steps are taken by the two bodies. from the MWSS privatization and other private sector participation should be carefully incor- · Remove structural barriers for GFIs and private porated into the design and execution of future finance institutions (PFIs) to extend financing to involvement of the private sector. water districts, including subordination of GFI · and PFI debt to LWUA exposure, and the need for Benchmark all public utilities, require submission approval by the board of trustees of LWUA (i.e. a of audited financial data, and establish perfor- waiver). To implement Executive Order 279, the mance targets. A well-disseminated bench- process of allowing creditworthy water districts to marking system is an important first step in access financing from other sources than LWUA instilling accountability among the utilities should be streamlined. There is also a need to and can also help mobilize public support for explore refinancing of the current LWUA loan reform. NWRB, in collaboration with LWUA and portfolio by GFIs, PFIs, and the capital market in DILG, should undertake the task as a priority. order to broaden exposure of the domestic capital Transmission to NWRB of the Commission on market to the sector. Audit-verified financial data for public utilities should be a requirement to enable NWRB to · Clarify the policy on enforcing graduation of water fulfill its mandate. districts. While differentiated terms for public Beyond benchmarking, performance targets for financing according to viability of providers each utility should be set and monitored. Such are needed in accordance with the capabilities targets should include a small set of indicators of the different types of utilities, policies should (e.g. service coverage, operational efficiency, be clarified in their early stage to remove the financial viability) where the utilities can be perverse incentives for utilities not to graduate held accountable. The targets can arise from (so as to continue to enjoy subsidies). This can be province-level master plans, and the provincial done, for example, through strict criteria on the governments should play an active role in usage of the more concessional funding sources, collaboration with NWRB in monitoring the including setting up performance criteria for performance targets. accessing funding. WorldBankInfra.indb 133 12/6/2005 8:41:39 AM 1 Philippines: Meeting Infrastructure Challenges Box 7.6 Ecuador's merit-based government transfers to water service providers I n December 2004, Ecuador's are funded from a 10% tax on tele- for municipalities to adopt tariffs Ministry of Economy and Finance phone calls (the ICE) which gen- that cover at least O&M costs, issued a decree to link national erated some $75 million in 2003, reduce operating costs in line government transfers to the representing about one-third of with benchmarks, and adopt country's 220 urban water and sani- revenues raised by Ecuador's water autonomous (public or private) tation service providers (a private service providers in 2003. Until the management models instead of concessionaire, some municipal decree was passed, ICE tax rev- direct service provision by the local companies, and many municipal- enues had generally been returned government. While the majority of ities that operate their water supply directly to the municipalities funds in the past went to the two and sanitation services directly) to generating the tax revenues, for largest cities in the country, Quito a series of performance parameters, water and sanitation investments, and Guayaquil, the new allocation including operational efficiency, without regard for the efficiency mechanism is biased toward and institutional separation and of the water and sanitation service smaller (and poorer) municipalities, autonomy from the municipal provider or the adequacy of cost- which generally have higher costs administration. recovery tariffs. of service. Most of the national govern- The new decree is expected ment's transfers to the water sector to provide a powerful incentive Source: World Bank staff. · Rationalize and leverage subsidies. One of the short- and PFIs in lending to the sector. Implemen- to medium-term priorities of the government tation performance of ODA projects should also should be to clarify the rationale and targeting of be improved to allow financing to reach the subsidies in the water supply and sanitation sector beneficiaries efficiently. and to broaden the application of policies formu- lated for government grants to other transfers, Expanding sanitation and sewerage coverage including concessional financing and, to the extent · Reinforce public awareness-building measures possible, congressional funds. Particularly in light regarding the impacts of inadequate sanitation of significant expenditures required for the imple- and the insufficiency of individual septic tanks, mentation of the Clean Water Act and to improve and instigate stronger demand for improvement. sanitation more generally, ensuring the following An advocacy campaign for the public and among should remain top priorities for the government: political representatives is required to secure that subsidies are increasingly tied to results, awareness and commitment to sanitation at the that investments reflect the priorities and actual highest political level. demand of beneficiaries, and that disbursement of subsidies provides for the strongest possible incen- · Review and clarify accountability for planning, tives for efficient use of funds. A good example construction, operation, and regulation of sani- of subsidies implemented by Ecuador is shown in tation infrastructure, including drainage at box 7.6. Exploring output-based aid approaches the national and local levels. This includes the more extensively may provide an opportunity to identification of departmental responsibility for strengthen the quality of public expenditure in sanitation policymaking and planning. Currently the sector. (See box 4.5 in chapter 4.) the responsibilities are dispersed among DPWH, · LWUA, water districts, DENR, MWSS, and LGUs. Improve the usage of ODA financing. ODA has Such a review should form an integral part of the historically played an important role for sector implementation of the Clean Water Act. In the financing, and will continue to play such a role short run, the government may want to appoint in the medium term in view of the relative low a lead agency to coordinate such a review and capacity within the country to provide financing. submit specific proposals to policymakers as to Policies should, though, be developed to guide how responsibilities for sanitation may be stream- the overall use of ODA in leveraging domestic lined. The same agency should also take the lead currency financing, and to clarify the type of in broader efforts to raise the general awareness credit enhancements available to GFIs/LWUA of sanitation. WorldBankInfra.indb 134 12/6/2005 8:41:39 AM Chapter 7 Water Supply and Sanitation 1 Table 7.14 Summary of recommended actions Objective Short-term actions Medium-term actions Implement · Issue clear guidelines, in the form of an executive · Strengthen incentives for LGUs to adopt cost- adequate order, on charging cost-recovery water tariffs to recovery tariffs, including making any subsidies cost-recovery achieve an appropriate return on assets, including conditional on full cost recovery for water services tariffs implementation and monitoring strategies · Articulate clear policies on sanitation service tariffs, and the responsibilities of water districts and local government units (LGUs) in collecting sanitation surcharges jointly with the water tariff · Review and quickly act on requirements in the Metropolitan Waterworks and Sewerage System (MWSS) for tariff surcharges to fund bulk water investments in the Manila area Establish an · Operationalize and strengthen the Inter-Agency · Update the national water supply and sewerage integrated Oversight Committee for water sector reform plan sector (established by Executive Order 279 on LWUA reform · Prepare, update, and consolidate province-level framework and on the policy for water districts to graduate to water supply, sanitation, and sewerage master capital markets). plans ··Implement Executive Order 279 · Enact legislative action to consolidate sector Enhance capacity of the National Water Resources oversight responsibilities and set up a dedicated Board (NWRB) in economic regulation. Realign the regulatory agency for the sector budget to enable NWRB to fully function, including transferring staff from the Local Water Utilities Administration (LWUA) and the Department of Environment and Natural Resources Carry out a · Require formal corporatization of all public utilities, · Strengthen incentives for mergers of various public public utility registered with the Securities and Exchange service providers to attain scale economies and reform and Commission, having appropriate governance financial viability performance structure and corporate accounting systems · Establish performance targets for public utilities enhancement Benchmark all public utilities based on province-level master plans program ··Require the Commission on Audit to provide audited · Monitor progress toward provincial targets data and indicators to NWRB to fulfill its mandate · Promote private sector participation for selected public utilities through well prepared and structured competitive tender process Enhance · Develop and implement a strategy for the Rationalize and leverage subsidies sector financial restructuring of both LWUA and MWSS, to ··Clarify policy on enforcing graduation of water financing and reestablish the financial viability of both entities districts rationalize · Remove structural barriers for government and subsidies private finance institutions to extend financing to water districts · Improve usage of official development assistance financing Expand · Reinforce public awareness-building measures on · Develop and implement plans to scale up sanitation the impacts of inadequate sanitation, and instigate sanitation facilities in LGUs (including targets and and sewerage stronger demand for improvement programs) as an integral part of the water supply, coverage · Review and clarify accountability for planning, sanitation, and sewerage master plan construction, operation, and regulation of sanitation · Establish practical standards for local wastewater infrastructure, including drainage systems · Provide technical assistance to LGUs and local utilities in planning and implementing sanitation improvements · Allocate funding from national government to provide incentives for LGUs and utilities in sewerage investments WorldBankInfra.indb 135 12/6/2005 8:41:40 AM 1 Philippines: Meeting Infrastructure Challenges · Assist LGUs and local utilities develop strategies term (up to five years). It is important to highlight and plans for sanitation improvement. Technical the close linkages among the five action areas: guidelines for improved sanitation should be raising tariffs to cost-recovery levels has to be accom- provided by national government agencies for panied by performance improvement of the service local utilities, and technical assistance should be providers, otherwise there will be strong resistance provided where local entities become committed by consumers; utility performance improvement on to certain steps. the other hand cannot be realized unless appropriate · tariffs are charged to ensure financial viability. Both Allocate funding from the government to provide measures will rely on a good regulatory system incentives for LGUs and utilities in sewerage invest- that can effectively mediate between the interests ments. Budget support is needed for the implemen- of the service providers and consumers and instill tation of the Clean Water Act, and any national discipline in both sides. This integrated reform and funding should be leveraged to bring more local performance enhancement can only occur in an government financing and private funding, and integrated framework with strong leadership and targeted particularly at areas where benefits will oversight by the national government. This same go beyond individual LGU boundaries. "package" is needed not only for water supply but also for sanitation and sewerage. It is therefore critical Table 7.14 above summarizes the steps to be taken that progress in all these areas occur in parallel, and in the immediate term (up to two years) and medium be synchronized. Endnotes 1 World Bank. 2003. Philippines Environment Monitor 2003. in infrastructure and are entitled to patronage refunds or shares Manila. in dividends from cooperative operations. They therefore have a 2 Ibid. financial stake in the success or failure of the cooperative. 3 Many of the policies and reforms were already detailed by the 10 In 1995, there were 480 cases of cholera in Manila, compared government in 1998 in a Letter of Sector Development addressed with 54 cases in 1991, according to the Department of Health. to the Department of Finance and, prior to that, two NEDA Reports of severe diarrhea-causing infections peaked in 1997 at board resolutions in 1994, Nos. 4 and 5. 109,483--more than triple the 1990 number. 4 2003­2004 Directory of Water Districts. Philippine Associa- 11 WPEP. 2002. Small Scale Independent Providers: Are They Here tion of Water Districts, Inc. The coverage figures, however, are to Stay? http://www.wpep.org/downloads/SSIP%20study%20(fi misleading. Franchise areas are very narrowly defined by water nal%20draft%20-%2011%20March%2004).pdf districts and often exclude peri-urban areas that water districts 12 Cristina David and Arlene Inocencio. 2001. "Public-Private- do not view as viable for expansion. Community Partnerships in Management and Delivery of Water 5 In the form of a certificate of conformance. to Urban Poor: The Case of Metro Manila." Philippine Institute 6 Through a Supreme Court ruling issued in the 1980s (201 SCRA for Development Studies Discussion Paper 2001­18. Makati. 593). 13 Arthur C. McIntosh. 2003. Asian Water Supplies: Reaching the 7 During the late 1980s, LWUA started to appoint a sixth member Poor. Manila: ADB. on water district boards. By 2003, LWUA had appointed board 14 Ibid. members to 40 out of a total of 433 operational districts to ensure 15 ADB. 2004. Water in Asian Cities: Utilities' Performance and Civil that recommendations of the LWUA's institutional development Society Views. Manila. advisors received sufficient attention from boards. 16 Ruben G. Mercado. 2003. "A Review of the DPWH Regional 8 Step-in rights assigned to LWUA differentiate between partial and District Office Management and Spending: What's Pork Got and full takeover. In a partial takeover LWUA assumes the func- to Do With It?" Philippine Institute for Development Studies. tions either of the management or of the board, while in a full Unpublished discussion paper. takeover it assumes the functions of both. 17 From the case studies done by WPEP. 2002. Small-Scale Indepen- 9 The governance models of cooperatives and water user associa- dent Providers: Are They Here to Stay? WPEP, Manila. Investments tions are similar. A cooperative differs from an RWSA in that of SSIPs in Metro Manila ranged from P500,000 to P15 million members of cooperatives contribute equity toward investments serving between 100 and 3,000 households. The size of the invest- WorldBankInfra.indb 136 12/6/2005 8:41:40 AM Chapter 7 Water Supply and Sanitation 1 ments also depends on whether the SSIP has access to bulk water 31 World Bank and Social Weather Stations. 2004. Privatization supply from the concessionaires or needs to develop its own Survey. July. water source, usually deep wells. 32 L. Cleofas and J. Sy. 2004. "Face-off: Utility Sub-concessions and 18 Costs for a shallow well (12 meters deep) may range from about Local Private Providers in Metro Manila." Paper presented at P25,000 to P50,000, and for a deep well (20 meters deep) from Water Week, February. World Bank. about P60,000 to P250,000, if constructed by a household (lower 33 Arthur C. McIntosh. 2003. Asian Water Supplies: Reaching the estimate) or a foreign-funded project (upper estimate). Poor. Manila: ADB. 19 Water Supply and Sanitation Thematic Paper for the National 34 The Supreme Court established, by its ruling of September 13, Water Forum, prepared in December 2003, under the supervision 1991 in the case of Davao City Water District et al. vs the Civil of a government interagency committee composed of oversight Service Commission and the Commission on Audit, that water and water sector agencies under the leadership of NWRB. districts are GOCCs. 20 Services provided by public providers are grouped by the govern- 35 This is largely because, under the LGC, LGU responsibility for ment into three categories: level 1--a point source (either a water and sanitation services includes local tariff setting. As a protected well or a developed spring with an outlet but without matter of practice, LGUs decide on tariffs in LGU-managed water a distribution system) serving an average of 15 households. supply systems. These facilities are typically funded from government grants and 36 The memorandum of agreement between LWUA and DBP, dated managed by CBOs (BWSAs and cooperatives); level 2--a piped September 17, 2003 states in Section 5: "LWUA shall maintain system with communal faucets serving four to six households. its regulatory authority over the WDs, as provided in PD 198, These facilities are predominantly managed by CBOs; and level as amended, to conduct an annual review and among others, 3--a piped system with individual household taps. These facili- recommend to the WDs the adoption of water rates..." ties are operated and managed by local water districts, private 37 Stone & Webster Management Consultants, Inc. 2003. "Study on utilities, or LGUs either directly or indirectly through CBOs. reforms in the Financing Policies in the Water Sector, Gradua- 21 National Statistics Office. tion Policies in the Water Districts, and Approaches to Various 22 Water Supply and Sanitation Thematic Paper for the National Regulatory Issues." Department of Finance. Water Forum, prepared in December 2003. 38 Ibid. 23 World Bank. 2003. Philippines Environment Monitor 2003. 39 Water district projects are financed at highly concessional terms Manila. and compare favorably to loans provided to LGUs from GFIs. 24 WPEP. 2003. Urban Sewerage and Sanitation: Lessons Learned Projects are typically funded 70% from loans from international from Case Studies in the Philippines. June. financial institutions, 20% from LWUA counterpart funds, and 25 Project Feasibility Studies prepared under LGU-UWSP Adaptable 10% from water district equity. Funds are provided to water Program Loans 1 and 2 between 1997 and 2000. World Bank. districts at fixed interest rates of 8.5­12.5% depending on the 26 Based on socioeconomic reports of the LGUs in more than 100 loan amount, with a repayment period of 25­30 years with four feasibility studies for towns, prepared under the World Bank years grace period on the principal repayment. In addition to project LGU-UWSP. capital works, LWUA lends for technical assistance for feasibility 27 WPEP. 2002. Small Scale Independent Providers: Are They Here studies and design (9% of project costs), i.e. as well as supervision to Stay? Manila. costs (4% of project costs). 28 World Bank. 2003. Philippines Environment Monitor 2003. 40 In fact, about 75% of LWUA's cash position in 2002 was accounted Manila. for by undisbursed government appropriations. 29 Arthur C. McIntosh. 2003. Asian Water Supplies: Reaching the 41 Local Water Utilities Administration. 2003. 2002 Annual Report. Poor. Manila: ADB. Manila. 30 National Statistics Office. 2000 Family Income and Expenditure 42 World Bank. 2003. Philippines Environment Monitor 2003. Survey. Manila. WorldBankInfra.indb 137 12/6/2005 8:41:40 AM Paul Chesley/Getty Images WorldBankInfra.indb 138 12/6/2005 8:41:51 AM Chapter 8 Roads Overview would drop to 0.3% of GDP by 2009, which would T be their lowest level in at least 17 years. Local roads he main objective of road sector development also suffer from underinvestment and inadequate in the Philippines is to develop a network that maintenance, although the actual conditions are not will help promote sustainable economic growth clearly known due to lack of reliable data. and competitiveness, and provide adequate all-year The low level of expenditures on the road sector reliable and safe access throughout the country. is due to low contributions by the government, road The road sector has made some progress in users, and the private sector in general. While the meeting this objective. But high levels of congestion, decrease in investment funding of national roads by the poor condition of large parts of the road network, the government is due in large part to the increase inadequate connectivity, and the lack of a sustainable in the government deficit, expenditures on national road safety strategy reduce the efficiency of the road roads as a share of total national government spending network in promoting growth and providing safe declined by 50% between 1999 and 2002, indicating access. The cost of congestion in Metro Manila alone the decreasing priority of investment in national was estimated at around P100 billion a year in 1996 roads for the government during that period. prices, or 4.6% of GDP, while the poor quality of Road users are paying a proportion of the road roads resulted in high vehicle operating costs, with maintenance cost through their contributions to the intercity freight rates in the Philippines more than Motor Vehicle User's Charge (MVUC). Nevertheless, 50% higher than in Thailand or Vietnam. The cost these contributions fall well short of the required funds of road accidents in the country was estimated at for maintenance. Given the potential benefits to road $894 million in 2002, or more than 1% of GDP. users from improved road conditions and reduced Two major issues pose considerable constraints congestion, road users can be expected to pay more. to road sector development in the country: under- The experience of other countries is that road users investment in the road network and inefficiency in are willing to pay for improved roads provided that resource utilization. there is a clear perceived link between the payment and delivery of better services. Receipts from a fuel Underinvestment in the road network levy were supposed to augment the MVUC but there Expenditures on the road network in the Philippines has been little action on that front. in 2002 were estimated at P34 billion (0.9% of GDP), Private sector participation in the Philippines their lowest level in a decade. This represents half, started in the road sector in the 1970s but interest at best, of what would be necessary to maintain the has waned since, despite the enactment of the Build- existing network in adequate condition and to sustain Operate-Transfer (BOT) Law and its amendment in economic growth rates of around 4%. The situation the 1990s. In the last decade, only four agreements is expected to get worse over the next six years, as were concluded: one was completed after lengthy the figures in the 2004­2009 Medium-Term Public delays, two are stalled after completion of a phase, Investment Program (MTPIP) indicate that expen- and the fourth never got started. The contribution of ditures on national roads (currently 0.55% of GDP) the private sector (in the form of toll roads) over the WorldBankInfra.indb 139 12/6/2005 8:41:52 AM 10 Philippines: Meeting Infrastructure Challenges last decade represents only about 10% of the govern- maintenance practices, and low labor productivity ment's expenditures on roads. The sector's interest in at DPWH. There is one employee for every 1.3 km and contribution to investment in the road network of national roads in the Philippines compared with have been low for a number of reasons. Its inability about one employee for every 10 km in Indonesia. to come up with the necessary financing and the problems and costs associated with acquiring rights- Proposed reform strategy: Commercialization of-way are two main reasons (in toll roads), while the and efficient resource utilization uncertainty surrounding the investment climate and The underpinnings of the proposed reform strategy legal environment generally also contributes to low are the commercialization of the road sector and private sector investment. increasing the efficiency of utilization of scarce government resources. The establishment of a Inefficiency in resource utilization commercially oriented road sector, with increased The inefficiency in resource utilization is attributable participation from the private sector in terms of to inadequate policy, institutional, and governance both management and financing, requires a strong frameworks, and to poor capacity. Indeed, some partnership between the private and public sectors. progress has been made in implementing the road In this partnership, the public sector is to play the sector reforms at the Department of Public Works lead role in developing good plans (through collabo- and Highways (DPWH), but implementation has been ration with the private sector), in ensuring efficient slow. Much of the progress has been in developing utilization of its scarce resources, and in providing technical and information systems for reforming an enabling environment for the participation of the internal business processes of DPWH under the Road private sector. Information Management Support System (RIMSS) Project (discussed in more detail in box 8.2, below). Agency performance indicators have been developed Policy and institutional framework and some are already in use by DPWH. Land acqui- sition procedures have also been developed, with Main laws and regulations implementation and staff training ongoing. As a Two main laws govern the road sector in the Phil- result of the development of new contractor billing ippines (table 8.1): the Philippine Highway Act of systems, the average time to pay contractors was 1953, Republic Act (RA) 917; and the Land Transpor- reduced from 69 days in 2001 to 30 days in 2003. tation and Traffic Code of 1964 (RA 4136). RA 917 Nevertheless, institutional reforms have lagged defines four classes of roads (national, provincial, city/ behind their technical counterparts, jeopardizing municipal, and national aid1) with their respective the overall success of the road sector reforms. The administration and funding. Executive Order 113 Special Road Fund (SRF) was established in 2000 but (1955), as modified by Presidential Decree 702 in its secretariat was only appointed in mid-2004 and 1975, added a category called barangay road and in has been subjected to external pressures in delaying 1992 deleted the national aid road category. RA 4136 and diverting the release of funds, thereby reducing sets the rules for road use. its effectiveness in improving the road maintenance The Local Government Code of 1991 (RA 7160) program. Also, little progress has been made in impacted the road sector in two ways: the regulation separating the roles of client and service provider in of tricycles for hire was devolved to province, city, and DPWH and transforming the agency into a commer- municipal governments; and the provision of barangay cially oriented, performance-based National Roads roads was transferred from DPWH to barangays and Authority. local governments.2 Local road provision in provinces, As a rough indication of inefficiency, the public's cities, and municipalities was the responsibility of the perception of DPWH's efforts to combat corruption respective local governments prior to the Code, and is one of the worst with regard to public agencies, remained so after its introduction. and has further worsened over the past couple of RA 2000 (1957) defines the standards for limited years. Spending of the congressional ("pork barrel") access highways and their development by DPWH. funds, accounting for 19­30% of DPWH's budget and The legal basis for toll roads emanated from Presi- for more than maintenance expenditures on all local dential Decree 1112 (1977) and RA 7718 (1993) for roads, is widely regarded as inefficient. Further mani- privately financed infrastructure. The franchise festations of poor resource utilization are inefficient for the operation and maintenance of the first two WorldBankInfra.indb 140 12/6/2005 8:41:52 AM Chapter 8 Roads 11 Table 8.1 Main legal and regulatory provisions Legal provision Purpose Commonwealth Act (146, 1936), and Provides framework for grant of franchises for public land transport for hire, amendments, the latest being Executive including rate setting based on application and public hearings. Makes the Order 125-A, series of 1987 Land Transportation Franchising and Regulatory Board the quasi-judicial grantor Philippine Highway Act Provides for an effective highway administration; classifies roads according (RA 917, 1953) to administration and funding; establishes a highway fund; and provides for technical and financial assistance to provinces, cities, and municipalities Limited Access Highway Act Sets framework for the development of limited access roads under the (RA 2000, 1957) responsibility of the Department of Public Works and Highways Land Transportation and Traffic Code Governs the registration and operation of motor vehicles and licensing of (RA 4136, 1964) owners and drivers, and establishes traffic rules Equivalent Maintenance Kilometer Method Allocates funds for maintenance of each road, based on a certain formula (Presidential Decree 17, 1972) Charter of Toll Regulatory Board Regulates entry and pricing of limited-access roads (Presidential Decree 1112, 1977) Charter of the Department of Public Works Reorganizes the Department of Public Works and Highways into its current and Highways form and functions (Executive Order 124, series of 1987) Local Government Code Delineates powers and responsibilities of provinces, cities, municipalities, (RA 7160, 1991) and barangays in a number of economic sectors; devolved the maintenance of barangay roads to barangays Build-Operate-Transfer Law Lays down the rules for private sector financing and development of (RA 6957 as amended by RA 7718, 1994) infrastructure Right-of-Way Law Sets rules for expediting right-of-way acquisition and stipulates role of LGUs (RA 8974, 2000) in relocation/resettlement Motor Vehicle User's Charge Provides for additional resources for maintenance, safety, and air pollution (RA 8794, 2000) control, and for establishing a Road Board for the prudent and efficient management and utilization of these resources Government Procurement Reform Act Attempts to: harmonize procurement processes across all national line (RA 9184, 2002) agencies and LGUs, simplify prequalification and award, enhance trans- parency, and encourage electronic bidding Source: Compiled by World Bank staff. expressways was given in 1977 (under Presidential for the regulation of public transport or common Decree 1113) to the Construction and Development carriers. Under this law, market entry requires an Corporation of the Philippines, a private corporation administrative franchise (called Certificate of Public that was later taken over by the government in 1983 Convenience) and fares are decided by the government for unpaid debts and renamed the Philippine National after petition and public hearings. Construction Corporation (PNCC). To expedite right- Funds for maintenance of national roads are of-way acquisition, RA 8974 allows for immediate allocated based on the equivalent maintenance possession of land being expropriated, upon payment kilometer method, introduced in 1972 under Presi- of the zonal value of the property and pending a court dential Decree 17. The amount for each road is decision on the final purchase price. determined taking into account traffic volumes, road The Public Service Act (which originated from dimensions, surface type, and bridge type. Commonwealth Act 146 of 1936, and has been RA 8794 of 2000, the Law on Motor Vehicle User's amended several times since) provides the framework Charge, imposes this charge, which is designated for WorldBankInfra.indb 141 12/6/2005 8:41:52 AM 1 Philippines: Meeting Infrastructure Challenges road maintenance, safety, and air pollution control. entry, service standards, and fare setting for all road- Collected funds are put into the SRF administered by based public transport in the country, except tricycles the Department of Finance for program allocations and nonmotorized vehicles. The Land Transportation managed by the newly established Road Board under Office (LTO), an agency under DOTC, enforces the the same law. provisions of RA 4136. It registers motor vehicles, The Government Procurement Reform Act licenses drivers, and enforces LTFRB's regulations to (RA 9184 of 2002) was enacted to govern the ensure that public transport vehicles operate within procurement processes across all national line agencies their franchises. and LGUs. It attempts to simplify prequalification The main government agencies that play oversight and award, enhance transparency, and encourage roles in the infrastructure sector are the National electronic bidding. Economic and Development Authority (NEDA) and Department of Budget and Management (DBM). Allocation of responsibilities NEDA provides advisory and coordinative services Historically, the central government has been the in the formulation of sector policies and programs dominant provider of roads through DPWH, with through its Infrastructure Committee (Infracom) LGUs playing a secondary role. DPWH is responsible and screens and formulates DPWH's medium-term for planning, design, construction, and maintenance investment program. NEDA also monitors and of the national road network (table 8.2). Maintenance coordinates public sector investments (both foreign of national roads in provinces is carried out by the and domestic exceeding P300 million) through its district offices of DPWH in these provinces. DPWH Investment Coordination Committee. This committee sets technical standards for the construction of all requires the endorsement of the appropriate regional road and bridge classes, and establishes regulations development council before clearing local projects regarding vehicle weights and axle loading. It also for implementation. upgrades and constructs local roads financed by other DBM drafts the annual national budget for agencies, such as the Department of Agriculture and approval of Congress and sets the budgetary ceilings the Department of Agrarian Reform, and through through its Development Budget Coordinating congressional funds. Roads constructed for these Committee. All foreign funding and official devel- two departments are typically project components opment assistance (ODA) is approved by NEDA and for these agencies. In addition, DPWH assists LGUs the Department of Finance. in road provision when they lack the capacity for Incidental players in road infrastructure are the performing such services. Department of Agriculture and the Department TheRoadBoard,attachedtoDPWH,isresponsible of Agrarian Reform. They allocate funds for farm- for managing the SRF where funds are earmarked for to-market roads that are part of their respective road maintenance, safety, and air pollution control. programs. In addition to these two departments, The planning, construction, and maintenance of specialized national agencies occasionally get involved local roads are the responsibility of LGUs. Funding in the supply of roads. These are the Public Estates is approved by their respective local councils or Authority and the Bases Conversion and Devel- provincial boards, after they consider their own opment Authority and its subsidiaries, such as Subic revenue sources and Internal Revenue Allotment. The Bay Metropolitan Authority and Clark Development 1991 Local Government Code stipulates that local Corporation. Unlike farm-to-market roads, these are governments should dedicate 20% of their respective generally intra-urban local roads (with the exception Internal Revenue Allotment shares to development of the Subic Expressway). expenditures. LGUs regulate market entry and pricing for tricycles and pedicabs for hire. The Department Policy framework under the Medium-Term of Interior and Local Government coordinates LGUs' Philippine Development Plan participation in subnational programs and assists The Medium-Term Philippine Development Plan LGUs in capacity building for development planning (MTPDP), which is typically revised every six years and investment programming. to synchronize with the term of the president of The Land Transportation Franchising and the Philippines, contains the broad strategies as Regulatory Board (LTFRB), an office attached to the well as policies on infrastructure development. Its Department of Transportation and Communications key objectives for 2001­2004 in the road subsector (DOTC), is responsible for the regulation of market included the following: WorldBankInfra.indb 142 12/6/2005 8:41:52 AM Chapter 8 Roads 1 Table 8.2 Allocation of responsibilities/mandates Agency Functions Department of Public Works and Planning and construction of the national road network Highways (DPWH) ·····Maintenance of the national road network Setting technical standards for the construction of all road and bridge classes Establishing regulations for vehicle weights and axle loads for all road classes Selective upgrading and construction of local roads for other agencies such as the Department of Agriculture and the Department of Agrarian Reform, and through congressional funds · Assisting LGUs in the provision of roads when such services are unavailable or inadequate Road Board--Attached to DPWH · Managing the Special Road Fund where collected monies from the Motor Vehicle User's Charge are deposited and designated for road maintenance, safety, and air pollution control LGUs: provinces, cities, and · Planning and construction of local roads (including barangay roads) within municipalities their respective jurisdictions ·· Maintenance of local roads Economic regulation of tricycles and pedicabs for hire, in terms of market entry and pricing LGUs: barangays · Maintenance of barangay roads Department of Interior and Local Coordinating LGU participation in subnational programs Government ·· Assisting LGUs in building their capability for development planning and investment programming Land Transportation Franchising and · Regulation of market entry, service standards, and fare setting for all road- Regulatory Board (LTFRB)--Attached to based public transport in the country, except tricycles and nonmotorized the Department of Transportation and vehicles Communications (DOTC) Land Transportation Office--Attached Enforcement of the provisions of RA 4136 to DOTC ·· Registration of motor vehicles, licensing of drivers, and enforcement of LTFRB's regulations to ensure that public transport vehicles operate within their franchises Philippine National Construction Cor- · Developer and operator of some toll roads; franchise holder for the North poration--Attached to the Department Luzon and South Luzon expressways of Trade and Industry Toll Regulatory Board--Attached to · Economic regulation of toll roads DOTC Specialized bodies such as the Public · Provision of roads within certain areas, usually economic export zones, Estates Authority, Bases Conversion and following technical standards and guidelines of DPWH Development Authority, and Subic Bay · Maintenance of roads and other infrastructure within their defined geographic Metropolitan Authority areas National Economic and Development · Formulation and coordination of policies in transport (roads, maritime, air, etc.) Authority in the Medium-Term Philippine Development Plan ·· Formulation of medium-term public investment programs that include roads Approval and oversight of infrastructure programs/projects exceeding P300 million Department of Budget and · Synthesis and review of budget requests of agencies, submission of Management consolidated budget to Congress, and execution of approved appropriation · Release of the annual Internal Revenue Allotment of LGUs Department of Agriculture and · Incidental financing of rural roads that are necessary components of the Department of Agrarian Reform departments' agricultural and agrarian-related programs Source: Compiled by World Bank staff. WorldBankInfra.indb 143 12/6/2005 8:41:52 AM 1 Philippines: Meeting Infrastructure Challenges · Provide the transport infrastructure needed to Table 8.3 support the priority programs of the government, Classification of existing non-toll road network, 2000 namely: modernization of agriculture, devel- opment of tourism, improvement of peace and Classification Length ('000 km) Share (%) order, decongestion of traffic, and development of Nationala 30.0 15 Provincial 27.1 13 · information and communications technology. Improve the quality of existing infrastructure City 7.1 3 through proper maintenance, rehabilitation, and Municipal 15.8 8 Barangay 122.0 60 · upgrading. Achieve well-defined complementary roles of the Total 202.0 100 · government and private sectors. Streamline the contract procurement process a. The Department of Public Works and Highways (DPWH) reported to make it more transparent, efficient, fair, a total of 28,266 km (excluding the Autonomous Region in Muslim Mindanao), as of June 2004 due to reclassification, more accurate nondiscretionary, and conducive to the widest inventory, and devolution. possible competition of qualified contractors and Source: JICA-DPWH. 2003. "Roads in the Philippines." Manila. · consultants. Restructure institutions to ensure that the public 13%, and city and municipal roads 11% (table 8.3). and private sectors operate on the same levels The balance of 60% is classified as barangay roads, and that government is not both regulator and which are mostly unpaved village-access roads built · operator within a given subsector. in the past by DPWH but devolved to LGUs. Farm- Formulate a timely and realistic list of transport to-market roads fall into this last category. projects for implementation. With the exception of barangay roads, the above road classification system is based primarily on The key road subsector strategies to accomplish administrative responsibilities, i.e. which level of the above objectives included the following: government built and funded the roads. Barangay · roads were mostly built and funded by DPWH, Priority to road investments leading to regional with the Department of Agrarian Reform and the growth centers, key tourism development areas, Department of Agriculture financing a few farm-to- and in the economically lagging regions with low market roads. There are ongoing efforts to reclassify road densities and paved road ratios, with special roads by function. · attention to Mindanao. Table 8.4 shows that there are large differences Road users to increasingly pay for the use of in the regional distribution of national and local · national roads. roads, irrespective of the measure used. Region IV, Highest priority to the maintenance of existing for example, accounts for the highest absolute share of assets, including preventive maintenance, in order the road network at 11% of the total, but has one of the · to prolong the useful life of the road network. lowest densities of roads per square kilometer (0.5 km LGUs to assume full responsibility for the per sq. km). Metro Manila has the highest road density financing and management of local roads with persquarekilometer,morethansixtimesashighasany the national government providing appropriate other region, but ranks last when density is measured · assistance programs. in terms of kilometer per vehicle or population. The Allowable vehicle axle loads and configuration to road density in terms of kilometer per square kilometer · be strictly enforced to minimize road damage. of land area is highest in Metro Manila (7.5 km per DPWH to implement priority business processes sq. km) and lowest in Caraga (0.4 km per sq. km). If under the ongoing RIMSS Project. the 1,820 km of privately developed roads in Metro Manila are taken into account, road density further increases to 10.3 km per sq. km. Sector structure and ownership Private sector participation in the road sector Public road network Toll roads In 2000, the total length of the non-toll road network The Philippines has a total of 165 km of toll roads. was reported to be 202,000 km, with national roads The first two of these toll roads, the North Luzon accounting for 15% of the total, provincial roads Expressway (NLEX) and South Luzon Expressway WorldBankInfra.indb 144 12/6/2005 8:41:52 AM Chapter 8 Roads 1 Table 8.4 Regional distribution of roads, population, and vehicles Road length (km) Population Motor Road density in km per Region Area National Local (sq. km) ('000), vehicles sq. km '000 vehicles '000 2004 2000 2000 2001 population Metro Manilaa 1,019 3,723 636.0 9,933 1,255,140 7.5 4 0.5 CAR 1,587 7,183 18,294 1,365 50,605 0.5 173 6.4 I 1,609 13,166 12,840 4,201 210,135 1.2 70 3.5 II 1,711 13,035 26,838 2,813 130,762 0.6 113 5.2 III 1,980 13,481 18,231 8,031 477,106 0.9 32 1.9 IV 4,440 17,763 46,924 11,794 525,394 0.5 42 1.9 V 2,177 7,000 17,633 4,675 102,492 0.5 90 2.0 VI 2,878 14,816 20,223 6,209 225,056 0.9 79 2.9 VII 2,017 13,694 14,952 5,701 329,414 1.1 48 2.8 VIII 2,264 7,342 21,432 3,610 72,636 0.5 132 2.7 IX 1,068 9,603 15,997 3,091 98,392 0.7 185 3.5 X 1,603 13,671 14,033 2,748 89,217 1.1 171 5.6 XI 1,390 15,805 27,141 5,189 195,244 0.6 88 3.3 XII 1,196 8,527 14,571 2,598 64,511 0.7 151 3.7 ARMM 914.2 6,588 11,410 2,412 -- 0.7 -- 3.1 Caraga 1,327 6,276 18,847 2,095 39,758 0.4 191 3.6 Totalb 29,180 171,680 300,000 76,499 3,865,862 0.7 52 2.6 -- = not available; motor vehicles for the Autonomous Region in Muslim Mindanao (ARMM) are included in Region IX. CAR = Cordillera Autonomous Region. a. There are about 1,820 km of private roads in Metro Manila. Were these to be included in the estimation, the resulting density for Metro Manila would rise from 7.5 to 10.3 km per sq. km. b. Total length of national road network reported in 2004 is 29,180 km when including ARMM and 28,266 km when excluding it. Sources: 1. National road lengths as of 2004 from the Department of Public Works and Highways website. 2. Local road lengths as of December 2000, from National Statistical Coordination Board. "Countryside in Figures." 2004. Manila. 3. Motor vehicle data as of 2001, from the Land Transportation Office. 4. Land area and population data from Philippine Statistical Yearbook 2002. (SLEX), were constructed by DPWH in 1975­1977 Since the initial franchising of the SLEX and the and subsequently franchised to a private company, NLEX, construction of toll roads has followed the Construction and Development Corporation of BOT model where the project sponsor is responsible the Philippines, in 1977 (later taken over by the for construction/upgrading as well as operation government and renamed PNCC). PNCC is a and maintenance of a road (or a section). The government owned and controlled corporation STAR provides a different model of private sector currently attached to the Department of Trade and participation in that the government built the first Industry. With the passage of the BOT Law, and its phase of the road, the concessionaire was contracted amendment in 1994, PNCC entered into several joint- through public bidding to build the second phase venture agreements to redevelop the NLEX and SLEX, only, and then to operate and maintain both phases as well as expand the expressway system. The deals led (box 8.1). Certain key features of the existing toll to the incorporation of Citra Metro Manila Tollways roads and their proposed extensions are shown in Corporation (CMMTC) and Crown Hopewell for the appendix 9. rehabilitation and extension of the SLEX and Manila North Tollways Corporation (MNTC) for the reha- Private roads bilitation, upgrading, and extension of the NLEX. An indeterminate length of roads is classified as Two other private sector players are the Coastal Road private. These were built and financed by large private Corporation for the Manila­Cavite Toll Expressway property developers. These roads are not tolled and (MCTE) and the STAR Infrastructure Development are mostly found in urban areas. In Metro Manila, Corporation (STAR IDC) for the Southern Tagalog 1,820 km of roads, or about one-third of the total Arterial Road (STAR). road network in the metropolis, are private. WorldBankInfra.indb 145 12/6/2005 8:41:53 AM 1 Philippines: Meeting Infrastructure Challenges Box 8.1 Southern Tagalog Arterial Road: The two-in-one public-private partnership model T he Southern Tagalog Arterial P500 million for the cost of right-of- and economic viability are also Road (STAR), south of Manila, way of phase 2. improved. Such a scheme has the is a planned 42 km expressway It is thus far the only toll road advantage of reducing the demand stretching from Sto. Tomas to that followed the solicited mode. risk to the project sponsors who Batangas City, with a total con- The contractual structure is a can afford to charge lower toll rates, struction cost of $71 million. 30-year build-transfer-operate hence boosting overall demand for Phase 1 (22.1 km) was built by the model (a variant of the generic the road. Department of Public Works and BOT arrangement). The award was Notwithstanding its good Highways with Japan Bank for based on the lowest toll rate to be features, phase 2 has not been International Cooperation financing charged, with the winning bidder finished yet due to the conces- and was completed in 2002. Phase coming in at P0.625 per kilometer, sionaire's inability to secure the 2 was tendered in 1997 following significantly below the government necessary financing. This may also the Build-Operate-Transfer (BOT) ceiling of P1.25 per kilometer (in be due to an incomplete 8 km Law, and awarded to STAR Infra- 1997 prices). section between the South Luzon structure Development Corporation. The two-in-one scheme is a Expressway and the STAR, which Both phases will be operated and good example of public-private was initially scheduled to be fin- maintained as a single system partnership, where public sector ished in 2004. The completion of by the concessionaire. Under the investments in phase 1 effectively this section is likely to increase agreement, the concessionaire will reduce the total project cost to the traffic significantly on the STAR as also undertake some modifications private sector. With the revenues it would then be linked directly to and improvements (such as adding from the whole system backing Manila by expressway. toll plazas and interchanges) to up the phase 2 investment, the phase 1 and will contribute up to project's financial sustainability Source: World Bank staff. Maintenance and construction 2002, 20% of which were franchised for hire or use Private sector participation is extensive in as public transport. Use of motorcycles (including construction and maintenance processes, but varies motorized tricycles) is growing faster than that of the among LGUs particularly. With the exception of entire fleet, reaching 1.47 million in 2002, of which a few small nationally/locally funded projects, 39% are for-hire tricycles. Between 1990 and 2002, most of the design works are contracted out by motorcycle use increased at an annual rate of 12%. DPWH to local or foreign consultants (sometimes Motorization (excluding trailers) is about 54 per 1,000 working together). Local roads are usually designed persons, up from 26 in 1990, giving an average annual by provincial, city, and municipal engineers, with growth rate of 8%. technical support from the Department of Interior and Local Government or DPWH. Construction of road projects is generally implemented by contracts Road expenditures and financing awarded through competitive bidding, and very seldom by force account. Historical expenditure trends The maintenance of national roads is carried Table 8.6 shows spending on roads in the Philippines out by DPWH using both maintenance by admin- (both investment and maintenance) by national and istration and maintenance by contract. A little less local governments from 1993 to 2002. During this than half of the maintenance of national roads is period, expenditure levels as a share of GDP averaged outsourced to private firms (under maintenance by 1.25%. There was, however, a steady decline from a contract). Most of the road maintenance for local decade-high 1.6% of GDP in 1999 to a decade-low roads is maintenance by administration. 0.9% in 2002. In absolute terms, this was a 35% decline in real expenditures on roads over the four- Motorization year period. This large drop is largely due to the Table 8.5 provides some statistics on motor vehicle decrease in real investment in national roads by more use and growth in 1990­2002. Nearly 4.2 million than 50% over that period.3 Investment in national motor vehicles were registered in the Philippines in roads is mostly rehabilitation and upgradation and WorldBankInfra.indb 146 12/6/2005 8:41:53 AM Chapter 8 Roads 1 Table 8.5 Who finances road Motor vehicles by category, 1990­2002 expenditures? National roads 1990 1995 2000 2001 2002 Theoutlayfornationalroadsisfunded Private 1,305,142 2,030,705 2,835,801 3,010,974 3,274,316 from the general fund of the national Cars 419,410 581,910 688,402 681,050 694,557 government.Thereisanappropriation Utility vehicles 517,679 837,271 1,171,953 1,271,420 1,406,202 Buses 3,279 3,735 3,686 3,711 3,525 for investment and a separate one for Trucks 116,956 177,004 222,893 229,664 232,965 maintenance. According to DPWH, Motorcycles/tricycles 232,848 407,050 725,330 804,081 916,332 ODA accounted for about half of the Trailers 14,970 23,735 23,537 21,048 20,735 investment in national roads in 1997­ For hire 246,082 493,103 794,499 794,306 851,145 2001, most of which was for rehabili- Cars 13,676 35,977 69,464 40,908 45,161 tation and upgradation. In addition Utility vehicles 71,365 135,229 183,255 189,180 217,000 to the appropriation for road main- Buses 14,667 23,983 29,833 27,632 30,069 tenance, the annual motor vehicle Trucks 6,515 10,832 17,991 17,032 18,306 registration charges were revised Motorcycles/tricycles 138,948 285,366 491,113 517,087 537,811 upward with 80% of the proceeds Trailers 911 1,716 2,843 2,467 2,798 earmarked to be deposited in the Government 45,482 51,160 66,468 56,698 58,142 SRF for the maintenance of national Cars 6,052 4,613 5,968 4,089 6,077 roads (RA 8794). In the three years Utility vehicles 23,074 25,428 32,670 28,398 28,834 following the passage of this law in Buses 386 458 367 343 321 2000, P10.3 billion was deposited into Trucks 5,607 4,878 7,461 6,872 6,476 the SRF. However, less than half was Motorcycles/tricycles 9,617 15,571 19,793 16,812 16,233 Trailers 116 212 209 184 201 releasedbyDBMtoDPWH.Currently, the annual proceeds into the SRF are Diplomatic 5,895 3,070 3,391 2,698 2,904 about P5 billion. This rate is expected Exempt 17,641 3,316 1,014 1,189 1,166 to grow with the increase in vehicle Total vehicles 1,620,242 2,581,354 3,701,173 3,865,862 4,187,673 registrations. There is no provision Sources: Land Transportation Office (www.lto.go.ph); and National Statistical Coordination in the law or its implementing rules Board. Philippine Statistical Yearbook 2003. Manila. and regulations for indexing charges to the general price level. Over the past 10 years, the private sector has involves very little expansion or extension. The large financed three toll road projects costing $925 million: decrease in investment funding of national roads the redevelopment of the NLEX ($377 million); phase was due in part to the government deficit, which 1 of the MCTE ($47 million); and phase 1 of the adversely affected investment in all sectors. Never- Skyway ($500 million). With the exception of the theless, expenditures on national roads as a share of right-of-way, which was probably in the order of total national government expenditures declined by $100 million­150 million, the balance was financed 50% between 1999 and 2002, indicating the govern- by the private sector.4 In addition, work is under way ment's decreasing priority of investment in national on the construction of phase 2 of the MCTE at an roads. While investment expenditures have shown estimated cost of $117 million. significant fluctuations over the past decade, expen- ditures on road maintenance remained stable at 0.2% Local roads of GDP. The largest investor in local roads is the LGUs, Consistent and reliable data on expenditures although their investments have varied from 4% to on local roads are unavailable. The estimates in 6% of total LGU revenues.5 Another large source is table 8.6 make use of some available figures and congressional funds, which earmark funds in DPWH's involve certain assumptions regarding the spending budget for investment. These funds appear under the patterns of the different agencies funding local rubric "various infrastructure" in DPWH's budget roads. Similar to expenditures on national roads, it and are dedicated to projects selected by legislators, appears that there has been a decline in investment many of which are not part of well-conceived or in local roads over the past few years, but at a less sustainable development plans for local governments. pronounced rate. For 2001­2004, P30.4 billion was appropriated to WorldBankInfra.indb 147 12/6/2005 8:41:53 AM 1 Philippines: Meeting Infrastructure Challenges Table 8.6 Expenditures by government on roads (P billion, nominal, unless otherwise indicated) Sources 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 A. National roads A.1. Investment (mostly rehabilitation) DPWH1,2 10.5 14.3 13.6 21.9 21.8 18.2 30.8 21.5 20.3 16.0 A.2. Maintenance3 1.7 1.8 3.2 3.4 3.6 3.7 3.8 4.1 4.1 4.1 Total expenditures on national roads 12.2 16.1 16.9 25.3 24.4 21.9 34.6 25.6 24.4 22.1 Expenditures on national roads (% of 5.1 6.8 5.6 4.6 6.9 4.3 4.0 3.5 national government expenditures) B. Local roads B.1. Investment (mostly rehabilitation) B.1.1. Investment by national government Department of Agriculture1 0.0 0.0 0.0 0.0 0.0 0.9 1.0 2.3 0.7 0.7 Department of Agrarian Reform1 0.2 0.5 0.5 1.0 ARMM1,4 0.4 0.2 0.6 0.0 0.1 Allocations from Special Funds1,5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.1 0.7 0.7 Estimated congressional funds6 5.5 1.2 2.7 3.2 6.9 3.9a Subtotal (national government) 5.5 2.4 4.1 8.6 8.7 6.4 B.1.2. Investment by LGUs Estimated LGU investment in roads7 1.7 3.0 4.1 3.4 4.9 4.0 5.3 6.6 6.1 4.7 Total investment in local roads 1.7 3.0 4.1 3.4 10.4 6.4 9.4 15.2 14.8 11.1 B.2. Maintenance8 0.9 1.2 1.3 1.5 1.8 1.9 2.3 2.7 2.7 3.1 Total expenditures on local roads 2.6 4.1 5.4 4.9 12.3 8.4 11.7 17.8 17.5 14.2 Total investment in all roads 12.3 17.3 17.7 25.4 32.3 24.6 40.2 36.6 35.1 27.1 Total expenditures on all road 2.5 2.9 4.6 4.9 5.4 5.6 6.1 6.8 6.8 7.2 maintenance Total expenditures on all roads 14.8 20.2 22.2 30.2 37.7 30.3 46.3 43.4 41.9 34.3 Total road expenditures (% of GDP) 1.0 1.2 1.2 1.4 1.6 1.1 1.6 1.3 1.1 0.9 DPWH = Department of Public Works and Highways. a = assumed equal to the average of the previous five years. Sources: 1. Annual figures on obligation basis sourced from Department of Budget and Management. 2. The funds for road investment in national roads are historically heavily dependent on official development assistance (ODA). According to DPWH, ODA accounted for about half of the investment in national roads in 1997­2001. 3. DPWH-Bureau of Maintenance as cited in Japan Bank for International Cooperation. 2003. "Sector Study for the Road Sector in the Philippines." June. 4. ARMM receives a separate budget. 5. Includes funding from the Municipal Development and Local Government Empowerment Funds. 6. Figures for congressional funds from Rosario G. Manasan. "Infrastructure and Decentralization." May. World Bank, Manila. 7. LGUs' investment in roads was assumed at 70% of their total investment in transport. Resulting investment figures vary between 4% and 6% of total LGU revenues and are consistent with the results of the 2002 Annual Survey of Construction Projects of Local Government, National Statistics Office. 8. Maintenance expenditures for 2002 from Asian Development Bank. 2003. "Rural Roads Development Policy Framework." Manila. Figure represents 1.9% of LGU revenues for 2002. Maintenance expenditures for earlier years were assumed to be 1.9% of total LGU revenues. congressional funds, of which some P14.2 billion allocation of P700 million annually for farm-to- (or 39%) went to local roads.6 As table 8.6 indicates, market roads, and the Department of Agrarian the level of financing from congressional funds Reform allocated an average of P777 million a year varied significantly from year to year, from a low of from 2001 to 2003. The total annual allocations P1.2 billion in 1998 to P6.9 billion in 2001. for farm-to-market roads from both agencies were As for other financiers of roads, the Department P1.47 billion between 2001 and 2003. This amount of Agriculture has, in its Agriculture and Fisheries is over and above any funds committed by DPWH, Modernization Act (AFMA) program budget, an the LGUs, and congressional funds. WorldBankInfra.indb 148 12/6/2005 8:41:53 AM Chapter 8 Roads 1 Investment outlook: Next six years appears to be the inability of the proponents to raise National roads the funding required by the project.9 The total costs The MTPIP proposed by DPWH for roads for 2004­ are $46 million for phase 2 of STAR and $177 million 2009 has an annual budget of around P26 billion for phase 2 of the MCTE. (table 8.7). The MTPIP reflects the government's planned tight fiscal policy however, rather than Local roads the sector's needs. Under the proposed plan, The absence of long-term transport planning among investment in national roads (once congressional LGUs, with few exceptions, makes estimation funds are excluded from the total) is projected to of future road expenditures difficult. The trends increase to P22.0 billion in 2006 before dropping arrived at earlier are used to project spending by to P20.6 billion in 2009. According to these figures, LGUs on investment and maintenance, estimated and assuming average annual GDP growth of 4% at 4.5% and 1.9%, respectively, of LGU income. a year,7 expenditure on national roads would drop These rates, based on previous trends, are well below to slightly less than 0.3% of GDP by 2009. This desired levels. A study by the Asian Development would be the lowest rate of expenditure in at least Bank (ADB), for example, places the requirements 17 years. Figure 8.1 shows historical and projected for maintaining local roads at P13.9 billion10 a year, expenditure levels as a share of GDP. Projections inclusive of P4.0 billion a year for road restoration are based on the GDP growth assumptions cited works spread over 10 years. Table 8.8 is an indicative above. expenditure program for local roads, assuming that the previous expenditure trends continue. Toll roads A 2003 study8 compiled 15 proposals for toll roads Figure 8.1 likely to be implemented by 2015. The estimated Investment in national roads as a share of GDP, 1993­2009 cost of these toll roads is more than P300 billion. Given that several of these proposals appear to have 1.2 already been abandoned by their proponents, and 1.0 the fact that only about 10% of that amount was 0.8 t invested by the private sector in toll roads over the past decade, it is unlikely that this investment level encerP 0.6 0.4 will be achieved. Over the next few years, the toll 0.2 road projects with the best chance of completion 0.0 are those with preexisting signed concession 1993 1995 1997 1999 2001 2003 2005 2007 2009 agreements: STAR phase 2 in Batangas province Year and the MCTE phase 2. These two projects have Note: Projections from 2004. completed segments. In both cases, the main hurdle Source: Tables 8.6 and 8.7. Table 8.7 Proposed Medium-Term Public Investment Program, 2004­2009 (P million, nominal) Category 2004 2005 2006 2007 2008 2009 Total Total national roads 19,960 21,833 22,022 22,239 21,012 20,557 127,624 Foreign assisted 17,251 20,498 20,622 20,739 17,411 17,130 113,652 Ongoing 14,205 16,366 13,815 11,784 4,972 1,706 62,849 Additional requirementa 1,851 3,420 4,530 5,620 2,328 1,159 18,907 New/Proposed 1,195 712 2,277 3,335 10,111 14,265 31,896 Locally funded 2,709 1,335 1,400 1,500 3,601 3,427 13,972 Other infrastructure/CF 13,175 10,350 10,350 10,350 10,350 10,350 64,925 CF expenditure on roads (39% of total) 5,138 4,037 4,037 4,037 4,037 4,037 25,321 Total roads 26,153 26,698 26,887 27,104 25,877 25,421 158,139 CF = congressional funds. a. Covers cost overruns and change orders. Source: Department of Public Works and Highways. 2004. Medium-Term Public Investment Program (2004­2009). April. WorldBankInfra.indb 149 12/6/2005 8:41:54 AM 10 Philippines: Meeting Infrastructure Challenges Table 8.8 Indicative projections of local road expenditures (P billion, nominal) Item 2004 2005 2006 2007 2008 2009 Total LGU incomea 196 217 241 268 298 332 1.Road maintenance by LGUsb 3.7 4.1 4.6 5.1 5.7 6.3 2.Road investment by LGUsc 8.8 9.8 10.9 12.1 13.4 14.9 3.Road investment from CF (39% of total CF 5.1 4.0 4.0 4.0 4.0 4.0 allocation to DPWH­Table 8.7) Total investment in local roads (2 + 3) 14.0 13.8 14.9 16.1 17.5 19.0 Total expenditures by LGUs on roads (1 + 2) 12.5 13.9 15.5 17.2 19.1 21.2 Total expenditures on local roads (1 + 2 + 3) 17.7 17.9 19.5 21.2 23.1 25.3 CF = congressional funds. a. LGU income has been projected to grow at a real rate of 6.7% a year (following historical trends) and an average inflation rate of 4.5%. b. Road maintenance assumed at 1.9% of LGU revenue. c. Road investment assumed at 4.5% of LGU revenue. Source: Consultants' estimates. The financing gap: How big is it? Sector performance Maintenance With regard to national roads, the annual requirement Overall progress vis-à-vis the Medium-Term for maintenance of the road network is estimated Philippine Development Plan at about P16 billion (at 2003 prices)11 but projected The 2001­2004 MTPDP identified a number of reform annual expenditures through 2009 are P5.1 billion a measures and priority projects to be undertaken by year, or only 32% of estimated requirements. With 2004. A few of the targets were met. Among the regard to local roads, the 2003 ADB study indicates key targeted reforms that were not achieved were: that spending on the preservation of the 172,000 km expansion of the revenue sources for the SRF to local road network is one-quarter of estimated include a portion of the fuel tax; transformation requirements. The expenditure on maintenance of of DPWH into an autonomous National Roads local roads was about P3.1 billion in 2002 or P18,000 Authority; assumption of full responsibility by LGUs per kilometer, significantly lower than the required for the financing and maintenance of local roads; and P13.9 billion or P80,000 per kilometer. strict enforcement of vehicle axle loads. A review of priority projects revealed that only Investment three projects had been completed by 2002 against the Based on an average projected growth in GDP of planned 10. Of the 111 projects in the MTPDP, all of 4% a year, the investment needs in the road network which should have been started and most completed are around 1% of GDP a year over 2004­2009.12 by 2004, more than one-half showed no activity. A Moreover, based on the MTPDP targets, the period progress report by DPWH in 2004 revealed some 2001­2004 incurred an estimated investment backlog progress in meeting targets but results fell short in of P63 billion for national roads. If the backlog were many areas, particularly in expressway development to be made up over a 10-year period, this would (table 8.10). require an additional 0.12% of GDP to be invested Some progress has been made in implementing in roads. Table 8.9 shows the required investment the road sector reforms, but in general implemen- in roads, the projected/planned spending, and the tation has been slow. Much of the progress has been financing gap. in developing technical and information systems for reforming internal business processes of DPWH Total under the RIMSS Project (box 8.2). While there have The total financing gap for both investment and been extensions and delays of up to two years on maintenance for 2004­2009 is estimated to be about certain reform components, there have also been 1% of projected GDP a year. The underinvestment in important achievements. maintenance--such investment has been established Agency performance indicators have been as a priority in the MTPDP--is about 0.55% of GDP, developed and some are already in use by or slightly more than half of the total gap. DPWH. Road infrastructure surveys have been WorldBankInfra.indb 150 12/6/2005 8:41:54 AM Chapter 8 Roads 11 Table 8.9 completed and road and bridge Projected expenditures, estimated needs, and financing gap (P billion, information applications have nominal, unless otherwise indicated) been developed, including infra- Category 2004 2005 2006 2007 2008 2009 structure performance indicators, GDPa which generate reliable data for 4,768 5,172 5,627 6,112 6,621 7,157 Projected real GDP growth (%) 4.5 4.2 4.1 3.9 3.6 3.4 decisionmaking. Land acquisition Estimated investment needsb (% of GDP) 1.24 1.18 1.15 1.11 1.03 0.98 procedures have been developed with implementation and staff Estimated investment needs 58.8 60.5 64.3 67.6 69.0 71.8 training ongoing. New contractor Projected investment expenditures billing systems reduced the average National roadsc 20.0 21.8 22.0 22.2 21.0 20.6 time to pay contractors from 69 Local roadsd 17.7 17.9 19.5 21.2 23.1 25.3 days in 2001 to 30 days in 2003. Total 37.7 39.7 41.5 43.4 44.1 45.9 Human resource capacity is being Financing gap for investment 21.2 20.8 22.8 24.1 24.9 25.9 strengthened in parallel to be able to handle the new systems. While Estimated maintenance needs the development of a multiyear Nationale 17.1 18.5 20.2 22.0 24.1 26.3 network planning and programming Localf 16.6 18.0 19.6 21.4 23.4 25.6 system was to be in operation by Total 33.6 36.5 39.8 43.4 47.5 52.0 July 2004, the system can be fully Projected maintenance expenditures operational only after the collection Nationalg 4.7 4.8 5.0 5.2 5.4 5.6 of traffic data, a process that is Local 3.7 4.1 4.6 5.1 5.7 6.3 currently delayed. Another setback Total 8.4 8.9 9.6 10.3 11.1 11.9 has been the delay in the prepa- Financing gap for maintenance 25.2 27.6 30.2 33.1 36.4 40.1 ration of streamlined contract and procurement documents. Total financing gap 46.4 48.4 52.3 57.3 61.3 66.0 On the institutional side, the Total financing gap (% of GDP) 1.0 0.9 0.9 0.9 0.9 0.9 SRF was established in 2000, and a. Base case projections by the International Monetary Fund. Assumptions: annual inflation of revenues of P10.3 billion from the 4.5%, and real GDP growth of 4.5% in 2004 to drop gradually to 3.4% by 2009. b. The share MVUC were deposited in the SRF is estimated at 25% of projected GDP growth plus 0.12% of GDP to adjust for the investment backlog. c. Projected expenditures for national roads are from the MTPIP. d. Projections over three years. However, there has for local roads are based on average spending levels as a share of LGU revenues over the been little progress in establishing past 10 years plus the projected expenditures on roads from congressional funds as per the a commercially oriented National MTPIP. e. Maintenance needs for 2003 were estimated at P16 billion, equivalent to 0.36% of GDP. This percentage was held constant in projecting future maintenance requirements. Roads Authority, a reform plan f. Maintenance needs for 2002 were estimated at P13.9 billion, equivalent to 0.35% of GDP. This developed and approved by DPWH, percentage was held constant in projecting future maintenance requirements. g. Projected DBM, Department of Finance, and real expenditures on maintenance for national roads were held constant at the 2003 level and NEDA. only increased by the rate of inflation. Source: Consultants' estimates. In addition, little action has been seen in introducing a fuel levy as an Table 8.10 Key measurable targets under the 2001­2004 MTPDP 2000a 2004 targeta Actual (end-2003)b Paved share of national roads (%) 62 79 70 Lineal share of permanent bridges (%) 89 95 92 Expressways A total of 271 km of build-operate-transfer Only North Luzon Expressway interurban roads: North Luzon Expressway rehabilitation was rehabilitation (widening of existing facilities), STAR 2, implemented (83 km) South Luzon Expressway (widening and extension to Lucena), and Subic-Clark-Tarlac Expressway Sources: a. NEDA. 2000. 2001­2004 Medium-Term Philippine Development Plan. b. DPWH "Infrastructure Development." Presentation in the University of the Philippines 3rd Lecture Series 2004. WorldBankInfra.indb 151 12/6/2005 8:41:54 AM 1 Philippines: Meeting Infrastructure Challenges Box 8.2 Road Information and Management Support System T he Road Information and construction (project/contract man- reduced procurement time from Management Support System agement, land acquisition, design one year to between two and four (RIMSS) aims to improve the quality review, cost estimation, design months. In project identification and and delivery of Department of surveys and design tools), and oper- prioritization, decisionmaking can Public Works and Highways (DPWH) ation and maintenance (equivalent now be aided by empirical methods services in the provision and maintenance kilometer and mainte- from the multiyear planning system management of the road system nance management). The support that was developed and by the by: providing a source of readily processes to be assisted include executive information and project accessible, relevant, and valid financial management, as well as monitoring system. The automation information on the road system; management of physical resources, of financial management brought using various modern analytical human resources, information, and improvements in contractor and tools; and adopting efficient, procurement. consultancy billing guidelines, modern, information technology. Implementation of RIMSS started reduction of processing time for It was a comprehensive attempt in 1997. It has been integrated with payments, proper control mecha- at improving three areas: strategic the major business process reengi- nisms, and improved policies and management (quality assurance, neering program of DPWH, which procedures. Greater transparency strategic planning, performance aims for reforms and modernized in operations (e.g. clear rules and indicators, policies and procedures, systems in processes that were not procedures on infrastructure right- and public relations); core processes; only notoriously cumbersome but of-way, contractor billing guidelines, and support processes. The core also prone to suspect practices, civil works procurement) is likely to processes that were to be enhanced namely procurement, project pri- be achieved. are in planning (network planning oritization, financial management, and multiyear programming, and right-of-way acquisition. In pro- Sources: www.dpwh.gov.ph; DPWH presentation to the World Bank at bridge management, traffic infor- curement, for instance, the devel- DPWH, October 1, 2004; and World mation and analysis, assessment opment of the Civil Works Registry Bank Project Appraisal Document of and feasibility, postevaluation, and advertisement and rules posted the National Road Improvement and pavement management, and safety), on the DPWH website reportedly Management Project, January 21, 2001. additional source of revenue for the SRF. Experience procurement practices and reduces the quality of in other countries indicates that road users are road construction, which in turn reduces efficiency more likely to be willing to pay for improved roads, and adds significantly to the cost of road provision. provided that there is a clear perceived link between the payment and the delivery of better services. Access Furthermore, the administration of the SRF has been An important measure of access for a road network is subjected to external pressures that have resulted in the percentage of people within a certain distance (for delays and diversion in the release of funds, so that example, 2 km) from an all-season road. This infor- it has not been as effective as expected in improving mation is unavailable in the Philippines but is worthy the road maintenance program. of collection to help focus on the regions that require better integration into the country's growth centers Governance and markets. A proxy for access is the density of the Results of the June 2004 Social Weather Stations road network measured in terms of road length per Enterprise Survey13 revealed that the public's vehicle, per person, and per square kilometer of land perception of DPWH's efforts to combat corruption area. The Philippines compares favorably with other is one of the worst with regard to public agencies, countries in the region in this category (table 8.11), and that it had further worsened over the previous although there are large regional variations as two years. Speculations vary widely as to the level of explained below--a clear limitation of such broad leakage from DPWH-implemented projects, and are measures. The significantly higher road density per all difficult to verify. Governance issues also include 4-wheel vehicle in Vietnam and Cambodia is due in the selection of project locations or allocation of large part to the dominance of the motorcycle as a funds. The lack of a strong governance framework means of transport and the small number of 4-wheel in DPWH most likely results in uncompetitive vehicles in the two countries. WorldBankInfra.indb 152 12/6/2005 8:41:55 AM Chapter 8 Roads 1 Table 8.11 Table 8.13 Road network coverage, six Asian countries Length and paved share of national roads, Philippines, selected areas, 2000 Road density: length in km per Country Total road National road length length (km) 1,000 vehicles 1,000 sq. km of Area Paved (%) (4-wheel) population land area (km) Indonesia 310,000 65.8 1.4 0.16 NCR 891 100 Thailand 209,800 42.0 3.3 0.41 Luzona 14,061 60 Vietnam 204,318 302.0 2.5 0.62 Visayas 7,119 68 Philippines 202,083 91.3 2.4 0.67 Mindanao 7,807 51 Cambodia 38,257 372.0 2.7 0.21 Philippines 29,878 62 Malaysia 72,000 19.4 2.8 0.22 a. Excluding National Capital Region. Sources: Philippine data from JICA-DPWH. 2003. "Roads in the Source: JICA-DPWH. 2003. "Roads in the Philippines." Manila. Philippines." Manila; other countries from the ASEAN Statistical Yearbook 2004 and the ASEAN Transport and Communication Sectoral Report 1999. ASEAN, Jakarta. Quality of paved roads Reliable data on the quality of paved roads exist for about 11,000 km of national roads only.16 For this Quality of infrastructure/service group of roads, less than 50% is considered to be Paved national roads in good condition as measured by the International A key indicator of road quality is the share of national Roughness Index (IRI) of 5 or less. Table 8.15 shows roads that is paved.14 The estimated paved rate in June the average IRI for the four main groups of national 2004 was 70%. Table 8.12 shows the length of national roads based on the data available. Maintenance roads and the paved share in four Asian countries. Road expenditures, another indicator of the quality of the classification in the Philippines is still administrative, roads, have averaged about one-third of the desired ratherthanfunctional,andrecentstudieshaveindicated levels for both national and local roads. that the length of roads categorized as "national The poor road surface translates into higher roads" needs to be reduced to around 18,000 km.15 vehicle operating costs per kilometer. In 1999, one The resulting smaller network comprising the arterial study estimated that a 1% improvement in the IRI for national roads is likely to have a higher paved rate than national roads would yield a 4% reduction in vehicle the 70% average for all national roads. operating costs, equal to P13 billion a year.17 The same The paved rate differs considerably within the study estimated the required annual maintenance country, from province to province, as well as by cost to improve the IRI by, most likely, significantly class of roads. Table 8.13 shows the length of national more than 1% to be P10 billion. Given the underin- roads and the paved share for various geographic vestment in maintenance between 1999 and 2003, the areas, while table 8.14 presents changes in the length situation could only have worsened since 1999. This is and the paved share of roads between 1981 and 2000 consistent with DPWH's finding that average vehicle for all road types. Table 8.14 Table 8.12 Change in length and paved share of roads by road class Length and paved share of national roads, four Asian countries 1981 2000 Road class Length Paved (%) Length Paved (%) Country National road length (`000 km) (`000 km) (km) Paved (%) National 23.8 44 29.9 62 Philippines (2003)a 28,266 70 Provincial 33.6 17 27.1 21 Philippines (1981)b 23,835 44 City 7.1 77 Vietnam (2002)c 15,831 71 Municipal 11.9 26 15.8 34 Thailandc 51,544 98 Barangay 84.2 2 122.0 7 Myanmarc 28,790 80 Total 153.6 13 200.8 21 Sources: a. Philippines 2004, DPWH website: http://www.dpwh.gov. ph/infrastructure/stat_JUNE182000.htm. b. Government of the Sources: JICA-DPWH.2003. "Roads in the Philippines." Manila; Philippines. 1981. "National Transport Planning Project." Manila. Government of the Philippines. 1981. "National Transportation c. ASEAN Statistical Yearbook 2004. ASEAN, Jakarta. Planning Project." Manila. WorldBankInfra.indb 153 12/6/2005 8:41:55 AM 1 Philippines: Meeting Infrastructure Challenges Table 8.15 but costs have subsequently risen. Average roughness for a proportion of the national road network, 2004 Investment costs, covering rehabili- tation and new construction, have Length of network for National road classification which roughness data Total length of Average been lowered in real terms since the are available (km) national network (km) IRIa 1990s through stricter procurement East-west lateral 1,059 2,541 7.8 and contract management, but North-south backbone 3,830 5,222 5.7 significant increases in costs are Other strategic roads 3,805 7,691 6.5 again becoming evident. Funds are Secondary national roads 2,165 12,806 14.0 periodically used to finance labor- intensive employment-generation a. Five or less on the International Roughness Index is an indication of good road condition. programs. Most recently, about Source: DPWH-RIMSS. 2004. "Executive Information System." DPWH, Manila. P2 billion (or about 50%) of the amount released from the SRF was used to finance operating costs have doubled since 1999 while the employment-generation programs (such as the consumer price index has increased by only 20%.18 Kalsada Natin and Alagaan Natin programs), which are significantly more expensive than competitive Road accidents procurement of the required services by contract. The incidence of road accidents is another manifes- tation of the quality of the road system. Based on Congestion official statistics, the Philippines compares favorably The number of vehicles (excluding motorcycles and with other countries. It is however widely believed tricycles) relative to road length (excluding barangay that statistics severely understate the problem in roads) increased from 18.0 per kilometer in 1991 to road safety. The underreporting varies according to nearly 30.8 per kilometer in 2000. As a consequence, the severity of the injury. A study by Sigua (2004) major arterial roads, particularly the north-south estimates that fatalities are 5.5 times the reported backbone roads, are experiencing traffic congestion at figures, and serious and minor injuries are respec- sections around major urban centers where through tively over 50 and 100 times the reported figures.19 traffic mixes with local traffic. A study prepared by The same study estimates that road accidents cost the the National Center for Transportation Studies for economy as much as P49,173 million ($894 million) NEDA and the Legislative-Executive Development in 2002, or over 1% of GDP (table 8.16). Advisory Council in 2000 indicated that losses due to congestion in Metro Manila alone were around Efficiency P100 billion a year in 1996 prices, or 4.6% of GDP. Resource utilization Congestion is further exacerbated by an increasing Preventive maintenance program costs showed needforroadsbypassingtowns,toovercomesignificant significant savings under competitive procurement reductions in travel speeds and to reduce the rates of in 2000­2002 (about P40 million per kilometer) traffic accidents and casualties in these towns. DPWH has identified 60 urban sections where a bypass is already justified.20 Table 8.16 National cost of traffic accidents, 2002 Some of these bypasses have been studied but problems in right-of-way Accident type Average acquisition and lack of funding have cost (P) Number of accidents Total cost (P million) delayed construction. As reported Adjusted for Adjusted for underreporting As reported underreporting Expressways Fatal 2,273,000 714 3,820 1,623 8,683 The overall efficiency of the road Serious injury 353,000 797 43,870 250 15,486 network depends on a functional Minor injury 69,000 1,672 187,500 117 12,938 hierarchy and the presence of Damage only 55,000 9,623 219,400 529 23,067 sufficient kilometers of expressway Total 12,806 454,590 2,519 49,173 to provide unimpeded and swift Source: Ricardo G. Sigua. "Scale, Characteristics and Costs of Road Accidents in the Philippines." connectivity and access. The first Presentation at the 12th Annual Transport Science Society of the Philippines Conference, July expressways in the Philippines 23­24, 2004. University of the Philippines, Diliman. were inaugurated in 1977 with a WorldBankInfra.indb 154 12/6/2005 8:41:55 AM Chapter 8 Roads 1 total length of 126 km. This figure Table 8.17 remained unchanged until the late Length of expressway network, three Asian countries 1990s when expressway length increased to 165 km. Table 8.17 Total length Expressways as In urban capital (urban expressway)a shows that Thailand and Indonesia (km) percent of national Length (km) Length (km) road network have more extensive expressway per 1,000 vehicles systems, both in absolute terms Philippines 165 0.6 41 38 and as a percentage of national Thailand 270 1.8 136 57 roads. In addition, the benefits of Indonesia 490 3.4 160 61 the Philippine system are not fully a. An urban expressway is located within the administrative boundary of the urban centers realized due to missing links and (Manila, Bangkok, Jakarta). lack of interconnections of some Sources: Hitoshi Ieda. 2000. "Motorway Development in Eastern Asia 2000." Short Report for sections (in particular the section PIARC-C4 Meeting in Cuba 2000; Japan International Cooperation Agency. 2003. "Public-Private Partnership Study of Metro Manila Urban Expressway Network 2003." Manila. between the STAR and the SLEX). Productivity of road administration intercity passenger travel and freight in the Philippines DPWH employs about 35,000 workers, of whom are higher than in Thailand and Vietnam, attributable about 60% are deployed to manage the national in large part to high vehicle operating costs. road network of 28,600 km. It is a level that has not Figure 8.2 shows the toll rates of various changed much despite the reduction in the road expressways in the Philippines and how they compare program in recent years and in particular after the to other countries. The 2004 toll rate for the NLEX and devolution of barangay roads. This translates to a ratio SLEX were very low compared regionally. Even with of one employee for every 1.3 km of national roads. In the increase of NLEX toll rates in early 2005 after the comparison, Indonesia employs 2,726 workers under completion of its redevelopment, its toll level is still the Directorate General of Regional Infrastructure to within the middle ranges relative to other countries. manage about 26,300 km of national roads--or a ratio A 2003 study23 estimated the benefits to users of toll of one employee for every 10 km of roads.21 roads and determined that P4 per kilometer is likely to leave the user with significant savings in time and Affordability vehicle operating costs. Public transport fares within Metro Manila are the Gasoline and diesel prices in the Philippines are highest in the Philippines, with lower and different deregulated and are minimally taxed. As a result, the rates applied in the rest of Luzon, Visayas, and Philippine gasoline price (52 US cents per liter) is just Mindanao. In 2003, the applicable tariff in Metro above the "normal" sales price of gasoline of about 48 Manila for ordinary buses was P4.00 for the first 4 km US cents per liter.24 In contrast, diesel prices (34 US plus P0.65 per kilometer beyond that. In June 2004, cents per liter) are held below the "normal" sale price the tariff was adjusted upward to P6.00 and P1.10 per of 47 US cents per liter. It is worth noting that the kilometer respectively. The rate from late 2004 for prices of gasoline and diesel have increased 48% and jeepneys is different, with a rate of P5.50 for the first 4 km and P1.00 per kilometer thereafter. Fares on air- conditioned buses are deregulated, and are typically no Table 8.18 higher than 20% over ordinary bus services. While the Intercity passenger transport and freight costs, three Asian countries official rates in urban centers are generally followed, the provincial and interurban fares are discounted, Intercity passenger fare Intercity freight rate (P per pax-km) (P per ton-km) particularly in the Visayas and Mindanao. On the island of Cebu, operators charge P0.72 per kilometer Philippines 0.69­0.79 8.80 (instead of P1.10 per kilometer) due to competition Thailand 0.44 5.40 and sensitivity of passenger demand to fares.22 Vietnam 0.58 5.10 Rates for cargo are not regulated. The going rate Sources: Philippines: consultants' estimates; Thailand: World Bank. is about P40 per kilometer for containers in Metro Trade and Logistics in East Asia. 2003. World Bank, Washington, D.C.; Manila. The intercity freight rate ranges from P86 Vietnam: Japan International Cooperation Agency, Ministry of Transport, and Transport Development and Strategy Institute. 2000. to P104 per 20-foot equivalent unit-km for distances "The Study on the National Transport Development Strategy in the exceeding 200 km. Table 8.18 shows that the costs of Socialist Republic of Vietnam. Hanoi. WorldBankInfra.indb 155 12/6/2005 8:41:55 AM 1 Philippines: Meeting Infrastructure Challenges Figure 8.2 Main issues International toll rates PHI­MCTE One way to understand the main issues in the road PHI­NLEX closed sectoristoexaminethesupplyanddemanddimensions PHI­NLEX open of road transport, namely road provision--analyzed PHI­Skyway elevated further under the two key problems of unsatisfactory PHI­Skyway at grade preservation of road assets and inadequacies in the PHI­SLEX road network (as well as their causes); and road Indonesia use management--discussed under road safety and South Africa Malaysia vehicle overloading, the latter of which has a direct Brazil negative impact on road quality. China France Unsatisfactory preservation of road assets Canada Increasing vehicle operating costs are a manifestation Australia of the unsatisfactory preservation of road assets, both 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 national and local. With regard to national roads, US$ per km the annual requirement for the maintenance of Note: Australia, Canada, France, Malaysia, and Indonesia (2003); China the national road network was estimated at about and Brazil (2000); South Africa (1999); Philippines (2005). P16 billion in 2003 (as explained in the section MCTE = Manila­Cavite Toll Expressway; NLEX closed = Marilao to Sta. Ines; NLEX open = Balintawak to Marilao; PHI = Philippines; above, "Road expenditures and financing") but Skyway at grade = Magallanes to Alabang; Skyway elevated = Pasay actual spending for 2001 was about P4.0 billion, or Road to Bicutan; SLEX = South Luzon Expressway, Alabang to Calamba. only 25% of estimated requirements. Even though An "open" system means a road user pays upon entry and exits anywhere; in a "closed" system, a road user gets a ticket upon entry the government attached the highest priority to the and pays upon exit. Exchange rate used for conversion = P55/US$. maintenance of existing road assets in the 1999­2004 Source: Tasman Economics. 2003. "Institutional Arrangements in the MTPDP, maintenance spending for 1998­2002 has Toll Road Sector, Final Report." PPIAF and World Bank, Manila; basic varied at between 25% and 30% of requirements, data for Philippines from Toll Regulatory Board. indicating that the condition of national roads has been consistently deteriorating throughout this 26% respectively since 2002 in response to the sharp period. Moreover, most of the P4.0 billion is devoted rise in world crude oil prices. Table 8.19 shows that to routine maintenance, which is ineffective in gasoline prices in the Philippines are similar to those reducing deterioration and restoring the condition in Thailand and Vietnam but higher than those in of the roads. Indonesia, where they remain heavily subsidized. While the lack of reliable historical data precludes establishing how much the national road assets have Table 8.19 deteriorated in the past, recent investigations of road Gasoline prices, selected Asian economies, conditions carried out under the RIMSS Project for November 2004 11,000 km of paved national roads indicated that half Gasoline price of these roads were in poor condition (i.e. with an (US cents per liter) IRI higher than 5). As the roads that were surveyed Indonesia 27 were the national arterial and other strategic roads Malaysia 37 that would have received priority maintenance, Vietnam 48 a reasonable inference is that significantly more Philippines 52 than half of the national road network is in poor Thailand 54 condition. Cambodia 79 Further evidence of such deterioration can be seen India 87 by reexamining the 1999 study by Scott Wilson Kirk- Korea 135 patrick & Co.17 The study estimated the normalized Hong Kong, China 154 annual requirement for maintenance at P10 billion Note: November 17­20, 2004 survey; prices at filling stations. with an additional P2.6 billion a year over a 10-year Source: Gerhard P. Metschies. International Fuel Prices 2005, period to address the maintenance backlog. Given 4th Edition Data Preview. Deutsche Gesellschaft für Technische that annual maintenance expenditures from 1999 to Zusammenarbeit (www.internationalfuelprices.com). 2003 did not exceed P4.1 billion, the extent of the WorldBankInfra.indb 156 12/6/2005 8:41:56 AM Chapter 8 Roads 1 deterioration of the national road network becomes by financial problems facing the sponsors, difficulties apparent. with right-of-way acquisition, and in some instances, In addition to the low level of maintenance the unwillingness of the concessionaire to invest in spending, the efficiency of maintenance practices is extensions after receiving a concession to operate an in question. Most of the maintenance is by admin- existing section and build a new one. istration and, even when carried out by contract, There is also an increasing need for roads the administration limits scope for private sector bypassing towns to overcome significant reductions efficiency by defining specific activities for the private in travel speeds and to reduce the rates of traffic contractors to carry out. Exacerbating the situation accidents and casualties in these towns. In some is the fact that funds allocated for maintenance are cases, the benefits of a road network are not fully not always used for that purpose--as mentioned, realized due to missing links and lack of intercon- maintenance funds are periodically used to finance nection of some expressways. labor-intensive employment-generation programs. In terms of local roads, with a few exceptions, Causes of poor asset preservation and there are no expenditure recording and information inadequate road network systems in LGUs to provide reliable estimates on Two main factors account for the unsatisfactory maintenance spending or road conditions. The 2003 preservation of road assets and inadequacies in road study by ADB10 indicates that spending on the pres- network development. First is the weak institutional, ervation of the 172,000 km local road network is only policy, and governance frameworks as well as poor one-quarter of estimated requirements. Expenditures capacity of the sector, including poor governance and on maintenance of local roads were about P18,000 corruption, which lead to inefficient resource utili- per kilometer in 2002, significantly lower than the zation. Second is the relatively low level of contri- required P80,000 per kilometer. butions by the government and the private sector to road investment and maintenance. Inadequacies in the road network The increasing levels of congestion reflect both Weak institutional, policy, and governance frameworks demand management and infrastructure limi- At the national level, this can be discussed under tations. Investment in the upgrading and expansion four areas: weak commercial orientation of DPWH; (including extension) of the network has been low. corruption; lack of clear direction by the Road Board; The required investment in new capacity to sustain and overstaffing at DPWH. First, DPWH has been a 4% economic growth rate would be around 1.25% slow in implementing the institutional reforms to of GDP, or significantly higher than the current give it a greater commercial orientation. Although investment rate of 0.7% (see section above, "Road the development of the technical systems necessary to expendituresandfinancing").Thecurrentgovernment reengineer the internal business processes of DPWH inclination to freeze the national road investment is progressing, and will result in more transparency budget at its 2003 level through 2009 would result and better resource utilization, there has been no in significantly lower levels of investment as a share progress in converting DPWH into a commercially of GDP. This may be withstood by a country for a oriented National Roads Authority. Without further year or two but cannot be sustained for a long period progress on commercialization, there is a high risk without adversely affecting growth. The fast-growing that the potential benefits of the technical reforms will countries in the region are investing over 2.5% of not be realized. The high-level multiagency oversight GDP in road capacity expansion alone. group that was to be established to monitor and drive Only about 80% of arterial national roads are the reform process has still not convened or taken paved, even though paving all arterial roads is control of the reform. generally well justified on economic and social Second, the public regards DPWH as one of the grounds as they carry sufficient traffic volumes worst agencies in combating corruption and, as the and are essential for linking the provinces to the results of the 2004 Social Weather Stations Enterprise country's various economic growth centers and Survey25 indicate, the perception had further worsened facilities. However, the implementation of several over the previous two years. In addition, a manifes- foreign-assisted road projects has been delayed due tation of the weak governance framework of DPWH to the lack of counterpart financing. In addition, the is the discrepancy between the surveyed length of construction of some key toll roads has been delayed national roads and the length used in planning the WorldBankInfra.indb 157 12/6/2005 8:41:56 AM 1 Philippines: Meeting Infrastructure Challenges allocation of maintenance funds. Surveys carried Low level of contributions by the government and out under the RIMSS Project indicated that the road private sector lengths used for planning in the various regions were At the national government level, the increasing generally higher than actual surveyed lengths, and in government deficit resulted in a reduction in the one region the difference exceeded 20%. The lack of a budgetary resources committed to the road sector strong governance framework in DPWH and in the over 1998­2002, both in real terms and as a share of government generally will result in inefficiencies that GDP. More important, the share of the road sector will add significantly to the cost of road provision. in the national government budget declined over Third,althoughtheadministrativeorderwasmade these years, indicating that the sector has borne a in early 2003, the Road Board secretariat was only larger share of the government deficit. Nevertheless, established in mid-2004 after long delays in autho- budgetary resources to the sector are likely to increase rizing the staffing and budget status. Without the once the fiscal deficit is reduced and efficiency of the focused guidance of the secretariat, the Road Board sector in resource utilization is enhanced. runs a risk of developing objectives and processes Private sector participation in the Philippines that are heavily influenced by the political process started in the road sector in the 1970s but interest and that conflict with many reform objectives. has waned since, despite the enactment of the BOT Fourth, out of 35,000 employees at DPWH, about Law and its amendment in the 1990s. In the last 60% are allocated to roads. This translates into 1.3 km decade, only four BOT agreements were concluded, of national roads per employee compared with about one of which never started, two are stalled after 10 km in Indonesia, for example. completion of a phase, and the fourth was completed At the local level, the weak institutional, policy, in 2004. and governance frameworks are exemplified in the The interest and contribution of the private fact that only a few LGUs have prioritized investment sector to investment in the road network have been programs and that spending is not according to a low for several reasons. The inability of the private plan. In many cases there appears to be very little sector to come up with the necessary financing and systematic planning as to how funds are allocated the problems and costs associated with acquiring and no formal analysis of investments or prioriti- rights-of-way help explain its low investment in toll zation based on efficiency criteria. The devolution roads. Another reason is the weak institutional setup of responsibilities to LGUs was not accompanied associated with the two-in-one public-private part- by building their planning, technical, and imple- nership model (discussed in box 8.1 above). Under mentation knowledge and skill base. Planning and this model, a concessionaire receives a completed programming, in particular, are the weakest points phase 1 of a road project to build an additional phase in the project management cycle. and to operate and maintain both phases. While Resources for investment in local roads come the model itself is feasible, without the necessary from different sources with little coordination and safeguards in place it has been possible for conces- performance incentives among them. These include sionaires to operate phase 1 without carrying out the the Department of Agriculture, the Department of necessary investment in the ensuing phases. Agrarian Reform, LGUs, and the congressional funds. Of 16 road projects being monitored by the The departments finance farm-to-market roads. Metropolitan Manila Development Authority, a These road investments are typically conceived in special administrative body under the Office of the the context of an agricultural or irrigation project President created to coordinate services common and not as part of an overall road development to 17 LGUs of Metro Manila, 11 are encountering plan. Moreover, little attention is typically paid to right-of-way problems. A law enacted in 2000 to the maintenance requirements or sustainability of facilitate the acquisition of right-of-way for infra- these roads. structure projects has had little impact so far. The DPWH receives a budgetary allocation from delays are due to problems with the identification congressional funds for local roads. This amount of the beneficiaries and valuation, which often varied between 19% and 30% of DPWH's budget result in lengthy court proceedings; reluctance of and averaged about P3.9 billion over 1997­2001. It the government to use its power of eminent domain exceeds total maintenance expenditures of all local (compulsory purchase) and reliance on negotiation; roads and is slightly less than maintenance spending and complexity arising from the need to deal with on national roads. more than one LGU. WorldBankInfra.indb 158 12/6/2005 8:41:56 AM Chapter 8 Roads 1 The uncertainty surrounding the investment Vehicle overloading climate and the legal environment also contributes Vehicle overloading remains a problem. A study27 by to the low level of private sector investment. In the the RIMSS Project carried out in Batangas and Cebu past, collection of tolls has been stopped by court showed high costs to the Philippine economy (both injunction; toll rates have also been rolled back user and agency costs) as a result of overloading. by presidential order. The Toll Regulatory Board Overloading results in faster deterioration of the road (TRB)--the economic regulator for toll roads--is network, contributing to the country's high vehicle made up of the secretaries (or their representatives) operating costs. This in turn adversely impacts all of DPWH, DOTC, and the Department of Finance, road users and, moreover, would require maintenance as well as a private sector representative. The compo- sooner and more frequently than originally planned. sition of the group calls the autonomy of the TRB Based on the study by the RIMSS, the cost of over- into question. Moreover, the TRB is a party to road loading estimated over a 15-year period is about concession agreements in which it can adjudicate. A P104 million a kilometer of roads in Batangas and positive sign recently, though, is that the Department P43 million a kilometer of roads in Cebu. The cost of Justice denied to the TRB control of awarding of overloading in the case of Batangas would have service facility contracts inside expressways.26 been higher had the road not been designed for larger The MVUC has been instituted and road users loads. DPWH has raised the ceiling of the maximum are paying a proportion of the cost of using the single axle load to 13.5 tons. This, however, has not roads. Nevertheless, a large share of the cost of stopped overloading. In addition, the permissible load road maintenance and provision is not paid by is likely to be too high for many of the roads that users. The discussions in earlier sections demon- have weak pavements. strated the benefits of higher-quality roads and less The problem of vehicle overloading is not unique congestion. Comparisons with other countries in to the Philippines, and is quite common in many the region have indicated a significantly higher cost developing countries. Two main reasons for over- of passenger travel and freight movements in the loading are ineffective and weak enforcement of Philippines than, for example, Vietnam or Thailand. the relevant regulations, and lack of sufficient (and Road users, in general, are likely to be willing to pay functioning) weighbridges in vehicle inspection more for the use of roads once they are aware of the stations. Attempts over the years to deal with over- benefits and, more important, if they are assured loading by strengthening enforcement and by adding that the funds they contribute will be invested in new weighbridges have not borne much fruit. Given the road network. the prevalence of overloading and the poor track record in controlling it, it may be practical to start Road safety and vehicle overloading considering second-best solutions that acknowledge Road safety the existence of overloading. Comparing the costs The section "Sector performance," above, provided imposed on DPWH and road users as a result of truck some statistics as to how the Philippines compares overloading to the costs of designing and building to other countries in terms of road safety. The local the roads to higher standards that can withstand the study carried out by Ricardo Sigua estimated that higher axle loads (while observing road safety codes) road accidents and fatalities cost the economy as would help determine whether it may be advisable to much as $894 million in 2002, or over 1% of GDP. design the roads for higher axle loads or not. While some general good road safety measures and policies exist, there is no comprehensive strategy for road safety, and enforcement is weak. The main Recommendations obstacles to solving this problem do not have much to do with efficiency or shortage of funding as much as Underpinnings of the reform strategies the lack of perception of its gravity. While the Phil- The main objectives of the reform strategies are to ippines may compare somewhat favorably to other enhance the efficiency of the road sector in the Phil- countries in the region in terms of road accidents ippines and to increase the sector's effectiveness in and fatalities (although statistics in this area tend not promoting sustainable economic growth and compet- to be very reliable in many countries), investment in itiveness, while also providing adequate, all-year, road safety measures can be easily justified on the reliable, and safe access throughout the country. The basis of their high economic and social returns. underpinnings of the government's strategies should WorldBankInfra.indb 159 12/6/2005 8:41:56 AM 10 Philippines: Meeting Infrastructure Challenges be to increase efficiency in the utilization of scarce deal of political buy-in across many stakeholders, government resources, and commercialize the road including the legislature. sector. Better resource utilization primarily requires The key recommended actions are therefore improvements in planning, prioritization, and grouped and can be implemented in the following governance. Commercializing the sector addresses order (table 8.20). issues of: raising more funds from the users following the "user pays" principle; involving the private sector Improving governance and accountability of in the financing of toll roads; managing resources DPWH spending through the Road Board; and establishing an · Establish accountability for results of road spending autonomous National Roads Authority. at the district and regional levels. Spending for The creation of a commercially oriented road both capital and maintenance items should be sector with increased participation from the private guided by network requirements, defined by sector in terms of both management and financing district offices that are to be held accountable requires a strong partnership between the private and for measurable outputs. Performance-based public sectors. In this partnership, the public sector maintenance is one area where the concept of is to play the lead role in developing good plans, in accountable spending can be applied in a practical ensuring efficient utilization of its scarce resources, manner. Information on the investment require- and in providing an enabling environment for the ments for new roads in the network and mainte- participation of the private sector. These objectives can nance needs are now systematically generated by be met by realigning policies according to principles the methodologies and systems developed by the of sound economic management, strengthening RIMSS and should be the basis for allocations to institutions, building capacity, developing a strong capital and maintenance projects carried out by governance framework and culture, and weeding out district and regional offices of DPWH. corruption. · Prioritize spending based on major final output Practical approach to the reforms criteria. Political intrusion in public works deci- The proposed way forward for the road sector sionmaking should be minimized, if not elimi- involves short-term (up to three-year) actions as nated. This could be achieved by fully utilizing the well as medium-term initiatives. Over the next three system-wide technical analysis of investment and years, two critical factors will restrict the scope of maintenanceneedsnowputinplacebytheRIMSS. proposed government actions. The first is that very By strengthening the technical base for decision- limited, if any, additional funding from the national making within DPWH, the annual budgets for government beyond current spending levels can be road building and maintenance spending can be expected due to the government's tight fiscal position. fully justified and work plans of various units The second factor is that any short-term action should adequately supported. DPWH should start a not require the initiation of any new legislation. The serious application of the multiyear programming longer-term plan should reflect the relaxation of both and scheduling system, the bridge management of these constraints. Finally, a distinction needs to be system, and the pavement management system made between the time necessary for the successful developed under the RIMSS, in defining its completion of a reform and the time required to start capital and expenditure programs. it. While the successful accomplishment of many institutional reforms requires years, there is no need · Ensure better coordination among DPWH and to delay their initiation. other national agencies (such as the Department of Agriculture and the Department of Agrarian Broad directions to move forward Reform) and local government agencies in the Increasing efficiency and commercialization entails identification and prioritization of local roads. completing a series of critical actions. These actions This will contribute to greater efficiency in road can be sequenced according to the degree of imple- spending. mentability, starting with governance measures that are largely within the control of DPWH. Once results · Reduce costs and increase transparency in are seen, the government may intensify the reform procurement. The procurement reforms initiated package by focusing on actions that require a great within DPWH should be accelerated. Many of WorldBankInfra.indb 160 12/6/2005 8:41:57 AM Chapter 8 Roads 11 Table 8.20 Road sector recommendations Issue Actions for the short term Actions for the medium term (less than 3 years) (3­5 years) Improving governance and · Establish accountability for results of road accountability of spending at spending at district and regional levels Department of Public Works · Prioritize spending based on major final and Highways (DPWH) output criteria · Reduce costs and increase transparency in procurement · Apply the same efficiency and transparency principles to congressional funds projects Implementing structural Rightsize DPWH staff levels · Establish a commercially oriented changes in the road sector ··Operationalize Road Board to ensure National Roads Authority stakeholder oversight · Optimize road network: redefine · Enlist support from oversight agencies to primary and secondary roads monitor and drive the road sector reform process Placing greater reliance on · Expand toll road coverage and charge · Increase user charges through the user charges to support sector appropriate level of tolls fuel levy needs Improving private sector Resolve impediments to toll road concessions participation ··Increase use of performance-based maintenance contracts · Analyze obstacles in implementing the law on right-of-way acquisition (RA 8974) · Use open competition as preferred method for project selection · Limit role of Toll Regulatory Board to economic regulation · Develop a strong pipeline of road projects that could readily lend themselves to private sector participation Improving management of · Ensure effective control of axle road use to protect lives and loads road assets · Develop a road safety strategy the required actions are fully within the control of use of congressional funds could be signifi- of DPWH: full disclosure of relevant information cantly improved if they were linked more closely (e.g. bid documents, bid results); simplification of to local development priority plans and normal evaluation criteria; speeding up the review process standards of design and economic analysis, as (in the bid committees); institutionalization of would be done for programmed projects in outside oversight of the bid process (for example, DPWH. Congressional funds projects should by involving civil society representatives in bid be subject to the same system of prioritization, committee proceedings); and speedy prosecution rationalization, and transparency that is to be of erring DPWH officials and contractors. Lifestyle carried out in DPWH. checks28 on public sector personnel can be inten- sified, not only to expose corrupt staff and officials Implementing structural changes but to deter rent-seeking behavior in DPWH. in the road sector · There has been considerable progress, despite some Apply the same principles of efficiency and delays, in developing technical systems as part of the transparency, as applied to DPWH, to projects reforms of the internal business processes of DPWH, financed by congressional funds. The efficiency but the associated institutional reforms have lagged far WorldBankInfra.indb 161 12/6/2005 8:41:57 AM 1 Philippines: Meeting Infrastructure Challenges behind. The success of the technical reforms (known as both the continuous flow of funds and their use the reengineering of DPWH's business processes) will for their earmarked purposes. Strengthening not have the desired impacts without the supporting transparency in decisionmaking, monitoring, and institutional framework and administration. Conse- reporting, and enhancing the role of road users quently, there is an urgent need to focus reform efforts in the oversight of the SRF are ways to reduce on implementing institutional changes so as to bring the probability of diversion of funds. these reforms much closer to fruition. More specif- ically, this would involve the following: · Optimize the road network: redefine primary and · secondary roads. The ongoing reclassification of Rightsize DPWH staff. With a very high staff-to- secondary national roads into lower-level local kilometer ratio, overstaffing at DPWH is seriously roads should be accelerated, to enable DPWH to undermining the reform effort. Various proposals better focus on the management of the core arterial have been put forward and decisions now need roads. Most of the secondary national roads do not to be made to bring the department to a size perform the strategic function that warrants their adequate to perform its core functions, while classification as national roads. Reclassifying them other responsibilities are slowly shed from DPWH and reducing national roads to a core network through contract arrangements or transferred to of about 18,000 km would make the resources other agencies. Options discussed during some available for maintenance of the national roads earlier attempts of civil service reorganization adequate. With LGUs being given additional roads include deactivating the Bureau of Maintenance, in the reclassification, this will likely require extra reducing the workforce in the regional offices and transfers from the national government to LGUs. district engineering offices, and transferring the It would also be necessary to strengthen LGUs' management of the equipment pool from the capacity to manage existing road assets and to Bureau of Equipment to the 16 DPWH regional develop a simple information database for existing offices. roads and their condition, as a step toward effi- DPWH management can take advantage of the cient management. In this case, DPWH is an ideal bureaucracy-wide streamlining effort governed candidate to play a central role in building the by Executive Order 366 of 2004 to initiate the capacity of LGUs in road management. rightsizing program for DPWH. This executive order directs all government agencies to shed · Establish a commercially oriented National Roads redundant functions, restricts recruitment of new Authority. One of the government's objectives staff, and offers opportunities for early retirement in its 2001­2004 MTPDP was the development to affected staff. of an autonomous and commercially oriented · National Roads Authority. The rationale for Operationalize the Road Board to ensure stake- this is to increase the efficiency of the sector holder oversight. Setting up and empowering and its responsiveness to the demands of road the Road Board secretariat and strengthening users. Actually establishing an authority entails the Road Board's control over use of funds vertical separation of DPWH's activities between through well-defined ownership and oversight road-related activities and non-road-related of the SRF should be carried out as a matter of ones, as well as horizontal separation between urgency. The main purpose of the Road Board the client and service provider functions. The is to act as a "client" requesting services from vertical separation would allow the authority DPWH (the service provider), for planning and to focus exclusively on the management of the undertaking the maintenance of national roads national road network and would also allow for according to set standards. Recent experience has easier monitoring of resource use. The horizontal shown that there is a risk that the Road Board separation is intended to create accountability might not perform its responsibilities and that of the authority to road users. One mechanism the SRF might be diverted to other uses. It is to ensure the creation of this accountability is important to strengthen the safeguards against rigorous oversight by road users. The ideal body the diversion of resources from the SRF and to to which a transformed DPWH would report is ensure their disbursement as scheduled. Auto- the existing Road Board. The argument for one matic releases from the SRF could help ensure oversight body for both road investment and WorldBankInfra.indb 162 12/6/2005 8:41:57 AM Chapter 8 Roads 1 maintenance activities is clear if one considers from the national government in view of the fiscal the need for close coordination between the two situation, it would be advisable to pursue (as a in planning and the trade-offs between the two second stage to the fuel levy) an amendment to in investment decisions. the MVUC Law to raise rates on loaded trucks The realization of the National Roads Authority (which are currently set too low) and to allow for envisaged by the government would entail the annual indexation of the MVUC to the consumer proposed high-level multiagency oversight group price index. and DPWH agreeing on a transformation plan The government could also consider increasing the for DPWH's transition to such an authority fuel levy and earmarking the additional revenues and to expand the purview of the Road Board to the SRF. While fuel prices in the Philippines to cover investment in new capacity. While the are comparable to those in most other countries actual transformation is likely to require legis- in the region, vehicle operating costs are signifi- lative action and cannot be accomplished in the cantly higher, hence impeding the efficiency and short term, work on developing the plan and competitiveness of the economy. Consequently, on implementing certain aspects of it can start while a carefully designed increase in fuel price is straight away. likely to make fuel more expensive than in most · regional neighbors, such an increase could be Enlist external support to monitor and drive the offset by a reduction in vehicle operating costs road sector reform process. Due to the mixed due to improved road conditions, provided that incentives facing agencies undergoing reform, the additional revenues from the levy are invested these bodies almost always offer some resistance. in the road sector. Support from oversight agencies, such as NEDA, the Department of Finance, and the Department · Expand toll road coverage and charge an appro- of Budget and Management, to DPWH will be priate level of tolls. User charging is specifically critical to hasten the reform process. The assis- applied to toll roads for a discrete section of a road tance can be in the form of formal confirmation network. Revenues from toll roads are mostly of the DPWH plans and programs (through the used to pay for the cost of building, maintaining, MTPIP process), in turn indicating commitment and operating that specific section. Widening toll to the financing of its priority programs. Helping road coverage is thus one way of expanding the DPWH insulate its investment decisionmaking area of responsibility of road users in the upkeep processes from political intrusion is another form of road networks. of support that the oversight agencies can provide. Appropriate toll levels should be levied to reflect Finally, the key oversight agencies should help the cost of improvements (in road conditions the Road Board perform its mandated role by and reduced travel times), as in the case of the making sure it receives the funding it needs (as redevelopment of the NLEX, which resulted in defined by law). a 400% increase in toll rates. Some resistance to contractually agreed toll rates is inevitable, Placing greater reliance on user charges to sometimes leading to political intervention and support sector needs · eventual rollback in toll fees. Such actions can Increase user charges through the fuel levy. The send a negative signal to potential investors. The link between user payments and provision of government has so far resisted attempts, as in roads through augmenting the receipts of the the case recently of the NLEX, to intervene in SRF with revenues from the fuel levy requires tariff setting. If it continues to do so, this will further strengthening. Expanding the SRF's encourage greater private sector interest in toll revenues by an increase in the fuel levy would road projects. The government should launch a be easier if road users could clearly see that the public awareness campaign to better articulate the revenues from the MVUC were being invested in benefits of appropriate levels of toll rates. the maintenance of national roads. Given that the annual inflow from the MVUC and the potential Improving private sector participation receipts from the fuel levy are unlikely to be suffi- · Resolve impediments to toll road concessions. The cient to cover maintenance costs, and given the commitment of the government to resolving uncertainty of receiving funds for maintenance outstanding issues in toll road agreements would WorldBankInfra.indb 163 12/6/2005 8:41:57 AM 1 Philippines: Meeting Infrastructure Challenges provide a positive signal to local and foreign it would otherwise not make under a competitive investors and help attract private sector partici- bid. Doing so can create an added fiscal burden pation in the construction and operation of toll to an already worrisome fiscal position. Unso- roads. Focusing on a few toll roads (SLEX, and licited proposals, if considered, should be subject phase 2 of STAR and the MCTE, for example) may to especially rigorous analysis and monitoring. provide the necessary signals. Greater attention Conversely, the government should develop a to due diligence aspects in the choice of project strong pipeline of road projects that could readily sponsors and in the quality of contracts will lend themselves to private sector participation to greatly reduce risks of stalled toll projects such reduce any resort to unsolicited proposals. Ideally, as STAR (whose contract does not give a time feasibility studies and detailed designs should be frame for securing financing). Giving priority carried out with public sector resources to ensure to the 8 km section connecting the SLEX to the a more level playing field during the tendering STAR (box 8.1 above) would ease the flow of process. An explicit indication of priority by the traffic in this area and would in turn enhance the government to the projects lined up for possible financial and economic viability of expressways, private sector implementation will lend credibility including STAR. to the process and demonstrate the government's · commitment to these projects. Increase use of performance-based maintenance contracts. In line with DPWH's reengineered · Limit the role of the TRB to economic regu- business processes, road maintenance should lation. As regulator, it should not be involved in increasingly be allocated to service contractors. the development of toll roads or the award of Output-driven contracts are likely to be more franchises. efficient than the traditional DPWH-run main- tenance programs in that payment to the private Improving management of road use to protect sector maintenance contractor is based on lives and road assets performance rather than on quantity of inputs. · Develop and implement a road safety strategy. Furthermore, private firms under performance- Some of the immediate interventions ought to based contracts tend to be more conscious in be for high-risk roads and blind spots where keeping maintenance costs low than a typical the reduction in fatalities and injuries would be DPWH district engineering office. large. There is also a need to develop a strategy · for sustainable road safety, and to identify a lead Analyze obstacles in implementing the Right-of- agency to coordinate the efforts. Way Law. As right-of-way acquisition remains a deterrent to private sector participation in · Manage vehicle overloading through effective toll roads, it would be beneficial to analyze control of axle loads. Irrespective of the permissible the obstacles in implementing the law relating axle loads, some level of enforcement is necessary. to right-of-way acquisition (RA 8974) enacted More effective control could be achieved by in 2000 and to propose practical solutions. involving road users in the management of vehicle According to this law, a deposit toward the inspection stations and by focusing inspection cost of the land is sufficient ground for the on key roads for freight movement where over- courts to grant possession of it while the case loading is common. In Sumatra, Indonesia, a pilot is pending. However, a deposit presupposes a project for controlling truck overloading using budget, which is not available well in advance performance pay schemes and involving the of project construction. This problem could be private sector in managing weigh stations with overcome if DBM were able to release the funds the government is producing positive results, but when such a deposit is required. has not been in operation long enough to prove · sustainable. It would be worthwhile in the Phil- Use open competition as the preferred method ippines to test different programs for enforcing for project selection. Unsolicited bids frequently load limits, given the heavy cost that overloading subject the government to bear guarantees that imposes on society. WorldBankInfra.indb 164 12/6/2005 8:41:57 AM Chapter 8 Roads 1 Endnotes 1 National aid roads were local roads with full or partial funding well-maintained gravel rural roads can be of the desired standard from the national government. and quality. 2 The Local Government Code stipulated that maintenance of 15 DPWH-RIMSS. 2004. "Implementing a New Road Classification barangay roads be transferred to barangays, but was not clear System in the Philippines." DPWH, Manila. on their construction. The current practice is that cities and 16 DPWH-RIMSS. 2004. "Executive Information System." DPWH, municipalities finance the construction of barangay roads Manila. contingent on the approval of proposals submitted by the 17 Scott Wilson Kirkpatrick & Co. Ltd. 1999. "Better Roads Philip- barangays. pines." DPWH. April. 3 While investment in national roads was exceptionally high in 18 DPWH-Project Management Office Feasibility Study. 2003. 1999, there was still a 30% drop in the real investment expendi- DPWH, Manila. tures between 2000 and 2002. 19 Ricardo G. Sigua. "Scale, Characteristics and Costs of Road 4 Since the work on the NLEX and a large section of the first phase Accidents in the Philippines." Presentation at the 12th Annual of the Skyway were redevelopment of existing expressways, there Transport Science Society of the Philippines Conference, July was a limited need for right-of-way acquisition. 23­24, 2004. University of the Philippines, Diliman. 5 Investment by LGUs in local roads was taken as 70% of their 20 DPWH-JICA. 2003. "Mini Master Plan Study on Bypass Roads total investment in transport. Along the Arterial Road Network." Manila. 6 Interview with DPWH officials. 21 Information from Directorate General of Regional Infrastructure 7 GDP growth assumptions based on the "baseline" projections by of Indonesia, 2004. the International Monetary Fund. GDP growth rates have been 22 The Freeman News. Cebu. June 12, 2004. projected to drop from 4.5% in 2004 to 3.4% in 2009, averaging 23 JICA. 2003. "Public-Private Partnership Study of Metro Manila 4% per annum for the six-year period. Urban Expressway Network." Manila. 8 JICA. "The Development of the PPP Technique of Metro Manila 24 Gerhard P. Metschies. 2005. International Fuel Prices, 4th Edition. Urban Expressway Network." 2003. Deutsche Gesellschaft für Technische Zusammenarbeit (www. 9 Based on interviews with project proponents and DPWH internationalfuelprices.com). The "normal" price includes the officials. cost of crude oil, refining, distribution, and a 10­20% sales tax. 10 ADB. 2003. "Rural Roads Development Policy Framework." 25 Conducted from November 2003 to January 2004 (www.tag.org. Manila. November. ph/survey/default.htm). 11 World Bank estimates based on data from Scott Wilson Kirk- 26 Secretary of Justice Opinion 30 of 2004, "On the request of the patrick & Co. Ltd in Association with Cesar Virata & Associates DOTC regarding the authority of the TRB to enter into service Inc. 1999. "Better Roads Philippines." DPWH. April. facility and utility agreements involving gas stations, pipelines 12 The estimate is based on a formula developed by the World and cables along and inside the expressway" (www.doj.gov.ph/ Bank to give orders of magnitude. According to this formula, words_2004.html). investment needs for the road sector would be around 0.25% of 27 Report from RIMSS. 2004. "Impact on Pavements and Road User projected GDP growth. Costs of Truck Overloading." June. DPWH, Manila. 13 Conducted from November 2003 to January 2004. Downloadable 28 Investigating whether public bureaucrats and officials' lifestyle from www.tag.org.ph/survey/default.htm. or manner of living can be explained by their salaries. Leading 14 The percentage of all (rather than national) paved roads is some- an extravagant lifestyle that can hardly be provided by a public times used as a measure of quality but this can be misleading servant's salary is one indicator that wealth might have been and has to be interpreted with caution. For low-traffic volumes, accumulated illegally. WorldBankInfra.indb 165 12/6/2005 8:41:57 AM Romeo Gacad/Agence France-Presse WorldBankInfra.indb 166 12/6/2005 8:42:00 AM Chapter 9 Telecommunications Overview The prime thrust of Philippine government tele- T communications policy has been, since 1987, to create he telecommunications industry in the a regulatory and policy environment in which the Philippines has a unique history. Unlike those private sector plays the lead role in telecoms devel- in most of its neighbors, the country's telecoms opment and expansion. The National Telecommuni- sector has been dominated by a single private sector cations Development Plan for 1991 to 2010, published operator, the Philippine Long Distance Telephone by the Department of Transportation and Commu- Company (PLDT), for decades. Another difference nications (DOTC) in 1990 stated: is the long-term existence of a telecoms regulatory body, the National Telecommunications Commission The efficient and rapid growth of the telecommu- (NTC), which has been responsible for sector nications sector requires the maximization of the regulation in various forms for more than 30 years.1 role of the private sector, with the Government However, like most of its neighbors, the Philippines for acting as the facilitator. Accordingly, the many years suffered from poor telecoms availability Government shall initiate further improvements throughout most of the country. to the policy and regulatory environment and In 1988, the government recognized that privatize government telecoms assets and/or the sector was essentially moribund, with very operations as soon as practicable. limited rural services, and long waiting lists for services throughout the country. There were only This policy theme has been repeated often in 591,000 telephone lines nationally, and hundreds of legislation and policies relating to both telecommu- municipalities were without any telephone services nications and information and technology (together, whatsoever. The monopoly incumbent had failed to ICT) development. The National Telecommunications provide services in much of the countryside, concen- Development Plan set out growth targets for the trating its investment in the major urban centers. sector, including teledensity (3.5 per 100 population Moreover, the scores of smaller telephone companies by 2010), public calling office (PCO) distribution operating primarily in rural areas lacked the capital (100% of municipalities by 1997), and a series of to expand their networks and services. related investment and operational targets. To address these problems, the government The teledensity target has been exceeded by a initiated a series of legislative and executive actions huge margin, as have the various forecasts of sector aimed at introducing competition to the sector, and investments. Conversely, the PCO distribution target at removing the government from the sector as an has been missed by a large margin, primarily because operator. These initiatives have led to significant of the focus on urban areas by all of the carriers in progress, now marked by a multi-operator envi- the sector, and approximately 35,000 barangays out of ronment in all market segments, an increase a total of 42,000 have no telephone services.2 Further, in telephone penetration rates, and particularly there are still many municipalities in rural parts of the dramatic growth in the availability of cellular services country that lack access to basic telephone services, throughout the country. and even more that require upgrades to bridge the WorldBankInfra.indb 167 12/6/2005 8:42:00 AM 1 Philippines: Meeting Infrastructure Challenges "digital divide," through the provision of access to role, operating a marginal service in many parts Internet services. Cellular wireless services are not yet of the country, despite the government's efforts easily used for Internet access for such applications to privatize all telecoms operations and reduce or as education and health care, and while wireless eliminate the costly, inefficient operation that is technology is expanding rapidly in the country as TELOF.3 Government figures indicate that TELOF elsewhere, wireless service is only available to some incurs significant annual operating losses, amounting 41% of the nation's barangays. to some $17 million in 2001. Reports indicate that There is still a serious shortage of basic services in these losses are primarily due to overstaffing and that many parts of the Philippines. NTC has succeeded in the current level of 5,000 personnel could likely be motivating some expansion to rural and remote areas, reduced to 1,000 without seriously impacting service but such expansion has now slowed to a trickle, and levels. The problem of how to mitigate the effect on new thinking is required to finish the task. current employees is clearly difficult, and there is Despite significant progress in the sector, several also the problem of finding a suitable replacement challenges remain. Four main priorities for the for TELOF, which provides services in areas where government have emerged: no private operator has expressed any interest in · operating. The privatization of government facilities Systematically review initiatives that were imple- has been on the government's agenda for years, and mented to achieve adequate distribution of basic clearly requires attention and the cooperation of the telecoms and information services throughout telecommunications industry, although the fact that the country, and adopt and implement a new Executive Order 269 reaffirms the existence of TELOF · approach to providing universal access. in the government's plans appears to run contrary Bring about more dynamic competition in the to this policy. sector by putting in place more open market-entry The National Economic and Development arrangements and mechanisms for increasing Authority (NEDA) is responsible for overall · customer choice at the local service level. government development planning. To the extent Review the institutional structure of the sector, that NEDA is concerned about the development of with a view to increasing regulatory credibility infrastructure as an important element of economic and to better defining the operational role of growth, this agency has, from time to time, influenced · government in the sector. the direction of telecoms policy. In particular, NEDA Review and revise radio spectrum management has regularly published macroeconomic outlooks policies and processes to promote efficiency in for the country. The Medium-Term Philippine spectrum use and utilization of new wireless Development Plan 2004­2010 (MTPDP) provides technologies. an assessment and broad policy guidance on infra- structure development in the ICT sector.4 Policy and institutional framework Regulation Regulation of the sector falls to NTC, which is also Until recently, telecoms policy was the responsibility responsible for radio spectrum management and of DOTC, with the prime assignment falling to the regulation of the activities of the broadcasting sector. undersecretary for communications. Executive Order NTC commissioners are appointed by the adminis- 269, issued by President Arroyo in January 2004, estab- tration "at pleasure" and are not tenured. There have lished the Commission on Information and Commu- been numerous dismissals of commissioners in recent nications Technology (CICT) to be the "primary ICT years, and with each change of administration all policy, planning, coordinating and implementing, commissioners are usually replaced. The credibility regulating, and administrative entity" of the executive. of NTC can be greatly improved and made more The CICT is therefore the policymaking body, and stable if appointment of the commissioners is based NTC reports to the CICT chair, as does the Telecom- on certain professional criteria and the process is munications Office (TELOF). TELOF has historically more transparent. A regulator that is protected from been tasked with providing telecoms services in areas political interference is fundamental to stability in a not served by private sector operators. sector that is a vital part of the economic progress of Although many new private sector entrants the country. are now in the sector, TELOF continues to play a NTC is a source of revenue for the government, WorldBankInfra.indb 168 12/6/2005 8:42:01 AM Chapter 9 Telecommunications 1 through the generation of significant fees from likelihood of increased competition developing in the its supervisory and licensing activities--that is, sector is closely related to the likelihood of Congress regulatory fees are not set on a pure cost-recovery relinquishing its franchising powers. basis. For example, during fiscal year 2002, NTC In addition, a congressional franchise is insuf- had total revenues of over $25 million, with a budget ficient to allow a company to start offering services. allocation of approximately 10% of these revenues. The company must also obtain a license or certificate However, even though NTC generates revenues far in of public convenience from NTC before it can begin excess of its costs, it has no financial independence, operations. This, too, has often proven difficult and as all revenues accrue to general government funds, time-consuming, since the processes adopted by and it must rely on annual appropriations. Moreover, NTC can result in litigious and lengthy deliberations. as a government agency, NTC's entire staff is paid Finally, there are various local government (city, at the same (low) level as other government entities, municipality, or barangay) permits relating to taxes such that it finds it very difficult to recruit or keep and public construction that must be secured, often staff with the necessary qualifications. Compensation leading to further delays. levels so far below those of industry counterparts are a source of ongoing difficulty. Legislative and regulatory initiatives Supervision fees are far in excess of the cost of The government has taken various steps over the such supervision, and government doubtless sees this years to improve sector performance through the revenue as important to overall fiscal needs. However, selective introduction of competition, coupled with these fees could be put to use in more creative ways, service obligations for all players. The following are as the surplus could, for example, be used to fund the highlights of the formal initiatives that have either expansion of services to rural parts of the formed part of this process: country or other telecoms objectives prioritized by the government. These fees could also be used to fund a · DOTC Department Circular 87-188 was issued more effective regulatory function, including providing in May 1987, and set out a series of policy state- adequate equipment and keeping qualified staff. ments from a government/industry committee, stating that the structure of the telecoms sector Market entry should be competitive, and dominated by the All telecoms operators must obtain a legislative private sector. franchise from Congress. This is unlike regulatory · Executive Order 59 (Interconnection Policy) and policy frameworks in most countries, in which was issued in 1993, mandating interconnection the regulatory body issues licenses, pursuant to a of all authorized public telecoms carriers. The national policy favoring new entry into a competitive objective was a fully integrated nationwide market. telecoms network, and an environment that would The process of obtaining a congressional franchise encourage greater investment in the sector. is often tortuous and unpredictable. There is no · Executive Order 109 (Policy to Improve the national policy regarding the number or nature Provision of Local Exchange Carriers Services), of franchises to be granted, and since, in essence, issued in July 1993, required international gateway a franchise is a "law" like any other instrument of facility (IGF) operators and cellular mobile tele- government, it is subject to the energy of the poli- phonesystem(CMTS)operatorstoprovide(within ticians (including the president, who must ultimately five years) 300,000 and 400,000 local exchange sign the law) supporting the aspiring entrant. It is lines, respectively, in unserved and underserved clearly a highly political process, and in recent years areas, including parts of Metro Manila. Known various dominant financial players in the Philippine as the Service Area Scheme (SAS), it sought to business sector have attempted to find a niche in the establish at least one line in rural areas for every telecoms market, exploiting their political strengths. 10 lines installed in urban centers. To the extent that the telecoms market today has · Republic Act 7925 (Public Telecommunications many players in all segments of the marketplace, it Policy Act) was enacted in March 1995, and set is unlikely that further congressional activity will out a policy framework for the sector. It also be undertaken by putative entrants. The powerful mandated the privatization of all government- interests now in the market would likely have operated rural telecoms facilities (operated by sufficient political influence to keep them out. The TELOF) within three years. WorldBankInfra.indb 169 12/6/2005 8:42:01 AM 10 Philippines: Meeting Infrastructure Challenges Sector structure and ownership players such as Digitel, Globe, and BayanTel to install local exchange service infrastructure. In many cases, Overview however, this has led to duplication of local exchange Table 9.1 provides a summary picture of the sector's facilities in those urban areas where the early SAS structure while table 9.2 shows the market shares of investment was concentrated, and the data in table 9.3 the various players. mask a serious oversupply problem. Table 9.1 Table 9.3 Telecommunications industry structure Local exchange carrier lines capacity, 2003 Service providers 2000 2001 2002 Local exchange Total installed Subscribed Unsubscribed Local exchange carriers 77 74 74 carrier capacity lines over lines over total (%) total (%) Cellular mobile telephone systems 5 7 7 Radio paging services 15 11 11 BayanTel 443,910 51 49 Trunked mobile radio 10 5 5 Digitel 633,190 62 38 International gateway facility 11 11 11 Eastern Telecom 89,386 24 76 Satellite service 3 3 3 Globe/Islacom 1,484,269 14 86 International record carrier 5 5 5 Philcom 219,343 23 77 Domestic record carrier 6 6 6 PLDT/Piltel/Smart 3,170,116 68 32 Very Small Aperture Terminal 5 5 5 PT&T 125,912 29 71 services Other operators 391,277 56 44 Public coastal station 12 12 12 Grand total 6,557,403 50 50 Radiotelephone 5 5 5 Value-added services 156 186 156 Note: Eastern Telecom, Globe/Islacom, and Philcom--no report submitted as of 2003. Source: National Telecommunications Commission. Annual Report Source: National Telecommunications Commission. Annual Report 2003. 2002; Optel Ltd. In financial terms, local service remains a Table 9.2 significant segment of the telecoms market, with Market shares in local exchange, inter-exchange carrier, and international gateway facility services (%), 2002 some P33 billion in total revenues in 2002, which were projected to grow to P35 billion in 2003 and Local exchange Inter-exchange International P38 billion in 2004. These numbers represent about carrier services carrier services gateway facility 21% of total telecoms industry revenue, a number that services will decline with time as wireless services expand. BayanTel 6 5 5 Capital spending in the segment was approximately Globe 7 13 22 P12 billion in 2002, but this was expected to decline Digitel 12 13 6 to some P8.4 billion and P6.8 billion in 2003 and PLDT 64 52 52 2004, respectively. The bulk of this expenditure will Others 11 17 15 be devoted to expanding data services facilities. Source: National Telecommunications Commission. Annual Report 2002; Optel Ltd. Inter-exchange carrier services The domestic inter-exchange carrier market is also Local exchange carrier services dominated by PLDT (as shown in table 9.2). National As shown in table 9.3, only a few significant local long-distance traffic and revenues have been declining exchange carriers are operating in the country. The over recent years, and forecasts suggest that this trend remaining carriers are small, private, or municipal will continue. Figure 9.1 shows the trend of both companies providing services in various areas. revenue and traffic. Clearly, despite the introduction of competition The reduction in national long-distance minutes in this market segment, PLDT remains the dominant has been attributed largely to a switch to mobile operator. Global experience with "local competition" calling, combined with the changes introduced by has generally yielded even lower penetration levels PLDT in which local calling areas were expanded. than those in the Philippines, for new entrants, Pricing pressure from short messaging services and likely because in this case, the SAS has obligated new other wireless services will continue over the next few WorldBankInfra.indb 170 12/6/2005 8:42:01 AM Chapter 9 Telecommunications 11 Figure 9.1 Long-distance service rates National long-distance traffic and revenue trends, Table 9.4 contains some sample long-distance rates 2000­2005 in the region. In general, rates in the Philippines for 20 7 domestic traffic are in line regionally, although inter- 6 national rates seem high relative to countries where 15 5 es competition may be more spirited. This may be a 4 result of the failure of NTC to mandate some form pesos 10 minut 3 of long-distance carrier selection for users. Bilion 2 Bilion 5 1 Table 9.4 Call costs, selected regional countries (US cents a 0 0 minute), 2003 2000 2001 2002 2003 2004 2005 Year International long Domestic Revenues Traffic Country distance to US long distance Local mobile Note: Figures for 2003 to 2005 are forecasts. Brunei 10 n.a. 12.0 Source: Optel Ltd. Indonesia 57 -- 8.2 Malaysia 24 12­86 14.0 years, and prices will move closer to costs, as in other Philippines 40 9.0 12.0 jurisdictions. Innovative new service arrangements Thailand 22 7­44 7.4 will doubtless be introduced, and if resale in telecoms services is allowed, it may become as prevalent as in -- not available; n.a. = not applicable. other countries, where niche players can service some Note: Depending on distance. long-distance market subsegments effectively. Source: International Telecommunication Union. International gateway facility services Cellular mobile telephone services As table 9.2 above shows, PLDT dominates the inter- (CMTS or mobile services) national gateway facility market as well. The average The CMTS market segment is by far the most revenue per minute for international calling has significant in the Philippines, and is likely to be declined over the past few years, due to competition the dominant segment over the next several years. and the impact of the so-called FCC benchmarking Figure 9.2 shows how dramatic the trend has been, decision, which has forced settlement rates with US- even compared with regional neighbors. Much of this based carriers to be sharply reduced. Current average growth has been fueled by unprecedented growth in revenue per minute for US traffic is in the range of the use of short messaging services. $0.22 and is expected to move to about $0.18 over The CMTS market in the Philippines is essentially subsequent years. a duopoly, despite the presence of several players. Thedropinrateshasledtohugerisesincallminutes, withvolumegrowingfrom900 millionminutesin1995 Figure 9.2 to some 6 billion in 2002. These increases in volume Regional cellular phone market forecasts, 1998­2005 have not, however, offset the reductions in rates, 30 and total revenue has been decreasing. For example, 25 total international long-distance revenues dropped 20 marginally from P17.7 billion ($316 million) in 2001 to P17.3 billion in 2002, but over the years, the importance 15 subscribers of such revenues has decreased dramatically. In 1997, 10 international long-distance revenues were some 45% illionM of PLDT totals, and today (2004), the share is only 5 25%. This trend will continue. There are several inter- 0 national disputes currently active in this market, 1998 1999 2000 2001 2002 2003 2004 2005 Year following decisions by Philippine carriers to increase Philippines Malaysia Singapore their settlement rates--and various proceedings are Thailand Hong Kong under way relating to disputes from US-based carriers Note: Figures for 2003 to 2005 are forecasts. and other players, including the FCC. Source: Optel Ltd. WorldBankInfra.indb 171 12/6/2005 8:42:02 AM 1 Philippines: Meeting Infrastructure Challenges The PLDT Group owns Smart Communications and Cable television services Pilipino Telephone Corporation, and the Ayala Group Cable TV was first established in the Philippines in has Globe Telecom and Isla Communications (now Baguio City in 1969. In 1977, Sining Makulay Inc., a renamed Innove Communications). A recent entrant private company, was given a nationwide monopoly in this market is Sun Cellular, owned by Digitel, by presidential decree. In 1987, Executive Order 205 which is in turn owned by one of the country's largest ended this monopoly, and established a competitive, family conglomerates. Sun has shown that it intends open market. Finally, in 1998, NTC liberalized to be a price leader in some segments of the market, the international satellite industry, permitting the and is putting pressure on the other players--possibly reception of direct-to-home TV from content putting an end to the duopoly. providers using international satellite systems. Innovation in services and pricing of services There are two cable companies that dominate will be a trend for the next several years, benefiting the industry, in which the largest market, Metro consumers throughout the country. There are many Manila, represents 50% of the total national market. who say that mobile or cellular technology should It is estimated that there are approximately 1 million be seen as the "universal service" platform of the subscribers paying about $10 a month. Some 30 future in the Philippines, and there is merit to this companies serve this market, with the company argument. One question that needs addressing is the Beyond Cable, controlled by the Lopez Family and role of this technology in terms of Internet access PLDT, having some 70% of the market. The second for business and other broadband applications. The largest, Destiny Cable, owned by the Solid Group, introduction of 2.5G and, subsequently, 3G wireless has a 7% market share, and the remaining 23% is technology may address this matter, but it is unclear held by many smaller operators. today as to whether such technology will obviate the Convergence, which will permit both voice and need to extend fixed-line technology to communities cable services to be carried on the cable TV infra- that currently have no access to wireline services. structure, is slowly evolving, although it is not a major factor at the moment--perhaps because PLDT has Internet services a significant influence over new developments and Internet service providers (ISPs) in the Philippines is unlikely to introduce services that compete with have suffered from a flattening of the growth rate its telecoms packages. Destiny Cable is planning to in demand in recent years, leading to some consoli- introduce a bundle of services, offering cable TV, dation of operators (from 180 to the current 70). Internet, and voice over Internet protocol telephony-- Still, usage is growing, with approximately 4 million this will begin to change the market dynamics in the users, projected to double over the next three years. future, but since Destiny Cable is very small, it will Despite the fact that ISPs do not require a franchise take some time. from Congress (they need only register with NTC), The 2004­2010 MTPDP mentions a Convergence the industry is dominated by the carriers--PLDT, Act, which is intended to address the role of cable in Globe, and BayanTel. Major non-carrier ISPs include information infrastructure. Moscom and Pacific Internet. Broadband Internet access is in its infancy in the Philippines (there were only 15,000 broadband Sector investment and financing users in 2002 and 22,000 in 2003), but cable modems and DSL technology will drive the rollout of high- Overall sector investment has continued to grow, as speed Internet access, and broadband is expected to depicted in table 9.5. Table 9.6 provides more recent be a growth area over the next few years. Another figures by company, confirming a slight downward factor for optimism is the fact that the broadband trend in capital expenditures, although reports also facilities market is deregulated. This is a plus in the indicate continuing growth in wireless infrastructure, long run, but contributes to the advantage of the which has slowed the reductions somewhat. facilities-based companies with their infrastructures This trend will likely continue at the slowing pace in place, to provide their ISP operations with needed indicated above. The future growth in cellular systems, broadband facilities at essentially no cost. If services for instance, will probably be limited to refinements to competitors were regulated, then the carriers could and new services rather than significant infra- be required to tariff needed facilities and provide them structure investment. As for wireline systems, current to themselves at the same price as to competitors. oversupply will seriously limit new investments. WorldBankInfra.indb 172 12/6/2005 8:42:02 AM Chapter 9 Telecommunications 1 Table 9.5 instance rural local services being subsidized by other Cumulative investments in telecommunications, services. Competition is driving prices closer to costs 1992­2000 in an ever-increasing number of services, across a Year Pesos (billion) Equivalent $ (billion) wider geographic area, with the trend being toward cost-based pricing. While direct public subsidies 1992 90.2 1.61 1993 106.3 1.90 should not be required in the sector, TELOF receives 1994 142.7 2.55 subsidies annually to fund its operational deficits of 1995 182.1 3.25 some $17 million. 1996 209.4 3.74 1997 304.7 5.44 Sector performance 1998 454.7 8.12 Overall, the sector has performed well in the face 1999 524.7 9.37 of the serious economic downturn that has hit 2000 618.4 11.04 the Asian region and the telecoms sector globally. With total sector revenues for 2002 at P145 billion, Sources: National Telecommunications Commission; Optel Ltd.; other industry sources. and year-on-year growth of 7.2% estimated for the following three years, the sector is a major factor in the country's economy. The phenomenal growth in Table 9.6 mobile usage is the most significant development, Capital expenditures ($) with subscriber numbers growing from 12.1 million in 2001 to some 15.4 million in 2002, a growth of Company 2001 2002 2003 (estimate) 27%. Mobile penetration grew from 15.6% in 2001 BayanTel 15,406,127 18,758,381 10,349,923 to 19.4% in 2002, which is greater than that for fixed Digitel 200,000,000 213,163,423 260,000,000 lines. This trend is expected to continue over the next Eastern Telecom 13,727,455 9,689,246 -- few years, with projections of 26 million subscribers Globe 75,000,000 367,000,000 284,000,000 by 2005 generally considered achievable. Islacom 10,707,415 n.a. n.a. Broad measures of service development around PLDT Group 599,191,649 284,863,847 328,098,105 the turn of the century in selected regional countries are shown in tables 9.7 and 9.8, indicating that Total 1,590,032,645 893,474,897 882,448,028 the development of fixed-line phone services and -- = not available; n.a. = not applicable. television in the Philippines is well below regional Sources: Company annual reports of carriers; Optel Ltd. averages, while mobile, computing, and Internet development is about average. Given that the telecoms sector has been in the The market expansion mandated by the private domain, it is largely self-supporting. Subsidies government led to the award of licenses resulting are not involved in the sector, generally, although in 11 IGF operators and five CMTS operations. there are some inherent inter-segment subsidies, for In order to increase access to basic services, each Table 9.7 Access to fixed and mobile line telephone services, selected indicators, 2001 Country Fixed telephone service Mobile telephones Mainlines per 100 Mainlines per 100 Mainlines per Residential lines per per 100 inhabitants inhabitants inhabitants in largest citya employeea 100 households Philippines 4.0 14 14 230 14.0 Indonesia 3.7 25 11 177 2.5 Malaysia 20.0 28 65 187 30.0 Thailand 9.4 38 24 169 12.0 Vietnam 3.8 13 4b 17 1.5 ASEAN countries 5.1 21 18c 167 6.6 Lower-middle- 13.6 25 36 126 9.8 income countries a. 2000. b. 1999. c. Philippines, Thailand, Indonesia, Malaysia, and Singapore. Source: International Telecommunication Union. 2002. World Telecommunication Development Report. Geneva. WorldBankInfra.indb 173 12/6/2005 8:42:02 AM 1 Philippines: Meeting Infrastructure Challenges Table 9.8 Access to information and communications technology services, selected indicators, 2001 Country Computers per 100 Hosts per 10,000 Users per 10,000 Users per Television sets per inhabitants inhabitants inhabitants computer 100 inhabitants Philippines 2.2 4.0 259 1.2 14 Indonesia 1.1 2.1 186 1.8 15 Malaysia 13.0 31.0 2,395 1.9 17 Thailand 2.7 11.0 556 2.1 28 Vietnam 1.0 0.1 49 0.5 19 ASEAN countries 2.3 8.8 324 1.5 14 Lower-middle-income countries 2.5 4.3 265 1.1 28 Source: International Telecommunication Union. 2002. World Telecommunication Development Report. Geneva. of these operators was required to deliver within considered. There is a large oversupply issue, resulting five years (reduced to three years in MC 8-9-95), in much stranded investment and little prospect of any 300,000 or 400,000 lines (for IGF and CMTS licenses, uptake in the foreseeable future. Moreover, margins respectively) in various regions of the country. This on international revenues have dropped dramatically, arrangement was called the SAS. Fixed-line devel- reducing sharply the availability of the cross subsidies opment, still considered a vital part of the basic that have historically assisted in the deployment and service deployment picture, has not met regulatory maintenance of local exchange services. or policy requirements, resulting in serious shortfalls As part of its report on the SAS, NTC provided a in commitments made under the SAS. full list of the service situation in terms of coverage by Table 9.9 shows the distribution of telephones by fixed lines, payphones (PCOs), and cellular systems. region, highlighting the fact that the teledensity across Some 105 municipalities have no service coverage the country is uneven, and in some areas extremely whatsoever and within the 1,504 other municipalities low, especially when actual subscribed teledensity is listed, many barangays are without wireline services. Table 9.9 Teledensity distribution, 2003 Region Population Installed capacity Subscribed lines Installed teledensity Subscribed teledensity CAR 1,492,050 93,567 33,527 6.27 2.25 NCR 10,935,524 2,818,358 1,647,671 25.77 15.07 I 4,345,194 195,088 108,888 4.49 2.51 II 2,977,032 30,236 29,000 1.02 0.97 III 8,130,440 431,626 260,328 5.31 3.20 IV 12,206,054 1,064,590 564,370 8.72 4.62 V 5,001,342 124,957 72,656 2.50 1.45 VI 6,660,110 412,984 117,154 6.20 1.76 VII 5,856,441 458,637 185,620 7.83 3.17 VIII 3,977,372 127,264 16,339 3.20 0.41 IX 3,374,312 33,849 31,949 1.00 0.95 X 3,054,139 147,518 50,412 4.83 1.65 XI 5,646,477 381,295 104,730 6.75 1.85 XII 2,847,063 82,349 31,291 2.89 1.10 XIII 2,222,812 125,116 37,264 5.63 1.68 ARMM 2,327,967 29,969 8,162 1.29 0.35 Total 81,054,329 6,557,403 3,299,361 8.09 4.07 ARMM = Autonomous Region in Muslim Mindanao; CAR = Cordillera Autonomous Region; NCR = National Capital Region. Source: National Telecommunications Commission. WorldBankInfra.indb 174 12/6/2005 8:42:02 AM Chapter 9 Telecommunications 1 Only 52% of the 1,609 municipalities had fixed-line in the Philippines, where parts of the country are service, and 41% had cellular coverage. Some 88% severely lacking in telecoms facilities. This under- had PCO service. scores the fact that broad teledensity figures are really These statistics, if still approximately correct, meaningless in terms of the development targets that are cause for serious concern, especially in view of most nations wish to address. The International Tele- the suggestion that cellular is going to "solve" the communication Union (ITU) has begun to utilize a access problem. It is likely that cellular coverage in different teledensity figure, reflecting the influence of some remote areas is better today than in 2000/2001 mobile technology on the sector. A measure called when these numbers were gathered, but unless they "effective teledensity," as shown in table 9.10, has been have improved substantially, the coverage data are defined as the higher value of either main telephone not encouraging. lines per 100 population or cellular subscribers per It is clear that NTC and DOTC need more up-to- 100 inhabitants. Clearly, the intent of the ITU is to date coverage data, and a plan to address the issue. recognize that adding the two figures, as has been The programs aimed at universal access have not done in some comparisons, ignores the overlap in produced the desired results, and it is not clear that coverage that the two numbers denote. However, the government has attached an urgent priority to using teledensity figures as a measure of progress can addressing the problem. be misleading, as it does not reveal anything about There is a need for a concerted effort to address the breadth of availability of service throughout large the shortfall in distribution of services under the SAS, countries--and the Philippines is particularly difficult and a plan involving all of the carriers to consider to apply such measures to, for obvious geographic the probability of services being made available in reasons. unserved areas. It is not sufficient to rely simply on the likelihood that wireless expansion will take place over time. Quantifiable, time-bound targets and Main issues implementation mechanisms are needed to measure progress against objectives. Institutional structure The lack of true independence of the regulator, NTC, Teledensity in selected countries is an important issue, as it lacks both the authority The figures in table 9.10 show the influence of the to adequately enforce its decisions, and the political dramatic growth of cellular services throughout the independence to make the decisions needed for sector Asian region, but also indicate that the Philippines progress. This stems from the "at pleasure" nature has lagged behind in some respects (China, India, of the appointment of commissioners, the lack of and Vietnam have had higher growth rates in fixed- budgetary independence, and the fact that telecoms line teledensity), but is ahead in others, in that its operators require legislative franchises, which polit- growth in mobile teledensity is second only to that of icizes the market entry process unduly. China, and only by a small amount. However, these The role of DOTC as both policymaker and national figures do not address the regional disparity operator is an arrangement that is generally seen Table 9.10 Comparison of teledensity figures in the region, 1995 and 2003 1995 2003 Country Fixed Mobile Total Fixed Mobile Total Effective teledensity China 3.30 0.29 3.59 20.9 21.48 42.38 21.48 India 1.29 0.01 1.30 4.63 2.47 7.10 4.63 Indonesia 1.69 0.11 1.80 3.94 8.74 12.68 8.74 Malaysia 16.57 5.00 21.57 18.16 44.20 62.36 44.20 Philippines 2.05 0.72 2.77 4.12 26.95 31.07 26.95 Thailand 6.06 2.26 8.32 10.49 39.42 49.91 39.42 Vietnam 1.05 0.03 1.08 5.41 3.37 8.78 5.41 Note: Effective teledensity is the higher of either telephone mainlines per 100 population or cellular subscribers per 100 inhabitants. Source: International Telecommunication Union. 2004. Asia-Pacific Telecommunication Indicators 2004. Geneva. WorldBankInfra.indb 175 12/6/2005 8:42:03 AM 1 Philippines: Meeting Infrastructure Challenges as inappropriate, especially where the private sector does not appear to be contemplated by the bill or by is supposed to play a leading role. Given that it is those promoting the restructuring. The bill seems 15 years since the publication of its National Tele- to merely effect some consolidation of departments, communications Development Plan, DOTC should which is likely positive, but it does not change the provide an updated policy vision for the telecoms fundamentals, such as the role of TELOF or the industry. Such a policy would give the industry and powers and independence of NTC. other stakeholders the opportunity to examine alter- native approaches to regulating the sector, ensuring Competition real competition and the development of an approach Competition in the telecommunications sector to providing much-needed telecoms services in parts appears to be alive and well, as there are many of the country where market forces are not motivating operators in the market--11 international gateway expansion. operators for instance, and three significant wireless Service expansion of both basic and broadband players operating nationally. However, the fact is that services throughout the country has been supported the SAS actually created a series of regional duopolies, by government planning documents, notably the each with its own chosen domestic and international 2004­2010 MTPDP, which includes a major section on long-distance connections, duplicating switching and telecoms infrastructure, and a Philippine Information outside plant in many situations. Interconnection is Infrastructure Policy Study, published by DOTC in provided to allow for calls between public switched October 1998. However, unlike the more compre- telephone network points, but there is no long- hensive National Telecommunications Development distance carrier preselection or even "dial-around" Plan of 1990, neither of these documents provides arrangements for users to select among the many quantified, time-bound targets for the telecoms sector international or domestic long-distance carriers. toward achieving important policy objectives. This Users of a local exchange carrier are "captives" in is essential, though, to measure progress in meeting terms of the long-distance carrier to be used, which is overall distribution levels, for instance. the one that is affiliated or part of the local exchange The recent issuance of Executive Order 269 is carrier organization. worthy of note, in that it signals that the current Resale is not permitted for international private administration considers the development of ICT to lines, despite the fact that in other countries it has be a national priority. The appointment of the under- often been a valuable tool for encouraging new secretary for ICT from DOTC as chairperson of the entrants to the market. Resellers, however, must still CICT is also a positive step, and underlines the rela- possess a legislative franchise if they put up their tionship between telecoms infrastructure development own networks, thus limiting market entry by "niche" and the evolution of innovative broadband ICT players. In many countries, where market entry is not technology. However, the institutional arrangements restricted, many resellers enter and leave the market, set out as part of Executive Order 269 confirm that occupying niches that the incumbent players are not the current problems relating to NTC independence, interested in or competent to address. This in turn and the role of government as an operator, are likely has resulted in aggressive price competition, which is to continue. The MTPDP, indicating that commis- not evident in the Philippine marketplace, although sioners of NTC should have fixed-term appointments, prices have dropped dramatically due to international is a positive sign, but there is no sign of any progress pressures on all long-distance rates. toward achieving this. The wireless communications segment has two Finally, the proposed bill creating a department major service providers (Smart and Globe) and one for ICT would be a welcome change to the insti- newcomer (Sun). The two dominant players charge tutional structure, as it would recognize both the essentially the same rates to avoid what they have convergence of information technology and tele- called "ruinous competition." However, this duopoly communications technologies, and the importance is being challenged by Sun, which is apparently trying of infrastructure development and information to gain market share with lower prices, but is having technology for education, health care, and commerce. great difficulty obtaining useful interconnection However, such legislation will not bring about the arrangements. If the third operator can survive, it kind of reforms needed for the policy/regulatory will augur well for wireless users, but the compe- framework governing telecoms unless the institutions tition will likely result in lower margins and earnings that make up the structure are also changed, and this pressures. WorldBankInfra.indb 176 12/6/2005 8:42:03 AM Chapter 9 Telecommunications 1 However, the introduction of more dynamic Spectrum management competition in the sector generally will require more NTC has limited capacity and resources to set and aggressive and proactive involvement of both DOTC implement spectrum management policies. A major and NTC. issue in this regard is the inability of NTC to utilize the proceeds from its fees for spectrum usage to Service availability (universal access) manage and monitor this resource. All of the revenue In its 2001 report on the SAS, NTC provided the from NTC fees goes to the general revenue fund of following compliance information. the government, and it has virtually no budget for As of 2000, six operators--Digitel, Globe, new equipment or staff support. This lack has led to BayanTel, PLDT, Smart, and Pilipino Telephone a largely passive mode of regulation, by necessity. As Corporation--rolled out the required number of a result, there has been little enforcement to ensure local lines and rural deployment, but were deficient in that allocated spectrum is in fact used effectively and coveringtherequiredareas.Threeoperators--Islacom, efficiently. Automation of spectrum management Capwire, and Philcom--were deficient in rolling out and monitoring is minimal currently, and there is the required number of lines and required areas to a pressing need for a new system to integrate NTC's be covered but were able to meet rural development licensing and monitoring databases. targets. Eastern Telecom, which started the program, With regard to spectrum allocations, the current failed to roll out the required number of lines and cellular operators have sufficient spectrum assigned, to meet other requirements. Neither Extelcom nor and there is spectrum available in the 1800 MHz BellTel had started its roll-out program. band for assignment to existing operators, or a new Little has changed since this report and both NTC entrant. and the industry in general have concluded that the Broadband services have been authorized in SAS has served a useful purpose, but that its role in the 3.4/3.5 GHz band, 2.4 and 5.7 GHz band, and effecting further expansion of basic services to rural 38/42 GHz bands. A circular was issued by NTC in parts of the country is no longer viable, with wireless 2003 to facilitate the development and use of wireless technology having supplanted the need for fixed-line Internet and data networks. The development of expansion into remaining unserved or underserved 3G technology is not a priority for the industry at areas. the present time, and NTC has therefore not been NTC has not articulated a specific action plan pushing for its introduction--the operators seem to for completing this important national priority. The be content to concentrate on 2.5G services. initiative inherent in MC 08-07-2002 ("Rules and NTC has no detailed information on the coverage Regulations Authorizing Entities other than Public of the wireless cellular operators, though it knows that Telecommunications Entities to Install and Operate there are some 7,000 cell sites operating throughout Public Calling Stations/Offices and Telecenters") the country. The information on service availability has resulted in only a few small operations starting in all of the municipalities, including in this report, services, but in general, the industry seems unable or suggests that many areas have no cellular coverage. unwilling to pull together to provide further expansion The information should be formalized, and maps of existing services. While market forces are surely developed by each cellular operator and provided driving some expansion of mobile services everywhere to NTC on a regular basis. This information should in the country, it is unlikely that full coverage will be also be made available to the public, as is the case accomplished in the near future, and any expansion in most jurisdictions. of fixed-line services is even more remote. Historical methods of assigning frequencies to Following an assessment of the SAS in 2001, NTC the current operators have worked reasonably well, stated that a status report should be developed for with the dynamic growth of wireless users as ample determining the situation of the unserved munici- evidence. However, the lack of rural coverage likely palities, and that the existing carriers should be requires a different look at this area of frequency required to dedicate a part of their capital programs management, and a plan for reuse of spectrum to the expansion of services into these areas. However, in remote areas becomes critical. The pricing of without a proactive approach to this objective, it is spectrum licenses for application in rural areas unlikely that there will be measurable progress. This may need some adjustment, in order to motivate underscores the importance of a new national tele- more entry by entrepreneurs and community-based communications development plan. systems to be installed in rural locations, possibly in WorldBankInfra.indb 177 12/6/2005 8:42:03 AM 1 Philippines: Meeting Infrastructure Challenges partnership with the larger operators who lack the dations were accepted, NTC could then be required incentive to move into such areas. In other words, to implement the scheme. Some elements of such a new techniques should be examined, to make more proceeding could be: effective use of precious spectrum resources. · NTC should obtain a report from each of the carriers (public telecommunications entity or Findings and recommendations PTE) on its situation relating to SAS, naming all of the municipalities in its responsibility list Universal access and an assessment of the demand for, and costs This is the most serious issue confronting the associated with, the provision of minimum access government and the telecommunications industry to services, both wireline and wireless. today. The continuing role of government (TELOF) · Each PTE should provide an indication as to as the supplier of last resort has not been an effective its capability or plans to provide this minimal solution to the problem of service expansion to service level. currently underserved or unserved locations, nor have · All PTEs should be invited to indicate areas that the Alternative Communication Program5 (ACP) or they would be interested in serving, outside their SAS programs. The solution is not a simple one, current assigned territory. though. · If possible, commission an independent study of A report in 20026 recommended some form of all of these aspects, to determine overall costs subsidy to achieve the service expansion required. It and priorities, in consultation with the carriers, concluded as follows: user representatives, government departments, · and politicians interested in the subject. The government subsidy and other incentives · Evaluate, with carrier input, the possibility offered in the ACP are insufficient to motivate the of a special fund for addressing the short- · private sector to venture into the target areas. term problem of raising capital for the service The government's telecenter initiative needs expansion effort. Seek input on whether operators more development work, with the regulator and would be prepared to assume responsibility for policymaker working to create the environment PCOs or other systems for which capital costs · for expansion. were subsidized, but for which operating costs The government's privatization efforts need to be would be their responsibility. · strengthened and realistic expectations applied. · Commission a study as to whether wireless tech- A phased approach to expansion of service to some nology really is the answer to the universal access 35,000 unserved barangays should be undertaken issue, bearing in mind the fact that very soon the over a seven-year period: starting with noncash policy regarding access to basic services will likely incentives to private operators to achieve extension include some kind of Internet access. Can this of telecenter service to 800 municipalities; priva- additional requirement be met effectively through tizing all government operations; developing a current wireless technology? If so, what are the fund to subsidize the final stages of extension cost implications, and what is the current situ- of services; and awarding licenses and subsidies ation regarding access to such service throughout for barangays within reach of about 90% of the the country? A related question concerns 2.5G remaining unserved rural population. or 3G wireless technology, and whether there is promise in these recent developments to be the The amount of capital subsidy required to provide basis for a broadband Internet access mechanism. telecenters in all unserved barangays was estimated It is also recognized that for cellular services, to be some $50 million. This amount is large, but remote rural areas in the Philippines are generally represents only 2% of the annual gross revenues being locations where income levels are such that any generated by the sector today. In addition, it is only individual use of cellular service may be out of two years of NTC revenue surplus from fees charged the question economically. There is little incentive to users of the spectrum and to licensees. for the cellular operators to extend their network A public process conducted by NTC to address infrastructure to these areas, and some form of this issue should be considered, to generate recom- motivation will be required if this last step in the mendations to the government. If the recommen- coverage map is to be accomplished. WorldBankInfra.indb 178 12/6/2005 8:42:03 AM Chapter 9 Telecommunications 1 The key to resolving this issue is action. Action · Provide for tenure for NTC commissioners. Give to should be taken by the government through its NTC the autonomy needed in operational terms, regulator and policymaking body, whether it be allowing it to use the revenues from fees but DOTC or the department for ICT when formed. It requiring it to submit a budget to the responsible has been clear for many years that the private sector department secretary annually. Excess revenues will not solve this problem voluntarily. Market forces would be transferred to the general revenue alone will not motivate the level of commitment fund and fee structures would be reviewed by required. However, the sector should be capable the secretary from time to time. of funding the needed expansion without outside · Place NTC in the appropriate organizational mode subsidies. What is required is a concerted effort by that would allow it to pay its staff at something all concerned, and rules need to be put in place to approaching market rates, subject to review by the ensure that the problem is addressed and resolved DOTC secretary or other appropriate authority. within a reasonable time frame. A change that could possibly be implemented Institutional structure without new legislation may be the funding The current institutional structure is not in keeping mechanism for NTC. Allowing NTC to use some of with international best practice. The fact that NTC the revenues from its license and other fee charges is not independent and that commissioners are "at would do much to energize the agency, especially if pleasure" appointees weakens the regulatory process compensation levels could be increased for the profes- seriously. In addition, the requirement that all sional staff and commissioners. Its annual budget telecoms operators obtain a legislative franchise is a should still be subject to approval from the relevant weakness in the overall institutional arrangements department secretary, with any surpluses going to governing the sector. While recent announcements the general revenue fund. acknowledge the need for institutional change and A further short-term approach could be in the for more independence for NTC, it is unclear when form of an executive order that would make it more such change is likely to take place. difficult to dismiss commissioners during an admin- To resolve these issues completely will probably istration's term of office (except for cause), a sort of require legislative change, which would have to be job security guarantee that would at least last for the seen as a long-term solution. However, as the bill life of the administration in power. dealing with the creation of the department for ICT is still pending, perhaps there is a way to add the Competition changes required to the bill. In theory, there is competition among the many In the main, the following actions would be operators, and in some respects this is the case. In needed: reality, by far the dominant player in the market is · PLDT, with a dominant share in each major market Mandate a solution to the "TELOF problem." segment in which it operates. The industry structure, Commit to winding down its operation and selling especially the terms and conditions attached to the systems currently worth transferring to the market entry of many of the new players, has private sector and commit to a bidding process influenced the degree and nature of competition in for all systems, indicating that if no bidders are the sector. In the local market for example, there is found, the systems will be closed, or transferred at a kind of duopoly created by the SAS, and a consid- no cost to local barangay or municipal operators. erable oversupply of local facilities, and thus little It should be stressed that the TELOF operational incentive for any new entry in any of the urban deficit of some $17 million is a direct subsidy by markets that might be candidates for additional the taxpayer to a sector that should not require local operators. Consequently, the further opening any subsidy. The territory served by TELOF may of the local services market is not economically require some subsidy from within the sector, but justified at the present time. In the long run, the should not be receiving support from the public government's policy should be to open all market purse. It will be important, however, as part of segments by eliminating the requirement for a legis- a winding down plan, to provide a suitable way lative franchise (requiring only a license from the to deal with the employees of TELOF, over a regulator). This would require legislative change, reasonable period of time. and would take considerable time. In the short WorldBankInfra.indb 179 12/6/2005 8:42:03 AM 10 Philippines: Meeting Infrastructure Challenges run, consideration should be given to allowing any likely increase competition and efficiency in the sector existing franchised operator who wants to enter the as well. Resellers could be considered value-added local market to do so, subject only to its license being players, and perhaps would only require registration modified appropriately. with NTC. Firm interconnection rules for local competition With regard to cable TV, it is clear that both should be enacted by NTC. There is a need to review legislative change and a policy promoting compe- interconnection rules and ensure that incumbents, tition are required. The current domination by particularly PLDT, respond to requests for intercon- PLDT creates little if any competitive potential, nection facilities in a time-bound manner. To this end, so the currently fragmented remaining companies NTC needs to revise its interconnection regime and may have to consider some sort of joint action to put likely needs more trained resources to carry out this themselves into a position where they can challenge mandate. telephone monopolies with broadband and voice over The franchise requirement is not in keeping with Internet protocol services via cable. At the moment, the World Trade Organization (WTO) commitments this appears to be an unlikely scenario unless the set out in its telecommunications regulatory reference government wishes to act strongly in the area of ICT paper, specifically with regard to the public availability development and competition. The new department of licensing criteria. The requirement for transparency for ICT may hold some promise in this area. in the licensing process is not met by the franchising Another general regulatory principle applied process, nor is the requirement for an estimate of in other jurisdictions is the application of "asym- the time required to reach a decision. However, the metrical" regulatory rules to the sector. Companies Philippines has yet to commit to this reference paper, with significant market power are generally subject to although it has agreed to comply with certain other more stringent regulatory scrutiny than other market WTO telecoms policy objectives. players. Significant market power is defined in various The Philippines has no law or regulations applying ways, some very simple, others quite sophisticated. The to competition in general (antitrust, or competition easiest mechanism is a simple revenue/market share oversight body) as seen in many countries. In some calculation that states that significant market power jurisdictions, the furtherance of competition in the applies if a company has more than a 40% share of the telecoms sector is left to the telecoms regulator, as relevant market segment. This would likely mean that antitrust legislation is usually too broad to apply only PLDT and the two largest wireless players would in practical terms to telecoms matters. Although a be affected by the more stringent regime, with the general competition law can help, such as dealing others essentially deregulated. In addition, significant with broad issues of concentration of economic power market power could exist at the regional level, by and anticompetitive behavior at the corporate level, virtue of the SAS assignments, and it is therefore such legislation would probably not do much to conceivable that a few entrants would be considered improve the competitive situation in the Philippine to have significant market power in some regions, telecoms sector. Government policy is clear in the and as such, may be subject to regulatory constraints Philippines--a competitive, private sector-driven in those areas. telecoms market is desired, and it is now a matter In terms of process, it is recommended that DOTC for the policymakers at DOTC and NTC to ensure issue an order or instruction to NTC, requiring it that the market entry and operational rules maximize to conduct, within a specified time period, a public the opportunity for real competition to flourish. proceeding on competition in the telecoms sector in In the long-distance market, it is recommended the country. This should be a several-stage proceeding that NTC begin the process of introducing carrier in which the first phase could be the identification selection mechanisms for long-distance traffic. At of issues seen by stakeholders, including the carriers, the very least, a dial-around mechanism that would ISPs, and other interest groups, followed by a stage allow customers of a local exchange company to in which the stakeholders would be invited to submit route their long-distance calls to a particular long- position papers on the issues identified in the first distance provider would do much to increase the level phase. From this point on, the proceeding would then of competition in the sector. A carrier preselection be in the form of public hearings in which each issue mode would be even more effective, and should also could be aired, and NTC would decide upon priority be considered for later implementation. requirements and the process for introducing more Allowing resale in all telecoms services would competition. WorldBankInfra.indb 180 12/6/2005 8:42:03 AM Chapter 9 Telecommunications 11 Table 9.11 Proposed road map for government action (in order of priority) Objective Steps to be taken in the Steps to be taken in the short term (1­2 years) medium term (up to 5 years) Universal · Carefully define universal access and include · Put a mechanism for expansion in place and monitor access to basic the affordability aspect and targets for Internet performance services access · If an aid program can be harnessed to provide the · Conduct a public proceeding to determine needed subsidy, NTC and DOTC should manage its the nature of the problem, including status of implementation. All funding should support private commitments, demand factors, and wireless sector initiatives coverage · Universal access should be an integral part of a · Establish a subsidy program to achieve coverage long-term ICT plan to be coordinated with the new needed. If a universal service fund is deemed department for ICT when formed the answer, NTC and DOTC should define the mechanism and collection methodology · Examine evolving wireless technology, to determine if it is the answer to service extension to rural and remote areas. Costs and any subsidy requirements should be determined Institutional · Commit the government to ensure tenure for · Change legislation to ensure that commissioners are changes commissioners of NTC. If possible, issue an appointed for a fixed term with tenure executive order guaranteeing it during the · Grant to NTC full powers to license telecoms tenure of the current executive branch operators (with no need for a legislative franchise) · Allow NTC to fund its own operation, and pay staff competitive salaries · Follow through on the commitment to privatize all government operations and wind down TELOF as part of a two- to three-year plan Promoting · Open the long-distance market by introducing · Consider opening the local market to all operators, competition carrier selection mechanisms and establish interconnection rules for all entrants · Allow resale in all segments by value-added · Change legislation to allow market entry without the service providers need for legislative franchises; licensing to be done by NTC Spectrum · Conduct a study aimed at developing a plan · Ensure that staffing and other resources are in place management for spectrum management reform. This would in NTC to implement the plan emanating from the issues include governance and human resources issues, proceeding described in the short-term plan and management systems needed by NTC · Examine the benefits that would accrue from a · Conduct a study on frequency usage efficiency, more efficient monitoring and automated licensing with recognition of the possibility of different system, as well as the revenue potential of such treatment of rural and urban areas improvements National · DOTC (or its successor department) and the · DOTC should actively monitor progress on the NTDP, telecom- industry should implement a new "edition" taking action as required to ensure compliance by munications of the NTDP, following a similar pattern to the industry wherever failures occur, or institute development the production of the last plan in 1990, the necessary corrective action where feasible. NTC plan concentrating on hard development targets should issue an annual report on compliance with the with time frames. This time, the plan should NTDP, and recommendations for actions take a broader, ICT perspective, but care should be taken with the focus of the study and development targets in particular Legal · Begin the process of developing a successor law · Review the current legislation, with a view to create framework to Republic Act 7925, encompassing the needed a comprehensive ICT bill that would spell out a new for telecom- institutional strengthening, sector reform, role for the government, with an independent, self- munications universal service funding, and information funded regulatory body, and policy guidance to governance technology expansion goals ensure expansion of needed services DOTC = Department of Transportation and Communications; ICT = information and communications technology; NTC = National Telecommunications Commission; NTDP = national telecommunications development plan; TELOF = Telecommunications Office. WorldBankInfra.indb 181 12/6/2005 8:42:04 AM 1 Philippines: Meeting Infrastructure Challenges A cautionary note is required here. The proceeding business services, especially in the area of ICT infra- could fail if the various carriers in the industry today structure. The current regulatory regime covering see the risks involved outweighing the advantages each of these service areas should be addressed, they might achieve through a more open marketplace. with recommendations made for any deregulatory That is, the current situation may be preferable to any initiatives that might help in the diffusion of ICT change. At least some input to the proceeding that is services. There should also be a comprehensive study pro-competition in its best sense--whether this be of services provided to competitors by the larger NEDA, or a consumer or business user group--should companies with significant market power. Such be explored. It seems clear though that an advocate services should likely be tariffed, and price/cost rela- for more competition will be needed if there is no tionships mandated by NTC. champion within the industry. With respect to institutional strengthening, it is clear that the current legislation governing NTC--its Radio spectrum management powers and mandate--is inadequate. Work should The lack of resources by NTC for effective spectrum be done on the development of a more appropriate management is directly linked to the fact that the institutional structure, including a minimum tenure budget for NTC is drawn from the DOTC allocation, for commissioners, budget independence, compen- and it would appear that DOTC and/or Congress, sation levels, and licensing powers. This is a long-term which approves the DOTC budget and the NTC objective, but through appropriate executive orders the allocation, have decided not to strengthen the orga- government should address the aspects of this reform nization with the additional funding needed as the that can be undertaken through such actions. industry has grown and as the regulatory issues have It has been 15 years since DOTC published its become more complex and demanding. National Telecommunications Development Plan, and The radio spectrum management function should it is time for another such plan to be developed, in be examined with the aim of establishing a logical and order to provide a clear policy direction for the sector. practical plan of action for the future. Additional staff Serious consideration should be given to engaging the resources and training, as well as software systems, stakeholders in a repeat of this exercise, the objectives are needed to bring the operation to an efficient of which would be a set of time-bound development state. The policy issues raised by current initiatives in targets for the sector. As noted above, this plan should other jurisdictions (e.g. frequency trading) should be be broadened in all likelihood, to be more of a plan for examined for potential application in the Philippines, ICT infrastructure, but should not be confused with through a separate study by experts in the field, and overall ICT goals, which are more content-oriented by a process that would examine the potential benefits than delivery-focused. of innovations such as frequency resale and sharing, More emphasis should be placed upon the new and special pricing of spectrum in rural areas. To department for ICT to address the policy role of attempt to implement such initiatives with the current government versus the regulatory role of NTC, setting resources at NTC would not be practical. up more appropriate limits on the role of politics in Frequency licenses already represent a significant the telecoms sector. This department would also source of government revenue, and while it is not address the issues relating to Internet development and suggested that any increases in these fees should be universal access to an expanded list of needed services introduced, a more efficient scheme for allocating and in rural areas of the country, and the role of voice managing the spectrum will likely motivate more over Internet protocol telephony in the growing list usage of the resource, and hence would enhance of new services that should be encouraged for future government revenues from this important segment technological and economic progress. of the market, which promises to grow more rapidly Interconnection rules, cited by many players as over the next few years. an obstacle to meaningful competition, should be highlighted by NTC, and a proceeding launched to Other proposed government initiatives address the most urgent aspects of this problem, A comprehensive study of telecoms services pricing including enforcement mechanisms and penalties should be developed, covering both basic services and for noncompliance. WorldBankInfra.indb 182 12/6/2005 8:42:04 AM Chapter 9 Telecommunications 1 Endnotes 1 In 1979, under Executive Order 546, two regulatory bodies, the complete coverage for basic services, and the need for the exten- Telecom Control Bureau and the Board of Communications, sion of broadband services to areas currently lacking them. The were merged, and NTC was established under the Ministry of MTPDP indicates that teledensity had reached the level of 28.06 Transportation and Communications (now DOTC). per 100 population, which presumably includes the penetration 2 However, the national targets for availability of services have of mobile telephones--not usually the approach used in reporting always been set at the municipality level--thus, the number of teledensity. barangays not served may not be strictly relevant--but even then 5 The Alternative Communication Program (ACP) was instituted the number is very large, and reflects a serious problem. by the DOTC in 2000 in response to a presidential commitment 3 The reasons for the failure of the government's efforts appear to bridge the information gap in rural parts of the country. It to relate to the terms attached to privatizing the systems being offered incentives for investments in rural infrastructure. It has made available--operators are reluctant to assume responsibility not resulted in any substantial expansion. for equipment that they do not support, and in many cases, the 6 Björn Wellenius. 2002. "Extending Access to Communication areas of operation are not considered lucrative or even sustain- and Information: Recommended Approach and Implementa- able financially. tion Plan." Report submitted to the Republic of the Philippines 4 In this report, NEDA summarized progress to date, and acknowl- Department of Transportation and Communications, February edged the challenges ahead, especially the need to achieve more 21. PPIAF and World Bank, Manila. WorldBankInfra.indb 183 12/6/2005 8:42:04 AM Tim Graham/Getty Images WorldBankInfra.indb 184 12/6/2005 8:42:17 AM Appendixes Appendix 1 Correlation versus Causation: Does Infrastructure Cause Growth in the Philippines? E vidence of the positive correlation between lag specifications. Even so, the results did not alter, infrastructure expenditures and gross domestic implying a high degree of robustness. product (GDP) growth does not necessarily imply causation. To test whether infrastructure causes Checking for sign and duration growth, a Granger-causality analysis was performed While the Granger-causality procedure establishes on existing infrastructure and growth data in the Phil- a causal link from infrastructure to GDP, it does ippines. The intuition behind a Granger-causality test not however reveal the sign and the duration of the is that if variable X causes variable Y, then changes in X causality. Further econometric analysis was therefore should precede changes in Y. Therefore, in a statistical undertaken to ascertain the sign and duration of the regression of Y on other variables (including its own effect. Preliminary results from the analysis show that: past values), when past values of X are included, and investment in infrastructure has a positive impact on if that significantly improves the prediction of Y, then level of GDP; and infrastructure capital stock has a X is said to (Granger) cause Y. long-term impact on level of GDP (i.e. investment in infrastructure affects economic growth). The tests were Checking for causality and robustness repeatedseparatelyforpublicandprivateinfrastructure For Philippine data from 1985 to 2002, in order to capital stocks. For the Philippines, preliminary results assess whether infrastructure capital stock causes indicate that both public and private infrastructure GDP, GDP values were regressed against lagged positively affect economic growth. values of GDP and lagged values of infrastructure The above results are relevant in that they suggest capital stock (the stock was constructed from the that infrastructure investment--public, private, and gross fixed capital formation series). The results show combined--contributes positively to economic growth that infrastructure capital stock does indeed signifi- in the Philippines. However, further analysis will be cantly Granger-cause GDP. In order to check whether required to measure with accuracy the magnitude of the results were sensitive to the number of lagged the effect, as well as the relative marginal productivity values, the test was also repeated using different of private and public infrastructure investment. WorldBankInfra.indb 185 12/6/2005 8:42:18 AM 1 Philippines: Meeting Infrastructure Challenges Appendix 2 Spatial Effects of Infrastructure L ack of access to adequate infrastructure services hand scored low in road density, access to electricity, is also correlated to uneven development and access to sanitary toilets. In contrast, regions between regions in the Philippines. Existing with higher GRDP such as the National Capital empirical evidence indicates that wide income Region in Luzon and its surrounding areas, regions disparities among regions can be attributed, in part, III and IV, rank significantly higher for access to to regional differences in the level of infrastructure basic infrastructure. development.1 Table A2.1 depicts the close linkage Another measure of capturing spatial regional between gross regional domestic product (GRDP) inequalities is total net shift (TNS) analysis. A and the associated disparities in infrastructure access positive TNS value for a region indicates that the across regions. The southern and eastern parts of region's development, as measured by its GRDP, is the Philippines, which have the lowest GRDP, are above average. Figure A2 presents the results of a TNS also the regions that have dismal performance in time-trend analysis for 14 regions over 1987­2000. terms of access to basic infrastructure. The linkage Table A2.2 shows the strong correlation between between income and access is remarkably clear in the TNS values and major infrastructure development Autonomous Region in Muslim Mindanao (ARMM) indicators for roads, electricity, irrigation, and tele- and Region VIII. ARMM, having the lowest GRDP, communications, implying that the least prosperous consistently ranked the lowest for access to safe water, regions also have the least access to infrastructure electricity, and sanitation, as well as having the lowest services. This is consistent with the findings that road density in the country. Region VIII on the other areas such as the southern part of the Mindanao Table A2.1 Uneven regional development and uneven infrastructure access Gross regional Access to safe water Access to sanitary Access to electricity Region domestic product (% (%) toilet facilities (%) (%) Road density, distribution) 2001 2000 2000 2000 (km per sq. km) CAR 2.4 81.5 80.0 66.9 0.5 NCR 30.9 85.1 95.6 99.3 7.5 I 3.0 89.0 92.1 83.0 1.1 II 2.3 83.6 94.4 72.8 0.5 III 9.0 96.4 90.9 93.3 0.8 IV-A 15.2 84.9 90.6 93.9 0.7 IV-B 81.7 74.1 52.9 0.3 V 2.8 65.7 66.8 55.2 0.5 VI 7.0 68.3 70.5 63.7 0.9 VII 7.1 71.9 72.9 66.7 1.0 VIII 2.3 79.9 71.5 55.2 0.4 IX 2.7 63.3 72.7 53.9 0.6 X 3.9 78.4 83.6 70.1 0.9 XI 6.3 70.2 86.5 72.0 0.6 XII 2.6 79.7 83.5 65.6 0.6 CARAGA 1.4 80.0 86.8 65.1 0.4 ARMM 0.9 34.1 47.3 39.5 0.3 Philippines 100 78.5 82.5 75.4 0.6 ARMM = Autonomous Region in Muslim Mindanao; CAR = Cordillera Autonomous Region; NCR = National Capital Region. Source: Cecilia Reyes. 2003. Socio-economic Profile of the Philippines. Makati: Philippine Institute for Development Studies. WorldBankInfra.indb 186 12/6/2005 8:42:18 AM Appendixes 1 Figure A2 Table A2.2 Total net shift analysis of gross regional domestic Rank correlation coefficients: Total net shift values product, 1987­2000 and infrastructure development indicators, 1987­2000 20,000 15,000 Infrastructure development Spearman rank correlation indicator coefficient 10,000 Road density 0.47 5,000 Percent electrifieda 0.40 0 Percent irrigatedb 0.69 -5,000 Telephone density 0.53 -10,000 -15,000 a. Refers to the ratio of actual energy connections to potential NCR CAR IlocCaga os yan energy connections. b. Refers to the ratio of irrigated area to C. LuzS.Tagalog on BicolVisayC.VisayE.VW. MindanaoS. Mindanao as as W. isayasN. MindanaoC. Mindanao potential irrigable area. Source: Rosario G. Manasan and Shiladitya Chatterjee. 2003. Source: Rosario G. Manasan and Shiladitya Chatterjee. 2003. "Regional "Regional Development." In Arsenio Balisacan and Hal Hill, eds., The Development." In Arsenio Balisacan and Hal Hill, eds., The Philippine Philippine Economy: Development, Policies and Challenges. New York: Economy: Development, Policies and Challenges. New York: Oxford Oxford University Press. University Press. region, with its uneven access to vital infrastructure, Endnote have not been able to develop relative to the regions with better infrastructure such as the National 1 See Mario B. Lamberte, Rosario G. Manasan, and Gilberto M. Capital Region and Southern Tagalog (Region IV). Llanto. 1993. Decentralization and Prospects for Regional Growth. For areas lacking in infrastructure, the challenge Philippine Institute for Development Studies. Makati; L.Q. Basilio in stimulating economic activity (through increased and D.M. Gundaya. 1997. "The Impact of Collective Public Infra- productivity), and ultimately development, will be structure on Regional Income Disparities." Undergraduate thesis, much more daunting. University of the Philippines School of Economics. April. WorldBankInfra.indb 187 12/6/2005 8:42:18 AM 1 Philippines: Meeting Infrastructure Challenges Appendix 3 Framework for Local Government Access to Financing and its Implementation Progress I n 1996 the national government developed for property development (with the exception of two the LGU Financing Framework, which led local infrastructure projects). Key concerns with the to reforms in local government financing use of BOT include the higher cost of private sector and formed the cornerstone of the current LGU financing, lack of capacity of local officials to enter into financing arrangements. The government LGU these types of financing arrangements, and the amount credit programs--consisting of the Municipal Devel- of time and effort spent to arrive at financial closure. opment Fund (MDF) and the credit programs of Modest LGU bond market development. The the government financial institutions (GFIs)--are Local Government Unit Guarantee Corporation expected to pave the way for greater private capital (LGUGC) was created to guarantee debt issues of market participation in financing local development. local governments when these issues are financed Government credit programs for LGUs should have from private sources. It is the first privately managed a built-in graduation program in which LGUs with a local government guarantee corporation set up in good credit track record can readily "graduate" into a developing country in Asia. Six LGU bonds have the private capital markets. This graduation policy is been floated with the backing of LGUGC, for a total based on LGU creditworthiness. Technical assistance, amount of P1.35 billion. However, key impediments which includes grants, can be provided to LGUs to to the further development of the local government improve their creditworthiness. bond market remain, and include: higher costs in The LGU Financing Framework recommended issuing bonds than direct borrowing, lack of reliable the following measures to improve local government information about LGUs, the possibility of political access to the private capital markets: increase use of interference in project management or in debt build-operate-transfer (BOT) schemes; develop the servicing, uncertainty about management capacity local government bond market; improve LGU access at the LGU level, uncertainty about the quality of to private banks; optimize the role of GFIs in local feasibility studies, lack of an independent rating government financing; restructure and reorient the agency, lack of a market for secondary trading, and MDF; improve local government capacity to raise lack of access to the Internal Revenue Allotment as own-source revenues; and use official development security for LGU obligations. While the larger LGUs assistance (ODA), both loans and grants, to improve will be able to utilize bond financing more extensively local government capacity. once the institutional and regulatory issues affecting Over the last decade or so, local government bond issuance are sufficiently addressed, smaller and borrowing has expanded significantly, though it lower-income LGUs may not be as fortunate, since the remains at an overall low level. Total LGU borrowings relativelysmallsizeoftheirfinancingrequirementmay rose from P448 million in 1991 to an average of not justify the fixed expense incurred in arranging P5.2 billion in 2001­2002 (table A3). LGU borrowing a bond flotation. accounted for 4% of total LGU receipts in 2001, from Private financial institution financing not realized. less than 2% in 1991. Cities accounted for 53% of Some private banks have purchased LGU bonds, but total LGU borrowing in 2000­2001, the provinces direct lending is almost nil. This is due to a number of for 26%, and municipalities for 21%. factors:thelackofinformationonLGUs,unfamiliarity Key implementation progress of the 1996 LGU with LGU lending, and the lack of loan security that Financing Framework includes the following: could otherwise be provided by the Internal Revenue Very limited private investment in LGU infra- Allotment intercept mechanism1 and a depository structure. Very few LGUs have made use of BOT relationship with LGUs.2 Private banks have indicated contracts. Most of the completed BOT projects are that their inability to become depository banks for unsolicited, with only two LGUs having completed LGUs has been the chief structural impediment to solicited projects, while most of the BOT projects are their entry into the market. WorldBankInfra.indb 188 12/6/2005 8:42:19 AM Appendixes 1 Table A3 Local government borrowings, 1985­2002 Levels (P million) Averages 1985­1991 1992­2002 1991 1995 1999 2001 2002 All LGUs 110 3,538 448 2,493 5,949 6,109 4,219 Provinces 57 806 325 593 771 1,943 1,482 Municipalities 12 657 37 579 561 932 915 Cities 41 2,075 87 1,321 4,618 3,234 1,822 Share of LGU income (%) Averages 1985­1991 1992­2002 1991 1995 1999 2001 2002 All LGUs 0.79 3.75 1.88 3.67 4.94 4.10 2.62 Provinces 1.48 3.49 5.22 3.47 2.71 5.07 3.72 Municipalities 0.23 1.91 0.37 2.25 1.30 1.84 1.61 Cities 0.88 5.61 1.12 5.29 9.49 5.39 2.83 Source: Rosario G. Manasan. 2004. "Infrastructure and Decentralization." May. World Bank, Manila. Estimates based on Commission on Audit data. Dominant role of government financial insti- to transform MDFO into a financial intermediary that tutions. LGU loans have now become an important would catalyze the emergence of a viable LGU credit and profitable part of the portfolios of two GFIs, market. Executive Order 252 enabled the creation namely Land Bank of the Philippines (LBP) and the of the Municipal Finance Corporation (MFC), to be Development Bank of the Philippines (DBP). LBP established as a corporate entity affiliated to LBP with uses both ODA and its own resources to lend to initial capital subscription from the government (using LGUs. DBP exclusively relies on ODA resources for MDF) and LBP (10% of subscribed capital). MFC's LGU loans. The positive experience of these GFIs in primary purpose is a non-deposit-taking financing lending to LGUs provides a track record that may company providing loans directly or indirectly to demonstrate to private banks that the LGU market is LGUs. The operationalization of MFC is starting, and a relatively secure and profitable one. The main issue, is likely to have an important impact on LGU access though, is the failure of GFIs to develop a graduation to financing. policy for LGUs to be able to tap the private credit ODA financing to LGUs. The numerous ODA markets. Clearly, the graduation policy designed programs for LGUs offer considerable scope for greater under the original framework has failed to work since effectivenessinusingtheseresourcestostrengthenLGU GFIs are still the main financiers to LGUs. capacity. Long-standing constraints include incon- MDF restructuring, and establishment of the sistency of policies, often unhealthy competition among Municipal Finance Corporation. The MDF was ODA projects, and lack of leverage of domestic and established in 1984 by Presidential Decree 1914 private financing with almost all LGU lending sourced as a revolving fund for ODA-supported projects from ODA. Closer coordination between funding insti- for LGUs. In 1998 the Municipal Development tutions and government agencies is necessary to pave Fund Office (MDFO) was created as the first phase the way for private sector funding of local development MDF restructuring and has since handled subloan in the future. Additionally, a major effort should be promotion, appraisal, and supervision, as well as undertaken in helping local governments come up with subloan disbursement and collection. In 2004, the a pipeline of local infrastructure projects and prepare government started the second phase of restructuring, and implement these projects. Endnotes 1 In the event of an LGU defaulting on its loan repayment, the 2 Currently, LGUs are only permitted to open deposit accounts national government, through the Department of Budget and in the GFIs, and not in private financial institutions, except in Management, "intercepts" the Internal Revenue Allotment special circumstances. transfer to LGUs and instead transfers the equivalent amount to the lender. Currently, only the MDFO is given such access to the mechanism. WorldBankInfra.indb 189 12/6/2005 8:42:19 AM 10 Philippines: Meeting Infrastructure Challenges Appendix 4 Results of Privatization Perception Survey T here is scant information on the common Maynilad Water Services, Inc. (MWSI) and Manila Filipino's views on the role of the private sector Water Company, Inc. (MWCI) in water; South Luzon in the provision of basic infrastructure services. Expressway (SLEX) and North Luzon Expressway As part of this study, and in order to complement (NLEX) toll roads, which operate under private the detailed interviews of private sector participants, concessions; and the Metro Rail Transit (MRT) a survey on public perceptions on the level of public commuter train which is operating under a build- acceptance of privatization of basic infrastructure lease-transfer mode--public awareness seems to be services was conducted.1 low as the majority of the respondents perceives The survey was conducted during July 10­15, infrastructure utilities as wholly government 2004. The survey is not a comprehensive survey of owned (figure A4.1). Meralco and MWSI/MWCI the entire country's views on private sector partici- pation. Notably, respondents were drawn from largely Figure A4.1 urban areas: all of Metro Manila and parts of Cavite, Ownership of utility Bulacan, and Rizal. Access rates for all the services "As far as you know, is ___ a GOVERNMENT or were also high for the sample: around 98% have elec- PRIVATE institution?" (% of those aware of institution) tricity, 73% have piped water, and more than half 100 used the toll roads and commuter trains at some point. The survey was confined to questions related to formal providers only; the informal private sector was not covered.2 50 The survey asked respondents questions related to their awareness of private sector providers in basic infrastructure services; gauged their perceptions of 0 the quality and the price of services provided by the Meralco MWSI/MWCI SLEX NLEX LRT MRT private providers; and their awareness of institutions Don't know Private Government that regulate private providers. are exceptions--more than half of those who have Public perceptions of private sector participation in used their services are aware that they are privately basic infrastructure services are generally positive: run. One possible reason for the low awareness is more than half seem to think that it would benefit the that the differing degrees of government involvement country... As table A4.1 shows, the majority of the respondents agree (strongly Table A4.1 or somewhat) that encouraging the Opinion on private sector participation (investment and operation) participation of the private sector in infrastructure services in the investment and operation in "For the following, please tell me how much you agree or disagree that it will be good electricity generation, water distri- for the country to encourage the private sector to invest and operate in (ACTIVITY)" bution, toll roads, and commuter % of total sample trains will benefit the country. Electricity Water Toll roads Urban rail Strongly/Somewhat agree 59 62 53 67 However, public awareness of private Strongly agree 32 35 22 37 providers is low... Somewhat agree 27 27 31 30 While the Philippines has a number Strongly/Somewhat disagree 38 36 42 30 of providers--with varying degrees Somewhat disagree 13 12 17 11 of private sector involvement: Strongly disagree 25 24 25 19 Meralco in electricity distribution; Don't know/Refuse 3 2 5 3 WorldBankInfra.indb 190 12/6/2005 8:42:19 AM Appendixes 11 in private sector participation arrangements is often of the utilities, though this perception is somewhat not clear--for example, the Philippine National split in the power sector (table A4.3). When this Construction Corporation (PNCC) involvement as majority was further asked to name the government a government owned and controlled corporation agency responsible for setting tariffs, more than (GOCC) in the SLEX and NLEX toll road concessions. Moreover, in sectors such as electricity and water, there is substantial government involvement in the Table A4.3 input/resource side: the National Power Corporation Knowledge on whether price of service controlled by (NPC) provides some electricity to Meralco; MWSI government and MWCI are only distributors--they purchase "Is the price of the services under GOVERNMENT CONTROL OR water in bulk from the publicly owned Metropolitan NOT? IF CONTROLLED: Which government agency is this?" (% Waterworks and Sewerage System (MWSS). of total who used/aware of servicea) Electricity Water Public perceptions of profits made by private providers Under gov't. control 49 Under gov't. control 51 are not accurate... Don't know 63 Don't know 65 As table A4.2 shows, when asked whether providers NPC 12 MWSS 23 ERC 11 ERC 2 Table A4.2 ERB 4 Can't recall 2 Opinion on profits and losses President 3 NPC 1 "As far as you know, how big or small are the profits or losses DOE 2 LWUA 1 of ___?" Not under gov't. control 48 Not under gov't. control 44 Don't know 3 Don't know 5 % of total who used/aware of service NLEX SLEX Great Some Hardly Some Great Don't Under gov't. control 69 Under gov't. control 74 profits profits any profit Don't know 62 Don't know 62 or loss losses losses know DPWH 11 DPWH 12 NPC 53 25 2 8 7.0 5 PNCC 11 PNCC 10 MWSS 44 34 7 7 3.0 5 Can't recall 4 Can't recall 3 SLEX 51 36 5 2 1.0 5 DOTC 2 DOTC 2 NLEX 51 31 10 2 1.0 5 LTFRB 2 LTFRB 2 LRT 50 39 6 1 0.3 4 LTO 2 LTO 1 MRT 48 37 6 1 1.0 6 Not under gov't. control 22 Not under gov't. control 19 Don't know 9 Don't know 7 such as MWSS and NPC, along with agencies in the LRT MRT toll roads and commuter rails subsector, are posting Under gov't. control 78 Under gov't. control 77 profits, an overwhelming majority believe that these Don't know 68 Don't know 70 agencies are posting profits, be they great or small.3 DOTC 10 DOTC 11 One interesting outcome is how the respondents see LTO 6 LTO 4 NPC's financial position: the perception is the exact Can't recall 3 Can't recall 1 opposite to reality, i.e. NPC has been operating with LTFRB 2 LTFRB 1 a deficit since the early 1990s. DPWH 2 DPWH 2 The misperception that most private providers No idea 1 are earning profits gives an impression that service Not under gov't. control 13 Not under gov't. control 16 providers are more than capable of shouldering the Don't know 10 Don't know 7 cost of any activity to improve quality, and thus have a. For agencies: the corresponding figures are % of those who used no basis for passing the cost on to consumers by the service and say that price is under government control. The increasing the user charges. agencies reported here are the top seven mentioned. LTO = Land Transportation Office; DOTC = Department of Transportation and Communications; LTFRB = Land Transportation Moreover, public awareness of institutions that regulate Franchising and Regulatory Board; DPWH = Department of private providers is also low... Public Works and Highways; LWUA = Local Water Utilities The majority (51% for water, more than 75% for Administration; ERC/B = Energy Regulatory Commission/Board; MWSS = Metropolitan Waterworks and Sewerage System; NPC commuter trains, 69% for NLEX, and 74% for SLEX) = National Power Corporation; PNCC = Philippine National responded that the government controls the price Construction Corporation. WorldBankInfra.indb 191 12/6/2005 8:42:20 AM 1 Philippines: Meeting Infrastructure Challenges 60% responded that they did not know the agency Figure A4.2 responsible. Price vis-à-vis the cost of provision Interestingly, the agencies they identified, in "Compared to the cost of providing the service to you, reality, are not involved in such activities. For is the price you pay..." (% of aware/used service) example, only one respondent each for SLEX and MRT NLEX users correctly identified the Toll Regulatory LRT Board while DPWH garnered the highest answer for NLEX these two toll roads.4 In electricity, NPC, a power SLEX Skyway supplier, actually ranked higher than the Energy SLEX Regulatory Commission (ERC)/Energy Regulatory Water Board (ERB) as the agency thought to be responsible Electricity for setting tariffs. 0 25 50 75 100 When respondents were asked specifically about Only fair Above the cost Below the cost Don't know their perceptions of the ERC, more than a quarter (36%) were not even aware of ERC's existence, and they are paying enough, or more than enough. Only 17%, while acknowledging ERC's existence, stated a very small percentage of the sample perceives that that they did not know what it does (table A4.4). the price for these services is inadequate to cover the Only 1.7% of the respondents (correctly) identified (perceived) cost of provision. ERC's role as a regulator of the price of electricity. A Quality. Overall, as figures A4.3 and A4.4 illustrate, the majority perceives the present quality of Table A4.4 services to be good/fair, especially for the commuter Perceived function of the Energy Regulatory trains (i.e. MRT/LRT). Compared to five years ago, Commission "Can you please tell me in one or two sentences only, what you Figure A4.3 think is the job of the Energy Regulatory Commission?" Present quality % of total sample "What can you say about the present quality of the service?" (% of aware/used service) Not aware of ERC 36.3 Not know what ERC does 17.0 MRT Regulates the price of electricity 1.7 LRT Supplies electricity 1.3 NLEX In charge of pricing electricity 0.7 Controls and regulates electricity 0.7 SLEX Runs the power industry 0.7 Water Supplies and regulates electricity 0.7 Electricity Others (varying responses) 40.9 0 25 50 75 100 Very good Good Fair Poor Very poor Don't know small fraction (1.3%) incorrectly identified ERC as a supplier of electricity. These perceptions simply point to the lack of Figure A4.4 awareness of the various regulatory institutions and Quality compared to 5 years ago their roles. "Compared to 5 years ago, is the quality of service..." (% of aware/used service) Public awareness of price and quality by private MRT providers varies ... LRT Price. As figure A4.2 shows, the majority of the users of toll roads and urban rail, and the consumers of NLEX MWCI/MWSI believe that the price they pay is just SLEX right compared to the (perceived) cost of providing Water the service. For Meralco customers however, the Electricity majority perceives that it is paying a higher price vis-à-vis the cost of providing electricity. For the 0 25 50 75 100 SLEX Skyway, users are somewhat split on whether Better now Worse now The same NA/Don't know WorldBankInfra.indb 192 12/6/2005 8:42:20 AM Appendixes 1 however, the majority of the respondents perceive that Table A4.5 all services neither improved nor worsened. The same Perception on the trade-off between quality and price can be said for MRT, which has been operational "Agree or disagree: Quality will not improve unless consumers only for a few years. pay a higher price" Price and quality combined. When asked whether they agree on the notion that the quality of services will % of total sample improve unless consumers pay more for the service, Strongly Somewhat Somewhat Strongly Don't only a little more than a quarter agreed (table A4.5). agree agree disagree disagree know However, an overwhelming majority (somewhat/ Electricity 7 19 33 41 0.3 strongly) disagreed (74% for electricity, 70% for NLEX, Water 7 25 31 36 1 67% for water and the SLEX, and 66% and 63% for Toll Roads LRT and MRT). This finding is not surprising given SLEX 9 23 31 36 1 the fact that most believe they are paying enough for NLEX 8 20 34 36 2 Urban Rail the quality of service that they perceive to be good/fair, LRT 9 23 32 34 2 and which appears to them, to have remained at the MRT 9 25 31 32 3 same levels for the past five years. Endnotes 1 The survey was conducted in conjunction with the Social Weather respondents watching TV daily, three or more hours a day; 35% Stations, a non-stock, nonprofit social research organization. The seldom listened to the radio though 27% listened for three or sample consisted of 300 individuals with equal numbers of males more hours a day. and females residing in service areas of the MWSS concession- 2 Other data sources on independent or informal private providers aires and from the 25 to 54 age group. Some attained a high are available, such as those in the Filipino Report Card on Pro- school diploma (28%) and some a college education (24%). Poor Services. 2001. World Bank, Manila. May 30; and Arthur Only 18% had completed college. A total of 48% were currently C. McIntosh. 2003. Asian Water Supplies: Reaching the Urban employed while more than half were unemployed (39% were Poor. Manila: ADB. not working but had worked before; 13% had never worked). 3 Note that though NPC is a public generating company, it also Out of the employed sample, an equal number of the individuals purchases electricity from private independent power producers, (49% each) were working either for the private sector or were which is sold to distributors. self-employed (mostly nonagricultural entrepreneurs) while a 4 The Department of Public Works and Highways answer should small number (2%) were working for the government. In terms not be classified as wholly incorrect as the Toll Regulatory Board of media access, though only 23% read the newspaper daily, TV was previously lodged under it. seemed to be the more popular type of media with 62% of the WorldBankInfra.indb 193 12/6/2005 8:42:21 AM 1 Philippines: Meeting Infrastructure Challenges Appendix 5 Costs and Benefits of Sector Reforms T his appendix presents the cost-benefit analyses about P6 billion each, privatization of the majority of of some of the elements of the proposed NPC assets and the National Transmission Corpo- reforms in the power, water supply, road, and ration(Transco)by2006,universalchargeforstranded telecommunications sectors. cost recovery, and debt absorption of P194 billion, NPC's losses decrease by about $4,258 million (2.3% of GDP) in 2005 and 2006 compared to the status Power quo scenario. This reduction in losses represents a gain to Filipino taxpayers. The Philippine power sector is in a critical state In the long run (2004 to 2008) as WESM begins of development. The sector's immediate concerns operation in Luzon, electricity costs will approach are for the National Power Corporation (NPC) to LRMC. Assuming that end users reap the benefits regain financial sustainability. At the same time, the of lower costs and WESM begins in 2007, taking sector is launching a comprehensive and ambitious two years to reach LRMC, initial analysis shows reform program in a remarkably short amount of a total gain ranging from $2,400 million (0.5% of time. These developments will be accompanied by GDP) to $3,200 million (0.7% of GDP), depending on significant changes in end-user tariffs. First, NPC's assumptions regarding elasticities and stranded cost generation tariff is likely to increase in the near term recovery. Luzon accounts for all of this gain, with to help remedy its immediate financial crisis. Second, losses still occurring in the Visayas and Mindanao, interclass subsidies will be removed in the near term, highlighting the need for effective social protection raising residential tariffs and lowering commercial mechanisms, particularly in Mindanao. Further, and industrial tariffs. Third, tariffs will most likely Luzon's commercial sector enjoys the greatest benefits move to long-run marginal cost (LRMC) levels in at $1,100 million­1,400 million (0.2%­0.3% of GDP). the long term as the implementation of the wholesale Note that these benefits do not include the long-term electricity spot market (WESM) begins. These changes improvements in NPC's financial standing, which will have significant effects on consumer welfare and would certainly be a significant portion of the benefits NPC's financial standing. derived from the power reform program. By estimating end-user tariff paths by region and It must be noted that these figures are based customer type resulting from the changes described on numerous assumptions and should therefore be above, and employing standard consumer surplus considered with caution. Due to a lack of data and analysis, one can derive rough estimates of the benefits an uncertain future, assumptions on elasticities, elec- of reform. The analysis yields short-term (2004 to tricity consumption, tariff paths, and the speed and 2006) losses of approximately $300 million (0.1% of elements of market reform were required, limiting GDP), mainly due to the assumed P1.6/kilowatt-hour the reliability of the figures. The figures also ignore (kWh) increase in NPC generation tariffs from its the broad economic impact of the changes brought beginning of year 2004 levels (of which P0.98 has about by power reform. Despite these shortcomings, already been approved). While losses exist in all three the estimates provide useful figures. regions, the greatest loss in consumer surplus exists in Mindanao at about $175 million. By customer type, Methodology residential and industrial end users suffer losses of The analysis uses a model that calculates changes in about $240 million and $100 million, respectively, consumer surplus due to changes in end-user tariffs while the commercial sector gains approximately for each of the three types of customers (residential, $40 million. The improved financial standing of commercial, industrial) within the three grids (Luzon, NPC dwarfs the short-term loss in consumer welfare. Visayas, and Mindanao). The changes in tariffs result According to preliminary financial projections, given from an NPC generation tariff increase and removal a P1.4/kWh increase in generation tariffs, reductions of interclass subsidies in the short run. In the long in NPC operating costs and capital expenditures by run, tariffs in Luzon are affected by the introduction WorldBankInfra.indb 194 12/6/2005 8:42:21 AM Appendixes 1 of WESM. The model takes into account the steady lated to be P3.69/kWh for residential, P2.78/kWh state of growth in electricity demand due to GDP for commercial, and P2.79/kWh for industrial end increases, but isolates the price effect on consumer users.1 surplus by comparing the consumer surplus after · Stranded cost after the implementation of WESM a change in price with the consumer surplus if no is estimated to be P0.55/kWh (used for scenario change in price had occurred (but GDP still grew analysis). in both cases). The analysis also considers the financial impact Table A5.1 displays the tariff paths that result of the tariff increase and other possible reform using the assumptions above. It must be noted that measures on consolidated NPC/Power Sector Assets these tariff paths are not the official view of the and Liabilities Management Corporation (PSALM)/ World Bank and are based on numerous optimistic Transco financials. The preliminary projections are and simplistic assumptions. They should therefore based on numerous assumptions on privatization, be considered with caution. cost reductions, and government debt absorption, but they do give Table A5.1 a sense of the total financial Tariff paths at nominal prices (P/kWh) benefits if the reforms are imple- mented according to plan. 2003 2004 2005 2006 2007 2008 Residential Luzon 5.75 6.91 7.04 7.16 5.43 3.69 Inputs and assumptions Visayas 4.88 6.52 6.56 6.61 6.61 6.61 The model requires numerous Mindanao 3.12 4.90 5.08 5.26 5.26 5.26 inputs and assumptions, which Commercial Luzon 6.09 7.00 6.87 6.74 4.76 2.78 were based on information Visayas 5.24 6.79 6.74 6.69 6.69 6.69 from the Energy Regulatory Mindanao 3.47 5.07 5.08 5.08 5.08 5.08 Commission (ERC), PSALM, Industrial Luzon 5.23 6.15 6.03 5.90 4.34 2.78 Asian Development Bank Visayas 5.00 6.54 6.49 6.44 6.44 6.44 (ADB), sector specialists, and Mindanao 2.78 4.27 4.15 4.04 4.04 4.04 best estimates. The main inputs are as follows: · Consumer surplus inputs Low range constant price elasticities are based Tariff inputs · on sector reports and are ­0.6 for Luzon, -0.5 for Current average tariffs for each customer type Visayas, and ­0.5 for Mindanao for all customer and grid are based on the 2004 beginning of year types. average tariffs of the 19 private utilities in the · High range constant price elasticities are based · Philippines. on sector reports and are ­0.7 for Luzon, -0.6 for A P1.6/kWh increase in the NPC generation tariff Visayas, and ­0.6 for Mindanao for all customer from the beginning of year 2004 tariff is required types. · to cover operating costs. Of this NPC generation tariff increase, customers Table A5.2 in Luzon only experience a P1.04/kWh increase Electricity consumption, 2003 (GWh) since Meralco, which accounts for 70% of consumption in Luzon, procures only 50% of its Luzon Residential 14,178 · electricity from NPC. Commercial 12,210 Average interclass subsidies, derived from the Industrial 12,166 unbundled tariff schedules of 11 private utilities, are gradually removed over three years starting Visayas Residential 1,744 · in 2004. Commercial 632 WESM will start in 2007 and is implemented Industrial 2,125 only in Luzon, where tariffs are expected to reach Mindanao · LRMC two years after initial implementation. Residential 1,677 LRMC is derived from the ADB report "Welfare Commercial 826 Effects of Power Sector Reforms" and are calcu- Industrial 3,512 WorldBankInfra.indb 195 12/6/2005 8:42:21 AM 1 Philippines: Meeting Infrastructure Challenges · Constant income elasticities are Table A5.3 based on sector reports and are Net change in consumer surplus due to changes in tariffs, lower bound (high 0.6 for residential users, 0.6 for price elasticity, stranded cost recovery, $ million) commercial users, and 1.2 for 2004 2005 2006 Short % GDP 2007 2008 Long % GDP · industrial users across all grids. term term 2003 electricity consumption figures are presented in table A5.2 Luzon Residential -99 -47 7 -139 -0.1 249 617 726 0.2 above and are estimates based on Commercial -46 23 94 70 0.0 323 681 1074 0.2 reports. Industrial -56 7 75 26 0.0 266 588 880 0.2 Total -202 -18 176 -44 0.0 838 1,886 2,680 0.6 Financial analysis inputs · Base-case scenario Visayas Residential -19 -13 -7 -39 0.0 0 7 -32 0.0 No asset sale Commercial -6 -3 -1 -10 0.0 2 5 -3 0.0 No debt absorption by Industrial -22 -13 -3 -37 0.0 6 17 -14 0.0 national government Total -47 -29 -11 -86 0.0 8 29 -49 0.0 Status quo organization Mindanao No asset/debt transfer to Residential -22 -20 -18 -60 0.0 -14 -9 -83 0.0 PSALM Commercial -10 -7 -5 -22 0.0 -3 0 -24 0.0 Transco capital expenditure Industrial -40 -29 -18 -87 0.0 -9 0 -95 0.0 capped at $350 million for Total -71 -56 -41 -168 -0.1 -25 -9 -202 0.0 five years Philippines Sales/generation forecast Residential -140 -80 -18 -238 -0.1 235 615 612 0.1 based on Philippine Energy Commercial -62 12 88 38 0.0 323 686 1046 0.2 Plan 2004. · Industrial -117 -35 54 -98 0.0 264 605 770 0.2 Alternative scenario Total -320 -103 125 -298 -0.1 822 1,906 2,429 0.5 TariffincreaseofP1.4perkWh (already partially achieved) Reduction in NPC operating Table A5.4 costs by P6 billion Net change in consumer surplus due to changes in tariffs, upper bound (low Transco privatization and price elasticity, no stranded cost recovery, $ million) most of NPC's generation Short Long assets privatized by 2006 2004 2005 2006 term % GDP 2007 2008 term % GDP Universal charge for stranded Luzon cost recovery Residential -100 -47 7 -140 -0.1 329 709 898 0.2 Reductions in capital expen- Commercial -53 26 106 79 0.0 440 857 1376 0.3 ditures by P5 billion and Industrial -63 8 84 28 0.0 379 756 1164 0.2 P7 billion in 2005 and 2006 Total -216 -14 197 -33 0.0 1,149 2,323 3,438 0.7 respectively Visayas National government debt Residential -21 -15 -8 -43 0.0 0 8 -36 0.0 absorption of P194 billion and Commercial -7 -4 -1 -11 0.0 2 5 -4 0.0 related principal repayment Industrial -24 -14 -3 -42 0.0 7 19 -17 0.0 and interest expense. Total -53 -33 -12 -97 0.0 9 32 -56 0.0 Mindanao Results Residential -24 -22 -19 -65 0.0 -15 -10 -89 0.0 The model calculates a range for the Commercial -10 -8 -5 -24 0.0 -3 0 -27 0.0 net change in consumer surplus, with Industrial -43 -31 -19 -93 0.0 -10 0 -102 0.0 the results depending on high or low Total -77 -61 -44 -181 -0.1 -27 -9 -218 0.0 constant price elasticity, and stranded Philippines cost recovery after the implemen- Residential -145 -84 -20 -248 -0.1 315 707 774 0.2 tation of WESM. The detailed results Commercial -70 14 100 43 0.0 440 863 1346 0.3 of the lowest and highest figures are Industrial -130 -38 61 -107 0.0 376 775 1045 0.2 presented in tables A5.3 and A5.4. Total -345 -107 141 -311 -0.1 1,131 2,345 3,165 0.7 WorldBankInfra.indb 196 12/6/2005 8:42:22 AM Appendixes 1 The tables show short-term consumer surplus tariffs by 35% and gradually improving efficiency by losses of about $300 million, derived mainly from resi- 20% total $8.8 billion (1.3% of GDP) over seven years. dential customers in Luzon as they lose their interclass These figures were derived using standard consumer subsidy. Short-term losses are also significant for surplus analysis. The analysis calculates changes in residential customers in Mindanao, which may be consumer surplus for both inside and outside the more of a concern than the larger losses in Luzon National Capital Region. It first determines the since Mindanao is significantly poorer. Over the long increase in profit (as compared to the case in which term, Luzon enjoys substantial gains ($2,700 million­ no reforms take place) due to the increase in tariffs 3,400 million) as WESM in implemented and end- and efficiency, and then calculates the number user tariffs reflect LRMC. However, Mindanao and of new level 3 connections that can be built from Visayas continue to suffer losses in the long term. those additional profits. Next, it estimates the net Overall, the net gain in consumer surplus ranges from change in consumer surplus from increasing current $2,400 million­3,200 million (0.5­0.7% of GDP). level 3 tariffs and providing level 3 connections to Preliminary financial estimates show that if the households currently using level 2, level 1, and self- Philippines proceeds with the financial alternative provisioning as their main water source. Table A5.5 scenario assumptions presented above (tariff increase summarizes the results of the analysis (table A5.7 of P1.4/kWh, reduction of NPC operating costs by gives details). P6 billion, Transco and NPC generation asset privati- It must be noted that these figures are based zation by 2006, stranded cost recovery, capital expen- on numerous assumptions and should therefore be diture reductions, and debt absorption of P194 billion), considered with caution. Further, data on the sector the total change in consolidated NPC/PSALM/Transco are scarce and numerous estimates of aggregate losses is $4,258 million (2.3% of GDP) over 2005 figures were required, including assumptions about and 2006 compared to the status quo scenario. This average consumption, tariffs, connection fees, etc. short run financial gain is significant and would only Therefore, it is likely that location-specific benefits increase if projected out until 2008. will vary widely. These figures are conservative, Due to a lack of data and an uncertain future, underestimating the benefits of reform by not taking numerous assumptions on price and income elas- into account the time saved from having a household ticities, electricity consumption, tariff paths, and the connection in comparison with collecting water from speed and elements of market reform were required, a communal source or private vendor. Despite these limiting the reliability of the figures. They are only shortcomings, the estimates provide useful figures. intended to provide rough estimates of the benefits of reform and must be interpreted with caution. The Table A5.5 figures ignore the broad economic impact of the Net benefits of increasing level 3 access over seven years changes brought about by power reform, such as a Total net benefit/loss more competitive industry and commercial sector. National Capital Region Despite these shortcomings, the estimates do provide Number of households gaining level 800,000 useful figures that are helpful to consider. 3 access Initial loss in CS from existing level 3 -5,432 customers (P million) Water supply Change in CS after gaining level 3 59,833 access (P million) Growth in access to water services in the Phil- Outside National Capital Region 8,160,000 ippines has stalled. In fact, some estimates indicate Number of households gaining level 3 access that access levels nationwide have fallen over the Initial loss in CS from existing level 3 -48,211 last few years. Lack of cost-recovery tariffs and high customers (P million) levels of nonrevenue water in the sector constrain the Change in CS after gaining level 3 486,359 amount of sustainable investment. If the Philippines access (P million) is to expand level 3 access to the 56% of those who Total change in consumer surplus currently do not have it, service providers will have P million 492,549 to address these two issues. $ million 8,843 Rough estimates of the net benefits of increasing % of GDP 1.3 access to level 3 connections through raising water CS = consumer surplus. WorldBankInfra.indb 197 12/6/2005 8:42:22 AM 1 Philippines: Meeting Infrastructure Challenges Table A5.6 Inputs and assumptions: Level 3 providers NCR Outside NCR Source Initial consumption per household (m3/month) 22.8 20.0 Filipino Report Card on Pro-Poor Services; LWUA data Initial tariff (P/m3) 8.7 14.0 Filipino Report Card on Pro-Poor Services; LWUA data Initial water treatment cost (P/m3) 3.9 3.9 Filipino Report Card on Pro-Poor Services Initial water expenditure (P/m3) 12.7 17.9 Filipino Report Card on Pro-Poor Services; LWUA data National market share (%) 6 38 Estimate based on chapter 7 Households with level 3 connections 960,000 6,080,000 Estimate based on chapter 7 Operating ratio (%) 80 79 Sector specialist; LWUA data Connection fee (P) 5,700 5,700 Sector specialist Investment cost (P) 3,000 4,000 Chapter 7; Sector specialist Water mobilization cost (P/m3) 2.7 3.1 Assumption (half of investment cost spread over two years per m3); LWUA data Households without level 3 connections 800,000 8,160,000 Chapter 7 Percent tariff increase (%) 35 Assumption Elasticity -0.3 Sector specialist Maximum willingness to pay (P/m3) 200 Estimate based on chapter 7 Efficiency improvement 20% over 4 years Assumption Methodology Bank's Filipino Report Card on Pro-Poor Services,2 Overview input from sector specialists, chapter 7 of this report, The analysis first calculates the additional profit due to and data from LWUA. increases in level 3 tariffs and efficiency. In the model, It can be seen from table A5.6 that a total an increase in tariffs results in an increase in Figure A5 revenue, while an increase Demand curve for water from level 3 connections in efficiency is represented P (P/m3) by an improved operating ratio, which is then used Willingness to pay to determine profit available for additional B C level 3 connections. The model then calculates the net change in consumer Water expenditure surplus resulting from the after price increase A initial tariff increase and from newly connected Initial water expenditure level 3 customers who D previously used level 2, D level 1, or self-provisioned D water. Q (million m3/year) Notes: Inputs and assumptions Area A: Initial loss in consumer surplus. Data on the water sector Area B: Gain in consumer surplus after increasing access to level 3 connections in the first year. Area C: Gain in consumer surplus after increasing access to level 3 connections in the second year. are scarce. Many estimates Cumulative change in consumer surplus: and assumptions were Year 1: A+B needed to complete the Year 2: A+B+C analysis. The following D2 = New level 3 customers added. data for level 3 providers D1 = New level 3 customers added. are based on the World D0 = Existing customers. WorldBankInfra.indb 198 12/6/2005 8:42:22 AM Appendixes 1 Table A5.7 Net changes in consumer surplus Year 1 2 3 4 5 6 7 Total National Capital Region Number of households gaining level 3 access 88,896 201,866 339,162 170,076 0 0 0 800,000 Initial loss in CS from existing level 3 customers (P million) -776 -776 -776 -776 -776 -776 -776 -5,432 Change in CS after gaining level 3 access (P million) 1,264 4,133 8,953 11,371 11,371 11,371 11,371 59,833 Outside National Capital Region Number of households gaining level 3 access 594,866 1,220,746 1,961,820 2,993,252 1,389,316 0 0 8,160,000 Initial loss in CS from existing level 3 customers (P million) -6,887 -6,887 -6,887 -6,887 -6,887 -6,887 -6,887 -48,211 Change in CS after gaining level 3 access (P million) 7,728 23,586 49,072 87,957 106,005 106,005 106,005 486,359 Total change in consumer surplus P million 1,328 20,056 50,362 91,664 109,713 109,713 109,713 492,549 $ million 24 360 904 1,646 1,970 1,970 1,970 8,843 % of GDP 0.0 0.4 1.0 1.6 1.8 1.8 1.7 1.3 CS = consumer surplus. of 8.96 million households do not have a level 3 vary by location. Further, the estimates do not take connection. In the analysis, once these households into account time saved from having a household are connected, no additional level 3 connections are connection instead of having to collect water from built. It is also important to note that the estimated communal sources. Despite these shortcomings, the maximum willingness to pay is P200/m3. This figure analysis provides a useful, rough estimate of potential is an important part of the consumer surplus calcu- benefits of reforms as called for in chapter 7. lation and is based on the maximum price for water purchased from a water tanker. Figure A5 provides greater detail on the areas that the model calculates Road transport to estimate consumer surplus. Changes in consumer surplus are cumulative in order to properly compare A cost-benefit analysis (CBA) exercise has been the effect of the tariff and efficiency reforms against conducted to estimate the net benefits of scaling the status quo scenario in which nothing changes. up maintenance expenditure for the national road So, new level 3 users continue to experience gains network, the backbone of the transport system in the in consumer surplus in years following the initial Philippines. As discussed in more detail in chapter 8, connection, while existing level 3 users experience scaling up maintenance is identified as a key element losses even after the initial tariff increase. in the proposed reform of the Philippines transport sector, given the backlog of maintenance that has Results been accumulated over time. Whereas significant Table A5.7 displays the results of the analysis. In data constraints prevent a full-fledged CBA from total, all 8.96 million households gain access to level being conducted, the proposed exercise never- 3 connections over five years if all extra profit from theless provides a useful tool to measure the order raising tariffs by 35% and improving efficiency by of magnitude of the net benefits associated with the 20% is used to build connections. These reforms recommended maintenance expenditure plan. result in a net gain of $8.8 billion over seven years (1.3% of GDP). Approximately 90% of the net gain in The financing cost of scaling up maintenance consumer surplus comes from outside the NCR. The annual requirement for the maintenance of the Since numerous assumptions and estimates were national road networkin the Philippines is estimated at needed to derive these figures, they must be inter- about P16 billion (2003 pesos). As shown in table A5.8, preted with caution. In particular, the model required government allocation to road maintenance falls short many nationwide averages on tariffs, expenditure, and of the amount needed for network preservation. The consumption, which may limit the significance of the backlog of maintenance expenditure is expected results. In addition, there is significant variation in to impede further improvements in the condition utility characteristics and the situation will therefore of the national road network, unless timely policy WorldBankInfra.indb 199 12/6/2005 8:42:22 AM 00 Philippines: Meeting Infrastructure Challenges Table A5.8 in table A5.9 fail to account for Maintenance expenditure, national road network (P billion) travel time costs and may therefore significantly underestimate the cost 2004 2005 2006 2007 2008 2009 Average savings associated with better road Projected 4.7 4.8 5.0 5.2 5.4 5.6 5.1 conditions. Estimated 17.05 18.49 20.15 22.01 24.08 26.34 21.4 Financing gap 12.4 13.7 15.2 16.8 18.7 20.7 16.2 In order to calculate a measure of consumer surplus, a counter- Source: Chapter 8. factual scenario is simulated on the measures are implemented to reverse the declining trend in maintenance expenditure. The proposed Table A5.9 policy recommendation is to scale up maintenance for Estimated generic vehicle operating costs (P/km) national roads in order to realign expenditure to the optimal level over the next six years. The annual cost Road conditions (i.e. the financing gap) of the recommended increase Very bad Bad Fair Good in maintenance expenditure over the period 2004­ Paved 13.251 11.313 9.374 7.834 2009 is estimated at P16.2 billion (nominal pesos), a Unpaved 17.029 13.353 10.610 9.159 threefold increase over projected expenditure. Source: DPWH Project Monitoring Office Feasibility Study. 2003. This appendix presents an evaluation of the expected benefits of the recommended increase in assumption that the proposed realignment of main- maintenance expenditure. tenance expenditure to the optimal expenditure path would bring road conditions in line with the Benefit evaluation ideal scenario presented in table A5.10 by 2009. The The benefits of scaling up maintenance expenditure benefits associated with the counterfactual scenario are derived using standard consumer surplus analysis. are compared with the status quo scenario, where Consumers make their travel decisions by comparing failure to scale up maintenance expenditure would the private benefits derived from an additional vehicle-km traveled Table A5.10 with its associated incremental Road conditions, by region cost. Hence, an implicit demand Current scenario (2004) (%) Ideal scenario for vehicle-kms can be derived Type of road Luzon Visayas Mindanao (2009) (%) as a function of vehicle operating costs, the perceived shadow price Paved Very bad 62 9 68 9 51 9 90 0 of vehicle transport. An accurate Bad 9 9 9 10 Fair 41 41 41 15 measure of vehicle operating costs Good 41 41 41 75 would need to include both market Unpaved Very bad 38 9 32 9 49 9 10 0 costs and nonmarket costs of travel, Bad 9 9 9 10 travel time being often the most Fair 41 41 41 15 significant among the nonmarket Good 41 41 41 75 costs of vehicle transport. Deferring maintenance has Source: Current conditions--Paved ration is from DPWH, Roads in the Philippines 2003; road conditions are from Japan Bank for International Cooperation. 2003. "Sector Study for the unequivocally the effect of inflating Road Sector in the Philippines." June. Ideal conditions--assumption based on Thailand and vehicle operating expenses, by Indonesia road conditions. increasing market travel costs (e.g. by reducing the life expectancy of vehicles) as well as impede any improvement in road conditions. nonmarket costs (e.g. travel time, risk of accident). The benefit evaluation methodology is based Table A5.9 presents an estimate of vehicle operating on the assumption that the demand for vehicle-km costs by type of road--as an example, the vehicle traveled is inelastic with respect to vehicle operating operating cost of traveling on a paved road in good costs. Hence, the benefits associated with an increase condition is estimated to be only 46% of the vehicle in maintenance expenditure have been computed cost incurred when traveling on unpaved roads in very under the assumptions that the vehicle-kms traveled bad conditions. It has, however, to be noted that the would remain constant at the 2004 level (table A5.11) available estimate of vehicle operating costs reported throughout the period 2004­2009. This assumption WorldBankInfra.indb 200 12/6/2005 8:42:23 AM Appendixes 01 Table A5.11 sensitivity analysis has also been carried out to Vehicle-kms traveled, by region, 2004 check the robustness of the findings. The order of magnitude of the net benefit (% of GDP) is not Vehicle-kms/day affected by variations in the ideal scenario reported in Luzon 48,642,631 table A5.10, confirming the robustness of the findings Visayas 15,239,797 to change in the underlying parameters of the coun- Mindanao 20,431,238 terfactual scenario. The CBA exercise indicates that realigning main- may lead to underestimating total benefits to the extent tenance expenditure to the optimal path outlined in that a reduction in vehicle operating costs would in table A5.8 can deliver net benefits in the order of 0.1% fact induce an increase in total vehicle-km traveled. of GDP. Although the sensitivity analysis indicates that However, the size of the "forgone benefits" is likely to the results are relatively robust, some caution is needed be small given the short time horizon of the analysis in interpreting the findings owing to data constraints. (in the short run demand is generally less responsive In particular, the estimated net benefits are likely to to price changes than in the long run). Moreover, the be conservative given the following assumptions: benefits associated with an increase in road use may well be offset by an increase in nonmarket costs (e.g. · Nonmarket costs. The estimated net benefits fail environmental and congestion costs), which are not to account for the nonmarket benefits associated accounted for in the analysis. with the proposed increase in maintenance, such as travel time savings and/or reduced risk of acci- Results and sensitivity analysis dents. While these benefits could not be quan- Table A5.12 reports the results of the CBA exercise. tified due to data constraints, they may represent For each region, a measure of vehicle operating cost a significant share of the total benefits of the is defined as the weighed average of the estimated proposed maintenance plan. vehicle operating cost by type of road. A standard · Increase in vehicle travel. The analysis also fails measure of consumer surplus is computed as the to account for any potential increase in vehicle difference between vehicle operating costs under the travel associated with economic development over status quo scenario and vehicle operating costs under the period 2004­2009. The proposed maintenance the counterfactual scenario, multiplied by vehicle- plan would deliver higher benefits to the extent kms traveled. that demand for vehicle transport is expected to The CBA exercise indicates that net benefits of be driven up by economic growth. the order of 0.1% of GDP could be gained by scaling · Status quo scenario. The status quo scenario is up maintenance of the national road network. A based on the conservative assumption that road conditions would not improve if maintenance were not scaled Table A5.12 Cost-benefit analysis, 2004­2009 up. However, a more pessimistic status quo scenario could also be 2004 2005 2006 2007 2008 2009 Average envisaged where road conditions Vehicle operating costs (by region) would deteriorate further should Luzon 9.65 9.43 9.21 8.99 8.77 8.55 maintenance expenditure not be Visayas 9.57 9.36 9.16 8.96 8.75 8.55 realigned to an optimal level. Mindanao 9.79 9.54 9.29 9.05 8.80 8.55 The consumer surplus would Annual benefits (consumer surplus change) clearly be higher if the benefits P billion 6.90 13.70 20.60 27.40 34.30 41.20 41.20 of the counterfactual scenario % of GDP 0.10 0.30 0.40 0.50 0.60 0.70 0.40 were compared against this more pessimistic status quo scenario. Annual cost (financing gap) · P billion 12.40 13.70 15.20 16.80 18.70 20.70 20.70 Price elasticity. As mentioned, the % of GDP 0.30 0.30 0.30 0.30 0.30 0.30 0.30 analysis fails to account for the benefits associated with vehicle Annual net benefits travel that would occur as a result P billion 5.50 0.00 5.40 10.60 15.60 20.40 7.80 of the decline in vehicle operating % of GDP (0.10) 0.00 0.10 0.20 0.30 0.30 0.10 costs. WorldBankInfra.indb 201 12/6/2005 8:42:23 AM 0 Philippines: Meeting Infrastructure Challenges Telecommunications barangay payphones, separate individual gains are calculated for local and long-distance phone calls. About 30 million people (40% of the population), Additionally, consumer surplus gains are calculated mostly rural and poor, remain excluded from the for those with absolutely no prior access to phone most basic means of modern communication. service and those with sparse prior phone service. Some 200 municipalities (out of 1,609) and 34,000 It then multiplies these individual figures by barangays (out of approximately 42,500) do not have a the expected total number of new telecenter and payphone. To address this issue, the 2002 World Bank payphone users to calculate the total change in report "Extending Access to Communication and consumer surplus. Information: Recommended Approach and Imple- The revenue to the operator is simply the local mentation Plan"3 calls for an expansion of service to and national long-distance minutes called from underserved municipalities and barangays over five the municipal telecenters and barangay payphones years through the installation of 1,500 municipal multiplied by their respective prices. telecenters and 8,000 barangay payphones. On the cost side, average capital and recurrent This section estimates that the approximate net costsofmunicipaltelecentersandbarangaypayphones economic benefit resulting from this expansion are taken from the above World Bank report. The plan totals $123 million (0.02% of GDP) over 12 average investment costs are multiplied by the years. On the benefits side, this figure considers the number of newly built telecenters and payphones, additional operating revenues and added consumer while the average operation and maintenance costs surplus resulting from the new services. On the are multiplied by the number of telecenters and costs side, it includes the initial and recurrent costs payphones in operation each year. incurred by the operators to supply the services. The $123 million net benefit is comprised of $55 million Inputs and assumptions from the municipal telecenters and $68 million from Since data on this topic are difficult to obtain, the barangay payphones. numerous estimates and assumptions were needed Due to a lack of data, these estimates are based to complete the analysis. The following lists the main on numerous assumptions and should therefore assumptions needed to calculate the net benefits from be considered with caution. They do not take into telecenters and payphones. account increased access to computers and the Internet, which the telecenters will also include. Municipal telecenters They also do not consider the opportunity cost of the · Each new municipal telecenter will be built either build-out plan. In addition, broad assumptions on in a municipality with no phone service, or in one average prices, quantities, costs, and municipalities with sparse phone service. The model assumes and barangays limit the reliability of the figures. The that the first 105 telecenters built will be built in figures used in the analysis are best estimates of municipalities with no phone service. The other "representative" figures, but are still useful reference 1,395 will be built in municipalities with sparse points. · phone service. Users of the new telecenters are assumed to make Methodology two 3-minute local phone calls and two 3-minute Overview national long-distance phone calls per month The analysis calculates the net benefit from building at the current rates of P0.7/min and P5/min, 1,500 municipal telecenters and 8,000 barangay respectively. payphones. The net benefit is derived from the · The alternative price per minute (the price prior following equation: to implementation of the plan) used to calculate consumer surplus takes into account travel Net Benefit = Change in Consumer Surplus and time cost needed to gain access to another + Incremental Revenue to Operator ­ Incremental phone. Investment and Operating Costs In previously unserved areas, the average distance to the nearest phone is 10 km. In order to make this calculation, the analysis In previously sparsely served areas, the average first estimates the annual gains in consumer surplus distance to the nearest phone is 5 km. for an individual. For users of both telecenters and Average transport cost is P10/km. WorldBankInfra.indb 202 12/6/2005 8:42:23 AM Appendixes 0 Table A5.13 Inputs and assumptions Municipal telecenters Source Number of people served by each municipal telecenter 25,000 Sector specialists Number of municipalities without any phone service 105 Telecommunications chapter Local minutes per user per year 78 Sector specialists National long-distance minutes per user per year 78 Sector specialists Local price per minute (P) 0.7 Sector specialists National long-distance price per minute (P) 5.0 Sector specialists Local payphone calls constant elasticity -0.5 a National long-distance payphone calls constant elasticity -0.6 Estimate based on a Average distance to nearest phone in served areas (km one way) 5 Estimate based on a Average distance to nearest phone in unserved areas (km one way) 10 Estimate Average transport cost per km (P) 10 Sector specialists Average travel speed (km/hr) 30 Estimate Average cost of time per hour (P) 22.5 Estimate based on minimum wage Share of travel and time cost for phone call (%) 50 Estimate Alternative local price per minute in served areas (P) 18.6 Calculation based on figures above Alternative local price per minute in unserved areas (P) 36.5 Calculation based on figures above Alternative national long-distance price per minute in served areas (P) 22.9 Calculation based on figures above Alternative national long-distance price per minute in unserved areas (P) 40.8 Calculation based on figures above New telecenter users as % of those served in previously served areas 2 Estimate New telecenter users as % of those served in previously unserved areas 10 Estimate Capital Investment per telecenter ($) 8,000 b O&M cost per telecenter per year ($) 12,000 b Useful life (years) 7 Estimate Barangay payphones Source Number of people served by each barangay payphone 1,000 Estimate Local minutes per user per year 78 Sector specialists National long-distance minutes per user per year 78 Sector specialists Local price per minute (P) 0.7 Assumed to be same price as municipal telecenters National long-distance price per minute (P) 5.0 Assumed to be same price as municipal telecenters Local payphone calls constant elasticity -0.5 a National long-distance payphone calls constant elasticity -0.6 Estimate based on a Average distance to nearest phone in unserved areas (km one way) 10 Estimate Average transport cost per km (P) 10 Sector specialists Average travel speed (km/hr) 30 Estimate Average cost of time per hour (P) 22.5 Estimate based on minimum wage Share of travel and time cost for phone call (%) 50 Estimate Alternative local price per minute in unserved areas (P) 36.5 Estimate Alternative national long-distance price per minute in unserved areas (P) 40.8 Estimate New payphone users as % of those served in previously unserved areas 10 Estimate Capital investment per payphone ($) 1,000­ b 1,500 O&M cost per telecenter per year (% of investment) 15 b Useful life (years) 7 Estimate a. Robert J. Saunders. 1983. "Telecommunications and Economic Development." A World Bank Country Economic Report. The Johns Hopkins University Press. b. Björn Wellenius. 2002. "Extending Access to Communication and Information: Recommended Approach and Implementation Plan." Report submitted to the Republic of the Philippines Department of Transportation and Communication, February 21. PPIAF and World Bank, Manila. Note: Estimates are by World Bank staff. WorldBankInfra.indb 203 12/6/2005 8:42:24 AM 0 Philippines: Meeting Infrastructure Challenges Average travel speed is 30 km/hr. of the travel and time costs are attributable Average cost of time based on the current to the cost of the call. minimum wage is P22.5/hr. · The alternative prices per minute are calculated Since it is rare for someone to travel just to to be P36.5/min for a local call and P40.8/min make a call, the model assumes that 50% of for a national long-distance call in previously the travel and time costs are attributable to unserved areas. the cost of the call. · · If each new barangay payphone serves approxi- The alternative prices per minute are calculated mately 1,000, 10% of those served become to be P18.6/min for a local call in previously payphone users. served areas, P36.5/min for a local call in previ- · Constant price elasticities are assumed to be ­0.5 ously unserved areas, P22.9/min for a national and ­0.6 for local and national long-distance long-distance call in previous served areas, and payphones, respectively. P40.8/min for a national long-distance call in · The capital investment per payphone increases · previously unserved areas. over time--$1,000 for payphones built in year 1, If each new municipal telecenter serves about $3,000 for payphones built in year 2, $5,000 for 25,000, 10% of those served become users in areas payphones built in year 3, $10,000 for payphones with no prior phone service. The corresponding built in year 4, and $15,000 for payphones built in · figure for areas with sparse phone service is 2%. year 5 (no payphones are built after year 5). Constant price elasticities are assumed to be ­0.5 · The operation and maintenance cost of a payphone and ­0.6 for local and national long-distance is assumed to be 15% of the investment cost. · payphones, respectively. · Each payphone has a useful life of seven years The capital investment required to build a tele- before additional rehabilitation is needed. · center is $8,000. The operation and maintenance cost of a tele- Table A5.13 above lists these assumptions and · center is $12,000 per year. sources. Each telecenter has a useful life of seven years before additional rehabilitation is needed. Results Using the inputs and assumptions above, along with Barangay payphones · the five-year build-out plan as prescribed by the Each new barangay payphone will be built in an World Bank report "Extending Access to Commu- · area with no prior phone service. nication and Information: Recommended Approach Users of the new payphones are assumed to make and Implementation Plan," table A5.14 describes the two 3-minute local phone calls and two 3-minute number of telecenters and payphones built, as well as national long-distance phone calls per month the number of users disaggregated by type of area. at the current rates of P0.7/min and P5/min, In total, the plan results in over 1 million more · respectively. telephone users who had no previous access. It should The alternative price per minute used to calculate be noted that the table only describes new telecenters, consumer surplus takes into account travel and payphones, and users during the initial construction time cost needed to gain access to another period. It is assumed that these new users continue phone. to use existing assets over their useful life. New The average distance to the nearest phone is 10 km. Table A5.14 Average transport cost is Telecom build-out plan and users during initial construction period P10/km. Average travel speed is Year 1 Year 2 Year 3 Year 4 Year 5 Total 30 km/hr. New municipal telecenters built 100 200 600 400 200 1,500 Average cost of time based New telecenter users in 250,000 12,500 0 0 0 262,500 on the current minimum unserved municipalities wage is P22.5/hr. New telecenter users in 0 97,500 300,000 200,000 100,000 697,500 municipalities already served Since it is rare for someone New barangay payphones built 500 1,000 4,000 2,000 500 8,000 to travel just to make a call, New payphone users in 50,000 100,000 400,000 200,000 50,000 800,000 the model assumes that 50% unserved barangays WorldBankInfra.indb 204 12/6/2005 8:42:24 AM Appendixes 0 payphones are the same. These Table A5.15 individual consumer surplus gains are Individual gains in consumer surplus multiplied by the number of telecenter Previously served areas Previously unserved areas and payphone users resulting from Local National long- Total Local National Total the build-out plan. It should be noted distance long-distance that calculation of consumer surplus Municipal 454 818 1,272 680 1,284 1,963 is cumulative, meaning that new telecenters users continue to experience gains in Barangay 680 1,284 1,963 consumer surplus in years following payphones the initial construction of the phone or telecenter. telecenters and payphones are built up until year 5, In order to calculate revenue and costs, the model each of which will be in operation for seven years, first determines the number of minutes consumed making the time frame for this analysis 12 years in and phones is operation. Table A5.16 shows the total. The number of telecenter and payphone users, plan over the entire life of the assets, along with the disaggregated by service area, is multiplied by the total number of minutes called from the telecenters individual changes in consumer surplus calculated and payphones. The number of minutes is based on below to determine the total change in consumer the average consumption per user and the average surplus. number of users per telecenter and payphone, as Table A5.15 presents the results of the first step described in table A5.13. of the consumer surplus analysis, namely calculation Table A5.17 shows the full output of the model. of the individual gains in consumer surplus for tele- It can be seen that the benefits and costs gradually centers and payphones by type of service (local vs. increase up to year 7, then decrease. This is because national long distance) and type of area (served vs. the telecenters and payphones have a seven-year life, unserved). As can be seen from the results, gains in after which they are considered retired for purposes of consumer surplus are higher for those individuals this analysis. Also worth noting is that, in comparison without any prior access to telecoms services. This with municipal telecenters, barangay payphones have is due to the higher travel and time costs for those higher gains in consumer surplus, lower incremental needing to make calls in previously unserved areas. revenues, and lower costs. This results in a higher net Further, gains from national long-distance calls are economic benefit for barangay payphones. Assuming higher than for local calls. Lastly, because of similar a discount rate of 10%, the net present value of the assumptions, the gains to users of telecenters and total net benefits stream is $123 million, comprising Table A5.16 Total number of telecenters and payphones in operation, and in minutes Municipal Municipal Municipal Barangay Barangay Year telecenters in telecenter local telecenter national payphones in payphones local Barangay payphones operation (BOY) minutes LD minutes operation (BOY) minutes national LD minutes 1 0 9.8 9.8 0 2.0 2.0 2 100 23.8 23.8 500 7.8 7.8 3 300 39.8 39.8 1,500 27.3 27.3 4 900 59.3 59.3 5,500 50.7 50.7 5 1,300 71.0 71.0 7,500 60.5 60.5 6 1,500 74.9 74.9 8,000 62.4 62.4 7 1,500 74.9 74.9 8,000 62.4 62.4 8 1,500 65.1 65.1 8,000 60.5 60.5 9 1,400 51.1 51.1 7,500 54.6 54.6 10 1,200 35.1 35.1 6,500 35.1 35.1 11 600 15.6 15.6 2,500 11.7 11.7 12 200 3.9 3.9 500 2.0 2.0 BOY = beginning of year; LD = long-distance. WorldBankInfra.indb 205 12/6/2005 8:42:24 AM 0 Philippines: Meeting Infrastructure Challenges Table A5.17 Benefits, costs, and net economic flows of the build-out plan ($ million) 1. Benefits in year 1 2 3 4 5 6 7 8 9 10 11 12 Total Change in CS from municipal telecenters 4.4 10.1 14.9 20.6 24.0 25.2 25.2 20.8 15.0 10.3 4.6 1.1 176.2 Change in CS from barangay payphones 0.9 3.5 12.3 22.9 27.3 28.2 28.2 27.3 24.7 15.9 5.3 0.9 197.4 1a. Total change in CS 5.3 13.7 27.2 43.5 51.3 53.4 53.4 48.1 39.7 26.1 9.9 2.0 373.6 Incremental revenue from municipal 1.0 2.4 4.1 6.1 7.3 7.7 7.7 6.7 5.2 3.6 1.6 0.4 53.6 telecenters Incremental revenue from barangay 0.2 0.8 2.8 5.2 6.2 6.4 6.4 6.2 5.6 3.6 1.2 0.2 44.7 payphones 1b. Total incremental revenue 1.2 3.2 6.9 11.3 13.4 14.0 14.0 12.9 10.8 7.2 2.8 0.6 98.3 2. Costs in year 1 2 3 4 5 6 7 8 9 10 11 12 Total Investment and O&M for municipal 1.4 4.0 12.0 16.4 18.4 18.0 18.0 17.4 15.6 10.8 4.8 1.2 138.0 telecenters Investment and O&M for barangay 0.5 3.3 22.0 25.0 14.6 7.7 7.7 7.6 7.4 5.6 2.6 0.6 104.6 payphones 2a. Total investment and O&M 1.9 7.3 34.0 41.4 33.0 25.7 25.7 25.0 23.0 16.4 7.4 1.8 242.6 Net economic flows in year 1 2 3 4 5 6 7 8 9 10 11 12 Total Municipal telecenters 4.0 8.6 7.0 10.3 12.9 14.8 14.8 10.0 4.7 3.1 1.4 0.3 91.9 Barangay payphones 0.5 1.0 -6.9 3.1 18.9 26.9 26.9 25.9 22.9 13.8 3.9 0.5 137.5 Total net economic flows (=1a+1b-2a) 4.5 9.6 0.1 13.3 31.8 41.8 41.8 35.9 27.6 16.9 5.2 0.9 229.4 CS = consumer surplus; O&M = operation and maintenance. $55 million from telecenters and $68 million from plan. Since data were extremely difficult to obtain, payphones. However, benefits from payphones take numerous assumptions were needed to arrive at these longer to accrue than from municipal telecenters, figures, as can be seen from table A5.13. These figures as seen by the lower net benefit figures in years 1 are the best estimates of representative figures for through 4. After this initial period, net benefits from average prices, quantities, travel and time costs, payphones exceed those from telecenters. From a net and customer uptake per payphone and telecenter. present value analysis perspective, both components The results ignore the consumer surplus gains from of the rural access strategy are worth undertaking. obtaining Internet and computer access in the tele- These figures are only intended to be a rough centers. They also do not consider the opportunity estimate of the net benefits of the implementation cost of the build-out plan. Despite these shortcomings, the figures provide useful estimates. Endnotes 1 Commercial and industrial tariffs are the same and include the regions: the National Capital Region (NCR), Luzon excluding generation and transmission component of the residential LRMC NCR, Visayas, and Mindanao. plus a 2.5% premium 3 Björn Wellenius. 2002. "Extending Access to Communication 2 World Bank. 2001. Filipino Report Card on Pro-Poor Services. and Information: Recommended Approach and Implementa- May 30. Manila. The report card is based on a nationwide survey tion Plan." Report submitted to the Republic of the Philippines conducted in 2000, covering 1200 households in four broad Department of Transportation and Communication, February 21. PPIAF and World Bank, Manila. WorldBankInfra.indb 206 12/6/2005 8:42:24 AM Appendixes 0 Appendix 6 Key Legislation Relevant to Water Supply and Sanitation in the Philippines T he Clean Water Act (RA 9275), which was of fees depending on the amount of wastewater signed on March 22, 2004, imposes stringent discharge to bodies of water to cover the expenses measures to prevent the country's waters from incurred by the government in administering water becoming too polluted. Under the law, the National pollution abatement and control. Businesses shall Water Resources Board will work closely with the also be required under the law to secure discharge Department of Environment and Natural Resources permits that indicate the effluents contained in the and they will designate water bodies into water quality water. Furthermore, RA 9275 encourages business management areas using appropriate physiographic enterprises to modify their production processes and units such as watersheds, river basins, and water use green technology to treat the water released from resourcesregions.Thelawalsomandatesthecollection their factories and plants. Table A6.1 Legislation relevant to water supply Legislation Significance Republic Act 6324, creating In 1971, MWSS was created and made responsible for providing water supply and MWSS, as amended by PDs 425, sanitation services to the cities and municipalities of Metro Manila and adjacent 1269, and 1406 urbanized areas of Rizal and Cavite provinces. In 1997, MWSS was privatized, with the management and operations transferred to two private firms under a 25-year concession contract Provincial Water Utilities Act of Authorized the formation of local water districts in provincial centers of the 1973, as amended Philippines, its governance and administration, and the creation of LWUA as a specialized lending institution to provide financing and technical assistance in the development of local water districts. LWUA was mandated to review tariff rates of local water districts where it had financial exposure Water Code of the Philippines of Consolidated all existing legislation relating to ownership, development, utilization, 1976, as amended exploitation, and conservation of water resources, and mandated NWRB as the government agency responsible for the implementation of the Water Code, including the appropriation of water resources through the grant of water permits and imposition of penalties for administrative violations Presidential Decree 424 (1974) Mandated NWRB as the government coordinating body for all water resources development activities Public Service Law, Presidential Mandated NWRB to have supervision and control of all water utilities and their Decree 1206 (1977) franchises, equipment, and other properties, and regulation of water rates to be charged by waterworks operators, except those falling under the jurisdiction of MWSS and LWUA, and to act as an appeals body on tariff matters of water districts under LWUA jurisdiction. Executive Order 123 issued in September 2002 mandates NWRB to approve tariffs of local water districts Local Government Code of 1991 Mandated the block transfer of the Internal Revenue Allotment to LGUs following a formula-based allocation and transferred responsibility for providing basic services to LGUs Build-Operate-Transfer Law, Authorized the financing, construction, operation, and maintenance of government Republic Act 6957 of 1990, as infrastructure projects by the private sector amended by RA 7718, 1994 National Water Crisis Act of 1995 Provided the legal basis for the privatization of MWSS in 1997 LWUA = Local Water Utilities Administration; LGU = local government unit; MWSS = Metropolitan Waterworks and Sewerage System; NEDA = National Economic and Development Authority; NWRB = National Water Resources Board; PD = presidential decree. Source: Compiled by World Bank staff. WorldBankInfra.indb 207 12/6/2005 8:42:24 AM 0 Philippines: Meeting Infrastructure Challenges Table A6.2 Legislation relevant to sanitation Legislation Description National Plumbing Code through PDs 1096, Present guidelines, criteria, and standards for design and construction of 1959 sanitation and sewerage facilities Creation of Metropolitan Waterworks and Constructs, operates, and maintains water systems, and sewerage and Sewerage System (RA 6234), 1971 sanitation facilities in Metro Manila PD 198, known as the Provincial Water National policy authorizing the formulation of water districts to operate Utilities Act of 1973 and administer water supply and wastewater disposal systems in the provincial areas outside Metro Manila The Code on Sanitation of the Philippines Deals with water supply, excreta disposal, and sewerage and drainage (PD 865), 1975 concerns Revising Republic Act 3931, known as the Requires subdivisions, hospitals, and public buildings to provide sewerage Pollution Control Law (PD 984), 1976 and treatment facility National Building Code (PD 1096), 1977 Requires new buildings to be connected to a waterborne sewerage system; if system exists, sewage must be disposed of in an Imhoff tanker or septic tank with a subsurface absorption field Philippine Environment Code (PD 1152), Provides guidelines to protect and improve the quality of water resources 1977 and defines responsibilities for surveillance and mitigation of pollution incidents Philippine Environmental Impact Statement Mandates environmental impact statement for government and private System (PD 1586), 1978 sector projects affecting the quality of the environment Rules implementing the Subdivision and Connection to sewerage system where available and provision of septic Condominium Buyers Protective Decree, tanks when sewerage is not available 1981 Revised Water Usage and Classification/ DENR Administrative Order 34 amends sections of 1978 NPCC Rules and Water Quality Criteria and Revised Effluent Regulations and defines beneficial usage and classification of fresh surface Regulations of 1990 (DENR Administrative and coastal/marine waters; also provides water quality criteria for surface Order 34 and 35), 1990 and coastal waters. DENR Administrative Order 35 amends effluent regulations of 1982 and provides effluent standards to all industrial and municipal wastewaters based on the receiving water's classification Local Government Code of the Philippines, Enforcement of laws on sanitation and cleanliness as devolved function of IRR Rule V (Republic Act 7160), 1992 DENR to LGUs. LGUs to provide basic services and facilities, including water supply, sanitation, and flood control NEDA Board Resolution 4 (1994) and Increases role of LGUs in provision of sanitation facilities 6 (1996) NEDA Board Resolution 5 (1994) National policy strategy and action plan for urban sewerage and sanitation DENR = Department of Environment and Natural Resources; DILG = Department of Interior and Local Government; DPWH = Department of Public Works; IRR = implementing rules and regulations; LGU = local government unit; LWUA = Local Water Utilities Administration; NEDA = National Economic and Development Authority; NPCC = National Pollution Control Commission; NWRB = National Water Resources Board; PD = presidential decree; RA = Republic Act. Source: Compiled by World Bank staff. WorldBankInfra.indb 208 12/6/2005 8:42:25 AM Appendixes 0 Appendix 7 Principal Agencies Involved in Water Supply and Sanitation Policy Formulation and Implementation Agency Function Local government units (pro- Responsible for the provision of water supply and sanitation services to their con- vincial, city, municipal levels) stituents whether by administration (i.e. local government departments, local gov- ernment corporations registered with Securities and Exchange Commission); creation of water districts; or contracting services to third parties under service, management, lease/affermage, concession, build-operate-transfer, or joint-venture arrangements National Economic and Devel- Coordinates the preparation of the national development plan and investment opment Authority program; sets macroeconomic planning and investment targets; formulates sector policies and strategies; approves public investment programs and projects; and mon- itors implementation of policies, programs, and projects Department of Finance Guarantees LWUA loan; oversees performance of government-owned and controlled corporations and government financial institutions such as LWUA, DBP, and LBP, and takes the lead in the formulation of financing policies and strategies at the national level, including provision of national government grants for local projects Local Water Utilities Provides technical advisory services and financial assistance to local water districts. Administration Sets design standards for water supply systems operated by local water districts and regulates tariffs of local water districts under its jurisdiction Metropolitan Waterworks and Responsible for the provision of water supply and sanitation services to the cities and Sewerage System municipalities of Metro Manila; the services are currently being provided through two private concessionaires National Water Resources Board Responsible for the development and management of water resources in the country and acts as economic regulator of waterworks providers, except those under the jurisdiction of the Metropolitan Waterworks and Sewerage System Department of Interior and Local Responsible for overall capacity building of local governments. For the water supply Government and sanitation sector, the Project Management Office for Water Supply and Sani- tation coordinates the programs involving local governments Department of Public Works and Responsible for providing technical assistance to local governments in the devel- Highways opment and implementation of rural water supply systems Department of Health Responsible for setting standards for drinking water quality; and design of on-site sanitation facilities, standards, and procedures for sewerage collection and disposal, and drainage Environmental Management Responsible for setting standards for wastewater quality before disposal to natural Bureau under Department waterways; approves and issues environmental compliance certificates of Environment and Natural Resources Government financial institutions Serve as wholesale and retail lender of funds for water service providers using inter- (DBP, LBP) nally generated resources and external credit Build-Operate-Transfer Center Responsible for promoting private sector participation in infrastructure projects to government agencies, local governments, and the private sector National Statistics Office Census, data collection DBP = Development Bank of the Philippines; LBP = Land Bank of the Philippines; LWUA = Local Water Utilities Administration. Source: Compiled by World Bank staff. WorldBankInfra.indb 209 12/6/2005 8:42:25 AM 10 Philippines: Meeting Infrastructure Challenges Appendix 8 Estimated Investment Requirements in Water Supply and Sanitation I f the Philippines is to achieve the Millennium water supply to 90% by 2010, it needs to invest a total Development Goal of increasing formal access to of P22­24 billion (table A8.1). Table A8.1 Estimated investment requirements for water supply, 2004­2009 increase in population served as of 2003 Item Scenario 1: 20% Scenario 2: 30% Scenario 3: 40% Target incremental population to be served 5.1 5.1 5.1 in 2004 at 90% coverage (million)a Urban 2.3 2.3 2.3 Rural 2.8 2.8 2.8 Incremental population served as of 2003 1.0 1.5 2.0 (million) Urban 0.5 0.7 0.9 Rural 0.5 0.8 1.1 Shortfall in 2004 target (million) 4.1 3.6 3.1 Urban 1.9 1.7 1.4 Rural 2.2 1.9 1.7 Investment requirements to achieve 90% 6,922.0 6,156.0 5,144.0 coverage in 2004 (P million)b Urban 5,700.0 5,100.0 4,200.0 Ruralc 1,222.0 1,056.0 944.0 Estimated population in 2009 (million)d 92.0 92.0 92.0 Urban 44.0 44.0 44.0 Rural 48.0 48.0 48.0 Estimated incremental population to be 9.0 9.0 9.0 served in 2009 at 90% coverage (million)d Urban 4.3 4.3 4.3 Rural 4.7 4.7 4.7 Investment requirements to achieve 90% 15,511.0 15,511.0 15,511.0 coverage in 2009 (P million) Urban 12,900.0 12,900.0 12,900.0 Ruralc 2,611.0 2,611.0 2,611.0 Rehabilitation costs from 2000 to 2009 1,165.0 1,165.0 1,165.0 (P million)e Urban 924.0 924.0 924.0 Ruralc 241.0 241.0 241.0 Total investment requirements for 2004­2009 23,598.0 22,832.0 21,820.0 (P million) Urban 19,524.0 18,924.0 18,024.0 Ruralc 4,074.0 3,908.0 3,796.0 a. Based on 2000 population of 76.3 million: urban 34.1 million (45%) and rural 42.2 million (55%); population served in 2000 is 60 million: urban 24.2 million (40%) and rural 35.8 million (60%). Total population in 2004 is estimated at 82 million: urban 38 million (46%) and rural 44 million (54%). b. Per capita investment cost for level 3 system is P3,000 (based on Local Water Utilities Administration estimate of P2,500 per capita investment cost at 1999 prices and adjusted using 5% annual inflation from 2000 to 2003. Figure was rounded off. Per unit investment cost of a shallow well is P50,000, a deep well, P250,000 (based on engineering estimates under the Rural WSS Project V assisted by the Japan Bank for International Cooperation). Household size is assumed to be 6 persons. c. Assumed that investments would be in shallow wells only, with a well serving an average of 15 households. d. Annual growth rate of population is assumed to be 2.4%, the annual rate of urbanization 1%. e. Assumed rate of rehabilitation is 1% a year. Source: World Bank staff. WorldBankInfra.indb 210 12/6/2005 8:42:25 AM Appendixes 11 The Philippines Environment Monitor 2003 provides networks in urban areas (P158 billion) and to estimates for investment requirements for urban expand sanitation in rural areas (P53 billion) would and rural sewerage and sanitation (table A8.2). A require a capital cost of P211 billion and operating 10-year program to increase access to sewerage costs of P18 billion a year. Table A8.2 Investment requirements for urban and rural sewerage and sanitation Coverage area Population Service coverage Investment requirements (million) (million) (P billion) 2005 2015 2005 2015 2005 2015 Urban 48.85 (58%) 55.58 (60%) 9.77 (20%) 27.79 (50%) 55.69 158.40 Rural 35.37 (42%) 37.06 (40%) 17.69 (50%) 18.53 (50%) 50.42 52.81 Subtotal 84.22 (100%) 92.64 (100%) 27.46 (33%) 46.32 (50%) 106.11 211.21 Program support Operating costs: Urban 3.91 11.17 Operating costs: Rural 6.28 6.58 Support activities 13.79 27.46 Total 130.09 256.39 Note: Investment requirements were computed based on constant 2002 rates. Support activities were estimated at 13% of the capital cost. Source: World Bank. 2003. Philippines Environment Monitor 2003. Manila. WorldBankInfra.indb 211 12/6/2005 8:42:25 AM 1 Philippines: Meeting Infrastructure Challenges Appendix 9 Ownership Structure and Selected Features of Existing/Planned Expressways SLEX NLEX Skyway MCTE STAR Length 42.9 km (13.5 km are now 83.2 km Phase 1: Elevated 9.3 km; Phase 1: 6.2 km Phase 1: 22.1 km part of Skyway) At grade 13.5 km (the at Phase 2: 11.3 km Phase 2: 20 km grade section was originally part of SLEX) Phase 2: 13.6 km Phase 3: 16 km Phase 4: 58 km Status Built and completed in Built and completed in Phase 1: 9.3 km elevated Phase 1 completed in Phase 1 completed in 2002 1970s. Redevelopment of 1970s. portion completed in 2000. 1998. by DPWH. 13.5 km under Skyway. Redeveloped NLEX Rehab. of the SLEX 13.5 km Construction of Phase Phase 2 construction Redevelopment of the opened in February at grade portion completed 2 started in 2004. expected to start in 2005. remaining 29.4 km is 2005. in 2001. Completion expected delayed. Phases 2­4: completion in 2006. dates not known. Lanes 6/4 6/4 6 6 4 Function Urban/intercity Urban/intercity Urban Urban/Intercity Intercity Car toll rate 0.73 2.63: open system Elevated: 9.30 2.27 0.73 (P/km) as of 2.38: closed system At grade: 14.20 January 2005 Project PNCC shareholders: PNCC shareholders: CMMTC shareholders: UEM-MARA Philippines STAR Infrastructure company/ National government­95%; National government­ Citra (Indonesia)­55%; Corporation (100% Development Corporation concessionaire Private investors­5% 95%; PNCC 20%; local private company) (STAR IDC)­100% local Private investors­5% Stradec (Phils.)­5%; in joint venture with private company Metro Strategic Public Estates Authority Infrastructure Holdings (Phils.)­5% Redevelop- CMMTC for 13.5 km (see MNTC for whole stretch Not applicable Not applicable Not applicable ment phases "Skyway")­ of NLEX, (plus new (project joint venture between links ~100 km). company) Hopewell Crown Shareholders: Infrastructure Inc. and FPIDC (Phils.)­76% PNCC for the remaining Egis (France)­10%, section. Leighton Asia Ltd. (Australia)­10%, PNCC­4%. Estimated cost CMMT section: see $377 million Phase 1: $500 million Phase 1: $47 million Phase 1: P1.0 billion "Skyway" Phase 2: $117 million ($25 million) Hopewell Crown section: Phase 2: Cost estimate P10 billion P2.2 billion ($46 million) Mode of SLEX and NLEX built by DPWH in early 1970s with Build-transfer-operate Build-transfer-operate Build-transfer-operate for private sector ODA financing, then privatized in 1977; private joint venture of Public Phase 2. participation company taken over by government in 1983, Estates Authority with Phase 1 built by DPWH. renamed PNCC. Renong Bhd in 1994; Phase 2 was bid out, won For section developed under Skyway, see "Skyway." later sold to UEM- by STAR IDC in 1997. For remaining section of SLEX and for redeveloped MARA, then to Coastal Phases 1 & 2 to be NLEX, a joint venture between the state-owned Road Corp. in 1999. operated and maintained company and the private sector. by STAR IDC as one system. CMMTC = Citra Metro Manila Tollways Corporation; MCTE = Manila-Cavite Toll Expressway; MNTC = Manila North Tollways Corporation; NLEX = North Luzon Expressway; PNCC = Philippine National Construction Corporation; SLEX = South Luzon Expressway; STAR = Southern Tagalog Arterial Road. Sources: Japan International Cooperation Agency. 2003. "Development of Public-Private Partnership Technique for Metro Manila Urban Expressway Network." January; CEO remarks, First Philippine Holdings Corporation 42nd Annual Stockholders' Meeting, May 17, 2004; "Philippines' North Luzon Expressway To Be Upgraded." ADB Press Release, October 2000; "6 foreign firms eye SLEX." DTI website (http://www.dti.gov.ph/contentment/7/150/926f.jsp); CMMTC; Metro Manila Skyway (http://www.metromanilaskyway.com/skyway.htm); DPWH website http://www.dpwh.gov.ph/infrastructure/infrastructure_major.htm); Toll Regulatory Board. WorldBankInfra.indb 212 12/6/2005 8:42:25 AM Index A C access rates cable television services 172 among the poor 3, 107 basic services 1, 3 capital expenditure. See also investment in ARMM 9 power international comparisons 2 NPC 91 power 1 requirements 89 roads 3 roads 147 sanitation 1, 107, 119, 120 low level of 139, 150 sewerage 3, 107 share of ODA 46, 147, 148 under MDGs 116 telecoms 173 water 1, 107, 119, 120 water 107 low level of 116 accidents. See road accidents LWUA 118 activist judiciary. See judiciary, interventions Manila concessionaires 118 affordability cellular telephone services 171­172 and subsidies 24 comparisons, international power 25, 92, 93, 97, 101 access rates 2 roads 26, 155 business environment 6, 60, 75 telecoms 181 competitiveness 6, 75 urban public transport 26 cost recovery 17 water 25, 123, 124, 131 EIU competitiveness risk score 5 anticorruption 27, 73. See also governance EIU composite country risk score 60 progress in 73 FDI 61 proposals 78, 79 general 74 recommendations 27 ICRG 60, 61 avoidable economic losses 107 infrastructure investment, GDP share 11 investment attractiveness 61 B power access rates 89 BOT Law lifeline tariffs 93 ambiguities 27, 67­68 prices 92 and private sector 55, 58 private investment 56 provisions requiring review 68 roads recommendations 70 intercity passenger and freight costs 155 subsidies and guarantees 64, 68 length and paved share 153 BOT projects 67 length of expressways 155 CBK hydropower 26, 67 network coverage 153 guarantees on 12, 67 toll rates 156 under way 61 teledensity 175 unsolicited bids 67 water capital expenditure per connection 116 budget deficit. See fiscal situation drinking water and sanitation access 119 business environment 15­30, 61­62. See also four Cs sewerage access 119 ICRG risk assessment 60 tariffs 122 indicators 6 competition. See also four Cs international comparisons 6, 60, 75 benchmark 21, 29 judicial decisions 24 direct 19­20 private sector perceptions of 61, 62 indirect 20­21, 29 recommendations 24­29, 78 insufficient 18­19 WorldBankInfra.indb 213 12/6/2005 8:42:26 AM 1 Philippines: Meeting Infrastructure Challenges maximizing 28 country risk 60­61, 66, 68, 78 power introduction 84, 95­96, 99 coverage rates. See access rates telecoms 173, 176, 179 credibility of institutions 21­23. See also four Cs competitiveness rankings 6, 75 private sector perceptions of 62 competitive wholesale market. See WESM cross subsidies power conflict of interest removal 84, 93, 104 LWUA 22 NWRB 22 D PPA 23 DBM congestion. See roads, congestion recommendations 46, 80 congressional funds role of 36, 142 amount 18, 148 weak oversight by 34 channels 18 decentralization. See also LGC for local roads 148 issues 33, 39­41, 125. See also missing middle for water projects 117 improving use of 134, 161 devolution. See decentralization in DPWH budget 38, 147, 158 DOF inefficiencies of 11, 18, 38 recommendations 46, 70, 80 consumer surplus from reforms 76, 194­206 role of 67, 110, 124, 142 power 75­76 DPWH roads 77 public's perception of 140, 152, 157 telecoms 77 water 76­77 E cooperation EIU competitiveness risk score 5 example of interjurisdictional 48 EIU composite country risk score 60 coordination electricity. See power lack of 108, 158. See also fragmentation lack of policy 34­38, 110 enabling environment lack of regulatory 23, 124, 126 provided by public sector 58, 140, 160 recommendations 28, 46, 79, 131 ERC corporate governance. See also governance limited regulatory capacity 23 means to improve 28 weaknesses 23 F corruption 17­18. See also governance; See also four Cs FDI and unsolicited bids 21, 26 declining 60 business perceptions of 6, 17, 75 share of GDP 61 citizens' monitoring of 26­27 financial situation. See also fiscal situation effect on business climate 17 LGUs private sector perceptions of 62 lack of data 46 public perceptions of 17, 140 recommendations 50­51 tackling 18, 26, 73, 79 weakness of 43 cost-benefit analysis of reforms. See consumer surplus LWUA from reforms fragility 128 cost recovery. See also four Cs financing 43­46 and subsidies 24 financial market 44­46 and user fees 24 recommendations 49 fostering 24­26, 79 government 43­44 inadequate 15­17, 43, 59, 62, 113, 124­125 ODA 46 political intervention main reason for 15 recommendations 52 international comparison 17 user charges 43 political challenges of 74 recommendations 48 recommendations 130 financing gap WorldBankInfra.indb 214 12/6/2005 8:42:26 AM Index 1 general 43 insufficient competition. See competition NPC 83 roads 150­151 international comparisons. See comparisons, international fiscal reform Internet services 172 recommendations 49, 78, 79 investment. See also FDI; See also capital expenditure; See fiscal situation also underinvestment investor concerns 45 5% benchmark need 11, 13, 43 relationship with infrastructure 11, 12, 78 attractiveness 61 share of GDP 11 climate 7, 10 target for balanced budget 43 discouragement of. See also four Cs Mindanao 9 four Cs 15­29, 61. See also competition, insufficient; See ports 17 also corruption; See also cost recovery, inadequate; SSIPs 20 See also credibility of institutions LGU 40, 41 fragmentation 38, 63, 123. See also coordination, lack of needs and loss of scale economies 11 power 88­89 grants 42 roads 150, 151 of local government 43 sensitivity to population growth 9 water 123­124 water 107, 116­118, 210­211 water supply market 110 private sector 55­57 declining interest 59­68 G international comparison 56 to GDP ratio 6, 11, 35 governance. See also corporate governance; See also cor- roads 149, 157 ruption poor 75 IRA recommendations 79, 81 changes in LGC 35, 39 LGU dependence on 36, 42, 44, 51 growth, economic and infrastructure 6­7, 185, 186­187 J and poverty 4­7 geographic distribution 7­9, 39 judicial intervention. See judiciary, interventions growth, population 8­10. See also urbanization judiciary. See also credibility of institutions guarantees, government. See also subsidies interventions 22, 23, 24, 84 ambiguities in BOT Law 64, 67­68 recommendations 29 and ODA funding 52, 110 L for GOCCs 12, 25 for private projects 66­67 LGC. See also decentralization LGUGC 50, 73 lack of clarity 41 NPC 96 LGU revenue/expenditure mismatch 41 overuse of 67 LGU revenue increase 35 recommendations 69, 70, 79, 164 recommendations 47­48 risks of 96 LGUs measuring 70 and guarantee of debt issues 50, 73 unsolicited bids 64, 164 and inadequate infrastructure provision 40 WESM 84 and LGC 40 I and the missing middle. See missing middle capacity constraints 43 ICC (NEDA) dependence on national government 36, 42, 44, 51 role of 35, 142 example of coordination 48 inadequate cost recovery. See cost recovery importance in rural water provision 33 inefficiency in water systems 3, 11, 66 infrastructure investment in local roads 147­148 and economic growth 6­7, 185 need for technical assistance 47, 48, 50 and poverty reduction 6­7 own-source revenue institutions 21­23. See also governance; See also political as share of GDP 39 intervention recommendations 51 WorldBankInfra.indb 215 12/6/2005 8:42:26 AM 1 Philippines: Meeting Infrastructure Challenges poor access to financing 46, 188­189 financial situation 114 recommendations 50­51 suspension of concession fee 114 some progress in 73 tariff increases 15 recommendations 47, 48, 50 responsibility for local roads 140, 142 MWSS short termism 42­43 and low capital expenditure 108 weak coordination among 39­40, 108, 124, 158 financial situation 128 recommendations 47, 80 need for restructuring 128 weak investment 35, 108 privatization 55, 114 lessons from 115 lifeline tariffs, power 26, 84, 93, 98 recommendations 130, 133 international comparisons 93 responsibilities 110 local roads. See also national roads role in financing 117 expenditures and financing 147­148 financing gap 150 N inadequate maintenance 139 national roads. See also local roads investment outlook 149 condition of 3 lack of reliable data 139, 157 decrease in investment 147 underinvestment 139 DPWH responsibility for 142 low credibility of institutions. See credibility of institutions employees per km 140 LWUA expenditure, share of GDP 139, 149 and water district tariffs 16 expenditures 139, 146­147 capital expenditure 118 financing gap 150 conduit for ODA 118 financing of 147 conflict of interest 22 investment outlook 149 importance for water districts 111, 126, 127 length of 144 recommendations 131, 133 maintenance effectiveness 16 reform of 127, 128 maintenance of 146 restrictions on private sector financing 65 underinvestment 139 subsidies to 25, 127 NEDA recommendations 46, 80 M role of 35, 36, 142, 168 Manila water concessions. See MWCI, MWSI, MWSS weak oversight by 34 Metropolitan Waterworks and Sewerage System. See nonrevenue water 11, 114, 121, 122, 125 also MWCI; MWSI; See MWSS NPC Mindanao. See ARMM affordability 93 below-cost tariffs 16 missing middle 39­40, 108 contribution to public sector deficit 12 MTPDP 2001­2004 financial performance 90­92 roads 144 generating losses 90 targets and performance 150 increased tariffs 16, 75 targets and performance 36­37 in market structure 85 water 109 overinvestment by 16 MTPDP 2004­2010 political intervention 16, 38 main infrastructure goals 77­78 poor creditworthiness 94 telecoms 168 privatization of assets 33, 88, 96 recommendations 80 MTPIP reforms at 75­76 roads 149 steps toward financial recovery 91 MWCI sustaining financial viability 94 and MWSS financial distress 129 tariffs 92­93 divergent performance from MWSI 55 NTC listing on stock exchange 114 lack of independence 175 tariff increases 15 limited regulatory capacity 23 MWSI role of 167 divergent performance from MWCI 55 WorldBankInfra.indb 216 12/6/2005 8:42:27 AM Index 1 NWRB current 85­86 budget constraints 127 proposed reforms 86 capacity constraints 127 recommendations 98­104 conflict of interest 22, 110 reliability of supply 90 limited regulatory capacity 23 system losses 90 recommendations 132 wholesale market. See WESM O PPA conflict of interest 23 ODA priorities. See recommendations and guarantees 52 and ICC (NEDA) 35 priority actions. See recommendations approval process 142 private roads 145 recommendations 50, 52, 80 private sector. See also unsolicited bids; See also privati- share in national road investment 147 zation significance in infrastructure financing 46 and role of public sector 57 water attracting 58, 78, 97 lack of counterpart funding 118 BOT Law 35 output-based aid 65, 66, 73, 79 National Water Crisis Act 35 recommendations 134 recommendations 80, 81, 133 overinvestment declining interest in infrastructure, reasons for in power generation 11 ambiguous BOT policy 67 high general country risk 60­72 oversight poor business environment 61­63 weak central 34, 124 unclear rationale 64­65 oversight agencies weaknesses in planning 63 recommendations 46, 79, 80, 163 expenditure as share of GDP 35 role of 35, 36 mixed track record 68 potential benefits 57 P public perceptions of 64, 73, 190­193 planning recommendations 68­70, 163­164 lack of 35­38, 40, 63, 108, 124, 149 roads 147 recommendations 134 declining interest 139 low level of contribution, reasons for 158 political intervention 84, 108 telecoms and tariff increases 16 domination by PLDT 167, 170, 171 in LGU water utilities 112 main reason for inadequate cost recovery 15 privatization NPC 38 first major power plant 73 NWRB 130 Manila water concessions 35, 55, 114, 115 recommendations 47 moves toward 33 but gov't still major player 33 politicization MWSS 55 power reforms 84, 96 of NPC assets 33, 83 securing telecoms franchise 169 ports 37 tariffs 61 power distribution 57 poor business environment. See business environment power generation 19, 87­88, 95 pork barrel funds. See congressional funds public perception survey 64, 190­193 recommendations 178 poverty reduction rural telecoms facilities 169 and economic growth 4­7 survey 190­193 and infrastructure 6­7 telecoms power 83­106. See also NPC recommendations 178 access rates. See access rates Transco 87­88 competitive wholesale market. See WESM public sector. See also credibility of institutions; See investment needs 88­89 also governance lifeline tariffs. See lifeline tariffs, power and role of private sector 57­59, 140, 160 market structure expenditure as share of GDP 35 WorldBankInfra.indb 217 12/6/2005 8:42:27 AM 1 Philippines: Meeting Infrastructure Challenges need to strengthen planning 63 reforming spectrum management 182 roles of 33­36, 58­59 support to private sector contracts 64­65 recommendations, water carrying out public utility reform 132­133 R enhancing sector financing and rationalizing subsidies 133 rankings. See comparisons, international establishing an integrated sector framework 130­132 RDCs expanding sanitation and sewerage coverage 134­135 composition 40 implementing cost-recovery tariffs 129­130 recommendations 47, 80 reforms. See also recommendations; See also consumer weaknesses 40 surplus from reforms recommendations and political intervention 38 addressing power sector finances 80 business climate 18 attracting private investment transparently and competi- estimated impact of 75­77 tively 68 pension system 50 budgeting for preinvestment studies 69 prioritizing 74­78 clarifying rationale for public support for private proj- regional infrastructure 39­40 ects 69 regional variations 7­9, 186­187 engaging private investment 80 enhancing financial mobilization 48­51 regulators. See also judiciary, interventions evaluating all guarantee applications 70 lack of coordination 23 expanding water coverage and quality 81 lack of political autonomy 22 fostering cost recovery 24­26, 79 lack of separation between policy, regulatory, and opera- implementing fiscal reform 79 tional functions 22 improving governance 79 limited regulatory capacity 23 improving policy planning and coordination 46­48 recommendations 28 improving private sector planning 80 summary of 22 improving public perceptions of private sector 70 regulatory capacity increasing institutional credibility 28­29 recommendations 28 maintaining and expanding roads 81 regulatory capacity, limited 23 maximizing competition 28­29 minimizing corruption 26­27 risk. See also guarantees providing incentives and technical assistance to LGUs EIU competitiveness risk scores 5 80 general country 57, 60­61, 66 reducing general country risk 68 recommendations 68 resolving issues on stalled private projects 80 guarantees in BOT projects 12 strengthening and reorienting central agencies 80 high, in investing 21, 66 strengthening enabling policy framework 70 political 42 power recommendations, power main 98 ensuring consumer and industry protection 104 managing 98, 100 focusing investments on priorities 98 market reforms 83­84 implementing market restructuring 99­103 political, market, price 84 improving financial performance 98 political and regulatory 96 improving regulatory performance 103 price volatility 94 maximizing benefits from private participation 103 recommendations 98 recommendations, roads reforms 98­99 implementing structural changes 161­163 WESM 95 improving governance and accountability of DPWH private financing 52, 64 spending 160­161 regulatory 21, 59 improving private sector participation 163­164 water relying more on user charges 163 foreign exchange 115 recommendations, telecoms risk-aversion adopting best practice for the institutional structure 179 banks 44 developing new NTDP 182 road accidents 154 enhancing competition 179­182 cost of 154, 159 moving toward universal access 178­179 underreporting of 3 WorldBankInfra.indb 218 12/6/2005 8:42:27 AM Index 1 road map. See recommendations LGU water systems 16 roads 139­166. See also local roads; See also national need for more stringent policies 64 roads; See also toll roads; See also vehicle operating poor targeting 26 costs, high recommendations 69, 79 access rates. See access rates telecoms accidents. See road accidents TELOF 179 affordability 155 universal access 178 congestion 154 water cost of 139 rationalizing 129, 133, 134 increasing 157 recommendations 129, 133, 134 financing gap suggested actions. See recommendations investment 150 maintenance 150 Supreme Court. See also judiciary, interventions government expenditure 148 decisions 23, 24, 56, 68, 125 international comparisons 153, 155, 156 T number of employees per km 155 ownership structure, selected roads 212 tariffs. See also lifeline tariffs; See also subsidies; See recommendations 159­164 also cost recovery vehicle overloading 159 benchmark 29 road safety 159 judicial intervention 23 lack of sustainable strategy 139 long-distance 171 recommendations 164 political interference 15, 21, 59, 61 ports 17 S power 16, 92 composition 92 sanitation. See also water international comparison 92 minimal cost recovery 15 lack of cost recovery 91 sewage political sensitivities 93 and decline in tourism 4 recommendations 24­26, 75, 79 exposure to population 3 recommendations 79 sewerage roads 16. See also tolls access rates 120 freight 155 lack of 118, 120 intercity freight 139 low cost recovery 124 passenger 155 recommendations 132, 134, 136 public transport 155 underinvestment 129 recommendations 24­26 social considerations 15 short termism 42­43, 78 telecoms recommendation 47 cellular 176 spatial inequalities. See regional variations decreased 171, 176 spectrum management 177, 182 water international comparison 122 SSIPs lack of cost recovery 108 competition 20 LGU systems 16, 122 instability due to political interference 20 limited cost recovery, Manila 16 need for 68 low cost recovery 124­125 recommendations 28 Manila 122 transport 20 political interference 111, 112 water 20 public perceptions of 123 market share 111, 116 recommendations 24­25, 76, 79, 81, 129­130 service levels 121 set by LWUA, water districts 16 tariffs 123, 125 SSIPs 20, 123 subsidies 25, 59, 65. See also guarantees, government; See water districts 122 also lifeline tariffs, power water, lack of information 122 cost recovery 24 telecoms 167­184 for LWUA 128 access rates. See access rates improving delivery 73 WorldBankInfra.indb 219 12/6/2005 8:42:27 AM 0 Philippines: Meeting Infrastructure Challenges basic services, shortage of 168 user charges cable television 172 importance for financing 43 cellular 171­172 recommendations 48, 81, 163 competition 176 recommendations 179 V domination by PLDT 167, 170, 171 financing 172­173 vehicle growth 147 Internet 172 vehicle operating costs, high 3, 153, 155, 156 investment 172­173 vehicle overloading 159 market entry 169 regulation 168­169 W spectrum management 177 recommendations 182 water 107­137. See also SSIPs structure 170­172 access rates. See access rates teledensity 174 affordability 123 teledensity, international comparison 175 avoidable economic losses 107 universal access 177 capital expenditure recommendations 178 low level of 116 per connection 116 teledensity, international comparison 175 investment TELOF needs 107, 116­118, 210­211 losses 168 recommendations 133 toll roads 144­145, 149 key legislation 207­208 delay in construction 157 low cost recovery 124 investment outlook 149 recommendations 129­130 legal basis 140 Manila water concessions. See MWCI, MWSI, MWSS limited private sector role 139, 158 market structure recommendations 163­164 household provision 116 tolls LGUs and community-based organizations 112­113 international comparison 156 private sector 113 political interference 159 SSIPs 114­116 recommendations 161 water districts 111­112 policy, main gov't agencies 209­210 traffic accidents. See road accidents weak policy and institutional framework 108, 123 TRB recommendations 130 autonomy called into question 159 weak regulatory framework 108, 126 public misconceptions 70 recommendations 130 recommendations 164 water districts U ambiguity of relationship with LGUs 108 dominant urban service providers outside Manila 111 underinvestment financing constraints 65, 128 power distribution 11, 90 importance of LWUA 111, 126, 127 regional infrastructure 39 inadequate cost recovery 15 roads 139­141 low service coverage 16 sanitation and sewerage 129 political interference 15 water 107, 116 regulation 22, 109, 110 small size 108 unsolicited bids tariffs set by LWUA 16 ambiguities in BOT policy 64, 67 vagueness of ownership structure 23 high number of 20, 63 majority of private contracts via 21 water supply and sanitation. See water recommendations 68­70, 80, 164 WESM 67, 75, 83, 86, 95­96 scope for corruption 26 recommendations 99­103 urbanization 1, 4, 8­10, 43, 77 WorldBankInfra.indb 220 12/6/2005 8:42:28 AM WorldBankInfra.indb 221 12/6/2005 8:42:28 AM WorldBankInfra.indb 222 12/6/2005 8:42:28 AM