Duterte fiscal plan raises red flags

Infra pump priming, 24/7 construction, unsolicited proposals 

MANILA, Philippines - The new administration’s fiscal plan, which entails an aggressive infrastructure spending, around the clock public construction, unsolicited project proposals and presidential emergency powers underscores President Duterte’s resolve to hit the ground running early in his term.

Observers hailed the apparent fiscal pump priming after six years of “cautious” spending program under the administration of former president Benigno Aquino III. Yet this early, red flags are already being raised.

“Their methods mark an innovation, but a little bit complex,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands.

For her part, Rosario Manasan, research fellow at the Philippine Institute for Development Studies, said “it will all be a matter of projects to be prioritized,” while contractor Ibarra Paulino said execution will be “crucial.”

From here, they listed three vital challenges facing Duterte’s fiscal plan.

Absorptive capacity

Topping the list is government agencies’ absorptive capacity. Manasan said this pertains to the capability of agencies to utilize funds through the completion of projects such that their budgets are consumed by the end of each year.

Such was not the case, however, since 1992, data from the Department of Budget and Management showed. Since then, allocations were not completely used and that deficits are more a result of low revenues than high spending.

“Agencies are being choked with funds. They are not used to having so much money to spend,” Manasan said.

This could hit even President Duterte’s plan to get emergency powers from Congress to address what is already deemed a traffic crisis in Metro Manila.

Former president and now Pampanga Rep. Gloria Arroyo is set to file a bill that would grant Duterte additional powers to deal with the deteriorating traffic situation in Metro Manila.

Under her proposal, the President may enter into negotiated contracts for the construction, repair, rehabilitation, improvement or maintenance of critical infrastructure, projects and facilities, subject to certain conditions.

“That will help, but as far as public spending is concerned, the bottleneck is not really in the procurement side but on the agencies,” Manasan said in a phone interview.

“You can increase the budget as much as you want, but if agencies cannot absorb it or spend it because projects are not ready, it will be useless,” she said.

Neri had a different concern. He said while fasttracking spending is always welcome, this should not come at the expense of misusing public funds.

He echoed Melissa Yan, deputy executive director of the Government Procurement Policy Board, who earlier said the procurement laws, no matter how tedious, are created as “an anti-corruption measure.”

“If special powers are used to the extent of resorting to bending the rules, that’s a sign of wanting to take short cuts and that’s not good,” Neri said separately.

Finance Secretary Carlos Dominguez, however assured: “We will make sure that projects will undergo enough scrutiny.”

Revenues

The plan is to widen the budget gap—which indicates government spent more than earned — to three percent of economic output from just 0.9 percent last year.

This will be done through additional funds for infrastructure, programmed to corner at least five percent of gross domestic product (GDP) under Duterte. Last year, it hit a record high of 3.3 percent.

While Budget Secretary Benjamin Diokno said the figure is sustainable, Manasan said it would depend on where the deficit would come from. “What is the context of increased deficit?”

“They have plans to have tax reform and reduce income taxes. It remains to be seen if they can offset that, but I don’t think tweaking VAT exemptions would do it,” Manasan said.

“They should be careful because we might go back to a situation where we lack money,” she added.

So far, details were scarce as to the contents of Duterte’s tax reform. Former Finance secretary Cesar Purisima left Dominguez a tax package that would generate as much as P77 billion in the first year, but the latter said he will not use it.

He would, however, embarked on tax administration measures similar to Purisima’s such as filing of tax evasion and smuggling cases, rationalizing fiscal incentives, relaxing bank secrecy law, and making tax evasion a predicate crime to money laundering.

“The impact would really depend on the timing when these measures are rolled out. If they come in later than lowering income taxes, that could be revenue eroding,” Neri said.

At 14.7 percent of GDP as of the first quarter, the Philippines’ revenues are one of the lowest in Southeast Asia. Considering only taxes, the ratio of 13 percent was also among the worst.

Before this period, revenues and taxes, as a proportion of GDP, underwent a decline since 1997, finance data showed. This contributed to an increase in deficit to five percent in 2002.

“I think their appetite for risks is high would be willing to take a credit downgrade if it means pushing with their programs,” Neri said. Dominguez had long criticized the past administration for focusing too much on credit ratings.

But Alvin Ang, economist at Ateneo de Manila University, believes there should be no problem with it.

“Your economy is liquid and we have not really taken advantage of our investment grade. Besides, I’m sure Dr. Diokno knows what he is doing and will not let that happen,” Ang said by phone.

Diokno, whose first term as budget chief saw the deficit at 3.7 percent of GDP in 2000, only had this to say: “The fear of higher deficit is misplaced.”

Private sector woes

Paulino, executive director of Philippine Constructors Association, said another factor to consider would be the capacity of contractors to cope with the spending push.

While he welcomed plans to undertake a non-stop, 24 hours contruction of major infrastructure projects initially in Metro Manila, Paulino said there might not be enough willing contractors in the provinces, particularly Mindanao.

“There are not much qualified contractors who would want to go to Mindanao because of the peace and order situation there. Most of them are here (in Manila) and Cebu,” he said by phone.

Cosette Canilao, former executive director of Public-Private Partnership (PPP) Center, meanwhile said projects should also be scrutinized carefully, especially those coming from the private sector.

Unsolicited PPPs -- such as the Metro Rail Transit 3 and Ninoy Aquino International Airport Terminal 3 -- are so prone to corruption that the government should hire good consultants to evaluate them as well as improve Swiss challenges.

“The challenge process should be clear. The challenge period should also be increased, but that can only be done via amendment of the BOT (build-operate-transfer) law,” Canilao said in an e-mail.

But Neri said this would seem have to wait for a while.

“What (Duterte administration) is doing is contrary to institutional reforms. We have not seen that yet,” he said.

“I think they are trying to put out fires first. Focus on very urgent matters that need attention. Hopefully after, they would go on long-term reform, which is much more important,” he added.