Economic Development Through Infrastructure Financing in The Context of Official Development Assistance in The Philippines

FRANCISCO, GUILLERMO II L.
MADEPOL 11292164 DVS531M

ECONOMIC DEVELOPMENT THROUGH INFRASTRUCTURE FINANCING IN THE CONTEXT OF OFFICIAL DEVELOPMENT
ASSISTANCE IN THE PHILIPPINES | 1

I. INTRODUCTION

Asian Development Bank (2009) published a report on investing in sustainable infrastructure
to improve lives. Since the turn of the century, poverty has been at the centre of all development
strategies. In many developing countries, growth is constrained by infrastructure bottlenecks and this
is reflected in many investment climate surveys in which infrastructure ranks as the top priority
(Estache, 2007). Infrastructure serves as the foundation of economic and social activities and
supports the economic and social development of developing countries through various channels. It
also facilitates interactions and provides access to goods and services, which then contributes in
poverty reduction and eventually leads to economic development.

Further, The World Bank (2005) noted that the Philippines attained important achievements
in terms of infrastructure provision, and access to basic infrastructure services tends to be higher
than that of its neighbors. The government has also been undertaking critical reforms, such as
promotion of private sector participation and power sector restructuring, which are among the most
progressive in Asia. Further, preliminary analysis by the World Bank indicates that in the Philippines
there is indeed a strong relationship between infrastructure and GDP, and that growth of the
infrastructure capital stock has a positive and long-term impact on level of GDP.

However, it is noted that financing infrastructure project and programs entails the need for
stable source of funding, thus, deals with serious and significant amount of money. Considering the
financial and fiscal constraints of the Philippines, there is a need to have an alternative and external
source of funds. Official development assistance (ODA) plays an important part in infrastructure
financing. Considering the financial constraints of providing costly infrastructure, the amount being
provided is indeed significant. The Philippines then is recognized as one of the top recipients of ODA
globally.

With these in mind, this paper therefore aims to establish further connection between
Economic Development and Infrastructure Spending with the current trends of providing Official
Development Assistance (ODA).

FRANCISCO, GUILLERMO II L. MADEPOL 11292164 DVS531M


II. BACKGROUND OF THE STUDY

Official Development Assistance (ODA)

The Official Development Assistance (ODA) served as the primary means of foreign aid and
transfers between developed and developing countries. According to the official OECD DAC
Glossary of Key Terms and Concepts (2013), Official Development Assistance (ODA) is composed
of grants or loans to countries and territories on the DAC List of ODA Recipients (developing
countries) and to multilateral agencies which are: (a) undertaken by the official sector; (b) with
promotion of economic development and welfare as the main objective; (c) at concessional financial
terms (if a loan, having a grant element of at least 25%). In addition to financial flows, technical co-
operation is included in aid. Grants, loans and credits for military purposes are excluded. Transfer
payments to private individuals (e.g. pensions, reparations or insurance payouts) are in general not
counted.

On the other hand, World Bank (2013) defined that, Bilateral official development assistance
(ODA) commitments are the firm obligations, expressed in writing and backed by the necessary
funds, undertaken by official bilateral donors to provide specified assistance to a recipient country or
a multilateral organization. Bilateral commitments are recorded in the full amount of expected
transfer, irrespective of the time required for completing disbursements. Total sector-allocable aid is
the sum of aid that can be assigned to specific sectors or multi-sector activities. Basic social services
consists of, primary education, basic life skills for youth and adults and early childhood education,
basic health care, basic health infrastructure, basic nutrition, infectious disease control, health
education and health personnel development, population policy and administrative management,
reproductive health care, family planning, sexually transmitted disease (STD) control including
HIV/AIDS, personnel development (population & reproductive health), basic drinking water supply
and basic sanitation, and multi-sector aid for basic social services.



Official Development Assistance in the Philippines

At the height of the Philippine debt crisis in the 1980s, Official Development Assistance
(ODA) accounted for nearly half of the countrys external debt. The genesis of the crisis was
complex, but among the immediate causes were ODA-funded investments that did not yield the
expected economic and social returns and were, in fact, channelled to unproductive and low-priority
areas or otherwise lost to corruption. (Tsuda and Deocadiz,1986). In order to prevent such and to
provide a proper framework and parameters for programming, monitoring and evaluation of ODA,
the Official Development Assistance Act of 1996 or the Republic Act 8182 has been set into law,
and its subsequent amendments contained in Republic Act 8555.

Over the years, the Philippines has created and refined the structures to manage ODA
projects and programmes. As a result, the flow of ODA funds is under scrutiny by various agencies
from project inception to completion. At the first level, donors are requested to draw up Country
Assistance Strategies (CAS), which should be aligned with the Medium-Term Philippine
Development Plan (MTPDP) and the Medium-Term Public Investment Programme (MTPIP). The
MTPDP is a six-year plan that lays out the development goals and strategies of the country. It is
prepared by the NEDA in coordination with other government agencies and stakeholders. The
MTPIP is an accompanying document to the MTPDP, containing an ordered listing of priority
programmes and projects based on their assessed potential contributions to the development goals
set out in the MTPDP. Thus, donors are compelled to streamline and align their assistance to the
countrys development priorities and prevented from peddling ODA for activities. (Abrenica, et. al,
2013)

In the case the Philippines, as noted by the National Economic and Development Authority
NEDA, Infrastructure support gains the biggest chunk of the amount being received from ODA
(averaging 66% from 1990 2006). This is followed by the economic sectors; social spending and
others, which more directly affect the MDGs, averaged only 9%. ODA remains an important,
although limited, source of funding for infrastructure investment, and some of the more innovative
types of social spending (such as conditional cash transfer program or community-driven
development).



Table.1 Source of Infrastructure Funds of the National Government
Source: National Economic Development Authority, Public Information Division, 2008

Further, considering the source of Infrastructure Funds of the Philippine Government (Table
1), it suggests that the contribution of foreign transfers through Official Development Assistance
(ODA) is indeed significant and relevant for funding, covering 76% of infrastructure projects in the
country for the year 2008, as compared to that of the funds coming from the National Budget.

Foreign aid, therefore, through ODA, contributes significantly in the countrys efforts to
provide various economic infrastructures in attaining its goals for development and providing public
goods and services, to note that the necessary funding and financial constraints are to be
considered for such goal to be achieved.

III. THEORETICAL FRAMEWORK

Foreign Aid and Economic Development

Poverty served as one of the precursors of the concept of providing Aid programs. Kingsbury
et. al. (2004) had noted that, the purpose of aid, or why countries give aid, rests on a range of
interrelated values about what might be called an international social contract. That is, there is a
broad understanding amongst developed countries that, in order for the world to be, or to be seen to
be, a moderately equitable place, or at least to alleviate some of the worst suffering, there needs to
be some form of international assistance. These programs then served as an idea of alleviating
poverty in developing countries; however, issues as to the sustainability and the politics concerned
Million Pesos Percentage Share (%)
Local Financing 261.17 23.93
Official Development Assistance (ODA) 830.17 76.07

must be put into consideration. There are socio-economic implications concerning these programs,
the question lies as to the benefits of these capital transfers and whether these programs have
actually been of benefit of the receiving states and bodies or it just shows the invisible divide present
between the developed and the developing countries.

As in any debate, there have been two general but contending schools of thought with regard
to the effectiveness of aid in spurring economic growth in the third world. Critics of foreign aid argue
that it has had no effect on and even hurts the third world economies (negative aid-growth
correlation). On the other hand, Supporters of foreign aid espouse that on average or in most cases,
it has been an effective development tool (positive aid-growth correlation). (McMillan, 2011)

Papenek (1973) and Levy (1988) further noted that aid had a positive impact on growth,
hence sparking the debate between among economists and researchers. These analysts believed
that aid increases growth by augmenting savings, financing investments, and adding to the capital
stock. They argue that aid also helps increase productivity, especially aid in health or education
programs. They also consider the transfer of knowledge and technology from rich countries to poor
countries to have a positive effect. These transfers from the donating countries gave significant
benefits providing goods and services to the developing countries.

On the empirical side of this correlation, there have been many studies on the impact of aid
on economic growth. Research, however, is loaded by difficulties in data collection, differences in
econometric models, and different views regarding the methods through which aid affects growth.
According to Mosley (1987), there seems to be a micro-macro paradox, that is, aid seems to work at
micro-level, but there is no evidence of its positive effect at a macro-level. While, Burnside and
Dollar (2000) found out that aid is positively correlated with economic growth, but only when it is
accompanied by good policies and institutions.

Further, critiques of foreign aid and anti-aid theorists like the Economists Friedman (1958)
and Bauer (1972) called for an end in aid, arguing that it is not a necessary requirement for the
economic growth of a country. Both Friedman and Bauer assert that foreign assistance to
governments is dangerous because it increases the power of the elite in the recipient governments,
leads to corruption, thus, eventually hinders economic growth. In particular, Bauer noted that aid

discourages the growth of private sector investments, encourages public sector-led growth (since aid
is in fact money added to government coffers) thereby limiting growth and inhibiting development.
The money involved in such transfers is significant and may be prone to misuse and
mismanagement leading to corrupt practices. However, McMillan (2011) argues and claims that
although Bauer has been a leading critic of foreign aid, his ideas are grounded on very little empirical
research and this is the main critique against his published writings.

Infrastructure and Economic Development

Infrastructure is the foundation for a countrys economic and social activities and supports
the economic and social development of developing countries through various channels. It can play
a vital role to achieve sustainable growth and poverty reduction. For example, basic rural
infrastructure can address poverty problems through the direct channel. Large-scale infrastructure
can contribute to growth and poverty reduction through the policy channel, but also serve as a pre-
condition for realizing the market channel and affect the patterns and quality of growth. There has
been increased recognition of the critical role of infrastructure investment for economic growth, as
well as its linkages with the provision of social services and the attainment of the Millennium
Development Goals. (GRIPS, 2003) The development literature recognizes that infrastructure serves
as a catalyst for economic development, by improving access to resources and enhancing the
impact of policy intervention (World Bank 1994).

Poverty reduction was recognized as the overarch-ing goal in the United Nations Millennium
Declaration of 2000 and the Millennium Development Goals (MDGs) that were adopted in 2001 as
its roadmap. While poverty itself has multiple aspects, the first goal of the MDGs emphasizes income
poverty. Yamada and Ojima (2005) provided an illustration and noted that Infrastructure is thought to
contribute to poverty reduction mainly through three channels (Fig.1).


Fig.1 Relationship between Infrastructure and Poverty Reduction
Source: Yamada, Ojima, et al. (2005)

Yamada, Ojima, et al. (2005) explained the three channels necessary to attain Poverty
Reduction. The focus of the study lies in the first channel, by which pertains to poverty reduction
through economic growth; efficient infrastructure contributes to economic development as it provides
means of productivity reducing transaction costs through modern transport such as roads and public
transport, as well as communications systems. Having these sophisticated urban infrastructure and
system allows the flow of economy go smoothly amidst densely populated cities and facilitates
healthy urban agglomerations. These achievements also improve the investment climate and
potential for long-term economic development by attracting foreign direct investments and expanding
international trade. Dollar and Kraay (2002) further noted that this sustained economic growth, in
turn, contributes to poverty reduction in developing countries; which then supports the argument that
foreign aid contributes to economic development, however noting that such growth must be
sustainable, therefore having conditions and other implications for it to be fully achieved.

The second channel is the contribution to the distribution of economic growth. Having
improved infrastructure facilitates the flow of economy and the interaction between the rural and

urban areas, both in the context of backward and forward interactions. It plays an essential role in
realizing the mechanism of the classic two-sector model of agriculture and industry. Further, the third
channel includes direct contributions to the poor. Providing efficient infrastructure makes it easier for
the poor to access public goods and services, and allow improved opportunities for livelihood.

The model provided by Yamada, Ojima, et al. (2005) establishes and support the argument
that infrastructure investments and projects indeed contribute to poverty reduction, which is the
primary goal of economic development. Thus, allowing other indirect effects as reflected in the
different channels, where it is as well deemed necessary for attaining the goal.

On another note, in the study conducted by World Bank (2005), for Philippine data from 1985
to 2002, in order to assess whether infrastructure capital stock causes significant effect in the Gross
Domestic Product (GDP), GDP values were regressed against lagged values of GDP and lagged
values of infrastructure capital stock (the stock was constructed from the gross fixed capital
formation series). The results show that infrastructure capital stock does indeed significantly
Granger-cause GDP. However, evidence of the positive correlation between infrastructure
expenditures and GDP growth does not necessarily imply causation. To test whether infrastructure
causes growth, a Granger-causality analysis was performed on existing infrastructure and growth
data in the Philippines. The intuition behind a Granger-causality test is that if variable X causes
variable Y, then changes in X should precede changes in Y. Therefore, the study then suggests that
the results were relevant and that infrastructure financing and investment contributes to economic
growth in the Philippines.

Considering the different perspectives as to correlation and causality between infrastructure
and economic growth, this leads to the argument that infrastructure funding needs to be monitored
as to the efficiency of implementation and execution, which then requires necessary and sufficient
policies and mechanisms.



IV. SYNTHESIS

Analysis of Facts and Figures

The amount received by the Philippines coming from the Official Development Assistance
(ODA) is deemed significant and necessary to provide infrastructure projects as part of the
governments goals for economic development. Without the ODA, infrastructure projects may
actually fall short than that of the current infrastructure spending. The World Bank (2005) estimates
that the middle-income countries in East Asia will, on average, need to spend over 5% of the Gross
Domestic Product (GDP) on infrastructure to meet their needs over the next 10 years. While, as per
figures presented by the National Economic and Development Authority (NEDA), the Philippine
government only spent P249 billion (2.4 percent of GDP) in 2012 and P250 billion (2.6 percent) in
2011, which falls below the suggested 5% benchmark. Infrastructure spending in the Philippines is
already lower than that of the suggested sustainable and efficient spending, and that is with the
major contribution of the ODA.

World Bank (2005) further noted that in 2003, the annual Official Development Assistance
(ODA) disbursements for infrastructure projects implemented by national government agencies
constituted 37% of national government capital expenditure on infrastructure. Furthermore,
according to the National Economic and Development Authority or NEDA (2012), as of 31 December
2012 the total amount of the grants portfolio is US$2.9 billion covering 400 ongoing projects.
Australia (US$ 934.87 million or 32.79%), USA (USAID and MCC for a total of US$ 852.18 million or
29.89%), and the United Nations (UN) System (US$ 316.51 million or 11.10 percent) are the leading
providers of grants in the Philippines.

Total net commitment for the year 2012 was the second lowest among the reported net
commitments during the past ten years. The commitment level for project loans (US$6,888 million)
comprising the CY 2012 portfolio was also the second lowest within the ten-year period, with the
lowest registered in CY 2011 (US$6,858 million). Despite yearly fluctuations in net commitment

level, the trend within the past decade showed a general decline in net commitment: from about
US$11 billion worth of net commitment in CY 2003 to about US$8 billion in CY 2012. (Fig 2)

Fig 2. Historical Net Commitment in US$M (2003 -2012)
Source: National Economic and Development Authority (2013)

With the significant amount of money being received by the Philippines, majority or 58.8%
(US$5,186 million) of the net commitment received goes to Infrastructure Projects and Programs.
For other sectors: Social Reform and Community with 19.2% (US$1,692 million), Agriculture,
Agrarian Reform and Natural Resources with 17% (US$1,496 million), Governance and Institutions
Development with 3.8% (US$332 million), and Industry, Trade and Tourism with 1.3% (US$115
million). (Table 2)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Program 788 210 410 1370 2231 2131 1941 1718 1742 1932
Project 10200 10365 9508 8130 7539 8102 7899 8216 6858 6888
0
2000
4000
6000
8000
10000
12000
T
o
t
a
l

N
e
t

C
o
m
m
i
t
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e
n
t
s

(
i
n

U
S
$

M
i
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)

Program
Project


Sector
Net Commitment
(US$ M)
Share (%)
Infrastructure 5,186 58.8
Social Reform and Community
Development
1,692 19.2
Agriculture, Agrarian Reform and
Natural Resources
1.496 17.0
Industry, Trade and Tourism 115 1.3
Governance and Institutions
Development
332 3.8
TOTAL 8,821 100

Table 2. Net Commitment by Sector (CY 2012)
Source: National Economic and Development Authority (2013)

Key Issues and Policy Implications

The World Bank (2005) noted that the Philippines has attained important achievements in
infrastructure provision, and access to basic infrastructure services tends to be higher than that of its
neighbors. The government has also been undertaking critical reforms, such as promotion of private
sector participation and power sector restructuring, which are among the most progressive in Asia.
However, infrastructure deployment has not kept up with high population growth and rapid
urbanization, with serious consequences for the countrys competitiveness and in particular for its
growth and poverty reduction targets, including the Millennium Development Goals.

However, despite these achievements, The Global Competitiveness Report 20122013 by
the World Economic Forum (2012) placed the Philippines in the 98
th
rank out of 144 countries in
terms of Quality of Overall Infrastructure; supporting the claim of The World Bank (2005) that the
overall state of infrastructure in the country has not kept up with rapid population growth and
urbanization, and has emerged as a key impediment to the Philippines economic competitiveness.

The World Bank further noted in their study several key issues that the country is facing such
as low current spending in infrastructure, inefficient use of existing resources, poor environment
caused by corruption, lack of long-term planning and coordination, and lack of framework to support
suitable financing. The key issues presented justify the poor performance of the Philippines in terms
of competitiveness as to Quality Infrastructure.

The issues presented by the World Bank, relies heavily in the performance of the
government in attaining to its goals, acting according to their functions and being accountable for
their responsibilities and obligations to the public. Resources through the Official Development
Assistance (ODA) are available, and it is just the matter of execution and implementation to where
the funding will go through and be put at.

With these, there is a need to consider that although there is a correlation between
Infrastructure and Economic Development, there is no guaranteed basis for its causality for such to
occur. Although through Infrastructure Financing through the Official Development Assistance (ODA)
contributes significantly to the sources of funding, the causality of such depends heavily in the
implementation and execution of infrastructure projects and programs, supported by the sound and
effective policies and institutions as well as the essence of good governance. Indeed, If a
bureaucracy became increasingly more responsible as an agent for the implementation of public
policies, then chances for development would be enhanced. (Riggs, 1966) Involving the amount at
stake in the transfer, and the responsibility to provide goods and services to the public, the
government must properly act accordingly to its functions and obligations.

V. CONCLUSION

The amount being received by the Philippines as a recipient of Official Development
Assistance (ODA) is significant, being the source of 76% of the funding for Infrastructure projects for
the year 2008. This percentage and amount is vital for the government to provide projects across the
nation; however, considering the arguments presented by the anti-aid critiques Friedman and Bauer
that foreign aid increases the power of the elite in the recipient governments, leads to corruption and
hinders economic growth which is then reflected in the performance of the country in the Global

Competitiveness Report and the study conducted by The World Bank, implies that the anti-aid
theories may have a point and basis considering the current scenario. If not addressed properly, the
results and implications presented by the anti-aid theories may actually be realized rather than the
aim of having sustainable economic development. Further, the need to have supporting efficient
policies and systems are supported by the studies of Burnside and Dollar (2000), they noted that aid
is positively correlated with economic growth, but only when it is accompanied by good policies and
institutions. These theories presented by both sides, then, can be applied to the current scenario in
the Philippines, leading to further applications and proper policy directions.

Indeed, we can conclude that in order to solve these issues and achieve developmental
goals, good governance supported by stable institutions and effective policies is necessary; thus, is
deemed essentially part of their responsibility as part of the government. On another note, we can as
well conclude that just like any resource present, these opportunities for funding coming from foreign
aid must be utilized and managed properly.

Within the term ODA, the word assistance is present, denoting that there is one party that is
willing to support and another that is willing to receive. However, in this case, relying entirely in
Foreign Aid suggests that a country is merely unstable and not sustainable to its endeavours. It is
also necessary to recognize that Foreign Aid is not always present; governments must recognize
that such financing opportunities are temporary and are subject to several conditions bound by
agreements, impressions and relationships between the donor countries, agencies and the receiving
country. The government must figure out how to fund these projects and programs using internal
revenue and other sources other than that of Foreign Aid.

Given the significant and essential contribution of foreign aid through the ODA in
Infrastructure financing in the Philippines, there is indeed a necessity to address and recognize such
to promote efficient and sustainable economic development amidst various internal issues of the
state and with the critiques implied by the downfalls of Globalization. Infrastructure therefore
contributes and is critical to Economic Development in various channels; thus, its effect and
causality and achievement of the goals relies heavily in the implementation and execution of the
projects and programs by the government.



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