Golden Age of Infrastructure, Debt, and China

A concept which I think is widely misunderstood is this idea of good debt vs bad debt. At a consumer level the accepted theory is that if you use debt to buy depreciating assets it equals good debt. If you buy appreciating assets it is good debt. While there is merit to this basic premise it is by no means a complete picture.

There are millions of people who have been bankrupted by good debt.

Someone who I am sure no Filipinos have ever heard of is a guy named Steve McKnight. He is a successful property investor and educator who describes the same debt equation as bad debt vs worse debt. There is no such thing as good debt.

Perhaps this conservative view of debt is something that Filipinos may want to keep one eye on as we enter this Golden Age of Infrastructure.

philippines infrastructure

Injection of Hope and Capital

The prospect of a huge injection of capitalinto infrastructure is an exciting one! The Philippines is crying out for an upgrade and full marks to Duterte for taking massive action on this point. But starting is the easy part. The execution is much harder.

It is Duterte’s style to make big bold promises. This is what inspires the millions of supporters that he has. It is what people want to hear and the hope that he can do it is something that people hold on to. What is the alternative?

As I have said on many issues previously, this hope and blind faith is what is stopping people from looking for the checks and balances that are necessary to promote good government, and responsible management of the country. There are only extremes. Blind faith in Duterte, or you are a yellowtard hell bent on destabilisation and ouster plots.

So don’t expect there to be any level of genuine due diligence or accountability released to the public for these upcoming projects. Undertaking so many huge projects at one time brings with it enormous risk. Especially in a country with regular natural disasters, a history of corruption (that is still present in many departments in Government no matter what Duterte says), and a generally accepted pace of work comparable to a snail.

If you look at the history of major infrastructure projects around the world there is smorgasbord of budget blowouts, and bankruptcy. Then when you mix in massive government spending fuelled by debt… well this has been a theme of the last decade for economic crisis around the world.

Is the Duterte government capable of pulling off such a massive undertaking? Time will tell. The consequences of getting things wrong? Well no one wants to think about that for now.

The China Deal

After reading a recent article regarding the China infrastructure loans I noticed that the terms of these loans are not yet public. Duterte’s often unpredictable flip flopping on all things China are no doubt connected to the back room dealings surrounding these loans. Mix that in with the grandstanding of the land grab in the South China Sea (I have no doubt that the Chinese were made aware of this before the grandiose announcement – Duterte wouldn’t fart in Xi’s direction without asking if its ok) and you have a scenario where the Philippines is perhaps walking into a stranglehold that it will not be able to break free from.

Now this may not be the case – the interest rates quoted in the article of 10%-15% seem very high for government debt. I am not expert on the subject but I would be stunned if it were anywhere near this figure. But it doesn’t have to be for it to be risky.

Debt must be repaid in one way or another.

China are some of the best long term thinkers on the planet. They will give many short term concessions for long term gain. If anyone thinks that hundreds of millions in loans will not be used as leverage at some point well then you must have a lot more faith in Duterte than I thought possible.

Coming back to the Steve McKnight debt adage. He says that the day you take on debt, you must have a plan for how you are going to get out of debt. I have not heard this part yet in the Government’s plans (if I have missed this please leave a relevant resource in the comments below – I would love to read it).

What is at Risk?

One thing is for sure, if anything goes wrong with such a large scale undertaking you may be kissing those disputed islands goodbye. Cost blow outs, global financial crises, a change in government (yes, these will take longer than five years to complete) are all risks to the all at once approach. 

A country in a debt spiral is a very difficult thing to stop. So an important question every Filipino should ask themselves is are they comfortable with the contingencies in place to deal with these risks? You would need to put those starry eyes aside for a minute and look at the long term prospects of the Philippines.

This is an enormous opportunity that could lead to incredible prosperity, or inter-generational pain. The very thing they are trying to change. With every shortcut taken, the latter becomes more and more likely. To truly address the needs of the Philippines there needs to be a 30 year plan, not a five year plan.

The rapid growth of the Philippines’ economy should ensure that national revenues will continue to increase, and provide some insulation to ballooning interest payments if the debt is mis-managed. But over time there will be diminishing returns on quarterly growth and the country catches up to more developed countries. If a big dent has not been made in the debt by then it could be a long term drain on Government resources.

Failed Projects

You do not have to look far for evidence of failed infrastructure projects in the Philippines. Not just new construction, but basic maintenance. Many landmark buildings, icons and transport systems have become dysfunctional eyesores through long term neglect.

Even a simple sculpture like the Layag Islas that greeted travellers near the airport went from artistic masterpiece to ugly inconvenience in the space of just a few years. Keeping it clean was too difficult.

duterte infrastructure

Then there is the MRT. The ugly mass transport system with a limited network, inadequate services, faulty doors and air condition, and regular breakdowns…. Not to mention the hours of waiting time just to get onto the platform.

These misdeeds serve as a daily reminder to Manilenos of the squalor that some parts of the city have become.

The previous administration failed on infrastructure. Not because of a lack of funding, but a lack of competency to get things done. A combination of delays with tender processes, and an unusual pattern of underspending (and gloating about it) when the country is crying out for investment.

I guess you could say that the only way is up from here. There is a new government at the helm who wants progress. But ambition does not equal capability. Will the departments charged with executing these projects be any different that the failures of the past?

Aggressive spending without any material lift in competency is a recipe for serious waste. This is waste that the Filipino people cannot afford and do not have the patience for – which is the catch 22 of the situation. People want progress now, which means taking on the risk, increasing the chance of further wasted resources.

Build, Build, Build…. Then What?

After reading through the publicly available information on the current pipeline of PPP projects I have not yet been able to find out exactly how the private company will recoup their investment. As is typical with new road and rail construction for example, fares and tolls would provide the revenue.

This raises another question about the behaviour of your typical Filipino consumer. A large number of people will put up with terrible inconveniences to save money.

I have witnessed Filipinos undertake enormous and unnecessary journeys to save a few bucks. There are plenty of people willing to spend days traveling to islands on a series of buses and ferrys where a reasonably priced plane ticket is available, and is affordable for that person.

We have seen resistance to fare hikes on the MRT system time and time again. As a result there was no increase for 12 years. It could be argued that this was a major factor in the deterioration of the service – but that would be assuming that any extra money paid would be reinvested into maintenance. I know many will roll their eyes at the very suggestion.

golden age of infrastructure

The point is that there is some conditioning that is needed on both sides of the transaction. If people want the private sector to participate in delivering better services then they will probably have to pay for it. If operators want to charge extra then they should also deliver a higher standard of service. There will be resistance to both.

A recent LRT 6 update cited delays caused by requests for the easing of operation and maintenance requirements. So that eye roll may be a valid one. Surely ongoing maintenance to look after the build, build, build bonanza is the most important part for lasting improvement?

Final Word

None of this intended to take away from the ambition of the infrastructure plan. The Philippines is hopelessly under served in this area and huge improvements are needed. Short term thinking has led to most of the current Government’s problems so far and I am concerned that we are skipping past the overhaul of many departments needed for them to successfully execute on such ambitious projects where they have failed in the past.

But Duterte the visionary doesn’t have time for details, and no one has the balls to press him on them either. So the masses can just believe and hope. Let’s just hope it all works out.

After all this, there is one question that lurks in my mind… How on earth are they going to build a subway in less than five years in a city that floods whenever someone leaves a tap running? Sorry, it’s a faucet in the Philippines. If they can deliver on this, well they can deliver on everything. 

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