ICSID

Dredging the Waters

The Laguna Lake dredging project is a good analogy for what the Aquino administration seeks to achieve with its anti-corruption campaign.

Last month, during the celebrations of Independence Day, PNoy sought to put an emphatic fullstop to the ongoing debate over what to do with a 19 billion peso dredging project involving the Laguna Lake by a Belgian firm which had handled a similar project involving the Pasig River.

In its most elemental form, the project intended to dredge the silt from one part of the lake and dump it on another part. It was cancelled not because the deal was invalid, as the DOJ had determined it had been. Nor was it due to corruption, as the administration did not allege any form of it had taken place (otherwise the OECD Anti-Bribery Convention would have required the filing of cases against those who offered or paid any bribes).

It was cancelled simply because as PNoy had put it, he was “allergic” to such deals, which led the firm to file for damages amounting to 6 billion pesos with the International Centre for Settlement of Investment Disputes. In seeking to dredge the silt from its own spending, the government seems to have delayed, if not cancelled many of its own public works projects in the first half of the year. Applying the same criteria (suspicion of corruption) to PDAF or congressional pork barrel would actually mean cancelling the lot of it.

But this post is not about that issue. Today, it was reported that credit rating agency Moody’s had followed another agency Fitch Ratings in recommending a structural (read: roots-to-branch) reform of the fiscal system. After praising the government for its efforts at consolidation (read: restraining expenditures while improving collections) without resorting to new taxes, it said that

(I)t is unlikely that stricter tax compliance will generate a material change in revenue performance if tax evasion cases are not resolved expeditiously by the country’s inefficient legal system.

So it would seem the efforts towards apprehending tax cheats is similar to the scuttled project that involved dredging the waters of Laguna de Bay in that it takes volumes of silt from one end of the bureaucracy, i.e. the revenue agencies, and dumps them onto another end, i.e. the courts, where they presumably accumulate and clog up the system. Without substantial amounts of spending to upgrade our court system, Moody’s is saying that a significant, permanent improvement to collections is unlikely.

To underscore the scale of the mountain the country has to climb if it wishes to gain an investment grade rating, Moody’s noted that the Philippines which had an average revenue-to-GDP ratio of 14.7% from 2006 to 2010 compared unfavorably with similarly rated peers in its category which averaged 23.7% in that period.

While it recognized the existing proposals to rationalize fiscal incentives and to index sin taxes to inflation as a positive first set of steps, it encouraged the country to go down a path of fiscal reform to improve its “ratings trajectory”. This is probably the loudest endorsement for what we have been espousing in this column.

Considering the problems the government has encountered in rolling out its PPP projects (with the first one being taken off the table), the government has to consider such recommendations seriously. Given the increasingly menacing headwinds coming from Europe, MENA, Japan, China and the US, it will have to find a way to pursue infrastructure and social spending in the future as the period of low interest rates (read: cheap capital from abroad) is bound to come to an abrupt halt.