CCT debt trap? Future
of pro-poor deal a poser

Last of Three Parts

IT HAS been described as an “investment in the next generation,” with its supposed results of millions of healthier, better educated Filipinos not expected to be realized anytime soon. But the Conditional Cash Transfer (CCT) program is also an investment that is drawing a substantial chunk of its capital from foreign loans, a fact that has many observers raising red flags.

“The poor of the future will be the ones who will carry the burden of paying off this debt,” says Freedom from Debt Coalition Executive Director Milo Tanchuling, who believes it would be better if the CCT relied on locally sourced funds. That the government is also vague about alternative funding prospects for the program has only made those like Tanchuling uneasy – and wondering if it’s an initiative that is sustainable.

In fact, official records show that the CCT had started out as an entirely government-funded program. But with a dramatic expansion in the program’s coverage since 2008, as well as the acceleration of its implementation, the government opted to supplement the CCT budget with monies from the World Bank and the Asian Development Bank (ADB). Altogether, these loans amount to $805 million or P34.6 billion at current exchange rates.

The funds are intended to support, among other expenses, the targeting of beneficiaries for the CCT, cash transfers to beneficiary-households, project monitoring and impact evaluation, and the institutional strengthening of the Department of Social Welfare and Development (DSWD), the CCT’s lead undertaker.

Official data show that for 2010-2011, about 32 percent or P10.2 billion of the expenses for the CCT would be paid through these loans.

Big money

It’s obviously not free money. The $405-million World Bank loan under its Social Welfare and Development Reform Project allows for a 25-year repayment period including the 10-year grace period (or when the principal does not yet have to be repaid). This means that the Philippines will have to remit its first payment in 2020, and finish paying up by 2034, or after three more presidents, apart from Aquino, would have served their full terms.

The $400-million ADB loan, meanwhile, needs to be repaid in 20 years, including a five-year grace period. The government will have to start paying the ADB loan in March 2016 and continue to do so twice a year until September 2035.

The government’s CCT project involves a total estimated cost of US$1.29 billion for 923,000 households from 2009-2014.  Only a third of the total cost will be shouldered by the government while two-thirds will be financed by loans from the World Bank and the ADB, according to an August 2010 report of the ADB.

According to Socioeconomic Planning Secretary Cayetano W. Paderanga Jr., the long-term nature of the loans will make it much easier for the government to “spread (the payments) out.”

This is important, he says, because the CCT-related loans are not the only foreign debts taken on by the Philippines. Indeed, Bureau of Treasury records reveal that by the end of 2009, the national government’s total foreign and domestic debt was already at P4.4 trillion. By last January, that figure had risen to P4.74 trillion.

As if those figures aren’t mind-boggling enough, there are still the interest payments to consider. For this year alone, says the Department of Budget and Management (DBM), at least P357 billion or about two-fifths of the amount set aside by the government for debt service will go to interest payments.

Not for profit?

CCT advocates have pointed out that the World Bank and ADB loans for the program are concessional loans or those with interest rates that are lower than market rates. World Bank country director Bert Hofman himself says that the international lending agency does not stand to gain financially from the CCT. While the bank does charge interest, he says that’s “only enough to cover (the Bank’s) costs.”

“We don’t make any profits in that sense,” says Hofman. “That’s not our intent. Our intent is poverty alleviation and the financing is a vehicle.”

But the unsettled mystery is why the World Bank extended a bigger loan for the CCT, despite an assessment by its own team that CCTs in most parts of the world do not guarantee fantastic strategic results in the fight against poverty.

A 2009 policy research report by the World Bank, for instance, found CCTs to have increased “the likelihood that households will take their children for preventive health checkups, but that has not always led to better child nutritional status.” The report also found that “school enrollment rates have increased substantially among program beneficiaries, but there is little evidence of improvements in learning outcomes.”

The report – authored by Ariel Fiszbein and Norbert Schady – reviewed assessments made on CCT programs in several countries worldwide. It concluded that while CCTs were “effective” in “reducing short-term poverty” and “increasing the use of education and health services… the evidence of CCT impacts on final outcomes in health and education… is more mixed.”

The same report also found “ample reasons to be cautious” and warned governments to “avoid transforming the obvious virtues of CCTs into a blind advocacy campaign in support of them.”

The report stressed the necessity of combining the CCT with other programs “to improve the quality of the supply of health and education services, and should provide other supporting services” in order to “maximize their potential effects on the accumulation of human capital.”

Yet still, the World Bank gave the Philippines a bigger loan for its expanded project, even before it could finish a full assessment of the first two years of the CCT’s implementation under the Arroyo administration.

Review debt policy

The amounts involved are hardly small. IBON Foundation Research Head Sonny Africa says that by his think tank’s “conservative estimate,” interest payments to the World Bank for the CCT program could reach $94.6 million. The corresponding figure for the ADB loan $107.4 million, for a combined total loan service of $1.007 billion (P44.31 billion). Thus, says Africa, for every $4 borrowed by the government to help finance the CCT, the country will need to pay $1 as interest.

As it is, both Tanchuling and Africa attribute the government’s apparent budget deficiency for social services to the country’s automatic debt payments, which they say eat up a huge portion of the budget. Part of the solution therefore is not only to avoid taking on more debt, but also, Africa says, to put a cap on debt payments. He argues that even if this were done temporarily, it would already provide the government the space to “reinvest on the domestic economy, in rural construction, education, and on industries.”

For Tanchuling, even just a review of the country’s current debt payments is critical. He considers it quite puzzling that the country’s debt stock continues to rise despite the fact that the government “regularly pays what is due.”

He suspects that many of those debts are illegitimate in nature, meaning that the country did not really benefit from those loans. One classic example was the loan to fund the construction of the Bataan Nuclear Power Plant during Martial Law. Despite the billions of pesos borrowed, the power plant never became operational.

A more recent example, says Tanchuling, is the P503.65-million loan from the Bank Austria that the government took out in 1997 for medical-waste incinerators for 26 public hospitals. The incinerators turned out to be an “obsolete technology” and did not even pass the emission level standard of the Department of Health and the World Health Organization. In fact, as early as 2003, the Clean Air Act already prohibited the use of such incinerators. Yet, Tanchuling notes, the government continues to pay P100 million each year to pay off its debt to Bank Austria.

It might bring Tanchuling and Africa some comfort that the Aquino administration is now busy “reviewing and re-arranging certain projects.” In fact, Paderanga says that the government “has already stopped certain projects that it has thought were not worth doing.” But he declines to name the specific projects, financing institutions, and contractors involved “because the government does not want to embarrass them.”

Big social returns

CCT supporters, of course, are not about to lump the poverty alleviation program with such ventures. Filomeno Sta. Ana III of the group Action for Economic Reforms (AER) even says that the hefty interest payments the country will be making for the foreign loans for the program is “insignificant” when compared to the “social returns that the country stands to gain from the CCT in the short- and long-term.”

Actually, both Africa and Tanchuling also say that borrowing is not necessarily a bad thing – provided that the loans are put into good use as development instruments. But one of the problems with this country’s borrowing, says Tanchuling, is that it seems to have become a knee-jerk approach for the current and past administrations instead of being part of a well-thought-out plan.

Africa, for his part, talks of a “two-way dynamic” in which the government on one end “wants money, so (it) will design programs that (it knows) will be acceptable to the World Bank.” At the other end, says Africa, is the World Bank touting “certain programs like the CCTs, which it has been pushing for the last decade and a half.”

World Bank’s Hofman offers a different picture, saying, “It is not us determining what we’re financing in the Philippines. It’s the government that determines what we can usefully finance in the Philippines.”

The way the World Bank works, he explains, is through the development of a “country assistance strategy,” which outlines the Bank’s priorities based on “what the government wants from us in terms of knowledge and project financing.” Currently, says Hofman, that strategy goes under the banner of “making growth work for the poor” and the Bank’s “overarching target of inclusive growth.”

Urged to borrow?

And yet even Albay Governor Jose ‘Joey’ Salceda, an economist and staunch ally of President Benigno Simeon ‘Noynoy’ C. Aquino III, comments quite candidly that even without the CCT, foreign lending institutions such as the World Bank “would have given us the money anyway.” According to Salceda, these institutions have a tendency to “urge the government to borrow.”

There lies another worry for people like Tanchuling and Africa: Once the government starts borrowing from foreign lenders for a program, it cannot seem to stop.  In the case of the CCT, the Aquino administration has set as target 4.6 million beneficiary-families by 2016. While there’s no telling whether the program will still be running by then and beyond, the World Bank itself says that similar initiatives in other countries tend to run for years and years – and supported by loans.

World Bank Human Development Country Sector Coordinator Nazmul Chaudhury says that after an initial four-year cycle for its CCT program, Bangladesh requested another loan from the international lending agency. He also says that Mexico’s program, which is considered one of the most successful so far, “has been running for many, many years” with the help of loans from the Bank.

Socioeconomic Planning Secretary Paderanga says that the Philippine version of the CCT “will be a continuing program…up to the extent that the economy has not yet developed.” But he is uncertain how the CCT would be funded should it continue beyond 2016.

“We will have to look at the resources at that time,” he says.

Salceda, though, says that the key to sustain anti-poverty projects like the CCT is for the government to automatically direct at least one percent of the gross domestic product (GDP) to the poor, just like the Venezuelan model where “the revenues from oil are directly earmarked for the poor.” He argues that if local governments are assured of internal revenue allotments, then “the poor should have a direct share in the national income.”

May lend more

In any case, Hofman says that should the government ever decide to ask the World Bank for another loan to fund future cycles of the CCT, the Bank’s approval would “depend on the performance of the CCT here” or “how it fits within the overall evolving framework of social protection in the Philippines.”

The nature of World Bank’s assistance could also change to technical assistance instead of being a loan, he says. According to the Bank executive, this is what happened with the World Bank’s assistance for Mexico’s CCT program, which began “heavy on the technical aspect.” But later on, says Hofman, the Bank’s assistance “focused on the supply side.”

Another factor to consider would be the fiscal situation of the government – “whether they would actually need any World Bank financing,” Hofman says. Adds Chaudhury: “Maybe the Philippines would have a completely different paradigm (by then)… But it’s really depending on the government.”

To Africa, however, such loans would make more sense – and lead to more universal and lasting results – if they were direct investments in the public health and education system and in creating domestic industries. He says that if these funds were used to develop the rural sector, the government would already effectively address the plight of three-fourths of the population who reside in the rural areas. That would then mean less or no need for programs like the CCT.

For sure, Africa can hardly be pleased with the government’s hard sell of the CCT, which a member of the Aquino Cabinet says is a reflection of the current administration being “defensive” about its anti-poverty programs. This, the cabinet member observes, is largely because of the administration’s failure to communicate its programs effectively to the public.

It could also be because government officials cannot really seem to grasp the CCT’s limits – with no less than President Aquino himself appearing to have misconstrued the CCT as an immediate relief to widespread hunger. Last April, the Social Weather Stations (SWS) revealed the results of its first-quarter survey, which said 4.1 million families had experienced hunger in the three months preceding the poll. The president questioned SWS’s sampling method, which he thought was Luzon and Metro Manila-leaning. He then said that the survey failed to “capture those who benefited from (the administration’s) CCT program,” who are mostly located in the Visayas and Mindanao.

Last September, Social Welfare Secretary Corazon ‘Dinky’ Soliman was also quoted as saying that the CCT is “a life-saver to those drowning in poverty.” Notably, however, Soliman has since toned down her description of the CCT, and is content with saying that it is an important intervention to improve the education and health status of poor Filipinos.

These days, Secretary Paderanga says that the government itself “hopes that there will be less need (for the CCT) in the future.”  This is why, he says, there is “a very strong emphasis on massive infrastructure investment in order to help businesses grow.”

Paderanga explains that the Philippine Development Plan (PDP) 2011-2016, which was released just last week, will provide the framework for “economic activities that would generate employment and reduce poverty much more directly.” He cites in particular business process outsourcing (BPO), tourism, and agro-industrial processing as the main areas to be targeted by the government.

Paderanga also says that the PPDP’s overarching theme, “governance and anti-corruption” – essentially a translation of Aquino’s campaign slogan “Kung walang corrupt, walang mahirap” – is expected to “reduce the cost of doing business, which will also further increase investments by the private sector.”

“If the economy starts to operate and it demands more labor then the unemployment rate will go down,” he says.

Paderanga is confident that, with the kind of economic policies that the administration is putting in place, the economy will grow “bigger in the future,” with an ever-increasing revenue collection and discipline. He predicts that by the time the government repays the loans for the CCT, “it will be a small part of (government’s) problem.” – PCIJ, May 2011