Flood Control Corruption Cleanup Spooks Investors, Drags PH Growth

MANILA, Philippines – The government’s effort to clean up alleged corruption in infrastructure is meant to restore confidence in how public money is spent, but for now, the uncertainty surrounding the review has stalled projects and made investors more hesitant to commit money to the Philippines. The World Bank identified the infrastructure disruption as one of the two main reasons Philippine economic growth has slowed, alongside the surge in global energy prices caused by the Middle East conflict. Real gross domestic product (GDP) growth fell to 2.8% in the first quarter of 2026. The World Bank forecasts full-year growth to slow to 3.7%, from 4.4% in 2025, with fixed investment projected to contract by 0.5%. The World Bank previously expected the Philippine economy to grow by 5.3% in 2026. “Uncertainty around infrastructure procurement has made investors more hesitant,” World Bank division director Zafer Mustafaoglu said during the launch of the Philippines Economic Update on Monday, August 3. Though the World Bank did not explicitly single out the flood control scandal, its report said allegations of corruption led to increased scrutiny and audits of infrastructure projects beginning in mid-2025. The review covers how projects are planned, included in the budget, and procured. The immediate result has been a slowdown not only in government construction, but also in private investment. Fixed capital formation — spending on assets like roads, railways, factories, and machinery — contracted for three consecutive quarters beginning in the third quarter of 2025. Government spending on infrastructure and other long-term assets fell by around 1.3 percentage points of GDP between the first quarters of 2025 and 2026, while foreign direct investment declined alongside rising domestic and global policy uncertainty. “The infrastructure probe transmitted through both public budgets and private confidence, producing a sustained investment contraction,” the report said. Construction recorded the sharpest contraction among major economic sectors in the first quarter as project pipelines stalled. Short-term pains of a necessary cleanup The World Bank was not arguing that the government should abandon its investigation or allow questionable projects to proceed. Stronger controls could improve the quality of infrastructure spending and give investors greater confidence that public projects are selected and awarded under credible rules. But the cleanup also carries a short-term economic cost when projects cannot proceed while agencies review their planning, budgets, procurement, and compliance with tighter controls. “The key here is to really continue, as the government has been doing, on improving governance of public infrastructure to send a signal to the market, but to do so efficiently and effectively,” World Bank senior country economist Jaffar Al-Rikabi said on Monday. If the government succeeds, the near-term slowdown could prove temporary and stronger governance could support investment over the longer term, he added. The most immediate backdrop to the review was the flood control corruption scandal that erupted in 2025. The government said it funded 9,855 flood control projects worth about P545 billion from July 2022 to May 2025. An initial audit found that around 20% of the spending, or roughly P100 billion, went to only 15 contractors. Authorities also flagged projects that were reportedly substandard, poorly documented, or nonexistent, as well as contracts with suspiciously similar costs despite being located in different places. The allegations triggered Senate and Commission on Audit inquiries, the creation of an independent infrastructure commission, and project-by-project scrutiny. The Department of Public Works and Highways also suspended bidding for locally funded flood control projects. The World Bank warned that investor confidence “typically recovers more slowly than it deteriorates.” The report said progress by late 2026 would determine whether its projected recovery in public and private investment begins in 2027 or is pushed back further. “The timeline for restoring public investment depends on governance progress, not fiscal space,” the report said. Recovery would require transparent and consistently applied project-approval criteria, credible communication on the path for restoring spending, and a resolution of the corruption investigation that removes uncertainty from procurement. Mustafaoglu said “clear, transparent, and consistently enforced standards” could help restart investment and place economic growth on a stronger trajectory. – Rappler.com