The $2 Billion Flood Control Scandal Rocking the Philippines

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. The Philippines is no stranger to storms. But this year, the country's been hit with some of the most brutal monsoons in years. Typhoon Kalmigi ripped through the Philippines, killing more than 188 people. Forecast to cause widespread damage, power outages and flooding across the island of Luzon. Hundreds of people were killed when several typhoons barreled through the archipelago earlier this year. In the aftermath, Bloomberg reporter Andreo Calanzo and our colleagues traveled to one of the hardest-hit regions. In a village called Francis, on the outskirts of the capital of Manila, he met Estelita Pagdanganan.

1:49Estelita was cleaning the mud on her front yard when we spotted her. She had a broom. She was wearing rubber boots. She was cleaning up flood debris that washed up when the nearby river overflowed during the storms.

2:06When we talked to her, she told us that she's already exhausted from cleaning her house every time a flood comes in. She said she's already getting sick. She's already old. She can't do this every single time. Like many people in Francis, Estelita's house is built close to the Pampanga River. For years, villagers have relied on the river water for farming. But for at least half the year, the river is also a liability. Francis' village is also what is called a catch basin. So whenever there are floods in nearby towns, in nearby provinces, all the water also ends up in that village. This region floods every year.

2:56After years of fielding complaints, the Philippine government finally stepped in. A few years ago, it allocated money for a dike to stop floodwater from inundating the village. The villagers were telling us that they were very happy when they saw that the dike was being built. They thought that it was already the end of their struggles with the flooding and the high tide. It wasn't. Villagers said the dike, which was completed in 2023, made the flooding worse. When Dreo visited Francis at the end of November, it hadn't rained for weeks. But the floodwater was still there. The residents told us that before, when it rains, the water subsides in a couple of days or a maximum of a week.

3:45But now the water stays on for months. An initial government inspection of the dike found it wasn't built properly. And it wasn't the only one.

4:01In his State of the Nation address in July, Philippine President Ferdinand Marcos Jr. announced that his government had uncovered a web of corruption that potentially touches thousands of public flood control projects. Some were constructed shoddily or had serious defects. Others were paid for by the government, but never built. It's one of the biggest corruption scandals the country has ever had to contend with. The government's probe implicated dozens of contractors, public works officials, and politicians, who allegedly colluded with each other to receive kickbacks over the years. The network of corruption may have looted as much as 70 % of the public money allocated to flood control projects in the last two years.

4:45That's an estimated$2 billion U.S. dollars. Corruption is something that's been going on for years in the Philippines, but even by Philippine standards, this scandal has been pretty shocking. Rosalind Matheson is the chief Asia correspondent at Bloomberg. She says countries across Southeast Asia have struggled with flooding this year. But the situation in the Philippines has been complicated by a corruption scandal that has struck a nerve with its citizens and put intense public pressure on President Marcos. There's quite a lot of anger there, frustration, and a lot of anxiety about what will happen next year.

5:22A lot of economists are expecting this to really be a drag on the economy. And for a lot of businesses who are looking at the Philippines and saying, is this a place to invest or to continue to invest? Is there fundamental reform because of this? This is The Big Take Asia from Bloomberg News. I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies and the markets, tycoons and businesses that drive this ever-shifting region. Today on the show, the devastating impact of one of the biggest corruption scandals ever to hit the Philippines. We look at how lawmakers and contractors fleeced the government out of billions of dollars that was earmarked to mitigate floods, and how the depth of this corruption risks paralyzing the country's economy.

6:28Public outrage over the years-long corruption in projects designed to reduce flooding has boiled over in the Philippines. Massive protests began this summer and continued through to the end of November. Tens of thousands of Filipinos have taken to the streets, calling for an end to corruption and for prosecutions. Bloomberg's Dreo Colanzo witnessed that anger firsthand in Francis. That's where he met Jesse Cayago, the village chief.

7:04The people I talk to are angry at the high-level corrupt officials. Congressmen, senators. In the news, we see millions of pesos in kickbacks. I sometimes think that we never learn. Those implicated before still end up winning elections and then repeating what they did. Jesse told Dreo that people in the village are furious about what they see as rampant corruption. He says some of the people accused in the flood scheme had been implicated in corruption scandals in the past and had managed to keep their roles in public office. Then, of course, there's the total devastation on the ground. There were farmers who don't have farmlands anymore.

7:47students have to build a makeshift bridge on the school so that they can go to their classes. The village chief also told us that it was a struggle for ambulances to reach residents who are having heart attacks because of the flooding. And they also worry now that stagnant water from the flooding will stay there and breed dengue mosquitoes. So it's really affecting their lives, their livelihoods, and their health. The dike in Francis was supposed to help prevent these types of catastrophes by diverting floodwaters away from homes and businesses. But Dreo says so far, it hasn't worked out. Instead of keeping the water in the river and draining the water from the streets to the river, the dike is trapping the water in streets and in residences.

8:45The dike took five months to build and cracked open less than a year after it was completed. We saw that the dike had poor workmanship. The bars were exposed. Part of the dike was already covered in grass, meaning the cement has already been entirely washed away. The dike in Francis is just one of thousands of projects that a government investigation alleges are part of a vast corruption network. There are at least 2 ,400 contractors in the Philippines, but just 15 of them managed to corner 20 percent of the flood control projects across the country over the past three years. The scheme starts with a lawmaker proposing a project to the Department of Public Works and Highways.

9:34It's kind of like they're sponsoring a project with the expectation that they are going to get a kickback from that project. The government says these lawmakers conspired with public works officials and contractors. The lawmakers worked to get the funding for flood mitigation projects through the Senate. The public works officials then rigged the bids for the projects in favor of the contractors in the network. Once those contractors were paid, they kicked back a chunk of that money to the officials and politicians. How much did these corrupt networks deal? It's not clear. Estimates varied. Anywhere from 25 to 70 percent of the total costs of the projects.

10:16But Bloomberg's Rosalind Matheson says what is clear is that there wasn't enough money left for the actual structures to be built to standard. In some cases, the allegation is that the contractors use very substandard products to build these protective dikes. They cut corners. So one local said to us, this dike was supposed to have, you know, for every 10 bags of cement, they only used two. And if you look at the dike, you can see areas where they've crumbled away and inside it's hollow. The dikes, dams and bridges that were built were shoddy and unable to withstand the severe floods they were supposed to contain.

10:56That's if they were built at all. Every place we went to, there was at least one ghost project where they said the funds were allocated and nothing ever was built. And so the money has just disappeared. Government investigators are still trying to figure out exactly how much has been lost to graft and corruption for all these flood mitigation projects. We're not talking yet about substandard projects. So safe to say that the Philippines has lost billions of U.S. dollars in this corruption scheme for the past decade. Before the scandal broke, the Philippines ranked 114th on Transparency International's corruption index of 180 countries and territories.

11:41Dreo says this scandal has revealed just how deep the alleged corruption reaches. The public works chief has called this a syndicate. Everybody seems to be in on the scheme from the top, from the lawmakers, to the bottom, to the contractors. Coming up after the break, we look at the government's response to the scandal. Will it be enough to reassure investors worried about putting money to work in Southeast Asia, a region swamped by natural disasters and often clouded by corruption?

12:26As recently as last month, torrential monsoon rains have triggered floods and landslides across Asia, from Sri Lanka to Indonesia, Thailand and Malaysia. Initial estimates put the damages for the disasters in the region at$20 billion just last month alone. Climate change has made the extreme storms that batter the region around half a year more commonplace. Corrupt practices make the devastation even worse. Bloomberg's Rosalind Matheson says the corrupt practices that stand in the way of trying to manage climate change are most pronounced in the Philippines. Does corruption go on in flood mitigation in other countries?

13:07quite potentially when you've got politics and big contractors mixing. It's a bit of a toxic combination potentially, but we haven't seen the scale of it come to light in any way in other countries to the extent that we've seen it come to light in the Philippines. Since the scandal first broke in July, the Philippine government has cracked down hard and fast. Authorities have frozen more than$200 million in assets so far, including bank accounts, cars, real estate, and nearly a dozen aircraft. A handful of people have been arrested, and President Ferdinand Marcos Jr. has promised that more officials would be locked up by Christmas.

13:46You cannot steal from Filipino people and expect to hide or fly away on your private jets. You have the money to run. Bloomberg's Rosalind Matheson says the current administration wants to show the public they're taking the scandal seriously. They've frozen hundreds of millions of dollars from bank accounts. Have they actually recouped that yet? Not necessarily. And it's still a small amount of what they estimate was siphoned off. They say the investigations are ongoing. Some people have been arrested. But so far, it's mostly lower level officials who've been arrested. And the government says that they have to do really proper probes of more senior names, the more senior politicians.

14:30But Rosalind says the promise of accountability has done little to quell anger in the country. She says deep-rooted graft and corruption have been tolerated, even accepted, as part of life in the Philippines. But this scandal feels different. Corruption is something that's been going on for years in the Philippines. It's not that startling in a way. It's sort of seen as a facet of life. But even by Philippine standards, this scandal has been pretty shocking and that's why you've seen big street protests. I think because the weather in a way is so visceral for people. I mean, 20 typhoons at least come through the Philippines every year.

15:10People know that they have to deal with this weather every year, the risk of flooding. It's quite fundamental for them and they've been putting their faith in the government to fix it. And then to hear from the president that, in fact, this corruption has been going on for years. It never came to light. So I think it's a combination, really, of this being such a direct impact on people's lives. The corruption allegations and public uproar that followed have hammered Philippine markets. Economic growth in the third quarter was surprisingly weak and grew at the slowest pace since 2021. The peso slumped to a record low against the dollar in October, and the benchmark stock index fell more than 14 percent at one point this year.

15:54To ensure that even more money isn't lost to corruption, the government has frozen spending for flood control projects through 2026. That might stop the rot in the short term, but Roslyn says it comes at a cost. It's frozen not just government spending, but it's frozen people's decision-making about whether to expand their business, to invest in a new plant, to wait and see, really. And that kind of indecisiveness can be a real infection for an economy, because once that sentiment starts, it's hard to know when it starts to fade away again and people start to regain confidence. Economists and analysts that Rosalind spoke to expect the scandal to continue to be a drag on the economy through at least the first half of 2026 and perhaps even longer.

16:42I asked Rosalind, what's at stake for the Philippines if leaders fail to address the more deep-rooted issues, including the lack of transparency and budget accountability, that are behind this scandal? Well, the sense is that unless the Philippines fundamentally addresses some of these issues, that will be stuck in this doom loop of corruption and relative underperformance. And really, if you look at the Philippines, it's a country that's got loads going for it. I mean, it's in a terrific location in terms of the global supply chain for trade. It has a young dynamic population. It's quite involved in the BPO sector because it's got a strong English speaking base.

17:22It's had some success in drawing tech investment from China. And so on the surface of it, the Philippines should be and is an attractive investment destination. nation. It's just that this corruption cloud hangs over it. And with this corruption cloud hanging over the Philippines, Roslyn says it could pose an even bigger risk for the country long term. It could push investors already looking elsewhere in Southeast Asia to seek out opportunities to invest and do business in places like Vietnam and Thailand. For the Philippines, there's quite a lot at stake in this in terms of its ability to present itself as an attractive destination for investment and business, especially when it's competing against a lot of other countries in the region.

18:04And those countries are actively touting for business and all trying to draw companies as well away from China as the global trade map gets redrawn and global supply chains get redrawn. There's a real opportunity here for the Philippines. But the danger is if this remains an overhang for the next year, other countries will have a one-year head start on the Philippines in doing so. The warnings that we're hearing from investors, economists, and so on, is that the Philippine government really needs to demonstrate fundamental action here. Not just, you know, here's a few people we found who we've arrested and charged, but we've really tried to root out the people who are behind the scheme.

18:44As the Philippine government works to fix the country's reputational damage, the villagers of Francis are focused on fixing the damage to their town. With no projects being funded next year, they're not likely to get a new dike for the foreseeable future. Sir Roslyn says they're taking matters into their own hands. They're like, we're just going to have to get on and find a way. So they're trying to dig drains down the sides of houses. They're trying to raise roads in order to prevent further flooding. What surprised me is how stoic people are about it, how resilient they are. They say they're not getting a ton of help, and their big concern is obviously that the floodwater will finally fully recede, and then you get into the next rainy season, and it all just begins again.

19:37This is The Big Take Asia from Bloomberg News. I'm Wan Ha. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at bloomberg.com slash podcast offer. If you liked the episode, make sure to subscribe and review The Big Tick Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.