Ramping up the infrastructure spending
As the administration of President Rodrigo Duterte, who came into power in 2016, rolls into the second half of his six-year term, the government is ramping up its infrastructure spending from 4% of the GDP, or about US$15.5 billion, during the past two years to a high of 7%, or US$35.5 billion, by 2022.
Laying the groundwork for what could be the golden age of the Philippine infrastructure, the Duterte administration unveiled in April 2017 an ambitious infrastructure initiative called Build, Build, Build (BBB), which was embodied in the Philippine Development Plan 2017-2022. The programme features 75 flagship projects, with 60% of the spending allocated for rail transportation and one-fourth towards road transportation.
“We will see a lot more infrastructure projects being carried out in the next three years,” says Eduardo Francisco, president of BDO Capital & Investment Corporation. “The capital expenditures as a percentage share of the GDP are the highest they have been as the government wants to catch up with the infrastructure programme, which has been impacted by the election ban and budget delays.”
A Nomura report issued on August 16 on the state of Philippine infrastructure notes that projects worth 7.4 trillion pesos (US$140 billion) are in the pipeline so far. Private sector participation, such as through public-private partnership (PPP) and unsolicited proposals, covers 63% of the value of the projects, while government funding and official development assistance (ODA) account for 37%. Japan leads in ODA support with US$26.4 billion involving 20 projects, with the Metro Manila subway project worth an estimated US$6.5 billion being the largest recipient of the Japanese assistance.
“The Chinese have also showed keen interest, especially since China has been one of the main proponents of ODA financing,” notes Francisco. “They are in the third telco and have also expressed interest in partnering with the local investors for subway and other projects.” China Telecom has partnered with a domestic company Udenna Corporation and its subsidiary Chelsea Logistics Holdings Corporation to form Mislatel Consortium, which was given the license to operate as the third mobile player in the country.
For its part, the government is raising revenue to fund the infrastructure projects anchored through its fiscal reforms. The administration is urging Congress to pass the next package of fiscal reforms in order to raise revenues to help finance the infrastructure programme. These include the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill, which aims to rationalize fiscal incentives and phase in corporate income tax cuts from 30% to 20%.
While the mode of financing infrastructure projects has changed under the Duterte administration, some project promoters are just fine with it. Rodrigo Franco, president and CEO of Metro Pacific Tollways Corporation, says: “There are ways of doing business under different sets of rules. You just adapt. The support is there. Because of the thrust of the government, all our projects require support especially for roads, which require land to build [the roads] and need a substantial amount of resources dedicated by the government.”
What makes the BBB programme crucial for the Philippines – apart from addressing the infrastructure bottlenecks - is the fact that the lack of proper infrastructure continues to drag the country’s ranking in terms of competitiveness. A World Economic Forum report, according to Nomura, cites the inadequate supply of infrastructure as one of the most problematic factors for doing business in the Philippines, which adversely affects the country’s attractiveness as an investment destination.
The private sector is an active participant in infrastructure development with many of the country’s leading conglomerates bidding for various projects including airports, railways and toll roads, and submitting unsolicited proposals to undertake big-ticket infrastructure projects.
One such unsolicited proposal involves the construction of what could be the Philippines’ biggest air gateway – the 735-billion-pesos New Manila International Airport (NMIA). Food, beverage and infrastructure conglomerate San Miguel Corporation (SMC) emerged as the winner of the tender when no other bid was lodged by the Swiss challenge deadline on July 31.
The NMIA project, which aims to decongest the country’s premier airport Ninoy Aquino International Airport (NAIA), will cover about 2,500 hectares in Bulakan, Bulacan, just north of Metro Manila. Upon completion, it will have four runways, with space to expand to six, and passenger capacity of more than 100 million per year, or about three times the current capacity of NAIA. SMC says it will be part of a large infrastructure ecosystem that will connect seamlessly with the existing expressways and mass rail transits that will connect to both southern and northern Luzon.
For NMIA to take off and thrive as an international gateway, Francisco says SMC has to convince the airlines to transfer their operations to gain critical mass. “The retail component is another key, but we believe it will succeed once there are enough airlines and customers using the airport,” he adds.
SMC has tapped three foreign companies for the design and construction of the project: Groupe ADP (Aeroports de Paris), Meinhardt Group, and Jacobs Engineering Group. These firms have worked on Changi Airport in Singapore, Charles de Gaulle Airport in France, and Hartsfield-Jackson Atlanta International Airport in Georgia in the US.
NAIA itself will undergo an extensive renovation under a four-year plan submitted by NAIA Consortium. For the past few years, NAIA has been plagued by overcrowding, congestion and inefficiency problems as it has been forced to accommodate more than its design capacity of 31 million passengers. In another unsolicited proposal, the group, comprising some of the country’s biggest conglomerates, is aiming to upgrade, expand, and operate and maintain NAIA and transform it into a regional airport hub in the 102-billion-pesos project.
The NAIA Consortium is comprised of Aboitiz Equity Ventures (AEV), Ayala Corporation, Alliance Global Group, Filinvest Development Corporation, JG Summit Holdings, LT Group and Metro Pacific Investments Corporation.
AEV has also submitted unsolicited proposals, collectively valued at 148 billion pesos, for four airports considered key entry points into the Visayas and Mindanao regions. These are the Iloilo International Airport, Bacolod-Silay Airport, and New Bohol International Airport, all in the Visayas, and Laguindingan Airport in Mindanao.
The active participation of the country’s leading conglomerates in the BBB agenda has fuelled some concerns about their ability to continue tapping the bank market for funding in view of the single borrower’s limit.
“Local banks continue to be very liquid. Sooner or later, there are going to be constraints. Especially for a big group like us, we are hitting the borrowing ceiling of the banks. We have been going to the local capital market. We have done project financing, but those are the typical limited recourse. When these projects start commercial operation, we will explore opportunities for refinancing,” explains Franco.
One of the big-ticket infrastructure projects under the BBB programme is the North-South Commuter Railway (NSCR) project, a 163-km suburban railway network stretching from New Clark City in Tarlac province in the north to Calamba in Laguna province in the south of Manila, which is expected to be completed in 2025.
A major component of the NSCR project is the 53.1-km Malolos-Clark railway project. This involves the construction of two rail segments – a 51.2-km section connecting Malolos City in Bulacan province to Clark economic zone and Clark International Airport, and a 1.9-km extension connecting the NSCR to Blumentritt station in Manila, where an elevated interchange station for Light Rail Transit Line 1 will be built.
The Asian Development Bank (ADB) approved in May this year financing of up to US$2.75 billion for this component of the NSCR project – its single largest infrastructure project financing ever. The Japan International Cooperation Agency (JICA) is co-financing the project with an additional funding of up to US$2 billion for the rolling stock and the railway systems. The project will provide affordable public transport to about 342,000 passengers expected to travel daily along the Manila-Clark corridor and up to 696,000 passengers per day to Calamba by 2025.
To help facilitate and accelerate the infrastructure investments in the country, the government, in addition to tapping ODA and accepting unsolicited proposals, is adopting a new approach called hybrid public-private partnership (PPP). Under this concept, the government builds and spends on big-ticket infrastructure projects, and upon completion, auctions off their operation and maintenance to the private sector.
This comes as the government argues the traditional PPP method takes too long to negotiate in terms of the agreement. The hybrid model is also considered the most viable way to implement the BBB programme because the government can borrow money at lower rates than the private sector and do away with protracted private sector negotiations.
“The hybrid PPP model is another way to allow the private sector to participate in the infrastructure programme, as opposed to an ODA where the government owns and operates the projects once they are completed,” says Francisco.
One example of such hybrid PPP projects involves Clark International Airport, which attracted several bidders representing local and foreign companies from Asia and Europe. The airport’s new terminal is now under construction, and is expected to be completed by May 2020 and to be ready for operations in 2021.
The 25-year concession to operate and maintain Clark airport was eventually awarded to the four-member North Luzon Airport consortium, which consists of Changi Airport Group, the operator of the Changi airport in Singapore; Filinvest Development Corporation; JG Summit Holdings, and Philippine Airport Ground Support Solutions.