MANILA, Philippines – Metro Pacific. Ayala. San Miguel. Megawide. Fil-Invest. DMCI. Lopez and Ty groups. These business groups associated with the Philippines’ richest families are a staple whenever road, rail, airport and other infrastructure projects are up for privatization via the public-private partnership (PPP) scheme.
It’s a testament to how much they have grown and matured. They’re now looking for yield and more portfolio expansion opportunities. It used to be that the Philippine “playground” required the deep pockets and technological muscle of foreigners, especially when it came to multibillion-dollar projects, like infrastructure and power. Some were burned and spurned.
The situation today indicates that these Filipino families have the stomach for the projects’ risks. With how things are going in the roll out of PPP projects under the Aquino government, we’ll likely see more of the same. (READ: Gov’t raises infrastructure spending)
“Money is not an issue” in big-ticket projects in the Philippines, Suraj Moraje, who manages McKinsey’s Manila office, told the audience at the Philippine Economic Briefing on Tuesday, September 30.
“Local institutions have very good balance sheets,” and therefore, can afford to finance infrastructure projects, which are inherently risky but potentially profitable. Moraje noted: “The international community has not even started getting involved.” It’s a hint that we are missing out on mega-billion long-term foreign funds that have made their way into emerging markets, including those in Asia. These are the same funds generally touted as a “vote of confidence,” thus state officials actively pursue them.
Sun Life Asia Investments managing director Michael Manuel echoed the same sentiment. “At this time when interest rates are very low, we are looking at higher yields. PPP in infrastructure and power is a natural choice for us. We [are willing] to trade liquidity for more yield.” Infrastructure projects under the PPP scheme involve long term commitment since funds and other resources are tied in it for years, even decades.
Manuel cited one of the Philippines’ golden tickets: an investment grade from the credit rating agencies. “The opportunities in the Philippines are something we’re looking at. The investment grade [rating of the country] means we have to include the Philippines in our [PPP investment] portfolio.”
Time running out
That locals’ pockets are deep and foreign investors are waiting in the wings are a recurring refrain.
We’ve heard this in other previous economic briefings, as well as other gatherings here and abroad. A handful of toll road, rail and airport projects planned and promised by the current officials way back in 2010 have made it through the PPP contracting mill, but a long list of crucial assets meant to ensure that the Philippine economy sustains its attractive growth rate have yet to get off the ground.
With just months to go before the Aquino administration turns over the reins of the government to its successor, Socioeconomic Planning Secretary Arsenio Balisacan said there are still about 950 infrastructure projects in the pipeline.
While more taxpayers’ money will be spent on infrastructure — from 2.2% of GDP in 2012 to at least 5% by 2016 — “the private sector is expected to participate” in these projects worth about US$46.7 billion, Balisacan told the audience at the Philippine International Convention Center.
Time is running out, admitted Cabinet Secretary Rene Almendras, who stressed: “It’s now all about execution. We’re passed the planning stage. All agencies have roadmap to 2016.”
Yet, the gap between these must-do’s and what-is-happening remains wide. The Aquino government has previously explained they wanted to rid the system of corruption and wrongdoing, resulting in the delays in packaging and bidding of projects.
There are reasons beyond their control, including the Constitution’s foreign ownership limit at only 40%. Investors committing billions-worth of resources at such lengthy period would naturally want more control over or influence in the project. This limitation was brought up again by investors during the Filipino officials’ recent trip and meetings in Europe, according to Transportation Secretary Emilio “Jun” Abaya. “Clearly, it is an issue we need to address if we want more investments in infrastructure,” he said, though also noting difficulties in changing the Charter now that 2016 is near.
Public Works Secretary Rogelio Singson also talked about right-of-way issues, which delay road and other projects. Government takes on the responsibility of buying the proposed site and relocating and compensating the affected residents, before passing it to the private firm. He’s up against the legislative mill, which also needs time, an elusive luxury. “We have been pushing for the changing of the provisions on the BOT (Build-Operate-Transfer) Law to make it easier to have right-of-way.”
Risky and costly
There are, however, bottlenecks and issues that are of the government’s own doing.
A classic case is how the economic managers handled the much-needed tollroad meant to connect the main north and south Luzon expressways (NLEx and SLEx), and designed to ease road congestion leading into and out of the crucial Manila port.
The P18-billion toll road was further delayed for another year after the justice department ruled that the public works and transportation agency officials’ decision on how to move the project forward was illegal. Wanting to expedite the process, the team of Transportation Secretary Abaya pushed for a joint venture deal between local infrastructure giant Metro Pacific Investment Corporation (MPIC) and the state-run Philippine National Construction Corp. (PNCC), a move that the National Economic and Development Authority (NEDA) Board, led by President Benigno Aquino III, endorsed.
Justice Secretary Leila de Lima said Singson’s public works department should just proceed with the project’s original design and conduct a Swiss challenge to the unsolicited proposal of MPIC, instead of evading it via a joint venture scheme. Under the process, MPIC would have the right to match the highest bid, an option Aquino was not comfortable with. This NLEx-SLEx connector project was originally submitted to the DPWH in May 2010, and would have been finished by 2016.
These and other issues in the design and permitting process are what turn off foreign investors, noted Moraje of McKinsey. The risk-return profile of the Philippines remains a concern and often compared to other peer countries, like Indonesia and Malaysia, he noted, citing a World Bank study.
Another issue that keeps the Philippines’ risk profile uncompetitive is the ability of the government to be consistent with the application of laws and processes. Transportation Secretary Abaya said the Cabinet officials are fully aware of this stigma and that “consistency of policy is on the top consciousness of the economic development cluster.”
“We cannot turn a blind eye on previous contracts. In DOTC, we are in arbitration proceedings with regards to two major projects,” he said. He was referring to the cases filed by German firm Fraport against the Philippine government in a Washington court for its investments in the scandal-ridden Ninoy Aquino International Airport Terminal 3 (NAIA-3), as well as by the Filipino consortium involved in the rail project, MRT-3. The latter’s case is ongoing in a Singapore court.
These two cases have been often cited as reasons why transportation officials are careful and deliberate — thus, slow — in processing much-needed rail and airport projects.
That puts us, the consumers and taxpayers, at the losing end. Risks are costly, and unfortunately, we’ll have to bear that burden through higher fares or fees just to have access to the infrastructure we deserve. – Rappler.com
Lala Rimando was former business editor of Rappler. She specializes in stories on political economy, boardroom dramas, infrastructure and energy issues, and corporate governance. She is currently doing strategic consulting for multilateral agencies and foreign groups keen on investing in the Philippines.