The Philippines using public-private partnerships to upgrade infrastructure

There is little question that public infrastructure in the Philippines has been underfunded. In the World Bank’s most recent Logistics Performance Index, published in 2014, it ranked 75th out of 160 countries surveyed, with a score of 2.5 out of 5.

Policy Shift

In an effort to accelerate growth in infrastructure investments, in 2015 the administration of President Benigno Aquino III re-oriented government policy to enlist greater private sector participation in the construction and operation of major projects. These public-private partnership (PPP) projects rely on the build-operate-transfer (BOT) model of financing. Under the BOT model, private companies bid for a concession from a government agency to finance, design and construct a major public facility, such as a transport system or a utility. The winning concessionaire then operates the facility for a set number of years, often decades, before transferring ownership to the government.

A government agency initiates a BOT project and may provide some financing together with development banks. While BOTs, sometimes called build-own-operate-transfer schemes, are most popular in emerging economies, they have also been employed in Australia, Japan and the US. The arrangement enables the concessionaire to recover its investment and maintenance costs through operating the facility for a set period. From the government vantage point, the financing model frees up funds for other essential spending priorities. In the Philippines, that has meant paying down sovereign debt, financing reconstruction following natural disasters and subsidising affordable housing.

The first Philippine law authorising the BOT mechanism was actually adopted more than 20 years ago during the administration of Corazon Aquino. In the following three administrations, only five BOT projects were awarded accounting for total spending of $365m. In this light, the current Aquino administration was successful in awarding 10 infrastructure projects, totalling P189bn ($4.2bn), by the end of 2015. However, that number is dwarfed by the 54 PPPs currently proposed.

Improved Investment Environment

To promote transparency and alleviate legal and administrative uncertainty, BOT functions were transferred from the Department of Trade and Industry to the newly created PPP Centre within the National Economic and Development Authority. The centre is the overall policy-making and monitoring body, with a board led by the finance secretary and other government agency heads, and the private sector co-chairman of the Competitiveness Council.

In 2012 a presidential executive order mandated that all contracts involving PPPs and other joint ventures with the private sector contain alternative dispute resolutions. Local firms have traditionally dominated bidding for PPP projects, but some recent awards to joint ventures suggest that there may be more foreign involvement in the future.

The PPP Centre’s role in the implementation of programmes was a significant factor in improvement of the country’s environment for long-term PPPs, according to a 2014 study that the Economist Intelligence Unit (EIU) conducted for the Asian Development Bank. The study weighed the Philippines’ legal and regulatory framework, investment climate, financial facilities and operational maturity. Overall, the Philippines’ environment ranked seventh among 21 countries with PPPs, ahead of China and Indonesia, but behind Australia and India.

The country had moved up one place since the previous study in 2011 and was now among “the most developed PPP markets groups” and “was the most improved country overall”, according the EIU report. The study noted the country’s progress in terms of its investment climate, regulations, financial facilities and political will. The regulatory framework ranked fourth in the study, only behind Australia, the UK and South Korea.

Expressways & Railways

The 12 PPP projects awarded and signed as of the end of 2015 represented a total value of $4.5bn. Among the most high profile of these schemes is the P35.42bn ($786.3m), 44.63-km Cavite-Laguna Expressway (CALAX). CALAX is a four-lane toll highway that will eventually link the South Luzon Expressway and the Manila Cavite Tollroad in Kawit, Cavite. This expressway is intended to ease the traffic to the coastal areas of Cavite province and Laguna province. The winning bid was submitted by MPCALA Holdings of Metro Pacific Investments Corporation.

Another much delayed project that is now under way is a railway linking Manila to Cavite, just south of the capital. At a cost of P64.9bn ($1.4bn), the concession was awarded in October 2014 to a consortium comprising of Metro Pacific Light Rail, Ayala’s AC Infrastructure Holdings Corporation and Macquarie Infrastructure Holdings.

Meanwhile the $700m, 25-year BOT contract to expand and operate the Mactan-Cebu International Airport terminal was won in 2014 by a consortium that included local Megawide and India’s GMR Infrastructure. The latter operates airports in Delhi and Hyderabad. Construction of the airport is expected to take two years and employ 3000 people, and began in early 2016. When complete, the airport’s capacity will be increased from 4.5m passengers annually to 15.8m.

Projects In The Pipeline

Other projects awarded during President Aquino’s tenure include an extension of the NAIA Expressway, construction of the Daang Hari-SLEX Link Road, the development of bulk water supply to 24 municipalities in Bulacan province, and two school infrastructure projects. Up to five more projects may be awarded before Aquino’s term ends in mid-2016. The two projects closest to implementation are extensions of Manila’s commuter rail line.

In terms of expense and economic impact, the most critical pending project in 2016 is the P123bn ($2.73bn) Laguna Lakeshore Expressway Dike (LLED), which is to be financed solely by private capital. LLED’s main feature is a 47-km dike on top of which would run a high-speed four-lane expressway connecting Taguig City, in southern Metro Manila, to Los Baños to the south.

The project entails the reclamation of 700 ha of forest and lake bed, as well as a flood control system with bridges, pumping stations and floodgates. It aims to relieve heavy metropolitan traffic congestion by creating an alternative route between the capital and Laguna province.

The dike is intended to protect both Manila and the communities on the western lakeshore from flooding. There have been several delays in awarding final LLED bids, partly due to environmental and technical concerns and partly to enable domestic and foreign firms to work out partnerships and investors. Final awards and signing seemed imminent at the end of 2015.

Foreign Participants

Another major PPP project to be awarded in 2016 is the $2.4bn deal to develop, operate and maintain five provincial airports: Iloilo, Bacolod, Bohol, Davao, and Laguindingen. The six bidders vying for the concession from the Department of Transportation and Communications are GMR-Megawide once again, a consortium of Metro-Pacific and JG Summit, Aboitiz Equity Ventures, San Miguel Corporation, Philippine Skylanders International and Union Equities. Other PPP projects awaiting final approval by government agencies include Manila’s NAIA airport, the Batangas-Manila natural gas pipeline, the North-South Railway in Luzon, expanded prison facilities and modernisation of Davao Port.

Foreign contractors may bid on PPP projects, but so far their participation has been limited. Local builder Megawide’s partnership with India’s GMR on a large-scale venture like Mactan-Cebu International Airport may be the vanguard of things to come. Historically, foreign builders have rarely been involved in any sector of construction in the Philippines, partly due to regulatory restrictions on foreigners owning land and holding stakes in retail, commercial and housing developments. They have also had concerns about transparency of bidding processes and the sanctity of contracts.

In 2015, however, Cabinet level officials were actively encouraging US and European contractors to bid and propose on projects in the country. They have proposed that foreign firms be granted permits not only on a per-project basis but to be able to register as regular contractors eligible to participate in local projects with full equity. Local contractors are opposed but the Aquino administration is trying to allay those fears by requiring foreign firms invest at least P1bn ($21m) in a project.