Partnerships for growth: Investment opportunities abound as infrastructure development continues to expand

A 2010 World Bank report noted that “middle-income countries in East Asia will, on average, need to spend over 5% of GDP on infrastructure to meet their needs.” This fact has not gone unheeded by the government and the need to up spending on key infrastructure projects has been brought to the top of the priority list by economic planners. President Benigno Aquino III himself has led the charge in this regard and has pushed for greater private sector involvement in the country’s infrastructure development. “The answer to our lack of funds is new and creative ways to address longstanding problems,” he said during an address. “There are a number of investor groups that have expressed interest and confidence in the Philippines. This is the solution: public and private sector partnerships.” He also added that his government plans to shorten the process of build-operate-transfer (BOT) programmes in the Philippines to increase private investment.

PIVOTAL PARTNERSHIPS: The Aquino administration is confident that public-private partnerships (PPP) will be pivotal in curbing the country’s budget deficit and will help to restore investor confidence. President Aquino has pursued a strict anti-corruption campaign to restore trust in a government that under previous administrations has been plagued by corruption allegations and bad governance. Transparent bidding systems and good governance practices have been put in place that should instil greater confidence in potential investors.

The government has set up a centre for PPPs to assist implementing agencies, including local government units, in project preparation, capacity building and in monitoring projects. The private sector has also moved to support this agenda. To this end, the Philippine Constructors Association, the Bankers Association of the Philippines, the Investment Houses of the Philippines, and the Research, Education and Institutional Development Foundation have formed a coalition to provide funding, resources and expertise.

“PPPs will be a significant vehicle for private sector investment in the coming years. It is clear the private sector has many capabilities and capacity that the government does not have, thus its contributions are valued,” Florencio Abad, secretary at the Department of Budget and Management, told OBG. “However, given issues in the past with previously contracted bilateral projects, the current administration must ensure that future projects adopt a more sustainable and open model for development. While this may lead to a temporary slowdown in the development of PPP projects, these efforts should lay the foundations for more rapid economic growth in the long term.”

In 2010 the government unveiled 10 priority projects in airport, rail and road development for which it is seeking the private sector’s assistance. Some projects include the extension, and privatisation of the operation and maintenance of the light rail transit Line 2 (LRT2) and mass rail transit lines (MRT) as well as the development of the new Bohol Airport, estimated to cost $176m, and Puerto Princesa Airport, at a cost of $102m. The Bohol Airport project involves the construction of a new airport at international standards to replace the existing Tagbilaran Airport. The Puerto Princesa Airport project envisions the construction of a new passenger terminal and control tower as well as the construction of a new apron and the upgrade of the existing 2.6-km runway.

Frederic Neumann, managing director and co-head of HSBC’s economic research unit for Asia, said in a press conference in 2011 that the successful implementation of infrastructure projects and other investments that might come in following the implementation of these projects would help accelerate economic growth by about 5 percentage points.

REFORMS PAY OFF: The president’s strategy in pursuing good governance and transparency in public service may have caused some delay in implementing the projects but the administration’s reform efforts have also been welcomed by the business community and international ratings agencies. Indeed, the Aquino administration’s governance reforms in the first 15 months in office led to a 10-notch upgrade to 75th place for the Philippines’ ranking in the 2011-12 World Economic Forum’s “Global Competitiveness Report”.

In addition, the Philippines could achieve investment-grade ranking in 2012 after credit ratings companies said they were “satisfied” with the country’s deficit-reduction progress, the budget secretary, Butch Abad, said. The country won credit ratings upgrades from both Fitch and Moody’s as well as an outlook change from Standard & Poor’s in 2011 on account of diminished external vulnerability and improvements in its fiscal metrics. The government surpassed its goal of reducing the deficit to 3.2% of GDP in 2011, posting only a 2% deficit for the year.

Higher ratings will mean lower borrowing costs and, in turn, more funds to build roads, bridges and other needed infrastructure. Fitch raised the country’s debt rating to BB+ with a stable outlook in June 2011, bringing it to one step below investment grade. Earlier that month, Moody’s upgraded the Philippines to Ba2 with a stable outlook, the highest level since the beginning of 2005. Standard & Poor’s increased the nation’s rating to the second-highest non-investment grade in November 2010 and changed the outlook to positive from stable in December 2011. This is significant for the country, which has lagged behind the region in terms of investment inflows.

According to the UN Conference on Trade and Development from 1970 to 2009, the Philippines attracted $32.3bn in investment, compared with $285.8bn for Singapore and $104.1bn for Thailand. Foreign direct investment (FDI) took a further hit in 2010 plunging 12.7% amid the European debt crisis and inflation concerns in emerging markets. Still, FDI in 2011 grew to P256.1bn ($5.81bn), the highest level since 1996.

IN THE PIPELINE: By the fourth quarter of 2011, four projects worth a combined P34.3bn ($778.6m) were in advanced stages of preparation, Cosette Canilao, the executive director at the PPP Centre, told the press. These include two toll roads, and a proposal to establish production facilities for pentavalent, tetanus toxoid and single hepatitis B vaccines, as well as classroom construction. “Planning these projects takes a great deal of time to ensure their success,” Canilao said. “We want to create a programme that can become a legacy that would solve our nation’s infrastructure needs.”

For the second quarter of 2012 there are plans to build about 10,000 classrooms under the PPP scheme. The education secretary, Armin Luistro, has said public bidding is on schedule for early 2012. “It will be an initial batch of 10,000 classrooms in the first year, and another 10,000 in the next year and then another 10,000 in the next,” Luistro said, adding that the Department of Education has set aside a budget of P1. 5bn2bn ($34m-45.4m) for the project. The construction of 30,000 classrooms would in effect reduce by almost half the classroom shortage in public schools within a period of three years. As of the 2011/12 school year, the shortfall is estimated at 68,000.

SUPPORTING WATER SUPPLY: In addition to the initiatives currently being prepared by the PPP Centre, there are a further two projects in the pipeline that aim to expand the supply of potable water for Metro Manila and rehabilitate hydroelectric plants to boost output. The works have been approved for funding of preinvestment studies out of the Project Development and Monitoring Facility (PDMF), a P550m ($12.5m) revolving facility for pre-investment studies which is supported by the Philippine and Australian governments, as well as the Asian Development Bank.

The New Water Supply Source Project, which is estimated to cost a total of some P25bn ($567.5m), will involve the construction of a dam, water treatment plant and associated main pipeline to deliver water to Metro Manila, according to information that has been released by the PDMF.

The other initiative is for the rehabilitation, operation and maintenance of the Angat hydroelectric power plants in Bulacan, which is expected to generate at least 28 MW of electricity for the Luzon grid in 2012. The project involves private sector participation in the rehabilitation of the existing auxiliary turbines owned by the Metropolitan Waterworks and Sewerage System (MWSS) and in their operations and maintenance for a definite period. Increasing supply is crucial to bolster the country’s competitiveness as high power costs have been hurting local businesses, according to the Philippine Chamber of Commerce and Industry.

Meanwhile, a potential PPP project was also approved for the PPP centre’s assistance. The Balara Water Hub Project of the MWSS, estimated to cost some P20bn ($454m), is envisioned to be a centre for a variety of water-related activities. According to the MWSS it will be a modern, water-themed destination for education, sports entertainment, business and leisure.

The successful implementation of the PPP programme is crucial for future economic growth for the country. Speed is of the essence with this project, with local analysts noting that it may lose momentum if it is delayed beyond 2012 due to any political posturing ahead of the mid-term elections that are scheduled for 2013.