Promoting investment: Encouraging foreign entrants and private sector participation is key

Largely helped by significant public spending in infrastructure, the construction sector saw robust growth in 2013. An improving investment climate, which saw a steady inflow of remittances and inward investments directed at the property sector, also played a part in spurring construction activity. Investment-grade upgrades from Fitch Ratings and Standard & Poor’s continue to make the country an attractive investment destination. In 2013 the Asian Development Bank said that the outlook for construction remained “bright”.

STRONG PROSPECTS: Government growth forecasts expect GDP to expand between 6.6% and 7.6% in 2013, with the real estate and construction sectors leading the charge. While the residential segment is the most profitable in the construction sector, foreign participation in housing and other commercial and retail developments remains restricted by regulation. Investors must therefore look out for opportunities in public infrastructure projects. The administration of President Benigno Aquino III is driving growth via investments in major infrastructure programmes through the public-private partnership (PPP) model. The public transit system in Manila is due for an upgrade and highways, airports and sea ports are being systematically overhauled. According to a 2013 sector report from market analyst BCI Asia, civil construction works on roads, bridges and facilities for utilities drove much of the momentum for new construction projects in 2013. Monetary conditions are also helping to sustain private sector interest in the sector (see overview).

Real growth for the construction sector is forecast to reach 15% in 2013, with an average annual growth of 7.9% between 2014 and 2017. The boom in construction, especially in the residential subsector, is in turn pushing demand for power. Therefore demand for utilities-related construction projects (power stations, transmission lines, water treatment facilities) is expected to increase going forward (see Energy chapter).

CATCHING INTEREST: Foreign investors have started to take notice, however, most foreign participation, is still largely limited to equity and technical partners for local firms bidding for PPP projects. The playing field in the construction sector still remains largely tilted in favour of domestic firms.

Although there are a respectable number of companies operating in the country, a lack of transparency hurts the sector’s competitiveness. There have been conflicts over contractual rights, such as the legal wrangling over the privatisation of Ninoy Aquino International Airport 3 and the South Luzon Expressway toll bridge. Further, bottlenecks have been slowing the pace of project execution. As of July 2013, only two road projects had been awarded out of a list of 57.

Despite these challenges, plans to build 12 new expressways under PPP initiatives, should encourage new entrants. “There has been consistent capital investment into the construction sector, in particular as the PPP programme picks up,” Jorge Consunji, director of DMCI Holdings, told OBG. “The Official Development Assistance model offers opportunities to accelerate the growth in infrastructure construction; however, the policy framework can also be overhauled to relax qualifications and allow foreign companies to join.”

CHALLENGES AHEAD: While the infrastructure sector presents numerous potential opportunities, its relatively small size compared to its bigger neighbours means that the country’s risk-reward trade-off for large foreign investors is not as attractive as some other Asian countries. Possible risks to growth might be expected from a slower recovery of the global market, delays in rolling out large-scale PPP projects and possible asset price bubbles in the real estate sector.

Indeed, demand drivers for the sector are largely dependent on external factors – the state of the global economy, remittance inflows, the business process outsourcing sector and tourist arrivals. Domestic demand for housing and office space is not sufficiently robust to buffer the sector from a global downturn, which could adversely affect the state’s fiscal position and potentially threaten public infrastructure spending.