The Philippines makes a large-scale push to improve transport and close the infrastructure gap

On the back of the government’s Build, Build, Build (BBB) initiative, various infrastructure projects have been implemented across the country to ease the flow of goods and people, as well as make the country an attractive place to live and work. Dubbed “Dutertenomics”, President Rodrigo Duterte’s prioritisation of infrastructure is intended to usher in a golden age of development for the Philippines. Indeed, infrastructure was a cornerstone of the election campaign that brought him into office in 2016. The administration is holding true to its promise, and in a bid to foster economic growth and alleviate congestion, the state is making major strides towards an efficient transport ecosystem.

While congestion in the country has been a concern in recent years, strong economic expansion has led to matching investment in transport-related infrastructure. Given the shift in the political agenda since 2016 and the subsequent rise in infrastructure funding, government bodies, development organisations and private investors are working towards a well-connected and accessible Philippines, with new airports, roads, bridges and rail networks springing up across the archipelago. Nevertheless, the infrastructure gap remains a key bottleneck to achieving sustainable growth, requiring the continuation of current projects and the further development of a long-term transport and logistics strategy.

Sector Structure

Established in 1899, the Department of Transportation (DOTr) is responsible for the sector’s oversight and policy implementation, as well as the maintenance and expansion of the country’s transport network. While the DOTr has an important role to play in terms of project management, the Department of Public Works and Highways (DPWH) is the primary agency in charge of infrastructure development. The National Economic and Development Authority (NEDA), for its part, is an independent Cabinet-level agency headed by the president that serves as a key driver of flagship infrastructure projects under the BBB programme. The current policy roadmaps guiding the sector are the Philippine Development Plan 2017-22 and the National Logistics Management Plan 2017-22.

Under the Duterte administration, the national infrastructure budget has increased significantly, with around P8trn ($148.8bn) of public funds set to be injected into infrastructure projects from 2017 through to 2022. In 2017 the government budgeted 5.4% of GDP, or P858.1bn ($16bn), for infrastructure development, which is more than double the 2.5% average allocated by the past six administrations. In 2018 the budget was increased to P1.1trn ($19.9bn) and again in 2019 to P1.3trn ($24.1bn).

The DPWH has also witnessed a steady increase in its budget, which totalled P467.7bn ($8.7bn) in 2017 and rose by 39% to P650.9bn ($12.1bn) in 2018. The department spent P611.8bn ($11.4bn) of its 2018 budget on infrastructure works, of which 55% was used to maintain or upgrade the country’s highways, while 21% was used for flood-control measures. In terms of geographic distribution, infrastructure work in Mindanao accounted for the lion’s share of the 2018 budget, at 33.19%; followed by Northern Luzon (21.75%); Southern Luzon (21.08%); Visayas (16.52%); and the National Capital Region (7.46%).

In the Works

Increased spending on infrastructure is central to promoting sustainable and inclusive growth across the country. “Building infrastructure is the first step towards boosting economic activity,” Stefan Schmitz, CEO of local Antrak Logistics, a division of French company Bolloré Logistics, told OBG. “The BBB initiative and the state’s commitment to projects with official development assistance (ODA) have generated a positive economic impact.”

As of February 2019, 37 projects worth a total P1.56trn ($29bn) had been approved by NEDA since President Duterte took office. According to NEDA estimates, 25 of the 75 big ticket projects under the BBB plan – valued at P263.2bn ($4.9bn) – will be finished by 2022, while the remaining 50, worth a total of P1.9trn ($35.3bn), are expected to commence before the end of President Duterte’s term in June 2022. As of April 2019, 46 projects valued at P1.56trn ($29bn) were in the implementation stage; 24 projects for a total of P528bn ($9.8bn) were under development; and the remaining five projects, worth an estimated P84.3bn ($1.6bn), were still under review. Of the 75 projects, 53 totalling P2.04trn ($37.9bn) are transport related, including 34 road projects, nine railways, six air transport projects and four for water transport.

Roads

While the total coverage area of the Philippine road network is fairly high for South-east Asia, at a km-to-sq-km density of 0.68 in 2018, the overall ratio of paved roads is low, at 0.31. Roads are also heavily congested, particularly in the densely populated National Capital Region, also known as Metro Manila. According to the Land Transportation Office, there was a total of nearly 11.6m registered vehicles in the country in 2018, with one in every four registered in the National Capital Region.

According to the “Global Competitiveness Report 2018” by the World Economic Forum, the Philippines ranked 88th out of 140 countries for road quality, with a score of 3.5 out of 7. However, the country’s road connectivity scored particularly low at 22 out of 100, placing it 129th. The road network has suffered inadequate maintenance, which is the result of an insufficient budget and institutional capacity under previous regimes. Ineffective enforcement of traffic regulations has also contributed to the unsatisfactory status of road transport in the Philippines.

According to a December 2018 performance report published by the DPWH, the country’s overall road network comprised 210,528 km at the end of the year. Of this total, 32,933 km were categorised as national roads that connect major cities, the majority of which are single and dual carriageways. The department has set a number of goals to reduce travel time along these links.

Priority Corridors

As part of the BBB programme, the body plans to improve and widen 3190 km of national roads along priority corridors to at least four lanes by the end of 2022. As part of this, the department will implement 103 bypass and diversion road and grade separation projects, also to be completed by end-2022.

Some 13 corridors have been identified as priorities under the BBB initiative. The largest of these is National Route 1, which stretches 2826 km from Luzon to Mindanao. The second-longest corridor is from Manila to Pagudpud, at a length of 552 km, followed by the Manila-Cagayan corridor that spans 467.5 km. Major cities are also set to benefit from additional highways, such as the 1040-km Luzon Spine Expressway system to decongest Metro Manila and the busiest parts of Luzon. Works will add 18 expressways with a total length of 655 km to the country’s existing 12 expressways that span 385 km.

Included in the Luzon Spine Expressway system are the North Luzon Expressway Harbour Link Project, the Central Luzon Link Expressway (CLLEX), the Tarlac-Pangasinan-La Union Expressway (TPLEX), phase two of the Plaridel bypass road, stage three of the Metro Manila Skyway, and the connector road between the North Luzon Expressway (NLEX) and the South Luzon Expressway (SLEX). All are expected to play a significant role in decongestion. According to DPWH estimates, the new expressway system will reduce travel time between Metro Manila and San Fernando, La Union by more than half, from six hours and 55 minutes to three hours and 10 minutes. Travel time between La Union and Bicol will also be significantly reduced, from 19 hours and 40 minutes to an estimated eight hours and 15 minutes.

The Harbour Link project, a 6-km, six-line elevated expressway, was completed in 2018. It traverses Karuhatan in Valenzuela City, Governor Pascual Avenue in Malabon City and Circumferential Road 3 in Caloocan City. Other projects completed by the close of that year included the 10.6-km Laguna Lake Expressway, the 12.8-km Cagayan de Oro Coastal Road, the 8-km Laoag City Bypass and the 4.1-km Boracay Circumferential Road. About 96% of national roads were paved at the end of 2018, compared to just 18.85% of local roads, and around 6150 km of roads had either been constructed, rehabilitated or upgraded between July 2016 and December 2018.

Bridges

In addition to a number of major road projects, the Duterte administration has plans to connect islands via bridges. Following financing discussions between the Philippine government and China, there are a number of such projects in the pipeline, including the Davao-Samal bridge and the Panay-Guimaras-Negros inter-island bridge. The latter is valued at P27.2bn ($505.9m) and will involve the construction of a 5.7-km bridge between Panay and Guimaras, and a 12.3-km connection between Guimaras and Negros. The Davao-Samal bridge, for its part, will see travel time between Samal Island and Davao City reduced from one hour and 40 minutes to only five minutes. In August 2018 China agreed to supply a $13.4m grant to help finance the feasibility study process of these two bridges.

A total of 2680 bridges were either constructed, widened or otherwise upgraded between July 2016 and December 2018, according to the DPWH.

Rail

Major rail investments are also under way as part of the BBB programme. Chinese loans will fund two railway projects in the Mindanao and Central Luzon areas, following an agreement signed by the Department of Finance and the Chinese government in March 2019. Known as the Mindanao Railway Project and the Subic-Clark Railway Project, both initiatives have received approval from NEDA. The P50bn ($930m) Subic-Clark Railway will extend for 64.2 km between the Subic Bay Freeport Zone and the Clark Freeport Zone, with construction expected to commence in mid-2020 and end around mid-2022. The project will also include a 7-km spur line that connects the Subic Bay Port’s new container terminal to the main line, for a total of 71 km. The first phase of the Mindanao Railway Project, for its part, will be a non-electrified, single-track rail running 102 km. Connecting Davao, Digos and Tagum, the cost of this first section is an estimated P35.3bn ($656.6m).

New light rail lines in Metro Manila and the construction of the country’s first underground public transport vehicle – the long-awaited Metro Manila Subway (MMS) – are set to transform the commutes of those in the capital. The first phase of the MMS, envisioned to encompass 14 stations covering a length of 30 km between Mindanao Avenue in Quezon City and the Ninoy Aquino International Airport (NAIA), will be financed through an ODA agreement between Japan International Cooperation Agency (JICA) and the DOTr. The first loan of the project’s total P357bn ($6.6bn) cost is for P51.3bn ($954.2m). The loan agreement includes an annual interest of 0.1% for consulting services, 0.01% for non-consulting services, and is payable over 40 years inclusive of a 12-year grace period.

The MMS is designed to accommodate 1.5m passengers per day when fully complete, which is scheduled for 2025, and is expected to serve 370,000 passengers per day in the first year of partial operation, targeted as 2022. Japan’s Shimizu Corporation, Fujita Corporation, and Takenaka Civil Engineering and Construction Company are partnering with local EEI Corporation for the design and construction of the project, which includes a depot in Valenzuela and a new Philippine railway institute.

Meanwhile, the construction of the first phase of the North-South Commuter Railway Project in Manila, managed by the DOTr and Philippine National Railways (PNR), began in February 2019. Referred to as the PNR Clark Phase I, it will cover 37.6 km and feature 10 stations. It is expected to reduce the travel time between Manila and Malolos from one hour and 45 minutes to 35 minutes. The line will be served by 13 trains, each of which will consist of eight carriages, and have a daily capacity exceeding 300,000 passengers. In January 2019 JICA agreed to provide a $1.5bn loan towards construction.

Air

While road and rail projects will do much to enhance the lives of locals around the country, the air segment is tackling inefficiencies to the benefit of international travellers. The Philippines ranked 26th out of 140 countries in the “Global Competitiveness Report 2018” for airport connectivity and 92nd for air transport efficiency, with the latter marking a large improvement over its position of 124th in 2017. There are a number of planned and ongoing projects in the segment that are set to bolster the Philippines’ position as a travel destination and assist in decongesting existing facilities.

One important development is the planned airport in Bulacan, referred to as the New Manila International Airport, which is being spearheaded by San Miguel Corporation. The new facility is primarily being built to ease capacity constraints at Manila’s NAIA and to provide a boost to the economic development of Central and Northern Luzon.

Built to cater 30m visitors per year, NAIA is operating significantly beyond capacity at 43m annual travellers, and flights are frequently delayed as aircraft await clearance to depart from the airport’s two runways. While works are ongoing to expand and upgrade NAIA, efforts are also under way to boost the capacity of the Philippines’ second biggest airport, Mactan-Cebu International Airport. These include a second international terminal, which was completed in June 2018 and cost P17.5bn ($325.5m), and a planned P2.5bn (46.5m) second runway.

Stakeholders are also pushing ahead with plans to upgrade and expand regional airport facilities, most notably Clark International Airport (CIA). The rapid growth of Clark City has led to an increase in the number of domestic and international travellers, with this set to increase further with an ongoing relocation of government offices to the city. In January 2019 an operations and maintenance agreement for a new terminal was signed with a consortium comprising Singapore Changi Airport and the domestic firms Filinvest, JG Summit Holdings and Philippine Airport Ground Support Solutions. The airport is also being better integrated into the country’s national transportation network, through the North-South Commuter Railway Project. Scheduled for completion by 2025, the 163-km railway network will link CIA directly to Clark City, Metro Manila and other major cities. These initiatives have been cited as important measures to improve the aviation ecosystem of the Philippines and boost regional development (see analysis).

New Airport

Another plan to help ease air congestion in the capital is a proposal for the development of an international airport at Sangley Point in Cavite province, 28 km from NAIA. At the site of a former US military base, the facility would require land reclamation of 1500 ha and cost some P508.5bn ($9.5bn). Sangley Point was selected by JICA as the best option out of nine pre-selected locations for a new airport in the vicinity of the capital.

It would be jointly financed and developed by state-owned Chinese enterprises linked to that country’s Belt and Road Initiative, and the provincial government of Cavite. In June 2019 President Duterte ordered that the airport be opened by November 2019, ahead of the original start date of March 2020 and the revised date of December 2019. The Philippines’ efforts to expand the number and size of its international gateways are intended to help keep the momentum going from strong tourist arrivals (see Tourism chapter).

Ports

In terms of cargo movement, the Philippine Ports Authority (PPA) has made a push in line with the BBB programme to accelerate the implementation of port infrastructure. As of May 2018 the PPA was undertaking 45 locally funded port projects in Luzon, of which seven were already complete, 19 were ongoing and 19 were up for procurement. The body also had 19 locally funded works on the docket in Visayas, three of which had been completed by May 2018, while eight were ongoing and eight were waiting for procurement. A further 40 port projects were under the purview of the PPA in Mindanao at that time, with five completed and 21 ongoing.

The archipelago’s busiest port, the Port of Manila, has benefitted from increased efficiency and volume-handling capacity following the introduction of a terminal appointment booking system in 2015. Between that year and 2018, container traffic in Manila and Northern Luzon rose by 28%, from 3.98m twenty-foot equivalent units (TEUs) to 5.09m TEUs. However, growing demand at primary facilities has seen the government explore strategies to draw ships to ports in other regions and on other islands. “Despite efforts to diversify logistics routes, Luzon still receives more than two-thirds of all imports,” Daniel Ventanilla, general manager of Japan-headquartered shipping firm NYK Line, told OBG.

While the populous island of Luzon continues to receive the majority of shipments to the Philippines, a trend is emerging of opting to not dock at the Port of Manila to save on additional transport costs and improve efficiency. “There is a natural shift of cargo from Manila to other facilities in Luzon,” William Khoury, executive vice-president of Asian Terminals, told OBG. “As a competitive alternative to the Port of Manila, Batangas Port is facilitating greater trade activity in southern Luzon, with a significant number of multinational and local companies now shipping directly through the port.”

Meanwhile, total container traffic across the country rose by 29% between 2015 and 2018, from 5.86m TEUs to 7.57m TEUs. This is partly due to imports accelerating on the back of heightened infrastructure development (see Trade & Investment chapter). All goods coming into the country at seaports and airports require holding space before being transported to their respective final destinations, and this is an area that needs more attention.

“Convergence among the different components of the logistics chain is occurring, from seaport management to roads and warehousing,” Roberto R Locsin, CEO of Philippine Growth Terminals for International Container Terminal Services, told OBG. “Furthermore, the supply of support services – including warehouses – continues to be a challenge for importers in many of the high demand markets in Luzon, Visayas and Mindanao.”

Funding

In February 2019 the total investment required for the 75 large projects outlined in the BBB programme was estimated at around P2.2trn ($50.4bn). According to NEDA, ODA is expected to constitute the largest portion of financing, at P2trn ($36.6bn). The national budget is slated to finance 11 projects valued at about P134.5bn ($2.5bn), while public-private partnerships (PPPs) will cover P71.9bn ($1.3bn) worth of projects.

While conventional PPPs were common under the previous Aquino III administration, a negative perception caused by lengthy project delays has seen a shift towards other financing mechanisms. The Duterte administration has shown a preference for financing its infrastructure targets through ODA and public funds; however, unsolicited private sector proposals and hybrid PPP projects have become an important enabler of the BBB programme (see analysis). Under hybrid PPPs, projects are financed and often developed by the government and ODA partners before the operations and maintenance are tendered to the private sector. “The BBB initiative has encouraged the implementation of infrastructure projects that bring together Philippine companies and international consultants whose expertise can help mitigate bankability and delivery challenges,” Joseph Homer Macapagal, country chief executive at the France-based international certification agency Bureau Veritas, told OBG.

Fiscal reform measures have also been taken to assist state infrastructure investment. The Tax Reform for Acceleration and Inclusion (TRAIN) package that came into effect in January 2018 has helped to generate revenue for the infrastructure pipeline as a result of increased excise duties on fuel, vehicles, tobacco and sugary drinks, among other items. According to estimates from the Department of Budget and Management, tax revenues are expected to fund some 25% of the BBB programme. The TRAIN measure generated P41.9bn ($779.3m) in revenue in the first nine months of 2018, 5.3% below the government’s target, although total tax collection for 2018 as a whole rose by 10.2%. Furthermore, in September 2018 the Asian Development Bank (ADB) announced that it was rebalancing its financial assistance to cover more transport infrastructure projects in the Philippines. Under its new six-year country partnership strategy (CPS) for 2018-23, the ADB is accelerating infrastructure and long-term investments in Mindanao and Visayas to promote local economic development. Indeed, the largest categories of this CPS are transport projects, which will account for 47% of all funding; public sector management – which provides policy support – at 21%; and 13% to bolster the nation’s financial system operations. Over the first four years of the new CPS, the ADB will provide $7.8bn in loans to the country.

The Malolos-Clark Railway, the North-South Commuter Rail, Metro Manila bridges, the Bataan-Cavite long-span bridge and Epifanio de los Santos Avenue Greenways projects are all set to benefit from the ADB’s rebalancing. Moreover, the CPS is aligned with the government’s long-term development plan AmBisyon Natin 2040 vision, as well as the medium-term Philippine Development Plan 2017-22, for greater cohesiveness in pursuing national goals.

Outlook

With greater financial resources being made available and a refined focus on timely execution, the country’s transport network is seeing the completion of some major projects under the BBB initiative. During the second half of the Duterte administration’s tenure, a mixture of funding mechanisms and openness to unsolicited proposals from the private sector will continue to enhance connectivity within Metro Manila and across the regions. While the outlook for the sector is positive, the timely completion of these projects, coupled with the further development of a strategy to increase urban mobility, will be necessary to close the infrastructure gap and ensure sustainable growth.