One of the fast growing economies in the Southeast Asian region, the Philippines is at a crucial juncture at present. After the archipelago held its general elections in May 2019, the change in the government has not affected the momentum with regard to infrastructure development. The extant programme of Build Build Build is far from losing steam, as the focus to increase economic growth rests crucially on large-scale infrastructure works.

Counted among the ASEAN-5, the country has undertaken significant infrastructure development in recent years; however, much remains to be realised. As per government data, investments to the tune of about PhP 9 trillion (about $180 billion) are required during the period 2017 to 2022 to plug the current infrastructure gap. Towards this end, measures with regard to institutional capacity building, addressing governance challenges, fixing the financing scenario, and creating an investor-friendly business environment is imperative. Southeast Asia Infrastructure presents an overview of the Philippines’ growth in infrastructure development, key trends and outlook for the near-medium term…

The macro setting

It is least contested that the policy and regulatory framework for infrastructure development in the ASEAN region needs to be strengthened. Recognising this, the Philippines has been at the forefront of implementing new policies/reforms to augment infrastructure sector growth.

The country (in addition to Vietnam) is expected to lead in terms of actual growth numbers among the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand and Vietnam). It is also looking to increase funding for infrastructure development and attract more private participation. Plans are also afoot to revisit foreign investment laws and policies to attract greater amounts of foreign funds to meet the requirements of infrastructure projects.

At the macro level, the country’s infrastructure building initiatives have five major themes – disaster mitigation, social and tourism infrastructure, industry- and trade-related works, highway development, and transportation.

Besides, the new governor of the Bangko Sentral ng Pilipinas, the country’s apex bank, is looking to balance growth while arresting inflationary pressures. There has already been a round of interest rate cuts, followed by reduced reserve requirements, all of which is to ease liquidity and encourage more lending activity, which bodes well for debt seekers, primarily infrastructure companies.

Competing international finance

Given the overall slowdown in global GDP and saturated markets in developed countries, economic powers such as China, the US and Japan are actively scouting for investment opportunities in growing economies. While the whole of the Southeast Asian region provides a unique and lucrative opportunity, especially with regard to infrastructure development, the strategic location of the Philippines makes it one of the most preferred investment destinations in the region.

With the South China Sea to its west, the Philippines has emerged as an important geopolitical location for the US and China for their Asian strategies. China and the US are both wrestling to enhance their influence on the Philippines, and funding large infrastructure projects is the most preferred approach adopted by both the economic majors. Japan too is looking for a share of the Filipino economy, which has immense untapped potential.

Thus far, China, the US and Japan have pursued their financing strategies through the financial institution route. Thus, international financing institutions have played a pivotal role in financing infrastructure projects in Southeast Asia. Their well-defined guidelines and stringent criteria for lending to infrastructure projects instil confidence among various stakeholders and act as a catalyst for investment in such projects. Apart from government funding, official development assistance (ODA) loans have provided the bulk of infrastructure financing in the Philippines.

China-backed investments have been on a sharp rise in the past few years. Recently, in April 2019, the Philippines secured $12.16 billion worth of new investment and trade deals with China, including big-ticket and labour-intensive energy, petrochemical, industrial park and infrastructure projects. In 2016, China pledged $24 billion in investment to the Philippines – $9 billion in soft loans and a further $15 billion towards investments in railways, ports, energy and mining projects.

The World Bank is another multilateral agency that extends long-term funds for infrastructure projects. As of June 2019, the World Bank has financed 297 infrastructure projects in Southeast Asia, of which 44 are in the Philippines. In addition, the country has also been an important recipient of funds from the Asian Development Bank and the OPEC Fund for International Development.

The Japan International Cooperation Agency (JICA) has been an active lender for infrastructure projects in Southeast Asia, especially for the urban transport and urban infrastructure sectors. It provides long-term loans at concessional rates to the sector through its ODA facility. So far, the agency has provided JPY 9,061 billion worth of financial assistance to 878 infrastructure projects. The major beneficiaries of JICA funding include Indonesia, the Philippines, and Vietnam.

Infrastructure – Growth in key sectors

The maximum growth in the power sector has been in the renewable energy sector. During 2014-18, 1,803 MW of renewable energy capacity was added. Amongst renewable sources of energy, geothermal has the biggest share at 10.49 per cent.

Oil-based generation capacity has remained almost stagnant, as the country is trying to move away from the fuel given pressing environmental concerns. Gas-based capacity increased from 2,760 MW in 2014 to 3,286 MW in 2018, while coal continues to have the dominant share in the country’s energy basket – coal-based generation capacity increased from 5,378 MW in 2014 to 8,368 MW in 2018.

The transmission network in 2017 was 20,053 km (network line length) and transformer capacity was 31,501 MVA. The distribution line length increased from 17,409 circuit km in 2014 to 18,748 circuit km in 2018.

In the transport sector, the country’s road network has remained stagnant at around 32,000 km for the past four years. The rail route length in the Philippines has also remained constant since 2013 at about 530 km.

There has, however, been some decent growth in the case of ports. The number of domestic ports has increased from 414 in 2014 to 428 in 2018; many of these were added in 2015.The number of international ports too has increased from 170 in 2014 to 189 registered in 2018.

Growth in air transport too has been encouraging. After Indonesia, the Philippines has the maximum number of airports in the region. As of 2018, the country had 75 commercial airports and 11 international airports. The number of air passengers carried has increased from 61 million in 2014 to about 78 million in 2017.

In terms of information and communication technology (ICT) infrastructure, absence of latest data is a major source of concern. According to the latest data (2017), the number of fixed telephone subscribers increased from 3.09 million in 2014 to 4.16 million in 2017. Mobile cellular subscribers too increased from 111 million to 115 million during the same period. Internet usage has also gained traction, from about 50 per cent of the population having access to internet services in 2014 to 60 per cent in 2017.

Thrust on PPP continues

The public-private partnership (PPP) mode of executing infrastructure projects has found wide acceptance in the Philippines. The country is considered to be a “mature” one with regard to PPP project design and execution. This can be attributed to the persistent focus by the government on engaging the private sector in the development of infrastructure.

Countries with the most number of active PPP projects in the region are Thailand, Indonesia, the Philippines and Vietnam. The Filipino government recently shifted its strategy from the traditional PPP model to the hybrid PPP model in a bid to fast-track big-ticket infrastructure projects in the country. The rationale behind the move was to initiate projects by tapping domestic sources as well as low-cost overseas avenues for funding and then bid them out to a private player for operation and maintenance.

Outlook and opportunities

The coming two to three years are crucial for the Filipino economy. With the new government, the thrust on infrastructure development is likely to translate into a wider positive impact on the country’s economic growth through channels such as employment creation and by boosting domestic consumption. Macroeconomic parameters, such as the high rate of inflation and continued weakening of the peso, call for a multi-pronged approach from the new government. At the same time, strategic ties with competing economic heavyweights such as the US, China and Japan can be a major breather for the budget-strained country. Fiscal prudence, however, if not exercised (while taking loans from countries such as China), may result in risks related to a “debt trap”.

That said, the Philippines is well positioned at present to take advantage of competing infrastructure finance lines. The need of the hour is to create a supportive policy framework that would spur further investment. Issues such as corruption and bureaucratic hurdles need urgent attention from the policymakers. Such steps will be crucial in realising the Build, Build, Build vision by 2022.