The Philippines currently lags behind its Southeast Asian peers, including Indonesia, Malaysia, Singapore and Thailand, in terms of foreign direct investment inflows and overall infrastructure quality. This sub-par performance has been attributed to the lack of a well-developed pipeline of projects, deficiencies in project design, frequent delays and failures in procurement, and poor coordination during project implementation. Moreover, public investment in infrastructure has remained relatively low in the country despite improved public finances due to weak links between planning and budgeting and slow budget execution. This is reflected in the fact that despite an increase in the budget allotment for infrastructure from 1.8 per cent of the gross domestic product (GDP) in 2010 to 5.2 per cent of the GDP in 2016, the Philippines government spent only an average of 2.9 per cent of the GDP from the period 2010-16.
Build-Build-Build programme
Taking cognisance of the need to ramp up infrastructure in the country, the Philippines government allocated PhP 860.7 billion towards infrastructure (which is a 13.8 per cent increase from the previous year’s infrastructure budget allocation of PhP 756.4 billion) from the PhP 3.35 trillion national budget for 2017. Backed by a robust infrastructure budget allocation, the Philippines government announced an aggressive infrastructure programme, the Build-Build-Build (BBB) programme, which aims at putting the said allocation to good use.
Based on the plan, the total funding requirement is PhP 8.4 trillion to achieve the targeted infrastructure outlay between 2017 and 2022. Further, the National Economic and Development Authority (NEDA) developed a three-year rolling infrastructure programme (TRIP), under which 4,895 projects, costing an estimated PhP 3.6 trillion, have been identified, all of which have a target completion date of 2020. Of the 4,895 projects, 3,334 will be funded through the national government’s budget, 70 through various official development assistance (ODA) sources, 33 projects will be rolled out under the public-private partnership (PPP) programme, 1,341 through other modes (such as the special shares of local government units in the proceeds of national taxes, and other financing windows), while the funding source for the remaining 117 is yet to be determined. The NEDA Board Committee on Infrastructure (INFRACOM) has identified 75 high-impact flagship infrastructure projects in support of the BBB programme.
A major project to be launched as part of the BBB programme is the Metro Manila Subway, the country’s first underground mass transit system. The 13-station subway, which has an estimated cost of PhP 355.6 billion, is expected to carry around 370,000 passengers annually upon its partial opening in 2025. Construction is being part-financed by the Japan International Cooperation Agency (JICA), which is set to provide JPY 1 trillion over the next five years.
In addition to the metro, other key projects in the pipeline include the Luzon Spine Expressway Network, a series of new roads stretching 1,000 km from north to south Luzon; the Metro Manila Logistics Network, a set of new bridges and roads designed to alleviate congestion in the capital; and the 74 km Metro Cebu Expressway, which is expected to halve the travel time between Naga City and Danao City.
Funding avenues for infrastructure
In order to finance the BBB programme, the government will shift from the PPP mode of financing and rely more on public funding and ODA to avoid delays and higher project costs. The government will also employ a hybrid PPP model, in which construction is financed by the government or ODA and operation and maintenance is entrusted to the private sector. While this will mean fewer opportunities for private investment in infrastructure, the shift will help reduce the likelihood of contractual disputes and uncertainty over financing that has weighed on PPPs, improving overall project implementation. Despite its supposed advantages, the change in funding mode has also been questioned by experts. One of the key concerns highlighted is that the administration has little political or corporate brand to build and protect infrastructure since it is limited to only six years. Lack of technical expertise and the limited capacity of the government to undertake huge infrastructure spending have been cited as some of the other concerns.
ODA remains a viable option for financing infrastructure due to longer-term maturity and favourable concessional financing terms, wider access to knowledge, experience and technology, and the absence of contractual disputes. Among multilateral agencies, the Asian Development Bank (ADB), for instance, has increased funding for the Philippines’ infrastructure-related investments from 34 per cent of actual lending approvals covering the period 2011-16 to 48 per cent over the next three years. Sovereign loans offered by the bank for the country’s infrastructure-related projects account for almost 40 per cent of its $3.68 billion sovereign lending programme for the period 2018 to 2020. Among the projects eligible for ADB’s sovereign financing programme are the Davao public transport modernisation project ($70 million), expanding private sector participation in Infrastructure Sub-programme 2 ($300 million), the Metro Manila Transport Project ($100 million), the Metro Manila Water Supply Project ($200 million), Central Spine Connectivity Project Phase 1 ($100 million), etc.
The Philippines capital market has always been a significant source of financing for infrastructure projects. The recent approval of the rules and guidelines for the listing of PPP companies in the Philippines Stock Exchange opens up equity investment. Under the PPP listing rules, a company that has been awarded a PPP contract or a special purpose company incorporated specifically for undertaking an awarded PPP project may apply for listing in the stock exchange. At the same time, the Securities and Exchange Commission also plans to come up with rules to allow companies with ongoing PPP contracts to issue and list project bonds with the Philippine Dealing and Exchange Corporation (PDEx) to provide wider financing options to these companies. Moreover, the Government Service Insurance System (GSIS) plans to set-up another $400 million fund for major infrastructure projects after the success of the Philippine Investment Alliance for Infrastructure (PINAI) fund. The PINAI was a $625 million private equity fund primarily financed by GSIS ($400 million), and co-financed by ADB ($25 million), the Dutch-based pension fund Algemene Pensioen Groep ($150 million) and the Macquarie Group ($50 million) to finance infrastructure projects in the Philippines, particularly in the following sectors: water and waste, roads, rail, mass transit, ports, airports, power generation, transmission, renewable energy, gas distribution, and telecommunications.
Conclusion
With sound macroeconomic fundamentals, effective policy reforms, and an aggressive infrastructure programme, the Philippines is poised for an economic breakthrough. Although promising, much needs to be done to achieve the promised “golden age of infrastructure”, especially in terms of addressing the inequity in development and resource allocation at the local level. Notwithstanding the merits of the government’s hybrid PPP scheme, the Philippines PPP Centre’s proposal of hybrid financing of PPPs is worth considering. Under the proposed financing scheme, the government evaluates the viability of a project and determines whether government support (i.e., viability gap funding or subsidy, availability or milestone/bullet payment, etc.) is required; such government support requirement, if any, may then be sourced from ODA funds.
