Philippines’ inadequate infrastructure deterring foreign investment-
Given its strong macroeconomic growth over the past year, the Philippines is gearing to become a key investment destination in Southeast Asia. The country’s GDP grew by 6.6 per cent in 2012, surpassing the government’s expectations. Moreover, the Philippines has managed to sustain its growth momentum through 2013: its GDP grew by more than 7 per cent in the first two quarters, outpacing several of its peers in the region.
A healthy current account surplus, low inflation, and low interest rates have aided the country’s growth at a time when other Southeast Asian nations are raising interest rates to attract capital in the midst of a sluggish global economy. Neeraj Jain, Country Director of the Asian Development Bank (ADB) for the Philippines, offers his analysis: “Despite the weak external demand and tepid global economic environment, the strong domestic demand in the country has lifted the overall growth rate to a record high level.”
Furthermore, the country’s macroeconomic fundamentals received significant endorsements from first Fitch Ratings and then Standard & Poor’s: they upgraded the Philippines to investment grade in 2013 – the first ever for the country. As Andrew Colquhoun, Head of Asia-Pacific Sovereigns, Fitch (Hong Kong) Limited, notes, “The health of public finances is clearly very important for sovereign credit as are countries’ macroeconomic prospects and levels of development.” Moody’s is latest credit rating agency to have upgraded the Philippines’ to investment grade in October.
Overall economic growth and political stability have also dramatically boosted the international business community’s perception about doing business in the Philippines. The World Economic Forum’s (WEF) Global Competitiveness Report 2013–14 ranks the Philippines 59th among 148 economies, marking an advancement of six positions over the previous year. The country posted significant improvements in scores across parameters such as ethical business practices, combating corruption, and government efficiency. Other reports such as the American Chamber of Commerce’s 2014 ASEAN Business Outlook Survey highlighted a reduction in dissatisfaction regarding corruption in the Philippines, which declined from 73 per cent in 2012 to 59 per cent in 2013.
Despite this sanguine backdrop, the infrastructure deficit that the Philippines faces today will still make it a herculean task for the country to attract significant foreign investments. The growth in the Philippines’ infrastructure sector has been constrained by the slow award process, tedious approvals, along with nepotism and corruption in the government departments, which have prevented the country from reaping the benefits of improved governance and resurgent foreign investor interest. Based on the trends documented in WEF’s competitiveness reports between 2010 and 2013, the inadequate infrastructure has replaced corruption as the most problematic factor in doing business in the country.
Inadequate infrastructure remains a key point of dissonance
The WEF’s latest Global Competitiveness Report ranks the Philippines’ quality of electricity supply, railroad, ports and airports infrastructure, at dismal rankings of 81st, 89th, 116th, and 113th, respectively, among 148 nations. The poor performance on infrastructure indicators partly stems from the fact that the expansion in infrastructure has failed to keep up with the growing demand on account of rapid economic development. Even the government has acknowledged this deficit in its own reports. According to a 2012 report on regional economic development by the Bangko Sentralng Pilipinas, the country’s central bank, 12 out of 17 regions face deficiencies in transportation systems and widespread power shortages.
Accelerating infrastructure development was identified as one of the key priorities by the federal government in its Philippines Development Plan (2011–16), launched in May 2011. The plan aims to address issues of inadequate project preparation, poor project quality, and poor project execution, in the course of six years, in order to prevent delays and changes in project scope and cost escalations.
Since the launch of the plan, some progress in public works involving road construction has been made. Out of the 2,320 km of national road length targeted to be paved by Department of Public Works and Health (DPWH) from January 2010 to December 2012, 86.5 per cent was accomplished as of December 31, 2012. Nonetheless, to date, most of the other goals have remained on paper, with slow actual implementation.
In the case of the power sector, most of the power projects in the pipeline are at different levels of implementation: none of them is expected to be commissioned before 2015 to provide additional capacity. Thus, the country will be coping with inadequate power supply in the short term.
Very few coal-based power plants have been commissioned in the past decade, primarily on account of slow local approvals, as well as general opposition to coal-based generation due to environmental concerns. For instance, a capacity expansion project at Aboitiz Power’s plant in Luzon, announced in 2011, has yet to start the process in the face of resistance due to environmental issues.
Several new road projects and extensions to light rail systems that had been planned to decongest the traffic in key cities have yet to be undertaken. To ease the traffic in Metro Manila, two private companies had separately proposed to construct a connector road between the two major toll roads – North Luzon Expressway (NLEX) and South Luzon Expressway (SLEX). However, after two years, the status of the project remains unclear. Another key project that has met with the same fate is the extension of the Light Rail Transit Line-1 (LRT-1) project from Pasay City to Bacoor in Cavite. Originally slated to be rolled out in 2012, the project was supposed to have been bid out by April 2013. However, the bidding process has since been deferred three times.
Airport projects have also faced delays. In fact, the PhP 7.9 billion Laguindingan airport that was finally commissioned in June 2013 is one of the most delayed government infrastructure projects in the country’s history. Originally conceived in 1991, the airport project was mired in financing, land acquisition, and bureaucratic difficulties.
The slow pace of infrastructure project development has largely been a result of delayed project awards and the challenges encountered during the implementation of these projects. Obtaining approvals, concession agreements, right of way, and other local permits have posed major problems. Project developers are often forced by local government officials to subcontract project works to the latter’s preferred contractors, failing which the officials would either refuse to or unnecessarily delay the issuance of building and other local permits. Corruption in local government departments is another area of concern. For instance, district engineers are allowed to approve projects of up to PhP 50 million; hence, they often resort to techniques such as dividing a multi-million project into several separate low-value projects so as to retain the approving authority.
Grounded: PPP infrastructure projects fail to take off
Developing infrastructure projects under the public–private partnership (PPP) model has topped the agenda of the government since it came into power in 2010. One of the major mandates of the new PPP Center that operates under the aegis of the National Economic and Development Authority (NEDA) was to expedite the PPP approval process. However, thus far, its pace has not been impressive.
Of the 10 PPP transport projects identified for execution during 2011, only two PPP projects have been awarded so far. Of these projects, the Daang Hari–SLEX Link Road project awarded to the Ayala Group in December 2011 is not fully operational yet. It has recently hit a roadblock, due to a disagreement with the SLEX concessionaire, South Luzon Tollway Corporation, over the design of a particular route.
Other important projects, such as the LRT-1 Cavite extension project, the Mactan-Cebu International Airport (MCIA) rehabilitation project, and the automated fare collection system (AFCS) project for Metro Manila’s LRT, are all stuck at the bidding stage.
The lack of commercial viability of the PPP projects designed by the government has been stated as a key concern by investors. As a result, project reports have to be revised. Government officials have stated that while bidder response to these projects has been satisfactory, the comments and requests for changes have been aplenty. For instance, issues pertaining to guaranteed fare increases (in the case of LRT-1), real property taxes (for LRT-1 and MCIA), as well as the delineation of the functions of agencies (AFCS) have been the key reasons for auction deferment. Industry experts have commented on the importance for the government to put forth a business case that is commercially and financially viable for the private sector, which will, in turn, save time on revisiting the original contracts for alteration.
The government, on its part, has acknowledged that its limited expertise in the implementation of the PPP model constitutes a key reason for delays. Transportation and Communications Secretary J. Abaya has called “pursuing PPP projects” a “very complicated” process – one that requires the government to ensure that the final deals provide no room for corruption, while benefiting all stakeholders. Meanwhile, NEDA has noted that the government needs more consultants and transaction advisers to conceptualise PPP projects.
In fact, the government has adopted a very cautious approach towards the PPP project award process. It wants to ensure that the projects have no loopholes and have widespread acceptance. However, many are beginning to question the length of time being taken to test the waters, which has prevented the country from executing some big-ticket infrastructure projects.
Government’s commitment to infrastructure growth
On a positive note, the PPP projects that have been bid out so far have attracted significant interest from foreign conglomerates. For instance, in the case of MCIA, the Changi Airport Group, France’s Aeroport de Lyon, Flughafen Zurich AG (operator of Zurich International Airport), and India’s GMR were some of the key players that bid through consortiums. Thus, fast-tracking the awarding of a PPP project is important to retain investor interest and usher in more participation. To this end, the government claims to have been working on resolving bidders’ concerns and making these projects commercially viable for them and bankable for lenders.
Spending on public infrastructure has also been on an upswing, although there is significant room for improvement. The Philippines government has announced the allocation of PhP 399 billion to public infrastructure projects in 2014, about 35 per cent higher than the PhP 295 billion in 2013. Florencio Abad, Secretary of the Department of Budget and Management, stated during his closing remarks at the recently held Philippine Economic Briefing, “We are committed to further increase investments in the needed public goods, especially in infrastructure, to connect the farthest margins of our country to opportunity. We will increase the rate of public infrastructure spending from 2.3 per cent of GDP this year to the benchmark 5 per cent by 2016.”
ADB’s Jain also supported Abad’s statement: “The infrastructure needs are being addressed by the government, both through public spending and PPPs. Several flagship projects are in the pipeline right now. We feel that structurally, the economy may have already shifted to a higher-growth path. It has definitely become more competitive. As governance reforms deepen and become entrenched, investors, both local and foreign, are finding it easier to take a long-term call on the Philippines.”
Currently, PPP projects worth PhP 113.34 billion are at the bidding stage, most of which are expected to be awarded by the first quarter of 2014. Further, projects amounting to PhP 101.47 billion are currently in the process of being approved for bidding. All these projects will add significant capacity across various infrastructure sectors in the coming years. Besides PPP projects, the country has a strong pipeline of infrastructure projects that will be funded through public resources. The DPWH intends to pave all unpaved national arterial roads (15,872 km) by 2014 and all unpaved national secondary roads (15,370 km) by 2016. As for the power sector, the Department of Energy has identified power facilities that will be up and running by 2015. A total of 869 MW, 310 MW, and 588 MW committed power projects are expected to be commissioned in Luzon, Visayas, and Mindanao, respectively, by 2015. In addition to new power plants, the rehabilitation of several power plants is also on the cards.
In conclusion, the recent credit upgrade and improvement in business environment have brightened the Philippines’ prospects of attracting investments and becoming a more favourable investor destination in the region. However, complementary growth in infrastructure still holds the key to translating these prospects into reality in the coming years.
