Easing constraints: Infrastructure improvements are aimed at enhancing competitiveness

Endowed with natural and human resources that hold the potential of catapulting it from a mid-ranking developing nation into a competitive developed one in a relatively short span of time, the Philippines is held back by its infrastructure and requires a well-connected, affordable transportation system.

A 2005 World Bank report on the state of the Philippines’ infrastructure identified low public spending, a poor business environment, corruption and lack of a healthy framework for attracting financing as some of the critical weaknesses of the sector. The report said that to ease infrastructure constraints, the Philippines needs to gradually increase infrastructure investments to at least 5% of GDP.

INVESTMENT TARGETS: President Benigno Aquino III has responded by increasing budget spending, improving the business environment, encouraging private sector participation and introducing greater accountability in the implementation of projects. With an investment target of P698bn ($16.8bn), however, the Department of Public Works and Highways (DPWH) has expressed confidence that its rankings would improve before the end of President Aquino’s term in June 2016. According to a DPWH report at least P585.93bn ($14.1bn) has been earmarked for the road sector until 2016.

RISKS & REWARDS: Although progress has been made, the administration’s policy of keeping contracts free of graft has slowed the bidding process and could prevent a number of the public-private partnership (PPP) projects from being awarded before the end of President Aquino’s term in office in 2016. Should any of the 57 PPP projects currently being tendered fail to be awarded before the end of his term, they could be put on hold indefinitely should a new incoming administration decide to review earlier decisions. Investments in sectors such as transport, therefore, carry political risks.

AVIATION: In June 2013 the signing of the P1.9bn ($45.8m) construction agreement with a Japanese contractor Takenaka to complete a rehabilitation of Terminal 3 at the Ninoy Aquino International Airport (NAIA) was briefly put on hold after government lawyers decided to go over the contract a final time. The Department of Transportation and Communications (DoTC) had been negotiating with Takenaka to address “structural issues” that have prevented Terminal 3 from being used only to about half its total annual capacity of 13m passengers. In 2013 Cecilio Bautista, assistant general manager of MIAA, told OBG he was confident the issue would be resolved “soon” as there were only few “minor technicalities” left to be settled. Once an agreement with Takenaka is signed, Terminal 3 is expected to become fully operational by the first quarter of 2014.

NAIA Terminal 3 opened in 2008 after being frozen for over six years. In 2002 the Philippine government, under the then-President Gloria Arroyo, alleged that the contract with Philippine International Airport Terminal Corporation (Piatco) – signed under the earlier Ramos administration – was riddled with irregularities. Takenaka was then hired by Piatco as contractor. Further delays were caused by years of litigation between the government, Piatco and the latter’s German shareholder Fraport.

PORT INFRASTRUCTURE: Expanding the capacity of its existing ports is crucial to improving the capacity and the quality of its chain of logistics network to handle a diverse range of cargo efficiently and economically. At the moment, more than 80% of the country’s trade goes through the Port of Manila. Manila container ports handle around 2.6m twenty-foot equivalent units (TEUs) of international container traffic. With economic growth averaging 5-6% annually that figure could climb to 4m TEUs by end 2020, according to Asia News Monitor. A push is thus being made to develop alternative ports such as Subic and Batangas to handle some of these increasing volumes in order to complement the growth being handled through the ports at Manila.

The high cost of land, restricted access, informal settlements and inadequate investments in port facilities have raised logistics costs and prevented the country from emerging as a manufacturing and trans-shipment hub. The authorities are making efforts to tackle heavy traffic congestion at the Port of Manila, relocate shanties, undertake major dredging operations to allow large vessel movements and improve cargo handling facilities.

TRANS-SHIPMENT: The Philippines lacks a major international port facing the Pacific Ocean in the east. According to a feasibility study by the Asian Institute of Management, an international port at Dingalan Bay could cut distance for trans-Pacific shipping and be a more competitive alternative to the existing international ports that face the South China Sea. The cabotage law, which prevents international shipping lines from picking up empty containers at provincial ports, is additionally seen as a barrier for the Philippines to emerge as a trans-shipment centre.

Despite significant trade volumes, there is no direct shipment between the Philippines and the US or Europe. Insufficient cargo base and berth depth at Philippine ports are partly to blame. International shipping lines instead use Singapore, Malaysia, Hong Kong and Taiwan as trans-shipment hubs, adding costs and time to supply chains.

ROAD CONSTRUCTION: Difficulty obtaining financing and the costs associated with acquiring right of way have generally been seen as the two main stumbling blocks for road works, while challenges in raising toll charges have also contributed to low private sector investment. Private participation, however, is extensive in construction and maintenance of local roads. With the exception of a few small nationally and locally funded projects, most of the design works are contracted out by DPWH to local or foreign consultants. Construction of road projects is generally implemented by contracts awarded through competitive bidding. Maintenance of national roads is carried out by mostly by DPWH itself with a little less than half of the work outsourced to private firms.

Traffic congestion in Metro Manila is estimated to cost P2.4bn ($57.8m) a day in lost productivity. Connecting the North and South Luzon expressways should relieve traffic, but a complicated legal issue and failure of concerned parties to come to an agreement has meant that decades after the plan was first proposed the two highways remain unconnected, though construction on a link is due to start soon.

LEGISLATION: The Philippines was among the first in the region to enact a build-operate-transfer law in 1990. However, the law was vague over the question of unsolicited bids and left considerable scope for corruption. The principle of good governance now being applied to the process of awarding contracts should improve accountability and service delivery resulting in better economic and social outcomes, stimulating economic growth, creating jobs, reducing poverty, making public institutions more effective and allowing for greater social inclusion.

Meanwhile, the authorities are moving on with infrastructure plans with the National Economic Development Authority approving seven major transportation projects, including the implementation of the Metro Rail Transit project and the bid out of the Light Rail Transit common station in November 2013. Assuming they don’t slow the tending process too much, the changes coming about in the transport sector promise to develop good governance and offer plenty of opportunities for private investment.

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The Report: The Philippines 2014

Transport & Infrastructure chapter from The Report: The Philippines 2014

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