Development banks to play a key role in the Philippines' upcoming infrastructure projects

Government financial institutions are set to play an increasingly important role in infrastructure financing in the coming years, as President Rodrigo Duterte’s administration rolls out the Build, Build, Build (BBB) agenda, a multibillion-dollar infrastructure development programme focusing on the construction of new railways, urban mass transport systems, seaports, bridges, roads, highways and cities. The government plans to boost infrastructure spending to as much as 7.3% of GDP by 2022, with an estimated $158bn of medium-term investment required to implement the BBB programme. Recent regulatory reforms have sought to boost capital markets’ ability to finance infrastructure, while state-owned development banks are also set to play an important supportive role. Local institutions have launched initiatives to deliver infrastructure projects in the transport and energy sectors, and the lending programmes are expected to bolster decentralised infrastructure development.

Banking Support

In a June 2017 report the UN Economic and Social Commission for Asia and the Pacific highlighted the supportive role that government financial institutions can play in the BBB programme. Although public spending, specialised development funds and public-private partnerships (PPPs) were identified as the most likely sources of new infrastructure funding, government banking institutions have also increasingly moved to support big-ticket projects.

The Development Bank of the Philippines (DBP), which has operated as a commercial bank since 1995, and the Land Bank of the Philippines (LBP), which acts as the official government depository but has functioned as a commercial bank since 1973, will likely be prominent in new infrastructure financing. Many DBP and LBP initiatives offer new opportunities for commercial banks to become involved in infrastructure lending, particularly at the local government unit (LGU) level.

The DBP acts as the primary government banking institution in infrastructure financing, with activities covering transportation and logistics, power generation and distribution, and water supply. The bank has launched a host of initiatives to support such projects, including the Connecting Rural Urban Intermodal Systems Efficiently initiative, which utilises long-term funds from development partners, and redeploys funding to an array of stakeholders, including financial and microfinance institutions. The DBP also supports BBB by assisting in the deployment of PPP projects at the national and LGU levels, granting a P550m ($10.9m) loan to Camarines Sur for infrastructure development in 2017, according to local media. The bank has also advised the Department of Transportation on the tender and award of a P65bn ($1.3bn) light rail PPP project.

Meanwhile, the LBP provides an LGU lending programme dedicated to equipment financing, land acquisition and providing credit for construction, infrastructure, ports, roads, bridges, sport facilities, hospitals and schools. Its LGU investment programme, originally financed by Germany’s KfW Development Bank, also supports construction in Visayas and Mindanao, which were hit by a powerful typhoon in 2013.

Merger

The DBP and LBP have areas of functional overlap, leading some to call for a merger. In February 2016 then-President Benigno Aquino III approved an executive order to merge the two entities, but President Duterte halted this after winning the 2016 presidential elections. Nonetheless, ongoing reforms are expected to boost both banks’ financing capacity, and in May 2017 the Department of Finance announced that it was mulling plans to transform the DBP into a national infrastructure bank similar to the Development Bank of Japan. According to Carlos G Dominguez III, the secretary of finance, the DBP’s reorganisation into a dedicated infrastructure bank could help it raise funds through capital market investments, with the Philippine Stock Exchange already undergoing reforms to improve infrastructure financing under a $300m reform programme backed by the Asian Development Bank.

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The Report: Philippines 2018

Banking chapter from The Report: Philippines 2018

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