Economic View

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What types of construction business might sustain demand for engineering, procurement and construction contractors in the near term?

DELFIN J. WENCESLAO JR: There are 2 general sources of construction business, the government and the private sector. On the government side, construction business is governed by national budget and disbursed through process payments. Currently, out of a 3 trillion pesos budget, 25% has been allotted to infrastructure and is generally awarded under the procurement law to contractors licensed locally. These qualified Philippine contractors are categorized on different levels according to technical qualifications and financial capability. On the other hand, private sector construction is open for real estate developers as they can privately finance the infrastructure work, with many developers actively engaged in the construction of roads or bridges.

This scheme, however, is complicated when government asks private sector participation in infrastructure in which they do not have a budget through a public-private partnership (PPP), which comes in solicited or unsolicited forms. Under a solicited PPP, a project is bided out by the government to a number of qualified proponents and it undergoes standard project financing, design and construction. On the other hand, unsolicited PPPs are open and carry zero risk or cost to government as it is purely privately funded. Generally a proponent would submit a proposal and a viability study to the government for approval, and this proponent would be one with deeper pockets as these projects require large financing requirements. A classic example of this type of the project is the over 20 billion NAIA Expressway, which was an unsolicited project by San Miguel Corporation.

During the past government administration, there was not enough receptiveness to unsolicited bids, which is why the 12 major PPP projects awarded were all solicited bids. This was because it was assumed that unsolicited proposals are subject to potential graft given that they it do not undergo the usual procurement process. However, these projects would still be subject to challenge by competing bidders and the risk factor would belong to the private sector. In an unsolicited proposal, a private company would develop the studies for the project, shoulder the risk and invest the money; therefore, it will not put the government under any risk of failure. Additionally, a private company would need to be experienced in the type of project to be developed or else it would not subject itself to that level of risk. This shorter learning curve would enable a faster development process for the project from concept to implementation. Local governments units (LGUs) have been more willing to accept unsolicited proposals for PPP projects as it is the private sector that shoulders the cost, however, the problem with dealing with LGUs is that they have a short term tenure and there is a high degree of unpredictability on whether a new leadership would stop a project.

The incumbent administration has opened the possibility to entertain unsolicited projects to fast-track much needed infrastructure development throughout the country, unlocking the potential for the private sector to be more active and significantly increase the pipeline of projects that can be completed in the medium term. The private sector will look for financing and technical capability to materialize these projects, however, they will be better equipped to take the risk. To achieve long-term development of infrastructure, the government should be more consultative with the private sector given the latter’s experience factor is bigger.

What advantages do unsolicited proposals pose for infrastructure development? In what ways can players mitigate risks involved in project development?

WENCESLAO: A major difference between solicited and unsolicited proposals is the amount of consultant work involved. For solicited projects you have to make sure that the proposal is covered by extensive studies and consultant work, whereas the unsolicited proposal rests on the responsibility and funding of the proponent. A major attractiveness of unsolicited projects is that it allows for a private company to manage its own risk and protects its in-house knowledge whereas in a solicited proposal it would have to expose its experience as part of the process.

To undertake an infrastructure development project is ultimately a question of the expectation of risk. While some projects would not get into a project because of lack of previous experience, another would be more inclined to make an unsolicited proposal to government to tap into new opportunities. If a player has no previous experience in land reclamation or highway construction, then participation in certain types of projects that include those components would not be viable. In the same way, if a player is not comfortable with the lengthy structure of a build-operate-transfer (BOT) project where it would need to put its own funding and collect after completion of the projects from tolls or other fees for a 25 year period, then it will not be inclined to participate in those types of projects and prefer progress payments from the government. Business models will depend on risk assessments, for instance, if a private firm is not prepared to assess the risk in a manner it is comfortable with, it will not do it. Additional factors that add to a project’s risk profile is the lack of coordination between LGUs and other government agencies that may interfere or compete with awarded projects.