The Philippines’ construction industry is headed for prosperous times, according to both analysts and the government. The residential and infrastructure segments are set to expand due to high demand, though questions remain as to where the funding for some of these projects will come from.
Figures issued by the National Statistics Office (NSO) in mid-July showed a sharp jump in the value of private sector construction developments for the first quarter of the year, with project spending totalling $1bn, up by 59.5% year-on-year (y-o-y) . Though there had been strong growth over the year, which ended March 31, the NSO report suggested there had been a slowdown in the first quarter of this year compared to the last three months of 2009, with a slight fall in the number of construction permits issued in Q1.
Of the 29,992 permits issued in the first quarter of the year, around 23,600 were for residential projects, a 20% increase y-o-y, while the $483m worth of non-residential projects approved represented a 130% jump in value over the same quarter of 2009.
While this flood of capital into the industry has raised fears that a bubble could be developing in the housing market, others only see the strengthening of an already powerful sector of the economy. According to Victor Abola, an economist at the University of Asia and the Pacific, there is little possibility of a bubble in the real estate segment. Given the current 3m shortfall in residential units, combined with future needs and the industry’s delivery rate of just 250,000 units a year, it is unlikely that the market could become overheated and then crash, he said in an interview with a local business daily on July 19.
"People who talk about a bubble are looking most probably in the higher-priced luxury apartments,” he said, adding that with the residential market dominated by middle- to low-end projects and with potential buyers looking to use apartments for living purposes rather than as investment vehicles, any concerns over a bubble could be discounted.
While demand will drive the residential segment, the need to address the country’s infrastructure constraints will prompt a surge in the non-residential component of the industry, Abola said. "We will have a construction boom in this decade because of two things – infrastructure and housing,” he said.
However, while meeting the country’s pressing infrastructure needs is expected to give impetus to the construction sector, equally pressing is the need to find the funding to pay for these projects. The government’s finances are stretched, with last year’s budget having been exceeded by $2.5bn and with the state having booked $4.2bn worth of red ink in the first six months of 2010. This has left newly installed President Benigno Aquino III with little room for error if he tries to further stimulate the economy or to invest in essential infrastructure projects.
Aquino’s solution to the funding shortfall, as outlined in his first address to the nation on July 26, was to join forces with the private sector to build for the future. By adopting what he described as a new and creative approach, Aquino said the "dearth of funds” would be overcome. That approach involves public-private partnerships (PPP), which the president said would see the state identify priority projects and then work with private investors to turn these plans into reality.
To facilitate private involvement in major construction and infrastructure developments, Aquino said the administrative procedures would also be streamlined. "We will make sure that the build-operate-and-transfer (BOT) projects will undergo quick and efficient processes,” he said. "With the help of all government agencies concerned and the people, a process that used to take as short as a year and as long as a decade will now only take six months.”
Among the projects Aquino cited in his address was the construction of an expressway from Manila to Cagayan Valley passing through Bulacan, Nueva Ecija, and Nueva Vizcaya, along with a network of farm-to-market roads across the nation.
On the back of increased infrastructure and residential construction, the building trade could expand by between 7% and 9% this year, according to Manolito Madrasto, the executive director of the Philippine Constructors Association (PCA) . That said, the industry could post double-digit growth depending on the demand for residential units and activity in the infrastructure segment, he told local media in mid-July.
"In the PCA, we are trying to be as conservative as possible. We don’t want to raise hopes too high,” Madrasto said.
At least some of those hopes are pinned on the government’s ability to fast-track its BOT business model and deliver on its PPP programme in a way that would make pouring large amounts of money into high-profile projects appealing to private investors. Having laid the foundations for partnership with the private sector, the state now needs to build on its promises.