The Philippines' bustling economy leading to a series of developments in the construction sector

A flourishing outsourcing sector, fresh investments in infrastructure and the development of new housing will continue to fuel the Philippines’ swiftly growing economy. These factors are set to have a positive impact on the construction sector, despite significant structural bottlenecks. At 8.9% in 2015, growth in the Philippine construction sector outpaced GDP growth of 5.8%. After a stagnant three quarters, the private construction sector recovered in the fourth quarter of 2014 and grew 20.5%, according to the Philippine Constructors Association (PCA). In the public sector, growth had slowed markedly to 1.2% in the second half of the year. Yet thanks to stronger private activity, overall gross value growth for 2014 was 12.6%.

As of the end of 2014, the construction industry accounted for almost 6% of the economy and 6.6% of total employment. However, public spending on roads, bridges, airports and other infrastructure has consistently been less than 3% of GDP, among the lowest levels in the region. The target for 2016 is 5% of GDP. While GDP growth is expected to exceed 6% in 2016, the construction sector may not quite reach 2015 levels, due in part to the weakening global economy and because of self-regulation by banks and residential builders. However, the launch of several large government-backed infrastructure projects are expected to come on-line over the course of the year, which would further stimulate the construction and materials industries.

Infrastructure Developments

Throughout his six-year tenure, President Benigno Aquino III has encountered many legal roadblocks to his ambitious infrastructure proposals, including a 2014 Supreme Court ruling that found that some projects proposed in his economic stimulus package were unconstitutional. Nonetheless, government spending grew steadily each year and has exceeded that of any previous presidential administration in the country.

From 2010 to 2015, public spending was on track to more than triple, according to the Philippines’ Department of Budget and Management, from P165bn ($3.6bn) to an estimated P595.8bn ($13.2bn). For 2016, the department projected total infrastructure spending could reach P766.6bn ($17bn), bringing total spending from 2010 through 2016 to P2.6trn ($57.7bn).

The three sources of funding for infrastructure projects are the private sector, the national government and overseas development aid. Of these, the private sector has traditionally been the largest contributor, while overseas aid accounts for the smallest share. In early 2015 public sector spending rose to catch up with the private sector. The gross value of private sector construction projects grew by 16.3% to or P1.137trn ($25.6bn), bringing the total value in constant prices, including public sector activities to P1.42trn ($31.5bn) in 2014, according to the PCA. At constant prices, the gross value of construction for both the public and private sectors grew by 10% to P641.8bn ($14.2bn) in the same year.


The public sector infusion of 2015 was due to the approval and launch of several long-delayed infrastructure projects, while up to an additional five projects may be approved before President Aquino leaves office in mid-2016, thus adding further economic stimulus. Many more are in earlier stages of planning for the next administration to execute. Under Aquino’s leadership, the Philippines has adopted a public-private partnership (PPP) model to finance construction of roads, airports, water projects and rail lines. In brief, private sector companies or consortia bid for a government concession, then wholly or primarily shoulder investment costs, which they recoup by operating and maintaining the airport, road or railway over a set period of time.

With the concession for the 44.6-km, P55.53bn ($1.2bn) Cavite-Laguna Expressway (CALAX) awarded to MPCALA Holdings in 2015, construction should begin by 2017 if the government obtains all the rights of way. Also awarded in 2015 was a railway contract that will link Manila to Cavite at a cost of P76bn ($1.7bn). In all, Aquino has proposed 54 PPP projects since the government’s PPP Centre was established in the third quarter of 2010. As of the end of 2015, 10 projects representing a total cost of $4.2bn had been signed off on since Aquino took office in 2010.

Foreign Participation

Historically, foreign builders have had limited involvement in construction in any sector, even as the Philippines has climbed the competitiveness rankings of the World Economic Forum and as credit-rating agencies like Fitch and Standard & Poor’s have upgraded investment ratings. Regulatory restrictions on foreign land ownership and holding stakes in retail, commercial and housing developments in particular had curbed investor appetite.

The Philippines counts some 6500 registered contractors, and there are some firms, such as Aboitiz Equity, that are able to compete on a regional and global scale. The argument in favour of foreign involvement is that outside companies can introduce new kinds of expertise and knowledge in addition to capital. In the past few years, several foreign firms have been involved in high-profile winning bids for PPP projects, and there are signs that there may further concessions awarded in the future. In 2014 India’s GMR Infrastructure partnered with local construction firm Megawide to win the $700m, 25-year contract to expand and operate the Mactan-Cebu International Airport terminal. Construction on the airport, which is expected to take two years and employ 3000 people, began in early 2016. When complete, the airport’s capacity will be increased from 4.5m passengers annually to 15.8m.

The GMR-Megawide consortium is also among six final contenders for a $2.4bn PPP contract to develop five provincial airports. Expected to be awarded in 2016, the project entails building new facilities, and operating and maintaining airports in Iloilo, Bacolod, Bohol, Davao and Laguindingen.

A P7bn ($155.4m) contract to construct New Bohol Airport, was won in May 2015 by a joint venture of two Japanese firms, Mitsubishi and Chiyoda. Designed to replace Tagbilaran Airport, New Bohol Airport, on the popular tourist island of Bohol, will have a floor area of 8800 sq metres, a 2000-metre runway and a modern terminal building.

The new airport will also have environmentally friendly features, such as a filtering system to mitigate pollution and a pre-departure area powered entirely by a photovoltaic power generation system. While private sector participation has been on the rise, government agencies are continuing to fund and undertake smaller infrastructure projects. For example in June 2015 the Department of Public Works and Highways (DPWH) began building a P1.27bn ($28.2m) underpass in Makati City, which promises to relieve some of Manila’s heavy traffic. When completed in January 2017, the four-lane, 880-metre underpass will allow vehicles taking Senator Gil Puyat Avenue to cross Makati Avenue and Paseo de Roxas without interruption. A 570-metre tunnel will enable vehicles to bypass two busy intersections. Mid-2015 also saw the Department of Transportation and Communications begin construction on an extension of the capital’s Light Rail Transit Line 2. Beginning at Pasig City, the new 4.3-km line will have two stations, link to Antipolo City and be operational by the third quarter of 2017.

Licensing Foreign Firms

2015 saw the government encourage more participation by foreign firms. While on a trade mission to the US in June 2015, Philippine cabinet secretaries urged US construction firms to set up offices in the Philippines to take advantage of opportunities created by infrastructure projects. At a June 2015 trade conference in Washington DC, Rogelio L Singson, secretary of public works and highways, announced plans to create a new license category for foreign firms, called “Quadruple A” or “AAAA.” It would enable foreign contractors not only to be granted permits on a per-project basis, but to be registered as regular contractors eligible to participate in local projects with full equity. To allay the concerns of local contractors, Singson said that foreign firms would be required to invest at least P1bn ($22.2m).

However, as of early 2016 the new licensing category had yet to be issued by the Department of Trade and Industry due to opposition from local contractors and the Philippine Contractors Accreditation Board, according to Philippine newspaper The Philippine Star. Singson, in the meantime, urged European firms to base their regional offices in the Philippines to take advantage of the skills of Philippine engineers and technicians while seeking contracts elsewhere in the region.

ASEAN Economic Community

The last day of 2015 marked the official inauguration of the ASEAN Economic Community (AEC). While full single-market integration will take time, licensed contractors within the AEC are now able to work significantly more freely throughout the region, which will bring more competition to the Philippines’ construction sector.

In 2015 Exequiel Sarcauga, director of the Philippine Department of Labour and Employment, urged the local construction sector to both modernise and remain united in the face of “bigger and tougher competitors” from elsewhere in the new community. He said the industry needed to be more efficient by reducing wastage, rejections and downtime, and to upgrade their standards for worker safety and health. At the same time, there has been concern in the past that the AEC could further stimulate brain drain from the Philippines in fields such as engineering and project management to places like Singapore and Thailand.

However, that may be less of an issue in the current economy. “We’re so busy in the Philippines. We don’t need to go overseas. We have 100 buildings in the pipeline. Some are in Cebu, Iloilo City and Davao. We do outsource some work to Bangkok such as the design process and structural modelling,” said Jose A Sy, president and CEO of Sysquared + Associates.

Sysquared + Associates builds high-rise residential and office buildings, including large-scale business processing outsourcing (BPO) structures. “The Philippines doesn’t have a shortage of engineers, but we do have a shortage of highly-skilled engineers,” he told OBG.

Building Homes

Whether measured by value or by the sheer number of building permits, the Philippine construction industry has traditionally been dominated by residential projects. The most recent figures from the Philippine Statistics Authority (PSA) show that in the fourth quarter of 2015, 24,724 permits for construction of residential buildings were issued, up 14.7% over the same period in 2014. However, P30bn ($666m), the total value of the properties was only 1% higher than for the fourth quarter of 2014. This was influenced by the increase in the construction of single-family houses, which rose by 25.4%, according to the PSA.

The segment continues to dominate all other types of residential construction, accounting for 21,045 projects, or almost 87% of all construction in the fourth quarter of 2015. The value of the construction of single-family housing totalled P16.8bn ($373m) over the quarter, which translated into an average cost of P8672 ($166.68) per sq metre. The most significant quarter-on-quarter drop was in permits issued for duplex and quadruplex structures and other types of residential condominiums. The number of permits issued fell 51.1%% and 34.8%, respectively, when compared to the fourth quarter of 2014. The 3717 permits issued for non-residential construction projects represented a 5.6% increase over the same period in 2014; most of these pertained to a rise in the construction of commercial structures.

The total value of non-residential construction dropped to P33.9bn ($752.6m) for the quarter, down from P36.2bn ($803.6m) in the same period of 2014. This translated to an average cost of P10,125 ($224.78) per sq metre, which represented a decrease of 25%. The PSA attributed the drop in value to double digit decreases in the average cost per square metre of industrial buildings, which dropped by 18.6%, commercial buildings, which decreased by 10.1% and other non-residential construction buildings, which dropped by 63.8%. Construction was overwhelmingly concentrated on Luzon Island. Three of its regions accounted for more than 43.7% of all construction projects in the fourth quarter of 2015. Leading the way was Region IVA, the so-called Calabarzon region comprised of Cavite, Laguna, Batangas, Rizal and Quezon. The region’s 8349 projects accounted for 26.4% of construction in the fourth quarter of 2015. Central Visayas, the only region outside of Luzon Island in the top four, had a share of 11.9%. This was followed by Central Luzon with slightly more than 9%, while the National Capital Region accounted for 8.1%.

Bullish Cement Scenario

Eventually tariffs on imports of building materials from member countries should decline dramatically within the ASEAN economic bloc. “There’s pressure toward lowering tariffs. We would like to do it gradually,” Ernesto Ordonez, president of the Cement Manufacturers Association of the Philippines, told OBG. Responding to renewed public sector infrastructure spending early in the year, cement sales in 2015 rose 14% year-on-year to 24.36m tonnes. Ordonez said that new housing projects due to low interest rates also contributed to increased sales.

Since the Philippines is a net importer of most categories of building materials, lower import tariffs could benefit the local industry. However, capacity constraints at Philippine ports could require importers to stockpile inventories. In addition, regional prices can be volatile, due in large part to the strong influence that China has.

In 2015, however, there was a downward trend for wholesale and retail prices of cement and other construction materials, including fuels, lubricants and electrical materials. Local companies, banking on continued domestic growth, have been investing in new production capacity. “2016 will be the same as 2015. The momentum will continue. The private sector has found new confidence,” Ordonez told OBG. Taiheiyo Cement, a Japanese-owned company based in Cebu, in January 2016 inaugurated a new P663m ($14.7m) finish mill and recently doubled the capacity of its port facilities’ at a cost of P270m ($6m).

In 2015 Northern Cement, a large player and a pioneer of the local industry, broke ground on a $200m expansion of a factory in Sison, Pangasinan province; the company’s annual capacity will double to 2m tonnes. San Miguel Group holds a 35% stake in Northern Cement and has been especially bullish about the local cement industry. San Miguel companies are building five new cement plants at a cost of $1bn, up from $800m initially announced in early 2015.

The five plants will add 10m metric tonnes of annual capacity. That alone will increase the national industry’s capacity from 33m to 43m tonnes and propel San Miguel from the country’s fourth-largest cement-producer to its largest.

The current leader in the cement industry is LafargeHolcim, which is the product of the merger of European firms Lafarge and Holcim in 2015. Their subsidiaries in the Philippines, Lafarge Republic and Holcim Philippines, had together controlled more than 55% of national production capacity. Before the merger, Holcim Philippines announced plans to invest P1.8bn ($40m) to expand its production capacity in 2016 by 2m tonnes to 10m tonnes per year. However, with the merger, Lafarge and Holcim were forced to sell off assets all over the world.

The largest producers after Lafarge and Holcim historically have been CRH and Cemex, each of which produces about 4m tonnes of cement annually. In the Philippines, Ireland-based CRH picked up most of Lafarge‘s cement assets, with the exception of a plant in Rizal, located east of Manila, which was retained by Holcim.


Construction growth in the short and long term will continue to be robust, even if it does not reach the 8.9% heights of 2015. More BPO structures are in the planning stages, and some long-stalled strategic mega-projects were finally approved in the latter half of 2015. Industry is ready to respond, as indicated by the 33% growth in licences issued for industrial subdivisions in 2015, and the ambitious expansion plans of local cement companies and Philippine subsidiaries of international cement firms.

Upgrades in the Philippines’ sovereign credit rating by US and Japanese credit agencies in 2014 and 2015 should encourage the next administration to support pending PPP projects and continue Aquino’s other infrastructure proposals. The development of these projects will be critical as the country goes forward By maintaining a strong building and development programme, the next government can build on the country’s success.


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The Report: The Philippines 2016

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