Steady progress is under way in the Philippines' transport sector

Though still trailing its neighbours, the transport sector in the Philippines is in the process of modernising as the current government continues to fast track relevant infrastructure projects, while also taking modest steps to improve inter-agency cooperation and good governance. The sector is a key component of the national economy, which will be better able to achieve its potential through improved linkages between economic centres and cities on the archipelago.

Road transport remains by far the most dominant mode of travel, and, according to the Asian Development Bank (ADB), road transport accounts for 98% of passenger traffic and 58% of cargo traffic. However, due to a lack of adequate financing, levels of servicing have fallen behind. The World Bank has predicted that the economy will grow 6.7% in 2015 – although this growth will depend on the government’s ability to improve spending and encourage public-private partnerships (PPPs). Regulatory uncertainty and convoluted bidding procedures have hindered the progress of such projects so far and must be righted so that the advantages of private sector interest can be realised.

GLOBAL PLAYER: In the area of logistics, the Philippines ranked sixth among ASEAN-6 countries and 57th overall in the World Bank’s 2014 Logistics Performance Index (LPI), which shows that there is still much work to be done. Improvements within the maritime transport sector will be crucial to boosting these ratings, while the building of secondary airports will also improve economic potential. Such an overhaul will be key if the Philippines is to realise its potential as an investment destination and increase the cost-efficiency of its transport system. Nearly $3.9bn in foreign direct investment (FDI) flowed into the country in 2013, the highest in more than a decade. This indicates the depth of investor appetite and the importance of creating an attractive environment for investment. However, in the first nine months of 2014 total approved FDI reached P91.8bn ($2.06bn), a 35.4% drop over the same period in 2013, according to the Philippines Statistic Authority’s figures.

PARTICIPANTS: The Department of Transportation and Communications (DoTC) is the agency in charge of regulating, planning and coordinating the modernisation and expansion of the sector. The Department of Public Works and Highways (DPWH) is the next most authoritative body in the sector, and is currently developing IT-enabled planning and programming systems with the support of the ADB and the World Bank. It is hoped that greater reliance on e-governance and monitoring will improve the efficiency of budget disbursement, which has been a problem in previous years.

The Bases Conversion and Development Authority, the Philippines Ports Authority (PPA), the Philippine National Railway (PNR) and various civil aviation authorities all play a complementary role in the management of the sector. In shipping, the Maritime Industry Authority is under the DoTC’s purview and is the single administration in the Philippines that deals with domestic shipping, overseas shipping, shipbuilding and maritime manpower. Finally, local government units (LGUs) are tasked with the development and management of local roads and other transport infrastructure components. Intermodal integration and connection is another area where there needs to be better communication so that there is a coordinated approach between the DPWH, the DoTC and LGUs in the future.

PRIVATE & INTERNATIONAL: While the strength of the private sector in providing transport services is clearly dominant, its role in providing transport infrastructure has been less assured. Between 1998 and 2007 private sector investment in transport infrastructure was equivalent to approximately 1.9% of GDP, only slightly higher than public sector investment for the same period at 1.6%, which was one of the lowest in the region, according to an ADB report. However, since then the private sector has become actively important in promoting transport sector policy reform in order to catalyse development. For example, private sector involvement was instrumental in bringing about the necessary changes in policy to support the development of the roll on/roll off (ro-ro) system through the Strong Republic Nautical Highway programme and the establishment of open skies agreements for the development of secondary airports into international gateways.

GOVERNMENT EXPENDITURE: With public infrastructure spending rising to 4.1% of GDP in 2015 and 5% in 2016, greater private sector participation is crucial to ensuring efficient and effective delivery of projects. The country has been operating under a build-operate-transfer (BOT) law since 1990, which aims to tap and mobilise private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development programmes normally implemented by the government.

While such a law, also used by Malaysia, China and Japan, has the potential to significantly fast track the infrastructural development of a country, it is still heavily reliant on effective government authorisation, monitoring and the eventual transfer of projects back into the hands of the government. In the Philippines years of poor performance in this area have led to it falling behind its competitors. A primary example is the condition of keystone transport hubs such as Ninoy Aquino International Airport (NAIA), which faces significant challenges that can hamper connecting flights. For those projects that have been completed using the BOT law – such as the Manila Metro Rail Transit (MRT) 3 commuter line that was financed and constructed by the Metro Rapid Transport Corporation (MRTC) – poor financial management has often left the government saddled with the excess costs.

Tangible progress has been made by the current administration of President Benigno Aquino III during its 2010-16 term, and the state has sought to catalyse private sector participation in large-scale projects through the creation of a dedicated PPP Centre, boosting spending and willingness to seek expertise from international partners. However, realisation remains relatively slow and while the PPP Centre has some 66 projects, only eight had reached completion of the bidding and contract award stage as of January 2015. A number of delays are due to corruption scandals among major agencies, such as the DoTC.

In terms of international investment prospects, the Philippines has benefitted from investment-grade sovereign credit rating upgrades in 2013, as well as hosting the World Economic Forum (WEF) on East Asia in 2014. While poor relations with China over the South China Sea have deprived the country of access to the inexpensive loans and development assistance that neighbouring countries such as Indonesia can take advantage of, it has nonetheless benefitted elsewhere.

One of the most promising partnerships has been with the Japan International Cooperation Agency (JICA). Collaboration between the Philippines and Japan includes developing a sustainable transport network in Metro Manila, increasing disaster resilience, boosting energy efficiency and maximising value through PPPs. Furthermore, in mid-2014 the National Economic and Development Authority board, chaired by President Aquino, approved the “Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas”. The World Bank and ADB have also participated in the creation of informative studies specifically addressing domestic transport infrastructure needs, which remain the largest impediment to more evenly distributed growth.

At the end of 2014, the Aquino administration and PPP Centre were pushing to amend the BOT law with the aim of attracting more investors to participate in projects valued at over P200bn ($4.5bn). The proposed PPP Act would strengthen the institutional and regulatory environment surrounding PPPs and lead to a more accommodating environment for private sector engagements in the long term.

ON THE ROAD AGAIN: As the dominant form of transport in the Philippines, covering around 98% of passenger traffic, roads are the most crucial aspect of the national transport network and have been slowly, but steadily, improving in quality. This has been evidenced by a jump in the quality of roads ranking in the WEF’s Global Competitiveness Index from 100th in 2011-12 to 87th in 2014-15. A total of P230.4bn ($5.18bn) has been budgeted for transport in 2015. The national road network extends approximately 215,000 km, with 15% of arteries classified as national roads and under the jurisdiction of the DPWH. The remaining 85% are local roads managed by LGUs, which means that only 18% of such roads were paved with asphalt or concrete, according to an ADB report. The report also revealed that LGUs only spend about 4.5% of their budget on road investment and 1.9% on road maintenance. Over 50% of barangay (district) roads are unpaved and dedicated to allowing access to villages. They were previously built by the DPWH but are now delegated to LGUs.

IN A JAM: Congestion on roads in urban areas is particularly bad, with Metro Manila losing an estimated 4.6% of GDP to traffic annually. Despite vehicle ownership in the Philippines being among the lowest globally with 47% of households not possessing a car, ASEAN Automotive Federation data for 2014 revealed a 29% rise, or 234,747 units, in vehicle sales compared to the same period in 2013, making it the fastest-growing auto and motorcycle market in South-east Asia, outpacing Vietnam, Singapore, Malaysia and Indonesia.

For transnational travel, highways such as the Pan-Philippine Highway, also known as Maharlika Highway, are the primary routes. The Pan-Philippine Highway is a 3517-km network of roads, bridges and ferry services that connects the islands of Luzon, Samar, Leyte and Mindanao and serves as the country’s principal transport backbone. The next most important is the Epifanio de los Santos Avenue, which serves Metro Manila and passes through six of the 17 settlements in the region. A number of modern expressways also make up part of the national road network, mostly connecting urban areas across the main island of Luzon, with many more being planned via the PPP Centre, which is fast tracking such projects to ensure bid completion before the end of President Aquino’s term in 2016.

One example is the current construction of the third stage of the P26.5bn ($596.25m) Metro Manila Skyway (MMS), a 14.8-km elevated expressway, which began in mid-2014 and is planned to open in 2017. The MMS will connect the Southern and Northern Luzon Expressways, two major traffic arteries that link the capital city to regional urban centres.

One particular breakthrough outside of urban areas in recent years has been the addition of the Strong Republic Nautical Highway programme. The project links many of the islands’ road networks through a series of ro-ro ferries, which allow cars to roll on and off without the time-consuming unloading of cargo. As for the larger problem of poor road quality and durability, one of the major causes is the overloading of trucks. Axle-load surveys conducted by the DPWH in 2005 showed that 11-12% of all trucks were overloaded, and it is likely that this situation has worsened since then. Damage done to already poor-quality roads results in a high number of traffic accidents, with an estimated 20 road deaths per 100,000 people, according to 2011 World Health Organisation data. However, it has since been announced that the DPWH’s 2015 budget of P174.5bn ($3.92bn) for roads and bridges will consider new construction design specifications, such as increasing the thickness of concrete pavement from 230 mm to 280 mm to prevent the early deterioration of roads caused by rampant overloading.

URBAN TRANSPORT: The Philippines, in which nearly 50% of the population live in cities, is currently seeing rapid urbanisation that is causing productivity-damaging levels of congestion. There are more than 120 cities in the country, including 16 in Metro Manila, which is the only metropolitan area. Though Davao, Cebu and Iloilo can also be considered metropolitan areas, they are yet to be formally classified as such by the government. Transport systems in all cities are almost entirely road based, with the exception of Metro Manila, which possesses an MRT and a commuter rail service.

Road transport services consist mainly of “jeepneys” (public utility vehicles), taxis, motorised tricycles and pedicabs. Almost all road-based transport in urban areas is provided by the private sector. In Metro Manila there are an estimated 433 bus companies operating 805 routes, while privately owned jeepneys serve 785 routes. The central strategy for dealing with the evolving problem has been proposed by JICA. The agency has created a “Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas” in coordination with the DoTC, DPWH and the Metro Manila Development Authority.

The central aim of the roadmap is to introduce strategies that will reduce traffic congestion before it impacts lower-income groups, which will be the main victims of congestion. The JICA study concluded that without intervention traffic costs will likely rise to P6bn ($135m) per day from the current level of P2.4bn ($54m). Preliminary analysis in the study showed that the average low-income household has to spend at least 20% of its total monthly income on transport costs. Without intervention, traffic demand will likely increase by 13% by 2030, and transport costs will be 2.5 times higher.

LOOKING FURTHER ABROAD: The roadmap also emphasises the need to establish better north-south connectivity and an appropriate hierarchy of different transport modes such as roads, railways and other transit systems. These initiatives together form the Dream Plan to have a modern, affordable, well-coordinated and integrated transport system for the Greater Manila Area by 2030. Of all the projects envisaged under the Dream Plan, the most viable is a bus rapid transport (BRT) system, which has been successfully implemented in countries like Brazil. Such a project would develop defined corridors for bus transport while integrating jeepneys. According to the DoTC, the BRT project would cost an estimated P4.8bn ($108m), with 32 stations across 13 km from Recto to Quezon City. Currently, the journey takes over one hour and 30 minutes; however, the BRT would reduce this to 45 minutes while being able to transport some 290,000 passengers per day.

RAILWAY: The railway network of the Philippines currently serves only the urbanised areas of Metro Manila and Luzon and includes three networks, namely the Manila light railway transit system (LRT-1 and LRT-2), MRT-3 and the PNR. Boasting the first metro system in South-east Asia, the Philippines’ LRT-1 and LRT-2 are owned and operated by the government, while the MRT-3 was financed and constructed by the MRTC, but is operated by the government under a BOT agreement. The LRT lines, both of which have been in need of upgrading for years, carry 579,000 per day, while the MRT carries around 400,000, according to the ADB report. While there are planned upgrades and extensions for all three metropolitan lines, in September 2014 the P65bn ($1.46bn) LRT-1 Cavite Extension project was awarded to the Light Manila Railway Consortium with a planned completion date of 2019.

Users of the metropolitan lines have enjoyed some of the lowest fares in the region for many years due to the debt of government-owned and controlled corporations being serviced by annual allocations in the state budget, which has the effect of subsidising the operations of the light rail systems.

However, LRT and MRT fares were both hiked at the start of 2015 to offset debt incurred after the MRT’s privatisation and maintenance costs. In 2014 the national congress allowed P1.2bn ($27m) under the 2014 supplemental budget and another P10.6bn ($238.5m) in the 2015 national budget for the repair and rehabilitation of the LRT-1, LRT-2 and MRT-3.

In terms of heavy railway the PNR, which is one of the oldest railways in the world, operates commuter lines that serve areas such as Luzon south of Metro Manila. The Metro South Commuter Line extends as far south as Calamba City, Laguna, and transports approximately 100,000 commuters every day. The popularity of the line has increased in light of heavy road congestion caused by construction on the Skyway project across Manila. The rehabilitation of the Caloocan-Alabang section of the commuter line, along with the introduction of new rolling stock via development assistance financing, has helped mitigate the spike in ridership, but only for the time being.

The other main line operated by the PNR is the Bicol Express, which links towns in the Bicol region with Manila; however, the line has been plagued with difficulties. It was damaged by the typhoon in the 2006, and after being successfully revived in June 2011, it suffered a train derailment in October 2012 that resulted in services being suspended. In June 2014 trial runs resumed on the 422-km line; however, a full reopening is yet to occur. As for future PNR plans, the DoTC is focusing on reviving the long-defunct northern railway line via the North Rail Project and expanding lines outside of Luzon. It has clearly communicated that it is looking to increase coordination with the private sector in such development, as well as in other areas of freight operation and maintenance. However, there has been scepticism about new rail projects in light of the need to upgrade existing lines and the lack of confidence in the DoTC’s bid and project management.

SAFE HARBOUR: Ports make up an essential part of the Philippines transport network as connecting hubs for the 3219 km of navigable water. There are currently nine major ports that handle the majority of domestic and international cargo: Manila, Subic, Batangas, Cebu, Davao, Zamboanga, Cagayan de Oro, Iloilo and General Santos. In addition, there are approximately 1300 ports of varying sizes, of which 1000 are government owned. Of the state-owned ports, about 140 fall under the jurisdiction of the PPA and the Cebu Ports Authority, while the remainder are the responsibility of other government agencies or LGUs.

The Philippines is considered fairly well-connected with the global container shipping services network. It ranked 66th out of 159 countries in 2012, according to the UN Conference on Trade and Development’s Liner Shipping Connectivity Index (LSCI). The LSCI score indicates how well countries are connected to global shipping networks based on their maritime transport sector. However, on a contextual level, according to the WEF’s Global Competitiveness Index, the Philippines’ ports continue to rank lowest out of its 13 regional peers.

One of the main reasons for the low regional scoring is the high level of congestion at ports, which has a knock-on effect for overall efficiency. Michael Kurt Raeuber, group president and CEO of Royal Cargo, told OBG, “The problem with port congestion is that it generates a reduction in the productivity of trucks and delays the moving of supplies in the Philippines. And these problems in the Philippines supply chain will persist, and may even further aggravate in high trade seasons, if the root cause of the port congestion is not recognised in a coordinated way. It is clear that the present situation is not a port capacity issue, but the confluence of a lack of proper coordination between the national and local government, real time and misplaced regulatory restrictions, and the absence of long-term strategic planning and infrastructure development.”

Clearance time with physical inspection was five days in the Philippines compared to just two days in Vietnam, according to 2014 World Bank LPI data. Located close to the busy metropolis of Manila, the Port of Manila has been struggling to accommodate the flow of cargo required to supply a country for which consumption amounts to 60% GDP.

Furthermore, a policy decision by Manila’s government in February 2014 to ban trucks during certain hours of the day to reduce the amount of traffic on the roads during rush hour highlighted the urgent need for the completion of port and road infrastructure upgrading if demand for consumer goods is to be fulfilled.

LEGISLATIVE HURDLES: In terms of the regulatory landscape, the current administration is considering a relaxation of cabotage law, which precludes foreign-flagged vessels from serving domestic routes. The rethink follows a study conducted by the Joint Foreign Chambers of Commerce in the Philippines, which showed the high cost of domestic shipping compared with the cost of shipping via foreign trans-shipment.

It is hoped that a relaxation would increase the industry’s competitiveness, and therefore lower costs. Even though the Philippines is the fifth-largest shipbuilding country in the world, it is dominated by ships with a capacity of 200- to 300-twenty-foot equivalent units (TEUs), which are less cost-effective than the 5000-TEU capacity typical of more modern ships.

Jose Go II, the president and CEO of Oceanic Containers Lines, told OBG, “The local shipping industry relies on 200- to 300-TEU ships, which cost a lot of money to operate, and unfortunately local ports do not have the equipment necessary to handle larger vessels. These limitations reduce efficiency and mean domestic shipping liners end up having to charge higher tariffs to remain profitable.”

However, a relaxation of the cabotage law would increase the requirement for more accurate monitoring of vessels and smuggling activity, while some domestic ships could opt to reflag elsewhere in order to avoid paying taxes. The Philippines only has 160 vessels in the flag registry (it previously had 700), whereas landlocked Mongolia has 800 vessels. Mike Camahort, the president and chief operating officer of courier, cargo and remittances services LBC Express, told OBG, “The Bureau of Customs has to complement increased trade traffic through expediency, with timing of clearance processes having increased from two days to five days. Additionally, given the manpower deficit at the bureau and a high number of holidays, when it shuts down, the backlog has worsened during peak holiday months.”

OVERCOMING OBSTACLES: Challenges for the shipping industry mostly lie in the accessibility and serviceability of domestic port infrastructure. One of the main obstacles for the country is that the majority of the waterways are only accessible by low-draft vessels (less than 1.5 metres). Furthermore, ports are generally insufficiently equipped. This includes the Port of Manila, which still has only two gantry cranes. Because most ports lack the necessary facilities, many ship owners must buy vessels with cranes or install cranes on their vessels. This increases shipping costs in general while also increasing the amount of time it takes to unload vessels. Other ports suffer from simple over crowding, such as Cebu Port, where incoming ships have to wait for hours before being allowed to berth.

While the PPA has championed the ports at Batangas and Subic, particularly during the duration of the truck ban, which placed excessive strain on the Port of Manila, there are limits to their potential. The main limiting factors are their capacity to accommodate larger vessels due to their low draft rate and insufficient equipment, as well as location. The distance from Manila is a considerable disincentive for companies, and while the PPA has attempted to offset these by cutting port costs, the savings are only negligible.

What is needed is for Batangas to be developed to become a more viable international and domestic port by encouraging the development of manufacturing sites around the area. The same is true for the Luisita-Clark and Clark-Subic corridors, which are ideal for light industries, and could be well served by the upgraded North and South Luzon Expressways. Go told OBG, “To turn to the immediate use of Batangas and Subic will create an increase in transport costs because a lot of the factories sending finished goods to the provinces are clustered around Metro Manila. Initially, this will have an impact on inflation and eventually the overall economy, as consumption accounts for 60% of GDP.”

For the majority who will continue to ship into the more strategically positioned Port of Manila, port operator International Container Terminal Services (ICTSI) has completed a $35m, 9-ha yard expansion project, which is part of a larger plan to spend $330m on upgrading port infrastructure over the next 10 years. The new space will be used as an empty container depot (ECD) with the capacity to store up to 4300 containers, which will ease pressure on the surrounding roads. The operator will soon add an additional 2 ha to the ECD as it begins construction of the much-needed Berth 7. When this round of expansion is finished in 2016, it is estimated that the upgrade will add roughly 500,000 TEUs’ worth of yard space to the facility. ICTSI has also disclosed plans for an inland container depot that will be developed 160 km away from the Port of Manila in Laguna with an area of 21 ha, for which $30m has been earmarked. Such plans for offsite facility constructions come as the space available for development at the Port of Manila becomes squeezed. As for the issue of congestion around the port, narrow access to the north and heavy congestion going south to Luzon have resulted in frequent gridlock for trucks. However, access to the South Harbour, which is operated by Asia Terminals (ATI), has been significantly worse.

IMPROVEMENTS ELSEWHERE: As for Batangas Port in the north, the road network is similarly inefficient. Current roads connecting to Batangas’ port to the manufacturing centres in the Calabarzon Region south of Manila handle about 50% of the area’s container traffic, while the other 50% goes to Manila. For all containers from this region to move through Batangas Port, the roads would have to handle double the current truck traffic, and there are currently no visible plans in place for an upgraded road or train option.

Though there has been talk of expansion of the port at Davao, where there is already high congestion driven by a rise in international shipping and surrounding industry, this situation would eventually mirror that of the Port of Manila due to the limitations of building in a confined urban area. It has been suggested that it would be more constructive to seek FDI investment to develop a new facility either north or south of it.

While ports may continue to invest in upgrading their existing facilities, improved road infrastructure and the construction of new, modern ports are required to take the sector to the next level. Erry Hardianto, managing director at Maersk Filipinas, told OBG, “Mindanao offers tonnes of potential, and the country needs to unlock it and build the necessary infrastructure. However, the development should be in accordance with market potential. We should not be fooled that we need 1mTEU terminal in Davao if the cargo potential is far less. Also, if one plans to build it in the city, one has to make sure to build access roads and covers the whole chain.”

FRIENDLY SKIES: There are 215 airports in the Philippines, of which 84 are owned and controlled by the government, with the rest privately owned and operated. Of the government-controlled airports, 10 are designated as international airports, 15 are Principal Class 1 airports, 19 are Principal Class 2 airports and 40 are community airports. The country’s busiest airport is Manila’s NAIA, followed by the Mactan-Cebu International Airport (MCIA) and Clark International Airport (CIA) in north-west Manila. The government liberalised the domestic air travel sector in 1995 with the aim of increasing competition.

However, due to several underlying disincentives that worked to hinder the entry of other international carriers, domestic carriers undoubtedly benefitted the most. In February 2014 the top 12 carriers serving the domestic market commanded over 92% of all weekly seats and flights, according to air travel analysis website Anna.Aero. Dominant player Cebu Pacific Air is three times larger than the second-biggest carrier, PAL Express, formerly known as Airphil Express and the low-cost arm of Philippines Airlines.

Cebu Pacific Air operates at 61 domestic airports and has a 50% share of all weekly seats and flights in the Philippine market. The airline also serves 33 international routes, with Hong Kong being the top foreign destination with a total of 45 weekly flights from Manila, Cebu, Iloilo and Clark. While domestic air travel remains dominant, accounting for 71% of all weekly seats in 2013, this is expected to change in light of incoming ASEAN integration and increasing GDP per capita.

OPEN AIR: As of 2015 the Philippines had yet to commit to an ASEAN multilateral open skies agreement, which would allow foreign carriers to introduce additional flights in the Philippines that would create a free market environment in the airline industry to drive tourism, increase competition and maintain lower airfares for passengers. However, the government has stated that it is not ready and that further patience is required. Local carriers in the Philippines continue to oppose the agreement as it will not provide a level playing field for privately owned Philippine carriers that would be going head to head with South-east Asian carriers that enjoy strong government backing and financial assistance. In terms of contextualising regional growth, routes to, from and within the Asia-Pacific region will see an extra 1.8bn annual passengers by 2034, for an overall market size of 2.9bn, according to the International Air Transport Association.

LOOKING TO ALTERNATIVES: However, regardless of the current administration’s reluctance to sign up to the ASEAN Open Skies, progress has been made as Philippine authorities have taken steps to gradually open up the sector to an increased number of foreign players over the years. In particular, it has been promoting the development of secondary international gateways through negotiating bilateral “pocket open skies” agreements. These agreements now cover all secondary international gateways in the country and have led to substantial increases in travel through these airports. In 2013 the government also dropped discriminatory taxes that were being levied against foreign carriers, known as the Common Carriers Tax and Gross Philippine Billings. The law was signed by President Aquino with expectation of achieving 10m foreign visitors a year by 2016, up from 4.3m in 2012.

The sector also received a major boost in April 2014, when the Philippines regained its aviation rating upgrade from US authorities, allowing local carriers to launch and add flights to the world’s largest economy. The upgrade was a result of considerable improvements among national carriers, which helped to meet the international safety standards set by the UN’s International Civil Aviation Organisation. The upgrade from Category 2 came just as the EU lifted a ban it imposed on Cebu Pacific Air, allowing it to enter Europe’s airspace again. Burkhard Andrich, president and CEO of Lufthansa Technik, told OBG, “Return to Category 1 increases the number of destinations, but it does not necessarily increase passenger demand. In my opinion it will not increase passenger demand, but it will increase competition in the [maintenance, repair and overhaul] MRO industry, since new airlines with their own MRO services will be coming to the country.”

The Philippines is the centre for MRO in Asia, which is experiencing the highest MRO growth in the world at 7-8% per year. The main reason for the advantage of the Philippines is a widespread fluency in English and its strategic location. However, human capital remains a challenge, with young workers requiring costly and time-consuming training. This has been exacerbated by the contingent of workers who go abroad, making the retaining of qualified individuals more difficult. Abdallah Okasha, the former Philippines country manager for Qatar Airways, told OBG, “Unemployment rates in the Philippines explain the reason why there are 250,000 [overseas Filipino workers] OFWs in Qatar. The Philippines has, officially, 7.5% unemployment, while in Qatar it is only 0.5%. The high number of OFWs in Qatar has acted as a link between both countries and as a way to connect both economies. Bilateral trade, for example, is expected to reach $1bn by the end of 2014.”

NEW OPTIONS: Despite concerns over congestion, NAIA remains the primary airport in the Philippines, handing around 30m passengers in 2013. However, since completion of the P1.9bn ($42.8m) rehabilitation works at NAIA’s Terminal 3, international traffic is now being diverted away from Terminal 1. Terminal 3 became fully operational in August 2014 and has since welcomed a number of international carriers, including AirAsia, KLM, Emirates Airline, Singapore Airlines and Cathay Pacific. This move has significantly reduced passenger flow and vehicular traffic at Terminal 1 and allowed for the fast-tracking of ongoing renovation works that have been stifled by congestion.

In another move to reduce queuing time at the overburdened Terminal 1, the Manila International Airport Authority successfully negotiated for terminal fees paid by departing international passengers to be incorporated in the price of airline tickets in October 2014. A one-year transition period will take place before full implementation in October 2015.

NEW HUB: Elsewhere, CIA is making headway amid the current expansion of its terminal to accommodate at least 4m passengers annually. Between 2005 and 2012, its number of passengers more than quadrupled from 230,000 to over 1.3m. The increase in passenger volume has been largely anchored by the additional flights launched by AirAsia Philippines, Airphil Express, Dragonair, Zest Air, Asiana and Seair. The entry of Emirates Airlines and Qatar Airways in October 2013 paved the way for an increased number of long-haul flights from the Middle East. CIA has also improved its viability as a major MRO facility in the Asia-Pacific with the entry of the $40m Hong Kong-based Metrojet Engineering Clark in a 3-ha area at the Clark Civil Aviation Complex.

However, connectivity remains an issue for CIA in terms of hitting its passenger goals due to it being a two-hour drive to the north of Makati. While the Aquino administration has been looking into a rail link to connect CIA with Manila and NAIA, feasibility studies indicate the project would be too expensive.

It seems more practical to develop CIA as a hub for the 23m people who live in the North Luzon region, while continuing to expand NAIA to accommodate the 27m inhabitants of the South Luzon region. The JICA is championing a new airport to replace NAIA, to be located at Sangley Point, Cavite City, and targeted to open in 2025. As for MCIA, a P17.52bn ($394m) contract has been awarded in the form of a PPP for the construction of a new terminal building. On the regulatory front, the Air Passenger Safety Bill of Rights is being reviewed for proposed amendments in 2015. The changes would include provisions to stop overbooking of flights while increasing charges for flights that are late.

At the end of 2014, the DoTC reported that it had fully rehabilitated three airports damaged by Typhoon Haiyan. The Civil Aviation Authority of the Philippines has assisted in the full reparation of Kalibo International Airport, Roxas Airport and Busuanga Airport. Repairs to the asphalt overlaying Tacloban Airport’s runway are ongoing, limiting operations to small aircraft. The airports at Kalibo and Busuanga cater to tourists visiting the country’s renowned beaches, while Roxas Airport serves over 200,000 passengers per year as a gateway to the island of Panay. The government increased the 2015 budget for aviation by 46% to P13.3bn ($299m).

OUTLOOK: Though the Philippines is suffering an infrastructure deficit that cannot be remedied overnight, positive steps taken by the current administration to prioritise spending and get keystone projects moving are all steps in the right direction. However, with slow internal bureaucracy and mistrust of certain government agencies still apparent, the Philippines has realised it must also rely on outside help for sector development. A willingness to communicate with international banks and development agencies has created a strong dialogue that investors can benefit from. Significant improvement in connectivity and transport infrastructure is vital for inclusive growth for its citizens.

Augmenting road infrastructure and the coordination of different transport entities is a central priority. Unfortunately, the city of Manila is currently in a catch-22 whereby construction works on the essential Skyway project is temporarily increasing congestion to unprecedented levels. However, these growing pains are essential for progress as Metro Manila remains the economic engine of the country. The amendment of the BOT law and greater integration of international investors and development agencies will hopefully boost investment and improve management of such projects, so that these pains will be lessened.

The state of the country’s ports, which is exacerbated by the condition of the roads, is a direct burden on logistics costs. Thankfully, the existence of proactive port operators such as ICTSI and ATI is helping to keep things moving. After previously poor dialogue between private and public sector players in the industry, the truck ban has arguably forced them to work together on solutions. Overall, strong fundamentals indicate continued growth for the sector as the government has given it the green light. A focus on implementation of these ambitious plans can sustainably increase connectivity.


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The Report: The Philippines 2015

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