What is the long-term picture for transport demand in the Philippines?

 

Transport operations and infrastructure development were acutely impacted by the Covid-19 pandemic as lockdowns stalled construction projects, movement restrictions prohibited travel even within communities and a ban on international arrivals in March limited aviation services for the rest of 2020. The government is now intent on restarting activity across the economy through infrastructure spending under President Rodrigo Duterte’s flagship Build, Build, Build (BBB) programme, which launched in 2017.

Structure & Policy

The Department of Transportation (DOTr) is responsible for transport oversight and policy, and was tasked with implementing new rules for transport operations during the pandemic. In late May 2020 the DOTr outlined guidelines to facilitate the safe reopening of services after initial lockdowns with “new normal” precautions in place, including mandating masks, providing hand sanitiser in public utility vehicles (PUVs), disinfecting vehicles, establishing contact tracing procedures and enforcing capacity limits. In a statement that month the DOTr noted progress in the use of digital systems that would facilitate the reopening process, including the widespread use of an automatic fare collection system for cashless payment transactions on public transport, a more decisive push towards electronic toll collection on main expressways, and online procedures for licensing and registration.

Initial projections for the BBB programme outlined spending of P8trn-9trn ($159.1bn-179bn) for infrastructure projects between 2017 and 2022. In the first year of the plan’s implementation, infrastructure spending exceeded 5% of GDP – the minimum threshold for developing countries in the region to meet the needs of their fast-growing economies, according to the Asian Development Bank (ADB). While already a record high, authorities aimed to increase this to 7.3% of GDP by 2022. As of end-2018, 31 of the 75 priority infrastructure flagship projects (IFPs) worth a combined P514.8bn ($10.2bn) were slated for completion by 2022. However, a July 2019 review concluded that only two of these projects – both related to river rehabilitation – had been completed, and lowered the number of projects expected for completion by 2022 to 21. By August 2020 the number of IFPs had expanded to 104 with a cost of P4.1trn ($81.5bn). Of these, 72 target transport improvements: half are road, expressway or bridge projects, and the remainder are rail, airport, subway and port initiatives. While a key criterion of IFP status is that the project is economically viable, the high number of concurrent initiatives and uncertainty around transport demand after the pandemic poses challenges to ascertaining which projects should be prioritised. The primary implementing agency of the BBB programme is the Department of Public Works and Highways (DPWH), followed by the DOTr. Other bodies include the Bases Conversion and Development Authority, which is involved in the 70-km Subic-Clark railway and three other IFPs around Clark City; the Metropolitan Waterworks and Sewerage System, which oversees privatised water provision in the capital; and the Department of Information and Communications Technology, which handles ICT policy. These and other government agencies are supported by public and private sector actors that assist with implementation.

However, the high number of agencies and the complexity of bureaucratic processes involved in infrastructure projects can prove a hurdle to development. “The implementation of projects needs to improved,” Stefan Schmitz, country manager of Antrak Logistics, told OBG. “A single window to reduce red tape; simplified taxes and permissions; and quicker implementation of the rules and regulations of new laws would help.”

Funding

Although the pandemic markedly reduced demand for travel and business activity fell across many sectors, President Duterte doubled down on his administration’s commitment to the BBB initiative as a principle means to rejuvenate the economy. This was reflected in the proposed 2021 budget: in August 2020 the government outlined a P1.1trn ($21.9bn) allocation for the scheme, up 13% from its 2019 allotment of P976bn ($19.4bn), and posited that related projects could create 140,000-220,000 jobs. In his August budget message to Congress, President Duterte emphasised that the budget focused on “shovel-ready projects” to enhance service delivery and mobility.

The 2021 budget was approved by the House of Representatives two months later, with the DPWH and the DOTr to receive P667.3bn ($13.3bn) and P143.6bn ($2.9bn), respectively. The Senate subsequently passed the budget on November 26, increasing funding for the repair and upgrade of ports and airports, and accessibility for those with disabilities by P226m ($4.5m), P1.2trn ($23.9bn) and P70.3m ($1.4m), respectively.

Projects involving foreign assistance had been set to receive the bulk of funds – a proposed P100bn ($2bn) – in the 2020 transport infrastructure budget. Large-scale undertakings are generally financed by official development assistance (ODA) from multilateral institutions or bilateral partners. As of October 2019 the Japan International Cooperation Agency (JICA) was backing eight ongoing road and bridge projects with funding valued at around P69bn ($1.4bn), led by a P20.4bn ($405.7m) project to reconstruct nine roads and bridges severely damaged by an earthquake along the Bohol Circumferential Road.

The revised IFP list enveloped several public-private partnership (PPP) projects initiated by the administration of former President Benigno Aquino III, as well as a raft of new projects inspired by unsolicited proposals. Of BBB’s total 104 IFPs, 30 are PPPs, with unsolicited proposals in the transport sector alone valuing P1.39trn ($27.6bn). These are overseen by the PPP Centre of the Philippines, which manages a revolving fund called the Project Development and Monitoring Facility. The authority also advises implementing agencies on technical matters, monitors the progress of priority PPP projects, formulates policy guidelines for PPP transactions – whether they are build-operate-transfer, joint venture (JV) or sole contractor contracts – and maintains a central database of all PPP projects.

Aviation Infrastructure

The largest unsolicited PPP is a P740bn ($14.7bn) proposal from conglomerate San Miguel Corporation (SMC) to build New Manila International Airport and adjacent infrastructure in Bulacan, in an effort to relieve congestion at Ninoy Aquino International Airport (NAIA). NAIA handled 47.9m passengers in 2019, but was only designed to accommodate 30m. The SMC plan outlines the construction of four runways – potentially rising to six – to accommodate 100m passengers per year. A franchise bill for SMC subsidiary San Miguel Aerocity to begin construction was awaiting President Duterte’s signature as of mid-November 2020, after being approved by the Senate early the previous month. The project is slated for completion within 12 years of starting construction.

A concurrent P102bn ($2bn) plan to redevelop NAIA was still being evaluated as of late 2020, after the government rejected revised terms from a group of seven conglomerates. The consortium, which includes Ayala, Cebu Pacific parent JG Summit Holdings and Philippine Airlines affiliate LT Group, adjusted its submission as a result of the pandemic’s impact on demand for air travel and asked the government to reconsider its pledge to hold back from directly funding major IFPs.

Nevertheless, there were some completions in 2020. Sangley Airport in Cavite – around 30 km south of the capital – was inaugurated for commercial operations in February and a new passenger terminal at Clark International Airport was finished in September. The latter was completed ahead of schedule and can now receive passengers, although it remains to be seen how long it will take to reach the annual capacity of 12.2m passengers after Covid-19-related travel restrictions ease.

Public Utility Vehicles

An essential means of transport for many Filipinos is PUVs, although a high number of antiquated vehicles remain on the road despite plans to replace them. A programme launched in 2017 to phase out 175,000 jeepneys for replacement with 85,000 modern units by July 2020 saw just over 2500 modern vehicles on the road as of late 2019.

To facilitate a safe, affordable return to work for the country’s labour force, modern jeepneys with location-monitoring technology such as GPS were permitted to restart operations on selected routes from June 22, 2020 – three weeks after some public buses resumed operations and concurrent with the resumption of certain UV Express services, a van-based PUV whose seating arrangement facilitates social distancing. Traditional jeepneys were permitted a phased return beginning two weeks later. Health precautions include manual contact tracing and plastic dividers along vehicle seats, and in October 2020 the DOTr partnered with the Land Transportation Franchising and Regulatory Board to offer incentives for PUV drivers to register online to assist with contract tracing, paving the way for a more comprehensive reopening of services.

In recognition of the economic impact of Covid-19 restrictions on the country’s numerous PUV drivers, these workers received designated support in the country’s second stimulus package, the Bayanihan to Recover as One Bill (also known as Bayanihan 2). President Duterte signed the P165.5bn ($3.3bn) bill into law in September 2020, with a P9.5bn ($188.9m) allocation for the DOTr. The lion’s share of this allocation, or P5.6bn ($111.4m), was earmarked for assistance to PUV drivers.

Roads & Bridges

Road infrastructure improvements, both within the capital and elsewhere across the archipelago, have remained at the heart of the administration’s BBB programme and were highlighted in the country’s pandemic response strategy. Mark Villar, secretary of the DPWH, revealed in July 2020 that almost 24,000 km of roads had been built or improved since 2017, complemented by the construction, upgrade or rehabilitation of almost 5000 bridges. Villar also stated that the government intended to spend P802bn ($16bn) to lay a further 1066 km of highways in Luzon, Cebu and Davao. Key to improving Luzon’s highway network is the DPWH’s flagship P633bn ($12.6bn), 905-km Luzon Spine Expressway Network, which will more than double the length of expressway on the country’s most populous island. The network should halve the travel time between Ilocos and Bicol from 20 hours to nine, with multiple components including the 89-km Tarlac-Pangasinan-La Union Expressway (TPLEX), the 67-km South Luzon Expressway (SLEX) Toll Road 4 and the 45-km Cavite-Laguna Expressway (CALAX).

While BBB aims to enable inclusive development in areas beyond the National Capital Region (NCR), many of the most impactful projects lie close to Manila. For example, in October 2020 SMC-backed Citra Metro Manila Tollways finished the six-year construction of the Metro Manila Skyway Stage 3, an 18-km elevated route to connect Senator Gil J. Puyat/Buendia Avenue in Makati with a North Luzon Expressway (NLEX) access point in Balintawak, Quezon City. In late November 2020 SMC announced in a statement that the project’s target completion date will be February of the following year. The thoroughfare – with just 20 minutes’ expected travel time – should help mitigate congestion as more vehicles return to Manila’s roads.

Another NCR-based project with the potential to galvanise development is the 80-km NLEX-SLEX Connector Road. Initiated in 2015, the Manila North Tollways project aims to reduce the journey time between Luzon’s two busiest expressways from two hours to 20 minutes. The 8-km link will also be connected to Skyway Stage 3, and should therefore aid trade and logistics operations along the Calabarzon corridor upon its completion, expected in December 2021.

The government further stated in July 2020 that the 680-metre Binondo-Intramuros Bridge and the 506-metre Estrella-Pantaleon Bridge, connecting Makati with Mandaluyong’s Barangka Drive, remain on schedule for conclusion in the first quarter of 2021. These will supplement 30 other bridges in Metro Manila that span the Pasig River, Marikina River and Manggahan Floodway, further easing traffic on the capital’s main roads.

Intercity Rail

Rail improvements are key to the BBB initiative: over 80% of the DOTr’s 2020 budget was allocated to the construction, rehabilitation and improvement of railway infrastructure. These developments aim to enhance the movement of both freight and passengers, with many projects designed to boost connectivity among cities beyond Metro Manila. For instance, the P50bn ($994.5m) Subic-Clark freight railway, funded by an ODA loan from China, will connect freeport zones in the two areas and include a link to Subic Bay New Port Container Terminal. Work on the 71-km route – part of DOTr plans to create an integrated logistics hub in Central Luzon in a further effort to decongest the capital – had been slated to start in July 2019. The project has been delayed, however, with consulting services worth P1.5bn ($29.8m) launched for rebidding in October 2020.

The DOTr seeks to expand the Philippines’ rail footprint from 77 km of operable railways in 2019 – comprising Light Rail Transit (LRT) Line 1, LRT Line 2, Metro Rail Transit (MRT) Line 3 and Philippine National Railways (PNR) lines – to 1200 km over the next few years. Expansion projects include the 163-km NorthSouth Commuter Railway to connect Clark to Calamba in Laguna via Malolos in Bulacan and Metro Manila. The initiative, which is co-financed by the ADB and Japan with a projected cost of around P777.6bn ($15.5bn), aims to expand access to economic opportunity while reducing congestion around the capital. In August 2020 PNR awarded the first two engineering contracts for Phase 2 of the project to South Korea’s Posco, and to a partnership between domestic player EEI and a local unit of Spain’s Acciona. Phase 1 is already under construction and targets partial operations by December 2021, while Phase 2 aims to be partially operational by 2023. A fully completed railway is set to serve 340,000 passengers per day from 2025.

Meanwhile, the P81.7bn ($1.6bn), 2000-km Mindanao Rail Project, a flagship BBB initiative, is moving forwards after the pandemic delayed the first phase. Works on the initial 102-km route linking Tagum City to Digos in Davao are set to begin in the first quarter of 2021.

Urban Rail

Construction is also imminent with regard to Phase 1 of the Metro Manila Subway Project, as the delivery of six Japanese tunnel boring machines is expected in January 2021. The 17-station, 30-km subway project, funded by Japanese ODA at a cost of P357bn ($7.1bn), is expected to begin partial operations on a section from Valenzuela to North Avenue in Quezon City in 2022 to serve 370,000 daily passengers ahead of full operations commencing in 2026. In October 2020 the DOTr opened bidding for the Ortigas North and South stations and tunnelling works. A Japanese contractor is obliged to act as the lead party, although firms from other countries are eligible to serve as sub-contractors.

The 11-km Cavite LRT Line 1 extension, a pre-Duterte project, was almost halfway complete by July 2020, according to the DOTr, and was on track to begin operations in 2022. The Light Rail Manila Consortium – a group of Metro Pacific Light Rail, Ayala’s AC Infrastructure Holding and Macquarie Group – is undertaking the works in technical partnership with Paris Metro operator RATP Group. Upon completion, the extension is forecast to lift daily passenger numbers on the line from 500,000 to 800,000 as another relief valve for Manila’s overloaded services. A raft of new MRT projects are also ongoing, with the SMC-led MRT Line 7 from Bulacan to Quezon City 50% finished as of March 2020.

In January 2020 the DOTr gave the green light to the new ADB-backed, P59.3bn ($1.2bn) MRT Line 4 servicing Eastern Metro Manila, with work on the 15.6-km route due to commence in 2021 for completion in 2025. Elsewhere, the P22bn ($437.6m) rehabilitation of MRT Line 3 by Sumitomo is expected to be finalised by 2022, with passengers already benefitting from faster speeds and a higher number of trains on the line by October 2020.

Ports

For water transport, work began on the P10.1bn ($200.9m) New Cebu International Container Port in September 2020. The project – funded by an ODA loan from Export-Import Bank of Korea, alongside the Philippine government and led by Yooshin Engineering Corporation – aims to relieve congestion at the existing port, which will revert to handling domestic cargo once the new berthing infrastructure is completed in 2025.

A total of 369 seaport projects had been completed under the Duterte administration as of August 2020, with another 108 ongoing. Of these, 189 completions and 37 ongoing initiatives were commercial port projects. Expanding port infrastructure is key to improving the Philippines’ attractiveness as a manufacturing investment destination, as well as to easing the flow of commerce among the country’s many inhabited islands.

Outlook

The government’s preference for financing major BBB projects through ODA and creating a welcoming environment for unsolicited private proposals seems prescient given the uncertainties for transport demand created by the Covid-19 pandemic, as a larger share of public funding could have resulted in an unsustainable burden on the state. Going forwards, investor interest seems stronger than the challenges presented to the sector in 2020. Indeed, SMC’s commitment to building a new airport in Bulacan is just one example of sustained confidence in long-term demand for transport infrastructure of all types in the Philippines.

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The Report: The Philippines 2021

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