For an archipelago of 7107 mostly mountainous islands, the task facing the transport sector has always been complex. Yet with renewed vigour, the Department of Transportation and Communications (DoTC) has unveiled ambitious plans to connect the islands and their regional economics by land, sea and air.

CLEARING THE WAY: With the unveiling of the National Transportation Policy Agenda (NTPA) in 2010, the administration of President Benigno Aquino III has initiated an unprecedented overhaul of transport infrastructure development, providing for the first time a centrally coordinated yet nationally inclusive strategy spearheaded by the DoTC. The government, however, is banking on private sector investment to carry the load, with its intentions enshrined in law, as well as in President Aquino’s first State of the Nation address.

The policy shift affords investors considerable opportunities for the first time in almost 20 years, yet it remains ambitious. Corruption, weak governance and the reluctance of local financial institutions to provide long-term financing for infrastructure projects have long deterred private sector investment in the past, compounding almost a quarter century of budget deficits and public sector underinvestment, the rate of which dropped to a low of 1.8% of GDP from 2001-11. Unsurprisingly, the World Economic Forum’s “2010-11 Global Competitiveness Report” singled out inadequate infrastructure and inconsistent policies as key failings of the Philippine economy, which ranked 85 out of a total of 139 countries surveyed.

STRAIGHT PATH: The government has not been blind to this. In search of a “straight path” it has pursued widespread institutional and regulatory reform, suspending construction, bidding for proposed projects, renegotiating contracts with investors and national partners such as China and Japan, and calling on the World Bank and the Asian Development Bank (ADB) to assist in capacity building and feasibility studies. It is a strategy that many hope will finally address key failings in the country’s transport infrastructure policy and development. Speaking in October 2011, the secretary of the DoTC, Mar Roxas, stated the government’s underlying motivation: “A strong and stable leadership, a government continuously investing in Filipino human capital and a modern transport system are among the indispensable factors that will make our country perpetually competitive despite the vagaries in the global realm.”

ATTRACTING INVESTORS: This rhetoric has seemingly won the hearts and minds of investors, and the Aquino administration has successfully attracted substantial and renewed investor interest, enabling it to unveil a P565bn ($12.8bn) five-year public-private partnership (PPP) plan in October 2011, just 16 months after coming to power (see analysis). Moreover, investors with an eye for opportunity have seen that future demand in the transport sector is going to mean big business in a country with a population of some 95.8m and a median age of just 22.2. Nonetheless, they have had to be patient. The review of scheduled PPP projects during 2010-11 has delayed project implementations across the board, but it has also allowed a restructuring of government departments and an overhaul of PPP architecture, overcoming shortfalls in inter-modality and the fragmentation of services – traits that typified the piecemeal approach to past projects.

PPP CENTRE: According to the PPP Centre’s director of planning, Ronaldo Corpus, who is charged with coordinating and auditing all PPP project bids, while there have been some delays, these have been necessary to ensure that the projects are in line with the administration’s agenda. “The delays are fitting because they ensure that the projects are problem free and that transaction structures are set and are in line with [ President Aquino’s] ‘straight path’ initiative. This government is ensuring that these projects, though delayed, are free of problems and corruption,” Corpus told OBG.

The PPP Centre itself is an offshoot of this agenda. Replacing the Build-Operate-Transfer (BOT) Centre – which was bypassed for much of the past decade with unsolicited bids sent directly to frontline agencies, fuelling allegations of corruption – the Aquino administration has placed the PPP Centre at the forefront of ensuring transparency, accountability and integrity in all future bidding. In September 2010 most of the BOT Centre’s staff were shifted to the National Economic and Development Authority (NEDA). The centre is receiving technical support from the ADB and providing capacity-building assistance to central and local government units in support of the NTPA. With revised processes in place, bidding opened on a few projects in 2011, and 2012 should see the implementation of major transport projects led by the private sector.

LINKING REGIONS: The NTPA has sought a coherent and coordinated approach based on the national priority of decentralising investment from North Luzon and the National Capital Region (NCR), the nation’s powerhouse that has absorbed much of the state spending aimed at the transport sector. However, initiatives continue to focus on linking the four economic “super regions” by land, sea and air. These include the North Luzon Agribusiness Quadrangle, which encompasses the northern half of Luzon; the Luzon Urban Beltway, which represents the major concentration of population and industry in the country, including the NCR and the island of Mindoro to the south; the Central Philippines region, which covers the largest swath of the country’s landmass, stretching from the Camarines region in the north to Bohol and Negros in the south, and to outlying Palawan in the east; and Mindanao, which consists of the archipelago’s second-largest landmass and outlying southern islands.

The inception of the Bases Conversion and Development Authority (BCDA) in 1994, tasked with the development of former military bases, airfields and ports in nine locations, including within Metro Manila, focused a significant portion of current transport projects on providing fast and efficient links between these business and industrial centres. Provided with incentives similar to those from the Board of Investment (BOI) and the Philippine Economic Zone Authority (PEZA), BCDA sites have proven to be key to growth across Luzon.

TOURISM: Another strategic thrust came in 2010 with the government’s push to boost development in the tourism industry (see Tourism chapter). In the revised national tourism strategy the government has prioritised the development of airport infrastructure, as well as the provision of local market access and road connectivity to bring communities into the supply chain. This sector will see some of the most dynamic transport infrastructure growth over the next decade. According to the DoTC, most of the PPP projects related to airport development pertain to introducing new tourist destinations. Although the focus is there, the government faces substantial obstacles as it works to meet its target of reaching 10m foreign arrivals by 2016.

DOWNGRADE: While the government is striving to attract more international arrivals, 2011 was spent trying to reverse the Civil Aviation Authority of the Philippines’ downgrading by both the US Federal Aviation Authority (FAA) in 2008 and the EU in 2010, following a failed safety audit. Not only did this downgrade damage the country’s national air safety reputation, but it also restricted the operations of Philippine-registered airlines to the Asian region and may affect several industries. The downgrade was met with a pragmatic response and ahead of a December 2011 review, the government announced it had addressed all but seven of the FAA’s findings and concerns, having hired FAA consultants and installed an International Civil Aviation Organisation-compliant communications navigation surveillance/air traffic management system. Their efforts gained industry support, but the FAA’s report released in early 2012 pointed to lingering issues within the industry, raising further questions.

NEW PATHS: Liberalisation of the aviation sector has accelerated lately, creating an influx of low-cost carriers and establishing a mature and competitive market environment for passengers and cargo. Building on 29 national air services agreements as part of the country’s “pocket open skies” initiative, the Civil Aeronautics Board also granted local air boards the autonomous right to permit foreign carriers without reciprocal arrangements in 2011, heralding further growth. To cope with the anticipated boom in visitor numbers by 2016, airports are being overhauled and turned over to private management as the government moves from being a service provider to an industry regulator.

OUT TO TENDER: Eight airport projects are being put to tender in 2012, following the successful operate and maintenance (O&M) PPP agreement between Caticlan Airport and San Miguel Corporation’s subsidiary TransAire Development Holdings. Mindanao’s Laguindingan International Airport, which will include cargo capacity and be completed by 2013, will replace two domestic airports. Its O&M contract is being put to tender on a 20-year concession at an estimated project cost of P8.7bn ($197.49m). To the west, the Zamboanga International Airport is being offered on a 20-year concession to finance, build, operate and maintain the facility, with a price tag of P9.9bn ($224.73m).

In the central region, Bohol province’s Panglao International Airport and Mactan-Cebu International Airport are set for construction and redevelopment, respectively. Panglao will replace the existing Tagbilaran Airport at an estimated P6.9bn ($156.63m), with a 20-year concession offered on a finance, construct, operate and maintain basis. Mactan-Cebu is also seeing increasing international and domestic traffic, which will require upgraded facilities and a new cargo terminal. The 20-year concession is estimated at P2.5bn ($56.75m).

To the east, Palawan’s Puerto Princesa is expected to become one of the country’s best-performing destinations. It is preparing for the arrival of up to 2m visitors by constructing or rehabilitating key facilities and extending the runway at Puerto Princesa International Airport at a cost of some P4.2bn ($95.34m), helping it to become a primary international gateway.

In Luzon, the new Daranga International Airport is to be built at Legaspi, costing an estimated P6.6bn ($149.82m). Additionally, Laoag International Airport in the north-west requires the installation of air navigational facilities, as well as substantial air and landside rehabilitation, costing some P5.5bn ($124.85m). Alaminos Airport in Pangasinan requires both air and landside facilities worth P4.7bn ($106.69m). All are being offered on 20-year concessions to December 2032. The airports at Mactan-Cebu, Kalibo, Tacloban, Laguindingan, Panglao, Puerto Princesa, Laoag, Davao and Zamboanga will also all benefit from liberal point-to-point air services by designated foreign carriers once they become operational.

LIBERALISATION: The effects of market liberalisation are already manifest in the aviation sector, with rival flag-carrier Cebu Pacific Airlines (CEB) now topping national carrier Philippine Airlines (PAL) with 44% of the passenger and 46% of the cargo market, prompting a process of reform and rationalisation within PAL that eventually erupted into a bitter and public union dispute in 2011. With plans to increase its fleet to 53 planes by 2015, CEB is leading international route expansion. The industry as a whole projects annual passenger traffic will rise to 40m by 2021. “Over the next few years we will see double-digit growth in the domestic market,” Candice Iyog, CEB’s vice-president for marketing and distribution, told OBG. “The environment is supportive and air travel penetration is currently low. From a bottom-up view, domestic tourism growth is among the fastest-growing sectors in the country.”

But Ninoy Aquino International Airport (NAIA), the congested and partly dilapidated national gateway in Manila, remains a weak point in the country’s aviation network. Carriers at NAIA complain about substantial delays as well as high landing and terminal fees. Attracting negative press locally, however, has meant that the airport has also drawn the government’s full attention, and an overhaul of Terminals 1 and 2 is planned. .

Opened in 2008, NAIA’s Terminal 3 was meant to alleviate some of the strain, but remains a monument to investor concerns. After international arbitration, the terminal’s longstanding ownership dispute with the Philippine International Air Terminals Company (a consortium that includes German airport operator Fraport) looked to be resolved in early 2012, following the government’s expropriation of the terminal in 2004, citing contractual irregularities.

The new terminal is unlikely to alleviate pressure on NAIA, which is operating in excess of 36 aircraft movements per hour and is just 2m short of its annual 32m passenger capacity. Diosdado Macapagal International Airport (DMIA) at Clark, a BCDA site, has already been designated as NAIA’s successor. However, carriers have been reluctant to shift operations there before capacity upgrades in the passenger terminal and ground transport links to Metro Manila are complete. So far only AirAsia Philippines has agreed to move to DMIA. Consequently, to handle traffic until the new transport links to Clark are in place, NAIA will be getting an upgrade that should see it through the next five years, In 2011 the DoTC announced the construction of rapid-exit taxiways to address congestion on NAIA’s runways, which had been forcing airlines to limit their flights. The government has ordered aviation schools and general aviation aircraft, which make up 17% of NAIA’s traffic, to transfer their operations elsewhere, giving them a deadline of 2014. Upgrading airports to be night-capable is critical to relieving congestion at NAIA and improving air connections nationwide.

Another PPP airport project, the P3bn ($68.10m) Metro Manila check-in terminal with shuttle bus services to Clark will serve the airport until 2016, when the Northrail project is scheduled for completion.

RAIL RECONFIGURATIONS: The Aquino administration suspended the Northrail project with the intention of reconfiguring it from a commuter service with 11 stops into a high-speed train system much like Hong Kong’s Airport Express. Connected to the Metro Rail Transit (MRT) and Light Rail Transit (LRT) lines, Northrail will link Metro Manila’s Fort Bonifacio Global City to Clark International Airport, both of which are BCDA project sites. The Northrail is a stated BCDA and government priority, and progress is expected in 2012, although a final completion date and price tag are still pending.

The project’s Southrail counterpart, which was intended to reconnect Manila and the southern end of Luzon, is also behind schedule. Backed by Chinese and Korean loans, the estimated costs on the Korean section alone have risen to some $100m.

The government has also proposed a modernisation of the existing 478-km Philippine National Rail line from Calamba to Legaspi City at $687.28m, but elsewhere an ambitious plan to connect 10 coastal municipalities and all major population centres via a 2000-km Mindanao Railway System has captured investors’ attention. A feasibility study and initial costing led by NEDA is under way, with details for the 124-km phase one tender expected in 2013. The line will serve the province’s growing agricultural sector, providing an alternative bulk transport system to the limited but expanding “farm-to-market” road network. The economic benefits are expected to consolidate gains made following the retreat of the region’s separatist insurgency. However, with just 995 km of rail in place nationwide, the government’s attention remains focused primarily on decongesting Metro Manila.

RAIL IN MANILA: The LRT system lines 1 and 2 serve the city in two north-south and east-west routes, alongside the MRT-3, which traverses the Epifanio de los Santos Avenue complex, the busiest passenger and commercial transport corridor in Metro Manila. Known as the yellow, purple and blue lines, they carry 1m passengers per day. In an example cited by Secretary Roxas of the previously hapless implementation of transport projects, all three have different physical and engineering specifications. Following the review of their readiness for PPP status in 2011 (to be concluded in 2012), tenders have been released for extensions on the LRT lines. For the LRT-1, an 11.7-km, eight-station extension will run from Baclaran to Bacoor in Cavite. The 4-km, two-station Masinag extension for LRT-2 will open up the Antipolo and Marikina areas for denser development and facilitate commuter movement.

The government is also opening for tender the already privatised O&M concessions for both the LRT-1 and MRT-3 lines in a combined bid worth P15bn ($340.5m). It is also offering a 10-year concession for the standardising of a common automated fare collection system across all lines, worth P1.73bn ($39.27m). Expansions are planned for a network of light urban railways for commuters connected to both Northrail and Southrail projects, but these will take priority only after 2016.

ROAD INFRASTRUCTURE: As the backbone of the transport sector, the Department of Public Works and Highways (DPWH) is working towards a 2011-16 public investment programme worth $15.84bn that will see 100% of its arterial north-south routes and 81% of its east-west secondary roads paved by 2014. Over 80% of its budget ($13.38bn) will be spent on highways alone, with $4.43bn sourced from foreign financing and PPPs. Much of this will go toward consolidating infrastructure gains made in previous years in North Luzon, where industry and business has been concentrated.

In the Subic-Clark-Manila-Batangas Corridor, which handles over 80% of national cargo throughput, 2012 should see the completion of the 88.5-km Tarlac-Pangasinan-La Union Toll Expressway project, extending the Subic-Clark-Tarlac Expressway and connecting Manila to core northern industrial and agricultural zones. To the south, the completion of the Batangas Port Development Project and the Southern Tagalog Arterial Road Expressway are also anticipated.

EXPRESSWAYS: Up to 2016 the DPWH has a pipeline of 13 other expressway projects totalling 387 km at a cost of P276.69bn ($6.28bn). These projects will draw on the Master Plan Study on High Standard Highway Network Development, which was formulated with technical assistance from Japan International Cooperation Agency. The first tranche of these will build on the existing 426 km of expressways and toll roads in the Luzon Urban Beltway, bringing the total network to 626 km by 2020 and 995 km beyond 2030. This will require significant investments in elevated roadways across Manila. In 2012 the 5.2-km, phase two NAIA elevated expressway, the South Luzon Expressway (SLEX)- North Luzon Expressway (NLEX) connector road and the Cavite-Laguna expressway are expected to open. Another six projects will be put to tender in 2013: the C-6 and C-5 links, which bypass Metro Manila for south- and north-bound traffic; the SLEX Batangas-Lucena extension; the NLEX East Expressway to Cabanatuan; the Calamba-Los Banos link expressway; the R7 link across some of the most congested parts of Metro Manila; and an O&M contract for the Marcos Highway.

PUBLIC TRANSPORT: While expressways will facilitate interstate travel, the government is also targeting public transport (the “weak link” in the country’s development plans, according to the DoTC) as part of the 2011 National Environmentally Sustainable Transport strategy. Modernising road and rail public transport infrastructure will ease traffic congestion and pollution, lower economic and health costs, and help to wean the transport sector off its dependence on fuel subsidies.

With traffic at peak times in urban areas moving at an average of just 20 km per hour, congestion is certainly a problem. The government’s flagship project to address this issue is Cebu’s World Bank-supported 16-km Bus Rapid Transit system, which will have a capacity of 270,000 passengers per day and is undergoing a feasibility study. The government is also looking to reduce an oversupply of privately operated transport services (which are blamed for significant congestion) by removing taxis, buses and even iconic “Jeepneys” that are over 13 years old from the road.

ROLL-ON ROLL-OFF: The three roll-on roll-off (ro-ro) nautical highways that connect Mindanao, Visayas and Luzon have “progressed tremendously and ahead of schedule”, according to Raul Santos, the assistant general manager of operations at the Philippines Ports Authority (PPA). The highways have been one of the country’s transport success stories, helping to reduce travel times and costs by up to 70%, according to the ADB, and they have also facilitated a marked increase in ship calls and vehicle traffic. Despite the suspension of ro-ro port facility construction in 2010 – it was found that some facilities were unnecessary, with warranties rendered invalid in typhoon-prone regions – the Aquino administration has remained supportive, proposing international links to China and other ASEAN nations.

CAPACITY DEVELOPMENT: However, as there are just 10 commercially viable ports nationwide, capacity development at Philippine ports with continued private sector support remains the priority, according to Santos, and concerned parties are calling for the development of strategic ports. While the PPA and industry players have divergent views on the causes, both agree that port development is an urgent necessity to ease the congestion resulting from the concentration of container traffic into just seven ports: Mindanao’s Cagayan de Oro, Davao, General Santos, Zamboanga, Iloilo, and Manila’s South and North Harbours.

Privately owned and operated ports have helped plug the gap, specifically in Mindanao, which has seen a 30% traffic increase over the past three years on the back of an agricultural boom. The higher costs of private ports have also been offset by increased efficiencies, yet they remain side-line players, with a combined throughput of 173,000 twenty-foot equivalent units (TEU) in 2010 against Manila’s 1.54m.

With 12-15% growth still expected, tenders for the 20-year concession and construction of two short-train berths at Davao’s Sasa Port were released in 2011, boosting capacity from 700,000 TEUs to 1.2m TEUs at an estimated project cost of P5bn ($113.5m). While this will ease congestion, the expected 50% decline in the use of refrigerator “reefer” ships over the next decade (to be replaced by refrigerated containers) will streamline portside operations, according to Santos.

REGIONAL ROLE: Underlying the perceived shortfalls in the maritime sector’s operations is the fact that the Philippine economy is a net importer, with 18.25m TEUs imported against just 8.42m exported in 2010. The country remains a tributary feeder to the maritime hubs of Hong Kong and Singapore, and most ports cannot accommodate industry-standard large container vessels. With consumer demand strongest in Manila, shipping and industry continues to favour the north and south harbours. Meanwhile, Subic and Batangas have struggled to attract business despite their respective BOI- and PEZA-incentive-backed developments, although they continue to post strong throughput performances and port management company International Container Terminal Services penned a deal to run a second container terminal at Subic in 2011.

Congestion in Manila looks set to increase with the completion in 2012 of Manila International Container Terminal’s berth six, which will lift total annual capacity to 2.4m TEU at the city’s only dedicated container terminal. The PPA’s new Manila bulk terminal at the North Harbour should also open for tender in 2012, followed by 20-year concessionary development bids for Mindanao’s Cagayan de Oro, General Santos, Zamboanga and Ozamiz ports, along with Iloilo and Metro Cebu’s Mandaue port in 2013.

SAFETY & SECURITY: Brought to the fore by the 2008 sinking of the Princess of Starspassenger ferry that killed over 800 passengers and crew, the country’s shaky safety record is the focus of the Maritime Transport Development Plan, which has seen the implementation of internationally compliant codes for ship inspections, ship and port facility security, and electronic manifest protocols. Philippine ports have also received substantial attention and assistance from foreign governments in recent years, due to shortfalls in security protocols and capacities. Maritime security has received the most focus in the years since the attacks of September 11, 2011, but following the creation of the Maritime Transportation Security Bureau in 2004, attention has also been turned toward the International Ship and Port Facility Security Code. Manila North Harbour should be the first port to gain accreditation in 2012.

OUTLOOK: As the Aquino administration works to transform public agencies from service providers to regulators, the private sector’s role will come to define the country’s transport infrastructure, providing lucrative opportunities for investors and operators alike. While substantial improvements are still required, the Philippines has entered a new era of coordinated and critical transport development. The next decade should see substantial improvements in the integrated transport infrastructure, supporting the regional role it seeks through the Master Plan on ASEAN Connectivity, which the Philippines adopted in 2010. However, the administration’s plans up to 2016 – concurrent with the end of President Aquino’s term – belie concerns that its commitment to transparency, integrity and good governance may prove unsustainable beyond its own tenure.