Since the inauguration of the administration of President Rodrigo Duterte in 2016 the government has made the development of infrastructure its leading priority. As part of the Build, Build, Build (BBB) programme, a range of projects have been pushed through, including those to upgrade and expand the transport network across the country in order to increase efficiency and encourage investment and development. While this emphasis on infrastructure has received widespread support, the manner in which projects are to be financed and developed has remained a point of discussion.
Expanded Options
For the most part, the Duterte administration has shown a preference for financing the BBB programme through official development assistance (ODA) and through public funds. Conventional public-private private partnerships (PPPs), favoured by the previous administration of President Benigno Aquino III, have taken a smaller role. However, the government has expressed its willingness to consider unsolicited private sector proposals and hybrid PPP projects, whereby projects are financed, structured and often developed by the government and ODA partners before the operations and maintenance are tendered to the private sector. The Duterte administration’s concerns regarding PPPs stem from the perception that they lead to lengthy delays as contractors struggle with financing and compete with one another.
Nevertheless, speaking at a press conference in November 2017, Benjamin Diokno, secretary of budget and management, stated that the government had not abandoned PPPs, but rather sought to expand the range of options available to finance infrastructure projects. Diokno went on to state that the government remained open to unsolicited PPP proposals, on the condition that contractors could guarantee that they would break ground on their projects within 18 months of receiving approval.
The ongoing debate over the financing of infrastructure is centred around differing views on the most appropriate way to fund construction. While many within the administration are unconcerned about who actually delivers projects, as long as they are delivered in a timely manner, there remains debate over how much financial risk the state should assume, and whether projects are more efficient if undertaken by the public or the private sector.
ODA projects can potentially run the risk of slowing down the pace of growth, according to Stefan Schmitz, CEO of Antrak Logistics. “We will need to see examples of ODA working well in terms of timing and quality. Therefore, I believe the expertise of the private sector will be required, and that the administration must focus on procurement and partnerships to streamline these projects and make INCREASED LIQUIDITY: Given the robust performance of the Philippine economy in recent years, the argument has been made that there is sufficient liquidity in the local economy to publicly finance projects, thereby avoiding international borrowing. Furthermore, given the sizeable cost and considerable expertise required for major infrastructure projects, ODA can be seen as an effective means While those in favour of private funding may argue that public investment increases national debt and foreign exchange risk, below-market credit loans from development partners have undoubtedly accelerated previously stalled projects, many of which were initially intended to be implemented as conventional PPPs under the previous administration.
Foreign Funds
The source of funding is an important policy question given the size and scope of the government’s infrastructure programme. According to the Department of Finance, 75 priority projects are in the BBB pipeline, valued at P1.8trn ($35.6bn). Of this total, 15 are big-ticket developments, with eight of these being funded by ODA loans.
These projects include the P23bn ($454.4m) Metro Manila Flood Management Project, which is co-funded by the Asian Infrastructure Investment Bank and the World Bank; the P151bn ($3bn) Philippine National Railways South Long-Haul Line, which is being financed through ODA from China; the P355.6bn ($7bn) Metro Manila Subway Project, funded by the Japan International Cooperation Agency (JICA); and the P19.8bn ($391.2m) Davao City Bypass Road, also financed by the JICA. As of the end of 2017 Japan accounted for 36% of all ODA loans. In addition to Japan, the Philippines has secured below-market loans from China, South Korea, Germany, Austria, Italy and Israel.
Role for PPP
While the previous administration of President Aquino III favoured the use of conventional build-operate-transfer arrangements, the Duterte government has shifted towards hybrid PPPs in instances where it has deemed a project to be suitable for private sector involvement. In early 2017 the implementing agencies began reviewing unsolicited proposals based on revised guidelines issued by the PPP Centre, an organisation which provides technical assistance to government institutions for the implementation of PPPs.
The first hybrid PPP project, which involves the design and construction of a new passenger terminal building at Clark International Airport, was awarded to a joint venture between local firm Megawide Construction and the India-based infrastructure company GMR Group in late 2017. Upon completion in 2020, the new terminal will triple the existing capacity of the airport to 12m passenger annually.
Under the hybrid model, the development costs will be met by government, while the maintenance and operations will be bid out separately to the private sector. The Bases Conversion and Development Authority, which oversaw the tender, called it the fastest PPP ever to be auctioned by the national government. Nevertheless, the project deal was relatively less complex than many previous PPP projects, given that it did not include an operations and maintenance programme. Construction work began in December 2017 and is set to be complemented by an extension of the railway line from Manila to Clark, with work beginning on this latter project in January 2018 (see analysis).
The two companies, Megawide Construction and GMR Group, are already working together on the expansion of the Mactan-Cebu International Airport, through a PPP issued under the previous administration. The companies were awarded the project after they submitted the best offer to build the new terminal, at P9.4bn ($185.7m), about 25% below the ceiling price set by the government.
Moving forward, the viability of PPPs will not only depend on the government’s willingness to consider private sector proposals, but also on its reliability as a partner for private investors. “If PPPs are to be more widely used in key projects, the government must build a track record of contractual consistency along the life cycle of a project”, Jim Wilkins, country manager of Fluor, told OBG. “Last-minute changes to the structure of contracts and bids create uncertainty for investors,” he added.
Divesified Funding
Alongside the development of these alternative PPP models, and a continued openness to unsolicited PPP proposals, the government is also working towards providing the fiscal space needed for greater state investment in infrastructure. The Tax Reform for Acceleration and Inclusion (TRAIN) initiative, which establishes a series of tax reform packages, is also expected to play an integral part in financing projects.
With the first package signed into law in January 2018, TRAIN is expected to help finance major infrastructure projects by generating additional revenue. The Department of Budget and Management has projected that the reforms will generate P1trn ($19.8bn) in revenue between 2018 and 2022.
The first tax reform package increased excise duties on fuel, vehicles, tobacco and sugared drinks, while at the same time reducing personal income tax and taxes for small businesses. In total, government investment, bolstered by the tax reforms, is expected to fund around 25% of BBB programme.
Bond Market
The government is also making use of the international bond market to secure financing, particularly in Japan and China. In March 2018 the Philippines raised P12bn ($237m) in its maiden renminbi-denominated bond issuance in the Chinese market. The sale of these Panda bonds makes the country the first ASEAN nation to issue bonds denominated in the Chinese currency.
The three-year notes saw high international demand, with 87.7% purchased by offshore investors; however, they were issued at a higher yield than the prevailing Chinese rate. In a statement in March 2018, the Philippine government’s Investor Relations Office stated that the proceeds from the sale would be used “to help fund government infrastructure projects and other financing requirements”.
Other foreign currency-denominated issuance is anticipated. In May 2018 Carlos Dominguez III, the finance secretary, told local media that the country is set to proceed with the issuing of yen-denominated bonds, also known as Samurai bonds, in either September or October 2018. While the proceeds of the planned Japanese bond sale are expected to be used to upgrade the Philippine embassy in Tokyo and settle maturing yen-denominated loans, further issuances could be used to finance parts of the BBB programme. Speaking to the local press in May 2018, Erwin Sta Ana, the national deputy treasurer, stated that the Philippines intends to continue its issuance of renminbi-denominated bonds in 2019, and that the government intends to use the Chinese market as a regular source of infrastructure financing.
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