Making up for lost time
The Philippines’ BBB infrastructure reboot battles red tape, slow pace and funding challenges
WITH the six-year term of President Rodrigo Duterte at the halfway mark since coming into power in 2016, the Philippine government is ramping up its infrastructure spending from 4% of the GDP during the past two years to a high of 7% by the year 2022.
In doing so, it hopes to break the infrastructure logistics bottleneck it sees as restricting the country’s long-term growth.
However, questions persist on how best to accelerate and finance the infrastructure projects formulated under the BBB programme.
In an effort to speed up the programme, the government has taken a bigger role in implementing the BBB agenda and has negotiated for more official development assistance (ODA) to help fund the projects, instead of relying on PPPs to offset red tape and protracted negotiations, which slow down the process. Project financing is also being raised through a package of fiscal reforms, which aims to raise the much-needed revenues.
To enhance and facilitate infrastructure investments, the government is also accepting unsolicited proposals and implemented what it calls a hybrid PPP model as demonstrated in a number of airport projects. Under the hybrid PPP model, the government builds the projects and later tenders their operation and maintenance (O&M) under a concession to the private sector.
“We want to complete as many infrastructure projects as possible by 2022, which is why we are reviewing the list of flagship projects,” Carlos Dominguez III, secretary of finance of the Philippines, told The Asset’s 14th Philippine Forum held in Manila in early October. “Last year, for the first time in our history, we have exceeded 5% of GDP infrastructure spending, double the average spending over the last 50 years.”
While noting the substantial uptick in infrastructure investments, Ma Cynthia Hernandez, principal and sector head for infrastructure at KPMG Philippines, points out that the spending has actually been going more to the Department of Public Works and Housing to improve and build much-needed roads in the countryside.
“If you think of the infrastructure programme, that has been substantially slowed down because of the conversion of large PPP projects in the pipeline into hybrid [PPPs],” she explains. “In the National Capital Region, there’s not a lot to show so far, but we are still hoping that these large projects take off.”
“Too little, too late, but better late than never,” BJ Sebastian, senior vice-president and head of strategic investments at JG Summit, says of the BBB programme, arguing that many of these projects should have been implemented 20 years ago, before the current congestion made them more complicated and costly.
As for the pace of BBB project implementation, Tim Meaney, principal infrastructure finance specialist at the Asian Development Bank (ADB), feels the government will load more burden onto itself, especially with hybrid PPP projects, as it will be responsible for negotiating 100% of each contract rather than having the private sector handle contracts on its own behalf.
On the power side, Frank Thiel, managing director at Quezon Power, sees his firm’s challenge as finding opportunities within the BBB masterplan, noting that some projects in it have not been reviewed and upgraded on a regular basis.
And while there are some proactive signals coming from the Department of Energy, “there is still quite a bit to be done [by the various government entities],” he notes, adding that the existing power plants are aging and additional capacity is needed as the persistent power shortages demonstrate.
Private BBB investment
Local conglomerates with experience of the slow pace of the regulatory environment are still very upbeat about investing in infrastructure projects, explains KPMG’s Hernandez. However, “there will come a time when the BBB agenda will need international investors,” she adds.
The government, Hernandez argues, will then have to be less bureaucratically rigid and think more about how to facilitate private investment. “Sometimes, the government does not get enough bidders to move forward with a project, or the bidder just goes to Vietnam or elsewhere.”
Sebastian sees the uneven risk allocation as the main impediment to investors.
“I think the thrust of the government – whether it is doing the projects through ODA funding or granting a concession to the private sector – is to weigh the risk heavily towards the providers of equity capital,” he adds.
And it is doing this even more with some of the concession agreements, he points out, arguing it needs to have a “more considered view of risk allocation”.
Another risk that the owners of equity capital and the providers of project debt capital have to face, Sebastian notes, is the government’s reluctance to provide guarantees, suggesting that the political system may be the cause of this. “There is a change of administration every six years, a change of personalities, and the system of deliveries on agreed-upon terms has not been even across administrations.”
ADB’s Meaney suggests that first principles of project finance should always apply.
“The party bearing the risk is best able to manage that risk,” he says. “A private sector proponent of a government-sponsored infrastructure project cannot manage government-related risks and should not bear them.”
A better solution, Meaney believes, especially for hybrid PPP projects granting O&M concessions to private contractors, would be for the government, after completing the project, to sell the asset to the private sector and recycle the capital by reinvesting in the next project in the pipeline. “I think when a government moves the goalposts in terms of allocation of risks, it creates challenges to the underlying financeability of the project,” he shares.
Each project’s risks must be assessed, quantified and justified before it is deemed financially feasible. A case in point are two airport projects - the development of the Clark International Airport, which requires construction of a new terminal building and runway, and the rehabilitation of Ninoy Aquino International Airport (NAIA).
“Clark is largely an O&M concession. The government funded the building of the new terminal, but that will be paid back to the government by the O&M concessionaire over a long period of time,” says Sebastian, whose firm, JG Summit, is involved in both projects. “The economics of that are very attractive because the government spent the capex for the new terminal building.”
NAIA is a build-and-operate project involving new terminals and runway expansion – a considerable capital expenditure (capex), yet a concession period of only 15 years compared with Clark’s 25 years. “A smaller capex, longer concession at Clark; bigger capex, shorter concession at NAIA. It begs the question, why are we planning to do NAIA?” Sebastian asks. “Well, the need is greatest there as it affects businesses that we are involved in. There is an economic interest for us to be involved in resolving an urgent [logistics] bottleneck.”
As well, JG Summit is of the view that, because of the existing infrastructure at NAIA and Clark, a kind of twin airport system between the two locations might be a more workable and feasible framework for both projects. And, as Manila moves north towards Clark, the firm’s real estate investments will accrue in terms of value.
Sebastian also points out there is the added risk of competition and market over-capacity as there are two more airports in the pipeline. These are Sangley Airport in Cavite and the 735 billion pesos (US$ 14.52 billion) New Manila International Airport to be undertaken by another domestic conglomerate San Miguel Corporation.
Hernandez says that with investment decisions on capital-intensive projects of BBB’s magnitude, one has to also ask what is the overall objective or development goal to help her clients justify their investments.