Infrastructure Investment News Analysis

Bumps in the road

New and upgraded airports, superhighways criss-crossing the archipelago, fast and efficient urban rail networks, new and expanded port facilities. This is Philippine President Rodrigo Duterte’s bold vision for his “Golden Age of Infrastructure” – a PHP8.56 trillion spending package that will run throughout his presidential term and will be the biggest disbursement of cash-to-build in Philippine history.

This isn’t just about having roads to drive on and airports to fly out of, though; this is about opening up the country to make it efficient and competitive. Greater output from agriculture and industry, for example, will translate to greater exports; which means heightened logistics will be required – bigger better roads for haulage; bigger better port facilities from which to ship out Philippine products.

It will also finally give Philippine tourism a chance to shine. Instead of trailing behind its peers in the Association of Southeast Asian Nations (Asean), it will have the capacity and the travel solutions to add millions more foreign tourists to annual arrival figures and move the Philippines towards the top of that league. Presently, it sits behind Malaysia, Thailand, Singapore, Indonesia and Vietnam, with Cambodia close on its heels.

Duterte’s goal before he steps down is to put in place a federal system of government which will allow the regions to manage their own economies. Whether a federated Philippines will materialise remains to be seen – though greater regionalism will –  generally, it’s fair to say that local and provincial governments are keen on this initiative. However, they lack decent infrastructure and without that, as autonomous economies they’d struggle to meet much of their potential.

For the regions, the Golden-Age of Infrastructure will level the playing field and allow them to compete with each other on more equal terms. Overseas investor interest is growing in the provinces and is likely to grow further as the details of the new federal arrangements emerge. For foreign direct investment (FDI), the construction and logistics sectors will be the first off the rank with agriculture and tourism coming next.  And so if all this is handled properly, for the Philippine regions the next five-something years could also turn out to be the “Golden Age of Investment”.

But, it’s a big “if”. Large-scale infrastructure projects handled through foreign partnerships have not always faired well in the Philippines and those failures of the past – resulting from internal disputes, government interference, financial irregularities and lack of professionalism – ended up dampening commitment among overseas players. The Philippines’ FDI underperformance within Asean bear this out. The Golden Age of Infrastructure, if it’s to live up to its name, cannot afford setbacks like those. And certainly not with what’s at stake here.

The three biggest impediments are corruption, official red tape and gross inefficiencies of scale. Any one of these can hinder, hobble or completely destroy a project – incurring, along the way, cost overruns, missed completion deadlines and, in the worst cases, lost investment. In short, they could put the Golden Age back in the Stone Age.

Duterte’s plan is to distribute infrastructure funding right across the archipelago, and the countryside will be a major beneficiary. If there’s one thing we know for sure about this president it’s that he will not be tolerating mismanagement of these disbursements. Local government units who are found wanting in that regard are likely to pay a very heavy price.

There’s no doubt that this administration is wholly committed to pulling off its plan for a massive infrastructure build-out. It’s been their plan since day one. And it’s a bold; it will see infrastructure spending hit 7.2% of gross domestic product by the end of Duterte’s presidency in 2022. In 2015, under the previous administration it stood at 3.3% of GDP.

Duterte’s also been lining up the foreign cash to get his infrastructure show on the road. His visits to China and Japan were largely geared to that purpose. And there’s no doubt too that he won over the leaders of those countries to the cause, coming away with investment promises for billions of US dollars. Development assistance from these countries has become a main plank of Duterte’s infrastructure strategy. And just yesterday, the Bank of China – one of the Mainland’s ‘Big Four’ state-owned commercial banks – announced that it’s in the process of evaluating for possible financing 19 infrastructure projects worth US$50 billion.

It’s the other side to these deals that creates the bigger headache. For example, will construction schedules be left at the mercy of bureaucrats and low-level office staff who have little understanding of the projects? Does the government have the capacity, both in terms of manpower and technical abilities – in the case of Public-Private Partnership (PPP) projects, to bid-out and implement a vast array of often complex works and then oversee and inspect them?

In the case of PPP projects, a big part of the problem the preceding administration of Benigno “Noynoy” Aquino faced, which led to the tired pace of implementation, was the sheer size of some of these schemes and the amount of technical expertise required to enable them to be bidded out. This resulted in just 10 being awarded to private-sector partners for implementation in five years. Clearly, that pace was hopeless; all it really achieved was to stuff the pipeline with approved projects that couldn’t be offered for bidding and implementation.

Then there’s the abiding problem of graft. To give an example, during the presidential term of Gloria Macapagal-Arroyo, two Chinese-partnered projects – one, a railway, the other, a national broadband network; combined worth around US$900 million – had to be cancelled. Both had been blighted by corruption. The loss of that investment was one thing, but these damaging stories get global exposure and who knows how much inward investment they deter.

Aquino was aware of the corruption threat too, and sought to put in place a number of safeguards. But while these succeeded in considerably reducing corruption, they also succeeded in further slowing progress. Laborious screening of projects by government agencies, among them the National Economic Development Authority – and, of course, the lawyers – made an already difficult process even more time consuming.

And while everyone agrees that corruption needs to be eradicated, they also agree that the system needs to be radically simplified – in other words, the superfluous red tape that has no function other than to give an officer worker something to do, needs to be eliminated.

But the size of the corruption should not be underestimated. Based on various research sources, in the Philppines, up to 30% of the value of an infrastructure project is lost through corrupt practices. If that incidence was spread across the PHP8.56 trillion to be outlaid in Golden Age of Infrastructure spending, that would amount to a loss of PHP2.57 trillion.

Even a 10% corruption cost would reduce the value of that investment by PHP856 billion. To put that in an expenditure setting, it would be equivalent to the money allocated in the 2017 National Budget to the departments of agriculture education, national defence and social welfare combined – plus change of around PHP130 million.

And then there are legal and contractual concerns. Can the Philippines guarantee to safeguard these investments?  In the event of internal disputes, will foreign partners get a fair hearing in the courts? Will they even get a court date? Philippine arbitration settlements can take years to materialise, if ever. Like the rest of the judicial system, courts handling commercial litigation cases are notoriously slow and laborious.

These issues and many others like them are what concern companies and individuals when they look at the Philippines as an investment market. And though largely, they’re very much on board with what Duterte wants to do – there’s a tremendous amount of investor interest out there – based on the history, those doubts still linger.

The Philippines’ Golden Age of Infrastructure has the potential to virtually rebuild the country from the ground up, providing efficient transport systems in the cities and well-planned road networks between them and to the coastal resorts and the ports. And sectors that have traditionally struggled – notably agriculture and tourism – will start to flourish as the country becomes better connected. In short, the Philippines will start to experience a new Golden Age.

Interest from overseas is there – of that we have little doubt – and will want increasingly to capitalise on Golden-Age spending as it’s rolled out. But if the money is to join that interest – and keep joining it – these bumps in the road will need to be ironed out.

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