CONGLOMERATES love this era. They now enjoy a generally stable government, a healthy consumer market and easy access to cash with low interest rate.
These things, which were scarce even about a decade ago, led companies like San Miguel Corp., and the holding firms of the Ayala, Aboitiz and Lopez families to diversify their respective businesses to include infrastructure, a capital-intensive sector that promises a good return.
In the process of extending their reach within the sector, each of these firms learned the art of partnering with each other, or, at least, just talk among themselves, to get the job done. They also learned the Philippine infrastructure sector is in dire need of fixing.
“We’re in crisis mode now. We need to act fast,” said Jorge Consunji, president of DM Consunji Inc., the construction arm of DMCI Holdings Inc.
DMCI, which made its fortunes in construction, has been bagging many infrastructure contracts, especially when the public-private partnership (PPP) initiative of the government was started in 2010, when Benigno S. Aquino III assumed the presidency. The PPP initiative of the previous administration, however, was far from perfect. All the big-ticket projects were centralized and handled by the PPP Center, the government body organized for that sole purpose.
As a result, only a handful of infrastructure projects were carried out. As the economy grew, traffic gridlocks were present in all transportation modals—airport, seaport and especially the roads.
Consunji said the Duterte administration could look into bringing back the infrastructure-development projects to the agencies in charge. During the time of President Gloria Macapagal-Arroyo, Consunji said that, if there was a port project, it would be handled by the Philippine Ports Authority; if it was an airport concern, it was the Manila International Airport Authority; and if it was rail, it was the Light Rail Transit Authority (LRTA).
“Then, when the Aquino administration came in, they started to centralize. That may not be a good idea anymore because, if you really want to move fast, why won’t we decentralize it when the expertise is better addressed directly by the involved agencies? They’re fully responsible. The role of the national government is to support,” Consunji said.
The structure of funding should also be looked at. Consunji said when DMCI bagged the LRT Line 1 extension project from Monumento in Caloocan to North Edsa to connect with the Metro Rail Transit 3, it only took the project about two-and-a-half years from construction to start of operation. That extension project, with the length of about 4 kilometers worth about P3.6 billion, was bidded out by the LRTA, covering both design and construction. These included the electro-mechanical system for the trains system to actually work.
“We’re talking with the LRTA directly because they were the ones operating it. They know all the technical issues; they know the traffic. And the DOTC [the Department of Transportation and Communications] was just overall supervision,” he said.
The project worked well, with the exception of the connecting line with the MRT 3.
Consunji is using the LRT 1 extension project as the benchmark on how a simple extension of an infrastructure project should be carried out in partnership with the relevant agency.
Fast-forward to the present year. DMCI also bagged the LRT Line 2 East expansion, and Consunji could not help but compare it with the LRT 1 extension project.
The LRT 2 East expansion almost looked liked the first one—two stations to be located in Cainta and in Masinag, Antipolo, and an additional 4.2 kilometers in length.
When compared, the difference, however, was huge since the government has opted for a hybrid-type of funding for the LRT 2-East, which jacked up total construction cost to about P9.5 billion. The funding is a cross between local and official development assistance (ODA) financing.
A portion of the project is called viaduct, or the civil works that involve the elevated structure used by the trains. DMCI bagged that project, which costs about P2.27 billion.
There’s a separate contract for the stations and another for the electro-mechanical systems, which further complicates the project.
DMCI started work on its portion of the project in June 2015. The project should be finished—meaning fully operational—by the middle of next year, along with the operation of the expansion project.
But Consunji expressed doubts the LRT 2 East extension could be finished on time, with all the delays. And there are calls for the newly installed transportation secretary to dismantle what DMCI has built and instead use a rapid-bus system.
There was a failed bid for the stations and the government still has to award the electro-mechanical system. “I don’t think they can operate it next year,” Consunji said.
Consunji said what caused the delay was how the project was handled and how it was structured financially. That included an ODA, a term first coined in the late-1960s and mainly referred to as international aid. He said it was a case of over-partnering that could spell delays in a project.
An ODA is part long-term financing, whose payment terms can be stretched as long as 30 years, and a small portion is grant.
These types of loan, normally handed out by the multilateral agencies, were the saving grace of the Philippines at a time when no one wanted to lend the country any money, partly as a result of a series of failed military coups during the Corazon Aquino adminnistration; a popular people uprising that toppled President Joseph E. Estrada from power in the early 2000s; and a shaky Arroyo administration.
Government data showed, as of end-2015, total ODA portfolio of the Philippines amounted to $15.71 billion, consisting of 73 loans worth $12.61 billion and 460 grants at $3.05 billion.
Japan International Cooperation Agency was the biggest source of loans with a 43-percent share, followed by the World Bank at 27 percent and the Asian Development Bank at 25 percent.
The infrastructure-development sector accounted for almost half of the ODA at $6 billion, followed by the governance and institutions development and social reform and community development, with each having a fifth of the total.
According to a government-led review of the ODA, among those implementing agencies that failed to reach the 70-percent threshold for both availment and disbursement included the DOTC, the Department of Public Works and Highways (DPWH), and the National Irrigation Administration (NIA). All these agencies are concerned with the country’s infrastructure development in respective sectors.
Those firms that performed well did not even include an agency that had anything to do with infrastructure. The DPWH has the biggest disbursement shortfall of $149.48 million from its target last year of $272.1 million, followed by the Department of Education, NIA, Department of Agrarian Reform and the DOTC. These firms constituted for close to 90 percent of the total shortfall.
Along with the shortfall came the commitment fees, the amount levied on the undisbursed loan amount. The DOTC paid some $362,000 last year for its project on capacity enhancement of mass-transit systems in Metro Manila, while the DPWH paid $300,000 for the road upgrading and preservation and for the Central Luzon link expressway projects.
In an era of easy money, however, ODA loans may not be applicable, especially for capital-intensive projects, according to many in the construction industry.
There are ways to shore up cash right now, with the Philippines now with an investment-grade status.
The Philippine Stock Exchange (PSE), for instance, is pushing for supplemental listing of PPP projects at the equities market.
The PSE, however, is also awaiting the approval of the Securities and Exchange Commission (SEC) of the listing and disclosure rules.
“We recognize the need for PPP companies to have funding options available to them. We hope by enhancing our listing rules for infrastructure companies, PPP firms will consider raising capital through the stock market,” PSE Chief Operating Officer Roel Refran said.
There’s also the Real Estate Investment Trust (REIT), which is another way of recycling capital and plow it back to the property sector.
The REIT law was enacted in 2009, with the main aim of promoting the development of the capital market, broadening the participation of the public in the ownership of real estate in the Philippines, and use the capital market as an instrument to help finance and develop infrastructure projects.
The law was designed to recycle real-estate assets by placing it in another REIT company in which the public can invest into by purchasing shares. The shares of the company can also be traded at the PSE.
The SEC has already said it is ready to push for amending some of the implementing rules and regulation of the REIT, mainly focusing on those issues frowned upon by investors, such as the 33-percent minimum public float and some of the taxation issues.
“We’re looking at the stock market as a reflection of what is happening in the economy. Last years the stock market has been growing and, this year, there’s still growth. Essentially, fund-raising in the exchange is still robust,” PSE President Hans B. Sicat said.
The real test is how many companies will tap into these funding modes after all these efforts came into fruition.