The country is no longer just experiencing what was then deemed as an infrastructure gap—the situation has gone from bad to worse.
The Philippines, according to experts, is now in the midst of an infrastructure crisis. And the common Filipino is the one bearing the brunt of such a “catastrophe.”
Long before the Duterte administration took over the reigns of the Philippine government, infrastructure development in the country was already slow. Business groups have been complaining tirelessly about it, perennially naming the infra situation as one of the main reasons the country has been an investment laggard in the region. Filipinos, on the other hand, are dealing with the horrors associated with it on a daily basis.
Traveling has never been this uncomfortable—be it by air, land or sea. Prisons are crumbling down due to the years of underdevelopment. And energy reserves remain to be scant, leading to bouts of power interruptions in certain parts of the country.
Infrastructure is key to addressing this, and the new government—even in its nascent stage—has vowed to increase spending in this area in the next six years.
Experts are clear on how this could be implemented well—that there must be close collaboration among all stakeholders involved in the problem: the government, the private sector and the general public.
This kind of collaboration is known as the Public-Private Partnership (PPP) Program, a scheme that was initially introduced three decades ago, but only came to flourish during the time of President Benigno S. Aquino III.
During the said period, the agency was able to produce a pipeline of more than 60 projects with an estimated worth of P1.5 trillion. The government was able to award 12 deals with a cumulative worth of P217.4 billion, and three of these deals are now up and running.
“The success was due to several macroeconomic, private-sector and public-sector factors. First is that local banks were very liquid and very willing; second is that domestic conglomerates had the capacity and appetite for infrastructure projects; and third, the government did four things right: support, integrity, capacity and market-sensitivity,” Andre C. Palacios, a former executive director of the center, said in an interview.
The previous government was able to do this because Aquino and his Cabinet gave strong political support to the key infrastructure program, while successfully keeping politics out of the projects.
“The government ensured integrity and transparency in project development and procurement, thus, assuring a level-playing field for all players,” said Palacios, who now works as a professor at a state university in the Philippines.
He added that the previous administration also used an Asian Development Bank-funded revolving fund to access international expertise to properly prepare and structure the projects and develop the capacity of government staff.
“And, on the whole, the government was sensitive to private-sector concerns regarding project viability,” he said.
Abotiz Equity Ventures Inc. First Vice President Roman Anthony V. Azanza agreed, saying that the Aquino administration was serious in developing a program that will hopefully last to finally eradicate the infrastructure problem in the Philippines.
“One of the last administration’s notable reforms was the establishment of the institutional and regulatory framework that reinvigorated the build-operate-transfer [BOT] law via the PPP Program,” he said. “The ecosystem that was developed around the PPP Program increased local and international investment interest in the country and raised the profile of the country as an investment destination.”
Megawide Construction Corp. Corporate Information Officer Louie B. Ferrer listed the polices implemented by the previous administration that were notable.
“For us, the most notable were policies that promoted transparency and a level-playing field among bidders,” he said, citing his company’s experience in participating in the Department of Education’s PPP for School Infrastructure Project.
“Because of the fair process followed during the bid, we were able to submit our proposal and were eventually chosen to build more than 7,000 classrooms in Luzon,” Ferrer said. “Because of the clean process, we were encouraged to participate in the other PPP projects and we’re sure other private-sector participants will say the same.”
Related to this, the government set mechanisms for dialogue and a dynamic cooperation that companies greatly appreciated, Ferrer added.
“For example, they implemented policies on market sounding and bidder interaction. Contrary to what the government typically assumes, the private sector cannot absorb all types of risks,” he said.
“Having a venue to discuss all issues in the project, whether technical, financial or legal, allowed the parties to come up with a balanced and mutually acceptable risk-allocation framework. This is critical in projects which are long term,” Ferrer explained.
Megawide holds the lion’s share in terms of projects won under the key infrastructure program under the Aquino administration.
“While these may not have been perfect, it is clear that bold steps were taken in an attempt to make the entire PPP Program work through,” Ferrer noted.
Metro Pacific Investments Corp. Chief Finance Officer David J. Nicol, for his part, lauded the transparency of the auctions of deals, although noting that a much faster process would have been ideal.
“On the positive, I think transparency of the bidding on PPP projects was generally positive, although it would have been preferable to see more projects bid out and executed,” he said.
Given this, Palacios believes that the Duterte administration can sustain the healthy relationship between the government and the private sector to push for more infrastructure developments in the country.
“The current administration should build on the efforts and gains of the past six years, especially the existing pipeline of PPP projects. After all, infrastructure projects are intergenerational efforts. They last 30 years to 40 years and span at least five presidential terms,” he said.
Trust as foundation
European Chamber of Commerce of the Philippines (ECCP) External Vice President Henry J. Schumacher added that strong collaboration between the government and the private sector is essential to meeting goals and, consequently, improving lives.
“Cooperation between the government and the private sector is key, and we see the willingness for that kind of cooperation with all the executives of the Duterte administration we have met,” he said. “We firmly believe that this kind of cooperation, in which the government enables and the private sector implements, is the formula for success.”
Hence, it is vital for the appointees of Mr. Duterte to, at least, keep or further promote collaboration between the two parties.
“First, it is essential to maintain the relationship of trust between the government and the private sector by ensuring fairness, transparency and integrity in the projects. Second, it is imperative to institutionalize the best practices for the Philippine setting that were developed over the past years,” Palacios said.
For Ferrer, who also sits as the president of GMR-Megawide Cebu Airport Corp., the concessionaire for the development of the gateway to the Queen City of the South, there are three ingredients to a successful key infrastructure program.
“First is continued transparency. What attracted private companies the most to PPP was the transparent and open process. We cannot deny that there was stigma in the past when it came to dealings with the government, but the previous administration set mechanisms for dialogue and accountability that the private sector greatly respected. It was a major factor in our decision to bid for large-scale projects,” he said.
He added that the government must continue effective policies that worked for the previous government.
“For example, the Mactan-Cebu Airport is considered a success by many governments and PPP practitioners. The model can, of course, be improved. But what should be done in other airport projects should not significantly depart from what was done in Mactan, as we have seen how effective it has been,” he said.
Second ingredient is for the government to continue listening to the demands of the market.
“Projects are usually structured after thorough market sounding. In some cases, projects are restructured or modified during the tender process based on feedback from the bidders. This is very good practice, because without a project structure or risk-allocation framework that is acceptable to the market, a project will not have any bidders,” Ferrer said.
Last, the government must also maintain a robust pipeline of PPP projects to bid out.
“It is good that some projects from the previous administration are being continued. But it is equally important to develop new projects that could be launched in a few years time and continued even during the next administration,” Ferrer pointed out.
Metro Pacific’s Nicol agreed, noting that his group is particularly happy with the pronouncements of government officials that the state is open to accepting unsolicited proposals to further accelerate infrastructure development in the Philippines.
“As to what policies they should implement is for them to decide, of course. I am pleased they are open to unsolicited proposals, as these can harness the collective creativity of the private sector while ensuing returns stay reasonable and fair for all. I think everyone is also impressed with the energy and drive of the new administration to get things done,” he said.
A policy brief from the PPP Center defines unsolicited proposals as offers submitted by the private sector to the government to help develop infrastructure in the country.
However, the current BOT law prohibits the approval of such offers if it does not involve the introduction of “new technology.”
The current administration did not take much interest in these kinds of proposals, as these offers only attract unwanted rumors and issues. The main issue with unsolicited proposals is not that the project concept originated from the private sector, rather that governments’ award to the original private-sector proponent may be perceived to lack sufficient transparency or competition, thus, associated with corruption.
Pursuing unsolicited proposals is also tedious, as these offers, under the law, should be subjected to a competitive dispute, or more commonly known as a Swiss Challenge.
A competitive challenge essentially allows other groups to dispute the initial proposal and offer a better deal. The original proponent, however, has the right to match the highest offer to pursue the project.
‘Respect concession deals’
Ferrer also noted that keeping private-sector engagement and cooperation healthy also requires respect on contracts signed in the past.
“The concession agreement should be respected. This is very important for us bidders,” he said. “If the government changes the terms of the agreement at any time, the entire business model will be affected. The private sector takes bid projects very seriously—we spend time and resources for research and in joining the bid.”
He cited for example the upcoming bidding for the P50.18-billion deal to develop a prison facility in Nueva Ecija.
“We have already partnered with international experts who regularly travel to the Philippines for research and meetings. If the terms are changed at this stage, then we would have to come up with a new proposal or adjust to new timelines—all of this costing a significant amount of resources. Investors will not be confident in a partner that keeps changing their terms,” Ferrer said.
Nicol echoed this statement, citing his group’s experience in delays in tariff implementation.
“On the not so positive note, we were disappointed on the various well-publicized tariff issue on roads, water and rail,” he said. “I think the best single move, which they have said they will do, is sticking to the contract and not changing the rules halfway through. This, together with receptivity to unsolicited projects, will benefit development. I am hugely encouraged.”
The previous government failed to implement years’ worth of toll-rate increases for the North Luzon Expressway and the Manila-Cavite Toll Expressway. Likewise, it did not implement adjustments in water rates for Maynilad, despite the company receiving a favorable award in the arbitration of its 2013 to 2017 water tariff.
The current administration, meanwhile, sought for the postponement of fare increase for the Light Rail Transit (LRT) Line 1.
Continue pushing for key legislation
Aside from these, ensuring a positive outcome for infrastructure deals require legislation. For Azanza and Schumacher, the passage of the amendments to the decades-old BOT law is essential to ensuring lasting reforms in the PPP arena.
“It is unfortunate that the BOT law amendments, creating a more powerful PPP Center, did not pass in the 16th Congress. It is trusted that this will happen early in the 17th Congress,” Schumacher said.
When approved, the proposed PPP Act will institutionalize the Project Development and Monitoring Facility, the PPP Governing Board and the contingent liability fund. The proposed amendments include the separation of regulatory and commercial functions of government-owned and -controlled corporations and create a list of projects, called “projects of national significance.”
By virtue of being included on the list of projects of national significance, projects will be “insulated” from local laws, among others, by local government units.
The proposed amendments also include allowing time-bound temporary restraining order and the extension of the period for Swiss Challenge to six months from the current two-month period.
Also, the said piece of legislation will give the executive director of the PPP Center a fixed tenure, and will, likewise, make the said body a voting member of the Investment Coordination Committee and the Cabinet Committee of the National Economic and Development Authority (Neda).
“The proposed PPP Act institutionalizes many of the prior reforms and improves on the shortcomings of the current BOT law. We hope that current efforts to see this proposed law passed will bear fruit,” Azanza said.
Allaying fears
It is clear that the intention of the current administration to accelerate infrastructure development, so much so that it has included it in President Durterte’s 10-point socioeconomic agenda during a business forum in Davao.
Specifically, it aims to “increase annual infrastructure spending to account for 5 percent of the country’s GDP, with public-private partnerships playing a key role.”
“Given that ‘accelerate annual infrastructure spending to account for 5 percent of GDP, with public-private partnerships playing a key role’ is part of its 10-point agenda, the Duterte administration just needs to follow through on this effort,” Azanza said.
But already, there have been signs of fears from investors, with foreign investments crippling over the course of just 90 days. Stock indexes were also dropping, and the peso-to-dollar valuation has plunged to a more-than-a-decade low.
The BusinessMirror tried to get comments from PPP Center Executive Director Ferdinand A. Pecson, but he refused. Although the agency, through an e-mail, replied.
“The Philippines has already established the PPP framework with PPP processes and policies already in place. In fact, the World Bank’s recent report commended the country’s PPP framework,” the agency said.
The key infrastructure program cornered high scores in a report released by the World Bank. Based on a study, titled “Benchmarking Public-Private Partnerships Procurement 2017,” the Philippine framework employs internationally recognized good practices given its ratings—96 in preparation of projects, 85 on procurement of deals, 84 for PPP contract management and 67 for unsolicited proposals.
“Scores nearing 100 are economies that are considered having PPP regulatory frameworks that closely align with internationally recognized good practices,” the World Bank report read.
Such ratings brought the Philippines to the top 23 percent among 82 economies that have PPP regulations that ensure consistency between the priority projects and the country’s investment agenda.
“In the Philippines, for example, procuring authorities must prepare infrastructure or development programs to identify specific priority projects that may be developed as PPPs; ensure that the list of priority projects is consistent with the Philippine Development Plan, the Provincial Development Plan and the Physical Framework Plan; and submit the list to the National Economic and Development Authority Board or the Investment Coordination Committee for approval,” the report explained.
The World Bank report also highlighted that the Philippines has prepared its own comprehensive risk matrix.
“In the Philippines, where the generic preferred risk-allocation matrix indicates the type of risks to be assessed and also includes definitions, proposed allocations and rationales, possible risk mitigation efforts, and suggested contract provisions,” the report read.
The recent World Bank report is the latest study that recognized the successful implementation of the PPP framework in the Philippines.
In April 2015 the Philippines has been recognized by the Economist Intelligence Unit Infrascope 2014 report as the most improved country in Asia Pacific for PPP readiness. The country ranked No. 7 among the 21 countries included in the study and was categorized as developed PPP market alongside countries like Japan, India and Republic of Korea.
“Thus, we do not see any impact on the participation of international and local investors in our PPP projects. We believe that investors here and abroad will continue to show interest and support to the Philippine PPP Program,” the PPP Center said, pertaining to fears associated with Mr. Duterte’s pronouncements.
Schumacher noted that, as far as European businesses are concerned, he sees cooperation to continue as normal, despite Mr. Duterte’s spicy comments, and controversial speeches with regard to foreign aid.
“It is essential that business here and abroad focuses on the 10-point socioeconomic agenda of the Duterte administration, which was released in Davao in July. The business community supports this agenda and we have already made suggestions where we can and want to be of assistance,” he said.
Schumacher added: “The task of business organizations, like the European Chamber of Commerce [of the Philippines], is to dialogue with business or investors abroad and convince them to focus on the opportunities here and allow business organizations onshore to guide them into new investments here.”
New team to continue legacy of predecessors
Currently, the agency is on the process of identifying bottlenecks and necessary improvements in the implementation of PPP projects in the country. It aims to stage several market-sounding activities—starting with the one slated for November—to assure investors that the Philippines remains to be a good investment destination, especially for infrastructure.
“One of the steps that we will take is the conduct of stakeholders’ consultation that the PPP Center is organizing this coming November. We will seek inputs and suggestions from the private sectors, partners and stakeholders in improving and streamlining the country’s PPP process,” it said.
It also vowed to ensure that there will be minimal to no delays in implementing projects—starting from conceptualization to construction.
“The PPP Center, together with our partner-agencies, will continue to conduct infrastructure and investment road shows and conferences to attract more foreign companies to invest in Philippine PPP projects,” the agency said. “We will also ensure to improve and further streamline the current PPP process to gain more confidence and trust from international and local investors in participating in the country’s PPPs.”
It will also prioritize mass-transportation infrastructure deals to improve the sorry state of traffic in the Philippines.
“There is no specific list yet on the flagship projects of this administration. We are still coordinating with the various implementing agencies. But mass-transportation projects will be the utmost priorities,” it said.
“The government is concentrating on improving public transportation around the country and interconnectivity through various airport, road and rail projects.”
As of September 15, there are 12 PPP projects under procurement, majority of which are under the transportation and pubic works departments.
In the meantime, businesses will continue to participate in infrastructure-development exercises, as long as the government continues to be transparent and open for dialog with the stakeholder, while maintaining a robust pipeline of deals.
“All infrastructure investment is, in the end, an article of faith in the contracts being honored once the infrastructure is built. The stronger these contracts are and the more clearly they are acted on, the more investors will be encouraged,” Nicol said. “I think this is beyond the PPP Center’s ability, as it’s all about what happens post project build, when the center is no longer involved.”
For his part, Ferrer said his group stands by Mr. Duterte’s promise of effecting change in the government, regardless which agency it is.
“As long as the PPP Center commits to continue doing what works, this should continue to attract and ensure the confidence of private-sector investors. The President himself mandated transparency in all contracts and transactions from proposal to implementation, and, in his inaugural speech, ordered all agencies to refrain from changing and bending the rules of government contracts, transactions and projects already approved and awaiting implementation,” he said.
Ferrer added: “We consider the Philippine government our long-term partner, not just the current or previous administration. This means having to take stock of what would be beneficial to all parties for a 20-year to 30-year horizon, or even beyond the length of the concession.
“Having this perspective, we, as a company, are encouraged to go over and above our obligations in the PPP contract to ensure that the government’s vision is fulfilled.”