Hybrid future for Philippines PPP market

PPPs are set to play a pivotal role in the Philippines' ambitious infrastructure development targets – just not in the build phase. Aaron Woolner, inspiratia's newly-appointed Asia editor, reports on the market's changing dynamics

By the time former president Benigno Aquino's term ended in May 2016, the Philippines had started construction on 12 infrastructure PPPs, with another 55 deals waiting for approval. Then everything ground to a halt with the election of Rodrigo Duterte.

While a handful of projects have gone ahead since Duterte came to office, such as the PHP 35.43 billion (£497m €558m US$650m) Cavite-Laguna Expressway PPP and stage three of the PHP 37.43 billion Metro Manila Skyway PPP, most have been cancelled. The expected flood of Philippines PPP deals turned into a trickle. 

The explanation for this change is simple. While PPPs were a cornerstone of the previous president's administration, his successor has switched firmly away from a private financing model for the construction phase of large-scale infrastructure projects.

It's significant that the only physical PPP project currently in the procurement stage is the Clark Airport O&M tender. The PHP 12.55 billion (£178m €197m US$231m) airport terminal itself is being constructed on an EPC basis by a Philippine-Indian consortium of Megawide Construction and airport specialist GMR Infrastructure, with the PPP model only to be utilised for the operation and maintenance component. 

Infrastructure pipeline in the Philippines

Source: Philippines PPP Centre, inspiratia 

The Clark Airport deal is the first to be completed under Duterte's preferred hybrid development structure, which sees the government fund the construction phase and then bring the private sector on board to manage the facility's operations. And while Clark may be the first, it is unlikely to be the last. 

Though there is currently a relatively short list of projects in the procurement stage, this could change quickly. At the start of September [2018], the Philippines' budget secretary, Benjamin Diokno, revealed the government was putting up PHP 36.23 billion (£524m €579.7m US$677.7m) to back a series of transport and flood control projects across the archipelago in 2019.

Diokno's announcement formed part of Duterte's Build Build Build programme, which the government hopes will increase infrastructure investment to 7.4% of GDP by 2022, up from 5.1% in 2016.

The BBB programme is part of the 2017 Philippine Development Plan, which is estimated to need a total of PHP 9 trillion (£130.1bn €144bn US$168.3bn) in investments for 75 large-scale projects nationwide between 2017 and 2022. 

Cheaper financing

Importantly, almost all the projects will be delivered via the hybrid PPP approach that Duterte views as faster and offering potential cost savings. And the experience with Clark Airport suggests he may be onto something – a statement from the IFC, which helped structure the EPC transaction, described it as one of the fastest mandates globally that the lender had participated in. 

Likewise, cost savings appear to have already been achieved. The shift away from a build-operate-transfer approach to the more streamlined O&M model is driven by the expectation of cheap funding from Chinese and Japanese sources, with both countries keen for their construction firms to get a slice of the Philippines infrastructure market. The same can be said for South Korea. 

Take the example of phase one of the Metro Manila Subway project. In March this year, the Japan International Cooperation Agency (JICA), the development bank of the East Asian nation, made a JPY 104 billion (£706m €804m US$930m) loan to support the 13-station project that links a big slice of Manila with the Ninoy Aquino Airport. 

Not only is construction expected to start later this year on a project which the authorities have been talking about since the early 1970s, but the 40-year loan has an interest rate of just 11 basis points, meaning that Duterte's aim to lower the cost of developing the country's infrastructure appears achievable. 

Nothing comes for free of course, and one condition of the cut-price cash is that all procurement is linked to Japan. "Although the main contract allows a joint venture with the borrowing country, a Japanese company must be the leading partner in such an arrangement," says the news release announcing the loan on JICA's website. 

The Manila Metro deal isn't a PPP, but its economics are a big factor behind the changing face of the Philippine project finance market.

It is easy to see why the government favours the cost savings from moving towards an O&M model, but will the private sector be as keen to participate? Early signs indicate they will.

The Clark International O&M PPP attracted a number of bidders, including the Megawide-GMR joint bid and French outfit Group ADP. The tender was due to be awarded on August 24, but has not yet been announced. The full shortlist is as follows:

• Megawide Construction -  GMR Infrastructure
• Groupe ADP
• GVK Airport Developers
• Metro Pacific Investment
• Filinvest Development
• San Miguel Holdings
• Prime Asset Venture - Central Luzon Infrastructure Consultancy 

But what exactly happened to the pipeline of deals that were under tender when the presidency changed hands? It's a mixed bag. Some of them became a reality, such as the Mactan-Cebu International Airport Terminal II, which reached financial close at the start of 2015 and was opened by the president himself at the end of 2017. 

Other Aquino-era projects which went into construction under the Duterte administration include the Southwest Integrated Transport System Project, MRT Line 7 and the Bulacan Bulk water supply project, as part of a total of 15 PPP contracts awarded in 2017. 

Source: Philippines PPP Centre, Department of Public Works and Highways, inspiratia

Others like the PHP 108 billion (£1.5bn €1.7bn US$2bn) BOT PPP to construct five regional airports - located in Bacolod-Silay, Davao, Iloilo, Laguindingan, and Bohol - have simply been cancelled. The projects were initially suspended following Duterte's election victory before gaining approval from the country's National Economic and Development Authority in November 2016, only to be cancelled in May this year. 

Or at least cancelled in their current PPP format. A statement released by the Philippine PPP Centre at the time said the government had "decided that the projects would be implemented through other modes," which is presumably a reference to its preferred O&M model for private sector involvement.

Unsolicited approaches

But the Duterte regime is also actively looking for other ways to get the private sector involved in infrastructure projects. Whereas his predecessor focused on solicited bids, which were viewed as more transparent, the new president's need for speed has seen his team encourage unsolicited project submissions.  

The reasoning is that if the private sector takes on the feasibility study side of a project, it will be quicker to identify the best places to put the country's infrastructure spend. 

It is not just the national government that can accept unsolicited proposals; it is also possible to submit them at the local government level. Local government in the Philippines is constructed at three levels: provincial, city and municipal, and it is in theory possible to approach any of them with an unsolicited PPP proposal.

So far, the hoped-for increase in speed of development hasn't yet materialised, with the government apparently lacking the resources to assess bids it has received. So far no unsolicited approaches at either national or local level have been given the green light. 

The current issue is uncertainty. The previous PPP model was understood by the market but as it stands, the new regime has yet to be tested. If the government keeps up the pace used to get the Clark Airport O&M PPP off the ground, then the potential for private sector involvement is significant.