A general introduction to projects and construction in Philippines

An extract from The Projects and Construction Review, 10th Edition

Introduction

Throughout recent Philippine history, past administrations have understood the importance of infrastructure development, but the measures taken to reach the ideal level and mixture of infrastructure spending vary greatly. Even with its fast-growing economy, expanding population and rapid urbanisation, the Philippines lags behind its ASEAN counterparts in terms of infrastructure spending. Thus, the current government has made infrastructure development part of its priority development programme because it has identified infrastructure as one of the key drivers of economic growth. In 2017, the government launched the ambitious Build, Build, Build (BBB) programme, which aims to raise infrastructure investments to 7.4 per cent of gross domestic product (GDP) by 2022 from 5.1 per cent in 2016. Between January and November 2018, the government's infrastructure spending reached an estimated 728 billion Philippine pesos, 50 per cent higher than the 486.5 billion pesos recorded during the same period in the previous year.

As part of the medium-term Philippine Development Plan, the BBB programme is estimated to require US$168 billion in investments for 75 high-impact priority projects nationwide. To finance this, the government plans to use an optimal funding mix composed of government spending, official development assistance (ODA) and private capital.

Arguably, however, private capital to fund infrastructure projects is underused. Thus, the current administration identified public-private partnerships (PPPs) in its 10-point socio-economic agenda as one of the key strategies to accelerate annual infrastructure spending.

Since its official launch in 2010, the PPP programme has played a part in 17 national PPP projects worth about 328.67 billion pesos. According to the 2018 Infrascope Report by The Economist Intelligence Unit (The EIU), the Philippines now ranks second of the countries in Asia evaluated by The EIU, joining Thailand and China in the group of mature PPP markets based on both qualitative and quantitative criteria. In the World Bank Group's 'Procuring Infrastructure: Public-Private Partnerships Report 2018 – Assessing Government Capability to Prepare, Procure, and Manage PPPs', the Philippines is ranked first in the East Asia and Pacific Region in terms of preparation of PPPs, contract management and unsolicited proposals, and third in terms of procurement of PPPs.

This chapter focuses on the legal and regulatory framework of infrastructure projects and project financing in the Philippines, issues commonly encountered in infrastructure projects, and both existing and proposed measures to address these issues. Where relevant, we highlight key projects and current events to provide context.

The year in review

i From independent power producers to the hybrid PPP model

PPPs, in the Philippine context, are a strategic mode of procurement that involves a long-term contractual agreement between the government and a private firm targeted towards financing, designing, implementing and operating infrastructure facilities and services that were traditionally provided by the public sector.

A major turning point in Philippine history, the importance of private participation in project financing came to light during the energy crisis of the late 1980s to early 1990s. At its worst, the Philippines experienced daily drops of voltage in the electricity supply lasting eight to 12 hours, resulting in an estimated 6 per cent decrease of the country's GDP. To address the crisis, then President Fidel V Ramos expanded the Build-Operate-Transfer Law (the BOT Law) in 1994, which shortened the procurement process and accommodated private sector participation. As a result of the expanded BOT Law, independent power producers (IPPs) were allowed to operate, which contributed to the resolution of the energy crisis. Traditional PPPs, such as those entered into by IPPs, have thus been a proven solution when government could not meet energy demands.

Recently, however, the government has shifted its preference to hybrid models, for which funding for the initial phase is secured through public procurement or ODA, while the operation and maintenance (O&M) of the project is allocated to the private sector through PPPs, a reversal of the procedure observed by previous administrations. As claimed by the government, hybrid models fast-track infrastructure projects and enable project costs to be cheaper in the long run. To illustrate, the Clark International Airport in Pampanga (the Clark Airport) features hybrid PPPs as the government seeks to decongest the Ninoy Aquino International Airport (NAIA) in Metro Manila by expanding the capacity of airports outside Metro Manila. The Clark Airport, in particular, was thrust into the national spotlight in August 2018, when NAIA's operations were paralysed for two days owing to an unplanned runway closure, costing the country's main airport millions in lost revenue. The Clark Airport Expansion Project is considered to be the first airport project using the hybrid PPP model.

However, some PPP proponents argue that there is no longer any incentive for private participants to raise revenues and provide O&M services efficiently in the absence of any capital risk. While shifting policies create some uncertainty in government support towards PPP projects, further comparative analysis is necessary to determine whether the traditional PPPs or their hybrid models will be best suited to finance a particular project.

ii Private participation opportunities in the health sector

Whereas the BBB programme focuses heavily on transport infrastructure, PPPs in the healthcare industry have been making headway to achieve the government's objectives of addressing the health service needs of the poor. Through the Public-Private Partnerships Center (the PPP Center), the government has encouraged private participation through PPPs with a focus on projects that would help in the delivery of universal healthcare for Filipinos. One of the pioneering PPP projects in this sector is the development of the planned Philippine General Hospital in University of the Philippines, Diliman (the PGH Project). The PGH Project is also designed to be implemented as a hybrid project, wherein the O&M component will be bid out to the private sector via PPP.

With the enactment of the Universal Health Care Act in 2019 (UHCA), healthcare PPPs may bridge a funding gap of 164 billion pesos needed to implement healthcare reforms during UHCA's first year of implementation.

Outlook and conclusions

Private participation through PPPs has a critical role in reducing the infrastructure gap in the Philippines, especially in sectors that require technical expertise and innovative technologies. Traditional infrastructure still remains a priority for the government and the available capital augmented from ODA and domestic and foreign investors make traditional infrastructure projects highly competitive. The expansion of private participation in non-traditional areas of infrastructure, such as renewable energy projects and other social infrastructure, is a welcome step in the right direction towards achieving the government's ambitious infrastructure goal of 7.4 per cent of its GDP by 2022.

With favourable economic conditions and a more relaxed fiscal policy, the Philippines should take advantage of these bullish conditions, but must likewise take more proactive steps towards fulfilling the Philippines' infrastructure needs that first and foremost benefit the public. Specifically, the government must adopt better monitoring and evaluation mechanisms to ensure the proper implementation of a project, instil a robust regulatory regime and intensify its project assistance to implementing agencies and impose flexible yet consistent policies and standards for contract preparation to tailor-fit a project's needs.

At present, the private sector's risk appetite and willingness to participate in infrastructure development is far from satiated. Consequently, the government must leverage the private sector's efficient use of capital and resources by finding the means to allow faster or larger-scale project participation from the private sector. With the proper incentives and allocation of risks, private participation in infrastructure development will undoubtedly be integral to the Philippines surpassing its infrastructure goals.

Footnotes

Ocampo, Manalo, Valdez & Lim Law Firm - Angela K Feria and Carlos Alfonso T Ocampo

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