FITCH Solutions Macro Research warned of a “high degree of political risk” in long-term contracts for public-private partnership (PPP) projects even with the government recently adopting a policy favorable to PPPs.

According to a Fitch Solutions note issued Friday, the government’s shift to a friendly stance towards PPPs, with a PPP framework considered to be the most comprehensive in the region will boost Philippine infrastructure as investments pour in.

However, Fitch Solutions said long-term PPP contracts are subject to political and regulatory risks, based on the record of government interventions that caused some projects to hit roadblocks.

“The Philippines’ established PPP framework will facilitate PPP transactions and lend support to growth of the infrastructure industry, which we expect to expand by 8.2% year—on-year, in real terms from 2021 to 2025. However, we highlight a high degree of political risk associated with long-term contracts in the Philippines that could result in difficulties post-commercial and financial close,” according to the note, PPP Profile: Philippine PPPs Subject To Political Risks.

Fitch Solutions said the government recently acknowledged the role that the private sector can play to provide investment. Early in the government’s term, economic managers had sought to carry out the infrastructure program largely with public funds and Overseas Development Assistance (ODA).

The government has since included more PPP-funded projects in its revised list of 100 infrastructure flagship projects, providing more opportunities for the private sector to participate in the program.

“We hold a moderately favorable view of the Philippine PPP market, given the government’s eagerness to engage the private sector through the use of PPPs,” it said.

It said political risks over the long term may arise due to changes in leadership, if the succeeding administrations do not agree with the priorities of the current government, and the revocation of concession agreements, which could weaken investor confidence.

Fitch Solutions cited the cancellation of the concession extension agreement for Metro Manila’s water concessionaires in December. This “derailed any long-term plans which these companies have devised, and in the short term, created a high degree of financial difficulties, in aspects such as borrowing and attracting new capital, due to revenue uncertainty.”

The Metropolitan Waterworks and Sewerage System (MWSS) privatized its water distribution operations in 1997, granting concessions to Maynilad Water Services Inc. and Manila Water Co., which now service the two zones of capital region.

The MWSS, which remains the industry regulator, granted extensions to the two water companies well ahead of the expiration of the original concession agreements, which were cancelled last year as part of a government crackdown on allegedly “onerous” concession contracts across all industries that were disadvantageous to the government.

All utilities, as well as transport companies and toll road operators, are also subject to regulatory approval for tariff hikes, adding another layer of risk.

“Loose definition of these provisions (in contracts) could have resulted in the numerous clashes between the concessionaires and MWSS, whenever the former attempts to hike water tariffs. These are also the provisions which were deemed ‘onerous’ by President Duterte, and is a motivating factor for his decision to revoke the concession extension agreements,” it added.

Fitch Solutions said another example is the Ninoy Aquino International Airport Terminal 3 Project which was implemented under the Ramos administration, but “several amendentns” to the contract were reportedly made during the Estrada administration.

When President Joseph E. Estrada was ousted, his successor Gloria Macapagal-Arroyo ordered a review of the Build-Operate-Transfer (BOT) contract.

“We view the change in leadership as a source of risk to long-term contracts between the government and private participants, as incumbent leaders may not necessarily agree with what their predecessors had implemented,” it said. — Beatrice M. Laforga