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Fitch Solutions: Revived PPP focus to help lure investors to flagship projects, but risks remain

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THE GOVERNMENT’s recent decision to include more public-private partnership (PPP) projects on its revised “Build, Build, Build” (BBB) flagship infrastructure list should make this development centerpiece of the Duterte administration more attractive to private capital, Fitch Solutions Group Ltd said in a Nov. 12 note, even as it acknowledged that investors “continue to face a high degree of risk in the Philippines” due to deep-seated “bureaucratic inefficiencies” as well as “a high level of corruption.”

Fitch Solutions said it sees PPP playing “an increasingly important role in President Rodrigo (R.) Duterte’s flagship ‘Build, Build, Build’ infrastructure plan,” after this funding mode was downplayed in the first half of his term for purportedly taking longer than state- and foreign aid-funded modes to start projects.

A number of foreign business groups and local infrastructure firms had expressed concern over the government’s shift in funding preference, saying it is a model also being tapped abroad and that they had gotten used to.

The government had announced earlier this month that it is increasing it flagship infrastructure projects to 100 from 75, and the number of PPP projects on that list to 26 from nine, thus raising the proportion of PPP projects to a total to 26% from 12%.

The flagship projects cover transport and mobility, which is the top priority; power, water, information and communications technology as well as urban development and renewal.

“The move marks a shift back to a PPP-friendly stance which was previously adopted by the administration under President Benigno (S.C.) Aquino III and will offer the potential for more opportunities for private sector participation in the BBB,” Fitch Solutions said, noting that the current administration will still not allow provisions deemed “detrimental” to public interest such as automatic rate increases, commitment of government non-interference and non-compete clauses.

“The increase in the number of PPP projects suggests the government’s eagerness to tap private capital for infrastructure investment, as its ambitious infrastructure plans face fiscal constraints.”

Fitch Solutions also noted that “[t]he Philippines’ relatively well-structured PPP framework gives it an edge over its regional peers in attracting private capital,” including Malaysia and Vietnam.

RISKS
At the same time, the group expects investors to continue facing “a high degree of risk in the Philippines.”

“Despite having one of the most comprehensive PPP frameworks in the region, slow reforms to tackle root issues such as bureaucratic inefficiencies will continue to be a source of risk for investors,” Fitch Solutions said.

“These inefficiencies have often resulted in delayed project timelines and cost overruns, but we highlight that this issue is not unique to the Philippines, but a recurring theme in the infrastructure sector of many emerging markets” like India and Indonesia.

Fitch Solutions also noted that the country’s general operating environment remains risky as well, due mainly to “high levels of petty, violent and organized crime” as well as its vulnerability to “terrorist attacks”, as exemplified by the five-month siege of Marawi City in 2017 by Islamic State-inspired militants.

“Besides that, a high level of corruption undermines the effectiveness of laws and regulation in place.” — Beatrice M. Laforga

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