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Infrastructure financing seen complicated by water dispute

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Field staff of Maynilad Water Services, Inc. check pipes in this 2015 official photo release. -- BW FILE PHOTO

GLOBALSOURCE Partners said rising regulatory risk in government contracting may soon affect public-private partnership (PPP) deals for infrastructure projects, as the President continues to insist on modifying water contracts for Metro Manila while declaring his intent not to support a major broadcaster’s franchise renewal.

“The continuing rants cannot but put these business groups in a somber mood, especially given the President’s strong one-sided demands,” according to a report by the emerging-markets consulting firm sent via e-mail over the weekend by Romeo L. Bernardo, country analyst for the Philippines.

He was referring to President Rodrigo R. Duterte’s unilateral decision to renegotiate the water contracts with Manila Water Co., Inc. and Maynilad Water Services, Inc. after finding allegedly “onerous” provisions in their contracts. He has also threatened to block the franchise renewal of ABS-CBN Corp., which expires around March, after it declined to broadcast some of his campaign ads during the 2016 elections.

Mr. Bernardo said investors and creditors will continue to monitor the regulatory environment and noted the need to be “more watchful of political and regulatory risks in long-term infrastructure projects.”

He said the uncertainty surrounding contracts could cause loan rates to rise and parent firms under pressure to provide more robust guarantees on project loans, which will not be favorable for PPP projects and the government’s efforts to develop infrastructure.

“Higher risk assessments that lead to larger risk premia on lending and/or stronger parent firm guarantees to secure credits would spell bad news for PPP projects and government efforts to build up the country’s infrastructure, something that would extend well beyond the term of this administration,” Mr. Bernardo said in the report.

Fitch Solutions Macro Research reported last month that the government’s move to revise its concession deals with the two water distributors pointed to “high regulatory risk” for private firms contracting with the government.

However, it said investor confidence may recover over the long term as the country continues to improve its PPP frameworks.

Meanwhile, GlobalSource Partners’s Mr. Bernardo noted that the concessionaires may not be able to accept all the “10 or so” revisions to the allegedly onerous provisions drafted by the government without the water companies “facing problems financing future investments.”

“Hence, we cannot totally rule out the dreaded wild card, i.e., nationalization of water distribution services.”

Mr. Duterte last week said that the government had completed drafting new contracts for the two water firms.

However, the President also issued a threat to nationalize the country’s water system and charge those who negotiated the water deals on behalf of the companies and the government with plunder or fraud.

In its revised list of 100 infrastructure projects, the government included more PPP-funded projects. From an initial list of nine PPPs out of 75 projects, the current list now consists of 26 PPPs out of 100.

Of the total flagship project value of P4.2 trillion, projects to be funded through PPP will cost around P1.77 trillion.

OTHER RISKS
Meanwhile, the report also flagged the uncertainty generated by the pending corporate income tax bill and unstable global oil prices, which are posing downside risk for the Philippines’ growth outlook this year.

Mr. Bernardo said that despite the Finance department’s wish to pass the bill by the first quarter to protect investment sentiment, he warned that further delays to the bill’s approval may dampen investment.

“We continue to think that Congress needs to move faster on this measure as the reform window narrows. Too, further delays risk more losses in investments, especially in footloose export sectors, e.g., semiconductors and BPOs (Business Process Outsourcing),” he said.

Currently, the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) is still pending with the 18th Congress.

The bill aims to gradually lower corporate income tax to 20% from the current 30% and rationalize tax perks by making them more time-bound and performance-based.

Overseas, Mr. Bernardo said unstable global oil prices due to the US and Iran tensions may also affect fuel prices, as will the implementation of the another set of increases on petroleum product excise taxes due to the The Tax Reform for Acceleration and Inclusion (TRAIN) Act.

The third tranche of excise tax increases on petroleum products under TRAIN took effect on Jan. 1.

Higher global oil prices, however, have not affected inflation so far, he said.

“So far, increases in world oil prices do not pose a threat to our inflation forecast, especially with corrections of late. However, with heightened geopolitical risks, we expect the BSP (Bangko Sentral ng Pilipinas) to be more watchful of price pressures from this source and may take a more cautious approach to planned monetary easing.”

Nonetheless, he said with the P4.1-trillion budget signed within the first month of the year, the firm expects government spending to rebound especially in the first half and recover from last year’s “poor performance” that was dragged down by the delayed passage of the 2019 budget.

“We expect to see much higher growth in government spending especially in the first semester of the year considering last year’s poor performance.” — Beatrice M. Laforga





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