Infrastructure, anyone?

I am pleased to share with readers, post below that Christine Tang and I wrote for subscribers of Globalsource Partners (globalsourcepartners.com). GSP is a New York based network of independent analysts of economic and political outlook in emerging markets.

In Washington for the World Bank/IMF Spring meetings earlier this month, the country’s economic managers turned the spotlight on infrastructure opportunities in the Philippines under the Marcos administration. In a half-day briefing that focused on the economy’s macro fundamentals and investment prospects, the economic team unveiled impressive headline grabbing numbers about the size (3,770 projects worth $317.5 billion) and breadth (six to nine sectors depending on which list) of the infrastructure program, including public-private partnership (PPP) projects in the pipeline (97 projects worth $42 billion).

Just like similar presentations in the early days of previous administrations, the usual comment we hear is that the latest infrastructure program looks more like a shopping list that has not taken budget constraints into account. Tagging 194 of these as “infrastructure flagship projects” appears to have done little to persuade observers that prioritization has been made. And like before, the strategy seems to be one of waving the list and letting the market pick and choose which ones are bankable and shovel-ready.

Talking to experienced on-the-ground players, we gather that despite the current administration’s more welcoming attitude, it will take time to get the PPP program up and running smoothly again. The program stalled under the six years of the Duterte administration when government opted for ODA/publicly-financed infrastructure projects. Moreover, the usual issues continue to hound project selection and implementation, including:

• Right of way delays. This is still the major bottleneck despite the enactment of Republic Act No. 10752 in 2016. One of the major changes that the law introduced was to use properties’ current market values, rather than the much lower zonal values, as bases for price offers. However, disputes over the current values reportedly continue as markets bring forward anticipated appreciation of land prices due to the infrastructure projects themselves. This is partly a reflection of the slow-moving bureaucracy where decision- makers tend to be risk averse due to possible political interference and audit disallowance, as well as shortfalls in planning and project management.

• Non-implementation of user fees, such as tolls and fares. Although automatic adjustments by formula are standard clauses in PPP contracts for the projects’ financial viability, these are especially vulnerable to political interference, resulting oftentimes in fixed prices for years on end. The most recent example is the President’s order to defer implementation of approved fare hikes on Metro Manila’s commuter rails, which have not adjusted fares since 2015, a period where average prices have gone up by over 20%. One of the three rail lines is operated by the private sector. Aside from adding to project risks which increases projects’ hurdle rates, the practice ends up burdening taxpayers with the cost of subsidizing a small set of users and beneficiaries of the affected infrastructure facilities.

• The lack of a national inter-modal framework to serve as basis for identifying, selecting, and prioritizing projects that will yield the highest economic returns for the archipelagic country. This, we gather, affects mass transport the most, with an overemphasis on rail vs. say, inter-island shipping. Further, we have been told that while integrated masterplans are available for metropolitan cities, e.g., Metro Manila, Cebu and Davao, even these have not been given sufficient attention when drawing up priority infrastructure lists. The problem is complicated by private sector-initiated “unsolicited” proposals that by law are not part of the development plan but involve some new innovation and would not require direct government subsidy or guarantee. Without a reference masterplan, evaluating these proposals would necessarily involve some ad hockery and create more confusion. The top-of-mind issue today is in air transport, particularly the lingering uncertainty over the rehabilitation of the Ninoy Aquino International Airport (NAIA), the main gateway to Metro Manila and surrounding provinces. A key issue appears to be the length of the contract to be bid out, which is affected by three other airports located just one to two hours away from NAIA, i.e., Clark which is already operating and Bulacan and Sangley, both unsolicited proposals that have yet to break ground.

• The problem that is the Department of Transportation (DoTr). Experts in the field tell us that while current Secretary Jaime Bautista is well-qualified for the job, he is handicapped not only by the above issue but also by: a.) a hollowed-out department, the result of decades of politicization of public investment decisions that underrated technical competence; and, b.) managing several quasi-independent bodies regulating land, rail, sea, and air transport, over which he exerts little influence, e.g., no power to dismiss people. This is unfortunate as DoTr is key to addressing transport and logistics bottlenecks, hurdles for raising investments in the country as well as attracting more tourists.

• Any number of challenges that could hold-up progress, from project preparation to award. The challenges start with the bureaucracy where a strong PPP Center is needed to facilitate projects and avoid papers being pushed from one department to the next, with requirements multiplying at every stage. After surmounting the project approval process, the competition stage is also prone to delays, especially in cases where bidders take for granted that calling on the courts, congress, or the President of the Republic to intervene on their behalf is part of the rules of the game. All this, a reflection of the country’s weak institutions, contribute to long delays in bringing projects to completion.

Overall, we get the sense that the building blocks for getting PPP off the ground are not yet in place. It took the Aquino government almost four years before its flagship PPP program roared to life. After three years of the pandemic that led to permanent income losses for the economy, economic managers know only too well that the country cannot afford to wait that long.

Romeo L. Bernardo is principal Philippine Adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others. He has had a 20-year run in the public sector including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com