Cash-rich banks don’t view ODA as competition for funding projects

BY MELISSA LUZ T. LOPEZ

THE DUTERTE GOVERNMENT’S P8-trillion infrastructure spending plan was what local lenders were waiting for.

When it was announced in April, it created a stir in the industry for obvious reasons.

By helping lend money to big-ticket projects, local banks would be able to deploy cash and earn more from loans, instead of just placing them in low-yielding instruments.

Over the past year, the Philippines’ money supply has been posting double-digit increases, thanks to rising deposits and banks’ bigger capitalization. As a result, amounts that were available for corporate and retail lending have also grown.

But this expansion drove borrowing rates lower, prompting the central bank to step in by capturing excess funds just to bring rates closer to its benchmark.

With the government’s “Build, Build, Build” initiative, banks would have the opportunity to cash in on the infrastructure boom while also fulfilling a sense of duty to help upgrade the country’s roads and bridges.

THINGS CHANGED A MONTH LATER

What would have been a golden era for bank lending took a sudden turn when economic managers bared that the so-called DuterteNomics plan covering 2017-2022 meant a shift away from the public-private partnership (PPP) mode towards grant-funded and state-sponsored projects.

National Economic and Development Authority (NEDA) Undersecretary Rolando G. Tungpalan said in May that two-thirds of the projects will be wholly supported by government funds, with the remainder to be supported by other modes of financing. Some 18% will rely on PPP arrangements, while 15% will depend on official development assistance (ODA).

“The thing about the PPP program is because it was private-public, there was significant opportunity for banks to lend to the private side of PPPs… Now, we noticed a shift to ODA financing, which is really a government-to-government type, and that potentially could reduce the opportunity for banks to lend directly to these projects,” Cezar P. Consing, president and chief executive officer (CEO) at the Bank of the Philippine Islands (BPI), said in an interview. “However, I will say that the infrastructure needs of the country are so great that there’s probably room for both approaches.”

For this year alone, the government wants to spend as much as P847.2 billion for public infrastructure, accounting for 5.3% of gross domestic product (GDP). By next year, it is looking to spend over P1 trillion on projects nationwide, with the amounts expected to rise annually and peak at a share of 7.3% of GDP by 2022.

In defending the shift to ODA, Socioeconomic Planning Secretary Ernesto M. Pernia said the government simply wants faster and more efficient results, given that the Aquino administration’s PPP program saw but four projects completed within his six-year term against 53 on the pipeline.

Lined up under the DuterteNomics program are the P255-billion North line of the Philippine National Railways to be funded by ODA from Japan, eyed to link Metro Manila to Clark, Pampanga in 55 minutes; while funding for the P285-billion South line — which will connect Manila to Bicol — will be sourced from the Chinese government.

A man works on a government project, a 300-meter flyover that will connect two main expressways in Manila. / NOEL CELIS / AFP

The first phase of the Mindanao Railway that was planned to start by the fourth quarter will also be supported by a grant from Beijing, with the Tagum-Davao City-Digos segment seen to cost about P31.544 billion.

But will the new route taken towards the so-called “golden age of infrastructure” leave banks out in the cold?

Despite the shakeup in project financing options, Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. said the lenders will not run out of chances to cash in on infrastructure opportunities. These are so huge that it’s beyond what the banking system can support by itself.

With wider project selection, there’s more than enough to go around as far as banks are concerned.

“There might be friction, but if we look at it more holistically and with a more long-term view, you’ll realize there’s really room for both,” Mr. Consing said, noting that the goal was to get the construction plans up and running.

Instead, the opportunity lies on what he calls the “second- and third-order benefits” drawn from getting more roads and transport systems, such as new business hubs which would need fresh funding as they sprout — new malls, offices, restaurants, housing sites, among others.

Developers are quick to put together townships, placing office buildings and condominiums around train terminals as communities rise with the new transport routes.

Colliers International cited Fairview; San Jose del Monte, Bulacan; Novaliches; and Commonwealth Avenue in Quezon City as good sites for development, especially with the construction of the Metro Rail Transit Line 7 in the works.

Outside the capital, the provinces of La Union, Pangasinan, Tarlac, Batangas, Naga, Iloilo, Bacolod, Cebu, Davao, and Cagayan de Oro are also seen as strategic locations for budding townships with blueprints for more link roads and local railways in sight.

Besides construction companies, the household sector, wholesale and retail trade, and food production are among those expected to benefit from higher infrastructure spending, the NEDA said.

For his part, Security Bank Corp. President and CEO Alfonso L. Salcedo, Jr. said that lenders can take part in the infrastructure story by lending to domestic contractors and suppliers, who would need to tap fresh funds for its working capital.

“As they participate in infrastructure development, their business with banks will also expand,” he said.

But this is not to say that Security Bank has limited resources to support government spending by way of lending to build more roads, bridges, and trains.

Currently, the Philippines’ fifth-largest bank in terms of assets boasts of fresh capital, giving it the capacity to lend more to conglomerates involved in big-ticket projects despite the 25% single borrower’s limit (SBL) imposed by the central bank.

“We are well-positioned to support the financing requirement of our large corporate customers because we have a higher SBL for our corporate customers as a result of the P37-billion capital investment by MUFG (Mitsubishi UFJ Financial Group) in Security Bank last year,” Mr. Salcedo said. The lender can also leverage on the expertise of its Japanese partner in terms of project finance, the executive added.

Both BPI and Security Bank see the construction boom as a net plus for the local economy, noting that the ODA financing track should not be viewed as competition.

Melissa Luz T. Lopez is a senior reporter of BusinessWorld. She covers the Bangko Sentral ng Pilipinas and the banking sector.