A lasting vision

A drive down the streets of Manila is enough to tell even casual observers just how dire the Philippines’ need for better infrastructure is. With traffic jams lasting until 10pm and roads so narrow vans can barely turn, getting the country’s travel networks up to global standards seems a daunting task, to say the least.

It’s not that the Philippine government hasn’t been trying, but it has a good deal of catching up to do. For the past decade, the Philippines has only spent about 2 percent of gross domestic product (GDP) on infrastructure – a far cry from China’s 9 percent and India’s goal of the same number in its 12th Five-Year Plan. Even the developed countries of Europe spend about 5 percent of GDP on infrastructure, according to the Urban Land Institute.

The Philippines has been spraying out new infrastructure projects like a machine gun. In just the past 12 months, the country has put six major public-private partnership (PPP) projects up for bidding, and has awarded four projects in total. Before the end of 2013, the Philippines hopes to have three more PPPs awarded, according to Cosette Canilao, executive director of the Philippines’ PPP Centre.

Coming up with projects isn’t the issue, however: the glitches come in the implementation. Just two months ago, the PHP60.6 billion (€1.0 billion; $1.4 billion) LRT Line 1 Extension project applied for rebidding when it received no qualifying bids, even after months of delay.

Awarded projects aren’t immune, either. The first project awarded under the Aquino administration’s new PPP framework, the PHP2.0 billion DaangHari-SLEX Link Road, is technically on schedule for completion, but the board of the SLEX road is now objecting to Ayala Corporation’s development plans, according to Canilao.

For a country so determined to get infrastructure right, why is implementation so frustrating?

DIVING IN AT THE DEEP END

Delays in infrastructure are not unique to the Philippines, points out Michael Rodriguez, managing director of Macquarie Infrastructure and Real Assets (MIRA) and head of MIRA’s Philippines office. He has experienced similar problems in many other countries when their frameworks are embryonic, and Philippine investors are still getting used to operating in the PPP sector, he says.

But the Philippines is at a disadvantage because it started infrastructure development late. Other countries began the process years ago with smaller projects, and were thus able to establish a working system. Thailand, for example, privatised its electricity sector in 1994 in small increments, and that track record worked wonders in building private sector confidence, according to Christopher Thieme, director of the Asian Development Bank’s infrastructure finance division’s private sector department.

“The private sector became confident that [Thai] infrastructure had a durable foundation,” he explains. “That’s basically become the holy grail for PPP frameworks.”

Thieme admits that the Philippines does not now have the luxury of starting out slow and steady. The pent-up demand for infrastructure has become a bottleneck for the nation’s growth, and it needs large projects in everything from roads to energy. Indeed, since the appetite for large projects is there, the government is trying to fast-track development in the hope of recovering good standing in the eyes of international and local investors, Canilao says.

“We are a very impatient people,” she adds.

THE GOVERNMENT IS ALWAYS RIGHT

Unfortunately, that impatience comes with a price. Government departments want to get projects up and running as fast as possible, but fast is not always best. With little experience of working with the private sector to guide them, departments tend to focus solely on getting projects out at the lowest cost, Thieme explains.

Cheap advice makes for a “get what you pay for” situation, he laments. The projects and bids do get completed, but the research and proposed structures are of low quality, which makes it difficult for the private sector to correctly underwrite the risk. Rodriguez says he has continually noted issues surrounding “prescriptive terms and conditions that greatly reduce bidders’ flexibility to offer the most competitive solutions; and the lack of clarity and certainty on many key parameters of the concession”.

“The government’s desire to be frugal is disastrous,” Thieme claims. Even worse, once proposals are completed on the back of cheap advice, the government tends to resist changes. “The government body often believes that its project proposal is immaculate,” Thieme says, which makes it awkward for private bidders that want to negotiate.

The hold-up on the SLEX project is one such example. After doing 10 months of research, Ayala wants to construct a road cloverleaf interchange and tunnel for the connection to improve traffic, but the government board in charge of SLEX has been demanding that Ayala revert back to the original plan of a roundabout connection, bringing up the same issues that Ayala had already addressed.

Canilao confesses that convincing the government the private sector knows what it’s doing sometimes takes extensive effort, and the loss of confidence becomes even more costly.

“There’s nothing more expensive than doing a project badly, both for the economy and for the community,” Thieme adds.

HEALTHY MEDIUM

Certain government bodies, such as the PPP Centre and committees within departments, have learned to act as intermediaries in the public-private interactions. Canilao describes it as a process of education for both sides. The private players have been learning that the Philippine government can only selectively guarantee returns, and they have to take on some market risk, such as construction costs.

However, the PPP Centre says it is aware of the roadblocks in infrastructure projects that become deal breakers, such as right-of-way permissions and local taxes, and has been encouraging the government to amend them, Canilao says. The Philippines recently passed a new policy stating that central government would absorb excessive taxes of local government jurisdictions. There is a need for central government to “exercise its will” in ways such as that to pull projects off, Thieme says.

“There are structural changes that need to be implemented to speed things up in the bidding, award and implementation processes,” Canilao admits. “There are a lot of long processes that have no value-add in themselves which need to be cut.”

The biggest hurdle will be convincing government bodies that there can be “win-win negotiations” in infrastructure projects and processes, Thieme adds. Most government bodies believe that if they concede to change, they are losing something rather than making the project better.

“Unlike in some of the more developed PPP markets, a very strict, textbook and cold-nosed approach to solving problems will not generally be as effective in the Philippines,” Rodriguez warns. “There will always need to be a stronger element of person-to person interaction based on mutual respect and the clear intention to work towards a mutually acceptable solution.”

To do infrastructure well in the Philippines, foreign investors “usually cannot successfully operate on a fly-in, fly-out basis” anymore.

To build momentum in Philippine infrastructure, however, the current administration must also leave a legacy that investors can depend on, Canilao says. Her goal is, when Aquino’s term is up, to have a framework for infrastructure investment that future administrations can follow.

“This government may be gone, but the private sector will remain,” is Canilao’s vision.