The Republic of the Philippines is not only able to afford its highly ambitious infrastructure development programme, but has also learned from past mistakes about how to implement it.
That was the conclusion of a recent FinanceAsia webinar led by three of the country's leading practitioners: Rosalia V De Leon, Treasurer at the Department of Finance; Ferdinand A. Pecson, executive director of the Philippines' Public-Private Partnership (PPP) Centre and; Dennis Montecillo, head of the corporate clients group at the Bank of the Philippines Islands.
In April, President Rodrigo Duterte, announced the country’s most far-reaching infrastructure spending programme ever as part of a 10-point Socio-Economic Plan to lift the Philippines into the upper middle class bracket and reduce poverty from 21.6% in 2015 to 14% by 2022.
The $167 billion programme, which has been dubbed Build, Build Build (known colloquially as B3) covers 75 flagship projects. The government also plans to deploy a hybrid funding model whereby it will finance and build projects, leaving the private sector will run them.
However, its plan has caused concern on a number of fronts, not least whether the country will slip back into a debt trap, which last caused the sovereign to default in 1983.
Some critics also worry about the country's pivot towards China, which handed Duterte credit and investment pledges worth $24 billion when he visited the country last October. Will the Philippines end up with a Sri Lankan-style balance of payments crisis caused by excessive reliance on Chinese financing for economically unviable infrastructure projects at commercial rates?
In her presentation, De Leon emphasised that this will not be the case. "Build Build Build will be implemented with the same fiscal discipline we've exhibited for the past six years," she commented.
Over the past 20 years, the Philippines has progressively built up a hard-won reputation for debt management, which has enabled it to gain investment grade status from all three international rating agencies. De Leon pointed out that this had given the country some fiscal headroom to expand government debt, which will ultimately be balanced out by increasing government revenues through a combination of tax reforms and higher GDP.
She highlighted the Republic's strong credit metrics. These include a ratio of interest payments to government debt amounting to just 14.5% of GDP, she noted. The figure stands at a 10-year low.
She also forecast that a tax reform bill, which is currently passing through the country's Senate, should bring the Philippines incremental revenue amounting to 0.7% to 0.9% of GDP.
At the same time, she added that infrastructure spending should push GDP up from 6.5% in the second quarter of 2017 to the 7% to 8% level by 2022. She partially based her figures on a NEDA report from 2006, which forecast that every peso spent on GDP should yield Ps2.039 in incremental growth.
De Leon also forestalled potential criticism about Chinese funding sources. She said the Philippines intends to rely on about $1.81 billion in Official Development Assistance (ODA) loans from China and Japan during 2018, which are fixed at sub market rates.
She also told one respondent that the Department of Finance may examine the feasibility of project bonds, but in the near-term will rely on general funding.
The PPP Centre’s Pecson agreed with De Leon. He siad, “Money is not the issue but the country’s capability in delivering projects.”
The Philippines is currently in the process of turning its BOT law into a fully-fledged PPP Act and the PPP Centre has been forwarding its own proposals.
Pecson said the centre wants to prevent possible collusion and cronyism by institutionalising governance and separating the granting and oversight of infrastructure projects.
The PPP Centre is also advocating an open, competitive and fair tender process for contracts. For example, Pecson said the Philippines allows unsolicited proposals for some infrastructure projects, but the PPP Centre wants a longer extension period of 120 days (up from 60 days) enabling rival proposals to be put forward.
Finally, he discussed ways to accelerate implementation including the establishment of a Budget Development and Monitoring Facility, which will help government departments and national agencies to gauge different projects.
Pecson noted there are already three hybrid infrastructure projects on the drawing board covering operations and maintenance contracts, which have completed feasibility studies and are undergoing review by implementation agencies. These are for Clark International Airport, Cebut Bus Rapid Transit and New Bohol (Panglao) Airport.
He also said the ICC had received two unsolicited proposals for the East-West Rail Project and Manila Bay Flood Control and Expressway project.
The Bank of the Philippines Islands’ Montecillo said the country’s most pressing infrastructure needs are in the transport sector rather than the power sector, which has dominated spending over the past few decades. De Leon said the government is prioritising easing city congestion and connecting rural areas to urban growth centres.
Montecillo concluded there has been a, “promising uptrend both in absolute government spending on infrastructure and relative to GDP.”
Whereas the past six administrations averaged 2.6% of GDP, Duterte’s is forecasting 5.3% during 2017 rising to 7.3% by 2022.
Montecillo likened the Philippines to China two decades ago. “When I was an investment banker back in 1998, my revenue budget for the year was $5 million, the same as my colleague’s in China,” he reflected. Today, he estimated that colleague’s budget would be 100 times higher.
“That’s where infrastructure spending at a compound annual growth rate of 7% has got China today,” Montecillo stated. The Philippines wants to be next.
FinanceAsia will put investment opportunities in the Philippines under the spotlight at our Belt and Road Connected: Invest Philippines conference in Manila on January 30. For more details, visit the website.