YEARENDER: Laying the groundwork for infrastructure buildup

By Czeriza Valencia, Philstar, Dec 25, 2016

MANILA, Philippines – While it remains to be seen if the Duterte administration can deliver the promises under its massive infrastructure push, the groundwork for game changing projects is being laid down at an unprecedented speed and with promise of greater resources.

Infrastructure buildup is among the government’s main thrust to sustaining the robust economic growth seen in recent years and making this progress more inclusive. Economic managers envision this administration to become the Golden Age of Infrastructure for the country, with a deliberate focus on spurring development in the regions through connective infrastructure that would facilitate the flow of trade, investment and boost tourism activities.

The government is thus ramping up infrastructure spending to at least 5.4 percent of the gross domestic product (GDP) beginning next year until 2022. According to the Public-Private Partnership (PPP) Center, this entails expenditure of P8 trillion over the next six years.

As of the Dec. 20 meeting of the Development Budget Coordination Committee (DBCC), the Philippine economy is still expected to grow by 6.5 percent to 7.5 percent in 2017 and by seven to eight percent in 2018. Growth is expected to be fueled by strong domestic consumption as well as investments in construction, public infrastructure and durable equipment. From the supply side, growth in the industry and services sector is expected to be sustained while the agriculture sector is expected to sustain recovery after an almost year-long contraction in growth.

Inflation is also expected to remain at a manageable level of two to four percent throughout 2017 to 2018.

Since the turn of the new administration in the second semester of the year, the National Economic and Development (NEDA) board has approved 17 projects, many of which are located outside Metro Manila.

Among the hard infrastructure projects improved in the past two meetings were Phase 1 of the Metro Manila Flood Management Project, EDSA Bus Rapid Transit Project, Plaridel Bypass Road Project, New Cebu International Container Port, and South Line of the North-South Railway Project.

In the first six months of the new administration, there had been a newfound discipline in the conduct of meetings in NEDA committees dedicated to infrastructure and investment. The NEDA board is also seen to be convened with greater regularity than what was done in the previous administration.

“I think things are moving faster in NEDA and that’s because the president is not a micromanager. He doesn’t really look at the minutiae of projects, the tedious details,” said Socioeconomic Planning Secretary Ernesto Pernia, also director general of NEDA.

“NEDA board meetings are very fast but the projects have already gone through a careful vetting process at the (NEDA) ICC (Investment Coordination Committee),” he added.
To secure funding for projects that need to be implemented immediately, the NEDA Infrastructure Committee (Infracom) also approved this year the reinstitution of the three-year rolling infrastructure program in the national budget beginning next year. This would ensure budget support for projects that need to be implemented immediately within three years.

This would also guarantee that hard budget ceilings of government agencies are optimized in funding infrastructure projects that conform to the priorities of the Philippine Development Plan.
To move projects faster in the clearing process, the NEDA board also streamlined the ICC review procedures for minor changes in scope, design, cost, and extension of implementation of projects.
The public-private partnership program also would continue to play a major role in bridging the country’s infrastructure gap but reforms would be carried out to address its slow pace and accommodate more unsolicited proposals — two issues confronted by the program under the previous administration.

Major changes would also be implemented to accommodate the Duterte administration’s thrust for greater economic inclusivity and the pivot of its foreign policy in favor of China. At the same time, the government also wants to do away with the requirement of a bid premium for the PPP projects to attract more investors and get more projects moving.

The Aquino administration was largely unethusiastic over unsolicited proposals but the Duterte administration wants to foster a more welcoming environment for pitches emanating from the private sector to fast-track the build up of project pipeline and get these ventures going.
In November, the PPP Center completed the draft guidelines for assessing and evaluating unsolicited proposals. The guidelines, however, would still have to be subjected to further review and subsequent approval.

Among the reforms proposed were the conversion of unsolicited proposals to solicited proposals, as well as the extension of the existing Swiss Challenge review period from proposals emanating from the private sector from the current 60 days to a minimum of 90 days.

Under the law, unsolicited proposals are automatically subjected to Swiss Challenge in which the original proponent may match the offer of the third party challenger based on the established bid parameter.

The center is also proposing the and imposition of administrative fees for having unsolicited proposals reviewed by pertinent government agencies. This is meant to ensure that implementing departments have the budget to undertake a thorough review of the proposed projects.

“This administration is embracing unsolicited proposals,” said PPP Center executive director Ferdinand Pecson.

“When we say embrace, we are actually encouraging rather than being a passive receiver but really telling the private sector you also have a lot of good ideas. But of course we will do it according to certain guidelines and there will still be competition. The law in fact specifies that we go through a Swiss challenge,” he added.

To address the slow progress of projects in the pipeline, Pecson said the center would be boosting the capability of institutions involved in the PPP program and would be having stronger collaboration with government agencies implementing PPP projects, the most prominent of which are the Department of Public Works and Highways (DPWH) and the Department of Transportation (DOTr).

Pernia has also mentioned ongoing reforms to shorten the approvals process for projects in the PPP pipeline from an average of 29 months to 18 to 20 months through the streamlining of the approvals process at the ICC level where projects tend to stagnate.

To reduce the cost of PPP projects, the new administration is keen on eliminating the use of bid premiums as a parameter during the procurement process.

A bid premium—called a concession feel under the BOT law— is essentially an amount paid to the government by the project proponent for the privilege of securing the contract for a project. It is paid on top of the project cost.

“The use of premium as bid parameter has been in question although it is allowed under the law,” said Pecson. “But in the current administration, it is preferred that we use other bid parameters.

The thinking now of the new administration is that projects be available to the people at the lowest costs to them as much as possible,” he added.

There are are currently 11 PPP projects in various stages of procurement that include five regional airports, train systems, a port, a water source for Metro Manila, and a modern prison facility.

Hybrid PPPs

As more countries and multilateral development institutions show increased interest in participating in the country’s infrastructure buildup, the government is entertaining the possibility of having hybrid PPP projects which would provide for the use of government-to-government financing and private sector management of operations.

At the start of 2017 a technical working group composed of the PPP center, NEDA, Department of Finance (DOF), Department of Budget and Management (DBM), private sector representative, and implementing agencies would be convened to create the guidelines.

It would take at least three months to formulate the guidelines, after which, it would still have to be approved by the NEDA-ICC.

This new modality in the country’s PPP program is considered in line with the strengthening of the country’s economic ties with China—that entails massive investment pledges in infrastructure from Chinese firms— and the ratification of the Philippine’s membership in the Beijing-led Asian Infrastructure Investment Bank (AIIB) that creates a new source of funding for projects.

The pivot in the country’s foreign policy to strengthen ties with China, Pecson said, is one of the main drivers of change in the country’s PPP program among others.

“We are now looking at a number of infrastructure projects that can be supported by China and also through the AIIB,” Pecson said.

President Duterte came home from his official visit to China in October bearing around $24 billion worth of funding and investment pledges for transportation, infrastructure, power and agriculture among others.

This also included a $3 billion credit line for small and medium enterprises from the Bank of China.

The two countries also signed 13 MOUs on various areas of cooperation covering agriculture, energy, infrastructure and ICT.

The NEDA is now working on a list of more than 30 infrastructure projects proposed for funding by China through Chinese loans. To protect the quality of investments flowing into the country, it has designated its ICC as the clearing house for Chinese investments.

Pernia said countries like Japan and Korea are also scouting for projects to invest in. The Philippines, he said, has received assurances of continued support from Japan-led Asian Development Bank and US-led World Bank in its massive infrastructure push.

“But it does not mean that every PPP project from now on would be following this model,” Pecson said.

“We are looking at this in its totality from financing to operations and maintenance. If it turns out that the government is better off constructing the infrastructure using financing from soft loans with lower interest rates, we would pursue this,” he added.

Projects in the pipeline, whose financing have not yet been finalized may reviewed for inclusion in the hybrid mode of procurement. Projects that are already under procurement would proceed as PPP projects.

Pursuing a hybrid PPP projects may seem like a more economical option in terms of financing but it also comes with a caveat.

For instance, countries providing ODAs may set conditions favoring their own companies in undertaking the contracts for operations and maintenance or as suppliers during the construction phase of the project.

“That is why we have to look at the totality and that is for the government to decide if it will accept the conditions or not,” said Pecson. “We’ve seen those (conditions laid down) before.”

AIIB

Pernia believes AIIB, regarded as the rival of the World Bank, can be a driving force in the ongoing infrastructure buildup in Asia because of its specific function and the promise of greater speed and ease of financing for projects.

During his recent visit to the Philippines, AIIB president Jin Liqun told economic managers that it can exceed the speed of approval by both the World Bank and the Asian Development Bank (ADB). While the World Bank approves a project within three years, it can do so within six months or less than a year.

The AIIB is a multilateral institution that consists of 57 member countries, 37 of which are in Asia. It was formally established in November 2014 when 22 Asian countries gathered in Beijing to sign a memorandum of understanding on the bank.

It aims to boost lending for infrastructure projects in the Asia-Pacific region, including energy, urban construction, transportation and logistics as well as education and healthcare. It has an authorized capital stock of $100 billion.

The Senate rarified early this month the country’s membership in the AIIB and has set aside P4 billion in the proposed budget for 2017 as the Philippines’ initial contribution to the bank.

Pernia was quick to point out, however, that AIIB would operate as an independent multilateral development institution despite the country’s now stronger economic ties with China.

“I think governments will go to AIIB if they show speedy processing of projects. And they are infrastructure-focused so I think the deficit in Asian countries, not just here, is infrastructure,” he said.

Other means of PPP financing

To meet the anticipated huge infrastructure financing demand, the PPP Center is also exploring several mechanisms for tapping capital markets as a financing option for PPP projects.

The Securities and Exchange Commission, for instance, approved recently the easing of stock exchange rules on companies engaged in PPP projects. This would allow companies to tap the capital market for funding specific projects.

With funding from the British government, the center is also developing a foreign investment framework for PPPs that would provide alternative investment schemes to allow greater foreign participation in operations and maintenance companies.

Before the finished framework can be put to use, it needs to be supported by an executive order issued by the president and a policy circular by the PPP governing board.

With greater foreign participation seen as one of the drivers of the PPP program, Pecson said the center is keeping its eyes peeled for changes in foreign investment caps contained in the Foreign Investment Negative List which would be up for review in May 2017. The list was last updated in 2015.

Other infrastructure endeavors

On a less talked about level, the (Infracom) is already identifying investments that would address the long-term water security needs of Metro Manila by 2037 and beyond.

The NEDA Infracom commissioned in October a value analysis and value engineering study for the planned expansion of Metro Manila water sources to include at least eight new major water sources.

Identified as main sources of water were: the Angat-Umiray river basin, Pampanga rivers, Agos rivers, Laguna Lake Basin, Marikina River, Cavite-Batangas Basin and Manila Bay. Also being looked at is the Kaliwa-Kanan river system in Quezon province.

At the same time, the committee is also looking into the viablity of more infrastructure investments in Northeastern Luzon to boost agriculture trade.

NEDA deputy director general for investment programming Rolando Tungpalan said NEDA has added Northeastern Luzon in the priority geographical areas for regional investment— along with Visayas and Mindanao —because of its large potential for agriculture trade. The area comprises food-producing provinces of Quirino, Aurora, Isabela, Cagayan and Nueva Vizcaya.

With more investments in roads and railways, food can be more easily transported from provinces in the the northeast part of Luzon. This would augment the supply coming from Benguet, therefore easing price pressures in Metro Manila.

The NEDA-Infracom, one of the six Cabinet level-committees that assist the NEDA board, is tasked to oversee the country’s infrastructure development plans and policies. It is composed of the director-general of the NEDA Secretariat, as chairman; Secretary of Public Works and Highways, as co-chairman; and the Executive Secretary and Secretaries of Transportation and Communications, Finance, and Budget and Management, as members.