Philippines PPP: Prospects and challenges

Recently recognised in a report by the Economist Intelligence Unit as the most improved country in Asia-Pacific for public-private partnership (PPP) readiness^[1] and with an ambitious pipeline of projects, the Government of the Philippines is seeking to encourage more overseas investors to bid for its PPP projects. This article examines the prospects and challenges facing investors who are looking to invest in the Philippines PPP sector.

The need for infrastructure

A comparison of infrastructure competitiveness by country highlights the need for continued infrastructure investment in the Philippines. The table to the right identifies the quality of overall infrastructure in selected countries in the Asia-Pacific region.^[2] The report ranks each of the 144 countries reviewed based on the score achieved by each country (1 = extremely underdeveloped; 7 = extensive and efficient) by international standards.

Ranked 52nd of 144, the Philippines lags behind a number of its Asia-Pacific neighbours. Worldwide, the Philippines features below countries such as Kazakhstan, Latvia and Barbados. However, in just three years, the Philippines has jumped 61 places to 52nd (it was ranked 113th in the World Economic Forum's 2011-12 Global Competitiveness Report), testament to how effective its infrastructure development has been over the past few years. Since the current PPP programme began in 2010, ten PPP deals cumulatively worth US$4bn have been awarded, including the Mactan-Cebu Airport Project and the Cavite Laguna Expressway Project. This drive for further infrastructure development shows no sign of abating.

Country	Rank	Score
Singapore	2	5.65
Japan	6	5.47
Hong Kong SAR	7	5.45
Taiwan	14	5.25
Australia	21	5.16
South Korea	26	4.96
China	28	4.89
Thailand	31	4.66
Indonesia	34	4.57
Philippines	52	4.40
Vietnam	68	4.23

Opportunities

For those considering investing in PPP projects in the South East Asia region, the Philippines presents an enticing investment opportunity, given the Government's demonstrable commitment to PPPs as evidenced by the establishment of the country's PPP Center and the healthy pipeline of PPP projects coming to market.

The PPP Center

The PPP Center of the Philippines (PPP Center) is an agency attached to the National Economic Development Authority (NEDA, the independent planning agency
of the Government of the Philippines) which is responsible for facilitating, co-ordinating and monitoring Government PPP programmes and projects by acting as an oversight agency in their programming, implementation, monitoring and evaluation. It also serves as an information repository on PPP contracts and reports annually regarding the status of the PPP programme.

The PPP Center has been very successful to date in working with the various implementing agencies to build a pipeline of projects. It has also shown a willingness to listen to the market and the concerns of market participants, and to adjust its PPP programme accordingly. The PPP Center has been increasingly active in marketing the pipeline of PPP projects to foreign investors and finance providers. The strength of the PPP Center has been a key success factor in building sufficient momentum and interest to drive forward the Government's PPP programme.

A healthy pipeline of projects

The PPP Center publishes and regularly updates the pipeline of current projects on its website.^[3] It is currently promoting a healthy pipeline of projects across a wide variety of sectors.

Airports: the tendering process is already underway for the development, operation and maintenance of two bundles of regional airports (Bacolod-Silay and Iloilo and Davao, Laguindingan, and New Bohol (Panglao)), with pre-qualification documents due to have been submitted in August 2015. In addition, in July 2015, the PPP Center announced that the Cabinet-level NEDA-Investment Coordination Committee (NEDA-ICC) has also now approved the Ninoy Aquino International Airport (NAIA) PPP Project. This project is intended to transform the Philippines' main gateway into a world-class modern airport facility. While international interest in the regional airports has been muted to date, greater interest is expected in the NAIA PPP. Other airport projects currently subject to ongoing studies include the upgrading of the San Fernando Airport and the operation of Clark International Airport.

• Rail: projects in this sector include the recently announced North-South Railway PPP which covers the rail link from Metro Manila to Legazpi City, Albay, plus a number of existing and proposed branch lines totalling approximately 653 kilometres. It consists of both commuter railway operations and long-haul railway operations and is expected to cost US$3.79bn. In the light rail sector, the LRT Line 4 Project has now been approved by the NEDA-ICC, while the larger LRT Line 6 Project, for the financing, design and construction of the 19-kilometre rail line from Bacoor to Dasmarinas, Cavite, is pending approval.
• Roads: the ambitious US$2.7bn Laguna Lakeshore Expressway-Dike Project is currently in procurement. The private partner will finance, design, construct, operate and maintain the six-lane expressway toll road atop a 47-kilometre flood control dike. Other projects in the pipeline include the construction, operation and maintenance of the NLEX-SLEX Connector road.
• Water: in the water sector, the Bulacan Bulk Water Project for the financing, design, construction and maintenance of conveyance facilities, treatment facilities and water source to provide treated bulk water is currently in procurement, and the Kaliwa Dam Project procurement process is scheduled to be repeated after all the prospective bidders were disqualified.
• Social infrastructure: the Regional Prisons PPP Project was launched earlier in the year and is currently in procurement. However, interest in the project - which involves the construction of a facility that can accommodate 26,880 inmates - has been comparatively muted and there are only two pre-qualified bidders.

A clear legal and regulatory framework

The implementation of PPP projects is governed by the Republic Act No. 9, more popularly known as the Build-Operate-Transfer Law (as amended, the BOT Law) and its implementing regulations (the BOT Law IRR).

The BOT Law sets out a number of prescribed contractual arrangements including build-operate-and-transfer (BOT), build-own-and-operate (BOO), build-transfer-and-operate (BTO) and rehabilitate-operate-and-transfer (ROT). Other contractual arrangements which are not expressly set out in the BOT Law are also permitted, subject to Presidential approval.

An amendment of the BOT Law to turn it into a fully-fledged PPP law is intended to be implemented before the change of administration in 2016. It is expected that the amendments will generally be favourable to investors and will further institutionalise the process for issuing awards and the role of the PPP Center.

A transparent bidding process

The BOT Law IRR sets out the process by which tenders for infrastructure projects are undertaken. As a general rule, projects to be undertaken pursuant to the BOT Law must be awarded after public bidding. Usually, a two-stage process is followed:

(i) invitation to pre-qualify and bid: the invitation to pre-qualify and bid sets out the standards and requirements that prospective bidders must meet in order to be permitted to participate in the bidding process; and

(ii) bid submission and evaluation: the implementing agency issues the bid documents to pre-qualified bidders. Technical proposals are evaluated first. If acceptable, financial proposals are then evaluated.

Partnership with foreign participants

Traditionally, the Philippines market has been dominated by local conglomerates, who, to this day, are still very active in bidding for PPP projects. However, where more substantial projects are being procured or where there is a lack of local resources (either due to a lack of experience in a sector or simply a lack of capacity due to the number of projects coming to market), local conglomerates are showing an increasing willingness to partner with experienced foreign sponsors and investors.

Incentives

Under the Omnibus Investment Code, projects in excess of PHP1bn that are undertaken pursuant to the BOT Law are entitled to incentives, including an income tax holiday, upon registration with the Board of Investments.

Challenges

There remain, however, challenges, both for the Government in its implementation of infrastructure projects and for those considering investing in the Philippines
PPP sector.

Rights of way

The acquisition of rights of way (ROW) and other interests in real property in connection with a national government project is governed by Republic Act No. 8974 which permits various modes of acquisition of ROW including expropriation. As expropriation involves a court process, there have historically been long delays in the acquisition of necessary ROW and the incurring of potentially high resettlement costs (for example, in the North Luzon Expressway Project). In past projects, the Government has been willing to take on some of the burden of obtaining the necessary ROW, and further amendments to the law are expected which are aimed at increasing the efficiency with which land rights may be obtained for national projects.

Nationality restrictions

Under the constitution of the Philippines, and as reflected in the BOT Law, where an infrastructure facility's operation requires a public utility franchise (such as a franchise to operate a railway or airport), the facility operator must be Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission (of the Philippines) and owned at least 60 per cent by Filipinos. This therefore limits the ability for participation by foreign investors and sponsors. In previous projects in the Philippines, this has been managed by allowing the project company the option of acting as facility operator itself (if it meets the ownership requirement) or by appointing another entity through an operations and maintenance agreement (if it does not). While some foreign investors have been discouraged by such limits on their equity participation, others have indicated that, for the right project, such a limitation would not be a barrier to their investment.

Timelines and resources

The Government and the PPP Center have set out an ambitious pipeline of projects which they intend to award prior to the change in administration in 2016. This has been putting some pressure on the resources of bidders (especially those interested in several projects which may be being bid for simultaneously) and may help to explain why some projects have received fewer bids than expected, as participants become more selective in choosing which projects to bid for.

Property tax/other local taxes

Depending on the location of a project, the project company may be exposed to multiple local tax and consent processes (with potentially onerous conditions attached to these consents).

The Government is reportedly considering including additional mitigants to such risk in the proposed amendments to the BOT Law.

Currency of tolls and fees

Where the project company is to be repaid through the collection of tolls, fees and charges, it may be exposed to currency risk in relation to any foreign-denominated loans.

Historical precedent

In spite of the clear legal and regulatory framework, high-profile issues have arisen on a few projects which has injected uncertainty into the bidding process and given some investors pause for concern. For example, the Cavite Laguna Expressway (CALAX) Project has recently been awarded to Metro Pacific Investment Corporation's subsidiary MPCALA, but only after the project was rebid due to another bidder having questioned its disqualification from the original tender for what it called an "inadvertent and harmless typographical error".^[4] The Mactan-Cebu Airport PPP Project, which was awarded to the GMR Infrastructure and Megawide consortium, has also faced delays, in part due to a dispute between the GMR-Megawide consortium and the runner-up, the Filinvest-Changi Airports consortium.

Change in administration

President Benigno Aquino III is barred from seeking re-election in the 2016 election and there will therefore be a change in government next year. There is some market uncertainty as to the approach which a new administration would take to the current Government's flagship PPP programme. However, the risk is in part mitigated by the institutionalisation of the PPP programme under the BOT Law and also by the unquestionable need for both improved and new infrastructure in the Philippines.

Risk allocation

The PPP Center has published a Generic Preferred Risks Allocation Matrix based on the results of studies under the Philippines-Australia Partnership for Economic Governance Reforms Facility. It is a guideline only, and risk allocations may vary from sector to sector and from project to project, although the PPP Center has encouraged the use of precedent risk allocations where appropriate. However, foreign investors have indicated that they have withdrawn from projects in the past due to inappropriate risk allocations and that the proposed risk allocation for individual projects will need to be carefully evaluated.

Local bank liquidity

Traditionally, foreign lenders have found it hard to penetrate the infrastructure market in the Philippines due to the liquidity of the local banks and the dominance of local sponsors with access to, and long-term relationships with, such banks. Although single borrower limits apply, the rules were relaxed for PPP projects that are part of the Government's official pipeline of projects. Given the ambitious pipeline of projects and the increasing interest of foreign sponsors, foreign lender participation is therefore expected to increase.

Conclusion

The Philippines, like many other of its Asia-Pacific neighbours, still requires a significant amount of new infrastructure, alongside the renovation of its existing infrastructure. The institutionalisation of the PPP Center and the legal and regulatory framework for PPP projects, combined with a healthy projects pipeline, indicates that the Philippine Government is continuing to tackle its infrastructure gap head-on.

However, PPP projects in the Philippines come with a distinct set of challenges, some of which are typical of infrastructure projects in emerging economies in the Asia-Pacific region and some of which are more specific to the Philippines. With some significant projects coming to market, such as the North South Rail Project, greater interest from foreign investors is expected. So far, the Government of the Philippines and its PPP Center have shown a willingness to listen to the concerns and suggestions of potential investors and to engage with multilateral agencies and international experts to benefit from best practice. While this continues, we expect it to be a market that continues to generate significant investment opportunities.

Click here to download a PDF version of this article in Issue 6 of our InfraRead publication (September 2015).

_Notes

_{[1] The 2014 Infrascope: Evaluating the environment for public-private partnerships in Asia-Pacific', Economist Intelligence Unit.
[2] According to the World Economic Forum Global Competitiveness Report 2014-15.
[3] ppp.gov.ph
[4] Darwin G. Amojela, 'San Miguel asks Malacanang to intervene in CALAX bid', InterAksyon.com, July 2014.}