PPP Programme: Not Likely To Be A Total Success

BMI View: The Philippines public-private partnership (PPP) programme continues to move up the gears, with its largest road project, the Cavite-Laguna expressway, launching its prequalification process on July 22. Although this once again highlights the strong potential for opportunities in the Philippine infrastructure sector, the lack of maturity in the country's business environment continues to present considerable execution risks to the programme. With President Aquino's term in office coming to an end in 2016, time is running out for these PPP projects as we believe a change in government could result in these projects being shelved.

The prequalification phase for the 47.02km, four-lane Cavite-Laguna (CALA) expressway started on July 22 2013 and is scheduled to end by September 23 2013. The PHP35.4bn (US$820mn) project will be awarded under a 35-year public-private partnership (PPP) contract, where the successful bidder would be responsible for financing, designing, constructing, operating and maintaining the CALA expressway. The project is expected to start construction works in January 2015 and be completed in December 2017.

The progress with the CALA expressway, the largest road project under the PPP programme, once again highlights the strong potential for opportunities in the Philippine infrastructure sector. Beside the road project, we have also seen some progress among the other projects under the PPP programme (see chart below). Some of the key milestones are:

  • In July 2013, the EPC (Engineering, Procurement, Construction) contract for the Ninoy Aquino International Airport Expressway Phase II project was awarded to DM Consunji, with the project scheduled to start construction works in January 2014.

  • The contract to develop a new urban railway ticketing system in Manila is close to being awarded, with five parties pre-qualified to bid for the project in May 2013.

  • The project structure to operate and maintain the greenfield airport in Bohol is completed and awaiting approval from the government.

Far From Completed
The Philippines - Projects Under PPP Programme

BMI View: The Philippines public-private partnership (PPP) programme continues to move up the gears, with its largest road project, the Cavite-Laguna expressway, launching its prequalification process on July 22. Although this once again highlights the strong potential for opportunities in the Philippine infrastructure sector, the lack of maturity in the country's business environment continues to present considerable execution risks to the programme. With President Aquino's term in office coming to an end in 2016, time is running out for these PPP projects as we believe a change in government could result in these projects being shelved.

The prequalification phase for the 47.02km, four-lane Cavite-Laguna (CALA) expressway started on July 22 2013 and is scheduled to end by September 23 2013. The PHP35.4bn (US$820mn) project will be awarded under a 35-year public-private partnership (PPP) contract, where the successful bidder would be responsible for financing, designing, constructing, operating and maintaining the CALA expressway. The project is expected to start construction works in January 2015 and be completed in December 2017.

Philippines - Projects Under PPP Programme
Project Name Sector Value (US$mn) Status
Source: BMI, Philippines Public Private Partnership (PPP) Center [July 28 2013]
DaangHari - SLEX Link Road Roads 47 Awarded
PPP for School Infrastructure Project (Phase I) Social Infrastructure 389 Awarded
NAIA Expressway Project (Phase II) Roads 380 Awarded
Mactan-Cebu International Airport Passenger Terminal Building (Phase I, II) Airport 405 Under Tender
LRT Line 1 South (Cavite) Extension and Operation & Maintenance (O&M) Rail 1400 Under Tender
Automatic Fare Collection System Rail 43 Under Tender
CALA Expressway Roads 820 Under Tender
Modernization of the Philippine Orthopaedic Center Social Infrastructure 136 Under Tender
PPP for School Infrastructure Project (Phase II) Social Infrastructure 203 Under Tender
O&M of Angat Hydro Electric Power Plant (AHEPP) Auxiliary Turbines 4 & 5 Water 28 Under Tender
Talisay City Plaza Complex Heritage Restoration and Redevelopment Project Commercial Construction 5 Under Tender
NLEX-SLEX Connector Road Roads 590 NEDA Approved
Civil Registration System - Information Technology Project Phase II Commercial Construction na Awaiting Approval
Integrated Transport System (ITS) Project Urban Transport 117 Awaiting Approval
Enhanced O&M of New Bohol (Panglao) Airport Airport 191 Awaiting Approval
Grains Central Project Commercial Construction 10 Structure Being Finalised
Establishment of Cold Chain Systems Covering Strategic Areas in the Philippines Commercial Construction 16 Structure Being Finalised
Rehabilitation of Quirino Highway Roads na Structure Being Finalised
O&M of Laguindingan Airport Airport 43 On-going Studies
O&M of Puerto Princesa Airport Airport na On-going Studies
LRT Line 2 East Extension and O&M Rail 281 On-going Studies
Integrated Luzon Railway Project Rail na On-going Studies
Manila-Makati-Pasay-Paranaque Mass Transit System Rail na On-going Studies
Bulacan Bulk Water Supply Project Water na On-going Studies
New Centennial Water Supply Source Project Water 596 On-going Studies
EI Nido Solid and Liquid Waste Management Facility Water na On-going Studies
Davao Sasa Port Port na On-going Studies
Regional Prison Facilities through PPP Social Infrastructure na On-going Studies

The progress with the CALA expressway, the largest road project under the PPP programme, once again highlights the strong potential for opportunities in the Philippine infrastructure sector. Beside the road project, we have also seen some progress among the other projects under the PPP programme (see chart below). Some of the key milestones are:

  • In July 2013, the EPC (Engineering, Procurement, Construction) contract for the Ninoy Aquino International Airport Expressway Phase II project was awarded to DM Consunji, with the project scheduled to start construction works in January 2014.

  • The contract to develop a new urban railway ticketing system in Manila is close to being awarded, with five parties pre-qualified to bid for the project in May 2013.

  • The project structure to operate and maintain the greenfield airport in Bohol is completed and awaiting approval from the government.

Far From Completed
The Philippines - Projects Under PPP Programme

Delays and Removals

There have, however, been delays among several of the PPP projects at the tendering stage. The government has once again pushed back the submission date for the prequalification documents concerning the PHP17.5bn Mactan-Cebu international airport project to July 30, six months from the original submission date of February 18. Besides the airport, the prequalification dateline for the US$1.25bn LRT Line 1 extension project, originally earmarked for Q412, has also been pushed back to July 30.

More concerning, several projects (mostly at the planning stage) have been removed from the PPP programme. According to data from the PPP Center, there were a total of 57 projects under the programme in April 2013, but this was reduced to 46 as of July 16 2013.

Philippines - Projects Under PPP Programme, At Early Stage
Project Name Sector Region Status
Source: BMI, Philippines Public Private Partnership (PPP) Center [July 28 2013]
O&M of Iloilo, Davao and Bacolod Airports Airport Visayas/Mindanao Ready For Advisors
Batangas-Manila Natural Gas Pipeline Project I (BatMan I) Gas Pipeline Luzon Ready For Advisors
LRT-1 Extension to Dasmarinas Rail Luzon Ready For Advisors
Plaridel Bypass Toll Road Project Roads Luzon Ready For Advisors
Manila Bay-Pasig River-Laguna Lake Ferry System Project Waterway Luzon Ready For Advisors
Philhealth Information Technology Project Commercial Construction na Under Development
Metro Cebu Expressway Project Roads Visayas Under Development
Manila Heritage and Urban Renewal Project Commercial Construction Luzon Under Development
Central Luzon Link Expressway Phase II: Cabanatuan-San Jose Section (DPWH) Roads Luzon Under Development
Global City Mass Transit (Monorail System) Project Rail Luzon Under Development
C-6 Extension (Laguna de Bay Flood Control Dike Expressway) Roads Luzon Under Development
Calamba-Los Banos Toll Expressway Project Roads Luzon Under Development
Tagum-Davao-General Santos High Standard Highway Roads Mindanao Under Development
Improvement/Modernisation of Kennon Road Roads Luzon Under Development
MRT Line 7 O&M Rail Luzon Initial Planning
Metro Manila Skyway Stage 3 Project Rail Luzon Initial Planning

In our opinion, these successive delays in the prequalification process and the removal of projects from the PPP programme are due to the lack of maturity in the Philippines' business environment.

Despite the political stability offered by President Benigno Aquino's administration, policy continuity continues to be an issue in the country, with two recent instances - the revision of guidelines for the bidding of airport projects and the tightening of rules and investment requirements for foreign companies - highlighting the issue.

In addition, policy reforms carried out by the government are still insufficient to resolve all of the structural weaknesses in the Philippines's business environment. For example, during Aquino's recent State of the Nation Address, he highlighted the presidential decrees - 1113 and 1894 - made by former President Ferdinand Marcos. These decrees give the Philippine National Construction Corporation (PNCC), a construction company founded by Marcos in the 1960s, the right to maintain its ownership of the North Luzon and South Luzon expressways when new roads are build to connect both expressways. Aquino has plans to review both presidential decrees and this could delay several PPP projects such as the CALA expressway - once completed, the CALA expressway will link the Manila-Cavite (CAVITEX) expressway in Cavite to the South Luzon Expressway in Laguna.

Lastly, the Philippine bureaucracy continues to lack sufficient institutional capacity to carry out pre-construction activities (eg, documentation, spatial planning, feasibility studies, public consultation, permit issuance, land acquisition) in a timely manner or to a level of detail desired by all of the project stakeholders (ie, local residents, project developers and financers). Indeed, we believe this is the main reason why projects were removed from the PPP programme as the government already has difficulties completing the preparatory work for the projects on hand.

Slowing PPP Progress
Asia-Pacific - Ease of Doing Business Rankings, By Countries, 2012 and 2013

These deficits in the country's business environment are corroborated by data from the World Bank. In 2012, the World Bank ranked the Philippines 138 out of 185 countries on its ease of doing business (one of the lowest rankings in the Asia Pacific region), with the country faring poorly in several key areas that facilitate project development such as contract resolution, lending rights and investor protection.

Time Running Out

In conclusion, even though we believe that the demand for these PPP projects is high, thanks to a strong economic performance, execution risks for these projects remain considerable. This makes it increasingly unlikely for all of the projects under the PPP programme to be awarded or to start major construction works before the end of Aquino's term in mid-2016. We estimate that in a 'best case' scenario, only projects that have already moved beyond the planning stage co uld be awarded before mid-2016.

Should projects under the PPP programme fail to be awarded before the end of Aquino's term in office, we believe that they could be shelved if there is a change in government. This is a pertinent threat to our long-term forecasts for the Philippines' infrastructure sector. The political system in the Philippines is personality-driven and dominated by several old political dynasties, while incumbent presidents are also constitutionally prohibited from taking part in any re-election. In our opinion, this leads to large transition risks as it would typically mean that a new coalition of political parties would be needed to form the next government. Therefore, even though Aquino's comfortable victory during the May mid-term elections suggests that his favoured candidate will stand a considerable chance at winning the elections in 2016, it remains to be seen if that would be the case.

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Geography: Philippines
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