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[OPINION] Golden age of promise?

Golden age of promise?

The Philippine Star | August 28, 2019
Boo Chanco, Demand and Supply 

BSP Governor Ben Diokno is one lucky fellow. Because he has a new supposedly more independent job, he is not obligated to explain what happened to Build Build Build and the golden age of promises.

Indeed, three years after arrogantly claiming government funded infrastructure projects are faster to implement, they are finding out it just isn’t so. How many of those supposed flagship GAA/ODA funded projects are now in construction stage?

Money is no longer the problem. The technocrats call it “lack of absorptive capacity.” Government agencies don’t have the trained manpower that the private sector has. Few have qualified staff to evaluate complicated infra proposals. And the approval process is tedious.

As for ODA, only Japan is on the ball. Chinese ODA are still being processed. Here is a European bank’s view:

“Chinese-funded infrastructure projects are still in early stages. Most Chinese-funded infrastructure projects are still undergoing pre-procurement activities (i.e.  hiring of consultants for bidding, detailed engineering design, etc.) and actual construction for these projects could realistically start only in 2020/2021, given that right-of-way will still need to be acquired.”

The European bank observed in a recently issued report: “Infrastructure gaps are a major bottleneck for Philippine economic growth. The country is usually criticized as having among the worst infrastructure in Asia and, as a result, foreign investment and tourism are dismal compared with other countries.”

Luckily for Mr. Duterte, he can inaugurate leftover P-Noy projects that will be completed soon. His infrastructure secretaries took too long to break ground on their own projects.

This major European bank is warning private sector investors thinking of investing in Philippine infrastructure to be selective because the near-to-medium term risks are high. The bank advised their clients raring to submit unsolicited proposals not to hold their breath. Waiting for the go-signal to get started can be frustrating.

“The outlook for the infrastructure-related sector remains dependent on government action. Recent delays in the passage of the budget as well as the slow pace of approvals and construction for (most) big projects will likely weigh on the sector.

“We advise investors: (1) To expect cement demand growth to moderate this year. (2) NOT to expect too much to happen on big ticket projects (e.g. Makati Subway, M. Manila Subway, PNR NSCR and Long-Haul).”

As for unsolicited projects, the European bank said, it is like “building castles in the sky.”

“There are more than 30 unsolicited proposals, with a combined value of P5.4 trillion, currently under review. So far, only three projects (i.e. Makati subway, Quezon City waste-to-energy, and Bulacan International Airport) have received a green light for either a Swiss challenge or construction.

“We believe construction for most (if not all) new unsolicited projects is unlikely to progress meaningfully in the next one to two years, and completions are highly unlikely before this government’s term ends. Moreover, the risk-reward profile has generally not been attractive, in our view…

“The government has proposed to spend P823 billion on infrastructure this year, a modest (+two percent) increase from 2018. Under the 2019 budget, the government’s infrastructure spending target already included capex for the following big-ticket projects, which are largely funded by Official Development Assistance (ODA) loans:

– P150 billion PNR North 1 North-South Commuter Rail (Tutuban – Malolos), of which P14 billion will be spent in 2019.

-P356 billion Metro Manila Subway Project, of which P1.5 billion will be spent in 2019.

-P35 billion Mindanao Rail Project (Tagum – Digos segment), of which P2.9 billion will be spent in 2019.

“This year’s capex for the above-mentioned projects is largely concentrated on right-of-way acquisitions and detailed engineering design.

“A large proportion (>90 percent) of the 2019 budget will still be spent on bite-sized projects (i.e. provincial roads/ bridges, regional airports, marine ports, etc.).

“Challenging in the near term, but medium-term prospects positive… Construction of several PPP-led projects granted during the Aquino administration will finally be in full swing this year…

“Progress on the build-out of big-ticket infrastructure progress hinges largely on the pace of (a) contract biddings/procurement and (b) right-of-way acquisitions, which we believe can be highly unpredictable…

“… the approval process for unsolicited proposals is extremely slow and normally takes four to six years. We believe further delays or even rejections are within the realm of possibility for some of these projects…”

There is always a lot “of inter-agency coordination challenges. Unsolicited rail and road projects could face alignment issues/conflicts with the government’s own projects, which could cause delays in the approval process.”

Then there is MAGA or “Material Adverse Government Action” we previously discussed in this column.

The bank noted that the “Duterte administration has taken a firmer stance against concession agreements with sovereign guarantees and subsidies. Thus, PPP contracts, solicited or unsolicited, signed under this administration have removed these provisions, including recently awarded concessions for the (a) Bulacan International Airport and (b) Clark International Airport O&M.

“Material Adverse Government Action”, the bank pointed out, often occur due to political reasons. “The removal of the guarantee raises business and regulatory risks, as tariff adjustments could be deferred or denied unilaterally.

“History suggests that PPP projects are riddled with risks and unsolicited projects are even riskier, in our view, given that: (1) Government guarantees are removed. (2) Right-of-way costs are borne solely by the private sector.

“With higher interest rates today than two years ago and heightened regulatory risks, we believe the financial viability of most of these projects could be at risk.”

So it now seems the bankability of PPP projects is not as easy as it was three years ago. Even if government wishes to shift gears from GAA/ODA to PPP, it may not happen.

Nothing in the European Bank’s report surprised me. I have been warning of slow movement of projects in this column. Hopefully, Duterte is taking all the claims of progress by DPWH and DOTr with a grain of salt. Something is happening for sure, but not as fast as it was promised.

Build Build Build? Dream Dream Dream!

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco


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