Private sector looks to the markets

At the corner of Ayala Avenue, the main street in Manila's central business district of Makati, stands a small library containing historical books, photographs and documents. As the former control tower of an American military airport, the library premises are themselves a curious relic of the past. The avenue, now lined with the headquarters of the biggest Philippine corporations, started life as the airport's runway.

Fifty years on, the Philippines is obsessed again with trains, boats and planes, not to mention telephones, power stations and roads. A massive campaign to upgrade the country's infrastructure is under way, with $50 billion worth of projects on the drawing board.

It is not before time. Manila has thoroughly outgrown its 1960s-vintage infrastructure. (Years of dereliction and cronyism under the Marcos government before 1986 stifled planning.) Traffic jams are ubiquitous, water pipes date back to the late 19th century and in 1992 electricity shortages almost brought the economy to a complete halt.

Those "brownouts" galvanized the government. The private sector was mobilized and the power shortage was cured within months. Four years later, the Philippines has emerged as a major destination for private-sector investment in infrastructure ­ one of only two developing Asian nations reckoned by the World Bank to have grasped the complexities of attracting private firms into this arena.

In 1995 the Philippines and Indonesia between them raised almost $4 billion worth of international financing ­ for two power station projects ­ out of a total of only $5 billion committed to private infrastructure projects in Asia. This is just the start, according to Philippine financial secretary Roberto De Ocampo.

"We have already privatized the main power supplier Meralco, along with Philippine Air Lines and the Manila port company," he says. "One third of our power is supplied by independents and that will rise to 100% by the end of the decade. Around 35 private-sector projects worth $5 billion are almost or fully complete."

The involvement of the private sector has been so successful that it is now being extended to road building, railways, water supplies and telecommunications. Financing will come from syndicated lending, multilateral and other concessional loans, equity and bond issues on the local and international markets, and further privatizations.

The biggest push involves transport, with a complex range of projects to capitalize on the infrastructure the Philippines inherited from the US military. When the American troops pulled out of the Subic Bay naval base and Clark air base north of the capital, they left behind some of the best facilities in the country.

The government established the Bases Conversion Development Authority (BCDA) to develop a plan to maximize the benefit of the two bases, each of which occupies 2,000 hectares of land. Subic Bay is already attracting substantial foreign investment to its export industry zone, while Clark Air Force base is to become Manila's new airport. Fort Bonifacio, another military base in central Manila occupied by the Philippine army, has also been integrated into an ambitious scheme to transform the capital.

Fort Bonifacio is to be developed into a new 440-hectare city and transport hub, with offices and residential apartments for 300,000 residents and one million workers, hotels and entertainment centres, hospitals and a new university campus. Surrounded by 214 hectares of parks and golf courses, the city will be linked by conventional high-speed trains to Clark City and to the existing international airport. Travellers will go by underground light rail to the Makati business district nearby. Road access to an existing ring-road and to the new Manila Skyway toll road, now under construction, will be built.

The BCDA holds a 45% stake in the Fort Bonifacio Development Corporation, owned by a consortium of 17 companies. Its controlling shareholder is the listed Metro Pacific Corp, local subsidiary of First Pacific, the Hong Kong-based arm of Indonesia's giant Salim conglomerate. Metro beat prominent rivals to buy the Bonifacio site for $1.6 billion a year ago at Ps33,000 per square metre. It has already sold on 16 hectares at Ps180,000 per square metre, raising $1 billion to finance initial clearing costs.

Phase one of the development is a two-stage plan ­ known as the North Rail Project ­ to build the link from Fort Bonifacio to the planned new airport. The high-speed rail line will eventually mean a journey time of 55 minutes from Bonifacio to Clark. A spur line will later connect Clark to Subic Bay. "The runway at Clark is very strong, built to take the Challenger space shuttle," says Jaime Ladao, chief financial officer of the BCDA. "Two-thirds of the cost of an airport are the land and the runway. What we need now is the terminal and the transport links to the capital."

Costing $400 million, the first stage is being funded by Spanish supplier credits and the government, which already owned the railway land. The heavy rail line will initially terminate north of Manila. Construction of the stretch to Fort Bonifacio is estimated to cost $1.5 billion, including tunnelling costs.

North Rail is being developed by a joint venture whose shareholders include the Bases Authority, Spanish rail, DMCI, a locally-listed property developer and the developers of Fort Bonifacio.

José Noel de la Paz, vice-president at Bankers Trust, which advised the consortium on the Fort Bonifacio bid, says the developers will be seeking to raise $1.4 billion for North Rail. The mix looks like $600 million in export credits, $400 million in bonds, $400 million in onshore and offshore syndicated loans, and the rest in multilateral loans.

"This is a very high-profile project with strong government support," says de la Paz. "Of course lenders will be looking for guarantees, direct and indirect. But this should be a quality project, very well planned with good services."

Also planned is another rail link to the existing Ninoy Aquino International Airport, where a consortium of six local ethnic-Chinese Filipino companies, challenged to contribute to national development by president Ramos, are to construct a new terminal. The existing facility, which is small, overcrowded and dingy, is a source of great shame to the Filipino business sector.

The Fort Bonifacio project is planned over 20 years and may need that amount of time to avoid creating a massive property glut. It will be the fourth business district in Manila, with both Makati and the newer Ortigas business districts continuing to put up new towers. The old Manila Bay area is being developed into a convention, tourism, leisure and exhibition centre.

Makati was originally developed as a residential area by Ayala Land, the prominent listed company which missed out on the Bonifacio contract with a 30% lower bid. Makati established itself as the main central business district but was challenged by the Ortigas family in the 1980s. Its development in Manduluyong attracted the new Philippines Stock Exchange, the Asian Development Bank headquarters and the head office of San Miguel Corp, along with a giant mega-mall shopping centre, a five-star hotel and residential accommodation.

Ayala Land's profitability has not, however, been dented by Ortigas, which is located only a few kilometres from Makati but can take more than one hour by car to reach in heavy traffic. The popularity of the Ortigas mega-mall is creating its own traffic problem.

Investing in infrastructure

Analysts believe that tight competition in the property sector could slow down Fort Bonifacio's development, but they also think it could benefit from a flight to quality in the event of a glut. The developer will spend Ps24 billion on infrastructure for the city and plans to develop parts of the project ­ such as water supply, a hospital and the city management ­ through joint ventures.

The project's main private-sector shareholder, Metro Pacific, is also a shareholder in Smart Communications, a telephone company which controls both land and cellular telephone line concessions in the district containing the project, offering potential access to communications which Makati cannot provide.

Bonifacio Development Corp will fund two high-rise towers internally and sell the rest of the sites to developers, which must follow its master plan. Metro Pacific launched a $135 million convertible bond earlier this year, but the future financial strategy for Fort Bonifacio is still being discussed with the wide selection of international investment banks now seeking advisory mandates in Manila. A further bond issue and an initial public offering of shares next year are likely.

The government is watching over the private-sector involvement in infrastructure carefully, both to minimize its own risks and costs, and to promote synergy in order to reduce the competition for scarce financing. Unbundling risks and allocating them according to ability to pay is the aim, according to finance secretary De Ocampo.

"For instance, on road or rail projects we can give a guarantee of toll-fee or fare levels, and compensation in case of political problems," he says. "But traffic volume is a risk to the developers. If we allow the private sector to transfer risks to the government, we're just kidding ourselves."

An official "swat team" was sent in to look at a $650 million mass rail transit project by a local consortium. It was able to identify savings through technical cooperation between departments. The consortium was then able to raise financing from the capital markets without a mooted government subsidy of $100 million.

On foreign exchange convertibility the government will give guarantees, but on force majeure, such as earthquakes, to which the Philippines is prone, only large damage levels are likely to be covered.

The government's challenge next year will be the privatization of the Metropolitan Water and Sewerage System, a build-operate-transfer project under which Manila will be divided into two districts. Private-sector companies will bid for the concession to operate and upgrade the system. Foreign companies and the World Bank, plus other multilateral agencies, are expected to take part. Also on the drawing board is the privatization of the electricity grid.

To help clear the funding logjam, De Ocampo is pushing foreign governments to reconsider their policies on lending to the Philippines. Regulators in some European countries and Japan require their commercial banks to make loan-loss provision for up to 35% of lending to the Philippines.

The regulations are a hangover from the early 1980s when Manila was forced to reschedule all its foreign debt. Japan is owed around $11.6 billion of the Philippines total foreign debt of $39.4 billion. De Ocampo has asked Tokyo to drop the regulation before 1998, when it is due to expire, since it is a major disincentive to Japanese banks considering loans to the Philippines.

He notes that the Japan Investment Credit Agency has already rated the Philippines as investment grade and the Philippine government issued a successful samurai bond raising ¥40,000 ($370 million) in July.

But he also believes that local markets need to be further developed to provide more capital. Among the planned improvements are the expansion of mutual funds and regulatory changes ­ such as longer-term treasury bills ­ to boost the local bond market.

The shortage of local capital is forcing companies to be more creative in accessing international markets for capital. Infrastructure companies are leading the way, both in equity offerings on the newly-revitalized Philippine Stock Exchange, which is dominated by foreign institutional investors, and in bonds, mostly on the US market.

"Financial advisers are generally telling companies that are already listed that they should raise their international profile by issuing international bonds," says de la Paz of Bankers Trust. Philippine companies, still often dominated by families, are frequently averse to diluting ownership through stock sales or rights issues.

Those with big expansion plans have to go to the international markets, as locally available funds are no longer adequate. "Companies are aiming to diversify funding sources, so as to keep local money free for short-term borrowing," says Valentine Araneta, operations manager of the Philippine National Bank (PNB), which was recently privatized.

Apart from Metro Pacific, other infrastructure companies like Philippine Long Distance Telephone Co (PLDT), Philippine Telephone Corporation (Piltel), Filinvest Land, Ayala Corp and Bauang Private Power have sought funding from bond issues over the past year. A total of $1.5 billion has been raised this year ­ with initial public offerings, mainly from cement companies in a weak market, reaching only $425 million.

Project finance tempts investors

Ayala International Finance launched the Philippine's appearance in the convertible market last year with a $100 million five-year Eurobond led by Jardine Fleming. Although it was launched at a difficult time, it was a success and was followed by the highly successful $150 million Euromarket high-yield bond issue by National Power Corp. The issue had a government guarantee and was rated BB by Standard and Poor's. It carried a coupon of 9% with a seven-year tenor and, as the first bond from the Philippines to achieve this, it was heavily oversubscribed.

National Power has set up a medium-term note programme, a scheme also favoured by PLDT and the Philippine National Bank. These shelf programmes give broad documentation to the company, reducing listing, legal and other costs for individual issues. National Power has a $500 million Euro-MTN programme, while PNB has a $400 million programme.

So far the international markets have viewed Philippine infrastructure project financing deals favourably. The $1.35 billion deal for the 1,200-megawatt power station at Sual in Pangasinan province, one of Asia's largest, was arranged in record time in 1995.

The project's sponsor was Consolidated Electric Power Asia (CEPA), a subsidiary of Hong Kong tycoon Gordon Wu's Hopewell Holdings, which has a 25-year build-operate-transfer deal to supply power to the National Power Corporation. The deal was syndicated in only four weeks, despite the involvement of numerous participants and export credit agencies from Britain, France and the US. The deal encouraged some European commercial banks which had shunned the country since 1983, to resume lending to the Philippines.

Other companies are expected to capitalize on this success later this year and next. Smart Communications, the Metro Pacific subsidiary, may be first off the mark with an initial public offering on the PSE later this year, raising $200 million.

The local firms developing the new terminal at Manila's present airport, grouped in a company called Asia's Emerging Dragon Corporation (AEDC), will be seeking $450 million in primarily debt financing and may seek a public listing later.

Also likely to be seeking funds is a consortium which includes Ayala Land and Penta Capital. It is to construct a light rail system down the middle of Manila's famous Edsa Boulevard ­ the scene of the "people power" demonstrations which toppled the Marcos regime in 1986. As a key artery, Edsa is frequently jammed with traffic. Unclogging it will be a powerful symbol that the Philippines can achieve economically what has already achieved in politics.