Pernia: Philippines’ infrastructure build won’t depend on China

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By:
Chris Wright
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Vast infrastructure initiative taking shape, minister says; insists PPP will be used, not just Chinese soft loans.

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Ernesto Pernia, secretary of socioeconomic planning for the Philippines

The Philippines’ Build Build Build infrastructure drive is one of the most ambitious in the region: 75 priority projects, more than 4,000 others under assessment, and costs approaching $200 billion.

Getting it under way successfully may transform the country’s approach to investment and markets.

Ernesto Pernia, the former Asian Development Bank (ADB) economist who now serves as secretary of socioeconomic planning for the Philippines, says that the average spending on infrastructure has gone from 2.6% of GDP during the previous Aquino administration to 3.8% in 2017, and 4.5% to 4.8% in 2018.

“Then it will ratchet up even further to about 7% by the end of this administration in 2022,” he tells Euromoney on the sidelines of the IMF annual meeting in Bali.

It’s one thing to say this, but the Duterte administration is certainly not the first to do so. Why is it any better equipped to deliver than those who have tried before?

“Well, we have better fiscal space now,” Pernia says. “Revenue generation has been higher, and also we have offers of official development assistance from at least three countries.”

The three he’s referring to don’t include the US, a story in itself: he means Japan, South Korea and China.

“[Beyond that], it really is the political will and the determination to arrest this infrastructure deficit which has been maintained for some time,” says Pernia. “The public have been left behind in terms of infrastructure development.”

The question

The legislative environment is in place – a comprehensive tax-reform programme has helped generate revenue, with the Bureau of Internal Revenue now beating its collection targets where once it used to massively undershoot them – but where is the money going to come from?

Clearly, no matter how tempting the offers of foreign lending from China and elsewhere, Duterte’s infrastructure targets – the 75 high-impact priority projects alone require about $168 billion of investment – are going to require the involvement of foreign private-sector capital.

Pernia says there is “a lot of interest” from private-sector capital, and cites several examples of projects being conducted under the public-private partnership (PPP) model.

Among them is the rehabilitation of the Ninoy Aquino International Airport outside Manila, which is being undertaken by a consortium of seven conglomerates; all of them are domestic, with Singapore’s Changi Airports International hired as a technical consultant.

By August this year, the country had awarded 16 national PPP projects worth $6.2 billion since 2010.

He says we are “definitely more open this time compared with past administrations” to international private capital. Asked for a number, he says that the mix of local to foreign funding, currently around 80-20 in favour of local, will “probably have to increase” to 75-25, “with more money coming in”. 


China is beginning to be a major player, but is still at the initial stage. Compared with Japan, China has been rather slow, and we are very careful in making sure we don’t get into difficulties later 
 - Ernesto Pernia

However, there is a fear expressed by banks in Manila and overseas that the availability of cheap, soft financing from China will push the Philippines away from the PPP model, instead taking the relatively easy model of just accepting a debt to other countries.

It was perhaps with this in mind that the ADB approved a $300 million policy-based loan in August to support the effort to build the PPP programme in the Philippines.

Pernia presents Chinese funding as just one option among many.

“China is beginning to be a major player, but is still at the initial stage,” he says. “Compared with Japan, China has been rather slow, and we are very careful in making sure we don’t get into difficulties later.”

Pernia says there is a screening process for any Chinese bidder on a project, adding: “They have to give us a list of three SOEs, the companies that would be doing the project, and they have to be of the highest integrity and competence, with a good track record.”

He says that, so far, only one project has been signed with Chinese funding: an irrigation project in the north of the country, called Chico River.

He is aware of the challenges that Sri Lanka, Pakistan and several African countries face in terms of indebtedness to China, and has seen Malaysia’s reversals on committed China-funded projects.

“We are not going to be in that position,” he says. “We have to be perfectly sure that the project will be financially viable, economically rewarding and socially acceptable.”

Another question is the capacity of the government to process and approve all these projects. Pernia says that of the 75 flagships, 44 are processed and in various stages of implementation.

Tangible difference

However, infrastructure is, by its nature, slow; a government list from June this year showed only seven of the 75 had entered construction. When will people start to see a tangible difference?

“I think in a couple of years people will feel Metro Manila’s traffic easing considerably,” he says; in fact, an elevated road taking trucks from the harbour to the North Luzon Expressway should be usable in January, with a connector between the expressways to the north and south of the city not far behind it.

It will be essential that infrastructure reaches a lot further than Manila. Duterte is from the southern island of Mindanao, and the advancement of projects there is a priority.

Rolando Tungpalan, undersecretary of the National Economic and Development Authority, says projects will include a railway circling Mindanao’s main ports, while elsewhere in the region they will include bridges as long as 24 kilometres connecting the islands in the Visayan group to Luzon and to one another.

And in terms of jobs, Pernia says the impact is already there: 400,000 to 600,000 additional workers on infrastructure in 2018.

“By the end of 2022, the total employment that will have been contributed by the construction of infrastructure will be about 1.3 million net additional jobs,” he says.

By then, he adds, the infrastructure should be contributing about three percentage points extra to GDP, by which time the Philippines will officially be an upper-middle-income country – a slightly mixed blessing, since the country will then be charged more by multilateral agencies.