Infra spending boom seen until 2015

The Philippines is on the cusp of an infrastructure spending boom that may attract record-high annual investment levels of P200 billion to P400 billion starting this year through 2015 as the public-private partnership (PPP) finally gains momentum, a research by investment firm CLSA Asia-Pacific said.

“Investments in infrastructure should jumpstart the next phase of high economic growth in the Philippines. From more efficient travel to encourage domestic tourism, to stronger growth in loan growth due to financing requirements, the economy stands to benefit greatly,” according to CLSA’s special report on Philippine infrastructure.

The report, titled “Laying the Groundwork” dated January 9 and written by CLSA analyst Raf Mercado and CLSA head of transport and infrastructure research Robert Bruce, said the direct stock market beneficiaries from this infrastructure push would include conglomerates with sound balance sheets and funding as well as construction firms and airlines. CLSA’s top picks on this theme were Ayala Corp., Metro Pacific Investments Corp. and Cebu Air.

DMCI Holdings and SM Investments were also seen benefiting from the PPP play, either by obtaining concessions outright or winning construction contracts or subcontracts. Meanwhile, it noted that there were only a handful of local contractors with the scale and expertise to take on large infrastructure projects, thus predicting that growth in the sector would mainly focus on companies like DMCI, Megawide Corp. and EEI Corp.

“Construction companies have also seen declining order books since 2010, but we expect that to reverse with a flow of new infrastructure contracts, which will continue for the next two to three years. Local airlines and tourism will benefit especially, both in bringing in international travellers and in shuttling tourists domestically. Other indirect winners include the cement, consumer, bank and property sectors,” the research said.

Despite “tweaks and delays,” CLSA said it was relieved that things were finally underway with the award of the first PPP project, the Daang Hari toll road project, which was awarded to the Ayalas late last year. For the 15 projects scheduled for 2012, CLSA said it expected total spending of $2.6 billion. Auctioning off eight to 10 projects would already be a success, the research added, especially if that would include big-ticket items like the North-South Luzon Expressway Connector Road and the provincial airports. Annual infrastructure spending through 2015 could range between P200 billion and P400 billion, the research said.

The PPP requires a transparent and fair environment, which most business people agreed the administration has provided, CLSA noted. “The government is willing to offer provisions protecting against regulatory risk—this is important in ensuring project stability outlasts the Aquino administration.”

CLSA estimated that the government would allow an average project internal rate of return (IRR) of 13.5-15 percent. “However, in a sign of their aggressiveness, most conglomerates are positioning to bid lower,” it said.

It also noted that while unsolicited bids could speed up the investment process, the government viewed this as less competitive than a straight auction, which meant it would still entertain them but the 60-day challenge period might be extended to at least 90 days to allow greater competition.

ODA loans may not necessarily be a cheaper source of funding on an absolute-cost basis, it said. But ultimately, “ODA funding does not kill the PPP story. It will allow foreigners to participate in the construction, but the 40 percent foreign-ownership limit for concessions will still apply. The only negative would really be to local construction companies, which might lose or share some contracts with foreigners.”

It said establishing the PPP Center was a step in the right direction but all projects were still segregated on an agency level. Designating a secretary for the PPPs, which Malacañang has so far resisted, could shorten the implementation schedule and establish more consistent rules to streamline the entire process.

It also noted that long-term planning was still an issue as unlike other countries, the Philippines had no equivalent of a five-year plan. Agendas change every time a new President is elected every six years, resulting in poor urban planning.

Other legal issues, such as obtaining rights of way, add risks to the successful execution of the PPP program, it said, noting that getting local government units on board with the PPP plans remained a critical step in reducing political risk.