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1. By Dunalee Peiris - Global Research and Analysis Team
2017-07-31
Will Foreign Funds Take Away from Private
Investment as the Philippines Enters the Golden
Age of Infrastructure?

2. 02
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
‘Dutertenomics’ is the term coined for President Duterte’s ambitious socio-economic
development plan. A significant part of this development plan is based on the mantra of ‘build,
build, build’ and aims to usher a ‘golden era of infrastructure’ in the Philippines over 2017-
22F. As per government sources, this plan requires PHP 8.4 trillion to be spent on
infrastructure development in the Philippines over a five-year period, and is expected to push
infrastructure spend up to 7.4% of GDP by 2022F from 5.4% in 2017, and is higher than the
annual average infrastructure spending of the previous six administrations.
As per the current plan of the government, 66% of infrastructure spending under
Dutertenomics is to be funded by tax revenue. The remainder is to be financed via Private
Public Partnerships (PPP) and Overseas Development Assistance (ODA), accounting for 18%
and 15% of overall planned spending respectively. This heavy dependence on taxes is based on
the government’s reluctance to increase the country’s external debt, thus limiting its reliance
on ODAs. Moreover, its aversion to PPPs stems from the delays in awarding PPP contracts in
the past.
However, the government’s ability to fund infrastructure projects without pushing up its
budget deficit beyond its desirable level is questionable. This may, therefore end up with PPPs
and ODAs getting a bigger share than what was originally accounted for, with PPP
contribution having the potential to increase from 26%-37% and ODA potential growing from
23%-34%. While both these alternatives have their pros and cons, the government is showing
an inclination towards ODAs, on the back of previous failures in the PPP process, and the
growing interest shown by Asia in investing in the Philippines’ infrastructure. However, this
will require the Philippines to sacrifice its desired debt to GDP ratio to a certain extent.

3. 03
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
Insufficient Spending in the Past has Resulted in Sub-Standard Infrastructure,
Making Dutertenomics a Necessity
The Philippines is currently ranked the lowest in terms of quality of infrastructure among the ASEAN 6.
As per the World Economic Forum Global Infrastructure Competitiveness Index 2016-17, out of 138
countries, the Philippines was ranked 95th in terms of the overall quality of infrastructure. The
Philippines especially lagged in air transport infrastructure (116th), port infrastructure (113th) and
road infrastructure (106th).
The Philippines Ranked the Lowest Among ASEAN 6 in terms of Infrastructure Quality in 2016-17
Source: World Economic Forum, “Global Infrastructure Competitiveness Index 2016-17

4. 04
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
The sub-standard levels of infrastructure have largely been a result of low infrastructure spending in
the past. As per the Philippines Infrastructure Transparency Portal (PITP), Duterte’s planned spending
on infrastructure (as a percentage of GDP) in 2017 is almost twice the annual average infrastructure
spend of the more recent five administrations.
Source: PITP based on data from the Philippine Institute for Development Studies 2017 National Expenditure Programme
As per KPMG, these insufficiencies in infrastructure have resulted in a loss to the country in terms of
productivity and efficiency and has increased travel time of Filipinos, traffic congestion, pollution, and
has reduced access to basic utilities. Moreover, a study conducted by the Japan International
Cooperation Agency (JICA) in 2012 revealed that the under developed infrastructure caused the
country to lose PHP 2.4 billion daily or approximately PHP 876 billion per annum, equivalent to 8.3%
of GDP.
With the intention of uplifting the level of infrastructure in the country, major infrastructure agencies
within the national government, the National Economic Development Authority (NEDA); the
Department of Public Works and Highways (DPWH); the Department of Transportation (DOTr); and
the Bases Conversion and Development Authority (BCDA), have started to coordinate and come under
the same ‘Build Build Build’ programme as implementing agencies.

5. 05
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
As per this programme, the following sectors have been selected as areas of focus:
• Airports
• Roads and bridges
• Railways
• New cities
• Urban mass transport
• Seaports
• Flood control
• Communication and Information
The Philippines currently has 60 infrastructure projects in the pipeline, 39 of which are in the
development stage, 5 in the procurement stage and 16 in the implementation stage. Out of these 60,
23 projects were initiated during the past year under the Duterte administration. The projects range
from an estimated cost of USD 3.3 million (Night Rating of Naga Airport) to USD 4.5 billion (Mega
Manila Subway).
It can be observed that the number and the value of the projects in the development stage are a lot
higher than those in the implementation stage, indicating the Duterte administration’s keenness and
commitment towards infrastructure development. As of July 2017, the 39 projects in the development
stage totalled an estimated cost of USD 21.4 billion.
It could be further observed that in the majority of sectors, projects took a longer time to pass through
the pre-implementation stages, as opposed to the actual implementation of the project. The longest
average time taken in pre-implementation was witnessed in flood control and roads and bridges
projects, whereas airport projects saw the longest average implementation time.

6. 06
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
Infrastructure Projects- Costs and Time
Sector
No of
Projects
Development
Stage
Procurement Stage Implementation Stage
Airports
18
Estimated cost
(PHP billion)
281
(USD 5,546
million)
No current projects
at this stage
21
(USD 397 million)
Average time
taken (months)
38 48 60
Roads and bridges
12
Estimated cost
(PHP billion)
147
(USD 2,904
million)
4
(USD 79 million)
110
(USD 2,167 million)
Average time
taken (months)
82 16 39
Railways
10
Estimated cost
(PHP billion)
600
(USD 11,856
million)
3
(USD 55 million)
258
(USD 5,093 million)
Average time
taken (months)
17 15 42
New cities
7
Estimated cost
(PHP billion)
211+
(USD 4,175+
million)
No current projects
at this stage
No current projects at
this stage
Average time
taken (months)
TBD - -
Urban mass transit
6
Estimated cost
(PHP billion)
27
(USD 528
million)
38
(USD 747 million)
18
(USD 352 million)
Average time
taken (months)
24 21 42
Seaports
3
Estimated cost
(PHP billion)
6+
(USD 113
million)
No current projects
at this stage
2
(USD 30 million)
Average time
taken (months)
TBD TBD 11
Flood control
3
Estimated cost
(PHP million)
8
(USD 156
million)
8
(USD 156 million)
No current projects at
this stage
Average time
taken (months)
161 18 -
Communication and
information
1
Estimated cost
(PHP billion)
1
(USD 18 million)
No current projects
at this stage
No current projects at
this stage
Average time
taken (months)
TBD - -
Source: PITP
*Note-Converted using exchange rate as of 25/7/2017
TBD-To be disclosed

7. 07
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
Tax Reforms Impede Government Funding Capabilities; Creates Opportunities
for Alternative Sources
In order to meet the requirements for the government funded portion of this plan, PHP 5.5 trillion
needs to be collected as tax revenue over the course of five years, solely for financing infrastructure
projects (an average of PHP 1.1 trillion per annum). To put things in perspective, the average tax
revenue collected for the past five years (2012-16) amounted to only PHP 1.3 trillion per annum, with
PHP 1.6 trillion being raised in 2016. As per the 2017 proposed budget, the government expects to
collect PHP 2.4 trillion through taxes. However, only PHP 780.6 billion has been set aside for
infrastructure and other capital outlays (out of the PHP 3.4 trillion budget), which accounts for only
71% of the required PHP 1.1 trillion. The 2018 proposed budget has been pitched to reach PHP 3.8
trillion, a 14.6% increment from 2017. Out of this only 25.4%, or approximately PHP 965.2 billion, has
been set aside for infrastructure and capital outlays. Assuming that infrastructure spend is levelled out
over the five year period, this falls short by approximately PHP 135 billion (in 2018F).
Moreover, the Senate and the Department of Finance are currently in disagreement over tax reforms
in the country. The tax reform bill passed by the Senate in May 2017 will increase the government’s
tax revenue by PHP 1.2 trillion over 2018F-22F from what was originally budgeted. However, this is 8%
lower than the tax reform plan proposed by the Finance Department. This additional revenue will not
be solely utilised on infrastructure, as there are other sectors that require high levels of government
support in terms of funding.
The Duterte administration has also included the following as priority areas for development (in
addition to infrastructure):
• Human capital development
• Social protection and sustainable livelihood
• Peace and order
• Agricultural and rural enterprise productivity
The recently passed Universal Access to Quality Tertiary Education Act is one example in which
government funding will be directed towards an alternative sector. This act requires an additional PHP
50 billion (1.5% of 2018 budget) on average to be spent annually on education. The 2018 budget,
however, has been made without making allocations for the above.
In addition, the President’s war on drugs, and focus on peace and order, will also require an increase
in budget allocation. In addition to the increments seen in the police, military and judiciary budgets in
2017, the government plans on increasing the salaries of the police and the military in 2018F. As per a
statement made by the government, policemen’s salaries alone will be increased two-fold, requiring a
further PHP 50 billion annually. The addition of these expenses may result in the worsening of the
country’s budget deficit, resulting in a further accumulation of government debt.

8. 08
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
The Philippines witnessed a three-fold increase in its budget deficit in 2016, reaching 2.7% of GDP from
0.9% in 2015, and is anticipated to pass the 3.0% mark in 2017. The current administration has stated
that it aims to limit its budget deficit to 3.0% and maintain it at the same level until 2022.
The aforementioned projects and the deficit in infrastructure spend alone will require a minimum of
PHP 235 billion to be spent annually in addition to the proposed budget in 2018, which, as per our
estimates, may cause the budget deficit to reach 4.4% of GDP in 2018F as opposed to the government
estimate of 3.0%.
Budget Deficit May Rise Beyond Estimate in 2018
PHP billion
Expected government revenue (taking into account tax reform) 2,841
Proposed budget expenditure 3,364
Budget deficit 524
% of GDP 3.0%
Additional annual requirement for education Universal Access to Quality Tertiary Education Act 50
Additional annual requirement for policemen’s salary hike 50
Additional annual requirement for infrastructure (2018) 135
Prospective budget deficit 759
% of GDP 4.4%
Source: by UZABASE
The accumulation of these factors may hinder the government’s plan of relying on tax revenue to fund
66% of infrastructure, with aforementioned PHP 135 billion needing to funded through alternative
means. Assuming that the difference between the expected PHP 1.1 billion and the budgeted
infrastructure outlay in 2017 and 2018F was funded entirely through foreign loans, ODA contribution
has the potential to increase from 23.0%-34.0%. If the same shortage was funded entirely by the
private sector, PPP contribution could increase from 26.0%-37.0%. This provides greater opportunities
for PPPs and ODAs to increase their involvement in Dutertenomics, while allowing the government to
stay on track of its PHP 8.4 trillion end goal.

9. 09
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
Restructured PPP Framework, A Viable Alternative
The Philippines is no stranger to PPPs, with its use of build-operate-transfer (BOT) contracts dating
back almost 30 years, where the country was awarded the first BOT contract in Asia in 1988.
Subsequently, the Philippines applied a PPP framework to resolve the power crisis the country faced
in the 1990s. During this time, PPP projects worth USD 5 billion and a power generation capacity of
4,200 megawatts were commissioned. By 1998, 46% of total power generation came from the private
sector, and by 2015 this number had increased to 95%. By 2014 the Philippines’ access to electricity
(as a percentage of population) reached 89.1% from 61.8% in 1990. Furthermore, in the late 1990s,
the Philippines went ahead to execute the world’s largest water privatisation deal by awarding the
Metropolitan Waterworks and Sewerage System franchise to two private entities that engage in water
and waste water services (Manila Water Company Inc., and Maynilad Water Services, Inc.), which are
still engaged in the provision of water as a utility in the Philippines. Since then, the country’s PPP
framework was subject to various challenges, such as having to face the 1997 financial crisis, along
with various legal complexities, rendering it ineffective.
The weaknesses in the previous PPP framework resulted in the introduction of the prevailing PPP
programme in 2010. This new programme, which was recognised by the World Bank in its report titled
“Benchmarking Public-Private Partnerships Procurement 2017”, was introduced by the Aquino
administration, and is still in use in the Philippines. Under the framework, the government assumes
regulatory risk (with a promise to compensate contractors due to a regulatory action which inhibits
them from collecting the agreed fee), while commercial risk is to be borne by the private sector. The
PPP system is also now open to hybrid structures outside the usual BOT (Build-Operate-Transfer) and
BLT (Build-Lease-Transfer) structures. The government has also taken a cue from other countries, and
has adopted a more complex bidding system than the previously used ‘lowest bid’, by considering
factors such as highest premium offered and lowest viability gap financing (a certain percentage of
total capital cost is paid by the government as a grant to make the project economically viable). All of
these changes have been made in order to make infrastructure projects more feasible and to attract
more private sector investments.
There are currently 37 PPP infrastructure projects in the pipeline, out of which 15 had been awarded
as of July 2017. These include big ticket projects such as the Line 7 (MRT 7) project and the LRT 1 South
(Cavite) Extension Project. (See appendix.)
Much interest has been shown by the private sector, both domestic and foreign, towards bidding for
PPP projects, with an observable trend of forming consortiums. Since the implementation of this PPP
framework, major conglomerates in the country have come together to jointly bid for major projects.
One such example would be the forming of Trident Infrastructure and Development Corporation by
Aboitiz Equity Ventures, a leading investment holding company, and Ayala Land, a leading real-estate

10. 10
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
developer in the country. Similarly, Megaworld Corporation and SM Prime Holding came together in
2014 to bid for the Laguna Lakeshore Expressway and Dike Project.
The Ayala group is a prominent participant in the PPP programme, being involved in four PPP projects
with a total cost of PHP 135.5 billion, and has done so mainly through forming of similar consortiums.
The LRT 1 South (Cavite) Extension Project was awarded to a consortium (Light Rail Manila Consortium)
made up by Ayala, Metro Pacific Investments Corporation and Macquarie Infrastructure Holdings.
Ayala also partnered with three foreign firms in 2016, to bid for the Ninoy Aquino International Airport
development project. Under the PPP framework, foreign investments in infrastructure projects is
limited to 40%. This has been an improvement from the previous 25% limit set prior to 2010.
The forming of such consortiums by well reputed conglomerates have resulted in the PSE relaxing its
listing rules for the private proponents of PPP projects. The PSE originally required companies to be
profitable for three consecutive years in operation before going public. This requirement no longer
exists for companies engaged in PPPs with a minimum project cost of PHP 5 billion. However, a
company can seek initial listing only when it has commenced commercial operations on a PPP contract
which has a minimum remaining life of 15 years from the date of filing for the listing.
Furthermore, in 2016, the Central Bank refined its regulatory guidelines in order to allow companies
to participate in PPP project finance activities by structuring as self-contained special purpose entities
or consortiums. This allows these companies not to be restricted by the 25% single borrower limit set
by banks, as special purpose entities would be considered as independent parties. All these measures
provide companies engaging in PPPs with greater opportunities to raise funding.
The present government has also encouraged private participation in PPP projects by being open to
unsolicited proposals and is in the process of reviewing them for approval. An unsolicited PPP proposal
is one in which a private sector company submits a project idea to the implementing agency to develop
a public facility. The following conditions need to be met for unsolicited proposals to be considered by
the government:
• the proposal should involve a new concept or technology and cannot be a part
of the list of existing priority projects;
• will require no direct guarantee, subsidy or equity from the government;
• and should not be a component of an existing approved project.
As of February 2017, the DOTr was reviewing an unsolicited proposal for the New Manila International
Airport project submitted by San Miguel Corporation, and the DPHW was reviewing an unsolicited
proposal for the Manila-Taguig Expressway proposed by Citra Central Expressway Corporation.

11. 11
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
The government is also considering utilising the PHP 550 million Project Development and Monitoring
Facility (PDMF), which was initiated to fund and facilitate pre-investment activities of potential PPP
projects, to fund the pre-investment studies for unsolicited proposals as well.
However, while the PPP framework has its advantages, and serves as an efficient way to raise funds, it
has not been pushed forward as the main source of financing by the current administration. The NEDA
has cited delays in awarding of contracts as the main reason for this, as a result of legal complexities
behind the bidding process and advanced technical requirements to be fulfilled by the private
proponent. During the period 2010-16, only 28 PPP projects were awarded (out of this only 12 were
awarded by the Aquino administration). Furthermore, 50% of these projects are yet to be implemented
or were terminated as of July 2017.
Therefore, it can be established that the way forward for the PPP programme is making its contract
awarding process more efficient. This would increase the attractiveness of PPPs as a source of funding,
and thereby create better opportunities for private sector involvement in the development of the
country.
ODAs Receive Preferential Treatment by the Government Despite its Setbacks
The second alternative available, ODAs, are looked upon as a favourable option especially on the back
of President Duterte’s strong political connections with East Asia, that has drawn interest from
countries such as China, Japan and South Korea into financing infrastructure projects in the Philippines.
As of March 2017, 14 infrastructure projects totalling USD 8.8 billion had been lined as possible
Japanese investment options, the largest of which was the USD 4.5 billion Mega Manila Subway System.
South Korea, on the other hand, is set to finalise USD 1 billion as ODA for the duration of the
infrastructure plan. While Japan and South Korea have been significant contributors of foreign aid in
the past, China’s involvement has been relatively low. However as of March 2017, China had
committed to funds worth USD 3.4 billion to be used to finance at least three infrastructure projects
that are expected to be rolled out within 2017. This is in comparison to the USD 115 million given in
the form of ODA loans in 2014 (no loans received as ODA from China in 2015).
With growing interest from ODA sources, the government has started to shift projects that were being
delayed in the PPP pipeline into ODA funded ones. In 2017, two such projects, namely the New
Centennial Water Source Kaliwa-Dam Project and the North-South Railway Project-South Line
underwent this transferal. China has shown interest in funding both these projects, while Japan has
expressed its interest in financing the railway project. The government is also pushing for the
implementation of a hybrid PPP system which uses ODAs as a funding tool, with operation and

12. 12
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
maintenance being handed over to the private sector. This will further take away potential investment
opportunities from the private sector.
However, while the government is eager to push forward ODAs, past issues related to cost overruns
and project delays still remain a concern among industry experts. The ODA-funded Subic-Clark-Tarlac
Expressway is one such project which faced both of the issues cited above. The project faced a delay
of two years after receiving government approval and took seven years for completion as opposed to
the projected five. Furthermore, there was a cost overrun of USD 14. 1 billion making the final project
cost amount to USD 32.8 billion, nearly double the approved budget of USD 18.7 billion. The Iloilo
International Airport project is another ODA funded project that saw a delay of one year and a cost
overrun that resulted in the final cost being 42% higher than what was approved. In retrospect, ODA
funded projects faced delays once projects had received approval as opposed to PPPs, which faced
delays in the approval process.
Furthermore, pushing for ODA funding above the planned 15% will result in a rise in government debt.
Growing public debt has not been cited as a major concern by the government due to its expectation
of steady economic growth. However, major international institutions such as the World Bank, IMF
and ADB have projected the Philippines’ GDP growth to remain within the 6.4%-6.9% range in 2018F
and 2019F, lower than the government’s projection of 7.0%-8.0%. Moreover, the Philippines is
determined to not see a recurrence of its debt crisis in the 1980s, and as per the Department of Budget
and Management (DBM), is focused on pushing down its debt to GDP ratio to 38.1% in 2022F from
40.6% in 2016. This has also been a reason for the government to restrict its infrastructure funding
from ODAs, despite growing interest. Moreover, ODAs from China come with unfavourable stipulations
in the form of Chinese contractors and labourers tied to these projects. This contradicts the
government’s claim that infrastructure projects increase employment opportunities for Filipinos. As
per the DBM, job creation is expected to double because of Dutertenomics, with two million jobs
expected to be created annually for the duration of the plan, in addition to the average of two million
jobs created in the Philippines annually.
However, despite these short comings, the Filipino government’s growing political ties with Asia, may
result in ODAs being given preference over PPPs in order to finance any gaps that arise in the funding
of Dutertenomics.

13. 13
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
Appendix
PPPs in the Pipeline
Project Private Proponent Status
Daang Hari-SLEX Link Road Project Ayala Corporation
PPP for School Infrastructure Project
Phase I
Bright Future Educational Facilities
Inc. (Region I) and Citicore -
Megawide Consortium Inc. (Region
III and IV-A)
Automatic Fare Collection System
AF Payments, Inc. (consortium of
Ayala and Metro Pacific Groups)
NAIA Expressway Phase II Vertex Tollways Development Inc.
PPP for School Infrastructure Project
Phase II
Megawide and Consortium of BSP
Co. Inc. and Vicente Lao
Construction
Mactan-Cebu International Airport
Project
GMR Infrastructure and Megawide
Consortium
Metro Manila Skyway Stage 3
Project
Citra Central Expressway
Corporation
Southwest Integrated Transport
System
MWM Terminals, a consortium of
Megawide Construction Corp. and
WM Property Management Inc.
MRT Line 7 Project San Miguel Corp.
Bulacan Bulk Water Supply Project
SMC – K Water Consortium (San
Miguel Holdings Corp. and Korea
Water Resources Corporation)
Civil Registry System Information
Technology Project (Phase II)
Unisys Public Sector Services
Corporation
LRT Line 1 Cavite Extension
Light Rail Manila Corporation
(consortium of Ayala Corporation,
Metro Pacific Light Rail Corporation
and Macquarie Infrastructure
Holdings)
Cavite- Laguna Expressway MPCALA Holdings, Incorporated
South Integrated Transport System
Project
Ayala Land Incorporated
NLEX-SLEX Connector Road
Metro Pacific Tollways Development
Corporation
Operation and Maintenance of LRT
Line-2
Road Transport IT Infrastructure
Project (Phase II)
Regional Prison Facilities
LRT Line 6
Manila Bay Integrated Flood
Control, Coastal Defence and
Expressway
East-West Rail Project
New Nayong Pilipino at
Entertainment City Project
NAIA PPP Project

14. 14
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
North-South Railway Project- South
Line
Integrated Transport System-North
Terminal Project
San Ramon Newport Project
Duty Free Retail Development
Project
One DTI Building Complex Project
Motor Vehicle Inspection System
Project
Clark International Airport O&M
Project
Naval Base Mactan Project
Judiciary Infrastructure
Development Project
Rural Dairy Industry Development
Project
Metro Manila Bus Rapid Transit
Project
Tanauan City Public Market
Redevelopment Project*
Guru Property Development and
Management Corporation
Baggao Water Supply Project*
Source: Public Private Partnership Centre
*Projects under local government units
Contract Awarded
For procurement- Bidding stage
Bid submission delayed
Project under evaluation by concerned
agency
Unsolicited- Ongoing evaluations by
Investment Coordination Committee Project Under Development
Bidding Ongoing

15. 15
Will Foreign Funds Take Away from Private Investment as the Philippines Enters the Golden Age of
Infrastructure?
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