Last updated: November 20, 2012 8:40 am

Manila in infrastructure investment push

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Construction workers arrange the steel reinforcement bars of a pillar that will support a 300-meter flyover that will connect two main expressways in the Metro Manila©Getty

At a recent reception for the visiting French prime minister, a European railway executive tried to lobby the Philippines’ transport secretary about his company’s bid to extend and operate one of Manila’s light rail systems.

“You know, Mr Secretary, we’re the best rail system in the world. We haul 5m people every day. We are confident we will win the contract,” Joseph Abaya, the newly appointed minister, recalled the French businessman telling him.

Surprised at the executive’s boldness, Mr Abaya replied: “Good luck to you. You sound very competent. But I just heard six other guys saying the same thing.”

His remarks reveal a belief that the Philippines can afford to be more selective in awarding public infrastructure deals to private investors – a shift that has become possible because of increased investor confidence in the government of President Benigno “Noynoy” Aquino.

“Over the last two or three years, there has been a real change in what’s happening in the Philippines and it’s all very exciting,” Ian Taylor, infrastructure director at Arup, an engineering and design group, said recently in the country’s capital, Manila.

According to the World Bank, the Philippines is one of the top five Asian destinations for private investment in infrastructure. Over the past 20 years, it has secured $54.3bn in commitments, equal to just half that of India and China, but slightly ahead of its regional rivals Malaysia and Indonesia.

In recent years, however, investment has been unsteady – falling to $1.1bn last year after hitting a 10-year high of $5.5bn in 2009 – as many investors were put off by high levels of regulatory risk.

Investors have been particularly concerned by the government’s tendency to renegotiate contracts and moves by the courts to cancel them.

While Mr Aquino’s government has revoked what it thought were unsound projects championed by the previous administration, his officials say they are setting up a strict vetting system to make sure future contracts are fair and can withstand close scrutiny by future administrations.

“The government is investing in feasibility studies so we know what we want, and what the numbers are,” said Mr Abaya.

The growing interest in infrastructure deals may help boost low overall levels of foreign direct investment in the Philippines, which lags behind its southeast Asian neighbours and is one of the factors blamed for the country’s historically sluggish growth.

In the first half of 2012, FDI into the Philippines was $900m, or just a 10th of the average flows going to Indonesia, Thailand and Malaysia, according to the UN.

Long-term investment in factories and infrastructure has not kept pace with soaring inflows into Philippine debt and equity markets, which have benefited more from Mr Aquino’s efforts to curb corruption and the country’s better-than-usual prospects for economic growth.

The International Monetary Fund last week said economic growth could reach more than 5 per cent this year. Philippine share prices are up about a quarter since the start of the year, making the country the world’s fifth best performing equities market.

One of the big tests will be the $625m 25-year contract for the operation of the light rail transit system, which represents the single biggest project in the public-private partnership (PPP) pipeline.

While the system will not be completed until well after Mr Aquino steps down in 2016, four groups – including domestic conglomerates and foreign companies – have been approved to bid for the contract in January.

The foreign groups include Australia’s Macquarie Infrastructure, South Korea’s Posco Engineering and Construction and Samsung C&T Corp, Japan’s Marubeni, Mexico’s Sistema de Transporte Colectivo Metrorrey, and Malaysia’s Alloy MTD Capital.

The Aquino administration has also awarded contracts for two smaller PPP projects, and is lining up for bidding at least 10 more projects with a combined worth of $1.9bn, suggesting that the PPP infrastructure programme – which Mr Aquino launched in late 2010 with much fanfare – is finally taking off.

Investors say the government has benefited by bringing in consultants to advise on ways to improve the competition process. Neeraj Jain, Philippine country director at the ADB, said: “Once investors know that this transaction was put together by credible international consulting firms . . . that in itself creates investor interest.”

Not everyone is happy with the new procedures, which tend to slow things down and are tough on smaller companies. Angelo Penson, chairman of Ausphil Tollways, complained that the bar for having a track record has been set too high, disqualifying smaller but more innovative companies from offering lower bids.

But overall the shift is impacting both foreign and domestic companies. Augusto Manalo, president of the Philippine Constructors Association, said local companies that used to shy away from perceived faulty or rigged deals are now actively taking part.

“Our problem now is there are so many good projects to choose from. Apart from government infrastructure projects, there is also a private construction boom. It’s a good problem for us.”

This article has been amended since original publication to reflect the fact that Sistema de Transporte Colectivo Metrorrey is a Mexican group

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