Financing the Philippines’ Golden Age of Transportation Infrastructure
Raya Buensuceso, Princeton-in-Asia Fellow, Asia Center
The Philippines’ crumbling transportation infrastructure is threatening to halt the country’s upward growth trajectory. How can the government attract more private investment in this sector?
For many years, the Philippines has proudly claimed to be one of the fastest growing economies in the fastest growing region in the world. Since 2010, the country has expanded at an average rate of 6.3 percent per annum, far exceeding global equivalents. However, the decaying state of transportation infrastructure is placing the future of its growth story at risk. The average Metro Manila resident is said to spend nearly 3 hours per day stuck in traffic, which translates to US$20 billion in health costs and productivity losses each year.
In an effort to address this impending economic roadblock, the current administration of President Rodrigo Duterte has committed to boost public spending on infrastructure through its US$180 billion ‘Build, Build, Build’ campaign. It comes as no surprise that infrastructure will be getting the lion’s share of the record-breaking, US$75 billion national budget for 2018, which the President signed into law just last week. While an increase in public infrastructure spending is long overdue, the government need not carry out this massive undertaking alone. From private equity firms, commercial banks, and development finance institutions to institutional investors and local conglomerates, there is a wide range of both local and foreign players that are willing and able to pour capital into the country’s deteriorating roads, rail, bridges, ports, and airports.
The private sector is not new to the infrastructure finance space. The Philippines boasts a long history of public-private partnerships (PPPs), which began when late President Corazon Aquino issued the Republic Act No. 6957 nearly 30 years ago. Nevertheless, key barriers to private investment remain. These include the absence of a long-term national plan for infrastructure, limited government capacity to develop PPPs, project development delays, high political and corruption risks, restrictions on local and foreign capital ownership, and the lack of strong capital markets.
A Milken Institute Financial Innovations Lab® report published in December 2017 identifies policy and financial solutions that could mitigate some of these challenges. The report is based on a Financial Innovations Lab® that the Institute organized earlier in the year, which brought together top decision-makers in the infrastructure space, including representatives from the Asian Development Bank, the Development Bank of the Philippines, Macquarie Infrastructure and Real Assets, the Light Rail Manila Corporation, and Ayala Corporation, among others. Government agencies that were present during the day-long workshop include the Department of Transportation, the Department of Finance, the Public-Private Partnership Center, and the National Economic Development Authority.
On a policy front, the legislation of a national infrastructure prioritization plan, improvements in the project procurement process, the standardization of legal contracts and permits across ministries and local governments, a better land acquisition process, the provision of government funding for canceled or delayed projects, and the creation of more effective tax exemptions are deemed critical for facilitating more PPPs. Additionally, the report suggests structuring new private equity funds that combine both public and private monies, the issuance of corporate bonds, the use of secondary market funds, and the implementation of tax increment financing as potential ways to broaden the channels for allocating private capital towards infrastructure.
As the Philippine government continues on its quest to ‘build, build, build,’ capital needs for infrastructure will only rise. Truly, the time is ripe for creating a more conducive environment for private investment—the country’s future depends on it.
For the full, in-depth analysis, read the Milken Institute Financial Innovations Lab® report.