Philippines infrastructure - Aggressive ramp in infra spending ahead

102 Pages·2017·7.63 MB·English

Global Markets Research

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Philippines infrastructure: Aggressive ramp in infra spending ahead

Initiating on property, conglomerates,
14 February 2017
construction, and others
Research analysts
Philippines Conglomerate
The Philippine economy has managed to deliver 6% average GDP growth
Dante Tinga Jr - BDO-NS
over the past seven years, despite poor-quality infrastructure that has
[email protected]
hampered productivity and overall economic competitiveness. The
[phone]
government plans to ramp-up infrastructure spending from 3% to 6% of
ASEAN Property
GDP as well as reduce red tape in order to address this growth bottleneck.
We take a look at the implementation process for the infrastructure Abigail Chiw, CFA - BDO-NS
[email protected]
program as well as sectors and stocks likely to be impacted.
[phone]
While investors looking for beneficiaries on this theme usually look to the
ASEAN Industrials
Philippine conglomerates (AC and MPI), we think the property (ALI, MEG,
Thomas Earll Huang - BDO-NS
RLC), construction (DMC), and building materials (CHP) sectors
[email protected]
are more attractive from a risk-reward perspective.
[phone]
Key themes and analysis in this Anchor Report include: Asia Economics
Euben Paracuelles - NSL
 Issues to be hurdled to implement the infrastructure rollout
[email protected]
 Sectors and stocks most attractive from a risk-reward perspective [phone]
given the thrust towards improving public infrastructure
 Initiation on the Philippine conglomerate, property, construction, and
building materials sectors
Production Complete: 2017-02-13 20:32 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Philippines infrastructure

EQUITY: ENGINEERING & CONSTRUCTION
Aggressive ramp in infra spending ahead
Global MarketsResearch

14 February 2017
Initiating coverage on property, conglomerates,

construction, and others
Anchor themes
Implementation of the
Poor infrastructure a drag on Philippine growth
government's infra program is a
The World Economic Forum (WEF) cites poor-quality infrastructure as the
key growth catalyst for the
second most problematic factor for doing business in the Philippines. WEF
Philippine economy. We believe
surveys suggest failure to address the infrastructure deficit may compromise conglomerate, property,
the Philippines’ attractiveness as an investment destination. Furthermore, construction, and building
poor-quality infrastructure is already a tangible drag on the economy. The materials areas will be most
Japan International Cooperation Agency (JICA) estimates the economic cost impacted.
of traffic congestion in Metro Manila alone at US$13bn per year, or roughly 4%
of Philippine GDP. Nomura vs consensus
Our TPs and valuations are
Government focused on finding solutions
generally higher vs consensus,
Positive steps have already been taken (passage of a right of way bill, creation
as we factor in the potential
of a Ministry of Transport, emergency powers for the Transport Minister, etc.) impact of the government's
to address bureaucratic bottlenecks that are impeding project funding and infrastructure program.
implementation. The Duterte administration’s planned ramp-up in infrastructure
spending from 3% of GDP in 2015 to at least 6% over the medium term is Research analysts
unprecedented. Hence, we conservatively estimate this will translate to
USD167bn of infrastructure-related disbursement (90% of target) over the next Philippines Conglomerate
five years. Moreover, the government’s pragmatic approach to Public Private
Dante Tinga Jr - BDO-NS
Partnership (PPP) Projects will likely translate to a more orderly rollout of [email protected]
projects. There could be fewer PPP projects bid out, however, as the [phone]

government’s project selection process will likely be more stringent.
ASEAN Property
Infrastructure beneficiaries: Property, construction, and conglomerates
Abigail Chiw, CFA - BDO-NS
Investors looking for beneficiaries of increased private-sector participation in [email protected]
infrastructure may look to the Philippine conglomerates (AC and MPI) sector. [phone]

Historically, however, direct private sector participation in Philippine
ASEAN Industrials
infrastructure subjects investors to regulatory risks. In our view, the property
(ALI, MEG, RLC), construction (DMC), and building materials (CHP) sectors Thomas Earll Huang - BDO-NS
[email protected]
are more attractive from a risk-reward perspective, as these sectors / firms
[phone]
benefit from an accelerated government infrastructure program without the
hazards involved in direct equity investments in infrastructure. Asia Economics
Euben Paracuelles - NSL
Fig. 1: Stocks for action [email protected]
[phone]
Mkt cap Avg T/O Target Price Upside
Company Code Rating (USDmn) (USDmn) price (9 Feb) (%)
Robinsons Land Co. RLC PM Buy* 2 ,072 1 .0 35.93 25.85 39% The "BDO-NS" (which stands for "BDO
International Container Terminal Services, Inc. ICT PM Buy* 3 ,086 2 .2 92.82 74.85 24% Nomura Securities, Inc.") placed next
Ayala Land Inc. ALI PM Buy* 1 0,396 8 .0 43.72 35.75 22% to an analyst’s name on the front page
Megaworld Corp. MEG PM Buy* 2 ,514 2 .7 4.61 3 .84 20% of a research report indicates that the
Cemex Holdings Philippines CHP PM Buy* 1 ,152 2 .4 13.40 11.18 20% analyst is employed by BDO Unibank
Metro Pacific Investments Corp. MPI PM Buy* 4 ,269 2 .1 8.10 6 .84 18% Inc. ("BDO Unibank") who has been
Vista Land & Lifescapes Inc. VLL PM Buy* 1 ,299 0 .5 5.98 5 .06 18% seconded to BDO-NS, to provide
Ayala Corporation AC PM Buy* 9 ,799 5 .8 920 7 97 15% research assistance services to NSL
DMCI Holdings Inc. DMC PM Buy* 3,455 2 .4 15.10 13.10 15% under an agreement between BDO
SM Prime Holdings Inc. SMPH PM Neutral* 1 7,339 6 .3 30.57 30.00 2% Unibank, NSL and BDO-NS. BDO-NS
Aboitiz Equity Ventures Inc. AEV PM Neutral* 8 ,357 2 .4 70.00 74.00 -5% is a Philippines securities dealer, which
is a joint venture between BDO
Source: Nomura Research. Note: *Initiating coverage Unibank and the Nomura Group.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Philippines infrastructure 14 February 2017

Contents

Philippine infrastructure: problems and opportunities .............................. 3 
Poor-quality infrastructure remains a growth bottleneck ................................. 3 
Box 1: The rising cost of traffic in Manila* ....................................................... 4 
The 2017 budget: Putting its money where its mouth is .................................. 5 
How did we get here? ...................................................................................... 5 
The road ahead ................................................................................................ 6 
Ayala Corporation .................................................................................. 17 
Aboitiz Equity Ventures ......................................................................... 24 
DMC Holdings ....................................................................................... 31 
Metro Pacific Investments ..................................................................... 38 
Cemex Holdings Philippines .................................................................. 45 
Intl Container Terminal Services ........................................................... 53 
Ayala Land ............................................................................................. 59 
Megaworld ............................................................................................. 66 
Robinsons Land ..................................................................................... 73 
SM Prime Holdings ................................................................................ 80 
Vista Land & Lifescapes ........................................................................ 87 
Appendix A-1 ......................................................................................... 95 

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Nomura | Philippines infrastructure 14 February 2017

Philippine infrastructure: problems and
opportunities
The economic implications of the Philippines’ infrastructure bottlenecks are frequently
cited. The World Economic Forum (WEF) in its annual Global Competitiveness report
consistently identifies the Philippines’ poor-quality infrastructure as one of the major
drags to investment and economic growth. Furthermore, the Japan International
Cooperation Agency (JICA), using 2012 data, estimates that traffic congestion in Metro
Manila alone results in productivity losses of PHP2.4bn per day. This figure could
escalate to PHP6bn by 2030 daily assuming the problems are left unaddressed. Poor-
quality infrastructure also results in urban congestion that triggers a host of other
problems such as pollution and a shortage of affordable housing. In this report, we
undertake a review of the state of Philippine infrastructure, the root of the problems, and
government plans to address existing problems. Perhaps most importantly, we seek to
identify sectors and stocks which stand to be impacted by government implementation of
infrastructure-related programs.
Poor-quality infrastructure remains a growth bottleneck
Respondents to the World Economic Forum's 2016 Executive Opinion Survey were
asked to select the five most problematic factors for doing business in their country and
to rank them between 1 (most problematic) and 5. The scores in Fig. 2 correspond to the
responses weighted according to their rankings. It is worth pointing out that inadequate
supply of infrastructure ranks as the second most problematic factor for doing business,
next to an inefficient bureaucracy.

Fig. 2: Most problematic factors for doing business in the Fig. 3: Philippines ranks 57th in overall competitiveness but
Philippines just 95th in infrastructure quality
Inefficient government bureacracy Macroeconomic environment
Inadequate supply of infrastructure Market size
Corruption
Financial market development
Tax rates
Tax regulations Business sophistication
Policy instability Global competitiveness index
Restrictive labor regulations Higher education and training
Access to financing
Innovation
Crime and theft
Health and primary education
Inadequately educated workforce
Insufficient capacity to innovate Technological readiness
Poor work ethic in national labor force Labor market efficiency
Government instabililty Institutions
Foreign currency regulations
Infrastructure
Inflation
Poor public health Good market efficiency
0 5 10 15 20 0 20 40 60 80 100 120

Source: World Economic Foundation, 2016-17 Global Competitiveness Report, Source: World Economic Foundation, 2016-17 Global Competitiveness Report,
Nomura Research Nomura Research

Fig. 4: Philippines lags most of its ASEAN peers in terms of Fig. 5: Philippines’ persistently poor infrastructure score a
infra quality drag on competitiveness
7 120
Overall Competitiveness Infrastructure
6
100
5
80
4
3 60
2 40
1
20
0
ropagniSe aisyalaM dnaliahT aisenodnI manteiV enippilihPs idobmaCa RDP oaL 0 -900201 -010211 -110221 -210231 -310241 -410251 -510261 -610271
Source: World Economic Foundation, 2016-17 Global Competitiveness Report, Source: World Economic Foundation, Nomura Research
Nomura Research

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Nomura | Philippines infrastructure 14 February 2017

The poor quality of Philippine infrastructure impacts the nation’s attractiveness as an
investment destination. It is worth emphasizing that in the WEF’s Global Competitive
Index 2016-17:
• The Philippines ranked #57 of 138 countries in terms of competitiveness
(1 = highest ranking) but only 95th in terms of quality of infrastructure.
• The Philippines ranks behind most of its ASEAN neighbors in terms of quality of
infrastructure.
• While the country’s overall competitiveness rank has improved from 87th in the 2009-
2010 survey to 57th in the 2016-17 study, the quality of infrastructure has not improved
whatsoever from 95th over the same six-year period. In our view, improvements in
overall Philippine competitiveness are capped until the infrastructure bottlenecks are
addressed.

Box 1: The rising cost of traffic in Manila*
In addition to the public annoyance factor, there are real economic costs from traffic congestion that can rapidly rise if left
unchecked. According to a joint study by Japan International Cooperation Agency (JICA) and several government
agencies, the three interrelated urban problems in Manila include traffic congestion, the risk of natural disasters and the
lack of low-cost housing.
The report’s main recommendation is therefore a multi-pronged approach with an integrated mass transit network, public
transport modernisation and expressways to connect other areas, among others. The total investment cost for these
projects through 2030 was estimated at PHP2610bn (15.2% of GDP). This could be covered within the national
government budget and appears low relative to JICA’s estimated economic cost of traffic at about PHP2bn per day (or
PHP630bn per year, 3.7% of GDP). If left unchecked, these costs could rise to PHP6bn per day by 2030 (Fig. 7).1
Encouragingly, some of the projects identified under the report, including road and expressway projects – such as the
NLex-SLEx connector, Metro Manila Skyway access and road connections between the two main airports (NAIA and
Clark) – and metro/railway projects – such as upgrading and extending LRT1, LRT2 and LRT3 lines – are already
underway, as highlighted by projects under the Public Private Partnership program.

*This box draws heavily from the JICA study cited above.

Fig. 6: Population, vehicles, and public transport growth of Fig. 7: Traffic demand and impact in Metro Manila
Metro Manila
2012 2030 Difference
1980 2010 CAGR (%) Traffic demand (million trips/day) 12.8 14.5 1.13
Population (000) 5923 11856 1.4 Public transport share in total demand 69% 69% 1.00
Occupancy of road space by private vehicles 78% 78% 1.00
Roads (km) 6.75 1032 10.8
Transport cost (PHPbn/day) 2.40 6.00 2.50
GRDP per capita (PHP 000) 208 272 0.5
Transport cost (PHPbn/year) 876 2190 1314
No. of vehicles (000 units) 446 1904 3.0 % 2018 GDP 5.1 12.7 7.6
LRT (km) 20 50 1.9
Source: JICA; Nomura Global Economics.
PublicTransport Bus (000 units) 3.6 14.2 2.8
Jeepney (000 units) 37 48 0.5
Source: JICA; Nomura Global Economics. GRDP = gross regional domestic product

1 see NEDA: Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas
(Region III and IV-A), Technical assistance from JICA, March 2014.

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Nomura | Philippines infrastructure 14 February 2017

The 2017 budget: Putting its money where its mouth is
How did we get here?
Providing basic infrastructure in a country with the Philippines’ archipelagic geography is
inherently expensive. This challenge is further complicated by rapid population growth
and urbanization. All these have triggered self-reinforcing trends of: 1) underinvestment
in areas that are difficult to access, and 2) population migration to areas which provide
relatively better basic services and infrastructure. Note that 12.8% of the Philippine
population resides in Metro Manila, which accounts for just 0.2% of the country’s total
land mass. Despite this problem, government policy response has been that of persistent
underspending on infrastructure.

Fig. 8: World Bank Logistics Index (2016) 1 = low to 5 = high

Singapore
HK
Australia
Malaysia
Thailand
Vietnam
Indonesia
Pakistan
Philippines
Cambodia
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Source: World Bank, Nomura Research

Fig. 9: Ranking of development indicators, by region (1=best, 17=worst)

Poverty Access to safe Access to
Regions incidence water electricity Road density
NCR 1.0 4.0 1.0 1.0
Luzon 7.0 5.7 7.1 9.0
I 6 2 4 1
CAR 7 10 8 11
II 4 6 5 11
III 2 1 2 6
IVA 3 3 3 7
IVB 13 5 15 16
V 14 13 13 11
Visayas: 8.3 12.3 12.0 7.0
VI 9 14 12 4
VII 5 15 10 3
VIII 11 8 14 14
Mindanao: 13.0 11.7 11.0 9.7
Caraga 17 10 11 14
IX 15 16 16 8
X 12 6 7 4
XI 8 12 9 8
XII 10 9 6 8
ARMM 16 17 17 16

Source: DPWH, PIDS, Nomura Global Economics; NCR = National Capital Region, CAR = Cordillera Autonomous Region,
ARMM = Autonomous Region of Muslim. Nomura Research

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Nomura | Philippines infrastructure 14 February 2017

Fig. 10: Population density (people per km2) Fig. 11: Infrastructure spending as % of GDP (2000 to
present)

25,000 Indonesia Philippines
21,000 20%
Singapore Malaysia
20,000
Lao PDR Cambodia
Thailand Vietnam
15,000 15%
10,000
10%
5,000
850 600 510 390 350 337
-
R N s n s s S 5%
CN OZ aya ozu oco aya EN
RABALAC siV lartneC L lartneC lI siV nretseW IPPILIHP 0% 0002 1002 2002 3002 4002 5002 6002 7002 8002 9002 0102 1102 2102 3102
Source: National Statistics Authority, 2015, Nomura Research Source: International Monetary Foundation, Nomura Research

The road ahead
Going forward, however, we believe that there are reasons for optimism. In its 20
October 2016 Beyond Words report, the Nomura Global Economics team pointed out
that: 1) the state of the Philippine economy as well as the government balance sheet
allow for a reversal of previous years’ underspending; 2) reforms allowing for faster
planning and execution of infrastructure projects have been put in place or are in the
process of being put in place; and 3) a pragmatic approach to Public Private
Partnerships (PPPs) should result in a more orderly rollout of projects, reducing policy
uncertainties in the infrastructure sector.
Government willing and able to spend
We are forecasting average Philippine GDP growth of 6.4% over 2016A-18F,
underpinned by strong domestic demand complemented by rising investment spending.
Regardless of whether or not infrastructure bottlenecks are addressed, we see the rate
of Philippine economic growth remaining superior to global and regional trends.
Furthermore, we believe the Philippines can better withstand the impact of rising external
risks than most other countries in Asia (Global Annual Economic Outlook, December 18,
2016) especially as government and private sector debt levels remain relatively low.
While we forecast weakness for the Philippine peso, sizeable policy space nonetheless
provides a significant buffer against external risks. We forecast cumulative 50bps of
interest rate hikes in 1H17. The BSP is the only central bank in Asia from which we
forecast hikes this year.
With regard to infrastructure spending, it should be pointed out that Budget Secretary
Benjamin Diokno said that the Duterte administration is looking to spend PHP8.2tn on
infrastructure during his term of office over 2017-22. The government is specifically
looking at reversing the underspending over 2011-2015 while still keeping the budget
deficit at a manageable 3% of GDP.
What concerns us? It should be pointed out that the Duterte administration’s economic
team is looking to ramp-up infrastructure spending, while at the same time implementing
tax reforms meant to broaden the tax base by shifting the tax burden from corporates
and salary workers to consumers. We are concerned that political and populist pressures
may cut into the scope of the reforms, thereby limiting revenue collection. This, in turn
may limit the government’s ability to ramp up infrastructure spending.

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Nomura | Philippines infrastructure 14 February 2017

Fig. 12: Summary of economic forecasts for Philippines

% yoy growth unless otherwise stated 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2015 2016 2017 2018
Real GDP (sa, % qoq, annualized) 5.0 8.5 4.8 7.9 4.4 6.2 7.5 8.0 - - - -
Real GDP 6.8 7.0 7.1 6.5 6.4 5.8 6.5 6.5 5.9 6.9 6.3 6.5
Private consumption 7.0 7.4 7.3 6.0 6.5 6.5 5.5 6.3 6.3 6.9 6.2 6.5
Government consumption 11.8 13.5 3.1 3.5 2.0 1.5 8.2 5.7 7.8 8.2 4.2 5.8
Gross fixed capital formation 28.2 24.6 23.5 15.6 13.1 11.3 8.5 11.7 15.2 22.5 11.1 17.1
Exports (goods & services) 7.3 10.0 8.8 6.4 6.4 4.1 3.6 3.7 9.0 8.2 4.4 3.0
Imports (goods & services) 19.0 23.2 14.2 11.9 6.6 3.6 6.1 8.3 14.0 16.9 6.1 8.3
Contribution to GDP growth (ppts)
Domestic final sales 12.6 11.6 10.8 8.6 8.4 7.2 6.9 8.3 8.4 10.8 7.7 9.8
Inventories 0.9 1.5 -0.3 1.1 -1.2 -1.6 1.4 0.9 0.1 0.8 -0.1 -0.1
Net trade (goods % services) -6.6 -6 -3.5 -3.2 -0.8 0.1 -1.8 -2.7 -2.5 -4.8 -1.3 -3.3
Exports -8.4 -6.6 -3.9 -7.2 -3.7 -0.3 0.5 1.6 -5.3 -6.5 -0.4 0.5
Imports 8.8 27.3 7.7 13.3 12.8 7.1 7.5 8.9 8.7 13.8 9.0 6.0
Merchandise trade balance (USDbn) -5.5 -6.4 -5.9 -8.0 -8.4 -7.9 -7.4 -9.7 -12.2 -25.9 -33.4 -38.4
Current account balance (USDbn) 0.7 0.1 1.2 1.9 0.1 0.2 0.9 0.3 7.7 3.9 1.5 1.5
Current account balance (% of GDP) 1.0 0.1 1.7 2.3 0.2 0.3 1.1 0.3 2.6 1.3 0.5 0.4
Fiscal balance (% of GDP) - - - - - - - - -0.9 -2.2 -2.7 -2.8
Consumer prices (2006=100) 1.1 1.5 2.0 2.3 3.4 3.4 3.3 3.2 1.4 1.7 3.3 3.7
Unemployment rate (sa, %) 5.8 6.1 5.4 4.9 5.3 5.3 5.1 4.5 6.3 5.6 5.0 4.8
Reverse repo rate (%) 4.00 3.00 3.00 3.00 3.25 3.5 3.50 3.50 4.00 3.00 3.50 3.50
Exchange rate (USD/PHP) 46 47.2 48.5 49.9 50.2 50.5 51.00 51.5 46.9 49.9 51.5 50.5

Notes: Numbers in bold are actual values; others forecast. Interest rate and current forecasts are end of period; other measures are period average. All forecasts are modal
forecasts (i.e., the single most likely outcome). Table reflects data available as of 10 November 2016. *At this early stage, we very tentatively estimate that under President-elect
Trump, Real GDP growth could be lowered to 0.2% in 2017 (for more details, see Asia Insight: What Trump means for Asia, 9 November 2016 ).
Source: CEIC and Nomura Global Economics

Fig. 13: Philippine 2015-18F GDP CAGR% above trend Fig. 14: Philippine Debt to GDP (%) declining

7% 6.6% (PHPmn) Total debt (LHS) (%)
9,000,000 Total debt % of GDP (RHS) 100
6%
5.3% 8,000,000 80
5% 4.7% 7,000,000 60
6,000,000 40
4%
3.3%
5,000,000 20
3% 4,000,000 0
3,000,000 -20
2% 1.6%
2,000,000 -40
1%
1,000,000 -60
0% 0 -80
Philippines Asia/Pacific Emerging Global Developed 00 1020 30 40 50 6070 80 90 01 11 21 31 41 51
Markets Markets 02 0202 02 02 02 0202 02 02 02 02 02 02 02 02
Source: CEIC and Nomura Global Economics Source: Bureau of Treasury, Nomura Research

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Nomura | Philippines infrastructure 14 February 2017

Fig. 15: 2015A Debt to GDP (%) ASEAN Fig. 16: Philippine Budget Deficit as % of GDP (Actual vs
Target)
120%
4.0% Budget Deficit (%GDP) Actual
100% 3.5% Budget Deficit (%GDP) Target
3.0%
80%
2.5%
60%
2.0%
40%
1.5%
20% 1.0%
0% 0.5%
e a s a d a n a
ropagniS isyalaM enippilihP idnI naliahT eroK awiaT isenodnI 0.0% 9002 0102 1102 2102 3102 4102 5102 F6102 F7102 F8102 F9102
Source: CEIC and Nomura Global Economics Source: CEIC and Nomura Global Economics

Planning and execution bottlenecks being addressed
In addition to increasing budget allocations for infrastructure projects, the Duterte
administration is also looking to streamline planning processes and fast-track project
implementation. The Philippines’ poor-quality infrastructure is partly attributable to
general weakness in technical capacity for project planning and monitoring, as well as
intermodal integration. The technical and financial capacity of the local government units
responsible for the development and management of the local transport infrastructure
appears similarly inadequate, putting a bigger burden on the national government.
Limited technical capacity at the bureaucratic level translates to the following issues:
• Slow budget disbursements and overall project quality of developed infrastructure
tends to be subpar, with limited coordination between impacted agencies.
• Planners are vulnerable to the effects of political pressures that lead to the inclusion in
national or local transport plans of projects that are not properly validated.
• Long-term infrastructure programs tend to be haphazard, opaque, and subject to policy
reversals, particularly with changes in national leadership occurring every six years.
For its part, the IMF assessed that there are sizeable gains to be made from improving
the efficiency of public investment (see Beyond Words). The IMF estimates indicate that
the efficiency gap in the Philippines is “substantially larger” than the 27% average for
emerging economies. Furthermore, the IMF recommended that the link between
planning and budgeting be strengthened, as there appear to be inefficiencies in the
allocation of public investment to the right sectors and projects.
The government has actually taken steps in this regard. The passage of R.A. 10752 (The
“Right of Way Act”) last March 2016 should reduce ROW issues that cause delays and
inflate project costs. Furthermore, the spin-off of the Department of Transportation and
Communications into a Department of Information and Communications Technology
(DICT) and a Department of Transportation due to the passage of R.A. 10844 last May
2016 should streamline the latter’s functions, allowing for more focused planning and
implementation of transport projects. Other measures the Duterte administration is
looking at in order to further cut through bureaucratic red tape in the transport and
infrastructure sectors include:
• Emergency powers for the Department of Transportation enabling the harmonization of
all traffic rules and the fast implementation of priority projects for traffic decongestion
without a lengthy approval process.
• Imposition of 24/7 construction work for major projects as well as further simplifying the
implementation of rules and regulations for the Government Procurement Law.
• Centralization of project monitoring and project execution powers at the cabinet level.
There is also plenty of scope for these reforms to improve spending without adding
pressure on the budget. In this context, the Budget Department’s announcement of a
focus on capacity building, improvements in budget planning and preparation, and public

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Nomura | Philippines infrastructure 14 February 2017

financial management (PFM) reforms, appears to be the appropriate approach. While
improving in recent years, disbursement rates for capital outlays averaged 85% of full-
year budgets over 2011-16. The Nomura Global Economics team estimates that
increasing this disbursement rate by another 10pp to 95% would provide an additional
fiscal boost to growth worth 0.5% of GDP per year. Of course, execution is always the
bigger issue and it is probably unrealistic to assume disbursements of budgeted capital
outlays at 100%. We forecast a 90% disbursement rate, which is similar to disbursement
levels in Malaysia. This translates to PHP7.4tn in infrastructure spending over 2017-
2022. This figure is less than the government target of PHP8.2tn, but nonetheless
represents a substantial ramp-up in government infrastructure spending.

Fig. 17: IMF estimate of the public investment efficiency Fig. 18: Government infrastructure spending ramps up
frontier
(PHPbn) Gov't infrastructure budget (LHS)
1,400 Infra spends % of GDP (RHS) 7%
1,200 6%
1,000 5%
800 4%
600 3%
400 2%
200 1%
- … … … … 0%
9 0 1 2 3 4 5 0 0 0 0
0 1 1 1 1 1 1 2 2 2 2
0 0 0 0 0 0 0
2 2 2 2 2 2 2
Source: IMF; Note: The closer a country is to the efficiency frontier (solid line), the Source: Department of Finance, Nomura Research
more efficient its public investment

What about PPPs?
The Duterte administration will continue the previous government thrust regarding Public
Private Partnerships (PPPs). The Aquino administration rolled out 14 PPPs cumulatively
worth PHP294bn since launching the program in 3Q10. It appears, however, that the
Duterte administration is taking a more pragmatic view with regards to the role of PPPs
in infrastructure development, especially given the mixed track record on Philippine
PPPs. It should be pointed out that:
• A build–operate–transfer law has been in place in the Philippines since 1990. The
Philippines has a wide range of generally well-developed regulations governing the
transport sector but implementation of these regulations is often weak and subject to
political pressure. This limits the intended positive impact of these regulations on
performance as well as the willingness of the private sector to invest, especially if
economic returns on projects are rendered unattractive by political or regulatory risks.
• Interestingly, not all projects have been developed using an open, competitive bidding
process. A lot of completed projects have been the result of unsolicited proposals from
potential investors to form PPPs with government corporations. We believe this reflects
the limited capacity within sector agencies for project planning and preparation as well
as the lack of clear rules for the development of such partnerships. However, the
reliance on unsolicited proposals could mean that risks to the government side of the
partnership are not properly understood and allocated.
• While the Duterte Administration remains generally supportive of PPPs, the Economic
Team as represented by the Finance and Budget Departments have indicated that they
would prefer the government undertake projects itself rather than through PPPs, if it is
more cost effective to do so. The Duterte Administration’s Economic Team is also
cognizant of the risks in the form of contingent liabilities government is exposed to in
case project deals do not work out.
We believe the government’s more pragmatic (and possibly more conservative)
approach to PPPs should translate to a more orderly rollout of projects. We caution
investors against anticipating an accelerated rollout of PPP projects, however.
Nonetheless, properly validated PPP projects where sharing of risks and rewards are
well defined is ultimately more beneficial to both the government and private investors
versus a haphazard and rushed PPP program.

9