AEV-led consortium to build P10-billion water facility in Davao

THE biggest bulk water-supply deal in the country to date has been signed for the benefit of over a million  customers in Davao City.

In a regulatory filing on Wednesday, Abotiz Equity Ventures Inc. (AEV) said it was informed by Apo Agua Infrastructure Inc. (Apo Agua) regarding the execution of the joint-venture contract and bulk-water purchase agreement (BWPA) with the Davao City Water District (DCWD).

Apo Agua is a joint-venture company between AEV, with 70-percent ownership, and JV Angeles Construction Corp. (JVACC), which holds the remaining 30 percent, for the Tamugan Surface Water Development Project.

The pact covers the building of a P10-billion bulk-water facility with a fully renewable-energy powered hydroelectric plant.

As per the BWPA, Apo Agua will supply treated bulk water of up to 300 million liters per day from the Tamugan River to DCWD.

“The agreements are subject to conditions precedent that need to be satisfied,” AEV said in the disclosure.

The landmark project forms part of AEV’s expansion into infrastructure development.

“We have long been partners in Davao’s economy through Davao Light and our other businesses. Through our investment in Apo Agua, we will ensure that Davao City has the necessary bulk-water infrastructure for it to continue with its impressive economic-growth story,” AEV President and CEO Erramon Aboitiz said in a statement.

JVACC will serve as the engineering, procurement and construction contractor for the project.

“We are excited to be able to provide Davao City with this innovative bulk-water supply solution,” said JV Angeles, chairman and president of JVACC.

source:  Business Mirror

Purisima: PHL underrated, to see more credit upgrades

The Philippines failed to muster the so-called second wave of credit upgrades this year from all three global credit watchers as the UK-based Fitch Ratings signaled its unease on the country’s economic prospects. Fitch’s refusal to signal its vote of confidence followed earlier affirmations from two other sovereign credit watchers.

The indecision prompted Finance Secretary Cesar V. Purisima to remark that the Philippines, no matter its many fiscal and monetary policy victories, remain “underrated” by Fitch. Still, Purisima is convinced the Philippine credit story should further improve in upcoming assessments.

Fitch Ratings announced late Tuesday that it has kept the country’s rating at “BBB minus” (or “BBB-”), with a stable outlook. For Fitch, the country’s credit narrative requires more convincing data showing the $272-billion economy deserves a credit boost a few more notches above junk status.

This contrasted sharply against much earlier credit boosts by Moody’s Investors Service and by Standard & Poor’s (S&P) Ratings Services elevating the country’s credit stature two notches above junk status.

Fitch particularly cited the country’s strong macroeconomic performance and the condition of its external sector.

Fitch also noted that Manila’s governance standards and its per- capita income were weak points of the economy even as its public finances remain a neutral factor.

Fitch, likewise, said the steady inflow of worker remittances and growth of the business-process outsourcing (BPO) industry “underpins” the country’s economic growth. Such growth was forecast to grow by 6.3 percent this year and by 6.2 percent in 2016, or below the official target of 7 percent to 8 percent for this year and next year.

Likewise, sustained current account surpluses since 2003 supported the buildup of the country’s foreign-exchange reserves and helped turn the Philippines into a net external creditor for several years in a row already.

But the optimism on external finances and the country’s strong macroeconomic performance was offset by allegedly weak governance standards and the low per- capita income.

“Governance standards have strengthened under the Aquino administration since 2010. However, the Philippines continues to score especially low on the World Bank’s Ease of Doing Business and Political Stability metrics, at levels that are far below the ‘BBB’ median,” Fitch said.

“The Philippines’s per-capita income stood at only $2,836 in 2014 compared against the ‘BBB’ median of $10,654,” Fitch said.

Fitch also said continued strengthening in governance standards that could lead to a better business climate, a strong gross domestic product (GDP) accompanied by a narrowing of income and development and the broadening of the general government revenue base should help push the rating higher going forward.

“Consistently robust growth and macroeconomic fundamentals built over the past four years affirm that the Philippine economic story is defined by sustainability, stability and resiliency. Looking ahead, we expect credit ratings to further improve as the country continues to register even better fundamentals on the back of expanded fiscal space and continued governance reforms,” Purisima said.

A sustained period of overheating that leads to the instability of the financial system and a deterioration in governance standards or reversal of reforms could push the country’s credit stature lower down the line, according to Fitch.

While Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. welcomed this development, Purisima said the Philippines remains a country whose credit stature is underrated by the major sovereign credit watchers.

“The Philippine economy has reached a level of resiliency that is more comfortable than that of its peers, as a result of accumulation of sufficient foreign-exchange buffer, sturdy financial system, and price stability. All of these are anchored on prudent monetary policy and effective supervision of banks and other financial institutions,” Tetangco said.

On the subject of the Philippines as an underrated sovereign, Bank of the Philippine Islands economist Nicholas Antonio Mapa said unless specific deficiencies are addressed, Fitch could stick by its conviction that the sovereign does not deserve an upgrade.  “True, our fiscal numbers continue to improve but if this comes at the expense of the failure to address deficiencies such as poor physical infrastructure, further upgrades may not be forthcoming,” Mapa said.

“Improvements in governance standards and tax collection are also needed, as well as an improvement in per-capita GDP…Improvement in our per-capita GDP may take time,” he added.

source:  Business Mirror

Fitch affirms Philippines’ rating

Fitch affirms Philippines’ rating

FITCH RATINGS has affirmed its grade and outlook on the Philippines, keeping the sovereign’s score at the minimum investment grade.

In a statement yesterday, the global debt watcher said it has maintained the country’s long-term foreign-currency issuer default rating (IDR) at “BBB-”.

Similarly, the long-term local-currency IDR was kept at “BBB”.

Fitch also kept its ratings outlook on the Philippines at “stable”, which it said reflects its assessment that “upside” and “downside” risks to the country’s score are “well balanced.”

These scores and the outlook were first issued by the ratings agency in March 2013 and affirmed in the same month last year.

Fitch’s score for the Philippines remains lower than those issued the other two of the so-called “big three” debt watchers, Standard & Poor’s and Moody’s Investors Service, which both upgraded the sovereign’s rating two steps into investment grade last year.

In affirming the country’s credit rating, Fitch cited the country’s strong macroeconomic performance, its favorable external position and the ample liquidity in the financial system.

“The steady inflow of worker remittances and growth of the business process outsourcing industry underpins the country’s economic growth,” the global debt watcher said.

“Fitch forecasts real GDP (gross domestic product) to grow at 6.3% in 2015 and 6.2% in 2016. The Philippines’ five-year real GDP growth was estimated to be 6.3% at the end of 2014, which is far above the ‘BBB’ median of 3.0%,” it noted.

The country’s external finances, Fitch said, are also “a key credit strength.”

“Sustained current account surpluses since 2003 have supported the build-up in FX (foreign exchange) reserves and turned the country into a net external creditor,” it noted.

Credit growth has likewise been supported by the continued expansion of the economy and the abundant supply of cash in the financial system, Fitch said, with the banking system remaining healthy and inflation risks staying low amid a strict regulatory environment.

“This abundance in liquidity has not led to evidence of overheating but it is a risk that bears monitoring over the medium-term,” it said. “The inflation outlook remains close to the central bank’s target range.”

“Fitch also expects that an increase in US interest rates in the near term could ease pressure on domestic liquidity.”

The ratings agency however tagged the country’s public finances as a “neutral” factor, noting the government’s tendency to underspend as well as undershoot revenue goals, even as it continues to pare down its debts.

“Fitch’s assessment balances declining general government debt ratios against limited progress in widening the government revenue base... Sustained fiscal discipline and the propensity of the government to underspend keeps the fiscal deficits low,” it said.

“The Philippines’ revenue and grants at 15.1% of GDP at end-2014 was much lower than the ‘BBB’ median of 28.6% of GDP.”

It also cited persistently “weak” governance standards -- as measured by international organizations -- and low per capita incomes.

TASKS AT HAND
Moving forward, Fitch said that the Philippines must be able to sustain the gains posted over the past few years to be able gain a positive rating action.

It said that the country’s recent showing of strong economic growth should be sustained, but this should also be coupled with improvements in income and development that could put the country at par with its rating range peers, and “without the emergence of imbalances.”

Strengthening governance reforms should also remain a priority, with better standards that would help create a better business climate and support higher domestic and foreign investment also tagged as a positive rating driver.

Fitch added that there should also be “[a] broadening of the general government revenue base that lends stability to the government finances.”

WARNING
At the same time, the credit rating agency warned that “[a] sustained period of overheating that leads to instability in the financial system could be considered credit negative.”

Any sign of deterioration in governance standards or a reversal in reforms set in motion by the Aquino administration could also lead to a negative rating action, Fitch said.

After stellar growth of 6.8% in 2012 and 7.2% in 2013, the Philippine economy’s expansion slowed to 6.1% in 2014, a few points shy of the government’s 6.5-7.5% target.

Crawling farm sector output and lower-than-programmed -- and at times even contracting -- state spending had weighed on GDP growth for much of last year.

This year, the government expects GDP growth to accelerate to 7-8%.

source:  Businessworld

...and of a metro train subsify

THE GOVERNMENT should cut and minimize its subsidy to the metropolitan rail system, and allow market forces to dictate the cost of riding the MRT and LRT.

This is most likely an unpopular position, particularly since the metropolitan rail system offers a viable alternative to the public’s everyday commuting concerns. Let us explain our position on the matter.

First, the persistent and festering problems plaguing the MRT and LRT service cannot be reasonably solved if we continue the existing rate and level of government subsidy.

It has been politically expedient across successive administrations to subsidize the fares of Metro Manila train commuters. But the demonstrable mismanagement of this relatively small train system only corroborates the unsoundness of a policy that keeps fares below their economic value and marginal cost.

Train fares have stayed the same since 2003, even with the general price level nearly doubling since the beginning of 2000, while fares for other public transport modes (buses and jeepneys) have been adjusted periodically. However, train travel offers shorter and more predictable travel times, and thus should cost more. A sound fare policy will take into account the relative economic values (and competitive advantages) of every transport mode. Fare setting for the MRT-LRT and Philippine National Railways systems should not be done in isolation from the prevailing fares on non-train transport.

As a matter of equity and efficiency, fares should be set to the maximum extent possible, based on recovery of costs (operations and maintenance, or O&M) and the “users pay” principle. Government subsidy becomes justifiable only when full-cost recovery fares exceed the economic value of train travel, which by definition incorporates what the average commuter is willing and able to pay. New York City Transit prides itself on having the best recovery ratios in the United States, but manages to cover only 53% of its costs from rider fares.

When subsidies are misplaced, demand is distorted and unintended consequences abound. For example, a 2010 study showed that riders from the economically disadvantaged sector (with a monthly income of P8,000 or less) accounted for only one-third of Metro Manila train riders. The subsidy ends up benefiting, not the poor, but mainly non-poor riders who understandably flock to the cheapest transport alternative. This overflow of non-poor riders aggravates the strain on train system operations and maintenance, compounding the damage already caused by negligent management.

The 2015 budget already allocates P7.4 billion for MRT rehabilitation, while a supplemental 2014 budget contains nearly P1.2 billion for the rehabilitation of both MRT and LRT. Arguably, these funds, properly spent, might already suffice.

However, audits by international experts have confirmed that years of maintenance neglect have led to the deterioration of service quality and safety to dangerous levels.

The only other meaningful action proposed by certain transportation officials -- a government buyout of private equity interests in the MRT -- was a purely financial deal that only benefited the banks and none of the other stakeholders, most especially the riding public.

In an election year, given our patronage politics, the public has every right to worry that funds raised from the fare hikes might be diverted for partisan purposes. Such worries can only be aggravated by the lack of public consultation, transparency, and third-party oversight that surrounded the fare increase process.

In the end, misplaced subsidies do the biggest damage to those among us who have the lowest tolerance for wasted resources -- namely, the poor and economically disadvantaged. Thus, the Foundation supports not just the current fare hike, but also a series of successive fare hikes that will gradually phase out all misplaced government subsidies to Metro Manila’s train system and contribute to full rationalization of relative pricing among the various transport alternatives. The P2.3 billion of subsidy savings expected from this first fare hike is a good start, but it is only a start.

Second, we need measures that will address this subsidy concern.

Policy reforms must be instituted so that future fare setting is insulated from political grandstanding, system management is professionalized, and the present train network can expand from its current size of 79 kilometers to more than 200 kilometers by the year 2030.

Consider setting up a multisectoral oversight body -- to include civil society, the business sector, and international experts -- as a confidence builder for the public and an additional resource for the evidently inadequate Department of Transportation and Communications.

Immediately replace the current maintenance contractor with a globally reputable provider equivalent in quality to Sumitomo, the previous contractor.

Agree upon clear rehabilitation and maintenance milestones, with corresponding rewards and sanctions for over- and under-performance. People’s heads must be put on the line. Clearly specify where the additional funds generated from freed-up subsidy monies are to be used within the overall transportation sector.

Innovate additional revenue sources and cost savings in order to minimize fare hike requirements. On the revenue side, real estate and signage deals come to mind. On the cost side, automation and integration of all fare collection processes must be expedited as one of the performance milestones.

Good ideas, like train fare hikes, must not be dragged down by bad managers, bureaucrats and politicians. Sound economic policy must not be held hostage by unsound governance.

The issue of increases in the MRT and LRT fares continues to occupy media space, the streets, and the courts. I yield this space to a recent statement on this by the Foundation for Economic Freedom, an advocacy group for market-friendly reforms and good governance. While the statement is focused on tariff adjustments for MRT-LRT to achieve utmost equity and efficiency, the thinking applies with equal force to other infrastructure with both private and public benefits -- toll roads, water, power, trains, ports, airports, etc. Infrastructure inadequacy has been tagged as a top binding constraint to the country’s sustainable and inclusive growth.

An unspoken message in the statement is that the private sector will be discouraged from investing in such much-needed public-private partnership infrastructure if tariff setting impedes proper maintenance and cost recovery, and is politicized. And at the end of the day, what is the most expensive water, power or road network? Not having any:

Romeo Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.

romeo.lopez.bernardo@gmail.com

source:  Businessworld

Manufacturing renaissance?

GOVERNMENT policy has until now implicitly assumed that a good part of inclusive growth can be achieved mainly by promoting manufacturing. This follows from two inferences that are sensible on the face of it. First, beating poverty is indeed about moving people from low- to higher-productivity jobs -- and manufacturing is certainly home to some of the economy’s high productivity occupations. Second, the Philippines failed to catch the wave of export-oriented industrialization that lifted many dragon-boats in the 1980s and 1990s, leaving an obvious gap in the country’s industrial structure, where manufacturing is underrepresented for an economy of this size. So surely there is a chance to make up? Perhaps even belatedly replicate the experience of the NIEs?

Recent trends seem encouraging at first glance. There is renewed interest in the country as an investment destination; manufacturing growth has been robust; and some important foreign investments have entered the country (yes, including that indirectly famous Mitsubishi plant). This has led some quarters to even proclaim a “manufacturing renaissance.”

But take a slightly longer view of the matter and things look a lot less dramatic. Manufacturing’s share in GDP has barely risen -- from 22.2% in 2010 to 23.2% in 2014. On the other hand, the employment share of manufacturing actually stagnated at 8.4% in the last five years, which is even lower than the 10% employment share a decade ago. But what about the high manufacturing growth we hear about? Doesn’t that matter?

Math is cruel. For the share of manufacturing to grow, it must grow faster than the total itself. So, suppose the economy was growing at 7% and we wanted to raise the output share of manufacturing by just one%age point from 23 to 24% in one year. Manufacturing would then have to grow by almost 12% in that year -- which has never happened. Manufacturing value-added grew by an average of only 8% in the last five years, with no sign of accelerating.

Even crueler algebra applies to employment. Total employment currently grows at 2.8% annually (about a million new workers added per year). To raise its share in employment from by just one%age point -- from 8.4 to 9.4% -- manufacturing would have to expand employment by 15% a year, i.e., add 5.6 million workers -- an absurd proposition, since that would mean shrinking employment in the rest of the economy.

In last December’s issue of the Philippine Review of Economics, Jeffrey Williamson and I ask whether the Philippines can still follow the old and well-worn path of the first- and second-tier NIEs. Our answer -- after reviewing a series of unfortunate events in recent Philippine economic history -- is that it is highly unlikely. With the large and irreversible current-account surpluses piled up by overseas workers’ remittances and the still-increasing revenues from the service-industry BPOs, there is no obvious way to engineer a sustained currency undervaluation the way the Koreans, Taiwanese, and Chinese did. And given the country’s now-higher living standards and enhanced labor protection (relative to, say, some South Asian or African countries), there is little room to compete in the lowest-wage and least-skilled categories (e.g., garments and textiles). Finally technology is also changing, with the appearance of robotics and digital technology (e.g., 3-D printing and customization), making low-cost labor less crucial in production. The latter, spurred on additionally by tax breaks or penalties, has even induced the “on-shoring” of some manufacturing jobs back to the United States.

Turns out we weren’t alone in our worries. A recent paper by the Princeton economist Dani Rodrik (who should probably get the Nobel at some point) documents a global trend showing that the manufacturing surge in developing countries is petering out much earlier than it used to -- he calls it “premature deindustrialization” (though my colleague Raul Fabella coined the earlier term “development progeria”). Mr. Rodrik cites technology and globalization as reasons. He suspects that manufacturing technology is now trending towards saving in unskilled and semi-skilled labor and a greater use of skilled labor, the greatest decline being in the use of unskilled labor. The problem, of course, is that manufacturing technology tends to be global in nature, adopted and diffused notably by multinational enterprises and their affiliates. (Which also explains why manufacturing productivity is “converging” globally -- another trend found independently by Messrs. Rodrik and Williamson.) Trade liberalization abets this by letting in the trend of cheaper manufactures, turning the terms of trade against the manufacturing industry.

As a practical matter, however, what this implies is a smaller likelihood that manufacturing will assume the same development importance as it did in the past. Mr. Rodrik predicts that manufacturing shares of output and employment will begin to decline at lower levels of income (around one-third to one half less) than they did before 1990. It will be more difficult for manufacturing output to reach the 30-35% shares that Japan, China, Malaysia, or even Thailand displayed in the 1990s. Today, for example, Indonesia, with a slightly higher income per capita than us, still has a manufacturing share of only 24% of GDP. Brazil and Mexico, both richer than the Philippines, all have shares below 20%. If Mr. Rodrik is right, the share of manufacturing in employment is also likely to peak earlier and well below the 18% China achieved in the 1990s. Indeed rising manufacturing productivity means employment will grow more slowly than output, so that manufacturing’s share in output rises even as its share in employment falls or stagnates, a pattern already found in the Philippines.

Make no mistake: we should still try to clear obstacles to get as much manufacturing as we can, e.g., improve infrastructure and logistics, cut the red tape, keep labor markets flexible, and at least keep the peso from rising too far. It should be clear, however, that manufacturing itself cannot play the key role in providing the jobs that can lift large numbers of people out of poverty. Numbers simply don’t add up. With new manufacturing jobs increasingly requiring more skills, most poor people will have less and less of a chance to enter them, for the same reason the BPOs don’t make too big a dent on poverty. Rather than burden a sector with unrealistic hopes and inflating it through unwarranted subsidies and other incentives to fulfill those hopes -- it is more prudent to spend on the education and training that will allow people to adapt to whichever sector emerges to employ them. Not the Renaissance, which sought to recreate a classical past; rather the Enlightenment, which looked toward the future.

Emmanuel de Dios is Oscar M. Lopez professor at the UP School of Economics and boardmember of IDEA.

source:  Businessworld