Fitch-research arm BMI Research said increased Chinese involvement in the Philippines’ infrastructure sector will pose a risk to the country’s public-private partnership (PPP) sector.
In its latest analysis, BMI Research said the previous government under Aquino highly favored PPPs as a method for meeting the country’s infrastructure needs and has implemented a number of favorable policies, including, most recently, allowing PPPs to list on the Philippine Stock Exchange.
“Increased Chinese involvement may have the dual effect of both reducing the number of PPPs in the pipeline as well as increase competition in the market,” BMI said.
“China-backed bids will likely be able to undercut competitive private bids and companies which have positioned themselves to expand in the Philippine PPP sector may lose out,” it added.
(Bank of China has agreed to provide a $3-billion credit facility for infrastructure investments in the Philippines, Dept of Trade and Industry Secretary Ramon Lopez told reporters in Beijing yesterday.)
BMI also said downside risks to its outlook for the Philippines attracting greater investment from China primarily arises from near-term political uncertainty.
“Although (President) Duterte has taken a less confrontational approach to the South China Sea dispute, there is the risk his position could change in the future given his unorthodox political style and populist politics, which would then place into question any China-backed infrastructure projects in the pipeline,” BMI said.
It also noted that public opposition to Chinese construction projects could derail projects in the Philippines.
“A string of accidents in 2015 at the Ha Dong-Cat Linh elevated rail project site – for which China Railway was the main contractor – in Vietnam resulted in government officials criticizing Chinese contractors of having poor safety practices, a concern that may be present in other markets,” it said.
The North South railway system, funded by Chinese entrepreneurs, started under the Arroyo government did not take off.
However, on the positive side, BMI said friendlier ties with China will provide a boost to the Philippines’ infrastructure industry, as competitive Chinese construction firms and financing options become available.
“Although the full extent of investment deals may be muted by underlying political tensions, increased Chinese involvement in the Philippines’ infrastructure will help close funding gaps in Duterte’s infrastructure spending ambitions,” BMI said.
“We expect President Rodrigo Duterte’s tilt toward friendlier relations with China will provide a boost to the Philippines’ infrastructure industry as Chinese construction and financing agreements help fulfil his plans for a ‘Golden Age of Infrastructure’ in the country,” it added.
BMI noted while underlying tensions over the South China Sea may dampen initial talks during Duterte’s visit to Beijing this week, both countries have clear incentives for closer ties.
“China sees befriending the Philippines as a way of reducing the United States’ influence in Asia; while the Philippines seeks to gain access to China’s generous infrastructure investment packages which peers in Southeast Asia are already benefitting from,” BMI said.
The research arm said such deals will help bring to reality Duterte’s plan to spend at least P7 trillion on infrastructure through 2022.
BMI said this supports its forecast for real growth in the construction industry averaging 8.2 percent between 2016 and 2020.
“Although Duterte is continuing PPPs initiated by his predecessor Aquino, we expect him to shift more in favor of a government-centered investment approach, which he regards as more efficient and cost-effective,” BMI said.
The report cited data from PPP Center which showed that only three of the 53 PPP projects launched since 2010 have been completed and only around four under construction.
The government attributed the delays to a lengthy review and approval process under the previous administration and has expressed doubts about the efficacy of PPPs for shorter-term projects, BMI said.
“As a result, we expect a reduction in the proportion of projects open to private bidders and subsequently greater demand for government budgets to fund infrastructure developments,” it said.
The analysis said Duterte will face many of the same obstacles of bureaucratic and financing bottlenecks as his predecessor.
“As a result, the Philippines currently has a bloated project pipeline which sees a significant number of projects failing to move beyond the tender phase,” BMI said.
“According to our Key Projects Database, around 97 projects worth more than P2.5 trillion in total are in the pre-tender phase,” it added.
The report noted Duterte is eager to drive momentum into infrastructure projects since he approved nine projects worth P171 billion in September.
“Increased involvement from Chinese firms will fit neatly into the Philippine government’s shift toward state-backed projects, as trade and investment deals that come out of a friendlier relationship with China help meet the Philippines’ growing infrastructure funding needs,” BMI said.
“Other Southeast Asian countries have welcomed Chinese government-backed investments in part due to their low costs, short timelines and favorable financing terms,” it added.
The report cited as an example the $5.5 billion Jakarta-Bandung High-Speed Railway under construction in Indonesia, which is largely financed by a two percent interest, guarantee-free loan from the China Development Bank and will be built without any funds from the Indonesian government.
“For Duterte, greater cooperation with China will also act as a hedge against uncertainty in Philippines-US relations – as noted by our Country Risk team, Duterte is unlikely to establish good terms with either US presidential candidate,” BMI said.
source: Malaya
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