Phl to host forum on Asean PPP guidelines

MANILA, Philippines - The Association of Southeast Asian Nations (Asean) is looking at harmonizing the guidelines or principles on Public-Private Partnership (PPP) to further enhance the economic integration and global competitiveness of the region. 

The PPP Center of the Philippines said the proposed Asean Guidelines/Principles for PPP would be discussed during the first Asean PPP Networking Forum to be hosted by the Philippines next month. 

The proposed guidelines would harmonize policy, institutional, and regulatory frameworks of Asean member countries with the view to further enhance the economic integration and global competitiveness of the region.  

The guidelines would also establish a network of PPP units or similar institutions that will be a venue for regular interaction of Asean member economies. 

The PPP Center said the networking forum scheduled on Dec. 16 and 17 would also provide a venue for sharing experiences on PPP and challenges, opportunities, and innovative PPP practices as well as insights from the private sector.  

The forum would bring together members of the Asean Connectivity Coordinating Committee (ACCC), national coordinators, PPP focal points and officials responsible for infrastructure projects from the 10 Asean member states.  

The forum is being organized by the Permanent Mission of the Philippines to Asean led by Her Excellency Elizabeth Buensuceso, with support from ACCC, Department of Foreign Affairs (DFA) Asean Economic Community (AEC) Division and the PPP Center of the Philippines. The Economic Research Institute for Asean and East Asia (ERIA) and Asean Regional Integration Support from the EU (EU ARISE) are sponsoring the event. 

Representatives from the private sector, financing institutions, and development partners are expected to attend the forum that would serve as an opportunity for Asean countries to pitch in their pipeline of projects and development support requirements.  

Earlier this month, President Aquino announced at the Asean Business Advisory Council (ABAC) dialogue during the recently-concluded 25th Asean Summit in Nay Pyi Taw, Myanmar that the Philippines would host the networking forum. 

Prior to the forum, the Philippines is set to conduct a roadshow for close to 50 projects worth $20 billion in Melbourne on Nov. 25 and Sydney on Nov. 27. The roadshow in Australia is the last for the year after successful investment roadshows in North America, Europe, Japan and Singapore. 

The government has so far rolled out the biggest PPP project with the P123 billion Laguna Lakeshore expressway dike project; the P24.4-billion Bulacan bulk water supply project; the P18.7-billion New Centennial Water Source; the P4-billion Integrated Transport System (ITS) – South terminal; the P2.5-billion ITS-Southwest terminal; and the operation and maintenance of LRT-2. 

The roll out of PPP projects in the Philippines is in full swing after the award of eight PPP projects worth close to P133 billion. 

These include the Daang Hari – South Luzon expressway link road (P2 billion), PPP for School Infrastructure Project phase 1 (P8.86 billion), the PSIP-2 (P16.28 billion), the modernization project for the Philippine Orthopedic Center (P5.98 billion), the Ninoy Aquino International Airport expressway (P15.52 billion), the automated fare collection system project (P1.72 billion), the Mactan – Cebu international airport expansion project (P17.5 billion), and the Light Rail Transit line 1 Cavite extension project (P65 billion).

source:  Philippine Star

Manila Hosts ASEAN Forum on PPPs

The Philippine Government is set to host the first ASEAN Public-Private Partnership (PPP) Networking Forum which will gather members of the ASEAN Connectivity Coordinating Committee (ACCC), national coordinators, PPP focal points and officials responsible for infrastructure projects from the ten ASEAN Member States (AMS).

The Forum will provide ASEAN member countries the opportunity to exchange information and share experiences about their PPP programs, establish a network of PPP units among ASEAN member countries and  pitch their PPP projects to prospective investors,  financing institutions, and development partners.

It will also tackle the proposed ASEAN Guidelines/Principles on PPP that will harmonize policy, institutional, and regulatory frameworks of the AMS and enhance the economic integration competitiveness of the region.

Ambassador Elizabeth P. Buensuceso of the Philippine Permanent Mission to ASEAN shared that,“Among the ASEAN member countries, the Philippines is said to be the one with the most advanced PPP legal and administrative structure.”

The Philippines has been ranked highest in terms of PPP readiness in the ASEAN Region in the Infrascope 2011 Study of the Economist Intelligence Unit commissioned by the Asian Development Bank.

  “There is room for improvement and we, together with our colleagues in ASEAN, would like to learn the best practices and guidelines of PPP in this workshop, as well as share our  experience with our ASEAN neighbors,” added Ambassador Buensuceso. 

The Forum will be held from December 16-17 at the Sofitel Philippine Plaza Hotel in Manila and is being organized by the Philippine Permanent Mission to ASEAN, with support from the ACCC, theOffice of ASEAN Affairs of the Philippines’Department of Foreign Affairs (DFA), and the PPP Center of the Philippines. The Forum is supported by the Economic Research Institute for ASEAN and East Asia (ERIA) and ASEAN Regional Integration Support from the EU (EU ARISE).

source:  Public Private Partnership Cernter

Singapore backs investment in Philippine infrastructure, food

THE PHILIPPINES has been endorsed by a Singapore government agency as an investment destination for the infrastructure and consumer sectors, among others, citing the country’s strong economic fundamentals amid robust investment inflows and solid domestic consumption buoyed by remittances.

A report issued by International Enterprise Singapore (IES) and written by Huimin Liu and Yin Yin Lam said: “The Philippines holds significant economic growth potential and has begun to come into the investment spotlight as a result.”

“Although the country has in the past been hampered by political instability and poor investor perception, we believe President Benigno [S. C.] Aquino III has been able to make progress on both fronts,” it added.

IES specifically identified the infrastructure, private real estate, utilities, food, and retail industries as possible investment destinations for Singapore companies.

In the infrastructure sector, the IES recommended that Singapore companies participate in the Public-Private Partnership (PPP) program, which allows private firms to bid for various government projects that include road construction, water supply improvement, and government buildings.

In particular, the report said Singapore companies have competitive advantages in PPPs involving aviation, rail and water projects. They can also participate in renewable energy projects, particularly solar energy generation.

“Interested Singapore companies have to prepare the PPP project tenders thoroughly to avoid disqualifications, which are not uncommon, and partner with local conglomerates or complementary industry leaders with the necessary PPP track record for these tenders,” the report read.

The report also noted growing private infrastructure opportunities, and urged investors from Singapore to participate in residential, commercial and industrial real estate development projects.

The report said the remittances from Overseas Filipino workers are fueling the growth in the demand of housing projects, saying that 40-45% of the sales of residential development is being funded by funds sent from abroad.

Meanwhile, the report noted the increasing demand for office and commercial infrastructure due to the booming business process outsourcing (BPO) sector in the Philippines.

The IES said that despite the rising rental rates, office occupancy -- especially in key business districts in Metro Manila -- remains at 97%, indicating steady demand.

“This demand for office space generates opportunities for self-contained mixed use township developments, involving residential, retail, and other commercial spaces in these developments,” the report read.

In the industrial real estate development, the demand is being driven by the revival of the manufacturing sector, the report said.

“The government wants to create employment by revitalizing the manufacturing sector. Political instability and rising operating cost in other regional economies, coupled with cheaper labor cost in the Philippines have lead to more multinational corporations (MNCs) to consider relocating to the Philippines,” the report said.

The IES noted that the Philippines is an ideal investment site for MNCs because of the country’s talented work force, who are young and fluent in English.

Meanwhile, the report also recommended investors to take a look into the Philippine utilities sector.

In particular, the report endorses investments in the Philippine renewable energy, power generation, and water supply businesses.

Being one of the largest consumer markets in Southeast Asia, the report also sees great opportunities for investments in food, clothing and footwear retail sectors.

Driven by strong remittances, steady BPO income, and a growing middle-class population, the Philippines’ rosy consumer outlook should encourage Singaporean companies to invest, the report said.

It also said household spending in the Philippines is expected to increase annually by 10.5% to $322.6 billion (about P14.5 trillion) in 2018, from $210.5 (about P9.5 trillion) estimated for this year.

“The country’s demographics also boost consumer spending. About 3% of the population are well educated Filipinos between the age of 24 and 34. This demographic group accounts for more than 20% of discretionary consumption and is expected to contribute 50% of the country’s discretionary expenditure by 2020,” the report said.

“In general, the dual-income, middle-class families and young professionals who are willing and able to pay for what they want, coupled with a low lending rate as well as an increase in the number of foreign expatriates and tourists into the country due to the expansion of Manila’s gaming industry are key drivers of the Philippine consumer market,” it added.

The IES also sees huge investment potential in the food industry, with food and drink making up 53% of household expenditure, which is estimated at $171 billion (about P7.7 trillion) this year.

“Filipinos have a hearty appetite. It is typical for them to eat at least five times a day,” the report noted.

While consumers are becoming more health conscious by looking for products that are low in fat, or with reduced sugar content, Filipinos remain to be meat lovers and have a sweet tooth. But above all, rice would always remain as a staple food. “A meal without rice is deemed incomplete to Filipinos -- they eat rice even with Western cuisine such as burgers, pizzas, and other fast food,” the IES report noted.

The report said Filipino restaurant diners spend as much as $25 (about P1,126) per meal. “[This is] an indication of the viability of casual dining concepts, which is a strength of many of our Singapore companies,” the IES said.

However, the report puts in a caution, saying that affordability remains the key for the mainstream market.

“Singapore companies looking at the Philippine market should keep in mind their pricing strategy, and consider options, such as offering bundled deals or individually packaged sachets as compared to large packets,” the report said.

Aside from the food sector, the IES sees bright investment prospects in the Philippine clothing and footwear market, which growth is being driven by the young population aged 20 to 39.

The report said clothing and footwear, which currently account for a modest slice of the overall household spending pie, is forecast to see strong growth, with the retail category expected to increase by an average of 9.4% to $8.6 billion (about P387.5 billion) in 2018, from $5.8 billion (about P261.3 billion) estimated for this year.

Based on consumer insights that IES collected from the Philippines, foreign brands are considered aspirational purchases for most Filipinos. It also noted that clothing and footwear companies would have a strong chance in the local retail market if they have popular celebrity endorsers.

The report said retailers in the Philippines like the Filipino lifestyle brand Bench are strong in their marketing campaigns, and visual merchandising.

“Therefore, it is important for Singapore brands to invest in advertising and promotion; and to not only position themselves as a foreign brand, but also include the use of celebrity endorsers, television commercials, giant billboards, and attractive visual merchandising as part of their marketing strategy,” the report read.

It added that Singapore brands can participate in the local retail sector either by joint ventures, leasing, franchising, distribution, or by partnering with local multi-brand operators like Store Specialists Inc. (which carries a variety of brands from Gucci to Marks and Spencer), and Robinsons Retail (which carries Top Shop, Top Man, and Dorothy Perkins, among others.)

While the report paints a rosy picture for investment in the Philippines, it cautions Singapore investors to consider that national elections are scheduled in 2016, when the current administration steps down.

“Major policy flip-flops from one government to the next can undermine confidence in contract durability,” the report warned. “Without political continuity, private investor interest will be dampened,” it added.

However, the report also believes that the government has “put in legislation to institutionalize these polices, such as the ‘pocket open skies’ policy.”

It also noted the consumption-driven nature of the Philippine economy, making it relatively more resilient to external shocks, unlike export-driven economies.

The report advises Singapore companies to build key relationships in the business sector, since 40 wealthiest Filipino families practically control trade and commerce in the country.

The report also advises Singapore companies to allow adequate time in getting business permits and licenses since they may take long, and delay operations. It cited that it took five steps and 42 days to obtain a new electricity connection.

The IES also recommended that Singapore companies to look for investment opportunities beyond Manila. It cited Cebu and Davao to be potential locations for the next big central business districts in Visayas and Mindanao respectively.

“Singapore companies can consider going beyond Manila to tap these emerging market opportunities,” the report said.

source:  Businessworld

The PPP promise, a work in progress

AFTER A FALSE START back in 2010, the Aquino administration’s flagship public-private partnership (PPP) program finally roared to life. Several large projects have been auctioned off under seemingly competitive conditions that, contrary to model forecasts, yielded substantial revenues for the government. Moreover, the government, with the help of a donor-sponsored project development fund, has built up a pipeline of about 50 projects for PPP that it has taken on international road shows to attract more foreign investors.

However, as the government exhausts the first batch of projects -- which featured revenue streams that appealed to private investors -- and moves to more complicated greenfield projects, there is a high risk of another stall. Having observed closely the problems the government encountered in the newly awarded projects, we’ve identified some policy, institutional and political issues that, left uncorrected, will make it hard to sustain the winning streak.

After a false start and a few years limping along, the Aquino government’s flagship PPP program finally roared to life. In relatively quick succession, the government bid out or awarded four projects worth P125 billion and rolled out six more costing about P170 billion. What was particularly surprising was that the auctions yielded substantial concession fee payments to the government, as against pre-bid financial model results showing that the government would have to provide subsidies to enhance project cash flows.

Encouraged by the successes, the government through the PPP Center has lined up another seven projects worth about P180 billion for approval by the National Economic and Development Authority (NEDA) board, and is preparing feasibility studies for 10 other projects. In all, there are about 50 projects in the PPP Center’s pipeline which the government is also actively marketing to foreign investors through a series of international road shows.

The mood has not always been this upbeat due largely to unmet expectations following the government’s high publicity launch of the program back in 2010. Then, the much-hyped “PPP is the solution to the infrastructure shortage in the country” failed to consider that in the wake of controversies surrounding failed PPPs in the past, both sides of the partnerships had their guard up and were distrustful of each other. In particular in the aftermath of the Asian crisis, the public sector had to grapple with and absorb some of the liabilities in PPP contracts, and for years leading up to 2010 preferred to manage the risks from contingent liabilities by avoiding them altogether. In turn, the private sector was particularly leery of government contract promises that the latter had time and again failed to keep, notably delays in tariff adjustments in most sectors -- power, water, rail, toll roads -- particularly during politically sensitive periods.

Moreover, there were very few market-ready projects in the pipeline at the time and fast-tracking last-mile adjustments to ready projects was constrained by technical limitations in implementing agencies. It was thus a slow process of learning by doing on a per-project basis, tentatively delineating risks among the parties involved, with the government deftly testing what risks the market could bear through actual biddings of smaller projects.

These included (a) a small 4-kilometer (km) toll road in December 2011 that very soon became stuck in right-of-way (ROW) disputes, and (b) a project to build classrooms, awarded in September 2012, that was the first of its kind in that it relied solely on government payments for its cash flows and thus was not able to attract more bidders willing to assume congressional appropriations risk. Critics also pointed out that this project and its second phase the following year lacked features of true PPPs in that the private sector merely handled construction of the schools and were not exposed to market and operating risks.

The first major win for the Aquino government was the P15.5-billion, 7.75-km, four-lane elevated NAIA Expressway project that had been in the drawing board for decades and was finally brought to market with donor technical assistance. Albeit it attracted only two bidders, the auction, won by a consortium led by one of the large domestic conglomerates (SMC) in May 2013, yielded P11 billion in concession fees to the government and by early 2014 had already broken ground. Another win six months later was a five-way bid in November to install a P1.7-billion single-ticketing system for Metro Manila’s rail system, where the winning bid was a P1.1-billion payment to the government.

But it has not become easier. The latest auctions, involving three multibillion-peso transport projects, have been uphill struggles for both the government and the private sector. The challenges that have emerged during the bid stage are reminders of the inherent difficulty and associated time lag of doing PPPs, especially in a developing country like the Philippines where institutions remain weak and bidders take for granted that calling on the courts, Congress or the President to intervene on their behalf is part of the rules of the game. Such politicization of the formal PPP processes tarnishes the program’s image and dulls investors’ appetites. Here are a few of the project holdups:

LRT LINE 1 EXTENSION
The biggest and the most complicated one to date, it has been subjected to repeated feasibility studies. The first bidding in August 2013 failed due to misallocation of risk (shifting to the private sector the uncertainty of real property taxes) and the insufficiency of allowed subsidy. It was rebid in May this year with the lone bidder (out of seven prequalified) winning. The award was delayed to September by a still ongoing legal tussle involving the location of a “common station” shared with another rail line.

MACTAN-CEBU AIRPORT TERMINAL
Seven bidders showed up in November 2013, with the consortium of Megawide Construction Group, which partnered with India’s GMR Infrastructure, winning the bid. Citing conflict of interest, the losing bidder challenged the qualifications of the winning group, which was then subjected to a Senate inquiry. Even with a legal challenge filed before the Supreme Court, the project was awarded in April, delayed by a few months.

CAVITE-LAGUNA EXPRESSWAY
Four groups vied in the June bidding, with the SMC consortium disqualified based on a noncompliant bid bond. Of the three remaining, the Ayala-Aboitiz consortium offered the highest premium, amounting to P11.66 billion. The SMC group claimed that it would have won with a P20 billion had it not been disqualified on a “technicality.” It appealed to the President to overturn its disqualification and the Palace issued an order in late June suspending the awarding of the project. The issue has yet to be resolved.

(Next week: Moving forward)

This piece is based on a GlobalSource report by Christine Tang and Romeo Bernardo

Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.

romeo.lopez.bernardo@gmail.com

source:  Businessworld

DoTC targets completion of 12 transport projects by 2019

THE DEPARTMENT of Transportation and Communications (DoTC) is targeting to complete over P258-billion worth of infrastructure projects by 2019, in line with the target timeline for the Japan International Cooperation Agency’s (JICA) P2.61-trillion Road map for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas, known simply as the “Dream Plan”.

Transportation Spokesman Michael Arthur C. Sagcal said via text message on Sunday that the following projects are scheduled for completion from 2016 to 2019: the P30.40-billion Operation and Maintenance (O&M) of Iloilo Airport; the P40.57-billion O&M of Davao Airport; the P20.26-billion O&M of Bacolod Airport; the P5.23-billion O&M of Puerto Princesa Airport; the P15.92-billion Laguindingan Airport O&M; the P2.34-billion Enhanced O&M of the New Bohol (Panglao) Airport; the P64.9-billion Light Rail Transit Line 1 (LRT-1) Cavite Extension; the P63.14-billion Metro Rail Transit Line 7 (MRT-7); the P1.72-billion Automatic Fare Collection System; the P3.7-billion MRT-3 Capacity Expansion; the P9.7-billion LRT-2 Masinag Extension; and LRT-2 O&M.

“For our part in the Dream Plan, the DoTC’S mandate is to develop infrastructure which will help decongest traffic. Our rail projects will move commuters off of the roads and on to the rail systems,” said Mr. Sagcal.

JICA’s “Dream Plan” outlined a P520.44-billion short-term program for this year thru 2016 consisting of: P305.465-billion worth of expressways and roads; P178.823-billion worth of railways; P12.085-billion worth of sea ports; P11.368-billion worth of airports; P8.340 billion in bus systems; and P4.359 billion in traffic management projects.

Part of these initiatives are some of Transportation department’s projects, such as the MRT-3 Capacity Extension and LRT-2 Masinag Extension projects.

Pablito M. Abellera, who heads the Transportation Division of the National Economic and Development Authority’s inter-agency Infrastructure Committee, explained that an estimated 52% of the short-term program will be financed by a mix of official development assistance (ODA) and government funding, while the balance will consist of private sector investments.

“[F]or medium- and long-term projects amounting to about P2 trillion, a third of it will come from the private sector and the remaining is through the combination of government and ODA,” Mr. Abellera added.

The road map emphasizes the need to establish better north-south connectivity; a hierarchy of various transportation modes; planned and guided urban expansion to adjoining provinces through integrated public transport; the expansion of multi-modal public transport networks; and the strengthening of traffic management systems.

If the road map is implemented, JICA said it is expected to yield economic savings of P1.2 trillion a year starting 2030, public transport fare savings of P18 per person per day, travel time reduction by 49 minutes per person per trip, and additional toll and fare revenues of P119 billion annually. -- C.J.V. Dela Paz

source:  Businessworld

The bills that Congress must pass

THERE ARE three things on Congress’ plate now that we are keenly following, given their crucial role in keeping confidence and economic growth up in the very short term as well as over the longer haul.

The more immediate one is the President’s request for emergency powers to address a forecast shortage in electricity supply in the Luzon grid next summer. There is some urgency to this and we expect a favorable joint resolution from Congress, likely within the month. However, the burning issue is not whether or not emergency powers will be granted but what those powers will be.

There is now a tug of war between private players and the Energy department over the best option for filling the forecast 600 MW deficit. The private players believe that a well-managed Interruptible Load Program (ILP) that aggregates private companies’ self-generating capacities, together with energy conservation measures and more prudent plant management (including plant rehabilitation and scheduling of maintenance shutdowns), will be enough to close the gap.

So far, commitments to the ILP are less than 150 MW, about a 10th of available capacity, but the business sector is hopeful that with government providing the proper incentive framework, more will sign up. Overall, the main attraction of this packaged option is that government’s role is less heavy-handed and the ILP kicks in only at particular points in time, thus keeping added costs to a minimum.

While the Energy Secretary openly recognizes the value of these measures, he appears less confident that the ILP can produce the needed volume, and he prefers that the government contracted additional capacity to guarantee adequate supply. The fear among private players is that the government may end up with costly, extended contracts that not only burden taxpayers and/or end-users with needlessly high power bills, but which, beyond the critical summer months, will serve as government-owned reserve capacity that can be sold into the spot market, contravening the intent of the Electric Power Industry Reform Act (EPIRA). Several lawmakers have publicly expressed reservations about the government’s preferred option, also citing cost considerations.

Our best case here is a well-studied, time-bound resolution, clearly defining the parameters of the authority granted to the Executive that leaves little room for perceptions of abuse of powers to arise. Additionally, the resolution needs to be accompanied by clearer policy directions from the Energy Department and its regulatory arm that turn around perceptions of non-market-based price setting. This will help preserve private players’ confidence in the EPIRA, ensure that this episode is seen as a one-off case, and make needed private investments in additional generating capacity happen.

Second on our list is the Bangsamoro Basic Law (BBL), which we have tagged as a medium-term game changer on security and economic grounds. Although the Senate President is looking to pass the law in the first quarter next year, the best case here is passage by end of this year. This will give ample time for expected challenges to be resolved so that elections in the new autonomous region can be held within this administration’s term. It is also essential that the approved legislation is seen as preserving the terms that the Executive agreed with the Moro Islamic Liberation Front (MILF), which were the product of a long struggle and negotiation for peace. The short-term goal is to allow the current, more pragmatic MILF leadership to secure early wins and broaden support for the peace agreement in order to fend off the younger fundamentalist faction demanding greater autonomy. Over time, peace and security will help unlock Mindanao’s potentials. The island is rich in natural resources, its climate condition is conducive to agriculture, and historical and cultural ties will allow it to forge closer economic linkages with neighboring ASEAN communities in line with the aspirations of the ASEAN Economic Community.

Last but not least is the General Appropriations Act (GAA), the government’s budget for 2015. Following the controversies this past year, there has been increased and more intense scrutiny of the executive’s proposed expenditure items lately. Nevertheless, we are confident that just like the past four years, the budget will be passed on time, before the year ends. The proposed budget amounts to P2.6 trillion, a 15% increase over this year’s total appropriations. It is based on assumptions of 7-8% GDP growth, another P80-billion increase in the tax and revenue efforts to 15.5% and 16.5%, respectively, yielding a deficit of equivalent to 2% of GDP, about the same as this year’s target.

Budget officials have been stressing the importance of on-time passage of the GAA to enable the front-loading of priority expenditures, particularly infrastructure that should be completed before the start of the rainy season midyear. For 2015, the Aquino administration intends to bump up infrastructure spending to 4% of GDP (from 3.5% this year and 2.5% last year) and continues to raise allocations for education, health and the CCT program. Whether or not the government can in fact spend as planned to meet its growth and inclusivity targets is still a question mark as latest statistics (for August) show still anemic spending performance. On the other hand, we think there will be greater urgency for the administration to ramp up spending next year to secure political support for its candidates in the 2016 elections, especially for the Presidency.

Aside from the three, there is a slew of proposed economic reform measures that has been in the legislative mill for years, including a competition law for fair trade practices; amendments to the Build-Operate-Transfer Law to support the government’s Private-Public Partnership program; a bill clarifying the fiscal regime for the mining sector; and, in preparation for the AEC, liberalization of more areas for foreign investments, including a one-line “unless provided by law” amendment to free up economic restrictions in the Constitution.

The key piece, insofar as the short-term macro outlook is concerned, is the harmonization of fiscal incentives embedded in some 186 laws. Estimates put the cost of these incentives at 1-2% of GDP. Unfortunately, we expect that even if Congress approved this measure, it will likely be in diluted form. In fact going into an election season, we expect to see more revenue eroding proposals from Congress, with several bills lowering income taxes already under deliberation. We think the grounds for correcting long-term “bracket creep” on both equity and productivity are solid, and we do not expect these to appreciably dent public finances.

This column is based on a GlobalSource report written by Christine Tang and Romeo Bernardo.

Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.

romeo.lopez.bernardo@gmail.com

source:  Businessworld

Managing risks in the mining and metals sector

THE MINING and metals sector in the Philippines is considered one of the key industries driving economic development and growth. Yet, it is also a sector that is constantly confronted with risks detrimental to the sector participants’ long-term profitability, and economic growth and sustainability. It is therefore important in strategic planning to anticipate and plan for these risks.

Many of these risks are consistent with the risks found globally, as identified in a recent Ernst & Young report titled Business Risks Facing Mining and Metals 2014-2015. These risks include:

RESOURCE NATIONALISM
Resource nationalism will remain a risk as the Philippine government looks to initiate legal and regulatory measures to increase its share from industry earnings. Early this year, the Philippines’ Mining Industry Coordinating Council approved the proposed mining revenue sharing policy which would impose either a 10% tax on gross revenue or a 55% tax on adjusted net mining revenue, plus a certain percentage of profit, whichever would result in higher revenues for the government. Additionally, a bill requiring domestic processing of all minerals extracted in the country prior to export was approved in early September at the committee stage of the House of Representatives. The bill aims to extract more value from mining.

To address this risk, mining and metals companies need to continue to dialogue with government on the impact on investment decisions of increasing levels of resource nationalism, whether in the form of taxes, use-it-or-lose it or in-country processing requirements. Companies need to continually demonstrate the benefits brought by the mining and metals industry to the broader community, and enhance the understanding that raising the cost of doing business may hinder investment and jeopardize those benefits for the country as a whole.

SHARING THE BENEFITS
Balancing competing demands from multiple stakeholders is a challenge for all mining and metals companies. Firms that fail to do so face the risks of damaging their corporate reputation, encountering project approval delays and protests or violent opposition. Companies need to ensure that these stakeholders have a common understanding of the challenges their projects face.

While there is no perfect approach that will appease all stakeholders, increased transparency helps generate trust with stakeholders. Transparency through reportorial requirements, such as the Social Development and Management Program progress reports, and participation of the Philippines in the Extractive Industries Transparency Initiative is a way to communicate how value is shared across all relevant stakeholders.

SOCIAL LICENSE TO OPERATE
Over the last few years, mining and metals companies have spent more time and resources grappling with an increasing number of groups in order to obtain or maintain their social license to operate. The risks in not obtaining acceptance from any one of these stakeholder groups can include lost potential investment streams, supply chain and customer base challenges, and reputational damage. This means that now more than ever, company leaders should take proactive measures that address the bigger industry picture. These measures should aim to develop policies beneficial to the company while also working to address the interests of the different stakeholders.

PRICE AND CURRENCY VOLATILITY
While the country’s mining output is slowly rebounding, price and currency volatility remains a significant risk to mining and metals companies. In addition, the industry is also facing much volatility in supply and demand, which means that prices cannot be expected to follow any definitive trend.

To manage this risk, companies can look at ways to enhance their flexibility to respond to these instabilities, which may include a preference for variable over fixed costs, improving their processes from more effective mine planning to increasing production efficiency, engaging in hedging, and mining high quality assets with better grades and better margins. Through such measures, the adverse impact on margins may be absorbed or be negligible.

INFRASTRUCTURE ACCESS
Since most of the untapped resources are located in remote areas, access to infrastructure is another barrier. It often falls on the company to initiate spending for developments such as roads, trails and bridges, and even social structures. While these expenditures comprise part of mine development costs, firms should view infrastructure development from a sustainability perspective, in that it provides a distinct social and economic benefit to local communities. This, in turn, helps mitigate the social license risks and visibly provides a means for companies to share the benefits of their operations with the community.

CAPITAL ALLOCATION
One of the most challenging decision-making areas in the mining business is identifying the best and most sustainable use of capital. A myriad of options are available, ranging from recycling of capital against dividend distribution, investing in and developing greenfields, acquisition of brownfields to disposal, and abandoning certain non-core projects/assets.

In one way or another, options considered by entities will likely benefit the shareholders. However, the complex part is determining how much money should be allocated to each action in order to yield the most benefit and generate as much wealth as possible to demanding investors. Mining and metals companies should zero in on the changing risk appetite of shareholders and their preferred funding mix.

CAPITAL ACCESS
Raising the capital requirement may not be the concern of large industry players but it defines survival for junior players and small-scale miners. Freestanding financiers may be reluctant to release funds to smaller mining and metals companies whose credit worthiness is uncertain. This can result in smaller companies encountering cash constraints and difficulty funding expansion projects. Consequently, cost and capital management remain essential. These companies should improve on their ability to curb high capital costs and mitigate credit risk. This includes exploring all financing options, reducing capital expenditures through incremental project design and considering strategic partnerships.

PRODUCTIVITY IMPROVEMENT
The sudden upsurge in physical commodity prices during the 2000s lured most of the mining and metals companies to focus efforts on increasing output without much regard to costs. However, when prices began falling dramatically a decade later, industry players realized that producing more does not equate to higher profitability where prices are depressed.

Mining and metals companies should embrace a significant end-to-end transformation of the whole business to deliver sustainable and long-term improvement. Strong financial performance can be achieved through productivity improvement such as reassessment of mining methods, favoring automation, and changes to overall mine plans.

Given the current issues and controversies plaguing the Philippine mining and metals industry, taking these risks into consideration may prove beneficial to our local players. In the long run, employing effective risk reduction and management exercises can help companies not only adapt to changing factors, but even thrive in this challenging environment.

Jaime F. Del Rosario is a Partner of SGV & Co.

source:  Businessworld