Sunday, 17 February 2019

Improving confidence in the Philippines

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The project finance sector in the Philippines is driven by two main actors: the Department of Transportation Communications (DOTC) and the Public Private Partnership (PPP) Center. Each has its own remit to originate projects and under the auspices of the two institutions project finance in the Philippines has made considerable progress over the past few years. By Jonathan Rogers.

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The PPP was renamed in 2010 from the old Build Operate Transfer (BOT) centre that was established in 1993 and its principal activities are to provide advisory services, facilitate the development of PPP projects, monitor their implementation and to advocate government policy reforms. 

A key driver for project finance in the Philippines is the Project Development and Monitoring Facility (PDMF), which is a revolving pool of funds to be made available in order to develop the PPP pipeline. In a salient example of how a multilateral development bank can work with government to facilitate PPP projects, the Asian Development Bank secured funding for the PDMF from the Australian and Canadian governments.

While there has been criticism about the transparency of the bidding process for projects, there has been progress made in this regard, most recently where the tendering process for the planned Mactan-Cebu International Airport was delayed due to the devastation of typhoon Yolanda but reopened, with the process seen as transparent.

It would probably be a fair assessment to say that the country’s recent economic growth spurt – which allowed the Philippines last year to be bumped up to investment grade status by Moody’s and S&P – has been partly driven by the country’s success in completing an array of projects in infrastructure.

“Investor confidence in the Philippines has lately been improving, leading the international financial community to rate the Philippines as the third most preferred market in the world for global fund managers. This confidence from the international finance community is moored on the collective affirmation of the government’s current reform agenda,” wrote PPP head Cayetano Paderanga in the PPP’s annual report.

“The Philippine economy has remained robust and resilient despite the global economic turbulence that has rocked several economies elsewhere. We expect such steadfast resilience, supported by initiatives in good governance, to help the country move forward in a sustained manner.”

The PPP this month introduced probity advisory into its procurement mechanisms in a bid to add transparency and accountability in engaging private partnerships and to further institutionalise the procurement process.

This move is designed to convince the private sector that there is an assurance of fairness and a level playing field for procurement and seeks to avoid a costly and unpredictable tender process.

“This is aligned with the Daang Matuwid agenda of the Aquino administration, where we are continuously improving on our processes. We are committed to upholding transparency and accountability in our PPP biddings. And we want to assure the private sector a level playing field at all times,” according to Undersecretary Cosette V Canilao, PPP Center executive director. 

Daang Matuwid means “straight path” in Tagalog and represents the core policy mission of President Nonoy Aquino to stamp out corruption in a country that is widely regarded as one of Asia’s most corrupt at the government level, both central and local.

Probity advisory is a core element of procurement best practice in Australia and Canada, two of the main sponsors of the PPP, and the implementation of this process will involve bringing in experts from the Infrastructure New South Wales Australia (INSWA) to the PPP in a formal twinning arrangement between the two institutions.

“It’s encouraging to see the Philippines moving in the right direction in relation to issues such as transparency and creating the perception of a level playing field. While international companies may have been put off from investing in the Philippines’ project sector, the hope is this will convince them that the country is moving on from its bad old ways,” said a Hong Kong-based project finance banker. 

In 2012, a panel of nine consortia of firms was engaged by the PPP Center under an indefinite delivery contract facility, with the facility set to expire in 2015. The panel consists of CPCS Transcom, Deloitte Touche Tohmatsu India, Ernst and Young Australia Infrastructure Advisory, Hill International, ICRA Management Consulting Services, Manabat Sanagustin & Co, PricewaterhouseCoopers Services Singapore, Rebel Group International and SMEC International Australia.

“For the PPP Program, we are confident that the next round of PPP projects will benefit from an improved procurement process in various aspects. First, implementing agencies who have successfully tendered projects are now armed with actual competencies not only in procurement but in practically all aspects of project and institutional decisions leading to award. The experience in actual bidding situations have been helpful for them and other agencies who will learn from these lessons,” said Eli Ricote, director of the PPP Center.

Ricote pointed out what he saw as a significant development in the project procurement process in the Philippines, saying: “For the PPP Center, there is a recognition that its efforts [ie, project development inputs to agencies, capacity building, the PDMF, policy and process improvements, etc] are in the right direction and are now bearing fruit. Note that the Center’s mandate is not simply to generate and roll out projects. It is about building up a PPP Program – projects, policies, institutions.”

Under the Philippines’ BOT law and its Implementing Rules and Regulations (IRR), the current legal framework allows allows two modes of procuring private partners in these PPP projects. These are the Solicited (public sector initiated) and Unsolicited (private sector Initiated) modes. Both have mechanisms (prequalification, review of technical and financial proposals) for selecting private partners. 

In the solicited track, there is a very detailed public bidding process, while for the unsolicited, there is the comparative challenge process that also employs the same qualification and review phases. In both instances, there are provisions for competition and assurance that government can get the best private partner. 

“We started with a really tall order, given the huge infrastructure requirements in the Philippines. We had the BOT Law as the policy framework for PPPs but we had to deal with the need to capacitate agencies in all aspects of project preparation/structuring, procurement, etc. Thankfully, there was focused direction towards that and resources – the PDMF, Technical Assistance from Development Partners, etc – were made available. We had to work on policy guidelines, process improvements and beef up the public sector PPP institutions towards building a pipeline of diligently prepared projects attractive to private partners,” said Ricote. 

He singled out the Cavite-Laguna Expressway (Calax), LRT Line 1 Cavite Extension and the Integrated Transport System-Southwest Terminal as key pipeline projects, notable for their cost magnitude and the involvement of new players and participants. Upcoming projects up for tender include those in water, ports and prisons.

Calax is a proposed 47km expressway crossing the provinces of Cavite and Laguna and will cost Ps35.42bn (US$787m). The road is expected to ease the heavy traffic congestion in the Cavite-Laguna region. There are four pre-qualified bidders for the Calax: Alloy MTD Philippines, Team Orion, (the consortium of AC Infrastructure Holdings, Aboitiz Land and Macquarie Infrastructure Holdings Philippines), MPCALA Holdings and Optimal Infrastructure Development, a subsidiary of San Miguel Corporation.

“Despite huge challenges, we now have a robust pipeline of projects; we’ve signed and awarded seven projects, the government received unprecedented premium payments/concession fees to build and operate various infra projects, we’ve strengthened the legal and regulatory framework, we’ve issued several policy guidelines and we have stronger government institutions involved in delivering PPPs,” said Ricote.

“A lot remains to be done, including policy and process improvements, capacity-building in more specific areas, but thankfully these have all gained ground already. Policy actions in key areas such as dispute resolution and the contingent liability fund have been done or initiated via the BOT Law Amendment. Institutional readiness has significantly improved with existing resources.”

The origins of the Department of Transportation and Communications (DOTC) go back to 1899, when it was one of the first government agencies established under the Malolos Constitution. Transportation is crucial to a country that consists of more than 7,000 islands and according to the DOTC’s website it’s mission is to “provide the [Philippines] with efficient, effective and secure transportation systems that are globally competitive, compliant with international standards and responsive to the changing times”.

That’s a laudable mission statement but anyone who has ventured into the Philippines recently and into Metro Manila in particular will know that the DOTC has its work cut out in transforming what remains something of a transportation nightmare. Manila’s legendary traffic is as dense as it ever was, its light rail system inadequate to the task of moving vast crowds of pedestrians around the capital and travel to the islands a less than pleasant experience. 

Throughout its long history the DOTC has been the subject of criticism in a country where distrusting institutions and politicians is something of a national pastime. 

As recently as earlier this month the DOTC’s head, Joseph Abaya and three of its undersecretaries were the subject of a lawsuit alleging corruption over the handling of a Ps1.7bn train ticketing system contract. The National Coalition of Filipino Consumers claims the contract was awarded to a consortium in a manner that violated “specific rules on bidding”. 

This is not the first time the Manila rail system has been the subject of controversy. The Metro Rail Transit (MRT) III Funding deal was completed in 2002 with the underlying debt funding a build-lease-transfer agreement (BLT), under which the Republic of the Philippines, through the Department of Transport and Communications (DOTC), is obliged to pay for the cost of building the Metro-Manila MRT III mass transit system through monthly equity rental payments (ERPs) over a 25-year period to Metro Rail Transit Corporation (MRTC), the company that constructed the mass rail transit line.

The project generated excitement in 2002 when it appeared it would be securitised, in what would have represented only the second ABS transaction out of the Philippines and the first in six years. However, after much work on the deal, HypoVereinsbank, whose ABS team devoted around 18 months to the trade, walked away from the transaction when a member of the consortium failed to agree terms and documentation could hence not be signed. 

This was a major embarrassment to the bank and a huge disappointment to the Asian ABS community, who believed a successful deal would give a shot in the arm to the region’s securitisation market.

In the event, the deal was structured in a rather under-the-radar fashion by boutique securities house Penta Capital and by 2005 the DOTC had gone into arrears on the ERPs to the tune of US$40m amid cries that the sovereign had gone into default. The situation brought into the spotlight the perennial issue that dogs transportation projects: that traffic is always over-estimated at the greenfield stage. So while the ERPs totalled US$3.33m per month, monthly ticket revenue was just US$2.3m. 

Although the default issue was downplayed and no formal default was called, given the ongoing shortfall in the financing, the Republic sought to take out the debt. It’s a measure of the DOTC’s relatively naive approach to pricing that it was aiming to use a 15.75% discount rate to value the debt while at the time, the Republic’s long-term offshore dollar debt was trading at around the 6.5%–7% mark. 

The difference between the two rates represented a US$600m divergence in the value of the debt and clearly getting the mark-to-market accurately valued was a skill egregiously lacking at the DOTC.

While there were plans to take out the entire issue via sukuk issuance from the Republic, this plan never got off the ground, and although some US$35m was taken out via a private placement the bulk of the issue remains outstanding – and trades, perhaps tellingly, at a steep discount to par. 

This does not speak well of the DOTC’s market savvy and adds to the perception in the Philippines that the government department needs to sharpen up its act. It recently came under fire from senators who claim that the agency has failed to engage with developing the country’s woefully inadequate rail network.

At a recent Philippines senate hearing on renewing the Philippines National Railway charter, which is about to expire, senate president protempore Ralph Recto and senator Cynthia Villar denounced the DOTC’ apparent failure to grasp the importance of a fully functioning railway system to the Philippines economy. 

“We started with a rail line [sic] of 1,100 plus kilometres. Today, you are operating 50 kilometres only and we have not heard anything from the DOTC on what plans [it has] as far as PNR is concerned. We hear some plans with the MRT and the LRT … you have a situation that the PNR [charter] in two months time [will expire]. Is someone minding the store?” said senator Recto at the hearing. 

Despite this blunt criticism of its prowess with regard to the Philippines’ railways, to its credit the DOTC is proposing a US$2.5bn PPP project designed to upgrade Luzon’s crumbling railway system. Earlier this month the DOTC signed a consulting contract with Canada’s CPCS Transom to prepare a feasibility study for a PNR integrated Luzon Railway project, aimed at improving the transport infrastructure on the Philippine’s main island where Manila is located. 

Any potential deal that is put up for tender will be closely scrutinised in terms of the transparency of the bidding process and will be a test of the PPP’s probity initiative. And the DOTC, should it seek to produce a securitised financing, will be under the spotlight in terms of structuring and pricing any deal given the less than salubrious precedent of the MRT III financing.

“The Philippines is perceived as a very vanilla market when it comes to debt and there is still a comfort level to be reached when it comes to securitisation out of that country. But with the size of the project, and its position as a key asset in one of the world’s most congested cities, it looks like a viable candidate for at least a partial securitisation,” said a Singapore-based debt syndicate head.


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