As Prepared for Delivery
Mr. Bert Hofman
Country Director, World Bank Philippines
Infrastructure Philippines 2010: Investing and Financing in Public-Private Partnership Projects
17-19 November 2010
The Manila Marriott Hotel
Pasay City, Philippines
The Philippines Government has taken significant strides in augmenting the infrastructure stock in the country. The country compares favorably to its neighbors in East Asia and other middle income countries in many infrastructure indicators, such as per capita electricity consumption, access to water and sanitation, and quantity of road infrastructure. However, the overall state of quality of infrastructure service delivery remains a concern and has emerged as a key impediment to the country’s economic competitiveness. The 2009/2010 Global Competitiveness Index of the World Economic Forum ranks the Philippines 98th out of 133. Business leaders rank “the inadequate supply of infrastructure” as the third most problematic factor for productivity in the Philippines, while in comparison, no respondents pointed to poor infrastructure as a source of problems in Malaysia and Thailand.
In particular, assessments of transport infrastructure network indicate quality is low and costs are high. While road density is comparable with countries in region, road quality compares less well, leading to higher land transport costs and high accident rates. Moreover, ports and airports are plentiful but the capacity is under pressure in some places, resulting in congestion and high costs, and in other places the issue is sustaining a viable operation with limited demand.
While electrification rates are above middle income country averages, major parts of the islands (especially outside Luzon) suffer frequent electricity supply interruptions; and electricity tariffs in the Philippines are some of the highest in East Asia. Outside Metro Manila, water supply systems suffer interrupted supply and significant pressure fluctuations.
Since the 1997 Asian financial crisis, infrastructure investment has dropped from a peak of 8.5% of GDP in 1998 to only 2.8% of GDP in 2002. This has improved in 2008 but the average rate still fall short of the 5% of GDP target suggested by the donor community for the Philippines and her neighboring countries for the past decade. Stepping up infrastructure spending in order to achieve the 5% target is undermined by inadequate public funding capacity, evidenced by a decline in tax revenues, an expanding share of non-discretionary spending, a relatively high public debt level, and significant principal repayments due on its external debt.
The World Bank, and may I say, the donor community, thus see the initiatives of the new Aquino Government to re-energize the PPP agenda as a promising signal of its dedication to resolve some of the most difficult country challenges. And we fully support this initiative. Private participation in infrastructure development, not only fills a critical financing gap for the Government, but also improves the efficient delivery of services. This has clear linkages to the country’s competitiveness and prospects for sustained growth. Moreover, we understand that the government has developed a list of priority projects that are aimed at improving the country’s transport infrastructure.
In Metro Manila, available transport capacity is unable to meet increasing demand and hampers the movement of people, goods and services. Some principal corridors already have high capacities but also exceedingly high traffic volumes. Different modes of public transport are characterized by low levels of service to commuters in terms of travel time, safety and convenience, and ease of transfers. The Light Rail Transport (LRT) network provides reliable mass transport service, but will need investments for the upkeep of rolling stock and additional capacity to match ridership, and extensions into suburban communities. Economic losses due to congestion in Metro Manila alone have been estimated to be around P100 billion a year in 1996 prices, or 4.6 percent of GDP. In other urban areas, congestion problems may be less severe compared to Metro Manila but rank among the most critical concerns of the residents. Population growth and motorization rates in these areas are now higher than in Metro Manila, and urban transport demand will continue to increase as the Philippines becomes one of the most urbanized countries in the region.
The Philippines has a rich history in involving the private sector in the financing, operation and maintenance of infrastructure services. The country’s experience in PPPs began in 1990 with the passage of a BOT law which pioneered a transparent and competitive bidding process that became the model for many countries in East Asia as well as developing countries in other continents. During the late 1990s notable achievements were realized in the Philippines PPP program.
Private participation was introduced in power generation with the introduction of private independent power producers, and in 2001 the power sector was unbundled and liberalized. Following the early success of its drive to encourage private participation in energy projects, the Government has pursued private sector investments in other sectors, namely railway, toll roads and water.
Altogether a total of 91 PPP projects were financially closed during this period accounting for an investment of $45.1 billion. Energy was the leading sector both by the number of projects and total investment. What is also remarkable is the extent of PPI in the water and sewerage sectors, where the two projects in Manila are the major constituents. In 1997, the Government successfully bid out to two operators for the concession of the Metro Manila Waterworks and Sewerage System (MWSS), which still today remains one, if not the largest PPP of public water utilities in the developing world. The 25-year concessions were developed with World Bank Group assistance and are still regarded as ‘best practice’ models for the concession approach. Value for money in these two projects was evidenced by the winning bidders providing water at an average supply price 57 and 27 percent below pre-concession tariffs, while meeting compliance standards and improving and expanding the system.
Important successes and pioneering initiatives are often coupled with some setbacks and the Philippines has not been spared. What is imperative is that we learn the right lessons from the past, and make the right decision to confront and resolve the big issues so we can move ahead with a strategic, competitive, and transparent PPP program, which I am confident the new administration is ready to do, and which the private sector both local and international is looking forward to become a part of. Moreover, the financial crisis of 1997 sharply halted much of the progress in PPPs and heightened the requirements for guarantees from both lenders and investors, particularly on currency risks. This severely limited the options available to Government in pursuing PPPs in the post crisis years. The most recent global crisis continues to place challenges to moving to the next chapter. Investors remain risk averse and today more than ever need greater assurances of a fair and transparent legal and regulatory framework. Guarantees against policy and regulatory risks are inevitable. While infrastructure projects have an inherent risk structure, there are certain risks that private firms will not be prepared to bear. Providing guarantees is one way the Government can give greater assurances to investors and lenders for participating in the program going forward.
The World Bank Group organizations have been long time partners of the Government in supporting the PPP agenda by offering a wide range of financial and non financial products. Principally, the Bank has done this in two ways; (i) policy advice, technical assistance and program lending to foster changes in the “enabling environment” needed to foster private sector growth and robust partnerships in the various infrastructure sectors; and (ii) credit enhancement instruments through the Bank’s partial risk and partial credit guarantees to strengthen the Bank’s catalytic role for mobilizing private capital financing to the infrastructure sectors. The Bank often is brought in an honest broker role and our involvement in PPP transactions brings and extra level of comfort to private parties. While I present the things that the Bank can offer, I know that ADB, JICA, Ausaid and other development partners have more or less similar products and services to assist the government in the PPP program.
In addition, through the IFC and MIGA, the World Bank Group supports individual infrastructure projects through direct lending and guarantees to private sponsors in addition to providing transaction advisory services to Governments for preparing, structuring and tendering them for bid. We have been supporting the preparation of several projects in the government’s priority list, and hope to continue to do so. We have also been providing advice to the government in developing its plans for the PPP agenda and have provided international experience on financing vehicles that have been useful in other countries around the world. One of our unique strengths is a cadre of Bank Group specialists that can be quickly called upon to provide advice on international best practices and cross-cutting knowledge. In this regard we have directly supported initiatives in most aspects of the Government’s PPP program in the past and are available to offer advice on new initiatives.
In moving forward we are prepared to work with the new Government in some important areas for accelerating its PPP program including:
- 1. The World Bank can offer 30-year loans also to Governments of middle-income countries and allows the borrowers to tailor their repayment schedule to address the specific needs of projects. Blended with private finance, these loans can greatly reduce amortization costs and the need to shore up tariffs to make projects viable. The use of such hybrid schemes is becoming more and more common in an effort to reduce the total cost of financing for poor communities.
2. The recent 10-year global Peso bond issue illustrates the progress made in mobilizing long-term and local currency financing. This is essential in PPP given the currency risk exposure through traditional FX financing. The Bank Group can mobilize long-term Peso financing through currency swap facility for financing projects that do not have the capacity to earn foreign exchange and as such are exposed to currency risks.
3. We can assist the Government for putting in place a “Viability Gap” facility that could support projects needing public subsidy support.We have been involved in designing a project with such a funding support, and how such a design could be applied to other projects should be very interesting. The objective will be to ensure that government’s financing support to a project will be ready in a timely manner acceptable to the private sector.
4. We also offer a wide range of guarantee and risk management instruments to stimulate private-sector investments. For example, for a concession agreement a World Bank partial risk guarantee can assure private sector investors that the concession terms would be honored. Otherwise they will be financially compensated by the World Bank, a AAA-rated guarantor. In short, we are increasingly taking advantage of the expanding market opportunities; and we are also trying to leverage, and better supplement, the growing private-sector capital flows.
5. We can assist the Government in structuring, marketing and tendering of model transactions, which are sustainable and bankable. The objective will be to ensure that there is a pipeline of transactions for private investment, and that these are attractive to investors and lenders, but also meet the Government’s policy objectives.
6. We can provide assistance in looking at emerging transaction models such as, hybrid PPPs structures, output based and performance based road contracts. The latter is a model that has been done in other developing countries, and could be adopted in the Philippines to allow private sector to be engaged in sustaining roads quality over extended periods of time. Moreover, developing PPPs in non-infra sectors could be an area where if there is a strong potential, support from development partners would materialize.
7. And finally there is a need to address the constraints at the local government level. Provinces and cities have their own demands for infrastructure, but tend to have serious limitations in the knowledge of PPP. Specialized assistance is often needed to address many of the gaps at their level.
The Bank Group is ready to work with the government and development partners in further developing some of these products and services to suit the objectives and requirements of the government’s PPP program. There is still significant work to be done, but as we can see from this conference, the helping hands are many.