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The Philippines as an investment destination 

The article is published in the July issue of the ISCA Journal.
The ASEAN infrastructure market holds huge potential over the next decade. An estimated US$60 billion is needed per year until 2022 to fulfil all the infrastructure needs in the region. The energy and transport sectors are expected to make up the biggest proportion of this investment.

With slow growth expected to continue in the mature markets of North America and Western Europe, more investors may choose to venture into the markets of ASEAN. While the operating environment in parts of ASEAN has traditionally been challenging, government reforms are now underway across the region with many countries updating their policy frameworks to attract investors.

For many governments in ASEAN, Public Private Partnerships (PPPs), with private finance used to help fund the cost of construction is widely seen to be a key ingredient in spurring the much needed infrastructure growth with government budgets for capital spending limited.

Many ASEAN countries have set up PPP units to oversee the implementation of PPP projects, but further development is needed to enhance the robustness of their frameworks. Multilaterals will continue to play a key role in providing the fuel for growth not only in terms of financing but also regarding advisory support.

While political stability in the region is on the rise, the next two years will be vital for affirming this. Elections are taking place this year in Indonesia and next year in Myanmar. There is ongoing political unrest in Thailand.

If these events pass peacefully, private capital may flow more readily into ASEAN where it is welcomed to fund the huge pipeline of projects being planned.

In this article, we will provide an overview of the infrastructure market and investment climate in the Philippines.

Key Observations

GDP Growth

The Philippines has seen an impressive improvement in its GDP growth rate, nearly doubling from 3.64% to 6.82% in 2011 to 2012. However, the growth in the fourth quarter in 2013 was limited by the impact of Typhoon Haiyan, which had disrupted exports and productive capacity in the Philippines. Nevertheless, the impact on the economy is expected to be small, with GDP growth expected to be sustained at above 6% until 2014.

The recent healthy economic growth can be attributed to the improvements in political stability and the introduction of fiscal reforms by the Aquino administration since 2010, which have improved investor sentiments and strengthened public finances.

Improvements in the business environment can be seen in the improved rankings from 148 in 2011 to 108 in 2013 in the World Bank’s Doing Business report. The Philippines’ domestic consumption is highly dependent on remittances from overseas Filipino workers which make up 8.9% of the GDP. These remittances inflows have proved to be resilient to a slowdown in global growth.

More importantly, the manufacturing sector, which led the 10.9% increase in industrial activity in 2013, is a key driver of GDP growth. Since the Philippine Economic Zone Authority (PEZA) was set up in 1995, the network of free zones has increased from 16 to 277 in 2012.

Half of the free zones comprise of IT centers, while manufacturing has 69 free zones. The burgeoning economic activities in these free zones have driven the economic growth seen in recent years.

Net FDI Growth

Overall, net FDI growth has seen an improvement, partly due to the government’s budget attracting substantial foreign interest. The Philippines’ equities market has generated significant bullish foreign activity, with the Phillipines Stock Exchange Index (PSEi) gaining around 96% between Jan 2010 and Dec 2013.

In 2013, FDI is expected to be significantly higher, with the first half of the year experiencing a 127% growth in FDI over 2012, with an overwhelming majority of 73% of investments in Q2 coming from the US.

Despite the improvements in FDI growth, Philippines has continued to lag behind its peers, with its 2012 US$2.8 billion inflows lagging behind Indonesia and Vietnam, which received US$19.8 billion and US$8.4 billion in inflows respectively. This is mainly due to existing limitations with caps on foreign ownership, restrictions on business activities and land ownership.

Restrictive Foreign Ownership Legislation

Philippines has generally fared poorly in the ease of doing business index, as its policies continue to be restrictive despite reform efforts to amend its closed-door policies. Its 60/40 foreign ownership law imposes an ownership cap on foreigners, with land and corporate ownership requiring at least 60% Filipino ownership.

The Regular Foreign Investment Negative list also restricts investment areas and economic activities from foreign investment and ownership, and this list was recently expanded in October 2012 by President Benigno Aquino III. Analyst observations reveal that only the retail and gambling sectors have been open up to foreign investors so far. In addition there seems to be a growing gap between the approved amount of investments and realized investments with the difference hitting about US$3 billion in 2012.

With the Government recognizing the importance of FDI to achieving a sustainable 6-7% annual economic growth, more policy reforms may be implemented in the short to medium term.

Opportunities for Greater Foreign Investment

Special export zones in Philippines, which allow multinationals to benefit from financial incentives such as six years of tax exemptions, as long as outputs are for export, provide great opportunities for enhanced business efficiency and investment returns.

Strong macroeconomic fundamentals in Philippines coupled with rising costs and political tensions in neighbouring countries are making Philippines an increasingly attractive investment destination in Asia.

Particularly, its available land and mining resources open up many opportunities to investors interested in renewable energy and mining investments.

Infrastructure Needs

When Typhoon Haiyan desolated the infrastructure of the Philippines last year, it revealed how fragile and patchy the country’s infrastructure was. In terms of infrastructure quality and competitiveness, Philippines is ranked 96th out of 148 countries, with a score of 3.40 out of a possible 7.

In order to sustain its growth momentum, the Government has said it needs to raise infrastructure spending from around 3% of GDP now to 5-7% of GDP annually. The amount of infrastructure investment required by the country is estimated to be approximately US$110 billion between the period of 2013 and 2020.

The Philippines Government announced it would be embarking on a PHP 184.2 billion (US$ 4.1 billion) infrastructure building programme. The scheme, to be implemented over a period of several years, will involve seven projects which will be undertaken together with the private sector under a PPP scheme.

The projects aim to build and rehabilitate vital infrastructure such as airports, light rail transits, hospital and others to improve the delivery of basic services and movement of trade.

Infrastructure Project Procurement Framework

Since the landmark BOT law in 1990, the Philippines’ major infrastructure projects have been largely procured using PPPs.

Based on a study commissioned by the Asian Development Bank, Philippines is ranked the highest in terms of PPP readiness in the ASEAN region, with its good overall legal framework.

In 2010, the BOT Centre was renamed the PPP Centre which is attached to the National Economic and Development Authority (NEDA), the main government coordinating and monitoring agency for the PPP Program.

As part of the Philippine Development Plan 2011-2016, PPP is being used as a strategy to accelerate infrastructure development, through the PPP centre as the main facilitator to encourage private sector participation.

In November 2013, the Philippine Government announced it would be embarking on a P184.2 billion (US$4.3 billion) infrastructure building programme. This consists of three rail projects and one airport, transport terminal, hospital, and water supply projects.

Of the seven projects approved by the NEDA Board, six will be undertaken through a Public Private Partnership (PPP) mode. Government support for PPP projects are provided in two forms:

  • Project Development and Monitoring Facility (PDMF): a revolving pool of funds that is made available to implementing agencies to fund advisory services for all stages of project development and capacity building.

  • Strategic Support Fund: a lump sum appropriation lodged in the budget of implementing agencies to fund the government share for PPP project components such as right of- way acquisition and resettlement. The amount must not exceed 50% of the total project costs.

This article is contributed by Roddy Adams, Head of ASPAC infrastructure market at KPMG in Singapore.