When it comes to playing rivals off against each other, Philippine President Rodrigo Duterte has not only won the headlines but more importantly a good proportion of foreign direct investment budgets. In the last year alone rivals Japan and China have committed multiple billions towards Duterte’s “Build, Build, Build” infrastructure policy.
As the EU and the US reduce foreign direct investment into the Association of Southeast Asian Nations (Asean) region, enter stage left: Japan and China. Since mid 2017, Chinese President Xi Jinping has signed at least $15 billion worth of deals with his Philippine counterpart, whose relationship with China is far warmer than that of his predecessors. In September last year Japan offered up $6.7 billion in foreign aid for the Metro Manila Subway Project alone – the first of its kind in the Philippines, and one badly needed to solve the capital’s chronic traffic gridlock.
There is a distinct lack of transparency about how these deals were arranged and what is expected in return for them. Ostensibly they appear to be just financing related, but it’s natural to assume the respective governments will want to export their infrastructure-related services alongside it. With at least 150 projects signed or under way in the country, there should be plenty of business to go around but despite the billions of investment dollars pledged by the Asian economic powerhouses, it is not clear who will get the work done.
As part of the Belt and Road Initiative, Chinese engineers and contractors are reportedly ready to pounce on all the available work to support the Philippines’ projects. However, FinanceAsia believes they will have to exercise restraint. Despite government reforms designed to attract foreign aid, problems of politics, bureaucracy and lack of technical and local expertise will all influence how quickly the money reaches the hands of those responsible for doing all the hard work.
Take government procurement for instance. On the back of years of vocal criticism about the contracting processes it employed, the Philippine government overhauled its procurement law in 2016 to improve transparency, and increase competition and accountability.
“What might sometimes be lost in translation is that solicitation for business [off the back of government bilateral agreement] won’t immediately translate into business for [foreign] companies. The Philippines procurement process has to be transparent, open and fair” a senior government official told FinanceAsia during the inaugural Belt and Road Connected: Invest Philippines conference, which took place in Manila on January 30. As the event was held under Chatham House rules, FinanceAsia is not naming individual speakers.
This comment holds true… to a point. The Government Procurement Reform Act does not cover public private infrastructure or development projects outside of the portions explicitly financed by the Philippine government. It also does not cover infrastructure projects and consulting services “funded from foreign grants… unless… agree[d] otherwise”.
The above caveats are designed precisely to attract foreign governments and the private sector to the table. But the fact they do so raises another important problem: namely the risk of scaring off the local Filipino companies from bidding for infrastructure contracts. Senior executives working for Philippines’ construction and engineering companies tell FinanceAsia they are now reluctant to invest the substantial sums required simply to bid for a government contract, especially if their chances of beating a Chinese or Japanese bidder are slim. Where they really need procurement transparency, they still have none.
Given the rate of actual and proposed infrastructure development in the country this friction is the last thing the government needs. In fact, with so much infrastructure activity lined up the bigger risk is that there will not be enough local construction expertise in the market to support demand.
“Too few skilled domestic contractors are operating on too many projects,” said the CEO of a large Philippine construction company. “If one goes down, then how many of us could be affected at the same time?”
Technical skills required
The natural conclusion of this is that foreign subcontractors would find opportunity in the country. However, they lack the required level of expertise and understanding of nuances of the Philippine way of doing business. This means top Filipino contractors are holding off accepting their solicitations.
“The increased interest is welcome, but we have yet to accept [Chinese] help,” the CEO said. “The level of technical understanding is not there yet.”
This technical shortfall is largely down to a lack of exposure to the country. Despite deepening bilateral ties between China and the Philippines during the early 2000s, under the presidency of Gloria Macapagal Arroyo, China’s historic investment into the country has been anemic at best – there simply isn’t the track record that the private sector requires to quantify the risks of doing business with Chinese parties.
Source: Nomura
Cultural battles
When asked why Chinese FDI into the Philippines was historically low, a Chinese private equity investor with investments in the Philippines told FinanceAsia: “It’s a difficult question to answer. There does seem to be an issue between the two countries working together. Maybe it’s cultural. Maybe the influence of the US still holds strong for many.”
At the highest political level, Duterte has worked hard to build strongs ties with China - his willingness to take an easy line on the disputed water of the South China sea is proving to be a successful method of currying favour with president Xi, for example.
However, political fumblings of the past have also slowed FDI into the country. For example, a member of Arroyo’s administration badly handled negotiations with the Industrial and Commercial Bank of China when negotiating the opening up of operations in the country, according to EastAsiaForum,
Having almost reached an agreement to open bank branches, which would have deepened financial and technical ties between the two countries much earlier, the Philippine exec requested the government take equity in them. This was duly rejected and discussions subsequently broke down.
For now, the Chinese bank still have limited exposure into Philippines and few Chinese companies are operating in the Philippines. With the notable sums of government bilateral money being offered around, this will undoubtedly change. Money talks, and that money is right now talking in Chinese and Japanese.
However, money can only go so far when it comes to the world of greenfield infrastructure development. If China (or Japan for that matter) expects to immediately win the lion share of infrastructure-related business in the Philippines it may be in for an unpleasant surprise.
