Carlos ‘Sonny’ Dominguez, the finance secretary of the Philippines, cannot be accused of a lack of ambition.
He announced a series of optimistic economic targets almost as soon as taking office in the government of President Rodrigo Duterte. He has consistently criticised the former administration of Benigno Aquino for failing to do enough to lift the country out of poverty. He has attempted a wide-ranging — and politically difficult — tax reform bill that will cut income and corporate taxes while raising taxes on fuel and removing some consumption tax exemptions.
But even for a politician as pugilistic as Dominguez, his latest move is remarkable: Dominguez unveiled what he calls “the golden age of infrastructure”.
Infrastructure has been a major talking point for Dominguez since he took office in June 2016, but at the ‘Dutertenomics’ conference in April, he added some meat to the soundbites.
This includes a commitment to spend as much as 7% of gross domestic product on infrastructure by the time Duterte leaves office, compared to an average of just over 2% between 2011 and 2014, according to estimates from the Asian Development Bank.
Perhaps more importantly, Dominguez appeared to pull the rug out from under a key infrastructure policy of the previous administration — the public-private partnership (PPP) programme.
PPP was arguably the signature policy of Aquino, a man with a reputation for careful deliberation. The idea of using private capital to fund public projects is common, but Aquino was widely criticised for moving too slowly to push projects over the starting line.
Dominguez has torn up the old script. The government will now fund as many early-stage infrastructure projects as it can, filling the gap with overseas development assistance from Japanese and Chinese institutions, as well as big multilateral lenders such as the Asian Infrastructure Investment Fund. Given the desperation of Japanese lenders to get anything but the paltry yields on offer domestically, he could have picked few better times to ask for their assistance.
The move is widely seen as a positive step for a country that faces a huge infrastructure burden. But by leaving the private sector out of early-stage infrastructure projects, Dominguez has also ensured a much smaller role for the company’s bank lenders and capital market investors.
At least for now.
State of repair
In the truest sense, there has been limited infrastructure financing in the Philippines. The idea of project financing being a limited recourse loan provided to a special purpose vehicle — as applied in Europe and the United States, for instance — has not taken off in much of Asia.
Instead, Philippine banks have tended to make conventional loans to corporations, who then use that money to fund their projects.
“Infrastructure has ultimately been funded by Philippine conglomerates selling debt to their financers, who just look at the top level of the group,” said Thomas Jacquot, head of Asia Pacific infrastructure ratings at S&P Global Ratings. “It is the simplest form of infrastructure financing.”
There has also been at least some attempt to get the bond market more involved. The Philippine Dealing and Exchange Corporation, a major fixed income exchange, has had talks with the Securities and Exchange Commission about allowing the listing of projects bonds, which could bring retail investors into the market. There is also some hope that institutional investors can play a bigger role.
“Insurance companies are becoming more interested in project bonds because of duration,” said Reggie Cariaso, co-head of investment banking at BPI Capital. “It will eventually develop into a very interesting pool of demand for project finance bonds.”
This is a long-term hope. But insurance insiders told FinanceAsia greenfield projects were still too risky for them to invest, both in Philippines and elsewhere. This gives extra weight to Dominguez’s argument that it is time for the government to step up. So far, the deal flow in the bond market has been limited.
The Asian Development Bank took a big step forward last year, providing a 75% credit guarantee to a subsidiary of Aboitiz Power that helped the company sell a $225 million green project bond in the domestic market.
That was an innovative deal and one that appeared to show there was — at the very least — a role for the Philippine peso bond market when it came to infrastructure financing. But a closer look challenges that assumption.
BPI managed the bond, and ended up taking the entire deal onto its own balance sheet, according to its rivals. That should not be taken as a sign that the bank could not find investors for the deal. More likely, it was more than happy to keep the exposure for itself. But the move should raise doubts about the chances the bond market will be able to step into the breach.
These doubts grow when you consider the tiny size of the Philippine peso bond market. Imagine the ADB was willing to provide a similar guarantee on every project in the Philippines. Imagine further that every corporate bond sold in the Philippines was replaced by one of these infrastructure deals. Would that help? Not much.
According to ADB data, there were P891 billion ($18 billion) of outstanding corporate bonds by the end of 2016. Dominguez has previously said the Philippine government wants to spend around P8 trillion on infrastructure before its term ends in June 2022. In the absurd event that every bond outstanding in the country was being used to plug the infrastructure gap, the country would barely be 10% of the way there.
There are even bigger problems when you consider the viability of projects. Those projects that have an easily identifiable, reliable income stream — toll roads, for example — tend to attract much more private capital. But projects with social or long-term economic benefits, such as those that would improve the environment, are much harder to market to private investors.
In this context, bankers and analysts agree that the Duterte administration has little choice but to take some of the extra burden itself. And after Aquino’s torturous experience with PPP, it should perhaps come as little surprise that teaming up with the private sector is no longer the lynchpin of Philippine government policy.
Back in business
At the Credit Suisse Asian Investor Conference on March 29, Dominguez spoke to a mix of investors, bankers and journalists about his plans for the country. He announced a plethora of projects that the country planned.
When asked exactly how much PPP would make up as a portion of the government’s infrastructure plan, he did not give an exact figure. But he did draw a sharp contrast with the Aquino administration, pointing to the example of a PPP project for a four-kilometre road.
“If we can’t do that ourselves, we should be out of business,” he said.
Dominguez said that when the government does turn to private sector companies with a PPP bid, it would be at the operational, maintenance, and monitoring (OMM) stage. “But to get the projects going, we will start them ourselves,” he said.
The long gestation period of infrastructure projects means it may be several years before the private sector — and as a result their financiers — are brought in to help. But even senior bankers in the country are taking the news on the chin.
“The role for the capital markets is going to be nil,” said Eduardo Francisco, president of BDO Capital and Investment Corp. But he stressed — as did other bankers interviewed by FinanceAsia — that the long-term impact was going to be good for everyone in the country.
“We are now going to be shut out for the next four years,” he said. “There’s going to be no private sector involvement, until they bid these projects out for OMM. But that’s [speaking] as a banker. As a Filipino, I don’t care whether it is ODA or PPP. It’s more important that things get built.”
Bankers are also stressing the long-term benefits for the country’s banking system and capital markets. By improving the country’s infrastructure, the Duterte administration will ensure a long-term boost in financing opportunities, bankers argue. That may come in the form of conventional loans to construction companies — a direct response to the infrastructure need — but it should also lead to a broader rise in financing needs, simply due to a boost in economic activity in the country.
Philippine lenders can also look forward to a financing boom when new projects do reach the OMM stage, at which point private sector bidders will be invited to take over. Some bankers think there may even be room for earlier involvement from private companies.
“The government will prioritise what to fund directly,” said Eduardo Olbes, head of wholesale banking at Security Bank Corporation. “The private sector will cover other opportunities in turn — and the banks will have a major role to support both public and private sector funding requirements through capital markets and [their] own balance sheet initiatives.”
For now, though, bank lenders and bond investors are unlikely to play a major role in the Philippines’ latest infrastructure push. But if Dominguez can make good on his promises, few will complain. In the long-run, everyone will be invited to the party.
