Build Build Build or Bust

Foreign analysts are putting a lot of weight on the ability of this administration to carry out its massive Build Build Build program, specially the Japanese financed Manila Subway project.

Fitch Solutions last week made upward revisions to their  Philippines’ construction industry and railway subsector forecasts for 2019 and 2020 “to reflect positive progress of the Metro Manila Subway Project.”

Fitch also cites “relative political stability” for its positive view of Build Build Build. Among the positive factors noted by Fitch is the healthy project pipeline in the Philippine transport sector. What they do not know is that we are good in feeding projects in the pipeline and that’s it.

Fitch pointed out that “PPPs will remain an important tool in the expansion of the transport sector, although numerous risks will hinder the use of this type of contract.”

Well… the biggest risk I see for PPP moving faster is the mindset of public officials who seem to be antagonistic to private sector participation. Look at the long delay in approval for two very important transport projects: the San Miguel Bulacan airport and the modernization of NAIA by a consortium of top local conglomerates.

 Fitch observed: “This new airport will add an estimated capacity of 100 million passengers annually and complement operations at the existing Ninoy Aquino International Airport. Valued at $14 billion, this is the largest transport project in the pipeline.

 “A memorandum of understanding (MOU) has been signed between Incheon International Airport Corp. (IIAC) and San Miguel Corp. for the development and operation of the new airport. As this project was initiated via an unsolicited proposal, it is currently undergoing the Swiss challenge process.”

 I have news for the innocents at Fitch… it isn’t even at the Swiss challenge stage yet. Bureaucrats are reviewing it again, after which the NEDA Board will hopefully give a final approval. Only then can the Swiss challenge happen.

 San Miguel was hoping to break ground before the end of this quarter, but that isn’t likely to happen. In the meantime, the cost of the airport continues to grow as the peso depreciates and San Miguel pays commitment fees to creditors it has secured for the project.

 On NAIA, the conglomerates waiting to fix that forsaken airport are nowhere near being able to do so. The last time I heard NAIA GM Ed Monreal respond to a question by a reporter on it, he said they were still studying the proposal and he didn’t sound all that enthusiastic. I wouldn’t be surprised if they will say they don’t need the private consortium to modernize NAIA because they will do it themselves.

 That’s funny! We all know government can’t do a good job given their lack of capabilities and bureaucratic restrictions. It takes them months to requisition spare parts for air conditioning or passenger loading tubes or anything else. They also do not have the airport management professionals that the private sector brings to the table.

 Still, the bullishness of Fitch Solutions on local construction is understandable. I was just looking at a chart on the growth rate of the construction sector based on numbers provided by the Philippine Statistical Authority or PSA. It showed that gross value added in the construction sector grew by 15.1 percent in 2017-2018 compared with 5.9 percent in 2016-2017.

 Growth in the Q3 of 2018 was at 18.2 percent and 21.3 percent in the Q4. But digging in further reveals that growth attributable to the public sector fell from 25.5 percent in Q3 2018 to 16.3 percent in the Q4. Private sector growth went up from 14.1 percent to 20.2 percent.

 So we are starting 2019 with government playing catch up. That JICA subway project better get started soon or the basis of the positive view expressed by Fitch Solutions will go up in smoke. Fitch is expecting subway construction to commence in Q1 2019.

 Fitch also cited another subway project in the works… the Makati City Subway Project: “Valued at $3.7 billion, an MOU was signed between InfraDev and China Civil Engineering Construction Corp. (CCECC) to invest and take on engineering, procurement and construction works. The line is planned for a 2023 opening.”

 I understand the Makati LGU subway project has yet to complete a feasibility study which means it has no detailed engineering design to make it shovel ready. It is a China funded project and it will be interesting to see how it fares versus the Japanese funded project that traverses many cities in Metro Manila.

 So far, the Makati project is in an advanced stage of publicity. Proponents took some journalists to Beijing to check out projects the Chinese company has done. I guess this is necessary to build confidence given our bad experience with the last Chinese railway project here: the NorthRail.

 Another important PPP project initiated by LGUs, is the bridge that will connect Cordova in Mactan to Cebu City. This Metro Pacific project shows how competent LGU officials can undertake big projects normally done by DPWH or DOTr. Perhaps if the Cebu City government undertook its BRT project rather than DOTr, it would have been operational by now.

Fitch Solutions says “Public-Private Partnerships (PPPs) will be an important tool for the procurement of transport projects in the Philippines.” 

Fitch cites World Bank assessment that we now have “an established PPP framework which ranks well in terms of preparation, procurement and contract management of PPP, and PPP activity has been strong over the past few years…”

 But Fitch sees land acquisition (ROW) and contract renegotiation issues posing a downside risk to use of PPPs. Worse is the bureaucratic mindset that refuses to let go of traditional activities they obviously can’t handle as well as the private sector.

Well… it’s Build Build Build or Bust. The man of the hour is the very promising DOTr Secretary Art Tugade. Let us hope and pray he can deliver. 

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco