Ghosts of Philippines' infrastructure past haunt PPP scheme


Posted at Nov 17 2010 12:05 AM | Updated as of Dec 09 2010 01:03 AM

MANILA, Philippines - Investors gathering at a Manila hotel this week to hear the Philippines president pitch for $17 billion of infrastructure projects can look out of the window directly at a symbol of the difficulties of doing business in the Philippines.

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NAIA 3 (airport terminal)

Concessionaire Piatco, with German partner Fraport, lost $1 billion in compensation claims after RP gov't and Supreme Court nullified the contract
South Luzon Expressway (SLEx) Consumer advocates and politicians have blocked a scheduled toll rate hike meant to cover investments made by Malaysian operator

The country needs private funds to upgrade its dilapidated infrastructure as it aims to reverse decades of decline and lift its growth rate upwards to 7% to 8% so that it can catch up with some of its Southeast Asian neighbours.

President Benigno Aquino is not planning a hard sell aimed at signing deals during the conference. Instead, he intends to project a more investor friendly image to try to overcome the country's lowly rankings in global business surveys and begin the process of lifting widespread investor scepticism.

But just out of the window from the hotel where the conference is being held, delegates can see an unfinished terminal at the capital's international airport that has come to embody the challenges of doing business in the Philippines.

It was supposed to open in 2002 but instead became entangled in a protracted legal dispute triggered when a new government came to power and had the contract reviewed. It was eventually declared void by the Supreme Court.

"We are looking at how to safeguard the interest of foreign investors," said Henry Schumacher, executive vice president of the European Chamber of Commerce of the Philippines.

"We still have Terminal 3 which is an unresolved big issue. It is a bit funny that the conference is going to be opposite Terminal 3, so foreign investors will say, 'hey man what is this?'"

Around 300 foreign and local investors have signed up for the conference to be held on Thursday and Friday, organisers say.

Investors have generally welcomed comments by the new president since he came to power in June that he will protect them and offer a level playing field.

Still, investors want to see real changes given the country's history of contract problems, corruption, flip-flopping policies and a sometimes inconsistent legal environment.

"Investors must have that trust that once you enter into contractual arrangements, these arrangements must be adhered to," said Neeraj Jain, the Asian Development Bank's country director for the Philippines.

"It needs to go that extra mile and create that credibility that I am taking the right actions, I am addressing taxation issues, I am assuring you as the investor that my policies are predictable... my judicial system will uphold your contractual rights."

A contract to build the terminal was awarded to Piatco, a cargo forwarding firm, by the administration of President Fidel Ramos in 1997.

The contract was amended under President Joseph Estrada's government. It was also at that time when Piatco partnered with German airport operator Fraport .

The facility was scheduled to open in late 2002. That year, another president, Gloria Macapagal Arroyo, sought a review of the contract, saying it was unfair and breached Philippine law.

Two years later, the Supreme Court ruled the contract void and the government subsequently seized the terminal.

Consortium members lost compensation claims before arbitration courts in Washington and Singapore, including on jurisdiction grounds, and appeals are pending. The terminal, mothballed from 2002 to 2008 due to the court cases, is only partly used.

Saying the right things

Infrastructure spending in the Philippines is less than 3% of GDP, below the average 5% of neighbouring Asian countries.

The government's spending abilities are tied up by a steep budget deficit and weak tax system, so it hopes to form partnerships for projects to build and upgrade roads, ports, airports, power and water utilities among others, with a priority list of 10 projects to be launched next year.

Rather than solicit bids, the government plans to use the conference to change the view of the Philippines as a faded star dragged down by corruption.

Aquino has promised investors a level playing field and to make it easier and less costly to do business. He has launched a high-profile campaign against tax evaders, smugglers and corrupt officials to shore up government revenues, although its effectiveness is yet to be seen.

A centre to promote public-private partnerships has been set up to ensure fast approval and processing of infrastructure projects.

"Everything will be done in broad daylight. There will be no backroom deals, midnight deals," Finance Secretary Cesar Purisima said. "We'll make it easier for them to do business in the Philippines as compared to the past."

Still, the government is trying to overturn years of scepticism among investors.

In another case investors cite as an example of the hurdles they face, Malaysia's MTD Capital Bhd , operator of the South Luzon Expressway connecting the capital to southern provinces, has been frustrated in attempts to implement toll increases.

The Supreme Court last month upheld the toll increases, which were due to take place on June 30. But it also referred them for review, declaring void and unconstitutional clauses in the contract covering compensation for the operator if the increases were not implemented.

"The toll increase is one that is worrying us... you have government or Supreme Court interference in the decision-making process for large infrastructure projects," Schumacher said.

Trailing on scoreboard

In the World Bank's "Doing Business" report, the Philippines slipped 4 places to 148th out of 183 countries; Thailand was 19th and Vietnam was among the top 10 pro-business reformers.

The Philippines ranked 85 out of 135 countries in the World Economic Forum's Global Competitiveness report, and Transparency International's corruption index has it 134th of 178 nations.

Unlike Vietnam and Indonesia, the Philippines did not make it to the United Nations Conference on Trade and Development's top 20 priority foreign direct investments (FDI) destinations for global firms -- and it shows.
FDI flows were $1 billion in the 8 months to August, down 38% from year-ago levels. In 2009, FDI reached $1.95 billion, central bank data showed, way below Vietnam's $7.6 billion and Indonesia's $4.9 billion.

Bankers say the Philippines now has a chance for a fresh start with investors following Aquino's initiatives.

"If you are looking at investors right now, they have a good feeling, there is a new government, everyone is optimistic, there's been a programme that's been announced... but there is still a lack of track record," said Benjamin Gilmartin, a member of the HSBC's financing solutions team in Kong Kong.

"Once they launch the first few projects off of the programme, the bidding goes smoothly, contracts are awarded, construction starts, it builds its own momentum that those who haven't been involved will say, they really are able to deliver what they want to deliver."