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Asia Business Law Journal: "Build or Bust?"

Published: Sep, 2017  -  Philippines



In its flagship report entitled Global Economic Prospects released in January, the World Bank observed: “The Philippines is particularly weak with regard to transport and trade-related infrastructure … with particularly low rankings for the quality of its seaports and airports. About one-quarter of the population remains without electricity.”

Yet growth in the Philippines is projected to accelerate to 6.8% on average from 2017-2019, making this nation one of the true tiger economies of the region. Its credit rating at Baa2 is stable, unemployment (6.1%) is comparatively low and poverty rates are falling, though they still average above 20%.

So how can this state of affairs be possible? What has been impeding an expected improvement in the quality of life for its people via the need for obvious upgrades to infrastructure? As is often the case, legal bottlenecks are partly to blame, as is the political will to change.

Enter Rodrigo Duterte, maverick populist, some would say sinister overlord, a leader in the mould of a Trump or LePen. At 71, he is the oldest person to assume the presidency, and a lawyer and Davao City prosecutor in another life. When he’s not flashing his badge on drugs, death penalties and other justice initiatives, Duterte has made it clear infrastructure is a priority.

At one instant a pivot to China and a quick ingratiating visit gleans more than US$20 billion in project pledges and aid, while at another a stroll down his home town streets in casual gear with Shinzo Abe is followed by a cabinet-led delegation and announcements of US$17.2 billion from Japan to upgrade transport and power projects. In the infrastructural mix for the Philippines, politics is for the moment an integral player, and there are many directions that legal solutions can take.

“Their slogan now is ‘build build build’. That’s the message,” says Eusebio Tan, a senior partner at ACCRA Law Offices in Manila.

But while the mantra from the government (via its Transport Secretary) is the declaration of a “Golden Age of Infrastructure”, the catchcry from many of Manila’s top law firms has been “Let’s wait and see”. And unfortunately in the Philippines there has been much more waiting than seeing to date.

“To give you an idea, if you are a solar power company and you are a foreigner wanting to invest here, to get your project up and running you’ll need 6,000 signatures, from the time you come in,” says Manolito Manalo, managing partner at Ocampo & Manalo. “That is based on a study from our own Department of Energy.”

The impression from law firms is that while the previous administration did some solid work, very few projects came into being. But fresh blood may make the difference.

Christopher Stephens, the general counsel at the Asian Development Bank (ADB) at its head office in Manila, says the new administration has its own ideas and developmental priorities, highlighted in the government’s Philippine Development Plan (PDP) 2017-2022, but those needs share a common emphasis with the prior administration on infrastructure – power and transport, better water systems – the usual list.

“But the new administration has emphasized infrastructure that will attract investment, generate jobs and spur economic growth, and they’ve been very engaging,” says Stephens. “The early signs are they are more engaged and more focused on some of this, at a more granular level, than the last group. It’s refreshing to meet with a group that says ‘we’ve looked at these projects, we’ve looked at their obstacles, and this is what we’re trying to achieve, and here’s how we think you can help’. This is enormously helpful for us.”

Stephens says the ADB’s country operations business plan (COBP) for the Philippines for 2017-2019, agreed with the government, aligns with the government’s emphasis on infrastructure development in the Visayas and Mindanao, while also supporting national programmes including:

Sovereign lending of US$4.2 billion, largely focused on infrastructure, including climate-resilient projects;
Technical assistance (advisory and capacity-building) of US$9.3 million, emphasizing good governance and finance, employment, education, and regional integration, notably the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area;
The ADB will in addition separately promote non-sovereign (private sector) investment, particularly in public-private partnerships (PPPs);
The bank will also emphasize transport (e.g., Manila bus rapid transit; Davao public transport modernization), roads and road improvement projects in support of the administration’s traffic and transport priority.
“They’re looking at a lot of transportation and that will help alleviate traffic congestion and also open up and connect poor and rural areas of the country, and particularly help rural farmers and manufacturers move goods into urban centres and markets where they can distribute or export,” says Stephens. “It would be an enormous lift.” Stephens says increasingly the ADB is looking at ways to incentivize private investment, both to support companies’ growth and employment, and to engage the private sector in infrastructure finance and operations. “That’s one of the ways that the Philippines has got a good jump. They’ve been looking at PPPs since before I came to Asia in 1996, and they’ve got among the best PPP centres in terms of understanding how PPPs needs to work and how to design projects that are attractive to private sector investors.”

PPPs are a hybrid of sovereign-private participation but infrastructure is traditionally a sovereign function, so the PPP is an effort to design projects to attract private sector financing, technology and operations know-how to public services.

The new broom

Julius Cervantes, a partner with Quisumbing Torres (a member firm of Baker McKenzie International), says he is optimistic about what the new administration can achieve. “The fact alone that they have made their intentions clear is something we have not seen from past administrations,” he says.

“I also have some reservations, but I won’t be too hasty to say something should have happened already. Some quarters have expressed concern with his [Duterte’s] experience internationally. I think he has made clear that he will leave things he is not good at to other experts, he has a good cabinet, generally trusted, and a good economic team. I think this administration can do great things for the infrastructure sector.”

Andres Gatmaitan, senior counsel at SyCip Salazar Hernandez & Gatmaitan, agrees the new administration is giving priority to infrastructure projects and shows more promise than previous governments. “It’s a turning point,” he says. “I read where NEDA [the National Economic and Development Authority] announced it has lined up 15 big-ticket projects for loan financing.

“Priorities were quite different in previous administrations, and infrastructure projects lagged behind in terms of priority. This administration has to raise the funds for these projects, which is why they are going to present comprehensive tax reforms this year to both houses of congress. They are proposing to raise taxes on petroleum products, so-called sin products [tobacco and alcohol] and automobiles, but they plan to reduce, somehow, individual and corporate income tax. They will then use the revenue directly on infrastructure.”

According to Alex Fider, the managing partner at Picazo Buyco Tan Fider & Santos, every new administration brings new hope that things will be better. “The previous administration started big with initiatives, and opened up a lot of projects, from airports to toll roads and power projects,” he says. “The problem is not too many of these projects were completed. With the new administration there is hope that these incomplete projects will be pursued, and further hope that they will be more open to more private participation. We still have to see.”

Manalo at Ocampo Manalo says that most in the business sector were not in favour of Duterte becoming president, but notes he is undeniably very popular. “There was clearly a mandate,” he says. “We knew some of his promises were probably not doable, but there were some that had a sound analysis, and some of the people he appointed were very reasonable, with solid reputations. There is still a considerable amount of frustration, though, that drugs and extrajudicial killings are so far the main focus of the administration.”

Roderico Puno, the managing partner at Puno and Puno Law Offices, is cautiously optimistic. “Because we were talking about major deals, rail and airports, it has to be now,” he says. “Roads has been going forward, but not that many [projects] are being made available. The need has to do with public transport and rail.”

 

Read the article online.

 

Andres G. Gatmaitan is senior counsel at SyCip Salazar Hernandez & Gatmaitan. Mr. Gatmaitan was part of the team that represented a consortium of foreign and local companies in the first PPP mass transit project in the Philippines (EDSA MRT project). He represented Asian Development Bank and other lenders in a joint venture with the Philippine government for the rehabilitation and expansion of the North Luzon Expressway. He is part of the team that advises the MPIC-AC consortium for the LRT1 capacity expansion project.

 

Angel M. Salita, Jr. is a partner in SyCip Salazar Hernandez & Gatmaitan. His expertise is in special projects (including power, energy, oil and gas, telecommunications, water, construction, BOT, and other infrastructure laws), project finance, acquisition, investment and banking. Some of the projects in which he was involved are the Hutama-RSEA''''''''''''''''s $370M construction contract with CMMTC for the Manila Skyway (Phase I and Phase II), NTT’s investments in PLDT and Smart, and Meralco PowerGen’s investment in RP Energy.


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© World Services Group, 2017