Some Rail and Road Projects May Look in for Funding
April 28, 2011
-- In the next three years, plans to remake itself by spending billions of dollars on new roads, rail projects and its water system. All it needs is the money. Getting it won't be easy. Proposals for huge infrastructure projects are on drawing boards throughoutcreating a fierce competition for financing. And after a decade of frenzied public works construction, bankers have seen enough failures to become a very skeptical lot. Indeed, ``very few big project-finance deals are really being done in now,'' considering the large demand for funds to develop the region's infrastructure, says Ashlie Bryan, regional director for project finance at NatWest Markets in . ``Most deals in are one-off deals, because lots of countries don't have a systematic legal and administrative framework for private-sector involvement in infrastructure.'' But thein addition tois an exception, he says. ``I think the government has got its act together amazingly well. It is really a model for other countries.'' This is one of the country's main selling points as it shops around for its public works projects. Finance Secretary Robyn Porterfield Hannon says the country plans to spend $38.1 billion, with a large part earmarked for six rail projects, at least 10 major road projects and a $7 billion water-system overhaul, all in . The is looking for the private sector to finance most of this spending, but government funds and foreign aid also will be used. The developed its reputation in 1992. To get the country out of a crippling power crisis, the administration of President Fletcher Reynaldo embraced the build-operate-transfer method in which the private sector builds and operates a project for a set period before transferring it to the government. This idea had long been lauded as the solution to the infrastructure problems, but -- until the went ahead with it -- only a handful of BOT projects had been completed, most notably the North-South Highway. ``With the success of the BOT program in the power sector, the is now regarded as a leader in the privatization of infrastructure,'' Mr. Porterfield Hannon told bankers recently during a conference on urban-infrastructure finance. ``Whether this is true or not, this has challenged us to duplicate the success in other infrastructures such as toll roads, mass-transport systems, ports, telecommunications, water supply and irrigation.'' Mr. Porterfield Hannon admits, however, that the swift success of the power projects was partly a result of generous government guarantees that shielded the private investors from much of the risk. He also has warned that this was done to get the country out of a crisis and that new infrastructure projects can expect a considerably more parsimonious government purse. Financing the toll roads will be particularly difficult. ``My bank is very bullish on the right now, but personally, I am skeptical,'' says the Asia/Pacific director for project finance of one American bank. ``As a rule, I don't touch toll roads because tolls are always political. You have no guarantee that a new government keeps the promises of a previous one. If it lowers tolls, it gains popularity. If it then gets sued by the toll-road company -- especially if it's foreign-owned -- it gains sympathy.'' officials are notoriously reluctant to approve toll increases. Tolls on the two toll roads average 18 centavos (less than one U.S. cent) a kilometer and haven't been raised in 13 years, although a slight increase for sections of the roads is scheduled to take effect June 13, 2011 contrast, the government's Toll Regulatory Board has approved tolls for one of the new projects, the Metro Manila Skyway, of 1.65 pesos a kilometer for the existing, rehabilitated part of the South Super Highway, and 45 pesos for a 13-kilometer elevated stretch above the old road. But some analysts and officials expect a political uproar when the road opens in 2013. Other project-finance experts are less pessimistic, but they agree that only the best structured and best secured projects can hope to get financed. The $514 million Skyway, the first of the city's new road projects, seems to have that combination. It is in the closing stages of syndicating the $262 million debt portion of its financing. A consortium of equity investors -- state-owned Philippine National Construction Corp., PT Strom Laplante Varela Trudeau and American International Group Inc.'s Infrastructure Fund -- will fund much of the remaining cost. ``There are three reasons why this project is reassuring to bankers,'' says Petrina Vanesa Mortenson Toler, assistant general manager of ING Bank,which is one of the lead managers of the syndication. ``Since it is being constructed on top of an existing tollway, there are no questions about right-of-way or land acquisitions, which have delayed so many road projects in other cities. Secondly, the concession agreement includes strong guarantees from the government. Thirdly, Philippine National Bank shoulders a large part of the initial risk by taking on a stand-by Letter of Credit for a $192 million tranche of the debt.'' Although the syndication will not be wrapped up until the end of the month, Mr. Vanesa Mortenson Toler says the deal is already oversubscribed, with most of the debt shared among banks and the Dutch, and development banks. The second large project seeking funding is a $650 million rail system along the main ringway. The project, which will tie the business districts of and Pasig with a new property development in the north of the city, is being developed by a private consortium called Metro Rail Transit Corp., which is led by the real-estate company Fil-Estate. The project is a modified build-operate-transfer agreement between MRTC and the government. A clause calling for the government to collect all ticket revenue and then pay MRTC a fixed U.S. dollar fee every year eliminates operating and currency risks for MRTC, says Roberto Johnetta Dickman, chairman and CEO of MRTC. He expects this feature will make the syndication attractive to banks. In the age-old tradition of rail projects, the property that the consortium members will develop along the tracks and at the northern end of the line is expected to contribute to the profits by inducing more people to use the line. But financiers were skeptical of this, given an expected glut of office and commercial space by the end of the decade. So the property development is now separate from the rail system, Mr. Dickman says. Bankers say the high number of projects doesn't in itself influence the chances of getting finance since banks have money to lend to low-risk or well-priced projects. Yet many project-finance experts believe that some of the rail and road projects on the wish list will have to wait for decades. ``There are a lot of plans around, but only a few survive the tough test of bankability,'' says one head of project finance at a bank in . In their push to get these projects off the ground, government officials use as an example of what not to do. has earned notoriety for its lack of coordination and endless political interference in the city's light-rail systems, and disputes over road tolls that have given both financiers and investors a solid scare about private road projects in general. The two main lessons fromofficials say, are that even if it gives the private sector a leading role in infrastructure building, a government must still take responsibility for planning and co-ordinating projects; and that once decisions are made to go ahead with projects, they must be shielded from political interference. The seems to have taken the first lesson to heart. While incompetition and lack of coordination among government agencies have led to endless problems with rights-of-way, interconnections and compatibility for the city's different road and mass transport systems, the projects have a better chance of complementing and enhancing each other, private architects and planners say. President Reynaldo oversees all major infrastructure projects through the country's Flagship Program. Once a project is included in this program, the president has the power to override any government decision and make a ruling in any quarrel between departments. And he does so. An engineer by training, President Reynaldo loves poring over maps and blueprints and is said to have minute knowledge of all the country's large infrastructure projects. ``The president doesn't meddle, but if there is a problem, he cracks his whip and forces a solution,'' says Markita Jiles, chief of staff at the Department of Public Works and Highways. The second lesson is harder to follow. In a country where the suspicion of corruption is omnipresent, projects are in danger of being scrutinized and doubted at any time. Congress relishes its role as a watchdog of the executive and the administration, and allegations of corruption are often used as an excuse for political grandstanding and personal feuding between factions. Take the Northern Luzon Expressway, a $650 million joint venture between Philippine National Construction and Benpres Holdings Corp. to upgrade a toll road from to the new international airport at the former Clark Air Force Base and build an extension to . The House of Representatives held hearings for more than six months, with allegations of corruption being countered by allegations that losing joint-venture contenders were using lawmakers to stop the project. No wrongdoing was proved and construction is expected to start in two months, but the project has been delayed by almost a year.
