Philippine Investors Pin Infrastructure Hopes on ‘Man of Action’

Under Benigno Aquino, public-private partnerships were cynically referred to as power-point presentations due to a lack of progress in building roads, rail and power plants.

Investors are betting Rodrigo Duterte, who took over as president on Thursday, will be able to make speedier progress than his predecessor. Seven of the top 10 performers on the Philippine Stock Exchange Index since the May 9 election are utilities or conglomerates with major infrastructure components. Aboitiz Equity Ventures Inc., which invests in electricity, has surged 23 percent and Metro Pacific Investments Co., with water and power units, is up 20 percent.

Duterte, the firebrand former mayor of Davao City, has said he intends to ramp up infrastructure spending to 5 percent of GDP, from 3.2 percent under Aquino. Only a dozen PPPs worth $4.2 billion have been awarded since 2010 and Aquino handed his successor a list of 50 such deals to speed growth in the nation with the lowest infrastructure quality among Southeast Asia’s emerging markets.

“Duterte’s character as a man of action is making a lot of people expect that he will make infrastructure projects move faster, unlike the previous administration,” said Nescyn Presinede, a trader at Rizal Commercial Banking Corp. in Manila. “There is a growing sense that using his accomplishment in Davao as a gauge, he will not let bureaucracy stand in the way.”
Aquino had success in narrowing the budget deficit, winning credit-rating upgrades and boosting economic growth to the fastest in Asia apart from China. But he struggled to overcome bureaucratic and legal hurdles, such as right of way for toll-road projects, to get more infrastructure built.

Political Will

The government signed a law in March to address the right of way problem and the Public Private Partnership Center, a public agency, is working on a PPP bill to minimize risks for investors, improve transparency, and create a fund for unexpected costs in cases where the state can’t meet its commitments. Duterte wants to cut the implementation time for PPP projects to 18-20 months from an average of 29 months under Aquino, said Finance Secretary Carlos Dominguez.

“Definitely these laws will help but political will is really the clincher,” said Astro Del Castillo, managing director at First Grade Finance Inc. in Manila. “The past six years showed that the outgoing administration could have done more.”

The Philippines is behind Malaysia, Thailand and Indonesia in all seven quality indicators covering roads, rail, ports, air infrastructure, electricity supply, and fixed and mobile telephone connectivity, according to a 2015 report by KPMG. It trails frontier-market Vietnam in five of the seven areas.

The country is “starved” of infrastructure, according to David Nicol, chief investment officer at Metro Pacific, which last month bought a controlling share of the largest power supplier in central Philippines and increased its stake in Manila Electric Co., the nation’s largest electricity retailer.

Electricity demand rose 86 percent in the 15 years through 2014, compared with 44 percent growth in generating capacity, government data show. San Miguel Corp., a brewer that expanded into rail and toll roads, and Ayala Corp., a property developer that got into infrastructure, have made recent investments in the sector.

Electricity will be a focus of the new administration and “assuming Duterte moves faster than Aquino, investors will react positively,” said Smith Chua, who helps manage about $12 billion as chief investment officer at Bank of the Philippine Islands.

Cash on Hand

The nation’s largest conglomerates, including Aboitiz, Metro Pacific, Ayala, GT Capital Holdings Inc. and JG Summit Holdings Inc., have the cash on hand to pursue infrastructure projects, according to Bank of the Philippine Islands, BDO Unibank Inc. and Metropolitan Bank and Trust Co.

“There’s so much anticipation for projects that many companies including banks raised funds,” said Fritz Ocampo, chief investment officer at BDO Unibank, the nation’s biggest money manager, which oversees $20 billion. “If executed more aggressively this time around, expect conglomerates holding a lot of cash in their war chests to participate."

The Philippine Stock Exchange Index is up 12 percent since Duterte was elected. That’s one of the best performances in Asia and has helped lure $599 million of net inflows since the end of April. The gauge closed up 0.4 percent on Friday. Aboitiz Equity climbed 1.4 percent, paring an earlier gain of as much as 3 percent, and Manila Electric increased 1.9 percent.

“Any improvement in the pace of implementing infrastructure projects could cause investors optimism and push up the market,” said John Padilla, head of equities investment at Metropolitan Bank & Trust, which oversees $8.2 billion. “The only way to get into that action will be through conglomerates like Metro Pacific, which will be at the forefront, and the banks.”


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