Duterte’s ‘golden age’ comes into clearer view

Philippine President Rodrigo Duterte’s ambitious “Build, Build, Build” scheme, an initiative he claims will deliver a “golden age” of infrastructure, is starting to shine in terms of overseas development assistance (ODA) and signed deals.

Bids on the first tranche of construction contracts for the second phase of the 163-kilometer North-South Corridor mass transit rail system designed to run from Clark Airport (in the north) to Calamba (in the south) were submitted last week and attracted nine international and two local contenders.

Bidders’ interest was described as a “record high turnout” by the Department of Transportation (DOT), the government agency tasked with executing the project.

The Bidders comprised Acciona (Spain), Daelim (South Korea), Song Ah Construction (South Korea), EEI (Philippines). Hyundai Engineering & Construction (Korea), Italian-Thai Development (Thailand), Megawide Construction Corp (Philippines), PT Pembangunan Perumahan (Indonesia), PT Waskita Karya Tbk (Indonesia). PT Wijaya Karya Tbk (Indonesia), and Sumitomo Mitsui Construction Corp (Japan).

The elevated train project is being jointly financed by the Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA). The bid vetting is expected to take three months, with the winner announced before year-end.

The project, a 51-kilometer line from Malolos to Clark Airport, will be the recipient of ADB’s largest loan to date, amounting to some US$2.75 billion to finance the civil works. JICA will finance the signaling systems and rolling stock. The Philippine government will contribute another $1.4 billion to the scheme.

Altogether the North-South Corridor will cost about $9-$10 billion, with the ADB picking up about half of the tab. This is still less than 10% of the “Build, Build, Build” scheme which envisions investment of 7-8 trillion pesos ($134-$153 billion) in various infrastructure projects nationwide.

Japan is not the sole international financier of “Build, Build, Build”; China is also in the loop. Approximately $10 billion of the “Build, Build, Build” scheme is already in the pipeline for Chinese government investment on new railways outside of Metro Manila, including on Duterte’s home southern island of Mindanao.

On Duterte’s recent state visit to Beijing (August 28-September 1), Philippine Finance Secretary Carlos Dominguez signed an agreement with the China Exim Bank on a preemptive purchase credit agreement for the Southern Railway, according to Chinese news reports.

“We have three lines (with China), all heavy rail,” said Transport Department Undersecretary Timothy John Batan in an interview.

The three lines comprise a 630-kilometer link between Manila and the southern provinces of Bicol and Quezon to be commissioned by the fourth quarter of 2019, a 70-kilometer freight link between the Clark Economic Zone and Subic Bay and a 100-kilometer railway for Mindanao.

Duterte has made it clear that he wants as many “Build, Build, Build” projects to be financed by ODA, and he has not been choosey about whether it comes from Japan, China or wherever. “Absolutely,” Batan told Asia Times. “We are maximizing all financial resources available. There is a lot of catchup [to be done].”

The Philippines has lagged for decades in infrastructure development, especially in the rail sector, which is energy efficient, environment-friendly and the best way to alleviate some of Manila’s notorious traffic congestion.

The government estimates that economic losses in 2014 due to Manila’s road congestion were $53.6 million a day, or $18 billion a year, with low-income people suffering the most. The country’s rail system has declined from more than 2,000 kilometers prior to World War II to about 70 kilometers now, all of it in Manila.

Ironically, Manila was way ahead of other Southeast Asian capitals in putting up an elevated light rail network in the metropolis in the early 1980s. But this 48.5-kilometer system is now badly outdated and overcrowded, transporting 283 million passengers in 2015.

Tackling Manila’s transport needs, while pursuing a broader goal to push new economic developments outside Metro Manila and up north to the Clark neighborhood, was an obvious priority for Build Build Build, launched by the Duterte administration in April 2017.

Manila accounts for about 10% of the Philippines total population of 108 million, and for about 39% of the country’s gross domestic product (GDP). The first rail project to get underway was the JICA-financed 37-kilometer Blummentritt-Malolos elevated line in northern Manila.

Sumitomo Mitsui Construction won the contract and preparatory civil works work started in February at Blumentritt Station, which will be a major interchange with the existing light rail lines. JICA signed a loan agreement to finance this line in September, 2015, long before “Build, Build, Build” left the station.

JICA is also financing Manila’s first subway system, the $6.9 billion Metro Manila Subway. In February the design and construction work contract was awarded to a four company consortium comprising Shimizu Corp (Japan), Fujita Corp (Japan), Takenka Civil Engineering & Construction and EEI Corp (Philippines).

ADB only officially got on board the “Build, Build, Build” bandwagon on May 27, when the bank approved its $2.75 billion loan to finance the 51.2 kilometer Malolos-Clark Airport section of the North-South Corridor, its largest ever single loan in the bank’s history.  The previous largest was a $1.5 billion loan to Bangladesh Railways. ADB is also expected to finance the 54.6-kilometer Blummentritt-Calamba southern line, which is likely to cost another $3 billion.

So why all the ADB largesse to the Philippines now? Part of the answer appears to go back to history.

ADB has been headquartered in Manila since 1966, and even has a street named after it, ADB Avenue in Manila. Another facilitator might be that ADB executive director representing the Philippines, Paul Dominguez, is the brother of Philippine Finance Secretary Carlos Dominguez.

The ADB reportedly fast-tracked the lending process, which is usually a three-year or longer process. Both ADB and the government wanted the loan signed while the Philippines was still in lower middle income status, allowing it a concessional rate of LIBOR plus a 0.7% spread. The government hopes to achieve upper middle income status by 2020, but the shift up will raise its cost of borrowing.

“Since it is our host country we are supportive to develop the infrastructure here in the Philippines,” said Markus Roesner, ADB’s principal transport specialist. “And this project fits in ADB’s overall policy to develop livable cities to reduce greenhouse gases, and even to support regional connectivity and commercial integration by linking these free trade zones and Clark and the airport to provide access to the ASEAN [Association of Southeast Asian Nations] region.”

Besides expanding Clark Airport, scheduled to open next year with an upgraded 12 million passenger capacity, the government also plans to create a New Clark City, with a population of 1.2 million and providing 800,000 new jobs. In that direction, Duterte has banned the opening of new economic zones in Metro Manila to force development northwards.

A plan has been mooted to shift all government offices to New Clark City, a scheme which may make more sense a few decades from now when Metro Manila, which lies between Manila Bay and Laguna de Bay, could be partly submerged.

“That’s one of the reasons everything is elevated,” Roesner said of the North-South Corridor. “This area (in the north) is comparatively on higher ground, so that’s not a risk, but of course some areas of Manila are very low-lying and could be at risk in the long run.”

There are other risks attached to the project, portions of which are supposed to be completed before 2022 when Duterte’s six-year term ends, with the entire system scheduled to be operational by 2025. That will be a tall order, according to analysts.

One risk to the schedule is delays caused by land purchases. Although the North-South Corridor will run above the “legacy alignment” belonging to the Philippine National Railway, about 10% of the track land will still need to be purchased to accommodate the bigger stations and straighter track requirements.

The ADB estimates that some 1,889 households, or 7,580 people, currently squatting on PNR land – the northern line fell into disrepair and ceased operations decades ago – will need to be resettled, the task of the DOT.

DOT Undersecretary Batan claims that an amendment to the land appropriation law in 2016 will make it easier to acquire the needed land because now they can buy at market values, instead of government determined valuations.

Another challenge, ironically since the Philippines has some 11 million of its citizens working abroad, will be the lack of skilled labor, industry sources said.

“We have been talking with a lot of construction companies here in the Philippines and their main concern is on skilled labor,” said Rachelle Cruz, research analyst for AP Securities Inc. “A lot of the construction-related skilled labor has been going out of the country to the Middle East, where a lot of our engineers are, so there is a missing piece in terms of labor.”

Yet another challenge may come from “unsolicited projects.” For example, the local San Miguel Conglomerate has proposed building a new airport at Bulacan, situated east of Clark Airport, although this is not part of the government’s “Build, Build, Build” plan.

“The unsolicited projects are approved by the local governments,” Cruz said, pointing out that there are 17 local governments in Metro Manila alone. “In terms of projects being in sync with each other, it’s kind of hard for investors to see what’s happening in the future because you have to plan ahead on how to connect all these projects and that requires a lot of coordination.”