After some initial hiccups, the Philippines seems poised to continue working with China to build three major railways.
The Department of Transportation said last week that Beijing remains the country’s “best option.” Manila previously tapped its big neighbor to construct the Mindanao, Philippine National Railways (PNR) South Long Haul and Subic-Clark rail lines. However, the loan applications for the trio were considered withdrawn as Beijing was unable to release funding before the Rodrigo Duterte government stepped down at the end of May.
Whether the bureaucratic delay or worry about political risk – as projects agreed upon with an outgoing leadership may be derailed by an incoming one – was the issue is already water under the bridge. The fate of the three railways no longer hang by a thread. Last week, the new administration of President Ferdinand Marcos Jr renewed talks with China about them, a move that could pave the way for their implementation.
Thus, after a botched rail deal in 2003, China is at the cusp of finally breaking into the Philippine railway sector. And it might do so in a grand fashion, simultaneously executing three railways with a combined length of about 739 kilometers, more than nine times that of the Northrail project it lost in the past.
Manila’s desire to enlist a new infrastructure partner is driven by several factors. It wants to address its huge connectivity gaps, catch up with its neighbors and leverage public works as a stimulus to fuel recovery from the Covid-19 pandemic.
China will enter the Philippine railway scene brimming with confidence. It has developed world-class engineering and technical capacity, and its financing now is competitive with prevailing standards.
Indeed, much has changed since the Philippines walked away from a project that could have linked Manila with Clark, a bustling economic hub that hosts an international airport in the central region of the main island of Luzon.
China and rail sector
Between 2000 and 2019, China constructed 9,485km of standard railways at home – an average annual growth rate of 1.07%. Since 2008, it also laid out 37,900km of high-speed rail courses. This excludes railway projects abroad, especially after the roll-out of its Belt and Road Initiative (BRI) in 2013. Unmatched railway costs-per-kilometer and the astonishing speed with which it completes projects make China a powerhouse in the global rail sector.
Last year, China delivered Laos’ railway after just five years of arduous work in the mountainous northern part of the landlocked country. The US$5.9 billion, 422km undertaking features 75 tunnels that run for 198km and bridges that span 62km. It is directly linked to Kunming, capital of southwestern China’s Yunnan province, via the Yuxi-Mohan line. This engineering marvel became a key showcase of China’s massive BRI.
Beijing also completed Vietnam’s first metro line last year. It is also building Indonesia’s Jakarta-Bandung High-Speed Railway, which will be Southeast Asia’s first and is slated for completion next year, and Malaysia’s East Coast Rail Link, expected to be done by 2026.
China is also in talks with Thailand and Myanmar for similar rail deals. Thus a decade since Manila terminated Northrail, China had become an engine powering regional connectivity.
With Manila renewing negotiations for the three railways, the country may no longer be Southeast Asia’s odd man out in terms of excluding China as a partner for railway work. The country foresees substantial completion of the three rail lines before Marcos leaves office in 2028. This would place it not far behind the region’s burgeoning rail buildup. But this assumes Manila does not miss the train again.
Japan factor
Two weeks ago, several senators expressed a preference for Japan building the country’s railways. This is understandable given Japan’s long track record in the country and Tokyo’s time-honored position as the Philippines’ top donor.
The Japan-led Asian Development Bank (ADB), another key funder of numerous projects in the Philippines, is also headquartered in Mandaluyong in Metro Manila. However, given the country’s burgeoning infrastructure needs, working with more – not fewer – partners is better.
In fact, Japan’s and the ADB’s current exposure with the Metro Manila Subway and the Calamba-to-Clark North-South Commuter Railway (NSCR) raised concerns about their ability to underwrite other flagship projects.
The entry of new players compels established ones to offer better terms in light of competition. Such rivalry also diminishes the market power and leverage of a traditional dominant partner and enhances the host country’s bargaining position.
The economic principle that having more sellers works to the buyer’s advantage is as true in infrastructure as it is in other settings. Besides, all creditors spread their risks and fund other projects elsewhere instead of pouring resources in just one place.
Low interest rates were also cited as a factor behind choosing Japan over China. However, the Philippine Department of Finance revealed that China’s interest rates for their loans, which are denominated in US dollars, are at par with other lenders.
For instance, Chinese funding for the Kaliwa Dam and the recently completed Chico River Irrigation Project has a nominal interest rate of 2% with a 20-year maturity period and a seven-year grace period. In contrast, when converted to dollars, interest in Japanese financing for the NSCR will stand at 2.7% for the same terms, while South Korean funding for the New Cebu International Container Port is at 1.36%.
As inflation and interest rates rise, Manila is hard-pressed to seek better provisions to make its projects viable and debts sustainable. Hence securing more favorable interest terms may be behind Manila’s efforts under President Marcos to restart talks on the three proposed railways.
Transport needs
Mass transport is in high demand in Southeast Asia’s fastest–growing economy. A 2018 study by the Japan International Cooperation Agency found that the Philippines was losing 3.5 billion pesos (US$62.4 million) a day because of its notorious traffic jams, especially in big cities like Metro Manila. This amount could swell to 5.4 billion pesos per day in 2035 if the problem persists.
The National Capital Region, a collection of 16 cities and one municipality with a combined population of more than 14 million, is served by only three rapid urban mass transit systems. The Duterte government began extending these metro lines to neighboring provinces (for example, LRT-1 to Cavite and MRT-7 to Bulacan) to relieve traffic and improve mobility.
New railways beyond Metro Manila are also being built (such as NSCR) or being considered for construction to decongest major cities and spur economic activities in other provinces.
Besides China’s industrial advantages, already paid costs make it a logical choice for the three railway lines. Both sides have already invested much time and resources to negotiate and perform relevant preliminary work to get the projects going. The feasibility study for the Mindanao railway project is already done, and 6.5 billion pesos has been allotted for the right-of-way acquisition. China just needs to provide a shortlist of contractors to proceed.
For the PNR South Long Haul Project, 14 billion pesos has already been spent on a project-management consultancy, and a consortium of Chinese companies has already obtained a design-and-build contract.
Jose Maria Clemente Salceda, chairman of the House of Representatives Ways and Means Committee and Albay Second District representative, said last week: “Given how much progress has already been made on the Bicol rail, it appears that the best way forward is to just keep the arrangement with China, subject to some changes in interest rates.”
Salceda was previously governor of Albay province, the southern terminus of the PNR line.
China Harbor Engineering Co bagged the Subic-Clark railway deal in 2020. The Duterte government set the stage for China’s entry to the Philippine railway sector. Its successor, the Marcos administration, is taking the cue and going “full speed ahead.”