Philippine membership in China-led Asia Infrastructure Investment Bank (AIIB) will firmly establish the role of Chinese companies in the domestic infrastructure sector for the long term, BMI Research said in a report.
Although the Chinese government has said AIIB’s activities will be non-political, the research unit of the US Fitch Group expects that many projects will nevertheless align with the objectives of China’s ‘One Belt One Road’ initiative.
BMI said while this will provide strong support for the Philippines’ infrastructure sector, it also risks crowding out other potential participants in the country’s public-private partnership (PPP) program.
“One of our key themes for 2017 is that the AIIB will emerge as a key vehicle for China to use to increase its influence as the institution begins making its presence felt on the Asia infrastructure financing scene,” BMI said in the report released recently.
The Senate ratified the Philippines’ entry to the AIIB with a 20-1 vote on December 5, beating the December 31, 2016 deadline set by the bank for members to submit their respective “instruments of ratification.”
“The Philippine Senate’s ratification of the country’s membership in the new development bank on December 6 opens another avenue of financing for projects – the country expects to raise $200 million to $500 million in loans from the bank annually,” the report said.
Earlier, the Department of Finance (DOF) said the government may now request the AIIB for a mission to come and discuss with local officials the proposed list of projects for financing, now that the Senate has ratified the Articles of Agreement formalizing the country’s status as founding member of the China-led lender.
Referring to priority projects, the DOF said the EDSA Bus Rapid Transit project and the Metro Manila flood control project would be among the first to be presented to the AIIB for possible funding.
“These are the projects that are the most prepared in terms of government approvals, feasibility studies and other requirements, and are already in the pipeline. So these projects can be processed most expeditiously for co-financing by AIIB,” National Treasurer Roberto Tan had said.
The AIIB is founded by 57 sovereign-member countries with a total capitalization of $100 billion.
Members include Australia, China, South Korea, United Kingdom, Philippines, Malaysia, Thailand, Singapore, Brunei, Indonesia, Laos, Myanmar, Cambodia, Vietnam, Austria, France, Germany, Italy, Brazil, Russia, India and South Africa.
Out of those, 37 are from Asia and 20 are non-regional members. The AIIB became operational on January 17, 2016. To date, its board of directors has approved six infrastructure projects costing $829 million.
Chinese firms well positioned
BMI reiterated that Chinese construction companies are well-positioned to take on high-value infrastructure projects in the Philippines, given their ability to raise large sums of capital and excess operational capacity that will help them compete fully in the country’s infrastructure industry.
However, it said while this will provide strong support for the Philippines’ infrastructure sector, it also risks crowding out the country’s PPP program.
“We believe that Chinese construction companies are well-positioned to take on high-value infrastructure projects in the Philippines, helping President Rodrigo Duterte fulfil his ambitious P7 trillion infrastructure spending goals,” the study said.
BMI noted that five Chinese construction firms – all of which are at least partially state-owned – signed a memorandum of understanding (MOU) with two Philippine consultancies on December 7 to pursue $100 billion worth of projects, drawing on their excess capacity built up during years of fiscal stimulus in China and generous politically-oriented financing from state-owned banks to take advantage of a Philippine policy allowing full foreign ownership of high-value projects.
“This development supports our view that Chinese funds and contractors will play an increasingly important role in the Philippines’ infrastructure industry in the wake of Duterte’s tilt toward friendlier relations with Beijing,” it said.
It sees projects of interest in the country being in the transport sector – specifically ports and railways – aligning neatly with China’s ‘One Belt One Road’ initiative.
BMI said that under the most recent MOU, projects in which the Chinese companies are reportedly interested include a park and pier in Davao City, an industrial park in Davao City and a dredging project near Manila.
Despite this, BMI said the existing PPP projects in the Philippines already see limited participation from foreign companies, and an increased presence of Chinese SOEs in the sector could further crowd out opportunities for other international players.
According to the Philippines’ PPP Center, of the 16 projects that have been awarded since the launch of the program, only four have foreign companies involved in the winning consortium primarily in technologically advanced roles, while domestic Philippine companies are more competitive in construction and financing roles.
“Chinese companies have an advantage in raising large sums of capital, giving them the ability to take advantage of a policy in the Philippines that allows foreign contractors to have 100 percent ownership of projects and participate in PPPs if they invest at least P1 billion and obtain a ‘Quadruple A’ or ‘AAAA’ designation,” it said.
Two upcoming PPP projects – the South Line of the North-South Railway Project and the Manila subway – are among those courted by Chinese companies, or being considered for official development assistance, the study added.