APAC: Billionaires bet on airports in the Philippines

03 April 2018 - 09:21 am UTC

The Philippines' biggest companies have flooded the Duterte administration with unsolicited proposals as the government seeks faster alternatives to the PPP program. Mirzaan Jamwal reports
 

The battle to transform Manila’s congested international airport into a premier gateway is the latest chapter in a long-running rivalry between local conglomerates to control essential infrastructure.

In February, a ‘Superconsortium’ of seven of the biggest Filipino companies submitted a PHP 350bn (USD 6.7bn) unsolicited proposal to expand and operate Manila’s Ninoy Aquino International Airport (NAIA).

Aboitiz Infracapital, Ayala’s AC Infrastructure, Alliance Global Group, Lucio Tan's Asia’s Emerging Dragon Corp, Filinvest Development Corp, JG Summit Holdings and Metro Pacific Investments Corp (MPIC) have come together to turn NAIA into a regional hub, with technical support from Singapore's Changi Airport International.

Not to be outdone, Megawide Construction and its Indian partner GMR Infrastructure then offered a USD 3bn alternative solution to upgrade the airport, which is struggling to deal with the rise in passenger traffic. Last year it saw 42 million passengers but is designed to handle 31m passenger per annum (mppa).

Passenger traffic is projected to reach 47.8m in 2020 and 71.6m by 2030, according to a 2014 study by the Japan International Cooperation Agency (JICA), undertaken for the Phiippine National Economic Development Authority (NEDA).

President Rodrigo Duterte's administration has been fielding multi-billion dollar offers on an unsolicited basis since taking office in June 2016, after it abandoned the PPP project pipeline to focus on building much-needed infrastructure with government funds or official development assistance (ODA).

The private sector has offered to develop airports, toll roads and rail lines among projects worth more than USD 61bn over the last 12 months, in response to the Duterte administration welcoming such offers.

 

Pieces of a puzzle


The policy on unsolicited proposals is unwieldy and can sometimes feel like “putting together pieces of a puzzle” notes one Manila-based industry source. The government has “just really been saying submit your unsolicited proposal and then they'll figure it out after they get all the submissions”.

There is lack of clarity in the aviation sector, for example, because the government has not said how it intends to develop the Manila capital region airport system, including how many airports it wants in operation or how they will work together to cope with the increased number of air travellers.

 

Changing tack


The Duterte administration approved and then last year shelved PPPs to outsource the operation and maintenance of NAIA and five regional airports. The NAIA concessionaire was to optimize use of the existing terminals and two runways. The 15 to 20-year concession was meant to be a “short-term solution” to ease congestion because the government had chosen not to add a new terminal and runway due to space constraints at the airport site.

Meanwhile, the Department of Transportation (DoTr) came up with a draft policy in 2017, according to which the state would invest for the short-term development of existing airports and be open to proposals for a new airport, says a source at DoTr.

The government did not officially issue the Manila airport policy or announce an alternative to the scrapped PPP. Instead it went ahead with plans to expand the under-utilised Clark International Airport in Pampanga province, some 95 kilometers from the capital.

Clark has been designed to handle around 4mppa. In 2017, it served a total of 1.5m passengers, of which 1.08m took international flights while 431,343 were domestic passengers. As of March this year, it was used for 452 flights a week.

Passenger traffic demand at Clark is forecast to rise to 2.62m by 2020 and 4.9m in 2030, according to the JICA study.

Nevertheless, the government has begun work to expand capacity from 4mppa now to 12mppa by 2020 and expects this to reduce the burden on NAIA.

In December, the DoTr and the Bases Conversion and Development Authority (BCDA) awarded an EPC contract to build another passenger terminal at Clark to serve an additional 8mppa by 2020. The airport operations will be bid out to the private sector.

The 2017 draft policy stated that the government would let market forces determine the airline traffic split between airports. However, the government now intends to re-assign airlines among the four NAIA terminals and transfer some flights to Clark, DOTr Secretary Arthur Tugade said in February.

But PwC director Rosemary Ong says that unless connectivity concerns are resolved, travellers would still prefer NAIA in the short-term. “The government considered decreasing user taxes at Clark to boost traffic but the proximity given its lack of connectivity to Manila is still a key factor.”

DoTr has said that a new ODA-funded railway to connect Clark airport with Manila will be ready by 2022.

 

New airports


While capacity is being added at Clark, the DoTr has accepted an alternative proposal to build a new airport closer to Manila. 

San Miguel’s PHP 750bn unsolicited proposal to build a new airport in Bulacan province involves the construction of four runways and a design capacity of up to 200mppa, with a 50-year concession period.

The company won original proponent status for the greenfield airport - located around 20km from the capital - in October 2017. It plans to complete construction within five years after getting all the necessary approvals.

The project terms have been fine-tuned through negotiations with DoTr and the next step is for the the National Economic and Development Authority (NEDA) to give the final go-ahead.

The government will then invite rival bids through a Swiss Challenge and San Miguel as original proponent will have the right to match a lower price proposal.

If the Bulacan project gets built, how does it affect the viability of other airport proposals over the long term? “That's the question from stakeholders interested in any airport development plans in the Philippines,” says the industry source.

The position of the Secretary of Transportation, Arthur Tugade, is to entertain all proposals under the multi-airport system approach. “At this point, having NAIA, Clark, and a new gateway is ideal”, DoTr Undersecretary for Airports and Aviation Manuel Antonio L. Tamayo said in an emailed response.

In March, another proposal surfaced for an airport in the Manila region. SM Investments and the Solar Group offered to build a USD 12bn regional airport hub in Sangley Point, a naval base some 20km from NAIA, on a 50-year concession. The proposed airport would be able to handle 120m passengers annually.

 

Growth


Filipino airports have on average recorded annual passenger growth of 10% over the last ten years, says Marcus Balmforth, managing director at InterVISTAS Consulting.

The Philippines has historically been driven by domestic traffic. The country is now seeing significant international growth predominantly from other Asian countries, but also from Australia and the US, Balmforth notes. Domestic accounts for 67% of scheduled seat capacity, while international accounts for 33%.

NAIA was the 17th busiest airport in Asia in 2016, according to Airports Council International, with passenger traffic higher than Tokyo’s Narita International.

There is significant private sector interest in developing NAIA because of the perception that it will still be the airport of choice even if there are newer airports, and the fact that the new airport will not be operational in at least ten years, the industry source notes.

“What we see in other markets when privatization is introduced is that the proportion of earnings related to the aviation airline charges come down as a proportion of the total,” Balmforth says.

Private investors look to grow non-aeronautical revenue by rolling out improved food and beverage outlets, duty free shops, and car parking.

But the majority of airport revenue in the Philippines comes from passenger service charges, PwC’s Ong adds.

Passenger charges at NAIA are lower than at Mactan-Cebu International Airport - operated by GMR and Megawide - and could be increased if improvements are made to the facility, she observes.  “However, it is also important to consider how limitations in airside facilities, such as runway capacity, will impact upon future growth in passenger numbers at NAIA.”

 

NAIA options


The Manila airport has two perpendicular runways and is surrounded by residential and commercial buildings, so adding a runway would require reclamation or relocation.

The Superconsortium’s proposal offers both a shorter 15-year option and a 35-year one. with a third runway.

“Our proposal gives government the flexibility to choose from long-term options including Bulacan or Sangley," says group spokesperson Jose Emmanuel Reverente.  “They can choose to do our short term and another long term or both of the phases we offered to develop.”

A USD 2bn first phase would increase capacity to 65mppa by 2022 from the current 31mppa and can increase its hourly aircraft movements (ATM) to 48 movements per hour, from 40.

It has also offered to build a third runway on a reclaimed island in Manila Bay to raise ATM to 100 and serve as many as 100mppa. The second phase cost is estimated at USD 5bn.

GMR Megawide’s rival offer for NAIA is a USD 3bn plan to increase annual throughput to 72m passengers and peak hour capacity from 40 to 60 aircraft movements over 18-year contract. It does not include a third runway.

The consortium propose to pay the government annual concession fees, which entails a revenue share with a guaranteed minimum revenue component.

 

Evaluation


Under the rules DoTr has to evaluate the Superconsortium’s unsolicited proposal first because it was submitted before GMR Megawide’s.

Only if negotiations with the first in time bidder break down and the proposal is rejected can DoTr move on to the next offer.

There are clear criteria for unsolicited proposals to be considered by the government. Projects should involve a new concept or technology and/or are not part of the list of priority projects. Further, no direct government guarantee, subsidy or equity should be required and the proposal should not be a component of an approved project.

How the government goes about evaluation beyond the criteria is not very clear, Ong says.

Common reasons for rejection include an incomplete feasibility study or one that is not robust enough or where the government is not convinced of the value proposition and wider economic benefit of the proposal, she explains.

She adds that some of the unsolicited proposals also do not follow the preferred risk allocation of the government and propose rather onerous terms in the concession agreement, such as exclusivity.

Reverente also flags risk allocation as a dealbreaker and says the Superconsortium has tried to incorporate the latest thinking around the Duterte administration’s preferences.

It is also unclear how long it will take to complete the procurement and whether it can be finished by the end of President Duterte’s six-year term in 2022.

Unsolicited projects have experienced long delays. For example, MPIC submitted its North Luzon Expressway (NLEX)-South Luzon Expressway (SLEX) Connector Road proposal in 2012 to the previous administration. It took three years to move to the Swiss Challenge stage.

 

Foreign interest


The government’s desire to have Filipino ownership of airports may limit prospects for foreign investors, according to the Manila-based source. Both San Miguel and the Superconsortium have expressed a preference for Filipino partners.

If the proposed mega projects do get the green light, they are likely to require a mix of foreign and local lenders as most of the local banks are limited by single borrower limits (SBL) and DOSRI (directors and other related interests) rules.

Most of the Filipino banks are part of the conglomerates that bid for infrastructure projects, and the DOSRI rules set a ceiling on lending to affiliates.

Therefore, on projects larger than USD 1bn and when statutory lending limits start to constrain domestic financing, there will be more room for foreign private banks, multilateral and even bilateral sources, says Ong.

Chinese investment bank CITIC Securities’ offshore platform, CLSA, has already said it is working on the finance for a new Manila airport that is awaiting government approval. 

 

Philippines