Philippines infrastructure: Hole in the road

The maiden private equity investment made by the Philippines' largest pension fund, Government Service Insurance System (GSIS), is indeed ambitious. Last July, it agreed to put up nearly two thirds of the $625 million in capital raised by the country's first-ever infrastructure fund.

This boldness can ultimately be traced back to government policy - and GSIS is government-owned, government-controlled and run for the benefit of government employees. Known as the Philippine Investment Alliance for Infrastructure (PINAI), the fund is designed to facilitate investment in the Philippines' road, rail and energy projects. Other LPs include the Asian Development Bank (ADB), which put in $25 million, Dutch pension fund asset manager APG and Australia's Macquarie Infrastructure and Real Assets (MIRA). Macquarie will serve as manager.

Macquarie is certainly not the only private equity player targeting this sector - at least five PE houses bid for the PINAI mandate. Meanwhile, Capital Advisors Partners Asia (CapAsia), which held a first close for its $500 million Southeast Asia infrastructure fund in December, has earmarked at least one fifth of its corpus for deployment in the Philippines.

"We see a clear need for infrastructure investments in the Philippines combined with efforts by the government to create the right environment to mobilize investor capital into this sector," Brian Liu, an investment officer involved in ADB's commitment into PINAI, tells AVCJ. "As long as ADB can achieve the maximum developmental and financial returns, we would be interested in deploying more capital into private equity funds."

The PPP route

While the Philippines has long boasted strong growth potential and favorable demographics, investor interest only began to gather pace in the wake of the election of President Benigno Aquino and the launch of substantial efforts to curb corruption. Last October, Moody's raised the country's debt rating to one notch below investment grade. According to Thomson Reuters, foreign inflows to the Philippine Stock Exchange totaled $2.64 billion last year, more than double that of 2011.

However, the country's hardware has not kept pace with rising investment from overseas. Despite PHP339.3 billion ($8.3 billion) in government spending on infrastructure sector last year, investment in the sector is just 3% of GDP compared to a Southeast Asia average of 5%.

"There is a significant infrastructure gap in the Philippines that needs to be met," says Frank Kwok, senior managing director of MIRA Asia. "In its Development Plan 2011-2016, the government highlighted the need for significant investment in infrastructure and has implemented policies that are supportive of such investment."

The country is likely to spend more on infrastructure than ever before this year, with a budget of PHP400 billion, up 19.3% from 2012. At the same time, the government is looking to attract private capital into the sector through the Public-Private Partnership (PPP) Centre. Established in 2010, the PPP Centre already has 26 projects in the pipeline. PINAI, which aims to fund 5-10 projects costing $50-125 million each - is also exploring opportunities in the PPP space.

"The government of the Philippines is actively working to attract foreign investment to promote economic development," says David Stollard, Southeast Asia head of asset investment and finance at consultancy E.C. Harris. "The PPP Centre in particular has done a great job in providing visibility on its project pipeline. This increases potential investors' ability to evaluate the size of the market."

The hard work is paying off. When the Association of Mindanao Rural Electric Cooperatives Power Supply Aggregation Group (AMRECO PSAG) announced plans to construct a 300-megawatt coal-fired power plant in Mindanao last July, it had attracted at least six corporate bidders including the likes of AES Corporation, Aboitiz Group and Ayala Group. Meanwhile, four local groups are among the frontrunners for the $1.5 billion Light Rail Transit line 1 Cavite extension project, the biggest infrastructure project under the Aquino administration's PPP scheme.

Crowded market

Competition among strategic investors keep to expand their market share appears to be coming at the expense of private equity. According to AVCJ Research, KGL Investment Company's $30 million investment into Global Gateway Logistics City - an aviation-oriented logistics complex - is the only disclosed PE infrastructure investment in five years. Looking forward, Hans-Martin Aerts, head of infrastructure at APG Asset Management Asia, argues that one of the best PE approaches to tap into this market is to partner with a strong local partner.

"Domestic conglomerates including the likes of Ayala and Metro Pacific have all made substantial investments in the infrastructure sector and they will probably continue acquiring assets," he says. "You don't need to compete with them. What we want to do is to work alongside them. Even if you take the bottom-up approach, the risk-adjusted returns in the Philippines are still higher than many of the other markets."

Partnering with these firms, however, is easier said than done. While PINAI and APG's direct investment unit could leverage its close ties with ADB and GSIS to co-invest alongside some of the big conglomerates, independent private equity players must establish an on-the-ground presence in order to source the right partner. This takes time, given the country's regulatory, political and operational uncertainties.

CapAsia, for example, has spent five years exploring the country and is only now considering opening its fifth ASEAN office in Manila. Though happy to work with local companies, the PE firm targets mid-market deals in the region of $50-100 million so as to avoid direct competition with strategic investors.

"When more managers explore infrastructure opportunities in the Philippines, this will eventually create a larger market by itself - but in a pace slower than many may like," says Johan Bastin, CEO of CapAsia.

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• Topics
• Infrastructure
• Infrastructure
• Infrastructure
• Southeast Asia
• Infrastructure
• Southeast Asia
• Philippines