South Korea to extend $1B in concessional loans for PH infra projects

Not wanting to be left behind by neighboring China and Japan in providing financing for infrastructure projects, South Korea is eyeing to extend $1 billion in loans to the Philippines, state planning agency National Economic and Development Authority said Wednesday.

In a statement, Neda said “the Philippines welcomed the offer of the Korean government to finance key infrastructure programs,” specifically the plan of Export-Import Bank of Korea (Kexim) to allocate $1 billion in concessional loans from 2017 to 2022.

Neda said the Philippine and South Korean governments aim to finalize the loan framework agreement in August.

Last May 29 to June 1, Kexim officials met with a number of government agencies “to discuss possible projects that may form part of the Kexim pipeline” in the next six years, Neda said.

“Transport, information and communication technology, and energy infrastructure were identified as priority areas in the proposed cooperation considering South Korea’s comparative advantage in these sectors,” according to Neda.

Besides loans, Neda said Kexim also offered support for Philippine projects via its knowledge sharing program facility, “a knowledge-driven economic cooperation program that will enable South Korea to share its successes and failures and propose applicable policy recommendations.”

“Kexim also expressed willingness to assist in the Philippines’ pre-investment activities, including project preparation, and feasibility studies and plans formulation, through the bank’s project preparation facility,” Neda added.

Neda Undersecretary Rolando G. Tungpalan said South Korea’s offer “will boost the Philippine government’s efforts to carry out its infrastructure program, which requires roughly P8.4 trillion.”

“We need to be ambitious, and at the same time we need to scale up our implementation capacity. Financing this six-year infrastructure program will be sourced from domestic resources, official development assistance [ODA], and public-private partnership [PPP] programs,” Tungpalan said.

Last week, Tungpalan said that of the P7.125-trillion investment target under the 2017-2022 Public Investment Program, 66 percent or P4.705 trillion will be locally financed projects.

To be funded through PPP is P1.27-trillion worth of infrastructure projects or 18 percent of the total, while ODA from development partners and donors will finance P1.101 trillion or 15 percent of projects in the pipeline.

Tungpalan said that despite more reliance on domestic borrowings, both ODA and PPP financing will still play a role in the Duterte administration’s “build, build, build” thrust, although more projects may be funded by ODA.

Economic managers had said the Duterte administration during its first six months in office already secured almost P1 trillion in ODA from China and Japan.

Tungpalan said the ODA financing scheme provides “longer-term maturity and favorable concessional financing terms, with grant element of at least 25 percent as provided for in our own ODA Act” as well as “a wider access to knowledge, experience and technology.”

“As we all know, many large infrastructure projects will require long-term financing, especially if these have long gestation period. ODA accessed by government has favorable financing terms that match the needs of such infrastructure projects better than commercial sources of our grants,” Tungpalan said.

While “concerns have been raised on whether ODA financing is sustainable and supportive of local growth and development, particularly, as foreign borrowing could expose us to undue foreign exchange risks and a serious debt burden that would imperil our strong macroeconomic stability, and therefore sustainable growth,” Tungpalan said, noting that “over the last six years, debt-to-GDP [gross domestic product] ratio has improved from 52 percent of GDP in 2010 to 45 percent of GDP in 2015.”

“While government has decided to increase its deficit to 3 percent of GDP under the current plan, the deficit will be financed largely by local borrowing at 80:20 ratio in favor of domestic borrowing. With the expected growth in GDP, expanding by more than 1.5 times by the end of the plan period, government’s debt is expected to decline from 42.7 percent of GDP in 2016 to 40.9 percent of GDP in 2017 and to 35.4 percent of GDP in 2022,” Tungpalan added.

According to Tungpalan, “the specific decisions in recent times to change the mode of implementation from PPP to ODA if not [sourcing from the national budget] of some projects do not constitute a ‘shift in policy from PPP to ODA.’”

“On the other hand, implementation through ODA under the financing strategy administered by the Department of Finance, as well as agreement with our ODA partners to speed up processes without compromising quality, enable us to have greater control over the quality and timeliness of project implementation,” the Neda official said.

“As we gear up to improving further the quality of project preparation and implementation, we are confident that the programmed financing and implementation arrangement of our medium-term infrastructure program will be realized, consistent with sound macroeconomic fundamentals… It’s not whether it’s ODA or PPP: good quality at entry, implementation, and operations and maintenance should be matched with good governance to produce good sustainable results,” he added. JE