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The building blocks of the country’s future

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On the back of a massive ongoing plan by the Philippine government to upgrade and modernize the country’s infrastructure, the construction industry is in for a boom.

As Metro Manila continues on its growth track toward becoming a megalopolis, ambitious efforts are being rolled out to decentralize the country’s business from the urban complex and divert them to Special Economic Zones around it. The undertaking includes the expansion of roads, ports, and train lines, as well as the cooperation of the big name real estate players to construct residential and commercial districts outside the metro, all of which requires a substantial chunk of investment.

This is where the President Rodrigo R. Duterte’s administration’s P7-trillion ($137 billion) infrastructure development plan comes in.

According to the research arm of the Fitch Group, BMI Research, the Philippine construction industry is projected to steadily expand over the next decade, gradually expanding at an average real rate of 9.8% in the decade between 2017 and 2026. The positive outlook is a continuation of a longstanding upward trend from the 1970s and early 2000s, before it was interrupted by economic issues in 2011.

“If we take a look at the trend from the ’70s to the early 21st century the construction trend was on a steady level, which drastically dropped in 2011 due to economic setbacks,” local design and construction firm Mundo Builders told BusinessWorld in an interview.

“However, from 2015 onward the industry has been on an upward incline.”

In addition, Mundo Builders pointed out that while the urban landscape of Metro Manila may not seem to hold any more space for building new structures and edifices, old buildings are being torn down and replaced with new high rises, and new developments are growing in the areas of Bonifacio Global City, Pasig, Quezon City and the reclaimed areas in Muntinlupa. These developing areas and the rebuilding efforts, Mundo Builders noted, have contributed to the present steady rise of the construction industry.

“Because of the steady incline in the construction industry this contributed to a steadier source of livelihood for all levels of society. A steady supply and demand for the materials needed in the industry has also opened up new venues for budding entrepreneurs as well,” the company said.

Foreign players are also expected to profit from the greater investments and project opportunities provided by the government’s “Build, Build, Build” project, with BMI Research expecting construction, engineering and heavy industry firms from China and Japan largely benefiting from the robust growth of the industry.

The research unit predicted that imports of infrastructure-related goods from the two countries are going to continue on upward trajectories, noting “we expect this trend to continue to manifest with the number of project opportunities remaining significant.”

According the BMI Research, the Philippines’ has maintained historically warm relationship with Japan regarding trade and industry, and Japan’s significant investments into the Philippines are currently being bolstered by its infrastructure export strategy. Meanwhile, Mr. Duterte’s recent efforts to push for friendlier relations with China are strengthening the economic ties between the two countries.

Many of the Duterte administration’s largest proposed projects have been converted from public-private partnerships (PPPs) to official-development assistance projects, with the implicit aim of targeting the generous financing packages available from China and Japan.

“We note that switching from developing projects from PPPs to be financed by overseas development assistance threatens locking other international companies from benefitting similarly,” it wrote in its report.

But with opportunities come challenges. There is mounting pressure to maintain the Philippines’ attractiveness to foreign investors, as the construction industry is largely dependent on the local economy and the political environment. This is worsened by factors including the rapid pace of inflation and the country’s deteriorating currency.

“On a large scale, this industry is deeply affected by the status of our political environment. We are largely dependent on the local economy at the moment due to the current political situation. Once our political climate becomes friendlier to the foreign investors who need to build infrastructures in the country, our industry will see a larger growth,” Mundo Builders said. “Our global image as a country is also a contributing factor in enticing foreign investors to build more infrastructures. Maintaining a positive global image will assure us that the construction industry will see a steady growth.”

The company added another point of issue in the construction industry: professionalizing it. “It is still a challenge to ‘professionalize’ the industry. There are licensing and/or certifying bodies but a lot of entities still look for opportunities to make fast and easy money and skip out on all the legalities. Investors must be wary of the fact that not all entrepreneurs have really taken time to calculate their personal risks and embark on a construction endeavor with the purest of intentions.”

Mundo Builders added that addressing the current issues in the country’s construction industry at the very least involves taking another look at the political relationship between conglomerates and the government.

“Fixing, even challenging at the very minimum, the political effect on the country’s construction industry, and probably across all others as well, comes only with ideal circumstances. For now, the conglomerates will continue to nourish this industry with their visions. The government, for its part, must be able to help in as far as regulating material prices and leveling labor ordinances,” the company said.

“Strict promulgation of regulations and certifications added to aggressive information campaigns will eradicate the proliferation of “fly by night” contracts. This way, prospective investors will have more confidence in dealing with local providers thus increasing business takes.”

Additionally, construction companies should be mindful of the limited space available, as prices continue to rise rapidly. Massive efforts are being done to curb Metro Manila’s overcrowding issues, including the promotion of new central business districts like Clark Freeport outside the capital.

It may be too early to tell whether such efforts would be enough to forecast a bright future for the Philippine construction industry. Current global political tensions, such as that of an imminent trade war between the world’s most powerful nations, and local economic issues, such as the rising inflation and depreciating peso, are weighty adversaries to such a goal. But Mundo Builders remains optimistic.

“The possibilities are endless for the industry,” the company said.