Build Build Build to push construction costs up — AIIB

MANILA, Philippines — Building costs in the country is expected to rise further this year due to demand for large-scale projects amid the government’s Build Build Build program, according to a report by the Asian Infrastructure Investment Bank (AIIB).

In its Asian Infrastructure Finance 2019 report, AIIB said market and structural factors conspire to push construction costs up further this year.

“The cost of construction is likely to increase due to demand from large-scale projects, the projected depreciation of the peso as well as inflationary pressure,” the report said.

“Construction materials need to be imported, making costs vulnerable to peso’s depreciation, driving input prices up and increasing inflationary pressure,” it added.

Structural factors in the economy such as having a small labor market amid high demand for workers are also expected to contribute to high building costs.

“At the same time, structural factors such as high capacity utilization and a relatively tight labor market will continue to push up domestic prices,” the report said.

As of 2018, the estimated cost for a four-lane, urban arterial road including traffic controlled intersections is P60,000 per meter.

AIIB said strong demand for construction materials and continued weakness of the peso are expected to push this higher in 2019.

AIIB noted that the Duterte administration’s aggressive infrastructure development program would stimulate the economy this year as a total of P909.7 billion (24.2 percent of the cash budget for 2019) would be allocated to the construction of the program’s flagship projects in 2019

A key focus of the budget is greater development outside Metro Manila, with a significant amount of the 2019 investment allocated to putting up connective infrastructure such as roads and bridges.

The Department of Public Works and Highway (DPWH) gets the largest allocation (P555.7 billion) for network development, construction, maintenance and flood management.

The Department of Transportation (DOT) would allocate P76.1 billion for various projects, a bulk of which would be designated for railway development.

The DPWH would also allocate P25.2 billion for the construction of the 35-km, 13-station Metro Manila subway, the Philippines’ first underground mass transport system. The development has an estimated cost of P355.6 billion and is expected to carry 370,000 passengers annually when it partially opens in 2025.

AIIB noted, however, that progress may be slowed by structural and institutional weaknesses, gaps in funding and uncertainty about the effectiveness of the administration’s preferred public-private partnership structure in which is builds the hard infrastructure using own funds and auctions off the operations and maintenance component of the project to the private sector.

“A downside risk is that authorities tend to underspend in the face of bureaucratic obstacles in the construction sector,” the report said.

High interest rates would also mean higher financing costs for infrastructure in the country.

“An increase in long-term debt financing costs is expected in the next 12 months due to high/rising inflation rates, as well as uncertainly surrounding tax reforms in the Philippines,” the report said.

AIIB’s infrastructure report said Asia is now one of the most dynamic regions in the world but is held back from realizing its full potential by lack of infrastructure investments.

It said establishing cross-border connectivity in the region would be vital for long-term growth amid declining global economic growth and market instability brought about by global headwinds.