Daily Archives: February 5, 2012

Wanted 34 Billion Pesos in PPP investments required

With the pending PPP project expected to be rolled out this year, the Philippines will need investors to bankroll over 34 Billion pesos (around than AUD$ 750 Million @$45:PHP1). I hope some of that will come from Australia.

From BusinessWorld Philippines

February 02, 2012

Economic boost from PPP deals to be felt in 2013

THE ECONOMIC IMPACT of the public-private partnership (PPP) program will not be felt until next year, a Finance official said, despite government hopes that 2012 growth could be driven by the big-ticket infrastructure projects.

“Assuming we bid out the 16 projects this year, the funding requirements will not come until three, four, five, six months after those bids,” Finance Undersecretary John Phillip P. Sevilla said in an chance interview.

Moreover, construction will likely begin only in the summer of next year to take advantage of good weather, he explained, adding that this includes a schoolbuilding project recently opened to bidders.

“The commitment is to begin the bidding process. But in terms of actually breaking ground, it depends on when the bids are finished, but the bidder will prefer to hold the construction during summer,” Mr. Sevilla said.

The Education department announced its PPP project — involving the design, financing, construction and maintenance of 9,332 classrooms — last month.

Only the P1.96-billion Daang Hari-South Luzon Expressway Link project bagged by Ayala Corp. in December could have an economic impact this year, Mr. Sevilla said.

“The bulk of spending, the economic growth, the multiplier effect will start next year,” he added.

Mr. Sevilla, however, claimed the PPP program could still stimulate the country’s economy to some extent.

“When the government announces it is planning to fix a certain airport, businesses flock to that area and create economic activity,” he explained.

The downside, though, is that it pushes up property values in the area, making it more costly for the government to acquire the right of way.

After the schoolbuilding project, the government plans to offer the Health department’s P900-million Vaccine Self-Sufficiency Program next. It is tentatively scheduled for a first quarter rollout.

Lined up for the second semester are the modernization of the Philippine Orthopedic Center (P5 billion); the Common Fare Collection System (P1.8 billion); the Laguindingan Airport Operations and Maintenance contract (P7.8 billion); the New Bohol Airport project (P8 billion); and the Mactan Terminal 2 Airport Development project (P10.15 billion).

“If we get the projects done, the financing requirements will come next year. The inflow of investments to infrastructure this year, it’s not going to be massive,” Mr. Sevilla said. —Diane Claire J. Jiao

Article location : http://www.bworldonline.com/content.php?Section=TopStory&title=Economic boost from PPP deals to be felt in 2013&id=46154

Curtailing Excessive Executive Pay

One of the problems developed countries have which resulted in the GFC (Global Financial Crisis) is the huge executive pay in publicly listed companies. I have a view since most publicly listed companies do not have a major stockholder, the determination of executive pay is left to the Board to decide these matters. Unfortunately, the Board is usually composed of people close if not friendly to the CEO.

The recent changes in Australia now requiring stockholder approval for such matter are suppose to address this shortcoming. Still, from reading this article there are a number flaws that will allow for this practice.

In the Philippines, where most publicly companies have a majority shareholder, whatever is the executive pay is kept in check by them. Still, I would like to know how huge is the difference in executive pay in the Philippines compared to that in Australia.

From Macrobusiness.com.au

How to fix executive pay

Posted by  in Australian Economyon 1 Feb 2012

Since the GFC, there has been a renewed focus on executive remuneration for publically listed companies.  In particular the size and structure of bonus schemes came to the fore after ludicrous payments were made to US banks executives, despite their companies being bailed out by taxpayer funds.  Australia was not immune to this disease, with executive wage growth far out stripping average wage increases over the last decade.  So hostile were public attitudes in Australia towards executive pay and bonuses that the “two-strike” rule was enacted, where:

  • companies that receive 25 per cent or more ‘no’ votes for the remuneration policy in two consecutive years must put to shareholders a board spill resolution at the AGM,
  • If this resolution proves successful, all board members (except the managing director) must stand for re-election for their positions

These new laws gave some teeth to the non-binding shareholder votes that were often ignored by boards in the past.

Since these new laws were passed, I’ve read many annual reports that highlight “shareholder concern” over executive pay (as if it were a new thing).  These same reports invariably contain changes to remuneration policies that “better align shareholder and executive interest” as boards react to the new environment of accountability.

Despite this new-found respect for shareholder wishes, I still think the majority of remuneration policies for ASX companies are poorly structured – especially bonus pay.  To my mind, management bonuses should be aligned squarely with shareholder interest.  This invariably means alignment with the long-term performance of the company.

Below I describe the most commonly-used bonus pay metrics I have come across, as well as their inherent flaws:

Earnings per share:  An oft-used and potentially misleading metric, earnings per share (EPS) growth records the increase in company earnings divided by the number of ordinary shares.  Earnings is typically net profit, but in some cases it is earnings before interest and tax or other nebulous earnings measures.  Thismetric can be easily boosted via increased borrowings, which are used to purchase more assets or buy other companies.  The increase in assets should produce an increase in earnings; however the number of shares on the registry remains the same.   As long as interest rates are lower than the resulting return on the debt employed, EPS will go up and management get a fat bonus cheque.  The trouble is, balance sheet risk increases and as soon as earnings drop or interest rates go up the company can be in serious trouble.  Take a look at listed real estate companies prior to the GFC for examples of EPS gone wrong.

Total Shareholder Returns (TSR):  TSR measures the dividends paid and the share price change over a given period (usually 3-5 years).  While it sounds better than EPS, it can still be manipulated by generous dividend policies which artificially boost share price in the short term.  It also uses the share price as a primary metric, when in fact it’s a secondary outcome of a well-run company.  Get the company fundamentals right, and the share price and dividends increase – not the other way around.

Relative Return on EquityI am a big fan of the return on equity (ROE) measure because it measures how efficiently shareholder capital is being used to generate profit.  You know, the whole successful business thing.  However, almost every ROE measure I have read is a relative measure – that is, measured against companies in the same industry or index.  Relative measures really get my goat because a 20% loss can be rewarded if your peers lose 25%.  Unfortunately for the shareholder a 20% loss is still a big loss in the company he or she part owns – who on earth should be rewarded for that?

So what should be the metrics for bonus pay Mr Q??  Well, if I were Emperor for a day and was given the power to determine bonus metrics, I’d choose the following:

Absolute Return on Equity: High ROE tells us the managers are generating good profits on our precious shareholder capital.  It is the primary metric in business and should be the major metric against which all mature businesses are measured.  It’s not terribly got for start-ups (especially miners) as earnings are often negative until production comes on line, but for a mature business like Bluescope, Woolworths or Wesfarmers, it should be a central part of any bonus metric.  Note also the use of the word absolute – it must always be positive.

The only downside to ROE is that it can be boosted by the use of debt, much like EPS.  Which leads us to the second metric.

Absolute Return on Funds Employed:  Return on funds employed measures after-tax profit divided by the sum of equity and debt in the company.  So a company with 20% ROE, but which has just as much debt as equity, will have a 10% ROFE.  This metric is makes sure management aren’t inflating ROE by using excessive debt.  It’s not just equity dollars that are used to generate profit, but also borrowed dollars.  Managers should be getting a good return on both.

Net Profit to Interest Ratio: As a final check on corporate performance, net profit should be checked against the interest costs on borrowings.  This ratio shows how exposed a company is to a movement in interest rates.  Equity and debt levels may stay constant, but if rates move up quickly then borrowings become much more expensive and start eating into shareholder dividends. 

If these three metrics are maintained within appropriate ranges (which will vary depending on the industry) then the company should perform well.  As a result, shareholders we be rewarded as share price and dividends increase in line with the underlying strength of the company.

This approach would allow manager to lay legitimate claims to bonus pay whilst shareholders benefit from high returns.  A classic win-win scenario (or “alignment” in management speak).  It would also remove many methods of share price manipulation or “gaming” of current metrics that can be employed (consciously or sub-consciously) to boost bonus metrics.

Will it ever happen?  I wouldn’t bet next month’s pay on it.

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