MAPping the Future
Public-private partnership–pitfalls and opportunities
By Felicito C. Payumo
Philippine Daily Inquirer
First Posted 22:30:00 03/27/2011

Filed Under: Infrastructure, Laws, Government
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PRESIDENT Aquino, in launching the first batch of Public-Private Partnership (PPP) projects, has stressed the important role of the private sector in the government’s infrastructure program.
Listed were five projects, which included the expansion and upgrading of the Light Rail Transit 1, privatization of the operation and maintenance of the Metro Rail Transit 3, linking of the South Luzon Expressway to Daang Hari Road, Naia Expressway Phase 2 and NLEx-SLEx Expressway.
We should not count on our usual generous share of Official Development Assistance (ODA) from Japan for she may well need all her resources to rebuild the houses and infrastructure devastated by the 9.0 intensity earthquake and the tsunami that immediately followed.
The renewed interest in PPP has fueled discussion on how to successfully implement the program without committing the mistakes and abuses of past Build-Operate-Transfer (BOT) projects. The PPP is but BOT renamed.
Genesis of the law
To understand the issues, it would be helpful to start with the intent of the law—RA 6957.
PPP is not a new concept, but the Philippines was the first country in Asia to give the PPP infrastructure program a legislative framework by enshrining it into a law in 1990. The BOT bill was filed simply because government did not have money to fund the huge investment requirements of our infrastructure program. Revenue collection was never enough, government assets for sale were not inexhaustible, and there were limits to government borrowings. This was shortly after we passed the Water Wells Act to fund the construction of 100,000 water wells in our 45,000 barangays. The object was to reduce the high rates of mortality and morbidity caused by waterborne diseases. Within five years, the program would increase the rural population that would have access to potable water from 45 percent to 76 percent, numbering about 15 million people. While we felt good having addressed the most basic need in the countryside, but with budgeting being a zero-sum game, it dawned on us legislators that what we had done was merely re-divide the national pie when what was needed was to enlarge the pie.
We asked why should government be solely responsible for building our infrastructure? Why not harness the resources of the private sector, supposedly the engine of economic development? Thus, the BOT Law was conceived.
It was amended in 1994 by RA 7718, which added variants such as Build and Transfer (BT), Build-Own and Operate (BOO), Build-Lease and Transfer (BLT), etc. It also allowed unsolicited proposals, provided the projects involved new technology and were not part of the priority projects, and did not require direct government guarantee, subsidy or equity. In the event another proponent submitted a lower price, the original proponent had the right to match. And from herein arose the controversies.
Unsolicited proposal
The rationale for allowing unsolicited proposals is sound. Government has no monopoly of foresight and expertise in planning for the country’s development. The private sector is a rich resource of ideas and technology that government can tap. But like all other laws with good intention, it is subject to abuse.
Arangkada Philippines 2010 published by the Joint Foreign Chambers observed that too many contracts were awarded under the unsolicited mode. Through connivance with the implementing agency, some projects have been delisted from the priority list so that an unsolicited proposal may be submitted—a neat way to avoid competitive bidding. And the time for developing a proposal under the Swiss challenge (60 days) is too short.
Government financing
After some columnists questioned the need for government financing and warned of possible moral hazards with government sharing in what is supposedly private sector responsibility, Finance Secretary Cesar Purisima had since clarified that government will issue PPP bonds only as needed, i.e. when the gap between the project’s financial feasibility and economic desirability is substantial. The statement is reassuring since such low feasibility-high economic benefits projects are better financed by ODAs that are subject to clear rules than through a hybrid PPP that has none of the financial discipline of the private sector. Since such financing is a disguised public expenditure, it is actually a subsidy that should be treated as sunk costs, e.g. right of way acquisition, feasibility studies, etc. The project is thus made viable by not having to raise user fees to unaffordable level. But as suggested by a USAID- supported Technical Team to the Board of Investments, it should be allowed only when there is acknowledged public good from the project. Otherwise, there will be no need to be efficient because the proponents know that government will always come to the rescue.
Government guarantee
The issue of direct government guarantee for a PPP project is related. Indeed, during the deliberation on the bill, the legislators were emphatic that they did not want a repeat of the loan guarantees granted to PNCC and others by the defunct PhilGuarantee.
More important than financial guarantee is an assurance to the private proponents that contractual commitments will be enforced. This was what President Aquino meant when he assured investors that they would be protected against regulatory risks. Since realistic user charges are key to achieving financial viability, the US-AID Technical Team also recommended that “government regulatory bodies responsible for hearing petitions for user-charge adjustments act in a timely and decisive manner. It must, however, carefully weigh competing efficiency and equity concerns prior to rendering a decision.” This should be a reminder to government not only in the case of the SLEx but of other PPP contractors’ petitions to collect cost-recoverable toll rates.
Guarantee for loans contracted by the project proponents, however, should be distinguished from compensation for a project that is revoked, cancelled, terminated or taken over by the government by mutual agreement or by expropriation. The law provides that government shall compensate the contractor for actual expenses plus a reasonable rate of return not exceeding that stated in the contract.
Equally important to the team is the improvement of project quality at entry level since it has been the observation that projects which encountered legal problems were generally of low quality. This applies to the controversial case of NAIA 3 which, unless resolved quickly, serves as a dampener to the PPP program.
Take or pay
But what about the issue on the take or pay provision that allows independent power producers (IPP) to be paid whether or not the plants are producing electricity? While not a direct guarantee on loans, it is a virtual guarantee against commercial risks which the investor, and not the government, should cover. But the daily power interruptions we had in the early 90s did not give the government a strong card. No wonder, the queue for IPPs was long. We should learn our lesson and work now to install the country’s required generating capacity lest we rush in more IPP projects with “take or pay” provisions.
Status of PPP projects
As of September 30, 2010, there were 84 projects (valued at $21 Billion) of which 41 were operational and 24 completed. After removing one contract nullified by the Supreme Court, nine terminated and four under litigation, the PPP has still contributed $19.5 billion in infrastructure investments. The program, no doubt, has been a boon to the economy. Could we have funded approximately P1 trillion worth of infrastructure from internal operations, borrowings or sale of government assets? Or would we have to wait, and for how long?
The power sector contributed a total of $9.5 billion in projects and the transport sector, $2.66 billion. Together, they contributed more than 50 percent of total PPP projects.
The local government units had done minimal projects. Other than a few public markets, slaughterhouses, and electric and water supply systems, no project of significant values had been done.
But with the entry of Manny Pangilinan (NLEx-SLEx Link) and Ramon Ang (Tarlac-La Union Expressway) in PPP projects, would Ayala be also looking into PPP projects other than water and power projects? Would a monorail connecting LRT with MRT, as Architect Felino Palafox, Jr. suggested, and Ayala Makati with The Fort be the LGU (Makati and Taguig) PPP project we had been waiting for?
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author was a three-term representative of the first district of Bataan and former chairman and administrator of the Subic Bay Metropolitan Authority. He was the principal author of the BOT Law. He is currently chairman of the University of Nueva Caceres. Feedback at map@globelines.com.ph. For previous articles, visit map.org.ph.)