PHL fights to save PPP initiative before PNoy goes in 2016

After the Aquino administration failed to bid out a rail rehabilitation job—the most expensive infrastructure project in the pipeline at P59.2-billion—the government is scrambling to correct the doubts cast over its flagship public-private partnership (PPP) program. 
 
Officials now acknowledge the need to shift to high gear by inserting changes in the rules and regulations concerning contracts, while the private sector waits the next invitation to bid on the Light Rail Transit Line 1 Rehabilitation project.
 
“We have to do some structural changes on the PPP,” Cosette Canilao, executive director at the PPP Center, told GMA News Online in an interview at her office. 
 
The decades-old Build-Operate-Transfer (BOT) Law is a major problem—as pointed out by the private sector—and a hindrance to the bidding process.
 
PPP Center wants to introduce new changes into the BOT implementing rules and regulations (IRR) by January 2014, just over a year after amended IRR was released. 
 
“An intermediate IRR” will cut the tedious multi-agency approvals needed in changing draft concession agreements of PPP projects, while the actual law amendment eyed within the current Congress is still in the works, Canilao said. 
 
Big-ticket projects can help sustain P850 billion worth of infrastructure developments annually, which the Asian Development Bank (ADB) considers a must for the Philippines to keep growing at seven percent, attract foreign direct investments, and alleviate poverty.  
 
But without an intermediate IRR, the PPP program seems doomed to stagnate. Revisions to concession terms will—again—have to be approved by an inter-agency committee before it is forwarded to President Benigno Aquino III, who has the final say.
 
This tedious process of amendments and approvals is what is keeping the government from bidding out the rehabilitation works on Southeast Asia’s first light rail transit, called LRT 1. 
 
Two months ago, bidding for the LRT 1 was stunted after government received a conditional and non-compliant bid from Metro Pacific Investments Corp., the lone bidder, who went for it without partner Ayala Corp. 
 
Three other bidders, mainly high-profile conglomerate their their foreign partners, backed out the last minute, and pointed out the expected returns—under government’s own terms—will not suffice in making up for the economic and political risks the project entails. 
 
Lessons from the past? 
 
In an e-mail to GMA News Online, Transportation Department spokesperson Michael Arthur Sagcal noted that coming up with the terms that are mutually acceptable to both government and prospective partners from the private sector is a great hurdle. 
 
“Our main challenge is balancing the interest of both government and the private sector… Not wanting to leave behind a legacy of questionable projects, we are doing our best to make sure that public money is spent wisely, prudently, and in the best interest of the people,” Sagcal said. 
 
How risks are spread is a common ground for disagreements hounding most PPP projects. In the end, concession agreements had to be revised stretching out the bidding time frame in the process. 
 
The irony is that both the government and the private sector use the supposed lessons from past failed biddings in defending their respective positions on the matter, with the government arguing on the need for caution to avoid awarding contracts that would later be criticized as disadvantageous to the public.  
 
Nightmares of “flawed” undertakings like the Metro Rail Transit 3 (MRT 3) prompt government to view contracts under a microscope and sprinkle it with stringent performance indicators the private sector must meet, said a government official—who asked not to be named due to the controversy of the subject—to GMA News Online. 
 
A 2010 World Bank publication noted that in 1993, the Philippines accepted foreign exchange, demand, and revenue risks while guaranteeing a 15 percent return on equity for the MRT 3—a mass rail transit system that plys through the Metro Manila’s main thoroughfare, EDSA. 
 
MRT 3, however, attracted lower-than-expected passengers and required billions of pesos in government subsidies. The latter had to be raised because petitions for higher fares were unapproved in the face of stiff public opposition. 
 
The government is now mulling over a complete buy-back of the concession to avoid shelling out money for the subsidy. 
 
Still, “a long list of historical contracts shown to have overly favored the private sector… should not be an excuse for their inability to reach positive deals with the private sector,” noted Bank of the Philippine Islands (BPI) economists Nicholas Antonio Mapa and Emilio Neri Jr. in an e-mail to GMA News Online. 
 
In the case of LRT 1, government stood firm on its position that real property and income tax risks should be borne by the winning bidder. As a result, companies backed out to avoid getting caught in a financial squeeze.  
 
In an ambush interview a week after the Aug. 15 LRT 1 bidding, which was declared a failure, Ayala Corp. managing director John Eric Francia shared his fears. “My concern was the risk was real from where I sit,” he said.
 
The government has since agreed to shoulder some of the risks originally assigned to the private sector. 
 
For what they were worth, such lessons from the past were part of the “birth pains phase,” said Tala Fernando, managing director at BF Corp., part of the group of consortia that bagged the P16.28-billion contract to build 9,300 classrooms for the Department of Education under the PPP initiative.  
 
“Both the government and investors are trying to find comfort levels,” she noted in an e-mail, saying the disagreements with government over design and building methodology took time until these were ironed out before the project was finally awarded last year. 
 
A major concern by the private sector is the uncertainty about whether or not future administrations would honor the contract. The fear stems from an ongoing international arbitration over the Ninoy Aquino International Airport Terminal 3 with a German contractor. 
 
“The private sector needs to be afforded a higher rate of return for possible changes in the rules of the game along the way,” Mapa and Neri said. 
 
The economists noted the private sector needs “compensation for the risk that contracts will not be honored every six years” or when a new administration assumes office. 
 
On ‘institutionalization’
 
To address regulatory risks, including “any breaches” by future administrations, the government has earmarked P30 billion in next year’s budget to set up a contingent liability fund, said PPP’s Canilao.  
 
A separate fund for feasibility studies and manuals on processes will be drafted into the proposed amendments to the BOT Law that is now being reviewed by economic managers, she said, adding that an Executive-approved bill for consideration by the 16th Congress should be out in the summer of 2014.
 
“The institutionalization is very important,” the PPP official noted. 
 
Despite a history of “failed” contracts, the institutional problem seems odd as the current PPP flow is actually viewed as one of the best in the world. 
 
“The Philippines stands out very well in setting up a PPP standard,” ADB president Neeraj Jain said in a telephone interview. “Your ASEAN neighbors have long wanted to push for a standard PPP format and for a center handling PPPs. They have not achieved that much.”
 
Projects under Aquino’s PPP program took no more than 18 months to reach financial closure from when invitations to bid were released. This was on a par with Canada and Australia, and deemed faster than the 22-month minimum for the UK and India to seal a deal. 
 
“I cannot say in a clear-cut manner that there are delays. Yes, expectations of both private sector and government have not been met, but we know that necessary blocks are there,” said Jain.
 
An understandable dilemma
 
The fear boils down to this: Not enough number of projects will be awarded while funds are there, or investors’ interest will fizzle out once the most popular president steps down less than three years from now in 2016. 
 
“The accommodative financing environment should embolden investors, both the private and public sectors to take advantage while the tap is flowing,” said BPI economists Mapa and Neri. 
 
The dilemma on the part of government is understandable, but the danger of sliding back remains a threat to infrastructure development.
 
“I understand the government’s teething problem, but it’s disappointing… I hope things don’t get pushed back again,” Eduardo Francisco, president at BDO Capital Investment Corp., said in an interview.
 
Decades of neglect by past administrations have made simply obvious the fact that Philippines needs to improve its decrepit infrastructure, and the clamor is there to pursue that path of development.
 
“We’re willing to finance, but there are no projects to bid for now,” Francisco said. 
 
From the current pipeline of at least 47, only four projects worth a combined P43 billion were actually awarded three-years after the program was unveiled. 12 of the proposed projects were in advanced-approval stages—and likely to be awarded during Aquino’s term.  
 
“In a fight or flight situation, we choose to fight despite bruises from criticisms, because we believe that what we do will change the way the government does business,” PPP Center’s Canilao said. –VS/VC, GMA News 
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