PPP ‘reinventing wheel’ may turn off investors — paper

A private think tank has urged economic managers to fine-tune the flagship public-private partnership (PPP) program and rid it of key provisions that will only turn off prospective investors, weaken the constitutional checks-and-balances system and shove the Philippines deeper in debt.

Forensic Law and Policy Strategies Inc. (Forensic Solutions), in its 14th policy paper, questioned the move by the President’s economic team to “reinvent the wheel” — and likely dishearten potential investors — in offering regulatory insurance as a PPP come-on in lieu of the slew of the Congress-approved fiscal incentives that had been adopted by government in the past to woo private capital into the Philippines.

“Malacañang’s “focus on PPP as the ideal platform for integrated national infrastructure development is on point” because “it is the best option for cash-strapped developing countries like the Philippines, where the potential for growth and industry is limited only by its capacity to set in place the necessary infrastructure to support economic activity,” the paper noted.

Forensic Solutions headed by one-time justice secretary and solicitor general Alberto Agra cautioned the Palace’s economic team from going ahead on several PPP features, which, it said, would undermine the viability of this centerpiece program, which President Aquino himself unveiled in a three-day PPP summit or road show at the Manila Marriott Hotel last Nov. 17 to 19. Co-written by Agra and Cynthia Perez Alabanza, a public-private partnerships advocate and former government corporate attorney, the Public-Private Partnerships Series No. 3 titled “The Country Needs a Stable PPP Policy, likewise questioned Malacañang’s plan to worsen rather than ease the country’s debt trap by creating a Philippine Infrastructure Development Fund (PIDF) to jumpstart this pro-investor project with a start-up amount of P200 billion.

This amount will be sourced from the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LandBank), Government Service Insurance System (GSIS) and the Social Security System (SSS).

The paper pointed out too that in insuring against all forms of regulatory risks, including judicial risk, as a pro-investor incentive, Malacañang “will negate the power of the judiciary to review executive action…and force one branch of government to abdicate its function in favor of another.”

“By insuring against all forms of regulatory risk, including judicial risk, some fear that President Aquino’s new PPP policy undermines this system of checks and balances,” they said. Malacañang is “in effect, saying that a contract entered into by the government is immune from judicial inquiry, and will be honored, at least financially, regardless of the result of any review by the courts.”

The paper said President Aquino “hit the nail on the head in identifying a major cause of lack of investor confidence in the Philippines: the danger that the rules, mid-game, may change. President Aquino’s intention to protect investors from such regulatory uncertainty is laudable. Yet in the same breath, his financial managers have publicly initiated a unilateral withdrawal of legislatively-granted fiscal incentives.”

“In lieu of the favorable terms offered by previous administrations, like guaranteed return on investment, guaranteed market and sales, fiscal incentives, full cost recovery, and subsidies for production input, the cost of which is to be borne by the people as consumers and as taxpayers, the Aquino government now offers regulatory risk insurance,” it said.

Malacañang’s economic team is reinventing the wheel, rather than making an objective assessment of the status quo and building upon the gains of the past,” Agra and Alabanza said. “Pulling out previously offered incentives will turn-off investors, unless the incentive offered will put them at a greater advantage.”

“More important than all the fiscal and regulatory incentives that his administration may churn out, President Aquino must ensure that his government will honor its valid and binding contractual obligations, regardless of whether these were entered into by a past administration. Otherwise, no investor, foreign or local, will gamble his or her financial resources on a country whose policies will likely be reversed at every change in the administration,” the paper added.

As for the PIDF plan, it said the state-run investment arm National Development Co. (NDC) will issue government-guaranteed PIDF Bonds, “which is just another form of indebtedness,” with varying maturity periods ranging from 5 to 25 years, and the proceeds from which will then be loaned to PPP investors.

Such bonds will be backed by guarantees from multilateral lending institutions like the World Bank and the Asian Development Bank (ADB).

“To the commoner, this is all just rhetoric,” the paper said. “The clear bottom line is that these guarantees provided by multilateral institutions, as well as the bonds to be issued for the PDIF, must be paid back, with interest. The storyline is at once compelling and familiar. Juan de la Cruz will foot the bill,” it added.

Rather than pursue these questionable features, the paper said Malacañang could improve the PPP and make it far more attractive for both overseas and local investors by way of five imperatives, among them the reinforcement of cooperation among co-equal branches of government.

“Coordination within government is key to ensuring that policy formation and enforcement, and the remedial measures designed to support policy, remain consistent,” the paper said.

Second, it said, the Palace should temper the government’s risk assumption “to prevent exploitation as guarantee of immunity against government regulation, and therefore, a license to contract any and all kinds of commercial, economic and political agreement terms, without regard to existing law, rules and jurisprudence.”

Third, it should reconsider financial risk assumption, especially in highly regulated industries like the energy sector, and adopt alternative incentives like capital subsidies (e.g. access to real estate, technology, and intellectual property) and revenue subsidies (e.g. tax breaks and guaranteed annual revenues for a fixed period).