Is Philippines really ready for PPP?

Last March 7, 2011, President Aquino, during the launch of the Public-Private Partnership (PPP) Center, announced the first five PPP projects which will be subject to bidding this March to June. The PPP projects are: the P6.3 billion Metro Rail Transit Line 3, the P7.7 billion Light Railway Transit Line 1, the P1.6 billion Daang Hari-South Luzon Expressway link road, the P10.6 billion Ninoy Aquino International Airport Expressway Phase 2, and the P21 billion North Luzon Expressway-South Luzon Expressway connector road.

It may be recalled that last November, the President, during the launch of his PPP Program, mentioned more than 100 possible PPP projects. Based on news accounts, this administration is planning to push for the bidding of 10 to 12 PPP projects this year.

But we must ask: Is the country really ready for PPP? After coming out with the list? What is next? Aside from the usual rhetoric about PPP, have our responsible officials done their homework? Is it enough to say that the country will engage in PPP because the country lacks the required capital; the investors are confident about the economy; the public trusts the President; the administration has a long list of possible PPP projects; it promises to protect investors from regulatory risks; and our government financial institutions will provide the necessary funding to help propel PPP?

While the above statements and promises are important, these are not enough. Contrary to what our officials are saying, PPP is not that simple. PPP is not a walk in the park.

PPP is not the only solution. PPP is not THE Magic bullet. It involves a wide range of difficult choices, and so far, the public has yet to know if real policy choices have been made and what the reasons supporting these decisions were, if there are any.

The first decision point is why PPP? Why can’t government, on its own, provide the needed services? Why does it have to shift its position from being a seller or provider of services to being a buyer or purchaser of services? If government truly wants to promote PPP as a tool for nation-building, basic questions must be asked and must be answered.

The answer to the question, “Why PPP?” may be found in the adoption of a Public Sector Comparator (PSC) model. A PSC model estimates the cost of government if it were to undertake the project, with adjustments based on identified risks, and compares it with the costs on a net-present value if the private sector in a PPP arrangement were to pursue the project. If the value of the public sector cost is greater than the value of the expected payments to the private sector provider under a PPP mode, then PPP is more appropriate than the public provision of services.

This now begs the question: Did the administration adopt a PSC model in so far as the 5 priority projects are concerned? Or is this Administration shooting from the hip? If it did adopt a PSC model, what were the results? If it did not, was there a conscious decision not to use one?

Based on official statements made by the administration, the bidding of two of the five priority PPP projects — MRT3 and LRT1 — will commence by the end of this month, which means that the terms of reference and bid documents will be released this March.

Has the administration prepared a relevant PPP feasibility study on these two projects? How about for the other projects? If so, what are the components of this study? Investors, foreign governments, and financing institutions are anxiously waiting to get copies of the terms of reference, bid documents and feasibility studies.

More questions: Has the National Economic Development Authority or the public implementing agency conducted a/ an:

1. Needs Analysis, defining the government’s goal relative to each of the 5 priority projects, outputs of the service, and standards to be met;

2. Affordability Assessment, identifying the current cost to government of providing the service, capacity of the government to run the service, and impact of proposed project on user fees or tariffs;

3. Value for Money Assessment, justifying PPP over public sector initiative based on cost estimates using net present value approach if undertaken via PPP or public provision on risk-adjusted basis;

4. Preliminary Risk Assessment, determining the risks that will transferred, shared or retained by the public section, the value of each risk, and the capacity of the private stakeholders to manage and control the risks that will be shared or transferred to them;

5. Stakeholder Assessment, recognizing the stakeholders, supporters and oppositors to each of the PPP project and securing their feedback on the project;

6. Institutional and Human Resources Assessment, providing a plan to absorb employees of the public sector if needed, and creation of special purpose vehicles or asset holding companies;

7. Bankability Assessment, requiring long-term investments, private financing, guarantees, subsidies, incentives , and security for cash flows;

8. Legal Viability Assessment, listing all legal and governmental requirements, PPP options and authorities of public units involved;

9. Market Testing, assessing the potential field of qualified bidders, domestic and international, their interests and appetite;

10. PPP Option Recommendation, recommending the best or appropriate PPP option — whether Build-Operate-Transfer or any of its variants, joint venture, concession, lease, service contract, management contract or disposition, among others; and

11. Indicative Transaction Implementation Plan, spelling out the procurement process, and detailed implementation plan?

We hope that government has undertaken all these assessments with regards the first five PPP projects. These documents will show what decisions were made by the Administration and whether the Government has made the choices needed for any PPP project, and whether such choices are the right ones. Indeed, everybody is hoping that the first official salvo of this Administration on PPP will be founded on solid fundamentals, and not just hype.

The Philippine PPP policy should not promote partnership for mere partnership sake. Any PPP Project should be driven by two simple standards, “MORE” and “BETTER:” BETTER quality public service, MORE affordable prices and tariffs, and BETTER value for money for government.

We will only know if the Philippine PPP under President Aquino truly advances the rationale of any PPP once we know the policy choices. We have the right to ask. We have the right to be informed.

This is the position of Forensic Solutions.

Forensic Law and Policy Strategies, Inc. or Forensic Solutions is a think tank offering services in the fields of policy, law reform, advocacy and governance. The group provides forensic study and viable policy options, giving our clients a crucial advantage in navigating executive, administrative, legislative and judicial inquiries. Forensic Solutions recently published a book on Knowing PPP, BOT and JV: A Legal Annotation. Together with the Center for Global Best Practices, it conducted two seminars on PPP.

Alberto C. Agra is the former justice secretary, solicitor general and government corporate counsel. He is an advocate of PPP. –Alberto C. Agra, Forensic Solutions