Corruption risk among 50 pitfalls for PPP — paper

Published by rudy Date posted on April 7, 2011

The effect of corruption and political succession were listed among 50 potential risks facing the smooth implementation of the public-private partnership (PPP) projects, which the Aquino administration identified as a cornerstone of its economic development program, a prominent think tank said in a recent report.

Forensic Law and Policy Strategies Inc. (Forensic Solutions) called on government to seriously consider and review the risks it identified in PPP projects before rushing into its flagship program to avoid unreasonably high tariffs, finger-pointing, congressional probes plus other woes in the future it said could dent investor confidence in the Aquino administration.

In its 8th policy paper on the PPP, Forensic Solutions said such an exhaustive and complete risk assessment should include corruption risks arising from public officials getting bribes or favors; environmental risks concerning the project’s impact on the ecology; foreign exchange fluctuations and inflation surges; legislative risks brought about by new laws affecting the project; taxation risks arising from revisions in taxation laws and revenue rules; and succession risks brought about by change of policies by the next administration.

Former Justice Secretary and Solicitor General Alberto Agra, who heads Forensic Solutions, wrote in this latest policy paper that “no PPP project must be opened for private sector participation without doing a risk assessment,” which is “an integral and indispensable part of any feasibility study of a PPP project, especially project-finance based PPP like build-operate-transfer (BOT) mode, joint ventures and concessions.”

The paper said the risk assessment process should also cover force majeure risks arising from circumstances beyond the parties’ control and weather risks causing project disruptions attributable to erratic weather patterns; economic risks resulting in a drop in revenues or project financiers suddenly pulling out; social or protester risks involving the opposition of certain host communities to projects; market competition risks that could erode the potential gains of the project; and credit risks induced by the possible default of the debtor or when the lenders or sponsors are not credit-worthy.

“If the relevant risks are not addressed and properly assigned to the party that can best manage and control the risks, one can expect high or unreasonable tariffs, an unaffordable PPP project, delay, failure, finger-pointing, penalties, defaults, litigation, congressional investigations, loss of confidence, and distrust,” Forensic Solutions noted.

Forensic Solutions has so far released 20 policy papers discussing various pressing national concerns.

The paper is — titled “50 PPP-Related Risks: Has the Government Considered Them?”

Forensic Solutions has published a book titled Knowing PPP, BOT and JV: A Legal Annotation, and, together with the Center for Global Best Practices, conducted two seminars on PPP just recently.

Its earlier PPP policy papers are detailed discussions on the PPP policy, the Swiss challenge method of bidding out major projects, the joint venture guidelines, corporatization and the lease option as viable PPP modes.

Forensic Solution said the proposed risk assessment list, based on the book titled Public-Private Partnerships (Managing Risks and Opportunities), could be classified into systematic or market risks, and non-systematic or specific risks.

“The former pertains to those risks that change broad economic conditions that affect the whole market,” Agra said. “The second type pertains to those risks associated with a particular asset, facility, project, company or segment of the market,” he added.

From an initial list of over 100 projects, the Aquino administration announced in mid-March that five of these PPP projects will be auctioned off in a month’s time. These 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.

Agra pointed out that contrary to what the public had expected, the light railway projects, which are the first two PPPs of the Aquino administration, would not be implemented via the BOT mode that it had been espousing, but through four-year service contracts where funding will be drawn exclusively from the government.

He explained that unlike in BOT contracts where there is considerable funding and assumption of risks on the part of the private sector, winning bidders in service contracts perform the service for the least cost.

In BOT schemes, the private sector’s payment are to be taken from and linked with the tariffs, while in service contracts, the government assumes the risks in the funding aspect, Agra said.

Agra also observed that the Terms of Reference (ToR) and bid documents for these PPP projects have not been released up to now by the Department of Transportation and Communications, even if the DoTC had already placed announcements in newspapers inviting interested parties to submit their expressions of interest to its office not later than April 15.

The delay in the release of the ToR, though, could be “a blessing in disguise,” he said, because it means that it is not yet too late for the government’s economic experts to carry out an exhaustive risk assessment of the PPP projects.

Agra suggested that these risk assessment tests be incorporated in the government’s PPP guidelines and tool kits. The National Economic and Development Authority was last month reported in the media as planning to come up with PPP tool kits for the use of concerned and/or interested parties.

On top of these risk assessment tests, Forensic Solutions also came out last month with its 6th PPP policy paper tackling an 11-point valuation process to determine the viability of PPPs and prove the government’s readiness to partner with private investors on these big-ticket ventures.

Agra said the risk assessment tests to be conducted by the government’s PPP experts should also include bid process risks due to unwieldy, lengthy and costly process; demographic risks where changes in population and density could affect the project; design risks where the proposed technical solution is unworkable or inefficient; availability risks, which relate to facilities and equipment being on hand for use by the parties; and gearing risks, which arise from an inappropriate funding structure (ratio of debt to equity) and its impact on profitability. –Daily Tribune

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