The long road to PPP

(Ric Saludo’s colleague Verbo Bonilla contributed today’s column.)

NEARLY a year ago, President Benigno Aquino III hailed public-private partnerships (PPP) as a major development thrust of his new administration. “We will make sure that the Build-Operate-and-Transfer projects will undergo quick and efficient processes,” he said in his first State of the Nation Address last July. “With the help of all government agencies concerned and the people, a process that used to take as short as a year and as long as a decade will now only take six months.”

After nearly one year, none of the 10 initial PPP projects have been bid out, despite tentative schedules for rollout throughout this year. The lone project set for bidding, the LRT-MRT light rail management contract, was deferred as the implementing agency, the Department of Transportation and Communication (DOTC), welcomed its new Secretary, former senator and Aquino running mate MAR Roxas.

The delay has tempered somewhat the optimism that greeted PPP at the Infrastructure Philippines investors conference last November, which announced 10 projects for 2011. Since then, the list has been streamlined to focus on a first batch of the following four projects: 1) NAIA Expressway (Phase II), linking the Skyway and the Manila-Cavite Coastal Expressway (?10.6 billion); 2) DaangHari – SLEX Link Road, a 4-km road from Alabang to Bacoor (?1.6 billion); 3) MRT/LRT Expansion Program: Privatization of LRT 1 Operation & Maintenance (?7.7 billion); and 4) NLEX-SLEX Connector, an elevated expressway running above the train line from Caloocan to Makati (?21 billion).

After the initial cheering, however, what’s emerging is that there is much preparation to be done before even one project goes on the block, such as implementing guidelines, bid documents and feasibility studies. In asking “Is the Philippines really ready for PPPs,” former Justice Secretary Alberto Agra of Forensic Solutions points out that a decision process has to be undergone before concluding that PPP is the appropriate mode for any project. He also lists down several assessments that should have been done before government selected the above-mentioned projects.

While citing the benefits of PPP, the ADB Public-Private Partnership Handbook also lists four broad categories of PPP preparatory works: legal, regulatory and policy frameworks; technical issues; institutional and capacity building; and, commercial, financial, and economic issues.

The preparatory works are to ensure that the PPP projects, which commit substantial amounts of money over years or decades, succeed in providing returns for both the public sector and the private sector partners. In the U.P. study titled, “Determinants of Outcomes of Public-Private Partnerships in Infrastructure in Asia”, there are six major factors identified as risks affecting PPPs: 1) the macroeconomic environment; 2) incentive issues; 3) political risk; 4) fiscal capacity of government; 5) firm-embodied traits; and, 6) reasons such as regulation and credit risks.

Has the Aquino Administration done its homework for the PPP program? The government would like us to think so, even as Finance Secretary Cesar Purisima, maintaining that projects are on track, said in a Business World report: “We want to build a good, sustainable foundation. We don’t want our projects to be questioned and not stand scrutiny.” Yet the Cabinet economic cluster indicated recently that PPP would only augment state-funded public works, as it had always done.

In laying the groundwork for PPP, the former BOT Center was reorganized into the PPP Center and tasked with overseeing the PPP program. The PPP Center website lays out the process flowchart for project approval and bid.

In terms of incentive issues and regulatory risks, the PPP Center, in the frequently asked questions section of its website, lays out the government’s preference for solicited over unsolicited proposals and the guarantee offered against regulatory risks.
With regard government’s fiscal capacity, the issue is whether the Philippine government would be able to stand by the required counterpart funding given its low fiscal standing. To ensure adequate funds, the government aims to set up a Philippine Infrastructure Development Fund with the help of international financial institutions.

In terms of risks from the macroeconomic environment, the government in its Philippine Development Plan 2011-2016 states a commitment to a stable macroeconomic policy. The concerns of prospective PPP investors, however, are longer than six years and would have to go beyond such statements of policy. In the end, whether investors would bid for a PPP project depends on the overall attractiveness of the Philippine option vis a vis opportunities elsewhere.

The Aquino Administration also assures prospective investors that the government is minimizing risks associated with PPPs. In addressing political risk, President Aquino’s speech at the infrastructure summit promised that deals would now be done “in the broad light of day”, where rules are clear, honest and transparent, in contrast to alleged “backroom deals” in the past.

Yet despite his assurances, President Aquino recently worried foreign investors when he reviewed three contracts, then canceled a Belgian-funded lake dredging project, ordered a French-funded ports contract renegotiated, and a Chinese-financed rail line reassessed — all due to alleged contract anomalies. That prompted a word of caution from Hubert d’Aboville, president of the European Chamber of Commerce in the Philippines, who told ANC that the government was hurting investor confidence by renegotiating contracts done in good faith and according to the law.

The government recently issued more assurances that the much-awaited partnership program guidelines are under way. But investors are getting tired of yet more pledges to roll out the program and give adequate protection to joint ventures. Until one deal actually gets done and well, PPP may only encourage the perennial wait-and-see attitude toward the Philippines.

Verbo Bonilla is writer-analyst for The CenSEI Report, providing subscribers of the Center for Strategy, Enterprise & Intelligence analytic research on national, business and global issues. –RICARDO SALUDO, Manila Times