Back to the drawing board (Part 1)
October 12, 2011 at 14:18
This is a re-posted opinion piece.
Part I
The Aquino administration’s centerpiece public-private partnership (PPP) program will have to undergo a major makeover. Why am I not surprised? It was unveiled with much fanfare during Mr. Aquino’s first state-of-the-nation address 16 months ago. In November 2010, ten new projects were announced with the promise that these projects would be bid before the end of 2011.
None has been bid and awarded, even as the projects in the shortlist kept changing.
This review tells you something — the PPP program was not well thought out from the very beginning. The timing of the announcement was premature — way before the necessary conditions for PPP’s success were in place. There was no clear strategy on how the PPP program would be implemented, there were no set of readily implementable list of projects, and at that time the institutional mechanism that would turn the PPP concept into reality was still hazy.
There were many signs that the PPP program was in trouble. Deadlines for project biddings were set and reset. The projects in the shortlist kept on changing. The huge sum which was appropriated in the 2011 budget to support project identification, development, and evaluation remained largely unspent. The PPP center was reorganized and transferred from the Department of Trade and Industry to the National Economic and Development Authority after much delay. Finally, only last month the PPP center head resigned, allegedly because of the pressure and disgust with the political turf war.
The decision to review the PPP program — its coverage, rules and regulations, and implementation mechanism — is warranted. The program had a bad start. It has to be rebooted. It’s better to get all the kinks out of the system, before it is relaunched.
The review of the PPP program should start with discarding some popular myths about governance.
Myth No. 1: public public-private arrangements are a novel idea. The fact: it’s an old concept, an old wine in a new bottle.
Public-private partnership has always been embedded in the way the government delivers public services to its people. The important distinction between public provision and private production has always been recognized. That’s true for most of our public infrastructure projects — from the largest to the smallest projects, from large multi-purpose dams to one-story school buildings.
The government provides the financing, either through taxes or loans, while private firms build or provide the service. But the award of projects or services has to go open, through competitive bidding.
Myth No. 2: all public infrastructure projects are best financed by user charges and at no cost to the government. Fact: some projects are better financed by taxpayers’ money rather than through user charges because some projects have external benefits that benefit society as a whole. This means that there are projects where the sum of all user charges, what direct beneficiaries are willing to pay for the project, may not be enough to pay for the full costs of the project. In such a case, the project may not be provided or may be under-provided. There are many examples: communal irrigation, rural roads, rural water supply, and so on.
One can even throw in most urban transit systems, such as the Metro Rail Transit (MRT) system, as an example of how financing the project using user charges alone may not be appropriate. Imagine if the government approved a rate of P65 per ride rather than the present subsidized rate of P15 per ride. No investors will come in because ridership will drop sharply. The benefits from cleaner air (as the number of buses and cars along EDSA falls), reduced traffic, and time saved for the riding public, will not be reaped. (This by the way is not an argument for keeping the present MRT rates unchanged. Some upward adjustment to recover at least the operating costs of the system may be appropriate.)
Myth No. 3: the provision of infrastructure through PPP arrangements will necessarily be more affordable and beneficial to citizens. The fact: it maybe more expensive and less beneficial to citizens. Consider a toll road, say SLEX, constructed using taxes or soft-loans. It may result in lower toll fees compared to being constructed and managed by a private firm, other things equal. This is so because the government can borrow at lower costs and longer maturity, and is not expected to generate profit from the project.
The private firm, on the other hand, will have to borrow to finance the project, at higher rates, and will be under pressure from its stakeholders to generate profits from its investment. With higher cost of financing plus the inclusion of extraordinary profit for its investment, the costs that the private investors would like to recover will be higher. Hence, the user charges will be higher.
Of course, things are generally not equal. A project, say an urban transit system or water system, constructed and managed by the government, is likely to be costlier because of corruption and inefficiency owing to political patronage (new set of officials and workers are taken in every time there is a change in administration). It is impossible to find an administration that is totally incorruptible, competent, and transparent.
But it is also naive to think that giving the private firm (contractor, owner or concessionaire) the entire project, from construction to management, will be a bed of roses. What if the private investor deliberately overbuilds, knowing that user charges will depend on the costs of the project, and overcharges to reap extraordinary profits to satisfy his stakeholders’ demand for higher return on investment?
But even in the latter case, the evil hands of government cannot be entirely ruled out. There has to be a regulatory body to limit the abuses of the private investor. Of course. But what if the regulators end up in the pocket of the regulated — a case of “regulatory capture”? What if the regulators end up working in the interest of the regulated rather than the project beneficiaries?
In some cases, the appropriate policy is to limit the participation of the private sector to activities where the rules of engagements are clear and well-defined. For example, consider two options: first, of having a project awarded on a build-operate-and-transfer (BOT) arrangement to a private firm; the second option is to have the facility built by a private firm on a build-and-transfer (BT) arrangement, choose the firm through open competitive bidding, have the facility turned over to the government or its instrumentality, and then have the management and maintenance of the facility awarded to another private firm through an open, competitive bidding.
Which option will serve the people better — the first or the second? There are more unknowns in the first option than in the second, more uncertainty in the first than in the second option. Hence, a better contract may be agreed upon in the second option compared to the first option.
An example of the second option is the SCTEX project — a hybrid in the words of Transportation Secretary Roxas. It was funded by an official development assistance (Obuchi Plan). Through open, competitive bidding, it was constructed by a private firm. After the project was completed, it was turned over to the government. The government decided to bid the management of SCTEX.
By bidding out the service maintenance contract rather than the total project (construction plus maintenance over a period of time) it is easier on the part of the government to narrow down the parameters of the PPP arrangement (what the service contract may or may not cover, full costs or just variable costs), reduce uncertainty, and make it less costly on the part of users. Bidding out the whole project would have bloated the cost of construction and maintenance as it would include a higher cost of financing and pure profits that the private sector provider would try to capture.
Myth No. 4: in the case of ODA-funded projects, the benefactor chooses the contractor. Wrong. Foreign-funded projects should go through competitive bidding. A loan from a foreign government, say China or Japan, does not mean that a contractor chosen by the foreign government should implement the project. Since it is a loan, not a grant, the Philippine government should insist that the contractor be chosen through open, international competitive bidding. At the very least, it should be competitive bidding among foreign firms from the lending government in partnership with local firms.
Open, competitive bidding should be the general rule. Negotiated solution should be resorted to only if there is failure of bids.
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By: Benjamin E. Diokno – Core
Source: Business World, Oct. 11, 2011
To view the original article, click here.
