Perfect partners? The Aquino government is upbeat in inviting more private firms to invest on infrastructure like the Metro Rail Transit, but some are worried this would mean the public would end up paying higher costs of services and that government would bend some rules to entice investors. JES AZNAR

While President Benigno Aquino III has vowed to implement key reforms and take a wholly different track from his predecessor, not all the policies of the Arroyo presidency have been abandoned.

One of the few things pursued by the previous administration which is set to continue and be intensified is the Public-Private Partnership (PPP) program.

Under this program, the government will tap the private sector to invest in public infrastructure projects. While private investors will be expected to abide by regulations that come along with operating public infrastructure projects, the government is expected to ensure the consistency of regulations and provide an environment suitable for both business and just for the end-users – namely the general public.

So far, projects lined up under PPP are in those sectors intended to help drive the economy, such as tourism. In an ambush interview after the Philippine Development Forum (PDF) on February 26 at the Sofitel in Pasay City, Finance secretary Cesar Purisima said the government aimed to have the first project bid out before June and have more out before the end of the year.

And in fact the first has just last week come out.

"If we rely on our budget alone, we cannot do it [infrastructure development]. The solution is, therefore, to tap the resources of the private sector," Purisima told reporters.

In November, the Finance secretary’s team announced the first set of projects which together are estimated to cost around PhP 107 billion (USD 2.5 billion). They comprise the MRT/LRT expansion project; the MRT Line 2 East extension; Panglao Airport; Laguindingan Airport (operation and maintenance); Puerto Princesa Airport; Daraga International Airport; Kalibo Airport; NAIA Terminal 3 upgrade and full operationalization; CALA Expressway (Manila side); NAIA Expressway Phase II; Central Luzon Expressway Phase I; and finally, the supply of treated bulk water for Metro Manila.

Why do we need PPP?

Increasingly, governments around the world see tapping private investment into public infrastructure programs through PPP as an ideal way of avoiding heavy borrowing costs and increasing national debt. Advocates also say PPPs can also be operated more efficiently by business given their financial acumen, resources and project planning expertise.

There is a consensus among economists that the Philippines needs more job-generating investments to reduce poverty: To attract investors, however, the country has first to build new and enhance existing infrastructure, such as farm-to-market roads, bridges, airports, irrigation facilities, rail systems, power-generation and distribution facilities.

In a press briefing on February 26 immediately after the PDF Budget secretary Florencio Abad echoed this by stating a key plank of the administration’s agenda is to reverse the growing poverty incidence by inviting businesses to invest in public infrastructure.

Infrastructure spending in the Philippines amounts to less than three per cent of the country's gross domestic product. This is two per cent below the average in Southeast Asia.

According to Purisima, the only way for the Philippines to catch up with its neighbors is to have more private firms involved in building infrastructure projects. The budget deficit stood at PhP 270 billion (USD 6.3 billion) for the first 11 months of 2010, while overall national debt stood at PhP 4.7 trillion (USD 109 billion) as of the end of November 2010.

What critics say about PPP

While the new government is very upbeat about the PPP, some sectors have expressed opposition to the idea of surrendering infrastructure projects to private firms. Critics have warned against potentially dire consequences of having profit-oriented firms run projects oriented towards public service.

One adverse consequence, they argued, is the tendency for such infrastructure services to be more expensive than they should be. The very reason such projects should be run by public companies and not private entities, is to make sure people enjoy services at the most affordable cost.

"Private sector participation means operating for profit and user fees for what should be mainly or even solely publicly provided social services and utilities," Sonny Africa, head of IBON Research, said in an interview with the Philippine Public Transparency Reporting Project (PPTRP).

Africa cited the case of privatizing water services in Metro Manila. Since privatization in 1997, water charges have increased much higher than inflation.

He said that from 1997 to 2010, average consumer prices rose by 100 per cent. Comparatively, water rates charged by Maynilad and Manila Water increased much faster, or by 359 per cent and 646 per cent, respectively, over the same period.

Africa added that PPP also poses the danger of having private monopolies run public services. A private firm that wins a government contract to operate a public infrastructure service is virtually sure of doing business competition-free, thus potentially leading to higher charges to people.

Meanwhile, the Freedom from Debt Coalition (FDC) argues the strategy of making private firms spend on public infrastructure is “a cure worse than the disease”.

In a statement issued last month, FDC said the PPP program could result in the tendency for the government to bend and relax prudent regulations just to entice investors.

Infrastructure projects require huge sums of investments. To attract investors, therefore, some critics argue the government may be forced to offer sweeteners, such as the relaxation of regulations or an assured return on investments. The latter could mean huge subsidies by the government in the event the projects fail to generate the expected income.

"Such regulatory risk insurance could take the form of make-up payments from the government to PPP investors, other guaranteed payments, and adjustment to contract terms," FDC president Ric Reyes said. "Regulatory guarantees already subvert the punitive principle of justice and expose our institutions to moral hazard, if not mockery," he said.

FDC cited the power sector as a case in point, noting that the move of the previous administration to provide generous contracts to independent power producers (IPPs) over a decade ago served ultimately to worsen the government's fiscal position.

The IPPs were given protection against fuel cost and foreign-exchange fluctuations. Losses incurred from unexpected increase in fuel prices and the depreciation of the peso were thus shouldered by the government. The IPPs were also given income tax holidays, the group noted.

Counter proposal

For FDC, which has called for moratorium on payments of some of the government's debts, the best way to solve the problem of weak infrastructure is for the government to spend less on debt payments and more on vital infrastructure projects.

“True, infrastructure development is suffering in the Philippines due to lack of fiscal space," Reyes said.

However, he said the problem is due to the fact that the government, since the term of President Corazon Aquino, has been spending an average of 38.6 percent of its budget for debt payments.

"Had payments for debt been channeled to more productive expenditures – which includes infrastructure – then we wouldn’t have this predicament,” Reyes said.

For IBON, the government could engage in joint ventures with the private sector, but only under a framework where the former exerts full regulatory control. Moreover, joint ventures should only be pursued while the government improves its capacity to fund, operate, and then take over infrastructure services over time.

IBON said the PPP program should not be pursued if there is no assurance that regulations will not subsequently be relaxed.

"[The danger with the administration's PPP scheme is that it] seeks to broaden the scope of privatization to create the most favorable conditions for investors even at the expense of long-term national development," IBON's Africa said.

Government's response

Responding to criticisms on the PPP, Finance secretary Purisima said the Aquino administration will not resort to bending of prudent regulation and to guaranteeing of returns.

"Like any business, investors in PPP projects must take risks," Purisima said. He emphasized that the government promises private business consistency of regulations and not the bending of rules or any assured returns.

He said one of the things that discouraged investment into the Philippines was the changing of rules in the middle of the game. While rules seemed acceptable for investors at first, these would change at the course of doing business, thereby making firms spend much more than they initially thought.

Purisima said the commitment of the Aquino administration to have consistency in the regulatory environment is not tantamount to a relaxation of prudent rules to entice investors.

On concerns about the PPP's tendency to make public infrastructure service expensive, Purisima said it does not have to be the case.

"If PPP is not implemented properly, then it can indeed be expensive," Purisima admitted.

However, he stressed that the government would keenly monitor execution of projects to make sure appropriate processes and timetables are observed and, therefore, resources are not wasted.

Purisima also said that ensuring that projects are corruption-free, such as by having transparent bidding processes, would ensure contracts are justly priced.

Moreover, Purisima said the government prioritizes solicited project proposals and would avoid, as much as possible, unsolicited ones.

He said projects proposed by the private sector but are not on the government's PPP list would not be prioritized. This is because corruption involving public infrastructure projects usually arise from unsolicited proposals.

Foreign donor’s view

The World Bank, one of the Philippines' biggest sources of foreign aid through loans, has expressed support for the Aquino administration's PPP program.

Bert Hofman, country director of the World Bank for the Philippines has gone on record as saying that tapping the private sector is a wise strategy to pursue infrastructure development in the midst of budget constraints of the government.

He added that having private firms operate public infrastructure services need not be expensive if efficiency is observed.

"If projects are managed well, that [high cost of service] is not going to be the case. Efficiency will avoid such a problem," Hofman said.

Hofman, however, said that transparency in procurement and bidding processes is crucial for projects to achieve their developmental objectives. He said it is important for the government to fulfill the commitments to continue enjoying support of different sectors, including the international financial community.

The World Bank executive said that so far, there is confidence on the Aquino administration's ability to execute transparency in the delivery of public service. The government, he said, simply has to execute and sustain its reform programs to accomplish its development agenda for the medium term. Philippine Public Transparency Reporting Project