THE INSIDE MAN

Will the real PPP please stand up?

Will the real PPP please stand up? image

Text: Tito F. Hermoso / Photos: | posted July 18, 2012 18:03

PPP; What if, what is and what isn't

Bedtime story

You hear it often as a warning to a hungry shopper in a grocery; never buy things in the heat of the moment or risk regretting it. By definition, procrastination and dithering imply a worthwhile cooling off period. This must be the inspiration for the popular new book, “Wait: The Art and Science of Delay”, by Frank Partnoy of University of San Diego. Must be the bedside reading in Mar Roxas's DoTC. But really now, is being slow, taking one's sweet time really that bad?

Counterflow

Irony of ironies. Against a backdrop of slowing superpower economies [US and China], not to mention disputes with China on territory and the EU on our contractual obligations, our economy, against the odds, just keeps being upbeat, enthralled by the P-noy magic in sweeping corruption, raising growth rates and stoking optimism. A Grant Thornton Business Report even claims that the Filipino businessman is the 2nd most optimistic in the world, at par with Chile and behind Peru. Unfortunately, all this makes the PPP look like a wasting opportunity as we enter into P-noy Year 3.

BOT plus?

The slow start up of PPP, supposedly an improved version of the BOT, is a glaring side effect of the anti-corruption crusade. The current administration's purgation resulted in the delay and/or cancellation of many shovel ready projects, and even some that are in the middle of their enterprise lives. Whether it was negligence, ignorance or amateurism, the uncertainty and failure to follow through with replacement projects and objective study resorting instead to endless re-study to justify top to bottom handed down, and usually, unfounded decisions or, worse, indecision muddling unto oblivion.

Recap

To recap, the BOT or Build Operate and Transfer Law, on which PPP is based, allows the private sector to propose, design, build, operate and maintain the road/railway/building, and pays the government for the privilege of charging the public toll or rent for the road/railway/building it built. Since the private sector takes a risk in financing it, break-even point and investment recovery now comes into play. Sen. Ralph Recto's definition is even simpler: government expects to earn and/or gain something, like a road, railway or building, when it bids out a project under the BOT or PPP process, instead of shelling out money via the traditional Government Procurement.

Private enterprise

Recognizing that government has no monopoly of ideas, expertise, and foresight in planning for what the public needs, has made it open to the idea of allowing public infrastructure projects initiated by the private sector. It is a given that roads should be built before traffic comes and not as reaction to congestion. Since public infrastructure is not market driven, it already excludes private investment financing looking for a quick turnaround. Visionary "greenfield" or missionary projects, like the SCTEx, are the kind of projects risk-averse private sector financing would only take with a high premium which jacks up the cost of the project to unaffordable. This is where ODA or Official Development Assistance financing comes in as the terms [long] and interest rate [low] are tailored to long gestations. Not all government agencies and private companies are eligible to borrow ODA.

Definitions and the four E's

The best definition of the PPP by far, comes from BCDA Chairman Felicito Payumo, one of the original framers of the BOT Law. Atty. Arnel Casanova, BCDA supremo, lays out the easiest to understand criteria for what makes an ideal PPP through his four E's: Equity, Effectiveness, Efficiency, Exportability. Equity means user pays and as an example you won't have a Mindanao tax payer subsiding a motorist driving through the SCTEx. Effectiveness in optimizing the mode of financing, recovery of costs and control of revenues, incentives for efficient operation, high quality of service and maintenance. Efficiency has to be motivated or incentivized so that necessary investment in technologies and upgrading in infrastructure could be made. It also necessarily needs a regulatory environment that is predictable, transparent and free from regulatory capture. Exportability means the shifting and allocation of risks from the government to the private sector who can deal with these risks better and more efficiently.

Those contentious Swiss

Under the BOT Law, there is such an animal called the Unsolicited offer. These involve new concept (design or technology) and should not be in the list of priority projects. Like all BOT's, unsolicited offers do not require direct government guarantee, subsidy or equity. An unsolicited offer is also subject to a Swiss Challenge, where competitors will be invited to match the bid and/or improve the performance specifications of the project.

Refinement

The PPP was supposed to be a refinement of the BOT, i.e. a BOT without the alleged lopsided pro-proponent deals typical of the FVR era or the alleged spectacularly overpriced projects of the GMA era. To be fair, FVR's weak bargaining hand was the poisoned chalice of the debt default, left wing harassed and coup-prone previous administrations. As for the spectacularly overpriced GMA era projects, some of which were incidentally were born in the ERAP administration, were projects that needed further “sweetening” post Asian Financial Crisis. Besides, the SCTEx and Nautical Highway are far more spectacular than the STAR Tollway or Coastal Expressway. To find comparison in scale and grandeur, one has to look back at the NLEx Candaba viaduct and the San Juanico Bridge during FM's term.

Latest news? More delays

Recently, the DoTC had approved a whopping PHP100M to study the feasibility of turning DMIA into an alternative NAIA. Fine, but that is if one does not remember that as early as the waning years of the GMA term, Metro Pacific proposed to expand DMIA into a 2 terminal airport. At that time, the North Rail project was not yet cancelled [due to a gross mismatch of specifications and expectations] and there was talk of a NAIA-DMIA rail link. Being a Metro Pacific proposal, San Miguel Infrastructure was also interested. But, like all proposals and projects of the GMA era, the new Aquino administration had to subject it to restudy, either back to square one or de-packaging into a confused lot of deals.

Whose project is it?

Recently, the FVR era LRT 7 of Ausphil-San Miguel finally got going after so many procedure and LGU clearance related delays, but only to be thrown back to NEDA for another review. With the 2 year dearth of projects that can take off, a result of the past administration's underfunding for Department feasibility studies, the current administration needed to to grab projects that can get started sooner than Mar Roxas can say “teka, teka...”. Case in point; when Citra Metro Manila Skyway reminded the administration that it has an FVR era approved PNCC alignment for Skyway Stage 3 from Buendia to Balintawak, there was a clamor to push it as a PPP and have Citra subjected to a Swiss Challenge. Thankfully, the DOJ intervened and restated that Stage 3's approval in 1995 was valid and thus, no longer subject to any fresh bidding.

Not enough to go around?

Meantime, the DPWH has offered the NAIA Expressway project as PPP. There was no lack of interested financiers and bidders as the NAIA Expressway would lead to the well funded and future Ang Bagong Nayong Pilipino Entertainment City by the Bay, sort of Manila's or rather Parañaque's Las Vegas by the Bay. DPWH plans will run into problems with the TRB, as affirmed by the DOJ. It appears the TRB has the jurisdiction to approve extensions of existing expressways and Citra Metro Manila Skyway, since 2000, already has an approved unsolicited proposal to build a 5km 2x2 dual carriageway from the existing section 1 of the Skyway NAIA Expressway to extend all the way to Macapagal Ave. Originally called the “Airport Expressway Project” now the SNEE or Skyway NAIA Expressway Extension, Citra's PHP12.4B budget already includes RoW expropriation expenses of PHP1.15B. To top it all, Citra's approved project is PHP2.0B cheaper than the DPWH's PPP starting bid.

Lean pickings

To date, the only awarded PPP project is the 4.0km 2x2 dual carriageway Daang Hari Expressway, which now needs design adjustments to link with the SLEx. There is also a PPP for several thousand school buildings, traditionally built via Government Procurement. This turns out to be a Build-Lease and Transfer to be paid for by Government over several years. Then there are the PPP projects that began life in previous administrations and having survived the purgation process of the current administration, are being resold and rebid, sometimes bereft of any repackaging, as a “new” PPP.

Built then transferred to operate?

By far the definitive Poster Boy for the PPP muddle is still the vital and perennially congested MRT-3, several years behind in equipment, track and train upgrades as ridership has trebled from its early days. Built during the term of FVR as a BOT, the project proponent, MRTC [Metro Rail Transit Corporation], had to hand operations and maintenance to the DoTC in exchange for “economic rights”, which one can conceivably call as rent. Since DoTC insists on subsidizing train fares, it ends up paying the DBP and LBP, today's owners of the bonds with economic rights, billions a year.

MPIC to the rescue!

It didn't have to be this way. Some time in 2010, Metro Pacific proposed that in exchange for 15 more years of franchise and a slight upward adjustment in train fares at par with EDSA bus fares, Metro Pac will end DoTC's annual P7.5B payment for the economic rights/guaranteed rate of return, its loans to DBP-LBP and buy new trains and new signals and integrate it with LRT-1, LRT-2, expand the stations including the interconnection to the upcoming LRT-7. MRTC, the owner of MRT 3 is raring to go. So what is the response of the DoTC?

Role reversal, studied to death

Mar Roxas's DoTC prefers to unbundle the bidding of the project, which was Metro Pacific's idea, first for the O&M then prioritize the LRT extension to Cavite, which in turn, gives the winning bidder the right to operate the MRT3. DoTC wants Government to buy the trains and has done nothing about raising train fares, thereby delaying any decrease of the government subsidy for the train fares, a subsidy that all Filipinos, including non MRT Riders pay for. It really looks like an attempt to reinvent the wheel which ended up creating a useless widget, or are some say, hot air. After so many tries, multiple “further” reviews and studies, government comes up with such a muddled model of priorities and project finance, one begins to wonder where is the sense of purpose, sense of urgency?

Related development

On the other hand, DoTC are proceeding with extending the LRT 2 to Masinag and will tap ODA financing. But wait, Mar doesn't want to hand it over to a Japanese contractor. I can hear the Japanese politely and unemotionally nodding but actually meaning its a Japanese loan and the Japanese require Japanese standards so it has to be a Japanese contractor, while the Philippines gets a loan with concessional rates and term. Just like JIBC and the SCTEx, more of which we will explain shortly.

BCDA, SCTEx and MNTC

Not to sound and look like the home page of the BCDA website, the SCTEx should be the poster boy of the PPP. Contrast the MRT muddle with the ERAP to GMA era SCTEx. BCDA borrowed long from JIBC [now JICA], built the SCTEx as a complete dual carriageway scenic expressway to high Japanese standards and wants to turn around and hand over the payment of the JICA loan, interest, O & M expenses and improvement to Metro Pac's MNTC [Manila North Tollway Corp.] which will integrate the SCTEx with the NLEx and the SFEx, the Tipo-Subic expressway. Government thus earns and has passed on the risk and loan repayment to the private sector.

Japanese money? Japanese say

Yes, there were rumblings from pundits that the SCTEx was overpriced but a drive through its scenic gorges through alpine height viaducts and artful dissection through mountain peaks should convince any simpleton that the beauty of the finished product was worth it. Having been built through virgin territory meant BCDA had to fund and create scores of kilometers of access highways, again built to high Japanese standards, thus widening the scope of economic benefits to far flung and hitherto inaccessible towns. As to the preference for Japanese construction companies, well, its a Japanese ODA loan with concessional terms and rates, so they have the right to insist on Japanese standards. Who better to build it than the ones they trust? Besides, the Japanese contractors sub-contracted a lot to the locals anyway.

TPLEx, PIDCo

JIBC was willing to finance the SCTEx extension all the way to La Union but the local construction industry was adamant about being locked out of such a big project. A pity because if not, the rest of the SCTEx would have opened by now as a complete dual carriageway, scenic, through greenfield areas [not to shadow parallel the existing MacArthur Highway] to spread economic benefits to remote towns and to stay as far as possible from the heavily built up ones. But the GMA administration wanted to please the local construction industry so the SCTEx extension, now called TPLEx, was passed on to a consortium of local construction companies named PIDCo and classified as an “unsolicited proposal”.

Compromised

TPLEx ended up being highly compromised, first by local governments that did not want the expressway to veer too far from their towns, so as not to lose out too much from the rich pickings of the commercially rich and congesting North bound traffic. Secondly, PIDCo had no access to ODA so it had to borrow at commercial rates and they were only able to get going when San Miguel Corp. became a partner. Thirdly, since the finance is at commercial rates, the “visionary” and the “missionary” elements of the TPLEx had to be abandoned.

Politically influenced

And so TPLEx starts out as a single carriageway highway to be built and opened in stages; up to Gerona, then Rosales. As it is, areas where the flow of seasonal alluvial floods and farm access, which would have been ideally served by a viaduct, like SCTEx in Tarlac and NLEx on the Candaba swamp, TPLEx had to settle for a few box culverts. Construction costs gets pretty expensive when TPLEx crosses the wide Agno river and then transfers from the eastern side of MNR to route on its west for the sake of keeping close to the Pangasinan towns.

Thanks to SCTEx, Luisita's second wind

Still, it cannot be denied that no thinking businessman would have ventured to borrow billions at commercial rates to build the TPLEx, if the SCTEx was not the complete expressway that it is. Thanks to the SCTEx, Subic, Clark and even the long sleepy Luisita economic zone are now waking up.

Poster boy? Palace's failure

The BCDA's SCTEx and its integration with the NLEx, is probably the best PPP project extant and deserves to be its poster boy. Unfortunately, the opportunity for the NLEx, SCTEx and TPLEx to grow in synergy has been tied up as the Palace has been sitting on the approval of the integration of the SCTEx to the NLEx for close to a year. Instead, the SCTEx is becoming a poster boy of a different kind; Palace inaction. Perhaps the finance whizz kids can't understand the benefits of the deal or they are too obsessed with squeezing out every ounce of advantage that the private sector will have no choice but to walk away. Just like the REIT's [Real Estate Investment Trust] that were emaciated of any investment attractive conditions that it died for lack of any takers. For the SCTEx-NLEx integration, instead of restudying it, the authorities should ask all the northbound motorists if they need to be convinced. And those who REALLY understand what PPP is all about.

Meantime, any cure for multiple toll plaza queueing for Northbound motorists - twice at NLEx, twice at SCTEx and twice again at TPLEx - is a long time coming. Ditto for the daily commuters queueing on the MRT and all the LRT lines. One can be tempted to wile away all that waiting time by reading a book. Try “Wait: The Art and Science of Delay” by Frank Partnoy.