THE INSIDE MAN

Build, build, build unto debt disaster?

Build, build, build unto debt disaster? image

Tito F. Hermoso / AutoIndustriya.com, DOTr | August 14, 2017 12:51

The Great infrastructure funding dilemma

Moving forward for a change

Pie-in-the sky? Our wildest dreams come true? All the tollways, highways, railways, airports, power grids, communication links and waterways [but hardly any RoRo ports] that tantalized administrations for over the past 40 years but were never built. All 8.4 trillion Pesos worth of it, up and running or close to commissioning by the end of 2022. No more unscheduled Earth Days [brownouts]. Dry household taps [water shortage]. Impromptu elevated tollway parking lots. Unscheduled trains stops where no stations exist. Scheduled flights suddenly diverted from original destinations. Spinning beach balls on macbooks tied to weak wi-fi.

Dutertism, the new ideology 

This administration, says it will build it all and afford it. And it is with much impatience that Infrastructure dreamers and urban planners/managers want this to happen. Thus with the mistakes of the past causing project delays fresh in our minds, this administration has decided to bypass time consuming private sector PPP negotiations and costly lawsuits and TRO's [temporary restraining order] by losing bidders, by building the infrastructure itself through GA [Government Appropriation].

Debt defying generosity?

To fund it, the government will take advantage of “generous” offers of ODA [official development assistance] from State-owned infrastructure conglomerates of China and Japan. Being loans requiring local counterpart funding and interest payment amortization, the government will have to raise taxes through the CTRP [comprehensive tax reform program] or TRAIN [tax reform for acceleration and inclusion] to fund such acquisition of real estate or RROW road/rail right of way besides the infrastructure projects already in the pipeline to be funded by the National Budget.

How much is too much? Big time!

As in anything Economics, driven by politics, it will cost us taxpayers. Big time. But does it have to? Herein lies the resistance of many learned Economists and pro-administration businessmen against the CTRP/TRAIN even if all are in agreement that taxes have no way to go but up. Yes, the say, but not by too much. For no matter how many times we've studied the assumptions and forecasts of CTRP/TRAIN, we, individual consumers and conglomerates alike, will suffer rising costs, decreased sales and crippling national debt, because government is putting a heavy reliance on GA, for the wrong reasons. We simply find CTRP head author, DoF Usec Karl Kendrick Chua's rosy scenario, absolutely detached from reality.

Background : State central planning vs. the robber barons

For more than a hundred years now, Governments, from extreme Stalinist persuasions to the vaguely socialist FDRoosevelt, have relied on the pump priming abilities of variable “G” or government expenditure to push Aggregate demand in order to make up for what private capital cannot or does not want to invest in. Central planning replaced the predatory oligopolistic practices of utilities controlled by the robber barons of the oligarchy and plutocracy, clipping the wings of the private sector and increasing the Public sector's control of the economy. Hence, if its infrastructure that you want, the great and unique provider will always be the government.

Post War: Birth of the Third World and ODA

With post-war ex-colonies coming into their own as the underdeveloped Third World, their economies were too weak to create and invite capital to expand public utilities and services. They turned to the richer countries, their former colonial masters, for finance and such were channeled to infrastructure funding institutions like the IBRD [World Bank – international bank for reconstruction and development]. Thus, the era of ODA – official development assistance - and foreign sovereign debt was born. Government guaranteed borrowings gave the Third World a start on investing in infrastructure for their fast growing populations.

Build, build, build unto debt disaster?

The Oil Crisis and debt spirals 

The first severe oil price shock of the 70s, panicked a world now deeply dependent on fossil fuels. Lending windows closed and countries went into default as uncertainty fueled interest rate climbs. With both debtor and creditor burned by the experience, world growth paused and recession bit. But not all infrastructure investment can be put on hold. Bridges, dams and waterworks are utilities of necessity and countries went to the private sector to borrow at commercial rates.

We rode the trend

The history of our country's borrowing and investing in infrastructure mirrors the Third world's. The Macapagal era of the 60s exhausted government budget's ability to build infrastructure to service the future. The Marcos era exploited foreign debt to fund our first expressways, the Diversion Roads. Owing to the small size of our export economy, we continued to rely on ODA to pay for our dams, roads and bridges. The Oil Crises and the succeeding Tequila or Latin American debt debacle almost dried up the funds available for us. By the 80s, the Philippines was borrowing from commercial sources to fund our leapfrog into a major industrial nation via the 11 Major Industrial Projects. Authored by Trade and Industry Minister Roberto V. Ongpin, the 11 industrial projects had an infrastructure component, but it also funded large export oriented industrialization investments that the private sector [a.k.a. Crony capitalists] could not undertake by their lonesome.

Then we shot ourselves in the foot

The 1986 Revolt put a stop to all this and with the blanket debt repudiation of the Cory Administration, we instantly became a pariah to all global, public and private, lending institutions. Whatever infrastructure that was planned was put on hold and whatever existed shriveled to waste because of the lack government resources. By this time, the Philippine government, which used to be a reputable borrower over and above any large Philippine company, was now discredited world wide.

Weak negotiating hand

It is with this handicap that the Ramos administration had to resort to making use of the Private sector's better credibility through the new fangled BOT [build operate and transfer] concept. The idea was for the better connected and better funded private sector to undertake infrastructure building functions of government. The private sector will be allowed to build the infra – dam, rail, road, water works, etc. - charge a toll to operate, maintain and recover its investment, make a profit and at the end of the term, turnover to government for further operations and maintenance. With our reputation in taters, the Ramos administration had little choice but to bend over to make BOT projects as attractive as possible giving incentives like guaranteed rate of return, minimal pricing and even sovereign guarantees to financiers.

Blame game

Twenty years hence, these BOT's looked like raw deals or lop-sided deals, riddled with alleged corruption, but pundits easily make light of the dire straits the Cory era ground-zero debt repudiation did to nuke the Philippine economy's reputation. And that was the criticism of the Pnoy administration against the BOT so they then crafted the PPP [public private partnership] as the better version. 

Build, build, build unto debt disaster?

Baby steps and missteps

Still part of the baby steps of BOT, PPP started with poorly studied projects and contracts with little or no participation from seasoned experts in O&M and investment finance. But what made the PPP expensive and slow to get off the ground was the “franchise premium” the government was charging on top of the cost of building the project. This franchise premium became the bid benchmark, leading some PPP project winners to pay more for this franchise premium than the entire project cost itself [MCx, NAIAx, CALAx]. To recover this, the O&M proponent has no choice but to jack up the cost of the toll or the utility charges once the project is commissioned.

Dutertisimo, a collection of pet peeves

From the first day of the new Duterte Cabinet, both neo-liberal economists and business men hailed DoF Secy. Dominguez first step – abolish the PPP franchise premium. With this and enhanced project and finance specification preparation honed through the stumbles during the Pnoy years, the PPP was open for business to a wider audience on a more level playing field. Added to this was the welcome attitude to unsolicited proposals since the NEDA-ICC [national economic development administration – investment coordinating council] is there to wield the Swiss Challenge and as a watch dog for competitiveness, cost-benefit ratio and transparency. With PRRD's dislike for oligarchs and his open contempt for foreign ownership masquerading as Filipino-owned companies, the new dispensation welcomed foreign participation. Add to this mix, PRRD's hatred of all forms of corruption in public biddings, it really appeared that change was coming in all levels of government transactions for all broader range of participants.

The new allies

Naturally, the enterprising new ally – China – and the pro-active old one – Japan – were quick to offer their expertise and finance in dams, trains, airports and mass transit. Projects, to be financed by ODA were treated as done deals even before any project studies were commissioned much less approved by NEDA ICC. Needless to say, the government was swamped with high tech offers to slay the traffic congestion beast and soon, 2022 was being projected as the year the country caught up with its 40 year backlog of infrastructure.

A mysterious change of heart

Then sometime in the 4th quarter of 2016, government started chanting a strange tune. Conventional wisdom up to that point was that when it comes to construction contracts, the private sector was far more efficient and less prone to corruption. Moreover, the quality of the job done is better and faster; anything the public sector can do the private sector can do better and faster. That was why it was quite a surprise to hear from the neo-liberal economic managers of the government to now say that there would be less reliance on the PPP for construction, as government can get it done faster and cheaper, relegating PPP to O&M. The added claim was that PPP's get embroiled in court suits resulting in delays so GA funded by ODA is faster and cheaper.

Puzzling twist

Many in the academe and the business community were puzzled as to how those new found assertions vs. PPP came about. True, losing bidders to PPP projects resorted to law suits delaying the project but those are lodged in the past as PPP contracts today are better defined to prevent any ambiguity that would give rise to TRO's. Yes, there were delays in RROW acquisition, but even GA funded projects suffer these time delays due to the Judicial process. As to corruption, there is no dispute to the fact that it is the small time construction outfits, eager to land a government contract, who resort to corruption at the provincial and regional level. Something that cannot happen in a big ticket PPP, where the bidders are large corporations guided Boards who swear against corrupt practices.

Build, build, build unto debt disaster?

Problems brewing

To be fair, the previous administration's DoTC was already practicing this hybrid PPP. The LRT-2 extension to Masinag was approved only as a construction project, without stations nor trains or train operator. The LRT-1, built by the government, was a PPP for constructing the extension but inclusive of the O&M. The MCX, which was started as a DPWH project during the GMA era but later converted to PPP. ,Typically, the PPP winning bidder had to improve the specs to tollway standards as the road, built by GA, was to different specs. Back in the Ramos era, the STAR started as a DPWH construction project that was looking for a BOT winner to finish it. The Plaridel bypass, another GMA era DPWH project ripe for PPP conversion during the Pnoy term, was reversed back to a GA project during this current administration. In all these cases, one can clearly see that projects initiated by government as GA were woefully under specced for PPP and that the PPP winner and O&M franchisee would still have to invest in more rectification construction. So why the change of tact? 

Revelation day

This strange twist finally made sense when the CTRP was announced and the 8.4 trillion peso “golden age of infrastructure” budget was revealed. It was clear that a vast majority of that 8.4 trillion was to be funded by ODA and constructed under GA, leaving room only for PPP as O&M contractors. And since the bill was huge, the tax increases were just as huge. Then everything else fell into place. PPP's for 5 airports were rescinded. Unsolicited proposals for NAIA and Clark airport were accepted but then shelved in favor of DoTr GA construction.

Spurious safety nets

To soften the blow and ease legislative passage, CTRP author, DoF's Usec Karl Kendrick Chua points to the larger take home pays due to the cut in income tax. But the authors of CTRP did not prepare options nor game-theorize worst case scenarios. They think slightly lower car sales would ease congestion. We say, good luck on the “slightly lower car sales” and the “ease congestion” part. They assure with vague promises of safety nets for business failures that may arise. In other words, they did not prepare for failure and treated their forecast sales and tax collections as gospel truth. How unrealistic or unprepared can they get?

Build, build, build unto debt disaster?

Which is cheaper?

So it boils down to ODA vs. PPP. Which is cheaper? Look no further than the ODA funded SCTEx which was 7 years in the making, 2 years delayed and partly finished at the cost of 349million Pesos per kilometer. And yet on turnover of the SCTEx to O&M contractor Metro Pacific Tollways, the latter is still re-constructing and rebuilding the SCTEx in several areas. Compare that to the PPP funded TPLEx which is on schedule to finish next year, and is costing 274million Pesos per kilometer.

Which is faster?

Which is faster, construction wise? The ODA funded Iloilo airport took 5 years to build, whereas the PPP for the new Cebu Mactan airport, despite being 5 times larger than Iloilo airport, will take 3 years to build including one year delay due to a court suit. Which is faster, process wise? Compare the average time spent for ODA's from project development to ground breaking : 27 months for the PPP under the old administration, 37 months for Korean ODA, 38 months for Japanese funding and 40 months for the Chinese. The 2022 landscape is starting to look like a lot of construction projects in mid stream.

Why insist?

So why insist on ODA and by extension and justification, the humongous tax increases of CTRP/TRAIN? Is it because of some blind adherence to act “Leftist” according to the President's arbitrary definition of leftist? Well the regressive taxation is Leftist enough, as it demonizes the rich, who will run away with their wealth anyway. There won't be capital flight, but you can be sure that the rich will be taking their luxury shopping, particularly luxury car shopping, elsewhere. Why social justice types never see the glaring failures of regressive taxation. This was the way to ruin of Castro's Cuba, Chavismo in Venezuela and many other Latin American “boom to bust” economies. Ironically, the usually noisy Left isn't even celebrating this CTRP as it is vehemently against all the consumer price increases that the CTRP tax increases will trigger. Perhaps it appeases the “inclusion” part of TRAIN because ODA funded GA projects gives small builders and contractors a chance to spread the wealth around rather than concentrate on a few oligarch-led corporate responsible conglomerates?

Unfair and not inclusive

Conceptually, ODA or tax financed GA is unfair, something that is anathema to PRRD, because it makes Luzon and Mindanao tax payers pay for say a bridge between Negros and Cebu. It's like having Mindanaoans and Visayans pay for the MRT-3. PPP, on the other hand, is a user-pays proposition; only users of NLEx pay toll to pass NLEx. ODA's contractors and suppliers is dictated by the donor or creditor country, so this does not guarantee that local small and medium scale suppliers and contractors will get first dibs. With the Clark Airport offered by BCDA as a Hybrid-PPP supposed to have lower charges because the PPP is only limited to O&M, it still isn't any less unfair to other non Clark Airport users as the ODA-GA construction costs are borne by all taxpayers, user or not. 

Soldier on and keep soliciting

Admirably, the private sector is not discouraged and many continue to offer unsolicited proposals. There are more city and provincial expressway proposals from Metro Pacific Tollways and San Miguel Infra. Filinvest and the Tiengs are very active in concocting unsolicited proposals for our major airports. San Miguel's Bulacan Airport is still in the active file. Even DPWH Secy Mark Villar joined the unsolicited bid parade by proposing a NAIAx tollway to BGC and Manila, which can only be conceived under Citra's C-5-C-6-Metro Manila Expressway franchise, Metro Pacific's C-5 Cavitex link and RSA's proposed NAIAx extension to Roxas Boulevard Buendia.

Doomed? 

We do not want our economy to rush into a debt abyss. But we also want to catch up with our quality of life that only the Golden age of infrastructure can deliver. There is the Private sector which is eager to take the risk, eager to fund and eager to build. Private sector funding does not bloat government debt and so it won't bloat your tax return. Never before has the Private sector been so gung-ho about PPP, only to be doused by the administration's sudden turn to ODA financed GA. There is a better way to get our long delayed mass transit, water works, power grid, genuine wi fi and smooth flow traffic – and we don't have to tax ourselves and our businesses to death. The economic managers should practice “inclusion” to the Private sector, through the PPP. Let the PPP take the strain of building infrastructure and thus we won't need to raise taxes too much just to pay for ODA loans. There is still time to rework the CTRP/TRAIN to have the private sector bear most of the burden away from all the tax payers.