Philippine PPP experience: lessons learned mid-stream

June 2014 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

The Philippines has finally freed itself from perennially being touted as the sick man of Asia to being second fastest growing economy in the region. With upgrades in investment ratings and national growth rates above 6.0 percent over the last two years alone, there is no doubt that the Philippines continues to be one of Asia’s brightest investment spots.

Despite these impressive strides, however, the country still lags behind its neighbours in infrastructure development, which is critical to achieving sustainable and a more inclusive economic growth. The country’s full economic potential requires investments to address overcrowded and decrepit airports, insufficient rail and road networks, and costly technological infrastructure.

Aquino’s PPP program

At the start of his six-year term in July 2010, President Aquino adopted a program on public-private partnerships (PPPs) as the key implementation policy in infrastructure development. The premise for this policy adoption was incredibly simple and was thus appealing: utilise private sector resources for infrastructure development to free up government resources for other social and public services.

The PPP Program, however, was beset with challenges at the onset – from delays in the bidding process, to inconsistent or changing government policies, to opposition from affected sectors and public interest groups.

In spite of these challenges, the program was able to move and slowly gains momentum. As of April 2014, a total of seven projects have been awarded. The projects cut across the infrastructure space – an expressway, a specialised tertiary hospital, an international airport, the metro rails’ automatic fare collection system, and two schools projects. Thus, the Philippine PPP experience and capacity have significantly progressed from rolling out purely energy projects in the 1990s to big ticket and high impact infrastructure projects that include social and technological developments.

Mid-course review

Putting PPP in public discussions also ushered in new insights and valuable lessons that, if considered and developed, can improve the Philippine policy framework. That PPPs are really not a bipartisan endeavour but a complex tri-partite project by and among the public, the private sector, and the government, is one such important realisation – and which must be crystalised into a central reform principle.

In the context of PPPs, the dynamics of a tri-partite contracting process becomes a more complex exercise of reaching that optimal point where all parties will be mutually satisfied. It requires negotiations that consider without necessarily accepting the points raised by all interested private parties on the various aspects of the project. As a consequence, it is common in PPP projects to end up having every aspect of the contract as a negotiable item – all occurring within the parameters of a strict public bidding process.

The malleability of the PPP projects underpins the need to reorient PPPs as a tri-partite partnership. Both the private sector and the government must acknowledge that their interests are not necessarily aligned with that of the public. The solution may not require one party to abdicate its point or cede economic interest; public participation in the process, however, is indispensable to arrive at that optimal point where all sectors – the public, the private sector and the government – buy into the project.

Points of divergence

By experience, two critical points of divergence are identified among the three sectors: (i) financial implications of PPP projects; and (ii) speed and efficiency of implementation.

As noted, the government admits that the primary driver for the PPP program is the need to free up its limited resources. Thus, the government exerts every conscious effort, during negotiations, to limit its contingent liabilities by stipulating measures that result, for instance, in full transfer of market risk to the private sector and institutionalising a users-pay principle in the fees and charges to be exacted. For its part, the private sector would want to have government guarantees especially to cover risks that, to its mind, government can manage better, such as regulatory risk, taxes and even demand risk. For the public, on the other hand, any effort to pass on the financial burden to consumers, riders or end-users, even on a users-pay principle, is anathema to a perceived superior right to access and use government facilities and services.

In the same manner, the issue on speed and efficiency of implementation is more complex than it appears. Contrary to a common assumption, it is not in the interest of the government to implement PPP projects at the soonest possible time. Implementing agencies of the respective PPP projects are required to follow a preset process and procedure, dictated by both internal rules and regulations, and practice. Thus, an implementing agency, even at the risk of non-compliance with directed timelines, will need to wait for the reviews and actions by other government agencies on the various aspects of the PPP projects. All these inputs are required before any decision is made on a specific project aspect.

Swiftness does not necessarily work for the interest of the private sector either. While it is expected that the private sector will push for quicker processing and action by the government, this interest can be defused by the economic costs of speed – the costs incurred in immediate deliveries and deployment of labour, capital, and other factors of production. As it is still guided by economic rationality, to the private sector, project implementation is still largely a matter of cost-benefit analysis and trade-off.

For the public, if the concern on financial burden were to be addressed or set aside, having the infrastructure facility at the soonest possible time is primordial. Regulatory or legal compliance and attendant economic costs appear as mere excuses and justifications for delays or increased contractual price.

Philippine imperative

For the Philippines to achieve the goal of utilising PPPs as a development tool, it is critical to acknowledge this divergence and develop the next phase of the PPP program in this light. At present, the PPP process in the Philippines is largely a bipartisan affair, driven only by the government and the private sector. The public is often left at the receiving end of what has already been agreed upon by the government and the private sector; as a result, the government ends up defending the project in face of oppositions with at times the mistaken premise that government interest is necessarily aligned with public interest.

It is imperative at this juncture in the developing PPP program to refine this practice. A genuinely responsive and interactive program is critical to foster public acceptance of PPPs and limit (if not totally avoid) opposition that leads to litigation. From such exercise, all sectors can take ownership of projects and implementing agencies can then proceed to adopt standard contracts or contractual provisions that passed the tests of economic viability, implementation risk and public acceptance.

Francis Alvin V. Asilo is a lawyer at PJS Law. He can be contacted on +632 8405025 or by email: fvasilo@pjslaw.com.

Francis Alvin V. Asilo

PJS Law