Introspective

Our latest report for GlobalSource Partners (globalsourcepartners.com), a subscriber based global network of independent analysts, dove into the issue of projects funded via Public-Private Partnerships (PPP) vs. Official Development Assistance (ODA).

In our view, the sharp dichotomy is not warranted. There are clearly good grounds to pursue one vs. the other depending on the nature of the project, technical capacity of the government agency undertaking, and the terms and conditions of particular ODA and the donor country.

We concluded that given the huge infra requirements of the Philippines, it should not be PPP vs. ODA, but rather PPP and ODA.

The lively debate may have been driven by the sudden change in public policy, yanking without compelling reasons, several projects at advanced stages of preparation to an ODA or GAA mode after these have been studiously prepared for a PPP bid over many years. This has raised concerns over consistency and stability of government policies from many capable local and global players who have invested substantial resources to bid for these. Included in these are the five regional airports projects, the Kaliwa Dam (a new water resource for Metro Manila) and Clark Airport as a second national airport.

Moving forward, government should be able to proceed using both PPP and ODA tracks by developing a richer project pipeline based on coherent masterplans, strengthening the institutional capability of line agencies (notably the DoTr,), and tapping proven technical experts local and foreign. On the latter, government has asked the Asian Development Bank for a $100-million Infrastructure Preparation and Innovation Facility to help in preparing feasibility studies, project design and procurement.

Is there enough time?

We think the problem becomes more acute the more non-PPP projects are pursued since government will not be able to leverage its limited technically skilled manpower by off-loading project supervision and management to the private sector. This may just be the Achilles heel of Dutertenomics and argues for continuing to pursue PPP in parallel with ODA, particularly for projects that have clear commercial value that the private sector would find attractive.

In any event, even if the Duterte administration is able to do only 70% of what it is ambitiously targeting, this would still be a major gain for the economy, both in laying the foundation for future growth and in contributing to achieving its seven to eight percent growth target.

Sharing below a section of the report on the issues pros of PPP vs. ODA.

ISSUE 1: WHO PAYS?
One source of contention is that users pay for PPP projects while taxpayers pay for ODA projects. Strictly speaking, whether users or taxpayers pay depends on the project’s cost vis-a-vis its revenue profile, not on the mode of implementation. Projects that can demonstrate high revenues from market demand are able to pass a bigger share of project cost to users.

In comparison, projects that hurdle the economic but not the financial viability test would need higher, if not wholly, taxpayer funding.

The issue is somewhat muddled by several factors.

For instance, by their very nature, PPP projects need to hurdle some minimum financial viability test to be attractive to investors; and private investors would normally look for sources of cash flows independent of government. To the extent that commercial revenues are robust, investors would not require additional government subsidies. On the other hand, if investors find these cash flows insufficient or high risk, government would still need to step in to close “viability gaps.” In these cases, taxpayers pay part of the cost. One can argue that the same projects built with ODA financing can charge user fees as well. Realistically however, due to political reasons, government may not be able to impose the same level of fees that would otherwise be allowed if the facility were privately managed; in which case, ODA financing would mean that taxpayers shoulder a bigger share of the costs. On the other hand, there are also plenty of cases where government as regulator has failed to adjust user chargers as agreed under PPP contracts and would have to use the budget to compensate investors for any losses. In this and other cases related to realized contingent liabilities, taxpayers end up footing a bigger than expected portion of the bill.

ISSUE 2: WHICH IS COSTLIER?
In terms of investment costs, both PPP and ODA have their pros and cons, with overall costs also dependent on timely delivery. The case for PPP is the acknowledged efficiency of the private sector in managing whole-of-life project risks and costs, trading off its higher cost of capital against lower operating and maintenance costs. Moreover, completion risk that leads to cost overruns is seen to be smaller under PPP considering the private sector’s incentive to start operating sooner to generate cash flows early. Hence, done properly, PPP projects should deliver value for money to government in terms of total lower cost. The usual argument for ODA is its favorable financing terms, with interest charges that may be below market and long maturity periods of as much as 40 years. However, since ODA loans are typically denominated in the donor’s currency, it is arguable whether the loans remain concessional after factoring in currency risks. Also, limited competition for ODA-financed projects due to the “tied” feature of these loans has been observed to inflate project costs by about 15-30%.

ISSUE 3: WHICH TAKES LONGER TO PREPARE?
In shifting away from PPP, President Duterte’s economic managers repeatedly cited the lengthy preparation time for PPP projects of nearly 30 months. However, PPP defenders claim that at their fastest from project development to groundbreaking, ODAs take even longer, between 35 to 40 months depending on the donor agency. (This is according to Vaughn F. Montes who delivered a presentation entitled “The merits of ODA and PPP for Infrastructure Financing and Development” during the MAP Forum in May.)

Considering that all infrastructure projects are unique, project preparation time is likely influenced more by the projects’ complexity and less by the mode of financing. Likewise, experience shows that both PPP and ODA projects are equally vulnerable to right of way acquisition delays.

ISSUE 4: DOES ODA FINANCING THREATEN FISCAL SUSTAINABILITY?
Reacting to the shift away from PPP, the president of a local conglomerate active in the infrastructure space warned of the impact on fiscal sustainability of using ODA borrowings for infrastructure. This follows from government accounting where projects financed by ODA are added to the public debt at full cost from day 1 while PPP projects are largely treated off-budget (excepting any necessary upfront subsidy), with no budget provisions for contracted future payables (i.e., availability payments) nor contingent liabilities. But while public debt would indeed be higher if infrastructure were ODA-financed rather than PPP-financed, the assessment of fiscal risk goes beyond the headline number, with sovereign credit analysts digging into the terms and conditions of public debts as well as the risks from all types of contingent liabilities and their expected costs. The exercise would allow them to value the concessionality of ODA loans and apply some risk premium to unrecognized risks from PPP projects. In the end, what is important for fiscal sustainability is that projects are properly vetted for social and economic soundness and implemented well. Economically productive projects will pay for themselves over time.

ISSUE 5: HYBRID, BEST OF BOTH WORLDS?
Economic managers have touted the benefits of pursuing a hybrid structure to capture the best of both PPP and ODA (and/or government budget) schemes. Thus, to do away with lengthy PPP structuring and negotiations, government would build the facilities on its own, financing with own funds or ODA which reduces financing charges, then auction off the facilities to the private sector to benefit from the latter’s efficiencies in operations and maintenance. According to skeptics, aside from the equally lengthy if not lengthier ODA processes, what the hybrid structure fails to consider are (a) the efficiencies gained from a proper allocation of risks over project life to the party best able to manage them that minimizes projects’ whole-of-life costs, (b) the incentive to perform on the part of the private proponent who has skin the game and (c) the avoidance of inter-operability issues where operators are held accountable for facilities they did not design nor build.

(This column drew from GlobalSource Partners special report of Christine Tang and the writer, “The Great Infrastructure Debate,” July 14, 2017)

Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com