5 good news and 5 not-so-good news about PPP
MANILA, Philippines – Almost six (6) months since the launch of the Public-Private Partnership (PPP) program of the Aquino Administration, there are still many issues on PPP which have been left unanswered.
5 Good News. Since the launch of the PPP last November 18, 2010:
1. Five (5) PPP projects have been prioritized and will be subjected to bidding within the year. These are the P6.3 billion Metro Rail Transit Line 3, the P7.7 billion Light Railway Transit Line 1, the P1.6 billion Daang Hari-South Luzon Expressway link road, the P10.6 billion Ninoy Aquino International Airport Expressway Phase 2, and the P21 billion North Luzon Expressway-South Luzon Expressway connector road. The selection process for the service contractor for the first two (2) projects – MRT3 and LRT1 has already commenced.
2. A lot of countries have signified support for the Philippine PPP initiative. These are China, U.S.A., United Kingdom, Singapore, Japan, India, Korea, Qatar, UAE, Doha, and Abu Dhabi. Foreign governments and investors have manifested their desire to invest in the Philippines. International donor and financing agencies have likewise extended their technical and financial support for the flagship program of President Aquino.
3. The local private sector is also abuzz over PPPs. About 44 investors sent their expressions of interest to the Department of Public Works and Highways for the MRT3 and LRT1 projects. A number of unsolicited proposals are in the pipeline and the proponents are awaiting directions from the concerned government agencies regarding their viability and suitability for PPP. There are proposals for development and financing of airports, seaports, roads, energy, water supply and distribution, land development, health services, among others.
4. PPP initiatives from the public sector abound both at the national and local levels. The Philippines has been named as the center for PPP excellence for health. More than 100 PPP projects were identified as priorities by the various departments of government. At the local government level, the Province of Camarines Sur adopted its own guidelines for provincial joint ventures and leases, and provided for incentives and tax exemption privileges to PPP investors.
5. Aside from project financing that will be provided by banks and financial institutions, public financing schemes are about to be put in place to fund the PPP projects. Budgets for some PPPs are already in the General Appropriations Act, including a P300 million revolving fund for the PPP Center (formerly BOT Center). An additional single borrower’s limit has been set by the Bangko Sentral for PPP infrastructure projects. Bond flotation, investment by government insurance systems and financial institutions, creation of a Philippine Infrastructure Financing Corporation, and the establishment of a Philippine Infrastructure Development Fund are being considered.
Unfortunately, there are five (5) Not-so-Good News about PPP. But fortunately, these are not irreversible. Government has the time, commitment and resources to make PPP a phenomenal success. The Aquino Administration must, however, act immediately and without further delay. There is a downside to PPP insofar as policies are concerned. Among them are:
1. There is no National PPP policy and framework. As pointed out by the Asian Development Bank, the Philippines lacks a stable legal and regulatory PPP environment. The definition of PPP currently espoused by the Aquino Administration is limited and is confined to project finance-related PPPs. The modes of PPP are also unclear. There is likewise the perception that PPP is equivalent to Build-Operate-Transfer schemes. It is also not clear what the drivers are for PPPs, the reasons for going and not going into PPPs, the benefits of PPP, and the PPP requirements. If the Administration has answers to all these, the answers are not embodied in any official or formal document.
2. In the past, government officials have categorically stated that there is no room for unsolicited proposals because according to them, these schemes lack competition and are prone to “sweetheart” deals. Against this backdrop, there are a number of unsolicited proposals which are being evaluated. The aversion to the unsolicited route is seen by some as self-imposed since the BOT law and Joint Venture Guidelines explicitly allow this mode of PPP. Further, and perhaps, more importantly, the Supreme Court has categorically held that the method for unsolicited proposals under the BOT Law, specifically the employment of the Swiss Challenge method, is characterized by competition.
3. There are a number of consummated PPP contracts entered in the past which have been suspended or are facing rescission. Incentives already accorded to certain projects have been declared under scrutiny, and may even be withdrawn. Foreign and local investors have criticized this pronouncement due to the uncertainty of PPP contracts brought about by the change in Administration. The proposed amendment to the BOT law providing protection against regulatory risks is also of no comfort because it only seeks to compensate private investors from intrusion by the courts and Congress. The private sector finds no protection from the acts of the Executive Branch of Government itself.
4. The feasibility studies on PPP projects may not be as complete and as exhaustive as they should be. Some of the essential components of a PPP feasibility study may be missing, such as risk assessments and bankability assessment. A risk assessment which allocates risks (to be retained by government, transferred to the public sector or shared between the parties) is critical since an incomplete risk assessment may yield to higher tariffs. There are more than 50 PPP-related risks.
5. There are no well-defined and official PPP policies on: (a) Initiatives of local governments; (b) audit and accounting mechanisms; (c) joint venture as a variant of or distinct from BOT; (d) tariff-mitigation; and (e) overall objectives and success parameter.
The Proposed Solution. One solution to collectively address these five (5) Not-so-Good News on PPP is for the Administration to officially adopt a National PPP Policy and Framework, and for the Administration to issue the Policy NOW and without further delay. We understand that such a policy is being drafted.
In order to address this gap and to expedite the release of this much needed PPP requirement, Forensic Solutions submitted a draft National PPP Policy and Framework (NP4) to the National Economic Development Authority and Department of Finance last May 2, 2011. The NP4 aims to generally provide 5 specific solutions:
1. Provide a broad definition of PPP that will cover traditional procurement, focused on inputs by government and innovative or project finance PPPs which underscore outputs. The suggested definition is:
Public-Private Partnership (PPP) is a contractual relationship between a public sector entity (PSE) and a private sector proponent (PSP) where the PSP assumes substantial financial, technical and operational risk in the design, financing, construction and operation of a project aimed at promoting public interest by making available higher quality public services that are affordable, and which provide better value to both government and end-users. PPP shall also include private sector participation involving procurement; disposition of an asset, facility, project or a state corporation itself; or performance of a function, usage of public property or where the PSP allows its property to be used by a PSE.
2. Identify all the possible modes of PPP under the proposed PPP definition.
The 10+ PPP modes are Build-Operate-Transfer Schemes and 8 variants, Joint Venture, Concessions, Lease, Procurement, Contracting, Disposition or Divestment, Franchising, Corporatization and Donation.
3. Clarify the policy on unsolicited proposals. The proposed policy is:
As a rule, all priority projects of the government shall be subjected to competitive bidding or selection, or open bidding or solicitation. For non-priority projects, the competitive challenge or procedure for unsolicited proposals may be pursued. Priority projects may only be bid out using the competitive challenge approach if the unsolicited proposals bear new technologies.
4. Formalize the key indicators of a successful PPP.
The proposed overall success parameters of the Government’s PPP Policy are the following: (a) Increase level of participation of private sector in the PPP program to [x] percent of the Gross Domestic Product by Year 2016; (b) Build the capacity of public sector entities to properly develop, prioritize, prepare for tender, negotiate and monitor PPP projects; (c) Improve the quality of life for all Filipino citizens by increasing access to basic services; and (d) Improve the capacity of the country as an investment destination by enhancing the stock, diversity and competitiveness of Philippine core infrastructure.
5. Determine the PPP objectives, impacts, parties, principles, tariff-mitigating schemes, benefits, sectors and projects, funding, payment schemes, feasibility study elements, attendant risks, procedures, contractual provisions and contract management schemes.
This is the proposal and position of Forensic Solutions.
Forensic Law and Policy Strategies, Inc. or Forensic Solutions is a think tank offering services in the fields of policy, law reform, advocacy and governance. The group provides forensic study and viable policy options, giving our clients a crucial advantage in navigating executive, administrative, legislative and judicial inquiries. Forensic Solutions recently published a book on Knowing PPP, BOT and JV: A Legal Annotation. Together with the Center for Global Best Practices, it conducted two seminars on PPP.
Alberto C. Agra was the immediate past Secretary of Justice, Solicitor General and Government Corporate Counsel. He is an advocate of PPP.