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With Due Respect

Three contrasting PPPs

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Our country needs modern airports, expressways, railways, water systems, electric power and other infrastructures. However, the government does not have the funds to build them and the skill to operate them. The solution is public-private partnerships (PPP) mainly via the build-operate-transfer (BOT) system.

Failed PPP. Under this program, private concessionaires construct the infrastructures at their sole expense; no public funds are spent; rather, the government earns without spending anything and acquires the built projects, free of charge, after the lapse of the agreed concession period of usually 25 years.

The concessionaires recoup their investments plus reasonable profit from fees paid by the users of the infrastructures. To prevent abuse, the user fees are adjusted periodically by regulatory agencies under pre-agreed rate-setting formulas.

Unfortunately, as I wrote last Sunday, the first major PPP project—Terminal 3 of the Ninoy Aquino International Airport (Naia 3)—went awry. After 20 years of disputes, it is still unfinished. Worse, the government, per the Jan. 6, 2011 Inquirer editorial, has “spent at least P2 billion” in litigation and arbitration fees.

It will spend another P1.9 billion to complete the terminal by next year. And, per decision of the Court of Appeals on Aug. 7, it will have to pay $371 million as just compensation to the builder, Philippine International Air Terminal Co.

Moreover, Naia 3 has become a drag on our tourism industry because it cannot serve the many more million visitors lured by the “It’s more fun in the Philippines” campaign.

Successful PPP. In contrast, the PPP program involving the Manila Water Company to supply the water needs of the eastern half of Metro Manila (the western half is supplied by Maynilad Water Services) has been widely hailed as a model PPP, notably by the International Monetary Fund and the World Bank.

Fully funded by private investors, it has religiously paid royalties to the government since 1997. It reduced water leakage from 67 to 11 percent, thereby saving 700 million cubic meters of water daily, the equivalent of building a water dam costing P25 billion.

It had only 3 million customers in 1997, of whom only 26 percent had water 24/7. Now, it serves 6.3 million, 24/7. Of these, 1.7 million are poor with subsidized rates. Manila Water has invested P75 billion in capital expenditures to assure potable surging water.

Of late, the concession agreement has been attacked for allegedly allowing Manila Water to profit unreasonably, allowing it to charge even its taxes to the consumers. In reply,  Manila Water said it has faithfully observed “the agreement that was  written, reviewed, approved and guaranteed by the Philippine government.”

Probably still pondering on the lessons learned from these two contrasting programs—the first a failure and the second a success—the present government has been quite slow in launching new PPPs. Three years have gone, but it has successfully bidded out only two projects, the P2-billion Daang Hari-South Luzon Expressway link and the P15-billion Naia toll road.

Timid PPP. A third—a real biggie—the recent public auction for the P60-billion Light Rail Extension to Cavite did not produce a winner. Only one pre-qualified bidder filed a “conditional” bid; the others backed out due to “unattractive and unbankable” terms.

Basically, the prospective bidders felt that the project is unviable because the fares to be charged were fixed at a very low rate. No realistic mechanism for fare adjustments was allowed resulting in the inability to replace antiquated equipment, to maintain them properly, to provide satisfactory service and to profit reasonably.

Further, government wanted the concessionaires to shoulder real estate taxes amounting initially to about P2 billion a year, escalating over the years. And yet, the private investors will not own the land on which the rails shall be built. Why then should they pay these taxes?

Investors have choices on what projects to invest on and in what country. Consider these simple investment alternatives. In 1988, lots in Forbes Park were selling at P5,000/sq m. Now, 25 years (the normal PPP concession period) later, the same lots sell at P200,000/sq m (40 times more).

Similarly, in 1988, lots in Ayala Alabang were selling at P1,000/sq m; now, they sell at P45,000/sq m (45 times more). In 1988, Jollibee shares were selling in the stock market at P10; they traded last Friday at P162 (16 times more, not counting the generous periodic cash dividends).

In sum, it seems that the failed Naia 3 and the belated criticisms of the successful Manila Water PPP have resulted in over-cautiousness to the point of timidity in the bidding of the Cavite LRT. While every effort must be made to avoid the lapses of Naia 3 and to secure the best terms possible for the public, no PPP project will be undertaken if the bidding terms are not viable and concessionaires are not allowed reasonable returns.

Further, when PPP investors deliver on their contracts and build infrastructures the government is incapable of providing and operating, they should be commended, not unfairly deprived of the contracted returns on their long-term investments. The least government should do is to honor sovereign commitments and observe the sanctity of contracts. Only then will it truly inspire inclusive growth that creates jobs, alleviate poverty and promote prosperity.

* * *

Comments to chiefjusticepanganiban@hotmail.com


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Tags: artemio v. panganiban , business , opinion , PPP , Public Private Partnerships , With Due Respect

  • tadasolo

    Filipinos by their very nature are devoid of success and when they see one they are suspicious

  • nice_boy

    This government does not honor sanctity of contracts. Do not expect foreign investors to come in.

  • southernsons

    Usually, I don’t see any honor codes amongst us Filipinos even terms of agreements are not followed. I’ve invested on a partnership basis so many times with fellow pinoys but after a year or so, they deviated the terms of our contract on their own favor.

  • usizero

    As long as this PPP projects are helmed by lawyers, nothing will come out of it because they have a template on what happened to some lawyers at DBP wherein one of them committed suicide as a result of the scorched earth policy of witch hunting initiated by the factotums of the inutile president in malacanang to ferret out “kuno” the graft and corruption committed in the previous administration. So these board members managing these PPP projects would prefer out of self preservation to side with over caution even at the expense of sabotaging these projects than to be subjected to court cases in the future as co-conspirators in graft cases by an unfriendly future Regime that will succeed this present inconsequential Regime led by an inutile president.

  • alisto101

    PPP is good if the officials doing the deal is not corrupt. .

  • josh_alexei

    And the Cost of Litigation in case there are disputes to the contract has also becomes prohibitive (might be some hidden cost, somewhere, please tell us if this is true, Mr Panganiban or was it just a Rumour?) So if you are an investor, would you? The greatest success of PPP I have even seen, Mr. Panganiban is our Health Care system…we call it Privately provided, Publicly funded…Laboratories are privately operated, yet all their services are publicly funded…so are all Physicians…Even our Student Assistant Programs are mostly provided by Banks,(that is still PPP) interest of which is paid by the govt. while the Student is completing his studies and would later assume the loan upon gainful employment or completing the programs.

  • Scorpio15

    “Our country needs modern airports, expressways, railways, water systems, electric power and other infrastructures”.

    Mas lalong nanganga-ilangan ang mga Bulsa ng ating Tongressman at mga Senatong kesa sa sinabi ni Panganiban.

  • http://inquirer.net unokritiko

    with due respect this PPP projects is under the scrutiny of lawyers not technical people who know much up to the last screw it will be used. The results is that this PPP stinks like a rotten animals were you can smell 5 km away. I really object 1100% on this projects because sure it is tainted with anomaly which in turn the public suffer in the long run. It does not help the government at all!!!

    • nakabahag

      natumbok mo.
      it has always been like that.
      the BNPP issues were tackled and decided by lawyers. Issues are about economics, safety, and nuclear science. Those lawyers are mostly, if not all, politicians.
      Sec. Atty de Lima annouced that they were near apprehending the hackers that defaced several govt sites. She probably doesn’t even know what binary equations are. Basic foudnation of cmputer sicence that’s why ,maybe, she thought that hacking is simly like hide-and-seek. The hackers are still watching for an ethical time to attack.

  • kokak

    PPP? Infrastructures? Duh..
    The Senators-Napoles partnership has more funds.
    .

  • lemon88

    Technically hindi nagkasundo sa hatian ng commission kaya failure ang bidding ng ibang PPP. kac on the gov’t side puro lawyering for commission ang mga kasama



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