Three contrasting PPPs

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.

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