Neda recommendation a huge mistake

After more than four months of review, the National Economic and Development Authority has recommended that the national government continue its support of Apeco (Aurora Pacific Economic Zone and Freeport Authority) in managing and operating the expanded special economic zone (12,900 hectares) now called the Aurora Pacific Economic and Freeport Zone (APEFZ).

A huge mistake. One that is comparable, sadly, to its NBN-ZTE fiasco during the Arroyo regime. While the Neda staff has tried to protect itself by putting in a number of caveats on Apeco’s future operations, the caveats and their justification only serve to induce the Reader to ask the question: Why the go-ahead signal, in the first place?

The huge mistake has at least three aspects, the last two of which have to be fatal to the conclusions that are made (i.e., game-changing/deal-breaking).

The first aspect is that while the executive summary of the Neda study was submitted to the Office of the President last April 18, the whole study will be available only after “a few weeks” (from April 30).

Now this wide gap between the submission of an executive summary and the entire report is not “normal.” The executive summary, after all, is exactly what it sounds like—it summarizes what is in the main body of the report. So there should not be any gap whatsoever. The gap—and a wide one at that—can mean either one or even a combination of two things: One is that this is a situation where a conclusion comes first, with the findings supporting that conclusion having to be tailored during the interim.  Another implication is that this is an attempt to postpone facing the political fallout until such time that the damage would be minimized.

Neither implication would be flattering to the Neda or to the Aquino administration. In fairness to the Neda, though, if it was indeed a here’s-the-conclusion-come-up-with-the-study situation, the executive summary shows that the staff wasn’t going to follow meekly.  The number of caveats and the final statement of the summary attest to that.  But that is really cold comfort.

The second aspect of the huge mistake is that reading just from the executive summary, it is clear that the Neda was jumping through hoops in order to get the project to achieve an Economic Internal Rate of Return (EIRR) of almost 20 percent (15 percent is the minimum acceptable).

Everything else remaining the same, the smaller the costs of a project, and the greater the benefits, the higher the EIRR. So what were done to get the costs of Apeco/APEFZ as low as possible? For starters, all the previous expenditures undertaken by the economic zone—from 2008 to 2012, or the first five years of its existence—were disregarded. The justification here was that they were “sunk costs”—water under the bridge. Marginal analysis, after all, means comparing extra costs and benefits. Which is correct, but it should be applied to the entire project, rather than that part that still has to be done.

That a feasibility study estimating, among other things, the EIRR wasn’t done before the laws creating the economic zone and the free port were passed is already an egregious error. Treating all previous expenditures (lowest estimate P800 million, highest estimate P10.7 billion) as “sunk costs” and therefore ignoring them does not penalize, but rather rewards, that error. The message to politicians would be: Undertake a project even without the necessary feasibility study, because when the Neda comes in to review, all your previous expenditures will be disregarded (no matter how wasteful or corrupt).

But wait. That’s not the only thing that was done to lower the costs. The cost of the 121-kilometer Baler-Casiguran road (Casiguran is where the Apeco corporate campus is)—estimates ranging from P2.3 billion to P5.1 billion—undertaken after the law was passed, was also not included, because “it would have been built anyway,” even without Apeco. The cost of rehabilitating the existing Casiguran airport wasn’t included, because it was funded by the Civil Aeronautics Authority (what, aren’t these government funds?).

Worse, it looks like the cost of building an international seaport wasn’t included either, because, as I understand it, the project did not pass muster with the Neda (the only one so far that I know to have been submitted to it). Of course, the question is: If there is no seaport, and the airport (which has never, in the five years of the ecozone’s existence, seen a commercial flight) is for small planes, then the freeport/ecozone concept is useless.

Nor were enormous costs to the economy of smuggling that seems to be standard practice in all freeports (e.g., Subic, Cagayan, Poro Point) taken into account.

Now how were the benefits enlarged?  How about assuming, contrary to the experience of other Philippine freeports and ecozones, that the targeted locators would be in place by 2017 (for the so-called agri-aqua ventures) and by 2024 (for “light industries”)?  Or assuming that all the outputs would be absorbed by Aurora and its neighboring provinces (not taking into account other ecozones in the area)?

The third aspect of the huge mistake is the implicit assumption that all the caveats listed that still need to be fulfilled in order for the benefits to take place, and for the costs not to balloon, would indeed be fulfilled: a master plan, a land-use plan, feasibility studies for various projects, other operational plans, coordination between stakeholders, government and civil society, environmental safety measures. That is a heroic assumption.