PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

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“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
— Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

  1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.
  1. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.
  1. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport — which was funded by ODA — took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.
  1. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

  1. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.
  1. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

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  1. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”
  1. 201706146745fThe China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden — North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers — even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects — may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

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PPP vs. ODA

* This is my article in BusinessWorld last week.

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Among the important characteristics of the user-pay principle is that only those who use the service or facility will pay for its construction and maintenance while the rest of the population — who won’t use them — will be spared of such cost. This characteristic is embedded in the public-private partnership (PPP) mode of construction, procurement, and maintenance of big infrastructure projects.

In contrast, projects that are funded through the annual general appropriations act (GAA) and official development assistance (ODA) are under all-taxpayers-pay principle. More specifically, GAA are paid by current taxpayers while ODA are to be paid by future taxpayers.

Last month, the government through the Department of Transportation (DoTr) and Civil Aviation Authority of the Philippines (CAAP) has terminated the PPP mode of Development, Operations and Maintenance for five regional airport projects — New Bohol [Panglao], Davao, Iloilo, Laguindingan and Bacolod-Silay. These five projects are projected to have a total cost of P108 billion.

There are other projects that suffered from policy reversals from PPP to ODA-funding, like the Kaliwa Dam project in Quezon, and the PNR South Railway project.

Since late 2016, the Duterte administration has announced that it will avoid PPP modes whenever possible and shift to government funding via GAA or ODA or a mixture of both. The reason given is that it will be faster and cheaper to build via government funding. This will cover mostly the P8-trillion infrastructure programs then auction off the operation and maintenance (O&M) contracts to the private sector.

Recall that in my previous piece, the DOTr said during the BusinessWorld Economic Forum last May 19 that these four big projects will all be ODA-funded:

  1. PNR North Railway (Manila-Clark), Q4 2017 — Q4 2021, P255B.
  2. PNR South Railway (Manila-Bicol), Q3 2018 — 2021, P270B.
  3. Mega-Manila subway (Phase 1, QC-Taguig), Q4 2019 — 2024, P225B.
  4. Edsa-Central Corridor Bus Rapid Transit BRT, Q1 2019 — Q1 2021, P38B.

Now the basic question — is it true that GAA or ODA-funded are more efficient, faster, and cheaper to build, than PPP-funded projects?

In the same BusinessWorld Economic Forum last May 19, one of the speakers was Oliver Tan, Chief Financial Officer of Megawide Construction Corp. He showed two tables comparing the construction of two airports in the Visayas, the New Iloilo and expanded Mactan-Cebu airports (see table).

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Mactan Cebu airport terminal — whose awarding was delayed for 18 months but will still be completed on time — is almost five times the size of the New Iloilo airport and yet construction time is almost half that of the latter. The Cebu airport serves 17 international destinations, 27 domestic destinations, by 20 partner airlines. When this new terminal is finished middle of 2018, passengers are projected to enjoy these benefits: check in time will be reduced from 10.5 minutes to 6.85 minutes; getting luggage from 11 to 6.5 minutes; while retail outlets will rise from 17 to 28 and dining options from 17 to 31.

From this example alone, it is NOT true that burdening all taxpayers with government-implemented infra projects is more beneficial to the public.

There are inherent problems and risks to the public if GAA- and ODA-funding become the dominant mode in building important infrastructure projects.

One, a government administration is short term, limited to only six years term and thus, it has little political or corporate brand to build and protect, it can worry less of what the people would say after its term has ended especially if the project is later discovered to be of inferior quality and tainted with corruption. In contrast, a corporation has a brand to protect and it would not risk this brand that has been built for decades to be tainted with corruption and wastes.

Two, ODA funding normally have tight strings attached, like a China-ODA would mean only Chinese contractors, suppliers, managers, and even workers would do the work. Local firms would be relegated to O&M and their purchase of equipment and supplies might be constrained by the project specifications so that they will be forced to source these from China again.

Three, there are recently finished and ongoing PPP projects that are yielding positive results, like the Mactan-Cebu Airport terminal building, NAIA Expressway, Tarlac-Pangasinan-La Union Expressway (TPLEx), school buildings, and automated fare collection system for the trains. These gains cannot simply be dismissed as inferior to government-promised better infra, especially under the environment of bad governance culture in the country.

Four, the user-pay principle means that a tollway or an airport in northern Luzon will be paid only by those who frequently use those facilities. So the people and taxpayers in southern Luzon, Visayas, and Mindanao who seldom or do not use these facilities will be spared of servicing the cost of construction and O&M.

201706014008dThe shift from PPP to GAA and ODA funding of the build-build-build plan of Dutertenomics does not bode well for Filipinos.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET, both members of Economic Freedom Network (EFN) Asia.

ADB’s costly electric tricycles loan

Update on the ADB-DOE more electric tricycles, more public debt racket. Why is it a racket?

(1) 100,000 more tricycles, we need less tricycles, not more.

(2) Capex of $300 M loan, Filipino taxpayers will pay, not the ADB, DOE, DENR or LGU officials, nor the e-trike beneficiaries fully;

(3) Opex daily electricity charging, via municipal/city hall charging stations, ultimately the taxpayers.
(4) Political clientelism, cronyism and rent-seeking, we need less of it, not more.

If those e-trikes are really cute, really financially viable, why not leave it to the market and see if operators will take on that business even without taxpayers’ subsidy? Chances are beneficiaries and recipients of those e-tricycles will never get that expensive investment. P250,000 per unit alone, the  cost of battery, getting a new one as such battery won’t last long, not included yet. http://www.interaksyon.com/…/fat-free-economics-foreign

I read this story first time in August 2010. The original plan was a $280 M (P12.7 B) ADB loan, which later moved upwards to $300 M loan. With due respect to my friends who work at the ADB, but I think this is among those lousy, debt-pusher (no different from drug-pusher) attitude of the ADB in riding the climate alarmism movement.

Instead of adding 100,000 more tricycles, we should cull and remove 100,000 tricycles from the roads, encourage tricycle operators and drivers to drive instead even a 2nd-hand car or taxi. More e-trikes to “save the planet”? http://funwithgovernment.blogspot.com/…/foreign-aid-14

In 2012, Greenpeace and FDC attacked this e-tricycle loan by the ADB, for a different reason. They did not want e-trike cronyism, they wanted solar power cronyism, http://www.gmanetwork.com/…/groups-protest-adb-funding

In 2014, the estimated price of each e-trike is P250,000. Wow ADB, being the debt-pusher of this program, you really want more money from us taxpayers to pay for this expensive and lousy program ha?

And that P250k per tricycle does not include yet the daily cost of electricity charging. I doubt that the favored pol. supporters of LGUs who will receive these e-trikes will charge at home, no. They will charge at city/municipal hall. http://www.mb.com.ph/300-m-adb-loan-dims-on-higher-e…/

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If ADB would lend $300 M say for double-decker buses, or the train-like bus rapid transit (BRT), or electric buses, it would have been more justified. But more tricycles? 100,000 new tricycles? P250k each? daily electricity charging at taxpayers account? ADB naman, panloloko na yan.

I hope that the next administration will cut and discontinue this lousy debt-pushing project by the ADB.