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.

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.

Dissecting Dutertenomics’ overspending plan

* This is my article in BusinessWorld last Tuesday.

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During the BusinessWorld Economic Forum held last May 19, Budget Secretary Benjamin E. Diokno showed two interesting charts: (1) sustained overspending and borrowings, budget deficit/GDP ratio from -0.9% in 2015 to -2.7% in 2016 then -3.0% from 2017-2022. And yet (2) debt/GDP ratio was expected to decline from 44.8% in 2015 to 40.2% in 2017 and further down to 36.7% in 2022.

Is this possible? That one overspends and over-borrows and yet the debt/GDP ratio will keep falling?

DBM, NEDA, and Malacañang say yes because the projected taxes/GDP ratio will increase via the proposed Tax Reform bill of 2017. Sec. Diokno said in the same forum that “We will continue to guard against underspending, the Waterloo of the previous administration.”

“Underspending” for me should mean that expenditures are lesser than revenues, resulting in a fiscal surplus. When expenditures are larger than revenues but the deficit is only at -1% or below -3% of GDP, that is still overspending, not underspending. So the previous administration did not really underspend, just that it did not go into an uncontrolled spending spree.

Here are relevant numbers about the Philippines’ fiscal position and levels of outstanding public debt, and comparative debt/GDP ratio of seven ASEAN countries (see table).

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The numbers above show three important facts:

One, the average deficit in the previous administration, 2010-2015 was only P185 B/year or -1.8% of GDP, benign and considered as “underspending” by many fiscal hawks, especially when compared with deficit in 2009 (last year of the Gloria Macapagal-Arroyo administration) and 2016 (first year of Duterte administration).

Two, low annual budget deficit and borrowings in the same period means the country’s outstanding debt stock has risen only mildly, with the average of P260 B/year.

Three, partly a result of this, the Philippines’ debt/GDP ratio over the same period showed significant decline, similar to the experience of Myanmar while other neighbors posted deficits, owing to increased borrowing.

Fewer borrowing means less debt service payments for both principal and interest. It was during the same six-year period that Philippines’ GDP growth was 6.2% per year, much higher than Thailand’s 3.7%, Indonesia and Malaysia’s 5.7%, Vietnam’s 6.0%.

In the same BW Economic Forum, the DoTr showed that these projects will be ODA (government loans) funded, not PPP.

  1. PNR North Railway (Manila-Clark), construction Q4 2017 — Q4 2021, P255 B.
  2. PNR South Railway (Manila-Bicol), construction Q3 2018 — 2021, P270 B (originally a PPP).
  3. Mega-Manila subway (Phase 1, QC-Taguig), construction Q4 2019 — 2024, P225 B.
  4. Edsa-Central Corridor Bus Rapid Transit BRT (Edsa, Ayala, Ortigas, BGC, NAIA), construction Q1 2019 — Q1 2021, P38 B.

Other big projects were identified but it wasn’t specified whether these would be funded by official development assistance (ODA) or via Public-Private Partnership (PPP). In December 2016, DoF Secretary Sonny Dominguez already indicated that infrastructure projects under the Duterte administration will avoid PPP whenever possible. And the massive China and Japan ODAs came into the picture.

Then there are tweaks in some major projects, from PPP to ODA. Like the PNR South Railway and the Kaliwa Dam project in Quezon province of Maynilad Water. What would pre-qualified players like San Miguel do with this policy reversal?

The Dutertenomics’ spending plan is detrimental to taxpayers in general and the investment environment in particular, for the following reasons.

  1. Bigger annual budget deficit would mean more government loans, higher public debt stock, and will lead to higher taxes now and the future to service those huge loans to be contracted. Soon the P6/liter increase in oil excise tax will not be enough, it will further rise.
  2. Massive shift from PPP (private investment) to ODA of major infrastructure projects will result in more loans which mean more public debt, more taxes, and fees in the future.