Completion risk

The really good thing about PPP is that it is to the interest of the private sector proponent to complete the project at the shortest time possible and at the least cost… a built in profit discipline. This is also makes it more transparent than ODA or GAA.

Let us take my favorite botched project of DOTC that DOTr inherited: the four-kilometer LRT2 extension to Antipolo. They broke ground on the stations with much pomp and publicity last week. Nothing wrong with that. Indeed, it is good to know they are moving on the project again after months of nothing much happening.

 If that were a private sector project, the commuters from Antipolo would be using the system now. The motorists on Marcos Highway will not suffer a second time due to construction.

DOTC chopped the project into several components when it should have been presented for bidding as one. So the main bulk of the project, the concrete carriageway had been completed months ago. But work on the stations, the signaling and electrical systems and the rails are yet to start.

This happens because bureaucrats appear to have vested interests to chop up projects so their less capable friends can bid. This chop chop approach will cost taxpayers more money, but they don’t care. A private sector proponent of such a project will find it to its interest to do the least cost approach.

NEDA Usec Rolando Tungpalan then presents a number of PPP projects which he said failed or was problematic. I agree. But he didn’t tell the whole story of why the projects failed.

Tungpalan cited the failed PPP project for the rehabilitation of the Orthopedic Hospital. The winning bidder, Megawide, gave up the project after waiting for over a year for government to provide the land for the project. Megawide lost money they spent preparing the feasibility study as well as incurred opportunity cost on a large sum of money set aside for the project.

The project’s failure was clearly not private sector’s fault. Government awarded a project with no regard to details such as where to put it. There were other problems too, essentially political. A change of health secretary sealed the project’s demise.

The NEDA official then cites MRT7 which took about a decade to break ground. I had followed the project closely and much of the delay happened while the project was in government offices being processed. The proponent couldn’t even talk to their bankers and work for financial closure until details of the government approval are clear.

Perhaps there were really good reasons for the DOF to go through the proposal with a fine tooth comb to protect the Treasury from such things as financial guarantees to creditors and proponents, contingent liabilities, etc. But the process should have been facilitated so proponents could either accept changes being proposed by government or drop the project.

Then there is MRT3. No one will dispute the fact that it is a colossal failure. But it is because it is the wrong kind of PPP. It was a sweetheart deal of the Ramos administration with the consortium of blue chip companies that included Ayala, but managed by the Sobrepena group.

He forgot to mention NAIA T3, a failed PPP project, but it happened because of sheer corruption. Government officials who approved it had something to do with revisions to the original contract and I suppose, the private sector proponents, including the Germans, didn’t have our national interest at heart.

But going back to MRT3, in projects of that nature, government should build the superstructure and the private sector will operate and maintain. Government has responsibility for acquiring right of way and can get long term ODA for construction and the private sector has more flexibility to operate and manage. MRT3 is the exact opposite.

And we have not learned our MRT 3 lesson in designing the LRT1 extension which the private sector will build and government will buy the rolling stock via JICA financing. At least in LRT1, the entire system will be operated and maintained by the private sector.

As a general rule, government financing through GAA or ODA should be more in missionary areas and really major infra projects like large dams and flood control systems. Projects with commercial potential should be prioritized for PPP because after all, government keeps saying that the private sector is the economy’s primary engine for growth. And actual users of the toll road or rail line or airport pays for the project rather than all taxpayers. 

PPP projects must always pass the bankability test, protecting the public from expensive white elephant projects that government officials fall in love with somehow.  This is why private investors decided to stay in the sidelines when the government bid out the PPP project to build the Laguna Lakeshore Expressway and Dike.

The P123 billion project just wasn’t attractive to the private investors. Perhaps it is a good project for non commercial reasons and if so, that makes it an ideal project for ODA or for the government to undertake via GAA.

But it should not be included in Tungpalan’s list of PPP failed projects. The private sector stayed away because the project, as presented by government, didn’t make financial sense. It is back to the drawing board for DPWH.

That’s the other good thing about PPP… the risk of completing the projects is taken by the private sector. Completion risk is normally high with government managed projects. It is minimized in projects where private investors have exposure simply because the private investors determines beforehand the desirability of the project and its completion. 

Dr. Bong Montes, a former banker who advises the PPP Center on an ADB grant, emphasized, during the MAP forum, the superiority of a pure PPP play over variants like the so-called hybrid approach. It is important, he said, for the private sector to have some skin in the game.

Capital-at-risk in an integrated PPP is purely private sector’s. The private investor, Montes explains, puts in equity and borrows to fund capex and recovers its capital through revenues from operations and services.

On the other hand, a project company in a hybrid PPP has minimal capital-at-risk and no incentive to maximize revenues through better quality service and efficient operations. This was announced to be the preferred PPP mode of the administration.

But Montes warns, in a hybrid PPP, if the private concessionaire performs badly, it stands to lose only the profits from the project. It can just walk away.

“Is it PPP, ODA or straight from the budget?” Tungpalan told a BusinessWorld reporter that funding through budget is the best way to fast track infrastructure projects.

He has to be dreaming or simply misleading. Or maybe he should talk to Joey Salceda who had been clamoring for his new Bicol International Airport. That’s being handled straight from the budget and is taking more years than necessary, but still not completed and won’t be soon.

That’s why I have little confidence with the folks at NEDA. They can crunch numbers, but are merely theoritical, while the world outside is crying for fast delivery of infrastructure.

And yes, they are adept in waging bureaucratic wars with other agencies like the PPP Center as if they are not on the same team. One can only hope they know what they are doing for our sakes.

But at least government now acknowledges that when it comes to operations and maintenance of infrastructure, the private sector does it better than government.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco