ODA vs BOT: What works best for us

What is the gestation period for an ODA financed project? The SCTEX was the subject of a JICA mission in March 1999. Construction started in April 2005 and completed in July 2008. That’s nine whole years. If DOTC Secretary Mar Roxas insists on financing his big infrastructure projects using ODA, P-Noy will have nothing to show by the time he bows out of office in just four years from now.

There is little sense of urgency among the mostly government people involved in ODA financed projects. In a commercially financed project under a private sector proponent, there is the need to see the project through quickly because it has to earn a return on investment soonest. I thought this is something basic that would have been obvious to a supposedly private sector oriented investment banker like Mar.

Mar probably thought that ODA financing would be better because government won’t have to raise large sums of money for infra projects. But a BOT project would do that too. It also isn’t as if we don’t have enough local capital available to finance those PPP projects originally earmarked for BOT in pesos. There is so much liquidity in our financial system the Bangko Sentral is spending a bundle sterilizing a couple of trillion pesos in SDA accounts. It also isn’t as if a commercially financed infra project will have to spend that much more in interest rates given the prevailing low interest rates.

In fact, if the forex losses arising from a strong yen or other currencies are factored into the equation, the difference in the financing costs of privately financed BOT projects may not be too far away from that financed by ODA. More so if we also consider that ODA financed projects often end up 30 percent or so more because of the lack of transparency and competitiveness (e.g. NorthRail). A BOT project will have to be competitively priced if the proponent hopes to win the Swiss challenge as a condition for the award of the project.

I asked two knowledgeable sources about their thoughts on this ODA versus BOT debate. The first source is someone who is very familiar with government projects here and abroad and has an intimate knowledge of how our bureaucracy works. This is his take on the matter.

My impression is that most cabinet members (including Purisima and Roxas) do not really understand the whole logic of PPP. They wear the hat of a private sector CFO looking at cost of money. In that frame of mind, the ODA will always look like a bargain – interest cost less than three percent for JICA and slightly more for other ODAs.

But if they wear the public sector hat, investing or spending now takes precedence, with interest cost only a starting point. Often forgotten is the fact that tied loans end up with higher project cost – as illustrated by SCTEX. Here are the details of SCTEX and the lessons that should have been learned by today.

The original project cost was P15.73 billion per BCDA. The project brief accompanying the Special Yen Loan indicated a project cost of P18.739 billion. The out-turn cost per BCDA website, is P34.097 billion. Cost overrun based on the project brief is therefore P15.538 billion. Per JICA press release, the Yen loan was increased to JPY59,037 million in 2007.

Since this is a tied loan, at least 50 percent of the project cost must be imported from Japan. For this reason, it is reasonable to assume that a large part of the cost overrun can be traced to the ODA progeny. If 100 percent of the cost overrun of P15.538 billion is included, the effective interest rate rises to 7.26 percent (or 8.26 percent with the guarantee fee). If only 50 percent of the cost overrun is attributed, then the effective interest rate is 5.12 percent (6.26 percent with guarantee fee). If the Yen continues to appreciate at the 12-year average of 6.4 percent, then the actual cost to the Philippines will be higher.

Toll fees are 24.2 percent higher than they should have been, due to foreign exchange losses.  

The other variable is local borrowings create a bigger multiplier effect - local banks get their funds moving, and local content of project cost are larger.

But the more important aspect is that ODA enters the public sector budget; hence, these must fall within the budget ceiling. Under PPP, the investments brought in by the private sector are outside the ceiling. Historically, the Philippines investments in infrastructure averaged 2.6 percent of GDP. The ratio for our Asian neighbors is four percent to 10 percent. Vietnam is about six percent, and China on the 10 percent level.

Hence, if we continue to rely on ODA, we will never go beyond the 2.6 percent level – because of the budget ceiling annually set by the DBCC. We could, if we expand revenues (which Ramos managed to push to 18-20 percent of GDP and GMA successfully brought down to less than 15 percent despite the EVAT). Hence, if government removes some expenditures from the budget (transfer to private), it would free up this amount for some other important priorities.

Apparently Malaysia and India saw something we don’t with their modern efficient roads. Malaysia has set the gold standard for the region with 1,500 km of expressways in operation and 200 km under construction. Malaysian and Indian toll expressways were built and are operated using the BOT/PPP financing and operating model to avail of private sector capital and management.

Let me end my long answer with a bold assertion. Construction of LRT Line 2 extension could have started as early as 2008, had there been no fixation on ODA being cheaper. The country would already be reaping the economic benefits since 2011. That lost (plus another three years, if tendered this year) would exceed the perceived difference between ODA and local borrowings. I am willing to bet that it won’t get into tender under Mar Roxas’s watch.

Here is the view of the second source, an investment banker.

I really think the magnitude of borrowings and debt to GDP are manageable, given the cost and levels and should not factor into the ODA or PPP discussion. Perhaps the advantage of ODA is longer tenors but that no longer seems to be a problem for now. Another is lower cost but again the spread is not as wide as previously. The last is currency mismatch given ODA is in the donor’s currency.

I really think the issue is control of the asset and patronage/corruption/overpricing which goes away with PPP to a large extent. Yes the SCTEX is a great example. Let me tell you the project was so overpriced and the projections so fanciful (to pay for things like overpricing the payment to Luisita as the Aquinos and Arroyos were still allies then that made any C5 diversion of Manny Villar pale by comparison) that the revenues of the toll road cannot even pay for the interest on the ODA loan for the next 3 to 5 years!

So with ODA government keeps the project and doles out the favors.

Given these informed views, one wonders why Mar opted to change the PPP concept from BOT to ODA. Not only will going ODA financing delay his projects, Mar will also find it difficult to implement these projects on the daang matuwid principle. So it seems P-Noy is doomed to have nothing to show by way of completed vital infrastructure by the time he leaves office in 2016. I really wish Mar will prove us wrong, for our country’s sake. But I am afraid not only will Mar doom our hopes for improved infrastructure, he will also doom his own chances for higher office when 2016 comes.

SCTEX

Speaking of SCTEX, the government through BCDA is in danger of having to raise something in the neighborhood of over a billion pesos to pay JICA for amortizations due starting this quarter. That should already be the worry of Manny Pangilinan’s MNTC but the agreement on the matter is yet to be signed by P-Noy. I understand the documents were sent to Malacañang last October but are now missing somewhere in the black hole of the Palace bureaucracy.

The last time they failed to act expeditiously, MVP’s PLDT didn’t have to pay John Gokongwei over a billion pesos in dividends because the Sun buy out was not yet considered consummated while waiting for government approval. Now, here is another billion pesos in savings on SCTEX. But I am sure MVP would much rather just get expeditious approval of his projects, the P2 billion saved notwithstanding.

Stations

A bus station is where a bus stops. A train station is where a train stops. No wonder a bureaucrat’s desk is called a work station.

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