Financial or economic?
STREETLIFE - Nigel Paul Villarete (The Freeman) - August 27, 2019 - 12:00am

When NEDA-ICC evaluates projects as part of its mandate, it does not delve into the nitty-gritty of the feasibility studies themselves, but uses the approved guidelines and procedures, and courses the review along a laddered successive evaluation through the NEDA sectoral staff, the NEDA Public Investment Staff, the ICC-Technical Board, the ICC Cabinet Committee, and the final approval of the NEDA Board. As one goes higher, the decision parameters converge on the Financial and Economic Feasibilities, and any associated issues the project may have.

On the financial side, the Financial Internal Rate of Return should not be less than the Weighted Average Cost of Capital, while the social discount hurdle rate of the Economic Internal Rate of Return (EIRR) for the financial feasibility is 10%. While they tend to take consistent inclinations, economic feasibility is measured on the overall contribution of benefits to the entire national economy and is macroeconomic in nature. Financial feasibility, on the other hand, refers to a project’s robustness in microeconomic terms, whether it can pay for itself or not, and make a profit.

It is thus easy to understand that economic feasibility is the ultimate measure in national projects, especially those financed by ODA or Public-Private-Partnership (PPP). A lot of government projects wouldn’t even have any financials at all, such as a road, a flood control project, a lighthouse, or an irrigation dam – but their economic benefits are enormous. Other projects have financial streams – public markets, airports, toll roads, etc. and should be measured in terms of financial feasibility, too, on top of the economic measure. But it is by economic viability that projects are given a green light, or rejected by the ICC.

The financial evaluation becomes important in the case of PPP schemes, for two reasons. First, a PPP proponent, especially for the unsolicited ones, should show proof that they can make money out of the entire proposition. Second, there are projects which actually do not pencil out financially, but maybe profitable to the private sector if the government infuses a “subsidy” into the deal.

This is the case of most mass transport projects, especially rail-based ones, which needs both capital and operational subsidies. But the biggest hurdle for rail projects is in the economic side due to its huge initial capital costs and continuing substantial operational costs.

Subsidies are allowed to attain financial viability because these are externalities, the same as taxes, which are netted out of economic costs and benefits in the computation of EIRR. More especially so in the case of solicited projects where the government prepares the project financial and economic structure and solicits bids competitively.

The Build-Operate-Transfer Law, however, ordains that unsolicited proposals “have no direct government guarantee, subsidy or equity,” an impenetrable wall in the ICC process. Maybe that explains why until now, none of the numerous unsolicited proposals for rail projects in Metro Manila remain --err-- as they were, mere proposals. ODA projects often get approved, especially ones with high economic viabilities. (To be continued)

ECONOMIC FINANCIAL
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