Legal issues
• Build-Operate-Transfer (BOT) Law
The BOT Law (RA 6957), enacted in 1990 and amended in 1994 (RA 7718), is the legal framework for BOT and PPP projects. However, there is no single government agency in charge of BOT/PPP planning and project preparation, and very little is said in the law about the role of the government for project planning and preparation, principles and policies on risk sharing, and risk allocation.
• Unsolicited Proposals
Too many contracts are awarded under the unsolicited mode. RA 7718 states that the government may accept unsolicited proposals provided that the project involves a new concept or technology, requires no government funding, and/or is not part of the list of priority projects. Projects have been removed from the priority list to qualify for unsolicited proposals. The timeframe for developing a proposal under Swiss challenge (i.e. 30 days) is too short.
• Joint Venture Agreements (JVA)
The head of a government agency has full authority to sign a JVA. This process lacks transparency and competition. The public becomes aware of the project only after the agreement is done, and terms of the agreement are not usually disclosed. Other government agencies (e.g. DBM, DOF) learn of the project only when funds need to be released. NEDA has no oversight role in the approval process. The JVA has become a preferred mode of private sector participation in infrastructure projects, as the approval process is significantly shortened, and oversight is almost nonexistent.
• Foreign Equity Restrictions
In the Government Procurement Reform Act (RA 9184), a 25% cap on foreign equity is imposed on some infrastructure projects. In some projects where security is an issue, foreign equity is reduced to zero. Some projects require advanced technologies that may not be locally available. Foreign companies can provide such technologies but their participation is limited and opportunities to partner with local companies are limited.
Project Planning, Prioritization, and Approval
• Long Term Planning
There is lack of long-term planning for infrastructure development. Usually, project duration is co-terminus with the term of an administration. New projects that cannot be completed towards the end of a presidential term are no longer implemented nor prioritized.
• Lack of Technical Capability to Plan and Prepare BOT Projects
The government has not demonstrated the technical capacity to plan and prepare documents for potential BOT and PPP projects. As a result, many projects encounter problems that delay implementation and sometimes lead to cancellation.
The government must have the capacity to determine which projects are commercially viable for the private sector. At present, there is a BOT office in the DTI, but it has very limited staff and inadequate technical capabilities and financial resources. Project preparation requires technical expertise, commitment, and an adequate budget for the preparation of feasibility studies, bid terms of reference, etc.
The role of government is not limited to preparing the list of priority projects but extends to the preparation of necessary documents to make the BOT process work. For example, government hastily identified the Panguil Bay Bridge project in Mindanao for BOT financing without the benefit of a feasibility study. Three years later, the Department of Public Works and Highways (DPWH) determined it was not commercially viable for the private sector.
Senior government officials present brochures and power point presentations in meetings and conferences showing Potemkin-like projects “offered” to the private sector.68 When the private sector enquires about their details, including bidding schedules, answers are evasive.69 However, when projects are viable and well-prepared and the process is transparent, investors and lenders will come in (see “Transparency in Procurement and Implementation” below).
• Politicized Project Prioritization
The Office of the President has great discretionary power regarding the release of Countrywide Development Funds (CDF), which are often used to reward political support. A study shows that only 38% of CDF infrastructure projects came from Highway Development and Management Version 4 (HDM-4) generated projects.70 Most (62%) are politically determined. HDM-4 is a framework that allows for the systematic prioritization of infrastructure projects. The CDF originated after the 1987 elections with an allocation of one million pesos per representative and has increased to PhP 70 million. Each senator is allocated PhP 200 million. These amounts are usually budgeted annually.
Slow Project Approval
Infrastructure project approval in the Philippines is very slow. Investors have to wait a minimum of five years before a project is approved. Immense time and effort are needed from the start of the planning stage to approval. Inefficiency adds to project expenditure, raising the cost of doing business and the cost of the project itself. To prove that the GRP is serious in improving infrastructure, there is a need for a faster, yet still reliable, project approval process.
Infrastructure Budget and Release
• Congress re-allocates the DPWH budget
Congress inserts, deletes, and realigns some of the projects submitted under the president’s National Expenditure Proposal submitted to Congress each year. The list of approved projects in the General Appropriations Act (GAA) usually differs from the NEP. However, OP-DBM may impound the appropriated budget for some projects (listed in the GAA) and realigned to other projects (proposed by political allies).
• Delayed submission of project requirements
Payment of claims by the government is subject to submission of complete supporting documents. In foreign-funded projects, submission of all required documentation must be completed within the loan period for the financial institution to release funding. When delayed, all payables are borne by the GRP. This imposes an additional burden to its limited budget.
• Delayed release of funds
A major cause of delayed implementation is the slow release of funds by DBM to implementing agencies.
Lack of Transparency in Procurement and Implementation
Transparency is a problem in almost all types of government infrastructure projects – whether JV, BOT, or government funded – and at all levels of government. Resources are misallocated. There were two large tollway projects where variation orders worth a few billion pesos were approved, and the public was not informed. Even the Congress in its oversight function has only very limited access to accurate information.
The Freedom of Access to Information Act (when enacted) will require disclosure of details of government transactions, such as infrastructure projects. It allows the public to request further information from the responsible government agency. In other countries, such as the US, there is a Federal Register where hundreds of government actions are published online for stakeholder input. If the government does not comply, its actions may be subject to post-hoc judicial challenge.
DPWH and DBM are already required to post on their websites information on major projects (e.g. the project amount, releases, expenditure, information of contractors and suppliers, etc.). But this is not followed in practice, especially for Congressional infrastructure projects. When agencies such as the DPWH and DBM are asked about non-disclosure of their projects, they respond that the information is “sensitive.” Information on suppliers and contractors is also not disclosed with government agencies explaining doing so would infringe on their “privacy.”
Lump sum and Congressional Allocations
Some projects cannot be specifically identified ahead of time; thus the justification for “lump sum” budgeting. Emergency projects such as typhoon and flood control and subsequent infrastructure repair and maintenance cannot be predicted exactly (although the country experiences typhoons and floods every year). Lump sums also include budgets for right-of-way and preliminary detailed engineering.
However, the largest amount of lump sums is classified under Various Infrastructure and Local Projects (VILP) where Congressional allocations are included. Legislators identify specific infrastructure projects for financing under this fund. The amount of lump sum in the 2009 DPWH budget was PhP 25 billion, out of a total capital program budget of PhP 86 billion.
Some projects are deliberately classified under the lump sum budget to make the spending non-transparent. Of the estimated CDF (PhP 70 million per congressman and PhP 200 million per senator), PhP 40 million is spent for hard or infrastructure projects (most of these come under the VILP of DPWH). There is no system that shows how and where money is spent. Sometimes money is spent on “ghost” or non-existent projects. Even within Congress, there is very limited transparency.
Cost overruns
Poor project preparation and implementation can lead to high cost overruns. A major source of additional and unforeseen costs is the non-cooperation of LGUs. In one case, a mayor threatened not to issue a permit for the LRT-1 north extension between Trinoma and Monumento if there would be no station in his city.
Risk sharing
Risk allocation must be defined at the beginning of a project in order to clarify the responsibilities of each party (public and private) in BOT, PPP, and JV projects.
Footnotes
- Of the three FGDs devoted to infrastructure, the Road and Rail FGD spent considerable time discussing more general infrastructure policy issues applicable to most sectors. The recommendations are included here and the discussion specific to road and rail projects appears after the section on “Power.”[Top]
- Potemkin refers to a pretentiously showy or imposing façade intended to mask or divert attention from an embarrassing or shabby fact or condition (Random House Unabridged Dictionary, 1997).[Top]
- The former Secretary of Finance and the former Acting Director General of NEDA presented projects at the April 2008 Philippine Development Forum (PDF) at Clark. The same projects were presented at the Wallace Business Forum in Makati by the DTI Secretary in December 2008. At both fora the private sector was asked to invest, but JFC members were unable to obtain details of the bidding schedule in follow-on enquiries with government agencies.[Top]
- HDM-4 provides a powerful system for road management, programming road works, estimating funding requirements, budget allocations, predicting road network performance, project appraisal, policy impact studies, and a wide range of special applications. Its development was sponsored by international funding institutions and supported by national governments, and other organizations, particularly: Department of International Development, UK; World Bank; Asian Development Bank; and the Swedish National Road Administration (www.hdmglobal.com/AboutHDM4.htm).[Top]
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