Learning from past PPP mistakes (Second of three parts)

Part 1: PPP and a legacy of debt (First of three parts)
Part 3: Coming Soon

MANILA, Philippines – The no-nonsense executive director of the government’s Public-Private Partnership (PPP) Center said the Aquino administration’s PPP projects are structured the way PPP should be, with the government having learned tough lessons from the mistakes of the past.

She said that if there is an apparent delay in the rolling out of PPP projects, this is mainly because the PPP Center, implementing agencies and oversight agencies are carefully studying each contract to ensure that the government’s purse will not be burdened unexpectedly.

“We’ve learned from the mistakes in the past,” Cosette Canilao told The Star.

She said that the first wave of PPP done during the Ramos administration left a trail of debt for the government.

“We saw PPP projects before. Although we needed the infrastructure at the time, we are suffering now because of the guarantee we gave like on the foreign exchange,” Canilao said.

She said it’s the same case with the MRT-3. “This time around, were not just rolling out projects for the sake of having projects,” she said, adding that the Aquino administration is striving to increase the capacity of the government and implementing agencies to come up with projects that are really necessary.

“And we’re making sure that the risk allocation is fair to both the government and the private sector,” Canilao said.

Daang Hari project

The Daang Hari-South Luzon Expressway Link project is the first PPP project awarded by the Aquino administration and which Ayala Corp. won.

The P1.956-billion toll road project aims to decongest traffic in the South Luzon Expressway and Cavite areas.

According to the PPP Center, the 30-year build-operate-transfer project involves the construction of a new four-kilometer four-lane toll road from the junction of Daang Reyna and Daang Hari in Las Piñas/Bacoor, Cavite to SLEX through the Susana Heights Interchange in Muntinlupa, traversing the New Bilibid Prison (NBP) Reservation.

The proposed link-road will use the Susana Heights Interchange as exit and entry from north and south of SLEX and will include the construction of a new bridge crossing SLEX as well as the expansion of the Susana Heights toll plaza.

Canilao said that in this particular project, the government did not take on any market risk. “The private sector shouldered the market risk,” Canilao said.

This means that even if there will be no road users, the government is not obliged to pay the Ayala Corp. There is no guarantee of revenues.

On the part of the Ayala Corp., it said in its project blueprint for Daang Hari that it would be sourcing additional revenues from a portion of the property, which it would develop as a mixed-use center.

“So what the Ayala will do is that there’s a non-toll road portion, they will put up a mini mall there. So their source of revenues is not just toll road but revenues from the mini shopping mall they will put up there,” she said.

According to the 116-page concession agreement, the government would get a five percent share in the non-toll revenues.

But while market share is shouldered by the private sector in the case of the Daang Hari project, Canilao conceded that this is not an across-the-board formula for all PPP projects.

School infrastructure project

The second PPP Project the center was able to bid out is the $239-million School Infrastructure Project.

According to the PPP Center, the build-lease-transfer project will involve the design, financing and construction of 9,300 one-storey and two-storey classrooms including furniture and fixtures in various sites in Region I, III and IV-A.

For this project, Canilao said the government would be providing the private sector proponents an annual fee.

“In the case of the classrooms, the government will pay the private sector an annual fee because it’s not a revenue-generating project,” she said.

Under the contract, the government will pay the private sector roughly P1.6 billion a year for a period of 10 years and the money will come from the budget of the Department of Education (DepEd).

“We will pay them over a period of time, 10 years. That allows us to have the infrastructure in place so that it may already be used by the students,” she said.

Is P1.6 billion a year for 10 years a fair deal? Canilao believes so.

She said in computing for the P1.6 billion, DepEd based it on the costing of the Department of Public Works and Highways (DPWH).

The government has set a minimum performance specification standard for the private investor to ensure the annual payments of P1.6 billion.

Furthermore, as an added safety measure, DepEd also hired an independent consultant to check the timeline of construction, the quality of construction and that all requirements stated in the contract are met.

From now up to 2016 when the Aquino administration term ends, the government expects to roll out 22 projects, eight of which would be rolled out this year.

These include the Balara Water Hub, Cala Expressway (Cavite and Laguna Side), LRT Line 1 South Extension and Operation & Maintenance (O & M) and LRT Line 2 East Extension and O&M.

Other projects are Mactan-Cebu International Airport Passenger Terminal Building, modernization of Philippine Orthopedic Center, Naia Expressway Project (Phase II), New Bohol (Panglao) Airport, New Centennial Water Supply Source Project, NLEX-SLEX Connector Road and the operation and maintenance of Angat Hydro Electric Power Plant Auxilliary Turbines 4 and 5.

Canilao said that for each project, there is a different type of risk allocation or revenue sharing formula but the general idea is for the risks to be shared in a win-win formula.

However, this is not to say that the government will not be left indebted if a PPP project does not turn out as planned.

Canilao conceded that there may be instances – such as in commuter train projects – that the government may have to provide a subsidy to keep fares affordable to the riding public.

“The private sector may jack up prices. That’s the tricky part so as the government, we have to check whether the public can take the proposed fee for this type of service. Then the government will have to provide support or subsidy to the project. That is the primary role of the government in PPP projects,” she said.

At the same time, she said that if there is an established ridership, the commercial risks would be taken by the private sector.

“We’ve learned from our mistakes. But of course we are not precluding that for some projects, even if it is revenue generating, it is still possible that there is a minimum payment for the government. However, we’re also making sure that if the proponent exceeds a certain level of revenues, the excess will go to the government,” Canilao said.

However, she said that as a general principle, the risks are shared by both the government and the private sector.

“These are real PPP projects. The private sector takes the risk and the government would also take its risk. If we commit a breach in contract, we will address it but if it is the private sector that commits the breach, then they better pay us,” she said.

Challenges of PPP

The task of ensuring that the PPP of the Aquino administration work well is a challenge, Canilao said.

She said the Aquino administration is making sure that even after its term has ended, the government’s purse would not be burdened with debt, as has been the case in the past.

“That’s the reason we are all working hard on each and every project. The Department of Finance (DOF) and the National Economic and Development Authority (NEDA) act as oversight agencies. We are ensuring that it works. That’s one of the challenge we are facing now and that’s the reason why we are increasing the capability and improving the institutional set up of the government to ensure that only properly prepared projects are rolled out,” she said.

Indeed, the DOF is closely monitoring each project.

“We’ve really learned from the past. We’re careful of the risks,” said Finance Undersecretary Rosalia de Leon in a phone interview.

Canilao shrugs of criticisms that the PPP program is nothing but a mere power point presentation, because of the delay in jump-starting the program.

She said that if the government was not that stringent and provided lavish guarantees to the projects, the PPP program would have been implemented faster but may end up with the wrong investors.

“We don’t want to roll out projects just for the sake of having projects. What we are working hard on for all PPP projects is that the risk sharing should be fair and appropriate. It’s a balancing act. We don’t want the public to be burdened with higher fees at the same time, we don’t want to take on too much guarantee so for every project that we prepare and we roll out, we ensure the risk sharing is allocated to the one who can manage it properly,” she explained.

She said it is only right that the private sector takes on commercial risks because they can always think of ways to increase revenues.

At the same time, the government is willing to extend subsidies to ensure that the project is viable for the private sector and that the user fees will not be too expensive for the public.

At the end of the day, one can only hope that the subsidies or whatever form of financial help the government extends to the private sector would not burden its fiscal health.