PPP and a legacy of debt (First of three parts)

Part 2: Learning from past PPP mistakes (Second of three parts)
Part 3: Coming Soon

MANILA, Philippines – Former president Fidel Ramos is no longer active in the political arena, not even as a kingmaker. These days, he is seen in social gatherings with other VIPs like him, indulging admirers for photo-ops and small talks.

But the debt legacy left behind by his six-year administration from 1992 to 1998, particularly from infrastructure projects, lingered long after his term ended.

It is perhaps for these reasons that warnings have been raised on the Aquino administration’s much-touted public-private partnership (PPP) program for infrastructure.

Dbcc warnings against ppp

For instance, the Development Budget Coordination Committee (DBCC), the interagency group that sets the country’s macroeconomic assumptions and targets, has warned of the government’s fiscal risks in PPP arrangements.

“PPP arrangements expose the country to a diverse, complex and often large array of fiscal risks. Performance undertakings or acknowledgments of government obligations are issued for projects undertaking by line agencies through PPP. Fiscal risks stemming from these projects include risks related to right-of-way, political, regulatory risk, change in law, currency convertibility, events of termination, events of force majeure and take-or-pay arrangements, among others. Some of these eventualities translate to actual liabilities and should be included in the government’s budget when they do,” the DBCC said in its 2012 Fiscal Risks Statement.

Furthermore, the DBCC said that the contingent obligations associated with the performance undertakings arise in case of delay or default on the part of government in executing its deliverables and have varying probabilities of becoming real and having an impact on the budget.

The DBCC also said that contingent liabilities from defective PPP projects expose the government to the possibility of “unexpected and substantial obligations over a short period of time and could lead to a severe strain on its fiscal resources.”

As a precautionary measure, the DBCC recommended putting in place clear mechanisms to cover contingent liabilities in case such guarantees are called.

The Philippine Institute for Development Studies (PIDS), a government think-tank, in March 2012 also warned that PPP projects in general could bloat the government’s contingent liabilities if left unchecked.

In its study on PPP, it said that in comparison with purely public projects, PPPs are more complex transactions that need careful implementation and management. “Another problem seen with PPP is that a misallocation of risks and rewards may result in conflicts that could derail a project. The misallocation of risks often entails the issue of contingent liabilities where the government may have to shoulder fiscal risks and thereupon incur possible increase in its debt burden. In order to encourage private sector participation, especially in infrastructure projects, the public sector is sometimes forced to provide state guarantees. However, these guarantees create contingent liabilities that could spell financial trouble for the government if not properly managed,” the PIDS said.

And this is what happened in the case of the Metro Rail Transit (MRT-3), a project sealed during the Ramos era.

While the Ramos administration ended in 1998, the government was only able to finish paying off the debts incurred from the Metro Rail Transit (MRT-3) in 2010 and to this day, the Commission on Audit continues to prod fiscal authorities to find a way for the government to get back the payments once MRT-3 is privatized.

Data from the Department of Finance (DOF) showed that the government spent P32.08 billion to service the MRT-3 debts from 2000 to 2010.

The Metro Rail Transit Corp (MRTC) is the private entity behind MRT 3 which incurred loans from various creditors.

The government assumed the payment of MRTC’s obligations to its lenders on the basis of the 25-year build-lease-transfer agreement between Metro Rail Transit and the Ramos administration.

The COA has called the attention of the government several times on this and to this day, it continues to do so.

According to the 2011 COA report, the government paid the creditors of MRT-3 a total of P32.08 billion in principal and interest payments.

These creditors are the Japan Export-Import Bank of Tokyo-Mitsubishi and Postal Bank of Czech Republic and Czech Credit Agency.

On top of these foreign loans, MRTC also sourced funds to finance the MRT 3 project from a group of local banks termed as FCDU credit facility.

The government spread the payment for the P32.08 billion from 2000 to 2010. The annual debt service of MRTC loans to these lenders amounted to P1.372 billion in 2000; P3.446 billion in 2001; P3.243 billion in 2002; P3.510 billion in 2003; P3.873 billion in 2004; P3.996 billion in 2005; P3.519 billion in 2006; P3.108 billion in 2007; P2.437 billion in 2008; P2.397 billion in 2009 and P1.170 billion in 2010 or P32.08 billion for the 10-year period.

The assumption of these debt payments is based on the DOF’s Undertaking Letter dated Oct. 17, 1997, which provides that the obligation of the government to make payments shall be absolute, unconditional and irrevocable under any and all circumstances and shall in no way be released, discharged or otherwise affected for any reason.

“In previous audits, the assumption of the debt servicing of the MRT three project and the continuous debt servicing by the NG of the MRTC loans of P32.08 billion,” the COA said in its report.

Aside from the debt service, the government also provided subsidy to the Department of Transportation and Communication (DOTC) for mass transport and for the operation and maintenance of the MRT three project, the COA said.

The COA also said that the government should seek to reimburse the P32.08 billion once the operation and management of MRT 3 is privatized.

“[T]he full payment by the government to the MRTC’s creditors of approximately P32.08 billion or an equivalent of $632.32 million must be given due consideration by the concerned government agencies or corporations, particularly on the aspect of ensuring that the full amount is recovered and/or the interest of the government, as originally stated in the BLT agreement, is faithfully adhered to,” the COA said.

It urged the Bureau of the Treasury to make representation with the DOF to consider the P32.08 billion debt payments made by the government to MRTC creditors in negotiating the best terms of the government should the privatization of the MRT three project push through.

Aside from the MRT three project, the power projects approved during the Ramos era turned out to be debt burdens as well.

According to a report by the Philippine Center for Investigation Journalism (PCIJ) in 2002, an independent study commissioned by the Senate energy committee in 2000 listed 12 independent power producer (IPP) contracts signed by the Ramos administration as among the most expensive ever entered into by the government.

These contracts accounted for half of the estimated P400 billion in net liabilities that had to be shouldered by the National Power Corp. (Napocor), the PCIJ report said.

The promises of PPP

But despite the debt burden left by various infrastructure deals sealed during the past administrations, the Aquino administration insists that the PPP is the way to go to be able to fulfill its mandate of providing the country the crucial infrastructure it needs.

In November 2010, just four months after being elected into office, President Aquino launched his government’s flagship infrastructure program in the posh ballroom of the Marriot Hotel in Pasay.

He asked the help of local and foreign investors in building key infrastructure in the Philippines, with a promise to shoulder regulatory risks that the different projects may incur.

“The government does not have the resources of a developed country. The country’s budget deficit this year currently stands at 3.9 percent of the gross domestic product (GDP) or P325 billion. It is therefore important that government funds be prioritized. We have done what we can to rationalize and streamline our budget to cut out inefficient programs and transfer resources to priority projects that have demonstrated results. However, we do need your help. In areas like the development of infrastructure, the private sector must be induced to make the investments. And for that to happen, we know that the rules must be fair, clear, and equally applied to all,” Aquino said at the time.

He assured that the government would provide investors with “protection against regulatory risk.”

“Infrastructure can only be paid for from user fees or taxes. When government commits to allow investors to earn their return from user fees, it is important that that commitment be reliable and enforceable. And if private investors are impeded from collecting contractually agreed fees – by regulators, courts, or the legislature – then our government will use its own resources to ensure that they are kept whole,” he said.

On the other hand, he stressed that commercial or market risk, has to be borne by investors.

“As it should be,” he said.