Pros and cons of ODAs, GAAs, and PPP

By Andrew J. Masigan | September 5 , 2017

THE clock is ticking on the Duterte administration.

After spending its first year reviewing, recalibrating, and rewriting the terms of engagements for various infrastructure projects, it is now left with just five years to roll out its ambitions, eight-trillion peso infrastructure plan.

Infrastructure development is the centerpiece of “Dutertenomics” and it is on this basis that the business community will judge this administration. With limited time, the pressure is on to roll-out projects in the fastest way possible.

Earlier this year, the Departments Finance (DoF) and Transportation (DoTr) announced its intention to forgo with Public Private Partnerships (PPP) and instead, utilize official development assistance (ODAs) and budget appropriations from the general appropriations act (GAAs) to finance infrastructure projects. The idea is to bypass the development time required by PPP contracts. Typically, it takes 29 months to settle the technical, financial, and legal frameworks of a PPP contract before it could even break ground. The shift to ODAs and GAAs further saves government from having to deal with the customary lawsuits filed by losing PPP bidders.

Project cost is another consideration. The DoF asserts that government can build projects more economically since its borrowing cost is substantially lower than that of the private sector. ODAs are concessional loans that come with interest rates as low as 1% per annum, easy repayment terms, and a grant element of 25% or greater. The lower cost to build inevitably translates to lower user fees for the public.

Having decided on the ODA and GAA route, government has since adapted what it calls “Hybrid PPP,” whereby it builds the physical structure and subsequently bids out the rights to operate and maintain the facility to a private enterprise.

At face value, the plan makes sense as it allows government to build projects in a cheaper and faster manner. But for all its supposed advantages, Hybrid PPP is far from perfect. There are imminent risks in using ODAs and GAAs, hence, it must be utilized selectively and with caution.

NOT NECESSARILY CHEAPER AND FASTER
Lower interest rates do not necessarily translate to cheaper project costs. One of the reasons is because ODAs come with the proviso that the donee must utilize certain engineering firms, contractors, equipment and parts suppliers nominated by the donor country. These suppliers may not be the cheapest nor the best in their field. In fact, a study conducted by the Philippine Center for Investigative Journalism which covered 71 ODA projects revealed that seven out of 10 ODA projects failed to deliver their projected savings on the back of bloated supplier costs and repair works for shoddy construction.

Adding injury is the fact that this proviso leaves out local engineering and construction firms from benefitting from the infrastructure building boom.

Graft must also be factored into the equation.

A 2011 study conducted by Global Financial Integrity, a Washington DC based think tank, revealed that projects undertaken by the Philippine government were saddled with overspending and budget leaks ranging from 25% to as much as 50% of project cost.

While the study may have been done during the Arroyo administration, no one can deny that graft still persists today, albeit to a slightly lesser degree. Still, even with a minimal 5% graft cost, the saving derived from cheaper interest rates could be completely negated.

As for the savings of 29 months development time, this will only be realized if government can indeed construct a project as quickly as a private enterprise can.

In this regard, absorptive capacities becomes an issue.

As it stands, both the Departments of Transportation (DoTr) and Public Works & Highways (DPWH) are so choked up with project backlogs that certain projects have been put on hold or face years of delays. Cases in point are the P70-million slope protection project at Artemio Mate Avenue and the P30-million Tigbao-Diit bridge, both in Tacloban. The DoTr and DPWH need more engineers, more lawyers and financial auditors to cope with the hundreds of projects on its plate. Further dragging the process is the need to conform to stringent procurement laws.

Private companies work faster since they are motivated by profit, account to no one but their shareholders and face steep penalties if they fail to deliver a project on time. In contrast, delays don’t hurt the pockets of government bureaucrats.

FINANCIAL CONSIDERATIONS
Government officials feel they are awash with cash what with $8 billion worth of credit facilities committed by China and Japan. But the fact that government can afford to build projects using its own resources doesn’t mean it has to.

As a businessman, I always prefer to use investor’s money rather than my own for business ventures. Doing so frees my cash to be used for other projects or saved for a rainy day. It lowers my risk in case the project fails to deliver its economic benefits. It keeps my balance sheet strong with the ratio of liabilities to assets kept at a minimum. The same is true on a national scale.

DoF Secretary Sonny Dominguez said the Philippines has “a lot of headroom” to borrow since our debt-to-GDP ratio is exceptionally low at 41.87% as of March. Still, why use government funds when private enterprises are waiting in the wings to pick up the tab? Credit lines are a finite resource and it should be spent on missionary projects or projects not viable enough to attract private investors.

I look at debt with trepidation. No matter how cheap interest rates are, debts must still be repaid on the back of sovereign guarantees. It also exposes the system to foreign currency risk. The less obligations the nation is saddled with, the stronger our financial position will be.

In the end, I think that projects that require proprietary technologies from a donor nation and those that need government’s intervention to settle complicated right of way issues, like the Manila Subway project, qualify to be done through a hybrid model. However, projects that utilize cookie-cutter technologies and those that can do without government involvement, like the Clark Airport redevelopment, are better off in private hands.

I have no doubt that decision to scrap PPP in favor of a hybrid model is motivated by good intentions. But the last thing we want is to be overcome with debt while still experiencing delays in the roll-out of projects.

This is why the hybrid model need not be the exclusive format for all infrastructure projects. It must be used selectively and prudently. After all, experience has taught us that the private enterprises always carry out projects cheaper, faster, and better.

Source: http://bworldonline.com/pros-cons-odas-gaas-ppp/