Of CALAx, industrial policy and the nature of the State
July 5, 2015 at 18:00
Introspective
Raul V. Fabella
The Cavite Laguna Expressway (CALAx) is a 47-km. eight-interchange tollway project to link the South Luzon Expressway and the Cavite Expressway. CALAx is to be procured under the government’s Public Private Partnership program.
The first CALAx auction in June 2014 — won by Team Orion with a bid of P11.66 billion in premium payment — was scrapped by the government when a technicality disqualified contender, San Miguel Corporation-affiliated Optimal Infrastructure, opened its bid document to the public, revealing a P20.1-billion bid. President Aquino — responding to the revelation — ordered a rebid with bid floor of P20.1 billion.
This produced a howl because the government seemed to have reneged on an implicit promise to honor an aboveboard auction. The government’s response was that the disqualification was too harsh for too flimsy an infraction over the bid security and it cannot, in conscience, leave P8 billion on the table. In the rebid held on May 26 this year, Metro Pacific Investments Corporation won with a bid of P27.3 billion.
The spirited debate provoked by CALAx can be decomposed into two issues: (1) the correctness — or otherwise — of the President’s decision to scrap the result of the first auction; and (2) the correctness — or otherwise — of using the highest premium payment to the government instead of the lowest tariff as the bid parameter in the auction. This piece is only about the second issue.
The PNoy government trumpeted the revenue bonanza for the state treasury as evidence of the correctness of the President’s rebid decision and a triumph for the Filipino people. And who in PNoy’s stead wouldn’t? This may also have been instrumental in the rebound of PNoy’s approval rating in the May 30 to June 5 survey. But critics insist that this premium payment has to come from somewhere — the higher toll fee paid by users of the facility. The winner will just be acting as a tax farmer for the government. If usage is much reduced due to the higher tariff, the social return to the public investment will be lower and this could trigger future renegotiation. The point is then made that the bid parameter should have been the lowest toll charge rather than highest premium payment to the government.
There is here a real conflict of world views: the lowest toll fee option maximizes the benefit (consumer’s surplus) for actual local users of the asset but which the many more non-users — who nevertheless also contribute to the subsidy — do not share. Many infrastructure projects cannot be financed fully by user-fee financing alone and require a subsidy from the state treasury called the “viability gap financing” (VGF) to be built at all by the private sector. The State would like to minimize this subsidy for projects in specific localities so it will have more left to finance projects in other localities.
This squares well with the ideal State as the unbiased mediator among conflicting claims by different regions on limited resources. Lowest toll fee auction reduces the social friction arising from the disproportionate sharing of project cost and benefits. This is ideal behavior for the State. Most projects are deemed to require a positive VGF (the VGF for CALAx was estimated to be + P6.5 billion).
But sometimes aggressive bidding forces the VGF to turn negative, becoming a premium payment to the state worth a whopping P27.3 billion in the case of CALAx. Non-users of the facility will now in theory benefit from CALAx, as infrastructure projects in their localities requiring positive VGFs will now be afforded. A first best outcome in the flesh.
But the controversy persists. One headline read: “Government wins, public loses in CALAx rebid.” Apart from the higher tolls charged to users, critics are also well aware of weak governance in the Philippines. At the heart of the weak State is the inability to credibly commit to the upright use of resources. There is a fear borne out of past experience that such a bonanza can end up being wasted — or worse, stolen! If the weak State perception is correct, what appeared “first best” at first blush could turn out as nth best. The “lowest tariff” auction, in contrast, leaves much less room for fiscal shenanigans. First best under strong governance becomes nth best under weak governance! Truly a case of Robert Burns’ “The best laid schemes o’ mice an’ men gang aft agley an’ lea’e us nought but grief an’ pain for promised joy.”
Neglect of the nature of the State is a serious frailty in the choice of policy instrument and indeed in economics in general. In a forum on industrial policy (IP) organized by Action for Economic Reform (AER), the recurring theme from the speakers was that industrial development has retreated because we do not have an industrial policy. As a reactor, I observed that the country has in fact an industrial policy: the private sector is the engine of growth, with the State acting as enabler by providing the required infrastructure. This economizes on limited government capacity. That the outcome has fallen short so far is because the State hasn’t delivered even its limited share — a marker of weak states. One can shove a more ambitious IP, perhaps of the Japanese MITI variety requiring the picking of winners, upon a weak State and the result could be worse because such IPs will require the nonexistent Japanese standard of governance. Dictator Ferdinand Marcos’ bright boys had an IP which left us “nought but grief an’ pain.” Whether the country has or hasn’t an IP is not the right question; whether or not its IP is smart — one which adequately accounts for the nature of the State — is.
I would like to thank the spirited debaters in the Foundation for Economic Freedom e-group managed by fellow contributor Romeo Bernardo for insights. Likewise, I thank AER for bringing IP to open debate.
Raul V. Fabella the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology.
Source: https://www.bworldonline.com/content.php?section=Opinion&title=of-calax,-industrial-policy-and-the-nature-of-the-state&id=110477
