Back to the drawing board (Part 2)

October 13, 2011 at 14:14

This is a re-posted opinion piece.

Part 2

When President Aquino unveiled the PPP program to the world on the occasion of his first state-of-the-nation address, he proudly announced that some groups have shown interest to build an expressway from Manila, through Bulacan, Nueva Viscaya, and up to the tip of Cagayan Valley at zero cost to the government. That, I thought, was too good to be true, and thus probably not true.

As economists say, there is no such thing as free lunch. No private investor in his right mind will invest in a monumental, long-term, financial undertaking, say, that Manila-Cagayan Valley expressway, without any form of government guarantee or tax breaks or both.

But a PPP project, it turned out, will not be entirely costless to the government. For example, the government has to pay for the feasibility study of each project that will form part of the PPP program. In some cases, the government has to guarantee financial risk, which, at some point in the future, may turn out to be real costs to the government. The government has to provide tax breaks and other forms of non-fiscal incentives.

Specifically, according to official documents, PPP projects will be entitled to various government support. Projects costing more than P1 billion are entitled to tax incentives under the Omnibus Investment Code (OIC) upon registration with the Board of Investments (BOI). Projects costing P1 billion and below can avail of incentives under OIC subject to inclusion in the current Investment Priorities Plan. Private firms know howeasy it is to be included in the IPP. Tax incentives are not zero cost to the government.

Remember that the government is already giving up a huge amount of taxes from these BOI incentives — a conservative estimate of about 1% of GDP annually. Incentives for PPP projects will only compound the revenue loss from various incentives laws, making the life of Finance officials even more difficult.

But that’s not all. Projects with difficulty sourcing funds may be partially financed from direct government appropriation (general appropriations act, or GAA) or from official development assistance (ODA). The only restriction is that financing from GAA or ODA should not exceed 50% of project cost. Again, that’s not zero cost to the government.
The PPP guidelines speak of other financial “sweeteners,” including credit enhancement such as currency convertibility, and direct government subsidy or equity. Again, that’s not zero cost to the government.

The lesson here is that government authorities should be careful in figuring out the “true” costs of a PPP project. Private firms might join the PPP fray for many reasons, mostly pecuniary ones, tax incentives, government guarantees, subsidized financing, etc.

Private companies — local, foreign or foreign pretending to be local — will not build infrastructure projects for the government out of the goodness of their heart. That’s Fairyland. Even now, for every PPP project that may fancy them, private firms are trying to figure out the monetary value of the concessions they can extract from the government in the form of guarantees, tax breaks and other non-fiscal incentives.

This bilateral deal is asymmetrical. Large private firms can usually assemble the best lawyers, tax experts, and loan negotiators money can buy. On the other side of the negotiating table are government senior officials — overworked, underpaid, unappreciated. Yet, the government panel is expected to look at every PPP project proposal with the common good in mind.

What’s the challenge for the present administration which appears to favor PPP arrangements? The challenge is to avoid a future where Filipinos would one day wake up and be faced with an economy where large public infrastructures are run by greedy, profit-oriented people, and where user charges are set at unaffordable levels.

Realistically, I don’t expect the government of the day to allow that; it will then invoke the “financial risk” guarantee. Since it will not allow the user charge to be equal to the cost-recoverable rate, it will have to subsidize the private sector firm the difference in the rate. And where will the government get the subsidy? From the general taxpayers, of course.

In the meantime, here’s another problem for the taxmen: how to track the value of tax incentives that the government is giving away. For example, I am sure that the data on foregone fiscal incentives that one will get from the Board of Investments will be different from the data gathered by the Bureau of Internal Revenue and the Bureau of Customs.

Classrooms for rent?

I find intriguing one of the projects in the most recent shortlist of public-private partnership(PPP) projects — the PPP for classroom project. The PPP Center Web site has a terse description of the project. It “involves the construction of 10,000 additional school infrastructure (i.e., classrooms, furniture, and comfort rooms) in Region I, Region III, and IV-A. It aims to improve primary (and secondary) education by developing more school buildings and infrastructure at less cost to the government. It will also partially address the backlog in classrooms.”

Why do I find this intriguing? The proposed PPP for classroom project will be a major departure from the usual practice. Yet, the benefits from the new model are not clear.
Public school facilities are traditionally built by the government by contracting out the construction to private firms through competitive bidding. As a general practice, the construction of classrooms is done by local builders which are scattered all over the country. I thought having the classrooms built by small, locally based contractors will be a big boost to local communities and hence the overall economy.

For example, having P10 billion worth of school building projects built simultaneously, during the summer months, all over the country will have tremendous employment and output effects. Yet, the Aquino administrations failed to move these projects last summer.

Can the present way of constructing school facilities be improved upon? Yes. For one, the costs may be reduced significantly if the design is chosen from some prototypes (one-story, two-story or three-story) prepared by DPWH or a design team contracted out by DECS. This is less expensive compared to where an architect or a design firm will be hired to prepare the plan for the classroom.

Once the school building projects are done, they are turned over to the school principal or higher Education authority. Maintenance shall be done through the budget, with some help from teachers and students.

Now compare this traditional way with the PPP school building project. Assuming half-a-million for every classroom, the total amount involved for the 10,000 additional school infrastructure would be rough P5 billion. That’s a lot of money.

The question is, will the construction of 10,000 additional school structures in three regions be done by one or a few select contractors? And will they be selected through open, competitive bidding? Having it done by one or a few contractors will not give the economy as much boost compared to where the job will be done by hundreds of small, local contractors.

More questions on the proposed PPP approach. Will the proponent(s) turn over the classrooms to school authorities after they are built or will they continue to maintain the classrooms? If so, for how long? Five years? Ten years?

Don’t get me wrong. I am not against private sector participation in the provision of public infrastructure. But it has to be done the right way.

As the PPP program undergoes a serious makeover, Mr. Aquino should guard against possible abuses, irregularities and rent-seeking. Any hint of cronyism, bid rigging, or rent seeking will blow away the credibility of his centerpiece program, and with it the dreams and aspirations of the Filipino people for a bright future.
By: Benjamin E. Diokno – Core
Source: Business World, Oct. 12, 2011
To view the original article, click here.

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