public-private partnerships
from HSBC Economic Intelligence Unit
When Benigno Aquino III won a landslide victory in the Philippines
presidential election in May 2010, he made an immediate commitment to
improve the quality of public services and infrastructure. But he also
inherited a government that was badly short of funds. His solution was
to launch a program of public-private partnership (PPP) projects that
would improve infrastructure and public services using private resources.
In some ways, PPPs are a good fit for the Philippines. Its fiscal
deficit is not alarmingly high, at 3.5% of GDP in 2010, and its public
debt to GDP ratio of 52.4% is also manageable. But the government's
narrow revenue base severely hampers its ability to make investments in
infrastructure. The Economist Intelligence Unit expects fiscal revenue
to average just 14.1% of GDP in 2011-15, which is among the lowest in
the world, but Mr Aquino has ruled out tax increases to bolster the
public coffers.
At the same time, the Philippines desperately needs infrastructure
investment. The World Economic Forum's Global Competitiveness Index
2010-11 ranked the Philippines 104th out of 139 countries in terms of
the adequacy of its infrastructure. This is no surprise: Electricity
prices are among the highest in Asia, and supply is unreliable. Traffic
congestion plagues the main metropolitan areas, while the fact that less
than a quarter of the country's roads are paved illustrates how
difficult it can be transporting goods into rural areas. Given the
archipelagic nature of the country, sea transport is arguably more
important than land transport, but even the port system is in dire need
of modernization that would reduce shipping costs and improve efficiency.
Slowly may be more surely
However, with so many gaps in infrastructure provision, there is huge
potential for viable PPP projects that might pique the interest of
overseas investors. The government is aiming to tender out ten projects
in the road, rail and airport sectors in 2011 alone, ranging in value
from US$19m to US$240m. Over the medium term, it has proposed several
dozen projects stretching across the transport sector and into
education, agriculture and health. But the success of this program will
require trillions of dollars in new investment over the next decade.
Unfortunately, the government's initial push has not been as effective
as planned. "The private sector is interested, but many of the projects
have not been thought through and prepared for PPP," says Michael
Yaxley, director of the East Asian operations of Halcrow, a UK-based
company providing technical consultancy to the infrastructure sector.
"There is awareness that government funds are limited, which tends to be
followed by an assumption that the private sector will provide missing
finance. Although a number of projects on the government list will
generate interest, many will not. Little preparatory work has been done
to explore how the relationship would work."
In this sense, the repeated delays to the PPP bidding process, which
could cause the government to fall well short of its ten-project target
in 2011, need not be viewed negatively. Since Manuel Roxas II, a former
senator, took on the role of Transport and Communications Secretary in
July, bids for the operation of Manila's Light Rail Transit 1 (LRT1) and
Mass Rail Transit 3 (MRT3) have been postponed to allow him time to
review project details. A patient approach might yield a more
appropriate list of profitable projects, underpinned by comprehensive
feasibility studies.
The Australian and Canadian governments, along with the ADB, see the
potential of the PPP drive to improve infrastructure in the Philippines,
and have provided funding to the government to help build its capacity
to develop, competitively tender and monitor implementation of these
projects.
Moreover, closer scrutiny of PPP projects may help protect investors
from shoddy projects and altered contracts. On its website, the PPP
center says it is willing to protect investors from regulatory risks,
and Mr Aquino has promised that if a decision by regulators, courts or
legislators leaves investors with a lower return than was expected, then
the difference will be made good by his government.
Transparency is the key to contract stability
The problem is that even if investors trust Mr Aquino, returns on
investments in infrastructure usually stretch across decades and
multiple presidencies. Businesses need reassurance that future
presidents will honor the contracts signed by their predecessors.
History provides them little reassurance in this respect. The most
high-profile recent example involved the contract for the construction
of a third terminal at the Ninoy Aquino International Airport in Manila.
In 1997, during the presidency of Fidel Ramos, the contract was awarded
to Philippine International Air Terminals, a joint venture between local
and foreign interests. Just before the scheduled opening of the terminal
in 2002, then-president Gloria Macapagal Arroyo repudiated the contract,
claiming that it was overpriced and that the bidding process had been
flawed. The contract was voided by the Supreme Court in 2003, and the
government expropriated the facility in 2004. Legal appeals are still
ongoing.
But Felix Sy, a partner at Quisumbing Torres, a member firm of Baker &
McKenzie, says there is reason to be more confident in signing a deal
with the government than in the past. "It's important to note that most
contracts annulled by the Supreme Court have involved problems with the
transparency of the bidding process. If a bidding process is clean and
transparent, it is very unlikely the Supreme Court will strike down a
contract."
The fact that Mr Aquino has made the fight against corruption the
cornerstone of his presidency should be reassuring. Contract uncertainty
will still exist, as it does in many emerging economies, but the
transparent bidding processes being planned by the Aquino administration
should make PPP contracts more robust in face of government flip flops.
There is clearly a long way to go before the Philippines earns the full
faith of investors, but these projects represent interesting
opportunities. As Mr Yaxley puts it, "There is strong potential and a
general will from the government and the private sector to make PPP
work. The missing link is clarity and surety in the process. But we're
in the second year of a five-year presidential term, with good
individuals in key positions. The outlook for PPP infrastructure is bright."
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CARLOS ANI - International Microfinance Consultant - SEEDFINANCE Corporation Chairman
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