My Tuesday column about the dubious handling of a couple of major infrastructure project proposals by President B.S. Aquino 3rd elicited a number of responses from readers which revealed a basic problem: “PPP,” the government’s flagship “Public-Private Partnership” program, is poorly understood by most people. So today’s installment will be what I hope is an easily digestible lesson in developmental economics.
Public-private partnership is a vague term used mainly because it makes a cute acronym, a quirk of language that appeals to Filipinos generally, and especially to those in the business of politics. There is very little “partnership” actually involved, and the “public” aspect of it simply acknowledges that the projects developed under the scheme are those that are typically institutional in nature—basic infrastructure and facilities that provide public services such as education and health care.
PPP projects can take many different forms, which are all simply variations of the basic principle of letting private industry build and manage public works that a government can’t or for some reason won’t build and manage on its own. The form that is most often used here in the Philippines is the “build-operate-transfer” (BOT) version, hence the short name of the original enabling law for the concept (The BOT Law, RA 7718).
The ill-starred Cavite-Laguna Expressway (Calax) project discussed in the last column is a typical example. The government wants to build a highway, but decides it does not have the resources to do so in the conventional way, which would be to pay a contractor to build it under the supervision of the relevant government agency, in this case the Department of Public Works and Highways.
Instead, it offers a BOT project. Under the scheme, a private enterprise will build the highway according to the government’s specifications, and then take virtual ownership of it for a fixed period of time in order to recover the costs of building it, the costs to operate and maintain it during that time period, and a ‘reasonable rate of return,’ or profit.
In the case of the Calax, the costs would be recovered by charging tolls to users of the new highway, and the builder would have 35 years in which to do so. After that term expires, the highway would be turned over to government ownership.
Given that the government is not laying out any funds to build the project—those costs will be borne entirely by the winning contractor—the standard method of selecting the lowest qualifying bid does not apply. Instead, in a BOT contract, the awarding of the bid is based on who is willing to pay the highest “premium” for the privilege of building the project. The planned cost of the Calax is P35.4 billion but the actual cost of constructing the road would likely be different, so that is essentially ignored in the bidding; if the bid was written as a formula, it would look something like “(whatever it costs to build the highway) + premium to be paid to the government = total bid.”
The benefit of BOT schemes, and the reasons the development model is so strongly advocated by multinational finance organizations like the World Bank and the International Monetary Fund, is that it is a relatively fast track to basic development that would likely not be possible any other way for the governments who follow it. It works around the handicaps of insufficient government financial resources—either low revenue or low creditworthiness—and provides an avenue for outside investment from the domestic or foreign private sectors that might not otherwise be available. And it does work; empirically, the improvements to infrastructure and public services BOT schemes provide do correlate to economic gains for the countries where they are implemented.
The downside to BOT schemes is their heavy cost to the populations who use the infrastructure and facilities that are created by that form of development. For example, if the government were to build and operate the Calax through conventional means—by obtaining loans for the project, or issuing a construction bond—then the costs that would have to be recovered through tolls charged to users would be the principal and interest for debt incurred to finance the project, plus the costs of operations and maintenance for the highway after it is built. Under the BOT scheme, the recovery from tolls includes those costs plus the bid premium plus a percentage of the total of all of those as a ‘reasonable’ profit.
Hypothetically, the increase in economic activity facilitated by the upgraded infrastructure should offset the additional costs to the government’s source of revenues—the individuals and businesses that make up the tax base—and result in a net economic gain. That is an easy proof to make with respect to government-funded projects, but becomes problematic when a BOT project is involved.
A project with a higher overall cost automatically reduces the ‘net economic gain’ unless the project represents infrastructure or services that are of a significantly higher quality or have greater capabilities than comparable government-funded ones. That is obviously not the case for most projects, and certainly would not be with the Calax. A road is a road; no enhancement that a private contractor could provide would change the basic effect of that road’s existence (i.e., “facilitating moving people and goods from point A to point B”). And the studies that attempt to empirically support the benefits of BOT generally tend to overlook indirect, hard-to-define, but very real costs that arise from inevitable problems like regulatory capture—something Filipinos saddled with some of the world’s highest electricity costs, for example, are already keenly aware of.
For a country like the Philippines, which has achieved a reasonably stable fiscal position, has a healthy level of foreign reserves, and improved sovereign credit ratings, BOT schemes may very well have outlived their usefulness, and are now doing more harm than good. If not a complete failure, the Aquino Administration’s PPP program has certainly been a serious underachiever; perhaps it is time to thank everyone involved for giving it a try, send them home, and hang the “closed” sign on that office.