‘Hybrid’ PPP: Better, but still risky

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Ben D. Kritz

INANCE Secretary Carlos Dominguez 3rd deserves some credit for having helped to advance a scheme that improves on the glacially slow and expensive public-private partnership (PPP) program concocted to disappointing effect by the previous administration.

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On Wednesday, Dominguez explained that at least for some projects that are part of the menu of aspirations for the Duterte administration’s infrastructure program, the government is applying a “hybrid PPP” approach: Projects such as roads can be built according to conventional procurement processes at government expense, and when completed the government can either sell them to a private operator, or auction off the operations and maintenance (O&M) contract.

The main advantage of this approach, which employs the PPP at the end of the project rather than the beginning, is that it saves time, Dominguez said. The few PPP projects that have been launched have taken an average of 29 months to go through the stages between conception and the start of construction; with the “hybrid” approach, the time is cut to about nine months. So far, two road projects, the Plaridel Bypass Road and one phase of the Central Luzon Link Expressway, have been started using the hybrid framework.

The other significant advantage of the approach is that it likely lowers the cost of projects. The government generally can borrow money at a lower cost than the private sector, either through direct loans or through issuing a bond, so even though the government is incurring an upfront expense – as opposed to the regular PPP approach, wherein an awarded contractor usually pays a premium for the privilege to build and collect revenue from a project – the financial burden imposed on taxpayers is ultimately less. The cost recovery is also transferred from the private proponent to the government, which is an incentive to impose lower tariffs (such as road tolls) levied on consumers.

There are, however, a number of “buts” to the whole idea that Dominguez avoided talking about, because he’s a politician, and talking about actual or potential “buts” is not in his job description. First, the hybrid PPP scheme can make the real cost of projects lower, but the procurement method carries with it the usual risks associated with bidding out construction projects. There are political risks of cronyism and corruption – if Dominguez expects us to believe that can’t or won’t happen at some point under the current administration, he takes us for fools. And since the government will be pursuing the lowest bid, the process encourages cost-cutting throughout the entire process. “Lowest bid” means the lowest bid that meets the standards set for a particular project, and while we can reasonably assume the government would ensure successful bids meet the specifications, the need to keep costs as low as possible encourages cutting corners in developing those specifications.

Second, the hybrid scheme may make dispute resolution much more complicated. Let’s say, for example, that the government wishes to build an elevated commuter light rail line. Under a conventional PPP program, if a year after the line is built and begins operating one of the trains falls off the tracks onto the road below, killing everyone on board, the liability for that rests solely with the PPP contractor who built it. Under the hybrid PPP scheme, however, the liability would rest with the government as the builder and owner of the line, not with the PPP contractor who operates it on the government’s behalf. Certainly, the government would have a legitimate case against whomever it contracted to build the line, but the circumstances unavoidably add another level and another party to the dispute, and with it, added time and costs to resolve it.

Third, debt financing imposes a limit on how much the government can build and still enjoy the benefits of lower debt costs. Debt costs may be low at the beginning of the first project, and may even be lower for the next several projects as long as the government’s debt servicing is handled properly. At some point, however, creditors will determine that the government has taken on too much debt, and costs (interest rates on loans and bonds) will begin to rise. If the program continues to expand long enough, creditors will eventually refuse to allow any more debt to be raised. That point may be so far in the future that it will never become a real problem, but that is not an assumption that can be made without some uncertainty.

Finally, the willingness and the ability of the government to fund the launch of new infrastructure raises the question of why any sort of PPP is needed at all, at any point in the project’s lifespan. PPP became popular in part because governments have, for the most part, demonstrated that they are terrible at management, but none of the reasons why that has more often than not been the case is completely unavoidable. For an administration that makes more noise than most have about setting standards of clean and effective government processes, those problems should be easy to overcome, eliminating the need for private sector involvement —unless, of course, the noise is just noise.

ben.kritz@manilatimes.net

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