PPP is a flawed and costly concept

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Ben D. Kritz

IN a post for Rappler over the weekend, Public-Private Partnership (PPP) Center Director Ferdinand Pecson attempted to dispel some “misconceptions” about the program, which, for what it’s worth, has its basis in the Constitutional recognition of “the valuable contribution of the private sector” in achieving the country’s development goals.

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Pecson’s objective, of course, was to reassure the public of the importance of PPP in bringing the Duterte regime’s “Golden Age of Infrastructure” to fruition, which is much the same line taken by the former Aquino administration. Under Aquino, however, the PPP program, which aspired to complete 100 or more projects, was a spectacular failure; only a handful ever made it off the drawing board.

Pecson doesn’t necessarily assign blame for PPP being a flop, but implies that the wider population simply doesn’t understand it, and therefore creates obstacles to its success out of ignorance. If people got over their misguided apprehension and let the program work as designed, Pecson seems to be saying, we would be able to watch that Golden Age unfold before our eyes.

There is, however, a much simpler reason PPP hasn’t worked as advertised in the Philippines: It is a fundamentally bad idea, an unwieldy hybrid between socialism and privatization that costs too much and funnels any economic gains to a narrow group of beneficiaries at the expense of the state and its subjects.

The first myth Pecson tackles is that PPP is equivalent to privatization. Technically, he is correct, although PPP is often used as a stepping-stone to privatization. As the relevant law is written, ownership of the asset created under PPP reverts to the government after the end of its term, which could be anywhere from 25 to 100 years. What has sometimes been done in other programs, however, is that at the point the government would take over the asset, it is offered for sale to the project proponent/operator; nothing in the current laws of the Philippines precludes the same thing from happening here.

The argument that PPP is “not privatization” also falls flat given the long timeframe of PPP projects. Most of them have a term of 25 years, renewable once for an additional 25 years – the equivalent of two-and-a-half generations of the population. An asset such as a highway, commuter rail line, airport, or school building that won’t return to government control for 50 years is for that half-century privatized in every practical sense of the word.

After pointing out that PPP Center does not approve PPP projects (which is true, it does not), Pecson next tries to quash the misconception that “the government provides guarantees to PPP projects.”

“While the BOT Law provides for several forms of government support or contribution, such as government guarantees or direct government subsidies to a PPP project, the government has not provided guarantees to any of the PPP projects awarded since 2010,” he wrote.

Just as with the argument that “PPP is not privatization,” the assertion that the government does not provide guarantees to PPP projects is a bit of technical hair-splitting. The government rarely, if ever, directly subsidizes a PPP project, but the arrangement of a typical PPP deal is full of guarantees —everything from special tax rates, to fixed rates of return on capital, to specific tariffs to users, including a schedule for rate increases. These guarantees are further reinforced by the inclusion of investor-state dispute settlement (ISDS) provisions in most PPP contracts, which allows contractors to try to recover lost profits through arbitration proceedings.

Pecson also argues that PPP projects are “not necessarily more expensive” than projects developed through traditional procurement methods. More often than not, that is true on the front end of a project—prospective PPP projects do undergo a cost-benefit analysis—but those assessments do not take into consideration all the costs of the project’s life cycle, many of which may be intangible.

The case of the two water concessionaires for Metro Manila, Maynilad and Manila Water, is a good example. Both were rebuffed when they made requests for rate increases (in part to cover costs such as corporate income taxes) to the government, and both took the government to arbitration at the International Chamber of Commerce in Singapore. All the costs associated with the legal action were not accounted for in the original cost-benefit analysis, and neither was the cost impact of water rates and rate increases to consumers. After all, corporate income taxes certainly wouldn’t figure into water rates if the water system was a standard public service.

And finally, Pecson argues that PPP projects do not favor big conglomerates, and are not anti-competitive. A simple look at the list of awarded projects on the PPP Center’s website is enough to refute that argument: Out of 16 awarded projects, San Miguel Corp., Ayala Corp., Metro Pacific, and Megawide—a veritable Who’s Who of Philippine conglomerates—bagged 12 of them. While the government may not intentionally be favoring these companies, the nature of the PPP program does: It is used almost exclusively for large-scale projects, and the regulatory process preceding the awarding of a contract is so complex that only companies with huge resources can even consider taking part in it.

At its simplest, PPP is little more than a way for government to be lazy. The government recognizes that some things are necessary, perhaps even a duty of government to provide, but either does not have or is unwilling to make the investment. Instead, it tries to assume that the necessity constitutes value that can pay for itself and gets someone else to make the investment on that basis, never recognizing that its costs are ultimately higher.

ben.kritz@manilatimes.net

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