• PPP status report

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    IT turns out that the Public Private Partnership program is not the way media has described it – slow, ineffectual, an obstacle course with so far no results. It had some hoops to jump through, but it is off and running.

    Let us start by clarifying that PPP is not privatization but a contractual arrangement between government and a private party to partner together for development. Think classrooms, airports, highways, dams, even prison facilities. Those will always be in government hands and not privatized. In other words, it will be government infrastructure, the built assets that will make life for all better in basic services, mobility, communication, social institutions, future planning and everything else that governance owes its constituents in the social contract between them. The Constitution encourages the private sector to assist thegovernment to do infrastructure.

    Undersecretary Cosette V. Canilao gave the annual Ongpin Memorial Lecture on PPP. It was entitled “PPP: Where We Are At,” last Wednesday to a packed audience at the Ateneo Professional School in Rockwell, Makati City. Ms. Canilao is the Executive Director of the PPP and has an intimate knowledge of the facts and figures, the processes and results, the plans and the vision towards acquiring this country’s infrastructure needs estimated to cost $127B between 2010-2020. [A Manila Times editorial praised her presentation at the Times Business Forum last July].

    Between 2010-2014 $26B has already been spent with another $30B is programmed for 2014-15. Government has funded $57B so far with a gap of $70B still to be found presumably from various sources. The next administration should be managing about $45B. It is to be hoped that whoever wins the election will see the program through.

    The LRT 1 has already been bid out and won. Train stations will be the first to show the improvement that a PPP program can do to infrastructure – refurbishment of restrooms, getting the escalators and elevators to work properly and serve the commuting public better. Present cars will also be refurbished to be more comfortable and clean and punctual. New cars are expected some time next year. So that is one bid won and now on the implementing stage. Watch it take off. The DaangHari highway has opened after initial right of way issues. The beep cards usable for all the light rail lines are now a done deal. Classrooms have been built fulfilling the logistical demands of withstanding 250kph typhoon winds, even using new technology from the traditional cement and wood configurations which have shown much vulnerability in this age of climate change and the potential big one earthquake.

    The Mactan-Cebu airport is under implementation with Terminal One completed through some creative configuration that has made going through it faster and more efficient as well as more comfortable. More terminals to follow. The private partner involved has gone beyond construction into marketing it as a hub for OFWs from the Visayas who need not go through Manila to get to and from their destinations. That makes the infrastructure expansively more useful.

    Usec Canilao says the PPP Center learned some valuable lessons here when after the bidding was won; was discovered that the Philippine Air Force which was using some of the land had never been brought into the negotiations so that it would be prepared to transfer its facilities elsewhere. This dilemma caused undue delay because understandably the Air Force was not prepared not having been a party to the negotiations. Eventually it did but time was lost. Now the PPP Center knows enough to bring in everyone concerned or to be affected in a bidding so as not to delay matters after a bidding is won. Same with the right-of-way issue.

    One of the projects for bidding which upon the request of interested would-be bidders was postponed from this month to December is the new prison facility to be built in Nueva Ecija to replace the New Bilibid Prison and its intolerable overcrowded conditions and tenuous security arrangements. It is envisioned to be a state-of-the-art humane and secure institution for the rehabilitation of lawbreakers who have been convicted. So it has more complex requirements which the bidders are trying to meet.

    Other LRT lines are also about to bid out for expansion and for an addition of two new lines. The North-South railway from Tutuban to Matnog, Sorsogon is another project soon to be up for bidding.The Cavite-Laguna Expressway has been bid and won. Then coming up for bidding is the Laguna Lakeshore Expressway that will also include a dike and reclamation around Laguna de Bay. The NAIA Expressway is being implemented as well as the Orthopedic Center Rehabilitation.

    All in all with the kinks and the obstacles encountered 14 projects have been bid out, 10 have been awarded and at least two completed with an accelerating number on their way to completion as building has started. One remaining kink is the need for independent consultants for each project, which seems to be difficult to fill considering the complexity of some.

    You might pooh pooh the above but again the Philippines is the pioneer here in Southeast Asia on PPP. The Indonesians and the Vietnamese have been visiting our PPP Center to see how they can come up with their own using us as a model or learning how we have come along. Both foreign and local entities are interested in participating in its projects. PPP is definitely a positive road that should be continued into the next administrations.

    It has had its beginnings in the first Aquino Administration with the Build Operate and Transfer law, amended during the Ramos Administration, then under another name with the Estrada and Arroyo administrations and now the improved arrangements via the PPP. The only logic in this matter of infrastructure for nation-building is moving forward and not turning back.

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    9 Comments

    1. Show me the infrastructure that is outstanding, high-quality, well-built, and performing well in the public sector? Then show me the public assets that are regularly built, financed and operated with massive inefficiency. Please stop saying private assets are grossly overpriced – the reality is that PPP shows (and often for the first time) the true cost for the LIFE of the asset. Publicly procured assets almost are never properly budgeted for their management over time. Their cost and time delays are never documented well. Their performance is not measured by performance based outputs. So please get off your high horses about how private is more expensive than public – you, me and the govt all cannot say how many billions are wasted through govt’s undocumented, unmeasured inefficiencies. The honest truth is yes, high quality infrastructure is not cheap, so let’s either decide that if we want good infra, then we have to be happy to pay more as users or taxpayers but let’s stop pretending that the government has some magic pill that will allow us to see super high quality infra get built and it costs us nothing – whether the government or the private partnerships builds, finances, operates and maintains, we have to pay more. Deal with it.

    2. I’m part of the team involved in one of the mentioned PPP projects in this article and I have a couple of observations:

      1.) These PPP projects are very loosely defined. In the project I am involved with, for example, the concession agreement spent a lot of sections on the financial aspects (like 95% of sections of the concession agreement) but very short on the baseline requirements (technical, operational, not even a specifications or reference or definition design included). In short, the government or future asset managers (DPWH/DOTC/LRTA, etc.) do not know what to get out from these future legacy projects. In turn, the winning bidders have free rein on what to do as long as you satisfy the bare minimum safety & functionality as prescribed in the concession agreement and statutory requirements such as the National Building Code and their supplementary codes. Without reference design or specification as baseline, the variability of the project bids from interested bidders are expected to be high and evaluating bids would be like comparing apples to oranges. Because the PPP center did not focus much in preparing the reference design on the projects, it is bound to have a false start on each projects because losing bidders will file temporary restraining order or file a complaint to courts because their reasons may have some merit due to lack of baseline. Furthermore, in a PPP arrangement, the winning consortium has an incentive to keep costs as low as possible: the greater the difference between the project’s price tag and the revenue it ultimately generates the greater the consortium’s profit. With this objective in mind for the winning consortium, visual and aesthetic concerns tend to be neglected hence we don’t have beautiful PPP projects.

      2.) Managerial and technical incompetence of the government agencies’ heads. There’s a reason why the people who successfully venture in the business of engineering, procurement, construction, program & project management of infrastructure assets are a hybrid of managerial & technical excellence because these characteristics are what this highly specialized industry demands. It’s these people that our government should tap into, particularly those with international experiences who can bring and integrate the best global practices in upgrading and expanding our infrastructure, and not some bunch of lawyers who don’t know anything about the ins & outs of engineering, procurement, construction, program & project management of infrastructure assets. Who are these people? These people are the local managing directors or principals of local/international construction and/or multi-disciplinary engineering consulting firms with business interests in or out of the country.

      Regarding the author’s statement that there’s seem to be a shortage of independent consultants particularly for the rather ‘complex’ projects is false. What we lack are independent consultants that are home-grown consultancy firms experienced in this method of project delivery (i.e. PPP) that requires multi-disciplinary approach. Hence, most of the consultants on-board are foreign firms, which is not bad per se. I just hope that our local people will learn from them.

      Also, what we lack are homegrown talent & firms who are experienced in delivering these large-scale complex projects because:
      a.) They are already old or obsolete or virtually non-existent anymore. The last time we had local talents doing impressive & massive engineering projects is during the Marcos era. Back then, NDC, EDCOP, CDCP & PNCC are the local engineering & construction firms who can do these complex, and intensive engineering projects and have the manpower to do it. Back then, these firms were the sought after for these type of projects. CDCP & PNCC even built some of the infrastructures of Libya during Ghadafi’s early years and the oilfields of Saudi Arabia.

      b.) The experienced people became OFW’s. Due to lack of opportunity and slave-wage of these specialized people in our country, they’d rather risk their life and limbs in other countries where their skills and talents are much appreciated and better compensated.

      Good thing that there are already global multidisciplinary engineering firms that gained foothold in the country to address the lack of homegrown talent & firms. These global multidisciplinary engineering firms hire local people and train them (sometimes even outside of the country) to fill the need of specialist skills.

      • It is not right to say that PPPs are focused on financing rather than the technical requirements. In fact no lender will provide financing for the project if it is not technically sound. During the drafting of the contract, lengthy discussion happen in setting the Minimum Performance Specification and Standards (MPSS) to ensure that government defines clearly what it needs and at the same time allowing the private partner some flexibility to introduce innovation and creativity in their conceptual design. Given this approach, private sector can be creative in their proposals where they can utilize the technology and expertise they deem most appropriate for the project to increase efficiency and reduce project life-cycle costs, rather than prescribe what they should build (when we traditionally procure using RA 9184).

        Key Performance Indicators (KPIs) are also carefully crafted in order to measure and monitor compliance of the private partner in delivering service levels that were already set in the contract. The MPSS and KPIs are all part of the draft contract issued to all bidders and used as reference when they prepare their bids. In evaluating financial proposals, the approved bid parameter (e.g. lowest toll fee) shall be used as basis for choosing the best offer to the government.

        Remember that the concession agreement clearly defines the roles and obligations of each partner. Thus, it is not accurate to say that the private partner have a free rein on what to do. However, to put in proper context, if the operation of the facility is one of the responsibilities of the private partner then they should operate the facility in a manner that they deem more efficient and in accordance with the KPIs set out earlier.

        On the notion that we do not have beautiful PPP projects, again we emphasize the importance of defining clearly the MPSS. Government’s objective is to have a functioning and suitable infrastructure facility. If additional features are required, these would entail additional costs, thus let us answer the question, are these additional features necessary? As a result of competition, we see different and innovative solutions.

        Meanwhile, the national line agencies are experts and authority in their respective sectors. To complement this, they are assisted by experienced international PPP transaction advisors (TAs) in developing and structuring their PPP projects. These TAs bring with them years of expertise in the global PPP arena.

        Under the PPP Program of the Aquino Administration, the government hasn’t provided any guarantee on the private partner’s loans. Financing risks are borne by the private partner.

    3. Justaskingseriously on

      A few months ago, Ben Kritz wrote about the U.S. Congressional spigot for the funding of the PPP having been temporarily shut off. I wonder if the spigot has been turned on? That should be part of the status report. Conveniently omitted by the Undersecretary to avoid transparency? Transparency is tricky in this situation. Apparently the U.S. Congress is the financier. But the Philippine government tries to make it appear that it is the lender. What is the real score here? Do the Philippine government and the private sector both take loans? Or is the private sector the only party that applies for the loan? In any case, the triple P makes the “bosses” pay triple: pay tolls. pay taxes, pay overpricing. And what does the servant do? Renege on the promise to pass the Freedom of Information Bill. Transparency is really tricky.

    4. Not one among its most ardent advocates has bothered to explain what exactly is the value-for-money that we are supposed to get from these PPP projects. The presence of a private partner merely jacks up the cost because of the conscienceless profits guaranteed to the private partner,and all that extra cost be borne by Juan dela Cruz of course. Remember that all this cost represents loans guaranteed by the government to be paid by the likes of you and me, for the benefit of the private partner. What is that special thing that the partner brings to the equation that makes him deserve this largesse? No one can say either.

      • Concerned Citizen on

        I am saddened that this is the concept that you have of PPPs. I want to address some of your misconceptions:
        1. Value-For-Money – the value-for-money that the private sector brings is the efficiency by which they construct and operate. The private sector can construct and operate at a much lower cost than the public sector (estimated to be around 20% – 40% depending on the project). Also, as experts at operations, they can meet and respond to KPIs and innovate services that are an added good to the public.
        2. Guarantee of Private Profit – No PPPs launched in the Aquino administration guarantees the private partner profit. The demand and operations risk are always fully borne by the private sector. The private sector profit comes at no loss to government, since if they would have constructed it, it would have been way more expensive even considering private sector profit.
        3. Government-guaranteed loans – The debt of the PPP is not guaranteed by the government. It is at their own commercial terms with the private sector. The financing risks are fully borne by the private sector.

      • Please red faux_ph reply above with regards to your comments on value-for-money. As for guaranteed profits, all PPP contracts are blessed with a formula that binds the government to what effectively is a guaranteed profit for at least 30 years. Without this profit the toll/user fees will be lower. Your claim that ” the profit comes at no loss to the government as it would have been more expensive if the government had built it even considering the private profit.” Not true. There is the matter of the premium, for one, which is the reason the project always goes to the highest bidder, as opposed to the lowest bidder during the bad old days. This premium is a payment to the government for the privilege of extracting profits from the users/public, and its a loan taken on our behalf to be paid for by us through the user fees. This plus the profits are what jacks up the cost to Juan dela Cruz. All PPP projects carry a sovereign guarantee, which is anomalous in itself already because the loans carry a commercial rate of interest, another cause of higher costs. With a sovereign guarantee, interest should be closer to T-Bill rates than commercial rates, right? So we go back to my question, what is that special something that the private partner brings to the equation that makes him deserve all these very generous terms? If these terms were given to Danding, Lucio Tan, Rudy Cuenca and the others during Marcos time wouldn’t everybody be calling this a stinking crony deal?

    5. problem with PPP is all of them are way overpriced and the people will ultimately foot the bill.. case in point.. davao’s port expansion. from 4 billion. abaya jacked it up to 17 billion..thats plunder for me..

    6. Ms. Ongpin, it is so easy making reports just like what USec. Canilao just did. But what is the reality on the ground. The record of this administration is very bad in telling what is fact and fiction. Just like PNoy who keeps on parroting his accomplishments where there is really nothing substantial. As a columnist, you must check on the facts before you write about it. Believing in what is said or bragged about makes one an ignorant believer.