Why hybrid PPP is a confusing mess

The public-private partnership (PPP) is a framework where the private sector can participate in nation-building by providing needed infrastructure, thereby allowing government to use freed up funds for other things, such as social services.

In the previous administration, PPP was the vehicle for infrastructure programs. For most of the PPP projects currently in implementation, the private sector proponent actually paid government a premium to get the project (for example, LRT1), instead of government paying the proponent to implement the project.

The main criticism against PPP was the speed in which projects were conceptualized. Only 4 projects were completed after Benigno Aquino III’s term, 7 currently under construction, and 4 under “pre-construction” phase (as of June 2017).

The regional airports project was supposed to be bidded out last year, but bidding was delayed several times. It also became the first casualty of the mess called “hybrid PPP.”

The regional airports project was the lowest hanging fruit among the PPP projects in the pipeline. These airport projects were bundled to be more attractive to prospective bidders. Taken individually, bidders might not find the scale big enough for them to profit. Moreover, one of the requirements for prospective bidders is they should have at least 3 years experience (for Mactan-Cebu Airport project) in managing an airport. Since most of the local conglomerates have no prior airport management experience, they had to find foreign companies to partner with in order to comply with the requirements. All that being said, all the Duterte administration had to do was to bid out the projects.

But, strangely enough, the projects were unbundled – each airport was to be bid out separately, ostensibly to give smaller companies a chance to bid and win.

Ultimately, the Department of Transportation (DoTr) decided to scrap the projects. DoTr will develop the airports either through overseas development assistance (ODA) or national budget funding, then offer the operations and maintenance (O&M) projects for future auction.

What is hybrid PPP?

According to the Department of Finance, using the hybrid PPP mode, the government will build the infrastructure, then bid out the O&M afterwards. They claim that this mode will be faster than the original PPP. Funding for the project will either come from ODA, loans, or internal funds (aka funded by taxes).

Businessmen are worried, it seems, because this modification shuts down private sector funding.  It could take away much needed funds from education and healthcare agencies, and lead to new or increased taxes (despite the claims of reduced income taxes).

(As a side note, it seems that even people at the National Economic Development Authority are confused. Here’s a confusing quote from NEDA Undersecretary Rolando Tungpalan:

“Even broadly, we have always maintained that the private sector is the engine of growth and thus PPP must not be seen in the narrow sense of the BOT law, but the broader public-private sector engagement in development.”

Why is this mode “suboptimal?”

There are a number of reasons why this hybrid PPP mode is questionable:

  • It is basically a throwback to the time when government used to build substandard infrastructure projects at a very slow pace.  The Laguindingan Airport took 20 years to complete (from conception up to opening). When it first opened, night flights were impossible, as the installation of facilities for night flight operations were started after the airport was inaugurated. The ability of government to complete projects on-time is in doubt.
  • The government will have to fund the design, construction, and right-of-way acquisition. With considerably limited resources, the government has to rely on new taxes, bilateral loans, or ODAs for funding. Loans and ODAs have to be paid, of course, so it will still come from taxes, or from fees by concessionaires when these projects have been bid out.
  • By funding the projects through general appropriations, the government has to reduce funding to other, more crucial programs like education and healthcare.
  • A PPP expert claims this hybrid PPP can lead to investors to “just abandon revenues they are getting and disappear” in case the O&M project does not perform as expected. “It’s important for the O&M operator to have capital at risk” to give the operator the incentive to ensure the project will generate revenue, says Vaugn Montes.
  • ODA funded projects limit contractors to those accredited by the grantor (though these contractors can sub-contract to smaller local companies).

What a mess

And it doesn’t end there. The uncertainties remain unaddressed and the viability of PPP as a framework is in doubt. The government is quick to assure the private sector that PPP is here to stay, but with PPPs getting about 18 percent of the pie, that’s very comforting. We still don’t have an idea what projects are to be bid out, and we wish this regime is transparent with all the loans it is contracting.

It’s a mess.

 Image credit: Courtesy Gov.PH