14 January 2011
Debt & Public Finance
– The Freedom from Debt Coalition today hit the Aquino administration’s incorporation of public-private partnership (PPP) program as a major development strategy of the country, expressing fears that it is another case of “a cure worse than the disease.”
In a demonstration outside a hotel in Ortigas Center where the national consultation on the draft Medium-Term Philippine Development Plan (MTPDp) 2011-2016 is being held, dozens of FDC members carried placards saying “PPP privatizes profit, socializes cost,” and “Ayaw namin ng PPP sa MTPDP (We don’t like PPP in MTPDP).” The group earlier staged a demonstration in front of the office of National Economic Development Authority that is spearheading the drafting of the MTPDP.
FDC said that what they find particularly disturbing is the inclusion of PPP in a number of sections in the draft plan which seems to suggest that it is a major development strategy.
As stipulated in PPP’s institutional framework, the government has already recognized “the essential role of the private sector as the main engine for national growth and development” (http://ppp.gov.ph).
“Such recognition has no place in a government blueprint which is supposed to assume that it is government’s role and responsibility to spur development. We in FDC see this as an abdication, the surrender of state’s role and mandate to mega-corporations who will be involved in the PPP program,” said FDC president Ric Reyes.
Reyes said that the country’s experience with PPPs is “not a good one.”
“True, infrastructure development is suffering in the Philippines due to a lack of fiscal space. But we should be treating not the symptoms but the problem – which is the fact that we are paying a post-EDSA I average of 38.6 percent of our national government spending to debt service. Had payments for debt been channeled to more productive expenditures – which includes infrastructure – then we wouldn’t have this predicament,” said Reyes.
“Our neighbors in the ASEAN have been spending directly in infrastructure so as to create a good economic environment for investments to come in. In the Philippines, we are even relying on private investments to develop our infrastructure because debt service siphons our public coffers,” he added.
“Clearly, the best way to resolve our infrastructure problem is to resolve the debt problem. PPP as a solution only serves to worsen both. It is a cure worse than the disease,” he stressed.
According to the PPP website, the government promises that “[p]rivate sector investors will be selected through open competition under fair and transparent terms.” However, it is also willing, “on a case-to-case basis, to protect investors from certain regulatory risk events such as court orders or decisions by regulatory agencies which prevent investors from adjusting tariffs to contractually agreed levels. Such regulatory risk insurance could take the form of make-up payments from the government to PPP investors, other guaranteed payments, and adjustments to contract terms.”
In a statement, FDC said that regulatory guarantees already subvert the punitive principle of justice and exposes our institutions to moral hazard, if not mockery.
“They make it costly for the government to exact justice or to provide welfare. Ironically, the more vigilant regulation or legislative oversight is to future anomalous PPPs, the graver the financial burden will be,” it said.
The group also expressed fears that that country is yet to experience again the evils brought about by PPP-like schemes as employed by previous administrations:
- From Build-Operate-Transfer (BOT) to Joint Venture Agreements (JVA), PPPs in the past delivered infrastructure at the cost of the incapacity of the people to access it due to prohibitive prices. This in effect constraints fiscal space because the government has to subsidize the difference between what the Filipino people can pay and what the private contractor demands due to profit targets. This is the dilemma faced right now by the Metro Rail Transit (MRT) and the Light Rail Transit (LRT) – which is now set to increase its fares by as much as 56 percent by March 2011. This is also true for South Luzon Expressway (SLEX) and the North Luzon Expressway (NLEX) which recently imposed higher toll fees.
- PPPs increased our debt burden due to provision of sovereign guarantees. The economic reality is that the private sector credit market, intrinsically speculative in nature, does not like to provide credit to companies involved infrastructure projects because such projects have long gestation periods. They have to be enticed to provide credit for companies, and this enticement must come from government backing of private sector debts.
- PPP contracts have to have other “sweeteners.” This is exemplified by the case of contracts of the National Power Corporation (NPC) with Independent Power Producers (IPP) replete with onerous provisions such as:
- “take-or-pay” – in which NPC agrees to take or pay a minimum percentage of the IPPs’ available capacity, regardless whether NPC or its customers’ needs such capacity and whether said capacity is actually generated by the IPP concerned, fuel cost guarantee – NPC will supply fuel to the IPP and absorb any fluctuations in the cost, and
- foreign exchange guarantee since all contracts are quoted in dollars.
- Fiscal incentives like income tax holidays. (30)