On the occasion of National Consultation for the
14 January 2011
Debt & Public Finance
Medium-term Philippine Development Plan (MTPDP) 2011-2016January 14, 2011, Crowne Plaza, Ortigas Center, Pasig City
The Freedom from Debt Coalition (FDC) reiterates its opposition to this administration’s Public-Private Partnership (PPP) Program during the National Consultation for the Medium-term Philippine Development Plan (MTPD) 2011-2016. After an initial reading of the MTPDP Draft, we note that PPP is becoming a major strategy of Aquino’s six-year plan, something that we in the social movements find disappointing amid high public hopes for meaningful change in government policy.
The MTPDP Draft has many problems other than PPP, but we find particularly disturbing that it asserts that the private sector “is the main engine for national development”, in fact deliberately misquoting Section 20, Article II of the 1987 Constitution. Such an assertion 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 state’s role and mandate to mega-corporations who will be involved in the PPP program. Private Sector Participation: Bad Experience for PH
This is on top of the fears that the Filipino people will yet again experience the evils brought to them by PPP and other Private Sector Participation (PSP) schemes as employed by previous administrations. From Build-Operate-Transfer (BOT) to Joint Venture Agreements (JVA), PSP indeed delivered infrastructure. But this is at a 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.
PSP has invariably 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. The problem here is, sovereign guarantees strip off the private sector partner of any financial liability, transferring it all to the government and blowing up the country’s Contingent Liabilities (CL).
This is on top of other “sweeteners” PSP contracts have to include after sovereign guarantees fall out of favor. This is exemplified by the case of contracts of the National Power Corporation (NPC) with Independent Power Producers (IPP) replete with onerous agreements such as:
- “Take-or-pay” provisions – 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.
- Absorption of exchange rate fluctuations – IPPs enjoy a foreign exchange guarantee since all contracts are quoted in dollars.
Because of such concessions, NPC became extremely financially unviable, and by the time the Electric Industry Reform Act (EPIRA) in place, the P406.2-billion lease obligation of the NPC as of 2000, arising mainly from over-priced contracts with independent power producers (IPPs, such as Casecnan Multipurpose Irrigation and Power Plant or CMIPP) has now been loaded on to the public, particularly because NPC loans are guaranteed by the government. We were forced to borrow $300 million from Asian Development Bank (ADB), and $300 million from Japan Bank for International Cooperation (JBIC) for this under the Power Sector Restructuring Program (PSRP). Perks for Aquino’s PPP and its Costs
It is these “sweeteners” that the Aquino administration vows not to provide this time. Instead, Aquino’s PPP program promises “regulatory guarantees” which compensates investors via guaranteed payments and adjustments to contract terms should court orders, decisions by regulatory agencies, or even legislation affect the business. This is supposedly in response to the case of the Supreme Court yesterday declaring as null and void the Philippine International Air Terminals Co., Inc. (PIATCO) concession contract and all its three supplemental agreements on the construction and operation of the Ninoy Aquino International Airport Terminal, which supposedly sends a bad signal to investors.
At its face value, the concept of regulatory guarantee already subverts the punitive principle of justice and exposes our institutions to moral hazard, if not mockery. Compensating a private sector actor because our courts ruled against it is simply not right. But more than that, regulatory guarantees possibly have graver financial consequences than other guarantees issued before. Going by government's history, it is not far-fetched to expect PPPs which will have anomalous features, or will be detrimental to public welfare. The guarantee makes 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. The seemingly more innocuous guarantee being more dangerous - this is similar to our previous experience of sovereign guarantees being halted in favor of other sweeteners which proved to be costlier, such as take-or-pay.
This is on top of fiscal incentives provided for PPPs. These include:
- Fiscal Incentives. Income Tax Holiday (ITH) of six (6) years from commercial operation for pioneer enterprises and four (4) years for non-pioneer enterprises.
- Other Fiscal Incentives. The other fiscal incentives available if the BOT project is BOI-registered are, as follows:
- Additional Deduction for Labor Expense;
- Tax and Duty Exemption on Imported Capital Equipment;
- Tax Credit on Domestic Capital Equipment;
- Tax Credit for Taxes and Duties on Raw Materials;
- Exemption from Taxes and Duties on Imported Spare Parts; and
- Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fees.
This is despite of the fact that the draft MTPDP itself recognizes revenue generation as a problem. In fact, “Chapter 1: Macroeconomic Policy, I. Assessment and Challenges” admitted that “the country’s income from its corporate sector and from its assets 35 and investments amounts, on the average, to only 2 percent of GDP compared to the ASEAN 36 average of about 5 percent of GDP.” How can giving more tax incentives resolve weak revenue generation? Yet, this is an important incentive that the government incorporates in its PPP strategy. Strategic solutions: Addressing the Debt Problem, LBES for Grassroots Infrastructure
Our 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% of our national government expenditures to debt service. Had payments for debt been channeled to more productive expenditures – which includes infrastructure – then we wouldn’t have this predicament. 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. Clearly, the best way to resolve our infrastructure problem is to resolve the debt problem. PPP as a solution only serves to worsen both.
Another problem with PPP is that it calcifies governments’ fetish for “mega” projects involving the corporate sector. We believe that instead of PPPs that are actually designed by the International Financial Institutions (IFI) like the Asian Development Bank (ADB) to favor huge construction companies and suppliers, the Aquino administration can use of a Labor-Based Equipment-Supported (LBES) technology for public infrastructure, an International Labor Organization-recommended scheme that requires public construction projects to hire more warm bodies instead of renting or buying equipment.
Originally proposed by Institute for PopuIar Democracy (IPD), LBES is a shift from the traditional equipment-based technology. It raises the usual labor cost share from 10% to 30%. For example, the P10-billion budget of the Department of Public Works and Highways in 2000 could have employed 45,000, three times the 15,000 in traditional construction. LBES works by calibrating “factor prices”, making it bias on labor and ensuring that at a time being, firms will not cut cost by investing too heavily on equipment because it allows them a larger room for profit. This is as we try to redistribute income and decrease inequality. Later on as the purchasing power of Filipino worker increases and a domestic market is being created, we can shift to more capital-intensive means of investing for infrastructure.
LBES can be designed so as to focus on public infrastructure that ensures the people’s basic needs in the grassroots. We see public settlement as a primary need that can benefit from LBES, notwithstanding the fact that housing projects have high multiplier effect. Government (particularly Housing and Urban Development Coordinating Council) estimates a housing need of 3,756,072.
To support this, LBES must simultaneously be aligned with a focus on the strengthening of local and associative economy including Medium, Small, and Micro Enterprises (MSMEs) engaged in labor-intensive activities and grassroots cooperatives. For example, instead of encouraging PSP in bulk water supply and local water utilities, Aquino must explore Public-Public Partnerships in small-scale water systems that involve local government units and cooperatives.
The Aquino administration must marshal genuinely innovative and creative means to address the infrastructure deficit. It must not rely on tired and old solutions like PPP which only increased our debt problems and imposed huge burdens on the public.-30-
 First paragraph of Executive Order 8, Reorganizing and Renaming the Build-Operate and Transfer (BOT) Center to the Public-Private Partnership (PPP) Center of the Philippines and Transferring its Attachment from the Department of Trade and Industry to the National Economic and Development Authority and For Other Purposes
 This is the case in Philippine Cellophane Film Corp. (PCFC) and the Cellophil Resources Corp. (CRC) of the Herdis Group of Companies owned by Marcos crony Herminio Disini getting $182.44 million worth of loan guarantees from the Central Bank. This is also the case in Construction and Development Corporation of the Philippines (CDCP) owned by close Marcos associate Rodolfo Cuenca, with government exposure amounting to P12.3 billion ($1:P21.74) by 1989.
 Infrastructure Philippines 2010 Brochure, Tax Regime and Incentives Framework (page 161-167)
 45,000 jobs generated calculated thus: P3 billion or 30% of budget spent on wages. At P270 of average wage payment with 230 working days in a year, produces 44,445 full-time jobs