Minimize PPP risks, gov’t told

MANILA, Philippines – Ensure that contracts entered by the present administration can stand the test of time and change of leadership in the country.

This was the call of the private sector as the Aquino administration aggressively seeks the aid of private firms to fund and share their expertise on various infrastructure projects, which include roads, airports and railways, under the Public-Private Partnership (PPP) scheme.

READ: Aquino highlights PPP woes

Speaking before an audience of almost 1,200 at the mid-year economic forum in September, Ayala Corporation’s CEO and Chairman Jaime Zobel de Ayala stressed the importance of minimizing regulatory risks to entice greater participation of private firms in infrastructure projects.

READ: Live blog of the Economic Forum

“The longevity of infra projects protects the long cash flows. We want stability in 10 to 20 years. Half-measures cannot be taken; whole measures are needed. That involves discipline in the implementing side, the regulatory side and in making the framework work. That means our capital will still work in 20 years’ time,” Ayala stressed.

For his part, Macquarie Infrastructure and Real Assets Managing Director Michael Rodriguez noted that private firms want to see effective and efficient regulators in place for different industries, ranging from water and energy to infrastructure — industries that the government wants businesses to invest in.

“We want to see more independent, empowered regulators. Regulators should specialize, be up and running and serve as an arbiter, and resource to make sure that what was agreed on will continue even if it’s a  25-year period concession for a project,” he emphasized.

READ: Private firms on PPP: Nice but slow

READ: PPPs are complicated-Abaya

Rodriguez warned that if the private sector snubs PPP projects because they are risky, the country also loses out on the opportunity of tapping the local financing system, now awash with cash, to support economic growth. 

“If there are no investments and improvements in infrastructure, then money will go to short-term investments, or worse, to other countries,” Rodriguez warned.

The water privatization case

The statements of both Rodriguez and Zobel de Ayala came after the decision of the Metropolitan Waterworks & Sewerage System (MWSS) to reduce the rates charged by private concessionaires.

Regarded as one of the largest and most successful public-private partnership (PPP) projects in the world, the Philippines’ water privatization suffered a set-back when the water regulators decided to reduce water rates.

The ruling was highly criticized by business groups as it “undermines the sanctity of contracts.”

In a statement, the Japanese Chamber of Commerce and Industry of the Philippines raised alarm that MWSS  may lessen the attractiveness of PPP projects.

“The decision of foreign investors to invest in long-term PPP projects in the Philippines is due to a large extent to their belief that the Philippines has a stable and predictable regulatory environment,” the business group said. Japanese firm Marubeni has a stake in water concessionaire Maynilad, which has since sued the government.

The Ayala unit Manila Water Services was the first to bring its rate dispute against MWSS before an international arbitration court. 

The Ayala’s are also involved in infrastructure projects, including the 4-kilometer SLEx-Daang Hari toll road project it won in a government bidding way back in 2011. It is still working out the kinks with various government agencies so it cold complete the project. 

High regulatory risk

National Competitiveness Council Chairman for the Private Sector Guillermo Luz in an interview with Rappler noted that the Philippines for quite some time has been known to have high regulatory risks as contracts entered by the previous administrations were cancelled by the next administration.

“It’s been a common problem here, the changing of terms” he said.

Luz said the country’s track record in honoring contracts has been in question as the government has rescinded contracts in the past, like in the case of the Northrail project, the ZTE-NBN broadband deal, and the Ninoy Aquino International Airport Terminal 3 (NAIA-3) project .

The 80-kilometer Northrail project, which was supposed to link the northern part of Metro Manila with the Clark International Airport in Pampanga, was negotiated under the previous Arroyo administration. It was suspended in March 2010 pending review of the contract due to alleged anomalies, including bloated costs.

In February 2012, the Supreme Court ruled that the project was illegal because it did not go through bidding process.

The $329 million project for a National Broadband Network (NBN) on the other hand, was one of the biggest scandals suffered by the Arroyo administration.

The project was signed in 2007 only to be rescinded in the same year on allegations of graft and corruption on the part of then First Gentleman Mike Arroyo.

For the NAIA-3 project, the Arroyo government abrogated the contract of Filipino firm Piatco and its German partner, Fraport AG, in 2002 when the airport facility was days away from opening. After almost a decade, the government eventually won the arbitration cases filed by the consortium partners against the Philippine government in Singapore and Washington after proving the private sector committed wrongdoings.

The government, however, also spent billions of dollars on legal and other fees, as well as opportunity cost during the years the crucial airport facility was closed.   

Lessons learned

Luz stressed that perhaps the current administration has already learned lessons from previous deals as it is now carefully studying all the terms and conditions of the projects under the PPP — one of the reasons why the government has been rather slow in auctioning priority infrastructure projects.

“And that’s why the government is being careful not to rush into deals that can be opened in the future. Remember all deals signed in this administration will last until how many administration. For the good of the country we need to ensure that these are set up properly,“ he added.

Luz said that project terms that government will sign into should be written fairly and without problems, and can pass scrutiny in the suceeding years and governments.

“We cannot have something that will be questioned and questioned — that’s disatrous for the investors, that’s disastrous for the country. We cannot  have something settled and it becomes an issue 3 years, or 6 years from now. There’s a lot of good examples of bad deals — we need to stay away from [those],”  he stressed. – Rappler.com