PPP: More public debt, less gov’t responsibility

November 11, 2010

by superadmin

Aside from further bloating the debt burden, Aquino’s PPP thrust will also facilitate increased corporate takeover of government roles at the expense of public interest

IBON Features — On November 17-19, Malacañang will host a major event called “Infrastructure Philippines 2010” or what is referred to in the media as the public-private partnership (PPP) summit. This is an important summit for President Benigno “Noynoy” Aquino III, who has made PPP the centerpiece of his administration’s development plan.

According to its website, the summit “will examine investment opportunities, profiles of PPP projects in the Philippines, as well as policy, regulatory, and legal concerns in developing the infrastructure sector in the Philippines”.

Apologists of neoliberal globalization argue that while the corporations and banks will profit from PPP projects, they will in return finance and build much-needed infrastructure, which the cash-strapped government cannot afford. Aside from reaping the gains brought about by more infrastructures, the people will also supposedly benefit from improved government services since limited public resources will now be more focused on the provision of social services.

But are PPP projects, just like in any partnership, a mutually beneficial setup?

At no cost?

With a population of more than 94 million and growing, and a government that is facing a record fiscal deficit of Php325 billion by yearend, the Aquino administration claims that there is no viable way to meet the tremendous and increasing need for infrastructure in the country other than the PPP route.

Meanwhile, compared to its Southeast Asian neighbors that are spending on infrastructure an average of 5% of gross domestic product (GDP), the Philippines is only spending 3 percent.

The logic is that PPP will allow the government to save its scant resources because the private sector will shoulder the financial burden of building, maintaining, and operating costly infrastructure. In his first State of the Nation Address (SONA) last July, Aquino keenly plugged his PPP thrust declaring that through such partnerships, “we will meet our needs without spending, and we will also earn”.

However, no capitalist will invest in big-ticket projects in a relatively small market like the Philippines without certain guarantees that will ensure the protection and profitability of his investment.

Consequently, PPP contracts are loaded with favorable terms for investors like guaranteed return on investment, guaranteed market and sales, fiscal incentives, full cost recovery including on inflation and currency fluctuation, and even unheard of sweeteners such as subsidies for production input (the fuel cost subsidy of Napocor’s independent power producers comes to mind) – all of which are borne by the people as consumers and as taxpayers.

This has been the case in past PPP efforts since the first Aquino administration, Noynoy’s late mother Pres. Cory, introduced the Build-Operate-Transfer (BOT) Law in 1990.

Not manna from heaven

But Aquino wants to outdo his predecessors including the Arroyo administration whose much-hyped “legacy” centers on supposed unprecedented achievements in infrastructure development. “I am very confident we will not only exceed (Arroyo’s achievements) but will beat it by a mile,” Finance Secretary Cesar Purisima boldy predicted.

How do Aquino and his economic managers plan to do that? Underneath all the talks about bureaucratic reform and fighting corruption to attract the best capitalists to invest in PPP, the harsh reality is that more investors will come only with more state guarantees and protection such as guaranteed investment return, access to loans backed by government guarantees, and in recent years, protection from risks arising from unfavorable court decisions that affect profitability.

PPP investments are “not manna from heaven”, as Purisima has recently admitted. Put more concretely, PPP will exact costs from the government and the people, contrary to Aquino’s earlier proclamation that we will not spend a single peso.

Regulatory risk insurance

To make its PPP summit more saleable, the Aquino administration has designed a new scheme to protect the interest of investors. Aside from the traditional state guarantees on profits, etc. the government is also offering “pertinent incentives” to further stimulate private resources for PPP projects.

One of them is a so-called “regulatory risk insurance” under which the government will protect investors from “certain regulatory risk events such as court orders or decisions by regulatory bodies which prevent investors from adjusting tariffs to contractually agreed levels”.

Aquino’s economic managers explain that such insurance could take the form of make-up payments from the government to PPP investors, other guaranteed payments, and adjustment to contract terms. The terms of protection will be included in the contract of each PPP project.

While the government assures us that the risk insurance will only be offered on a case-to-case basis, it is reasonable to expect every profit-seeking investor that will participate in PPP projects to ask for the said insurance.

But if the government is operating on a serious deficit, how can it fund the regulatory risk insurance? National Economic and Development Authority (NEDA) chief Cayetano Paderanga said that they will tap multilateral institutions to provide for the guarantees so that when PPP investors face risk, they can still “be paid fast and immediately”.

Ultimately, however, it will still be the taxpayers who will foot the bill of the risk insurance through debt payments – interest and principal – to the multilateral creditors. Likely sources include the Asian Development Bank (ADB) and the World Bank, two of the most aggressive lenders and active promoters of PPP projects. The latter has already indicated a willingness to provide funds for the PPP projects of the Aquino administration.

Thus, even if government claims that it is not providing notorious sovereign guarantees for PPP projects, the country may still end up more indebted than ever before.

Undermining the courts

In addition, the risk insurance guarantee may also have the effect of undermining the system of check and balance and the use of courts to protect public interest.

For example, people who will turn to courts to question and stop the implementation of disadvantageous and harmful PPP contracts – like those that will lead to an enormous increase in toll rates, MRT fares, water and electricity bills, etc., or those that will result in physical displacement, environmental degradation, etc. – may get a favorable ruling.

But this favorable ruling will be negated, if not become practically meaningless, because the private operator will still be compensated through the risk insurance, which the people themselves will ultimately pay for to the World Bank, ADB, or whichever multilateral bank is funding the risk insurance.

Infrastructure fund

Aside from the risk insurance, the Aquino administration is also working with the multilateral banks for the establishment of the Philippine Infrastructure Development Fund (PIDF). This new entity is being patterned, according to the finance department, after India’s Infrastructure Development Finance Co. Ltd. (IDFC) and Indonesia’s PT Indonesia Infrastructure Finance (IIF).

In its website, the IDFC is described as “India’s leading infrastructure finance player providing end to end infrastructure financing and project implementation services”. On the other hand, the IIF was officially launched just last August as a private infrastructure financing company with an initial capital of US$170.3 million from the Indonesian government, the World Bank’s private lending arm International Finance Corp. (IFC), and the ADB on top of a 2 trillion rupiah loans from the same multilateral banks.

There is no official and final announcement yet on how the planned PIDF will raise resources. But it is likely that similar to the IIF of Indonesia, the Philippine government will shell out funds for the new entity’s initial capital, which is also expected to be beefed up by loans from the World Bank, ADB, and other foreign creditors.

In earlier statements, finance officials also disclosed that the PIDF may engage in issuing 25-year bonds domestically, targeting pension and insurance companies. The money borrowed will then be re-loaned to investors involved in PPP projects. Thus, in effect, the PIDF will become a mechanism of the Aquino administration to guarantee funders and creditors that the money loaned to PPP investors will be repaid.

Corporate takeover

For the Aquino administration, the private sector does not simply aim to profit but is in fact the “main engine for national growth and development”. Thus, through PPP projects, many crucial responsibilities of the government are being transferred to profit-oriented private corporations and banks, particularly the development and operation of core infrastructure such as roads and mass transportation network, power generation, and water supply and distribution, among others.

Consistent with the neoliberal agenda, PPP reduces the role of the public sector in stimulating growth and development, and consequently undermines the responsibility of the government to ensure economic opportunities for the weak and vulnerable and equitable distribution of wealth.

The supposed role of the government as regulator is tokenism at best since the main idea as espoused by neoliberalism is to let the corporations operate in the most favorable condition possible, i.e. no state intervention.

PPP initiatives are governed by contracts that set out the terms of the supposed partnership. But these contracts are often pre-designed by multilateral funders and banks to ensure that they are attractive enough for the private investors, in the process taking away any meaningful government regulation. One example is the MWSS privatization wherein the World Bank-designed concession contracts created a government regulatory body that is toothless and ineffectual.

The cost of PPP

The Aquino administration, whose team of economic managers and advisers are made up of the same people behind the neoliberal reforms of the past regimes, including the Arroyo administration, considers PPP as a magic bullet that will help solve the country’s chronic fiscal deficit and lack of infrastructure. Combined with a strong anti-corruption drive, the program will supposedly bring in and maximize private investments, create jobs, and consequently address poverty.

But as repeatedly pointed out by critics, the country’s experience since the time of Cory clearly shows that PPP initiatives do not guarantee savings for the government. Worse, in many cases, notably the privatization of the power industry, PPP initiatives even increase public debt.

Unfortunately, with additional schemes being cooked up such as the regulatory risk insurance and infrastructure fund on top of the usual incentives, the danger of more indebtedness and, as a consequence, of even less resources for social services and development needs looms large under the Aquino administration.

Aside from further bloating the debt burden, Aquino’s PPP thrust will also merely facilitate the increased corporate takeover of government roles and functions that expectedly results in various abuses and harm against public interest. IBON Features