Public-Private Partnership in the Philippines By: Carlos C. Rabago, Jr. Background Infrastructure is vital to the development of an economy.

The availability of essential infrastructure such as water, sanitation, transport, electricity, telecommunications and health services are not only important to the living conditions of the people in the economy, but they are also necessary conditions for investment in and development of the economy. For this reason, the United Nations and other multilateral institutions (including, for example, the World Bank) have recognized that the development of infrastructure is the central issue in poverty alleviation if the Millennium Development Goals of halving extreme poverty by the year 2015 is to be achieved. (World Banks Private Sector and Infrastructure Network in a conference Making Infrastructure Work for the Poor, February 2002) Historically, projects to build infrastructure have been in the domain of the public sector. Today, the public sector increasingly relies on the private sector to finance and construct the infrastructure projects. PPPs (also known as Private Finance Initiatives or PFIs) have in recent years become the way to finance infrastructure projects in developed economies as well as in developing economies. PPP projects are usually structured using a Build-Operate-Transfer (BOT) model or various forms of this. Examples are Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Build-Operate-LeaseTransfer (BOLT), Build- Lease-Operate-Transfer (BLOT), BuildTransfer-Operate (BTO), Build-Operate-Renewal (BOR), BuildRent/Lease-Transfer (BRT or BLT), Design-Build-Finance-Operate (DBFO) and Rehabilitate-Operate-Transfer (ROT). All these different forms of BOT are variations of the same theme, and will not be considered separately in this guideline. The reasons governments have undertaken PPP projects are:

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

Finance. Typically, construction of infrastructure requires large capital resources. Governments lack the finance resources to undertake necessary infrastructure projects (or it may have been decided that the financial resources were better spent in other ways). The private sector may be in a position to provide funding for projects where the government does not otherwise have funds available, or to enable government to use its budgets for other purposes.

Expertise. Governments may also lack technical expertise and resources to design, build and operate infrastructure projects. The private sector may have more experience than the public sector to design, construct or operate the project. This is because the private sector may be more efficient than the public sector, or because the private sector has access to technology and know-how that the public sector does not have. Typically, the private sector may be responsible for any or all of the design, build, engineer, operate or maintain functions of the project.

The lack of finance and expertise in the public sector are constraints to the development of infrastructure, more so in developing countries (where such infrastructure is badly needed) than in developed countries. Hence many governments in developing economies have come to view private investment as critical to ensure that much needed projects take place. At present there is, nevertheless, a pervasive sense of caution and disillusionment with regards to PPP infrastructure projects. Many PPP projects during the period of remarkable growth in PPP projects in the 1990s have failed to deliver the results promised. Most PPP projects have needed to be renegotiated and some have had to be cancelled or re-nationalized. (Clive Harris, Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons, World Bank Working Paper No 5, 2003,)

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

History of Private-Public Partnership in the Philippines The Philippines has been one of the pioneers in private sector participation in major government infrastructure projects in Asia. The Build-Operate-Transfer Law or RA 6957 passed in 1990 was the first of its kind in the region. Primarily undertaken because of continuous budget constraints, Public-Private Partnerships or PPPs have become a primary source of capital in key governmental areas such as electricity, water distribution, toll-ways, airports and ports. From 1990 to December 2008, the Philippine BOT program has generated general capital investment of more than US$19 Billion using private financing and private_partnership.pdf) The Philippines boasts of a long experience of public-private partnership (PPP) initiatives, which serve as a rich basis for future investments. With its aggressive PPP promotion, the government was and is able to attract private partners to invest not only in traditional infrastructure projects, such as power, transportation, and water sectors, but also in non-traditional infrastructure and development sectors, such as information and communications technology, health, and property development. Through the partnership, the power crisis in the early 1990s was addressed. The partnership likewise helped improve road network quality, transport linkages and social services. To date, approximately US$ 19.5 billion in investment has already been generated since its inception. (http://lexoterica.wordpress.com/2010/11/26/public-privatepartnership-center) What is Private-Public Partnership? A PPP is basically any one of the variants of permitted schemes under the BOT law. A Build-Operate-and Transfer (BOT) scheme is defined under RA 6957 as a contractual arrangement whereby the contractor undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The Public-Private Partnership in the Philippines 3
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expertise.

(http://www.legal500.com/assets/images/stories/firmdevs/new_public-

contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon. The contractor transfers the facility to the government agency or local government unit concerned at the end of the fixed term, which shall not exceed fifty (50) years. This type of privatization Philippines started in 1990 as a response to a power crisis. Using the scheme, 38 power plants were built, effectively ending the supply problems in 1995. The success experienced in that sector was then replicated through an expanded Build-Operate-Transfer Law, Republic Act No. 6957, in other areas of infrastructure, such as roads, airports, seaports, water, and even information technology. Republic Act 6957 authorized the financing, construction, operation and maintenance of infrastructure projects by the private sector through the BOT scheme. The implementation of BOT law improved public infrastructure and deregulated several industries to help liberalize the Philippine economy. The BOT law was also enhanced by several amendments and additional provisions to the law in 1994. Among other changes, the prior law's cap on returns was eliminated, the scope of projects available for investment was increased, bidding procedures were clarified and incentives such as tax holidays and duty-free importation of capital equipment were added. The amendment of the law also institutionalized Coordinating Council of the Philippines Assistant Program's (CCPAP) role in advancing the country's BOT program, mandating it as the national coordinating and monitoring body for BOT projects.(Public-Private Partnerships in the Philippines: A Practical Guide for Business)

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

Ninoys Agenda on Public- Private Partnership Program President Benigno S. Aquino IIIs Social Contract with the Filipino People envisions a country that has achieved inclusive growth and is characterized by rapid, sustained, and broad-based economic growth that is focused on creating more jobs and new opportunities to achieve full employment, and on significantly reducing poverty. In order to attain this vision, the development strategies will be directed towards attaining a high and sustained economic growth, providing equal access to development opportunities and formulating effective social safety nets. To help achieve the high and sustained economic growth needed to generate productive employment opportunities, the Government will provide an enabling environment for private sector investment through a stable macroeconomic environment and sound and consistent public policies. Measures to increase the countrys competitiveness will be implemented by investing in infrastructure, and improving governance by reducing the cost of doing business, enforcing the rule of law, ensuring the effective and efficient delivery of public service, and improving the investment programming processes. To achieve a higher growth path over the medium term, the Government will focus on improving productivity and creating new opportunities for full employment and efficient allocation of resources. The levels of private investment and entrepreneurship, especially among micro, small and medium enterprises (MSME) will also be raised. The Government will ensure that different geographical areas, income levels and social spectra will be given equal access to development opportunities, so that the expansion of employment opportunities truly translates into poverty reduction. This will entail more quality investment in human capital, especially in education, primary health care and nutrition, and other basic social services. The Government will also level the playing field through equal access to infrastructure, credit, land, technology, and other productive inputs. Public-Private Partnership in the Philippines 5
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And the Government will implement unbiased and facilitative policies that promote competition as it improves governance and strengthens institutions. In gearing up for a high sustained growth, the Government will provide effective and responsive social safety nets to protect and support those who are unable to immediately participate in this new economic growth process. These social safety nets will be formulated and implemented to effectively address the issue of poverty, as well as the devastating effects of climate change. Role of Public Private Partnership Center The President Benigno Aquino III, economic policy under his new administration is the development of the countrys much needed infrastructure projects through public-private sector partnership. On the conference Infrastructure Philippines 2010, Investing and Financing in Public-Private Partnership Projects, held from November 17 to 19, 2010, announced the infrastructure agenda and the different projects open for public-private partnerships. Projects are mostly in the agriculture, energy, transportation, tourism, and health sectors. In the emphasis on private sector participation in infrastructure projects, President Aquino previously issued Executive Order No. 8 on September 9, 2010 reorganizing and re-naming the Build, Operate and Transfer (BOT) Center to the Public-Private Partnership (PPP) Center. The executive order also transferred the PPP Center from being an attached agency of the Department of Trade and Industry to the National Economic and Development Authority (NEDA). The PPPs will be undertaken mainly under the framework of the BOT Law and its implementing regulations. Therefore, the role of the BOT Center, now PPP Center, is important. Among the powers and functions of the PPP Center under EO No. 8 are: 1. Assist the implementing agencies (IAs) and local government units (LGUs) in addressing impediments and bottlenecks in the implementation of PPP projects;
Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

2. 3. 4.

Provide advisory services, technical assistance and training Monitor and facilitate the implementation of priority PPP Recommend plans, policies and implementing guidelines

to IAs and LGUs in PPP project preparation and development; programs and projects; related to PPP in consultation with appropriate oversight committees, IAs and LGUs; 5. Manage and administer a revolving fund for the preparation of business case, pre-feasibility and feasibility studies and tender documents for PPP programs and projects; and 6. Prepare reports on the implementation of PPP programs and projects for submission to the President each year. (http://ppp.gov.ph) The center has the following on-going projects: Automatic Fare Collection System, Balara Water Hub. CALA Expressway (Cavite and Laguna Side), Establishment of Cold Chain Systems Covering Strategic Areas in the Philippines, Grains Central Project, LRT Line 2 East Extension and O & M Privatization, Mactan-Cebu International Airport Passenger Terminal Building, Modernization of the Philippine Orthopedic Center, New Bohol (Panglao) Airport, New Water Supply Source Project, NLEX-SLEX Connector Road, O & M of Angat Hydro Electric Power Plant (AHEPP) Auxilliary Turbines 4 & 5, O & M for Laguindingan Airport, PPP for School Infrastructure Project, Vaccine Self-Sufficiency Project Phase II and assisted with the following agencies; Asian Development Bank, Australian Government AusAid, British Embassy Manila, Canadian International Development Agency (CIDA), Department of Finance, and the Department of Trade and Industry. The organizational structure and flowchart process of the PPP center are hereunder:

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

Issues and Concerns on PPPs in the Philippines 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 countrys 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

Public-Private Partnership in the Philippines Carlos C. Rabago, Jr.

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). (A Position Paper on the Public-Private Partnership, National Consultation for the Medium-term Philippine Development Plan (MTPDP) 2011-2016, January 14, 2011.) Strategic Solutions 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 wouldnt 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
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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 peoples 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 laborintensive activities and grassroots cooperatives. For example, instead Public-Private Partnership in the Philippines 11
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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. ( A Position Paper on the Public-Private Partnership, National Consultation for the Medium-term Philippine Development Plan (MTPDP) 2011-2016, January 14, 2011.)

Online Sources: (http://ppp.gov.ph) http://www.mondaq.com/x/140210/Government+Contracts+Procureme nt+PPP/PublicPrivate+Partnerships+In+The+Philippines.02/172012 http://www.larano@dowjones.com/Philippines' Aquino: To Pursue Public-Private Partnership To Boost Economy, Cris Larano, Dow Jones Newswires; 632-848-5051. http://online.wsj.com/article/SB10001424052748703700904575390802 484639706.html (Philippines Aquino Seeks Public-Private Partnership, Cris Larano, Wall Street Journal Online) http://www.abs-cbnnews.com/business/09/12/10/aquino-issues-eo-8creating-public-private-partnership-center http://lawpolicy.org/the-archives-list/12633-ppp-bot-briefer-a-briefer-onpublic-private-partnership-and-the-bot-law-in-the-philippines.html http://lexoterica.wordpress.com/2010/11/26/public-private-partnershipcenter/ http://fdc.ph/index.php? option=com_content&view=article&id=524:position-paper-on-thepublic-private-partnership-&catid=34:debt campaign&Itemid=88 http://www.upou.edu.ph/downloads/2010%20downloads/philcompetitiv eness.pdf http://www.unescap.org/ttdw/ppp/trainingmaterials/PPP_Primer.pdf http://www.adb.org/Documents/TARs/PHI/45515-01-phi-tar.pdf
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Journal and Magazines Clive Harris, Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons, World Bank Working Paper No 5, 2003, Enrico Basilio, Jeremiah Acena, Rafael Hernandez, et. Al, Promoting Public-Private Partnerships in Infrastructure Development, AmCham Journal October 2010 A Position Paper on the Public-Private Partnership, National Consultation for the Medium-term Philippine Development Plan (MTPDP) 2011-2016, January 14, 2011 World Banks Private Sector and Infrastructure Network in a conference Making Infrastructure Work for the Poor, February 2002 Legal References Executive Order 08, 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 Republic Act No. 7160 otherwise known as Local Government Code of 1991, Book I Republic Act No. 7718, the BOT Law or An Act Amending Certain Sections of Republic Act No. 6957, entitled An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes Republic Act No. 8975, An Act To Ensure The Expeditious Implementation And Completion Of Government Infrastructure Projects By Prohibiting Lower Courts from Issuing Temporary Restraining Orders, Preliminary Injunctions or Preliminary Mandatory Injuctions, Providing Penalties for Violations Thereof, and for Other Purposes.

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