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HOW TO MEET THE CHALLENGES OF PPP DEVELOPMENT IN THE CURRENT FINANCIAL AND ECONOMIC CRISIS 1 By Noel Eli B. Kintanar 2
INTRODUCTION Good morning honored guests, fellow participants, ladies and gentlemen. I would like to thank UNESCAP for giving me this opportunity to share my thoughts on Public Private Partnerships (PPPs) and Build-Operate-Transfer Projects (B-O-Ts), in the context of the global economic turmoil we are facing, in front of such a distinguished group of international experts in the field. As a PPP practitioner in the Philippines for close to a decade, I have gathered quite a number of reflections, insights and war stories on the topic. Unfortunately, as many practitioners know, we are constantly immersed in the day-to-day battles to move projects forward, and are focused primarily on fire fighting to get these projects implemented on the ground and on schedule. As such, many of the insights and reflections of the PPPs practitioners, on how projects can be developed better and made to work better, are often, only left to passing discussions during the short breaks from the salt mines, or, during the informal policy meetings by the coffee machine and water cooler. And as a practitioner, I always appreciate the opportunity to step back and take a look at PPPs from a broader policy perspective, learn from fellow project developers from all over the world, and gain knowledge and insight from scholars in the field. Unfortunately, this happens too seldom, and only occurs occasionally, during conferences like this. So again, my thanks to international development agencies like the UN, for giving me the opportunity to reflect on real-world experiences of PPPs in a more structured and systematic manner. Particularly, let me thank ESCAP for the excellent arrangements that have led up to this conference, and the warm hospitality in hosting this meeting.
ARE PPPs STILL RELEVANT IN AN ENVIRONMENT OF TIGHT CREDIT AND ECONOMIC MELTDOWN? Let me begin with the simple reflection: Are PPPs or B-O-Ts still relevant in our current environment, when economic meltdown is governments primary concern, and, where people on the street are focused on very basics concerns, such as keeping their jobs? Is there still an opportunity for privately financed infrastructure and B-O-Ts in a global economy where the financial crisis has led to tightened credit, which is critical to financing these capital intensive PPP projects?
A paper delivered at the Interregional Experts Meeting on Public Private Partnerships, UN ESCAP, Bangkok Thailand, February 17-19, 2009 2 Assistant Vice-President for Public Sector Partnerships and Infrastructure Projects, Ayala Land Inc., former head of the Build-Operate-Transfer Center of the Republic of the Philippines, and President of the Philippine Infrastructure Corporation
PPPS IN GOVERNMENTS INFRASTRUCTURE SCHEME More and more, governments and multilateral funding institutions acknowledge that the public sector alone cannot meet the funding requirements to bridge the local, national and global infrastructure gaps. To provide a quick country snapshot to illustrate this point, in the Philippine Medium Term Development Plan 2006-2010, close to 50% of infrastructure spending is dependent on Public-Private Partnerships and Build-Operate-Transfer projects. Without these projects, especially during times of economic crisis, the cash strapped government would find hard to mobilize both the financial and technical resources to stimulate the economy through public infrastructure spending. And for many countries, the economic crisis further highlights the urgent need to address, both the immediate basic needs of the poor, and, the long-term infrastructure gaps of the economy, that will serve as the basis for a sustainable growth.
But for PPPs to continue to be relevant, we must identify ways to build on their strengths; focus on the projects that can reap quick gains, so that they may get the necessary share of public policy attention, and the critical government financial resources that can make a project viable, in order to pursue the policy in the challenging years ahead.
FOCUS ON ITS STRENGTH: THE SPEED-TO-MARKET OF PPPs So what could differentiate PPPs from the host of other infrastructure projects during this financial crisis, and therefore, give government the impetus to push these investments forward? I believe that one thing that can differentiate PPPs is its potential Speed to Market. Simply put, Speed to Market means that, once the contractual terms of the PPP project are agreed on with the public sector, in a clear and measurable way, the private sector can implement and opertationalize projects faster than government. Just to underscore the premium that governments put on the need for speed in infrastructure spending, as a vital component of stimulating a sagging economy, it caught my attention that under President Barrack Obamas stimulus package, one of the main criteria for allocating funds would be the timing in which these infrastructure projects could be implemented. I highlighted some provisions of the bill that underscore this point. The package repeatedly uses the criteria: Priority of awarding such funds (from the stimulus package) will be given to projects that can commence promptly after approval The secretary shall give priority to projects that are expected to be completed within 3 years of enactment of this act Clearly, the US governments stimulus package awards a premium to projects that can impact the economy quickly. Unfortunately, the fiscal policy tools available to the US, such as unprecedented public sector spending, are not necessarily available to governments in the developing world. Developing countries, already mired in national debt would find it most difficult to further mortgage the future in order for government to undertake spending programs like that of the US. But nevertheless, the principle is the same. We need infrastructure spending to stimulate the economy, and we need it fast. With this simple policy statement in the US governments economic stimulus package in mind, PPPs can differentiate themselves from other infrastructure programs by showing that they can be implemented faster that purely publicly financed projects. PPPs must demonstrate that against other forms of infrastructure development and financing, it can provide the speed-to-market. If well structured PPPs can drive home this point, then this would be enough reason for governments to support and finance these projects above all others to stimulate our global economic recovery.
GOVERNMENT SPENDING IS FASTER Again, critics of such a thesis may argue that government investment, rather than PPPs, is the fiscal policy needed to spend our way out of crisis. It is faster and more direct. But, assuming we all agree that government spending is the right economic policy out of the crisis, it was also my experience while I was in the bureaucracy, that speed is not something commonly associated with government. This is especially true in the Philippines where bureaucrats are paid a fraction of private sector managers, engineers and analysts. Thus, many government infrastructure agencies in the Philippines are severely constrained by human resource capability and hindered by political intervention in selecting and developing projects. Also, I believe that for many developing nations, fiscal policy measure to stimulate the economy through infrastructure spending is limited by their national budgets and access to global credit during this crisis. The private sector on the other hand, is much more nimble in the project development process. They have much larger business development budgets available to pursue PPPs. Moreover, unlike in government, there is no need for legislative approval from Congress to spend these budgets. If the market opportunity exists for a return on their investment in the provision of infrastructure and public services, the private sector can quickly respond.
PROJECT DEVELOPMENT: A FLIGHT TO QUALITY BY GETTING BACK TO BASICS But in as much as speed to market may be viewed as an advantage of PPPs in this crisis, the underlying difficulties in developing these types of projects remain. And it is the flight to quality that will ensure that PPPs get the opportunity to play the role of economic stimulant in developing countries. But what are some of the basic elements of developing good quality PPPs? 1. Project filtering A basic challenge in developing quality PPPs has always begun at the very start during the filtering of projects between those that have a revenue potential, and are therefore more suitable for private investment on the one hand, and identifying projects that are clearly best implemented by the public sector, on the other.
Take or Pay concessions oblige the public sector to pay the private proponents guaranteed payments whether or not the infrastructure is used or not. Such an arrangement usually insulates the PPP proponent from any market risk.
Also PPPs present an opportunity for pricing reform in infrastructure systems and public services and utilities. PPP toll roads for example, provide the venue to introduce road user fees and charges, whereas otherwise, governments would be hard pressed to introduce such measures using public funds, which may carry an expectation of free infrastructure. Through the PPP projects, governments have the opportunity to introduce user charges and fees, as the general public would better appreciate that any private investment would require some form of return on their investment in providing what is otherwise a public utility. Politically, it may be easier for politicians to accept the backlash of introducing pricing for the use of public utilities, if he has the opportunity to point to a third-party as the collector of such fees. In reality, the charging of users fees is a public policy, and the private sector is only an agent of government in collecting such fees. But in political reality, doing what right still requires that politicians that have to adopt the policy must remain to be politically viable. Although I am sure the private sector may not enjoy it, they will be identified as the boogie man, but as long as they are protected by a concession and clear regulatory environment, they can manage the negative image through social marketing and public relation budgets. But it must be kept in mind that policy reform in pricing infrastructure should best be implemented hand in hand with the independent and credible economic, technical and safety regulation of these infrastructure projects, services and public utilities. This underscores the value of my previous point on regulation of PPP infrastructure projects. 6. Solicited projects versus unsolicited projects
I continue to be biased towards solicited projects vis--vis unsolicited project from the private sector. Projects solicited by government through competitive bidding reflect that the five steps I mentioned above have been undertaken in one form or another. These elements are: Project Filtering Efficient Project Design Management of Public Sector Budgets A regulatory environment Pricing reform in infrastructure Solicited projects encourage greater competition, and can even encourage foreign investment, if the rules of the bidding and the terms of reference of the project are clear and commercially viable. If a project is clearly a priority project of government, then it should invest in the necessary project development documents, such as a full feasibility study, basic engineering studies, tender documents and a well written, and ideally, government approved concession agreement. This investment in project documentation is a small fraction of what the project will actually cost, and what government is asking the private sector to invest. This is the clearest manifestation that the project is in fact a government priority and will most likely pay for itself ten-fold by avoiding costly dispute resolution and contingent liabilities that are not properly budgeted by government.
But project development takes resources and specialized skills. Things that are in short supply in bureaucracies of developing countries. To try to address this short coming, the Philippine government established a Project Development Facility that was designed to finance project development and recover the cost upon award of the project or financial close. But unfortunately, the success rate was not noteworthy. At the end, the projects faced the basic question of did the government agencies have the political will to tender the projects? In most occasions, the answer was no. Or on some occasions, the agencies were not prepared to pursue the tender in a transparent and competitive manner in which they had been designed to be tendered. This brings me to the window for unsolicited projects, although arguably less desirable than a project solicited by government in a competitive and transparent manner, I do believe that they have a role in PPP project development. The Philippine BOT Law, known as Republic act 7718, has a fairly well defined criteria and methodology to process unsolicited PPP projects. The policy and mechanics can be sourced from the internet should there be interest to see it in detail. The criteria for an unsolicited project are: 1. If the project is NOT a priority of government and/or introduces a new or proprietary technology; 2. If it does not require a government guarantee or subsidy; and, 3. If it does not require government equity in the project These three criteria try to avoid moral hazard when the government reviews and accepts unsolicited projects. Should the project entail a monopoly, and as a result a regulated market, then government has to set the acceptable return prior to implementation. Finally, to check if there are better offers for the unsolicited proposal from other private entities, once government and the original proponent agree on the project and the concession document, a price challenge, or Swiss Challenge must be conducted by publicly soliciting alternative price offers to implement the concession agreement. This allows private competitors to offer a better price than that of the original proponent, under the same terms of the concession. The original proponent however, has the right to match the better offer should there be one, and reclaim the project for itself. Much can be said as to the competitiveness of the Swiss Challenge given the right to match. I believe the ability to establish a credible price challenge is critical in determining the desirability of the unsolicited project. But unsolicited project may have a role in PPPs, given the limited resources of government in developing solicited projects, keeping in mind the criteria identified in the BOT Law in the Philippines in considering and evaluating unsolicited proposal - so as to avoid moral hazards in approving these projects, and the fact that government is under no legal obligation to accept an unsolicited proposal from a proponent, then there may be reason to consider this approach, albeit with strict adherence to the process and
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Conclusions How do we meet the challenger of PPPs and BOTs in this difficult economic environment? I would say, first of all, let us build on the strengths of the private sectors role in project development by demonstrating the ability to implement infrastructure projects faster than if they were to be carried out purely by the public sector. This characteristic would differentiate PPPs against the host of other infrastructure projects jockeying for public funds and policy attention. The second step would be to go back to the basic of good project structure and development. Some of these elements I discussed above were: Project Filtering Efficient Project Design Management of Public Sector Budgets A regulatory environment Pricing reform in infrastructure Solicited versus unsolicited projects
In closing, in the midst of economic meltdown, clearly focusing PPPs along these lines would allow projects, albeit of much better quality to progress and play a role in stimulating our sagging economy and introducing the foundations for sustainable growth into the 21st century. The need is urgent. To quote the head of the International Monetary Fund head Dominique Strauss-Kahn, "The question is no more to convince the governments to move today, but for them to implement the policies they need to manage" Thank you and Good day!
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