As foreign loans for infrastructure face risks, hybrid option seen | Business, News,

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MANILA, Philippines — Faced with a dwindling pipeline of projects, the Public-Private Partnership (PPP) Center is proposing a “better” hybrid financing of infrastructure that could serve as a win-win for both the government and those with reservations over using more loans to fund projects.

“There is another and better hybrid financing for the more complex infrastructure like railways and airports,” PPP Center executive director Ferdinand Pecson said in an interview.

The financing strategy, he said, will involve the government still using official development assistance (ODA) to secure cheap financing. Money will then be given to a private company, who will construct, operate and maintain the project.

This is different from the current “hybrid” scheme of the Duterte administration, where ODA for building the infrastructure may be tied up to the government and the lender agreeing on a specific company who will construct the project. Only after this done will a bidding for maintenance private concessionaire be held.

“ODA are usually tied-up to conditions and you end up having limited choices on who will the contractors be,” Pecson said.

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But the economic managers are persistent.

Socioeconomic Planning Secretary Ernesto Pernia said the current hybrid model would cut project bidding to around a year from 29 months under PPP. Finance Secretary Carlos Dominguez agreed.

“Accelerating the implementation of the projects by having the government start them will be the strategy,” Dominguez said in a recent statement.

Over the next five years, the Duterte government is hiking ODA financing of infrastructure to P1.1 trillion from a programmed P118.4 billion under former president Benigno Aquino.

As a percentage of total funding, ODA will corner 15.5 percent of the P7.1-trillion program. Under Aquino, ODA accounted for just 3.8 percent.

Investor qualms

Concentration

But investors are having qualms. For one, Emilio Neri Jr., lead economist at Bank of the Philippine Islands, said a “concentration risk” on ODA is happening under the Duterte administration.

While the government is touting an “independent foreign policy,” Neri said it is appearing that most projects being announced are coming from Japan and China amid renewed ties between Beijing and Manila.

In recent bilateral trips abroad, the government had announced dangled 40 proposed infrastructure projects for Chinese financing and 14 others for Japanese loans or grants. Specific details on these projects remain unavailable.

“What is happening is that there seems to be a concentration of ODA funding on select players only,” Neri said in a phone interview.

“We need to watch this out as reliance on one or two lenders may put our debt profile at a disadvantage later on,” he added.

Corruption

Another concern is lack of transparency and corruption. The Philippines’ experience on Chinese lending had been marred by irregularities such as the botched $329-million National Broadband Network project by Chinese firm ZTE Corp.

The project, conceived in 2006, led to a political fallout and court charges against former president and now Pampanga representative Gloria Arroyo. Arroyo, however, was cleared of the charges last year.

“We let the lender (China) shortlist the contractors for projects. But of course, we do our own due diligence. We make sure that contractors are not blacklisted by the Asian Development Bank or World Bank,” said Budget Secretary Benjamin Diokno.

ODA vs. PPP

PPP Center’s Pecson admitted ODA remains a good financing option, although he said bigger infrastructure projects will benefit more with private sector taking the lead from the very start of the project.

“I’m not saying we don’t do hybrid… What I’m saying is that we should start with the less complex projects. Projects that are quite complicated, for me, we should do this through another hybrid we are proposing,” he said.

Complex projects, according to him, involve those which have many facets. He cited airports as example, which, he said, do not only include the terminal itself, but navigation technology, facilities and runway. The P108.2-billion regional airports project had just been taken off the PPP pipeline this month.

Pecson said through the hybrid financing he is suggesting, the government will be able to “marry the benefits of the two”—getting cheap financing for construction and also the benefits of private sector expertise.

“The private sector will still need to borrow money, but not a significant amount,” he said.

Neri agreed, saying that despite the Duterte administration’s promise, agencies continue to have problems fast tracking projects.

“They are experiencing the same problems encountered by the previous administration,” he said.

According to budget data, growth in state spending had continuously decelerated from a high of 34 percent in November to a contraction of 4 percent in April. State spending covers both those spent using revenues and borrowed money, including ODA.

In the 2015 ODA report, agencies improved their capacity to spend ODA funds to 31.6 percent of the program from 23.12 percent a year before.

Despite this, more than half or 40 of the 73 ODA loan-funded projects that year had experienced funding delays, including 19 from the government’s main infrastructure agencies, the departments of Public Works and Highways (DPWH) and Transportation (see chart below).

 

 

 

 

 

 

 

 

Broken down, DPWH suffered a 43-percent backlog with $347.85 million in ODA funds not availed. The DOTr– then Department of Transportation and Communications– fared better with only 39 percent backlog worth $103.71 million.

Once ODA agreements are signed, schedule of disbursement per tranche of funds are also laid out. Those with backlog means they failed to meet their target completion, hence, they cannot get additional funds as scheduled.

“I talk to them (agencies) on a regular basis. We have agreed on real time monitoring of projects. I report to the Cabinet every month on each agencies’ budget utilization rate,” Diokno said when asked how he deals with underspending.

“(That said), I’m convinced that we have significantly cut (underspending) down in only 6 months,” he added.

PPP pipeline

Currently, Pecson said the PPP Center is in the process of reviewing its pipeline of 57 projects, which will be reduced consistent with the Duterte administration’s thrust.

Already, three PPP projects had already been taken off the list. These are the New Centennial Water Source-Kaliwa Dam Project, South Line of the North-South Railway and the five regional airport projects, all collectively worth around $5 billion. The first two will be undertaken through Chinese ODA, while the airports will be built through the government budget.

A total of 15 projects worth P317.11 billion had been awarded so far, 13 under Aquino and 2 under Duterte.

Pecson defended PPP over allegations they move slow. “They are slow because (they are) PPP deals with complex projects,” he said.

That said, the Duterte administration is not entirely abandoning PPP.

“Greater focus is now given to addressing the bottlenecks in PPP planning and implementation, so as to fully realize and take advantage of the benefits of PPP in terms of tapping the private sector’s efficiency and innovativeness,” said Rolando Tungpalan, deputy director-general at the National Economic and Development Authority.



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