Hybrid PPP shuts out private sector funding

The hybrid Public Private Partnership (PPP) scheme being espoused by economic managers of President Durtete is “suboptimal” and comes at a crucial time when big conglomerates are willing to make long-term bets on the Philippines, according to a PPP expert.

Vaughn Montes, who aids the PPP Center on risk management via a grant from the Asian Development Bank, expressed his views in a business forum that sought to bridge the perceived rivalry between PPPs and overseas development assistance (ODA) loans as a way to finance infrastructure projects.

This followed the abrupt termination last week of a P108-billion PPP deal to modernize and expand five regional airports—once a coveted set of projects that many in the private sector believed would push through.

Instead, the government said it would develop the projects itself using government funds or tap ODAs and bid out the operation and maintenance (O&M) contracts later on.

This was the core of the hybrid model, which was to limit the private sector to the O&M component, preventing them from pouring in large sums of money they would later need to recover through potentially higher fees to consumers.

But Montes, who said he was expressing a personal view, noted this type of arrangement could produce less desirable results since there was less incentive for the operator to ensure the project “will be productive and make revenues.”

“It’s important for the O&M operator to have capital at risk,” Montes said in an event organized by the Management Association of the Philippines. “If they misperform, they can just abandon revenues they are getting and disappear.”

“This is why hybrid projects are usually not optimal,” he added.

Throughout his talk, Montes made the argument that PPPs should have a place in the way Duterte’s ambitious “build build build” infrastructure projects get their funding.

He also cited cost and time overruns associated with government- and ODA-funded projects, noting these were not very different and sometimes inferior to those of recent PPPs such as the Naia Expressway. His presentation showed the tollroad was less expensive by 35 percent as a PPP.

Moreover, big Filipino companies were on investment mode and Filipino consumers were more willing to channel money from low-yield savings into financial instruments that would support infrastructure projects.

“If you pull the plug on PPPs, all of that will go away,” Montes said.

Montes’ talk served as a counterpoint to that of Rolando Tungpalan, an undersecretary of the National Economic and Development Authority who cited merits of ODAs.
Tungpalan noted that ODAs would help smaller companies participate in big infrastructure projects.

“So you look at it not only from the point of view of the big contractors, but also how much [ODA] has generated in terms of capacity built with smaller companies,” Tungpalan said.

He said PPPs would still play a role in the administration’s P7.1-trillion 2017-2022 Public Investment Program, noting PPPs would get about 18 percent of the pie, without detailing the projects—a major source of uncertainty.

He said government financing would account for 66 percent, ODAs at 15 percent and “others” at 1 percent.