MR. PETER WALLACE
Columnist
Philippine Daily Inquirer
Chino Roces Ave. cor. Yague
and Mascardo Streets, Makati City

SUBJECT: 19 September 2019 Philippine Daily Inquirer Opinion Article Entitled “Revive PPP”

Dear Mr. Wallace:

This refers to your article in the Philippine Daily Inquirer on 19 September 2019, entitled “Revive PPP.” In your article, it is being recommended that the “shifting to Public Private Partnerships (PPPs) be revived to ensure all seventy-five (75) programmed projects actually get started before President Duterte bows out.”

During the roll-out of the Build, Build, Build Program, its objectives were made clear: to accelerate infrastructure spending and develop industries that will yield robust growth and create jobs with the ultimate objective of improving the lives of Filipinos. It is not about having a preference or discriminating against one mode of procurement. It is about delivering basic services to the people, without imposing unnecessary obligations and restrictions to consumers and the Government. As such, we must clarify that the Duterte Administration is not against PPPs as a mode of implementation, provided that, issues hounding PPPs are properly addressed.

Automatic rate increases, non-compete clauses, commitments of non-interference, Temporary Restraining Orders (TROs), and Concessionaire-required Government Guarantees are just some of the issues that have constantly plagued PPP contracts in the past. Like infrastructure projects implemented through Official Development Assistance (ODA), PPP Projects have their own bottlenecks in implementation that also result to delays. Take for example the Muntinlupa-Cavite Expressway (MCX) Project, which was highlighted as the first PPP Project of the Aquino Administration. The MCX Project was announced in President Aquino’s State of the Nation Address (SONA) in 2013, yet only approved by the National Economic and Development Authority (NEDA) Board in 2015. In fact, theMCX road project was already proposed in 2009 through a Joint Venture Company with the Philippine National Construction Company and the National Development Corporation. Altogether, it took Government six (6) years, from 2009 to 2015, to build a road that is only four (4) kilometers long just to structure it as a PPP. The Department of Public Works and Highways is more than able to construct a road and can do so quickly.

It is clear from this example that implementing projects through PPPs would not always be faster than projects implemented through ODAs. But as earlier emphasized, the Build, Build, Build Program is not only about delivery of services to the people, but also ensuring that the Filipino People and Government are not burdened by unwarrantedobligations imposed on them under PPP contracts. In our review of PPP concession agreements executed in the past, Government had agreed to the following provisions, which we view as detrimental to Regulators, the Government, and more importantly, a disservice to the Filipino People:

1. Automatic Rate Increases. In various contracts, Government was forced to approve the required rate increases proposed by the Concessionaires based on a parametric formula without the relevant regulatory authority determining whether it is actually just and proper to increase such rates. While this guarantees profit for the Concessionaires, Government is forced to forego its ability to regulate and balance public interest with profit motives. In cases where the Government refused to approve the private sector’s proposed rateincrease, contingent liabilities have surfaced as a result of arbitration proceedings.

2. Commitments of Non-Interference. In several contracts, Government did even more than just commit to approve rates proposed by the Concessionaires. In these instances, Government even promised not to interfere with the rate setting mechanism provided in the contract that made it liable to indemnify the Concessionaires, in respect to any loss it incurred by reason of said interference. This non-interference clause unnecessary restricts the Government’s ability to demand better service for the public.

3. Non-Compete Clauses. In various contracts, Government allowed Concessionaires to maintain a monopoly even in a situation when Concessionaires make profit beyond its expected return. As a concrete example, let us look at the Mactan-Cebu International Airport (MCIA). As of 2017, MCIA registered a net income of PHP1.1 Billion, which is forty-eight percent (48%) higher than the PHP752 Million forecasted in its financial model. And yet, Government still made the commitment that there will be no other competing airports in Mactan and in Cebu. Should the Government later on want to build a new airport in these areas, it would be required to reimburse not just the market value of the infrastructure assets, but also the future profit of the commercial business until the end of the concession. This means that Government would need to reimburse the Concessionaire around PHP20 Billion just to build another airport in the areaeven when actual traffic demand can support the profitability of two airports.

Before we are put to task to expedite Public Private Partnerships, allow us to ask whether “Regulation by Contract” in these PPPs promote public interest. In our PPP experience, Government has been tied to provisionswhich strip the Government of its regulatory authority and ability to require Concessionaires to improve services rendered to consumers. In addition, these contract terms have increased Contingent Liabilities of the Government, which are currently estimated at PHP309 Billion. The fund used by Government to pay Concessionaires are sourced from taxpayers’ money–money of the Filipino People which Government is mandated to judiciously manage. In support of nation building, the private sector must agree to risk transfer and absorb risks commensurate with the returns they are entitled to, by virtue of these exclusive contracts. We in Government simply will not subsidize private sector interests to the detriment of serving the public. It is not enough to roll out PPP Projects – PPP Projects must be Public-Private Partnerships FOR the People.

As PPPs FOR the People, PPP Projects should be flexible enough to accept Government’s demand for better service. Government should not be unfairly restricted in PPP contracts and should be given the opportunity to serve the Filipino People by adapting to enhanced service and safety standards. In the Mactan-Cebu International Airportcontract, Government was made to guarantee not only the increase in Passenger Service Charges, but also, Changes in Law and the Private Proponent’s right to alter project scope without the required approvals. These types ofprovisions restrict the power of the Government to perform its functions and address the needs of the Filipino People quickly and efficiently, leaving public infrastructure to the unregulated control of companies fueled primarily by profit motives.

Private Proponents must display willingness to accept terms imposed by Government to lessen the overall timeframe for the evaluation and implementation of PPP Projects, especially since the financial interests of the Concessionaires are addressed by providing the private sector reasonable returns. In a survey of Philippine PPPs, actual returns have significantly surpassed projected returns. On top of this, the private sector is allowed to engage in commercial activities surrounding the infrastructure project. We can no longer accept advice that the Government must continue to provide guarantees for a significant portion of project risk, when the private sector makes more than adequate returns for taking on limited share of the risk.

We have done our best to eliminate one-sided provisions in PPP Contracts in order not to unnecessarily burden the Government and the Filipino People. We likewise caution against the engagement of external consultants who have actual and potential conflicts of interest. Consultants play a major role in drafting PPP Contracts and can influence the fairness of their terms and conditions, ultimately affectingthe success of these projects. For instance, the International Finance Corporation (IFC) served as a consultant to the Metropolitan Waterworks and Sewerage System (MWSS)privatization where the Non-Interference commitment of Government was found. IFC then invested in Manila WaterCompany, Inc. which is a clear case of conflict of interest. IFC again served as PPP financial advisor for the Clark International Airport Operations and Maintenance Project (Clark O&M Project). In the evaluation stage of the Clark O&M Project, IFC advisors insisted in a meeting with theImplementing Agency and members of the NEDA Investment Coordination Committee (ICC) that removing certain provisions on Passenger Service Fee Guarantee and limiting the coverage of Material Adverse Government Action would be “deal breaker(s)” and would result to a failed bid. Contrary to IFC’s claim, however, the bidding was a success and proceeded with Government’s terms (against IFC advice) – which transferred risk to the private sector and limited Government guarantees. The Clark O&M projectwas awarded without delay to a Private Proponent which adopted the terms and conditions set by Government. This is what we believe to be a true PPP for the People and we will encourage projects that fit this mold.

The desire for speedy implementation of the seventy-five(75) Flagship Projects of the Government is a sentiment we share with the Filipino People. However, shifting from one (1) mode of implementation to another will again delay implementation of the Build, Build, Build Program. As seen in the Muntinlupa-Cavite Expressway Project cited above, a simple change in the mode of implementation can take six (6) years. This is because the Build-Operate-and-Transfer Law restricts project evaluation to one (1) mode of implementation at a time. There is limited portability from PPP to ODA, as the Private Proponents (in the case of Unsolicited Proposals) are provided certain rights and privileges. However, ODA Projects can later shift to PPPs due to financing and feasibility being established for a portion of the project at the onset. In fact, this is how we implemented the Clark O&M Project. In order to shorten the duration of project evaluation, Implementing Agencies should early on, determine its proposed mode of implementation. The Department of Finance has been one with those calling for the development of Transport Plans and Roadmaps delineating the relationship of one infrastructure project to another. In the absence of masterplans, and with increased submission of Unsolicited Proposals, the evaluation of the Implementing Agencies and NEDA will continue to be bogged down.

While we seek the speedy implementation of the Build, Build, Build Program, we cannot simply turn a blind eye to the delays in the PPP procurement, especially when “Regulation by Contract” in these PPPs override regulatory authority required to serve public interest. The decision we make today carry on to future generations and we take this responsibility seriously. We will not outsource this duty to consultants who do not share this commitment, and by the nature of their business, are not properly incentivized to serve public interest as a top priority. We will ensure PPPs do not expose the Government to unnecessary financial burden and require PPPs to conform to standards that better serve commuters. The Duterte Administration remains steadfast in its commitment to fulfill its responsibility to the Filipino People.

Very truly yours,

KAREN G. SINGSON
Undersecretary
Privatization and Office of Special Concerns
Department of Finance

Copy Furnish:

CARLOS G. DOMINGUEZ
Secretary of Finance

ANTONIO JOSELITO LAMBINO II
DOF Assistant Secretary