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Affordability of PPPs: 10 Ways to Mitigate Tariffs

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The current Administration pins its hope for economic salvation through its Public-Private Partnership program. However, there are some who criticize the program because it is perceived as a quick-fix solution to a cash-strapped economy, and that any Project Finance PPP would necessarily result in high tariffs.

By definition, PPP should provide more affordable tariffs, ensure delivery of better quality of service and better value for money for government. Thus, a successful PPP may be measured by the affordability of the tariffs or direct user fees. A PPP which yields a high, unreasonable or excessive tariff may be classified as a failed PPP.

Having a high or low tariff will be dictated by the choices the public sector will make in the identification of a project for PPP, and the policies it will adopt in pursuing that PPP project. Making the wrong choices at the feasibility study stage of any PPP will most likely determine if the PPP will pass or fail.

The first five PPP Projects which will be subject to bidding this month until June must be measured using this “affordability test.” The PPP projects are: the P6.3 billion Metro Rail Transit Line 3, the P7.7 billion Light Railway Transit Line 1, the P1.6 billion Daang Hari-South Luzon Expressway link road, the P10.6 billion Ninoy Aquino International Airport Expressway Phase 2, and the P21 billion North Luzon Expressway-South Luzon Expressway connector road.

If these projects will be pursued under either the Build-Operate-Transfer or any of its variants (BOT), Joint Venture (JV) or Concession framework, then the payment to the private sector proponent will be intimately linked to the tariff or user fee that will be charged. If the other PPP modes are used such as straight lease, service contract, pure operations and maintenance contract or management contract, then the remuneration of the private party will be delinked to the tariff. For these PPP modes, the private sector will be paid a fee linked to the performance of the PPP contract.
We have to wait for the terms of reference and bid documents of these five projects before we know which PPP mode will be adopted. On the assumption that the BOT or JV frameworks will be used, then government must make the right choices on many difficult questions.

Government in making the policy choices may consider all or any of the following 10 ways to ensure more affordable or “low” tariffs as against unreasonable or “high” tariffs:

Long-term, as against short-term, project life. If the private sector is given a longer period to recover its investments, then the revenue stream from tariffs and cost recovery may be spread out rather than cramped in a brief period. Rate impact to consumers will be mitigated by a long-term program.

Long-term repayment schemes. To be affordable, the term of the PPP must approximate the length of the financing required. A longer repayment scheme would result in the same benefit of a longer term PPP.

Low-interest financing. Government and private banking institutions may extend low-interest financing for PPP proponents. The lower the interest, the lower the costs.

Proper allocation of risk. Each risk which bears an associated cost should be assigned to that party (public or private) that will be able to best manage and control said risk. The more control a party has over the risk, the less it will charge for assuming the responsibility for that risk. Thus, government must decide which risks – political, economic, technological, social, financial – must be retained by government or transferred or shared with the private sector.

Cap on rate-of-return. A cap on rate-of-return is only found in the BOT Law. The law provides a maximum 12% ROR base on negotiated BOT contracts involving public utility projects which are monopolies. Thus, there is no statutory limit for BOT projects subjected to bidding, or projects which are not public utilities and monopolies. This notwithstanding, the National Economic Development Authority or the implementing public agency, may arguably impose a cap to ensure low tariffs as part of the terms of reference of a PPP project.

Provision for government guarantees, subsidies or financing. So that the private sector will not shoulder all the costs of a PPP project which it will seek to recover by way of tariffs, government subsidy or financing may be made available. Funds may be drawn from the Official Development Assistance or the National Budget. Government may also opt to infuse equity, or extend subsidies or provide direct government guarantees for solicited projects. Government, multi-lateral funding institutions, and banks may also put up guarantees or sub-guarantees for political risks.

The proposed creation of a special fund to defray the cost of compensation to project proponents which enter into BOT contracts, concession agreements or other contractual agreements with any national government agency or GOCC in the event that the government agency or GOCC fails to comply, or is prevented from complying, with its obligations under the aforementioned contracts or agreements, would result in lower tariffs. However, it is proposed that the protection against regulatory risks should cover all Branches of Government.

Government incentives. Government may provide income tax holidays, tax credits, tax exemptions, and other incentives not only to attract more bidders but also to ease potentially high tariffs if there were no such benefits.

LGU-incentives or tax exemptions. Aside from incentives that may be extended by the National Government, host or concerned local governments may provide incentives and tax exemptions. The 1991 Local Government Code permits LGUs to do these.

More components for the private sector. BOTs, JVs and Concessions are multi-component PPP modes. They consist of several outputs, namely, design, construction, operation and maintenance, and financing. If the private sector is allowed to assume these outputs, and not just one output, then it would have greater flexibility in meeting the key performance indicators.

Private sector innovation. Having more control over the components of outputs, the winning bidder can innovate within the parameters of the PPP as embodied in the PPP contract. Whole-life costs of a PPP project may be reduced by private sector efficiencies and innovation.

The choices lie with the Administration. We hope they make the right ones.

(Forensic Law and Policy Strategies, Inc. or Forensic Solutions is a think tank offering services in the fields of policy, law reform, advocacy and governance. The group provides forensic study and viable policy options, giving our clients a crucial advantage in navigating executive, administrative, legislative and judicial inquiries. Forensic Solutions recently published a book on Knowing PPP, BOT and JV: A Legal Annotation. Together with the Center for Global Best Practices, it conducted two seminars on PPP.)

 




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