PPP: Public - Private Partnerships

End project guarantees, gov’t urged - SMC

MANILA, Philippines—San Miguel Corp. (SMC) is urging President Benigno Aquino III to drop all state guarantees for projects under the public-private partnership (PPP) program, including railroads, toll ways, seaports and airports.

“The Philippine government should not make any guarantee in any form. It should only make sure that the bidding process is fair and square,” SMC president Ramon S. Ang said in a recent interview with the Philippine Daily Inquirer at the SMC headquarters in Ortigas Center in Pasig City.

Ang urged Mr. Aquino to ensure that the winning bidder provide the best service at the least cost to the public for the entire 25-year term of the build-operate-and-transfer contract.

The President should bid out all the PPP projects in the first quarter and compel all winning bidders to finish the projects within the next three to five years or face forfeiture of their contracts, he said.

During the launch of the PPP projects last year, Mr. Aquino said the government would protect investors from regulatory risk and not market risk.

“If private investors are impeded from collecting contractually agreed fees—by regulators, courts or the legislature—then our government will use its own resources to ensure that they are kept whole,” he said in a speech at the opening of the public-private partnership conference in Pasay City on Nov. 18, 2010.

The President said the government would compensate the private concessionaire for the difference between what the tariff should have been under the formula, and the tariff which it was actually able to collect.

South Luzon Expressway

Mr. Aquino was referring to the Malaysian-backed South Luzon Tollways Corp. (SLTC), which was earlier stopped by the Supreme Court from implementing higher toll rates on the South Luzon Expressway.

SLTC recently raised its rates, aimed at helping it recover the minimum of P12 billion it spent to rehabilitate and modernize the road from Alabang, Muntinlupa, to Sto. Tomas, Batangas.

Ang said the government should stop offering state guarantees just to make infrastructure projects attractive to local and foreign investors because these were viable and Mr. Aquino’s high trust rating has made doing business in the country attractive anew.

Although Ang cited 30 PPP projects, the current administration has revealed an initial list of 10 items—Metro Rail Transit (MRT)-Light Rail Transit expansion (P70 billion); MRT Line 2 extension (P11.29 billion); Bohol airport (P7.54 billion); Puerto Princesa Airport (P4.36 billion); North Luzon Expressway-South Luzon Expressway link (P21 billion); Cavite-Laguna Expressway-Manila side section (P10.5 billion); and Daraga International Airport (P3.07 billion).

Burden on taxpayers

The SMC president said previous state guarantees that covered proponents from legal and financial risks had mostly turned out to be a burden on the public as the government usually ended up shouldering the bulk of the costs and passing these on to consumers in the form of higher fares and toll or higher taxes.

“If this is the case, the government can implement the project itself rather than let a private company make a killing at the expense of the public,” Ang said.

Huge losses from subsidized fares on the Light Rail Transit and Metro Rail Transit lines in Metro Manila have prompted Malacañang to give the go-signal to increase fares.

In certain big build-operate-transfer (BOT) projects in the past, the government guaranteed the foreign debt of private firms and losses from currency devaluation.

Ang said all proponents should keep their profit goals modest and their period of recovering their capital much longer to ensure that the railway systems, toll ways, seaports and airports would be affordable to a broad range of consumers.

Reasonable return

Ang said a reasonable return on investment would be about 10 percent per year.

He favored stretching the period for recovering capital to the entire 25-year term of the project, with an option to amortize part of the loan in an extension.

Ang said a proponent could put in as low as 20 percent of the project cost as capital and borrow the rest at very low interest rates and at long-term repayment schemes while still getting a reasonable return without unduly burdening the public.

He cited as an example the North Luzon Expressway which had a toll of P10.25 from Manila to Angeles City when it was still under Philippine National Construction Corp. After it was “asphalted” by an Australian firm, the new operator charged P130 for the same stretch of road, he said.

“If I bid for it and charged 20 percent more, that would be abusive. If I increase it by 10 times, that is out of place,” Ang said.

The SMC head said a bidder’s intention would make all the difference for the public paying either P50 or P500 for the use of a toll road from Manila to Bicol.

Low toll, fare

“Of course, the public would suffer if the winning bidder wants to get his capital at the shortest time possible and maximize his earnings for almost the entire duration of the project. The government should insist on striking a balance between profit and public service. I believe that the public should benefit right away from these projects through low toll fees and fare rates,” Ang said.

According to him, proponents know that the PPP projects would increase the value of their real estate holdings. They should “spread the wealth” by sharing the gains from their properties by reducing the amount they charge their users, he said.

“They have to compute the appreciation in their real estate valuation because this is part of their profits. This way they don’t have to charge spectacular rates in their businesses,” he said.

Ang also said the proponents should not give excuses for demanding that the state guarantee their profits in undertaking PPP projects because low-cost and long-term financing was available.

All bidders are assumed to be good businessmen who are well aware of the risks involved in putting their money in PPP projects, he said.

Too often, Ang said, the government focused mostly on the time it would take over the project (after 25 years) rather than on ensuring that the winning bidder would deliver its service at affordable rates.

He said the new administration should also watch out for bad habits in bidding out BOT projects, such as allowing mere brokers or dummies to make a bid, settling for negotiated offers rather than pushing for competitive bidding, and allowing the BOT proponents to extend their contracts in the middle of their existing deals and without a new bidding.

To maximize the economic impact of the PPP projects, Ang said the President should award these as soon as possible (within the next three months) to ensure that these would be completed under his term.

Deter dummies, brokers

Ang said Mr. Aquino could deter dummies or mere brokers from taking over projects and waiting for financiers by rescinding their deals if they did not finish their projects within three to five years.

“Just imagine the multiplier effect of implementing all these projects at the same time. We will have millions of jobs created and the economy will be alive with activity for years from the suppliers to the subcontractors,” Ang said.

With a projected revenue of P518 billion (roughly $11.8 billion) and cash flow of P81 billion ($1.84 billion) this year, SMC will make a bid for all of the 30 PPP projects planned by the Aquino administration, Ang said.

“When we do business with the government, it should not only be for ourselves but for the good of the country. We will make sure that our bid will be very low,” said Ang who has taken pride in being able to effect more competition in government bidding with SMC’s entry into areas outside its traditional business of beer and food.

Over the past six years, SMC has rebuilt itself from a food and beverage giant into a diversified holding firm with interests in airports, trains, mining, oil and power.

For details on RA 9646 or RESA Law, please visit www.ra9646.com. RA9646.com is the central depository of all updates on the new law for the practice of real estate service in the Philippines. The Law has been passed and signed last June 29, 2009. Its implementing rules and regulations (IRR) has been published in July 2010 making the law fully operational as of August 08 2010.

source: Inquirer, Jan 24 2011