Fiscal issues, Global issues, SONA 2017

SONA 2017: What’s in it for China in Duterte’s ‘Build, Build, Build’?

President Rodrigo Duterte with President Xi Jinping of China (Photo from Etienne Oliveau/Reuters, Aljazeera)

In his second State of the Nation Address (SONA), President Duterte as expected mentioned his grand infrastructure plan. There was special mention of China that Duterte said generously offered money for his “Build, Build, Build” program.

“If your Congress has no money, we will give you money” was what the Chinese supposedly told him, the President said in his speech.

Duterte in his SONA made the Chinese offer look like simple altruism and generosity. But in reality, on top of making Chinese imperialism appear benign, using soft power by bankrolling the country’s hard infrastructure profits China’s economy in various ways.

No debt crisis?

The concerns that Duterte’s infrastructure plan would result in a heavy debt burden are valid. After all, the price tag of what economic managers call as the “boldest infrastructure development program” in recent history is a whopping Php8 to 9 trillion.

Economic managers, however, assure the public that they have everything figured out. The plan is that government appropriations, not debt, will mainly fund the so-called “golden age of infrastructure”. The Finance department’s tax reform package aims to raise Php157 billion in additional revenues a year; the version passed by the House could generate Php130 billion.

At Php8 to 9 trillion, the annual cost of building infrastructure from 2017 to 2022 would be Php1.6 to 1.8 trillion. Clearly, the additional revenues from the tax package will not be enough even as it bleeds the poor dry.

In reality, the infrastructure program would be mostly debt-funded. But again, the public is being told that a debt crisis will not rear its ugly head. In fact, the Budget department expects that by the end of President Duterte’s term, the debt-to-GDP ratio would even fall to 38.1% from 40.6% in 2016.

Such optimism hinges on the economy not only sustaining its expansion but posting even more rapid growth. To outpace debt, the gross domestic product (GDP) must grow by 6.5 to 7.5% this year and 7-8% between 2018 and 2022.

It is tough to be as upbeat as administration officials given the structural weaknesses of the economy and amid a global crisis. For this year, debt watchers and creditors put Philippine GDP growth at 6.4 to 6.8% – below the range being hoped for by the economic managers. That’s the most bullish the projections could get.

Whatever rate the GDP grows by, the budget deficit is sure to increase as government ramps up infrastructure spending. The plan is to let the budget shortfall climb to 3% of GDP as infrastructure spending reaches as high as 7.4% of GDP.

While a bigger deficit means greater borrowing, there is supposedly no need to be anxious as the Budget department claims they will borrow in a fiscally sustainable way. Eighty percent of the deficit would be funded by domestic debt and only 20% foreign. Such borrowing mix lessens foreign exchange risks that could cause public debt to balloon.

Chinese and Japanese loans

But a review of what the Duterte administration has identified as its flagship infrastructure projects tells a different story. To be sure, the flagships – numbering 75 as of June – are just a fraction of the more than 4,000 infrastructure projects that government plans to do. They nonetheless represent the largest ones in terms of cost and are the top priorities for implementation.

Of the 75 flagship projects listed by the National Economic and Development Authority (NEDA), 48 will be funded by foreign debt or official development assistance (ODA). Only 14 will be bankrolled through the national budget or General Appropriations Act (GAA). Just two projects are planned to be implemented via public-private partnership (PPP) while 11 have yet to be identified which mode to use.

As of June, only 53 out of the 75 flagships have estimated costs totaling PhpPhp1.58 trillion. Of the 53, 41 are ODA-funded projects worth Php1.40 trillion. The remaining Php181 billion would be funded through the GAA. In other words, almost 89% of the total cost of projects with already determined amounts will be paid for by foreign debt. (See Tables below)

Flagship infra summary

Notes: ODA – Official Development Assistance; GAA – General Appropriations Act; PPP – public-private partnership; TBD – to be determined (Based on data from NEDA) 

Just nine of the 41 ODA-funded flagship projects have identified donors/creditors, based on NEDA’s June list. These are Japan with three projects worth Php226.89 billion; China, three projects (Php164.55 billion); South Korea, two projects (Php14.06 billion); and World Bank, one project (Php4.79 billion).

The Chinese and Japanese are backing the Duterte administration’s largest mega-projects, an indication of how the two economic behemoths see “development cooperation” as one of the key arenas of their competition in the region. Japan is funding the Php211.46-billion PNR North 2 (Malolos-Clark Airport-Clark Green City Rail); Php9.99-billion Cavite Industrial Area Flood Management Project; and the Php5.44-billion Malitubog-Maridagao Irrigation Project, Phase II.

Meanwhile, China is bankrolling the Php151-billion PNR Long-haul (Calamba-Bicol); Php10.86-billion New Centennial Water Source – Kaliwa Dam Project; and Php2.70-billion Chico River Pump Irrigation Project.

Although not yet identified in the latest NEDA list, various media reports also link Chinese and Japanese loans to other big-ticket rail projects. These include the Php134-billion PNR South Commuter Line (Tutuban-Los Baños); the Php230-billion Manila Metro Line 9 (Mega Manila Subway Project – Phase 1); as well as the Mindanao Rail Project, of which the first phase (Tagum-Davao-Digos) costing Php35.26 billion will be funded via the GAA. (See Table below)

ODA flagship 1

ODA flagship 2

ODA flagship 3.png

Source: NEDA

Download NEDA’s entire list here

Gains beyond interests

Over-reliance on debt is obviously problematic but by itself tapping concessional loans to build much needed infrastructure is not a wrong policy. Sadly, ODA is shaped not by genuine development cooperation but by the narrow agenda of lending governments and the corporate interests they represent. Thus, potential economic and social development gains for a borrowing country are greatly weighed down by bloated costs of ODA-funded infrastructure.

Big infrastructure lenders like China and Japan profit not only from the interests accruing from their loans to build rails and roads. The larger gains they make are from the conditionalities they tie to these loans such as requiring the Philippines to exclusively source from Chinese and Japanese firms the goods and services needed to build the rails and roads.

Lenders dictate the technology, design and construction of the infrastructure to accommodate their own suppliers and infrastructure firms. As such, Chinese and Japanese contractors are also favorably positioned to corner operation and maintenance contracts once the rail systems and other infrastructure are privatized under the Duterte administration’s hybrid PPP scheme.

Lastly, creditors also favor the development of infrastructure in areas where they have business interests. This explains the concentration of Japan-funded infrastructure in Central and Southern Luzon where export zones with Japanese investments are concentrated. China’s interest in building infrastructure in Mindanao is tied to its plantation and mining interests in the region.

All these make the cost of infrastructure development in the Philippines more expensive and the debt burden onerous. Tied loans for infrastructure development creates commercial opportunities for Japanese and Chinese companies that are otherwise not available to them. In China’s case, infrastructure lending in poor countries is even used to create employment for their own workforce at the expense of local labor.

At a time of prolonged global recession and slowdown in profit rates of the industrial economies, these opportunities become even more important. Alas, these opportunities only arise by undermining the debtor’s own development needs. ###

(This is a slightly revised version of an article first published as IBON Features)

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Economy, Privatization

‘Dutertenomics’: golden age of oligarchic and foreign interests in infrastructure?

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Duterte’s economic managers present “Dutertenomics” – a grand plan that they said will usher in a “golden age of infrastructure” (Photo by Marianne Bermudez/Inquirer.net)

Build, build, build” is said to be the foundation of the Duterte administration’s development plan, which his economic managers are packaging as “Dutertenomics”. The plan is supposed to usher in a “golden age of infrastructure”.

But despite the attempt at branding, Dutertenomics is neither new nor unique. Its cornerstone of massive infrastructure development is still built on the neoliberal agenda of opening up additional profit-making prospects for big local and foreign business, including through “development” lending, building and operating the infrastructure themselves and/or constructing facilities that would benefit their commercial interests.

Worse, the ambitious plan may not usher in a golden age of infrastructure but instead a golden age of oligarchic and foreign interests in infrastructure while the public bears more onerous financial burden arising from greater debts and taxes.

AmBisyon Natin

There is no denying of the urgent and huge infrastructure needs of the country, especially transport. The Philippines has the worst overall infrastructure and worst transport infrastructure (roads, railroads, port and air transport) among major countries in Southeast Asia, according to the 2015-2016 Global Competitiveness Report of the World Economic Forum (WEF). The intolerable traffic in Metro Manila and the state of disrepair of the public transport system illustrate the dismal shape of transport infrastructure in the country.

Thus, infrastructure, specifically the transport sector, has been made the cornerstone of Dutertenomics. It is a key component of AmBisyon Natin 2040, a vision to make the Philippines a “prosperous, predominantly middle-class society” that President Rodrigo Duterte has adopted as guide for long-term national development planning.

AmBisyon Natin listed priority sectors that include the development of infrastructure such as roads, ports, airports, bridges and communication (“Connectivity”) as well as housing and urban development. It also identified “investment in high-quality infrastructure to make the cost of moving people, goods and services competitive” as one of the policy instruments to make the aspirations of AmBisyon Natin a reality.

The Philippine Development Plan (PDP) 2017-2022 is the first medium-term plan anchored on AmBisyon Natin. Under this PDP, the Duterte administration aims to make its six-year term the so-called “golden age of infrastructure” with spending on infrastructure increasing substantially (i.e. 5.1% of gross domestic product or GDP in 2016 to 7.4% in 2022). Concrete and measurable indicators have been set for transport infrastructure (road, rail, air and water transport); water and power resources; and social infrastructure (classrooms, health centers, housing units).

(Download the PDP’s Chapter 1 – Introduction and Chapter 19 – Accelerating Infrastructure Development)

The “golden age of infrastructure” includes an initial list of 64 big-ticket projects for implementation or in the pipeline that are mostly transport infrastructure such as major road networks, railway systems, bus rapid transit systems, and airport and seaport modernization. These are on top of 15 ongoing infrastructure projects, which are either locally funded, with official development assistance (ODA), or through public-private partnership (PPP).

Hybrid and unsolicited PPP

PPP, which is essentially the neoliberal privatization of infrastructure development and commercialization of services, will continue to be the main program to meet the country’s infrastructure needs. The PDP will promote PPP by addressing “bottlenecks in PPP planning and implementation” and pursuing “reforms to enhance the business environment” to encourage investors. To do these, among the legislative agenda under the PDP is the amendment of the BOT Law and its implementing rules and regulations (IRR).

In the previous Aquino administration, such policy reform has taken the form of the PPP Act that will among others institutionalize state guarantees on financial and regulatory risks of PPP projects. (Read “Aquino’s PPP legacy”) In the current 17th Congress, bills to introduce the PPP Act and BOT Law amendment have already been filed in both chambers. At the Senate, Sen. Sonny Angara filed Senate Bill (SB) No. 951 (“PPP Act”) while at the House of Representatives Rep. Vilma Santos-Recto filed a counterpart proposal (House Bill or HB No. 1944). HB 2727 of Magdalo party-list Rep. Gary Alejano, meanwhile, aims to amend the BOT Law. There are also moves to introduce foreign investment liberalization through the PPP Act.

As of March 28, there are 15 awarded PPP projects worth Php310.51 billion, based on the latest status report of the PPP Center. Of these, four are completed and operational (Php31.77 billion); seven are under construction (Php150.01 billion); and four are under pre-construction (Php128.73).

The country’s richest and most influential oligarchs control these PPP projects. The San Miguel Corp. (SMC) group accounts for 45.9% of the total cost of ongoing and/or completed PPP projects as of March 2017. The Manny V. Pangilinan (MVP) and Ayala tandem, meanwhile, comprises 21.5% on top of MVP’s own projects comprising 18.9 percent. All in all, the SMC, MVP, and Ayala groups collectively control 10 of the 15 ongoing and/or completed PPP projects worth Php275.15 billion or equivalent to 88.6% of the total cost. (See Chart)

Blog 05 Dutertenomics infrastructure Chart

These same oligarchs are positioning themselves to corner more infrastructure projects as the Duterte administration promotes unsolicited projects and the so-called hybrid PPPs to push its grand infrastructure plan.

Unsolicited projects proposed by the big oligarchs now total Php2.6 trillion, mostly in the transport sector as they see opportunity in the traffic crisis. These big oligarchs take advantage of unsolicited projects to build infrastructure that they will not only profit from but would also benefit their other business interests (e.g. SM’s unsolicited proposal to build a Php25-billion toll road that will link its malls in Pasay and Makati). This further weakens the central role that government should be playing in rationally planning and deciding which key infrastructure projects are needed, where to put them, and how they serve the overall development plan.

Hybrid PPP, on the other hand, is a worse form of PPP because it puts even heavier load on the public sector than the already onerous burden it shoulders under a regular PPP. In a regular PPP, the private sector will raise funds to build the infrastructure, and then operate and maintain (O&M) it in a fixed period to recover investments and earn profits. In a hybrid PPP, the public sector will finance the construction of the infrastructure through official development assistance (ODA) loans and then give the O&M to the private sector. The public will thus be burdened with direct debt servicing for the ODA loans (in a regular PPP, debt is often a contingent liability), profit guarantees and other perks for the private operator, and high user fees.

With preference for unsolicited projects and hybrid PPP, and the pending Traffic Emergency Bill – supposedly meant to address the traffic crisis – the stage to favor certain big oligarchs is set. With emergency or special powers, the Executive could fast track the implementation of transport infrastructure projects through negotiated contracts in the pretext of solving the urgent traffic crisis.

Increased foreign role

Meanwhile, as bilateral relations with China warm up under Duterte, the administration is actively seeking Chinese financing for big-ticket infrastructure projects through bilateral ODA loans, as well as multilaterally through the China-led Asian Infrastructure Investment Bank (AIIB), to fulfill the so-called “golden age of infrastructure”.

Reports say that China is set to finance Php172.4-billion worth of infrastructure projects this year. This is part of the 15 projects identified for Chinese financing under the Duterte administration estimated at a total of $6.96 billion (Php349.92 billion). Earlier reports indicated that one of the projects that China will finance is the South Line of the North-South Railway Project (NSRP) for $3.01 billion (Php151.33 billion). China also expressed initial interest in bankrolling “Duterte’s dream” of Php218-billion, 830-kilometer Mindanao railway system.

Aside from China, other imperialist financial institutions are also lining up to fund Duterte’s “golden age of infrastructure”, also mostly in the transport sector. The Japan International Cooperation Agency (JICA) has committed to finance three mega-transport projects with a combined cost of $8.8 billion (Php442.42 billion). Eleven other projects are being pitched as well to Japan for possible funding including irrigation and flood control projects. These projects are: $4.3-billion initial phase of the Mega Metro Manila subway system connecting FTI in Taguig City to the SM North EDSA and Trinoma malls in Quezon City; the $2.7-billion commuter line extending to Los Baños, Laguna, the south line of the North-South railway project, and the $1.9-billion high-speed rail extending to the soon-to-rise Clark Green City of the North-South Commuter Railway connecting Tutuban in Manila and Malolos, Bulacan.

The US-controlled World Bank, on the other hand, is providing $64.6 million (Php3.25 billion) for the first line of the Metro Manila bus rapid transit (BRT) system.

With increased ODA borrowing to fund infrastructure development, Duterte’s economic team has been pushing for a package of tax reforms that would be shouldered more heavily by the poor and ordinary income earners. The tax reform package entails additional burden that includes higher value-added tax (VAT), expanded and higher excise tax on all petroleum products, as well as the sugar excise tax. While the poor bear the brunt of these reforms, the rich get tax benefits such as lower corporate income tax as well as tax cuts in real estate and property-related transactions. And these rich include the oligarchs that corner the infrastructure projects (including those to be funded by ODA) the costs of which the taxpaying public will shoulder.

In addition to financing PPP projects, increased role for foreign interests is expected as the push to further liberalize infrastructure development continues. The US, for instance, has renewed calls to lift constitutional restrictions on foreign investments to allow and encourage American firms to participate in the Duterte administration’s PPP program. Another route being promoted by the US for American involvement in PPP is through the relaxation of limits set under the Foreign Investment Negative List (FINL). Meanwhile, Duterte himself has said that he is supportive of lifting constitutional limits on foreign investments through Charter change (Cha-cha).

Already, the PPP Center under the current administration has launched a UK-funded (Php4.35 million) Development of Foreign Investment Framework Project that “will facilitate the legal and institutional push to further build a favorable PPP business environment for foreign investors”. The output of this project will be translated into inputs to the PPP Act and its IRR.

Another pending legislative proposal to allow full foreign participation in key infrastructure sectors is HB 446 that seeks to amend the Public Service Act and redefine public utility. When passed, it will open telecommunications, transport and power industries to 100% foreign ownership.

Policy issue of profit-driven infrastructure

Ongoing PPP/infrastructure/transport projects continue to burden the people. The Php62.7-billion MRT-7 project (SMC) – the second largest among active PPP projects – for instance, is fraught with onerous contractual terms that are disadvantageous to taxpayers (state guarantees on private debt, amortization payments, etc.) and end-users (guaranteed fare adjustments) while causing massive displacement among urban poor and farmer communities. The same thing is true with the LRT-1 (MVP-Ayala) PPP project. (Read “How MVP-Ayala will squeeze LRT 1 commuters dry”)

Ultimately, it all goes back to the policy issue of private sector and profit-driven infrastructure development that the so-called Dutertenomics promote. The country needs to urgently address its infrastructure crisis but as IBON has repeatedly raised in the past, infrastructure development for transport as well other key sectors carried out with profit-driven agenda contradicts and undermines the role of infrastructure in improving the living condition of the people and serving the overall economic development and general public interests of the country. ###

This article was first published as IBON Features

(Exchange rate used: Php50.2752 per US dollar, March 2017 average, BSP – http://www.bsp.gov.ph/statistics/spei_new/tab12_pus.htm)

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2016 elections, Cronyism & patronage, Privatization

#BeyondElections2016: PPP investors bet on presidential bets

Infog_PPP-low

Infographic from IBON Foundation

All presidential bets vow that they will continue and improve the public-private partnership program (PPP) of the Aquino administration. This, of course, is not a surprise. Oligarchs who bag these contracts and profit from infrastructure development are also the biggest backers of leading presidential bets.

Take San Miguel Corporation, for example. The diversified conglomerate admitted that it has been lending its private jets to some 2016 bets for their campaigning. SMC has already cornered four PPP contracts worth more than Php49 billion.

These include the Php24.4-billion Bulacan Bulk Water Supply Project and Php17.93-billion NAIA Expressway Phase 2 Project under the Aquino administration; and the Php69.3-billion MRT Line 7 Project and Php37.43-billion Metro Manila Skyway Stage 3 Project under the previous Arroyo administration.

San Miguel is eyeing another Php489.58 billion worth of PPP projects, which may be auctioned in the remaining months of the Aquino presidency or early on in the administration of the next President.

It’s how bureaucrat capitalism works. Oligarchs back presidential bids as “investment” and rake profits later through government contracts such as PPPs.

This reality is prominent in the upcoming polls as candidates assure investors, including foreign interests behind privatized infrastructure development, of PPP continuity. The only competition now is who among the presidential contenders will implement most efficiently the incumbent’s centerpiece economic program.

PPP delays

Opposition bets use the horrendous traffic in Metro Manila amid delayed transportation projects to stress the failures of the Aquino administration. Vice President Jejomar Binay, for instance, calls Aquino’s PPP program as “epicenter of failure”. For the aspirant who poll surveys say is the man to beat, the main issue is the “inexplicable delays” in the PPP program.

So far, Aquino has already awarded 12 PPP projects with a combined cost of Php196.53 billion. The amount is based on the PPP Center’s report as of 1 April 2016.

But out of the 12 awarded contracts, government has completed just two projects. These are the Php2.01-billion Daang Hari – SLEX Link Road Project and the Php16.43-billion PPP for School Infrastructure Project (PSIP) Phase I. One of the awarded contracts – the Php8.69-billion Modernization of the Philippine Orthopedic Center – even got derailed. This after the investor backed out citing delays in the release of certificate of possession for the project site.

Presidential bets promise to fast track the implementation of the PPP program. One is Senator Grace Poe who is neck and neck with Binay in the surveys. Poe claimed that when elected, she would finish seven airports through PPP in the first half of her term. These airport projects are in various stages of bidding under Aquino’s PPP program.

Poll uncertainties

Candidates are pressed to have greater clarity in their economic plans especially on PPP to assure interest groups like banks and investors. The Institute of International Finance (IIF), for example, said that compared to Poe and administration bet Mar Roxas, Binay is more populist. Thus, Binay could undermine the PPP program.

Responding to the US-based lobby group, the Vice President’s camp asserted they would, in fact, enhance the PPP program. A Binay presidency, they said, will revise the Build-Operate-Transfer (BOT) Law, pass a Right-of-Way bill, and address bureaucratic inefficiencies to hasten PPP implementation.

Indeed, the PPP program’s fate is one of the main concerns of the business community as the country transitions from the current administration to the next. For instance, the Philippine Chamber of Commerce and Industry (PCCI) asked Aquino to accelerate the implementation of PPP projects in the remainder of his term. PCCI said this will ensure that the next President can “hit the ground running” in terms of infrastructure development.

But the business community is also wary of political risks. Historically, pet infrastructure projects of the incumbent administration, when replaced by the opposing camp, are either delayed or totally scrapped. This early, the American Chamber of Commerce of the Philippines is urging the succeeding regime to continue “all properly awarded” PPP projects.

Contracts are often reviewed supposedly to protect public interest. In reality, however, the intention is to favor other business interests that have closer ties to the newly installed political camp.

The LRT-MRT common station controversy is illustrative of this. The common station was originally located near Henry Sy’s SM City – North EDSA in a deal forged during the Arroyo administration. It was part of the Php69.3-billion MRT Line 7 Project. But when Aquino took over, the station was moved to the TriNoma mall of the Ayala group, bundled with the LRT 1 project.

Assuring investors

Nonetheless, investors are practically assured of the PPP program’s continuity even with Aquino bet Roxas lagging behind in surveys. For one, PPP projects are exempted from the poll ban on public works, said the Commission on Elections (Comelec). This means that scheduled bidding of some projects will proceed as planned. The PPP Center targets to award at least three more contracts before Aquino steps down.

Further, top presidential runners have already said they would not just continue the program but also improve its execution. All candidates have committed as well to increase infrastructure spending from 4% to 5% of gross domestic product (GDP). This includes the budget to protect PPP investors from political and economic risks.

The administration is also moving to guarantee investors the program will not be easily reversed by whoever will come into power. Aquino already certified as urgent the proposed PPP Law to expedite it in Congress before the polls. The bill would consolidate, institutionalize and expand the PPP reforms started by Aquino, which are feared to undercut public interest. Among them is further weakening public institutions that regulate private investments.

Indeed, the coming election is crucial for PPP investors. The next administration will oversee the implementation of awarded contracts and steering rest of the projects lined up under the program. These include mega-projects such as the Php122.8-billion Laguna Lakeshore Expressway Dike Project and the Php170.7-billion North-South Railway Project (South Line).

Contracts of such magnitude require a government that is able to address regulatory and commercial risks, noted the International Finance Corporation (IFC). The World Bank investment arm also said that greater foreign participation must be encouraged. Thus, foreign and local business groups and creditors are closely watching how contenders will handle PPP issues like regulatory risk guarantees and more liberalization of infrastructure development.

Candidates court ordinary people for votes. However, no one talks about how they will continue to bear an increasing burden to promote the commercial viability of PPP projects. No one is confronting the flawed policy that has raised user fees in water services, power rates, transportation fares, toll fees, telecommunication rates, etc. No one is raising the issue of how privatized infrastructure and services remain dismal amid skyrocketing profits of a handful business groups. ###

(This post is an updated version of the article “Presidential bets vow PPP continuity amid business, foreign lobby” that was first published as IBON Features)

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Privatization, SONA 2015

SONA 2015: Aquino’s PPP legacy

(Short video produced by AlterMidya)

First published as IBON Features

“We have so many needs: from education, infrastructure, health, military, police and more. Our funds will not be enough to meet them… Our solution: public-private partnerships… From these public-private partnerships, our economy will grow and every Filipino will be the beneficiary… We will be able to fund public service in accordance with our platform.” 

– President Benigno S. Aquino III, State of the Nation Address (SONA), 26 July 2010

Five SONAs ago, President Aquino declared public-private partnership (PPP) as the key to many of the country’s needs. Ten PPP awarded projects worth Php168.9 billion later and one SONA left to give, how did Aquino’s centerpiece program fare? (An updated report – as of 22 July 2015 – from the PPP Center now pegs the total cost at Php189 billion, reflecting the Php20.1-billion adjustment in the cost of the Cavite-Laguna Expressway from Php35.4 billion to Php55.5 billion)

Aquino has been often criticized for the slow progress of his flagship infrastructure program. There are 15 more PPP projects under various stages of bidding with an indicative cost of Php549.4 billion. Measured against this, Aquino has only awarded 40% of the total number of projects identified. They are equivalent to less than a quarter of the overall indicative cost. Aquino, however, claims that with 10 awarded projects, his administration has already surpassed the six solicited PPP projects of the past three administrations.

Before he steps down, Aquino aims to award five more PPP items. The largest is the Php122.8-billion Laguna Lakeshore Expressway Dike. Like others in the PPP portfolio, the bid schedule for this mega-project has been moved by several months. As such, doubts persist on meeting the target of 15 awarded PPP projects.

But the number of contracts Aquino has sealed will not define his PPP legacy. His biggest contribution is the kind of PPP environment that his regime has began to build. Aquino made a three-decade old neoliberal scheme even more desirable to the local oligarchs and their foreign backers. He has paved the way for more and bigger privatization deals for his successor. Twenty-seven more projects in various stages of pre-bidding preparations are in the pipeline of the PPP Center.

The country, in fact, is recognized globally for its PPP program. UK-based Economist Intelligence Unit (EIU) recently named the Philippines as the “most improved country in Asia Pacific for PPP readiness”. Aquino’s reforms led to distinctions as “most-improved regulatory and institutional frameworks” and “improved investment climate and financial facilities”. Aquino made this possible through perks and guarantees unprecedented in the history of privatization in the Philippines.

Creating the most favorable climate for private investors has been one of the earliest and top concerns of Aquino. Less than a year into his term, economic managers started conducting consultations with business groups and foreign aid agencies on revising the Implementing Rules and Regulations (IRR) of the BOT Law.

Approved in October 2012, the revised IRR introduced new provisions that make the PPP program more palatable to private business. Chief of them are explicit provisions guaranteeing that PPP proponents will be able to collect the contractually agreed fees or charges that they can impose on the public, regardless of regulatory intervention that may affect (i.e. lower) such fees or charges.

This is contained both in the context of granting final approval of grant of the franchise by the regulator and of regulatory determination of tolls, fees, rentals and charges that the proponent can charge to the public. Such government guarantee is absent in the old 2006 IRR.

Back in November 2010 at the international PPP Summit that government organized, Aquino referred to this as “regulatory risk guarantee”. Before 200 foreign businessmen, Aquino said, “When government commits to allow investors to earn their return from user fees, it is important that that commitment be reliable and enforceable. And 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.”

An example is the so-called Deficit Payment scheme in the Concession Agreement (CA) Aquino signed with the consortium of Ayala and Pangilinan for the Php64.9-billion LRT Line 1 Cavite Extension and Operation & Maintenance project. The LRT 1 Deficit Payment scheme states that government will shoulder the disparity between the Notional Fare, which the Ayala-Pangilinan group is entitled to impose under the CA, and the Approved Fare that the Light Rail Transit Authority (LRTA) may grant.

Aquino likewise issued Executive Order (EO) No. 78 in July 2012 that mandates the use of Alternative Dispute Resolution (ADR) in all PPP contracts. ADR provides for alternative avenues outside of court to settle disputes or conflicts, which may arise during the contract lifetime of a PPP project. ADR includes conciliation and negotiation, mediation and arbitration. ADR makes for a more inviting climate for investors. Costs are shared and investors have a say in the final decision. The process is also less tedious since watchful and assertive public interest groups are shut out unlike in regular judicial courts or public hearings.

The arbitration mechanism in the CA of the Metropolitan Waterworks and Sewerage System (MWSS) with the Ayala and Pangilinan-led concessionaires is a form of ADR. Under it, investors and regulators sit down in a panel to settle dispute away from any form of public scrutiny, much less participation. The LRT 1 PPP contract also contains a provision on ADR.

The worst of Aquino’s PPP reforms, however, are yet to come. As a “continuing legacy for the people”, Aquino seeks to pass the PPP Act that will amend the 26-year old BOT Law. Lobbying for the PPP Act are the Joint Foreign Chambers in the Philippines (JFC) and the Makati Business Club (MBC). The bill has already been approved by the House committee on public works and highways. It is currently pending at the appropriations panel which will discuss the bill’s funding provisions.

When passed, the PPP Act will consolidate, institutionalize and expand the already outrageously investor-friendly reforms Aquino has initiated. Aside from institutionalizing EO 78 on the ADR, for instance, the PPP Act will also substantially further weaken the courts and regulatory bodies by directly restricting their mandate.

The PPP Act will disallow courts from issuing temporary restraining orders (TROs), preliminary injunctions and preliminary mandatory injunctions against practically all PPP-related acts. Court officials who will violate this would be expelled from the judiciary and face criminal and civil liabilities. While the Supreme Court (SC) can still issue a TRO, etc. against a PPP project, such order will only be effective for a maximum of six months.

Aside from weakening established judicial and regulatory processes that the public can resort to for protection, the PPP Act will also guarantee that public funds are available to protect the commercial interests of investors. It will ensure, for instance, that funds are accessible to finance government obligations arising from regulatory risk guarantees like LRT 1’s Deficit Payment Scheme through a Viability Gap Funding (VGF).

Moreover, the PPP Act will also institutionalize a Contingent Liabilities Fund (CLF) to be funded by foreign debt and local resources. Permanently appropriated, the CLF will ensure a steady source of public funds to meet government’s financial obligations arising from PPP contracts. Such obligations include performance undertaking where government guarantees payments for debts incurred by the private investor. One of the PPP projects that enjoy performance undertaking is the Php69.3-billion MRT 7 of presidential uncle Danding Cojuangco.

Remember the Ramos sweetheart deals with independent power producers (IPPs) that until today bleed the National Power Corporation (Napocor) dry? Those are also examples of PPP-related contingent liabilities. In 2011, the public debt arising from such liabilities still stood at US$16.73 billion despite a staggering debt servicing of US$18 billion since 2001.

Like his predecessors, Aquino justifies PPP because of limited public funds. But his proposed PPP Act will even further worsen government’s fiscal woes. Aside from the VGF and CLF, the PPP Act will likewise allow government to shoulder more than 50% of a project’s cost, lifting the cap under the current BOT Law. Perks like exemptions from local and real property taxes will be institutionalized as well for the big-ticket projects of the oligarchs like power plants, toll roads and mass transport.

Aquino has actually already given these generous perks to the Ayala-Pangilinan consortium in the LRT 1 PPP deal. Of the total project cost of Php64.9 billion, Aquino agreed to shoulder Php34.9 billion or 54% of the total. Government share includes expenses for right of way acquisition, purchase of additional coaches, civil works and construction of depots. The Ayala-Pangilinan group also enjoys real property tax exemptions reportedly costing Php64 billion.

Through his PPP program, Aquino has successfully built a legacy of completely surrendering public interest and the people’s sovereignty to profit-driven corporate agenda. His term will be remembered for making the Sy, Pangilinan, Cojuangco, Ayala business groups and the foreign interests behind them more powerful and richer than ever.
Meanwhile, commuters are forced to endure trains that break down every week and greatly risk their safety even as fares jumped big time. Consumers are forced to bear rising water rates amid questionable charges. Households are forced to cope with steep electricity bills, manipulated charges, and insecure power supply.

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Consumer issues, Privatization

Maynilad says 65% of rate hike will be used to pay for its income tax

 

Manny Pangilinan and his foreign backers and financiers, who have interests in LRT, MRT and Maynilad, must be grinning widely right now.

With the public still reeling from the huge LRT/MRT fare hike, Maynilad Water Services Inc. announced that it will soon implement a significant increase in its basic charge. The average increase is P3.06 per cubic meter. What makes this rate hike as awfully unjust as the LRT/MRT fare hike is that 65% of the increase (about P1.99 per cu. m) will be used to recover the income tax of Maynilad. This was disclosed by the water firm’s Chief Finance Officer as quoted in a news report.

This means that hapless consumers will continue to pay for the corporate income tax of a highly profitable big business that has been cashing in on a basic service. In 2013, Maynilad reported a core income of P7.53 billion. (See chart below) Since 2010, its core income has been growing by more than 16% annually. Maynilad’s rising profits are mainly pushed by ever increasing water rates due to periodic and automatic adjustments allowed in its Concession Agreement with the Metropolitan Waterworks and Sewerage System (MWSS). Since taking over in 1997, Maynilad’s water rates have already ballooned by more than 500 percent. Since 2010, its all-in tariff (basic charge plus other charges) has jumped by more than 40 percent, which could further go up when the higher basic charge is implemented.

Image from Metro Pacific

Image from Metro Pacific (Core earnings represents earnings associated with business operations, and exclude earnings from goodwill, gains or losses from nonrecurring items, pension gains, legal settlements or employee stock options; source: Investopedia)

But while it has been earning billions of pesos from onerous and skyrocketing water rates, Maynilad wants to further milk the consumers dry by passing on their obligation to pay income tax to their customers. How does Maynilad justify this patently scandalous practice? A direct statement from its Chief Finance Officer: “Siyempre ang negosyante, ini-invest niya ‘yung pera niya para may return. So ang usapan dito, magkano ba ang tubo na dapat kitain ng pera na ‘yun. Importante ‘yung computation ng taxes kasi kailangan natin malaman magkano ‘yung net na iuuwi.”

To recall, the MWSS-Regulatory Office (RO) disallowed Maynilad and Manila Water Co. from including income tax recovery in their computation of the basic charge. Maynilad and Manila Water separately challenged the decision through arbitration led by the International Chamber of Commerce (ICC), a dispute resolution mechanism established by the Concession Agreement. Manila Water is still awaiting the result of its own arbitration case as of this posting.

More than eight million Maynilad customers are supposed to enjoy a reduction in their monthly water bill. In its decision last September 2013, the MWSS-RO ordered Maynilad to cut its basic charge by P1.46 per cu. m (which shall be distributed in five tranches at P0.29 per cu. m. per year) Now instead of a rollback, consumers are faced with a big rate increase. (Download the MWSS-RO resolution here)

The income tax is actually just one of the various issues raised by the MWSS-RO against Maynilad and Manila Water. Another is the P1 per cu. m. currency exchange rate adjustment (CERA), which the regulators ordered Maynilad to discontinue charging to its customers since a similar recovery mechanism – the foreign currency differential adjustment (FCDA), which recently also pushed water rates up – is already being imposed by Maynilad. But apparently, because of the arbitration, the CERA will remain in Maynilad’s water bill, and is now tucked in the basic charge.

Arbitration further exposes the privatization of MWSS, the region’s largest public-private partnership (PPP) deal in the water sector, as greatly anti-people and contrary to public interest. The Maynilad case clearly shows that effective public regulation is a sham in a program like PPP that is heavily biased to private corporate interests. The MWSS privatization was designed precisely to undermine government regulation as decisions are ultimately made by an arbitration panel where the concessionaire and a representative of foreign business interests have a say. ###

For background/additional information and discussion:

PNoy and the Big Water monopolies

Water arbitration: Issues and implications

Water rate hikes: Maynilad, Manila Water want P153B in future income tax passed on to consumers

Manila Water, Maynilad’s multi-million “pa-pogi” also charged to consumers

Maynilad, Manila Water ads further expose anti-consumer MWSS privatization

PH water rates among Asia’s highest

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Consumer issues, Privatization

LRT/MRT fare hike and the Aquino admin’s irrational, baseless claims

Image from RILES Network

Image from RILES Network

On 4 January, the Department of Transportation and Communications (DOTC) will start implementing the controversial fare hike for light rail transit (LRT) 1 and 2 and metro rail transit (MRT) 3. The issues surrounding the fare hike have not changed, with the administration mouthing the same irrational and baseless claims to justify the increase. Meanwhile, the fare hike has been further exposed as merely benefitting big business interests. The privatization of LRT 1 as well as the DOTC admission that the fare hike will not be used to upgrade MRT 3 despite the many glitches and breakdowns illustrate this.

‘Distance-based fare scheme’

According to the DOTC Order No. 2014-14, the new formula that shall be implemented is Php11 base fare + Php1 per kilometer. It is similar to riding a taxi – the flag down rate is Php11 and the meter goes up by Php1 for every additional kilometer. The DOTC calls this a ‘distance-based fare scheme’ and is consistent with the so-called ‘user-pays’ principle.

Under this scheme, commuters of the light rail system are facing a significant increase in fares. An end-to-end trip in LRT 1 and 2 will cost commuters Php10 more. In MRT 3, the additional cost for an end-to-end trip is Php13. The fare hike ranges from 0-50% for LRT 1; 25-79% for LRT 2; and 30-87% for MRT 3, depending on the station of origin and destination. (See Tables 1, 2 and 3)

Table 1

LRT 1 old and new fares, single journey (Php)

From Baclaran to: Old New % increase
Edsa 15 15 0
Libertad 15 15 0
Gil Puyat 15 15 0
V. Cruz 15 15 0
Quirino 15 15 0
Pedro Gil 15 20 33
UN Avenue 15 20 33
Central Terminal 20 20 0
Carriedo 20 20 0
Doroteo Jose 20 20 0
Bambang 20 20 0
Tayuman 20 30 50
Blumentritt 20 30 50
Abad Santos 20 30 50
R. Papa 20 30 50
5th Avenue 20 30 50
Monumento 20 30 50
Balintawak 20 30 50
Roosevelt 20 30 50
Sources of data: LRTA and DOTC
Table 2

LRT 2 old and new fares, single journey (Php)

From Recto to: Old New % increase
Legarda 12 15 25
Pureza 12 15 25
V. Mapa 12 15 25
J. Ruiz 13 20 54
Gilmore 13 20 54
Betty Go-Belmonte 13 20 54
Araneta-Cubao 14 20 43
Anonas 14 25 79
Katipunan 14 25 79
Santolan 15 25 67
Sources of data: LRTA and DOTC
Table 3

MRT 3 old and new fares (Php)

From North Avenue to: Old New % increase
Quezon Avenue 10 13 30
GMA-Kamuning 10 13 30
Cubao 11 16 45
Santolan 11 16 45
Ortigas 12 20 67
Shaw Boulevard 12 20 67
Boni Avenue 12 20 67
Guadalupe 14 24 71
Buendia 14 24 71
Ayala Avenue 14 24 71
Magallanes 15 28 87
Taft 15 28 87
Sources of data: LRTA and DOTC

(Download the complete fare matrix for LRT 1 stored value and LRT 1 single journey; LRT 2 stored value and LRT 2 single journey; and MRT 3)

The main reason cited by the DOTC for the fare hike is the need to cut down government subsidies for the light rail system. Supposedly, government is subsidizing 60% of the cost for each passenger of LRT 1 and 2, and 75% for each MRT 3 passenger. The average fare for LRT 1 and 2 is Php14.28, implying that the ‘actual cost’ is around Php35.70. This results in a deficit of Php21.42, which represents government subsidy per passenger. Similarly, the average fare for MRT 3 is Php12.40, with the actual cost at about Php49.60 and government subsidy at Php37.20 per passenger.

Authorities estimate that around Php2 billion in such subsidies will be freed up due to the fare hike. These savings, said the DOTC, can be used for ‘development projects and relief operations’ in areas outside Metro Manila to benefit those that do not use the LRT and MRT.

Irrational and baseless

But this argument is irrational and baseless.

First, it is wrong to pit the interest of LRT/MRT commuters against the interest of those from outside Metro Manila. It’s like saying that taxes from Metro Manila should not be used to pay for the cost of building and running public hospitals in Mindanao because the people of Metro Manila do not use the said facilities. Or that government support to Mindanao’s public hospitals should be reduced, and the money be used instead for relief and rehabilitation of typhoon victims in Metro Manila. Such argument eliminates the role of government in raising revenues and distributing them to fund the various needs of the people, regardless of where they are, such as key infrastructure like mass transportation and social services like hospitals.

Second, government should support the LRT/MRT as a mass transportation system. It offers social and economic benefits that even the DOTC recognizes: “Most urban railway systems in the world are not financially viable, but are implemented for their socio-economic benefits. Our Manila Light Rail Transit (LRT) systems promote the use of high-occupancy vehicles, thereby reducing traffic congestion on the corridors served, local air pollution and greenhouse gases emissions. Besides the substantial savings in travel time cost of LRT riders, the LRT systems reduce infrastructure investment in Metro Manila road expansion”. (See “Fare Restructuring Executive Report”)

When monetized, it is possible that the benefits far outweigh the government subsidies as related literature suggests. In its study on German rail subsidies, Swiss researchers found out that rail upgrades resulted to about 1.75 billion euros in benefits from road accidents prevention and lower nitrogen emission. (See “Does Supporting Passenger Railways Reduce Road Traffic Externalities?”)

The Japan International Cooperation Agency (JICA), in its separate study, calculated that traffic congestion in Metro Manila costs Php2.4 billion daily in 2012. With a reliable public transport system comprised of a large and efficient railway system, the losses can be reversed. Government can even save as much as Php4 billion daily by 2030, according to JICA. (See “Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas”) Thus, instead of reducing the subsidies, government should even invest more in the expansion and development of the rail system.

Third, commuters have already been bearing their share of the burden by paying for the full cost of operation and maintenance (O&M). The farebox ratio or the proportion of fare revenues to total O&M cost measures this. A farebox ratio of 1.0 means that fare revenues cover 100% of O&M cost. From January to September this year, the average farebox ratio of LRT 1 and 2 is pegged at 1.10. Meanwhile, latest publicly available data show that the MRT 3 has a farebox ratio of 1.17 in 2012.

In relation to O&M costs, Filipino rail commuters actually pay more than commuters in North America and Europe where the public transportation system is heavily subsidized. In the US, for instance, the farebox ratio ranges from 0.12 to 0.71. In Canada, its 0.39 to 0.78; Spain, 0.41 to 0.90; France (Paris), 0.30; Germany (Berlin), 0.17; and the UK (London), 0.91. (See Farebox recovery ratio, Wikipedia)

Fourth, government expenses in LRT/MRT are bloated not because of low fares. As just mentioned, current fares, in fact, already pay for the cost of O&M. In the case of MRT, the costs swelled because of the onerous financial obligations of government arising from its build-lease-transfer (BLT) contract with the privately owned MRT Corporation (MRTC). Under this deal, government agreed to pay for the guaranteed annual 15% return on investment (ROI) of the MRTC in the form of equity rental payments (ERP), as well as the settlement of MRTC’s tax liabilities.

These financial obligations under the BLT comprise about 81% of total MRT 3 expenses, while only 19% go to O&M (based on 2012 latest available data). (See Table 4) The DOTC admitted that the MRT fare hike would go not to the much-needed improvements of the infrastructure, amid glitches and breakdowns, but to serve government’s questionable financial obligations to the MRTC. Note that half of the projected Php2-billion ‘savings’ that government expects to generate from the fare hikes will come from the MRT.

Table 4

Summary of MRT 3 financial operations, 2012

Items MRT % distribution
Expenses (Php billion) 9.33 100.0
     Opex 1.82 19.5
     BLT financial obligations 7.51 80.5
         Taxes, duties & fees 2.01 21.5
         Equity Rental Payment & admin costs 5.50 59.0
Revenues (Php billion) 2.16 100.0
     Rail revenues 2.14 98.8
     Non-rail revenues 0.03 1.2
Farebox ratio (rail revenues/opex) 1.17
Source of data: DOTC

For LRT 1 and 2, bulk of the expenses goes to debt servicing with more than 47% and depreciation of the infrastructure with almost 16% (also based on 2012 data). (See Table 5) Government, through people’s taxes, shoulders these expenses since the LRT system is a public investment. But what makes the fare hike more unjust, particularly in the case of LRT 1 that has been recently privatized, is that the people will bear an increasing share of the debt-servicing burden even as the system generates private profits for the consortium of the MVP-Ayala group (which won the LRT 1 public-private partnership or PPP project) and their foreign backers and partners. Indeed, in the context of the PPP, LRT 1 commuters and all taxpayers (including those who do not use the LRT 1) are oppressed with regular and automatic fare increases and profit guarantees and generous tax exemptions granted by the Aquino administration to the MVP-Ayala group. LRT 2, which is also in the PPP pipeline, will soon be under a similar situation.

Table 5

Summary of LRT 1 & 2 financial operations, 2012

Items LRT 1 & 2 % distribution
Expenses (Php billion) 8.37 100.0
     Opex 3.03 36.2
     Depreciation 1.33 15.9
     Capex 0.06 0.7
     Financial obligations 3.95 47.1
         Loan payments 2.43 29.1
         Interest expenses 1.51 18.1
Revenues (Php billion) 3.67 100.0
     Rail revenues 3.44 93.8
     Non-rail revenues 0.23 6.6
Farebox ratio (rail revenues/opex) 1.13
Source of data: DOTC

Applying these data to the estimated full cost that LRT 1 and 2 and MRT 3 passengers must pay will suggest that:

  • Of the Php49.60 per passenger that represent the full cost of an MRT 3 ride, about Php40.18 represent the onerous BLT financial obligations of government. This means that without such onerous obligations, the cost would only be Php9.42 per passenger, Php2.98 smaller than the current average fare for MRT 3 of Php12.40; and
  • Of the Php35.70 per passenger that represent the average full cost of an LRT 1 and 2 ride, about Php22.49 represent debt servicing and depreciation. If these will not be passed on to the commuters, the cost per passenger would only be Php13.21, Php1.07 lower than the current average fare for LRT 1 and 2 of Php14.28.

Clearly, there is no need for a fare hike if only government will fulfill its mandate of providing a reliable and affordable mass transportation system and avoid passing on to the commuters unjust, onerous and unnecessary burden. So why then is government adamant in pushing the fare increases?

PPP and the user-pays principle

The Aquino administration’s PPP program is the underlying reason for the LRT/MRT fare hike. President Aquino announced the supposed need for a fare hike in his first State of the Nation Address (SONA) in 2010 together with his declaration of PPP – including for Metro Manila’s light rail system – as his administration’s centerpiece economic program. A fare hike and mechanisms to automatically implement and guarantee fare adjustments are meant to make PPP for the light rail system palatable to private investors.

The so-called ‘user-pays’ principle that the DOTC cited in its order is a neoliberal principle that simply means government will no longer be responsible in ensuring public access to LRT/MRT as a key infrastructure and public good. Subsidies will eventually be totally eliminated and commuters have to pay for the full cost, i.e. operation, maintenance, capital expenditures, debt servicing, etc. that would push fares to onerous and exorbitant levels. A review of the concession agreement between the Aquino administration and the MVP-Ayala consortium for LRT 1 shows how the user-pays principle will operate and oppress the commuters and general public. It is unjust because fares in LRT and MRT as a mode of mass transportation and as a public good should be premised on the people’s ability to pay and overall economic and social benefits, and thus should be supported through a progressive distribution of public resources.

Private profits at public expense

A closer examination of the profile of LRT/MRT commuters will further illustrate the oppressiveness of the user-pays principle while further supporting the need for a public good approach to Metro Manila’s light rail system. A previous study by JICA showed that almost 32% of LRT/MRT users during weekdays are students; 49% are employees and workers; and almost 10% are unemployed. This means that 9 out of 10 LRT and MRT commuters are ordinary income earners, students and jobless/job-seekers, and need substantial government support. (See “Chapter 8: Passenger Ridership Characteristics and Origin-Destination Patterns,” Mega Manila Public Transport Study, April 2007)

While commuters are burdened with unnecessary and oppressive fare hikes, big business interests will cash in big time from LRT/MRT. These business interests have close ties with the Aquino administration and in fact are the leading players in the PPP program of government. The MVP group, which also represents Indonesia’s Salim business empire, has economic interests in MRT 3 and together with the Ayala family and Australian investment giant Macquaire, will expand, operate and maintain LRT 1 through the Light Rail Manila Consortium (LRMC).

Meanwhile, the MVP-Ayala group is also positioning itself to corner the LRT 2 PPP deal, which is up for bidding this year. Other prospective bidders include San Miguel Corp. (SMC) of presidential uncle Danding Cojuangco and his right hand man Ramon S. Ang, and Japan’s Marubeni Philippines Corp. as well as other big local tycoons such as Aboitiz, Consunji and George Ty.

Petitions at the SC

Various groups have already expressed plans to question the LRT/MRT fare hike before the Supreme Court (SC). It is interesting to see how promptly the SC will act on the petitions that will be filed considering the urgency of the matter. Note that every day that passes without a temporary restraining order (TRO) on the new fares means millions of pesos are being collected from the commuters. These may no longer be returned to them in case the SC decides against the fare hike. It is extremely necessary, therefore, that the SC immediately issues a TRO to mitigate the harm on the commuters.

Another issue that must be closely watched in relation to the SC is the LRT 1 concession agreement. Assuming that the SC issues a TRO and later declare the fare hike illegal, this will not prevent the MVP-Ayala group from still collecting their additional revenues from the fare hike through ‘deficit payments’ from government under the LRT 1 PPP deal. This will make the SC decision practically futile unless the concession agreement between the MVP-Ayala group is also declared illegal. ###

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Cronyism & patronage

Presidential pork, election budget and Aquino cronies

Image from the DBM website

Image from the DBM website

Massive presidential lump sums and discretionary funds in the 2015 National Expenditure Program (NEP), along with a redefined savings, expose the proposed P2.6-trillion budget to abuse by the Aquino administration. It is vulnerable, in particular, to patronage and electioneering by the ruling Liberal Party (LP). The LP is desperate to bolster the low popularity of its president-on-leave and perceived 2016 presidential bet – Department of Interior and Local Government (DILG) Secretary Mar Roxas. Local government units (LGUs), including the barangays, play a key role in ensuring the electoral victory of a presidential candidate. With enormous pork barrel-like funds at Aquino’s disposal, the LP and Roxas have the resources to buy the political loyalty of governors, mayors and barangay captains for the 2016 presidential race. Vice President Jojo Binay may be the most popular choice right now as the next Chief Executive according to various polls, but Roxas boasts of a bottomless election war chest.

Thus, we see in the 2015 NEP mammoth increases in the administration’s planned spending for LGUs, many of which will be directly handled by Roxas as DILG head. A glaring example is the huge 80% increase in lump sum allocations for LGUs – from the current P17.3 billion to P31.1 billion next year. The amount includes P27.9 billion in LGUs’ Special Shares in Proceeds of National Taxes and P3 billion in Local Government Support Fund (LGSF), including P2.8 billion under the controversial Grassroots Participatory Budgeting (GPB) scheme and P200 million for “financial assistance to support various priority programs and projects”. The balance is comprised of a “death benefit fund” for barangay officials worth P50 million and shares in proceeds of fire code fees pegged at P200 million. The P31.1-billion LGU allocation is part of the P48.1 billion that Department of Budget and Management (DBM) Sec. Butch Abad has admitted as lump sum in the 2015 NEP. The remaining P17 billion is composed of P14 billion in disaster fund, P1 billion in rehabilitation fund, and P2 billion as presidential “contingent” fund. These amounts pertain to DBM-admitted lump sums; to be sure, much larger discretionary lump sums are tucked in various items of the NEP.

But another feature of the NEP seldom discussed is how the proposed spending plan, including presidential lump sums, will be used to support rich families and business groups with close ties to the Aquino administration. Through budgetary support for the Public-Private Partnership (PPP) program, these elite families and groups, and their foreign partners and patrons, will continue to receive presidential favors under the pretext of infrastructure development. Indeed, the proposed 2015 budget will be used not only to promote the political interests of LP’s presidential wannabe; it will also be used to promote the economic interests of presidential cronies.

Some P57.2 billion in public funds have been allocated in the 2015 NEP to guarantee the profits of investors participating in Aquino’s PPP program, pay for an onerous PPP contract, and facilitate the implementation of more PPP projects. The amount includes: (a) P30 billion for the Risk Management Program (RMP); (b) P10.9 billion for the Department of Public Works and Highways’ (DPWH) PPP for Infrastructure Projects; (c) P7.4 billion to support the LRT 1 and LRT 2 extension projects of the Light Rail Transit Authority (LRTA); (d) P4.7 billion to pay for government obligations under its Build-Lease-Transfer (BLT) deal with the Metro Rail Transit Corp. (MRTC); (e) P2.7 billion for the Department of Transportation and Communications’ (DOTC) PPP for Transport Projects; and (f) P1.6 billion for the Department of Education’s (DepEd) PPP for School Building Projects.

The P30-billion RMP, according to the NEP, is meant to “manage the National Government’s fiscal risks and enhance the country’s credibility among potential PPP proponents”. Executive agencies and departments as well as government-owned and -controlled corporations (GOCCs) can avail of the RMP fund to “cover commitments made by, and obligations of, the National Government, in the concession agreements relative to PPP projects”. The amount shall also be tapped to pay for all the obligations of a GOCC in concession agreement covered by a performance undertaking or any similar instrument issued by the National Government. A performance undertaking usually involves government assuming debt or other financial obligations related to a PPP project. One of the projects covered by the Aquino administration’s performance undertaking is the P62.7-billion MRT 7 of presidential uncle Danding Cojuangco and his right hand man Ramon S. Ang.

Aside from performance undertaking, RMP will also cover “contingent liabilities arising from regulatory risks assumed by the National Government”. One project that enjoys Aquino’s regulatory risk guarantee is the P64.9-billion LRT 1 extension and privatization of the Ayala family, a longtime ally of the Aquinos, and the group of presidential supporter Manny V. Pangilinan (MVP) and his Indonesian patron, the Salim family. Under the concession agreement that will be signed with the Ayala-MVP group, if the notional LRT 1 fares stipulated in the contract are lower than actual or approved fares, government will pay the difference through a so-called Deficit Payment Scheme. Notional fares refer to the adjusted fares as scheduled in the concession agreement. Such situation may arise, when, for example, a regulatory body or local court intervened and prevented the collection of the notional fare. To fulfill its deficit payment obligation with the Ayala-MVP group, which is essentially a profit guarantee, government will disburse from the RMP fund paid for by the people’s taxes. The RMP is actually just one of the many favors that Aquino is giving the Ayala-MVP group in relation to the LRT 1 project. As part of the contract, the common station that will link the LRT 1, MRT 3 and the soon-to-be-built MRT 7 was taken away from Henry Sy’s SM North and moved to the Ayala’s Trinoma Mall. (The SM group questioned this before the Supreme Court and got a temporary restraining order or TRO. In response, the DOTC said they might just build two common stations to accommodate Henry Sy and the Ayalas.) The Ayala-MVP group is also exempted from paying real property taxes, which government agreed to shoulder and could reach P64 billion throughout the 32-year concession agreement. These are on top of the P5-billion startup subsidy and P34.9 billion in loans that government will borrow for the project.

Meanwhile, the P10.9 billion allocated for DPWH’s PPP for Infrastructure Projects will be used to cover the costs of right of way (ROW) acquisition and relocation of affected communities. The projects identified in the NEP where this fund will be used include those controlled by the same groups with close presidential ties such as San Miguel’s P15.52-billion NAIA Expressway Project and P18.1-billion Tarlac-Pangasinan-La Union Toll Expressway Project, and the Ayalas’ P2.01-billion Daang Hari SLEX Link Road Project. Similarly, the DOTC’s P2.7-billion PPP Transportation Infrastructure Project fund will be used for ROW costs particularly for the P2.5-billion Integrated Transport System, which San Miguel, Ayala, MVP and Henry Sy, among others, are also eyeing. Meanwhile, DepEd’s P1.6-billion PPP for School Building Projects 2015 fund will be used for the amortization or lease payment of the total project costs of school buildings constructed by Henry Sy-affiliated Megawide Corp. and other firms.

P4.7 billion under the proposed 2015 PPP budget will go to the servicing of onerous contractual obligations with the MRTC, which is 48% controlled by the MVP group. The BLT contract, a PPP deal signed during the Ramos administration, tied the national government to paying Equity Rental Payments (ERP) to MRTC for its guaranteed 15% return on investment (ROI). Instead of rescinding, or at least renegotiating, the patently unfavorable contract with MRTC to build and operate the MRT 3, the Aquino administration continued to honor it because doing otherwise would undermine its PPP program. To supposedly correct the situation, Aquino has set aside P53.9 billion in the 2015 NEP’s unprogrammed appropriations to buy out the MRTC and scrap the BLT. But this approach means government will shell out more people’s money while legitimizing the illegitimate financial obligations with the MVP group.

Lastly, the P7.4 billion allocated for LRT 1 and LRT 2 extension projects will be used to support the privatization of both lines. The Ayala-MVP group will take over LRT 1, as already mentioned, soon. On the other hand, the LRT 2 operation and maintenance project, estimated to cost P14.3 billion, is scheduled for bidding within the year or in early 2015.

These planned expenditures show how public funds, raised mainly through taxes of ordinary wage earners and consumers, are being wasted and drained not only through corruption and political patronage but also through questionable economic policies that only benefit a favored few such as big business groups involved in PPP projects.

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SONA 2014

Deceptive PPP claims in SONA

Contrary to President Aquino's SONA claims, government continues to provide incentives for investors to build our infrastructure needs. (Photo from here)

Contrary to President Aquino’s SONA claims, government continues to provide incentives for investors to build our infrastructure needs. (Photo from here)

Infrastructure development through public-private partnership (PPP) was among the highlights of President Aquino’s fifth State of the Nation Address (SONA). Thanks to good governance, we no longer need to offer perks for investors to build our infrastructure needs, said the President. Thanks to good governance, the days of state-guaranteed private profits to entice PPP bidders are gone.

If the private sector wants to build our airport or highways, they must be willing to pay a premium, Aquino pointed out. The winning bidder in the Mactan-Cebu International Airport Passenger Terminal Building paid government P14 billion. The private contractor in the NAIA Expressway Project Phase 2 shelled out P11 billion.

But contrary to the SONA claims of Aquino, government continues to provide incentives to PPP investors. Some of these perks are even more generous than those offered by previous administrations. In addition, Aquino’s supposed “good governance” has nothing to do with investors paying a premium to bag PPP contracts. Their bidding decisions are always determined by how profitable or strategic the projects are.

Let us take a look again, for instance, at the P64.9-billion LRT Line 1 Extension and Operation and Maintenance project. This PPP contract will be awarded soon to Metro Pacific Investments Corp. (MPIC) and Ayala Corp. It is a sweetheart deal. Aquino would not just guarantee the debts of MPIC-Ayala; government is directly borrowing P34.9 billion or 54% of the project cost for right of way acquisition, additional coaches, etc. Government also agreed to shoulder the payment of real property taxes estimated at P64 billion throughout the life of the contract. These are on top of the P5-billion startup subsidy that government will provide. All in all, the direct cost to the government is almost P104 billion and just P30 billion to MPIC-Ayala. It becomes even more outrageous when you factor in the guaranteed profits that MPIC and Ayala will reap through automatic and periodic fare increases throughout the 32-year contract (which can be extended to up to 50 years). When MPIC-Ayala could not collect the agreed fares, government will again shell out public funds to cover the difference. Aquino called this regulatory risk guarantee, a government guarantee never before seen in the more than three-decade history of PPP and privatization in the Philippines. All these make the P9.5-billion premium that MPIC-Ayala promised to pay to clinch the concession meaningless.

Similarly, the Henry Sy-affiliated Megawide and its Indian partner GMR are building and operating the P17.52-billion Mactan-Cebu airport expansion because of its huge profit potential. The P14 billion that the consortium paid is peanuts compared to the windfall that the airport would make, which the Aquino administration guaranteed. Among the sweeteners of this PPP project is a 25-year government ban on the construction of other airports and related businesses in the Mactan and Cebu islands. There will also be a 25-year moratorium on the construction of any competing car park facility or any competing hotel facilities within the project’s 500-meter radius. Megawide-GMR will operate the country’s second busiest airport for 25 years, enjoying absolute monopoly over air passenger terminal and related services guaranteed throughout the concession agreement.

Meanwhile, in the case of the P15.52-billion NAIA expressway project, San Miguel Corp. (SMC) is charging P35-45 in toll rates. With traffic expected at 150,000 to 160,000 cars a day, that’s P1.92 to 2.63 billion in annual revenues. Its concession agreement with government is 30 years. This means that SMC is guaranteed to recover the project cost and premium in as short as 10 years, and then enjoy 20 years of raking profits. The recovery period could even be shortened by toll hikes and increased traffic volume. Note also that for SMC, the NAIA expressway has a more strategic value. The project will provide access to the NAIA terminals, which will benefit SMC’s air transport interests. The giant conglomerate of presidential uncle Danding Cojuangco controls 49% of the Philippine Airlines (PAL). It will also build a seamless link between SLEX/Skyway and the Manila-Cavite Toll Expressway. SMC, with Indonesian partner Citra, already controls SLEX/Skyway and the NAIA project will further consolidate its position in road transport in the area.

Local oligarchs and representatives of foreign interests in the country like the Ayala family, Henry Sy, Danding Cojuangco and his right-hand man Ramon Ang, or Manny V. Pangilinan (MVP) of MPIC participate in PPP not merely because they want to solve our infrastructure needs. As Jaime Augusto Zobel de Ayala put it: finding a private sector solution to the social problems of the country… must be oriented around a profit-centered solution. He was talking about private sector participation in mass housing for informal settlers. So, you see, there is a reason why these people are among the wealthiest in the world. In the 2014 Forbes’ list of richest Filipinos, Henry Sy and family recorded a net worth of $12 billion while Jaime Zobel de Ayala and family posted $3.1 billion; Danding, $825 million; Ramon Ang, $260 million; and MVP, $105 million.

PPP will continue to be the centerpiece program of Aquino in the remaining two years of his term. In his penultimate SONA, Aquino enumerated the top infrastructure priorities of his administration, most of which are controversial because of their social costs and impact. The P150-billion Laguna Lakeshore Expressway Dike, the P18.72-billion Kaliwa Dam, and Clark Green City, for example, are all feared to cause the massive displacement of local communities and the destruction of environment.

The same elite families and groups that have been bagging Aquino’s PPP contracts are positioning themselves to corner these deals. Despite public opposition, Aquino is determined to implement them, which could only further aggravate social tension and delegitimize his presidency even more.

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Consumer issues, Privatization

Water arbitration: issues and implications

It's not enough that there are well-meaning regulators who will monitor the water companies. The long-term solution is to reverse MWSS privatization. (Photo from the Water for the People Network)

Arbitration shows that it’s not enough that there are well-meaning regulators who will monitor the water companies. The long-term solution is to reverse MWSS privatization. (Photo from the Water for the People Network)

Updated, first published as IBON Features

Last 24 September, Manila Water Co. Inc. officially filed a dispute notice before the International Chamber of Commerce (ICC) questioning the decision of the Metropolitan Waterworks and Sewerage System (MWSS) – Regulatory Office (RO) to reduce water rates. Maynilad Water Services Inc., meanwhile, will also file soon its own dispute notice that shall set off arbitration proceedings.

(Download a PowerPoint presentation on the arbitration process here)

What does this mean and what are the implications?

One is that aside from paying the costs of arbitration, consumers may have to wait as much as three months (90 days) or possibly even longer to enjoy the lower water rates ordered by regulators. That, of course, optimistically assumes that the lower rates will be implemented at all. There is the possibility that the lower rates could even be reversed after arbitration.

Another is that even when the lower rates are finally upheld, there is no guarantee that the money amassed by the water firms during the delay in its implementation and charging more than what they should have will still be returned to the consumers. The new rates are supposed to have taken effect beginning January 1, 2013 but there is still no mechanism for how to treat the overcharging at current higher rates by water firms since the start of the year.

Consider further that arbitration of a Rate Rebasing dispute should be decided by not later than September 30 of the year in which the dispute is referred to the panel per the Concession Agreements (CA) between the private concessionaires and the MWSS. A decision in so short a time is unlikely to happen though.

(Download a copy of the Concession Agreement and related documents here)

Already greatly exposed as being contrary to public interest, the privatization of Metro Manila’s water system is further being bared as exceedingly anti-people with the concessionaires’ push for arbitration.

It also belies claims that privatization can benefit the public if only strict regulation is applied. In contrast, the current controversy shows that there can be no effective regulation under privatization. In the case of MWSS, the privatization contract or CA was designed to undermine government regulation as decisions are ultimately made by an Appeals Panel where the concessionaire and a representative of foreign business interests have a say.

Appeals Panel

Arbitration is a dispute resolution mechanism provided under Section 12.2 of the CA. It is the last resort for concessionaires and the MWSS to settle disagreements, which could no longer be resolved through negotiation, on the interpretation and implementation of the CA. Arbitration proceedings under the CA are in accordance with the United Nations (UN) Commission on International Trade Law.

An Appeals Panel handles the arbitration proceedings. According to Section 12.3 of the CA, its members include one representative each designated by the concessionaire and the MWSS-RO. A third member acts as the Chairman of the Appeals Panel and his or her appointment depends on the nature of the dispute.

For major disputes such as the ongoing controversy arising from the Rate Rebasing exercise, the President of the ICC will appoint the Chairman. For minor disputes, the representative of the concessionaire and the RO in the Appeals Panel will designate the Chairman. Foreigners can be appointed as members of the Appeals Panel, including as Chairman.

Among those being eyed to represent the RO in the Appeals Panel are former Supreme Court (SC) Chief Justice Reynato Puno, former SC Associate Justice Jose Vitug, and University of the Philippines (UP) College of Law Dean Danilo Concepcion.

But the RO representative is easily outnumbered by the two representatives from the private sector, i.e. the concessionaire and the Chairman appointed by the ICC. Being from the business sector, the ICC representative could be presumed to be more partial to the interest of the concessionaires than of the public. Decisions by the Appeals Panel need not be through consensus but by a simple majority vote.

Moreover, consumers are not represented in the Appeals Panel. They also do not have access to the proceedings which are done behind closed doors.

Also, under Section 12.5 of the CA, government regulators and the concessionaires agreed to waive their right to appeal the decision of the Appeals Panel through any court, judicial or regulatory body. This illustrates how, under MWSS privatization, government has abdicated its sovereign power to regulate and set policies to protect the public interest.

RO resolution

To recall, the RO denied the rate hike applications of Maynilad (Php8.58 per cubic meter) and Manila Water (Php5.83 per cu. m.). Instead, the regulators ordered the concessionaires to reduce their basic charge by Php0.29 (Maynilad) to Php1.45 (Manila Water) per cu. m. every year until 2017.

(Download a copy of the RO resolutions: Maynilad, Manila Water)

The concessionaires’ rate hike proposals and the subsequent RO decision form part of Rate Rebasing. It is an exercise to determine water rates that will allow the concessionaires to recover their expenses and assures them of a profit rate. Rate Rebasing is done every five years throughout the 40-year lifespan of the CA.

While still falling short of correcting and reversing the 16 years of abuse and oppression of consumers under MWSS privatization, the RO’s decision is still a welcome development and would not have been possible without strong public pressure. It affirmed many of the issues long being raised by anti-MWSS privatization advocates. Aside from the highly controversial income taxes (additional data and discussion here), the RO resolution also covered other questionable items being charged to consumers such as the cost of unimplemented projects, donations and advertising, and bloated costs of projects, among others.

On top of these disallowed items, the RO also ordered the concessionaires to stop charging the Php1 per cu. m. Currency Exchange Rate Adjustment (CERA). Thus, the immediate impact of the RO resolution on water bills by October should be a reduction of Php1.29 per cu. m. for Maynilad customers and Php2.45 for Manila Water’s.

Derailing the rate cuts

But such rate cuts will only become effective if the RO resolutions are not derailed by the arbitration proceedings. The concessionaires argue that arbitration means that the lower rates will not be implemented yet. And worse, it may even be reversed in case the Appeals Panel decides in favor of Maynilad and Manila Water.

In a paid ad (see image below), Maynilad cited Section 7.1 of the CA. This section pertains to MWSS’s obligation to “cooperate with the concessionaire” on, among others, the implementation of changes to standard rates as instructed by the RO or by the Appeals Panel. According to Maynilad, the said provision means that the Appeals Panel will have the final say on the new rate in case the RO-determined rate is brought to arbitration. Thus, current rates will continue to apply until the Appeals Panel has made a decision.

maynilad paid ad - 16 sep

Regulators are questioning such interpretation of the CA. But if the concessionaires were right, consumers will continue to pay water bills bloated by the income taxes of and other onerous charges imposed by the water firms. Section 12.4 (vi) of the CA says that unless stated otherwise the Appeals Panel has 90 days to make a decision from receipt of a dispute notice. But it can also opt to extend the proceedings if mutually agreed by the disputing parties although a decision should be made not later than September 30 of the year in which the rebasing dispute is referred to.

On top of all these is the issue of arbitration costs which under Section 12.6 of the CA shall be all shouldered by the public sector – i.e. government through the MWSS and the consumers through the pass-on charges that can be imposed by the concessionaires. Arbitration costs include the fees and expenses of panel members and legal, economic or technical consultants retained by the Appeals Panel. In its 16-year history, arbitration proceedings have been conducted thrice with the total cost reaching P140.04 million.

Clearly, it is not enough that there are well-meaning regulators who will monitor the water companies. By design, MWSS privatization was meant to protect the interests of the private investors, making effective regulation practically impossible. As water advocacy groups like the Water for the People Network (WPN) assert, lower water rates can only be realized through effective state control. IBON Features

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Fiscal issues, Privatization

LRT 1 privatization: public to bear costs of guaranteed private profits

Photo from Bulatlat.com

Photo from Bulatlat.com

It’s the same old story. We have seen it before in the privatization of the National Power Corp. (Napocor) where consumers are now being forced to pay more to shoulder stranded costs arising from sweetheart deals with private power generators. We have seen it in the privatization of the MRT where government has been insisting to hike fares to pay for financial obligations arising from guaranteed profits and debt payments. Both punish the public with exorbitant fees and drain the already scant resources of government.

The same fate awaits the Filipino people if the P60-billion privatization and line extension of LRT 1, the largest public-private partnership (PPP) project of President Benigno Aquino III to date, will not be stopped.

Those who are interested to look into the details of the LRT 1 privatization may download a copy of the draft 32-year concession agreement here. Scrutinizing the draft contract, we will see that despite the repeated denial by its officials, the Aquino administration will continue the usual practice of providing state guarantees to peddle its privatization program. And as you might expect, such guarantees will come at the great expense of the public.

Top-up provision

If the private operators of the MRT were granted with a guaranteed 15% return on investment (ROI) annually, the winning bidder for the LRT 1 privatization will enjoy a so-called top-up subsidy. The Department of Transportation and Communications (DOTC), the agency in charge of LRT 1 privatization, explained that the top-up provision will entail the government to shoulder the difference between the pre-approved fares contained in the concession deal and the actual fares that authorities will be able to actually implement.

This is essentially a profit guarantee for the private operator and can be found in Section 20 (on Concessionaire Revenues) of the draft concession agreement for LRT 1 privatization. Under the draft contract, the concessionaire will be entitled to a notional fare (Section 20.3.a) that shall be agreed upon by the government and the winning bidder to ensure the commercial profitability of the system. The notional fare would be periodically adjusted (read: increased) during the entire 32-year concession period. Section 20.4.a of the draft contract, meanwhile, states that: “In any period, where the Approved Fare is lower than the Notional Fare, the Grantors shall pay to the Concessionaire a Deficit Payment (“DP”), to reflect the difference between the Notional Fare (NF) and the Approved Fare (AF).” The Grantors refer to the DOTC and the Light Rail Transit Authority (LRTA).

Concretely, this means that if the DOTC or LRTA could not implement a certain fare level for LRT 1 as committed in the concession agreement due to strong public opposition and/or regulatory, legislative or judicial intervention, government is obliged to pay the private operator its expected revenues from such fare level. Government, of course, will be using public money. In other words, the public will not escape the greed of the private operator – whether as LRT 1 commuters (who will shoulder the fare hike) or as taxpayers (who will bear the top-up subsidy). Needless to say, prospective LRT 1 operators that include San Miguel Corp. Infra Resources, Inc.; Light Rail Manila Consortium of Manny V. Pangilinan and the Ayala group; DMCI Holdings, Inc. of the Consunji group; and the foreign consortium MTD-Samsung of Malaysia and South Korea are pleased with the deal that they will be competing to secure from the Aquino administration.

Regulatory risk guarantee

The top-up subsidy in LRT 1 privatization is a form of regulatory risk guarantee that the administration’s economic managers first disclosed in September 2010. The announcement was made ahead of the President’s working visit to the US where he promoted his PPP program to American investors. Two months later, Aquino officially declared the scheme as policy during the PPP Summit, which the government organized to jumpstart its privatization initiatives. In his speech, the Chief Executive said:

“The government will provide investors with protection against regulatory risk. Infrastructure can only be paid for from user fees or taxes. When government commits to allow investors to earn their return from user fees, it is important that that commitment be reliable and enforceable. And 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.”

While providing profit guarantees is standard practice in privatization, the regulatory risk guarantee is unique to the Aquino administration. His economic managers designed the scheme so as to avoid criticisms that he is repeating the same disadvantageous perks given to PPP investors in the past that caused the financial bleeding of government such as in the case of Napocor and MRT. But the top-up subsidy or regulatory risk guarantee is essentially the same as the take-or-pay provisions in previous PPP deals. Government and the end-users will still assume all the risks associated with operating the infrastructure while the profits of the private operator are secured.

More public debts

Where will government get the funds for the LRT 1’s top-up subsidy? To be sure, it will not come from disposable funds or public savings as the national budget deficit is still huge at P127.3 billion while the national government remains heavily indebted with more than P5.38 trillion in outstanding debt as of November 2012.

Like his predecessors, Aquino will borrow more to finance his PPP program including the profit guarantee for participating private corporations.  The National Economic and Development Authority (Neda) had earlier announced that government will tap multilateral institutions to provide for the guarantees so that when PPP investors face risk, they can still “be paid fast and immediately”. One of the multilateral lenders that made a pledge to fund the government guarantees on PPP projects was the World Bank which issued the commitment during the 2010 PPP Summit. Incidentally, the World Bank through its investment arm International Finance Corp. (IFC) is the transaction advisor of the DOTC and LRTA in the LRT 1 privatization.

Undermining check and balance

Aside from the direct financial burden that will hit the people, the regulatory risk guarantee will also further undermine the already weak system of supposed check and balance through the use of regulatory authorities, courts or Congress as a venue to protect public interest. For example, to prevent the implementation of an LRT fare hike, the people may seek relief from the Supreme Court (SC) through a temporary restraining order (TRO). The DOTC and LRTA would then be prevented from implementing the fare increase. However, the private LRT 1 operator could still collect the revenues from the fare hike through government-guaranteed Deficit Payments thus effectively negating the intervention of the High Court.

The regulatory risk guarantee was designed precisely to protect the commercial interests of the private business undertaking PPP projects from such outside intervention. Economic managers behind the regulatory risk guarantee have cited the case of the South Luzon Tollway Corp. (SLTC), the private operator of the South Luzon Expressway (Slex), which the SC stopped in August 2010 from implementing a more than 250% toll hike already approved by the Toll Regulatory Board (TRB).  Bayan Muna party-list congressman Teddy Casiño also filed a House resolution seeking for a suspension of the toll increase pending a legislative inquiry.

In reality, while DOTC officials try to differentiate the LRT 1 privatization’s top-up subsidy from the controversial guaranteed ROI present in earlier PPP projects, it appears that the former is even more favorable to the private concessionaire (and therefore more disadvantageous to the public) than the latter. The 250% Slex toll hike, for instance, arose from the guaranteed 17% ROI for SLTC contained in its 2006 Supplemental Toll Operation Agreement (STOA) with the TRB. But such guaranteed ROI became meaningless when the SC issued its TRO (although eventually lifted after more than two months). With the top-up subsidy, such risk of fewer profits due to an SC TRO or any outside intervention is eliminated.

More profits through commercial development

On top of its revenues and profits from fares and guaranteed periodic fare hikes, the winning LRT 1 bidder will also enjoy additional cash flows from project land and commercial development as contained in the draft agreement’s Section 11.4. In Section 20.7.a on Commercial Revenue, the deal further stipulates that “The Concessionaire shall be entitled to make arrangements for and charge for and collect the Commercial Revenue generated from the Project subject to Relevant Rules and Procedures.”

The development and lease of commercial spaces on LRT 1 stations and depot as well as revenues from advertising could be a potential source of income for government that could be maximized instead of resorting to steep fare hikes and/or privatization. The country’s LRT and MRT system has very low non-rail revenues which include earnings from commercial development and advertising. According to a 2007 study by the Japan Bank for International Cooperation (JBIC) cited by Senator Francis Escudero, the non-rail revenues of the LRT is equivalent to a paltry 2.6% of total revenues while neighboring countries get more than 20% from advertising and commercial leases. Clearly, there is much room to generate more revenues from commercial development for government if it will retain the LRT 1. Unfortunately, such potential source of income will also be transferred to a private business under privatization.

No need for privatization

The Philippines is among the first Third World countries to implement massive privatization of infrastructure development and operation. Early efforts were set off by conditionalities attached to loans from the World Bank, International Monetary Fund (IMF) and the Asian Development Bank (ADB) in the 1980s and 1990s. Among the big-ticket items already privatized are the Napocor assets, the Metropolitan Waterworks and Sewerage System (MWSS), the MRT, super highways like Slex, etc. Through the years, the people have been subjected to soaring and exorbitant user fees charged by the private concessionaires. Meanwhile government debt and deficit continued to balloon ironically due to, among others, privatization deals that were pursued supposedly to ease the fiscal pressure on public coffers.

Unfortunately, the Aquino administration’s PPP program will continue the long discredited and proven flawed policy of privatization such as its ongoing efforts to privatize LRT 1. Government could not even find a compelling justification to push for LRT 1 privatization. Unlike the heavily indebted Napocor and MWSS, for example, the LRTA – government operator of the LRT system – is at least generating enough revenues to finance its operation and maintenance (O&M) requirements. In 2012, the LRT 1’s gross revenues even increased by almost 10% while its farebox ratio – the proportion of fare revenues to total O&M expenses – improved from 1.10 in 2011 to 1.31 last year.  A farebox ratio of 1.0 means that fare revenues can cover 100% of O&M costs. Certainly, improving, modernizing and extending the system to Bacoor, Cavite would require additional investments and this is where the national government should step in by generating the needed funds.

Aquino could not argue that the government does not have the finances to make such investment thus the need for privatization. But if government is willing to incur more debts and guarantee the profits of whoever will win the LRT 1 project, why can’t it make the necessary investments such as through bilateral loans under concessional terms? When Malacañang was insisting on increasing the fares for LRT and MRT, its core argument was that government could no longer supposedly subsidize the system. Yet it is willing to subsidize the profits of the LRT 1 operator?

LRT 1 as a mode of mass transportation is a public investment imbued with public interest. It was never designed and intended to squeeze profits from commuters but to provide a reliable, efficient and affordable system of transportation for workers and employees, students, the self-employed, etc. Its true measure of viability is the social gains it creates for the people and the economy and not the private profits for the Ayalas and the Pangilinans, the Angs and the Cojuangcos, and their foreign partners. There’s no need to privatize it. (End)

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