Interview: Eric Francia, Jose Ma K Lim

What lessons have been learned following the roll-out of the government public-private partnership (PPP) programme?

ERIC FRANCIA: The PPP programme was launched in 2010, generating excitement and anticipation among investors given the portfolio of projects presented. At the same time, however, came the realisation that the pipeline was too ambitious to deliver during the current administration’s six-year tenure. Rolling out projects requires significant effort and time in order to complete technical and feasibility studies, conducting risk allocation processes and contract development, obtaining government approvals and conducting a transparent bidding process.

Bids for the first project, the Muntinlupa-Cavite Expressway, were strong, indicating substantial private sector appetite for PPP participation. However, the government push to make the private sector responsible for risk allocation has led to higher chances of bid failure and substantial project delays. The principal lesson to be learned here is the importance of ensuring balanced risk allocation.

An additional lesson is that no matter how one tries to prepare PPP projects, they can never be perfect in structure, which can lead tenders to be subjected to appeals by objections from the losing bidder. This experience shows the importance of having a strong, sustainable framework for PPPs. Moreover, the build-operate-transfer law should be updated to specify how the appeal process would work if one is a disqualified bidder.All of the issues mentioned above apply to the pre-bidding and bidding stages. There are additional hurdles to overcome in the execution phase of the PPP process, such as right-of-way acquisition. Some of these issues can be attributed to a lack of capacity in government departments, prolonged negotiations or possible expropriation – which necessarily includes a judicial process – as well to as problems associated with documentation.

JOSE MA K LIM: Currently some projects under the PPP programme have entered a more mature state, while others are still in the process of being implemented. However, the common denominator here, learned from past mistakes, has been the necessity to craft a comprehensive package before the actual bidding takes place. This allows for an easier transition into the concession agreement for the players involved. Infrastructure players have learned that between the time the bidding process starts and the time a concession agreement is signed, there are many provisions that can change the risk-sharing profile of the project. This means that participants, consortium partners and contractors will have to be prepared for unanticipated changes, which makes the choice of partners very important as it is critical that they are sufficiently ready adapt to such unforeseen contingencies. We have also learned that the risks one will face upon taking over a concession are not just in the implementation but also in changing regulatory policies midway through the concession and political risks. This is especially true considering we will have to adapt to new administrations, each with different views on any given project.

Regarding implementation, the single biggest challenge is lack of coordination among stakeholders and concerned agencies. While the PPP Centre has done a good job at preparing and packaging projects, there is a need for coordination in implementation. Currently, the deliverables are largely left under the responsibility of the concessionaire, which then has to coordinate on its own with various branches of government to get the deliverables worked on. An empowered government body, with the ability to coordinate and force implementing agencies to provide for the deliverables, would mitigate these challenges and address expediency. For example, to obtain right of way for a project, it is easy for the government to purchase it, and there is an existing process for that: the government makes an offer to the land owner, and if the latter refuses to take the offer, a petition is filed in court to decide the fair value of the land. In other words, the state is exercising its power of eminent domain, and the court can then give the participant an order to allow commencement of construction – even while the dispute over the price between the land owner and the government is ongoing – thus avoiding delaying the project. The problem originates when concerned agencies do not understand the urgency some projects require, leading the bidder to fall behind and get in trouble with the banks.

How can infrastructure development be decentralised into provincial areas?

LIM: The majority of the large PPP projects, both bidded out and in the pipeline, are centred in Luzon, despite the willingness of other cities and municipalities to welcome private initiatives to address infrastructural inadequacies. To decentralise the existing infrastructure network, the government has to look beyond existing individual projects.

For example, in the water supply and sanitation sector, Metro Manila is under a central regulator, the Metropolitan Waterworks and Sewerage System – while the provinces are under the Local Water Utilities Administration, which has a different set of rules and is vulnerable to political influence since committee members are appointed by local administrations.

As a result, the city government will try to keep control of the water district by limiting the service to ensure that no more than 25% of its consumers are coming from outside the city, otherwise the appointing body comes under the auspices of the provincial government. The result is a struggle between the provincial governments and the city administration over who should operate the water district. In this case, supply cannot be purely handled through a PPP project; it must be done through amending legislation.

To what extent have PPP projects been able to attract participation from foreign companies?

FRANCIA: As the PPP projects get bigger and morecomplex, we need to attract foreign investors on both the equity and the debt side of the equation, and not just through foreign technical parents. Locally, the private sector is able to handle projects that cost $1bn-1.5bn, as this equates to a little over a billion dollars worth of project finance if one assumes the traditional 70:30 debt-to-equity ratio. If this threshold was exceeded, there would be issues with single-asset limits, rather than with single-borrower’s limits, as banks and investors have caps on the amount of financial exposure they can have to a single asset.

This is especially the case with large-scale projects, which represent a $300m-500m investment – a high figure for a lender or equity investor to put into one asset. Large-scale projects in the pipeline, such as the North-South Railway overseen by the Philippine National Railway (PNR), need to attract foreign investors, not because there is a lack of domestic liquidity, but due to the financial prudence of the players involved, who will seek to form consortia and look for external funding.

The issue of currency risk did not affect the first 10 projects, as they did not require currency adjustments. However, this is an area of concern. So far currency risk has been passed to the private sector, but this cannot continue for future developments. For projects like the PNR system, which will cost about $4bn, it is not known what the traffic potential is for the long-haul route.

Therefore, for projects of this type, the private sector is not prepared to take all the market risk, and the government needs to structure projects of this nature properly to address these concerns. If thegovernment can deal with currency and market-risk concerns, they will be able to create a more enticing environment in order to attract foreign investment.