Government warned on debt levels with PPP deals

MANILA, Philippines –  Private think-tank Forensic Law and Policy Strategies Inc. has urged government to watch its debt levels as it enters into contracts under the so-called public private partnership (PPP) scheme.

The think-tank noted that under the PPP, $6 billion worth of infrastructure projects and $8 billion worth of power projects are reportedly up for launching via the PPP from 2012 to 2016.

In a policy paper, Forensic Solutions warned that Malacañang’s plan may worsen rather than ease the country’s debt trap by creating a Philippine Infrastructure Development Fund (PIDF) to jumpstart this pro-investor project with a start-up amount of P200 billion.

The amount will be sourced from the Development Bank of the Philippines (DBP), Land Bank of the Philippines (Landbank), Government Service Insurance System (GSIS) and the Social Security System (SSS).

The paper also pointed out that in insuring against all forms of regulatory risks, including judicial risk, as a pro-investor incentive, Malacañang “will negate the power of the judiciary to review executive action…and force one branch of government to abdicate its function in favor of another.”

“By insuring against all forms of regulatory risk, including judicial risk, some fear that President Aquino’s new PPP policy undermines this system of checks and balances,” it said. Malacañang is “in effect, saying that a contract entered into by the government is immune from judicial inquiry, and will be honored, at least financially, regardless of the result of any review by the courts.”

According to Forensic Solutions, President Aquino “hit the nail on the head in identifying a major cause of lack of investor confidence in the Philippines: the danger that the rules, mid-game, may change. President Aquino’s intention to protect investors from such regulatory uncertainty is laudable. Yet in the same breath, his financial managers have publicly initiated a unilateral withdrawal of legislatively-granted fiscal incentives.”

“In lieu of the favorable terms offered by previous administrations, like guaranteed return on investment, guaranteed market and sales, fiscal incentives, full cost recovery, and subsidies for production input, the cost of which is to be borne by the people as consumers and as taxpayers, the Aquino government now offers regulatory risk insurance.”

 “Pulling out previously offered incentives will turn-off investors, unless the incentive offered will put them at a greater advantage.”

Forensic Solutions added that “more important than all the fiscal and regulatory incentives that the administration may churn out, “President Aquino must ensure that his government will honor its valid and binding contractual obligations, regardless of whether these were entered into by a past administration. Otherwise, no investor, foreign or local, will gamble his or her financial resources on a country whose policies will likely be reversed at every change in the administration.”

As for the PIDF plan, the think tank said that the state-run investment arm National Development Co. (NDC) will issue government-guaranteed PIDF Bonds, “which is just another form of indebtedness,” with varying maturity periods ranging from five to 25 years, and the proceeds from which will then be loaned to PPP investors.

Such bonds will be backed by guarantees from multilateral lending institutions like the World Bank and the Asian Development Bank (ADB).

“The clear bottom line is that these guarantees provided by multilateral institutions, as well as the bonds to be issued for the PDIF, must be paid back, with interest. The storyline is at once compelling and familiar. Juan dela Cruz will foot the bill,” the paper pointed out.

The government had unveiled seven major public transport projects under the PPP program, namely the $1.6-billion expansion of the Metro Rail Transit (MRT)-Light Rail Transit; the $257.8-million MRT Line 2 extension, the $172.1-million new Bohol airport; the $99.5-million Puerto Princesa Airport; the $479.5-million North Luzon Expressway- South Luzon Expressway link; $239.7-million Cavite-Laguna Expressway-Manila side section; and the $70.1-million Daraga International Airport.