The 4Es of Good PPP: Principles In Structuring Public-Private Partnerships
Author: Atty. Arnel Paciano Casanova, President and CEO, BCDA*
Posted: November 07, 2011 | Category: SCTEX
Much has been written lately about public-private partnership as one of the centrepiece programs of the Aquino administration. However, while people continue to utter these acronyms, not much is understood on the whys and the hows of PPPs that would guide the common Filipinos to understand this concept and the reasons by which government and private sector would converge.
What are the traits of a good PPP?
When we assumed leadership in BCDA, one of our first tasks is to review the contract involving the operation and maintenance of the Subic-Clark-Tarlac Expressway (SCTEX), the longest and most modern tollway in the country. Taking on this big challenge which may dictate the success or failure of public infrastructure implementation required a clear vision and firm objectives.
Hence, when our negotiating team commenced negotiations, I adopted certain basic principles which I call the “4Es” of PPP as important guides that would measure our success. These 4Es are what I consider the traits of a good public-private partnership. They are Equity, Effectiveness, Efficiency and Exportability.
FIRST E - EQUITY. A PPP project must be equitable. It is paramount that only those who use and directly benefit from the infrastructure should pay for its cost, its operations and maintenance. No taxpayer who does not use it should shell out hard-earned money to pay for it. Thus, it is always desirable to have a "pay as you go" scheme than the onerous "take or pay" scheme which requires subsidy from the government.
In our SCTEX agreement, we have achieved this equitable arrangement. MNTC, our private sector partner, committed to provide sufficient cash flows, in terms of higher revenues shares and advances for BCDA, to meet any possible revenue shortfalls of BCDA in its debt service payments. Further, this arrangement is a "pay when able" basis such that payments to be made will be coming in excess of the revenue share of BCDA. Therefore, we were able to ensure that a taxpayer in Mindanao who will never use the SCTEX located in Luzon, will not have to pay for its cost, operation and maintenance. Only those who directly use and benefit from it will pay for these costs. The ordinary taxpayer is, henceforth, protected.
SECOND E - EFFECTIVENESS. Effectiveness can refer to the mode of financing, recovery of costs and control of revenues, incentives in efficiency in operation and the high quality of service and maintenance to ensure that the public infrastructure and service would always be at its best in any given period of the concession.
BCDA constructed the SCTEX with an ODA concessional loan from Japan Bank of International Cooperation (JBIC). This is a necessary means of financing because at the time of the inception of the project, the private sector cannot bear the high cost of financing that the project requires. Besides, a portion of the SCTEX project is considered "missionary" as the traffic volume is not yet mature. On a "greenfield" project such as this, the risk-averse private sector financing would not be willing to take on the financial burden without high premium which would then make the cost of the project unaffordable. Hence, a public sector initiative must be taken.
The peculiarity of building public infrastructure necessitates governmental initiative because it is a field which is not market-driven but “vision-inspired”. We do not build roads when congestion is already persistent. We build roads even before traffic comes. Public infrastructure is not created by the market. It creates and shapes the market. It is like building the great cathedrals of Europe, the one who envisions it must sometimes accept the reality that its completion will not be in his lifetime. But nonetheless, they must be built. This is true in public infrastructure and all the more true in nation-building.
In our agreement, whatever cost BCDA incurred would be recovered. On top of the recovery of that cost, we projected BCDA to receive additional revenues amounting to P34 billion. Hence, BCDA effectively provides a vital public infrastructure that would generate jobs and economic opportunities to the region and the country without burden to the taxpayer plus a revenue for the national government.
Moreover, this agreement provides BCDA an effective control of its revenues as the gross toll revenues will be placed in an escrow account in favor of each parties. It likewise provides the funding BCDA needs to ensure the payment of its obligations and providing a guarantee amounting to P20.5 billion for the maintenance of the tollroad. This guarantee makes certain that the quality and safety of the infrastructure is at its best always.
THIRD E - EFFICIENCY. Our experience in the old expressways and their deterioration in the past, point to the lack of competence of the government in running tollways or public utilities. There were a lot of inefficiencies, corruption and leakages. The privatization of their operation and maintenance proved to be a more efficient measure so that necessary investment in technologies and upgrading in infrastructure could be made by the private sector who has the better capability in dealing with these issues.
With MNTC as our private sector partner, we are bringing in the best and most competent toll road operator in the country. The quality of service and infrastructure in NLEX is a proof of that. With the seamless connection of NLEX and SCTEX, the motorists would have faster and easier access to their destinations in Central and Northern Luzon. And with the interconnectivity of Subic international seaport and the Clark international airport, we shall have the three biggest infrastructures in the country serving as the tools for synergy of these economic zones to be catalysts of national development.
As more players in the field of public infrastructure and utilities come in, the level of competition heightens which could lead to better services and affordability to the public consumers. However, this would also need a regulatory environment that is predictable, transparent and free from regulatory capture.
FOURTH E - EXPORTABILITY. Exportability refers to the shifting and allocation of risks from the government to the private sector who can deal with these risks better and more efficiently. Unlike in past failed PPPs which proved to be prejudicial to the government because government was obliged to provide a guarantee to the private sector, the agreement that we have here is the total opposite. BCDA or the government for that matter does not provide any guarantee to the MNTC. In fact, MNTC is the one ensuring that BCDA could meet its obligations to other parties. On the other hand, MNTC is provided reasonable profit and transparent toll-adjustment mechanism and financing flexibility to deal with the possible risks. The SCTEX toll road operation is a profitable business venture for MNTC.
By the end of the concession term, the government shall recover this vital asset and with more maturing traffic, the government shall have another opportunity to earn for and to serve our people.
Integrity and Competence. It must be emphasized that these 4Es must be founded on the underlying twin imperatives of Integrity and Competence. At the end of the day, any task must be performed by the right people with the moral courage to do what is right, in the right manner, in the right time, at the right cost, and with the right skills.
In the context of public infrastructure implementation in a developing country beset with corruption and governance challenges, integrity without competence can lead to paralysis caused by paranoia. On the other hand, competence bereft of integrity is a road to total disaster, plunder and impunity. The worst case is having both corrupt and incompetent people manage the project. The cases of failed PPPs in the past were plagued by these problems.
This is vital in PPP because it is a partnership. The foundation of all partnerships is TRUST. And trust cannot be generated without integrity and competence. If one or both partners are corrupt, then, the PPP project becomes a burden to the people because the cost of corruption will eventually be passed on to them. This is more burdensome when it is ODA-financed because of the sovereign guarantee associated with it. There is a huge moral hazard whenever the government guarantees a loan because it may lead to the implementing agency abdicating on its stewardship role in ensuring cost recovery or sufficiency in debt service payments. Any default on the debt service will be a burden to the taxpayers leading to inequity. In the same way, when one or both parties are incompetent, the public will be suffering from their inefficiencies.
In our dealing with MNTC, we could not have succeeded in concluding an agreement if not for the level of integrity and competence that we have put on the negotiating table which our private sector counterparts viewed positively. Our team in BCDA have shown to our partners a level of integrity, fairness and professionalism in dealing with them when confronted with difficult issues. We have gone extra miles in doing our research, crunching numbers, and always adopted a problem-solving mindset to grasp fully any obstacle that may come our way and offer solutions. We required our engineers to understand project finance and law. We compelled our finance people to grasp the law and engineering aspects of the agreement. We guided our lawyers to comprehend financing and engineering so that they could offer legal solutions that finance people and engineers could not perceive. Our Board exemplified these twin imperatives also to shepherd the agreement to successful conclusion. Hence, a good team is always essential.
Lastly, the environment of transparency and “doing the right thing” which President Aquino advocated allowed us to simply focus on the job of pushing for the best interest of the country.
With the fast paced developments around the world, the synergy of government and the private sector is necessary. Hence, PPPs are oftentimes the solution to government and market failures because this is the opportunity where the strengths of both sectors could merge to address intractable and complex social problems, particularly in the area of infrastructure development and basic services. Whenever that event comes, it would be helpful to be guided by the 4Es of PPP founded on integrity and competence both in the public and the private sectors.
*Atty. Arnel Casanova earned his MPA from Harvard University Kennedy School of Government concentrating on finance and leadership. He studied Law and Urban Planning from UP. President Ramos awarded him the Philippine Legion of Honor Medal for his work in the peace negotiations with RAM and eventually with the MILF. He advocates social entrepreneurship in his personal time and a core member of Kaya Natin! Movement for good governance and ethical leadership. He was selected as one of the Asia21 Young Leaders by the Asia Society based in New York.