Avoiding PPP pitfalls

AFTER A long wait, the government hopes to start the awarding process for public-private partnerships (PPPs) at the end of this month or soon thereafter. Five projects are said to be almost ready: the P6.3-billion Metro Rail Transit Line 3, the P7.7-billion Light Railway Transit Line 1, the P1.6-billion Daang Hari-South Luzon Expressway link road, the P10.6-billion Ninoy Aquino International Airport Expressway Phase 2 and the P21-billion North Luzon Expressway-South Luzon Expressway connector road.

Fast-tracking the PPPs. President Benigno Aquino III’s economic team, led by Finance Secretary Cesar V. Purisima, wants to fast-track the process even if a few issues (like ownership problems with some projects) still pend and even while Congress is yet to tackle a proposal to protect investors from regulatory risks, a promise dangled by the government last year.

But it seems this proposal is not needed, at least for the new projects. For one, the Supreme Court (Francisco v. TRB, Oct. 19, 2010) has frowned on it. The tribunal declared “illegal, unconstitutional and hence void” a PPP contractual provision in which the government “warrants and undertakes to compensate (the investors’) loss of revenue resulting from the non-implementation of the periodic and interim toll fee adjustments.”

For another, many business leaders, like San Miguel Corp. (SMC) president Ramon S. Ang, have said the government need not give “any guarantee in any form. It should only make sure that the bidding process is fair and square.” Ang added that infrastructure projects are viable and bidders should assume the business risks associated with them.

Indeed, the government should just concentrate on making the bidding transparent and on avoiding past pitfalls. It should heed lessons learned from the bidding of Terminal 3 of the Ninoy Aquino International Airport (Naia 3). The Supreme Court (Agan v. Piatco, May 5, 2003) said that this PPP was doomed from the very start because the Philippine International Air Terminal Co. (Piatco) was allowed to bid even if it did not have the financial capacity required by law and the bidding rules. Piatco was eventually chosen as the winning bidder.

While the project was estimated to cost over P9 billion for which bidders were required by the rules to have an equity of at least P2.7 billion, Piatco was found to have a total net worth of “only P558,384,871.55 or only 6.08 percent of the project cost.”

Selecting the right partner. Learning from this lesson, the government should include in the bidding only those conglomerates with proven financial capacity to undertake big ticket projects. It is not difficult to identify them. As can easily be computed from the stock market, the country’s largest-capitalized mother companies (in billion pesos as of March 16, 2011) are PLDT (P387), SMC (P375), SM Investments (P315), Aboitiz Equity Ventures (P228), Ayala Corp. (P172), JG Summit (P133), Metrobank (P130), Alliance Global (P116), Energy Development Corp. (P116), DM Consunji (P104), etc.

If we add their big related companies, the market caps of these conglomerates could double or triple. For example, Meralco (P255), Philex Mining (P70) and Metro Pacific Investments (P68) could be grouped with PLDT; San Miguel Beer (P478), Purefoods (P267) and Petron (P137) with SMC; SM Prime (P157) and Banco de Oro (P128) with SM Investments; Ayala Land (P199), BPI (P195) and Globe Telecom (P91) with Ayala Corp.; etc.

My point is that these blue chips, together with their foreign partners, could easily undertake the PPP projects if the bidding rules are transparent, fair and followed faithfully.

Reserved for Filipinos. Most of the PPPs are infrastructures like toll roads, airports and railways, which are reserved by the Constitution to corporations that are 60 percent-owned and-controlled by Filipinos.

Thus, it makes sense to encourage qualified Filipino companies to participate in the PPP program. While it is good to invite foreign investors, they must be told in no uncertain terms that they can participate only as minority partners, at most 40 percent, of bona fide Filipino corporations. One pitfall to avoid is to invite foreign groups, which may wittingly or unwittingly find the PPP projects so attractive as to tempt them to circumvent our laws by using Filipino dummies as fronts.

In fact, one major problem that besieged the Naia 3 project is the alleged violation of our Anti-Dummy Law by Fraport, the German partner of Piatco. This was a major defense of the Philippine government in the arbitration suits brought by Fraport and Piatco in Washington DC and Singapore. (For details, see my columns on Jan. 9 and 16, 2011).

One other lesson. The Naia 3 PPP contract contained a stipulation that to resolve a dispute, the parties (Piatco and the government) could avail of arbitration outside the territory of the Philippines. This is why, even while our Supreme Court had already ruled in favor of the government, an arbitration suit still pended in Singapore, thereby nullifying the finality of the Court’s decision.

One final lesson. To attract investments, past administrations entered into treaties, which allowed foreign investors to sue the Philippines in foreign arbitral bodies. These treaties that surrendered Philippine sovereignty should be reviewed so they could not be used to harass or delay future PPPs.

In sum, Aquino’s economic team is right in fast-tracking new PPPs but should avoid the pitfalls that bedeviled and delayed the past ones.

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