Presentation on the Official Development Assistance
and Public Private Partnership in Financing Public Infrastructure
by NEDA Undersecretary Rolando G. Tungpalan
Management Association of the Philippines (MAP)
General Membership Meeting
May 30, 2017; Makati Shangri-la
Members of the Management Association of the Philippines, good afternoon. Let me thank the MAP for this opportunity to shed light on what seems to be a “switch from PPP to ODA” when financing our Infrastructure Program. It is important to understand that Official Development Assistance or ODA and Public-Private Partnership or PPP are means rather than ends, and for us who are results-oriented, we give attention to those that are likely to deliver on the results that matter.
In the Philippine Development Plan 2017-2022, the Government continues to recognize the important role of the private sector through the PPP Program, where appropriate. In fact, the PDP clearly states that the investment program of the Government for infrastructure projects will be based on an optimal mix of Government domestic financing, official development assistance, and private capital. Even broadly we have always maintained that the private sector is the engine of growth and thus PPP must be seen not in the narrow sense of our BOT Law, but the broader Public-Private Sector engagement in development.
Recognizing that inadequate and poor quality of infrastructure has been a binding constraint to achieving sustained and inclusive high growth, the PDP underscores the need to ramp up Infrastructure spending. Infrastructure development supports all three pillars of “Malasakit,” “Pagbabago,” and “Patuloy na Pag-unlad,” and intermediate goals of the Plan. Infrastructure development is vital to enhancing the social fabric, reducing inequality, and increasing the country’s growth potential. Thus, the next six years will be characterized as the “Golden Age of Infrastructure,” to be delivered through the “Build Build Build” program or Dutertenomics.
In accelerating infrastructure development, Government has committed to increase spending on public infrastructure from 5.32 percent of Gross Domestic Product (GDP) in 2017 to around 7.45 percent of GDP by 2022, or an average of 6.8 percent of GDP in the current Plan period, and with total funding requirement of about PhP8.44 trillion (USD168 billion) over the medium term. Infrastructure spending was only about 2.9 percent of GDP from 2010 to 2016, on the average.
Of the USD168 billion total infrastructure investment requirement under the 2017-2022 Public Investment Program, the bulk of the projects will be implemented through local financing/GAA at 66 percent. The remaining projects will be carried out through PPP at 18 percent and ODA at 15 percent.
Let’s take a quick look at our recent experience with the PPP program.
In the period 2010 to 2016, of the 28 PPP projects approved by the NEDA Board, 50 percent or 14 PPP projects have yet to be implemented or was discontinued or terminated. In comparison, for ODA and locally-financed projects, at least 80 percent are currently ongoing or have been completed.
Noting the delays that have been encountered in the actual mobilization of PPP projects does not mean that infrastructure spending through PPP will not be promoted. Rather, greater focus is now given to addressing the bottlenecks in PPP planning and implementation, so as to fully take advantage of the benefits of PPP in terms of tapping the private sector’s efficiency and innovativeness.
Let me dwell on the basic merits in financing infrastructure projects through ODA. These include, among others, (1) longer-term maturity and favorable concessional financing terms, with grant element of at least 25 percent, and (2) a wider access to knowledge, experience, and technology.
As we all know, many large infrastructure projects will require long-term financing, especially if these have long gestation period. ODA accessed by Government has favorable financing terms that match the needs of such infrastructure projects much better than commercial sources of finance.
As an example, in the case of Japanese ODA financing, Japanese untied loans have a standard interest rate of 0.65 percent to 1.4 percent, with a maturity period of 30-40 years, inclusive of a 10-year grace period. For its tied loan, its terms and conditions include a 0.2 percent standard interest rate, with a maturity period of 40 years, inclusive of a 10-year grace period. These are highly concessional as compared to commercial lending, with a shorter maturity period.
Second, is the knowledge creation and transfer of new technology through a wider number options through ODA. This is embodied in the ODA Financing Framework crafted during the time of Sec. Purisima, that ascertains the comparative advantage of the source country in terms of technology, experience, and knowledge, as well as ensure competitive and transparent procurement among firms from the source country or internationally, to gain real benefits.
In addition, ODA-funded projects undergo full feasibility studies, go through a rigorous and transparent appraisal process, and entail a more participatory process of monitoring and evaluation (M&E).
Notwithstanding these merits, concerns have been raised on whether ODA financing is sustainable and supportive of local growth and development, particularly, as foreign borrowing could expose us to foreign exchange risks and a serious debt burden that would imperil our strong macroeconomic stability, and therefore sustainable growth.
Our economy is projected to grow between 6.5 percent and 7.5 percent in 2017, and between 7 percent to 8 percent from 2018 to 2022. This GDP growth translates to larger economy, expanding from about USD290 billion in 2016 to USD510 billion (assumption: USD1 = PhP50) by the end of the Plan period. The planned Infrastructure Program is meant to achieve our growth potential, sustain high economic growth that would generate gainful employment and reduce inequality and poverty.
You may wish to note that over the last six years, debt to GDP ratio has improved from 52 percent of GDP in 2010 to 45 percent of GDP in 2015. While Government has decided to increase its deficit to 3 percent of GDP under the current Plan, the deficit will be financed largely by local borrowing at 80:20 ratio. With the expected growth in GDP (expanding by more than 1.5 times by the end of the Plan period), Government’s debt is expected to decline from 42.7 percent of GDP in 2016 to 40.9 percent of GDP in 2017 and to 35.4 percent of GDP in 2022.
Let me show you some of the successful ODA-funded projects that have been undertaken by the government. However, this is not to say that there are no poorly implemented ODA projects.
First is the Angat Water Utilization and Aqueduct Improvement Project, funded by China. The project was completed eight months ahead of schedule and without cost overrun and now strengthens Metro Manila water security. This was bidded out among qualified Chinese contractors.
Another is the Philippine-Japan Friendship Highway, the longest highway in the Philippines that connects country’s north–south backbone. Construction and rehabilitation of the highway was funded by the Japanese government.
Third is the LRT Line 1 and Line 2 projects. LRT Line 1 began its operations in 1985, our first urban rail, funded by Belgian tied loan then by Japanese ODA for its capacity expansion. LRT Line 2 was funded by Japan, including its ongoing expansion.
On the other hand, let me share with you some PPP projects that have undergone major challenges. Of course this is not to say that there are no good PPP projects.
First is the Modernization of the Philippine Orthopedic Center, which was terminated by the private sector partner due to failure of the Government to deliver the project site.
Another big ticket PPP project that did not take off is the PhP123 billion (USD2.46 billion) Laguna Lakeshore Expressway Dike Project, where none of the 3 pre-qualified bidders decided to submit their bids.
An example of a PPP project that has been long delayed is the MRT Line 7 Project. The MRT 7 contract was signed in 2008, but only broke ground in 2016.
We can add the Daang Hari and the NAIA 2 Expressway wherein both suffered time and cost overrun, where such cost overruns were borne by Government.
Given the experiences and challenge we face with our PPPs, we need to revisit many of our assumptions and extent to which due diligence on the part of the Government in investment decision-making have been carried out.
This means ensuring project quality at entry (note solely on bankability), with better use of the existing Project Development and Monitoring Facility or the PDMF, where Government funding is now larger than the ODA grants earlier mobilized.
With respect to non-PPP projects, we are in the advance stages of discussion on the planned Infrastructure Preparation and Innovation Facility with ADB amounting to USD114.06 million for 2017-2020.
As a parting note, the specific decisions in recent times to change the mode of implementation from PPP to ODA if not GAA of some projects do not constitute a “shift in policy from PPP to ODA.” Our PDP and the Infrastructure Program clearly articulate our policies and strategies.
On the other hand, implementation through ODA under the Financing Strategy administered by the Department of Finance, as well as agreement with our ODA partners to speed-up processes without compromising quality, enable us to have greater control over the quality and timeliness of project implementation.
As we gear up to improving further the quality of project preparation and implementation, we are confident that the programmed financing and implementation arrangement of our Medium-Term Infrastructure Program will be realized, consistent with sound macroeconomic fundamentals.
In closing, good quality at entry, implementation, and operations and maintenance should be matched with good governance to produce good sustainable results.
– END –