Public-Private Partnership Center

21 July 2012, Business World Online

by Jose Maria Marella, IDEA

THE PHILIPPINE Development Plan highlights infrastructure bottlenecks and the country’s low levels of investment as among the vital concerns that need to be addressed in order for the country to achieve sustainable economic growth. While the Philippines experienced robust gross domestic product (GDP) growth of 6.4% in the first quarter of 2012, analysts prefer to exercise cautious optimism in the medium term, claiming that structural reforms are necessary in order for growth to become sustainable.

The latest GDP figures reveal the same growth patterns, suggesting little structural change in the Philippine economy. On the demand-side, growth remains largely consumption-driven, fuelled by remittances. On the supply-side, growth has increasingly relied on the services sector, which largely involves low-productivity activities. The result is a state of “low-capital-stock equilibrium” — an economy that delivers growth but creates few jobs. The country’s growth potential can be more effectively realized by private and public investments aimed at addressing gaps in infrastructure which could, in turn, support the development of high-productivity sectors.

The PPP promise

To give the needed boost to the country’s investment level and to build up infrastructure necessary to accelerate economic growth, public-private partnerships (PPP) have been made a flagship program by the Aquino administration. The PPP program taps into the financial resources of the private sector, which is presumably more efficient in funding, constructing, operating, and maintaining major infrastructure projects that the government would otherwise usually undertake alone.

Government’s partnership with the private sector in carrying out public projects can be traced as far back as the passage of the first Build-Operate and Transfer (BOT) Law in 1990 as a response to chronic fiscal strain. In 1994, the Ramos administration amended the BOT Law as it authorized various types of public-private financing schemes. The NAIA 3 Terminal, a public-private-partnership initiative, was conceived during this time. From 1994 to the 2000s, the Philippines managed to reel in sizeable investments from domestic and foreign firms through PPPs as a key policy in promoting growth. Additionally, PPPs have expanded their roles and found their way into local government projects, potentially providing the needed infrastructure in local economies.

Executive Order No. 8, otherwise known as the PPP Center Act, transferred the jurisdiction of the PPP Center from the Department of Trade and Industry to the National Economic Development Authority. The PPP Center is mandated to recommend plans, policies, and implementing guidelines. It is also tasked to provide technical assistance and advisories to the parties involved and facilitate access to information regarding PPP Projects.

Areas for Improvement

While the intention behind PPPs is laudable, areas for improvement are worth examining. In an analysis for Social Watch Philippines, Marianne Vital (2011) notes that the policy design of the PPP “has been found wanting in review and improvement.” The recommendation that clear guidelines should be in place particularly in the bidding process — i.e. in the “identification of prospective projects for partnership and approval” — should complement the good governance and transparency theme endorsed by the Aquino administration. Furthermore, she suggests that “the rules should also be flexible in responding to the needs of different economic sectors,” citing the agricultural sector as having different capital requirements than the operationally large-scale transportation sector.

While PPPs hold much promise, it is worth noting that they will ultimately have a limited role in the government’s Public Investment Program (PIP). While substantial, the projected contribution of the private sector to total sources of financing in the PIP amounts to only Php613.19 billion or 12 percent of the Php3.117 trillion total. Nevertheless, the delays in the rollout of PPP projects entail substantial economic costs and foregone opportunities. According to Finance Undersecretary Gil Beltran, economic growth would have increased by an additional two percentage points last year had all the scheduled projects been bid out. If the plan was for PPPs to boost growth, the private sector’s clamor for faster and more efficient approval and implementation of projects is justified.

Despite the drawbacks, nevertheless, the PPP program remains to be a step in the right direction in the administration’s goal of promoting investment. While the direct contribution of PPPs to economic growth is small compared to public infrastructure projects, the increased economic activity has multiplier effects on the rest of the economy given considerable unemployed resources at present. Moreover, PPPs free up a part of government resources that could be spent on equally important sectors such as education, health and social welfare.

But the strength of the PPP program lies in its signaling effect — done properly, PPPs send an effective signal to the private sector that the government is serious in taking them in as partners in addressing investment bottlenecks, not only in infrastructure but even in broader initiatives such as institutional reforms. In other words, more than a purely economic endeavor, the PPP program is also a confidence-building initiative by the government with the private sector, allowing and encouraging them to actively participate in nation-building.

Needless to say, however, these “signals” would be made clearer if they come sooner rather than later. While we ponder the “daang matuwid” advocated by the administration, wouldn’t it be better if we could see actual roads being built as a result of this governance philosophy? There is reason to be hopeful, but the nation can wait on the sidelines for only so long.

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