Pros and cons of ODAs, GAAs, and PPP

THE clock is ticking on the Duterte administration.

After spending its first year reviewing, recalibrating, and rewriting the terms of engagements for various infrastructure projects, it is now left with just five years to roll out its ambitions, eighttrillion peso infrastructure plan.

Infrastructure development is the centerpiece of “Dutertenomics” and it is on this basis that the business community will judge this administration. With limited time, the pressure is on to roll-out projects in the fastest way possible.

Earlier this year, the Departments Finance (DoF) and Transportation (DoTr) announced its intention to forgo with Public Private Partnerships (PPP) and instead, utilize official development assistance ( ODAs) and budget appropriations from the general appropriations act (GAAs) to finance infrastructure projects. The idea is to bypass the development time required by PPP contracts. Typically, it takes 29 months to settle the technical, financial, and legal frameworks of a PPP contract before it could even break ground. The shift to ODAs and GAAs further saves government from having to deal with the customary lawsuits filed by losing PPP bidders.

Project cost is another consideration. The DoF asserts that government can build projects more economically since its borrowing cost is substantially lower than that of the private sector. ODAs are concessional loans that come with interest rates as low as 1% per annum, easy repayment terms, and a grant element of 25% or greater. The lower cost to build inevitably translates to lower user fees for the public.

Having decided on the ODA and GAA route, government has since adapted what it calls “Hybrid PPP,” whereby it builds the physical structure and subsequently bids out the rights to operate and maintain the facility to a private enterprise.

At face value, the plan makes sense as it allows government to build projects in a cheaper and faster manner. But for all its supposed advantages, Hybrid PPP is far from perfect. There are imminent risks in using ODAs and GAAs, hence, it must be utilized selectively and with caution.

NOT NECESSARILY CHEAPER AND FASTER

Lower interest rates do not necessarily translate to cheaper project costs. One of the reasons is because ODAs come with the proviso that the donee must utilize certain engineering firms, contractors, equipment and parts suppliers nominated by the donor country. These suppliers may not be the cheapest nor the best in their field. In fact, a study conducted by the Philippine Center for Investigative Journalism which covered 71 ODA projects revealed that seven out of 10 ODA projects failed to deliver their projected savings on the back of bloated supplier costs and repair works for shoddy construction.

Adding injury is the fact that this proviso leaves out local engineering and construction firms from benefitting from the infrastructure building boom.

Graft must also be factored into the equation.

A 2011 study conducted by Global Financial Integrity, a Washington DC based think tank, revealed that projects undertaken by the Philippine government were saddled with overspending and budget leaks ranging from 25% to as much as 50% of project cost.