What is PPP?

It’s not purchasing power parity, a theory used to explain exchange rates.  But PPP was once called the BOT scheme.  So says the Philippine News Agency:

MANILA, Sept. 13 (PNA) — President Benigno Aquino III has issued an executive order reorganizing the Build-Operate-Transfer Center in fresh efforts to accelerate the financing, construction and operation of key government infrastructure projects through public-private partnership.

In issuing Executive Order No. 8, the President renamed the Build-Operate-Transfer (BOT) Center to Public-Private Partnership (PPP) Center of the Philippines, whose functions will now be supervised by the National Economic and Development Authority. The BOT Center was previously under the wings of the Department of Trade and Industry.

“There is a need to fast-track the implementation of the Public-Private Partnership programs and projects as a cornerstone strategy of the national development to accelerate the infrastructure development of the country and sustain economic growth,” President Aquino said in his State of the Nation Address last July.

But this looks very much like “industrial policy,” code for government taking a role in choosing potential “winners.” The Austrian School would say, as did some sober thinking economists, that we cannot really know beforehand which industries or sectors will be winners.  Who will pay the price for mistakes?

Of course, if you don’t like who’s in power, you would call it “cronyism.”  So, which is it?

Perhaps it’s neither industrial policy nor cronyism.  Perhaps it’s just another form of trickle-down economics except that big business wants to “play it safe.”  This is an insight from cartoon characters, Frank and Ernest.

Frank & Ernest

UPDATE:

Here’s an explanation of PPPs by Cielito Habito.  His solution to the potential rent-seeking problems: “Let’s make sure all PPP projects are transparent and properly evaluated…” How do you do that?  For starters, we should have a working Freedom of Information process, as I suggest in the comments thread.  All PPPs should be required to have websites where they promise to give the public information to which they are entitled, even if the Freedom of Information bill has not yet been enacted into law.

After all, partners under the law are entitled to equal access to information relevant to the business.  And if government is a partner, it acts as an agent of the people, who should likewise have access to information.

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2 thoughts on “What is PPP?

  1. PPP or Public-private partnership is not necessarily the Build-Operate-Transfer (BOT) scheme. In most cases, a BOT project or any of its variants should be one where the private sector proponent/developer takes all the financial risks.

    In a PPP model, the partnership occurs where the public sector takes an equity position, whether it shares in the profits or not, so that the project can become commercially viable for the private sector proponent/developer to be interested to invest on and take the financial risks. More often, the public sector forgoes a profit share in the project as it takes over the entire project structure after the lapse of the project concession period. Hence, in the case of a toll road, if the public sector contributes 25%, at the end of the concession period, it earns the entire 100% of the structure built.

    But this is resorted to when the public sector would want to optimize their limited financial resources as well as optimizing its financial risks.

    If the project were to be funded out of ODA loans, the public sector would shell out about 25% of the entire cost of the project as its mandatory counterpart funds. The balance is taken cared of the ODA loan releases. This translates to a 100% financial risk of the public sector.

    If the project were to be under PPP modality, the public sector can still shell out 25% as its equity participation and the balance is taken cared of by the private sector proponent/developer in terms of equity and loans without government guarantees. Thus, the financial risk of the public sector is limited to only 25% but is able to have 100% of the project delivered and service the population.

    PPP is normally solicited if the government wills it to be so.

    It is a mistake to state that PPP only favors the “big ones” as even if the projects were to be under the normal procurement modality of an ODA-financed or by internal appropriations, the size of the project would still relegate the activity to the appropriate size of the developer or contractor just the same.

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  2. Lito,
    Thanks for your info and your comment. But how come it seems that it is not so easy to get this kind of info? As to “bigness,” usually there is no point involving the public sector unless the matter is big enough to be a public good. Otherwise, the private capital markets can be expected to work well enough, as it would be “normal business.”

    The matter of who bears the risk is a good question. If, in the end, the government owns the project, then the private partner has unloaded its risk too. No? At least with ODA, the interest rate is low and the aid giver may have an incentive to police the project against corruption. With PPP, who watches? Perhaps all PPPs should have a built-in FOI-type commitment to explain to the public how it works.

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