ODA OR PPP? WHAT’S BEST FOR THE MANILA SUBWAY?

The Duterte Administration is pushing the official development assistance (ODA) track with Japan to realize one of its flagship projects, the Mega Manila Subway. Government is embarking on an unprecedented infrastructure program to the tune of P8.4 trillion ($168 billion) over the medium term, under its “Build, Build, Build” economic strategy. The Manila Subway falls into this ambitious agenda. Resurgent contributor Sam Leone, however, believes that ODA is not the only option available.

The Mega Manila Subway is planned by the Japan International Cooperation Agency (JICA) and the Department of Transportation (DOTr) as an Official Development Assistance (ODA) government-to-government undertaking, perhaps with a hybrid element for private Operations & Maintenance.  Costs for the 25km system are estimated at 227 billion Pesos (P 227,000,000,000), before recent commitments to extend the alignment to the Ninoy Aquino International Airport (NAIA) which will increase the total.  

DOTr and NEDA have embraced ODA from Japan as the way forward to realize this important undertaking.  ODA however is not the only option; another approach, better in many peoples opinion, is RA 7718, the BOT law, providing for private investment and capital to reduce government’s exposure and risk.   Historically, ODA was used for infrastructure too large or risky to attract private capital.  However, undertakings like the Manila subway, because of the potential ridership and revenue streams, can attract both ODA and private financing.   

Which is best for the Philippine taxpayers and Metro-Manila commuters, ODA or PPP?

PPP and ODA projects are fundamentally different.  ODA projects are owned by Government, sponsored and financed by ‘donor’ countries.  PPP (RA 7718) projects on the other hand, while still owned by Government, encourage Public-Private-Partnership with private enterprises.

ODA is another way of saying ‘loan,’ which costs taxpayers even when funds are borrowed at concessional rates.   Concessional ODA loans are planned by DOTr and JICA to finance construction, provide rolling stock, equip depot, etc.   They may also be required for operating subsidies because the farebox rate, for politically-motivated reasons, may be mandated by government to be lower than it should be to fully recover operating costs. 

Alternatively, private partners in a PPP undertakings provide 100% of the construction financing, assume and manage all construction risk, and then deliver and operate the system for a concession period of 30-50 years to enable it to recover its investments.   Farebox rates for PPP undertakings, while regulated by Government, provide a realistic revenue stream to fully recover operating and maintenance costs. 

JICA’s ‘desirable farebox’ for the Manila subway is Pesos 22 entry + 2 Pesos/km.  This rate is far too low to recover investment and operating costs; it will not recover even half of actual operating costs.  And this situation is not unique; Manila’s (Metro Rail Transit) MRT3 similarly operates with a government subsidy of more than three times the farebox.

For the nation’s taxpayers,’ borrowing to pay subsidies, even at concessional rates, adds long-term debt to the government’s balance sheet and reduces funds otherwise available for other priorities.  Operating subsidies if they are required would be annual, not one-time costs, so for the 50-years-or-so life of the subway the costs of borrowing to cover operating deficits would be incurred.  Subsidies are an "evergreen" loan, to use a banker's term, perpetually indebting borrowers, in this case the Philippine Government, and generating revenue for the banks providing the funds.  

Non-rail revenue, for example real estate sales and rentals at station locations, advertising, parking, etc. can potentially help subsidize operating deficits.  However, because there are also competing uses for these funds, for example rail and railcar maintenance technology, passenger amenities, and profit, this approach is problematic.   It creates an incentive for the proponent to minimize investments in amenities and maintenance technology, retaining as much revenue as possible as profits.  MRT3 has sadly proven this kind of system is dysfunctional; derailments have occurred due to lack of investment in rail maintenance technology, and passenger amenities such as escalators and elevators don’t exist rendering the passenger experience miserable.  

A PPP Unsolicited Proposal project structure avoids these issues with a market-based farebox rate that recovers the cost of construction & operations from the users of the system.  No Government subsidy, financial or construction risk is allowed within a PPP Unsolicited Proposal project structure and is thus a much better alternative for the people of the Philippines to the ODA model. 

Subsidies, if required as they are for MRT3, would require a variety of yearly approvals by government, both administrative and congressional, opening the door for potential corruption in the granting of such approvals.  A market-based full cost-recovery model reduces the potential of corruption by eliminating annual government approvals of subsidies.

ODA financing from Japan would most likely be made available to construct, operate and maintain the project.  JICA financed the N-S Commuter Rail project with a Special Terms for Economic Partnership Loan, fixed at 0.1% over a 40-year term, plus a 10-year grace period.  These loans, albeit with concessional interest rates, will nonetheless cost taxpayers of the Philippines millions of dollars.  An RA 7718 PPP Unsolicited Proposal project structure does not cost the government whatsoever.  It’s very clear PPP project structures are best for the Philippine people and taxpayers.  

In addition, ODA financing from JICA is ‘tied’ to procurement of Japanese services and technology.  ‘Tied’ financing has proven problematic in the past as Japanese suppliers are at times unable to meet project schedules due to JICA’s global reach and demand at home and abroad for Japanese products and services.  Beyond delivery/schedule issues caused by tied procurement, prices of Japanese technology are often higher than what may be available globally.  And while Japanese technology is generally excellent, it is not the only excellent option available globally.   Acceptance of Japanese ODA financing limits technology options in favor of Japan, Inc.  The PPP Unsolicited Proposal does not have such constraints, as the proponent is free to source and negotiate for the best quality at the lowest cost and delivery schedule world-wide.

Manila is blessed with excellent sub-soil conditions, generally Guadalupe Tuff, a type of adobe which is ideal for tunneling.  Initial studies indicate the system can be constructed underground using traditional mining excavation methods without expensive tunnel boring machines except for a limited section with softer soils.   ODA financed construction may however specify use of expensive TBMs for the entire system, considerably raising construction (and loan) amounts to create sales opportunities for Japanese suppliers. 

In addition to cost and schedule issues, ODA financing requires public bidding processes for services and goods which, because of cumbersome administrative requirements and potential for protests and delays, result in higher transaction costs.  PPP Unsolicited Proposals, where the proponent sources funds and manages procurement within its procurement policies, eliminates government bureaucracy and potential protests and delays.  PPP project structures will result in lower transaction costs and more efficient management versus a government managed and controlled system.  PPP undertakings place the burden of financing, operations and maintenance solely on the proponent and allows it to control the risk, which will result in a more efficient and timely delivery of the project.      

In view of all the above, before signing ODA loan agreements which will indebt the nation for decades, Government should solicit private PPP offers for comparison.  In doing so they will find more benefits and less cost with a PPP undertaking versus costly and debt producing ODA.

(Sam Leone is a pseudonym for an American expatriate who's had extensive and long-term development work in the Philippines. —editor)