Friday, November 05, 2010

Government for private profit

In his first state of the nation address, President Benigno Aquino III bewailed the fact that his new government has only 6.5 per cent (or 100 billion pesos) left of the total government budget of 1.54 trillion pesos to spend for the remaining months of the year. He pointed to his predecessor’s wasteful use of government funds as one reason for this sorry state of the nation’s coffers.

There was no need to worry, the President said, like a hopeful captain of the ship reassuring his passengers of the impending storm. “The answer is a new and creative approach to our long-standing problems. Many have already expressed interest and confidence in the Philippines. Our solution: public-private partnership,” the President declared.

In a speech before the Council on Foreign Relations in New York during his first foreign trip as President last September, Noynoy Aquino repeated his mantra of public-private partnership. He said: “I am here today to tell you that my government is doing what it takes to create a more investor-friendly environment. I came here to declare that the Philippines is open for business under new management. The forging of private-public partnerships would be our main engine in revving up our economy. We will enlist the participation of the private sector, both domestic and foreign, in big-ticket, capital-intensive infrastructure projects, while ensuring reasonable returns. We look forward to the participation of the U.S. investors, specifically as we open up our infrastructure sector for foreign participation.”

What exactly is this public-private partnership or PPP that President Aquino is so enamoured of? Contrary to what Noynoy Aquino claimed as a “new and creative approach,” PPP has a history of two decades of hit-or-miss performance in the Philippines, having been started by his mother Cory Aquino through the Build-Operate and Transfer program or BOT upon the advice of the International Monetary Fund (IMF) and World Bank.

Before he left for New York, Noynoy Aquino signed an executive order renaming the BOT Centre as the Public-Private Partnership Centre of the Philippines (PPP Centre) and earmarked P300 million for the study and evaluation of selected PPP programs and projects.

The concept of public-private partnership (PPP) applies to a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies. It is sometimes referred to as P3.

Fundamentally speaking, public-private partnerships are about giving private investors and financiers high returns with low risks, at the long-term expense of taxpayers and the public. Proponents of P3s are able to borrow capital at lower rates of interest, which narrows the interest rate spread between private and public sector borrowing rates, allowing P3s to appear more financially attractive than otherwise.

In reality, however, private investors do not bring as much investment to the table as advertised but actually rely on foreign loans, frequently with state guarantees. The Aquino administration’s PPP program will likely be funded through a multibillion foreign borrowing scheme. Another possibility is the creation of a government corporate entity that would sell bonds to foreign creditors to raise funds to bankroll infrastructure projects.

Right now, the Aquino government is developing a proposal to set up a new entity that would serve as a financial intermediary for PPP projects, issuing bonds and providing funds, equity participation and guarantees. This initiative would also involve ongoing discussions with multilateral financial institutions. The government is also planning to establish an insurance scheme to protect private partners in the event of courts overturning a contract or issuing a stop order. A total of $15 billion has also been earmarked by the current administration for its 2011 budget, representing the government’s counterpart for funding of PPP projects

Doesn’t PPP sound like privatization, and nothing more? Critics of P3s in Canada point out that they are means to contract-out public services over the long term, which in effect, is “privatization by stealth.”

The ideological preference for the private sector is based on the belief that the private sector can deliver services more efficiently than the government, and that the role of the state should be reduced. This can be traced to the pro-privatization policies of the late 1970s and 1980s when governments in North America and the U.K. pushed heavily for deregulation, policy decentralization, cutting the size of government, outsourcing public services and privatizing important utilities such as gas, electricity and communications.

Right-wing political groups and neo-liberals also helped spawn the notion of the private sector being superior in terms of efficiency and effectiveness. But the cuts in public spending that they demanded served to fuel disenchantment with the public sector. Privatization created problems of its own that only proved that the private sector was just as capable of the inefficiencies commonly imputed to the public sector.

The failure of Metronet, the private company that won a £30 billion, 30-year P3 deal to upgrade and maintain London's Tube network best illustrates the pitfalls of privatization. Taking over the beleaguered transport, the City of London cost its taxpayers an extra £2 billion and left Londoners with 500 subway stations in various states of disrepair for a P3 deal that was forced on their city by the central government under its Private Finance Initiative (PFI). Even the normally conservative Economist magazine admitted that the P3 deals looked like "complicated costly mistakes."

There is no empirical foundation to the claim that the private sector is better at managing risk than the public sector. In Canada, where virtually all P3s have been modelled after the U.K. privatization efforts, a growing list of public-private ventures shows that P3s are both more risky and more costly for the public. A number of Canadian studies reveal that privatization is often no more efficient or less costly than conventional approaches to service delivery. In the area of utilities, for example, studies have shown that there is no significant difference between public and private utilities in terms of quality of service.

Noynoy Aquino’s first 100 days of presidency are not very encouraging for ordinary Filipinos. His ambitious privatization program, which rivals the privatization frenzy of the 1990s through the public-private partnership route, is a clear indication that his government will continue to adhere to controversial free market policies that have pushed poverty and hunger to their worst levels.

The present administration’s privatization initiative is tantamount to a mega-sale of the Philippines to foreign investors who would participate in the public-private partnership programs of the government, which is best advertised by Noynoy Aquino’s declaration that “the Philippines is open for business.” His trip to the U.S. netted him US$2.4 billion in committed fresh investments, which included US$1 billion of PPP funds from the American Energy Solutions (AES) for the expansion of the capacity of the Masinloc power plant by up to 660 megawatts.

After his state of the nation address last July, President Aquino has ordered increases in mass rail transit fares and power rate hikes to finance privatization debts and scrapping of the rice subsidy. The government justified the hikes in train fares as necessary in order to pay the investors’ profits which were guaranteed by the government despite the government’s takeover of the Metro Railway Transit (MRT) system.

Last month, the Philippine Supreme Court lifted its restraining order on toll fee hikes in Southern Luzon Expressway (SLEx), Skyway and Northern Luzon Expressway (NLEx) where it said that private developers contracted by the government to build and operate what should have been government-controlled services are entitled to the right to reasonable profit. Drivers using these expressways have lamented that the roads which are part of public service have now been privatized and turned into businesses for profits.

Everywhere public-private partnerships are resorted as options to build infrastructure or render essential public services like transportation and utilities, P3s have turned out to be both flawed and costly. The traditional way of creating infrastructure, for example, was to have the private sector design and build it, but for governments to finance, maintain and operate it. The P3 model extends the role of the private sector into all of those areas. Everybody wins, so they claimed P3s could deliver – the private sector gets paid well for their efforts and after say, 30 years or so projects revert back to the public. But the reality is, all too often, it is the citizens who are left holding the bag and the list of failures keeps on growing.

Public-private partnerships, like the huge bailouts the U.S. government needed to stimulate its economy after the Wall Street financial meltdown, ultimately place all the risk on the shoulders of the public, while the private sector gets all the profit. Infrastructure and public services are still best financed and delivered by the public sector, and should not be left to risky and unaccountable public-private partnerships, especially if the end goal is privatization.

A Canadian actor and activist puts it best: “P3s should be called P12s – Public-Private Partnerships to Plunder the Public Purse to Pursue Policies of Peril to People and the Planet for all Posterity.”

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