State ownership equals control by politicians
By Felicito C. Payumo - Inquirer
MANILA, Philippines -- Revenue collections are never enough. Assets for sale are not inexhaustible. And there is a limit to what government can borrow.
These realities impelled the 8th Congress to craft a measure to formalize public sector and private sector partnership in infrastructure development. After all, there’s no reason why infrastructures should remain the sole responsibility of the state. Thus, Republic Act 6957, titled “An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes,” otherwise known as the Build-Operate-Transfer (BOT) Law was passed on July 9, 1990. Under the BOT scheme, “the contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon.”
President Fidel V. Ramos relied heavily on the BOT Law to get us out of the “era of darkness” in the early 1990s. President Gloria Macapagal-Arroyo likewise counts on the private sector in the implementation of her Medium-Term Development Plan. Since the law’s passage, investments in BOT projects have reached $20.349 billion, of which $7.975 billion was invested in power projects. The rest went to the water, information technology and property development sectors. Had it not been for the law, these projects might not have been implemented.
But even a good law can be taken advantage of, if the government is in a weak position. Investors are indispensable partners of government, but they are also hard-nosed businessmen. If they know that the government has no alternative, they will go for maximum advantage. That’s how we got the independent power producers (IPPs) with their “take or pay” contracts. Under the contract, the government is obligated to pay for the capacity of the plant regardless of whether it is operating or not. The IPPs knew that while the government mothballed the 620-megawatt nuclear power plant in Bataan, it did not have a project in the pipeline to replace the lost capacity.
I am bringing this up because we are being visited again by power blackouts. The recent downpour summoned by prayer power may alleviate the situation, but if we are not able to install the required generating capacity on time, the rotational blackouts could become long and widespread. Shall we then rush in more IPP projects with the “take or pay” provision?
True, the government does not extend a loan guarantee. What it provides is a virtual guarantee against loss. Thus, it was hardly surprising that investors were queuing up to secure an IPP contract.
It was never the intention of the law to shield the investor against loss. The investor is expected to assume the business risks attendant to the financing, construction, operation and marketing of the project. While the matter of government guarantees was included in the definition of terms in the amending law (Republic Act 7718 was passed mainly to include variants of the BOT scheme and to allow unsolicited proposals), there is no specific provision on “government guarantees” in either the original or amending law.
It was probably mentioned in the amending law “in anticipation” of the Implementing Rules and Regulations (IRR), section 13.2 (b) (ii), on “Credit Enhancements.” The IRR provides that “Credit enhancements may include but are not limited to government guarantees on the performance or the obligation of the agency/LGU under its contract with the proponent, subject to existing laws on indirect guarantees.”
Lawyers can argue whether or not the rule expands (or amends) the law and provides for something which is not expressly provided by either law. But what is clear is that we will have no choice but to accept more IPP contracts if the government does not act soon to install sufficient new capacity.
All this is not to demean the vital role of the private sector. The furor about the $329 million ZTE National Broadband Network (NBN) and the $460 million backbone for the Cyber Education Program (CEP) brings this issue to the fore. Not only does the government have no core competence for the projects, as two economics professors at the University of the Philippines said, it will be abandoning its policy “to stay out of business.”
The principle of subsidiarity not only says that matters ought to be handled by the smallest, or lowest competent authority, it holds that governments should undertake only those initiatives that exceed the capacity of individuals or private groups acting independently. The government will save money by putting up a backbone for its communications system despite the existence of the IT infrastructure set up by Philippine Long Distance Telephone Co. and its competitors? Why not go the whole hog by buying back Philippine Airlines and the Pantranco bus company because government personnel travel extensively between Manila and the remotest villages? Why not stop selling National Power Corp.’s power plants?
Government ownership of business, especially in the Philippines, does not mean public ownership of the business. It only amounts to control by politicians and civil servants.
Margaret Thatcher said it well: “State ownership effectively removes -- or at least radically reduces -- the threat of bankruptcy which is a discipline on privately owned firms... For state-owned businesses, targets can be set, warnings given, performance monitored, new chairmen appointed, but they can never function as proper businesses. The very fact that the state is ultimately accountable for them to Parliament rather than management to shareholders means they cannot be. The spur is just not there.”
Felicito C. Payumo is former chair of the Subic Bay Metropolitan Authority. He is the principal author of the BOT Law. Comments to fcpayumo@gmail.com
MANILA, Philippines -- Revenue collections are never enough. Assets for sale are not inexhaustible. And there is a limit to what government can borrow.
These realities impelled the 8th Congress to craft a measure to formalize public sector and private sector partnership in infrastructure development. After all, there’s no reason why infrastructures should remain the sole responsibility of the state. Thus, Republic Act 6957, titled “An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes,” otherwise known as the Build-Operate-Transfer (BOT) Law was passed on July 9, 1990. Under the BOT scheme, “the contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon.”
President Fidel V. Ramos relied heavily on the BOT Law to get us out of the “era of darkness” in the early 1990s. President Gloria Macapagal-Arroyo likewise counts on the private sector in the implementation of her Medium-Term Development Plan. Since the law’s passage, investments in BOT projects have reached $20.349 billion, of which $7.975 billion was invested in power projects. The rest went to the water, information technology and property development sectors. Had it not been for the law, these projects might not have been implemented.
But even a good law can be taken advantage of, if the government is in a weak position. Investors are indispensable partners of government, but they are also hard-nosed businessmen. If they know that the government has no alternative, they will go for maximum advantage. That’s how we got the independent power producers (IPPs) with their “take or pay” contracts. Under the contract, the government is obligated to pay for the capacity of the plant regardless of whether it is operating or not. The IPPs knew that while the government mothballed the 620-megawatt nuclear power plant in Bataan, it did not have a project in the pipeline to replace the lost capacity.
I am bringing this up because we are being visited again by power blackouts. The recent downpour summoned by prayer power may alleviate the situation, but if we are not able to install the required generating capacity on time, the rotational blackouts could become long and widespread. Shall we then rush in more IPP projects with the “take or pay” provision?
True, the government does not extend a loan guarantee. What it provides is a virtual guarantee against loss. Thus, it was hardly surprising that investors were queuing up to secure an IPP contract.
It was never the intention of the law to shield the investor against loss. The investor is expected to assume the business risks attendant to the financing, construction, operation and marketing of the project. While the matter of government guarantees was included in the definition of terms in the amending law (Republic Act 7718 was passed mainly to include variants of the BOT scheme and to allow unsolicited proposals), there is no specific provision on “government guarantees” in either the original or amending law.
It was probably mentioned in the amending law “in anticipation” of the Implementing Rules and Regulations (IRR), section 13.2 (b) (ii), on “Credit Enhancements.” The IRR provides that “Credit enhancements may include but are not limited to government guarantees on the performance or the obligation of the agency/LGU under its contract with the proponent, subject to existing laws on indirect guarantees.”
Lawyers can argue whether or not the rule expands (or amends) the law and provides for something which is not expressly provided by either law. But what is clear is that we will have no choice but to accept more IPP contracts if the government does not act soon to install sufficient new capacity.
All this is not to demean the vital role of the private sector. The furor about the $329 million ZTE National Broadband Network (NBN) and the $460 million backbone for the Cyber Education Program (CEP) brings this issue to the fore. Not only does the government have no core competence for the projects, as two economics professors at the University of the Philippines said, it will be abandoning its policy “to stay out of business.”
The principle of subsidiarity not only says that matters ought to be handled by the smallest, or lowest competent authority, it holds that governments should undertake only those initiatives that exceed the capacity of individuals or private groups acting independently. The government will save money by putting up a backbone for its communications system despite the existence of the IT infrastructure set up by Philippine Long Distance Telephone Co. and its competitors? Why not go the whole hog by buying back Philippine Airlines and the Pantranco bus company because government personnel travel extensively between Manila and the remotest villages? Why not stop selling National Power Corp.’s power plants?
Government ownership of business, especially in the Philippines, does not mean public ownership of the business. It only amounts to control by politicians and civil servants.
Margaret Thatcher said it well: “State ownership effectively removes -- or at least radically reduces -- the threat of bankruptcy which is a discipline on privately owned firms... For state-owned businesses, targets can be set, warnings given, performance monitored, new chairmen appointed, but they can never function as proper businesses. The very fact that the state is ultimately accountable for them to Parliament rather than management to shareholders means they cannot be. The spur is just not there.”
Felicito C. Payumo is former chair of the Subic Bay Metropolitan Authority. He is the principal author of the BOT Law. Comments to fcpayumo@gmail.com
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