Public-Private partnerships (PPPs) entail risks. There are risks retained or transferred by the government to, or shared with, the private sector proponent (PSP).
Neither the government nor the PSP should bear all the risks. If the PSP will be incentivized by the government to engage in excessive risk-taking due to inappropriate government guarantees and subsidies, this amounts to “Moral Hazard Risks” (MHRs) according to Jacques Cook of the Institute for PPPs (IP3).
MHRs can result in the formation of a new government entity or de facto parastatal further burdening the budget. Crony capitalism could also come about, which may result in public bankruptcy or fiscal crisis. Ned White, also of IP3, cautions against MHR. This could result in government bailout of PPP projects where public funds, which can be used for basic services, are now used to pay debts of the PSP.
This does not mean that the government should not assume any risk. Per Cook, the government must have some “skin in the game” so that PPPs will result in the desired outcome. If the PSP performs all the functions and assumes all the responsibilities of a project, then it will bear all the risks. This would increase the total project cost as no risk is cost-free.
High project cost would mean high end-user fees, which could result in “white elephants,” non-user of the project, payment defaults and protests.
So, the downside of faulty calibration of risks and misallocation of liabilities either by the government or the PSP will yield the same effect, i.e., public harm, rather than public good.
In the 12 PPP projects awarded under the build-operate-transfer law by the current administration, the government contributes. In the Daang Hari-South Luzon Expressway Link, Ninoy Aquino International Airport Expressway and Cavite-Laguna Expressway projects, the government shall provide the right-of-way (ROW). In the PPP School Infrastructure Phase 1 project, under a build-lease-and-transfer scheme, the government will pay the PSPs an annual lease rental for the next 10 years. In Phase 2, the government, using the build-and-transfer modality, will pay the PSPs as if the former procured the classrooms. For the SITS, the government will pay an annual fee.
Whether it is ROW, annual rent or fee, or outright payments, we, ultimately, absorb the risk. As taxpayers, whether we use the facilities or not, we shoulder the costs, and pay for the subsidies and fees.
Is the administration guilty of engaging in MHRs for these projects? Is the government “skin” excessive? I do not think so. On its face, the risk allocation is appropriate, even desirable. There is no incentive for the winning PSPs to engage in excessive risk-taking. If the government had to undertake these projects on its own, it would spend more and bear all risks.
What we have to guard against is the possibility that our public officials will renege on their commitments.
The annual rent or fees may not be budgeted. New tax regimes may be imposed. Expenses may be disallowed on audit. Executive officials may not prioritize the implementation of these projects.
The daunting challenge is how to “future-proof” these risky arrangements.