The PPP promise, a work in progress

BUSINESS WORLD
Introspective


After a false start and a few years limping along, the Aquino government’s flagship PPP program finally roared to life. In relatively quick succession, the government bid out or awarded four projects worth P125 billion and rolled out six more costing about P170 billion. What was particularly surprising was that the auctions yielded substantial concession fee payments to the government, as against pre-bid financial model results showing that the government would have to provide subsidies to enhance project cash flows.

Encouraged by the successes, the government through the PPP Center has lined up another seven projects worth about P180 billion for approval by the National Economic and Development Authority (NEDA) board, and is preparing feasibility studies for 10 other projects. In all, there are about 50 projects in the PPP Center’s pipeline which the government is also actively marketing to foreign investors through a series of international road shows.

The mood has not always been this upbeat due largely to unmet expectations following the government’s high publicity launch of the program back in 2010. Then, the much-hyped “PPP is the solution to the infrastructure shortage in the country” failed to consider that in the wake of controversies surrounding failed PPPs in the past, both sides of the partnerships had their guard up and were distrustful of each other. In particular in the aftermath of the Asian crisis, the public sector had to grapple with and absorb some of the liabilities in PPP contracts, and for years leading up to 2010 preferred to manage the risks from contingent liabilities by avoiding them altogether. In turn, the private sector was particularly leery of government contract promises that the latter had time and again failed to keep, notably delays in tariff adjustments in most sectors -- power, water, rail, toll roads -- particularly during politically sensitive periods.

Moreover, there were very few market-ready projects in the pipeline at the time and fast-tracking last-mile adjustments to ready projects was constrained by technical limitations in implementing agencies. It was thus a slow process of learning by doing on a per-project basis, tentatively delineating risks among the parties involved, with the government deftly testing what risks the market could bear through actual biddings of smaller projects.

These included (a) a small 4-kilometer (km) toll road in December 2011 that very soon became stuck in right-of-way (ROW) disputes, and (b) a project to build classrooms, awarded in September 2012, that was the first of its kind in that it relied solely on government payments for its cash flows and thus was not able to attract more bidders willing to assume congressional appropriations risk. Critics also pointed out that this project and its second phase the following year lacked features of true PPPs in that the private sector merely handled construction of the schools and were not exposed to market and operating risks.

The first major win for the Aquino government was the P15.5-billion, 7.75-km, four-lane elevated NAIA Expressway project that had been in the drawing board for decades and was finally brought to market with donor technical assistance. Albeit it attracted only two bidders, the auction, won by a consortium led by one of the large domestic conglomerates (SMC) in May 2013, yielded P11 billion in concession fees to the government and by early 2014 had already broken ground. Another win six months later was a five-way bid in November to install a P1.7-billion single-ticketing system for Metro Manila’s rail system, where the winning bid was a P1.1-billion payment to the government.

But it has not become easier. The latest auctions, involving three multibillion-peso transport projects, have been uphill struggles for both the government and the private sector. The challenges that have emerged during the bid stage are reminders of the inherent difficulty and associated time lag of doing PPPs, especially in a developing country like the Philippines where institutions remain weak and bidders take for granted that calling on the courts, Congress or the President to intervene on their behalf is part of the rules of the game. Such politicization of the formal PPP processes tarnishes the program’s image and dulls investors’ appetites. Here are a few of the project holdups:

LRT LINE 1 EXTENSION
The biggest and the most complicated one to date, it has been subjected to repeated feasibility studies. The first bidding in August 2013 failed due to misallocation of risk (shifting to the private sector the uncertainty of real property taxes) and the insufficiency of allowed subsidy. It was rebid in May this year with the lone bidder (out of seven prequalified) winning. The award was delayed to September by a still ongoing legal tussle involving the location of a “common station” shared with another rail line.

MACTAN-CEBU AIRPORT TERMINAL
Seven bidders showed up in November 2013, with the consortium of Megawide Construction Group, which partnered with India’s GMR Infrastructure, winning the bid. Citing conflict of interest, the losing bidder challenged the qualifications of the winning group, which was then subjected to a Senate inquiry. Even with a legal challenge filed before the Supreme Court, the project was awarded in April, delayed by a few months.

CAVITE-LAGUNA EXPRESSWAY
Four groups vied in the June bidding, with the SMC consortium disqualified based on a noncompliant bid bond. Of the three remaining, the Ayala-Aboitiz consortium offered the highest premium, amounting to P11.66 billion. The SMC group claimed that it would have won with a P20 billion had it not been disqualified on a “technicality.” It appealed to the President to overturn its disqualification and the Palace issued an order in late June suspending the awarding of the project. The issue has yet to be resolved.
(Next week: Moving forward)
This piece is based on a GlobalSource report by Christine Tang and Romeo Bernardo
Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.

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(to be published Nov 10)
Moving forward
From where it started in 2010, government has made significant strides in terms of project awards and in building a pipeline of PPP projects using the donor-supported Project Development and Monitoring Fund (PDMF).  The PDMF framework has led to a coherent, solicited and transparent government-led PPP program, a departure from the past where projects originated via the private sector-driven, unsolicited route. Donor assistance has also gone into strengthening technical capacity in government agencies for identifying and implementing projects suited for PPP and to a more limited extent, drawing up sectoral master plans that map out project requirements.

Notwithstanding the above, the PPP program is still a work in progress (with proposed changes to the legal framework pending in Congress) and continues to be at risk of sliding to stall speed.

For starters, success to date has been based on selecting projects that were either relatively simple to do or had ready feasibility studies sourced either from past technical assistance or unsolicited proposals.  The risk now is of exhaustion of feasibility studies for projects that may be undertaken as PPP.  While the PDMF is envisioned to be self-sustaining, seed funds provided by donors are at risk of becoming depleted as there is a gap/ time lag in its replenishment via reimbursement from awarded projects.   Also, while it would be fair to assume that the contract models now in place for each of the sectors awarded would make it easier to do succeeding ones, we think that the challenge of bringing seemingly similar projects to market will remain a slow process due to the many idiosyncratic factors, including political ones and even at the local government levels, that affect different projects’ risk profiles differently.

Moreover, as the program moves away from brownfield projects, where there are existing and predictable revenues streams, to riskier greenfield projects with uncertain demand, the as yet unknown unknowns can be expected to contribute to longer project cycles.  One example is the newly rolled out P123-billion expressway dike project, the biggest one by far, which we understand will have to hurdle challenges from competing tollroad concessions that may see their traffic volume diverted to the new road as well as a skewed cashflow profile with the huge upfront cost to be recovered from revenues too far into the future.

The policy environment
As PPP projects become bigger, riskier and more complex, government will also need to assess its own appetite for taking bolder measures to de-risk projects and provide stronger assurances to investors that it will be able to fulfill contract promises.  So far, the general impression is that due to its unpleasant experience with realized contingent liabilities in the past, government has been overly cautious in assuming risks in PPPs.  Even if government were prepared to assume more risks, its ability to do so in the short-term would be constrained by the lack of a medium-term expenditure framework that would enable it to commit resources to long-gestating PPP projects over successive administrations and protect projects from politicization.  For instance, we expect that two long-term public financial support mechanisms will become more important over time, but both will probably need legislation.

One is an automatic payment mechanism where annual appropriations will be allowed to accumulate and used automatically for payouts in case of government contract breach, similar to the treatment of debt repayments.  This would be a more permanent structure compared with the current setup where a “Contingent Liability Fund“ item is lodged under “unprogrammed funds” in the budget and expires every year and would have to be appropriated anew every year.  Similarly, a separate long-term fund is needed to meet so-called “availability payments” for projects that rely partly or wholly on government payments for financial viability (Examples include the classrooms and hospital projects as well as PPP structures similar to the take-or-pay power contracts in the 1990s). At present, government is relying on an instrument called multi-year obligation authority (MYOA) that commits the executive to include the required payments in the annual budget over the project period; but it is non-binding on the legislature which approves the budget, thus exposing investors to risk of non-appropriation by congress every year.

There is additionally the challenge of sustaining competitive pressures by expanding the pool of potential bidders beyond the current list of mostly large local conglomerates, which will be crucial to safeguarding the bidding process and ensuring that government receives the best price.  So far, the seemingly high concession payments on awarded projects suggest adequate competition but which we think may be more properly traced to extraneous factors – current low interest rate environment and upsides from real estate development that have enhanced forecast revenues beyond a “project only” analysis – that may not be relevant in future projects.  In the event, Constitutional restrictions particularly on public utilities may become binding constraints to ramping up PPP deals.

Postscript
The challenges notwithstanding, we think that the PPP program will continue to be a necessary feature of the country’s infrastructure program not only because of constrained public resources but more importantly because it enables government to tap into private sector technical, financial and managerial expertise.  But even as government is devoting a lot of resources on developing and marketing new deals, it should probably also pay mind to how it treats its private partners in ongoing PPP projects.  Recent reports of backtracking from market-based electricity rate setting, reinterpretation of the concession agreement with water concessionaires on the recoverability of corporate income taxes, and the delays in rate adjustments in mass transport and toll roads put the stability of the country's regulatory environment in a bad light.

At the end of the day, it is the assurance of a predictable legal and regulatory environment during the bidding and award stage and over project life that will kindle private sector interest and achieve value for money for the public sector.

Bangsamoro is a gamechanger

Introspective 
BUSINESS WORLD

http://www.bworldonline.com/content.php?section=Opinion&title=bangsamoro-is-a-gamechanger&id=95160 



THE GOVERNMENT’S herculean effort to put behind us a four-decade old, costly and painful civil strife and gain for us all the benefits of peace deserve our support. This can be a potential game changer in our economic landscape, not just in what is now called the Autonomous Region for Muslim Mindanao, but for the entire country. True, there are risks along the way. But it is well worth giving peace a chance.


The legitimacy of the Moro wars for independence was the basis for the peace negotiations from the time of Marcos to the present. The Bangsamoro claim they are a separate nation with a distinct identity, culture and independent state (sultanates) with a long history of resisting the colonizers. Nations like this have the “right to self-determination” (RSD), according to the United Nations. The Organization of Islamic Conference (OIC) supported Nur Misuari and the Moro National Liberation Front in part because they supported the Bangsamoro fight for independence under the RSD and in part because they believed that the Muslims of Mindanao were under threat of genocide during martial law.

Peace in the South can bring up Mindanao’s contribution to the gross domestic product (GDP). Mindanao has abundant primary resources, perfect agro-climatic conditions, lower wage rates (with the ARMM cost half of average labor cost in Mindanao), still lower power cost, and vast opportunities for growth and diversification through its BIMP-EAGA connection. Investments have stayed away from Mindanao, even more so than the rest of the country, due to security concerns. Remember the Zamboanga siege? The Ampatuan massacre? Killers for tourism and investments, and not just in Muslim Mindanao.

As for opportunities in the ARMM, the region has the biggest areas of untapped natural resources, rich fishing grounds and fertile lands, the best beaches anywhere in the Philippines or anywhere else, and closest cultural and historical links with Brunei, Indonesia and Malaysia which can allow the region to access new capital thru Islamic financing as well as a new export market in the still growing halal industry. Further, the barter trade between Sulu and Malaysia is an economic tie that is centuries old and can be revived, with BIMP-EAGA and the initiatives being mounted as part of ASEAN 2015, fully backed by the national governments and the Asian Development Bank.

The Bangsamoro will have even more powers than the ARMM government to help craft its own destiny. While the region has disadvantages largely due to the four decades of civil strife and neglect, it also has an important advantage -- starting fresh. It can learn from the history of flawed policies that have hurt the flow of investments and creation of needed jobs in the rest of the country -- rigid and costly labor policies, complex bureaucracies and red tape, a distorted fiscal incentive structure, a failed agrarian reform program and misguided environmental policies that choke the development of a responsible mining industry. As explained by Foundation for Economic Freedom President Toti Chikiamco in a workshop organised by the FEF/Philippine Center for Islam and Democracy, it may actually provide a model for the rest of the country, be the tail to wag the dog, the way Hong Kong/Shenzen has shown the way for the rest of China.

Investors may, by adopting their business models and organisational and management styles to the traditional leadership (datus) structures of the area, find that these can be better places to operate than in other places in the country. This is the encouraging lesson of Unifrutti of former Secretary Senen Bacani and the late Datu Paglas which have won international awards.

It would be fair to ask, who are these guys (in the Moro Islamic Liberation Front leadership) and why do we trust them to succeed? Why do we think that leadership won’t revert to the old traditional leaders/warlords after elections take place?

I posed this question to Amina Rasul, lead convenor of the Philippine Center for Islam and Democracy, also our home Bangsamoro expert. This is what she said: “The MILF leadership is better prepared to take on the mantle of leadership of a civilian government (unlike the MNLF after the signing of the 1996 peace agreement). Under Chair Murad, the MILF has succeeded in establishing the Bangsamoro Development Agency (BDA) and the Bangsamoro Leadership Institute (BMLI). The BDA and the BMLI, chaired by civilians, are led by boards consisting of the MILF Central Committee and professionals. The BDA is tasked to prepare the Bangsamoro Development Plan and has been assisted by development partners and government. The BMLI is putting together training programs for the Bangsamoro. Further, the MILF has been sending young Bangsamoro professionals to study, with the help of development partners.

While all development matters are still decided by the MILF Central Committee, it is clear that the MILF has been preparing for civilian government over the last few years. The failure of the MNLF to govern the ARMM, under Misuari, has been in large part due to their lack of preparation to govern under a democratic system. This is not the case with the MILF, which has been working with government and development partners to put in place programs such as the Sajahatra intended to provide services to its communities.

The MILF leadership also has the support of several political and traditional leaders, particularly in Central Mindanao. “

What can business do to help enhance chances of success at this time -- and moving forward after the Bangsamoro entity is set up?

The most urgent is for the business sector to support the passage of the Bangsamoro Basic Law. The MILF leadership under Murad has invested political capital in the peace agreement. Should the Basic Law be watered down or not passed, the pragmatists in the MILF Central Committee will lose out to the fundamentalist faction which is supported by younger (and more aggressive) leaders who already feel that the original demands of the MILF have been greatly undermined during the peace negotiations.

In the short term, before transition to the establishment of the Bangsamoro political entity, the business sector should assist in providing support for education. First, support adult literacy. Over half a million adults of ARMM are illiterate (more than a third of the voting population). When businesses are established in the Bangsamoro, labor will have to be imported from neighbouring non-Bangsamoro provinces if the existing labor force are unskilled and illiterate. This is a condition that will breed more conflicts, as the affected citizens will lose out on job opportunities to those who have not suffered from the armed conflicts. Second, support short management training for professionals who can run public and private sectors. Apprenticeships and internships can be provided by the private sector. Third, engage the BDA, the BMLI and the Bangsamoro private sectors (chambers of commerce and business councils) to identify opportunities for collaboration.

Let us begin.

Grains and Gilas: Geography, genes, dashed dreams

Opinion
BUSINESS WORLD
Posted on September 07, 2014 08:59:00 PM

Introspective
Raul V. Fabella


WE CAME very close to beating Croatia, Puerto Rico and Argentina in FIBA Spain. We beat Senegal by a whisker. All the basketball world marveled at our fighting spirit. The entertainment value was unmatched. But in the end we were eliminated. We tried; we even enlisted Congress to accord citizenship to foreign behemoths to raise our ceiling. This leaves a bad taste in the mouth, for how far can you go with instant citizens without eroding our team identity? Still, a win is a win. It was not quite our dream but it was certainly better than a “zero win “for China and India. Our genes in the end let us down.
 
And yet there is nothing wrong with our genes; the wrong is with our choice of competitive games. Basketball is a game of physical, not mental elevation. That is why a Jewish NBA player always inspires a chuckle like a ghost. And Jews are not insulted. It’s the case again of some Ivy League schools -- when their lowly football teams surprise some nationally ranked teams, a blue moon moment, there follows a groan of self-examination: a sign perhaps that we have lost our academic edge? For there is no free lunch, not even and especially academic edge. Wisdom dictates that we embrace our genetic make-up and choose the contests that enlist our genetic strengths. And for Filipinos, basketball cannot be the repository of lofty dreams. Jews don’t do so badly reposing their dreams in bio-, nano- and other techs. We can too.

As in sports, so in life. But in life, swimming against the tide can be disastrous. Basketball is at least fun and costs the taxpayer no money. Not rice self-sufficiency. In the annals of myths, rice self-sufficiency stands out as the most enduring. Dreams repeatedly get bludgeoned here, but it does not die. The fallacy is that any nation can just engineer it and thus should. In December 2011, Agriculture Secretary Proceso Alcala bragged that by 2014, the Philippines will be a rice exporter because by then the Philippines will have achieved rice self-sufficiency.

So a program of rice import reduction pulled imports down from 860 metric tons in 2011 to 350 metric tons in 2013 in the hope that domestic rice production will fill the void. Well, domestic production did not, despite the huge budget allocation for rice. In the first quarter this year, rice prices spiked. PNoy’s sagging rating had little to do with the Disbursement Acceleration Program (DAP) and everything to do with the price of rice.

Alcala’s was not just a shattered dream; it almost derailed Matuwid na Daan. The besieged Aquino administration quickly reversed course and rushed an import order of 800 metric tons of rice. It also stripped Alcala of four crucial units of the Department of Agriculture. In Japan, where honor is highly regarded, the same chain of events would have triggered a hara-kiri. Here, Alcala is still there.

Why did rice self-sufficiency fail? Rice self-sufficiency is a matter of geography. This is the message of the recent International Rice Research Institute study. Many economists, including Planning Secretary Arsenio Balisacan, have raised the warning. We do not have a comparative advantage in rice production. Our cost per cavan is too high. You can blame lack of infrastructure and farm-to-market roads till you are blue in the face, but if you do not have steady abundant water and a friendly soil, you will be marginal. Which means only limited areas in the Philippines will be competitive and not nearly enough for self-sufficiency. As Adam Smith once observed, Scotland can produce more wine, but if you have to artificially provide the warmth and abundant sunshine freely available in Portugal, you will go bankrupt. Why not produce woolens instead? Producing efficiently if only a fraction of consumption requirement and importing the rest is common sense. Geography is unfair; but it gets bloody if you bang your head against it. As with genes, you choose crops that suit your geography and not the geography that suits your crops.

It is the familiar law of comparative advantage in trade theory once again. If a country specializes according to comparative advantage -- that is, produce crops where it has a cost advantage, say rice for Thailand -- it realizes increases in its welfare. I prefer to emphasize perverse specialization in my class: countries often harvest a nightmare because their governments decide to defy comparative advantage, which for the Philippines is self-sufficiency in rice.

For an epilogue, I always observe that if left to the private sector, this madness does not arise because private business hates to lose money, its own money. Government bureaucrats, though, lose only other people’s money and worse perhaps make a pile for themselves on the side, making perverse specialization common.

Let me end by telling the story of a friend and fellow BusinessWorld contributor, Romy Bernardo, who turned 60 last week. Romy’s singularly successful career is a parable of genetic jujitsu. Had Romy chosen the tennis or basketball court as his Thermopylae, he would be dirt poor and miserable. But he chose as rapiers what the genetic gods dealt him -- abundant IQ and charming wit -- and he and we are all the better for it.

Raul V. Fabella the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology.

http://www.bworldonline.com/content.php?section=Opinion&title=grains-and-gilas:-geography,-genes,-dashed-dreams&id=94092

The life and times of our only Prime Minister

Introspective, Business World


I WAS PRIVILEGED to be Master of Ceremonies at a recent launch at the Yuchengco Museum of the book of Dr. Gerardo Sicat -- Cesar Virata: Life and Times Through Four Decades of Philippine Economic History (University of the Philippines Press). I highly recommend it to students of economics and history and admirers of the only Prime Minister our country ever had.
   
We waited 30 years for this book, and only Gerry Sicat could have written it. Professor, most prolific author of economic researches papers and textbooks, and development consultant, Sicat is also father of three economic-oriented institutions known for their excellence -- the UP School of Economics, the National Economic and Development Authority, and the Philippine Institute for Development Studies. (More recently, he is known as the father of the also excellent PSE President Hans Sicat.)

The hefty 800-plus-page book “stands on its own,” the author joked, making reference to its ability to stay vertical without support. He explains the reasons for its physical gravitas. “I see it as several books. The scope is large. First there is Cesar Virata. Along with him are other running stories: our nation in its young age of independence, and the problems of economic national building, then the Marcos years -- the positive, the controversial, and the crisis years. It is also about the transition afterwards.” You need to read the book to fully appreciate its intellectual heft.

Those present at that book launch had the privilege of listening to three “reviewers” and a beautiful musical number. These were, in the order of the program:

• Victor Macalincag -- I described him as “PM Virata’s right-hand man at the DoF,” “my former boss who was brilliant and hardworking,” and not the least “according to my wife and I heard the First Lady of that time, the handsomest undersecretary in government.”

• Washington Sycip -- “One of the few who can claim the high honor of being a mentor to PM Virata, even when the latter was still a student. Founder of the SGV Group, now a continuing mentor and guru to the nation.”

• Ambassador Alfonso Yuchengco -- “Industrialist, banker, diplomat, taipan, belonging to that breed of post-war nation builders which perhaps comes only once in a country’s history.”

The music in the forum was provided by the same person who provided the music in PM’s life: Mrs. Joy Virata, singing a soulful rendition of “Summertime.”

In the remarks I would have made had my iPad cooperated, I underlined some lessons for the idealistic public servant on a man who is the gold standard for public service, integrity and patriotism.

“This is the humbling story of a man who persevered and shepherded the economy through the Philippines most critical financial and political crisis. A man who sacrificed his own reputation, never abandoning the ship of state through the raging storm.”

Sicat writes of how PM typically shirked the limelight. He writes about a posthumous honouring of the late Finance Secretary Jaime Ongpin in Malacanang, during the Cory Aquino presidency, where Virata was unacknowledged by virtually all of those who spoke. That is, until Maribel Ongpin took the podium to give her response. She acknowledged Virata. According to Sicat’s recounting, “The full house thundered in applause. These were all faithful members of the Department of Finance, the career people who had worked for him for almost 16 years. He was a man they respected, who had performed his job in the department faithfully, and whose work was acknowledged as the most consistent and successful during his time in the post.”

Allow me to end this piece with an excerpt from Vic Macalincag. After elaborating on the roles PM Virata played across a wide front of economic reform -- banking and finance, trade, investment, industry, project development, international economic diplomacy, development of Mindanao, energy diversification, agrarian reform, etc., he ruefully considered:

“Reading his biography, one is tempted to conclude that in a different setting and stable political environment, and despite restrictive provisions in our laws, his economic management and policy prescriptions and strategies could have placed the Philippines not far behind South Korea, Singapore, Taiwan and Hong Kong.”

Why we need a credit information system, and why we need it now

BUSINESS WORLD
Introspective 


A 2007 STUDY by the Asian Development Bank (ADB) on binding constraints in the Philippines identified the lack of financing as a key stumbling block to growth and development. This was at a time when local banks were holding a lot of excess cash, and chasing after a few large corporates which were thus in a position to demand lower-than-treasury-yield interest rates.

The constraint clearly applied to micro-enterprises and small and medium enterprises (SMEs). Micro-enterprises refer to those with assets under P3 million, small enterprises those with P3 million to P15 million, and medium enterprises up to P100 million. SMEs alone make up 98% of firms in the country. It is often harder to lend to such enterprises than big corporations -- they do not have audited financial statements, and owners do not put a bar between their business and their household wallets.

SMEs’ lack of access to financing is of course not new. Together with the agricultural sector, they have been the target of failed government-directed programs since the 1970s.

In fact, even as the Bangko Sentral has been barred from these developmental activities, laws mandating private banks to lend to agri-agra and SMEs continue to be in effect. In many cases, banks had found themselves better off accepting the penalties of non-compliance than to risk capital loss by lending to these sectors. Why?

At the core of the problem is a well-known market failure in economies, information asymmetry: banks and other financiers do not know as well as the borrower the latter’s track record in loan repayment, and would thus have a hard time telling apart good borrowers from bad ones.

In the absence of reliable information to help banks make the right credit decision, SMEs and most especially micro enterprises applying for loans would face a higher probability of getting denied. This is true as well for individuals.

The flip side is that the pool of borrowers is smaller, resulting in high opportunity costs not just for the banks and other credit providers, but most crucially for the nation and public at large.

Although the problem is a well-known one, it was only in 2008 that a law was passed creating the Credit Information Corporation (CIC). The CIC is supposed to aggregate individuals’ and firms’ credit information in a database to help would-be borrowers prove good credit record (thus improving their chances of getting a loan) and financiers make good credit judgements (thus reducing default risk).

Work on this has been gaining traction in the past year with the appointment of a dynamic and charismatic IT entrepreneur, Jaime Garchitorena, as President. He has the solid support of his entire board, led by its ex-officio chairman, Securities and Exchange Commission Chair Teresa Herbosa.

Under Garchitorena’s leadership, key milestones were achieved: First, a meeting of the minds between the CIC and the first batch of data providers, primarily the banks. In addition to the banks, the CIC is also aiming to fill its database with payment records of utility companies such as Meralco, the water concessionaires and the telecoms, as well as those of pension agencies, cooperatives and micro-finance institutions.

Second, the signing of contract between the CIC and the CRIF, a leading international credit bureau services technology provider, after a thorough and transparent competitive procurement process supported by the International Finance Corporation. The target is to be able to offer CIC’s services to the public toward the end of next year even as it continually expands data sources to enrich its database.

A necessary activity to ensure public acceptance and wide usage of the credit information system (CIS), which the CIC law also mandates, is a continuing awareness campaign that educates the public about the benefits of the CIS, the do’s and dont’s of keeping one’s credit history clean, conditions for accessing credit records, and increasing financial literacy in general.

The activities of the CIC are fully supported by the government in light of the benefits generated by a functional CIC to the economy and financial system. In addition to the Bangko Sentral and the SEC, Finance Secretary Cesar Purisima and Trade and Industry Secretary Gregory Domingo have been keen for the Philippines to join soonest the rest of the original ASEAN countries with a functioning credit information system. This is one of the factors in international competitive surveys -- including the IFC’s Ease of Doing Business.

My own small involvement is as a member of the USAID-funded COMPETE project that is assisting the CIC in bringing global best practice knowledge in the design and marketing of the CIS as well as garnering broad-based support from local financial institutions, industry organizations, and the other government and non-government organizations.

International experience with credit information systems (most recently in Japan, Malaysia, Taiwan) shows that the availability of reliable information helps reduce firms’ and individuals’ financial constraints, increases their access to credit, lowers banks’ loan default rates and fosters long-term responsible borrower behavior. The CIS is clearly a win-win solution to a critical binding constraint to our country’s inclusive growth aspirations. Simply put, the CIC will help improve our people’s lives.

http://www.bworldonline.com/content.php?section=Opinion&title=why-we-need-a-credit-information-system-and-why-we-need-it-now&id=92018

Plumbing the Manila Water story for corporate lessons

BUSINESS WORLD
Introspective


I was recently asked to say a few words at the launch of an Asian Development Bank (ADB) book by Perry Rivera, Tap Secrets, The Manila Water Story. I hope that readers would find the excerpt of what I said below interesting enough to access the free downloadable version in the ADB website, where it will be posted soon. (In the meantime, you can access it from my Dropbox: https://www.dropbox.com/s/z466q9aj17x80jd/0407_TAP%20Secrets_web-version-2.pdf) It is an amazing story of a most successful public private partnership project:

MY ASSOCIATION with the Metropolitan Waterworks and Sewerage System (MWSS) Public-Private Partnership (PPP) goes back to when PPP was still called “privatization,” now a bad word in certain left-leaning circles. It has been 19 years ago almost to the day when, as a finance undersecretary, I was appointed to the Board of Trustees of MWSS. My assignment was to help make the PPP happen to cope with a “water crisis” in the metropolis. The water crisis arose from a vicious cycle of large systems losses, inability to raise rates because of poor service quality, a nonexistent waste water management, and the low productivity of a grossly overstaffed government agency.

Despite hiccups along the way -- labor unrest, a couple of temporary restraining orders filed by vested business interests, and assorted hurdles -- it was done in record of time of less than two years. This was thanks to the clarity of vision and political will of President Fidel V. Ramos, the thoughtful and dogged execution by a dream team -- then Public Works Secretary Gregorio Vigilar, former MWSS administrator Lito Lazaro, and then Chief of Staff Mark Dumol, now an executive in the San Miguel group.

The accomplishment looked big then, but what we in government started was actually just the beginning. The real achievement was done over 17 years -- and counting -- of dedicated work by the men and women of Manila Water under the Ayala banner, surpassing by far any scenario I could have imagined.

As ADB Vice-President Bindu Lohani’s foreword summarized, “with a $1 billion investment, Manila Water replaced kilometers of pipes, expanded service connections, increased service availability, and reduced non-revenue water from 63% in 1997 to 11% in 2012. The company now serves more than six million happy customers enjoying 24/7 water supply... In this book, Manila Water reveals its most classified corporate secrets, which finally sheds light on the company’s successes in instituting water sector reforms.”

To underscore, 17 years ago, 63% of every liter of water was lost, mostly due to leaking pipes (some to theft). I recall that number vividly because bringing it down to a more sustainable level was always part of the condition of every ADB loan that I had to negotiate as finance undersecretary together with then MWSS Chief Finance Officer Loida Dinio. And year in and year out, we failed to meet this condition.

Certainly, I never imagined that Manila Water could ever reach the current non-revenue water of 11%. This number meets the highest global standards. More importantly, it obviated the need to build a major water source dam and protected the public from another water crisis.

This book is about how these and other milestones were achieved. For instance, there is the multi-awarded Tubig para sa Barangay that connected poor communities at affordable rates. The book delivers on its clever title. It releases a stream of knowledge to any student of management -- public, corporate, civil society -- as well as to anyone or any institution, here in the Philippines or elsewhere, striving to make a difference in the world.

This book is inspirational prose and user’s manual rolled into one. The words flow freely, seemingly effortlessly. For example, take the memorable three EEEs (enable, empower, excel) or the beautiful imagery of the five marbles. And just like the Manila Water story, behind the excellent product is a lot of hard, thoughtful, dedicated plumbing.

In one sense, Perry’s book is not just the tap secrets of Manila Water. It is also about the secret of how the Ayala group as a whole and over the years has succeeded where others failed. In a sense there is really no secret. The factors of success are well known, though not easy to follow: leadership, a culture of excellence, integrity, teamwork, customer orientation, and a long-term commitment that goes beyond the bottom line.

Seventeen years ago, the Ayala group took a huge leap, taking risks in something that was untried here in the Philippines. This leap of faith was propelled by their 160 years of business experience (which date back to the first Manila rail system called Tranvia).

The Ayala Group did this too in telecommunications. Until Globe and around 10 others (whose names few will remember) came along during the de-monopolization in the Ramos years, we were described by Singapore’s Lee Kuan Yew as a nation where “98% of the people are waiting for a phone, and 2% are waiting for a dial tone.”

This would be seen as a biased review if I did not find a single shortcoming in the book. So here it is. The final chapter is devoted to “emerging challenges and issues.” The regulatory regime section is one that business, governments, multilateral institutions, academe, and civil society would have found of particular interest. However, it is only three paragraphs long.

When chided on it, Perry replied that as is done by all authors of best sellers: he is saving that for Volume Two.

Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.

http://www.bworldonline.com/content.php?section=Opinion&title=Plumbing-the-Manila-Water-story-for-corporate-lessons&id=90000

Business World
Posted on June 01, 2014 09:26:19 PM

V, J, or L?

Introspective
Romeo L. Bernardo

WAS I surprised that first-quarter GDP growth was “only” 5.7%? No. We in Global Source have maintained a below-consensus full-year forecast of 6.1% since early this year, expecting the first two quarters to be on the weaker side given the boost from election spending last year. Despite successive growth upgrades by other analysts, we continued to maintain our forecast in our latest outlook report released early this month.

But in contrast to equity market players who sold on the news causing a 111-point (1.6%) drop in the main stock index, I think the 5.7% growth figure not bad at all. As the Planning Secretary said in his statement, the Philippines is still the third fastest growing economy in the region (even with the lingering destructive effects of last year’s natural disasters). The slower growth, in my view, also helps in injecting a dose of realism into overly bullish growth expectations that many fear will lead to asset bubbles and cloud prospects for sustained expansion over a longer horizon.

First quarter 2014 performance owed mainly to a robust 5.8% growth in household spending. After four quarters of high double-digit growth, investment growth slid to 7.7% in Q1 as private construction declined 6% even as public construction grew 22% on a reported mix of infrastructure projects. Overall investment growth is traced mainly to durable equipment, which grew by 21.6%, reflecting high growth in “air transport equipment” (related to domestic airlines’ refleeting program) and “other general industrial machinery.” Export recovery generated a small trade-in-goods surplus that was offset by the deficit in services trade. From the production side, all service sectors grew steadily, industry and manufacturing growth slowed down, while agriculture managed less than 1% growth.

Is the Q1 economic performance just a blip or will growth henceforth be more “normal”? Visually, should we expect GDP growth to be V-, J- or L-shaped?

Government, which is keeping its 6.5-7.5% full-year target, is surely hoping for a V, or at least a short-hooked J. This seems possible considering extraordinary factors dampening Q1 growth that included not only base effects but also disaster-related losses in (a.) agricultural crops that also dented food manufactures, and (b.) tourism and insurance receipts. On its own, government also has the wherewithal to quickly push up growth by speeding up delayed rehabilitation and reconstruction work in disaster-affected areas.

On the other hand, an L is also possible depending on the severity of some of the newer developments we noted in our last report (including the Manila City truck ban, El Niño, other infrastructure constraints especially power). Plus, the revived pork barrel scandal may again have a negative impact on public spending, especially after the budget secretary, who has been the one spearheading reforms to increase the transparency of budget processes and quicken disbursements, was included among the hundreds of former and present lawmakers implicated by the alleged mastermind of the scam. The latter tagged him as being the real mastermind who mentored her. While we find this simply bizarre, even by Philippine political tragicomedy standards, there is still the risk that a major misstep in handling the scandal will cost the administration invaluable political capital necessary to keeping business confidence up in the short-term (and even beyond 2016).

Barring another political crisis, we are keeping our 6.1% annual forecast at this time, with the quarterly growth along a curve that gently slopes up. I do not expect growth to return to the 7% level mainly because of infrastructure constraints that, notwithstanding much publicized expressions of interest, will continue to deter actual private investments. However, I am becoming more confident that government will be able to meet expenditure targets, especially with increasing media attention on the slow pace of reconstruction work, and thus, expect GDP growth to improve in the second half of the year.

(This column was culled from a recent GlobalSource report written by Christine Tang and the columnist. The author is Philippine GlobalSource advisor and is a board director of IDEA.)