Personal bias versus public interest (an opinion on the Philippine government officials bias on joining the AIIB)
Introducing the concept of public infrastructure
Developed countries have continually sought partnership with the private sector to induce investments in public infrastructures. Public infrastructure in its widest sense pertains to services that are accessible to the public provided for by the government or the public entity. Frequently asked is whether private investment in public service is ethical as these services should have been provided for by the government for ‘free’ or at a lower fee (and not at a profit) since they are paid by tax monies and, thus, most people outside the industry would deem private investments in public infrastructure to be a profiteering activity. This indeed is an ethical dilemma. But whether public infrastructure can wait until governments, specially for developing countries, are able to fund these infrastructure needs is a greater dilemma since key public services cannot be provided by developing country government alone given the fiscal deficit. Further, public spending by the government in upfront payments might spell disaster for cash strapped countries where a bigger risk of default on senior or concession loans from international financial institutions such as the World Bank or other countries.
Note: You can go directly to my opinion section if you are familiar enough with how the government works and how project finance work, otherwise, the sections below and preceding my opinion section would help understand the context of the argument.
Introducing the AIIB
The Asian Infrastructure Investment Bank (‘AIIB’) is a brain child of the People’s Republic of China to consolidate financial resources for investments in public infrastructures. Although not yet operational as of this writing, it is expected to be fully established by the end of 2015. As at15 April 2015, there are 57 Prospective Founding Members (‘PFM’, link) and the list of PFMs does not include the United States of America — this decision not to join AIIB is actually criticised by the President of the World Bank in he’s post in the Financial Times (link). Similarly, as of date, the Philippines is not yet a member of the AIIB although it had entered into some concessional loans with the AIIB for public infrastructure investments.
Putting things into perspective
To put things into perspective, the Asian Development Bank’s (‘ADB’) President Takehiro Nakao reported in a 2015 post (link) that based on a study in 2010 by the ADB, Asia would need infrastructural investment at $8 trillion through 2020, with approximately $750 billion of which would be needed by the Philippines (link). To put the amount into context, this represents 3% of the country’s GDP (link) in 2014 (sorry, had to resolve to old data) amounting to Php399.42 billion ($9.1 billion). The $750 billion target for infrastural investment by 2020 seems to farfetched with the $9.1 billion investment in 2014.
This is where private investments kick-in. When public spending can no longer cover the necessary public infrastructure needed, it would resolve to either:
· Borrowing concessional loans from other countries or international finance banks which can be onerous depending on the available credit of the country as well as the country’s credit rating;
· Entering into a concession arrangement with a private company to provide the infrastructure service (public-private partnership); or
· A mixed approach of the first two mentioned.
Increasing government borrowings can be a dangerous concepts and can make a country’s fiscal stability fickle due to settlement of maturing debts and interests related to the increased borrowings. Further, foreign-currency denominated loans are subject to foreign exchange fluctuations which could includes the risk of unfavourable foreign exchange variances upon settlement. Another consideration for fiscal borrowing is the potential risk that the country be in a default position by not being able to settle outstanding loans within the loan tenor (see Greece). Finally, refinancing government loans are typically very onerous and can deteriorate a country’s credit rating in the international financial institutions and markets.
The second option is to finance infrastructure projects through public-private partnerships (PPP) where public infrastructure projects are privately financed with the government ultimately retaining ownership and control over the partnership (that’s awesome fiscal power but a necessary feature to ensure that private entities are appropriately penalised for non-performance or non-attainment of contractually agreed targets). Or sometimes, a PPP can be in the shape of full privatisation as well with guaranteed service level standards.
PPPs in essence are important as they provide: (1) funding and (2) better management. As private companies are profit-oriented, these companies will only enter into PPPs where there is a foreseeable profit and legal framework which allows businesses to exercise their expertise without unnecessary encumbrance by the fiscal powers of the government. Most of the businesses that enters into government projects usually have sufficiently good business ratings to apply for lower rate senior loans to cover their financing needs throughout the concession period.
Anyway, we’ll not delve much on this as PPPs is not the main concern of this post but an essential understanding to how government can actually pull private entities to work by providing a workable sum and a sound legal environment.
A lot of background reading was presented above and hopefully my next few statements would not be too difficult to understand. Before anything else, I would like to really acknowledge Rappler for being my news source whilst I’m outside the Philippines other than watching ‘Word of the Lourd’ from TV5 as my source of weekly news summary.
In 3 June 2015, Rappler published an article: Aquino: PH still mulling AIIB invitation (link) which I immediately got interested in since it involves investment banking at the country level which is my interest as a public sector and infrastrure specialist. AIIB was created after China got disappointed with other international financial institution in providing funding for its infrastructure projects. China invested heavily in public infrastructure as early as it opened the Bamboo Curtain and, until now, continually invests heavily in transportation as a focal point to ensure that business processes will flow efficiently despite the large land mass of China. This actually translated into fast economic growth — consistent with the Chinese economics adage that transportation drives economic growth. In the Philippines, it is until recently in the regime of Noynoy that public infrastructure investments begin to get focussed again (am not sure if he’s just good in flagging up his focus in public infrastructure, but sure he’s getting recognized for it). I bet that the alleged murderer of his father had created more infrastructures during his time than Noynoy anyway (but to be fair, 20 years should have really resulted to massive infrastructural change).
As mentioned, the infrastructure needs of the country is still too much to be financed by the government alone. In recent years, several investments through PPP-BOT (Build-Operate-Transfer) arrangements have brought significant improvements in public infrastructure primarily in the power and utilities sector as well as in user-pay access roads.
Private borrowings are important for the private sector to complete its project, but it should be remembered that not all public service projects can be easily outsourced and payments to the private entities during the project term and the ultimate handover of the concession assets at the end of the contract terms should also be considered. Further, major infrastructure projects can hardly be funded by the private sector alone without the cash injection from a public borrowings. An avenue for better government borrowing can be obtained through a consortium of countries like the AIIB which was rejected by Aquino for mere reasons based on past failures in contractual agreement between Philippines and China arising from onerous concession loans.
Past failures in contractual agreements only means that the government officials approving such contracts failed to see the lapses prior to their approval which should serve as a lesson rather than a trauma. These past experiences should only direct us to improve our fiscal procedures and accountability to ensure that contractual errors or mistakes would not happen again. What we’re doing now is acting like a kid in trauma. I drowned once and started to fear water, probably the government drowned as well, and like me, the government can’t get over it.
Another point to consider is that the AIIB will kick-off by the end of 2015 and the election will come by next year (2016) in the Philippines. The consideration of joining the AIIB contains political agenda as well. Should there be any failures again in these agreements, I guess the next President of the country will act just like Aquino— searching for all Aquino’s errors and put him to jail.
I would like to stress that joining AIIB is a must to fund the country’s infrastructure requirements. Private finance can be exercised up to a certain extent, but there will absolutely be a necessity that accessible funds can be infused by the public sector to reduce financing costs of infrastructure projects.