Nova workboard

a blog from young economists at Nova SBE

Public good turned bad?

The Public-Private Partnership Program (PPP) of the Philippines was established as a flagship program to achieve the Philippine Public Investment Program. The program intends to provide the public with adequate, safe, efficient, reliable, and reasonably priced infrastructure and development facilities while affording the private sector a level playing field, reasonable returns and appropriate sharing of risks.

One of the biggest privatization projects of the government is the extension of the Light Rail Transit (LRT). Since its operation in 1984, LRT is a metropolitan rail system serving Metro Manila area. It is operated by the LRT Authority (LRTA), a government-owned and controlled corporation, under the authority of the Department of Transportation and Communications. The LRT has been one of the cheapest and quickest ways to travel within Metro Manila, and with the heavy traffic around the area, more and more commuters are opting to take the LRT, thus, resulting to congestion. With the growing demand, the government said it can no longer solely cover the costs for its operation and maintenance, and provision of new train coaches; therefore, the need for partnership with the private sector.

The project aims to provide rapid and reliable access to and from the densely populated residential sub-urban communities south of Manila, and the various strategic commercial, industrial, and educational districts in Metro Manila. According to the Public-Private Partnership Center, savings in travel time and costs will make the mobility of people and goods in the area significantly faster and less costly. The project aims to increase average weekday ridership from 560,000 to 820,000 passengers in 2015.

With such improvement, as stated by the administration, many are still unfavorable of the proposition and privatization of the LRT. The government’s core argument for fare hike proposition is that it can no longer subsidize the system, thus the need for private investor cooperation. However, the regulatory risk guarantee clause specified in the contract draft states that infrastructure can only be paid for from user fees or taxes. When government commits to allow investors to earn their return from user fees, it is important that that commitment be reliable and enforceable. The President articulated, during his speech at the PPP Summit, that if private investors are impeded from collecting contractually agreed fees – by regulators, courts, or the legislature – then the government will use its own resources to ensure that they are kept whole. Then the question of where will the government collect the funds for the LRT’s guarantee subsidy arises. The national budget deficit is still huge, and the government remains heavily indebted with more than Php 5.38 trillion in outstanding debt.

Critiques argue that the privatization of the public transportation system would punish the public with exorbitant fees and increase government debt. The government may argue that the private sector will have to carry the costs (eg operation and maintenance) but if firms won’t be able to gain profit from the partnership, the government will have to subsidize the firm’s loss in order to meet the agreed upon revenue; hence, transferring what was used to be a subsidy to the commuters to private firms.

The government’s intention of creating a more efficient public transportation system can be improved with the establishment of public-private partnership. However, the government has to lay out a contract that would not compromise and burden the public in order to ensure private firm’s cooperation. The LRT, as a mode of mass transportation, is a public investment imbued with public interest. It was designed and intended to provide a reliable, efficient and affordable system of transportation for the public. Its true measure of viability should depend on the social gains it creates for the people and not the profits to private firms.

N 714

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Author: studentnovasbe

Master student in Nova Sbe

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