Availing of availability payments

How can a project undertaken through a public-private partnership (PPP) arrangement, whereby the investment and rate of return are not recoverable from end-users, become viable? How can a project undertaken through a public-private partnership (PPP) arrangement, whereby the investment and rate of return are not recoverable from end-users, become viable?

Such a scenario is particularly true for public good-oriented or “soft” projects where the  government, not the consumers, pay. Examples of socially aimed projects are schools, rehabilitation and evacuation centers, prisons, irrigation systems and agriculture development. Sports facilities and railways, while considered “hard,” may not be that feasible or “PPP-able” if implemented without “add on” or “value added” mechanisms.

One such mechanism is “availability payments (AP).” AP is a long-term agreement with fixed periodic payments by a government agency or sponsor to the private-sector proponent (PSP) when the facility is completed and delivered to government. When the facility or service becomes available, the government or the sponsor pays, hence the name. Simply put—no facility, no AP.

Unlike in a full concession, the scope of services in an AP would exclude ridership, demand risks and fare collection. Contrasted with amortization, amortization is just paying the debt over time, regardless of whether the facility or service is present.

Since government pays for the facility, in an AP, there must be an appropriation. Under our system, the General Appropriations Act (GAA) is annually passed. But what if the GAA for a specific year does not
contain such item? Even a multi-year obligational authority issued by the Department of Budget and Management cannot bind or be used to compel or dictate upon Congress.

The appropriations risk thus becomes directly proportional to the number of years of the project—the risk of nonappropriation is higher as the period wherein the AP must be made gets longer. So how can the apprehension of PSPs be assuaged? A performance undertaking or a promise by the Department of Finance (DOF) to pay the monetary obligations is one way. But the DOF may not be predisposed to this.

There is an alternative. International financial institutions (IFIs) may provide the level of comfort for PSPs. IFIs may backstop APs by guaranteeing them. While this may involve an additional cost, in the long run, government incurs savings…and the people benefit from the much-needed social service facility.

Financing costs by the PSP will be lowered since the interest rates will go down due to greater certainty of repayment when backed by an IFI like the Asian Development Bank (ADB). The interest rate is just passed on to government. When the PSP gets better rates, government, effectively, pays less. This scheme ensures working capital for the PSP whereby the PSP delivers the service at a relatively lower cost because of mitigated risks.

The AP is guaranteed by a letter of credit (LC) and that LC is guaranteed by the ADB.  When government fails to pay, the ADB pays and a sovereign obligation is created. Verily, this does not create an additional obligation for government because in pursuing the PPP with APs, government already assumed that obligation. Appropriations risk is removed because a sovereign obligation is automatically appropriated.

This columnist hopes that PPPs can avail themselves of this add-on. If and when, this should be disclosed.