A Toll Tale

A Toll Tale
02/13/2008 | 01:39 AM

A year or so ago, Manolito Madrasto, the executive director of the Philippine Contractors’ Association (PCA), spent an entire day counting vehicles passing through the Olongapo-Gapan road. “It was crazy," he says. “I just sat there alone in a McDonald’s restaurant while trying to count the vehicles on the road."

According to Madrasto, the government had agreed to the PCA’s request for the second phase of the Subic-Clark-Tarlac Expressway, which would extend the new toll road to San Fernando in La Union province, to be implemented as a build-operate-transfer (BOT) project with government subsidy. The first phase, in contrast, was funded by Japanese Official Development Aid (ODA).

Madrasto was trying to verify a Japanese consultant’s recommendation for a four-lane highway based on the projected traffic of 25,000 vehicles per day. Local contractors thought the forecasts were way too optimistic. “Where will the 25,000 cars come from?" wondered Madrasto.

Though his “study" was hardly scientific, his skepticism was eventually borne out. When the Department of Public Works and Highways tendered the project last November, it specified that only two lanes be built initially. Two more lanes could be constructed later should traffic volume reach 25,000 passenger-car units per day.

Madrasto suspects the first phase of the Subic-Clark-Tarlac Expressway, which was built with a $355-million loan from the Japan Bank for International Cooperation (JBIC), was likely “over designed" because of awfully high traffic projections.

He says the Bases Conversion and Development Authority (BCDA) is having a hard time attracting good toll management offers from private firms, which doubt BCDA’s traffic forecasts.

After two failed biddings, the BCDA negotiated a deal with a group led by the Lopez family’s First Philippine Holdings Corp. late last year.

But the agreement was only for six months, renewable for another six months, instead of 10 years. In an implicit admission of the dispute with bidders over traffic projections, BCDA chairman Narciso Abaya told journalists the government opted for the interim arrangement “to observe and get accurate traffic volume."

For Madrasto, the overly optimistic traffic estimates for the Subic-Clark-Tarlac Expressway highlight the government’s tendency to accept uncritically the forecasts of foreign consultants. Or, as Madrasto put it more colorfully, “hook, line and sinker." He grouses, “There’s no more counter-checking."

Rene Santiago, a transportation planning consultant and former president of the Transportation Science Society of the Philippines, is more biting in his criticism. “The Japanese consultants tend to bloat and justify projects so they qualify for funding from JBIC," he says. “Once it gets funded by JBIC, a lot of Japanese construction companies are happy. It’s all part of the usual cozy relationships of Japan Inc."

Santiago, who has advised transport planners in the Philippines and Asia, says the traffic forecasts for the Subic-Clark-Tarlac Expressway were based on doubtful methods and assumptions.

The Japanese consultants who prepared the feasibility study for Subic-Clark-Tarlac Expressway projected that traffic volume, as measured by passenger car units (PCU), will grow between 2005 and 2015 by 12.5 percent a year for the Subic-Clark section and nine percent a year for the Clark-Tarlac segment.

These growth rates are about twice the historical annual growth in traffic from 1996 to 2002 along existing roads, Olongapo-Gapan road and McArthur Highway, that run parallel to segments of the new expressway.

Santiago says he has not seen anything in the feasibility study that justifies the assumption that traffic growth rates will double. “Traffic usually grows by three to five percent a year as it merely follows the growth in vehicle volume," he says. “It may grow faster if there is a major property development but these developments take 15-20 years to pan out."

Santiago cites the example of Makati, which took almost two decades to develop into a central business district. “Besides," he says, “Clark is not a central business district. We’re talking of an industrial zone here so you can’t assume a lot of passenger-related traffic."

Indeed, the BCDA’s updated implementation program for the expressway as of August 2004 indicated that the traffic forecasts were built not just on growth trends, but also on what the agency’s Japanese consultants called “traffic from large-scale developments," presumably arising from growth in investments in the special economic zones of Subic, Clark, and Hacienda Luisita.

The consultants referred to government plans to increase Clark International Airport’s capacity of 300,000 passengers and 50,000 tons of cargo per year to 40 million passengers and 1.2 million tons of cargo per year.

Plans to boost the Subic Port’s capacity from 25,000 TEUS (twenty-foot equivalent unit, the volume of a cargo container) to 100,000 TEUs were also mentioned.

But Santiago says the consultants did not spell out how such targets would translate to higher vehicle traffic, and when. “Even if the projections come true, bulk of the cargo could be destined for enterprises within the zones," he says. “That won’t have much impact on traffic to and from the economic zones."

In another chapter of the report, the Japanese consultants wrote: “The development of the Clark-Subic Expressway and the North Luzon Expressway will enable the converted US military bases to be attractive investment locations for industries with global markets relocating from Taiwan in view of the planned take-over of Taiwan by Mainland China in 2007."

That may well suggestthat BCDA’s Japanese consultants are not just well-versed in toll road planning; they are also geopolitical experts who know for sure not only that China will take over Taiwan, but when it will do so. – Roel R. Landingin/PCIJ

PCIJ: 7 in 10 ODA projects fail to deliver touted benefits - Part 3

PCIJ: 7 in 10 ODA projects fail to deliver touted benefits - Part 3
By ROEL R. LANDINGIN, Philippine Center for Investigative Journalism
02/13/2008 | 01:33 AM


At least seven in 10 projects funded by Official Development Assistance (ODA) loans have failed to deliver their touted benefits and results, according to a six-month study of project documents conducted by the Philippine Center for Investigative Journalism (PCIJ).

Stories about “white elephants" -- grand but unfinished or unused public works projects, such as the Bataan Nuclear Power Plant in the '80s to the Telepono sa Barangay program in recent years abound. Yet many more ODA-funded projects disappoint, even after completion and roll-out.

Project completion and post-evaluation reports on scores of projects bankrolled by the Philippines’ top three lenders show that 73 percent of completed foreign-assisted projects fell below estimates of economic benefits made during appraisal stage.

The reports covered 71 projects and sub-projects funded by the Japan Bank for International Cooperation (JBIC), Asian Development Bank (ADB), and World Bank.

The economic returns were about the same or slightly better than forecast in only 27 percent of the projects, the reports showed.

ODA loans are long-term money lent by foreign governments or multilateral bodies at easy repayment terms to fund development projects.

Failed or lower economic returns from many ODA-funded projects illustrate serious flaws in the identification, design, evaluation, or implementation of government projects.

Whatever the cause, the certain outcome is a tax burden both heavy and unreasonable, on the Filipino people.

Bad or weak projects “ultimately lead to more taxes that have a distortionary effect on the economy," says Benjamin Diokno, a professor of public finance at the University of the Philippines School of Economics and former budget secretary. To repay loans for projects with poor economic benefits, government will have no recourse but to raise taxes sooner or later.

The economic internal rate of return (EIRR) is one of the criteria used by the National Economic and Development Authority (NEDA) in evaluating proposed infrastructure and other government projects. It tries to measure the benefits for the economy or society as a whole that a project is expected to generate vis-à-vis costs.

Another commonly cited indicator, the financial internal rate of return (FIRR), has a more limited scope. It measures the implementing agency’s cash inflows and outflows in connection with the project.

It is not unusual for NEDA to approve a project with low financial returns such as light rail systems if proponents can show there are tremendous benefits to the economy -- say, faster travel time for commuters or lower pollution levels.

In most cases, NEDA clears only those projects that have an EIRR of 15 percent or higher, a tough benchmark that has triggered many long-running disputes with officials and politicians pushing for one pet project or another.

This may have prompted the Cabinet in October 2007 to order NEDA to review and possibly lower the 15-percent benchmark for EIRR. Talk of cutting the hurdle rate has been going on for a number of years now, but the Cabinet move may hurry things along.

The project completion or evaluation reports reviewed by the PCIJ cover only a small proportion of loans granted by the JBIC, ADB, and World Bank.

Total portfolio: 161 loans

Since 2000, the three lenders extended 161 loans to the Philippine government worth $6.6 billion. But project completion or evaluation reports are available from the lenders’ websites on just 80 of the loans.

Fewer still (just 31 loan documents covering 71 projects or subprojects) indicated whether economic returns were higher or lower after completion, compared with estimates during the appraisal stage.

Still, when put together, the reports give a good overview and useful insights on the state of ODA-funded projects in the Philippines. These are often missing in detailed reports on controversial or particularly bad projects.

For one, the reports reviewed by PCIJ showed that project returns and benefits are often overestimated during planning and appraisal. After completion, expected economic returns fell by a median of 26 percent.

For another, economic returns are not only lower after completion, but have fallen below the minimum 15-percent threshold set by NEDA. About one-third of the subprojects yielded EIRRs below 15 percent after completion.

The decline in estimated economic returns after completion could be a sign of over-optimism in project evaluation. The result, according to economists, is unnecessary public spending on infrastructures.

“I’ve been saying that for the past 10 to 20 years in my lectures," says Ruperto Alonzo, former NEDA deputy director general and now the country’s foremost expert on project evaluation.

He points out that many feasibility studies for foreign-assisted projects in agriculture are required to use the World Bank’s commodity price forecasts, which are typically twice higher than the actual numbers. According to Alonzo, this tends to lead to artificially high economic return estimates during project appraisal.

Jeremy Berkoff, a British water resources planner and economist, reviewed a World Bank study of 340 Bank-funded irrigation projects completed from1948 to 2003, and compared economic return estimates made at various points of the project life cycle: appraisal, completion, and impact (five years after completion).

He summarized the data in a short paper for a 2002 meeting of the International Consulting Economists Association, and wrote: “From appraisal to completion to impact, the IRRs successively declined and to quite low levels."

“There is a systemic and optimistic bias in the economic evaluation of irrigation projects that can be explained primarily in terms of the incentives facing project analysts," Berkoff concluded. “Poor economic analysis has contributed to wasteful irrigation investment and in many developing countries there is now too much irrigation."

He traced the optimistic bias during evaluation to “political dynamics."

“The self-interest of beneficiary farmers who do not have to pay is obvious. So are those of an Irrigation Department with otherwise little to do, the irrigation staff in lending agencies, contractors, and consultants," Berkoff observed. “Programming and Finance Ministries that serve a broader national interest may restrain irrigation expansion but are seldom able to fully prevent it."

The observation could well be a commentary on the NEDA staff’s futile attempts in 2007 to check massive costs increase in the JBIC-funded Bohol Irrigation Project Phase 2 (BHIP-2) that was launched six years ago.

The NEDA staff was overruled by the NEDA Cabinet group, which approved the increases even though the implementing agency, the National Irrigation Administration (NIA), failed to seek prior approval from the NEDA Investment Coordinating Committee.

Alonzo, who uses Berkoff’s paper in his classes, says road projects fare somewhat better and tend to yield higher economic returns than initially estimated because of spillover effects. The EIRR on farm-to-market roads in the small sample of projects examined by PCIJ were generally higher after completion compared to appraisal.

But there are many exceptions, and one that easily comes to mind is the majestic but costly San Juanico Bridge that links Samar to former First Lady Imelda Marcos’s native Leyte island.

No cars, just carabaos

“San Juanico was constructed several decades too soon," says Alonzo who used to bring his students to the bridge for the annual field trip years after it was built with Japanese ODA loans in the early 1970s. “We’re in the bridge for several hours already but we don’t see any cars or jeepneys, only carabaos."

Public works engineers, he adds, used to joke among themselves that average daily traffic (ADT) was not measured in terms of vehicles but carabaos.

According to the project completion reports reviewed by PCIJ, lower-than-expected returns of completed projects stem from a variety of reasons, including extended delays in completing the project, hefty cost increases, or weak demand.

Various risks – economic, political and even security -- could hobble a project, dragging performance well below expectations or even minimum standards. This is apparent from even a cursory look at the three lenders’ biggest project loans.

One of JBIC’s largest project loans in the Philippines was a 32-billion-yen package signed in 1982 to finance the construction of extra-high voltage transmission lines that would bring power from the geothermal power plants in Bicol and Leyte to Manila and Central Luzon.

Yet, after erecting more than 560 steel towers and stringing up almost 250 kilometers of transmission lines in May 1987, a year and a half behind schedule, the borrower, National Power Corp. (Napocor), left the facilities unused for over a decade.

Communist guerrilla attacks and pilferage, which downed 11 towers, hampered the project. A more serious problem was the unexpected cancellation or postponement of plans to build several geothermal plants in Southern Luzon and the Visayas.

“The original project design has become less relevant in conjunction with overall power development plan," JBIC said in a project completion report prepared in October 2002. It did not bother to recalculate the project’s financial return, which was likely to be very low or negative because of the delay in using the project.

Similarly, the World Bank’s single biggest project loan was a $203-million funding support in 1996 that went mostly to building transmission lines connecting the newly-built coal-fired power plants in Masinloc, Zambales, and Sual, Pangasinan, to the rest of the Luzon power grid.

According to the Bank itself, the economic rate of return for the project after completion in 2003 was likely negative compared to original estimates of at least 20 percent because of low power rates, the slump in demand for electricity in the wake of the Asian financial crisis, and excessive power capacity because of overcontracting with the independent power producers (IPPs).

The disappointing performance of the ODA-funded power projects eventually exacted a heavy toll on Napocor. Since 2001, the state power company had been incurring massive financial losses that hurt its ability to repay loans. In 2005, the government had to bail out Napocor, assumed P500 billion of the power firm’s foreign obligations, and sold off state-owned power assets to repay debts.

Politics also ruined many a good ODA project, such as the Second Subic Bay Freeport project, which was funded by a $60-million World Bank loan that became effective toward the end of the President Fidel Ramos’s term in late 1997. The project aimed to improve power and water services in the special economic zone and nearby Olongapo City.

In time, an extended political dispute, triggered by then President Joseph Estrada’s decision to replace Richard Gordon with Felicito Payumo as administrator of the Subic Bay Metropolitan Authority (SBMA), delayed and reduced the project’s scale.

Olongapo City, the Gordons' political bailiwick, backed out of plans to merge the city’s public utilities department with that of the SBMA. A project to develop a bulk water source in a nearby municipality for the free port was delayed and eventually canceled.

Disappointing economic and financial returns on completed foreign-assisted projects should temper claims that ODA boosts economic growth and development in recipient countries, regardless of specific circumstances.

JBIC, for example, says that its foreign assistance in fiscal years 1996 to 2000 helped raise annual economic output by 0.71 percent in the Philippines, 0.5 percent in Indonesia and Thailand, and as much as 1.65 percent in Vietnam. JBIC adds that ODA had a positive impact on per capita gross domestic product “regardless of the differences of the policy and institutional environment."

Japan's claims

The Japanese embassy in Manila says that in the Philippines, “13 percent of all national highways were improved through Japan ODA." It notes that 200 new bridges, including the Second Mandaue-Mactan Bridge and the San Juanico Bridge, were funded by Japanese aid money.

But a close reading of the JBIC’s own post-evaluation reports presents a more nuanced, if mixed, picture. For example, economic returns on the Mandaue-Mactan Bridge were lower after completion compared to appraisal because of higher construction costs. And even those who have yet to hear Alonzo’s carabao story remember the San Juanico Bridge primarily as one of the costliest white elephants built during the Marcos period.

The Japanese embassy also touts Terminal 2 of the Ninoy Aquino International Airport, along with the Cebu-Mactan International Airport, among the major airports built with Japanese ODA. These airports “cater to about 1.3 million passengers taking domestic flights and about 8.3 million taking international flights," says the embassy.

Yet JBIC’s post-evaluation report on NAIA 2 halved the estimated financial returns on the project to only 3.7 percent after completion. Said JBIC: “Owing to the increase in the investment cost in peso terms and the decline of the number of passengers to the Asian economic crisis, and to the current limited use of Terminal 2."

To be sure, development aid could potentially help poor and developing countries grow faster by adding to savings and investments, especially in social development projects that are not likely to get the interest of private investors. Regions that enjoy high levels of infrastructure investments, a big part of which is funded by ODA, grow much faster and have less poverty incidence.

But the value of aid is diminished if capital or investment projects such as roads, power plants or ports financed by ODA generate returns that fall below expectations or minimum benchmarks.

Still and all, the government has no way of knowing, in a systematic and comprehensive way, which projects are performing well and which are failing. NEDA keeps tabs on ongoing projects and carefully measures time and cost overruns, as well as disbursement and availment rates. The NEDA monitoring stops after a project is finished.

There is as yet no system in place to check how foreign-assisted projects are doing after completion although NEDA’s project monitoring staff say they are trying to build one.

In contrast, another agency, the Department of Finance, which continues to strictly monitor the status of ODA loans knows exactly when each amortization is due, and how much more payments need to be made.

It’s time the government paid equal attention to both ODA loans and the projects funded by those debts.

- Philippine Center for Investigative Journalism

PCIJ: Bids sans caps, tied loans favor foreign contractors - Part 2

PCIJ: Bids sans caps, tied loans favor foreign contractors - Part 2
By ROEL R. LANDINGIN, Philippine Center for Investigative Journalism
02/11/2008 | 10:23 PM


For Antonio Molano Jr. and other government engineers at the Department of Public Works and Highways (DPWH), it felt like being in “Groundhog Day," the Bill Murray movie about a cynical TV reporter who kept reliving the same day over and over again.

Over a span of four years, Molano and his colleagues at the DPWH bids and awards committee (BAC) held three rounds of bidding for two World Bank-funded road projects in Mindanao and the Visayas.

Each time, all the bids exceeded estimated costs by wide margins. Each time, virtually the same set of construction companies won the first and second rounds.

The road projects were part of Phase 1 of the $305-million National Road Improvement and Management Project (NRIMP) that the World Bank was supporting with a $150-million loan. Unhappy with the high bids, the World Bank rejected the bid outcomes not once or twice, but thrice.

The DPWH went to great lengths to boost competition in the bidding for the road-building projects. At one point, “an independent call line outside the DPWH was established for any party to report any deviation from the process," says Molano. “We invited civil society groups such as Procurement Watch and the Volunteers Against Crime and Corruption as observers."

But these and other measures proved to be no match to the persistence and power of some suppliers to dictate their terms on bids for government infrastructure contracts, often in defiance of government rules and policies.

Rigged bids, same firms

The contractors' doggedness underscores the huge and lucrative merits of building foreign-assisted projects, and is among the symptoms of what Rodolfo Lozada Jr., a Senate star witness in the National Broadband Network (NBN) scandal, has called a “dysfunctional" government procurement system.

Some of the construction firms that took part in the controversial projects were also among the most successful bidders for government public-works contracts. This is evident in a report prepared by the Construction Industry Authority of the Philippines and Philippine Domestic Construction Board (CIAP-PDCB) that the Philippine Center for Investigative Journalism (PCIJ) analyzed.

Nine mostly Chinese and local construction firms that joined the ill-fated bids for the road projects were also the big players in many other projects funded by foreign money.

These nine firms accounted for 46 percent of the total value of civil-works contracts of ongoing or completed foreign-assisted projects between 2004 and 2006, the CIAP-PDCB’s Constructors Performance Evaluation System report showed.

Bid-rigging and corruption were suspected by the World Bank, which carried out a year-long investigation into the matter. Last November, the Bank deferred approval of a $232-million loan for the national roads project’s second phase, pending completion of its probe.

But contractors and government officials alike say foreign lenders like the World Bank may also be to blame for the apparent corruption plaguing official development assistance (ODA)-funded projects.

International financial institutions had thumbed down a Philippine proposal to impose a cap on bids for these projects. Instead, the lenders have insisted on exempting foreign-assisted projects from new Philippine procurement rules that disallow bids above the so-called approved budget contract (ABC), the estimated cost that is calculated by third-party consultants at considerable expense.

Manolito Madrasto, executive director of the industry group Philippine Contractors Association, says the industry itself is supporting the government’s efforts to convince ODA donors to adopt Philippine procurement rules.

He says the absence of caps on bids for these projects is a virtual invitation to collusion.

“Anybody who bids beyond (the ABC) in the Philippine setting is automatically out of the running," he points out. “Under World Bank (rules) there is no limit. You can even put in 10 times if you want. If the bidders talk to each other, is there a way to stop it?"

Cipriano Ravanes Jr., an independent procurement expert, agrees that putting a cap on bidding may be necessary, given the rampant collusion and overpricing in the local contracting industry. “If the approved budget contract reflects market price, it will protect the government," he says. “But even if the ABC is overpriced, it can still help because it imposes a limit."

In June 2002, the DPWH issued a department order stating that bids for civil works and supply contracts above 15 percent of the approved budget contract would be rejected outright. Then Public Works Secretary Simeon Datumanong noted that awarded contracts for foreign-assisted projects were higher than approved costs by an average of 15 percent, with some going as high as 30 percent.

Country managers of the Japan Bank for International Cooperation (JBIC), Asian Development Bank (ADB), and World Bank promptly wrote a joint letter opposing the order, reminding Datumanong that the imposition of contract price ceilings violates their procurement guidelines.

The order was not implemented because of the lenders’ objections.

More “groundhog days"

Without the caps, DPWH’s Molano could only have more “groundhog days," even as he and his colleagues scamper to implement stricter procedures for the biddings on infrastructure projects.

Up to now, Molano can only shake his head over their efforts in trying to prevent any shenanigans in the two road projects in Visayas and Mindanao. After the World Bank rejected the results of the first bidding, Molano and company changed some of the procedures for the second bidding. Among these were the disqualification of one of the bidders and the removal of the pre-qualification requirement.

This opened up the bidding to more contractors -- to no avail. The winner in the second bidding, China Road and Bridge Corp., a Chinese state-owned firm, had also clinched the first bidding for a section of the Surigao-Davao coastal road project in Mindanao. The other project component, the Kabankalan-Basay section in Negros Island, was won by a joint venture of China Road and local contractor EC Luna, which also figured as a winner in the first bidding (though its partner then was China State Construction Corp.).

When the World Bank again rejected the bids, the DPWH made more changes for the third bidding. The Negros island project was divided into two smaller packages. Instead of just one, two complaint hotlines were established – at the World Bank country office and the Government Procurement Policy Board. “We were very strict," says Molano. “If a bidder lacks a document, we disqualify it."

The results were a little different for the third bidding held in 2006. China Road, which previously won the Surigao-Davao section, bagged one of the two components of the Negros road project. But two new bidders, China Wu Yi Corp. and China Geo Engineering Corp., won the two other projects.

Still, the World Bank rejected the results due to what it called “strong signs of collusion and excessive pricing." Bank officials did not explain what that meant but a person familiar with the investigation said a disgruntled supplier had reportedly written the Bank a “poison letter" outlining plans by bidders for manipulating the auction.

All the bids in the third round were higher than the DPWH’s estimated cost. Also, all the bids, save for the lowest, clustered around a high number, a possible but not conclusive sign that the bidders were helping one of them win the contract.

The PCIJ wrote letters and made calls to all the companies involved but most did not respond to requests for comment. Hanjin, in an email, said the company's officials “are not aware of any allegations of collusion and excessive pricing."

Tied money

In large part, the lenders’ objection to caps on bids reflects their view that the price of government projects, like everything else, should be set by free and competitive markets rather than by government bureaucrats.

In practice, however, the policy against bid caps tends to benefit big foreign construction companies that win contracts for public-works projects funded by ODA loans.

PCIJ’s analysis of the CIAP-PDCB’s Constructors Performance Evaluation System Report revealed that 18 companies from Japan, Korea, Thailand, and China won 71 percent of the total value of civil-works contracts for foreign-assisted projects reviewed in the report. These foreign firms were awarded an average of P2.6 billion worth of contracts.

In contrast, 79 Philippine companies, which got the remaining 29 percent of civil-works contracts, won an average of only P240 million worth of contracts per firm.

Of the 10 biggest construction contracts for ODA-funded projects included in the report, only one was awarded to a Philippine company, Cavite Ideal International Construction & Development Corp. It won a P1.6-billion contract to build or upgrade a stretch of road linking Baguio to nearby towns in Benguet province.

The dominant role of foreign contractors in implementing ODA projects is a sore point for local contractors who feel that pre-qualification standards imposed by lenders are biased in favor of big foreign bidders.

Comments Madrasto: “When they fund an airport, they require that the contractor must have experience in putting up an airport of the same size in the last five years. But how often do you put up an airport?" Yet when the projects are awarded to foreign companies, these just turn around and subcontract the bulk of the actual work to local firms.

Cost overruns

For some reason, excessive bids and cost overruns are quite common for projects funded by bilateral lenders – notably Japan, Korea, and China – that still tie up sizable portions of their foreign aid to the purchase of goods or services, including consultants, from companies based in their respective countries.

Allowing bids to exceed estimated costs makes infrastructure projects costlier for borrowers. “These cost overruns have resulted in an increase in GOP (Government of the Philippines) counterpart funding," Datumanong had stated in his proposed department order back in 2002. “In some cases, it has caused the decrease in the scope of work of the other remaining projects in the loan package to compensate for increased cost of the projects already bid out."

A 2007 study for JBIC by the consulting firm Virata and Associates found that 13 of 14 road projects funded by the World Bank, ADB, and JBIC cost 26 percent to 51 percent more than DPWH estimates.

Last year, the National Economic and Development Authority (NEDA) also reported that 21 projects -- nearly a fifth of the 123 ongoing foreign-assisted projects it reviewed -- incurred cost overruns amounting to almost P36 billion, raising the total costs for these projects by more than a third.

In nine of the 21 projects, bids in excess of the approved costs were cited as a reason for the cost escalation. Eight of these nine projects were financed by JBIC.

The JBIC also funded 18 of the 21 projects that incurred cost overruns last year, while the other three were financed by loans from China, South Korea, and the World Bank.


A cost-benefit game

High bids and cost increases in bilaterally funded projects show that the debate over bidding caps is more than an academic or policy debate. It is, in truth, a cost-benefit game.

The issue entails costs for borrowers such as the Philippines, which must raise its local counterpart funding. In contrast, the situation benefits contractors awarded the lucrative contracts with no or restricted bidding among companies from the lending country.

A case in point is the Subic-Clark-Tarlac Expressway Project, the country’s second biggest foreign-funded project that is being built by Kajima Corp., Hazama Corp., and other Japanese companies with the backing of a $355-million loan from JBIC.

Apart from being Japan’s single biggest project loan to the Philippines, it is also notable for another less edifying reason: It has the biggest cost overrun so far among the ODA-funded projects.

When NEDA approved the project in 1999, the cost was estimated at P15.3 billion. In 2000, the Bases Conversion and Development Authority (BCDA), which was implementing it, raised the cost estimate to P18.7 billion. NEDA approved this the following year.

But the lowest bid BCDA got when it auctioned off the contracts between September 2003 and January 2004 was P27 billion. Though it knew that costs had gone up to P25.1 billion, BCDA was hoping competition among the bidders would force down the price.

BCDA was being overly optimistic. The loan was tied and bidders were limited to a few Japanese construction companies. Madrasto suggests that BCDA could have gotten lower bids if the tender was opened to local construction companies.

NEDA refused to approve the higher cost, prompting BCDA to negotiate with the winning bidder to bring the price down to P20.1 billion. NEDA cleared the award to the Japanese companies but the latest indications are that the cost may go up to P32 billion.

An even chance

Still, some lenders seem to be softening their opposition to Manila’s moves to impose bidding caps for foreign-assisted projects. The World Bank has agreed to set price ceilings on at least three road projects that it plans to fund as part of the stalled loan for the second phase of the National Road Improvement and Management Project (NRIMP).

The World Bank has also started packaging its Philippine projects into smaller components, giving local suppliers and contractors an even chance to win the contracts.

About 55 percent of goods and services for World Bank-funded projects procured through international competitive bidding between July 2000 and February 2007 went to Philippine-based suppliers, according to World Bank procurement data. The Philippines was followed by South Korean suppliers, who got 18 percent, and Chinese companies, 13 percent.

Some of the so-called Philippine companies, however, are subsidiaries of foreign companies that were incorporated locally. In fact, the single biggest World Bank-funded civil-works contract tendered through national competitive bidding was awarded to China State Construction Engineering Corp., which was classified in the World Bank database as a Philippine company even though it is a unit of a Chinese state firm.

Japan had already begun to reform its lending policies in the 1990s in response to criticisms that tied aid smacks of false and self-serving altruism. It reduced the proportion of tied packages in its foreign aid portfolio from 100 percent in the 1980s to only 26 percent in the early 1990s – though this has gone up again in recent years, according to a study completed last year by University of the Philippines Professor Eduardo Tadem.

In the Philippines, Tadem says, JBIC still links, totally or partially, almost 90 percent of its loans to purchases from Japanese companies.

China, an emerging major source of ODA that was the country’s fifth biggest lender as of end-2006, also ties all of its aid to the Philippines. The Export-Import Bank of China is lending $400 million, the single biggest ongoing project loan, for the North Luzon Rail project that aims to revive rail services between Manila and Central Luzon.

Apart from tying aid to procurement from Chinese companies, China also unilaterally chooses its project contractors, precluding any competitive bidding to select the best and least costly supplier.

The practice, which is inconsistent with Philippine laws that require competitive bidding for ODA-funded projects, has generated a lot of public enmity for Chinese development aid, and sparked suspicions that the goods being supplied are either overpriced or of dubious quality.

Widespread criticism of Chinese ODA prompted President Gloria Macapagal Arroyo to cancel the $329-million National Broadband Network (NBN) deal with ZTE Corp. and to review other China-funded projects, including the $542-million Cyber Education project.

(To be continued)

Surge in foreign aid sparks scandals for Arroyo, debt woes for country - Part 1

Surge in foreign aid sparks scandals for Arroyo, debt woes for country - Part 1
By ROEL R. LANDINGIN, Philippine Center for Investigative Journalism
02/11/2008 | 05:35 PM


Former economic planning secretary Felipe Medalla may have spoken in jest during a forum of previous chiefs of the National Economic and Development Agency (NEDA) last September when he said there are two NEDAs.

There is, he said, “NEDA sa Pasig," which houses the offices of the director general and staff, and which supposedly embodies the technical side of the agency.

Foreign aid inflows to the Philippines are soaring to their highest levels in about six years, but the availability of more money for government projects has not made life any easier for President Gloria Macapagal Arroyo and Filipino taxpayers.

Indeed, the latest controversy to rock her seven-year reign stems from the sharp surge in official development assistance (ODA) from China, an emerging economic behemoth, and the Philippines’ growing inability to impose its procurement policies and procedures on ODA projects.

A six-month study of project documents by the Philippine Center for Investigative Journalism (PCIJ) also showed that seven of 10 projects reviewed fall short of economic benefits promised, even after completion and roll-out.

Serious flaws in the identification, design, evaluation, and implementation of government projects have resulted in failed or bad projects. Too often, lenders tie up ODA outlays to contractors of their choice. Worst of all, kickbacks exacted by political sponsors in some cases have yielded overpriced projects.

The $329-million National Broadband Network (NBN) project, which was to be funded by the Export-Import Bank of China, was cancelled following reports of alleged commissions demanded by a close political ally of the president, Commission on Elections (Comelec) Chairman Benjamin Abalos Sr. The President’s husband was accused of meddling in favor of ZTE Corp., the Chinese telecommunications supplier. Abalos was also forced to resign last September despite his and the First Gentleman’s denials of irregular participation in the deal.

But revelations of alleged anomalies in the project continue, even as the scandal sparked the ouster of Speaker Jose de Venecia Jr. – father of whistleblower Jose de Venecia III -- in a Congress coup last week.

NEDA a casualty

Perhaps the most serious casualty in the NBN scandal, however, is the National Economic and Development Authority (NEDA), the economic planning agency tasked to weed out the bad from the good among proposed large-scale government projects funded by foreign loans and private investors.

One of the most bizarre twists to the NBN saga involves a contractless consultant tapped by then NEDA Director General Romulo Neri to look into the deal: electronics and communications engineer Rodolfo Lozada Jr., president of the state-owned Philippine Forest Corporation (Philforest) at the time.

Last week, unidentified men spirited Lozada away from the airport after he arrived from an overseas trip. The police later said Lozada had requested security, but furious senators said authorities were trying to keep him from testifying about NBN at the Senate. Lozada has resigned from Philforest. Last Friday at the Senate, he corroborated Jose de Venecia III’s testimonies on multimillion-dollar kickbacks demanded from the project.

Yet even before that, NEDA’s public standing had already been hit hard. Last August at the Senate, Neri had failed miserably to explain how he and NEDA’s staff exercised due diligence in evaluating the NBN project. This, even as the Arroyo administration continues to attempt to scale down NEDA’s central role and authority to evaluate major government projects, especially those funded by ODA loans or carried out by private investors under build-operate-transfer (BOT) or similar arrangements.

In part, this explains why in some policy advocacy circles, the surge in aid money in the last two years has been met with unease rather than optimism.

From an average of only $741 million between 2003 and 2005, new ODA loan commitments to the Philippine almost doubled to $1.3 billion in 2006. Last year, new loan approvals reached at least $1.26 billion, according to data from the government and the foreign lenders compiled by PCIJ.

ODA loans are long-term money lent by foreign governments or multilateral bodies at easy repayment terms to fund development projects.

So much money

The Philippines has so much fresh loan commitments it even backed out of a $70-million loan deal for a water supply project with the Asian Development Bank (ADB) last year. The government instead turned to China, which was offering cheaper money while imposing less stringent environmental and social conditions.

Far from being pleased, a worried Roberto de Ocampo, former finance secretary, recalls a similar flood of cheap credits in the early 1970s that ended in a debt crisis for the country a decade later. He notes:“A lot of the alleged hanky-panky that took place during the Marcos administration with respect to loans to some extent had their roots with the easy money that was floating around from commercial banks that were awash with cash from Arab liquidity. That is a lesson to be learned."

De Ocampo believes that China, like the West before it, will sooner or later adopt strict and formal credit policies as befits an emerging economic power. But he warns that the deal struck with the Chinese telecommunications firm ZTE Corporation for the NBN project underscores a number of trends that could increase credit risks.


Informal system

“The lending arrangements that you find in the case of ZTE are a reflection of, again, the informality of a system that is taking advantage of liquidity, a rising economy’s desire to expand its sphere of economic and political influence, and the pressing need of third world countries like the Philippines to have access to them," says De Ocampo. “And finally you sprinkle it with a lower than desired sensitivity to good governance in transacting these relationships."

Japan, the Philippines’ biggest ODA provider, resumed fresh lending to Manila last year after ceasing loan approvals since April 2004 because of the government’s low absorptive capacity.

In 2006, ADB approved a record $650 million worth of loans, a sign of the lender’s growing confidence in the government’s financial position after Arroyo imposed new and higher taxes following a brush with fiscal crisis the previous year.

Doubts linger about whether the Arroyo administration is keen or able to spend the growing amounts of aid money wisely.

Supply-driven loans

“Many economists are worried if the government is still interested in using funds efficiently," says Benjamin Diokno, former budget secretary and professor of public finance at the University of the Philippines School of Economics. “The government is becoming lax in project evaluation because the loans are supply-driven."

Diokno notes an avalanche of Chinese ODA loans going into projects of doubtful social or economic value, citing as example the Cyber Education Project, which assigns more weight to information technology than to the training of teachers. Studies show, he cites, that good teachers account for 60 percent of improvements in student performance.

“It’s like the U.S. subprime crisis in effect because they (lenders) are lending to debtors or projects that are not really qualified," says Diokno, referring to turmoil in global financial markets that stemmed from excessive lending by American banks to home buyers without capacity to pay back the mortgage loans.

At the core of the doubts is NEDA, which used to command a reputation of being fiercely independent and competent, an agency that stood up to top officials and politicians pushing ill-conceived if not corrupt projects. The late journalist Luis Beltran Jr. once even called NEDA as the only agency that could not be bribed.

For sure, its former chief Neri earned praise for his moral courage when he told the Senate last August that then Comelec Chairman Abalos offered him P200 million to approve the NBN project. Neri, however, was also rebuked for approving the project anyway with perfunctory scrutiny.

From Neri’s account, it seemed like the NEDA staff just limited themselves to validating the cost-benefit analysis submitted by the project proponent, the Department of Transportation and Communications (DOTC), and its supplier, ZTE Corp. Little effort was made to verify the project’s costs. Worse, NEDA did not examine alternative financing methods, such as build-operate-transfer (BOT) or other schemes.

A rubber stamp

Felipe Medalla, former dean of the UP School of Economics who also served as NEDA head, commented later at a forum: “What he (Neri) said about the NEDA process was very disappointing. His statement that NEDA was not looking at the financing side was a total distortion of what it should be doing. Although I admired him for testifying against Abalos, he did present NEDA as a rubber stamp."

Medalla could be in for more disappointment. According to Lozada, the information technology expert who helped Neri evaluate the NBN deal, Neri was aware of, and even abetted demands for, bribery in the project. Lozada says bribes amounting to $130 million accounted for half the project’s original cost of $262 million. The project cost has since risen to $329 million.

“His instruction to me was very clear. Sabi niya, ‘Jun, you moderate their greed,’" Lozada said in a press conference conducted in the wee hours of Thursday last week. “I was naive to accept that order. I do not know what moderating greed means, but I followed Secretary Neri."

From evaluating government projects to “moderating greed," the role of NEDA and the economic planning secretary has evolved in ways that may shock its former officials. Among them is Ruperto Alonzo, a former NEDA deputy director-general, who says that until the 1990s, NEDA staff refused to entertain phone calls from officials of implementing agencies, instructing them instead to communicate in writing. He himself “was hiding every so often from consultants of implementing agencies."

The transformation in NEDA’s role was not sudden. Long before the NBN project,
the Arroyo administration had been moving to give implementing agencies more power to approve big state projects, without going through the strict but often time-consuming evaluation process of NEDA and the Investment Coordinating Committee (ICC).

Clipped powers

Early last year, Arroyo proposed new BOT law implementing rules that would diminish NEDA-ICC’s powers in approving infrastructure projects funded and implemented by the private sector. Under these rules, which ostensibly aim to hasten the BOT evaluation process, implementing agencies such as government departments, state-owned firms, and local government units would have the authority to approve the projects.

The new BOT rules followed previous moves by Arroyo “to authorize agencies to approve contracts (worth) less than P500 million, except BOT, without going through the NEDA-ICC process, as long as the DBM (Department of Budget and Management) can certify the availability of funds," according to a March 2005 ICC policy directive.

Malacañang has put off issuing the new BOT rules after multilateral lenders and the foreign chambers of commerce objected to clipping the powers of the NEDA-ICC.

But the erosion of NEDA’s powers and independence continues, with the creation of new Cabinet groupings with powers that overstep those of existing NEDA bodies.

In May 2007, Arroyo issued an administrative order creating the so-called NEDA Cabinet Group that makes major economic decisions, including the approval of proposed projects, in between the monthly meetings of the NEDA Board.

She also set up the Pro-Performance System Steering Committee that would monitor and evaluate “all increases in project cost, whether local or foreign funded." Until then, it was the NEDA- ICC that approved cost increases in foreign-assisted projects, without which the Department of Budget and Management could not release additional funding.

Lax, relaxed

Tough standards for project approval are being relaxed. In a memorandum issued after the October 9 meeting of the NEDA Cabinet group, Cabinet Secretary Ricardo Saludo told NEDA to review the 15-percent minimum economic internal rate of return (EIRR) required for ICC approval of proposed projects “with the end in view of reducing it."

Alonzo, who notes that other administrations also had ad hoc economic policy groups, nonetheless warns they create opportunities for “forum shopping" for officials and agencies pushing for projects that do not pass muster with the ICC or NEDA staff.

The erosion of NEDA’s power and independence diminishes the gains made by the agency in recent years to improve the project evaluation system.

Jonathan Uy, public investment staff head, recounts that NEDA has adopted tougher standards in the way the agency approves projects. He says, “Before we were looking at projects as projects. We were looking at the trees. Now, we’re looking at the forest. When you submit a proposal you don’t just justify it as a good project alone. You have to show why it’s a good project in the whole program of things."

Pressure, fudged numbers

NEDA personnel tell of being subjected to varying degrees of pressure to tweak project evaluation numbers toward improving projected returns of favored projects.

For instance, members of NEDA’s project monitoring staff working on a Japanese-funded irrigation project in Bohol recall receiving “a suggestion" to count the dam’s beneficial impact on counter-insurgency efforts to boost the project’s returns, which fell below the 15-percent hurdle rate after costs soared by half. (See sidebar)

Roderick Planta, head of the NEDA project monitoring staff, recalls being told by a Cabinet member, “Kargahan n’yo na lang. Ilagay n’yo na lang ang benefits sa counter-insurgency (Just boost the numbers. Include the benefits to the counter-insurgency program)."

The NEDA economist says he refused, since no data or econometric model exists that would help them decide how much monetary value to put on quelling the communist insurgency.

Recounting the incident months later, Planta explains his refusal to fudge the numbers: “We are not blind to that. You can still pass the project even if EIRR is only 12 percent. That’s okay but don’t prostitute the process. It will hurt everybody’s credibility."

Fuzzy logic

Still, the NEDA personnel are not always successful in resisting instructions from higher officials to improve cost-benefit numbers of projects, especially those enjoying strong backing from what Lozada calls “good political sponsors." That may help explain the fuzzy economic logic that underscored the NEDA-ICC’s approval of the NBN project.

As initially conceived by the DOTC and the Commission on Information and Communication Technology (CICT), a major NBN component was to provide Internet connection to 23,549 schools nationwide. This was on top of a telecommunications network linking close to 2,300 national government offices.

The Chinese government, however, refused to finance the education component, dealing the project a potentially fatal blow. The NEDA staff had estimated that economic return on the project would fall from 20 percent to only 13.01 percent, below the 15-percent hurdle rate, if the schools’ Internet connection were taken out of the project.

To keep project returns above 15 percent, DOTC and CICT proposed to substitute exactly 23,549 municipalities and barangay offices for the schools that would be taken out of the project. The NEDA-ICC Technical Board and Cabinet Committee, in a joint meeting on March 26, 2007, agreed with the project proponents.

“The option to provide connectivity to local government offices such as barangay offices may be explored, so as to optimize utilization of the NBN infrastructure," the NEDA-ICC Technical Board and Cabinet Committee concluded, according to the meeting’s minutes.

NEDA’s evaluation report showed that benefits, consisting largely of savings in government’s phone, Internet and mobile expenses, are higher than costs over the next 15 years or so.

But in estimating savings, the NEDA staff largely adopted the optimistic assumptions of the project proponents. For example, all schools or offices covered by the project that do not currently spend for Internet access are assumed to have Internet connection through a private Internet service provider.

Even Neri found the assumption too optimistic and questioned it in one of the meetings of the NEDA-ICC Technical Board and Cabinet Committee. “Savings in Internet connection cannot be considered as a benefit given that the government does not have much Internet connection," Neri had pointed out, according to minutes of the meeting.

Too bad Neri did not pursue the point further. It could have made all the difference in how the public and his former colleagues should regard him now.

(To be continued)

Anomalies and controversies linked to First Gentleman 'Mike' Arroyo

Anomalies and controversies linked to First Gentleman 'Mike' Arroyo
02/07/2008 | 11:35 PM


I. Lozada Jr.'s statement linking First Gentleman Mike Arroyo to the ZTE deal is just one of several controversies that have hounded the President's husband.

Alleged P50-million payola for telecoms franchise bills

In July 2001, Veronica "Bing" Rodrigo, former correspondence secretary and friend of President Arroyo, alleged that the First Gentleman received a P50-million bribe for the President to recall her veto of the franchise bills of the Philippine Communication Clearinghouse and APC Wireless Interface Network. Rodrigo retracted her accusations a few days later.

Alleged use of PCSO funds as campaign funds

In October 2001, Robert Rivero, axed consultant of Philippine Charity Sweepstakes Office, alleged that First Gentleman Mike Arroyo used PCSO funds in the campaign of certain senatorial candidates and to bribe the media. He claimed that FG Arroyo paid P20.5 million to Bombo Radyo and Radio Mindanao Network; the PCSO and lotto draw announcements did not air in these stations, although some commentators aired pro-administration commentaries. The PCSO publicity department denied Rivero's accusations.

Designation as OFW envoy

In December 2002, President Arroyo designated Mike Arroyo as an OFW envoy so he could represent her in the countries she could not visit. However, critics assailed Arroyo's announcement when they learned that his activities as OFW envoy could be funded by a proposed overseas workers legal assistance fund. They feared that the Arroyo couple would use the funds for her 2004 campaign.

While the President did not recall her husband's designation, the first gentleman voluntarily resigned.

Jose Pidal expose

Sen. Panfilo Lacson's Jose Pidal expose in 2003 further cast First Gentleman Arroyo in bad light. Lacson accused First Gentleman Arroyo of maintaining secret bank accounts to launder money from campaign contributions for the 1998 vice presidential bid of Gloria Arroyo.

First Gentleman Arroyo denied the allegations. His brother, Ignacio "Iggy" Arroyo took up the cudgels for him and claimed to be "Jose Pidal" before clamming up and invoking his "right to privacy" during a Senate investigation.

Friend's involvement in importation of rotten rice

Indian trader Kishore Hemlani, allegedly a close friend of First Gentleman Arroyo, also figured that year in a contract involving the importation of 600,000 metric tons of rotten rice worth P9.5 million from India.

Stay in an expensive Las Vegas suite

In 2005, First Gentleman Arroyo drew criticism for staying in a $20,000-a-night MGM Grand Villa in Las Vegas, Nevada, during a Manny Pacquiao-Erik Morales boxing match. Arroyo’s camp said the accommodation was complimentary and not paid for by public funds.

Alleged receipt of jueteng payola

In the same year, witnesses at the Senate hearings on jueteng claimed that First Gentleman Arroyo received protection money for the illegal numbers game. The First Gentleman denied the allegations and left the country momentarily to help "remove distractions and doubts from people’s minds" on President Arroyo's ability to run the government. The Palace, then embattled with both the jueteng and "Hello Garci" controversies, dismissed the accusations against the First Gentleman as mere concoctions by those who wanted to oust the President.

Friend's involvement in fertilizer fund scam

In 2006, the Senate wrapped up a series of hearings on the fertilizer fund scam and concluded that First Gentleman Arroyo's close friend and fellow Makati Rotarian Agriculture Undersecretary Jocelyn “Joc-Joc" Bolante diverted agricultural funds to the 2004 electoral campaign of President Arroyo.

Alleged existence of multi-million dollar German bank account

Later that year, then opposition Rep. Alan Peter Cayetano claimed that a member of the Arroyo family maintained a bank account in Germany amounting to hundreds of millions of dollars. First Gentleman Arroyo flew to Germany and secured a certification from the bank to disprove Cayetano's claims. Upon his return, he sought Cayetano's expulsion from Congress. - GMA News Research