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.

	A two-lane steel bridge that leads to nowhere, the Natan Bridge in Diplahan, Zamboanga Sibugay, was funded by a loan from the United Kingdom. [photo courtesy of Sinag ng Bayan Foundation]

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.

SIDEBAR Aid for Whom? THE DUAL nature of overseas development assistance (ODA) loans as both foreign aid and support for businesses in the lending country has taken an interesting, if confusing, turn in the case of loans and guarantees provided by the United Kingdom. The NEDA lists the United Kingdom as the Philippines’ fourth biggest source of development finance, which comes in the form of guarantees provided by the UK’s Export Credit and Guarantee Department (ECGD). Yet according to the the British Embassy in Manila, the ECGD “is not part of the UK’s (aid) infrastructure but is purely a commercial operation.” Responding to a PCIJ letter, the British embassy’s trade and investment section said the ECGD’s only purpose is to help British exporters by providing the exporters and their financiers with insurance and guarantees against political and default risks. “The value of the loan is usually equal to 85 percent of the contract price — the other 15 percent is either paid in cash or covered by a separate commercial load — there is no discount and there is no artificially constructed low interest rate,” the UK embassy said. “The buyer therefore, pays for the contract in full at a commercial rate, there is no aid element.” It is easy to be misled if a transaction is purely commercial or assistance. A NEDA project evaluation report dated Nov. 26, 2004 on a UK-funded national bridge program spelled out the financing terms — and they looked the same as any other ODA loan. The report said: “The project is being proposed for financing from the British Government’s Export Credit Guarantee Department. The credit financing shall be made available to the GOP (Government of the Philippine) to meet up to 100 percent of the contract price for the project provided by the exporter/supplier. The credit facility covers an interest rate of 2.05 percent over a loan period of 14 years with a grace period of 2.5 years.” Still, the British Embassy could very well be right to consider the amounts as purely commercial transaction rather than aid. Almost 90 percent of £449 million guarantees extended by the ECGD to the Philippines between 2000 and 2007 backed sales to the Philippine government of just a single company, Mabey & Johnson. The British maker of steel bridges, through the efforts of its well-connected agent in Manila, was the supplier of choice for the special bridge-building programs of three Philippine presidents: Fidel Ramos, Joseph Estrada, and Gloria Macapagal Arroyo. More than three-quarters of the £513-million guarantees that Mabey & Johnson got from ECGD were for sales in the Philippines alone. A December 2005 investigative report in The Guardian newspaper concluded that Mabey & Johnson’s bridge sales to the Philippines helped the Mabeys become one of Britain’s richest families. In 2004, newspaper rich lists ranked the Mabeys No. 141, with an estimated wealth of £310 million, according to The Guardian. “Analysis of the company's accounts shows that the dramatic leap in fortunes has come largely from its Philippine contracts, worth £429 million and all funded by UK-backed loans,” the report noted. Perhaps that should convince Philippine officials the UK loan guarantees are “purely commercial” transactions and nothing else. — Roel R. Landingin/PCIJ