DOF drafts order limiting government guarantees to private companies

In an attempt to plug a major cause of its financial hemorrhage, the Arroyo Administration will soon issue an executive order imposing strict controls on government guarantees to private corporations by requiring prior clearance and approval from the Department of Finance (DOF).

The order, now being drafted by the DOF, will limit the risks assumed by the government and ultimately reduce its contingent liabilities that had been generated by government guarantees on projects undertaken by private corporations.

DOF assistant secretary Noel Bunoan said the new EO is intended to ensure that the finance department will not be a mere rubber stamp agency that will sign any agreement for a risk undertaking and commit the government to paying contingent liabilities.

The common practice, according to Bunoan, requires DOF’s pro forma approval after another government agency has already committed government to paying unreasonable risks.

This laxity in government’s assumption of risks attached to projects with private sector participation had generated some P12 billion in contingent liabilities this year alone, an amount that is expected to balloon to as much as P600 billion in the next 20 years.

This year, government is forced to settle P3.43 billion of Metro Rail Transit Corp.’s maturing obligation since government had agreed to guarantee a 15-percent return-on-investment (ROI) for the company, based on an average of 400,000 passengers per day.

This means that if MRTC’s ROI or passenger volume falls below what has been agreed upon, then government will have to pay for the difference.

The guarantee had been placed in the contract to lure private investors into the project in the first place.

Government has a similar problem with the take-or-pay arrangement between government and many independent power producers. Undertaken during the height of the power crisis, this arrangement requires government to shoulder the difference between volume of electricity sold by these IPPs and the off-take rate.

Bunoan said the Arroyo Administration wants to prevent government from incurring more debts because of such arrangements, particularly if it means paying for risks it has no control over.

According to Bunoan, the risks that government should be required to assume will be limited to political risks, regulatory risks and right-of-way risks. But items such as ROI and utilization, should not be government’s problem.

These sweetheart deals are common in build-operate-transfer (BOT) projects and its variants like build-lease-transfer projects in the case of the MRTC.