Gov’t agencies understate costs of FAPs resulting in expenditure surges

Government agencies are routinely understating the costs of foreign-assisted projects (FAPs) causing unpredictable surges in expenditures as the government is ultimately forced to shoulder the difference between the approved and the actual project costs.

The budgetary impact of understating the costs of foreign-assisted projects has prompted the Cabinet Investment Coordination Committee (ICC) to consider the possibility of penalizing government agencies that hide certain predictable expenses.

In his final official act as a member of the Arroyo Cabinet, Finance Secretary Jose Isidro Camacho directed the ICC to review the provisions made by project proponents for right-of-way and resettlement costs as well as fixed costs such as fees and various local taxes that should be declared at the outset.

Camacho and Budget Secretary Emilia Boncodin have repeatedly expressed concern over the unpredictability of foreign-assisted projects because government agencies that implement the projects have not been complying with the strict monitoring of fund releases.

ICC sources said that aside from the problems with the actual release of funds, FAPs also had deeply-rooted problems that could be traced all the way back to when they were packaged for approval and funding.

According to a source, project proponents normally try to understate the costs of their projects in the hope of increasing the chances for their approval by the ICC and the funding source.

"Ultimately, the government ends up paying for the difference between the approved project cost and the actual project cost because a lot of these things are either hidden or understated altogether," the source explained.

The source said the most common item that project proponents tended to understate was the right-of-way and resettlement costs. These costs reflect the amount the government has to spend in relocating private entities that would be affected by specific civil works.

"The estimates may be fine on paper but way out of range in reality," the source said. "This should not be hard to estimate even in the beginning, because if we know the historical difference between initial estimates and the actual costs, we can predict and make allowances for the discrepancy."

Camacho’s proposal is for project proponents to arrive at an internal allowance for ROW and resettlement costs so that the project cost estimate could make provisions for the difference in what the government expected to pay for properties that it has to take over and the actual price that the affected owners might ask for.

Another policy that Camacho had asked to be studied is the penalty provisions that could be applicable to project proponents that fail to fully disclose standard cost items such as local taxes and fees that should have been expected as part of the total project costs but are not openly declared in the project proposal.

The source said government agencies that implement these projects normally collect management fees that could be withheld or pegged against the actual performance and implementation of the project.

"The ICC has to decide on the relevant and effective penalties to the agencies that fail to comply with these terms," the source said. "Suspending or canceling the projects would not be right because then, the beneficiaries will suffer."

The source said the ICC did not want to sacrifice critical projects like roadworks, irrigation and other public infrastructure due to the failure of the agencies that implement them.