By USEC G Hope Libiran
Why ODA Loans?
A country that has more needs than available resources has to borrow, and when a country borrows, it has to find cheaper borrowing, such as with lower interest rate, longer repayment term, and longer grace period.
Cheap borrowing is available to developing countries (such as the Philippines) from ODA Partners (such as ADB, China Eximbank, JICA, and World Bank). Note that the availability of cheap financing depends on a country’s development status, meaning, as a country becomes richer, it loses access to cheaper ODA financing.
Just so you know, most of the DOTr railways projects are financed with Official Development Assistance (ODA). Examples of which are the Metro Manila Subway, MRT-3 Rehabilitation Project, and the PNR Clark Project. Funds for these projects were borrowed at very concessional rates of up to 0.1% per annum, up to 40 years to pay, and up to 12 years grace period, meaning, the government will not start paying for the principal borrowed for these projects until the 12th year, when the projects are already completed, operational, and benefitting the public.
These are also multi-year projects, covering investments that will be made over multiple years.
Now, let us explain investments in relation to economic benefits. Marami kasing tao ang natataranta makarinig lang ng utang ng gobyerno.
Take note of this: Large scale infrastructure projects are not simple government expenses. THEY ARE INVESTMENTS that are made for the purpose of realizing a minimum required economic return.
The determination of whether the economic cost of a project is justified by the economic benefits that it will generate is not a simple process done by a single agency. It consists of a robust multi-level and multi-agency process, where cost estimates are validated and where the expected project benefits are measured and assessed vis-à-vis the cost to generate those benefits. In the case of railway projects, the government’s investment decision making process determines how much it will cost to build the project, and how much benefits it will create, in terms of reduction in people’s travel time, reduction in road-based vehicles’ operating costs, and other benefits such as a cleaner environment and fewer pollution-caused illnesses. These benefits are quantified and assessed vis-à-vis the cost of the project, and if the economic return is at least 10%, then investment in the project is approved and the project is implemented.
Our government’s minimum required economic return of 10% is already relatively conservative vis-à-vis international benchmarks for developing countries like the Philippines. For instance, the Asian Development Bank uses 9%, while our own Philippine Institute for Development Studies has recognized a lower range of 8%.
Further, the investment time horizon for large scale infrastructure projects like railways ranges from 25 to 40 years. This means that the upfront economic costs of a project is measured vis-à-vis its projected benefits over a period of 25 to 40 years.
The approval of infrastructure projects undergoes a rigorous evaluation process by the Investment Coordination Committee of the NEDA Board. The economic managers are members of the NEDA Board that is chaired by the President.
Among the considerations for evaluation are economic viability and availability of fiscal space. The appraisal of projects does not only look at financial viability, but also takes into account impacts to the environment, potential land value appreciation, traffic congestion impacts, jobs generation, social impacts, among others.
For decades, government was not able to raise financing for these decades-delayed and long-needed projects.
Only the Duterte Administration was able to earn the trust and confidence of its development partners to finance and make these decades-long dreamed of projects a reality.
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