7 in 10 ODA projects fail to deliver touted benefits

This three-part series written by Roel R. Landingin, Manila senior correspondent of The Financial Times of London, caps a six-month review by the PCIJ of project and official documents covering 71 ODA projects funded by the Philippines biggest ODA lenders.

Part 3 reveals that seven in 10 projects reviewed have failed to deliver the promised economic benefits, and now posit to exacerbate the nation’s debt burden.

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.

The Philippines’ most infamous ‘white elephant,’ the Bataan Nuclear Power Plant in Morong town remains unfinished to this day, even as taxpayers had paid billions of pesos to pay ODA loans used for the Marcos-era project. [photo courtesy of Freedom from Debt Coalition]

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.

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.”

Table 4: Changes in EIRR Estimates for ODA Projects During Appraisal and After Completion

Number of Projects with EIRR Estimates 62 87
No. of Projects with EIRR Below 15% 7 29
No. of Projects with EIRR Equal to or Above 15% 55 58
% of Projects with EIRR Below 15% 11% 33%
% of Projects with EIRR Equal to or Above 15% 89% 67%
No. of Projects Where Change in EIRR After Completion is Indicated 71
No. of Projects With Lower EIRR at Completion 52
No. of Projects With Same or Higher EIRR at Completion 19
% Lower 73%
% Same or Higher 27%

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.

“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.”

The Masinloc coal-fired plant in Zambales, along with a similar project in Sual, Pangasinan, is the single biggest loan exposure of the World Bank in the Philippines today. Its total cost: $203 million. [photo courtesy of National Power Corp.]

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.

Aerial shot of the Subic Bay Freeport that is funded with a $60-million loan from the World Bank has been unduly delayed on account of political intramurals. [photo by Jun Dumaguing]

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.”

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.

Mandaue Bridge in Cebu province is one of about 200 new bridges built with foreign aid from Japan. [photo by Amper Campaña/Sun.Star Cebu]

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.