By ROEL R. LANDINGIN
Philippine Center for Investigative Journalism

Second of three parts

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.

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.

Total portfolio: 161 loans

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."

‘Optimistic bias’

"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."

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.