The costs of market distortions are aggravated by the difficulty in removing them because of political considerations. The government facing a budget constraint and a desire to maximize social welfare through the provision of greater and better infrastructure services faces a trade-off. On the one hand, if the private sector is encouraged to provide infrastructure services, it should be able to recover costs and generate profits from the endeavor. Private firms face the daunting problem of entering highly regulated and distorted markets for infrastructure where political patronage could present potential constraints to efficient operation. Confronted with the problem of providing services in a framework known to have eroded the value of public firms and projects in the past, private providers seek state guarantees on a wide variety of perceived risks. Because the provision of infrastructure services in power, water, and civil works is politically popular and normally perceived by the public as providing greater marginal social benefits than marginal private benefits, especially when severe water or power shortages occur, governments generally acquiesce to the provision of guarantees93. Encouraging private sector participation in infrastructure development has been driven in other countries by rapid economic growth, with demand by the population sometimes outpacing the government’s capability to provide services exclusively and efficiently. The Philippines is not an exception. Faced with favorable economic growth prospects, the government is dismantling inefficient bureaucratic systems in favor of private operation, ownership or both, of infrastructure. This is perceived to be a more efficient strategy to address the huge demand for infrastructure services without necessarily imposing pressure on the government’s budget. Thus, the Philippine government has used the guarantee mechanism to encourage private sector participation in infrastructure projects. It is an instrument used to minimize, and in some cases, eliminate certain risks that discourage private sector participation in financing, building, maintaining and operating public infrastructure projects. A government guarantee is an important feature of the Build-Operate-Transfer (BOT) schemes that helped solve the power crisis in the early 1990s. Government guarantee seeks to satisfy private investors who are maximizing their own return to risk ratio in the face of pressure from financiers, credit rating agencies, shareholders, etc., that seek to minimize in turn their own risk exposure to the private investors’ decision to take on risky infrastructure projects. These guarantees to private providers cover a wide variety of project-specific and general risks94. B.
Risks in Infrastructure Projects95
An illustration of project-specific risks is shown in Table V.1. Table V.1. Selected Project-Specific Risks and Sectoral Examples Government guarantees may also be provided by various GOCCs as may be allowed by their respective charters. The discussion on government guarantees in this paper pertains only to those provided to infrastructure projects. See de Vera (2002) for a discussion of the problem with government guarantees provided by GOCCs. 94 Llanto and Soriano (1997). 95 This section is from Llanto, Abrenica and others (1997) 93
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