PPP in the Philippines 12th Regional EFA National Coordinator Meeting Increasing the private sector’s role in education through PPPs can have several benefits over traditional public delivery of education. This includes: greater efficiency, increased choice, and wider access to government services, particularly for people who are poorly served by traditional schools 12th Regional EFA National Coordinator Meeting July 25-28, 2011 Seoul, Republic of Korea

PPP for School Infrastructure Background As of SY 2010-2011, the classroom shortage in public schools stands at 66,800. SY 2010 Shortages Classrooms Teachers Seats Toilets Kinder 14,924 27,852 NA Elementary 28,344 27,270 1,510,805 78,415 Secondary 23,532 46,290 1,062,407 57,432 Total Shortages 66,800 101,612 2,573,212 135,847

Using more conservative parameters (single shift, 1:45 class ratio, and higher participation rates), the shortage could reach as high as 152,569. REGIONS Elem Schs High Schs TOTAL % 1 NCR 16,345 7,619 23,964 15.71 2 Region IV-A 12,014 6,494 18,508 12.13 3 ARMM 10,834 2,570 13,404 8.79 4 Region VII 8,514 3,666 12,180 7.98 5 Region III 6,421 4,061 10,482 6.87 6 Region V 7,365 2,639 10,004 6.56 7 Region VIII 7,205 1,811 9,016 5.91 8 Region XII 5,687 1,902 7,589 4.97 9 Region X 5,359 1,718 7,077 4.64 10 Region XI 4,935 1,836 6,771 4.44 11 Region VI 4,012 2,391 6,403 4.20 12 Region IX 4,608 1,382 5,990 3.93 13 Region IV-B 4,378 1,343 5,721 3.75 14 CARAGA 3,721 1,129 4,850 3.18 15 Region I 2,601 1,627 4,228 2.77 16 Region II 2,697 872 3,569 2.34 17 CAR 2,281 532 2,813 1.84 108,977 43,592 152,569 100.00

Why the need for PPP? DepEd’s appropriation of PhP 11.3 billion for basic education facilities in 2011 can only address 15.60% of the current backlog. DepEd Schoolbuilding Program – 8,997 units Regular Program (DPWH-implemented) – 1,430 units Enrolment grows every year, thus the requirements of schools are also increasing. A total of 10,427 classrooms (excluding Counter-Parting Program with LGUs and Adopt-a-School) will be built using DepEd’s 2011 budget. Classrooms Teachers Seats Toilets SY 2011 Incremental Requirements 39,767 44,487 1,814,348 36,286 SY 2011 Estimated shortage 75,986 73,902 2,298,912 121,334

PPP Modality To plug the deficiencies in classrooms by 2013, DepEd is considering a PPP arrangement for school infrastructure. Modality: Finance-Design-Build-Transfer Contractor: project financing, design and construction Government: repayment upon transfer of classrooms Legal framework: BOT Law, solicited bid Scale: nationwide roll-out; pilot in Regions III and IV-A; site appraisal on-going for Region I Apart from financing, the DepEd sees the following advantages to undertaking a PPP scheme. The DepEd is considering a Finance-Design-Build-Transfer scheme where the contractor undertakes the financing, design, and construction of classrooms and after completion, turns it over to DepEd, which shall pay the contractor its total investment plus a reasonable rate of return, based on an agreed schedule.

Core Objectives Scale: 10,000 units per contract (economic lot) Cost savings: lower cost due to scale economies and use of technology Timeliness/speed of delivery: completion of construction within 1-2 years Quality: new technologies must meet minimum performance standard specifications of DepEd Apart from financing, the DepEd would like to push for the adoption of a PPP for classroom construction to achieve the following core objectives: On Scale: 10,000 units per lot to allow for value engineering and to help the proponent reduce its transaction costs. In terms of implementation, two modes are being considered. The first is 100% delivery of classrooms within a year and payment to commence upon transfer. The second is implementation of construction in phases and payment upon completion of lots.

Packaging the PPP Package: Classrooms with blackboards, electrical system (and water system for 2-storey structures) Classrooms with blackboards, chairs, desks, restrooms, electrical and water systems In terms of packaging the PPP, the DepEd is also considering the possibility of bundling the provision of furniture and other school facilities (i.e. water and sanitation facilities) along with classroom construction. The advantage of doing so is that DepEd can be assured that once classrooms are turned over, they may be immediately used by the school for conduct of classes. In addition, this provision will also ensure the aesthetic and functional consistency of DepEd school facilities, i.e. school desks match the quality and look of the rooms in which they are housed.

DEPED MODEL SCHOOL BUILDINGS Packaging the PPP 3 standard designs are chosen for the PPP. DEPED MODEL SCHOOL BUILDINGS DESCRIPTION SINGLE STOREY Type 1 1 classroom Type II 2 classrooms Type III 3 classrooms TWO-STOREY Type IV Type V 4 classrooms Type VI 6 classrooms Type VII 8 classrooms THREE-STOREY Type VIII 9 classrooms Type IX 15 classrooms To simplify the evaluation process, the group decided to choose three main designs for the PPP based on DepEd’s 9 standard models.

Example of Economic Lot Area: Region III, Sites A-D Economic Lot: 10,000 classrooms STANDARD MODELS DEMAND NO. OF CLASSROOMS BUILT Type I – One storey, 2 classrooms 4,000 units 8,000 classrooms Type II – Two storey, 4 500 units 2,000 classrooms TOTAL 10,000 classrooms This is an example of an economic lot for the PPP. It is possible to have one or two or three standard models in a lot.

Proposed Business Model FINANCING Loan Bond Floatation Project Loan - Securitization Funding requirement (PhP 25-50 Billion) Amortization (PhP 5 Billion x 5-10 years) via MYOA Performance Undertaking Proponent (Private Sector) Government DepED, DPWH The contract is between the private sector (proponent) and government (DepED) based on FDBT (and possibly Maintain) modality (in purple font) Contract to be awarded through solicited bidding: bidding is based on a pre-defined “economic lot” and specific site. (In red font) Private proponent secures financing either through loan, bond floatation, or a combination of both. Private proponent designs/constructs the classrooms within 18-24 months and turns them over to government after completion for operation Private proponent issues performance bond to the government. Government issues a MYOA to ensure that financing of the PPP project will be covered by annual budgetary appropriations (in orange font). DepEd proposes an annual appropriation of PHP 5 billion. Based on our initial computations, using a 5 year tenor and discount rate of 8%, the net present value of the project is P20 billion. Assuming that proponents can build at 15% lower than government’s cost, the PPP project can build about 30,000 classrooms. It was suggested that the tenor of the PPP be extended to 10 years instead of 5 years Advantages: more funds for the project, faster reduction of backlog, longer repayment and maintenance period Disadvantages: higher cost of money, spread of private proponent (6.5% for 5-7 years; 6.5% for 10 years) From our consultations with potential proponents and financing institutions, there is a need to strengthen the MYOA. It was recommended that government issue a Performance Undertaking. This will also will also enhance credit worthiness of proponent and translate to better cost for government ADB has proposed a performance undertaking similar to a lending contract. This addresses the concerns on the timing of MYOA release. Standby letter of credit to cover annual availability fees to private proponent (similar to bridge financing) Not a direct guarantee, subject to performance standards or ADB’s definition of PPP (per DepEd’s meetings with ADB, it is more ideal to include maintenance in the PPP package so that the private proponent is “more involved”, i.e. share risk of operations/management and not just financial risk. Longer term engagement through maintenance makes it a real partnership with the private sector and this can be the basis of the performance contract). FROM ADB PPPs present a framework that—while engaging the private sector—acknowledge and structure the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved. The structure of the partnership should be designed to allocate risks to the partners who are best able to manage those risks and thus minimize costs while improving performance. WORLD BANK: There are various modes of PPPs depending on the degree of involvement or risk that is shared by the private and public partners. An example or a “more involved” type of PPP is private management and supervision of public schools. On the other hand, a “less involved” type of PPP is contracting out the construction of school infrastructure such as classrooms and furniture. Operate Performance Bond Finance Design Build Maintain Transfer

Timetable 2011 2012 Stage 1: Pre-Project Launch   Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Stage 1: Pre-Project Launch Task 1: Site Assessment/Appraisal Task 2: Private Sector Consultations Task 3: Prepare Business Case and FS Task 4: Survey of Available Technologies Task 5: Secure NEDA ICC approval Stage 2: Project Launch Finalize Invitation to Bid, Info Memo and draft Contracts Publication/Release Invitation to Bid and Info Memo Stage 3: Pre-qualification Stage 4: Negotiation/Dialogue Stage 5: Submission of Final Proposals Stage 6: Selection and award of Final/Preferred Bidder Where are we now? Task 1: Ongoing finalization of sites to be included in PPP. Site appraisal completed for Regions III and IV-A. Region I on-going. So far, 1,603 schools are in the shortlist, with a requirement of 7,700 classrooms. Task 2: Completed two consultation sessions with potential proponents and financing institutions. Inputs were considered in developing the PPP program. Task 3: Ongoing preparation of the Business Case, which is supported by the Research, Education and Institutional Development (REID) Foundation through USAID and The Asia Foundation financing. The business case will include the computation of the PPP’s internal rate of return via Public Sector Comparator method. DepEd believes the financial yield curve is very critical in the decision to undertake classroom construction via PPP over traditional government procurement or ODA. Task 4: Upcoming survey of technologies will be undertaken to help develop the bid evaluation criteria and process. Given the FDB modality of the PPP, it is expected that various new technologies (in terms of construction, design and materials) will be proposed. A critical question that the group faces is how to evaluate different technologies against DepEd’s minimum technical standards. The idea of pre-qualification was raised. But it was later on agreed that a survey of technologies will suffice (to support the development of the business case) and that a formal pre-qualification process will be undertaken upon NEDA ICC approval. A technical committee from DepEd and DPWH will conduct an initial survey of technologies. Project launch is expected to commence in October-November this year so that awarding can be done in March 2012.

PPP: Education Service Contracting (ESC) Main objective of this PPP is to increase access and improve quality of education; The government contracts with private high schools to enroll student in areas where there is a shortage of places in public schools; Assistance is given only to students at institutions that charge low fees and serve low-income families; Another type of PPP being implemented in the Philippines is the ESC. The main objective of this PPP is to increase access and improve quality of education. The government contracts with private high schools to enroll student in areas where there is a shortage of places in public schools. Assistance is given only to students at institutions that charge low fees and serve low-income families. The program also includes certification aspects.

PPP: Education Service Contracting (ESC)

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