Ducky Paredes

“The capacity to command a credit line is a fleeting mark of affluence. If, however, a credit line prompts an irrational shopping binge, that is a sure sign of the poor ethos in action. That person is destined for bankruptcy.”

by Ducky Paredes

This is excerpted from a paper: “Lacking a backbone — The controversy over the ‘National Broadband Network’ and Cyber-education projects” by Raul V. Fabella and Emmanuel S. de Dios of the University of the Philippines School of Economics:
“Up to the early this year. . . most of the government’s plans for expanding IT access appeared consistent and benign. Indeed, they seemed to draw and build upon the logic and success of past privatizations, which had either brought in revenue, promoted efficiency, better service, or both.
“It was completely unexpected, therefore – how and why is still not entirely clear – when this apparent resolve and consistency crumbled and the government’s reversed its direction. In April 2007, President Arroyo stood witness to the signing of two commercial agreements in Hainan, China. These included the offer of a $329-million ODA loan at three-percent interest, payable over 20 years. It was then revealed that the budget for the government-broadband network had now been scaled up from the modest P5.1 billion to a whopping P19.3 billion. . .
“The justification for this all-too-obvious policy-reversal was that it would lower government fixed-line telephone expenses by 50% and its general telephone expenses by 8%. The government’s total expenses for telecommunications usage currently amounts to P3.7 billion annually, with fixed-line phones serving as anchor for most data and internet-exchange. The total project, on the other hand, including the reported P11.5 maintenance and operation over 15 years, is to cost some P31 billion, a figure that likely even an underestimate, since it fails to factor in delays and cost overruns.
“Even if the project were to live up to the hype, therefore, and end up halving all government’s telecoms expenses, the savings would still total only P27.75 billion over fifteen years, an amount even less than the P31 billion the system would cost over the same period. The numbers (at least those that have been made publicly available which however seem to morph as the criticism mounts) simply fail to add up.
“And, as if there could be any doubt regarding the policy-reversal, the so-called Cybereducation Project (CEP) also came forth. A component of the original NBN was the so-called “e-Education program”, which involved providing universal connectivity and content for the nation’s public schools. Again all this meant originally providing schools with the means to gain access to already-existing networks (e.g., last-mile connections and computer equipment), rather than establishing a separate network per se. Its budget was initially pegged at P5.2 billion. Through some inexplicable twist, however, even this project became scaled up to entail a second government-operated backbone, satellite-enabled this time, in addition to the NBN backbone, whose necessity the president herself questioned to begin with. With the ramping-up to a dedicated satellite-enhanced backbone, the original e-Education project cost of P5.2 billion has now soared to a staggering P24.6 billion (more than half a billion dollars).
“During the cabinet meeting of 21 November 2006, President Arroyo reportedly raised the question whether there was even a need for a government network backbone; and second, if there ever was to be one, she also insisted that it be implemented via BOT in order to reduce government exposure. In a letter dated 1 March 2007, the government ICT brain trust, DOT, CITC, NTC, and even Telof officials prudently nixed the two-backbone concept.
“In the event, after everything is said and done, the government has now incredibly ended up batting not just for one but for two publicly owned government broadband backbones!
“How has this happened?
“The solvent that has turned hard economic sense into amorphous policy-mush seems to have been ‘concessional’ financing. The common element and rationale for the upscaling of both the NBN and Cyber-education projects was the availability of official-loan finance, in this case from China. The China Export-Import Bank offered a $329 million loan to finance the NBN on condition that the project was awarded to the Chinese company ZTE. Similarly, the China Export-Import Bank has offered an even larger loan (equivalent to P21.48 billion or close to $500 million) to cover the cost of the e-education project, equipment again to be supplied by designated Chinese companies. Presidential misgivings and expert opinion notwithstanding, the only consideration that seems to have mattered is that the financing for the project is ‘very concessionary’.
“China’s newly-discovered generosity is, of course, neither strange nor totally unexpected. That country is, after all, currently sitting on some $1.33 trillion in foreign-exchange reserves. It therefore has an obvious imperative to offload some of these so that they yield a return of some sort, but also in order to deflect the incessant criticism of its policy of undervaluing the Yuan. As most parvenu trading powers are prone to do, however, China has sought to use tied foreign assistance as a tool to simultaneously unload some of its reserves and still advance its mercantilist purpose. An obvious solution is to pass off some of its idle reserves as loans to developing countries as an incentive for the latter to import from Chinese home firms, thus sustaining employment and the breakneck growth at home. Moreover, collecting a risk-free three percent (because sovereign-guaranteed) on multimillion-dollar loans is not such a bad use of money – it in fact represents a higher return than those Chinese reserves are fetching anyway. In many ways, therefore, China is doing a favor primarily to itself – ‘very concessionary’, indeed.
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“On almost all counts we have examined, therefore, no sound basis exists for the loan-enhanced NBN. But why would the government pursue it anyway?
“Just as a slave can get used to his chains and actually fear freedom, it is said that poor countries cannot afford to be rich. That is, poor countries are too engrossed in the “poor ethos” and find it difficult to escape from it. Their short time horizons prevent them from discerning the large future payoffs from postponing consumption. Thus, they tend to splurge today. In other words, poor nations are poor because they cannot handle affluence.
“The NBN and CEP stories suggest that the Philippines is poor for a similar reason. The capacity to command a credit line is a fleeting mark of affluence. If, however, a credit line prompts an irrational shopping binge, that is a sure sign of the poor ethos in action. That person is destined for bankruptcy.
“Beyond the resources directed to NBN and CEP, a real threat to public resources in general now exists. The mother-of-all good news in the Philippines has been the fiscal consolidation since 2004. The government is collecting more revenues thanks to RVAT, and a consolidated fiscal surplus is looming. But more revenues make sense only if additional resources are spent judiciously and effectively. Unfortunately, many in the political establishment have taken these promising numbers as a license for them to take what they believe is their well-deserved share. Even now wooly schemes are being spun that warm political hearts but which repel any rational mind.
“The country could certainly use Chinese ODA to great effect. But the ‘poor ethos’ stands in the way. Prudence dissolves before the blandishments of easy credit. The bloated NBN and CEP are parables whose moral cannot be reiterated enough.
“The only backbone the government needs today is a moral one; not fiber optic but fibre politique.”

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hvp (08.08.07)