E-Government PPP VC March 2011

LAND TRANSPORTATION OFFICE PROJECT PHILIPPINES To computerize and modernize the 247 offices of the Land Transportation Office (LTO) under a 10 year build-own-operate (BOO) concession for on-line country-wide processing of drivers' licenses and motor vehicle registration. One of the first IT projects for the Philippine government bidded in 1998 that, if successful, was expected to have a strong demonstration effect, leading to wider acceptance of the private sector's role in increasing public administration efficiency. The premise was that modern information and management systems would: 1.yield faster on-line processing of LTO transactions, resulting in time and cost savings and improved public safety (through reduction of car theft, document falsification and unqualified drivers); 2.eliminate the role of fixers (LTO employees who expedite transactions processing for extra payments); and 3.enhance revenue collection by increasing processing volume. 2

WINNING BIDDER - Stradcom Corporation (Stradcom) Sponsors: a)Strategic Alliance Development Corporation, a project development company owned by a self-made local entrepreneur (60%) b)Comfac Corporation - an integrated work place solutions provider (40%) The sponsors are two small Philippine companies – an indication that established Philippine business companies were reluctant to get involved in a service that required major interactions with government agencies and had a government entity as the major source of revenues. Technology Provider: Unisys IFC ROLE Total Project Cost:US$80 million IFC Funding: US$20 million long term loan US$8 million quasi-equity investment (preferred shares) 3

WHAT WOULD HAVE HAPPENED WITHOUT THIS PROJECT? LTO operations would have remained inefficient (long queues, extensive processing delays and prevalence of petty graft); Used to take 9 months to get your drivers license renewed – today you can get it in a few hours! LTO customers would have lost time and money needed for follow-up visits and fixers; No need anymore to find and pay for fixers. Road safety would have remained compromised for lack of easy monitoring and prosecution of driving-related offenders; GoP would have collected less revenue from LTO services and taxes and lacked a showcase of other IT projects; Less career opportunities would have existed in the private (240 Stradcom employees enjoy competitive employment terms and IT training) and public IT sectors (LTO staff are offered computer-proficiency enhancement); LTO database and systems would not have been available for other private (like drug and emission testing centers, car insurers and banks) and public users (like the Philippine National Police). 4

WHAT WOULD HAVE HAPPENED WITHOUT THIS PROJECT? Without IFC's financing: 1.Stradcom would have had difficulties obtaining third party financing without IFC's seal of approval and continuing support; 2.Local lenders would have been reluctant to provide debt financing; and 3.The debt-equity profile would have been non-bankable without the quasi-equity provided by IFC. 5

WHAT HAPPENED? - Significant delays - need to plan for and have financial resources to deal with such delays. A.Dispute over achievement of milestones resulting in delays of revenue transfers from LTO to Stradcom - Need to have clearly defined objective milestones that are subject to interpretation/dispute. B.Intervention of the Commission on Audit resulting in disallowance of LTO revenue transfers with resulting delays - Part of Philippine political landscape - IFC involvement helped resolve the audit office action. C.Delay in computer fee adjustment - Request for fee adjustment in 2002 was approved only in September Need to take into account for such delays in the financial plan. 6

WHAT HAPPENED? D.Technological difficulties not addressed in a timely manner due to strained relations with Unisys due to substantial payment delays - Need for financial reserves in anticipation of delays to make sure key technology providers and other suppliers continue to provide crucial equipment and services E.Sharp disputes between the local shareholders which distracted management and adversely affected Stradcom's operations (a number of legal cases are still pending) - Part of risk of having small shareholders with limited financial resources 7

LESSONS LEARNED 1.Overcoming start-up problems, in particular in a pioneer sector, may take much longer (sometimes years), causing substantial lags in project implementation and transaction ramp-up. 2.Even though concession contracts typically stipulate periodic fee adjustments, implementation is often delayed, in particular if there are unresolved regulatory issues or if action benefiting the concessionaire is seen as political, in particular where service is socially sensitive. Relatively minor issues may be seized upon by government oversight agencies with potentially fatal effects on a project. 3.In case of privatization of sensitive public services, both implementing and oversight agencies must have institutional capacity to adapt to lessons from project implementation. 4.In transactions with local sponsors without significant track record, IFC must scrutinize inter-sponsor governance arrangements and design safeguards, in particular for related party transactions. The true character of a sponsor is only revealed during difficult situations. 8

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