Public-Private Partnerships in Phillipines

Introduction

The Philippines government has long recognised the indispensable role played by the private sector in national growth and the value of public-private partnerships (PPPs) as an important model for engaging the private sector in public projects. The first build–operate–transfer (BOT) agreement was executed in 1989 between the National Power Corporation and Hopewell Energy Management Ltd for the construction and operation of a power station in Navotas, prior to the enactment of dedicated legislation on PPP arrangements.

Republic Act No. 6957 (the BOT Law) was enacted in 1990 to provide a legal framework for PPP arrangements, particularly through BOT and build–transfer (BT) arrangements. It was amended in 1994 through Republic Act No. 7718, which broadened the types of PPP schemes and introduced provisions governing unsolicited proposals, direct negotiations and special incentives for certain registered projects.

The number of PPP projects in the Philippines has seen steady growth in recent years leading up to the COVID pandemic. While the construction and infrastructure sectors in the Philippines have taken a hit during COVID, the PPP project pipeline has remained relatively resilient. There was a perceived preference for infrastructure projects funded by Official Development Assistance (ODA) under the Duterte government. However, there is reason to be hopeful going forward as the newly elected government has committed to retaining infrastructure projects at 5% of the GDP and announced plans to amend the regulations on PPPs to make PPP projects in the Philippines more attractive to private investors.

Regulatory Framework

BOT Law

Under the BOT Law and its Revised 2022 Implementing Rules and Regulations (the BOT Regulations), the principal contractual arrangements for PPPs include build-own-transfer (BOT), build-transfer (BT), build–own–operate (BOO), build–lease–transfer (BLT), build–transfer–operate (BTO), contract–add–operate (CAO), develop–operate–transfer (DOT), rehabilitate–operate–transfer (ROT), and rehabilitate–own–operate (ROO). Other contractual schemes may also be adopted, on a case-by-case basis, with approval from the President.

Under the BOT Law, a PPP contract may be implemented through public bidding or by the submission of an unsolicited proposal. Public bidding may be initiated through pre-qualification or simultaneous qualification proceedings. In case of unsolicited proposals, the relevant government agency may accept an unsolicited proposal from a project proponent, provided that all the following conditions are met: (1) such projects involve a new concept or technology and/or are not part of the list of priority projects (see below); (2) no direct government guarantee, direct government subsidy or direct government equity is required; and (3) the relevant implementing agencies (IA) or local government unit (LGU) has invited by publication, for three consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of 60 working days. Projects included in the list of priority projects may be eligible to be accepted as unsolicited proposals if they involve a new concept or technology. In addition, any component of an approved project is not eligible for any unsolicited proposal.

Aside from the BOT Law, certain other regulatory frameworks may also be applicable to some PPP projects. These include (i) the National Economic and Development Authority (NEDA) Joint Venture Guidelines which allow government entities to enter into joint venture agreements with private entities, either through a joint venture agreement or a joint venture company, and (ii) local PPP ordinances issued by local government units (LGUs).

Approval Process for PPP Projects

Powers to contract: Section 3 of the BOT Law enables all government infrastructure agencies, including government-owned and –controlled corporations (GOCCs) and local government units (LGUs), to enter into a contract with any duly prequalified project proponent for the financing, construction, operation, and maintenance of any financially viable infrastructure or development facility through any of the PPP models permitted under the BOT Law (as outlined above), subject to the approval requirements set out below.
List of Priority Projects: Concerned government agencies and local government units (LGUs) are tasked to prepare their infrastructure/development programs and to identify specific priority projects that may be financed, constructed, operated and maintained by the private sector through the contractual arrangements or schemes authorized under the BOT Regulations. The projects require the approval of either the NEDA Board, ICC or Local Development Councils (LDCs) and respective Sanggunians. Such requisite approval shall be applied for and should be secured by the head of the agency or LGU prior to the call for bids for the project. For this purpose, the head of the agency/LGU may submit projects for inclusion in the list, for approval by the appropriate approving authority, as often as necessary. The approved projects shall constitute the List of Priority Projects.
Investment Coordinating Committee (ICC)/ National Economic and Development Authority (NEDA)/Development Councils: All national PPP projects costing up to PhP300 million must be submitted to the ICC of the NEDA for approval, while national PPP projects costing more than PhP300 million must be approved by the NEDA Board, upon recommendation of the ICC. In case of negotiated projects or contracts (resorted to when only one complying bidder is left in a competitive bid (see below)), regardless of the development cost, the PPP project must be submitted to the NEDA Board for approval upon the recommendation of the ICC.

Local projects to be implemented by LGUs are submitted for confirmation as follows: (i) to the municipal development council for projects costing up to PhP20 million, (ii) to the provincial development council for those costing above PhP20 million and up to PhP50 million, (iii) to the city development council for those costing up to PhP50 million, (iv) to the regional development council or, in case of Metro Manila projects, the Regional Development Council for Metropolitan Manila, for those costing above PhP50 million up to PhP200 million, and (v) to the ICC for those costing above PhP200 million.

Presidential approval: PPP projects undertaken through the build-own-and-operate scheme or through contractual arrangements other than those permitted under the BOT Law are also required to be approved by the President of the Philippines.
Office of the Government Corporate Counsel (OGCC), Office of Solicitor General (OSG) and Department of Finance (DOF): In addition to the approval requirements listed above, PPP projects and the proposed PPP contract is subject to review by the DOF, OGCC, OSG or any other entity prescribed by law/issuances as the statutory counsel of GOCCs and LGUs.
Head of agency: After all of the relevant bodies have reviewed the proposed PPP contract, the head of the concerned agency or LGU shall review and approve the proposed PPP contract.

Competitive Bidding

The BOT Law has been enacted and the BOT Regulations have been issued precisely to provide a framework for the participation of the private sector in the development of government projects through competitive bidding. Under the BOT Regulations, Competitive Bidding is a multi-step process which may be outlined as follows: (i) preparation of bidding documents (ii) creation of the Pre-qualification, Bids and Awards Committee (PBAC), (iii) Publication of Invitation to Prequalify to Bid, (iv) Prequalification Conference, (v) Submission of Prequalification Documents, (vi) Notification of Prequalified Bidders, (vii) Release of Instruction to Bidders, (viii) Pre-bid Conference, (ix) Bid Submissions, (x) Bid Opening and Evaluation, (xi) PBAC Recommendations to Award and (xii) Project Award to Private Partner and Issuance of Notice of Award.

Market Snapshot

As of 2020, there are in total 176 PPP projects under implementation amounting to PhP1,289 billion. Among these projects are the Clark International Airport Expansion Project – Engineering, Procurement and Construction, the Clark Airport Expansion Project – Operation and Maintenance, Phase 2 of the PPP for School Infrastructure Project, Cavite-Laguna Expressway Project, Metro Manila Skyway Project Stage 3, and the Cebu-Cordova Toll Bridge Project.[1] Prior to the COVID pandemic, the number of PPP projects in the Philippines has been growing steadily. While the construction and infrastructure sectors in the Philippines have taken a hit during COVID, a number of PPP projects still managed to achieve significant milestones.[2]

On the other hand, infrastructure projects funded through the Official Development Act (ODA), which are contracted with governments of foreign countries, members of the United Nations, their agencies and international or multilateral institutions, amounted to USD14.55 billion as of 2020. It composes the largest share of the active ODA portfolio in 2020 (around 47%).

Key Issues for International Investors

International investors looking to participate in PPP projects in the Philippines should take notice of a number of issues.

(a) Risk allocation between public and private sectors

In general, Philippine PPP projects follow the risk allocation principle that the risk should be assigned to the party best able to control or influence its occurrence or manage the consequences of the risk. Commercial risks (e.g. demand risk, supply risk, operational risk, financing risk) are typically allocated to the private sector while legal, political or regulatory risks are allocated to the government (e.g. approval of rates or tariff adjustments, change in law, material adverse government action). In some instances, the parties may agree to share certain risks. Previously, there is a trend of shifting risks traditionally allocated to the government towards the private sector. The Revised 2022 BOT Law IRR appears to address these issues. For instance, under the Revised 2022 BOT Law IRR, material adverse government action now includes acts of the government which discriminate against the sector, industry or project, or have a material adverse effect on the ability of the project proponent to comply with any of its obligations under an approved contract. This deviates from the previous PPP contracts where material adverse government actions do not include those of the executive branch, made in the exercise of regulatory powers, and acts of legislative and judicial branches of the government.

(b) Nationality requirements

For PPPs involving public utilities, the Philippine Constitution requires that: (1) the franchise, certificate or authorisation to operate public utilities be held by Filipino citizens or corporations or associations organised under Philippine laws with at least 60 per cent of its capital owned by Philippine citizens; (2) the participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital; and (3) all the executive and managing officers of such corporation or association must be citizens of the Philippines. Franchise, certificate or authorisation for the operation of a public utility is limited to a period of 50 years.

Having said these, the recent amendments to our Public Service Act appear to limit the definition of public utilities to those that operate, manage or control for public use (i) distribution of electricity, (ii) transmission of electricity, (iii) petroleum and petroleum products pipeline transmission systems, (iv) water pipeline distribution systems and water pipeline systems, including sewerage pipeline systems, (v) seaports, and (vi) public utility vehicles. Upon the recommendation of NEDA, the President may recommend to Congress to classify additional public services as public utility based on certain criteria. Public services that are not classified as public utilities are not subject to any nationality restrictions.

The Way Forward

While there are still a number of infrastructure projects implemented under the PPP route, there is a perceived preference for infrastructure projects being funded by Official Development Assistance (ODA) under the Duterte government. With the change of government in 2022, there appears to be a shift in preference by the Philippine government under Marcos Jr. back to using the PPP model to implement infrastructure projects. The 2022 Revised BOT Law IRR was again recently amended.[3]

Aside from those discussed, notable amendments are as follows: (i) duty of the project proponent to provide a copy of the financing documents to the PPP Center and the implementing agency/LGU as well as the status of the fulfilment of the obligations and cure for defaults under the financing documents, (ii) the ability of the government to take possession of the assets or facilities, prior to the payment of termination payment, pursuant to the approved contract, and (iii) in case the regulator disapproves the proposed amount of charges under the contract, the agency/LGU may allow the project proponent to recover the difference between the charges stipulated in the contract and the amount approved by the regulator through measures allowed in the contract and consistent with applicable laws, and such difference shall not be considered as a direct government subsidy.