A new frontier for public-private partnerships in the Philippines

April 2024  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2024 Issue

The Philippines’ need for infrastructure development is immense. Though it is endowed with rich and abundant natural resources, the country appears to have fallen short of realising its full potential for economic growth. In a 2019 publication by the Asian Development Bank, one of the reasons cited for this lack of economic growth is inadequate infrastructure.

With a widening budget deficit (approximately US$4.4bn as of September 2023), improving and modernising the Philippines’ infrastructure will be a monumental challenge. The National Economic Development Authority (NEDA), in a 2023 economic briefing, estimated “an indicative total investment requirement of PhP17.3 trillion (US$317.49bn) over the medium-term” to meet the Philippine Development Plan’s requirements for infrastructure.

This is where the private sector may play an important role, with the potential to become the main engine for national growth and development. The public-private partnership (PPP) model provides a valuable vehicle for governments to secure financing and expertise for infrastructure development projects.

To this end, the Build-Operate-Transfer (BOT) Law, enacted in 1990, was helpful in jumpstarting private sector participation in public infrastructure development. Under the BOT Law, all government infrastructure agencies, subject to compliance with certain requirements, were authorised to enter into contracts with any duly prequalified project proponents for the financing, construction, operation and maintenance of any financially viable infrastructure. Most notable among these projects were the Light Rail Transit Line No. 3, Metro Manila Skyway, Manila North Luzon Tollway, NAIA Expressway Project, Clark International Airport Expansion Project, LRT Line 1 Extension and O&M Project, and MRT Line 7 Project.

The groundbreaking law did, however, have its flaws. Stakeholders lamented that ambiguities in the BOT Law, including unclear allocation of risks and responsibilities among PPP players, cannot be remedied through amendments to the law. Other critical challenges, such as the bureaucratic and time-consuming process of project approval, procurement and implementation, inadequate government capacity to manage PPPs, political and policy risks, and transparency issues, among others, need to be addressed since they contribute to significant delays and inefficiencies in executing PPP projects.

It has thus become evident that the two-decades’ old law has become outdated. To address the deficiencies of the BOT Law, Republic Act No. 11966, or the Public-Private Partnership (PPP) Code, was signed into law on 5 December 2023 and became effective on 23 December 2023.

The PPP Code covers all contractual arrangements between an implementing agency (IA) and a private partner to finance, design, construct, operate and maintain development projects ordinarily provided by the public sector. The PPP Code expanded its coverage to include not only BOT projects, but all contractual arrangements which possess characteristics or elements of a PPP, including joint venture agreements, which were not covered by the BOT Law.

PPP projects may be undertaken through: (i) solicited proposals or those submitted in response to a public bidding process initiated by IAs; or (ii) unsolicited proposals or those initiated by a private proponent.

The PPP Code introduced significant changes to the evaluation and approval of PPP projects. In terms of national PPP projects, if the project cost is PhP15bn or above, it must be approved by the NEDA board following favourable recommendation of the NEDA board investment coordination committee (NEDA-ICC). On the other hand, national PPP projects with a project cost below PhP15bn may be approved by the head of the IA. However, an exception is that the NEDA-ICC must approve a proposed PPP project if certain conditions are met as provided in the law.

Approval of local PPP projects will be undertaken by local legislative councils in the case of local government units (LGUs), or by boards in the case of local universities and colleges. Prior to approval, local PPP projects implemented by LGUs should be confirmed by local development councils.

For projects that affect national or sectoral development plans and national projects, it is imperative to secure national government endorsement through the Regional Development Council (RDC). Should the RDC fail to act on a request for endorsement within 30 calendar days of receiving all necessary requirements it may be assumed that endorsement has been granted.

Perhaps the most significant innovation under the PPP Code is the ‘deemed approved’ provision, which ensures the speedy review and approval of PPP projects.

Under the PPP Code, the decision of an applicable approving body must be rendered within 120 calendar days of receipt of completed requirements. Failure to decide within the specified period amounts to approval of the proposed project, and the IA may proceed with procurement.

With regard to unsolicited proposals, unlike the BOT law the PPP Code allows for the acceptance of unsolicited proposals even if a proposed project is already included in the government’s list of PPP projects.

Further, an unsolicited proposal must first be submitted to the government’s Public-Private Partnership Center (PPP Center) for determination of completeness within 10 calendar days from receipt. If complete, the PPP Center will endorse it and the IA may conduct a detailed evaluation of the unsolicited proposal. If the IA fails to act on the unsolicited proposal within 90 calendar days following the end of the evaluation period, the proposal shall be deemed approved.

Unsolicited proposals should not contain the following government undertakings: (i) viability gap funding and other forms of subsidy; (ii) payment of right-of-way related costs; (iii) performance undertaking; (iv) additional exemptions from any tax other than those provided by law; (v) guarantee on demand; (vi) guarantee on loan repayment; (vii) guarantee on private sector return; (viii) government equity; and (ix) contribution of assets, properties and rights.

To ensure the financial and economic viability of the PPP project, the PPP Code specifically provides that when an IA fails to implement the initial tolls, fees and other charges, and any agreed adjustments, the private sector is allowed to recover the difference. This is a major win for the private sector as there have been many instances where an IA, due to political or other reasons, is unable or hesitant to approve toll or fee increases, dealing a financial hit to the private sector partner.

PPP projects must have a prescribed reasonable rate of return, or the net gain of an investment over a specified period, expressed as an annualised percentage and reflected in the PPP contract. Notably, where the realised rate of return exceeds the prescribed reasonable rate of return, the excess will be remitted to the National Treasury.

To empower the PPP Center in implementing the law, its mandate has been expanded by the PPP Code. The PPP Center is now authorised to draft policy matter opinions in response to requests by government agencies and private entities, and to issue non-policy matter opinions relating to PPPs.

It remains to be seen how the PPP Center will implement and further clarify the provisions of the PPP Code. With the PPP Center’s track record of championing PPP projects, there are high hopes that it will strike the perfect balance between protecting the best interests of the government and citizens, and the legal and economic interests of the private sector. The Implementing Rules and Regulations are expected to be promulgated by the PPP Center no later than 23 March 2024.

Unification of PPP legal frameworks, organisation of the PPP evaluation and approval process, introduction of predictable tariff regimes to protect public interest, and new protocols to fortify PPP institutions are testament to the country’s resolve to develop a more sustainable PPP programme.

 

Patricia A. O. Bunye and Francis L. Fragante are partners at Cruz Marcelo & Tenefrancia. Ms Bunye can be contacted by email: po.bunye@cruzmarcelo.com. Mr Fragante can be contacted by email: fl.fragante@cruzmarcelo.com.

© Financier Worldwide

BY

Patricia A. O. Bunye and Francis L. Fragante

Cruz Marcelo & Tenefrancia

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