Unsolicited PPP proposals in the Philippines

April 2025  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2025 Issue

Public-private partnerships (PPPs), as a method for delivering infrastructure and development projects, has long been enshrined in law as state policy in the Philippines.

No less than the fundamental law, the Philippine Constitution, recognises the indispensable role of the private sector in nation building. Such a policy drove the passage of legislation (the Build, Operate and Transfer Law) as early as 1990 to develop a legal framework to facilitate the marriage of private creativity and initiative with public service and development goals, and to otherwise enable the mobilisation of resources to finance, construct and operate PPP projects.

The same statute was later amended in 1994, and after years of implementation was revised in 2023 into its current iteration: Republic Act No. 11966, or the PPP Code.

The unsolicited proposal

PPP projects may be initiated and developed in either of two ways. The first, through the ‘solicited’ route, which involves an implementing agency (IA), meaning the specific department, bureau, office, instrumentality, commission, authority of the national government, state university or college, local university or college, local government unit. or through a government owned and-controlled corporation charged with the implementation of the project, identifying and later putting out to public tender a PPP project to solicit or invite private entities to undertake the same.

An additional way is through the ‘unsolicited’ track, so-called because it is initiated or proposed by a private proponent (PP) without being prompted or solicited by government.

In either case, PPPs are gaining traction. One need only look at the website of the PPP Center, the agency charged with assisting IAs in identifying, developing and maintaining a pipeline of PPP projects, to see that myriad projects involving rail lines, water facilities, hospitals, sewage systems, highways, ferry terminals and airports have been deployed or are in varying stages of development.

In this article, we will focus on unsolicited proposals or projects (USP) and delve into some of the more significant changes introduced under the PPP Code.

USP used to be initiated by the PP submitting the same to the IA. Now, the USP must first be addressed to the PPP Center through its USP portal so that it may determine the completeness of the USP and the appropriate approving body. Only then will the matter be presented to the IA for consideration.

If the IA, after evaluation, decides to accept the USP, it proceeds to negotiate the parameters, terms and conditions of the project. If successful, the PP is given ‘original proponent status’ (OPS), which is valid for one year. The IA exclusively deals with the PP while the OPS is valid.

Thereafter, the matter is raised to the approving body. If approved, the USP will be subject to a comparative challenge. Third parties are invited to challenge the USP and submit comparable proposals. The original PP has the right to match any such third party counterproposal. The ‘winner’ of the comparative challenge is then awarded the project.

Any perceived advantage or benefit a PPP may enjoy in being more familiar with the peculiarities of the project, and earning the right to match, are offset by strictures and safeguards provided in the new PPP Code. Chief among these is the prohibition of certain government undertakings, contributions or support that government may extend to the project.

These include, for example, ‘viability gap funding’, payment of right of way-related costs, performance undertakings, tax exemptions beyond those already provided under the law, guarantees on demand, guarantees on loan repayments, guarantees on private sector return, government equity, credit enhancements, and contributions of assets, properties and rights by the government.

Government equity: public funding private

One prohibited government undertaking, government equity, deserves a closer look. The term ‘government equity’ is defined in the implementing rules and regulations (IRR) of the PPP Code as “the subscription by the IA of shares of stock or other securities convertible to shares of stock of the project company, whether such subscription will be paid by money or assets”.

A strict reading would allow other segments of the government (other than the IA), particularly those agencies performing proprietary functions, to invest capital in the PP. A prominent example is the Maharlika Investment Fund (MIF), which is managed by the Maharlika Investment Corporation. The MIF is the newly created sovereign wealth fund of the Philippine government with approximately $2.26bn in its coffers. The MIF was specifically cited by the law’s sponsor in the senate as a possible investor in PPP projects.

The change is significant because the prohibition formerly referred only to “direct government equity”, which was limited to subscriptions in the project company by the government or any of its agencies (not just the IA). The apparent relaxation of the IRR is a welcome development but may prove controversial and, in any case, is yet to be tested.

Right of way acquisition

Another prominent issue in PPP projects is the acquisition of right of way (ROW). The PPP Code prohibits IAs from shouldering ROW-related costs, unless the government receives appropriate compensation which must not be lower than the value of ROW costs to be acquired.

What is the value of the ROW cost that the PP has to pay? Is it the value of the just compensation paid to a private party by the government exercising its power of eminent domain? Eminent domain is the government power to acquire (or expropriate) private property for public use upon payment of just compensation. Private property so acquired belongs to the government. Why then should the PP pay for property it will not ultimately own?

It is another matter if the prohibition is read to mean that the PP must advance the acquisition cost of the ROW. The law clearly implies this, providing that the IA will not be obliged to advance payment for the ROW. Apart from advancing the cost, the PP is also required to submit an ROW acquisition and resettlement plan.

The use of the ROW (which belongs to the government) is nevertheless a contribution of an asset, property or right to the project. That means it is technically a subsidy, permissible only if appropriate compensation is paid by the PP. Such compensation may be taken as the reasonable value for use of (usufruct for) such asset or property, which  must be set by a third-party appraiser.

The Right-of-Way Act (No. 10752) provides that government cannot be prevented from entry into and use of subsurface or subterranean portions of private lands if such entry and use are more than 50 metres from the surface. To construct, operate or maintain a facility at a depth of 50 metres is expensive, if not prohibitive. If the government seeks to use land less than 50 metres from the surface, it will be obliged to negotiate with property owners, or initiate expropriation proceedings.

There is reason, however, to be optimistic. The Department of Transportation is reportedly seeking to amend the law to lower the limit of unrestricted ROW to 25 metres. The PPP Center is also reported to be working on new guidelines relating to the proper valuation of government assets, properties and rights used in PPP projects.

Availability payments

Notwithstanding the prohibition on certain government undertakings, the PPP Code allows for USPs to consider availability payments as a valid mode for investment recovery. Availability payments refer to predetermined payments by the IA to the PP in exchange for delivering an asset or service in accordance with the PPP contract. Such payments are ordinarily considered in order to make an economically viable and desirable PPP project more bankable.

However, availability payments are generally funded from government coffers. Congress will thus have to pass legislation to appropriate the required amounts. Needless to say, the process is fraught with politicking.

For multi-year PPP projects, IAs are required to secure a letter of commitment (LOC) from the Department of Budget and Management. An LOC is not an actual appropriation by Congress. It only represents a commitment by the IA that it will include budgetary support for these projects in its budget proposal to Congress. Whether Congress will approve an appropriation remains at its discretion.

It should be made clear, however, that the practice works. Banks have financed PPP projects on the strength of commitments by IAs as embodied in LOCs. Moreover, to further support PPPs and ensure fiscal sustainability, the PPP Code established a PPP Risk Management Fund which is meant to cover the payment of contingent liabilities arising from PPPs in accordance with its contract terms.

Conclusion

A solicited or unsolicited PPP project is, in the end, a project undertaken for the benefit of its end-users, the public. While there is sound reason to distinguish the two approaches, there is also good cause to accept that imposing stricter requirements on unsolicited projects would make undertaking these more burdensome and ultimately more expensive to the end-users they are meant to service. Imposing more onerous terms would discourage enlistment or mobilisation of private investment and resources for public welfare, effectively defeating state policy.

 

Manuel L. Manaligod, Jr. is a senior partner and Liam Calvin Joshua C. Lu is a junior associate at Cruz Marcelo & Tenefrancia. Mr Manaligod may be contacted on +63 (917) 562 9649 or by email: ml.manaligod@cruzmarcelo.com. Mr Lu may be contacted on +63 (917) 139 4926 or by email: lc.lu@cruzmarcelo.com.

© Financier Worldwide

BY

Manuel L. Manaligod, Jr. and Liam Calvin Joshua C. Lu

Cruz Marcelo & Tenefrancia

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