the bot law at the crossroads issues and reforms

Atty. Solomon Castro

December 2006

THE BOT LAW AT THE CROSSROADS: ISSUES

AND REFORMS

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract This report consolidates and examines the results of the consultation dialogues organized by EPRA through its Multi-Stakeholder Team on Private Sector Participation in Public Infrastructure, that were held from November 2005 to April 2006. It discusses main issues shared by most stakeholders such as the need for greater transparency and accountability in the build-operate-transfer process, complications associated with unsolicited proposals, managing fiscal risks and exposure to large contingent liabilities and lack of regulatory capacity and conflicts of interest in the performance of public functions. The Final Report finds that House Bill 5002, which seeks to amend the BOT law, shows a clear awareness of issues raised by stakeholders and espouses a radical approach to addressing them.

The BOT Law at the Crossroads: Issues and Reforms Final Report

TABLE OF CONTENTS

ABBREVIATIONS..............................................................................................................................................2 EXECUTIVE SUMMARY...................................................................................................................................3 INTRODUCTION ..............................................................................................................................................5

THE EPRA CONSULTATION DIALOGUES ....................................................................................................5 THE PHILIPPINE PSP PROGRAM..................................................................................................................6 THE BOT/PSP LEGAL FRAMEWORK ..........................................................................................................7 PREPARING FOR THE NEXT WAVE ..............................................................................................................9

RESULTS OF THE EPRA CONSULTATION DIALOGUES...........................................................................10 DISCUSSION OF MAIN ISSUES .....................................................................................................................10

PROPOSED AMENDMENTS TO THE BOT LAW..........................................................................................29 HB 5002 RATIONALE AND FEATURES........................................................................................................29 THE EMERGE REPORT ON BOT LAW AMENDMENTS ............................................................................31 RESPONSIVENESS OF PROPOSED AMENDMENTS .......................................................................................33 ADDITIONAL INPUTS FROM EPRA CONSULTATION DIALOGUES .............................................................42 FINAL POINTS AND COMMENTS ON HB 5002 ............................................................................................42

CONCLUSION.................................................................................................................................................44 SOURCES ........................................................................................................................................................46 ANNEXES EPRA CONSULTATION DIALOGUE PROCEEDINGS

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ABBREVIATIONS

ADB Asian Development Bank BOI Board of Investments BOT build-operate-and-transfer BOT Law Republic Act No. 6957, as amended BT build-transfer DA Department of Agriculture DOE Department of Energy DOF Department of Finance DOTC Department of Transportation and Communications DTI Department of Trade and Industry ECC Environmental Compliance Certificate Electric Power Crisis Act Republic Act No. 7648 EMERGE Economic Modernization through Efficient Reforms and Governance

Enhancement EPRA Economic Policy Reform and Advocacy ERC Energy Regulatory Commission ICT information and communication technology IFC International Finance Corporation IRR Implementing Rules and Regulations Land Bank Land Bank of the Philippines LGU local government unit LWUA Local Water Utilities Administration MTPDP Medium-Term Philippine Development Plan 2004-2010 MTPIP Medium-Term Public Investment Program 2005-2010 MWSS Metropolitan Water Supply and Sewerage System NGO non-government organization NPC National Power Corporation ODA Official Development Assistance PPP public-private partnerships PSP private sector participation RA Republic Act USAID United States Agency for International Development World Bank International Bank for Reconstruction and Development

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EXECUTIVE SUMMARY

This Final Report consolidates and examines the results of the EPRA consultation dialogues which were held from November 2005 to April 2006. In line with EPRA’s mission to widen and strengthen the ownership of economic reforms through participatory processes in policy formulation, the dialogues were conducted to bring out ideas and experiences from the key sectors and known stakeholders involved in the development, provision or use of infrastructure and public services that had been carried out on a PSP basis. Their views and comments were also intended to serve as inputs to an ongoing congressional initiative to amend the BOT Law. Several consultation dialogues were held which consisted of separate briefings, workshops and round table discussions organized for the following groups:

Government agencies Business/PSP proponents (water, energy, transportation, and ICT industries) End users/consumers Civil society groups/NGOs.

These sectors make up the principal stakeholders in the Philippine government’s program to use public-private partnerships as a key development strategy and policy tool to improve the delivery of public services. Since its inception, the Philippine PSP Program had brought in private investments worth almost USD 19 billion that went directly into the development of new infrastructure and the provision of improved services in power generation, transportation (principally, toll roads and rail), water supply, ICT, and property development. The BOT Law provides the basic legal framework for doing PSP transactions in the Philippines from both policy and implementation standpoints. It is considered the seminal law that opened up practically all types of infrastructure and development projects to PSP and which authorized government implementing agencies to enter into partnerships with qualified proponents. After more than ten years since the last major revision, House Bill No. 5002 seeks to further amend the BOT Law to address factors that have impeded BOT project development and implementation. The proposed reforms include: (i) establishing an independent and single BOT project review and approval body; (ii) setting the terms for a more competitive and transparent procurement process; and (iii) defining specific offenses and providing penalties for their violation, among others. Consolidating the concerns raised by the participants to the EPRA dialogues, the main issues shared by most of the identified stakeholders are:

Choosing suitable PSP modalities and lack of government capacity in developing PSP projects

Lack of regulatory capacity and conflicts of interest in the performance of public functions

Need for better technical understanding and cooperation on the part of government, and for greater public awareness and education

Lengthy approvals process and red tape; the process is also quite prone to political

influence/intervention which can cause delay

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Need for greater transparency and accountability in the BOT process

Complications and difficulties associated with developing infrastructure through

unsolicited proposals

Managing fiscal risks and exposure to potentially large contingent liabilities as a result of government guarantees and support given to PSP projects, and finally,

Determining the true social development impact of PSP in infrastructure and protecting the

public welfare. Serious questions, however, also hound the provisions of the congressional bill. There is a common belief that the proposed BOT Authority will not be effective if it assumes its intended role as promoter, facilitator, approving body, procurer, coordinator and monitoring agency for PSP projects all at the same time. This is a clear conflict of interest to many. Nevertheless, the Final Report confirms that the bill does well in covering the issues and concerns raised by the different stakeholders. While the solutions suggested by the bill may be debatable, it shows a clear awareness of the issues and conveys a genuine intent to resolve them. The bill espouses a radical approach compared to other solutions. But what has been obviously shown is that while there may be several options, the issues and goals are evidently the same.

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INTRODUCTION

The EPRA Consultation Dialogues This Final Report consolidates and examines the results of the consultation dialogues organized by EPRA through its Multi-Stakeholder Team on Private Sector Participation in Public Infrastructure, that were held from November 2005 to April 2006 (the “EPRA Consultation Dialogues”). In line with EPRA’s mission to widen and strengthen the ownership of economic reforms through participatory processes in policy formulation, the EPRA Consultation Dialogues were conducted to draw out ideas and experiences from key sectors and known stakeholders involved in the development, provision or use of infrastructure and public services which had been carried out on a PSP basis. Their views and comments were also intended to serve as inputs to an ongoing congressional initiative to amend the more than decade-old BOT Law. Several consultation dialogues were held which consisted of separate briefings, workshops and round table discussions organized for the following targeted groups or audiences:

Government agencies Business/PSP proponents (water, energy, transportation, and ICT industries) End users/consumers Civil society groups/NGOs.

Usually at each dialogue, a set of presentations on BOT/PSP project development experiences was given to prompt discussions. Selected reactors, followed by the rest of the participants, were then allowed to respond either in plenary or break-out sessions. During the exercise, participants were asked these two basic questions:

What are the issues affecting PSP as an infrastructure modality? Also, what matters were problematic in the application of past rules or policies that may

perhaps be improved or fixed through revisions to the BOT Law? The merger of issues was done solely on the basis of the proceedings, summaries and notes recorded by EPRA at each dialogue. The analysis, however, takes into account external information that might not have been known at the time some of the issues had been discussed. As a result, the issues either find support in the analysis or are candidly tested and placed in their proper context. In addition to reviewing the major PSP issues, the comments and recommendations of the various sectors on the revisions to the BOT Law proposed under House Bill No. 5002 (“HB 5002”)1 are discussed and presented in this Final Report as well.

1 House Bill No. 5002 entitled “AN ACT CREATING THE BOT AUTHORITY, FURTHER AMENDING

REPUBLIC ACT NO. 6957, AS AMENDED BY REPUBLIC ACT NO. 7718, ENTITLED ‘AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES,” introduced by Representative Joey Sarte Salceda and filed on 16 January 2006.

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The Philippine PSP Program For more than 20 years, the Philippine government has used public-private partnerships as a key development strategy and policy tool to improve the delivery of public services in the country. Since its inception, the Philippine PSP Program has brought in private investments worth almost USD 19 billion that went into the development of new infrastructure and the provision of improved services in critical areas such as power generation, transportation (principally, toll roads and rail), water supply, ICT, and property development. 2 Additional infrastructure privatization projects valued at around USD 514 million had also been awarded by the government and are currently at different stages of implementation, about half of which are under actual construction.

Figure 1. Status of BOT Projects

Completed Projects

$1,000.50 M

Under Construction

$514 M

Operational $17,800.72 M

Having been largely credited for solving the energy crisis that gripped the country during the late 80’s to mid-90’s, the Program, not surprisingly, channeled the largest chunk of recorded investments to the power sector, drawing close to 51% of the total. The water sector got the next highest share at 37% (owed largely to the two MWSS privatization transactions estimated to cost around USD 7 billion), followed by transportation at 8%, while ICT and property development projects combined for about 3% of the aggregate.3

2 See DTI-BOT Center Public-Private Partnership Program List of Completed/ Operational and Awarded

Projects, 31 March 2005. This Final Report has excluded pre-terminated projects from the list such as the San Pascual Co-generation Power Plant Project (worth USD 400 million) and the NAIA International Passenger Terminal III Project (previously listed at a project cost of USD 440 million).

3 Id.

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Figure 2. Investments by Sector

Property 2%IT 1%Transport 8%

Water 37%

Power 51%

0%

10%

20%

30%

40%

50%

60%

Sector

Percent

Government’s strategy for the delivery of infrastructure through PSP has been set as follows: competition for a specific market or service is identified and a private sector provider is qualified and selected either through a competitive bidding or an unsolicited tender process. The chosen provider is then contracted to provide the planned service and is made subject to government regulation either under applicable law or by contract on economic, technical, and other performance-related aspects. Since the BOT Law correctly treats PSP as a financing scheme, the proponent may be granted credit enhancements, incentives and other forms of government financial support such as revenue guarantees, automatic fee adjustments, and tax relief. These are seemingly justified so that the government would be able to attract the right private investors – an end made more critical considering the inadequacy of public investments to meet the country’s growing infrastructure requirements.

The BOT/PSP Legal Framework Capital investments came at particular times when enabling laws had allowed private sector initiatives in government infrastructure. Perhaps the earliest of these laws was RA 3741 (1963), otherwise known as the Private Financing Law. The basic framework and spirit of that law make it the sure precursor of modern PSP legislation. Under RA 3741, the then Department of Public Works and Communications was authorized to enter into contracts with the private sector for the construction, operation and maintenance of national highways, roads, bridges, public markets, irrigation systems and other self-liquidating public improvements. The contractor, in turn, would be entitled to the return of its capital with interest on the unpaid balance at a rate not exceeding 12%. The developer was also authorized to charge and collect reasonable tolls or fees for the use of its facilities. The Private Financing Law was subsequently repealed by Presidential Decree No. 1005 (1976). To justify the action, it was noted in the decree that the implementation of government infrastructure projects under the Private Financing Law might distort government plans and priorities since the law’s overriding consideration was the self-liquidating character of the project rather than its social and economic benefits. After more than ten years and, in what seemed to be a casual response to a looming energy crisis, the government, pursuant to Executive Order No. 215 (1987), ended State monopoly in power generation and permitted the building of private sector generation facilities throughout the country.

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EO 215 was promulgated to make up for the lack of public investments in the power sector and to help accelerate the development of new baseload capacity through private sector generators. Efforts to further mobilize private sector investments in infrastructure led to the enactment of the first version of the BOT Law in 1990. The law authorized government agencies to enter into contracts with qualified private sector proponents for the financing, construction and operation of financially viable infrastructure facilities through the build-operate-and-transfer (BOT) and build-transfer (BT) schemes.

With the economy nearing breaking point as a result of the severe power shortage, the Congress approved the Electric Power Crisis Act of 1993 which gave the President time-bound discretion and authority to execute negotiated contracts for the construction, repair, improvement or maintenance of power plants, projects and facilities. This was shortly followed by the substantial revision of the BOT Law through RA 7718 (1994). The Amended BOT Law expanded the different public-private partnership arrangements that could be lawfully entered into by implementing agencies with private sector proponents, broadened the eligible types of infrastructure facilities or development projects that may be carried out on a PSP basis, and introduced the unsolicited proposal process as a valid mode of project implementation. It also helped institutionalize the possible provision of government support arrangements to credit enhance PSP projects and led to the recognition of the need for sponsors to make market-based returns.

GOCC special legislative charters also became the legal bases for directly negotiated joint venture agreements with private developers for some big-ticket toll road projects such as the Metro Manila Skyway and North Luzon Expressway Projects. In 1995, the National Water Crisis Act was passed which gave similar direct contracting powers to the President for the financing, construction, rehabilitation and operation of water supply and distribution facilities through BOT-type contracts, and sanctioned the reorganization and full privatization of the MWSS including LWUA. The latest enactment would be the Electric Power Industry Reform Act of 2001 (RA 9136 or the EPIRA), which provided the policies and framework that would enhance the inflow of private capital to the power sector and set an orderly and transparent divestment or privatization of the assets and liabilities of NPC. The law also prohibited NPC from incurring new obligations to purchase power through bilateral contracts with generation companies but retained NPC’s missionary electrification function through its Small Power Utilities Group. From this extensive list of special statutes that make up the BOT/PSP program framework, the BOT Law may be considered the seminal law for doing PSP transactions in the Philippines from both policy and implementation standpoints. While it cannot be credited for having mobilized substantially all of the recorded investments, it is the law that opened up practically all types of infrastructure and development projects to private sector participation and that authorized government implementing agencies to enter into partnerships with qualified sponsors or project proponents. To address implementation issues and perceived weaknesses in the program, BOT regulation went through two major revisions in 1998 and 2006. The 1998 revision focused on clarifying the procurement requirements and procedures for the competitive bidding and Swiss challenge processes, while changes to the implementing rules effected during the first half of 2006 principally dealt with trying to accelerate the BOT government approvals.

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Preparing for the Next Wave Undeniably, infrastructure plays an important part in meeting the country’s economic goals and in maintaining overall competitiveness. Declining levels of public investment in infrastructure to proportions below international benchmarks seem to have reinforced PSP’s crucial role in economic development even more. Under the MTPIP, the total infrastructure investment requirement for 2005-2010 in the transportation, energy, water and ICT sectors is estimated to be PHP 1,048.8 billion (or USD 21 billion). Significantly, the government expects the private sector to finance or contribute about 28 % of that or around PHP 286.4 billion (or USD 5.7 billion). Meeting that target has become more challenging in view of the serious issues that have surfaced through the years and the hard lessons learned which have weighed down the entire BOT program. Awarded contracts widely perceived to be “onerous and grossly disadvantageous,” glaring allegations of corruption or wrongdoing, and failed transactions that had been judicially struck down have collectively set off a negative impact on the conditions for doing PSP in the country. One of the biggest hurdles is reversing the downtrend and marked drop in BOT/PSP investments that started in 1998 (see Figure 3) and cultivating instead a robust project pipeline that will help achieve the government’s MTPIP goals.

Figure 3. Annual BOT Investments 4 (current prices)

1,137,802,800

939,127,000

743,270,000633,670,000

1,307,092,800

295,000,000

1,156,310,300

1,214,980,000

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

1996 1997 1998 1999 2000 2001 2002 2003

Source: BOT Center (aggregate data) It appears that HB 5002 is being packaged as a magic bullet. The bill seeks to directly resolve those issues by proposing substantial amendments to the BOT Law which are intended to: (1) establish an independent and single BOT project review and approval body; (2) set the terms for a more competitive and transparent procurement process; and (3) define specific offenses and provide

4 The figures shown are an approximation of the annual investments and were derived by breaking down the

total project cost of a BOT project into equal annual investments during its implementation period.

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penalties for their violation, among others. While touted as a major piece of economic reform legislation, it has not been certified as urgent by the President to Congress. It remains pending with the Committee on Public Works and Highways at the House of Representatives. Whether HB 5002 adequately addresses the factors cited by dialogue participants that have deterred PSP infrastructure development is one of the main questions to be tackled in this Final Report as well. RESULTS OF THE EPRA CONSULTATION DIALOGUES The holding of the EPRA Consultation Dialogues was a useful approach in eliciting the needed inputs and comments from the concerned sectors. The exercise was not entirely novel, however, since similar clinical discussions had already been organized in the past – the last one being the series of public hearings called by the inter-agency committee that worked on the most recent revisions to the BOT Law IRR. In fact, a lot of the issues raised during the EPRA Consultation Dialogues had also been brought up during the public hearings and in earlier forums. Nevertheless, what made the EPRA-initiated exchange unique was its wider subject coverage and participant outreach. The discussion, for instance, not only covered experiences in the BOT program but also included lessons learned from other privatization models. The participation of civil society groups, NGOs and consumer organizations also provided a fresh perspective and brought out materially different yet fundamental points such as the need for more transparency, better regulation and protection of end users, and more rational government planning as a whole.

Discussion of Main Issues For the purpose of having a more structured presentation and discussion, matrices are used to integrate, classify and explain the issues and identify the particular stakeholder groups that have cited them. After each issue is explained, an assessment is made from an academic or practical viewpoint, which either helps validate the issue or places it in the proper context that may consequently temper its gravity. Table 1 synthesizes and describes the main issues that have been commonly raised or deemed critical, at least on their face, by the participants to the EPRA Consultation Dialogues. There appears to be unanimity in nearly all of the major concerns mentioned. Table 2, on the other hand, lists the issues that a specific stakeholder group has brought up as worrying points for the sector it represents which do not seem to be of significant interest to others. For full and easy reference, the proceedings of the EPRA Consultation Dialogues, as documented by the Multi-Stakeholder Team on PSP in Public Infrastructure, have been attached to this Final Report as annexes.

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Table 1. Main Issues on BOT/PSP Project Development and Implementation

Issue Nature or Description Concerned Sectors Report Analysis and Assessment 1. Choosing suitable PSP

modalities and lack of government capacity in developing PSP projects

There are different options for PSP and getting it wrong can be costly. A more fundamental question for government is whether PSP provides the solution. Thus, if the costs of doing PSP in infrastructure are high, then would it not be better for the government to undertake these projects directly instead? If the answer is no, given the design, features and objectives of a particular project, what would be the most suitable PSP modality to undertake? What variables are involved? Related questions are how government capacity to develop PSP projects can be improved and how can it be enhanced so that public interests are genuinely considered and protected.

Business, Users/Consumers, NGOs/Civil Society Groups

Selecting a suitable PSP option depends on several factors and the government must first be able to identify the problems in service provision that it wants to solve (e.g., operational inefficiency, lack of capital investments, poor maintenance). It should also evaluate how appropriate or responsive an option is in addressing those problems, and assess its own capacity to assume the obligations and risks that each option entails. (World Bank, 1997) But choosing the most appropriate PSP modality is just one of the many important aspects of successfully crafting and developing an infrastructure privatization transaction. In all cases, the basic principle is that a BOT/PSP project must be legally, technically, financially and politically feasible and sound. In the past, poor or even irrational planning and uninformed decision making have resulted in unfair deal structures or expensive infrastructure. The government is clearly aware of this issue and recognizes the need to build capacity. The BOT Center and the different BOT units of line agencies had received extensive technical assistance and support from donor agencies for this purpose. This type of assistance continues up to now. There are government agencies and professionals who understand the requirements

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment of PSP infrastructure development and project financing quite well. Also, as a functional tool, the government has set up a small project development facility or PDF (funded by USAID and administered by the BOT Center) which allows implementing agencies to engage professional advisors to prepare project feasibility studies and bid documents for the public tender of BOT/PSP projects. Winning bidders are then required to reimburse the agency for the costs incurred in packaging and tendering the projects. An ADB-funded private infrastructure PDF loan facility for LGU projects used to be in place as well. The facility was administered by the Land Bank. Applying the PDF concept, government sponsors have been recently hiring international transaction advisors (such as the IFC) on commercial terms to help design and carry out priority public-private partnership projects.

2. Lack of regulatory

capacity and conflicts of interest in the performance of public functions

The government does not seem to have the technical capability and resources to exercise regulatory functions over public services and infrastructure provided through PSP, which creates regulatory risk and tends to put off investments. Regulatory offices appear to be unable to act or decide independently. There is a need to rationalize regulatory functions which include the grant of incentives and

Business, Government, End Users and Consumers, NGOs/Civil Society Groups

Ideally, the regulatory framework should be conducive and prepared for private investments in infrastructure. Even if PSP projects are competitively tendered, service providers usually end up retaining or having some monopoly power. Regulation is therefore necessary to protect the social, environmental and public interest or public policy aspects of infrastructure and service provision such as those relating to prices, operating efficiency,

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment the protection of public interests. How then can government regulatory capacity be enhanced? What would be the appropriate institutional set-up for regulators? How can their independence be ensured? How can incentives for disclosure by regulated firms be strengthened? Even if most transactions lead to natural or regular monopolies, some PSPs are not subject to formal regulation. Should they be?

compliance with service level standards, possible monopolistic behavior or unfair trading practices, and consumer welfare and satisfaction. Unfortunately, some sectors have weak regulatory systems and are unable to cope due to inadequate laws or deficiencies in resources and technical capabilities. If sector laws have gaps, interim regulatory arrangements are normally formulated and missing elements of regulation are incorporated into PSP contracts. Government agencies sometimes find themselves in conflicted positions being asset owners or revenue sharers but acting as “independent” regulators at the same time. In this situation, it would be hard to see the fairness and logic of having a joint venture, for instance, seek regulatory approval for a decision it made with a partner-agency that is now asked to independently review the merits of the approval sought. The clear tendency is to favor the results, more likely, at the expense of public welfare or convenience. The lack of capacity and independence also leads to different forms and degrees of regulatory capture. Again, there is open recognition of these problems. Some steps have been taken to address them. For instance, the EPIRA was intended to strengthen the capacity and ensure

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment the independence of the ERC to serve as the apex regulatory body for the power industry. The NWRB was reorganized pursuant to EO 123 (2002) to exclude public agencies that had direct claims on water resources and to bring local water districts under its regulatory supervision. Finally, the MTPDP mandates the outsourcing by the LRTA of rail services while retaining regulatory functions over the operations of private concessionaires.

3. Need for better

technical understanding and cooperation on the part of government, and for greater public awareness and education

There is lack of technical and legal understanding by government and other stakeholders about the BOT process and its requirements. This contributes to additional cost on the part of investors. There should be better cooperation among government agencies particularly in the sharing of information. Some agencies intervene on the basis of wrong information which can adversely affect the implementation of projects. The role of local government units in the implementation of PSP projects has also been a concern since LGUs exercise regulatory functions and tax powers over businesses. Getting political and public support is also important. If the public is well-informed on the BOT process, a lot of

Business, Government, End Users/Consumers, NGOs/Civil Society Groups

Unpredictability and misguided interference in the BOT/PSP development and implementation process may be usually traced to the lack of knowledge about applicable laws, little or no appreciation of the project financing scheme, or a failure in communication or consensus building. These outcomes pose enormous risks on the part of investors, lenders and even government sponsors themselves. It has happened several times. The cases cited and complaints made by the participants to the EPRA Consultation Dialogues, particularly, the business sector, are valid and real. But the government has shown that it can take proper action. For instance, to settle the issue on the nature and treatment of fees payable to private sector proponents that are collected by implementing agencies from facility users, Joint Circular No. 03-01 (2003) was issued by the DOF, DBM, NEDA and BOT Center which

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment misconceptions can be corrected.

permitted agencies to deposit money collected from end users in designated escrow accounts and to pay the proponents’ fees directly from those accounts. This circular implemented a special provision in the General Appropriations Act clarifying that such fees were not public funds and could be paid to BOT proponents. It helped eliminate payment risk and secured the investors’ project cash flows. Agencies and proponents also fail to identify and consider the position of stakeholders who support or oppose PSP initiatives during planning and implementation. As a result, safeguards for specific interest groups are not provided in PSP transactions that can earn support, widen public acceptance, or eliminate opposition.

4. Lengthy approvals

process and red tape; the process is also prone to political influence/intervention which causes delay

Bureaucracy and red tape in the project review and approval process have caused delays in project implementation and transaction closing which results in higher costs. How can delays in the project approval process be eliminated? How can project approval and closure be facilitated to reduce cost? Is it possible to have a centralized government agency to approve projects, since, currently, there are several agencies that proponents have to deal


While the IRR of the BOT Law has consistently prescribed a 30-working day period for government BOT approving bodies such as the ICC to approve PSP projects (and has always declared projects to be deemed approved if that deadline is not met), this prescription is contradicted by reality and is treated more as something directory rather than mandatory. Implementing agencies including proponents are never bold enough to formally invoke this provision since most often the consent of other government agencies (that are members of the

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment with separately? A lot of delays in project review, approval, and implementation are caused by political intervention. How can we reduce undue political intervention/influence/pressure in the project development cycle? How can these risks be mitigated or avoided?

ICC) are required for key elements of the project such as the provision of government support and the setting of negotiating parameters. There are no real consequences for delay, therefore, on the part of the approving body. In any case, the technical, financial and economic review done by government of BOT/PSP projects is not only a legal but also a rational and practical requirement. Validating the feasibility of any project is crucial. The government must do its own due diligence for it to come up with an informed decision. The whole exercise in fact can be very predictable. Nevertheless, one may still ask if the decision-making process is transparent enough. But there are qualifications that should be made. Delays may be caused by many factors including the non-compliance of agencies and proponents with approval requirements and the limited absorptive capacities of government approving bodies. One other reason that could hamper the smooth processing of project approvals and could reverse logically expected outcomes would be political intervention. Questionable attempts to influence the results or change risk sharing decisions at the public approval stage typically originate from private sector proponents and are coursed through different government channels until the target of the political pressure is reached and eventually

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment succumbs. Arrangements or findings at the technical level deemed “unacceptable” are questioned, fought over and eventually brought to the attention of holders of political power. As a result, the issue takes time to resolve and an impasse occurs, delaying official action on projects and altering development policies significantly. This kind of dynamics is seen mostly in unsolicited proposals, which by law and experience, take so much longer to complete. A simple processing time study done by the BOT Center indicated that intrinsically unsolicited proposals would take almost double the time to close compared to publicly bid projects. Since the contract is directly negotiated and asymmetric information problems abound, it is not uncommon for unsolicited projects to be under development for at least five years or more. In an apparent effort to speed up the approvals process, the President through the NEDA Board issued a directive in April 2006 (1) instructing the BOT IRR Committee to incorporate further revisions in the Revised IRR by not requiring first-pass approval from the ICC for unsolicited proposals and just submitting the results of the Swiss challenge to the NEDA Board for appropriate action, and (2) fixing the rate of return for all projects at a maximum of 12%, after-tax. This order, however, had an opposite effect and merely confused oversight bodies and implementing agencies. Delays were caused

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment because line agencies had to grapple with understanding and applying the directive as faithfully as they could.

5. Need for greater

transparency and accountability in the BOT process

There is a need for greater transparency and accountability in the development of PSP projects. One of the relevant questions is how can transparency be ensured and maintained throughout the project review, approval, and implementation process. How can the government maintain the integrity of the bidding process? What are the optimal procedures for bidding, contracting, and approval which can lead to a fair balancing of the interests of all stakeholders? Moreover, there is a need to look at how PSP contracts are reviewed and implemented. Closer monitoring of projects during the different stages of development and implementation is necessary. As an additional safeguard, how can the public have sure and free access to contracts, records or documents? What are effective measures to ensure that culpable persons/agencies are held accountable for any illegal conduct or wrongdoing? It seems, for instance, that


PSP projects that have failed, become controversial or lacked political and popular support are mostly those which have been developed under less transparent terms, have been awarded to incompetent bidders, or have deviated, one way or the other, from the prescribed approvals or procurement process. It is a widely accepted principle that the more competitive and transparent the processes or approaches are for awarding development rights and forging strategic partnerships with competent partners, the more likely that the best possible offer will be obtained from the market and that the chosen deal will be publicly acceptable. Thus, it should not be surprising that most of the contentious projects originated as unsolicited proposals. These transactions had all been directly negotiated. CBK, Casecnan, and NAIA Terminal 3 are a few examples. These are the familiar deals for many because of the controversy they provoked. The issue of transparency and accountability, therefore, may be more relevant for and targeted at unsolicited proposals as a procurement and implementation mode.

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment the private sector does not have accountability to the public or any obligation to be transparent.

6. Complications and

difficulties associated with developing infrastructure through unsolicited proposals

There should be more solicited projects since unsolicited proposals generated most of the problems for government. Unsolicited proposals should be the exception, rather than the norm. Instead of complying with what had been envisioned in the BOT Law which called for tenders from the private sector, a lot of unsolicited proposals had been implemented. There had also been issues concerning the right to exclusivity and the degree of legal protection afforded by the law on original proponents specially when similar projects were involved. Related to this, there may be a lack of incentives for the government to develop projects internally.

Business, Government, Users/Consumers

The statement that unsolicited proposals have become the norm in developing PSP projects is not factual. Out of the 70 PSP projects that have been awarded by the government since the start of the BOT/PSP Program, only about four (4) were unsolicited proposals while three (3) were negotiated joint ventures.5 Other sole-sourced proposals may be under development but unless these projects get approved, tendered and closed, they should not be counted. Many approved unsolicited projects had gone this path and had fallen through. It is a common misimpression which may have been set off by the controversy that has been linked to unsolicited proposals at various stages. More attention may also be naturally drawn to them since unsolicited projects usually involve big-ticket items. These “high profile” cases have been investigated by government bodies and have been closely reported in the media.

5 The negotiated projects are the Caliraya-Botocan-Kaliraya Power Plant Project, San Pascual Cogeneration Power Plant Project (awarded but terminated by the

government), Casecnan Multipurpose Project, NAIA International Passenger Terminal 3 Project (declared null and void), Metro Manila Skyway Project (joint venture), Manila North Luzon Expressway Project (joint venture) and Manila-Cavite Toll Expressway Project (joint venture). The LRT Line 1 Extension Project, which started out as a negotiated joint venture and unsolicited proposal, was repackaged for competitive bidding. The Bulacan Central Bulk Water Supply Project was awarded as an unsolicited proposal but not implemented.

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment There was time too when a private proponent was able to enter into non-binding agreements with scores of local water districts outside Metro Manila for the development of bulk water supply or distribution system expansion projects under the unsolicited process. No doubt there are unsolicited projects that have been approved (such as the LRT Line 7, Carmen Bulk Water Supply Project, Philippine Postal Modernization Project) but experience shows that these transactions can still drop out unless they actually close. Implementing agencies cite the lack of resources to conduct feasibility studies and launch pre-investment activities which the proponents offer to do for free (or at least supposedly) as the reason why they are constrained to entertain unsolicited proposals. But problems are bound to happen because of the nature of the process itself. The main disadvantage of directly negotiated transactions is the lack of transparency and, in the particular case of unsolicited proposals under the BOT Law, the effective suppression of fair competition. Furthermore, as the agency interacts and works with the proponent on a regular basis, the relationship naturally evolves into a proponent-captured one.

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment 7. Managing fiscal risks;

exposure to potentially large contingent liabilities as a result of government guarantees and support given to PSP projects

Government support given to PSP contracts gives rise to significant fiscal risks, which are difficult to price and quantify. The request for a guarantee or other support compels government to examine projects more carefully. This can lead to disputes and delays. The main question is whether sovereign guarantees or government subsidies are needed. In this connection, what would justify the assumption of more risks or liabilities on the part of the public sector? Also, should government bear market risk?

Business, Users/Consumers, NGOs/Civil Society Groups

PSP deal structures are usually highly leveraged and can reach up to 80 percent debt. Therefore, transactions must be bankable. For them to be so, project risks have to be efficiently allocated and mitigated through credit enhancements. The rule of thumb is that the party who can manage the risk most efficiently (i.e., at the least possible cost) should bear it. On the government’s side, it may be called upon to provide support to ensure project viability and achieve financial closing. This may involve the provision of credit enhancements such as grants or direct upfront subsidies, guarantees on revenues or on foreign exchange fluctuation and convertibility, and protection from political risk. Concerns over large contingent liabilities may be primarily traced to the country’s experience with the IPP contracts that were entered into by the government during the 1990’s to solve the power crisis. While only around 17 out of 41 IPP contracts were backstopped by full performance guarantees issued by the national government, most of the agreements had minimum energy off-take or take-or-pay obligations, guaranteed capacity payments (both functioned more like hell-or-high water commitments), and substantial support provisions for fuel supply, site acquisition/right-of-way, transmission lines, utilities and tax relief or fiscal incentives.

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment The government, however, has become more cautious in providing government guarantees to PSP projects. There is a realization that guarantees are a limited resource that has to be effectively managed. The terms of current guarantees (if one is even granted) are more calibrated. Guarantees are limited, priced based on risk, time-bound, and structured to credit enhance and ensure project bankability only. Efforts directed toward better fiscal risk management by the government include taking an inventory of government guarantees issued to PSP projects and doing a qualitative analysis of project risks covered by those guarantees. A functional database of these risks including the possible financial impact of guarantee calls is also in place. These are the first elements of the planned government guarantee management system that the DOF would like to set up and operate.

8. Determining the true

social development impact of PSP in infrastructure and protecting the public welfare

What is the real impact of PSP in infrastructure on the Philippine economy? What are the social costs incurred and benefits derived from the program? How can these be measured? Are these effects greater or less than the effects of publicly provided infrastructure? How can consumer protection be

Government, Users/Consumers

Among the benefits that PSP is expected to deliver are technical and managerial expertise, operating efficiency, fresh capital and reduction of subsidies, accelerated implementation, and responsiveness to consumer needs and preferences. Unfortunately, no broad study has been made on this subject so far. While there are indications that public services in the country have been improved through PSP, winning stakeholder support and protecting the

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Issue Nature or Description Concerned Sectors Report Analysis and Assessment assured?

legitimate interests of consumers do not always appear to be among the main considerations of planners and sponsors in mapping out public-private partnership modalities. If regulatory entities are considered weak, then the protection of consumers (in respect of service quality, prices and tariff adjustments, market segment outreach, subsidy policies, and complaint mechanisms) may be even more compromised.

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Table 2. BOT/PSP Development and Implementation Sector-Specific Issues

A. Business/Private Sector

Issues Nature or Description

1. Defining the role of the judiciary; ensuring the validity of contracts

Disputes regarding BOT projects may potentially find themselves before the proper courts for resolution. What should be the role of the judiciary in BOT project development and implementation? Concerns have been raised regarding signed contracts that were subsequently repudiated and declared void by the government and/or the courts.

2. Supporting role of host LGUs

LGUs play important roles in facilitating or impeding the development of PSP projects particularly in the area of local taxation and municipal licenses. The private sector is often left on its own by the national government to deal with local governments.

3. Conflict resolution What is the best way to deal with conflicts or disputes?

4. Political risk How can a project be insulated from any change in political leadership?

5. Site acquisition/ right-of-way

How will the government fund site/right-of-way acquisition for priority infrastructure projects? It is also not always clear who should be liable for the payment of real property taxes. The tendency of government is to shift this obligation to the private sector which can be unfair particularly if it is the government that owns the land.

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A. Business/Private Sector


6. Public information and education

Developers are more concerned about completing the project but tend to overlook that winning the support of the public is important as well.

7. Competing projects in the rail sector

The government should resolve the case of the MRT 4 Project in view of other proposed rail projects such as MRT 7 that seem to compete with or undermine existing development rights.

8. Availability of domestic long-term financing

Domestic banks still have a weak appetite for financing infrastructure projects though some of them have begun to provide loans with longer terms.

9. Coping with technology

There is a need to update government policies, rules and procedures that conform to the E-Commerce Law.

10. Inadequacy of basic infrastructure at project sites

Telecommunication services and power supply are poor in some project areas which make projects difficult to implement. The situation causes delays and results in higher completion costs.

11. Role of the Commission on Audit

COA’s involvement in the BOT process should be timely to avoid any post-audit finding that the executed contract is “grossly disadvantageous” to the government.

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B. Government


1. Contract re-opening There is a need for contract re-opener provisions under applicable BOT rules.

2. Decentralization and regional coordination

The provision of infrastructure should have a decentralized framework. There should also be more coordination of development plans and investments in infrastructure among LGUs.

3. Private sector technical and financial qualification, competence and efficiency

How can private sector competence and efficiency be ensured or enhanced?

4. Strict monitoring of project/contract

implementation

There should be a monitoring system in place that would be capable of triggering alarm bells before implementation problems actually happen.

5. Water sector regulatory framework

There are specific issues on the regulatory framework for the development of water resources and the provision of water supply services. These include administering the water rights system, funding for small water utilities, affordability of tariffs, and settling the legal nature of water districts.

6. Compliance with the nationality or

ownership requirements under the Constitution

It is difficult to find Filipino partners for PSP projects that are covered by the 60/40 equity investment limit set by the Constitution.

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C. NGOs/Civil Society and Advocacy Groups


1. Graft and corruption How can graft and corruption in BOT projects be curbed?

2. Overly stringent BOT rules and requirements which favor foreign investors

The BOT rules are too stringent and only big capitalists, usually foreign firms, are able to comply.

3. Strengthening the role of the citizenry

There should be more public participation and better representation of citizens’ groups in the PSP development process.

4. Balancing profitability/sustainability with

affordability

Infrastructure privatization projects are profit-driven. But while pricing should be sustainable, the perception is that private sector services do not consider the needs and affordability levels of the poor. Are there sufficient profit and price controls?

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D. Users/Consumers


1. Environmental issues

Facility operations may have significant and detrimental impact on the environment.

2. Consumer advocacy

How can consumer groups be further mobilized to identify actual needs and to advocate improvements in the development framework and the delivery of public services through PSP? How can civic groups be more involved in infrastructure and development policy planning and implementation? What role should the media play?

3. Water industry regulation There is still no truly independent regulator for the water industry.

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From the foregoing matrices, three central themes come into view. The principal factors generally perceived to have an immense impact on successful PSP development and implementation are:

Transparency and accountability Government origination, sponsorship and regulatory capacity, and Consumer welfare and protection.

While these issues appear distinct, they are in fact very closely linked. Demand for public services drives government efforts to deliver better infrastructure. But the lack of resources and weak capacity eventually lead to poor planning on the part of implementing agencies. Instead of developing projects as a policy and setting service level requirements on their own terms for open competition, agencies are constrained to take on less transparent ways of obtaining private investments in infrastructure. Inefficient risk sharing likely occurs and a more pronounced need for accountability arises. However, serious gaps in the regulatory framework of major sectors exist which leave end users without adequate protection afforded by fair and independent regulation. In the end, the government is unable to measure and ensure that the infrastructure provided matches or satisfies in a sustainable and affordable manner the demand or public need sought to be met in the first place. PROPOSED AMENDMENTS TO THE BOT LAW

HB 5002 Rationale and Features HB 5002 proposes to further amend the BOT Law. While the bill’s explanatory note cites the usefulness and success of the original law in significantly increasing private investments in infrastructure, it also points out serious concerns that would have to be addressed. For the government, the issues specifically mentioned by the bill include the good provision of public services; adherence to environmental, health, safety and quality standards; and flexibility to changing conditions. To the private sector, the key concerns include transparency of rules and procedures; protection of private rights and property; and assurance to a reasonable return on investment. The proposed legislation, according to its author, aims to address those matters by providing a clear-cut policy on government support, adhering to best practices on risk allocation, setting a reasonable rate of return for solicited or unsolicited projects, and institutionalizing a fair, honest and competitive procurement process. It also seeks to convert the current BOT Center, an attached agency of the DTI, into the BOT Authority which shall act as the sole and exclusive approving body for national government priority infrastructure and development projects. The main features of the bill and the key reforms it hopes to introduce are the following:

Expanded PSP policies. – The proposed law declares: (1) the right of the private sector to a reasonable return on investment, (2) the protection of the public interest through fair pricing and the timely delivery of quality services to be ensured under the principle of full public disclosure of transactions, and (3) the grant of government support through judicious and transparent mechanisms, as additional State policies for the development and implementation of PSP infrastructure projects.

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Creation of the BOT Authority. – The bill proposes to convert the BOT Center into the BOT Authority, which shall act as the central oversight and procurement body for national infrastructure privatization projects. A Public-Private Infrastructure Development Committee will also be created to provide broad policy directions and promotional help to the new agency. The Committee will be chaired by the President and will be composed of the heads of selected line agencies and the leagues of local chief executives, to be joined by financial regulators and private sector organizations. In one of the hearings conducted by the Committee on Public Works and Highways, it was explained that infrastructure projects would only be placed under the responsibility of the BOT Authority if there would be no sufficient public funding for them. There was also some discussion about limiting the jurisdiction of the BOT Authority to unsolicited projects only. The creation of a separate BOT oversight body appears principally intended to fast-track the project approvals process through the specialization of agency functions. One of the criticisms leveled against the ICC is its perceived inability to process BOT projects quickly since it handles government and ODA-funded projects at the same time. ICC technical working group members are also just seconded to do BOT review work on top of performing regular line functions in their mother agencies.

Change in LGU project approvals process. – Only the approval of the sanggunian and

the local development council concerned will be required for all LGU projects. No national government approval will be necessary. This revision seeks to uphold the local and fiscal autonomy given to LGUs under the Constitution and the Local Government Code. It eliminates the requirement under the current BOT Law for LGUs to secure ICC approval for projects costing more than PHP 200 million.

Treatment of unsolicited proposals. – Unsolicited proposals will be subjected to a

“comparative or competitive tender process.” This is interpreted to mean that qualified parties will be allowed to openly challenge the proposal. The bidder who offers the lowest price will be the winning challenger. The winner, however, will be required to reimburse the development cost of the original proponent. The change in treatment is a clear attempt to make the unsolicited proposal process more competitive and evenhanded. More challengers are expected to participate since the right to match of the original proponent is taken away and the prescribed 60-working day bid preparation period is partially lifted.

Project development facility. – A project development facility (PDF) will be established

as a revolving fund to finance the identification, validation, development and packaging by government agencies of BOT projects for competitive bidding. The fund will be administered by an inter-agency steering committee under the proposed BOT Authority. The purpose of the PDF is to provide implementing agencies with the needed technical support and expertise in preparing and tendering legally, technically and financially viable PSP projects. This will improve the quality of projects and help build a good project pipeline developed internally by the government. It will reduce government’s reliance on privately-packaged unsolicited proposals and avoid possible rent seeking behavior through sole-sourced and supply-driven transactions.

Additional projects and PSP modalities. – New PSP contractual arrangements are made

eligible under HB 5002 including concession, joint venture, management or service contract, and lease affermage. The amendment hopes to further expand the allowable PSP options that may be lawfully adopted and carried out under the BOT Law. The inclusion of joint ventures is specifically intended to provide clear and definitive guidelines for the development and procurement of major infrastructure projects through this PSP variant.

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Large joint venture projects in the past had been awarded without any form of competition in cases where the special charters of GOCCs permitted their entering into commercial agreements with counterparties.

One-stop shop office. – The BOT Authority will establish a one-stop shop for investors to

secure all the necessary national government licenses, permits and approvals. Full information will also be provided regarding municipal licenses and permits. This innovation hopes to accelerate the development and implementation process by reducing the steps and providing a central location for the issuance of all necessary government consents, permits and licenses.

Offenses and penalties. – Penalties are attached to specific offenses such as material

misrepresentation, contract falsification, and partiality or unauthorized assistance by a BOT public officer. Defining offenses and providing penalties are meant to raise the duty of care and accountability of public officials and other stakeholders involved in the PSP process.

Other proposed amendments include revenue sharing in projects to be co-financed by the government, setting limits on rates of return, defining the types of possible government support, and providing government warranties to uphold the validity of signed contracts. These revisions are attempts to ensure fairness, clarity, predictability, and transparency in PSP project development.

The EMERGE Report on BOT Law Amendments The EMERGE Activity, which provides technical assistance in support of economic policy reforms aimed at sustainable economic growth and enhanced competitiveness, has prepared a technical report entitled A Proposed BOT Bill to Enhance Public-Private Partnership in Infrastructure Development. Its purpose is to help the DTI and its attached agencies (the BOI and the BOT Center) study and draft possible amendments to the BOT Law. The EMERGE Report presents an alternative bill amending the BOT Law. The main philosophy behind its version is that weak capacity of implementing agencies results in poor project quality at entry which causes delay or results in slow implementation. It highlights the need for agencies to obtain sufficient technical, financial, and legal expertise so that they can take the lead in contract writing and negotiations as well as in monitoring. Its basic proposition is that empowering implementing agencies is the key to having successful PPPs. The report therefore disagrees with the planned institutional framework envisioned under HB 5002, which reduces the mandate of implementing agencies and bypasses the established functions of existing oversight bodies. It questions whether HB 5002’s proposed institutional arrangement heads toward better transparency, accountability, and fiscal soundness. It recommends two strategies for improving the BOT process: (1) improving the capacity of implementing agencies in developing BOT projects; and (2) reducing ICC requirements and streamlining its functions and membership. It also suggests that BOT oversight tasks may be delegated to an ICC subcommittee. The EMERGE Report makes valid observations regarding major sections of HB 5002. These points include the following:

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Conflicted role of the proposed BOT Authority as promoter, facilitator, approving body, procurer, coordinator and monitor for PSP projects at the national level

Possible undermining of the implementing agencies’ responsibilities and accountabilities

as BOT project sponsors Need for more clarity on the additional PSP options proposed to be included

Need for more flexibility by keeping only broad policy directions and operating principles

in the law and relegating all other details to the IRR, and Negative signals and legal risks associated with an express recognition of the right by the

new administration to review the terms of subsisting PSP contracts approved by previous leaders.

The “conflict of interest” issue appears to be the most serious one. Thus, the draft bill prepared by EMERGE takes an opposite view. Rather than forming a BOT Authority, it upholds the current powers of the ICC, including the NEDA Board, as the public approving authority for PSP projects. But in contrast to what had been propounded in the report, there are no directives in the proposed bill that mandate the streamlining of ICC processes or memberships. The choice between creating a new super body and reengineering an established agency is a policy decision, for sure. The first option is radical but costly while the second is practical but not pioneering at all. Disappointingly, there may always be doubts if the right decision can be made since no formal institutional study supporting either side has been presented. Other comments on the EMERGE version of an amendatory bill are:

References to RA 9184 or the Government Procurement Reform Act under Sections 1 and 7 of the EMERGE bill (permitting negotiated procurement under exceptional circumstances) are inappropriate since PSP projects, by nature, are large and very complex transactions. In general, it will not be a correct and timely solution to the problems resulting from the exceptional circumstances described in the procurement law. One of the difficult lessons learned in doing BOT projects is that directly negotiated agreements actually take longer to implement than publicly bid ones. It also needlessly widens the grounds for negotiated procurement under the current BOT Law which is presently limited to unsolicited proposals (but still subject to competition through a Swiss challenge) or public biddings that have only one complying bidder. Moreover, as a seeming recognition of the distinctiveness between the BOT Law and RA 9184, the IRR of the procurement law itself declares that its provisions do not apply to infrastructure privatization projects.

Generally, contractual arrangements cannot be negotiated by the parties as suggested in

Sections 2 and 3 of the bill since direct negotiations are only allowed in very few instances. This is also the reason why expanded modalities have been included in HB 5002. The purpose is to bring as many PSP options as possible within the scope of the BOT Law so that uncompetitive and less transparent means of delivering infrastructure can be avoided.

Section 7 rules out the provision of any form of government guarantee, subsidy or equity,

whether direct or indirect, for unsolicited proposals. The current law allows indirect guarantees to unsolicited projects. There are two sides to this issue – prohibiting all types of guarantees could effectively shut down unsolicited proposals, which may be viewed as a

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good policy in general, but it would take away government’s flexibility in structuring bankable transactions for unsolicited projects that are fair and sensible.

Section 9 of the EMERGE bill, which seeks to limit the right of action to question the

legality of PSP contracts, has the right intention but may be overly broad. Getting project approval means that the implementing agency can proceed with the bidding. Several months pass until an award is made and the contract actually signed. Many events can still happen which could erode the validity of the process. Restricting the time to examine a deal in court to 90 days after publication of the approval may be too protective.

Finally, the main report states that most of the provisions in the law can be retained with

certain details to be relegated to the IRR. But the bill deletes important statutory provisions such as the 50% ceiling on government co-financing, the 12% cap on the return on rate base for negotiated contracts involving public utility projects that are natural monopolies, the allowable repayment schemes for the private sector, and the various consequences or legal remedies in case of contract termination. These are important principles that should have an explicit basis in the law.

Responsiveness of Proposed Amendments How responsive is HB 5002 to the issues raised by the different stakeholders? What other aspects have been addressed by the EMERGE bill and, more concretely, by the recent revision to the BOT Law IRR? Table 3, in the next page, provides a simple analysis and gauges how far off the current reform proposals are from dealing with all these concerns. A short explanation is provided to clarify why an issue may be considered fully or partially resolved by HB 5002, the EMERGE bill, or the Revised IRR. It should be noted, however, that in many instances an amendment to the BOT Law may not have been the most appropriate way to tackle a particular issue. This may be the reason why it had not been addressed by any of the draft bills or the IRR revisions. It does not also mean that the issue cannot be properly handled when a more detailed IRR is crafted later on after the corrective law has been enacted. Still in some other cases, the issue may have subsisted due to non-application or poor enforcement of a pertinent rule and not necessarily because of the absence of one. Overall, the matrix confirms that the three reform instruments have taken up substantially all of the main issues, one way or another. HB 5002, in particular, as this Report’s official measuring stick, does well in covering the subjects raised by stakeholders as their common points of concern. It therefore shows a clear awareness of the critical issues and challenges, and conveys a genuine intent to resolve them.

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Table 3. Responsiveness of Reform Proposals to PSP Issues

A. All Sectors Addressed by HB 5002? Addressed by EMERGE

Report? Addressed by Revised IRR?

Issue/Concern Yes No Yes No Yes No

1. Choosing suitable PSP modalities and lack of government capacity in developing PSP projects

Technical assistance and capacity building through PDF

Technical assistance and capacity building through PDF; building government capacity is a declared policy

Limited PDF is operational including on-going technical assistance projects

2. Lack of regulatory capacity and conflicts of interest in the performance of public functions

Limited to declaration of policy

Cites need for better regulation but no specific proposal

Outside the scope of IRR

3. Need for better technical understanding and cooperation on the part of government, and for greater public awareness and education

Centralized BOT processing functions

No specific proposal


4. Lengthy approvals process and red tape; the process is also very prone to political influence/intervention which causes delay

Centralized processing with fixed time limits; No national government

Streamlining of ICC processes and memberships; No national

Single-pass approval for all types of PSP projects

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approval for LGU projects

government approval for LGU projects

5. Need for greater transparency and accountability in the BOT process

Strict competitive bidding policy; Imposition of penalties for specific offenses; Express right of action to question anomalous deals; Reporting function to Congress and the President

Strict competitive bidding policy; Access to project information and contracts; Regular auditing and monitoring; Express right of action to question contracts

Tighter entry rules for unsolicited proposals

6. Complications and difficulties associated with developing infrastructure through unsolicited proposals

Unsolicited proposal process made more competitive

Unsolicited proposal process made more competitive

Tighter entry rules for unsolicited proposals

7. Managing fiscal risks; exposure to potentially large contingent liabilities as a result of government guarantees and support given to PSP projects

Directive to make government support provision more rational

Not tackled Outside the scope of IRR

8. Determining the true social development impact of PSP in

Protection of public interest is

Affordability and balancing of


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infrastructure and protecting the public welfare

a declared policy but no specific proposal

social costs and benefits are declared policies but no specific proposal

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B. Business/ Private Sector

Addressed by HB 5002? Addressed by EMERGE Report?

Addressed by Revised IRR? Issue/Concern

Yes No Yes No Yes No

1. Defining the role of the judiciary and respecting the sanctity of contracts

Express right of action to question anomalous deals; Executive warranty on the validity of contracts

Limited right of action to question anomalous deals/contracts


2. Supporting role of host LGUs

One stop shop assistance in securing LGU permits



3. Conflict resolution

Not tackled Not tackled No specific proposal

4. Political risk

With heightened political risk

Limited time to exercise right of action to question the validity of PSP contracts


5. Site acquisition/ right-of-way

Provision for direct government subsidy


Provision for direct government subsidy

6. Public information and education

Membership of private sector

Access to project


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B. Business/ Private Sector Addressed by HB 5002? Addressed by EMERGE



representatives in Public-Private Infrastructure Development Committee (PPIDC)

information and contracts

7. Competing projects in the rail sector

Not tackled Only a comment in the report against government rail projects being redeveloped as unsolicited proposals

Not tackled

8. Availability of domestic long-term financing

BSP and BAP made members of PPIDC but no specific proposal



9. Coping with technology

Not tackled Not tackled Not tackled

10. Inadequacy of basic infrastructure at project sites


11. Role of the Commission on Audit

COA made a member of the PPIDC

Requirement for regular auditing following COA rules

COA audit limited to government share of user fees

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C. Government




1. Contract re-opening



Allows no-cost contract variations

2. Decentralization and regional

coordination

No national government approvals for LGU projects; BOT Authority to establish regional offices

No national government approvals for LGU projects


3. Private sector technical and

financial qualification, competence and efficiency

PDF to provide eligibility criteria to disqualify incompetent bidders

PDF to provide eligibility criteria to disqualify incompetent bidders

Stricter financial prequalification requirement

4. Strict monitoring of

project/contract implementation

BOT Authority to monitor projects

Implementing agencies to monitor and supervise projects

Implementing agencies to monitor and supervise projects

5. Water sector regulatory

framework

Outside the scope of the bill


Outside the scope of the IRR

6. Compliance with prescribed nationality or ownership requirements



Outside the scope of the IRR

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D. NGO/ Civil Society Addressed by HB 5002? Addressed by EMERGE



1. Graft and corruption

Penalties for related corrupt practices



2. Overly stringent BOT rules and requirements which favor foreign investors


3. Strengthening the role of the citizenry

Private sector representation in PPDIC; Protection of public interest is a declared policy


Not tackled

4. Balancing profitability/sustainability with affordability

Not tackled but the current BOT Law provides that tolls, fees and charges must be reasonable

Affordability is a declared policy but no specific proposal

Not tackled

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E. Users/ Consumers




1. Environmental issues

Not tackled Not tackled Requirement for ECC is made explicit

2. Consumer advocacy


3. Water industry regulation




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Additional Inputs from EPRA Consultation Dialogues The discussions on HB 5002 during the consultation dialogues were relatively free and unstructured. Because of that, the comments and recommendations given by the participants regarding the bill were rough or general. Excluding subjects that had already been covered by the issues matrices above and by the EMERGE Report, the meaningful inputs from the represented sectors would be limited to the following:

There should be a separate provision calling for the institutional strengthening of the proposed BOT Authority.

The BOT Authority should be the central repository of all signed contracts.

The monitoring functions of the BOT Authority should be made specific and clear.

The proposed One-Stop Shop should have representatives from the different government

agencies such as DENR and DILG.

The proposed law should impose strict time limits and deadlines in the processing of PSP projects.

The warranty to uphold the validity of a contract may not be upheld by the courts. It is also

dangerous for the executive branch to give that kind of an assurance since the government may be subject to liability if that warranty is breached.

Misrepresentation and contract falsification are felonies that may be already covered by the

Revised Penal Code.

The amended BOT Law should have nationalist provisions and at the same time should protect the public from the assumption of too many risks by the government.

Laws related to the BOT Law should also be amended.

Final Points and Comments on HB 5002 There are other material points that have not been covered but should be brought up to complete the review of HB 5002. These last comments are explained following the order of the sections in which they appear. First, to strengthen the declared policy on the judicious and transparent grant of government support to PSP development projects, a specific mandate for the establishment of a rational government guarantee management framework may be included. Identifying fiscal risks and taking stock of government guarantees given to BOT/PSP projects will be the first important task and fortunately, the government has already done some work on this. These obligations to backstop agency or GOCC contractual commitments make up the government’s contingent liability portfolio. The legal and qualitative risk analysis will then be useful in coming up with reasonable estimates

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of government’s total exposure to potential losses. This is the next major step. These initiatives would be the basis for the formulation of a coherent guarantee policy and rational program for fiscal risk evaluation, monitoring and control. Second, on government co-financing, requiring that a government revenue sharing scheme be included in the contract for PSP projects which would be partly funded by ODA may reduce government flexibility in structuring bankable transactions. Some projects may need direct subsidies to make them financial viable from the investors’ viewpoint but mandating a splitting of revenues can affect the needed cash flow streams to make them so. The same issue of flexibility comes up when the share of government is directed to be used for the sole purpose of repaying ODA loans. Earned revenues may not justify a government share during the project’s early stages but outstanding obligations would have to be serviced in the meantime. When the government does become entitled to share in the profits, providing for debt repayments may no longer be as demanding at that point in which case the government should have the option of using the money for other public purposes. Third, on ensuring the financial capability of project proponents, there are several debt financing options possible and limiting the form to a standby letter of credit will effectively rule out all other choices leaving sponsors with less financial slack. Projects may be financed through syndicated term loans or Rule 144A bond offerings, for example. To make sure that proponents are able to fund project construction, implementing agencies, as a policy, could require financial closing to be a condition precedent to contract effectiveness instead. This requirement has been adopted in recent PSP projects under development. Fourth, the reference to counterpart government funding is more appropriate under the definition of “direct government subsidy” rather than “direct government guarantee.” Furthermore, indirect government guarantees may be issued not only by government financial institutions but by line agencies as well, in particular, the DOF. Finally, the terms “government guarantee,” “government subsidy,” “credit enhancements,” and “project cost” may be more precisely defined. Fifth, while eliminating national government approvals for LGU BOT/PSP projects is essentially right, there may be instances where central government consent will be required such as in LGU projects needing a government performance undertaking from the DOF. In this case, not only sanggunian or local development council approval will be necessary but also some level of central government authorization or endorsement. Sixth, setting the reasonable rate of return at the proponent’s WACC plus a maximum of 6% (as a “premium in doing business” in the Philippines) may be counterintuitive from a corporate finance perspective. An investor’s WACC is its hurdle rate which represents the expected return on a portfolio of all the firm’s securities and that keeps its business risk generally unchanged. The expected returns demanded by the firm’s shareholders and lenders (taking into account all relevant risk-return tradeoffs) are already imputed into that figure. Seventh, the noticeable deletion of the first qualification for unsolicited proposals laid down in the current BOT Law (that is, that such projects should involve a new concept or technology and/or should not be part of the list of priority projects) effectively enlarges the scope of potential projects that may be implemented on a negotiated basis. The only applicable condition left is that the project does not require any direct government guarantee, subsidy or equity. In addition, to make the reimbursement of development cost valuable and sensible for challengers, all project studies and information owned by the original proponent should be made available to them at the bidding. Moreover, the time to prepare comparative proposals during Swiss challenges may still be too short

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(which the bill fixes at a maximum of 120 days). In some ways, it may be considered worse than before since implementing agencies will have the discretion to cut down the original bid preparation period (set at 60 working days) to only 45 days. Eighth, making the Toll Regulatory Board an attached agency of the proposed BOT Authority is unwise since the board serves as the public regulator for toll operations in the country. There will be an odd fusion of promotional, approval, and regulatory functions in one government agency at least in so far as the toll road industry is concerned. Ninth, the warranty to uphold the validity of contracts sends crossed signals. Giving that warranty is quite bold. On the other hand, expressly acknowledging the prerogative of new political leaders to inquire into and review the terms of BOT contracts executed by the past administration waves a big red flag that would put future investors at risk and on guard. Tenth, if the idea of establishing a Public-Private Infrastructure Development Committee is accepted, its composition would have to be rethought and justified by the functions and objectives that its creation is supposed to serve. Why is the DOF not among the line agencies represented, for instance, since it has a direct stake in managing the government’s fiscal risks? Also, is there a special reason why the DA is there but not the DOTC or the DOE? Energy and transportation projects make up more than 80 percent of the country’s PSP/BOT investment portfolio. The answers are not apparent and a lot of second-guessing can happen. Both are not good when the time to construe the law finally comes. Lastly, creating a new institution for PSP and designing a regulatory system to support it entail answering other basic questions that have not been fully sorted out under the bill. How decentralized should oversight be and how much discretion should the proposed BOT Authority and its regional offices have? To reduce the danger of capture by proponents or short-term political interests, the bill needs to address how independent the new agency should be. If achieving independence is crucial, then the following elements should be considered: (1) professional criteria for all appointments; (2) fixed tenure for key positions; (3) multisectoral representation; (4) financial autonomy or funding out of levies or charges on client agencies or proponents, and not out of legislated budgets; (4) salaries that are competitive or comparable with the private sector; and (5) prohibitions against engaging in partisan political activity and taking financial interests in sectors and parties subject to its oversight functions. CONCLUSION HB 5002 has presented an opportunity for all stakeholders to examine what the Philippine PSP Program has achieved so far and to possibly chart either a fresh or a renewed course in light of changing events and bigger challenges for the future. While getting new legislation approved is an extremely deliberative process and, in most instances, meticulously slow, what has been revealed is that the principal players know the legitimate issues confronting successful PSP development today. To be fair, the government has taken some action, mainly through administrative revision, which pursues similar ends sought permanently by the proposed reforms under HB 5002. The bill espouses one approach. There are other positions, of course, but compared to them, it may be considered the most extreme track to take. Just for that, it would almost surely be subjected to closer scrutiny. But what has been obviously shown is that while the approaches may be different, the issues and goals are evidently the same.

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Amidst deeper problems facing the country and bearing in mind the practical consideration of BOT reform being part of a pecking order in a shifting congressional agenda, the best strategy to have at this time would be to continue getting engaged in fruitful consensus building and a truthful and sustained reform advocacy. The EPRA Consultation Dialogues and the consolidation done in this Final Report should be both counted toward that effort.

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SOURCES

Canlas, Dante B., et al., A Proposed BOT Bill to Enhance Public-Private Partnership in Infrastructure Development, EMERGE, Manila, 2006. Castro, Solomon R. B., Identifying Fiscal Risks: Government Contingent Liabilities in BOT/PSP Projects and under GOCC Charters, AGILE, Manila, 2001. National Economic and Development Authority, Medium-Term Philippine Development Plan 2004-2010, Manila, 2004. National Economic and Development Authority, Medium-Term Public Investment Program 2005-2010, Manila, 2005. The World Bank, Selecting an Option for Private Sector Participation, Washington, D.C., 1997.

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the bot law at the crossroads issues and reforms

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