Philippines: Private Sector Participation In Infrastructure And Development Projects In The Philippines

Last Updated: 25 September 2000

By Jesus M. Manalastas and Emelyn W. Corpus-Martinez

The majority of infrastructure and development projects in the Philippines have always been undertaken by the Government. However, given its limited resources, the government has grown more timid, if not reluctant, in undertaking such projects. Hence, the role of the private sector, both local and foreign, in infrastructure and development projects is seen as crucial in sustaining the country’s economic growth and development in the new millennium.

Thus, private sector participation in infrastructure and development projects has been actively encouraged by the Philippine Government since 1990 with the passage of Republic Act No. 6957 otherwise referred to as the Build-Operate-Transfer or "BOT Law". In 1994, the Philippine Government enacted an amendatory law, Republic Act No. 7718, which expanded the earlier BOT Law by providing more project arrangements or schemes, enhancing the coverage of projects eligible for BOT arrangements, and allowing direct negotiations and acceptance of unsolicited proposals for projects under certain conditions.

The BOT Law authorized all government agencies, including those government owned and controlled corporations and local government units ("LGU") allowed by law or by their respective charters to undertake infrastructure or development project ("public sector")1, to enter into contracts with pre-qualified private proponents2 for the construction, rehabilitation, improvement, expansion, modernization, operation, financing and maintenance of infrastructure or development projects.3

The list of projects which may be wholly or partly implemented by the private sector under the BOT Law, includes but are not limited to4 -

  1. Highways, including expressway, roads, bridges, interchanges, tunnel, and related facilities;
  2. Railways or rail-based projects packaged with commercial development opportunities;
  3. Non-rail based mass transit, navigable inland waterways and related facilities;
  4. Port infrastructures like piers, wharves, quays, storage, handling, ferry services and related facilities;
  5. Airports, air navigation, and related facilities;
  6. Power generation, transmission, sub-transmission, distribution, and related facilities;
  7. Telecommunication, backbone network, terrestrial and satellite facilities and related service facilities;
  8. Information technology and data base infrastructure;
  9. Irrigation and related facilities;
  10. Water supply, sewerage, drainage, and related facilities;
  11. Education and health infrastructure;
  12. Land reclamation, dredging and other related development facilities;
  13. Industrial and tourism estates or townships, including related infrastructure facilities and utilities;
  14. Government buildings, housing projects;
  15. Markets, slaughterhouses, and related facilities;
  16. Warehouses and post-harvest facilities;
  17. Public fish ports and fishponds, including storage and processing facilities; and,
  18. Environmental and solid waste management related facilities such as collection equipment composing plants, incinerators, landfill and tidal barriers, among others.

 

The contractual arrangements or schemes allowed under the BOT Law are:

1. BUILD-OPERATE-TRANSFER ("BOT") – A project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over the fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges to recover its investment, and operating and maintenance expenses plus a reasonable return. The project proponent transfers the facility to the government agency or LGU concerned at the end of the fixed term.

The BOT arrangement shall include a supply-and-operate contract whereby the supplier of equipment and machinery, if the Government so requires, operates the facility and provides technology transfer and training to Filipino nationals.5

2. BUILD-TRANSFER ("BT") — A project proponent undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the government agency or LGU concerned, which shall pay the proponent, on an agreed schedule, its total investments expended on the project, plus a reasonable return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government.6

3. BUILD-OWN-OPERATE ("BOO") — A project proponent will finance, construct, own, operate and maintain an infrastructure or development facility from which the proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users. All such projects require the favorable recommendation of the National Economic and Development Authority ("NEDA"), and the approval of the President of the Philippines. Under this scheme, the proponent which owns the facility may assign its operation and maintenance to a facility operator.7

4. BUILD-LEASE-TRANSFER ("BLT") — A project proponent will finance and construct an infrastructure or development facility and, upon its completion, turn it over to the government agency or LGU concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or LGU concerned.8

5. BUILD-TRANSFER-OPERATE ("BTO") — The public sector contracts out the building of an infrastructure facility to a private entity such that the contractor9 builds the facility on a turn-key basis, assuming cost overrun, delay, and specified performance risks. Once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU. The private entity however, operates the facility on behalf of the implementing agency/LGU.10

6. CONTRACT-ADD-OPERATE ("CAO") — This is a contractual arrangement whereby the project proponent adds to an existing infrastructure facility which it is leasing from the government. It operates the expanded project over an agreed franchise period. There may, or may not be, a transfer to the government in regard to the added facility.11

7. DEVELOP-OPERATE-TRANSFER ("DOT") — This is a contractual arrangement whereby a private proponent of a new infrastructure project is also given the right to develop adjoining property, and thus, enjoy some of the benefits the investment creates such as higher property or rent values.12

8. REHABILITATE-OPERATE-TRANSFER ("ROT") — This is a contractual arrangement whereby an existing facility is turned over to the private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is returned to the government.13

The term is also used to describe the purchase by a project proponent of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country.

9. REHABILITATE-OWN-OPERATE ("ROO") - This is a contractual arrangement whereby an existing facility is turned over to the private sector to refurbish and operate with no time limitation. As long as the operator is not in violation of its franchise, it can continue to own and operate the facility in perpetuity.14

The BOT Law allows variations of the foregoing project arrangements subject to the approval of the President of the Philippines.15

Project proponents may engage the services of foreign and/or Filipino contractors to build or construct the project facility. In the case of foreign contractors, Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available.16

A list of the projects to be undertaken under the BOT Law by government agencies and LGUs (in case of LGU projects worth more than P200 Million) is required to be submitted to the NEDA for its approval.17 Approved projects shall be subject to public bidding. Direct negotiation may be resorted to when there is only one qualified and complying bidder.18

For projects which are not on the list of approved projects, and/or involve a new concept or technology, unsolicited proposals may be considered by the government agency or LGU concerned provided (i) no direct government guarantee, subsidy or equity is required, (ii) approval from the NEDA (or the concerned local development council for LGU projects costing less than P200 Million) is obtained, and (iii) the government agency or LGU has invited comparative or competitive proposals and no other proposal is received within sixty (60) working days from date of issuance of the tender documents. In the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price.19

If a project requires a public utility franchise, the winning proponent shall be granted by the appropriate government agency or LGU a franchise to operate and maintain the facility, including the collection of tolls, fees, rentals, and charges.20 However, the facility operator, whether or not it is the proponent, must be a Filipino or, if a corporation, must be duly registered with the Philippine Securities and Exchange Commission and at least sixty percent (60%) Filipino-owned.21

For the construction of these projects, the private proponents may obtain financing from foreign and/or domestic sources. Projects which would have difficulty in sourcing funds may be financed from direct government appropriations and/or from Official Development Assistance (ODA) funding from foreign governments or institutions to the extent not exceeding 50% of the project cost. Government may also provide support through cost-sharing, credit enhancements, direct (except for unsolicited proposals) and indirect subsidy, and government equity.22

To cover their investments, operating costs, and reasonable return, private proponents shall be authorized to collect reasonable tolls, fees, and rentals for the use of the project facility, as specified in the contract, for a fixed term not exceeding 50 years. The tolls, fees, rentals, and charges may be adjusted based on a predetermined formula using official price indices and as indicated in the contract. For negotiated contracts, and for projects which have been granted a natural monopoly or where the public has no access to alternative facilities, the appropriate government regulatory bodies shall approve the tolls, fees, rentals, and charges based on a reasonable rate of return.23 Where applicable, the proponent may likewise be paid in the form of a specified share in the revenue of the project or other non-monetary payments, such as, but not limited to, the grant of commercial development rights or the grant of a specified portion or percentage of the reclaimed land, subject to the constitutional requirements with respect to the ownership of land. In BT and BLT arrangements, where the public sector operates the facility, the private proponent will receive amortization payments from the government agency or LGU concerned.24

To further encourage private sector participation, certain incentives such as income tax holidays, tax and duty exemptions and credits, and employment of foreign nationals are available under the Omnibus Investments Code upon registration of the project with the Board of Investments. In projects costing 1 Billion Pesos or less, the incentives are available only if the project activity or sector is included in the current Investments Priority Plan. Projects may also be entitled to incentives as are provided by other existing Philippine laws.

 

Jesus M. Manalastas and Emelyn W. Corpus-Martinez who are lawyers at the Ponce Enrile Reyes & Manalastas Law Offices, located at the 3rd Floor, Vernida IV Building, Leviste Street, Salcedo Village, 1227 Makati City, Philippines. They may be reached by e-mail at pecabar@pecabar.com or at telephone nos. (632) 815-9571 to 80 and fax no. (632) 818-7355 and 7391.

FOOTNOTES:

  1. Sec. 2.1, Implementing Rules and Regulations of Republic Act 6957, as amended ("IRR")
  2. Project Proponent - The private sector entity which shall have contractual responsibility for the project and which shall have an adequate financial base to implement said project consisting of equity and firm commitments from reputable financial institutions to provide, upon award, sufficient credit lines to cover the total estimated cost of the project. (Sec. 2(k), BOT Law)
  3. Sec. 3, BOT Law; Sec. 2.2, IRR
  4. Sec. 2(a), BOT Law; Sec. 2.2, IRR
  5. Sec. 2(b), BOT Law; Sec. 1.3(c)(iii), IRR
  6. Sec. 2(c), BOT Law; Sec. 1.3(c)(i), IRR
  7. Sec. 2(d), BOT Law; Sec. 1,3(c)(iv), IRR Facility operator — A company registered with the Securities and Exchange Commission, which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users: Provided, That in case the facility requires a public utility franchise, the facility operator shall be Filipino or at least sixty per centum (60%) owned by Filipinos. (Sec. 2(m), BOT Law).
  8. Sec. 2(e), BOT Law; Sec. 1.3(c)(ii), IRR
  9. Contractor — Any entity accredited under the laws which may or may not be the project proponent and which shall undertake the actual construction and/or supply of equipment for the project. (Sec. 2(l), BOT Law).
  10. Sec. 2(f), BOT Law; Sec. 1.3(c)(v), IRR
  11. Sec. 2(g), BOT Law; Sec. 1.3(c)(vi), IRR
  12. Sec. 2(h), BOT Law; Sec.1.3(c)(vii), IRR
  13. Sec. 2(i), BOT Law; Sec. 1.3(c)(viii), IRR
  14. Sec. 2(j), BOT Law; Sec. 1.3(c)(ix), IRR
  15. Sec. 2(a), 1st par., last sentence
  16. Ibid.; Sec. 12.6, IRR
  17. Sec. 4, BOT Law. For LGUs, a list of such projects costing below P 200 Million shall be submitted to the local development councils concerned.
  18. Sec. 5-A, BOT Law
  19. Sec. 4-A, BOT Law; Sec. 10.8, IRR
  20. Sec. 5, BOT Law, Sec. 12.2, IRR
  21. Sec. 2(b), BOT Law; Sec. 5.4 (a)(I), IRR
  22. Sec. 2(a), BOT Law; Sec. 13.1, IRR
  23. Reasonable rate of return on investments and operating and maintenance cost — The rate of return that reflects the prevailing cost of capital in the domestic and international markets: Provided, That, in case of negotiated contracts, such rate or return shall be determined by the ICC of the NEDA prior to the negotiation and/or call for proposals: Provided, further, That for negotiated contracts for public utility projects which are monopolies, the rate of return on rate base shall be determined by existing laws, which in no case shall exceed twelve per centum (12%). (Sec. 2(o), BOT Law).
  24. Sec. 6, BOT Law; Sec. 12.15, IRR

The information contained in this article is intended only to provide a general guide on the subject matter. Advice from a specialist is still recommended for your specific requirements and particular circumstances.

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