BOT: Build-Operate-Tax? By Jules E. Riego (February 22, 2010)

SUITS THE C-SUITE By Jules E. Riego
Business World (02/22/2010)

The Philippines claims to have one of the earliest Build-Operate-Transfer (BOT) laws in Asia and yet, today, we seem to suffer when compared with our Asian neighbors in terms of foreign investments in BOT projects. One can only wonder what happened to this supposedly emerging sector that bailed us out of “darkness” at the height of the power crisis in the late 1980s and early 1990s.

Fact is, BOT arrangements, as a form of public-private partnership, are the only way to go if we are to see further infrastructure development in power generation, road construction, airport and seaport construction, toll operation, and other sectors, particularly if the government lacks funds to finance these capital-intensive projects, and when borrowing some more money is certainly not an option for our debt-ridden country.

Thus, we need to encourage foreign and local investments in BOT projects.

But as we try to do that, we need to decisively address the concerns of present BOT players.

Case in point is the real property tax (RPT) issue hounding Independent Power Producers (IPPs) that have BOT arrangements with government.

By way of background, in Bauang Private Power Corporation (BPPC) v. Sangguniang Panlalawigan of La Union, the Supreme Court ruled in 2006 that since BPPC (and not the National Power Corporation) is the actual owner and user of the machinery and equipment, BPPC cannot invoke the RPT exemption that a government-owned and -controlled corporation (GOCC) like Napocor enjoys under Section 234(c) of the Local Government Code (LGC). This decision was later reiterated in Fels Energy, Inc. v. Province of Batangas where the High Court ruled that the RPT exemption of Napocor under Section 234(c) cannot be extended to its contractor since the power plant and equipment are neither owned nor actually, directly and exclusively used Napocor. The Court also ruled that the tax assumption clause (which includes assumption of liability for RPT) in the Energy Conversion Agreement (ECA) between Fels and Napocor was useless since that provision does not bind a third person not privy thereto, like the Province of Batangas.

In NPC (Napocor) v. CBAA (G.R. No. 171470 dated January 30, 2009) and NPC vs. Province of Quezon and Municipality of Pagbilao (G.R. No. 171586 dated July 15, 2009), Napocor argued that assuming the IPPs are liable for RPT, the power plant machinery and equipment must be subjected to the 10% assessment level as a special class of real property under Section 216, in relation to Section 218(d) of the LGC, instead of the 80% assessment level for commercial/industrial property under Section 218(b) and (c).
Section 216 of the LGC explicitly provides that all lands, buildings, and other improvements actually, directly and exclusively used by GOCCs like NPC, rendering essential public services in the supply and distribution of and/or generation and transmission of electric power, are classified as special and are subject to the assessment level of only 10% under

Section 218 (d). Similarly, Section 234(c) explicitly provides that all machinery and equipment that are actually, directly and exclusively used by GOCCs engaged in the supply, distribution and/or generation and transmission of electric power are exempt from RPT.

Considering the rationale and intent of the BOT Law, Napocor’s theory in these two latter cases seemed reasonable.

However, the Supreme Court rejected this argument by simply saying that since Napocor is not the actual user or owner of the machinery and equipment, the IPP is not entitled to the 10% assessment level.

If LGUs will insist on the collection of RPT on IPPs based on the 80% assessment level, this spells potential disaster for Napocor since it ultimately bears the RPT liability under the tax assumption clause of its ECAs or Power Purchase Agreements with the IPPs which run for as long as 25-30 years. More unthinkable is the impact on the consuming public who will be left in the dark because of brownouts, should the IPPs decide to abandon their power plants due to sheer exasperation. It is unthinkable to even consider the other possibilities if this issue remains unresolved.

We might see another Bauang case where the power plant, with all its equipment valued at more than P3 billion, was seized by the LGU and eventually held for auction. IPPs may also opt to invoke the buy-out provisions in their agreements with Napocor. With Napocor lacking funds, a call for government guarantee on some of these BOT arrangements is starting to look attractive.

From a long-term perspective, the more damaging effect of this issue is the erosion of investor confidence in the Philippines because of perceived policy instability. It is sad that for a nation of singers, we cannot seem to agree on the same song.

This issue calls for a firm, immediate policy decision by government. The Finance as well as Interior and Local Government departments must intervene and coordinate with LGUs to help IPPs find a mutually acceptable solution to this problem without undermining LGUs’ constitutionally enshrined right to fiscal autonomy. More importantly and looking forward, we have to find a way to ensure that tax assumptions of BOT projects will not be disturbed, considering that these projects run for as long as 30 years or even longer.

If not, we might as well change what “BOT” means — just to be fair to investors.

(Jules E. Riego is a Tax principal of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.