BOT – what rules have changed?

By Alfredo C. Ligon III

First Published in Business World (3/25/2013)

This year brings another chance for the Philippine economy to cement its hold on its new “tiger” status. Not only has Congress approved a budget of P2.006-trillion for 2013, which is over 10% higher than last year’s, but a general election is also coming soon. The influx of fresh capital and new ideas, if not new officials, should usher interesting opportunities in infrastructure and development projects.

All these factors present Government with excellent opportunities to maximize benefits by spreading them wisely and seeking suitable partners. Under our Civil Code, a partnership exists when two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. The requisites therefore are shared funds and shared risks; the benefit is shared profit; and the keyword is of course “shared.”

The Build-Operate-Transfer (BOT) Law (Republic Act No. 6957 as amended), which was enacted in 1990, still provides the key underlying framework for contractual arrangements under the flagship Public Private Partnership (PPP) Program of the government. After the successful award by the Department of Public Works and Highways (DPWH) and the Department of Education (DepEd) of the South Luzon Expressway (SLEX)-Daang Hari toll road project and the PPP for School Infrastructure Project, respectively, the Revised Implementing Rules and Regulations (IRR) of the BOT Law were issued in July 2012 and took effect in October 2012. Some of the revisions are discussed below.

List of Priority Projects
It is generally acknowledged that a pipeline of bankable projects is crucial to a successful PPP Program. Agencies of the National Government and local government units (LGUs) are tasked to prepare their development or infrastructure programs. They should identify specific priority projects that may be financed, constructed, operated and maintained by the private sector through the contractual arrangements or schemes authorized under the IRR.

These include build-and-transfer, build-lease and build-operate-and-transfer projects, which need to be approved by the appropriate body under the BOT law and the IRR. Variations of the listed contractual schemes may be approved by the President. The List of Priority Projects shall be consistent with the Philippine Development Plan and the Provincial Development and Physical Framework Plan. The Public Investment Program (PIP) and the Comprehensive and Integrated Infrastructure Program (CIIP) shall be deemed as the list of National Priority Projects. The Provincial/Local Development Investment Programs (PDIPs/LDIPs) shall be deemed as the List of local Priority Projects. The PIP, CIIP, and PDIPs/LDIPs shall be updated periodically.

Approval of Projects
The procedure for approval of projects under the IRR remains the same in that: (a) national projects costing up to P300 million and local projects costing above P200 million shall be submitted to the Investment Coordination Committee (ICC) of the National Economic and Development Authority (NEDA) Board for approval; (b) national projects costing more than P300 million shall be submitted to the NEDA Board upon the recommendation of the ICC; and (c) negotiated projects, regardless of amount, shall be submitted to the NEDA Board for approval upon the recommendation of the ICC.

Approval of Draft Contracts
Section 2.8 of the IRR now provides that the Head of the Agency or LGU shall review and approve a draft contract which shall be based on the parameters, terms, and conditions set forth by the Approving Body. Prior to such approval, the draft shall undergo review by the Office of the Government Corporate Counsel, the Office of the Solicitor General, or any other entity prescribed by law/issuances as the statutory counsel of government-owned and –controlled corporations (GOCCs) and LGUs.

For projects of national government agencies, local projects which will involve funds of the national government and local projects requiring ICC review/approval, the draft contract must be reviewed by the Department of Finance before the Head of Agency/LGU approves the same. For solicited projects, changes in the terms and conditions of the draft contract after its approval by the Head of the Agency/LGU may be allowed prior to submission of bids provided that the Head of the Agency/LGU shall secure the approval of the Approving Body for any of the following changes: (a) those which reduce service levels to the public; (b) those which reduce the economic internal rate of return below the hurdle rate used in the original analysis; (c) those which increase the total government subsidy by at least five percent of total project cost; and (d) risk profile changes which are detrimental to the best interests of the Government. As a general rule, changes after bid submission and prior to contract execution (in the case of solicited projects), or changes after the draft contract was approved by the Head of the Agency/LGU (in the case of unsolicited projects) shall not be allowed.

Negotiated Contracts
In the case of solicited projects, direct negotiation shall be resorted to when there is only one complying bidder left after prequalification or after the bidding, as defined in the IRR. The IRR now provides that it is the ICC which shall determine the reasonable rate of return prior to negotiation and that the scope of negotiation shall be limited to the financial proposal of the proponent and compliance with the ICC-determined reasonable rate of return. Direct negotiation should not result in a higher subsidy, or higher user fee, or lower amount of government revenue, or longer concession period.

Unsolicited proposals may also be accepted by an Agency or LGU on a negotiated basis, provided that all the following conditions are met, namely: (a) that the project involves a new concept or technology as determined by the Agency/LGU and/or is not part of the List of Priority projects and (b) no direct government guarantee, subsidy or equity is required, and (c) the Agency/LGU has invited by publication, for three consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of 60 working days.

Significantly, the grant of usufruct of government assets, including among others, right-of-way, to project proponents shall be considered as direct subsidy or equity unless government receives appropriate compensation pursuant to existing laws, rules and regulations, and guidelines. All costs related to relocation and resettlement in connection with the project subject of the unsolicited proposal shall be shouldered by the project proponent.

Government Undertakings
Recognizing that project proponents demand stability in their contractual arrangements, the IRR provides that the government shall ensure that the project proponent recovers the difference between the amount of tolls, fees, rentals, and other charges as stipulated or computed based on the contract and/or approved parametric formulae and the amount approved by the appropriate regulator or regulatory body through measures consistent with the applicable laws and the Constitution.

Subject to the restrictions on unsolicited proposals, the government undertakings (such as cost sharing, credit enhancements, direct government subsidy, direct government equity, performance undertaking, etc.) shall be based on an approved risk allocation matrix which shall be issued by the Approving Body/ICC. The total government undertakings shall not exceed 50% of total project cost.

These revisions highlight the need for both the Government and the private sector to partner well with institutions or experts that can assist them through all stages of project preparation, project approval, contract drafting, bidding, negotiation, award, and financial closing. Now as always, it is important to find suitable partners and be in good company.

Alfredo C. Ligon III is a Tax Director of SGV & Co.

This article 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.