PHILIPPINES: An Introduction to Projects, Infrastructure & Energy

In August 2022, the Department of Budget and Management presented the 2023 National Expenditure Programme before the House of Representatives. Among the banner items from the Executive Branch is the PHP1.96 trillion (approximately USD35.5 billion) funding for the Build Better More programme of the current administration. The Build Better More programme is an expansion of the Build Build Build programme, and is projected to raise government infrastructure spending and aid in the achievement of the government’s growth trajectory in the medium-term.

The current administration is keen on reinvigorating public-private partnerships (PPPs) to push its Build Better More programme, and on 15 September 2022, it issued the revised rules and regulations implementing Republic Act No 6957 (as amended by Republic Act No 7718) or the Build-Operate-Transfer (BOT) Law (the “Revised BOT Law IRR”). The Revised BOT Law IRR took effect on 12 October 2022 and supersedes the 2012 BOT Law IRR.

The amendments aim to address the “need to establish the right policies, institutional frameworks[,] and regulations that will further promote competition and transparency in [the Philippines’] PPP regime”. With these goals in mind, the key amendments introduced by the Revised BOT Law IRR may be thematically classified into the areas of concern which they seek to address, particularly:

-expansion of scope;

-mitigation of regulatory risks; and

-moderation of revenue risks.

Expansion of Scope  

Preliminarily, the Revised BOT Law IRR expanded the list of projects eligible for PPP arrangements to include:

-land transportation systems;

-transport and traffic management projects;

-navigable inland waterways and related facilities;

-energy efficiency and conservation, renewable energy, and electric vehicle charging stations with related infrastructure;

-flood control projects;

-urban redevelopment and townships projects; and

-heritage preservation and adaptive reuse projects.

These additional eligible projects closely mirror the priority projects under the Build Better More programme. The expansion also coincides with the opening of certain areas of investment resulting from:

-the amendments introduced by Republic Act No 11659 to Commonwealth Act No 146 or the Public Service Act (PSA Amendment) and its recently issued implementing rules and regulations, which carved out telecommunications from the definition of public utilities and characterised it as critical infrastructure that may now be foreign-owned subject to certain conditions; and

-the issuance, by the Department of Energy, of Department Circular No 2022-11-0034, which lifted the nationality restrictions on renewable energy service/operating contracts.

Mitigation of Regulatory Risks  

Among the more salient criticisms of the old BOT regime was of the unfair allocation of risks arising from government action or general shifts in the regulatory environment and changes in law.

In response, the Revised BOT Law IRR redefined material adverse government action (MAGA) under Section 1.3(v) by deleting the provision which excluded “acts of the agency/LGU and approving body, as well as acts of the executive branch, made in the exercise of regulatory powers; and acts of the legislative and judicial branches of government” from the definition of MAGA. As currently worded, MAGA now refers to any act of the government which discriminates against the sector, industry or project, or has a material adverse effect on the ability of the project proponent to comply with any of its obligations under the approved contract.

Further, the project proponent is now allowed to recover the difference between the amount stipulated under the contract and the amount approved by the regulator or appropriate regulatory body if government action results in a decrease in the amount or disapproval of tolls, fares, fees, rentals and/or charges stipulated under the contract. A similar recovery mechanism is available to the project proponent where the final approval of the franchise by the regulator results in a decrease in the amount of tolls, fares, fees, rentals and/or charges stipulated under the contract.

Finally, the provision in Section 12.22 which states that “[a]cts and decisions of regulators shall not be subject to arbitration” has been deleted in the Revised BOT Law IRR. Thus, regulator action may now be challenged through arbitration proceedings, provided that the parties contractually agree to resolve such disputes through arbitration. The terms of arbitration to which the Republic of the Philippines may agree are generally limited by Executive Order No 78, series of 2012 and its implementing rules and regulations.

These amendments are seen as balancing the allocation of regulatory risks which, under the old BOT regulations, have been borne exclusively by private sector participants. It must be noted, however, that the generic preferred risk allocation matrix (GPRAM), which guides parties in drafting and negotiating PPP contracts, has not been updated since 2 August 2016 and does not yet take into account the changes introduced by the Revised BOT Law IRR.

Moderation of Revenue Risks  

Most PPPs in the Philippines are revenue-risk contracts. This was seen as discouraging private sector participants from pursuing PPPs.

To address concerns arising from the revenue-risk contract model, the government sought to implement new schemes, which were formalised in the Revised BOT Law IRR, such as the availability payments model, and formalised the viability gap funding (VGF) model.

Availability payments “refer to predetermined payments by the agency/LGU to the project proponent in exchange of delivering an asset or service in accordance with the contract. Availability payments shall not be construed as direct government subsidy”. In an availability payment PPP, the project proponent is guaranteed some level of return on its investment while typically foregoing projected revenues which would have accrued from the collection of tolls, fares, fees, rentals and/or charges. Parties to a PPP are not constrained from adopting a combination of revenue-risk and availability payment models to fund the projects. Additionally, availability payments are expressly not considered direct government subsidies. Thus, availability payments may be accessible to project proponents submitting unsolicited proposals.

VGF is another way in which revenue risks are addressed. It is “a type of subsidy… that the government may provide to a revenue-based PPP project with the objective of making fees affordable, while improving the commercial attractiveness of the project”. While not an entirely new concept, the inclusion of a definition of VGF in the Revised BOT Law IRR further formalised the guidelines issued by the PPP Governing Board in Resolution No 2018-03-07 dated 22 March 2018. Unlike availability payments, VGF is “available only to solicited concession-based PPP projects which are economically viable but are not financially attractive.”

It is hoped that the formalisation of these new PPP schemes will improve the bankability of PPPs and attract investments in critical areas, sectors, projects or industries.

Whether the Revised BOT Law IRR will be the catalyst it is envisioned to be remains to be determined, but it is certainly peaking interest among players that have so far been skeptical of or largely removed from the PPP space, including those looking into investing in digital infrastructure, such as data centres and data networks.