What You Need to Know About Public-Private Partnerships
This commentary is authored by Fitch Solutions Country Risk and Industry Research. We are publishing it to help more Filipinos understand the origins and processes of public-private partnerships in the Philippines.
A massive infrastructure gap in the Philippines will require substantial investments in infrastructure over the next decade to cope with growing demand. Like many other emerging markets, the government’s capacity to fund its infrastructure needs is limited, and will require support from the private sector through PPPs or public-private partnerships.
The Philippines’ established PPP framework will facilitate PPP transactions and lend support to growth of the infrastructure industry, which we expect to expand by 8.2 percent year-on-year, in real terms from 2021 to 2025. However, we highlight a high degree of political risk associated with long-term contracts in the Philippines that could result in difficulties post-commercial and financial close.
Legal Framework on public-private partnerships
Enacted in 1990 through the Republic Act No. 6957, the Build-Operate-and Transfer Law provided the country with a legal framework for Public-Private Partnership (PPP) arrangements. The law was later amended by Republic Act No. 7718 (“BOT Law”) in May 1994, where the scope of PPPs was broadened and laws on unsolicited proposals (USP) were introduced. The BOT Law is accompanied with implementation guidance known as Implementing Rules and Regulations (“IRR”), which was most recently revised in 2012.
The IRR comprises of 15 “Rules” that address different stages of the PPP transaction. With regard to scope, the law encompasses a wide range of PPP transactions, including Build-Operate-Transfer, Build-Own-Operate, Build-Transfer-Operate and Rehabilitate-Operate-Transfer. Transactions are facilitated and overseen by the PPP Center, which is an agency of the National Economic and Development Authority (NEDA). A formal approval process is included in the BOT law under Rule 2, Section 2.6, which outlines the various authorities and committees involved depending on the location of transaction (National Projects vs. Local) and the value of the transaction.
The types of projects eligible under the BOT Law include:
- Highways, including expressway, roads, bridges, interchanges, tunnels, and related facilities;
- Railways or rail-based projects that may or may not be packaged with commercial development opportunities;
- Non-rail based mass transit facilities, navigable inland waterways and related facilities;
- Port infrastructures like piers, wharves, quays, storage, handling, ferry services and related facilities;
- Airports, air navigation, and related facilities;
- Power generation, transmission, sub-transmission, distribution, and related facilities;
- Telecommunications, backbone network, terrestrial and satellite facilities and related service facilities;
- Water supply, sewerage, drainage, and related facilities;
- Education and health infrastructure;
- Industrial and tourism estates or townships, including ecotourism projects such as terrestrial and coastal/marine nature parks, among others and related infrastructure facilities and utilities;
- Climate change mitigation and adaptation infrastructure projects and related facilities
Public-private partnership contracts may be implemented through a public bidding process or by the submission of a USP. The public bidding process largely follows international standards, where the process is initiated mainly through a pre-qualification process, followed by a request for proposal and a bidding process.
Only qualified bidders will be allowed to participate in bid evaluation. All qualified bids are subject to two rounds of evaluation, called “Envelopes.” First envelope evaluation is mainly based on environmental, technical, operational and financing feasibility, with respect to basic parameters set in the bidding documents provided by the procuring authority. The second envelope evaluation involves a deep-dive into the financial arrangements of the bid.
For USPs, the Swiss challenge process is applicable. The public authority will invite third parties to bid, attracting more interest from the market for 60 days in order to solicit better proposals. The submitter of the USP is then allowed to make amendments to the original bid to match or better the Swiss challenge within a 30-day timeframe. No direct government guarantee, subsidy or equity is required for USPs. We note that the Philippines is one of the few countries within the Southeast Asian region with dedicated laws and frameworks surrounding unsolicited proposals. This has led to projects such as the Manila Bay Integrated Flood Control and the Bulacan Airport Project.
The BOT Law provides for direct government guarantees, whereby an agency or local government unit assume responsibility for the repayment of debt directly incurred by the project company, in case of a loan default. However, government guarantees is not applicable for USPs. Section 13.3 of the IRR outlines a list of other possible government undertakings that could aid the PPP process.
1| Cost Sharing: The government can choose to bear a portion of the expense related to the project, either by direct government appropriations, through ODA contributions or foreign government financial assistance.
2| Direct Government Subsidy: Overall project costs could be lowered by subsidies provided by the government. This can take the form of direct subsidies, a contribution of assets, waiver or the grant of special rates on property taxes, or the waiver of administrative fees related to the PPP process (e.g. fees to obtain business permits etc.
3| Direct Government Equity: The government or local government unit could contribute equity to the project by subscribing to shares of the project company.
PPP Market Outlook
We hold a moderately favourable view of the Philippine public-private partnership market, given the government’s eagerness to engage the private sector through the use of PPPs. Historically limited fiscal space has prompted the government to explore the idea of PPPs as early as the 1980s.
While the current government under the leadership of President Rodrigo Duterte was initially unfavourable of the PPP arrangement and instead opting to pursue funding through official development assistance (ODA), that plan has run into several roadblocks as the administration races to implement infrastructure projects associated with the “Build, Build, Build” initiative (“BBB”).
Since October 2019, the Duterte administration made a policy U-turn and adopted a friendly stance towards PPPs, increasing the role of private capital for the financing of infrastructure projects. It was announced in early November 2019 that the list of BBB-related projects had been expanded from 75 to 100, of which PPP projects have increased from nine to 26. In doing so, the proportion of PPP projects within the BBB initiative will increase from 12 percent to 26 percent, creating more opportunities for private sector participation.