ppp for dummies

Fundamentals of PPP - Public Private Partnerships

2015

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A Player’s Practical Guide: Participating in the Philippine Public-Private Partnerships (PPP)

Initiative

“Our solution: Public-Private Partnerships… From these public-private partnerships, our economy will grow and every Filipino will

be the beneficiary.” – President Benigno S. Aquino III, State of the Nation Address, July

26, 2010

I. The Philippine Public-Private Partnerships Program: Where are we now?

It has been three (3) years since the Aquino Government launched its Public-Private Partnerships (PPP) Program. Only three projects have been launched, one per year – the Daang Hari-South Luzon Expressway (SLEX) Link Road, awarded in December 2011; the PPP for School Infrastructure Project (PSIP), awarded in August 2012; and the Ninoy Aquino International Airport (NAIA) Expressway Phase II, awarded in April 2013. The country’s infrastructure performance has increased by about 0.4 points (from 3.2 to 3.6) since the 2010-2011 World Economic Survey. However, its place among its Asian brothers remains the same (second to the last, the last being Vietnam), and still lagging behind the recorded mean of 4.3. The reason? The “slowly but surely” approach adopted by the Aquino Government. This means foregoing immediate results in terms of number of completed infrastructure projects (on this, not even the 0.4 growth in infrastructure performance can be attributed to PPP, since to date no PPP infrastructure has been completed) to ensure the establishment

Figure 1. Philippine Infrastructure Performance 2012-‐2013

1 = poorly developed and inefficient; 7 = among the best in the world Source: World Economic Forum, “The Global Competitiveness Report, 2012-‐2013”

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of an enabling environment conducive to PPPs. Hence in the area of policy reform, Government has taken considerable strides. Notable among these are:

(1) The transformation of the BOT Center into the PPP Center, an entity that is far more empowered than its predecessor, and which is now supported by a capable decision-making body – the PPP Governing Board – chaired by the Socioeconomic Planning Secretary and vice-chaired by the Finance Secretary;

(2) The amendment of the 2006 Implementing Rules & Regulations for the Build-Operate-and-Transfer Law (BOT-IRR) in 2012, which now provides stricter timelines in terms of the review and approval of PPP projects and bids as well as more stringent guidelines for unsolicited proposals;

(3) The amendment of the 2008 NEDA (National Economic & Development Authority) Joint Venture Guidelines in 2013 to better mirror the check and balance mechanisms present in the BOT Law and its amended IRRs;

(4) The creation of a Project Development and Monitoring Facility (PDMF), which is a revolving fund to finance the development of feasibility studies for proposed PPP projects;

(5) The mandatory use of Alternative Dispute Resolution (ADR) as an more efficient and time-saving mechanism to resolve project-related issues and disputes as opposed to resorting to the courts; and

(6) The extension of the 25% Single Borrower’s Loan to allow banks to better provide funding to PPP project proponents.

II. Changes in the Landscape: What to look out for? The aforementioned changes in the enabling environment, while signifying good progress on the part of government, entail due diligence for prospective players in the PPP arena to again review the rules of the game. The entire PPP regulatory framework is largely made up of the following laws: (1) the BOT Law and its Revised IRRs, (2) the Revised NEDA JV Guidelines, and (3) the recently passed LGU-level PPP Codes. The nature and coverage of these laws will be briefly discussed below, as well as the notable amendments or features of each. 1. The Build-Operate-and-Transfer (BOT) Law and its Implementing Rules &

Regulations (IRR)

The BOT Law is the basic statute governing Public-Private Partnerships, and through which most, if not all, PPP projects are implemented. It lays down the core concepts and principles for implementing PPP and establishes the nine (9) modalities through which a PPP project may be packaged. Its IRRs on the other hand, operationalizes the principles and concepts laid down in the law, and provides detailed guidelines for PPP projects covering all stages of implementation (i.e. project development, bidding, contract approval, execution and termination), whether through the solicited mode or unsolicited mode.

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Notable amendments in the 2012 IRR:1 -‐ Identity of Approving Body is no longer dependent on the value and nature of the

project, since the NEDA Investment Coordination Committee (NEDA-ICC) is now the sole entity that determines the Reasonable Rate of Return (ROR) of a proposed PPP project;

-‐ The draft project contract must now first be approved by both the Department of Finance (DOF) and the concerned statutory counsel (the Office of the Solicitor General or OSG, the Office of the Government Corporate Counsel or OGCC, or the in-house counsel of the concerned government corporation as the case may be) before the final approval of the Implementing Agency can be secured – this however, effectively adds another bureaucratic layer in the approval of the project contract;

-‐ The franchise (for PPP projects involving the operation of public utilities) issued to winning proponents is now automatic and permanent from the previous provisional issuance of franchise – this is a welcome amendment especially for banks who, before such amendment, were hesitant to approve a loan to a project proponent since a provisional franchise does nothing to ensure the continuity of the project contract;

-‐ Government now ensures that the proponent will be properly compensated in case the fare/toll rates approved by the regulator (ex: the Toll Regulatory Board or TRB) is not in accordance with that prescribed in the parametric formula indicated in the PPP project contract – this is to assure project proponents that they will be compensated in case such an instance arises;

-‐ Any references to indirect government guarantee or support have now been deleted – this is intended to plug the loophole previously exploited by prospective proponents of unsolicited proposals: that while direct government guarantee, subsidy or equity is not allowed for unsolicited proposals, an indirect government guarantee is (itself a concept vaguely defined in the 2006 BOT-IRR); with this amendment, it is to be understood that no government guarantee of any kind (whether direct or indirect) is no longer allowed for unsolicited proposals;

-‐ Now provides an option for the project proponent to divest or accede its rights over a project after a “lock-in” period to be determined by the Implementing Agency – this new provision provides an alternative “exit strategy” for project proponents.

2. The NEDA Joint Venture Guidelines

The NEDA “JV Guidelines” governs PPP projects implemented through the Joint Venture modality, which involves a joint project or undertaking between a government entity endowed with corporate powers (i.e. GOCCs, GFIs, GCEs, etc.) and a private entity. Since joint venture projects are outside the scope of the BOT Law and its IRR, it is the JV Guidelines that provide the detailed implementation procedures. Notable amendments in the 2013 JV Guidelines:2 -‐ Joint Venture project proposals now require the approval of NEDA-ICC prior to

bidding; for joint venture projects requiring the formation of a JV company, approval from the Governance Commission for GOCCs (GCG) is also required – while the inclusion of these entities as additional checks is, as in the case of DOF and statutory approvals for BOT project contracts, a welcome amendment for government, it nevertheless spells additional bureaucratic layers to deal with especially for proponents of unsolicited proposals;

1 See Appendix A for a tabular comparison of the 2006 BOT-‐IRR and the 2012 amendments. 2 See Appendix B for a tabular comparison of the 2008 JV Guidelines and the recent 2013 amendments.

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-‐ Ownership of the JV project may be transferred to the private sector or government at the end of the project contract/agreement – this is an amendment in favor of government, since it is now given the power and authority to decide whether or not to take over the project after termination of the project contract;

-‐ Now also explicitly adopts the “first-in-time” approach featured in the BOT-IRR, which is a system for regarding unsolicited proposals that cover the same project concept; it states that when such an incident occurs, these unsolicited proposals will be evaluated based on which complete proposal is submitted first, and that the second proposal will only be entertained if the first one is rejected or if negotiations with the proponent of the first proposal fails – this is testament to the real overarching theme why the BOT-IRR was amended, which is in order for it to more clearly be in line with the standards and requirements set forth in the BOT Law and its IRRs;

-‐ In the case of unsolicited proposals, the “right-to-match” mechanism for the “Swiss Challenge” process has now been eliminated and in its place is a right given to the original proponent to opt to submit a second financial bid on or before the date of the opening of the financial proposals of the other challengers – for prospective proponents, this is arguably the most significant amendment in the 2013 NEDA JV Guidelines and what primarily sets the Swiss Challenge process for JV projects apart from its BOT counterpart;

-‐ Again in the case of unsolicited proposals, the original proponent is now entitled to be reimbursed for the cost of developing the unsolicited proposal if it loses in the “Swiss Challenge” – the legality of this provision remains questionable: Stage Three of Annex B is entitled “Competitive Challenge and Reimbursement to the Original Proponent the Cost Incurred from Producing the JV Proposal”, and yet in the procedures therein set forth, no mention whatsoever is made regarding said reimbursement. Supposing that this amendment is recognized and legally enforceable, this is another amendment that sets the procedure for JV projects apart from its BOT counterpart, and one that could potentially encourage prospective proponents to develop and endorse/submit unsolicited JV proposals.

3. LGU-level PPP Codes

The emergence of these laws is a recent trend begun by former Justice Secretary Alberto Agra in late 2011. They are applicable only to select local government units (LGUs) that have decided to adopt or ratify their respective PPP Codes.3 Although still limited by the provisions not only of the BOT Law and its IRRs, but also of the Local Government Code (R.A. No. 7160) and its IRRs, these PPP Codes remain important as these contain the operative rules and guidelines governing the implementation of PPPs in select LGUs.4 Familiarizing oneself, or at least being aware of the salient features of some of these PPP Codes, is therefore important in order to effectively participate in the bidding of LGU-level PPP projects. What to look out for:5 -‐ What additional PPP modalities are available or were added? (May include: joint

venture, lease or affermage, management contract, corporatization, etc.) 3 To date, the following LGUs have adopted their respective PPP Codes: Cavite, Camarines Sur, Olongapo, Butuan City, Nueva Ecija, Northern Samar, Samar, Pangasinan, Davao City, and most recently the province of Bohol.

4 However, for LGUs that currently do not have their own PPP Code or ordinance, the BOT Law and its IRR still apply. The operative rules and guidelines for this is contained in the PPP Manual for LGUs prepared by the PPP Center.

5 See Appendix C for a tabular comparison of some of the salient features of PPP Codes as adopted by selected LGUs.

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-‐ Who is the selection body? (PPP BAC or Selection Committee) -‐ Who is the PPP Regulatory Authority? What are its mandates? -‐ Who is the Approving Body?

III. Unsolicited Proposals: What do you need to know? A least considered area or aspect in the Public-Private Partnerships Program of the Aquino Government is the use of the unsolicited mode as an alternative mode for bidding out PPP Projects. Due primarily to its bad history (most botched-up BOT projects before, one of which is the MRT 3 project, were unsolicited proposals), the unsolicited mode currently carries with it a stigma. This is not to say that the unsolicited mode is no longer an option – the NLEX-SLEX Connector Road is an unsolicited proposal submitted by the Metro Pacific Group and will be up for bidding anytime soon; likewise both the Ayala Group and Metro Pacific have submitted unsolicited proposals for the operation and upgrading of MRT 3. From a player’s point-of-view, bagging a PPP project via an unsolicited mode is an option worth exploring. Here we will see why. A. Preference Towards the Solicited Mode “If we are truly interested in a square deal for all, then what we shake hands on, should be what endures. To this end, what we will be doing insofar as solicited projects are concerned, is to minimize your risk in a meaningful and fair manner.” – President Benigno Aquino III “For PPP projects, the government will focus on the solicited mode. Priority projects identified in the MTPDP/MTPIP and CIIP will undergo the solicited mode and will be processed within 6 months.” – Socio-Economic Sec. Cayetano Paderanga, Jr. During the November 2010 Philippine Infrastructure Summit, the Aquino Government formally introduced its Public-Private Partnership Program to potential investors and international partners. In the event, both the President and the NEDA Director-General Paderanga highlighted the Government’s preference for the solicited process as the primary mode for bidding out PPP projects. In an interview, Finance Secretary Purisima also stated that the preference is due primarily to avoid having “sweetheart deals” between the Implementing Agency and the winning project proponent. B. Why Unsolicited? Briefly, the difference between the solicited mode and the unsolicited mode lies on where the project proposal originates:

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• For the solicited mode, the project originates from the implementing government entity

(IGE) itself (although the crafting of the project feasibility or FS is often outsourced through consultants), and hence ownership over the project proposal is with the IGE.

• For the unsolicited mode, a private sector entity submits an original project proposal to

the concerned IGE for its approval; once approved by the IGE and the NEDA-ICC (and other concerned regulators, if required), the private sector entity is then given “original proponent” status. Ownership over the project proposal stays with the original proponent until the end of the entire bidding process.

So why go unsolicited? Primarily because in the unsolicited mode, the original proponent has a considerable edge over its competitors. Once accepted and approved by the concerned IGE, the unsolicited proposal becomes the basis for the bid/tender documents. In a way therefore, the original proponent already dictates the bid parameters – such as the MPSS or the Minimum Performance Specifications & Standards, the PPP modality by which the project will be implemented, etc. – for the proposed PPP project. Secondly, for unsolicited BOT proposals, the original proponent is given thirty (30) days to match a better proposal submitted by a competitor during the Swiss Challenge, otherwise known as the “right-to-match.” For unsolicited JV proposals, the original proponent, while not given the same “right-to-match”, is allowed to submit a second financial proposal together with the other competitors; and if bested, may be reimbursed for costs incurred in preparing the unsolicited proposal. C. Conditions / Requisites Given the significant benefits granted to proponents of unsolicited proposals, it likewise becomes imperative that checks be put in place to ensure that Government still gets the best deal. Thus, for an unsolicited BOT proposal to be entertained, it must first hurdle the following conditions:

1. The project must not be part of the list of priority projects of Government; or 2. The project involves a new concept or technology; and 3. The project must not involve any government guarantee, subsidy or equity.

In reality, there are only two conditions since an either-or compliance for the first and the second conditions is allowed. What this means is even if the project is included in the priority list of Government,6 the prospective proponent may still submit an unsolicited proposal on the same project so long as the proposal introduces a new concept or technology. A “new concept or technology” on the other hand, can mean any of the following:

(1) A recognized process, design or method that significantly reduces construction costs, accelerate project execution, improve safety, enhance project performance, extend economic life, reduce maintenance and operation costs, or reduce environmental impact or social/economic disturbances during construction and operation;

(2) A process for which the project proponent possess exclusive rights to (either worldwide or regionally); or

6 For the indicative list of PPP projects included in the pipeline, one may refer to the website of the PPP Center.

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Figure 2. PPP Modalities under the BOT Law

(3) A design, method or engineering concept for which the project proponent possesses intellectual property rights to.

In the case of an unsolicited JV proposal, no particular requirements specific to unsolicited proposals were laid down in the Guidelines, except those that apply equally to solicited JV proposals as well, which are:

1. The JV activity is within the mandate and charter of the IGE concerned; 2. The JV activity is responsive in meeting national or specific development goals and

objectives; 3. The JV proposal clearly describes the proposed investment, including its total cost,

activities, objectives, sources of funding, extent and nature of the proposed participation of the IGE concerned, and other relevant terms and conditions;

4. The JV proposal establishes all the components in determining the overall feasibility of the JV proposal which include, among others, the technical, financial, economic, and legal aspects; and

5. The terms and conditions of the approval of the Privatization Council, if applicable. For the Agra PPP Codes, unsolicited proposals may be submitted for the other variants (i.e. lease, affermage, etc.) even if the project is included in the list of priority projects of the LGU or the proposal does not introduce a new concept or technology; it also allows for direct government guarantees and subsidies. On the other hand, the Davao City Ordinance closely follows the framework of the BOT Law, thereby adopting the same conditions for unsolicited proposals except for Joint Venture projects – on which the Ordinance bars the submission of unsolicited proposals. D. Knowing the PPP Modalities Essential to the task of preparing an unsolicited proposal is packaging the project for PPP implementation – in this, knowledge of the different PPP modalities allowed by law becomes indispensable. Knowing which PPP modality to adopt not only spells the difference between a good project proposal and what would otherwise be a poorly crafted one, but also

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determines which law or regulatory framework would apply (i.e. BOT Law, JV Guidelines, or local PPP Code).7 Under the BOT Law, there are nine (9) PPP modalities, namely: 1. Build-and-Transfer (BT) – The proponent builds the facility then transfers both ownership

and possession to Government upon completion; 2. Build-Transfer-and-Operate (BTO) – The proponent builds the facility then transfers

ownership to Government upon completion but retains possession for purposes of operating it;

3. Build-Operate-and-Transfer (BOT) – The proponent builds the facility and operates it for

an agreed period; upon expiration, the proponent then transfers both ownership and possession to Government;

4. Rehabilitate-Operate-and-Transfer (ROT) – The proponent rehabilitates an existing

facility owned by Government and operates it for an agreed period; upon expiration, the proponent then transfers possession to Government;

5. Develop-Operate-and-Transfer (DOT) – The proponent builds the facility and also

acquires rights to develop adjoining properties (proponent may gain benefits from higher property or rent values); it then operates the facility for an agreed period. Upon expiration, the proponent transfers both ownership and possession to Government;

6. Build-Lease-and-Transfer (BLT) – The proponent builds the facility, then turns over

possession to Government upon completion for lease purposes for an agreed period; upon expiration, the proponent transfers ownership to Government;

7. Build-Own-and-Operate (BOO) – The proponent builds the facility and operates it for an

indefinite period, although Government has the right to acquire ownership and possession (this modality requires the prior approval of the President upon the recommendation of the NEDA-ICC);

8. Rehabilitate-Own-and-Operate (ROO) – The proponent rehabilitates an existing facility

owned by Government and operates it for an indefinite period, although Government has the right to reacquire possession; and

9. Contract-Add-and-Operate (CAO) – The proponent adds to an existing facility owned by

Government and operates the expanded facility either for an agreed period or an indefinite period; upon expiration of the agreed period, the proponent then transfers possession of the expanded facility and ownership of the improvements therein to Government.

To better remember these modalities, here are some pointers:

• All activities indicated in each scheme (build, operate, lease, transfer, own, etc.) refer to activities undertaken by the private sector proponent and not Government; and

7 See Appendix D for a more comprehensive presentation of the delineation of roles between the private sector proponent and Government per modality.

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Figure 3. Process Flow for the Unsolicited Mode

• The title per scheme gives away the order or sequence by which the activities are to be undertaken by the proponent.

Under the Revised NEDA JV Guidelines, the Joint Venture PPP Modality may be entered into by a prospective proponent with a government entity that exercises corporate powers, such as Government Owned and Controlled Corporations (GOCCs), Government Financial Institutions (GFIs), and Government Corporate Entities (GCEs). Under the JV modality, the private sector entity and the government entity pool resources (money, capital, services, assets, etc.) and share risks in jointly undertaking an investment activity. Upon expiration of the cooperation period, ownership over the JV project may then be turned over either to the private sector partner or to Government. A JV project may be implemented either through contractual agreement (JV Agreement or JVA) or through the creation of a JV Company, a stock corporation to be registered in the Securities and Exchange Commission (SEC) upon acquiring the approval of the Governance Commission for GOCCs (GCG). The government partner may own up to fifty per cent (50%) of the outstanding capital stock of the JV Company. Other PPP modalities are included in the various local PPP Codes, some of which include: 1. Lease – The proponent manages, operates, maintains and/or provides improvements to

an existing facility for an agreed period; the proponent retains revenue collected from users of the facility and undertakes lease payments (fixed amount) to Government; and

2. Affermage – The proponent manages, operates, maintains and/or provides improvements

to an existing facility for an agreed period; both the proponent and Government share the revenue collected from users of the facility (sharing would depend on the amount of revenue acquired).

E. The Unsolicited Process

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Figure 3 summarizes the entire unsolicited process for the benefit of prospective unsolicited proponents. Without going into a discussion of the details for each step, the following are some key points worth noting: For unsolicited BOT proposals – • The unsolicited proposal to be submitted (Step 1) must contain all of the following: a

cover letter, the feasibility study (must indicate relevant assumptions), company profile, the draft contract, and other necessary documents as the IGE would require;

• As mentioned earlier, the “first-in-time approach” is used in cases where more than one unsolicited proposal is received by the IGE covering the same scope for the same project;

• The approval of the unsolicited proposal will be by the concerned Approving Body (NEDA Board for national projects above Php300 million; NEDA-ICC for national projects up to Php300 million and local projects above Php200 million; and the concerned LGU Sanggunian for projects up to Php200 million), while the approval of the draft contract will be by the concerned IGE, the concerned statutory counsel, and if necessary, the DOF;

• Steps 5 to 8 is what is commonly referred to as the “Swiss Challenge” stage, wherein the IGE invites other competitors to submit competitive bids to challenge the unsolicited proposal prepared by the original proponent. If the latter is bested, the original proponent is still given thirty (30) working days to re-match and attempt to beat the superior competitive proposal;

• On the first day publication of the invitation for comparative proposals, the original

proponent is required to submit a bid bond in the following amount: -‐ Two per cent (2%) of the project cost for projects less than Php5 billion; -‐ One and a half per cent (1.5%) of the project cost or Php100 million, whichever is

higher, for projects worth at least Php5 billion but less than Php10 billion; and -‐ One per cent (1%) of the project cost or Php 150 million, whichever is higher, for

projects worth Php10 billion or more. For unsolicited JV proposals – • The Revised NEDA JV Guidelines likewise adopts the “first-in-time approach” in cases

where more than one unsolicited proposal is received by the IGE covering the same scope for the same project;

• Among the significant revisions in the Revised NEDA JV Guidelines is the participation of

the NEDA-ICC in the approval of the Joint Venture proposal. Approval solely by the IGE is allowed only in cases where the project is: (1) Related to the primary corporate mandate of the IGE and does not involve

infrastructure projects; (2) Not an infrastructure project amounting to at least Php150 million; (3) Not a public utility with government contribution amounting to at least Php150 million;

or

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(4) Not an unsolicited proposal by a private sector proponent requiring government contribution amounting to at least Php150 million;8

• Unlike the unsolicited process for BOT projects, the draft contract need not be prepared

and included by the prospective proponent in the submission of its unsolicited proposal; • Steps 5 to 8 is referred to as the “Modified Competitive Challenge” stage, wherein the

IGE invites other competitors to submit competitive bids to challenge the unsolicited proposal prepared by the original proponent. Unlike the process for unsolicited BOT proposals, the original proponent has no “right-to-match.” Instead, he is given the option to submit a second financial proposal together with the other competitors. If bested, the original proponent may be reimbursed for costs it incurred in developing the unsolicited proposal;

• Similar to the process for unsolicited BOT proposals, the original proponent is also

required to submit a bid bond in the following amount: -‐ Two per cent (2%) of the project cost for projects less than Php5 billion; -‐ One and a half per cent (1.5%) of the project cost or Php100 million, whichever is

higher, for projects worth at least Php5 billion but less than Php10 billion; and -‐ One per cent (1%) of the project cost or Php 150 million, whichever is higher, for

projects worth Php10 billion or more. For PPP Codes – closely mirrors the procedures for unsolicited BOT proposals. IV. PPP Opportunities: What are up for Grabs? The PPP market is dynamic and constantly changing. The following discussion therefore, is an attempt to provide prospective players a snapshot, no matter how hazy, of the PPP market in two promising sectors: air transport and power. Air Transport Infrastructure

There is a grain of truth when NAIA 1 was ranked as the “world’s worst airport” by “The Guide to Sleeping in Airports” last 2011. When compared to its Asian brothers, the Philippines ranks the lowest when it comes to air transport infrastructure (even Vietnam, India and Indonesia is ahead).

8 Similarly, this means that if the unsolicited JV proposal only involves a contribution of less than Php150 million from the IGE, then the approval of the NEDA-‐ICC need not be required.

Figure 4. Air Transport Infrastructure Performance

1 = extremely underdeveloped; 7 = among the best in the world Source: WEF, “The Global Competitiveness Report, 2012-‐2013”

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In business terms, this translates to more opportunities for infrastructure development via PPP. This conclusion is supported by the policy thrust of the Department of Transportation and Communication (DOTC) for air transport, the running theme of which seems to be the privatization of operations and maintenance (O&M) of key airports in the country. Roughly two years ago, back when the Department was still in the hands of Secretary Jose “Ping” de Jesus, both the development and operation of these airports (primarily Panglao, Laguindingan, Daraga, and Puerto Princesa International Airports) were to be packaged via PPP. However, when Secretary Manuel “Mar” Araneta Roxas II took over, the now DILG (Department of Interior and Local Government) Secretary promoted what he referred to as “hybrid PPP”, which allocated the funding for developing key transport infrastructure (airports included) to Official Development Assistance (ODA) loans, and the O&M thru PPP, declaring that

Government can save by availing of the low interest rates of ODA. The concept of “Hybrid PPP” has now been formally adopted by DOTC and the PPP Center, as the list of airport PPP projects only covers O&M, with the exception of the Mactan-Cebu International Airport (MCIA):

PPP Project Cost Remarks Status

Enhanced O&M of Panglao Airport

$190.5 Million

DOTC to construct Panglao airport (will replace Tagbilaran Airport) via ODA

Project proposal for evaluation & approval

O&M of Laguindingan Airport

$42.9 Million

Already constructed by DOTC via ODA; O&M bid-out by 2014

Finalization of project structure

O&M of Puerto Princesa Airport

TBD

DOTC to construct airport via ODA; bid documents for terminal construction to be issued in June

Ongoing preparation of Feasibility Study

O&M of Iloilo, Davao & Bacolod airports

TBD Projects under conceptualization

DOTC 2013 Policy Thrust

Supporting Projects

Bolster tourism targets through the construction & reinforcement of transport infra • Develop airports • Open secondary airports to international traffic • Improve access to airports • Promote PPPs

• Airport expansion to accommodate more passengers and larger aircraft (Laguindingan, Mactan-Cebu, Panglao) • Privatization of O&M of airports (Mactan-Cebu, Panglao)

“The ODA loans would benefit the consumers as well since there is no rush in recovering costs. It is a cheaper yet effective option because of the sovereignty of the partnership since governments of foreign donors are involved.” – Then Transport Secretary Mar Roxas on Hybrid PPP “ODA bears only low interest rates as it is government that borrows money for the project, while under the PPP, it is the private sector that borrows but with high interest rates.”

– Tourism Secretary Ramon Jimenez on Hybrid PPP

Source: Philippine Economic Briefing, February 2013

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Source: PPP Center, June 2013 The list of potential players is largely based on the list of bidders that pre-qualified for the MCIA Project: • In a press statement, both MPIC and JG

Summit stated that the MPIC-JGS Consortium will be a joint venture engagement that extends to bidding for all airport PPP projects, and not limited to the MCIA project.

• Megawide is a recent upstart. It is the

preferred contractor of Shoemart Development Corporation (SMDC), and is in fact partly owned by the Sys. It won the Regions III and IV-A packages of the PPP for School Infrastructure Project Phase I (worth a total of Php12.83 billion) through its joint venture undertaking with Citicore Holding Investment Inc. For the MCIA project, it partnered with India-based GMR Infrastructure (operator of the New Delhi airport). Megawide is also the lone bidder that submitted pre-qualification documents for the Php5.7 billion Philippine Orthopedic Center BOT project.

• Earlier in 2012, First Metro Investment Corporation (FMIC) expressed its interest to

participate in PPP projects, specifically the Panglao Airport project; it admitted however, the need to partner with an entity that possesses the required technical expertise and experience in the sector to be able to come up with a competitive bid.

Power & Energy

The Philippines ranks just slightly better than Vietnam and India, and barely at par with Indonesia, in power and energy performance. Its ranking slid from 87th in 2009 to 98th in 2012. The Department of Energy (DOE) has likewise highlighted, among others, the need to implement strategic infrastructure in power and energy. In its outlook for 2013, it pointed out the necessity of allocating at least Php49 billion worth of investment in power-related infrastructure. Also, as an answer to the looming power crisis in Mindanao, the DOE has identified several energy sources in the area (coal and oil & gas). These may be considered as potential areas for PPP project proposals.

POTENTIAL PLAYERS: 1. AAA Airport Partners (Ayala-‐Aboitiz) 2. San Miguel & Incheon Airport Consortium 3. First Philippine Airports (Lopez Group) 4. Metro Pacific Investments Corporation – JG

Summit (MPIC-‐JGS) Airport Consortium 5. GMR Infrastructure – Megawide Consortium 6. Filinvest Development Corporation 7. Premier Airport Group (Sy-‐led) 8. GT Capital (First Metro Group)

Figure 5. Power Sector Performance

1 = insufficient & suffers frequent interruptions; 7 = sufficient & reliable Source: WEF, “The Global Competitiveness Report, 2012-‐2013”

“Government should never go into business. LGUs should not compete with the private sector. Instead, you should help the private sector do business.”

– Energy Secretary Jericho Petilla on LGU-‐level Public-‐Private Partnerships for Power projects

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As to the PPP market structure for power, Energy Secretary Petilla made it clear that the thrust should be focused at the LGU-level – this is not surprising; after all, power generation, transmission and distribution is devolved to LGU-level contractors and corporations. In his statement during the January 2013 PPP forum held in Leyte, Secretary Petilla stressed the importance of LGU-level PPPs to help government achieve its requirements for energy self-sufficiency. It is in this area therefore, that the importance of PPP Codes becomes apparent. Source: PPP Center, June 2013 PPP projects in the pipeline include: (1) the ROT (rehabilitate-operate-and-transfer) contract for Units 4 & 5 Auxiliary Turbines of the Angat Power Plant, which is still being evaluated by the NEDA-ICC; and (2) the Batangas Manila Natural Gas Pipeline 1 (BatMan 1) Project, which was recently endorsed by the Philippine Energy Development Corporation (PNOC) to the PPP Center for purposes of funding the preparation of a feasibility study for PPP packaging and implementation (since PNOC is a GOCC, JV could be a possible track for implementation). Note that these two identified PPP projects are national in scope, and as of this writing, no LGU-level PPP power projects have yet been identified by the PPP Center.

The list of potential players is sourced primarily from the list of corporations that gave their expressions of interest to bid for the Angat Power Plant Project: • Meralco, First Gen, and Aboitiz Power

are already established players in the power sector, while Marubeni and EEI are triple-A contractors that have a deep technical expertise in process engineering and an established

DOE 2013 Policy Thrust

2013 Outlook

• Maintain 60% energy self-sufficiency • Promote low-carbon future (30% alternative fuels by 2030) • Facilitate implementation of strategic infrastructure

• Energize 9,860 households & 4,982 sitios • Requires a minimum investment of Php 49 billion for infrastructure • Mindanao: promote energy exploration & development – oil & gas (Sulu Sea & Cotabato); coal (Agusan del Norte & Sur, Misamis Oriental, Surigao del Sur, Compostela Valley, Davao Oriental, Lanao del Norte & Sur, South Cotabato, Sultan Kudarat, Saranggani, Zamboanga del Norte & Sibugay)

PPP Project Cost Remarks Status

Rehabilitation, O&M of Angat Hydro-Electric Powerplant Auxiliary Turbines 4 & 5

$27.5 Million

Proponent shall: a) renovate & modernize the existing 1x10 MW (unit #4) and 1x18 MW (unit #5) auxiliary turbines; (b) construct a separate control room; (c) construct a new switchyard & transformer area; and (d) O&M of modernized Auxiliary Turbines 4 & 5; (twenty years cooperation period inc. construction)

Project proposal for evaluation & approval

Batangas-Manila Natural Gas Pipeline 1

$100 - $150 Million

Phase 1 involves construction of a 105-km pipeline; study to be completed 1st qtr of 2014 (can be implemented via joint venture)

FS yet to be prepared

Source: Philippine Economic Briefing, February 2013

POTENTIAL PLAYERS: 1. Meralco Power (MPIC-‐SMC) 2. First Gen Energy Philippines (Lopez Group) 3. Aboitiz Power Corporation 4. Ayala Corporation Energy Holdings 5. DMCI Power Corporation 6. EEI Corporation 7. Global Business Power Corporation (First

Metro Group) 8. Trans-‐Asia Oil & Energy (Phinma Group) 9. Filinvest Development Corporation

Utilities, Inc. (FDCUI) 10. Kaltimex Energy Philippines 11. Marubeni Corporation

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experience in the construction (and to a certain extent, design) of power plants and energy-related infrastructure.

• DMCI Power is no newcomer either. Led by its chairman, Isidro “Sid” Consunji, it won the

bidding to supply 25 megawatts of electricity to the Palawan Electric Cooperative and is currently supplying power to the Masbate Electric Cooperative from its 3-MW diesel power plant in Masbate. It is expecting to start commercial operation of its 27-MW diesel facility in Palawan by September of 2013, a 15-MW coal-fired power plant by October 2014, and another 15-MW coal facility by January 2017.

• The Ayala Group declared that it would invest as much as $200 million every year from

2012-2016 in key power projects (both conventional and renewable). Its portfolio include: (1) a Php12 billion conventional energy investment in a 135-MW coal facility in Batangas; (2) a 17.1% interest in the GN Power Mariveles Coal Plant, whose 600-MW coal facility in Bataan is set to start commercial operation sometime this year; (3) a Php12.5 billion 135-MW coal-fired power plant for construction in Iloilo, together with partners A Brown and Jin Navitas Resource Inc.; and (4) a 50% stake in the NorthWind Power Development Corporation, which owns and operates a 33-MW commercial wind facility in Bangui, Ilocos Norte.

• Global Business Power Corporation is a consortium led by the FMIC Group that is

currently the leading independent power provider in the Visayas region with a combined supply capacity of 633 megawatts.

• Phinma-led Trans-Asia Oil on the other hand, has been a player in oil and gas exploration

since the early 1980s. The group is also involved in renewable energy development via Trans-Asia Renewable Energy Corporation and Maibarara Geothermal Inc. It is currently poised to double its power capacity to 400 megawatts in the coming years through: (1) its new 135-MW coal power plant in Calaca, Batangas (in partnership with Ayala); (2) an integrated 20-MW geothermal project in Santo Tomas, Batngas (with the Yuchengco Group and PNOC); and (3) a 54-MW wind farm in San Lorenzo, Guimaras.

• FDCUI is a newcomer to the PPP market, but not in power. A subsidiary corporation of

Filinvest Development Corporation (FDC), it accumulated experience in the industry since 1995 through its ownership of the East Power Corporation and the Cebu Private Power Corporation. It is currently prioritizing a 300-MW power plant in Mindanao and a total of 190 megawatts of supply across various areas in Visayas.

• Kaltimex Energy Philippines is a recently established entity in the country (operating since

2009). Its parent company, based in Indonesia, has garnered experience in power generation and distribution; it supplies up to 25 megawatts of electricity across Indonesia from a power plant that it established via a BOOT (Build-Own-Operate-and-Transfer) scheme. Kaltimex now seeks to penetrate the Philippine PPP market in power with its entry in the $27.5 million Angat Power Plant Project.

V. Conclusion The PPP market is a thriving one; but for a potential player to maximize its opportunities and be able to participate effectively, it is advised that due attention to the rules of the game be given. In so doing, not only will it familiarize itself with the rules and avoid disqualification due to technicalities, but it will also be able to come up with ways on how to

17

strategically bid or submit proposals for a PPP project, as well as develop a skill for packaging project proposals and bids for PPP implementation.

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APPENDICES Appendix A: 2012 Amendments to the BOT Implementing Rules & Regulations

BEFORE

NOW

Approving Body is dependent on value & nature of the project: • For national projects, NEDA-ICC for projects ≤

Php300 million; NEDA Board for projects > Php 300 million

• For local projects, NEDA-ICC for projects > Php200 million; the concerned development councils for projects ≤ Php200 million

NEDA-ICC as sole approving body in determining the Reasonable Rate of Return (ROR) whether national or local

Implementing Agency (IA) is to execute the project contract as approved by the concerned Approving Body (depending the value & nature of the project)

Before approval of the final draft contract by the IA (based on terms & conditions set by the Approving Body), review and approval from the Department of Finance (DOF) and the concerned statutory counsel (OGCC, OSG, etc.) must first be secured

Franchise granted to winning proponents only provisional; it is only after hearing (to determine compliance of all requirements) will such franchise become permanent

Franchise (for PPP projects involving operation of public utilities) granted to winning proponents is now automatic and permanent

No related provision Government ensures that the proponent recovers the difference between the amount stipulated in the parametric formula and the amount approved by the regulator

Makes reference to indirect government guarantees Deletes any reference to indirect government guarantees/support

No related provision Now provides an option for the project proponent to divest or accede its rights over a project after a “lock-in” period to be determined by the IA

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Appendix B: 2013 Amendments to the NEDA JV Guidelines

BEFORE

NOW

Approval of Joint Venture proposal, regardless of cost, by the Government Entity

Joint Venture proposals now require NEDA-ICC approval; for JVs requiring the formation of a JV company, approval from the Governance Commission for GOCCs (GCG) is required

Ownership of the JV project must be transferred to the private sector alone under competitive market conditions at the end of the contract/agreement

Ownership of the JV project may be transferred to the private sector or government at the end of the contract/agreement

No related provision

Also adopts the “first-in-time approach” in treating unsolicited proposals covering the same project concept

In unsolicited proposals, if a competitor submits a superior bid than the one submitted by the original proponent, the latter is given thirty (30) calendar days to match the superior bid – known as the “right-to-match”

“Right-to-match” has been eliminated; original proponent can opt to submit a second financial bid on or before the date of the opening of all financial proposals

No related provision Original proponent is entitled to be reimbursed for the cost of developing the unsolicited proposal if it loses in the Swiss Challenge

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Appendix C: Salient Features of PPP Codes

Salient Features

Provision under

BOT Law & IRRs

Agra PPP Codes (Northern Samar, Pangasinan, Nueva Ecija, etc.)

Davao City PPP

Ordinance

PPP Modalities

9 BOT Modalities

Includes concession, corporatization, joint venture, lease or affermage, divestment, manaegement contract, service contract, and even government-to-government contracts

Includes joint venture (contractual JV only), lease or affermage, & management contract

Procedure

Solicited or unsolicited process under the BOT Law & IRRs

• BOT modalities – solicited or unsolicited process under BOT Law

• Management & Service contracts – procedure under the Government Procurement Reform Act (RA 9184)

• Concessions, joint venture, lease or affermage – procedure in the PPP Code (mirrors procedure in 2008 NEDA JV Guidelines)

• Corporatization and divestment of property – Audit Circular 89-296

Solicited or unsolicited process under the BOT Law and IRRs

Project Implementor

Concerned IA: DPWH, DOTC, DepEd, etc.

Concerned LGU

Concerned LGU (City Government)

Regulatory Body

NEDA-ICC

PPP Regulatory Authority (chaired by Governor & other provincial officers as members) Mandate: contract management & administration

PPP Board (chaired by the City Mayor, with city officers and private sector representatives as members) Mandate: policy direction, development of projects pipeline, proposal review, contract management & administration

Tariff-Setting Body

NEDA-ICC with relevant regulator

Tariff-Setting and Subsidy Administration (to be established by the PPP Regulatory Authority)

PPP Board (may elect to establish a separate body for such purpose)

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Appendix D: Role of Partners in Different PPP Modalities

PPP

Modality

Role of Private Sector Proponent

Role of Government

Remarks

Build-and-Transfer (BT)

Finances & constructs; turns over ownership of the facility to government after completion

Acquires ownership of facility after construction; compensates proponent at agreed repayment schedule

Build-Transfer-and-Operate (BTO)

Finances & constructs on a turn-key basis; transfers title of facility after commissioning; operates the facility under an agreement

Owns facility after commissioning

Minimizes construction risk delays

Build-Operate-and-Transfer (BOT)

Finances & constructs; operates & maintains facility for a fixed term; collects fees and charges to recover investments + profit; transfers facility at the end of O&M period (50 years max.)

Provides franchise (if required) and regulates activities of the proponent; acquires ownership of facility at the end of fixed O&M term

Includes supply-and-operate schemes (supplier of equipment and machinery for an infra facility also operates the same)

Rehabilitate-Operate-and-Transfer (ROT)

Refurbishes, operates, & maintains facility; turns over facility after the franchise period

Provides franchise to proponent; regains legal title of facility after franchise period

Used to describe the purchase of facility from abroad, importing, refurbishing, erecting & consuming it within the host country

Develop-Operate-and-Transfer (DOT)

Builds & operates a new infrastructure; transfers facility at the end of agreed period

Regains possession of property turned over to investor after agreed period

Proponent enjoys some of the benefits the investment creates such as higher property or rent values

Build-Lease-and-Transfer (BLT)

Finances & constructs; turns over project after completion; transfers ownership of facility after lease period

Compensates proponent by way of lease payments at agreed term and schedule; owns facility after lease period

Akin to “lease-to-own”

Build-Own-and-Operate (BOO)

Finances, constructs & owns the facility; operates and maintains facility in perpetuity (may assign O&M to a facility operator)

Provides authorization & assistance in securing approval of BOO contract; reserves its right to reacquire the facility

Requires recommendation of NEDA-ICC and approval of the President

Rehabilitate-Own-and-Operate (ROO)

Refurbishes & owns facility; operates facility in perpetuity

Turns over facility & provides franchise to operate to proponent

Contract- Adds to an existing Collects rental payment

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Add-and-Operate (CAO)

facility; operates expanded project for an agreed franchise period

under agreed terms & schedule; regains control of original facility at the end of lease term

There may or may not be a transfer arrangement with regard to the added facility

Build-Own-and-Operate (BOO)

Finances, constructs & owns the facility; operates and maintains facility in perpetuity (may assign O&M to a facility operator)

Provides authorization & assistance in securing approval of BOO contract; reserves its right to reacquire the facility

Requires recommendation of NEDA-ICC and approval of the President

Joint Venture (JV)

Contributes money/capital, services, assets (including equipment, land or intellectual property), or a combination or all of the foregoing; shares both profits and losses with the other party; project is transferred either to private sector or government after JV period

May be implemented through a contractual agreement (JVA) or a company (JVC)

Lease or Affermage

Operates, maintains, & manages the facility; provides working capital and/or improvements to an existing facility being rented for a fixed term

Leases the facility to the proponent on a fixed term; may provide purchase option at the end of lease period

Under a lease, private proponent retains revenues collected from users/customers & pays lease payments to gov’t; under an affermage, both parties share the revenue

Source: PPP Center, “Developing Public-Private Partnerships in Local Infrastructure and Development Projects: A PPP Manual for LGUs”, 2012

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