REVIEW OF GOVERNMENT

PROPOSED REVISIONS TO
THE BOT LAW IRR

Atty. Solomon Castro

June 2007
 DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
 Abstract
This report reveals the results of the review done on the government-proposed
revision to the latest version of the BOT Law Implementing Rules and Regulations
which became effective in April 2006. The review finds that instead of filling in
regulatory gaps to make the BOT process quick yet principled and sound, the
proposed IRR seems to have punched new and bigger holes into the system, possibly
making it worse. In particular, the intent to place responsibility for reviewing and
approving projects in implementing agencies instead of the Investment Coordination
Committee ignores these agencies’ lack of development, sponsorship and regulatory
capacity. The proposed fast tracking will likely undermine transparency and
accountability, and make it more difficult to manage fiscal risks arising from
government contingent liabilities. The government, and the whole country for that
matter, may simply not be ready for it.
Review of Government Proposed Revision to the BOT Law IRR
Final Report

TABLE OF CONTENTS

ABBREVIATIONS ....................................................................................................................................2
INTRODUCTION.....................................................................................................................................3
BOT LAW AND REGULATION: A QUICK OVERVIEW ........................................................................3
PROPOSED REVISION TO THE BOT LAW IRR....................................................................................4
PROPOUNDED LEGAL BASIS...............................................................................................................9
PAST BOT LAW IRR VERSIONS AND REVISIONS..............................................................................11
ANALYZING THE EFFECTS AND TRADEOFFS.................................................................................12
ASSESSMENT ........................................................................................................................................12
A LOOK AT THE ICC ............................................................................................................................18
PRECEDENTS AND INTERNATIONAL PRACTICES .....................................................................................19
EMERGE AND TAF POLICY REFORM PROJECT ...................................................................................20
CONCLUSION .......................................................................................................................................21

-1-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

ABBREVIATIONS

BOO build-own-operate
BOT build-operate-transfer
BOT Law Republic Act No. 6957, as amended
BT build-transfer

DBCC Development Budget Coordination Committee

DOF Department of Finance
EMERGE Economic Modernization through Efficient Reforms and Governance
Enhancement
EPRA Economic Policy Reform and Advocacy

GOCC government-owned-and-controlled corporation

ICC Investment Coordination Committee
InfraCom Infrastructure Committee
IPP independent power producer
IRR Implementing Rules and Regulations

LGU local government unit

MTPDP Medium-Term Philippine Development Plan 2004-2010
MTPIP Medium-Term Public Investment Program 2005-2010
NEDA National Economic and Development Authority
NPC National Power Corporation

ODA Official Development Assistance

PPP Public-Private Partnership
PSP private sector participation
RA Republic Act
TAF The Asia Foundation

-2-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Introduction

This Final Report reveals the results of the review done on the government-proposed revision
to the latest version of the BOT Law Implementing Rules and Regulations, which became
effective in April 2006 (“Revised IRR”).

This study on the effects of the suggested changes comes as a follow-on activity to the earlier
work prepared for EPRA’s Multi-Stakeholder Team on Private Sector Participation in Public
Infrastructure, on the possible implications of recent congressional initiatives to substantially
amend the existing BOT Law. The effort to revise the implementing rules in the meantime
may be considered part of a broader government strategy to accelerate the PSP project
development process and ensure the delivery of needed infrastructure expected from the
private sector in the medium-term.

The document under review officially originated from NEDA, which had it circulated among
the member agencies of the ICC for their comments. For the proposed amendments to take
effect, they would have to go through a mandatory public hearing prescribed by the law
before they could be published and formally issued. A public hearing on the revision to the
IRR was conducted by NEDA on 10 May 2007.

BOT Law and Regulation: A Quick Overview

Efforts to mobilize greater private sector participation in public infrastructure led to the
enactment of the first BOT Law (RA 6957) in 1990. A much simpler model of its current
version, the previous law gave limited authority to government agencies to enter into either
BOT or BT contracts with qualified private sector proponents for the financing, construction
and operation of financially viable infrastructure facilities. Priority projects of such agencies
had to be approved by the Congress of the Philippines or the local development council
concerned in the case of LGU projects. Congress passed a joint resolution approving all
projects identified in the infrastructure program after the law took effect for this purpose.

The law went through a substantial revision in 1994 with the passage of RA 7718. The
Amended BOT Law expanded the different PPP arrangements that could be lawfully entered
into by implementing agencies with private sector proponents (resulting in at least nine
different variants) and, at the same time, broadened the eligible types of infrastructure
facilities or development projects that may be carried out on a PSP basis. The law also
introduced the unsolicited proposal process as a valid implementation mode. Lastly, it
institutionalized the possible provision of government support to credit enhance PPP projects
and reaffirmed the adoption of market-based principles for the program.

While the BOT Law cannot be fully credited for drawing in all private investments in
infrastructure and public services, it is the law, nevertheless, that opened up practically all
types of development projects to PSP and which widened the discretion and authority of
implementing agencies to enter into commercial partnerships with qualified proponents. On
that basis it is rightfully considered the seminal law for doing PPP transactions in the
Philippines from both policy and implementation standpoints.

-3-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

To address implementation issues and perceived weaknesses in the infrastructure privatization

program after the amended law was enacted, BOT regulation went through two major
revisions in 1998 and 2006. The 1998 revision focused on clarifying the procurement
requirements and procedures for the competitive bidding and Swiss challenge processes,
while changes to the implementing rules effected during the second quarter of 2006
principally dealt with trying to fast track BOT government approvals by prescribing a single-
pass, rather than a two-pass, project review procedure. This latest version of the IRR is the
subject of the current revisions, which are now under study.

Proposed Revision to the BOT Law IRR

The proposed amendments to the Revised IRR have two principal thrusts:

ƒ First, to remove the power of the ICC to review and approve specific or individual
BOT projects and contracts, and

ƒ Second, to shorten the permissible processing time for BOT projects, in general.

Close to 50 different sections of the IRR are to be revised in varying ways. A rundown of the
proposed changes is presented in Table 1.

The revisions seek to accelerate the development and approval process as a whole. The IRR
amendments basically intend to do this by: (1) placing primary responsibility for reviewing
and approving PPP projects in implementing agencies instead of the ICC (except for BOO
projects which by law are required to be approved by the President upon the recommendation
of the ICC), and (2) cutting the time required for these agencies to approve, negotiate, launch
competitive tenders for, and award PPP projects.

Under the current IRR (including its past versions), the general procedure is that a BOT
project must be first studied or prepared by the implementing agency and then endorsed to the
ICC for its review and approval. For the ICC to do a proper review, the agency’s submission
should consist of a full-blown feasibility study with all the supporting documents that include
the draft concession contract (which is prepared either by the implementing agency or
presented by the original proponent after successful negotiation in the case of unsolicited
proposals). The implementing agency will only be allowed to proceed and hold the
competitive bidding or Swiss challenge, and eventually make an award, after securing the
approval of the ICC and adhering strictly to its terms.

The proposed revision effectively downgrades the status of the ICC as an oversight body and
converts it into a type of “clearinghouse” for government’s preferred BOT projects. As
presently formulated in the draft rules, agencies will prepare their “List of Priority Projects”
for submission to the ICC which will then be tasked to assess and approve the list based on
applicable guidelines. The guidelines, however, do not form part of the proposed IRR. There
is no mention as well of the nature and thoroughness of the review that the ICC is expected to
perform. The explanatory remarks, though, suggest that the ICC will have less leeway in
deleting projects from the various lists – the only ground indicated is that those projects
would be requiring substantial amounts of government subsidy, equity or guarantee. Aside
from this comment (in addition to a general statement that the pertinent guidelines should be
consistent with the BOT Law and the Revised IRR), no other guiding principle is provided.
This makes the draft IRR conspicuously incomplete compared to previous versions which had
the ICC BOT-project approval guidelines clearly referenced and incorporated to them as an
attachment.

-4-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Table 1. Summary of Proposed Revision to BOT Law IRR by Section

Section Heading Proposed Revision

Number
1.3.e, 3.1 Definition of Terms, Delete the reference to the “BOT Center” which has been programmed for abolition.
Composition of BOT-PBAC
1.3.t Definition of Terms Revise the definition of “Negotiated Contracts.”

1.3.aa Definition of Terms Change “Approving Body” to “ICC” as the agency that would determine the reasonable rate of return
for unsolicited projects.

2.2 Eligible Types of Projects Delete the requirement for projects to have a cost recovery component of at least 50%.

2.3 List of Priority Projects Require the endorsement and submission by the Head of Agency/LGU of its list of priority projects to
the Approving Body for approval.

2.4 Publication and Notice Add that the List of Priority Projects must be approved by the Approving Body.

2.5 Registration of Project The Agency/LGU will prescribe the submission requirements for the registration of proponents, instead
Proponents of the ICC.

2.7, 2.8, 2.11 Approval of Priority Projects, Change any reference to the approval of “projects” to the “List of Priority Projects” only. Also, delete the
Detailed Guidelines for the requirement for NEDA Board/ICC approval in the case of negotiated projects.
Approval of Projects,
Deadline for Approval of
Solicited Contracts
2.9 Policy on Deviations from Delete this section. There will be no legal consequence for any material deviation from contract terms
Approved Contract and conditions set by the Approving Body.

2.10 Presidential Approval, When Minor clarification and editing only.

Required

-5-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Section Heading Proposed Revision

Number
2.11 Deadline for Approval of The Approving Body will act on the List of Priority Projects within 30 working days, which will have a
Solicited Contracts 24-month validity. Agencies may submit revised lists of priority projects annually in case of changes.

4.1.c Bid/Tender Documents Delete the requirement for approval by the Approving Body of the draft contract.

4.2, 4.3, 4.4 Instructions to Bidders, Delete all references to approvals given by the Approving Body.
Minimum Designs and
Performance Standards, Draft
Contract
4.4 Draft Contract The Agency/LGU will be made responsible for ensuring the consistency of the draft contract with the
terms and conditions for project approval given by said agency/LGU.

5.2 Publication of Invitation to The publication of the invitation to bid will be made only after approval by the Head of Agency/LGU of
Pre-qualify and Bid the bid documents and draft contract. The development of the BOT project, the determination of project
feasibility, the preparation of the draft contract, and their approval, will be the sole responsibilities of the
agency/LGU.

5.3 Period to Prepare Pre- The preparation period for pre-qualification documents will be shortened from at least 30 calendar days
qualification Documents to 15 working days. For projects costing PHP 300 million or more, the period will be at least 30 working
days, from 45 calendar days previously.

5.4 Pre-qualification The Agency/LGU shall ensure that pre-qualification requirements will be consistent with applicable
Requirements laws, rules and regulations.

5.5 Pre-qualified and Disqualified The appeal period in case of disqualification will be reduced to 7 working days from 15 working days.
Proponents The appeal must also be resolved within 30 working days, instead of 45 working days. Lastly, the
appeal fee will be brought down to 0.1% of project cost, from 0.5%.

6.1 Responsibility of Bidder Change in grammar only.

-6-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Section Heading Proposed Revision

Number
6.3 Pre-Bid Conference Reduce the time to prepare bids to 45 to 90 days, from 60 to 120 calendar days, previously.

7.1.b.vi Requirements for Bid The amount of the bid security will be set by the agency/LGU and will be made the same for all
Submission bidders.
7.1.c.i Requirements for Bid Change the section numbering.
Submission
9.3, 10.7 Conditions for Negotiated Change “Approving Body” to “ICC” as the agency that will set the prescribed reasonable rate of return
Projects, Evaluation of for negotiated projects. Delete the requirements for notification of the Approving Body. Also, add that
Unsolicited Proposals the agency/LGU should confirm the “original proponent” status of the sponsor in the formal letter of
acceptance.

10.5 Submission of a Complete Change in grammar and minor editing only.

Proposal
10.8 (new ICC Determination of Add a new section providing for the determination by the ICC of the reasonable rate of return for an
section) Reasonable Rate of Return unsolicited project within 30 working days from its receipt of the endorsement by the Head of the
Prior to Negotiation Agency/LGU.

10.8 (now Negotiation with the Original Agency/LGU shall advise the original proponent of the mechanics for the negotiation within 7 days
10.9) Proponent upon receipt of the ICC’s decision on the prescribed rate of return. If the negotiations are successful,
the agency/LGU and the original proponent will issue a certification that an agreement has been
reached and that the Swiss challenge will be launched.

10.9 Approval of Unsolicited Delete the whole section. NEDA Board/ICC/local development council approval for unsolicited projects
Projects/Contracts by the will not be required.
Approving Body
10.10 Tender Documents Take out the reference to approval of the draft contract by the Approving Body.

10.11 Invitation for Comparative Delete the reference and requirement for acceptance by the original proponent of the terms of the

-7-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Section Heading Proposed Revision

Number
Proposals project and contract approvals given by the Approving Body.

11.3, 11.4 Notice of Award, Formation of Minor editing only.

Special Purpose Company
12.1 Execution/Approval of the Remove any reference to the draft contract being approved by the Approving Body. Require the
Contract submission of a copy of the signed contract to the NEDA Board through the ICC for its information.

12.11, 12.16, Contract Variation,
12.18, 13.13 Repayment Schemes,
Adjustments of Tolls/Fees/
Rentals/Chargers,
Government Undertakings
14.1 The BOT Center
Delete or change all references with respect to approvals (for contract variation, other repayment
schemes, fare adjustment formula, and the grant of government undertakings) given by the “Approving
Body” to the “Head of Agency/LGU.”
To be deleted in its entirety. Monitoring, coordination and reporting functions of the BOT Center will be
removed in anticipation of its planned abolition.

14.2 Timelines Delete any reference to monitoring functions of the BOT Center.

14.3 BOT Units Specify the composition of the BOT Units for each agency/LGU.

14.4 Informing Congress The duty of reporting to Congress will be a function of each agency/LGU, rather than the BOT Center.

15.2 Effectivity of these Revised Include requirement for public hearing before the publication of any amendments.
IRR or Amendments Thereto
15.3 Transitory Provision All BOT projects currently being processed or reviewed will be covered by the revised IRR.

-8-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Eliminating the requirement for ICC approval will take out a major procedural step in the current
BOT process. Presently, it is at the ICC level where a PPP project typically passes through a rigorous
review from a cross-sectoral perspective. Taking it out will naturally reduce the subsequent
processing time once the ICC has given its consent to an agency’s list of priority projects. There
seems to be no expectation that the approval of priority lists by the ICC will be as thorough.

The treatment of unsolicited proposals is poised to take an even more sweeping turn. Under the
proposed revision, ICC approval for unsolicited projects will no longer be required. Instead, the
agencies will assume full responsibility for them and the intervention of the ICC will be sought only
for the purpose of setting the prescribed reasonable rate of return of the original proponent prior to
negotiation. All existing references to ICC approval for unsolicited proposals are marked for deletion.

Scattered in different sections of the document are suggested reductions to timelines for completing
key tasks and activities. For instance, the preparation of pre-qualification documents should be done
within 15 working days rather than 30 calendar days; the resolution of appeals must be completed
within 30 instead of 45 working days; and the packaging of bids should be made within 45 to 90
calendar days, compared to 60 to 120 days currently.

Propounded Legal Basis

The approach suggested in the draft IRR would be a clear departure from what has become the
established procedure and known practice for the past 12 years. The revision also comes without any
substantial amendment being done separately on the BOT Law itself since RA 7718 took effect. It is
therefore very relevant to ask what could be the possible legal basis for the planned shift in regulatory
procedure and policy.

The IRR revisions do not provide a direct answer but the matter is partly discussed in the explanatory
notes, which, strange as it sounds, also advert to certain sections of the BOT Law as the justification
for the changes. The notes, however, still fail to cite specific provisions of the law but the pertinent
sections alluded to in the document may be deduced, as follows:

SEC. 2. Definition of Terms. - The following terms used in this Act shall have the
meanings stated below: xxx

(o) Reasonable rate of return on investments and operating and maintenance cost -
The rate of return that reflects the prevailing cost of capital in the domestic and
international markets: Provided, That in case of negotiated contracts, such rate of
return shall be determined by ICC of NEDA prior to the negotiation and/or call for
proposals: Provided, further, That for negotiated contracts for public utility projects
which are monopolies, the rate of return on rate base shall be determined by existing
laws, which in no case shall exceed twelve per centum (12%).

SEC. 4. Priority Projects. - All concerned government agencies, including

government-owned and-controlled corporations and local government units, shall
include in their development programs those priority projects that may be financed,
constructed, operated and maintained by the private sector under the provisions of
this Act. It shall be the duty of all concerned government agencies to give wide
publicity to all projects eligible for financing under this Act, including publication in
national and, where applicable, international newspapers of general circulation once
every six (6) months and official notification of project proponents registered with
them.

-9-
Review of Government Proposed Revision to the BOT Law IRR
Final Report

The list of all such national projects must be part of the development programs of the
agencies concerned. The list of projects costing up to Three hundred million pesos
(P300,000,000) shall be submitted to ICC of NEDA for its approval and to the NEDA
Board for projects costing more than Three hundred million pesos (P300,000,000).
The list of projects submitted to ICC of the NEDA Board shall be acted upon within
thirty (30) working days.

The list of local projects to be implemented by the local government units concerned
shall be submitted, for confirmation, to the municipal development council for
projects costing up to Twenty million pesos; those costing above Twenty up to Fifty
million pesos, to the provincial development council; those costing up to Fifty
million, to the city development council; above Fifty million up to Two hundred
million pesos, to the regional development councils; and those above Two hundred
million pesos, to ICC of NEDA.

SEC. 4-A. Unsolicited Proposals. - Unsolicited proposals for projects may be

accepted by any government agency or local government unit on a negotiated basis:
Provided, That, all the following conditions are met: (1) such projects involve a new
concept or technology and/or are not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the government agency
or local government unit has invited by publication, for three (3) consecutive weeks,
in a newspaper of general circulation, comparative or competitive proposals and no
other proposal is received for a period of sixty (60) working days: Provided, further,
That in the event another proponent submits a lower price proposal, the original
proponent shall have the right to match that price within thirty (30) working days.

It is noticeable that Section 4 of the amended BOT Law does refer to the submission of a “list of
projects” to the ICC/NEDA Board for its approval. In the same way, Section 4-A does not specifically
mention any requirement for government approval, whether by the ICC or the NEDA Board, of an
unsolicited proposal. Section 2(o) of the law, however, provides that for negotiated contracts, the
reasonable rate of return on investment must be determined by the ICC prior to negotiation and/or the
call for comparative proposals. As discussed earlier, these are the exact arrangements that have been
reflected in the proposed revisions to the IRR.

To support this change in legal interpretation, advocates assert that the current approvals process is
actually inconsistent with the law’s text and its original intent. But a check of the congressional
records tells something different. The collective legislative intent seems to be that the effort to
liberalize the approvals process under RA 7718 at that point did not mean giving full control to
implementing agencies or LGUs. Given the devolution of approvals under the law, the records still
suggest that it would be specific projects that should be approved.

In fact, during the interpellations, when asked why congressional approval was being substituted by
ICC review if what would be submitted was just a generic listing of projects (which made the process
not at all tedious), the response of the principal author was that the amendment to the BOT Law
entailed “an approval of a specific project, not of the generic list.” 1

Moreover, in the original Senate bill, there was a clear distinction between projects that were purely
private sector financed and those that were also government financed or guaranteed. For those fully
private sector financed – the list of projects would be submitted to the ICC for information. In the

1
See Records of the Senate, Vol. III, No. 45, 1 February 1994, page 476.

- 10 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

case when government financing or a direct government guarantee was required, the financing aspect
of the contract would be subject to the review and approval of the ICC. In other words, the
understanding was that “if there would be government expenditure or government guarantee involved,
then that is when the ICC will have to approve the project.” 2 However, the harmonized bill that came
out of the bicameral conference committee removed this distinction and replaced it with the multi-
tiered project approval structure now seen in the law. Again, in response to a query regarding
potential abuses and the need for controls as a result of the devolution of approving authority, the
answer was that “the scope of the approval [was] made stricter” because the Senate originally
provided for “the approval of a program” at the national level which could be “in very generic terms,”
but since the approval process had been devolved, it would be “projects now that have to be
approved.” 3

But regardless of what the real legislative intent was, while records could be an extrinsic aid to
statutory construction under Philippine jurisprudence, the views expressed by the legislators during
the deliberations of a bill as to its purpose, meaning or effect would not be controlling in the final
interpretation of the law by the courts.

Past BOT Law IRR Versions and Revisions

Tracing the history of BOT regulation more carefully, it was mentioned that the first version of the
BOT Law enacted in 1990 (RA 6957) required congressional approval for all national projects. This
requirement was abandoned with the passage of RA 7718 in 1994. Instead of Congress, the ICC
and/or the NEDA Board became the approving body for PPP projects sponsored by national agencies.

The first IRR carrying out the provisions of RA 7718 also took effect the same year. Predictably, the
1994 rules required ICC/NEDA Board approval for the implementation of competitively bid and
unsolicited projects as stated in the law. Thus, the earliest set of rules interpreting the amended BOT
Law (which remains untouched until today) had called for a project specific-type of review and
approval, and not an approval of priority lists.

After the first version in 1994, the IRR went through a major revision in 1998. The changes featured
clarifications on the government approval and procurement requirements for both the competitive
bidding and the Swiss challenge processes. They also included a contract re-opener provision that
would allow the contracting parties to re-negotiate the terms of their agreement under exceptional
cases. But again, the requirement for a project-specific ICC/NEDA Board approval was upheld and
the first-pass/second-pass review procedure was kept.

Finally, in 2006, critical modifications were introduced in an effort to speed up the approvals process
and to improve the level of transparency. The 2006 IRR set tighter criteria for projects that may be
carried out on an unsolicited basis. The latest IRR provides that all projects listed on government
development or investment plans can no longer be implemented through the unsolicited mode. The
more relevant variation, however, is that the rules now prescribe a single-pass approval, rather than
two passes, previously, by the ICC/NEDA Board for all BOT projects, whether solicited or
unsolicited. In this process, the PPP project and the concession contract are submitted for the review
and approval of the ICC as one package.

2
Id.
3
See Records of the Senate, Vol. IV, No. 72, 19 April 1994, page 822.

- 11 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

But even with the single-pass approach, the requirement for ICC/NEDA Board approval was retained.
Projects and concession agreements would still have to be reviewed and approved by the
implementing agencies and by the ICC/NEDA Board, separately.

The relevant features of the different IRR versions have been summarized in Table 2 below.

Table 2. Relevant Features of Amended BOT Law IRR Versions

IRR Version Agency/LGU Approving Body Approval Procedure

Review and
Approval
Required?

1994 Yes ICC, NEDA Board, Local First and Second Pass
Development Council

1998 Yes ICC, NEDA Board, Local First and Second Pass
Development Council

2006 Yes ICC, NEDA Board, Local Single Pass

(current IRR) Development Council

Proposed Yes ICC, Local Development No separate approval by

Revision Council (but only for the any government
(2006-2007) list of priority projects and oversight body is
the prescribed reasonable required.
rate of return for
negotiated contracts)

Analyzing the Effects and Tradeoffs

Assessment

There are serious issues arising from the regulatory track suggested in the draft amendments to the
IRR. The implications are far-reaching as well. The main concerns include the following:

ƒ Functions and Roles of Concerned Public Institutions

Relegating ICC’s position and having it take on a less substantive role in BOT project development
(through administrative rule change) may be considered an impingement upon its mandated
policymaking and oversight functions over major capital projects 4 (MCPs) that are programmed to be
implemented by public agencies under applicable laws.

The Revised Administrative Code of 1987 5 and the NEDA Charter, 6 for instance, direct the ICC to
evaluate the fiscal, monetary and balance of payments implications of MCPs. Its review covers
determining the peso or foreign exchange requirements of capital outlays needing financial support
and identifying suitable sources (including the terms and conditions) of financing. It should also

4
Currently defined under ICC guidelines as those costing at least PHP 500 million.
5
Executive Order No. 292 (1987)
6
Executive Order No. 230 (1987)

- 12 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

assess the technical, economic, financial, social and institutional viability of specific MCPs and their
consistency with sectoral plans and geographical strategies. NEDA, as an independent planning
agency, is tasked to study, review and recommend development plans and public investment
programs for the country.

Furthermore, the ODA Act of 1996 places oversight responsibility over the utilization of ODA funds
in NEDA. As a result, projects proposed to be financed by ODA loans or grants are processed and
approved by the ICC in accordance with its guidelines. This requisite specifically complicates matters
for BOT projects that are co-financed by the government through ODA if the proposed IRR revision
is carried in its current form. 7 How then would the two regimes work in these cases? It is a critical
question because the government has started to employ this scheme in actual projects (e.g., LRT Line
1 Extension, Panguil Bay Bridge) as a practical strategy to revive private sector interest in the
country’s BOT program.

Finally, ICC review and clearance are preconditions for Monetary Board authorization to negotiate
foreign loans and approve foreign borrowing, which are among the key government consents for
project financing.

Taking all these into account, it should not come as a surprise that the BOT Law had also vested
approving authority for PSP projects in the ICC/NEDA Board. Logically too, in the government’s
own interpretation of the law based on the 1994, 1998 and 2006 versions of the IRR, it had
consistently required separate ICC review and approval for individual BOT projects. This was done in
spite of what the BOT Law appeared to have said. In other words, its provisions had never been
construed in its literal sense.

The interpretation that has been applied continually so far in all versions of the IRR on the powers of
the ICC is consistent with the basic rules of statutory construction. Every law should be interpreted
and harmonized with other statutes so that a uniform system of law is formed. Furthermore, in the
absence of an express repeal or amendment, a statute is deemed enacted consistent with the legislative
policy embodied in existing laws. These seem to be the underlying construction principles in this
situation.

Thus, any planned shift in interpretation or regulatory approach with respect to the role of the ICC at
this stage would look odd from a policy viewpoint and would naturally beg for a compelling legal
justification. The main arguments propounded by supporters of the measure do not appear to be that
convincing or definitive in any case. For instance, while Section 4 of the BOT Law mentions the
approval of the “list of projects,” Section 5, which immediately follows, makes reference to the
approval of “projects” as a requirement before any public bidding is conducted. And as shown earlier,
legislative intent is not so clear and supportive either.

With the oversight functions of the ICC removed, the proposed revision seeks to grant exclusive
approving authority over PSP projects to the heads or governing boards of the different implementing
agencies or LGUs. Public sponsors therefore become solely responsible for doing all the due diligence
work and giving official approval on behalf of the government. This is not an inherently objectionable
proposition, in principle. In fact, the past and current IRRs have constantly subscribed to this norm.
Implementing agencies always had full contractual responsibility and final accountability in the end.

The planned way of BOT contracting is also consistent with the broad delegation of approving and
contracting authority given to the heads of procuring entities for government contracts awarded

7
Section 2(a) of the BOT Law allows projects to be financed up to 50 percent from government appropriations
and/or ODA.

- 13 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

through public bidding following the Government Procurement Reform Act (RA 9184). But
compared to what has been proposed for PSP projects, even if general contracting authority has been
given to agency heads for public infrastructure under RA 9184, they would have still gone through
some type of independent review or approval by NEDA (acting through the ICC, InfraCom or DBCC)
because those projects would have been earmarked for ODA or central government budget funding
beforehand.

The basic issue, however, with making implementing agencies the lone level of government review
and approval for PSP projects is the recognized lack of development, sponsorship and regulatory
capacity on their part. Only a few agencies have the necessary technical capability and financial
resources to prepare full pre-investment studies, devise bankable deal structures, draft or negotiate
complex PSP contracts, arrange security packages and credit enhancements, launch international
competitive tenders, and later, monitor and regulate the performance of their chosen service providers.
Weak capacity in these aspects can lead to poor quality projects at entry, 8 increase the risk of
selecting incompetent proponents, and lay the groundwork for eventual regulatory capture. To fill the
gap, the more prudent agencies engage transaction advisors to help them in project development and
origination. But this practice has not been fully institutionalized or logistically supported by the
government at the needed scale.

In addition, if at the outset the ability of agencies to rationally plan and develop their priority lists is
unsure, it will most likely result in government relying more on unsolicited proposals which is a less
transparent and historically more problematic way of pursuing infrastructure privatization. Mandating
agencies to assume a bigger role without accompanying measures to build their capacities
systematically or have ready access to technical assistance may just increase the possibility of
government entering into bad deals or experiencing failures.

Dispensing with the more deliberative, collegial and institutional approach toward PPP project review
and approval will effectively lead to a recentralization of approving authority. Since all line agencies
are directly supervised and controlled by the Office of the President, the chances are high that,
ultimately, all PSP investment decisions will be made by a single public officer who is free to exercise
personal discretion. Having that system of governance is far from ideal.

ƒ Transparency and Accountability in Implementing PSP Projects

As already pointed out, the draft rules intend to eliminate ICC approval for unsolicited proposals
altogether except to set the reasonable rate of return of the original proponent. This poses many
problems, which are more likely to occur because of the nature of the unsolicited process itself. The
trouble generally with directly negotiated transactions is the lack of transparency and, in the particular
case of unsolicited proposals under the BOT Law, the effective suppression of fair competition. Both
heavily impact on the chances of government getting value for its money with the best possible offer
from the market. Also, as a public agency develops a closer working relationship with and a
dependency on a sponsor, the probability of their association evolving into a proponent-captured one
rises. The natural tendency will be to favor the results of the bargain at the possible expense of public
welfare and convenience.

Again, taking all these factors into consideration, it should be easy to understand why controversy has
hounded the Philippine PSP Program at various points and why most of the setbacks had been linked

8
This was cited as one of the major problems affecting the Philippine BOT/PSP Program today. See Canlas,
Dante B., et al., A Proposed BOT Bill to Enhance Public-Private Partnership in Infrastructure Development,
EMERGE, Manila, 2006.

- 14 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

to projects which originated as unsolicited proposals. Without any checks-and-balances in place that
will deal specifically with directly negotiated transactions coupled with weak capacity among
agencies in general, there will be a moral hazard of fostering deals burdened by unfair risk sharing.
There may be also an instinctive push to make unsolicited proposals the preferred implementation
mode if it turns out to be an easier and surer process of locking in development rights with less
competition for rent seeking proponents and firms. Agencies can also facilitate this outcome by
simply not submitting their list of priority projects to the ICC, making all projects open to unsolicited
proposals if they will not require any direct government guarantee, equity or subsidy. If the ICC also
takes a project off the list, the draft rules do not disqualify that project from being implemented later
on as an unsolicited proposal.

With agencies acting as sole approving authorities, one may ask if their planning and decision-making
processes can be made transparent and informed enough. How can these be assured if implementing
agencies are given full discretion to set their own approval terms, standards and procedures? Would
the public have access to agency deliberations and project documents? A related issue is ensuring that
decisions to provide government support or credit enhancements (which would have been discussed
openly and decided based on policies and through consensus) are similarly done in a fair, transparent,
rational and predictable manner.

In terms of accountability, existing IRR provisions which declare contracts that have deviated from
ICC approval parameters and conditionalities invalid, become moot under the draft rules. All these are
lined up for deletion in the proposed amendments. Outside of judicial intervention, it seems that there
will be no equivalent administrative check or penalty which will ensure that public approvals are
respected and material contract terms are upheld. Implementing agencies will be completely
accountable if things go wrong for sure but that has always been the case, in theory. There is nothing
innovative about it.

ƒ Approval Process, Competitive Bidding Procedures, and Project Monitoring

The draft IRR basically intends to skip the ICC review process for both competitive bidding and
unsolicited projects. The steps to be taken following the existing and proposed IRRs are compared in
Figures 1 and 2 below.

Figure 1. Steps for Competitive Bidding of BOT Projects

Current IRR (2006) Proposed IRR

Step 1 Step 1
Preparation of pre-investment study and draft Submission to ICC of list of priority projects
PSP contract by implementing agencies prepared by implementing agencies

Step 2 Step 2
Review and approval by ICC or other ICC/local development council approval
approving body on a per project basis of list of priority projects

Step 3 Step 3
Project development, approvals, bid package,
Preparation of bid/tender documents and launch
and launch of competitive bidding of listed projects;
of competitive bidding; contract award and signing
Contract award and signing

- 15 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

The main difference between the two versions is that under the proposed IRR, the ICC would only be
called on to approve the agencies’ list of priority projects set for public tender. Except for this, no
other intervention from the ICC is expected. The duties and functions of implementing agencies will
remain essentially the same. However, the importance of the agencies’ evaluation would be much
greater since it would be the only form of public approval under the proposed rules.

For unsolicited proposals, ICC approval will also be taken out and official action on its end will be
limited to the setting of the prescribed rate of return for the original proponent. Removing ICC
review, which is a key step, will definitely reduce processing time. But again, considering the
unsolicited proposal system in place and the present state of most implementing agencies, it may not
be a wise and prudent move at all. Because the process is known to be less transparent and the risk of
regulatory capture is higher, ICC approval may be certainly viewed as a critical counterbalance in the
handling of sole-sourced proposals.

One of the principal reasons, for instance, why unsolicited proposals take longer to develop is that the
ICC usually moves to correct risk allocations or negotiated terms that are perceived to be unfair to
government. And since there is already a vested interest at stake represented by the original proponent
(unlike in projects to be implemented through open competition), a lot of haggling occurs and
political pressure is likely to be employed. As a result, the negotiating process becomes iterative,
which makes the whole development cycle long and unwieldy.

Figure 2. Steps for Unsolicited Proposals

Step 1
Review and acceptance by agency of complete unsolicited proposal

Step 2
Secure prescribed rate of return from Approving Body

Note: Under the proposed IRR, only the ICC sets the prescribed rate of return.
Step 4 is skipped
under the proposed
IRR

Step 3
Contract negotiation

Step 4
ICC/local development council approval of unsolicited project and contract

Step 5
Swiss challenge and contract award

- 16 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Comparing the two systems, it is easier to understand why it has been said that unsolicited proposals
can become the preferred mode of BOT implementation. The advantages of unsolicited proposals
under the draft rules are overwhelming – agencies get to develop projects at the original proponents’
cost; deals are directly negotiated; there is less competition (the first three are given); but there would
also be no requirement for ICC project and contract review and approval (the last one is the “killer”).
The perception that unsolicited proposals have become the rule rather than the exception may
eventually turn out to be not a fallacy anymore. With that, the government’s ability to set bidding
conditions, contract specifications and performance standards for public services on its own terms will
now entirely depend on the results of the bargain with project proponents. And without access by
agencies to technical assistance or ways to build up their capacity, that process will always be
asymmetrical.

Monitoring may be a problem too with the intended abolition of the BOT Center which is specifically
tasked under the BOT Law to coordinate, monitor and report on the progress of all projects to the
President, the ICC, and Congress. 9 With no dedicated, central PPP unit providing technical assistance
and performing coordination/monitoring functions, agencies are again asked to assume this additional
role and do self-monitoring and reporting under the proposed IRR. The relevant questions to ask are
the following: (1) Is separate reporting the ideal procedure in the first place, that is, having each
department, agency, GOCC, and LGU prepare and send individual reports to the Office of the
President and Congress? (2) Which agency will consolidate and analyze those reports and will make
the findings available and useful for decision-makers? (3) And finally, who will enforce compliance
by agencies in respect of their monitoring and reporting obligations, and will there be sanctions?
These are left unanswered.

Another seemingly innocuous change that may have a regressive impact is the supposed correction of
the current IRR’s broad reference to an “Approving Body” that would set the reasonable rate of return
for developers offering unsolicited proposals. The draft IRR provides that the right body should be the
ICC in all instances because the law specifically says so. However, if this is conceded, it will mean
that even local projects costing less than Php200 million (which the pertinent local development
council is authorized to approve under the BOT Law) will have to be brought to the ICC for that
purpose. It counters government’s decentralization and devolution policies, and goes against the
harmonized interpretation fittingly adopted in the past and existing IRRs.

ƒ Government Exposure to Fiscal Risks

Managing fiscal risks arising from government contingent liabilities in PSP projects may become
stickier as well. One of the important lessons learned from the BOT program is that government
guarantees are a limited resource, which should be rationally allocated and managed. Credit
enhancements and other forms of government support given to the first wave of BOT projects in the
country have triggered operative calls and have resulted in huge losses (e.g., Php200 billion stranded
cost bailout for IPP contractual payment obligations incurred by NPC; substantial subsidy payments
for the MRT 3 and Casecnan projects). Obviously, the cost of getting things wrong is tremendous.

Since then, the role of the ICC as a de facto gatekeeper has been reinforced. It provided the proper
venue for sponsors and fiscal policymakers to discuss and validate the appropriateness of granting
government support to PPP projects. And while the DOF, acting on behalf of the President, had
signing authority for the issue of sovereign guarantees, decision-making had become more policy-
based, calibrated and consensual at that level.

9
Section 12, Republic Act No. 6957, as amended. See also Rule 14, Revised IRR of the BOT Law.

- 17 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Abandoning the ICC process will definitely eliminate the queue at NEDA for project approvals but it
may necessarily create a new beeline toward agencies authorized to decide on the provision of
government support (such as the DOF for government guarantees and the DBM for direct subsidies).
The decision to give guarantees or enhancements will then be less tied to public policies and also less
transparent, which makes it very discretionary and consequently, easier to influence politically.

From both substantive and procedural standpoints, it is also quite difficult to understand how the ICC,
under the proposed IRR, will be able to determine if substantial government support will be required
in a BOT project (thus meriting its deletion from an agency’s priority list) if the committee will only
be getting a simple listing of projects without any supporting information. If the ICC will require
feasibility studies or other types of analyses to back up listed projects in these cases anyway, then the
difference between the suggested and the current procedures and requirements will be almost trivial.

ƒ Economic and Social Tradeoffs

There are expected economic and social tradeoffs between fast tracking the BOT project development
cycle and ensuring sound approval and competitive bidding processes. Accelerating the process hopes
to result in the faster delivery of improved infrastructure and public services. For developers, timely
implementation should lead to lower transaction and opportunity costs. A quicker mobilization of
direct investment is also anticipated to speed up job generation and immediately result in the
introduction of an economic catalyst in the targeted area. Furthermore, the assurance of unimpeded
project execution may create a strong enough incentive that could rekindle private sector interest in
PPP transactions overall. All these factors can help improve the country’s competitiveness and
attraction as an investment site.

But while the chief complaint is that the approval process is time-consuming, it may in fact be
beneficial to the project in the long term. Going through the proper procedure and passing tight
scrutiny should help a project gain political validity and win public support. Past BOT projects that
have been the subject of suits, congressional investigations or wide criticism involve those that have
been developed or procured under less transparent circumstances or those that have taken shortcuts
and deviated, one way or another, from the prescribed approval process. As a practical matter, since
what are involved are mostly big-ticket government infrastructure items that directly affect the public,
it is important that the mechanisms be entirely transparent, subject to proper review and approvals at a
technical level, competitive, and also limited, perhaps, by certain ceilings. The current BOT process,
despite its weaknesses, provides for this. For the many reasons explained above, it is unsure if the
proposed framework under the new IRR will be able to match that.

A Look at the ICC

Even during the congressional deliberations on the amended BOT Law back in 1994, the ICC was
already perceived as being bureaucratic and slow in the approval of projects. 10

This still appears to be the reason that is driving the current move to eliminate ICC approval as part of
the PSP project development process. In fairness, there are valid grounds to try to improve existing
procedures. The statutory 30-working day processing time has not been strictly followed and agencies
have not been assertive enough (for practical reasons) to invoke automatic approval. ICC working
arrangements and timetables are structurally ad hoc by nature. Project review and approval work on
PPPs depends heavily on the commitments and schedules of technical working group and committee
members who are asked to perform ICC review functions over and above their normal duties at their
home agencies. Aside from BOT/PSP projects, the ICC Secretariat processes and provides support to

10
See Record of the Senate, Vol. III, No. 46, 2 February 1994, page 509.

- 18 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

ODA and all other government-funded projects as well. There is reason to doubt if the same staff
(without building up their numbers and capabilities) can efficiently handle both portfolios
simultaneously.

Nonetheless, the ICC has been able to provide reasonable oversight by ensuring that (1) BOT projects
are consistent with national development goals, (2) government support arrangements are fair to the
public sector, and (3) deal structures take into account the lessons learned in the past. In the scheme of
things, the country’s BOT program still needs that kind of strict and close oversight.

Important PSP development policies formed out of the experiences and previous reviews done by the
ICC (which are now institutionally applied to all BOT projects up for approval) include:

ƒ Overall preference for competitive bidding as an implementation mode and more openness to
the provision of government support for projects implemented through public tender
ƒ Requiring a positive cash flow or at least a “deficit neutral” position on the part of the
government in projects needing direct subsidies
ƒ Rational and efficient sharing and mitigation of project risks
ƒ No market/demand/commercial risk guarantees, as a general rule
ƒ Better management of fiscal risks and higher concern for incurring large government
contingent liabilities. (This has translated to specific guarantee policies such as the issue of
performance undertakings for unsolicited bulk water supply projects which would be limited
to backstopping the agencies’ buyout obligations for any change in national laws only.)

These are sound principles, which, if applied consistently, can ensure fairly structured projects that
are more protective of the public interest. The ICC provided the venue for these policies to be formed,
shared and implemented.

Precedents and International Practices

As the earlier part of this Final Report has explained, the planned elimination of government oversight
through a revision of the IRR is unprecedented. The original BOT Law (RA 6957) even required
congressional approval of PSP projects in the beginning. This was given up and the oversight function
was passed on to the ICC under the amended law, which was preserved in the 1994, 1998 and 2006
IRR versions that followed.

This system of having project-specific approvals given by a centralized, cross-sectoral planning/fiscal

agency or PPP unit has been adopted in other countries. Table 3 provides an overview of country
practices in different parts of the world.

Table 3. BOT Approvals – International Practices

Separate Project Specific

Country Approval Required? Approving Body

India Yes Public-Private Partnership Appraisal

Committee
State of Gujarat, Yes Gujarat Infrastructure Development Board
India
Singapore No, but the Ministry of
Finance works closely with N.A.
agencies and ensures
consistent application of

- 19 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Separate Project Specific

Country Approval Required? Approving Body

partnership principles
Indonesia Yes Central PPP Unit, KKPPI Secretariat
Vietnam Yes Prime Minister (after evaluation by the
Ministry of Planning and Investment)
South Korea Yes Private Investment Project Committee,
Ministry of Planning & Budget
United Kingdom Yes (for local authority PPP Project Review Group, HM Treasury
projects that receive
government support)
Ireland No, but the Central Policy
Unit in the Department of N.A.
Finance coordinates the PPP
process, provides policy
guidance and disseminates
best practice
Chile No, but most PPP projects
are evaluated and originated N.A.
by the Ministry of Public
Works and approved by the
Ministry of Finance on the
basis of macroeconomic and
fiscal sustainability
South Africa Yes PPP Unit, National Treasury
Source: See listing of regulations and sources at the end

As shown above, PSP regulatory frameworks that require project-specific approvals, like the
Philippines, are common. However, there appears to be no single best practice or standard. PPP units
differ in roles, mandates, coverages, and procedures. There is no model that fits all circumstances and
situations.

EMERGE and TAF Policy Reform Project

Separate consultations on the proposed IRR were held with other policy advocacy missions, in
particular, EMERGE and the TAF Policy Reform Project. For EMERGE, the ICC review process is
necessary to determine accountability and to ensure that projects conform to policy objectives
stipulated in the MTPDP and MTPIP. It would be also difficult for one agency to consider all the
legal, technical, financial, fiscal and macroeconomic policy issues involved. Furthermore, because
ICC deliberations are recorded, personal liabilities are traceable specially in instances when decisions
made at a technical level are overruled for political reasons. Finally, for them, the proposed regulation
blurs the distinction between competitively bid and unsolicited projects. It can therefore circumvent
the carefully devised rules and preferences that were intentionally meant to differentiate the two
modalities. On the part of the TAF, it sees the need for oversight but a workable solution to make
current processes more demand-responsive must be found at the same time.

- 20 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

Conclusion

Trying to correct snags and eliminating causes of delay in the PPP development process are valid
objectives to be sure. But as proposed, there are negative tradeoffs between fast-tracking project
approvals through the suggested amendments to the IRR, on one hand, and ensuring sound investment
decisions in infrastructure and competitive selection processes, on the other. The bottom line is that
the proper checks-and-balances in project preparation, procurement and contract management must be
in place. This is irrefutable. The defining goals for any PPP program are to ensure that (1) only well-
structured, technically and economically feasible projects are implemented; (2) the most open and
competitive procurement process is achieved and the government gets value for money; and finally,
(3) project sponsors comply with service level commitments and act in the public interest throughout
the life of their contracts. These would be difficult without an effective form of public regulation and
oversight. Unfortunately, instead of filling in the regulatory gaps to make the process quick yet
principled and sound, the proposed IRR seems to have punched new and bigger holes into the system
possibly making it worse than before.

In the recent public hearing on the draft IRR, participants took a common position that the oversight
role of the ICC should be retained to confirm project quality, ensure transparency and accountability,
and provide a fair, rational and predictable review and approval process, for the benefit of all
stakeholders.

The problem of red tape and the costs associated with lengthy approval processes is a serious concern.
Other reform initiatives that have been put forward include the creation of a separate approving body
exclusively for PPPs (in the form of a central BOT Authority) and the streamlining of ICC approval
guidelines and mechanisms for the same purpose. Ideally, all the options should be studied and
considered together to see what would be the most practical and sensible course of action. The
question “What works best?” has not been sufficiently answered. This proposed revision to the IRR
may pass as a practical answer but it imposes an overly high expectation from the public system. The
government, and the whole country for that matter, may simply not be ready for it. This makes the
entire proposition fairly unrealistic and very risky.

- 21 -
Review of Government Proposed Revision to the BOT Law IRR
Final Report

SOURCES

Canlas, Dante B., et al., A Proposed BOT Bill to Enhance Public-Private Partnership in
Infrastructure Development, EMERGE, Manila, 2006.

Castro, Solomon R. B., The BOT Law at the Crossroads: Issues and Reforms, EPRA, Manila, 2006.

Dutz, Mark, PPP Systems for Good Governance of Public Service Provision: A Menu of Support
Options for Contract Design, Bidding and Monitoring, The World Bank Group, 2003.

Dutz, Mark, et al. Public-Private Partnership Units: What Are They and What Do They Do? Public
Policy for the Private Sector, The World Bank Group, Note Number 311, September 2006.

Engel, Eduardo, et al., The Chilean Infrastructure Concessions Program: Evaluation, Lessons and
Prospects for the Future, 2003.

Government of India, Guidelines for the Formulation, Appraisal and Approval of Public Private
Partnership Projects, Ministry of Finance, 2006.

HM Treasury, Project Review Group – Process and Code of Practice, United Kingdom.

International Monetary Fund, Chile: Selected Issues, IMF Country Report No. 05/316, 2005

Ministry of Finance, Singapore Revised PPP Handbook, 2004.

South Africa, National Treasury PPP Manual Module 1: South African Regulations for PPP, 2004.

LIST OF INTERVIEWEES

EMERGE
Dr. Gilbert Llanto, Ph.D.

TAF Policy Reform Project

Prof. Henry Basilio
Mr. Jaime Faustino

- 22 -