Review of the PPP Institutional Set-Up in the...

Review of the PPP Institutional Set-Up in the Philippines

Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page 0

DISCLAIMER

This Technical Paper is a working draft that represents the views and recommendations of

GHD Pty Ltd and not necessarily those of the Public-Private Partnership (PPP) Center or of

the Government of the Philippines. It should be noted that the document is being published

for comments on its substantive merit and policy implications. This will help the government

to formulate well-considered and transparent policy decisions. Being a work in progress,

there are parts that will be revised or modified. Permission to cite any part of this work must

be obtained from the PPP Center and GHD Pty Ltd.



REVIEW OF THE PPP INSTITUTIONAL SET-UP FINAL DRAFT as of 19 September 2012

Prepared for PPP Center Manila, Philippines Under Asian Development Bank's Capacity Development Technical Assistance "Strengthening Public‐Private Partnerships in the Philippines" (TA7796‐PHI)(co‐financed by the Government of Australia and the Government of Canada) By GHD Pty Ltd Canberra, Australia


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page ii

CONTENTS

ACRONYMS ................................................................................................................................................ iii

EXECUTIVE SUMMARY .............................................................................................................................. vii

1.0 INTRODUCTION AND METHODOLOGY .......................................................................................1

2.0 EXISTING PPP FRAMEWORK AND OVERVIEW OF THE ROLE OF THE AGENCIES .........................2

2.1 PPP as a Development Strategy ..............................................................................................2

2.2 Enabling Environment .............................................................................................................3

2.3 Overview of Government Agency Roles .................................................................................4

3.0 INSTITUTIONAL, LEGAL, REGULATORY AND POLICY CONCERNS ............................................. 10

3.1 Institutional Gaps ................................................................................................................. 11

3.2 Key Policy, Legal and Regulatory Issues ............................................................................... 17

4.0 ROLE OF PPP CENTER ............................................................................................................... 27

5.0 PPP CENTER MISSION, STAFFING, FUNCTIONAL ORGANIZATION, INSTITUTIONAL LOCATION32

5.1 New Directions ..................................................................................................................... 32

5.2 PPP Center Organization and Staffing .................................................................................. 33

5.3 Budgeting and Other Constraints ........................................................................................ 35

5.4 Selecting the right organization and location for the PPPC and the LGU PPPC ................... 37

6.0 SUMMARY RECOMMENDATIONS ............................................................................................ 45

APPENDIX 1 ...................................................................................................................................... 51

Historical Antecedents to the PPP Center ....................................................................................... 51


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ACRONYMS AC Administrative Code

APO Asian Productivity Organization

ADB Asian Development Bank

BCDA Bases Conversion and Development Authority

BLT Build Lease Transfer

BOI Board of Investments

BOO Build Own Operate

BOT Build-Operate-and-Transfer

BOTC Build-Operate-and-Transfer Center

CA Contract Administration

CAAP Civil Aviation Authority of the Philippines

CBKM Capacity Building and Knowledge Management

CCPAP Coordinating Council on the Philippine Assistance Program

CCPSP Coordinating Council for Private Sector Participation

CDC City Development Council

CdOPA Cagayan de Oro Port Authority

CIAC Construction Industry Arbitration Commission

CIIP Comprehensive and Integrated Infrastructure Program

CLF Contingent Liability Fund

CM Contract Management

COA Commission on Audit

CPA Cebu Port Authority

CPBD Congressional Planning and Budget Department

CPCS Compensation and Position Classification System

DBP Development Bank of the Philippines

DBM Department of Budget and Management

DENR Department of Environment and Natural Resources

DePEd Department of Education

DILG Department of Interior and Local Government

DOF Department of Finance

DOH Department of Health

DOJ Department of Justice

DOTC Department of Transportation and Communication

DPWH Department of Public Works and Highways

DTI Department of Trade and Industry

EB Executive Branch


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ES Executive Summary

EMB (ECC) Environment Management Bureau (Environmental Compliance Certificates)

EO Executive Order

ERC Energy Regulatory Commission

FOA Forward Obligational Authority

GCEs Government Corporate Entities

GCG Governance Commission on Government Owned or Controlled Corporation

GDP Gross Domestic Product

GFIs Government Financial Institutions

GHD GHD Pty Ltd (Canberra, Australia)

GICPs Government Instrumentalities with Corporate Powers

GOCCs Government Owned and Controlled Corporations

GPH Government of the Philippines

GPPB Government Procurement and Policy Board

HORs House of Representatives

IAs Implementing Agencies

ICC Investment Coordination Committee

IFC International Finance Corporation

INFRACOM Infrastructure Committee

IPP Investment Priorities Plan

IRR Implementing Rules and Regulations

IUK Infrastructure UK

JV Joint Venture

LDCs Local Development Councils

LGC Local Government Code

LGUs Local Government Units

LRF Legal and Regulatory Framework

LRTA Light Rail Transit Authority

LLDA Laguna Lake Development Authority

LWUA Local Water Utilities Administration

LSs Local Sanggunians

MC Memorandum Circular

MIAA Manila International Airport Authority

M&E Monitoring and Evaluation

MDC Municipal Development Council

MDF Municipal Development Fund

MOA Memorandum of Agreement

MOF Ministry of Finance


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MVA Multivariate Analysis

MWSS Metropolitan Waterworks and Sewerage System

MYOA Multi-Year Obligational Authority

NWRB National Water Resources Board

NCIP National Commission on Indigenous Peoples

NEDA National Economic and Development Authority

NG National Government

NGAs National Government Agencies

NWRB National Water Resources Board

ODA Official Development Assistance

OGCC Office of the Government Corporate Counsel

OIC Omnibus Investment Code

OSG Office of the Solicitor General

PA Project Agreement

PBAC Prequalification Bids and Awards Committee

PDC Provincial Development Council

PDF Project Development Facility

PDIC Philippine Deposit Insurance Corporation

PDMF Project Development and Monitoring Facility

PDP Philippine Development Plan

PER Project Evaluation Report

PFDA Philippine Fisheries Development Authority

PIMAC Private Infrastructure Investment Management Center

PIP Public Investment Program

PMO Project Monitoring Office

PNR Philippine National Railway

PPA Philippine Port Authority

PPIAG Public Private Informational Advisory Group

PPP Public Private Partnerships

PPPC Public Private Partnerships Center

PSA Public Service Act

PSP Private Sector Participation

PUK Partnerships UK

QC Quality Control

RA Republic Act

RDC Regional Development Council

ROW Right of Way

SCBA Social Cost Benefit Analysis


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SEC Securities and Exchange Commission

SFPA San Fernando Port Authority

SOJ Secretary of Justice

SPs Sector Plans

SSF Strategic Support Fund

SSL Salary Standardization Law

SSPS Social Safeguards Performance Standards

SUCs State Universities and Colleges

TB Technical Board

TOR Terms of Reference

TRB Toll Regulatory Board

TRO Temporary Restraining Orders

TWG Technical Working Group

VFM Value-for-Money

VGF Viability Gap Funding


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EXECUTIVE SUMMARY 1. The key objective of this report is to review the institutional set-up for Public Private

Partnerships (PPP) in Philippines to determine, (a) gaps in the government processing of these projects relative to international best practice, including the way in which they are identified, selected, prioritized, prepared, evaluated, approved, tendered and managed over their life cycle; and (b) steps to take to augment the PPP center functions and its location, to enable it to play a key role in responding to the issues raised. The report is prepared by GHD Pty Ltd (GHD) (Canberra, Australia) under the Asian Development Bank’s (ADB) TA 7796, Strengthening Public Private Partnerships in the Philippines.

2. Section 2 discusses the importance of the PPP program to the current administration as a key

component of development strategy including the foundations that have been laid by Republic Act (RA) No. 6957, as amended by RA No. 7718(the Build-Operate-and-Transfer (BOT) Law) and its implementing rules and regulations. Of importance also isRA No. 7160 (Local Government Code (LGC)) and, particularly, the roles and responsibilities of the key Departments, Agencies, Offices and Bureaus of the Government of the Philippines (GPH) in respect of the PPP program.

3. Based on our review of PPP processes related to the identification, selection, prioritization, evaluation, approval, tendering, negotiation, and management processes of PPP, including the review in Appendix I of Investment Coordination Committee (ICC) Guidelines, Section 3 summarizes our recommendations regarding steps to take in redressing the identified gaps in processes. Recommendations are made regarding expansion in the functional roles and responsibilities of selected Departments, Agencies, Offices and Bureaus of the Executive Branch (EB), as identified in the Table immediately below.

Table ES 1 Areas for Improvement in PPP Processes

Functions National Government

Agencies Involved

Areas for Improvement

Policy Formulation National Economic and Development Authority (NEDA) Board and Committees: Infrastructure Committee (INFRACOM)ICC, NEDA Secretariat and Public Private Partnerships Center (PPPC) Department of Finance (DOF) Local Development Councils (LDCs) and Local

Strengthen PPP policy guidelines as discussed in this report; in addition, define policies and preparation guidelines for each of the topics identified in the Executive Summary (ES) and in the main text of the report. - Define scope and content of

Contract Management. - Set guidelines for allocating and

managing government support for PPP projects, including contingent liabilities.

- Set Viability Gap Funding (VGF) process and implementation Guidelines.

PPP Center to build capacity of local councils and Sanggunians to formulate


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Agencies Involved


Sanggunians(LSs) policies promoting PPP.

Planning (Philippine Development Plan (PDP) and Sector Plans (SPs))

NEDA, Implementing Agencies (IAs), Local Government Units (LGUs) and LDCs

Prepare long-term development plan and sector master plans.

Investment Programming (Public Investment Program (PIP), Comprehensive and Integrated Infrastructure Program (CIIP)

NEDA, INFRACOM, IAs (including LGU Executive) LDCs, LSs and PPPC

Strengthen project selection criteria particularly the adoption of multivariate analysis (MVA) in conjunction with early social cost benefit assessment (SCBA).

Budgeting Congress, Department of Budget and Management (DBM), IAs and LSs

Formulate and set up funding mechanism for multi-year contracts. Determine appropriate financing mechanism for different PPP funds such as the Strategic Support Fund (SSF), VGF and, if required, Contingent Liability Fund (CLF).

PPP Program Facilitation

PPPC Expand functions of PPPC into quality control and other areas as set forth in Section 5 of this report. Review staffing and capacity constraints given existing PPPC staff and resources.

Project Preparation IAs, LGUs, PPPC, Project Development and Monitoring Facility (PDMF) and LGU Executive

Build capacity for preparing projects or managing the out-sourced PPP project preparation. Require value for money analysis as a standard component of a feasibility study.

Project Appraisal and Approval

NEDA, PPPC LDCs and LSs

Strengthen project appraisal by adopting strict guidelines for value-for-money analysis (VFM).

Land Acquisition

IA, LGU, DBM Improve capacity of IA/LGU to manage the process for land acquisition, including compliance with resettlement and IP guidelines.

Provide necessary funding for multi-year

Congress, DBM Address the need to ensure certainty with regard to availability and release


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Agencies Involved


contracts of funds in support of Multi-Year Obligational Authority (MYOA) obtained by IA and issued in favor of project.

Procurement and Contract Execution

IA, LGU Identify procurement watchdogs.

Contract Review and Approval

IA, LGU, Office of the Government Corporate Counsel (OGCC) (for corporate entities), Office of the Solicitor General (OSG) for National Government Agencies (NGAs), DOF and LSs

Establish dedicated ICC PPP guidelines including contract review and approval.

Contract Dispute Resolution

IA, LGU and DOF Establish Contract Management Guidelines to identify the role of DOF for any changes in project agreement or changes in base case financial model post financial close and/or role of IAs and DOF in dispute resolution, refinancing gains, workouts, expansions, etc.

Arbitration IA (represented by OSG or OGCC)

RA No. 9285 recognizes various forms of dispute resolution mechanisms, including arbitration. In the event parties choose arbitration, it may be useful to consider a model clause, but the type of dispute resolution process, including judicial processes, may be determined in the course of project preparation and contract drafting. For example, construction disputes may fall within the jurisdiction of the Construction Industry Arbitration Commission (CIAC,) even if some other institutional arbitration is provided in the contract.

Contingent Liability Management

DOF Develop guidelines for effective management of contingent liabilities, which may require provisioning into a special fund.

Regulation: Economic Toll Regulatory Board (TRB), Philippine Port Authority (PPA),

Until legislation is enacted to take out conflict of interest in roles, resort to


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Agencies Involved


Light Rail Transit Authority (LRTA), Philippine National Railway (PNR), Local Water Utilities Administration (LWUA), Metropolitan Waterworks and Sewerage System (MWSS) and LSs

regulation by contract and ring-fence regulatory operations to contain moral hazard, such as was done with the creation of the MWSS Regulatory Office.

Regulation: Quality/Resource

National Water Resources Board (NWRB), Civil Aviation Authority of the Philippines(CAAP), Department of Environment and Natural Resources DENR, Environment Management Bureau (Environmental Compliance Certificates) EMB (ECC), National Commission on Indigenous Peoples (NCIP), Department of Health (DOH) (water quality)

For both economic and quality regulation, strengthen enforcement regulations.

Water Rights NWRB While this award of water rights is clearly a function that belongs to NWRB, water sector economic regulation, e.g. tariff setting is highly fragmented with overlaps in responsibilities between LWUA and NWRB and self-regulation of LGUs.

Foreign Ownership of PPP projects

Constitution Ownership and Operation are regulated by Constitution

Contract Monitoring and Evaluation

PPPC, IAs Clarify the role of PPPC in monitoring and evaluation. Specifically, identify the tasks and activities that would be undertaken by the PPPC in relation to Contract Management (CM) and how this differs from the activities of other agencies that are also involved in this function.

Project Promotion Department of Trade and Industry (DTI), PPPC, IAs

All three entities involved in promotion, but who coordinates activities?

Audit

Commission on Audit (COA) COA is a constitutional body, but there is a need to define explicit guidelines on COA’s role in PPP transactions, in


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Agencies Involved


particular scope of audit and point of intervention in the process; in this regard seek Department of Justice (DOJ) opinion as to their audit role in all PPP projects, after which, NEDA and PPPC to assist COA in formulating audit guidelines for PPP.

LGU PPP Project Preparation, Capacity Building, Training

PPPC, Department of Interior and Local Government (DILG)

Improve coordination to maximize PPPC inputs into this function.

4. Some recommendations, above, can be amplified further:

a. In a separate paper, Evaluating Gaps in PPP Process,GHD sets forth a number of areas where

ICC policy and project preparation and approval guidelines could be augmented. These include, but are not limited to, the following topics: “Affordability”; “Value for Money”; “Designing the Payment Mechanism”; “Risk Management”; “Viability Gap Funding”; “Definition of a Complete Feasibility Study”; “Unsolicited Proposal Process”; “Requirement for Further Approvals by ICC”; “Contract Management”;” Refinancing Gains”; and “Dispute Resolution”;

b. The role of the PPPC can also be expanded as is described in Section 4, further below, to mirror the roles and responsibilities of successful PPP units elsewhere. In particular, the PPPC should have an important role in Quality Control (QC) and Monitoring and Evaluation (M&E) of PPP projects. But in the latter case, its role in this should be better differentiated from that of the IA, DOF and NEDA;

c. The CM function in other countries is often conducted by one unit. To avoid conflicts of interest, the function is sometimes assumed by a unit that is distinct from the national PPPC. In those cases, the CM function could include activities related to M&E and Contract Administration (CA).

Aside from the activity specifically identified in Executive Order (EO) 8, M&E activity of the PPPC could be more broadly described to include: i. Compliance with the project agreement1 and facility agreement;

ii. Adherence to GPH Social Safeguards Performance Standards (SSPS), as set forth in the

project agreement;

iii. Extent to which the commercial objectives originally set forth by the implementing agency for the infrastructure facility are being achieved;

1 The term project agreement in this report refers to the umbrella agreement in a typical PPP transaction. It is sometimes referred to in

the legal framework for PPP in the Philippines more simply as “the contract.”


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iv. Providing an early warning system for government if the facility appears to be in danger of becoming non-compliant in any of its obligations; and

v. Ensuring the adequacy of the maintenance program extended to the assets under the

control of the project company that are to be transferred to GPH at the expiry of the project agreement.

M&E could also involve ex post evaluation, i.e., determining whether the project actually delivered value for money, or whether such projects should be configured differently in order to increase the chances of success, or identifying other lessons learned from the project’s implementation and operation.

CA, as a separate component of CM, can be said to involve special duties that may arise during construction and operations involving changes in the project agreement or base case financial model, such as coordinating requests for variations during construction or operations, as and when needed, including changes to the financial model; refinancing and implementing agreed principles relative to the sharing of refinancing gains; restructuring of project agreements, as necessary, following force majeure; supervising asset handover at the expiry of the contract; supervising early termination activity and confirming accuracy of related termination payments; assisting in the management of disputes and their resolution; approving changes in the base case financial model (in conjunction with other project stakeholders) and any other non-routine activity for which special time, focused attention and the drafting of recommended actions are needed. The Implementing Rules and Regulations (IRR), in this regard require the following enhancements: i. Does DOF have a role in Contract Administration in case an event occurs that creates the

need to re-negotiate the project agreement or the base case financial model?

ii. What is the definition of M&E i.e., what are the elements of a PPP that have to be monitored and evaluated? Where do the results of M&E get recorded and displayed? What purposes are served?

iii. Given the existence of NEDA project monitoring staff, what overlap exists in the M&E function and how does this get reconciled?

iv. The IA is the actual administrator of a PPP contract, but it is not clear what its relationship with the DOF role is and/or how oversight and conflicts of interest are avoided on an ongoing basis.

While there is nothing wrong with the fragmentation of a function, it does place a burden on the need to be clear about roles, otherwise accountability is lost. It would appear that the role of the DOF, in particular, could be made clearer with regard to its review and approval rights of any changes in the project agreement, post financial close. This would reduce conflicts of interest (or moral hazard) within the IA, given that the latter is the main point of contact with the PPP project company.

d. Additionally, DOF appears to have locked in an important role in defining guidelines for

allocating and managing government support for PPP projects, including contingent


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liabilities, as well as setting up a system for managing and provisioning for contingent liabilities. This is in line with PPP Practice elsewhere;

di. MYOA is a requirement prior to entering upon multi-year contracts. It imposes an obligation on the department or agency to include in its annual budget the amount it is obligated to pay for each budget period. Because funds are appropriated each year, and the MYOA is not an explicit performance undertaking from the GPH, this raises concerns amongst lenders to PPP projects. To displace this instrument, what needs to be addressed is the availability of funds to meet obligations (and continuous replenishment from automatic appropriation) for a long-term project. An example is a Road User Fund, which, de-jure, gets annual contributions from motor vehicle registration. Such funds require legislation. In a Department of Justice (DOJ) opinion issued to the Department of Education (DePEd) for the 10-year, Build Lease Transfer (BLT) classroom project, and the specific question of how to devise a funding strategy for MYOA, the above specific issues werenot addressed. However, DOJ - in its April 23, 2012 opinion letter - stated that in the event an appropriation was approved to meet lease payments for any given year, the President has authority to augment from savings generated in other offices of the Executive Branch in order to meet that obligation. This is consistent with what DBM informed GHD in February 2012. This means that, in the absence of any freed portion available within DePEd’s budget ceiling, a legally realigned or re-allocated fund from actual savings in any other agency within the Executive Branch may be used to cover annual deficits in the MYOA-covered project. However, this still falls short of an explicit performance undertaking.

e. Generally, the powers of the regulator (with regard to economic regulation) and that of COA (with regard to audit) need to be reconciled with a smooth running PPP program. Overlaps of authority between these two institutions and the implementing agency with regard to audit rights or economic regulation potentially cause confusion and uncertainty for the private investors and are not good for the PPP program. For example, the role of COA has become contentious with respect to (a) DOHPPP,its unofficial view is that government should always have a share in the revenue of the operator; and (b) it may audit the private sector proponent’s books. There is also no official issuance from COA on the extent of its audit of PPP. (When GHD attended the meeting with COA early in the engagement, the latter indicated it is preparing such guidelines).

f. Promotion can also be a fragmented function, with several agencies having roles. This appears to be the case in the Philippines as the PPP Center promotes PPP and its various activities, the IAs promote their tenders; and DTI promotes foreign investment in general (which in turn includes PPP). If DTI is to lead this, there is a need to recognize the roles of agencies that perform this function with the objective of synchronizing activity to optimize the effectiveness of the promotional activity. GHD would suggest that the PPPC draws up an annual PPP promotion plan, to be agreed with DTI, that sets forth goals and action plans for the activity during the ensuing year. Roles and responsibilities of DTI, the PPPC and selected IAs would be clearly set forth in the plan along with its resourcing. It would then be the responsibility of DTI to properly synchronize the execution of this plan. This would have the benefit of (a) identifying what will be done during the year; (b) who will do it and by what timeframe, and (c) how will it get resourced?

g. Another area that requires thought is how to "operationalize" the tasks/functions/inputs of

the PPPC to local governments. EO 8 broadly defines this mandate for the PPPC, but implementation on the ground may require a clearer framework and strategic alliances to augment PPPC resources:


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i. NEDA Regional Offices require the PPPC to coordinate all interventions with the LGUs. It is unclear how much of a Chinese wall exists between what the PPPC does (PPP project development/preparation/structuring support/guidance) and what NEDA is supposed to do (project evaluation and approval). Coordinating interventions with the LGUs in PPP activity is easier said than done because in reality, the LGUs have long been used to approaching NEDA Regional Offices for technical support for their various planning/program/project questions. Should the PPPC set up a PPP unit (or a PPP coordinating function) within the NEDA-Regional Office to provide said assistance since the PPPC (which has no regional presence) is also under NEDA? Since NEDA is in charge of evaluating and approving PPP, and specifically prevented from project preparation activity, how would this seeming "conflict" be managed?

ii. The DILG also has regional offices expected to oversee and guide local governments. For

PPP projects, they have no competencies to provide technical assistance but compared to NEDA, they have stronger moral persuasion over LGUs, and they can more easily influence them to attend training sessions on PPP for example. As such, the PPPC has forged a Memorandum of Agreement (MoA) to reach out to as many LGUs as possible. DILG-main office agreed to this and in fact, issued a directive to its regional offices to encourage LGUs to avail of PPPC's training, technical assistance, project development guidance and support for their PPP projects. It also directed LGUs to set-up internal PPP Sub-Committees. We address this question in a later section of this memorandum.

5. Furthermore, detailedobservations in the same Section 3 are made regarding five key issues

impacting on thecurrent policy, legal and regulatory framework, namely:

a. Conflict of interest (where agencies act as operators and regulators); b. Role of COA in auditing PPP projects; c. Joint Ventures (JV): Current Guidelines for PPP and Other Structures;

d. VGF, the development of a policy framework to use subsidies to make a tariff commercially sustainable in a PPP project, most often (but not always) one that features social infrastructure;

e. VFM, the development of a policy framework for the use of a quantitative framework under which candidate infrastructure projectsare compared and contrasted under two distinct implementation options: PPP vs. traditional procurement. The purpose of such a comparative framework is to arrive at that option best able to meet the user’s requirements and which yields the optimal combination of whole-of-life costs and quality (or fitness for purpose).2 VFM is not the choice of goods and services based on the lowest cost bid;3 and

f. Provisioning for contingent liabilities arising from the public private partnership program and determining whether the creation of a special fund is relevant to this endeavor, or perhaps some other option.

6. A key objective of Section 4 has been to use the considerable information which has become available in recent years regarding the operation of PPP units, worldwide, particularly those that are regarded as best practice units and to compare their functions with those of the PPPC. The

2http://www.government-accounting.gov.uk/current/frames.htm

3HM Treasury, Value for Money November 2011


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aim being to identify what further functions the PPPC could undertake that would help redress some of the gaps in process noted above.

7. There are six functions which have been recognized by the World Bank as being undertaken by best practice PPP units. The PPPC now performs at least four of them. It could however also assume the role ofQC gatekeeper.

Table ES 2 Functions of a Best Practice PPP Center

Functions of

Best Practice Units

PPP Center Performance

(Philippines)

Advantage of Taking the

Function On

Quality Control Not included among principal functions

Better selection of projects, perhaps faster implementation with more consistent quality; thoroughness of due diligence before project goes to ICC;and overall improvement of transparency

Policy Advocacy and Formulation

Strengthened PPPC functions Friendlier, more consistent, legal and regulatory framework that is pro-PPP.

Technical Assistance A traditional function of the PPPC

Many, but not all, IAs use PPPC technical assistance for project preparation – one reason why the QC function is so important.

Project Promotion Function now assumed by DTI DTI can perhaps arrive at an agreement with the PPPC and IAs synchronizing the promotion of PPP. This function is not done by DTI alone.

Monitoring and Evaluation Recently added function of the PPPC

Critically important if the country is to obtain Value for Money benefits from its PPP Program

Standardization and Dissemination

Functionally, this should also be part of the PPPC remit

The new office, Capacity Building and Knowledge Management (CBKM) should be able to ensure standardization and dissemination of lessons learned and best practices.

8. There are a number of other recommendations GHD makes to augment the role of the PPPC,

namely:

a. The PPPC should be a non-voting member of the ICC-TB, and should be required to attend all meetings related to PPP projects. If it is to be made responsible for quality control, as we advocate, it would almost seem mandatory for it to set forth the rationale to the ICC-TB for recommending the approval of any PPP project in the first place and to assist the IA in answering any questions that may arise in Technical Board (TB) deliberations in respect of the project. It will be recalled that GHD is advocating that the PPPC assists in, (a) identifying


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good PPP candidate projects using MVA or other analytical tools; (b) project preparation, as required; and (c) vetting each and every PPP project for completeness of project documentation, commercial viability, as well as optimal legal structure and risk sharing. Whether it has status as a “non-voting member” or “observer” in the TB is less important than its function as a QC gatekeeper;

b. As indicated, there should be a rationalization of the M&E role that is to be assumed by the PPPC through Art 14.1 of the Draft IRR, as of April 2012, and the role of the NEDA project monitoring staff. Moreover, there is also a need for a rationalization of the PPPC M&E role with that of the DOF’s CM role, with potential overlaps in all cases eliminated; and

c. Since the PPP program will continue to evolve, GHD believes it should be made easier to modify the IRR with the number of agencies needing to sign off on the document limited to four: NEDA, DOF, DBM and the PPPC.

9. Section 5 explores a number of important PPP staffing and organization issues. Foremost amongst them is the impact that the expansion of proposed functions would have on the PPPC. GHD’s view is that the increased functions proposed for the PPPC would involve some increases in staffing. A larger concern, however, is that the PPPC has responsibilities to the LGUs to help them prepare projects, as well. It seems likely that the PPPC is already operating at maximum capacity (given current staffing) without the impact of our proposals or the future requirements of LGUs.

10. GPH and the PPPC should consider creating a new and separate unit for LGUPPP, with separate

staffing and offices in the field, in appropriate locations in Luzon, Visayas and Mindanao. HM Treasury in the UK has recently done this, setting up a dedicated office for LGUs. The primary rationale for adopting this strategy was driven by a concern that the PPP project pipeline for LGUs was not receiving the same priority focus as was the case with national government agency projects.

11. There are other arguments put forward for this. Practitioners involved with PPP at national and

local levels, will attest that the work involved is quite different. The types of projects LGUs focus on lend themselves to the development and dissemination of standardized financial tools and legal agreements. In developing countries particularly, the types of PPP projects pursued by LGUs are few in number and relatively small in scale: water distribution, wastewater treatment, landfills for solid waste disposal, city administration structures, etc. This focus on standardization tends to have greater application with these kinds of projects. They are not as complex and tend to be relatively uniform in structure. The key point made, however, is that when such projects have to compete for attention at the national level, they are not provided the same priority as the national projects.

12. A concern is that LGUs, or some of them, may already be discounting the attention their

projects are likely to receive at the national level. Hence, the responsibilities of the PPPC in respect of LGUs give rise to concerns.

13. While LGUs are empowered to pursue PPP projects, most lack the financial capacity and technical capability to undertake project preparation. Dependence on the PPPC should be expected to increase. An undesirable alternative would occur if the LGUs take matters into their own hands, if the PPP Center is unable to be of assistance.


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xvii

14. As is discussed in this paper at some length, the JV Guidelines categorically exclude LGU units from its coverage and apply only to Government-Owned and Controlled Corporations (GOCCs), Government Corporate Entities (GCEs), Government Instrumentalities with Corporate Powers (GICPs), Government Financial Institutions (GFIs), and State Universities and Colleges (SUCs). Nonetheless, certain LGUs have taken this together with their authority under the Local Government Code to undertake and implement projects, to mean that they can resort to joint venture without any intervention from the PPPC or NEDA/ICC. At least two LGUs have enacted local ordinances providing for JV as a mode of implementing PPP. The Department of Interior and Local Government appears to have already proposed rules and regulations on PPP for local government units which address these concerns. Five local government units, however, most recently the province of Pangasinan, have enacted PPP Codes.4 This is a dangerous trend which should be avoided. PPP transactions are complicated endeavors as global experience has taught over the last 20 years. To permit the LGUs, or others, to undertake JVs, without any guidance, is to invite potentially costly mistakes at the regional level.

15. The point raised in paragraph 14 above has to be regarded as a weak point in PPP governance.

For this reason alone, some attention needs to be given to how the LGU PPP projects will be processed, with the same priority, and at the same level of skill, as that which is available for national agency projects. Closely allied to this concern is whether the PPP skills base can be made accessible in the right amounts and locations as to be effective. This concern needs a well thought out strategy.

16. Other apprehensions expressed in this paper have to do with the budget that is available to the

PPPC as an attached agency to NEDA, which appears to be small in relation to gaps in governance and process that currently exist, as set forth in the main text of this report. There are also other matters to consider in respect of the location of the PPPC - whether it really belongs in NEDA, the Office of the President, or is it better off as aGOCC.

17. In Section 5, this report makes the case that the PPPC,in the long-run,should be organized asa

GOCC. PPPC would be able to be self-sustaining in revenue generation once its staff has developed skills akin to those available to the transactional consultants with which it works on PDMF. Once this, among the otherprecondition identified in the next paragraph is in place, it could then offer project development services toIAs directly, in this way generating revenues sufficient to sustain itself while, at the same time, delivering attractive savings to the national budget. Considering the interest in PPP at the national level, and the interest that could be generated in similar projects with LGUs, there isan opportunity to create a true center of excellence with outreach capacity into regional areas.

18 Preconditions that have to be in place before the PPP Center could become a GOCC are the

following:

a. Government (Governance Commission on Government Owned or Controlled Corporation (GCG), to be precise) should agree in principle to allow PPPC to set market competitive salary scale;

b. GPH would have to have the fiscal space to provide the equity needed by PPPC to

commence its functions;

4 “PPP Code Promises Pangasinan Growth,” by LieslBasaInigo, article which appeared online on 6 April 2012 in Manila Bulletin, accessible via URL at http://www.mb.com.ph/articles/356444/ppp-code-promises-pangasinan-growth, last visited 24 June 2012.


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xviii

c. There would have to be potential for sufficient transactional work and, therefore, self-sustaining revenue generation;

d. PPPC would havethe base skills in place to substitute for the external consultants it currently

works with in PDMF;

e. PPPC would have to have access to specialized consultant, on an as-needed basis;

f. Total fees payable by the implementing agencies would be a combination of ongoing retainers and success fees, but the total revenue paid to the PPPC would represent a net savings to the country; and

g. A business case would have to be developed on the approach to use in managing LGU requests for assistance efficiently, from an institutional perspective but also in practical terms. Most likely, the approach to be taken will consist of fairly rigid transaction guidelines supported by standardized documentation and basic financial models, enabling each officer to handle a number of assignments simultaneously. (Incidentally, this task should begin immediately, otherwise PPPC may find that it is unprepared to handle the volume of requests from the LGUs once interest in PPP begins to ramp up).

19. The PPPC’s conversion to GOCC has to be a deliberate decision of the GPH, so that there is a conscious and committed effort, along with a directed plan, towards achieving the preconditions.

20. For example, as a start in generating revenue, PPPC should get paid for the M&E function, by government for those projects that are already on the books and by the new PPP projects that arrive at financial close from some defined date onwards. This will help also helps to build the standalone case. This will help ramp up revenue and over time make it easier to make a financial case for GOCC status. It should also get paid for managing PDMF.

21. The disadvantages of remaining part of the government apparatus have been recognized by

some governments, and there has been a consequent move to reorganize PPPCs into the equivalent of GOCC status. This is true of national PPP units in Canada, Czech Republic, Portugal and Germany, among the more other notable examples. Although various reasons are given for this action in some countries, the primary ones appears to be the need to ensure flexibility and independence from the political process, enable continual interaction with the markets, incorporate faster and better response to changing market conditions and, most significantly, to stabilize the organization by retaining employees. We will return to this subject in more detail in Section 5.

22. It should not be difficult to develop PPPC as the Government’s preferred project feasibility adviser given the comparisons set forth in the Table below.


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xix

Table ES 3 Comparing PPP Center and Outside Advisors In Tasks Associated with Project Preparation

PPPC Analytical Functions Outside Advisers

Only Recently doing this activity, but skills are eminently developable

Conventional “bankability analysis

Long experienced

May need to outsource Engineering and Technology Many consulting firms outsource their engineering and technological skills anyway

Close to government decision making and should be one of the top skills of the PPPC over time

VFM Have the skills but most work off of Terms of Reference (TOR) and, particularly guidelines provided by government

Close to government decision making

VGF Have the skills but most work off of TORs and, particularly, guidelines provided by government

Inside knowledge Conformance to other government plans and policies

Must work under TORs

Cheaper over time and, in any case, the “home team”

Cost to PDMF More expensive, in foreign exchange

Must be a major objective to develop “PPP-ready” IA’s

Capacity building for IAs Do not really participate in extending technical assistance -only if one pays them

Know local rules, procedures and process

Tender documentation Experienced but may not know the Philippines

Must be developed but the Philippines has a strong people base

Staffing Often hired guns, but may have broad industry experience

Better understanding of local environments

LGU Engagements Size and [political complexity] of engagement below interest level for international firms

23. Nonetheless, development of PPPC to undertake project preparation will take time and current

contractors hired by PDMF will have to accept capacity building mandates as part of their obligations.

24. GHD believes that with an annual turnover of 10 national projects, at a cost of US$1.1 million

each being currently paid out to third parties, PPPC should eventually be able to fully staff for


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xx

and undertake the same workload at 40-50 percent of that total cost of using foreign contractors. This would imply revenue generation of around US$4.5-5.0million/year, excluding the agreed revenues which are paid to continue to undertake the M&E function. This estimate also excludes the revenue generated from LGU projects for the same activity, which are likely to be considerable once the interest in PPP ramps up in outlying areas. Many of the LGU projects will not be of interest to international or large, national, firms. The government would derive significant savings, building capacity at essentially no net cost over time as the PPPC assumes more of these functions.

25. To ensure that PPPC does not abuse its consultation monopoly, several measures are

appropriate:

a. Create an independent advisory board which has access to general market intelligence and can see the results of tenders – if there is good bidding interest, it can be assumed PPPC is doing its job;

b. Put a % limit, increasing over time, on the work that is done in-house to ensure continued access to the greater consulting world, not only for very specialized projects but also the occasional “on the run” exercise such as a power plant. The need to use outside technology and engineering consultants is more likely than other kinds of consultants;

c. Maintain close ties with multilateral institutions and ensure continuing training and personnel development, which is both necessary to do a good job and a motivator for continuity and;

d. Over time, bid for government projects in other countries – Filipinos fit in as professionals all over the world and certainly can compete in many, if not all, markets.

26 As the protector of the integrity of the PPP process, the PPP Center should have both, the clout and institutional location, to be able to perform its function properly. It should be able to identify policy needs; define procedural issues that are lacking in the PPP process; coordinate with DOF, NEDA or DBM needed course corrections in the PPP program; extend technical assistance in matters related to project preparation, evaluation of unsolicited proposals and procurement to national agencies and LGUs; ensure that conflicts of interest in the processing of solicited, or unsolicited, proposals are eliminated; and compensate for the weaknesses and gaps in knowledge related to the application of proper tools and forms evaluating/monitoring PPPs. At the same time, it should have more control over its budget; access to higher levels of decision-making; more opportunity to interface with the market; freedom from the structural conflicts of interest it faces in its present location; and the independence and flexibility to act when needed.

27 In the short term, our key recommendation is that PPPC be transformed into a Presidential

Commission, attached to the Office of the President. In the longer term, consideration should be given to its becoming a GOCC, if the deal flow is there. A Commission, by its very nature, is temporary, in this case, a “bridge” to GOCC status which is a more permanent solution that future administrations may find difficult to unwind. A Commission structure, attached to the Office of the President, could provide a basis for reforming the PPP process more quickly, which is important. It also sends a signal to the national and international community regarding the importance of the PPP Program and, of course, the PPP Center as its engine. Perception of high stature and clout is particularly useful for PPPC, especially in the light of recommendations to give it probity auditor functions for unsolicited proposals and the enforcer of some of the IRR


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xxi

guidelines, for example, adherence of IAs to the process flow timelines. It could also markedly improve access and communication with the private sector. For example, to further these goals, it could report directly to a Board of Commissioners appointed by the President. The Board could consist of top level decision-makers within Government. Top management of the Center could also have access to an Advisory Group drawn from key figures within the private sector. The key point is to improve access to top decision-makers within government and private sectors in order to optimize the PPP tool, while improving the potential for better PPP planning, promotion and, ultimately, participation by the private sector in the success of the program. The alternative to the Commission structure is an office within the Office of the President. This option at least addresses the conflict of interest issue and reinforces the message that the PPP program is a priority of the President. To a major extent, the strategy of government with regard to institutional arrangements rests on the importance accorded to the PPP strategy for eliminating the infrastructure deficit that is faced by the Philippines. The more ambitious the strategy, the more importance has to be placed on putting in place the preconditions that are likely to make it happen. Until very recently, the historical reliance on chance to make things happen has not worked very well.

28 The Commission would provide a transitory structure similar to that which GPH created in 1994,

when it organized the CCPAP-BOT Centre as a “Council”, an effectively autonomous unit, attached to the President’s Office. Most observers believe that the PPP Center was at its most effective when it was organized in this manner and had the full backing of the President. The two structures are dissimilar in other ways, to be sure, so it is not a perfect match. This new, proposed, Commission structure appears to GHD to be fit for the times - times which are likely to be extremely competitive for the infrastructure dollar, where getting things right is an important precondition to achieving success.

29. With regard to the mechanics for converting the PPPC to a Presidential Commission in the short-run, the following Revised Administrative Code provisions are relevant for: (a) carrying the authority of the President to reorganize the bureaucracy; and (b) explaining the significance of agency attachment. SECTION 31- Continuing Authority of the President to Re-organize his Office— The President, subject to the policy in the Executive Office and in order to achieve simplicity, economy and efficiency, shall have continuing authority to reorganize the administrative structure of the Office of the President. For this purpose, he may take any of the following actions:

(1) Restructure the internal organization of the Office of the President Proper, including the

immediate Offices, the Presidential Special Assistants/Advisers System and the Common Staff Support System by abolishing, consolidating or merging units, thereof, or transferring functions from one unit to another;

(2) Transfer any function under the Office of the President to any other Department or Agency as well as transfer functions to the Office of the President from other Departments and Agencies; and

(3) Transfer any agency under the Office of the President to any other department or agency

as well as transfer agencies to the Office of the President from other departments or agencies.

...SECTION 4 - Jurisdiction over Bureaus, Offices, Regulatory Agencies and Government Corporations— Each Department shall have jurisdiction over bureaus, offices, regulatory


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xxii

agencies, and government-owned or controlled corporations assigned to it by law, in accordance with the applicable relationship as defined in Chapters 7, 8, and 9 of this Book.

SECTION 5 - Assignment of Offices and Agencies -The President shall, by Executive Order, assign offices and agencies not otherwise assigned by law to any department, or indicate to which department a government corporation or board may be attached.

30. With regard to the mechanics of transforming the PPPC into a GOCCin the longer term,

Republic Act No. 10149, entitled “An act to promote financial viability and fiscal discipline in GOCCs and to strengthen the role of the state in its governance and management to make them more responsive to the needs of public interest and for other purposes,” defines and includes within its coverage – a. GOCCsreferring to any agency organized as a stock or non-stock corporation, vested with

functions relating to public needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock, which term includes GICPs/GCEs and GFIs; and

b. GICPs/GCEsrefer to instrumentalities or agencies of the government, which are neither corporations nor agencies integrated within the departmental framework, but vested by law with special functions or jurisdiction, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy usually through a charter including, but not limited to, the following: the Manila International Airport Authority (MIAA), the PPA, the Philippine Deposit Insurance Corporation (PDIC), the MWSS, the Laguna Lake Development Authority (LLDA), the Philippine Fisheries Development Authority (PFDA), the Bases Conversion and Development Authority (BCDA), the Cebu Port Authority (CPA), the Cagayan de Oro Port Authority (CdOPA), the San Fernando Port Authority (SFPA), the LWUA and the Asian Productivity Organization (APO).

31. The law creates the GCGwhich is empowered to, among others, conduct a compensation study

and develop a Compensation and Position Classification System (CPCS) which shall apply to all officers and employees of the GOCCs whether under the Salary Standardization Law (SSL) or exempt therefrom and shall consist of classes of positions grouped into such categories as the GCG may determine, subject to approval of the President. The following principles shall govern the CPCS:

a. All GOCC personnel shall be paid just and equitable wages in accordance with the principle of equal pay for work of equal value. Differences in pay shall be based on verifiable CPCS factors in due regard to the financial capability of the GOCC;

b. Basic compensation for all personnel in the GOCC shall generally be comparable with those in the private sector doing comparable work and must be in accordance with prevailing laws on minimum wages. The total compensation provided for GOCC personnel shall be maintained at a reasonable level with due regard to the provisions of existing compensation and position classification laws (including Joint Resolution No. 4, Series of 2009), and the GOCC operating budget; and


Final Draft – Review of the PPP Institutional Set-Up as of Sept 19, 2012 Page xxiii

c. A review of the GOCC compensation rates, taking into account the performance of the

GOCC, its overall contribution to the national economy and the possible erosion in purchasing power due to inflation and other factors, shall be conducted periodically.

32. Any law to the contrary notwithstanding, no GOCC shall be exempt from the coverage of the CPCS developed by the GCG under this Act.

33. The GCG may recommend to the President, incentives for certain position titles in consideration

of the good performance of the GOCC. But no incentives shall be granted unless the GOCC has fully paid all taxes for which it is liable, and the GOCC has declared and paid all the dividends required to be paid under its charter or any other laws.

34. The same law permits the creation of a GOCC through incorporation in the Securities and Exchange Commission (SEC) and provides that a government agency seeking to establish a GOCC or related corporation under Batas PambansaBilang 68 or the Corporation Code of the Philippines shall submit its proposal to the GCG for review and recommendation to the President for approval before registering the same with the SEC. The SEC shall not register the articles of incorporation and bylaws of a proposed GOCC or related corporation; unless the application for registration is accompanied by an endorsement from the GCG stating that the President has approved the same.

35. Considering that GOCC status can only be achieved through Congressional initiative, the

recommendations in this report would be to transfer the PPPC temporarily to the Office of the President until such time as Congress considers, prepares and enacts a bill providing the PPPC with GOCC status. Location under the Office of the President will provide the PPPC with increased status to work with other oversight agencies of the Government to rectify gaps and weakness observed in this report.



1.0 INTRODUCTION AND METHODOLOGY 36. The key objective of the report is to review the institutional set-up forPublic Private

Partnerships(PPP) in Philippines to determine, (a) gaps in the government processing of these projects relative to international best practice, including the way in which they are identified, selected, prioritized, prepared, evaluated, approved, tendered and managed over their life cycle; and (b) steps to take to augment the Public Private PartnershipsCenter (PPPC)functions and its location to enable it to play a key role in redressing the issues raised. The report is prepared by GHD Pty Ltd (GHD) (Canberra, Australia) under the Asian Development Bank’s (ADB) TA 7796, Strengthening PPP in the Philippines.

37. Methodologically, the report is divided into six separate sections:

a. This Section 1 is the introduction to the report and the approach and methodology adopted for the review;

b. Guided by the principle of inclusive growth, the Philippine Development Plan (PDP) espouses PPP as a cornerstone strategy to improve infrastructure and related development services. Section 2 reviews the current PPP project development process, with special attention to the roles and responsibilities of Departments and Agencies of the Government of the Philippines (GPH) during the life cycle of a typical PPP Project. The key outcome of this Section is to determine where there are weaknesses in the process, such as to strongly suggest the need for reformed processes that require the attention of National Economic and Development Authority (NEDA) or PPPC, and in some cases, both;

c. Section 3 identifies gaps in the legal, regulatory and policy framework that NEDA, Department of Finance (DOF), Department of Budget and Management (DBM) and the PPPC, working together, proactively should attempt to resolve. In some cases, these gaps are perceived to be extremely unfriendly to a viable PPP program, but can be redressed through focused attention if the PPP program is to be as successful as desired by the current political administration. In some cases, the issue may not have an immediate solution but a program of action aimed at correcting the issue, or mitigating its negative impact needs to be developed;

d. To illustrate how the PPPC can be used to maximum effectiveness, Section 4 provides an overview of what PPP Units do around the world, focusing particularly on those organizations considered to be very successful in recruiting PPP, primarily the countries that form part of the European Union, Australia, Canada and selected countries in Africa and Asia. Section 4 compares and contrasts the functions of the most successful units with that of the PPPC in the Philippines. The comparison is not meant to be an invidious one but rather to highlight the role the unit could, and should, play in eliminating process weaknesses described in Sections 2 and 3; and

e. Section 5 examines the other core business processes of the PPPC and, in the context of the conclusions in Sections 2, 3 and 4, how its functions might be expanded, with such expansion properly phased over time to enable it to gradually take on more responsibility for the success of the PPP program than it currently seems to have. The review, by necessity, encompasses not only the expansion of functional activity but, probably, the institutional and locational modifications that might better ensure success.



38. Stakeholder Consultation on this document was held on 4th September 2012 at Discovery Suites, Ortigas. The Consultation was attended by participants from government, private sector and academia who were invited to provide feedback on the recommendations included in the Report. A Summary of the consultation is provided in Appendix 2 and a list of attendees is provided in Appendix 3. The outcomes of this consultation have been considered and, where relevant (Refer Appendix 2), are addressed in this Final version of the report.

39. The following appendices also form part of the report and are written so as to elaborate on key points made in the main text.

Appendix Title Substance

1 Historical Antecedents to current PPPC.

Sets out a brief history of the PPPC from its inception to current day and its functional evolution over time.

2 The Outcome of the Public Consultation of September 4th

Summarizes the key points made by stakeholders with regard to the paper.

3 List of Attendees to the Public Consultation

Identifies stakeholders who attended the Review of the Institutional Set-up.

2.0 EXISTING PPP FRAMEWORK AND OVERVIEW OF THE ROLE OF THE

AGENCIES

2.1 PPP as a Development Strategy

40. The PDP espouses PPP as a cornerstone strategy to improve infrastructure and related development services, which in turn are expected to enable economic productivityand employment generation. Inadequate infrastructure has been, and continues to be, a binding constraint. Infrastructure investments as a percentage of Gross Domestic Product (GDP) peaked in 1997 at 24.8%, but generally declined over the ensuing years to 15.6% in 2010. In contrast Asian neighbors, such as Thailand and Malaysia, averaged 40% of GDP, and have been achieving higher economic growth rates.5

41. Low investments, coupled with a low interest rate regime, clearly points to a lack of productive

opportunities in the economy. The PDP identifies the critical areas for stimulating PPP investments: improved project preparation and implementation; coordinated and integrated infrastructure development across sectors and between national and local government programs; and improved institutional and regulatory environment of the infrastructure sector.

42. The recommended key policy reforms for each area are:

5 Philippine Development Plan, 2004, p. 30



Project Development Integrated Infrastructure

Development

Institutional and Regulatory

Environment

Strengthening capacity of NEDA and other government agencies in value engineering, risk analysis and management;

Preparing model transaction and contract documents;

Monitoring, management and evaluation of PPP projects;

Synchronizing the planning and budgeting process—ensuring program/project priorities are given the necessary budgetary allocation.

Harmonizing national and Local Government Units (LGU) planning and project prioritization to improve synergy with national government projects;

Building LGU capacity for planning and implementing projects;

Collecting, managing and integrating key infrastructure and related data at the national and local level.

Separating regulatory and operational function of implementing agencies to remove conflicts of interest;

Creation of regulatory framework in sectors where this is lacking;

Strengthening existing regulatory agencies through capacity building and reinforcing independence.

2.2 Enabling Environment

43. The basic legal framework for PPP is established in the BOT Law and Implementing Rules and Regulations (IRR). Related laws and issuances include the Local Government Code (LGC) and NEDA Joint Venture (JV) Guidelines. The BOT Law, being the primary PPP legal basis in the Philippines, is discussed at length.

A. Build-Operate-and-Transfer (BOT) Law

44. The BOT Law recognizes the indispensable role of the private sector as a driving force in national growth and development. It lays out the policy guidelines for the private sector to finance, construct, operate and maintain vital infrastructure and development facilities that are typically financed by the government. It grants authority for the private sector to recoup its investments, plus a reasonable return thereon, through the collection of tolls, fees and charges from facility users. It likewise provides the basis for the GPH to provide incentives and support (both financial and non-financial) to the private sector proponent.

B. Joint Venture (JV) Guidelines 45. Executive Order (EO)No. 423 issued in April 2005 mandates NEDA to issue JV Guidelines for

Government Owned and Controlled Corporation (GOCC), in consultation with the Government Procurement and Policy Board (GPPB).JV is not a contractual modality that is specifically defined in the BOT Law. The JV Guidelines effectively provide for an alternative mode of procuring infrastructure projects. Unlike projects undertaken through the BOT Law, JVs -as defined under the JV Guidelines- do not need NEDA/Investment Coordination Committee (ICC) evaluation and approval. Under the JV Guidelines, a JV may be a contractual JV, or a corporate JV.

46. For example, the JV Guidelines also admit unsolicited projects. A proponent pursuing an unsolicited project under the BOT Law cannot rely on any direct government equity. Shifting to the unsolicited JV permits direct government equity without prior examination by an approving authority (such as NEDA).



47. The JV Guidelines issued in May 2008 are in the process of getting amended but it is not known at this time what approvals or contacting process they will follow.

2.3 Overview of Government Agency Roles

48. The Administrative Code of the Philippines provides the basic mandates of the government agencies and instrumentalities across government’s three branches: executive, legislative and judiciary.

49. At the executive level, there are many institutional PPP stakeholders and they can be grouped

according to the following functions:

a. Policy formulation;

b. Policy implementation facilitation;

c. Quality, technical and economic regulation;

d. Project development and implementation;

e. Appraisal and approval; and

f. Monitoring and evaluation. 50. In addition to specific agency mandates, there are also inter-agency committees, notably,

committees of the NEDA Board that perform oversight functions on policy coordination and implementation. The key institutions at the executive level are discussed briefly in Table 1, below. These agencies and their roles are discussed in more depth in Annex 1 of this report.

Table 1

Current Roles of National Government Agencies In the PPP Program

National Government Agencies

Brief Description of Current PPP Role

Policy and Oversight Agencies

NEDA Leads and coordinates agency contributions to the formulation of the PDP,Public Investment Program (PIP) and Comprehensive Industry Arbitration Commission (CIIP). Evaluates and validates feasibility studies, prepares Project Evaluation Report (PER) and, as discussed in detail within this Section 3. NEDA is also mandated to monitor and evaluate projects vis-à-vis the parameters or conditions of approval, feasibility indicators and implementation issues that can feed to policy formulation. NEDA performs technical secretariat to the NEDA Board and its Committees, specifically the ICC and the Infrastructure Committee (INFRACOM); as well as to the BOT Law IRR Committee, which essentially tasks it with the review and drafting of the amendments. Recently, NEDA was given an ad-hoc assignment of reviewing and amending the JV implementation guidelines for GOCCs.





PPPC6 Provides technical assistance to Implementing Agencies (IAs) and their executing departments in the areas of project packaging, feasibility studies; manages Project Development and Monitoring Facility (PDMF); serves as repository of information on unsolicited proposals and PPP contracts; reports annually to the President regarding the status of the program; andreports to Congress salient features of PPP Contracts. New functions in the areas of Knowledge Management, Policy Formulation and Monitoring and Evaluation of PPP Projects.

Investment Coordination Committee of the NEDA Board

Sets policies and guidelines on public and PPP investment decisions Approve PPP national agency projectsup to PHP 300 million, LGU projects costing more than PHP200 million, endorses to NEDA Board projects that are larger than that threshold and all negotiated projects regardless of amount.

Office of the President Approves Build Own Operate (BOO) projects and other variants not specified in the BOT Law and its IRR.

INFRACOM Sets infrastructure policies consistent with national development goals and objectives and coordinates preparation of infrastructure program(s).

DOJ The role of the Department of Justice (DOJ) will be limited to those instances where the Secretary of Justice (SOJ) sits in the board, in an ex officio capacity or otherwise, of the implementing agency. In cases where the IA, other than a GOCC or any other government agency or instrumentality whose charter specifically designates the Office of the Government Corporate Counsel (OGCC) as its principal law agency, requests for clarification as to whether or not it can undertake the selected project, under its charter or any other law, the DOJ may provide legal services, such as issuance of a legal opinion, to the IA.7 In cases where there is a dispute over Right of Way (ROW) acquisition between the IA and another government department, agency, bureau, and instrumentality of the National Government (NG), the DOJ shall settle the dispute, if the same involves only a question of law. If the dispute involves questions of law and fact, the DOJ shall settle the same, provided one of the government parties thereto has designated, pursuant to its charter, a law agency other than the Office of the Solicitor General (OSG).8

OSG/OGCC In right of way acquisition-

a. In cases where there is a dispute over ROW acquisition between the IA and another government department, agency, bureau, and instrumentality of the NG, the OSG shall settle the dispute, if the same involves only both questions of law and of fact, provided both disputing

6Based on EO 8 and its amendment and the revised BOT Law IRR (April 2012 draft)

7 Sec. 3 (7), Chapter 1, Title III, Book IV, Executive Order No. 292, otherwise known as the Administrative Code of the Philippines

8Sec. 67, and Sec. 68 (2), Chapter 14, General Provisions, Book IV, Administrative Code.





parties has designated the OSG as its principal law agency, pursuant to law or its charter.9

b. In cases where ROW acquisition is undertaken by the implementing agency or the Department of Public Works and Highways (DPWH), as the case may be, and there is pending or ongoing litigation, the OSG shall represent the IA in these and related proceedings.10

c. In cases where ROW acquisition is undertaken by the implementing agency, which is a GOCC or any other government agency or instrumentality, whose charter specifically designate the OGCC as its principal law agency, as the case may be, and there is pending or ongoing litigation, the OGCC shall represent the IA in these and related proceedings.11

In contract drafting and negotiation, generally, assist implementing agencies review contracts prior to approval of IA heads and DOF – a. The OSG, upon request of the IA, other than a GOCC or any other

government agency or instrumentality whose charter specifically designate the OGCC as its principal law agency, may issue rules and guidelines governing the preparation of contracts, making investments, undertaking of transactions, and drafting of forms or other writings.12 The draft revised BOT Law IRR provides for review of the project contract by the OSG.

b. When the IA is a GOCC or any other government agency or instrumentality whose charter specifically designate the OGCC as its principal law agency, requests for an opinion as to any matter regarding the preparation of the contract, including any question as to the specific contractual provision, the OGCC may issue a legal opinion.13 The OGCC may also review and if necessary, recommend revisions or modification on contracts referred by the IA.14

Role in the event of breach of contract –

a. The OSG may investigate, initiate court action, or in any manner proceed against any person, corporation, or firm for the enforcement of any contract in favor of the NG.15

b. When the IA is a GOCC or any other government agency or instrumentality whose charter specifically designate the OGCC as its principal law agency, requests for an opinion as to any matter regarding the preparation of the contract, including any question as to the specific contractual provision, the IA’s respective legal

9Administrative Code, Book IV, General Provisions, Chapter 14, Sec. 68 (1).

10 Administrative Code, Book IV, Title III, Chapter 12, Sec. 35 (5).

11 Administrative Code, Book IV, Title III, Chapter III, Sec. 10.

12Supra note 1.

13 OGCC Rules and Regulations, Rule 6, in relation to Administrative Code, Book IV, Title III, Chapter 3, Sec. 10.

14Ibid.

15 Administrative Code, Book IV, Title III, Chapter 12, Sec. 35(2).





departments may investigate, subject the administrative supervision and control by the OGCC.16

In dispute resolution –

a. The OSG shall represent the IA, other than a GOCC or any other government agency or instrumentality whose charter specifically designate the OGCC as its principal law agency, and its officers, in all civil actions in the Supreme Court, the Court of Appeals, and all other courts or tribunals.17 The OSG shall also represent the Republic of the Philippines, upon instructions of the President, in international litigations or negotiations where the legal position of the Republic must be defended or presented.18

b. The OGCC shall represent the IA, which is a GOCC or any other government agency or instrumentality whose charter specifically designates the OGCC as its principal law agency, in the litigation of appropriate cases brought before the courts or quasi-judicial bodies in the Philippines or abroad.19

DOF Approves project agreement, government undertakings, direct and contingent, signs Official Development Assistance (ODA) loan agreements, manages and monitors contingent liabilities. DOF chairs the ICC Cabinet Committee.

DBM Prepares the national expenditure plan for approval of Congress into a General Appropriations Act. It determines the aggregate magnitude of the budget and allocation across government entities in close consultation among planning and fiscal agencies of the government. For PPP projects with an ODA component, DBM issues, after the approval of the NEDA ICC, a Forward Obligational Authority (FOA). The FOA serves as the instrument authorizing the DOF to negotiate with the international financing institution. DBM issues Multi-Year Obligational Authority (MYOA) in projects involving multi-year contracts.

Implementing agencies or IAs (line departments, GOCCs, LGUs)

Undertake sector planning and programming of investments Identify and prioritize the PPP projects, prepare pre-investment feasibility studies, including the business case for ICC approval, procurement and contract award and management. Generally, the agency budget shoulders any cost contribution toward the preparation of the project for approval and tender. In addition, the implementing agency is responsible for project monitoring and evaluation.

16OGCC Rules and Regulations, Rule 3, Section 1.4, in relation to Administrative Code, Book IV, Title III, Chapter 3, Sec. 10. 17 Administrative Code, Book IV, Title III, Chapter 12, Sec. 35(1). 18 Administrative Code, Book IV, Title III, Chapter 12, Sec. 35(10). 19

OGCC Rules and Regulations, Rule 3, Section 1.1 (a), in relation to Administrative Code, Book IV, Title III, Chapter 3, Sec. 10.





Some of the IAs has economic regulatory functions, that is, setting and approval of performance standards and tariffs: examples include: Philippine Port Authority (PPA), Light Rail Transit Authority (LRTA), Philippine National Railway (PNR),Metropolitan Waterworks and Sewerage System (MWSS) and LGUs.

Regulatory Agencies (economic regulation)

Roads: Toll Regulatory Board (TRB) Ports: Philippine Port Authority (PPA) Airports: Civil Aviation Authority of the Philippines (CAAP) Rail: Light Rail Transit Authority (LRTA) and Philippine National

Railways (PNR) Water: Local Water Utilities Administration (LWUA) for water

districts; LGUs (self-regulate), Concessionaires (regulation by contract), private providers, coops- National Water Resources Board (NWRB)

Regulatory Agencies (resource, quality)

NWRB: Water resource/allocation DOH: Water quality; it determines the Philippine National

Standard for Drinking Water and monitors compliance of water utilities

Environment: Management Bureau: Environment, Health and Safety.

COA Constitutional body tasked with audit of government agencies. Role on PPP not clearly defined yet.

LGU Legislative Councils

Approve development plans, investment program, projects, budget, financing and tariffs of LGU projects.

Local Development Councils

Approves LGU PPP Projects: Municipal Development Council (MDC) – with cost up to PHP20 million. Provincial Development Council (PDC)- above PHP20 million up to PHP50 million. Regional Development Council (RDC)- above PHP 50 million up to PHP200 million.

DILG Has no direct, or formal, role in planning, preparation or execution as LGUs are autonomous. At best, it can advocate for PPP, coordinates capacity building and training of LGUs with PPPC and issues circulars to this effect. In process, however, of developing guidelines for doing PPP. Recently, however, it was given an ad-hoc task of preparing implementing rules and regulations for joint ventures between LGUs and private proponents (Note: the LGU code allows the LGUs to enter into cooperative agreements with private proponents for services within the ambit of the devolved activities to LGUs).





BOI Prepares the guidelines for the Omnibus Investment Code (OIC) and the annual Investment Priorities Plan (IPP). According to the BOT Law, PPP projects costing at least PHP 1 billion can avail of the OIC incentives upon registration with BOI, whether solicited or unsolicited proposal. Projects costing less than PHP1 billion may also avail of incentives provided they are covered under the priority activities of the current IPP.

51. At the judiciary level, the 1987 Philippine Constitution states that the judicial power is vested in

the Supreme Court and in such lower courts as may be established by law. The constitution defines judicial power as inclusive of the “duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.”20

52. Although not directly involved in the development, implementation and regulation of PPP

projects, the Philippine judicial system also plays an important role in the government’s PPP program.Although the BOT Law IRR leaves the parties free to determine contractually the mode of resolving disputes arising from contract and allows them to agree on the venue for the resolution of disputes, arbitration or litigation, past contracts examined, including for the DaangHari Project, contain an arbitration clause. Judicial resolution has been prominent in those controversies involving violation of the bidding rules, the Constitution or the laws, or those that are grossly disadvantageous to the government.

53. A case in point is the NAIA Terminal III Project21 involving the validity of the BOT Agreement for

the development of the NAIA Terminal III. The Supreme Court declared the said agreement void for violating the BOT Law and the bidding parameters that were the basis for the public tender. Discounting the fact that NAIA Terminal III had, by that time, beenalmost completed, the Supreme Court ruled that the consortium that won the bid did not have the minimum financial capability required by the BOT Law to undertake the project. Further, the Supreme Court also ruled that the BOT Agreement had undergone numerous and substantial amendments following the award that it deviated too much from the draft BOT Agreement that formed part of the bid documents during the tender.

2.3.1 Republic Act No. 8975

54. To ensure the expeditious and efficient implementation and completion of government infrastructure projects to avoid unnecessary increase in construction, maintenance and/or repair costs and to immediately enjoy the social and economic benefits, Republic Act (RA) No. 8975 was passed.22 One of the key provisions of this law is to prohibit the issuance of temporary restraining orders (TRO), preliminary injunctions and preliminary mandatory injunctions against the government to restrain prohibit or compel the following acts: a. Acquisition, clearance and development of the right-of-way and/or site or location of any

national government project;

20

The 1987 Philippine Constitution, Article VIII, Section 1. 21

Agan v. PIatco; GR No. 155001, 5 May 2003 and 21 January 2004. 22

Section, 1, Republic Act No. 8975, entitled “AN ACT TO ENSURE THE EXPEDITIOUS IMPLEMENTATION AND COMPLETION OF

GOVERNMENT INFRASTRUCTURE PROJECTS BY PROHIBITING LOWER COURTS FROM ISSUING TEMPORARY RESTRAINING ORDERS. PRELIMINARY INJUNCTIONS OR PRELIMINARY MANDATORY INJUNCTIONS, PROVIDING PENALTIES FOR VIOLATIONS THEREOF, AND FOR OTHER PURPOSES;”



b. Bidding or awarding of contract/ project of the national government as defined under Section 2 hereof;

c. Commencement prosecution, execution, implementation, operation of any such contract or

project; d. Termination or rescission of any such contract/project; and

e. The undertaking or authorization of any other lawful activity necessary for such contract/project.23

55. Nonetheless, if the matter is of extreme urgency involving a constitutional issue, and unless a TRO is issued grave injustice and irreparable injury will arise, then the issuance of the same shall be allowed.24

56. If, after due hearing, the court finds that the award of the contract is null and void, the court

may, if appropriate under the circumstances, award the contract to the qualified and winning bidder or order a rebidding of the same, without prejudice to any liability that the guilty party may incur under existing laws. It is also provided that if any TRO/Injunction is issued in violation of the law it shall be considered invalid and would have no force and effect.25

57. At the legislative level, the main involvement of Congress is in the formulation of laws.

However, Congress has oversight functions, and may monitor the execution and implementation of laws, through a congressional oversight committee, or requiring the submission of regular reports as in the case of the BOT Law, which requires the PPPC to periodically submit monitoring reports and copies of PPP contracts.

3.0 INSTITUTIONAL, LEGAL, REGULATORY AND POLICY CONCERNS 58. Based on our review of PPP processes related to the identification, selection, prioritization,

evaluation, approval, tendering, negotiation, and management processes of PPP, including the review of ICC Guidelines, Section3 summarizes our recommendations regarding steps to take in redressing the issues. Recommendations are made regardingexpansion in the functional roles and responsibilities of selected Departments, Agencies, Offices and Bureaus of the Executive Branch (EB), as identified in the Table below and further relevant observations are made regarding the legal, regulatory and policy frameworks, as it relates to PPP.

a. Suggestions for expansion in roles and responsibilities in the functional processes of Departments and Agencies as these relate to PPP are set forth in Section 3.1 and, in particular, Table 2, below;

b. Legal, regulatory and policy framework issues are outlined Section 3.2; and

c. Policy gaps are discussed in Section 3.3.

23 R.A. No. 8975, Section 3 24 R.A. No 8975, Section 3 25 R.A. No. 8975, Section 4



3.1 Institutional Gaps

59. Although we mention several areas where functional responsibilities can be expanded, some of which are already under way, a key area is the need for more explicit policy and project preparation guidance in the ICC Guidelines. The current ICC Guidelines treat traditional procurement projects within the same guidelines as PPP projects, a practice which can lead to confusion. Policy matters, including project preparation guidelines, should be set forth in a separate document as is the case with best practice elsewhere, Europe, Australia, South Africa, and Canada, to name some of the most noteworthy PPP programs, have guidelines set forth exclusively for PPP.

60. In this respect, areas of concern regarding institutional gaps include the following.

Table 2

Areas for Improvement in PPP Processes


Agencies Involved


Policy Formulation NEDA Board and Committees: Infrastructure Committee and Investment Coordination Committee, NEDA Secretariat PPPC. DOF Local Development Councils (LDCs) and Local Sanggunians (LSs)

Strengthen PPP policy guidelines as discussed in this report; in addition, define policies and preparation guidelines for each of the topics identified in the Executive Summary (ES) and in the main text of the report. - Define scope and content of

Contract Management; - Set guidelines for allocating and

managing government support for PPP projects, including contingent liabilities;

- Set Viability Gap Fund (VGF) process and implementation Guidelines.

PPPC to build capacity of local councils and Sanggunians to formulate policies promoting PPP.

Planning (PDP and Sector Plans (SPs))

NEDA, IAs, LGUs and LDCs

Prepare long-term development plan and sector master plans.

Investment Programming (PIP, CIIP)

NEDA, INFRACOM, IAs (including LGU Executive) LDCs, LSs and PPPC.

Strengthen project selection criteria particularly the adoption of multivariate analysis (MVA) in conjunction with early social cost benefit assessment (SCBA).

Budgeting Congress, DBM, IAs LSs

Formulate and set up funding mechanism for multi-year contracts.




Agencies Involved


Determine appropriate financing mechanism for different PPP funds such as the Strategic Support Fund (SSF), VGF and, if required, Contingent Liability Fund (CLF)

PPP Program Facilitation

PPPC Expand functions of PPPC into quality control and other areas as set forth in Section 5 of this report. Review staffing and capacity constraints given existing PPPC staff and resources

Project Preparation IAs, LGUs, PPPC, PDMF LGU Executive

Build capacity for preparing projects or managing the out-sourced PPP project preparation. Require value for money analysis as a standard component of a feasibility study.

Project Appraisal and Approval

NEDA, PPPC LDCs and LSs

Strengthen project appraisal by adopting strict guidelines for value for money analysis (VFM).

Land Acquisition

IA, LGU, DBM Improve capacity of IA/LGU to manage the process for land acquisition, including compliance with resettlement and IP guidelines

Provide necessary funding for multi-year contracts

Congress, DBM Address the need to ensure certainty with regard to availability and release of funds in support of MYOA obtained by IA and issued in favor of project.

Procurement and Contract Execution

IA, LGU Identify procurement watchdogs.

Contract Review and Approval

IA, LGU, OGCC (for corporate entities), OSG, National Government Agencies (NGAs), DOF and LSs

Establish dedicated ICC PPP guidelines as mentioned in previously.

Contract Dispute Resolution

IA, LGU, DOF Establish Contract Management Guidelines to identify the role of DOF for any changes in project agreement




Agencies Involved


or changes in base case financial model post financial close and/or role of IAs and DOF in dispute resolution, refinancing gains, workouts, expansions, etc.

Arbitration IA (represented by OSG or OGCC)

RA No. 9285 recognizes various forms of dispute resolution mechanisms, including arbitration. In the event parties choose arbitration, it may be useful to consider a model clause, but the type of dispute resolution process, including judicial processes, may be determined in the course of project preparation and contract drafting. For example, construction disputes may fall within the jurisdiction of the Construction Industry Arbitration Commission (CIAC,) even if some other institutional arbitration is provided in the contract.

Contingent Liability Management

DOF Develop Guidelines for effective management of contingent liabilities, which may require provisioning into a special fund.

Regulation: Economic TRB, PPA, LRTA, PNR, LWUA, MWSS and LSs

Until legislation is enacted to take out conflict of interest in roles, resort to regulation by contract and ring-fence regulatory operations to contain moral hazard, such as was done with the creation of the MWSS Regulatory Office.

Regulation: Quality/Resource

NWRB, CAAP, Department of Environment and Natural Resources (DENR), Environment Management Bureau (Environmental Compliance Certificates) (EMB (ECC)), National Commission on Indigenous Peoples(NCIP), Department of Health (DOH) (water quality)

For both economic and quality regulation, strengthen enforcement regulations.

Water Rights NWRB While this award of water rights is clearly a function that belongs to NWRB, water sector economic




Agencies Involved


regulation, e.g. tariff setting is highly fragmented with overlaps in responsibilities between LWUA and NWRB and self-regulation of LGUs.

Foreign Ownership of PPP projects

Constitution Ownership and Operation are regulated by Constitution

Contract Monitoring and Evaluation

PPPC, IAs Clarify the role of PPPC in monitoring and evaluation. Specifically, identify the tasks and activities that would be undertaken by the PPPC in relation to Contract Management and how this differs from the activities of other agencies that are also involved in this function

Project Promotion Department of Trade and Industry (DTI), PPPC, IAs

All three entities involved in promotion, but who coordinates activities?

Audit

Commission on Audit (COA) COA is a constitutional body, but there is a need to define explicit guidelines on COA’s role in PPP transactions, in particular scope of audit and point of intervention in the process; in this regard seek DOJ opinion as to their audit role in all PPP projects, after which, NEDA and PPPC to assist COA in formulating audit guidelines for PPP

LGU PPP Project Preparation, Capacity Building, Training

PPPC, Department of Interior and Local Government (DILG)

Improve coordination to maximize PPPC inputs into this function

61. Some of our recommendations, above, can be amplified further:

a. In a separate paper, Evaluating Gaps in PPP Process, GHD sets forth a number of areas

where ICC policy and project preparation and approval guidelines could be augmented. These include, but are not limited to, the following topics: “Affordability”; “Value for Money”; “Designing the Payment Mechanism”; “Risk Management”; “Viability Gap Funding”; “Definition of a Complete Feasibility Study”; “Unsolicited Proposal Process”; “Requirement for Further Approvals by ICC”; “Contract Management”;” Refinancing Gains”; and “Dispute Resolution”;

b. The role of the PPPC can also be expanded as is described in Section 4, further below, to

mirror the roles and responsibilities of successful PPP units elsewhere. In particular, the PPPC should have an important role in Quality Control (QC) and Monitoring and Evaluation



(M&E) of PPP projects. But in the latter case, its role in this should be better differentiated from that of the IA, DOF and NEDA;

c. The Contract Management (CM) function in other countries is often conducted by one unit. To avoid conflicts of interest, the function is sometimes assumed by a unit that is distinct from the national PPPC. In those cases, the CM function could include activities related to M&E and Contract Administration (CA). The following definitions are relied upon in this paper to differentiate the function of M&E from that of CA. M&E, an activity relegated to the PPPC by the IRR and EO8, for example, could broadly involve ensuring, or evaluating, periodically: i. Compliance with the project agreement and facility agreement;

ii. Adherence to the GPHSocial Safeguards Performance Standards (SSPS), as set forth in

the project agreement;

iii. Extent to which the commercial objectives originally set forth by the implementing agency for the infrastructure facility are being achieved;

iv. Providing an early warning system for government if the facility appears to be in danger

of becoming non-compliant in any of its obligations; and

v. Ensuring the adequacy of the maintenance program extended to the assets under the control of the project company that are to be transferred to GPH at the expiry of the project agreement.

62. M&E could also involve ex post evaluation, i.e., determining whether the project actually

delivered value for money, or whether such projects should be configured differently in order to increase the chances of success, or identifying other lessons learned from the project’s implementation and operation.

63. CA, as a separate component of CM, can be said to involve special duties that may arise during

construction and operations involving changes in the project agreement or base case financial model, such as coordinating requests for variations during construction or operations, as and when needed, including changes to the financial model; refinancing and implementing agreed principles relative to the sharing of refinancing gains; restructuring of project agreement, as necessary, following force majeure; supervising asset handover at the expiry of the contract; supervising early termination activity and confirming accuracy of related termination payments; assisting in the management of disputes and their resolution; approving changes in the base case financial model (in conjunction with other project stakeholders) and any other non-routine activity for which special time, focused attention and the drafting of recommended actions are needed.

64. The IRR, in this regard could use some enhancements:

i. DoesDOF have a role in CA in case some event occurs that createsthe need to re-negotiate

the project agreement or the base case financial model? ii. What is the definition of M&E i.e., what are theelements of a PPP that have to be

monitored and evaluated? Where do the results of M&E get recorded and displayed? What purposes are served?



iii. Given the existence of a NEDA project monitoring staff, what overlaps in responsibility exist in the M&E functionbetween NEDA and the PPPC and how do they get reconciled?

iv. The IAis the actual administrator of a PPP contract, but it is unclear what its relationship

with the DOF role is and/or how oversight and conflicts of interest are avoided on an ongoing basis.

v. While there is nothing wrong with the fragmentation of a function, it does place a burden on the need to be clear about roles, otherwise accountability is lost. It would appear that the role of the DOF, in particular, could be made clearer with regard to its review and approval rights of any changes in the project agreement, post financial close. This would reduce conflicts of interest (or moral hazard) within the IA, given that the latter is the main point of contact with the PPP project company.

65. Additionally, DOF appears to have locked in an important role in defining guidelines for

allocating and managing government support for PPP projects, including contingent liabilities, as well as setting up a system for managing and provisioning for contingent liabilities. This is in line with PPP practice elsewhere;

66. MYOA is a requirement prior to entering upon multi-year contracts. It imposes obligation on the

department or agency to include in its annual budget the amount it is obligated to pay for each budget period. Because funds are appropriated each year, and the MYOA is not an explicit performance undertaking from the GPH, this raises concerns amongst lenders to PPP projects. To displace this instrument, what needs to be addressed is the availability of funds to meet obligations (and continuous replenishment from automatic appropriation) for a long-term project. An example is a Road User Fund, which, de-jure, gets annual contributions from motor vehicle registration. Such funds require legislation.

67. In a DOJ opinion issued to the Department of Education (DePEd) for the 10-year, Build Lease

Transfer (BLT) classroom project, and the specific question of how to devise a funding strategy for MYOA, the above specific issues werenot addressed. However, DOJ - in its April 23, 2012 opinion letter - stated that in the event an appropriation was approved to meet lease payments for any given year, the President has authority to augment from savings generated in other offices of the Executive Branch in order to meet that obligation. This is consistent with what DBM informed GHD in February 2012. This means that, in the absence of any freed portion available within DePEd’s budget ceiling, a legally realigned or re-allocated fund from actual savings in any other agency within the Executive Branch may be used to cover annual deficits in the MYOA-covered project. However, this still falls short of an explicit performance undertaking;

a. Generally the powers of the regulator (with regard to economic regulation) and that of COA

(with regard to audit) need to be reconciled with a smooth running PPP program. Overlaps of authority between these two institutions and the implementing agency with regard to audit rights or economic regulation potentially cause confusion and uncertainty for the private investors and are not good for the PPP program.

For example, the role of COA has become contentious with respect to (a) DOH PPPits unofficial view is that government should always have a share in the revenue of the operator; and (b) it may audit the private sector proponent’s books. There is also no official issuance from COA on the extent of its audit of PPP. (When GHD attended the meeting with COA early in the engagement, the latter indicated it is preparing such guidelines);



b. Promotion can also be a fragmented function, with several agencies having roles. This appears to be the case in the Philippines as the PPPC promotes PPP and its various activities, the IAs promote their tenders; and DTI promotes foreign investment in general (which in-turn includes PPP). If DTI is to lead this, there is a need to recognize the roles of agencies that perform this function with the objective of synchronizing activity so optimize the effectiveness of the promotional activity. GHD would suggest that PPPC draw up an annual PPP promotion plan, to be agreed with DTI, that sets forth goals and action plans for the activity during the ensuing year. Roles and responsibilities of DTI, PPPC and selected IAs would be clearly set forth in the plan along with its resourcing. It would then be the responsibility of DTI to properly synchronize the execution of this plan. This would have the benefit of (a) identifying what will be done during the year; (b) who will do it and by what timeframe, and (c) how will it get resourced;

c. Another area that requires thought is how to "operationalize" the tasks/functions/inputs of the PPPC to local governments. EO 8 broadly defines this mandate for the PPPC, but implementation on the ground may require a clearer framework: i. NEDA Regional Offices require PPPC to coordinate all interventions with the LGUs. It is

unclear how much of a Chinese wall exists between what PPPC does (PPP project development/preparation/structuring support/guidance) and what NEDA is supposed to do (project evaluation and approval). Coordinating interventions with the LGUs in PPP activity is easier said than done because in reality, the LGUs have long been used to approaching NEDA Regional Offices for technical support for their various planning/program/project questions. Should the PPPC set up a PPP unit (or a PPP coordinating function) within the NEDA-Regional Office to provide said assistance since PPPC (which has no regional presence) is also under NEDA? Since NEDA is in charge of evaluating and approving PPP, specifically prevented from project preparation activity, how would this seeming "conflict" be managed?

ii. The DILG also has regional offices expected to oversee and guide local governments. For

PPP projects, they have no competencies to provide technical assistance but compared to NEDA, they have the stronger moral persuasion over LGUs, and they can easily influence them to attend training sessions on PPP for example. As such, PPPC has forged a Memorandum of Agreement (MOA) to reach out to as many LGUs as possible. DILG-main office agreed to this and in fact, issued a directive to its regional offices to encourage LGUs to avail of PPPC's training, technical assistance, project development guidance and support for their PPP projects. It also directed LGUs to set-up internal PPP Sub Committees. We address this question in a later section of this memorandum.

3.2 Key Policy, Legal and Regulatory Issues

68. The rest of this section focuses on areas of special concern in the legal, regulatory, and policy framework, particularly:

a. Conflict of interest (where agencies act as operators and regulators);

b. Role of COA in auditing PPP projects;

c. JV: Current Guidelines for PPP and Other Structures;



d. VGF, the development of a policy framework to use subsidies to make a tariff commercially sustainable in a PPP project, most often (but not always) one that features social infrastructure; and

e. VFM, the development of a policy framework for the use of a quantitative framework under which candidate infrastructure projects are compared and contrasted under two distinct implementation options: PPP vs. traditional procurement. The purpose of such a comparative framework is to arrive at that option best able to meet the user’s requirements and which yields the optimal combination of whole-of-life costs and quality (or fitness for purpose).26 VFM is not the choice of goods and services based on the lowest cost bid.27

3.2.1 Conflict of interest (where agencies act as operators and regulators)

69. A recent example of where there is a problematic merger in a single entity of regulatory

responsibility and contracting authority is the TRB. 70. The TRB was created under Presidential Decree No. 111228 and given specific powers to (a)

enter into contracts on behalf of the Republic of the Philippines for the construction, operation and maintenance of toll facilities, (b) to determine the toll rates which toll road operators may charge its users, and (c) to grant authority to operate a toll facility and to issue therefor the necessary “Toll Operation Certificate.” The exercise by the TRB of these concurrent prerogatives was challenged in Francisco v. Toll Regulatory Board,29 where it was argued that the TRB’s power to award toll contracts is inconsistent with its quasi-adjudicative function in the determination of rate adjustments. The Supreme Court ruled that there is no “irreconcilable clash” in the various functions of the TRB and the concurrence of these powers in one agency does not mean that the agency cannot be impartial. The decision of the Supreme Court validated the authority of the TRB to enter into contracts for the construction, operation and maintenance of toll roads, even if it later acts as the regulator.

71. We note that Francisco v. TRB is under reconsideration. 72. Notwithstanding the Supreme Court decision, on December 19, 2007, then President Gloria

Macapagal-Arroyo issued EO No. 686 transferring certain functions of the TRB to the Department of Public Works and Highways (DPWH) with the end view of addressing the conflict of interest. Consequently, the DPWH was authorized to –

a. Enter into contracts in behalf of the Republic of the Philippines for the construction,

operation and maintenance of toll facilities for highways, roads, bridges and public thoroughfares; and

b. Determine and decide the kind, type and nature of highways, roads, bridges and public

thoroughfares. 73. Under the same executive order, the TRB was directed to discharge the following functions:

26

http://www.government-accounting.gov.uk/current/frames.htm 27

HM Treasury, Value for Money November 2011 28

A presidential decree is a form of issuance that is considered statutory in nature. It is no longer issued at present and a number remain

valid. 29

G.R. No. 166910, 19 October 2010.



a. Issue, modify and proclaim from time to time the rates of toll that will be charged the direct users of toll facilities and upon notice and hearing, to approve or disapprove petitions for the increases; and

b. Grant authority to operate a toll facility and to issue the necessary "Toll Operation

Certificate” therefor. 74. Since the issuance of EO 686, DPWH has entered into two toll road projects (the Southern

Tagalog Arterial Road Expressway and the TPLEX). The DPWH was also involved in the recently awarded DaangHari-SLEX Link Road Project.

75. However, we note that since Presidential Decree No. 1112 is a law, it is not deemed superseded

by the issuance of EO 686. Thus it is a welcome development that the proposed amendment to the BOT law will effect a legislative change.

76. In the Technical Working Group Version of the bill entitled, “An Act Further Amending Certain

Sections of RA No. 6957, as amended by RA No. 7718, Entitled ‘An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes,’” the following provisions are proposed:

a. SECTION 15. Section 8 of the same Act shall be renumbered as Section 10 and amended to

read as follows: b. “Sec. *8+ 10. Regulatory Boards. – [The Toll Regulatory Board which was created by

Presidential Decree No. 1112 is hereby attached to the Department of Public Works and Highways with the Secretary of Public Works and Highways as Chairman.] THE APPROPRIATE GOVERNMENT REGULATORY BODIES SHALL APPROVE THE TOLLS, FEES, RENTALS, AND CHARGES, PROVIDED, FURTHER THAT THEY SHALL BE PROHIBITED FROM BEING A PARTY TO ANY PPP CONTRACTS. IN THE ABSENCE OF APPROPRIATE REGULATORY BODY, THE INVESTMENT COORDINATION COMMITTEE APPROVED PARAMETERS AND TERMS SHALL BE ADOPTED.”

77. In addition, the same bill proposed to add a new Section 11, which states:

a. SEC. 11. LEAD AGENCY FOR TOLL ROADS. – THE DPWH SHALL BE THE SOLE IMPLEMENTING AGENCY FOR NATIONAL ROAD PROJECTS IMPLEMENTED THROUGH PPP ARRANGEMENTS, THE PNCC SHALL, THEREFORE, NO LONGER ENTER INTO NEW CONTRACTS FOR THE CONSTRUCTION, OPERATION AND MAINTENANCE OF EXTENSIONS OF TOLL ROADS. ALL OTHER GOCCS AND GOVERNMENT AGENCIES OR INSTRUMENTALITIES ARE NOT ALLOWED TO IMPLEMENT ANY NATIONAL ROAD PROJECT THROUGH A JOINT VENTURE OR ANY OTHER PPP ARRANGEMENTS WITH THE PRIVATE SECTOR ENTITY.

b. ALL NATIONAL ROAD PROJECTS IMPLEMENTED THROUGH ANY PPP ARRANGEMENTS ARE

REQUIRED TO COMPLY WITH THE PROVISIONS OF THIS ACT. 78. Conflict of interest also exists in other industries, such as the water industry, and almost all

transportation industries, where the agencies concerned have dual operating and regulatory functions. The interim resolution of the conflict in TRB’s mandate was made easy in view of the distinct juridical personality of TRB and DPWH and the latter’s unequivocal mandate on road development. For agencies with dual functions, the practicable way of working around the conflict of interest is to regulate by contract. For example in the case of MWSS and the regulation of the concessions, the rate adjustments and performance standards were set forth in the contract. The contract also created a regulatory office, referred to as the MWSS -



Regulatory Office, which is not under the operational control of the MWSS administrator but reports directly to the MWSS Board for policy direction. Its principal task is to compute the rate re-basing adjustments every five years to permit the concessionaires to recover over the 25-year period stipulated in their agreements.30

3.2.2 Role of COA in auditing PPP Projects

79. The COA is an independent constitutional body. Its primary function is to examine, audit and settle all account and expenditures of the funds and properties of the Philippine government. It was also given the power to define the scope, techniques and methods of its auditing and examination procedures. It also may prevent and disallow irregular, unnecessary, excessive, extravagant or unconscionable expenditures, or uses of government funds and properties.

80. Article IX-D of the 1987 Philippine Constitution states:

SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the Government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties.”

81. In addition to its Constitutional mandate, the COA is empowered to:

a. Examine books, papers, documents filed by individuals and corporations with, and which are in the custody of, government offices in connection with government revenue collection operations, for the sole purpose of ascertaining that all funds determined by the appropriate agencies and collectible and due the government have actually been collected, except as otherwise provided in the National Internal Revenue Code.31

b. Have visitorial authority over non-government entities subsidized by the government, those

required to pay levies or have government shares, those which have received counterpart funds from the government or are partly funded by donations through the government. This

30

A member of the House of Representatives has proposed that the MWSS-RO be closed and replaced by an independent regulatory

agency (see “Solon proposes abolition of MWSS regulatory office,” http://newsinfo.inquirer.net/158073/solon-proposes-abolition-of-mwss-regulatory-office, last visited 26 April 2012. 31

Revised Administrative Code, Title I-B, Chapter 4, Section 13



authority, however, shall pertain only to the audit of these funds or subsidies coming from or through the government.32

c. Upon the direction of the President, exercise visitorial authority over non-governmental entities whose loans are guaranteed by the government, provided that such authority shall pertain only to the audit of the government's contingent liability.33

d. Examine and audit the books, records and accounts of public utilities in connection with the fixing of rates of every nature, or in relation to the proceedings of the proper regulatory agencies, for purposes of determining franchise taxes.34

82. Francisco v. Toll Regulatory Board35 is instructive on the role of the COA in PPP involving public utilities. In that case, the Supreme Court said that, in determining the reasonableness of the subsequent toll rate increases, the TRB should to seek out the COA for assistance in examining and auditing the financial books of the public utilities concerned. Section 22, Chapter 4, Subtitle B, Title 1, and Book V of the Administrative Code of 1987 expressly authorizes the COA to examine the aforementioned documents in connection with the fixing of rates of every nature, including as in this case, the fixing of toll fees. The Supreme Court has consistently held that "the law is deemed written into every contract." Being a provision of law, this authority of the COA under the Administrative Code (AC) should therefore be deemed written in the contracts (STOAs).

83. The Supreme Court previously applied the same AC provision in Manila Electric Company, Inc. v. Leachate36 where the Energy Regulatory Commission (ERC) was tasked to seek the assistance of the COA in determining the reasonableness of the rate increases that Manila Electric Company (MERALCO) intended to implement.

84. During the examination and audit, the public utilities concerned are mandated to "produce all the reports, records, books of accounts and such other papers as may be required," and the COA is empowered to "examine under oath any official or employee of the said public utility[ies]." Any public utility unreasonably denying COA access to the aforementioned documents, unnecessarily obstructs the examination and audit and may be adjudged liable "of concealing any material information concerning its financial status, shall be subject to the penalties provided by law.” In the Francisco case, the Supreme Court ruled that the TRB is further obliged to take the appropriate action on the COA Report with respect to the finding of reasonableness of the proposed rate increases.

85. The conclusion from the above is that by law COA has the right to audit public utilities, as defined by the Public Service Act (PSA), to ensure that tariffs are set and the franchise tax according to regulations. However, for non-public utilities, COA can exercise visitorial authority over entities with government subsidies or guarantees. In both cases COA has to issue clear cut guidelines on the exercise of these powers. Table 3, below, sets forth COA’s auditing rights with regard to PPP projects and the specific circumstances under which it can exercise such rights.

32

Revised Administrative Code, Title I-B, Chapter 4, Section 14(1). 33

Revised Administrative Code, Title I-B, Chapter 4, Section 14(2). 34

Revised Administrative Code, Title I-B, Chapter 4, Section 22. 35

G.R. No. 166910, 10 October 2010. 36

G.R. No. 166769, 6 December 2006.



Table 3 Summary of COA Authority

Department/Agency/Account or Event

COA Authority

Prequalification Bids and Awards Committee (PBAC)

Representative from COA is non-voting observer on the PBAC

Use of PDMF

COA possesses the power, authority, and duty under the Constitution (Article IX-D, Sec. 2[1]) to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities.

Revenue, share and/or receipts of IA

All revenues, share and/or receipts pertaining to or accruing to the Agency/LGU derived from any project proposed under the BOT Law and its IRR (2006), including expenditures or use of funds and property, owned or held in trust by, or pertaining to the Government, shall be subject to examination audit by the COA, including ensuring that such revenues, share and/or receipts are fully and properly accounted for and remitted to the Agency/LGU (BOT Law IRR, Section 12.19).

Equity contribution or funding support by IA

COA possesses the power, authority, and duty under the Constitution (Article IX-D, Sec. 2[1]) to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities. Where the IA is a GOCC without original charter, it is subject to COA jurisdiction on a post-audit basis.

Other support provided by IA (land acquisition, right-of-way), particularly if made through SSF

COA possesses the power, authority, and duty under the Constitution (Article IX-D, Sec. 2[1]) to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities. Where the IA is a GOCC without original charter, it is subject to COA jurisdiction on a post-audit basis.

Contingent Liability

COA possesses the power, authority, and duty under the Constitution (Article IX-D, Sec. 2[1]) to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities.



Department/Agency/Account or Event

COA Authority

Under Presidential Decree No. 1445 or the State Auditing Code, upon direction of the President, the Commission shall exercise visitorial authority over non-governmental entities whose loans are guaranteed by the Government, provided that such authority shall pertain only to the audit of the government’s contingent liability. Where contingent liability arises under contract, payment by the IA may, depending on the circumstances, require a COA process for approval and payment (for example, in cases of “special judgment” as discussed in National Home Mortgage Finance Corporation v. Abayari.[1]

Project proponent or special purpose vehicle created for the project

Non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the Government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity, are subject to post-audit (Constitution, Article IX-D, Section 2 [1]). However, the BOT Law IRR (2006) states that all revenues and receipts pertaining to or accruing to the Project Proponent shall be treated as private funds including interest or yield thereon, which may be remitted directly to the Project Proponent, as may be stipulated in the contract (Section 12.19). The Constitution, in Article IX-D, Section 3 states that no law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the COA. The 2009 Rules of Procedure of the COA states that COA may -

Audit of the books, records and accounts of public utilities as provided by law (for franchise tax and rate determination); and

Exercise visitorial power over non-governmental organizations (1) subsidized by the government, (2) those required to pay levies or government share, (3) those funded by donations through the government, (4) those for which government has put up a counterpart fund, or (5) those entrusted with government funds or properties.

Public utilities The 2009 Rules of Procedure of the COA states that COA may audit of the books, records and accounts of public utilities as provided by law (for franchise tax and rate determination). The BOT Law IRR (2006) states in Rule 12.19, in case of public utility projects, it is subject to examination audit of COA for purposes of determining if the mandated return on rate base is complied with.



86. The 2009 Rules of Procedure of the COA provides in Rule II, Section 5 that the following come within the jurisdiction of the COA to examine, audit and settle accounts extended to them -

a. National Government, its departments, bureaus, agencies and offices, including Philippine

embassies, consulates and other foreign-based government agencies; b. Local government units, their agencies, and other instrumentalities; c. Government-owned and/or controlled corporations and their subsidiaries; d. Constitutional bodies, commissions and offices that have been granted fiscal autonomy

under the Constitution; e. Autonomous state colleges and universities; f. Public Utilities and Franchise grantees for rate determination and franchise tax; g. Non-governmental entities subsidized by the government, those funded by donations

through the government, those required to pay levies or government share, and those which the government has put up a counterpart fund, or those funded by the government; and

h. Such other entities as may be provided by law to be under COA’s jurisdiction.

87. The COA has the exclusive authority to define the scope of its audit and examination, establish

the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties (Constitution, Article IX-B, Section 2 [2]).

3.2.2 Joint Ventures: Current Guidelines for PPP and Other Structures

88. The JV Guidelines, issued in 2008, define a joint venture as a contractual arrangement whereby a private sector entity, or a group of private sector entities on one hand and a Government Entity or a group of Government Entities on the other hand, contribute money/capital, services, assets (including equipment, land or intellectual property), or a combination of any or all of the foregoing.

i. Parties to a JV share risks to jointly undertake an investment activity in order to accomplish a

specific, limited or special goal or purpose. The objective is to facilitate private sector initiative in a particular industry or sector, and eventually transferring ownership of the investment activity to the private sector under competitive market conditions. It involves a community or pooling of interests in the performance of the service, function, business or activity, with each party having a right to direct and govern the policy in connection therewith, and with a view of sharing both profits and losses, subject to agreement by the parties.

ii. There is basis for the interpretation that the express enumeration of contractual

arrangements in the BOT Law is not exhaustive. Instead, it already contemplates PPP modes other than those expressly stated, including joint venture, subject only to prior approval by the President. The issuance of the JV Guidelines, however, has led a number of observers to believe that joint ventures, and corresponding agreements, have been removed from the



relevant approval process; and consequently, have not been adequately assessed for purposes of risk management, among others.

iii. But EO No. 423,37 pursuant to which the JV Guidelines was issued, delineates the various

governing law for government contracts as follows:

a. Contracts for the procurement of infrastructure projects, goods, and consulting services shall be governed by Republic Act (RA) No. 9184 and its IRR (Section 4, RA No. 9184);

b. Contracts for the lease of goods and real estate shall be governed by RA No. 9184 and its

IRR (Section 5[n], RA No. 9184); c. Contracts for the acquisition of real property needed as right- of-way, site or location for

national government infrastructure projects shall be governed by RANo. 8974 (Section 5[n]), RA No. 9184);

d. Contracts undertaken through BOT schemes and other variations shall be governed by RA No. 6957, as amended by RA No. 7718, and its IRR; and

e. Government Contracts financed wholly or partly with Official Development Assistance

(ODA) funds shall be governed by RA No. 4860, as amended, RA No. 8182, as amended by RA No. 8555, and RA No. 9184 and its IRR (Section 4, RA No. 9184). The GPPB may issue guidelines for Government Contracts financed with ODA funds with the objective of promoting transparency, competitiveness, and accountability in government transactions, and, where applicable, complying with the requirements of an open and competitive public bidding, consistent with RA No. 9184 and its IRR (Section 4, RA No. 9184).

iv. JV agreements are segregated from the foregoing classification of government contracts and

were instead included in separate Section 8, which states that the NEDA, in consultation with the GPPB, shall issue guidelines regarding JV agreements with private entities with the objective of promoting transparency, competitiveness, and accountability in government transactions, and, where applicable, complying with the requirements of an open and competitive public bidding.

v. The JV Guidelines effectively provide for an alternative mode of procuring infrastructure

projects. Unlike projects undertaken through the BOT Law, JVs as defined under the JV Guidelines do not need NEDA/ICC evaluation and approval. Under the JV Guidelines, a JV may be a contractual JV, or a corporate JV.

vi. For example, the JV Guidelines also admit unsolicited projects. A proponent pursuing an

unsolicited project under the BOT Law cannot rely on any direct government equity. Shifting to the unsolicited JV permits direct government equity without prior examination by an approving authority (such as NEDA).

vii. JV Guidelines are currently under review and it is not known what approvals or contracting

process they will follow.

37

Repealing Executive Order No. 109-A dated September 18, 2003 Prescribing the Rules and Procedures on the Review and Approval of all

Government Contracts to Conform to Republic Act No. 9184, otherwise known as "The Government Procurement Reform Act,” (2005).



3.2.3 Viability Gap Funding 89. GPH is looking to formalize a process for approving VGF. While they have approved VGF in

certain project before, they evidently have done this on a project by project basis. Also, there are numerous procedural and implementation issues which should be addressed with a policy.

3.2.4 Value for Money Analysis 90. The purpose of such a comparative framework, mentioned earlier, is to arrive at that option best

able to meet the user’s requirements and which yields the optimal combination of whole-of-life costs and quality (or fitness for purpose).38 VFM is not the choice of goods and services based on the lowest cost bid.39 It is based on VFM analysis.

3.2.5 Contingent Liability 91. A policy advisory prepared by the Congressional Planning and Budget Department (CPBD) of the

House of Representatives (HORs) indicates that as of 2006, about P569.93 billion in contingent liabilities have been registered in the books of the government. The rise in the amount of contingent liabilities has been attributed in part to infrastructure projects including those pursued under the BOT Law. The policy advisory states that “*t+he determined effort by the government to bring in the private sector through solicited and unsolicited projects, joint venture and concession agreements, has given rise to contingent liabilities.”40

“PPP arrangements expose the country to a diverse, complex and often large array of fiscal risks. Performance undertakings or acknowledgments of Government obligations are issued for projects undertaken by line agencies through PPP. Fiscal risks stemming from these projects include risks related to right-of-way, political/regulatory risk, change-in-law, currency convertibility, events of termination, events of force majeure, and take-or-pay arrangements, among others. Some of these eventualities translate to actual liabilities and should be included in the government’s budget when they do. The contingent obligations associated with the performance undertakings arise in case of delay or default on the part of Government in executing its deliverables and have varying probabilities of becoming real and having an impact on the budget.”

41

92. The ICC previously proposed that the national government integrate contingent liabilities accounting into its budgeting and financial programming framework and process. To accomplish this, the government should first develop a database of national government exposure to contingent liabilities, which can be based on a review of all contractual provisions that have contingent liability implications.42

i. Considering the impact of contingent liabilities, clear mechanisms to respond to situations in

which they are triggered ought to be put in place, including insurance coverage.

ii. It is important to note that there is no provisioning for contingent liabilities, currently, for contingent liabilities.

38

Http://www.government-accounting.gov.uk/current/frames.htm 39

HM Treasury, Value for Money November 2011 40

Policy Advisory No. 2008-4 entitled “Revisiting Public-Private Partnerships in Infrastructure Development: Improving BOT Governance” prepared by the Congressional Planning and Budget Department of House of Representatives. 41

Fiscal Risks Statement of the Department of Budget and Management (2012), p. 1. 42

PIDS LLanto.



iii. In the normal course of the financing of an infrastructure project including a PPP infrastructure project, it is frequently necessary for a country to backstop through performance undertakings by the national government (or its agent, the DOF), obligations entered into by any public sector agency, in order to raise the necessary supporting finance. These contingent liabilities are potential liabilities on the country’s balance sheet and are recorded as such.

iv. One potential alternative credit enhancement acceptable to the lending banks is to rely on

the guarantee instruments of the ADB or the World Bank; however, these donors will normally require as security for the issue of its guarantee a back-to-back counter guarantee from the Government of the Philippines, which instrument will again be a contingent liability on the country’s balance sheet. In addition, the issue of guarantees by these donors will have to be set off against the Bank’s country limit, which could be utilized for other purposes.

v. Moreover, there is a limit to the number and amount of guarantees that can be issued by the World Bank or the ADB. The potential size of the PPP infrastructure programme, due to the substantial infrastructure needs of Philippines, makes it impractical to rely on this source of support. It will also restrict the ability of the GPH to utilise its balance sheet in support of other strategic and important political and economic programmes.

4.0 ROLE OF PPP CENTER 93. A key objective of Section 4 is to use the considerable information which has become available in

recent years regarding the operation of PPP units, worldwide, particularly those that are regarded as best practice units and to compare their functions with those of the PPPC. The aim in the regard is to identify what further functions the PPPC could undertake that would help redress some of the gaps in process noted above.

94. Historically, the PPPC has been underutilized when compared with best practice units. 95. PPP units that are regarded as the most successful in the recruitment function are

assignedsome, or all, of the following functions, highlighted below43:

a. Policy Formulation and Coordination. A PPP unit may act as a consolidator of information and policy regarding PPP, overcoming the traditional silo structure of government agencies. While this function has a wider applicability at a central level, it may be feasible in a specific department with numerous offices involved in the PPP process. For example, the UK Treasury’s PPP Policy Team—part of Infrastructure UK (IUK)—is responsible for formulating the national PPP policy guidelines. In Canada, Partnerships British Columbia, the PPP unit for that province establishes policies and best practices for PPP management.

A PPP unit may coordinate the stakeholders involved in the PPP program at different levels. In casethere are department-led PPP units, the central PPP unit may serve primarilyto coordinate an overall national policy framework. For example, Ireland’s Central PPP unit chairsthe Inter-departmental Group on PPP, which brings together the PPP units from various ministriesand representatives of other interested agencies. The coordination may also happen across levels ofgovernment, especially in a federal structure. The National

43

This paper draws on a much fuller discussion on this topic, see Emilia Istrate, Roberto Puente, Project on State and Metropolitan Innovation, Moving Forward on Public Private Partnerships, Project on United States and Metropolitan Innovation, Brookings Institute-Rockefeller Foundation, December 2011. This section of the paper benefits greatly from the authors’ observations.



Australian PPP Forum, created in 2004, is anational coordination and cooperation mechanism among the federal, state and local governments on PPP. In addition, the PPP unit may coordinate not only with government agencies but also with otherstakeholders. For example, Ireland’s central PPP unit coordinates the Public/Private InformationalAdvisory Group(PPIAG), formed by representatives of employers’ organizations, unions, engineers’ organizations and public sector. In the case of the Philippines, PPP Policy Advocacy is best done from a centralized location, with the PPPC as the primary advocate and formulator and the appropriate agency, the actual issuer of policy. In the draft executive issuance to amend EO No. 8 all government agencies are directed to submit reports to the PPP Center on all projects undertaken through PPP.

b. Quality Control. PPP units may respond to poor PPP procurement incentives by acting as the

first reviewer of the potential PPP project proposals. This may occur when agencies or ministries promote PPP projects without fully taking into consideration the long-term fiscal impact on the national budget resulting from pursuing PPP projects that allowed them to avoid the national budgetary constraints. In addition, a PPP unit may verify whether the proposed project fulfills all the desired criteria set beforehand. Portugal’s central PPP unit, Parpública SA, conducts a technical assessment of proposed PPP projects before the procurement phase and provides its recommendation to the Ministry of Finance (MOF).44 The GHD Team recommends that the PPPC be the first reviewer of potential PPP projects, by assisting IAs with the use of MVA/SCBA to identify good project candidates. Budgetary and approval matters would continue to rest, respectively, with DBM and NEDA. As a quality control agent, the PPPC should also vet every project that goes to the ICC for approval, should attach its recommendations and be available at the ICC meeting where the project is tabled for evaluation to discuss the rationale for its recommendation.

c. Technical Assistance. One of the recurring problems in PPP is the lack of adequate and

necessary skill in the public sector to prepare PPP projects for tender. This proficiency is not limited to financing issues such as the assessment of the VFM, an issue which can be contracted out to private consultants. More important is to understand the place of the PPP project in the government’s long term plan, its fiscal consequences, commercial sustainability, the allocation of risk between the public and the private sector and what government reforms would be required for a successful implementation. While there is a role for private advisors in pursuing PPP due to the complexity of the contracts, the public sector should be able at least to adequately provide oversight of the consultants to secure the public interest.

The creation of a PPP unit with the necessary technical skills to help procuring agencies wouldsimplify the PPP process and allow for a more effective negotiation process. Further, as deemed necessary, it provides a consolidatedauthority in negotiations. This is especially true with the PPP project involves several departments within the procuring client.45

44

See, for example, World Bank – PPIAF, Public Private Partnership Units, Lessons in their Design and Use, October 2007, p.32 45

Marcus Ahadzi and Graeme Bowles, Public Private Partnerships and Contract Negotiations: an Empirical Study” Construction Management and Economics, p.22



Most PPP units currently in existence provide technical assistance to public entities procuring projects through PPP. This is one of the major reasons Parpública SA was created in 2003. Portugal had poor experience with PPP in the 1990s, due to inadequate consideration of long-term fiscal consequences, insufficient risk transfer to the private sector and rigidities in the procurement process.46 The lack of public sector capacity in evaluating and managing PPP deals added to these problems. Apart of the reform of the PPP process, the Portuguese government created Parpública SA not only to conduct quality control upstream but also to provide technical assistance in project procurement and management. There is some concern about the potential conflict of interest in PPP units that provide both quality control and technical assistance. It is said this would be similar with an accounting firm that provides both auditing and consulting services to the same client. The mix of incentives, it is claimed, may lead to disastrous results as was the case with Enron’s auditor, Arthur Andersen in 2001.47While most PPP units do not have a direct profit motive, it is believed by some observers that these two functions should be clearly delimited in the structure of a PPP unit. However, GHD does not agree with this objection. Some of the most successful PPP units address both functions as will be shown in Table 1, further below. The PPPC should continue to be active in managing the PDMF, providing project preparation technical assistance to whichever Department requires it. However, PPPC should also review for completeness and for its endorsement, eachand every PPP project, regardless of its source, before it goes to the Investment Coordination Committee Technical Board (ICC-TB) for evaluation and approval. A strong and consistent quality control function is important in securing a successful PPP program. PPPC should also be placed in charge of all feasibility study funds for PPP that are made available to the GPH by donors, including those which have been made available to the Development Bank of the Philippines (DBP). There should only be one source of feasibility study funding for PPP in the country. We understand that PPPC assumes these roles in the draft revisions to EO No. 8. In the draft executive order intended to amend certain portions of EO No. 8 renaming the “BOT Center”as the “PPPC,” a PDMF Board composed of representatives from NEDA, DOF, DBM and PPPC is created. To sustain the PDMF, PPPC may collect and receive reasonable fees and recover costs under guidelines as may be prescribed by the proposed PDMF Board. In addition, PPPC may receive contributions, grants and/or other funds from among others, government agencies, corporations, LGUs, local and foreign donors, development partners and private sector institutions.

d. Standardization and Dissemination. In a PPP arrangement, the teams of bidders have to deal with myriad statutes and government regulations. Moreover, these regulations differ within a country from one administrative jurisdiction to another. This contributes to substantial transaction costs related to the procurement of PPP, for both the private sector and the government, estimated to be 10 percent of a project’s capital costs.48

46

World Bank – PPIAF, Public Private Partnership Units: Lessons for their Design and Use in Infrastructure, 2007 p 32 47

The Sarbanes-Oxley Act of 2002 specifically restricts audit companies to provide any other services besides audit for their clients 48

GertiDudkin and TimoValila, Transaction Costs in Public Private Partnerships: a First Look at the Evidence,” Competition and Regulation in Network Industries, 2006, p. 307-330



A PPP unit may deal with these transaction costs by standardizing the procedures and requirements at different levels of the procurement process. This standardization process may take the form of documentation, or recommended guidelines, and best practices. The companies interested in PPPopportunities can see beforehand a standard of the contracts employed and the required PPP characteristics, reducing the uncertainty in the market. In addition, it reduces the costs incurred in filling the paperwork for the bid. The public agencies benefit from the cutback in costs and time. Standardized documentation requires less time to grant approvals, create the tender documents or negotiate the contract with the bidders. Standardization complements the other functions of a PPP unit. By providing standardized documentation as far as that is possible, the PPP unit helps public entities to avoid pitfalls in structuring and managing the PPPcontract. Further, it provides another level of assurance that the contracts pursued fulfill the standard requirements and protect the public interest. In addition, it helps the promotion of PPP, because it creates certainty and legitimizes the PPP market. Standardization of difficult clauses and, subsequently, standardization of contracts for different project typologies should be a major responsibility of the PPPC. It should be responsible for updating, as necessary, all Sector Guidance and/or the National Government Agencies (NGAs) Manual in this regard.

e. Promotion. The creation of a PPP unit increases the credibility of the government’s commitment to PPP. Further, a PPP unit may act as a consolidator of information on PPP opportunities, given that investors are not always aware of the projects that the government would consider ripe for PPP.

Both developed and developing countries have used PPP units as means to increase private interest in PPP. Some maintain that incorporating both promotion and advisory functions in a PPP may lead to a conflict of interest problem. If the PPP unit is considered successful by the number of PPP deals completed, the PPP unit may have an incentive to accelerate the process and not do full diligence on the projects. The optimal arrangement is to split the functions in different entities or have the promotion department of the PPP unit reporting to different government bodies. The Philippines, for example, does this given that the entity responsible for promotion is the DTI.However, promotion requires a champion and the PPPC should be regarded as such for PPP projects. It perhaps should be held responsible for drafting an annual promotion plan with the collaboration of the DTI and selected implementing agencies where responsibilities for this activity are set forth for the coming year. We note that in the Technical Working Group (TWG) House Bill49, promotion and marketing is not specifically included as a PPPC function.

f. Monitoring and Evaluation. Typically, an M&E Plan should be part of the Project Agreement (PA) and, therefore, needs to be developed as fully as possible at the time the bidding documents are being drafted. The M&E Plan is formalized by being attached to the PA and therefore may be subject to clarification before it is finalized. The M&E Plan should set forth the Government’s reporting requirements which the Project Company has to abide by and

49

See Section 21 of the TWG House Bill. There has been no number, or other reference, provided by the draft sent to GHD by the PPP Center



the periodicity of these reports (preferably semi-annual or annually). As much as possible a standardized document is developed which is attached in every tender as an Appendix to the PA. It may be adjusted as necessary depending upon the needs of the project.

A distinction, as we have pointed out earlier, needs to be made between “Contract Administration” (the management of the project agreement and any changes to it, or the base financial model, over the life of the project) and the “Monitoring and Evaluation” of the impact the project has on the economy and the citizenry. A distinction between the two functions needs to be formalized and the allocation of responsibility needs to be made clearer than it is in the Draft IRR, as of April 2012.

96. Of the six functions identified above, the PPPC currently performs four to five. 97. There are six functions which have been recognized by the World Bank as being undertaken by

best practice PPP units. PPPC now performs five of them, whereas its historical antecedents did one or two at best. It could however have a more comprehensive role to play in QC and CM (the M&E component).

Table 4

Functions of a Best Practice PPPC

Functions of a Best Practice

PPPC

PPPC Performance

(Philippines)


Function On

Quality Control Not included among principal functions

Better selection of projects, perhaps faster implementation with more consistent quality; thoroughness of due diligence before project goes to ICC; and overall improvement of transparency

Policy Advocacy and Formulation

Recently added to the PPPC functions

Friendlier, more consistent, legal and regulatory framework that is pro-PPP

Technical Assistance A traditional function of the PPPC

Many, but not all, IAs use PPPC technical assistance for project preparation – one reason why QCfunction is so important

Project Promotion Function now assumed by DTI DTI can perhaps arrive at an agreement with PPPC and IAs synchronizing the promotion of PPP. This function is not done by DTI alone

Contract Management (Monitoring and Evaluation)

A new function of the PPPC Critically important, if country is to harvest Value for Money benefits from PPP Program

Standardization and Dissemination

Functionally, this should also be part of the PPPC remit

The new office, Capacity Building and Knowledge Management (CBKM) should be able to ensure standardization and dissemination of lessons



Functions of a Best Practice

PPPC

PPPC Performance

(Philippines)


Function On

learned and best practices

98. While the terminology in our table is self-evident for the most part, the term, “quality control”

may deserve some explanation. PPP units that are assigned this function, such as Parpública and IUK, ensure that a PPP meets specific criteria at the time the decision is made to consider the project for PPP implementation, such as economic desirability, commercial sustainability, consumer affordability, VFM, and optimal (not, maximum) risk transfer. It appears to be more of a gateway function in the PPP units featured in Table 1, than a feasibility study function.

99. There are a number of other recommendations GHD makes to augment the role of the PPPC,

namely:

a. Ideally, the PPPC should be a non-voting member of the ICC-TB, and should be required to attend all meetings related to PPP projects. If it is to be made responsible for quality control, as we advocate, it would almost seem mandatory for it to set forth the rationale to the ICC-TB for recommending the approval of any PPP project in the first place and to assist the IA in answering any questions that may arise in Technical Board deliberations in respect of the project. Whether it has status as a “non-voting member” or “observer” in the Technical Board is less important than its function as a quality control gatekeeper. Its key role in this respect is to ensure: (a) commercial viability of all PPP projects that go to ICC, as a top priority; (b) moderation in the use of government support (including VGF) by channeling it to those projects with highest economic benefit; and (c) optimal legal structure and risk allocation is achieved in every transaction;

b. As indicated, there should be a rationalization of the of the M&Erole that is granted to the PPPC through Art 14.1 of the Revised BOT Law IRR and the role of the NEDA project monitoring staff. Moreover, there is also a need for a rationalization of the DOF role, as an oversight body, with that of the IA’s Contract Management role, with the potential for conflicts of interest eliminated; and

c. Since the PPP program will continue to evolve, GHD believes it should be made easier to modify the ImplementingRules and Regulations if the number of agencies needing to sign off on the document limited to four: NEDA, DOF, DBM and PPPC.

5.0 PPP CENTER MISSION, STAFFING, FUNCTIONAL ORGANIZATION,

INSTITUTIONAL LOCATION

5.1 New Directions

100. Up to mid-2010, one could easily conclude that the PPP Center had become an underutilized resource relative to the functions and duties assumed by other best practice PPP units around the world. Although its functions have increased since 2010, there is still more that it can do.

101. For example, it does not yet have a quality control function as discussed in Section 4. It could,

for example, perform a variety of functions to ensure quality control, namely: (a) assisting IAs in selection of a pipeline of candidate PPP projects using MVA or other techniques; (b) reviewing and vetting all PPP before they go to the ICC for approval; and (c) directly participating in PPP negotiations up to Financial Close, thereby assisting the Implementing



Agency to ensure that the risk allocation is no more adverse at Financial Close than at the time the Approving Body cleared the project for bidding. Such a quality control function would have to be specifically mandated through an EO, otherwiseIAs may not willingly involve the PPPC to the extent required.

102. Historically, the PPPC does not appear to have been organized in practice to compensate for government procedural gaps and weaknesses in the way that best practice PPP units around the world are. See, for example, Appendix 1, Historical Antecedent of the PPP Center. The PPPC working closely with NEDA could play an important role in covering gaps in process which are currently evident and described in detail in a separate paper being developed by GHD.

103. It is recognized that, in potentially enlarging the role of the PPPC, there might have to be a

commensurate increase in staffing at the PPPC, or some adjustments made in the current organization and its staffing - a topic which is explored in the next two Sections.

5.2 PPP Center Organization and Staffing

104. From Figure2, overleaf, it can be seen that the PPPC is presently divided into six units under the Executive Director. These units include: (i) Legal Services; (ii) Project Development and Monitoring Facility; (iii) Policy Formulation and Evaluation, (iv) Project Development, (v) Capacity Building and Knowledge Management Services and (vi)AnAdministrative Unit. As of July 2012, the total staffing complement of 71 people is envisaged with 59 already on board.

105. Key areas identified in Section 4 which might benefit from enhanced participation of the PPPC

with possible adjustments in staffing include the following:

a. The Quality Control function could at the very least involve: (a) using MVA and SCBA, or a variant, for better selection of PPP candidate projects which are to be included in the annual PIP and CIIP - a task which requires working closely with Departments and their PPP units in identifying, selecting and prioritizing those projects which by virtue of their attributes and economic internal rates of return should be included as implementation priorities; (b) assisting in preparing feasibility studies, as needed; and (c) reviewing all feasibility studies for PPP projects that are to go to NEDA/ICC;

Figure 2

Functional Organization of the PPPC As of August 2012

Office of the Executive Director

Project Devt and Monitoring Facility Service

Legal Service

Policy Formulation and

Evaluation Service

Project Development Services

Capacity Building and

Knowledge Management

Service

Administrative Service



b. It could be argued that Quality Control also involves participation in negotiations, as discussed previously, providingfinancial modeling support to the IA related to negotiation of all project agreements and related documentation and, in particular, those legal provisions which impact adversely on the risk allocation reflected in the project agreement, as that document was approved by NEDA during the initial evaluation of the project. The PPPC could also assist the IA in preparing a record of ensuing negotiations and implications for any adverse deviations from previously approved contingent liabilities for approval by DOF and NEDA/ICC prior to Financial Closing; and

c. In its M&E function,the PPPC should assist GPH to keep comprehensive records of each

PPP project, including: (a) its adherence to the project agreement; (b) compliance with minimum performance standards and specifications; and (c) achievement of commercial objectives, as originally envisaged by the IA when preparing the project. As pointed out, apart from monitoring and evaluation functions, the M&E function may also involve taking on ad hoc tasks such as assisting where needed in the renegotiation of the project agreement or the base case financial model. It should be made clear in the Revised IRR that DOF must approve any revisions in the project agreement and base case financial model for (a) all national projects and (b) those LGU projects which go to the ICC for clearance to tender.

106. This expansion of work represented by these functions, however, would be made much easier

if more of the twenty, or so, Departments and agencies that are interested in extensive use of the PPP modality would form IA PPP units. In effect, this would enable the PPPC to leverage itself more effectively in the provision of technical assistance. If the interface between the PPPC and the PPP Department units is optimized, the additional functions will be more easily absorbable within a reasonable period.

107. This raises an important issue: if one includes the work that may have to be done on behalf of

LGU, however, we are doubtful that current staffing will be sufficient, particularly as demand for PPP from this source increases. We discuss this further below.

5.3 Budgeting and Other Constraints

108. The PPPCenter is currently an attached agency.50As an attached agency, the PPPC budget falls under NEDA and the General Appropriations Act for 2012, where it is allocated PHP192,355,000:51 PHP161,356,000 of which goes to the PDMF (the item specifically refers to

50

Attachment refers to the lateral relationship between the Department (or its equivalent) and the attached agency or corporation for purposes of policy and program coordination. The coordination may be accomplished by having the department represented in the governing board of the attached agency or corporation, either as chairman or as a member, with or without voting rights, if this is permitted by the charter; having the attached corporation or agency comply with a system of periodic reporting which shall reflect the progress of programs and projects; and having the department or its equivalent provide general policies through its representative in the board, which shall serve as the framework for the internal policies of the attached corporation or agency.

Matters of day-to-day administration or all those pertaining to internal operations shall be left to the discretion or judgment of the executive officer of the agency or corporation. In the event that the Secretary and the head of the board or the attached agency or corporation strongly disagree on the interpretation and application of policies, and the Secretary is unable to resolve the disagreement, the shall bring the matter to the President for resolution and direction.

Government-owned or controlled corporations attached to a department shall submit to the Secretary concerned their audited financial statements within sixty (60) days after the close of the fiscal year; and pending submission of the required financial statements, the corporation shall continue to operate on the basis of the preceding year's budget until the financial statements shall have been submitted. Should any government-owned or controlled corporation incur an operating deficit at the close of its fiscal year, it shall be subject to administrative supervision of the department; and the corporation's operating and capital budget shall be subject to the department's examination, review, modification and approval. (Revised Administrative Code) 51

Republic Act No. 10155 or the 2012 General Appropriations Act.



management and administration of the PDMF); and PHP1,450,000 is set aside as technical assistance to IAs, LGUs for public-private project development.

109. The budget appears to be low, relative to the role the PPPC should play in the PPP program as

it may very well constrain the speed with which it can reasonably take on new staffing and responsibilities, either under the 2010 EO8 [2010], or those additional responsibilities suggested in this paper. It also raises the issue of whether it can continue to find competent staff for these purposes. According to Section 8,the DBM is tasked to release the funds needed for the financial and operational requirements of the PPPC including the amount indicated in Sections 5A and 6 of the EO, subject to the submission of a special budget for the purpose.

110. Apart from the points that have been made in this paper regarding the functions of the PPPC

as they relate to national government agencies, PPPC is likely to have growing responsibilities to provide technical assistance in respect of LGUs. It must be assumed that coordinating PPP project development with local government units will increasingly take a considerable amount of time.

111. While LGUs are empowered to pursue PPP projects, most lack the financial and technical

capability to undertake project preparation. Dependence on the PPPC, very likely, will increase. The alternative, however, is that the LGUs may well take matters into their own hands, if the PPPC is unable to be of assistance.

112. As mentioned previously, the JV Guidelines categorically exclude LGU units from its coverage

and apply only to GOCCs, GCEs, GICPs, GFIs, SUCs. Certain LGUs have taken this together with their authority under the LGCto undertake and implement projects, to mean that they can resort to joint venture without any intervention from PPPC or NEDA/ICC. At least two local government units have enacted local ordinances providing for joint venture as a mode of implementing PPP. The DILG appears to have already proposed rules and regulations on PPP for local government units which address these concerns. Five local government units, however, most recently the province of Pangasinan, have enacted PPP Codes.52PPP transactions are complicated endeavors as global experience has taught us over the last 20 years. To permit the LGUs, untrained as they are, to undertake joint ventures, without any guidance, is to invite potentially costly mistakes at the regional level.

113. This would suggest that the PPPC should expand its hiring much faster than originally

envisaged to ward off this potential problem, or that GPH should create a separate, but related PPPC, for LGUs alone. This latter tack was taken by the UK in 2010, once its ability to service both, national and local administrative units were stretched beyond its capacity to do so.

114. The key argument for having separate national and LGU PPPCs is that the technical assistance

work is quite different. Most likely, an LGU PPPC will focus its technical assistance on a few project typologies: public markets, water distribution, wastewater treatment, landfills for solid waste disposal, etc. The national PPPC, however, has a much greater range of projects, arising from the twenty or so Departments which it works with, each of which may have several project types. The dissemination of standardized financial tools and PPP project agreements is critically important for LGU work, whereas it may have less application with national government agencies, where the range of projects and structures is far greater and the

52

http://www.mb.com.ph/articles/356444/ppp-code-promises-pangasinan-growth, last visited 6 April 2012.



opportunity for standardization may be somewhat less. Moreover, location is extremely important in LGU work. One could easily envisage an LGU PPPC that has three offices: Luzon, Visayas and Mindanao.

5.4 Selecting the right organization and location for the PPPC and the LGU PPPC

115. An equally important issue is the location of the PPPC, itself. Currently it is attached to NEDA,

which has its advantages: NEDA is the planning agency for the national government and the NEDA/ICC, NEDA Board approval authorities are part of its administrative structure. As an attached agency, the PPPC has the ability to work closely with NEDA and influence PPP policy. The disadvantage is that it is overshadowed by NEDA and may not be viewed as having the clout that it should have.

116. If it is attached to the Office of the President (as proposed in the TWG House Bill), it could

have more influence than it does presently and, particularly, more independence and flexibility to extend project preparation and capacity building into outlying areas. This may be offset by its history of being moved around the Executive Branch by one Administration after another, seemingly without an explainable strategy.

117. The table below describes what are believed to be the characteristics of successful PPPCs and the level to which these are comparatively achieved in three potential institutional locations.

Table 5

Comparing Different Institutional Locations and their Impact on Effectiveness of the PPPC

Qualities of an

effective PPPC

If Sited in NEDA If Sited in Office of the

President

Established as a

GOCC

Financial sustainability

Attached to NEDA, dependent upon NEDA’s budget

Presumably somewhat better than if attached to NEDA, but still dependent upon overall fiscal envelope However, placement with OP provides for more independence and flexibility, particularly in assisting LGUs As in the case with NEDA, with changing administrations, budgetary appropriation can be highly variable Unlikely that PPPC will evolve to the point it could as a GOCC

PPPC can only be financially sustainable as and when it can effectively displace external PPP consultants on a VFM basis When that time comes, It could generate fees directly from the IAs, or first ranked bidders, for project preparation activity When this objective is achievable, it could save the GPH money for undertaking the same job as the external consultants



Qualities of an

effective PPPC


President

Established as a

GOCC

Developing local expertise to this level should be a GPH objective

Capability to Attract/ Keep Top Talent

Likely to have turnover as the organization matures Overshadowed by NEDA Not perceived in all quarters to be an important player

Level of focus on PPP may vary from administration to administration Turnover could be a problem eventually With some other administration, PPP Center could simply become a source of patronage

Better and much more flexible ability to recruit Ability to maintain key employees and morale will depend upon the ability to generate deal flow and revenues Given the importance of deal flow, It will operate no differently than would an consulting firm – since salary compensation depend on effectiveness in closing

Independent from politics

Part of the government bureaucracy

Too close to the seat of power to be totally independent

Outside political bureaucracy, it may be able to achieve better access to policy makers Board members can be appointed by the President, which is recommended. Composition of Board can be designed to ensure access at top levels of private and public sectors

Capable of outreach to the LGUs where PPP could be very

With regard to LGUs, siting with NEDA appears to be a

Not entirely clear if access to LGUs is improved

Subject to the generation of financial resources



Qualities of an

effective PPPC


President

Established as a

GOCC

important

disadvantage Locating in NEDA regional offices would create conflicts in project preparation and project evaluation/approval for LGU projects

What PPP Center requires to properly service LGUs is field offices

and explicit provisions in its mandate, PPPC would be relatively free to establish offices in the field on its own, or through a subsidiary office Deal flow from LGU projects, although small scale could do a lot to stabilize revenues Probably best to address LGU market through a subsidiary of the PPP Center, which is created only when the revenue generation is self-sustaining

Flexible

Difficult to be as flexible inside government as would be the case outside

More flexibility and independence than with NEDA, but not the same as would be the case as a GOCC

Market-orientation

Difficult to develop this culture inside government

Difficult to develop this culture inside government

Much easier to develop a strong market orientation if maintaining financial sustainability and employment prospects is at issue

Stability of Organization

Turnover an eventual problem

Turnover an eventual problem

If the emphasis on the PPP modality can be maintained at the political level, and if the GOCC is well managed, there should be enough deal flow to ensure stability and continuity of the GOCC



118. The case made in this report is that the PPPC needs to be organized as a GOCC, where it would

have more flexibility, independence, and improved contact with the market. See Table 5 for a fuller discussion of this point. The PPPC would be able to be self-sustaining in revenue generation once its staff has developed skills akin to those available to the transactional consultants which it works with on PDMF. Once this, among other preconditions discussed in the next paragraph, is in place, it could then offer project development services directly to IAs, in this way generating revenues sufficient to sustain itself while, at the same time, delivering attractive savings to the national budget. Considering the interest in PPP at the national level, and the interest yet to be generated at the LGU level, the opportunity is great to create a true center of excellence with regional outreach. Of course, before this happens, GPH has to have the necessary fiscal space to provide the equity needed for GOCC to function.

119. The preconditions that have to be in place before the PPPC could become a GOCC, namely:

a. Government (GCG, to be precise) should agree in principle to allow PPPC to set market competitive salary scale;

b. GPH would have to have the fiscal space to provide the equity needed by PPPC to

commence its functions; c. There would have to be potential for sufficient transactional work and, therefore, self-

sustaining revenue generation; d. PPP Center would havethe base skills in place to substitute for the external consultants it

currently works with;

e. PPP Center would have to have access to specialized consultant, on an as-needed basis;

f. Total fees payable by the implementing agencies would be a combination of ongoing retainers and success fees, but the total revenue paid to the PPPC would represent a net savings to the country; and

g. A business case would have to be developed on the approach to use in managing LGU requests for assistance efficiently, from an institutional perspective but also in practical terms. Most likely, the approach to be taken will consist of fairly rigid transaction guidelines supported by standardized documentation and basic financial models, enabling each officer to handle a number of assignments simultaneously. (Incidentally, this task should begin immediately, otherwise PPPC may find that it is unprepared to handle the volume of requests from the LGUs once interest in PPP begins to ramp up).

120. The conversion to a GOCC has to be a deliberate decision of the GPH, so that there is a

conscious and committed effort, and a directed strategic plan towards achieving this objective. For example, as a start in generating revenue, PPPC should get paid for the M&E function, by government for those projects that are already on the books and by the new PPP projects that arrive at financial close from some defined date onwards. This will help also helps to build the standalone case. This will help ramp up revenue and over time make it easier to make a financial case for GOCC status.It should also get paid for managing PDMF.

121. The disadvantages of remaining part of the government apparatus have been recognized by

some governments, and there has been a consequent move to reorganize PPP Centers into



GOCC status. This is true of national PPP units in Canada, Czech Republic, Portugal and Germany, among the more other notable examples. Although various reasons are given for this action in those countries that have taken this step, the primary ones appears to be the need to ensure independence from the political process, enable continual interaction with the markets, incorporate faster and better response to changing market conditions and, most significantly, to stabilize the organization by retainingits employees.

122. It should not be difficult to transform PPPC to the GPH preferred project feasibility

adviser,given the comparison set forth in Table 6, comparing Outside Advisors with the PPPC, in terms of the required analytical functions.

Table 6

Comparing PPPC and Outside Advisors In Tasks Associated with Project Preparation

PPPC Analytical Functions Outside Advisers

Only Recently doing this activity, but eminently developable

Conventional “bankability analysis

Long experienced

May need to outsource Engineering and Technology Many consulting firms outsource their engineering and technological skills anyway


VFM Have the skills but most work off of TORs and, particularly guidelines provided by government


VGF Have the skills but most work off of TORs and, particularly, guidelines provided by government

Inside knowledge Conformance to other government plans and policies

Must work under TOR’s

Cheaper over time and, in any case, the “home team”

Cost to PDMF More expensive, in foreign exchange

Must be a major objective to develop “PPP-ready” IA’s

Capacity building for IA’s Do not really participate in extending technical assistance -only if one pays them

Know local rules, procedures and process

Tender documentation Experienced but may not know the Philippines

Must be developed but the Philippines has a strong people base

Staffing Often hired guns, but may have broad industry experience

Better understanding of local environments

LGU Engagements Size and [political complexity of engagement below interest level for international firms

123. Nonetheless, development of PPPC to undertake project preparation will take time and

current contractors hired by PDMF will have to accept capacity building mandates as part of their obligations.



124. GHD believes that with an annual turnover of 10 national projects, at a cost of US$1.1 million

each being currently paid out to third parties, PPPC should eventually be able to fully staff for and undertake the same workload at 40-50 percent of that total cost of using foreign contractors. This would imply revenue generation of around US$4.5-5.0million/year, excluding the agreed revenues which are paid to continue to undertake the M&E function. This estimate also excludes the revenue generated from LGU projects for the same activity, which are likely to be considerable once the interest in PPP ramps up in outlying areas. Many of the LGU projects will not be of interest to international or large, national, firms. The government would derive significant savings, building capacity at essentially no net cost over time as the PPPC assumed more of these functions.

125. To ensure that PPC does not abuse its consultation monopoly, several measures are

appropriate:

a. Create an independent advisory board which has access to general market intelligence and can see the results of tenders – if there is good bidding interest, it can be assumed PPPC is doing its job;

b. Put a % limit, increasing over time, on the work that is done in-house to ensure continued

access to the greater consulting world, not only for very specialized projects but also the occasional “on the run” exercise such as a power plant. The need for outside technology and engineering consultants is more likely than a requirement for other types;

c. Maintain close ties with multilateral institutions and ensure continuing training and

personnel development, which is both necessary to do a good job and a motivator for continuity; and

d. Over time, bid for government project development projects in other countries – Filipinos are professionals all over the world and certainly can compete in many if not all markets.

126. As the protector of the integrity of the PPP process, the PPP Center should have both, the

clout and institutional location, to be able to perform its function properly. It should be able to identify policy needs; define procedural issues that are lacking in the PPP process; coordinate with DOF, NEDA or DBM needed course corrections in the PPP program; extend technical assistance in matters related to project preparation, evaluation of unsolicited proposals and procurement to national agencies and LGUs; ensure that conflicts of interest in the processing of solicited, or unsolicited, proposals are eliminated; and compensate for the weaknesses and gaps in knowledge related to the application of proper tools and forms evaluating/monitoring PPPs. At the same time, it should have more control over its budget; access to higher levels of decision-making; more opportunity to interface with the market; freedom from the structural conflicts of interest it faces in its present location; and the independence and flexibility to act when needed.

127. In the short term, our key recommendation is that it be transformed into a Presidential

Commission, attached to the Office of the President. In the longer term, consideration should be given to its becoming a GOCC, if the deal flow is there. A Commission, by its very nature, is temporary, in this case, a “bridge” to GOCC status which is a more permanent solution that future administrations may find difficult to unwind. A Commission structure, attached to the Office of the President, could provide a basis for reforming the PPP process more quickly, which is important. It also sends a signal to the national and international community regarding the importance of the PPP Program and, of course, the PPP Center as its engine.



Perception of high stature and clout is particularly useful for PPPC, especially in the light of recommendations to give it probity auditor functions for unsolicited proposals and the enforcer of some of the IRR guidelines, for example, adherence of IAs to the process flow timelines. It could also markedly improve access and communication with the private sector. For example, to further these goals, it could report directly to a Board of Commissioners appointed by the President. The Board could consist of top level decision-makers within Government. Top management of the Center could also have access to an Advisory Group drawn from key figures within the private sector. The key point is to improve access to top decision-makers within government and private sectors in order to optimize the PPP tool, while improving the potential for better PPP planning, promotion and, ultimately, participation by the private sector in the success of the program. The alternative to the Commission structure is an office within the Office of the President. This option at least addresses the conflict of interest issue and reinforces the message that the PPP program is a priority of the President. To a major extent, the strategy of government with regard to institutional arrangements rests on the importance accorded to the PPP strategy for eliminating the infrastructure deficit that is faced by the Philippines. The more ambitious the strategy, the more importance has to be placed on putting in place the preconditions that are likely to make it happen. Until very recently, the historical reliance on chance to make things happen has not worked very well.

128. The Commission would provide a transitory structure similar to that which GPH created in

1994, when it organized the CCPAP-BOT Centre as a “Council”, an effectively autonomous unit, attached to the President’s Office. Most observers believe that the PPP Center was at its most effective when it was organized in this manner and had the full backing of the President. The two structures are dissimilar in other ways, to be sure, so it is not a perfect match. This new, proposed, Commission structure appears to GHD to be fit for the times - times which are likely to be extremely competitive for the infrastructure dollar, where getting things right is an important precondition to achieving success.

129. With regard to the mechanics for converting the PPPC to a Presidential Commission in the short term, the following Revised Administrative Code provisions are relevant for: (a) carrying the authority of the President to reorganize the bureaucracy; and (b) explaining the significance of agency attachment.

SECTION 31- Continuing Authority of the President to Reorganize his Office— The President, subject to the policy in the Executive Office and in order to achieve simplicity, economy and efficiency, shall have continuing authority to reorganize the administrative structure of the Office of the President. For this purpose, he may take any of the following actions: 1. Restructure the internal organization of the Office of the President Proper, including the

immediate Offices, the Presidential Special Assistants/Advisers System and the Common Staff Support System by abolishing, consolidating or merging units, thereof, or transferring functions from one unit to another;

2. Transfer any function under the Office of the President to any other Department or Agency as well as transfer functions to the Office of the President from other Departments and Agencies; and

3. Transfer any agency under the Office of the President to any other department or agency

as well as transfer agencies to the Office of the President from other departments or agencies.



...SECTION 4 - Jurisdiction over Bureaus, Offices, Regulatory Agencies and Government Corporations. — Each Department shall have jurisdiction over bureaus, offices, regulatory agencies, and government-owned or controlled corporations assigned to it by law, in accordance with the applicable relationship as defined in Chapters 7, 8, and 9 of this Book. SECTION 5 - Assignment of Offices and Agencies— The President shall, by Executive Order, assign offices and agencies not otherwise assigned by law to any department, or indicate to which department a government corporation or board may be attached.

130. With regard to the objective of converting the PPP Center to a GOCCin the longer term,

Republic Act No. 10149, entitled “An act to promote financial viability and fiscal discipline in government-owned or -controlled corporations and to strengthen the role of the state in its governance and management to make them more responsive to the needs of public interest and for other purposes,” defines and includes within its coverage –

a. GOCCs,referring to any agency organized as a stock or non-stock corporation, vested with

functions relating to public needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock, which term includes GICP/GCE and GFI; and

b. GICP/GCErefer to instrumentalities or agencies of the government, which are neither

corporations nor agencies integrated within the departmental framework, but vested by law with special functions or jurisdiction, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy usually through a charter including, but not limited to, the following: the MIAA, the Philippine Ports Authority (PPA), the Philippine Deposit Insurance Corporation (PDIC), the Metropolitan Waterworks and Sewerage System (MWSS), the Laguna Lake Development Authority (LLDA), the Philippine Fisheries Development Authority (PFDA), the Bases Conversion and Development Authority (BCDA), the Cebu Port Authority (CPA), the Cagayan de Orb Port Authority, the San Fernando Port Authority, the Local Water Utilities Administration (LWUA) and the Asian Productivity Organization (APO).

131. The law creates the GCG, which is empowered to, among others, conduct a compensation

study and develop Compensation and Position Classification System (CPCS) which shall apply to all officers and employees of the GOCCs whether under the Salary Standardization Law (SSL) or exempt therefrom and shall consist of classes of positions grouped into such categories as the GCG may determine, subject to approval of the President. The following principles shall govern the CPCS.

132. All GOCC personnel shall be paid just and equitable wages in accordance with the principle of

equal pay for work of equal value. Differences in pay shall be based on verifiable CPCS factors in due regard to the financial capability of the GOCC.

133. Basic compensation for all personnel in the GOCC shall generally be comparable with those in

the private sector doing comparable work and must be in accordance with prevailing laws on minimum wages. The total compensation provided for GOCC personnel shall be maintained at a reasonable level with due regard to the provisions of existing CPCS laws (including Joint Resolution No. 4, Series of 2009), and the GOCC operating budget.



134. A review of the GOCC compensation rates, taking into account the performance of the GOCC, its overall contribution to the national economy and the possible erosion in purchasing power due to inflation and other factors, shall be conducted periodically.

135. Any law to the contrary notwithstanding, no GOCC shall be exempt from the coverage of the CPCS developed by the GCG under this Act.

136. The GCG may recommend to the President, incentives for certain position titles in

consideration of the good performance of the GOCC. But no incentives shall be granted unless the GOCC has fully paid all taxes for which it is liable, and the GOCC has declared and paid all the dividends required to be paid under its charter or any other laws.

137. The same law permits the creation of a GOCC through incorporation in the Securities and

Exchange Commission (SEC) and provides that a government agency seeking to establish a GOCC or related corporation under Batas PambansaBilang 68 or the Corporation Code of the Philippines shall submit its proposal to the GCG for review and recommendation to the President for approval before registering the same with the SEC. The SEC shall not register the articles of incorporation and bylaws of a proposed GOCC or related corporation; unless the application for registration is accompanied by an endorsement from the GCG stating that the President has approved the same.

138. Considering that GOCC status can only be achieved through Congressional initiative, the

recommendations in this report would be to transfer the PPPC temporarily to the Office of the President until such time as Congress requires considering, preparing and enacting a bill providing PPPC with GOCC status. Location under the Office of the President will provide the PPPC with increased status to work with other oversight agencies of the Government to rectify gaps and weakness observed in this report.

6.0 SUMMARY RECOMMENDATIONS

139. The key recommendations in this paper involve the role and location of the PPP Center.

140. As the protector of the integrity of the PPP process, the PPP Center should have both, the

clout and institutional location, to be able to perform its function properly. It should be able to identify policy needs; define procedural issues that are lacking in the PPP process; coordinate with DOF, NEDA or DBM needed course corrections in the PPP program; extend technical assistance in matters related to project preparation, evaluation of unsolicited proposals and procurement to national agencies and LGUs; ensure that conflicts of interest in the processing of solicited, or unsolicited, proposals are eliminated; and compensate for the weaknesses and gaps in knowledge related to the application of proper tools and forms evaluating/monitoring PPPs. At the same time, it should have more control over its budget;access to higher levels of decision-making; more opportunity to interface with the market; freedom from the structural conflicts of interest it faces in its present location; and the independence and flexibility to act when needed.

141. In the short term, our key recommendation is that it be transformed into a Presidential

Commission, attached to the Office of the President. In the longer term, consideration should be given to its becoming a GOCC, if the deal flow is there.A Commission, by its very nature, istemporary, in this case, a “bridge” to GOCC status which is a more permanent solution that future administrations may find difficult to unwind. A Commission structure, attached to the Office of the President, could provide a basis for reforming the PPP process more quickly,



which is important. It also sends a signal to the national and international community regarding the importance of the PPP Program and, of course, the PPP Center as its engine. Perception of high stature and clout is particularly useful for PPPC, especially in the light of recommendations to give it probity auditor functions for unsolicited proposals and the enforcer of some of the IRR guidelines, for example, adherence of IAs to the process flow timelines. It could also markedly improve access and communication with the private sector. For example, to further these goals, it could report directly to a Boardof Commissioners appointed by the President. The Board could consist of top level decision-makers within Government.Top management of the Center could also have access to an Advisory Group drawn from key figures within the private sector. The key point is to improve access to top decision-makers within government and private sectors in order to optimize the PPP tool, while improvingthe potential for better PPP planning, promotion and, ultimately, participation by the private sector in the success of the program. The alternative to the Commission structure is an office within the Office of the President.This option at least addresses the conflict of interest issue and reinforces the message that the PPP program is a priority of the President. To a major extent, the strategy of government with regard to institutional arrangements rests on the importanceaccorded to the PPP strategy for eliminating the infrastructure deficit that is faced by the Philippines. The more ambitious the strategy, the more importance has to be placed on putting in place the preconditions that are likely to make it happen. Until very recently, the historical reliance on chance to make things happen has not worked very well.

142. The Commission would provide a transitory structure similar to that which GPH created in

1994, when it organized the CCPAP-BOT Centre as a “Council”, an effectively autonomous unit, attached to the President’s Office. Most observers believe that the PPP Center was at its most effective when it was organized in this manner and had the full backing of the President. The two structures are dissimilar in other ways, to be sure, so it is not a perfect match. This new, proposed, Commission structure appears to GHD to be fit for the times - times which are likely to be extremely competitive for the infrastructure dollar, where getting things right is an important precondition to achieving success.

143. Other recommendationsmade in this paper with regard to the institutional set up for PPP and, in particular, the role of the PPPC. Recommendations are divided into Institutional Arrangements, Legal and Regulatory Framework and Role of the PPPC. The legal instruments required to enable the recommendations to be operationalized are set forth in caps as each recommendation is made.

INSTITUTIONAL RECOMMENDATIONS

a. In a separate report, Evaluating Gaps in PPP Process, GHD will set forth a number of areas

where ICC policy, project preparation and approval guidelines could be augmented. CORRECTIVE ACTION WILL REQUIRE A RE-WRITE OF THE ICC GUIDELINES.

b. With regard to quality control, PPPC should assist IAs in, (a) identifying good PPP candidate

projects using MVA or other analytical tools; (b) project preparation, as required; and (c) vetting each PPP project before it goes to ICC for completeness of project documentation, commercial viability, as well as ensuring optimal legal structure and risk sharing – FOR ITEM (A), INFRACOM; FOR ITEM (B), EO 8 ALREADY PROVIDES FOR THIS; AND (C) FOR ITEM (C) ICC GUIDELINES.

c. DOF provides approval of initial contract but should have similar “rights” on an ongoing

basis, for example, in case there is a re-negotiations of the project agreement or a



reconfiguration of the base case financial model, but actual scope not define in Revised IRR - IN RE-REVISED BOT LAW IRR, DOF SHOULD REVIEW ALL PROJECTS BEFORE THE CONTRACT IS EXECUTED. IN ADDITION, THE CURRENT REVISION IS SILENT, OR UNCLEAR, ABOUT DOF ROLE IN REVIEWING FROM A BUSINESS AND RISK PERSPECTIVE, ANY AMENDMENTS IN THE PROJECT AGREEMENT IF IT REQUIRES MODIFICATION OF THE AGREEMENT ITSELF, OR AMENDMENTS TO THE FINANCIAL MODEL. ESSENTIALLY, THE EXISTING DRAFTING PLACES THE HEAD OF AGENCY IN A POSITION WHERE THERE IS NO OVERSIGHT IMPOSED RELATIVE TO HIS ACTIONS.

d. PPP Center is involved in monitoring and coordination (M&E), which is interpreted as involving some scope of work. However, its actual scope of work is not clearly stated in the Revised IRR – IRR REVISION, POSSIBLY BOT LAW, TO AVOID THE MONITORING FUNCTION TO FALL BETWEEN THE CRACKS.

e. PPPC should be placed fully in charge of all feasibility study funds intended for PPP projects

made available to the GPH by donors, including those which have been made available to the DBP. There should only be one source of feasibility study funding for PPP in the country; PERHAPS THIS RECOMMENDATION CAN BE OVERLOOKED PROVIDED THAT PPP CENTER HAS A STRONG QUALITY CONTROL FUNCTION IN RESPECT OF THE REVIEW OF THE FEASIBILITY STUDIES THAT GO TO NEDA/ICC.

LEGAL AND REGULATORY FRAMEWORK RECOMMENDATIONS f. It should be made easier to modify the IRR Rules and Regulations with the number of

agencies needing to sign off on the document limited to four: NEDA, DOF, DBM and PPP Center - BOT LAW MUST BE CHANGED FIRST AND SUBSEQUENTLY THE REVISED IRR.

g. Conflicts of interest in regulatory mandates (e.g., of TRB, PPA, LRTA, PNR, LWUA, and LSs)

need to be dealt with contractually in the manner in which MWSS has done it, until independent regulation is legislated in the relevant sectors - WILL REQUIRE LEGISLATIVE ENACTMENT OR AMENDMENT, OF SEVERAL LAWS.

h. Generally the powers of the regulator (with regard to economic regulation) and that of COA

(with regard to audit) need to be reconciled with a smooth running PPP program – FOLLOWUP DISCUSSIONS NEEDED BETWEEN PPP CENTER AND COA IN RESPECT OF THE DRAFT GUIDELINES AS AND WHEN THEY ARE DRAFTED.

i. PPPs created by joint venture by GOCCs to be exempted from the requirements of the

Revised IRR of the BOT Law – EO 423 [2003] IS THE UMBRELLA LAW UNDER WHICH GOCC, GFI AND SUC ARE ABLE TO ENTER INTO PUBLIC PRIVATE PARTNERSHIPS STRUCTURED AS JOINT VENTURES, UNDER GUIDELINES ISSUED IN 2008. BOT LAW HAS TO INCLUDE JOINT VENTURES UNDER ITS PROVISIONS AND THE JOINT VENTURE GUIDELINES SHOULD BE RESCINDED.

j. Development of a policy framework is needed to use subsidies, or VGF, to make a tariff

commercially sustainable in a PPP project, particularly those that feature social infrastructure projects – POLICY BRIEF ON THE SUBJECT TO BE REVIEWED AND APPROVED, TO INCLUDE PROCESS AND IMPLEMENTING GUIDELINES, PERHAPS COVERED IN THE ICC GUIDELINES.

k. Development of a policy framework is also needed for the use of a quantitative framework

under which candidate infrastructure projects are compared and contrasted under two



distinct implementation options: PPP vs. traditional procurement using Value for Money analysis – POLICY BRIEF PLUS REDRAFT OF NEDA ICC GUIDELINES.

ROLE OF THE PPP CENTER

l. GHD recommends that PPPC draw up an annual PPP Promotion Plan, to be agreed with DTI,

that sets forth goals and action plans for the activity during the ensuing year. Roles and responsibilities of DTI, PPPC and selected IAs would be clearly set forth in the plan along with its resourcing. It would then be the responsibility of DTI to properly synchronize the execution of this plan. This would have the benefit of (a) identifying what will be done during the year; (b) who will do it and by what timeframe, and (c) how will it get resourced – REQUIRES INFORMAL AGREEMENT BETWEEN THE TWO AGENCIES, SIMILAR TO MOA WITH DILG.

m. PPP Center will need to work effectively with the national government agency PPP units in

order to maximize the ability to bring technical assistance to bear on the preparation of project as PPPs. THE WAYS AND MEANS OF MAXIMIZING THE INTERFACE BETWEEN PPP CENTER AND THE PPP UNITS OF THE IMPLEMENTING AGENCIES IS THE SUBJECT OF A POLICY BRIEF AND THIS SUBJECT WILL BE DEALT IN THAT PAPER.

n. While the increased functions proposed for the PPPC in this paper involve some

enlargements in staffing, it seems unlikely that the PPPC can effectively manage the technical assistance requirements of the LGUs unless it focuses on providing LGUs with standardized documentation for the few types of projects LGUs tend to implement – PPPC CAN EXPAND ITS OUTREACH BY LEVERAGING TO LGUs BY DEVELOPING THE CAPACITY OF OTHER PLAYERS TO ASSIST IN TRAINING E.G., LOCAL UNIVERSITIES AND OTHER SUCH TRAINING INSTITUTIONS.

o. GPH and PPPC should consider creating a new and separate unit for LGU PPPs, with separate

staffing and offices in the field in appropriate locations in Luzon, Visayas and Mindanao. As mentioned, HM Treasury in the UK has recently done this, mostly based on the principle that the work involved in assisting LGUs is different from the support provided to national projects. Hence, they have set up a dedicated office for local government units - EXECUTIVE ORDER – THROUGH DILG.

p. The case made in this report is that the PPPC, over time, and after preconditions are met,

needs to be organized as a GOCC. The PPPC should be able to be self-sustaining in revenue generation once its staff has developed skills akin to those available to the transactional consultants which it works with on PDMF. Once this base is in place, it could then offer the project development services to Implementing Agencies, in this way generating revenues sufficient to sustain itself while, at the same time, delivering attractive savings to the national budget relative to the option of continuing to hire foreign consultants – LEGISLATION, EVENTUALLY.

q. There are some preconditions that have to be in place before the PPPC could become a

GOCC, namely: GCG should agree to allow it to set market competitive salary scales - There would have to be potential for sufficient deal flow and, therefore, self-

sustaining revenue generation -



A business case would have to be made that the PPPC had the base skills in place to be able to direct the delivery of the services to financial closing and that there was sufficient deal flow to tap into -

Services would have to extend beyond feasibility study preparation to that of assisting in the drafting and negotiation of project agreements -

r. A business case would have to be developed on the approach to use in managing LGU

requests for assistance efficiently, from an institutional perspective but also in practical terms. As indicated before, the approach to be taken will consist of fairly rigid transaction guidelines supported by standardized documentation and basic financial models, enabling each officer to handle a number of assignments simultaneously. (Incidentally, this task should begin immediately, otherwise PPP Center may find that it is unprepared to handle the volume of requests from the LGUs once interest in PPP begins to ramp up) – EXECUTIVE ORDER THROUGH DILG

s. As a start in generating revenue, PPPC should get paid for the M&E function by any and all

PPP project companies in the same manner that financial institutions charge for M&E of their term loans - that also helps to build the standalone case. This will help ramp up revenue and over time make it easier to make a financial case for GOCC status – EXECUTIVE ORDER



APPENDICES



APPENDIX 1

Historical Antecedents tothe PPP Center

The Coordinating Council on the Philippine Assistance Program53 (CCPAP) was created in 1989 for the purpose of mobilizing international community resources to achieve the objectives of sustainable economic growth coupled with an equitable distribution of income and wealth. The CCPAP was composed of the Secretaries of Foreign Affairs, Finance, Justice, Agriculture, Public Works and Highway, Trade and Industry, Transportation and Communication, Budget and Management, Socio-Economic Planning, Agrarian Reform, the Executive Secretary, the Cabinet Secretary, the Governor of the Central Bank, Senate representative, House representative and four private sector representatives. By mid-1989, the CCPAP Chairman was designated as a member of the NEDA Board by virtue of Memorandum Circular No. 242. Following the enactment of RA No. 6957, or the BOT Law, to ensure its effective and efficient implementation, the NEDA Committee on INFRACOM was designated as the overall coordinator of the activities of various government agencies, corporations and LGUs.54 Among the functions assigned INFRACOM under Memorandum Order No. 404 were the following:

a. Coordination with the implementing agencies/units in preparing the list of BOT55 eligible projects;

b. Implementation of information campaigns to promote BOT schemes; and c. Liaison with the Private Sector and Congress to ensure their active participation in the

implementation of BOT Law. In performing these functions, INFRACOM was authorized to call on any government department, corporation, office and instrumentality for necessary assistance. CCPAP’s role was to assist NEDA INFRACOM as necessary and consistent with CCPAP’s mandate. In 1992, CCPAP absorbed the functions, appropriations, personnel and equipment of the Project Facilitation Committee and the Committee on ODA.56 Recognizing the need for a more focused and proactive approach in the implementation of the BOT Program under the BOT Law, former President Fidel V. Ramos in Memorandum Circular No. 166, issued in 1993, delineated the functions of the NEDA, specifically the NEDA Board, as assisted by the ICC and INFRACOM, the CCPAP Chairman, and the BOI. The NEDA Board was tasked to provide the overall policy and operational directions on BOT and related schemes, while the ICC was designated as the supervising central and final authority for the approval and disapproval of BOT or similar projects and INFRACOM the body charged with the responsibility of coordinating the activities of government entities concerned with infrastructure development (including BOT and related activities).57

53

Per Administrative Order No. 105 issued by then President Corazon C. Aquino. The Philippines Assistance Program was established by the U.S. Congress to support economic growth in the newly-restored democracy of the Philippines. PAP was designed to foster private sector involvement as a primary driver of economic growth (see The World Bank, Public Private Partnership Units – Lessons for their Design and Use in Infrastructure, October 2007, p. 90). 54

Memorandum Order No. 404 (s. 1991). 55

Prior to its amendment in 1994, the BOT Law provided for only two contractual arrangements, BOT and Build-Transfer. 56

Administrative Order No. 259 (s. 1992). 57

Memorandum Circular No. 166 (s. 1993), Section 3. See also the Joint Congressional Resolution No. 03 dated 10 February 1992 and Executive Order No. 230 (Reorganizing the NEDA), dated 22 July 1987.



The passage of the BOT Law or RA No. 6957 in July 1990 and the Amended BOT Law or RA No. 7718 in May 1994 provided legal basis for the revitalized role of the CCPAP in coordinating and monitoring of projects implemented under the law.58

The CCPAP Chairman, as the Action Officer for the promotion of BOT, was entrusted with the following responsibilities.

a. Formulate regularly, in collaboration with the ICC, INFRACOM and the DTI, an integrated and updated list of potential projects for implementation under the BOT law;

b. Undertake the promotion and marketing of the BOT and related projects of the government, in coordination with the BOI;

c. Facilitate the mobilization of the necessary resources for the implementation of projects under BOT and related schemes;

d. Provide training and institution-building support services to private and public groups in the identification, packaging, financing, and implementation of projects under BOT schemes; and

e. Perform other functions that may be deemed necessary by the President and the NEDA Board in the furtherance of the BOT Program.

The sponsoring agency or the agency administering the BOT and related projects was responsible for the identification and implementation of such projects, including compliance with all pertinent rules and regulations. Notably, the CCPAP was authorized to establish the one-stop BOT Center, accessible both to the public and private sectors. In 1999, then President Joseph Ejercito Estrada reorganized the CCPAP and converted it to the Coordinating Council for Private Sector Participation (CCPSP).59 The basic composition of the CCPAP was retained in the conversion to CCPSP. The Secretary of Socio-Economic Planning was designated ex-officio as the Chairman of the CCPSP. CCPSP performed the following functions:

a. Coordinate and monitor the program of the government on private sector participation (PSP), hereinafter referred to as PSP, in its infrastructure and other development activities;

b. Formulate and recommend policies and guidelines that will ensure transparent and expeditious implementation of PSP programs and projects of the government;

c. Prepare and submit to the President and to Congress reports on the implementation of the PSP programs and projects of the government;

d. Coordinate project facilitation tasks for PSP projects; and

e. Perform such other duties and functions that the President may, by order assign.

The existing Technical Office of the CCPAP, consisting of the ODA Unit, the BOT Center and other support units, became the Technical Secretariat of the CCPSP, with following functions:

a. Undertake activities related to the development of PSP programs and projects, including projects with ODA financing pursued under the Amended BOT Law, as follows:

58

http://www.dti.gov.ph/dti/index.php?p=240, last visited 14 April 2012. 59

Administrative Order No. 67 (s. 1999).



Formulate policies and implementation guidelines, in consultation with appropriate government oversight committees, IAs, LGUs and private sector groups on various aspects of PSP project development;

Assist in PSP project development by providing technical assistance to national IAs, including GOCCs, and LGUs in the identification, preparation or evaluation of PSP projects;

Manage and administer a project development facility that will help prepare PSP projects to tendering stage;

Provide training and institution building support to national implementing agencies and LGUs on PSP project development;

Promote and market the PSP program, including the formulation and implementation of a promotion and marketing plan, providing service as a "one-stop information center" for investors/developers as well as government agencies; and

Monitor and coordinate the PSP programs and projects of the government.

b. Conduct project facilitation and problem-solving activities for PSP projects;

c. Serve as the research, technical and logistical support arm of the Council; and

d. Perform such other functions as may be assigned to it by the Council and/or the President.

The Department of Budget and Management was tasked to provide and release the funds needed for the financial and operational requirements of the CCPSP and its Technical Secretariat. Funds were sourced against the Office of the President and those previously appropriated to the CCPAP and its Technical Office, subject to government accounting and auditing procedures. Subsequently, CCPSP was converted to the Build Operate and Transfer Center (BOTC), with the intention of implementing the PDP, addressing the need for improved coordination between the lead government agency that facilitates, coordinates and monitors BOT or PSP projects, and the DTI as the agency mandated to act as catalyst for intensified private sector activity. The CCPSP Technical Secretariat was changed to the Project Monitoring Office (PMO), and both BOT Center and PMO were attached to the DTI. It was explicit that the BOTC was neither a regulatory nor approving authority, but an investment promotion body.60 Designed chiefly to promote investments, it was assigned the following specific functions:

a. Coordinate and monitor the BOT/PSP Program of the government and implement Section 12 (Coordination and Monitoring of Projects) of the Amended BOT Law, and Rules 3 and 14 of the IRR of the Amended BOT Law;

b. Promote and market the BOT/PSP program, including the formulation and implementation of a promotion and marketing plan, providing service as a "BOT Information Center" for investors/developers as well as government agencies;

c. Assist in the formulation of policies and implementation guidelines, in consultation with appropriate oversight committees, IAs, LGUs and private sector on various aspects of BOT/PSP project development that will ensure transparent and expeditious implementation of BOT/PSP programs and projects of the government;

d. Undertake activities related to the development of BOT and/or PSP programs and projects, including projects with ODA financing under the BOT Law;

60

Executive Order No. 144 (s. 2002), Section 5.



e. Assist in BOT/PSP project development by providing technical assistance to national IAs, including GOCCs, and LGUs;

f. Establish, manage and administer a revolving fund to be known as the Project Development Facility (PDF);

g. Provide training and capacity building on BOT/PSP project development;

h. Conduct project facilitation and assist agencies/LGUs in addressing impediments in the implementation of BOT/PSP projects;

i. Perform business development and investment-related activities in support of the other functions and mandate of the DTI;

j. Prepare and submit to the President and to Congress reports on the implementation of the PSP programs and projects of the government; and

k. Perform such other functions as may be assigned by the BOT Board and/or the President.

The PDF was also first established at this time, intended as a technical assistance fund for the preparation of feasibility studies and bid documents that will help prepare publicly bid BOT/PSP projects to tendering stage, and would allow for the recovery of the seed capital funded from the grant and to use the re-flows for other BOT/PSP project preparation/studies. Notwithstanding the limited mandate of the BOTC, its Executive Director retained to the Technical Board and Cabinet Committee of the ICC.

On 9 September 2010, President Benigno S. Aquino III issued Executive Order No. 8 which renamed the BOT Center as the PPPC. The PPPC was also transferred as an attached agency of NEDA from DTI.61 The PPPC has the following powers and functions:

a. Conduct project facilitation and assistance to the national implementing agencies, including government corporations, and LGUs in addressing impediments or bottlenecks in the implementation of PPP programs and projects;

b. Provide advisory services, technical assistance, trainings and capacity development to agencies/LGUs in PPP project preparation and development;

c. Recommend plans, policies and implementation guidelines related to PPP in consultation with appropriate oversight committees, implementing agencies, LGUs and the private sectors;

d. Manage and administer a revolving fund to be known as the PDMF for the preparation of business case, pre-feasibility and feasibility studies and tender documents of PPP programs and projects;

e. Monitor and facilitate the implementation of the priority PPP Programs and Projects of the agencies/LGUs which shall be formulated by respective agencies/LGUs in coordination with the NEDA Secretariat;

f. Establish and manage a central database system of PPP Programs and Projects;

g. Recommend improvements to timelines in processing PPP programs and project proposals, and monitor compliance of all agencies/LGUs;

h. Prepare reports on the implementation of the PPP programs and projects of the government for submission to the President at the end of each year; and

i. Perform such other functions which may be critical in expediting and implementing effectively the PPP Programs and Projects of the Government.

61

Executive Order No. 8, Section 1.



CCPAP CCPSP BOTC

PPPC

a. Formulate regularly, in collaboration with the ICC and NEDA INFRACOM and the Department of Trade and Industry, an integrated and updated list of potential projects for implementation under the BOT law;

b. Undertake the promotion and marketing of the BOT and related projects of the government, in coordination with the Board of Investments (BOI);

c. Facilitate the mobilization of the necessary resources for the implementation of projects under BOT and related schemes;

d. Provide training and institution-building support services to private and public groups in the identification, packaging, financing, and implementation of projects under BOT schemes; and

e. Perform other functions that may be deemed necessary by the President and the NEDA Board in the furtherance of the BOT Program.

a. Coordinate and monitor the program of the government on private sector participation, or PSP, in its infrastructure and other development activities;

b. Formulate and recommend policies and guidelines that will ensure transparent and expeditious implementation of PSP programs and projects of the government;

c. Prepare and submit to the President and to Congress reports on the implementation of the PSP programs and projects of the government;

d. Coordinate project facilitation tasks for PSP projects; and

e. Perform such other duties and functions that the President may, by order assign.

The CCPSP Technical Secretariat performed following functions: • Formulate policies and

implementation guidelines, in consultation with appropriate government oversight committees, implementing agencies, Local Government Units and private sector groups on various aspects of PSP project development;

a. Coordinate and monitor the BOT/PSP Program of the government and implement Section 12 (Coordination and Monitoring of Projects) of Republic Act 7718, otherwise known as the Amended BOT Law, and Rules 3 and 14 of the Implementing Rules and Regulations (IRR) of the Amended BOT Law.

b. Promote and market the BOT/PSP program, including the formulation and implementation of a promotion and marketing plan, providing service as a "BOT Information Center" for investors/developers as well as government agencies;

c. Assist in the formulation of policies and implementation guidelines, in consultation with appropriate oversight committees, implementing agencies, Local Government Units and private sector on various aspects of BOT/PSP project development that will ensure transparent and expeditious implementation of BOT/PSP programs and projects of the government;

d. Undertake activities related to the development of BOT and/or PSP programs and projects, including projects with ODA financing under the BOT Law;

e. Assist in BOT/PSP project development by providing technical assistance to national implementing agencies, including government owned and controlled corporations, and Local Government Units;

a. Conduct project facilitation and assistance to the national implementing agencies, including government corporations, and LGUs in addressing impediments or bottlenecks in the implementation of PPP programs and projects;

b. Provide advisory services, technical assistance, trainings and capacity development to agencies/LGUs in PPP project preparation and development;

c. Recommend plans, policies and implementation guidelines related to PPP in consultation with appropriate oversight committees, implementing agencies, LGUs and the private sectors;

d. Manage and administer a revolving fund to be known as the Project Development and Monitoring Facility for the preparation of business case, pre-feasibility and feasibility studies and tender documents of PPP programs and projects;

e. Monitor and facilitate the implementation of the priority PPP Programs and Projects of the agencies/LGUs which shall be formulated by respective agencies/LGUs in coordination with the NEDA Secretariat;



• Assist in PSP project development by providing technical assistance to national implementing agencies, including government owned and controlled corporations, and Local Government Units in the identification, preparation or evaluation of PSP projects;

• Manage and administer a project development facility that will help prepare PSP projects to tendering stage;

• Provide training and institution building support to national implementing agencies and Local Government Units on PSP project development;

• Promote and market the PSP program, including the formulation and implementation of a promotion and marketing plan, providing service as a "one-stop information center" for investors/developers as well as government agencies; and

• Monitor and coordinate the PSP programs and projects of the government.

Conduct project facilitation and problem-solving activities for PSP projects;

Serve as the research, technical and logistical support arm of the Council; and

f. Establish, manage and administer a revolving fund to be known as the PDF, a technical assistance fund for the preparation of feasibility studies and bid documents that will help prepare publicly bid BOT/PSP projects to tendering stage, and would allow for the recovery of the seed capital funded from the grant and to use the re-flows for other BOT/PSP project preparation/studies;

g. Provide training and capacity building on BOT/PSP project development;

h. Conduct project facilitation and assist agencies/LGUs in addressing impediments in the implementation of BOT/PSP projects;

i. Perform business development and investment-related activities in support of the other functions and mandate of the Department of Trade and Industry;

j. Prepare and submit to the President and to Congress reports on the implementation of the PSP programs and projects of the government; and

k. Perform such other functions as may be assigned by the BOT Board and/or the President.

f. Establish and manage a central database system of PPP Programs and Projects;

g. Recommend improvements to timelines in processing PPP programs and project proposals, and monitor compliance of all agencies/LGUs;

h. Prepare reports on the implementation of the PPP programs and projects of the government for submission to the President at the end of each year; and

i. Perform such other functions which may be critical in expediting and implementing effectively the PPP Programs and Projects of the Government.



Perform such other functions as may be assigned to it by the Council and/or the President.

By September 2005, the BOTC had assisted bringing 60 transactions, worth roughly US$18 billion, to financial closure. These transactions extended across several sectors, with power sector transactions constituting forty percent (40%) of the total value. Twenty percent (20%) of the total transaction value may be attributed to several smaller transactions in the transport, information technology, property development, and health sectors.62

The BOT Center was created with a number of objectives that should have improved the quality of PPP arrangements. It developed an expertise in project development, and to some extent provided assistance in contract negotiation and renegotiation.

Nevertheless it was observed that -

The BOTC did not possess formal mandate to approve or deny a line agency or LGU’s ability to pursue a PPP transaction. According to a World Bank study, a former BOT Center official said that that it cannot even compel line agencies to submit reports. The same study concludes that “the informal influence of the BOTC peaked under President Ramos and has declined since it has been subsumed to the Department of Trade and Industry”; and

Transactions did take place without BOTC participation. Often, however, where a project reached the ICC, the ICC would refer the line agency to the BOTCfor technical assistance.

62

The World Bank, Public Private Partnership Units – Lessons for their Design and Use in Infrastructure, October 2007, p. 91.

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