THE BUILD-OPERATE-TRANSFER (BOT) AGREEMENT BETWEEN QUEZON CITY

GOVERNMENT AND ITHIEL CORPORATION

Case Study on the Dapitan Public Market (known today as Suki Market)

Prepared by:

GABAON, Kathleen Joy A.

2008-65685

Submitted to:

Professor Simeon Ilago

PA 251 (Saturday 9:00 AM-12:00 NN)
I. INTRODUCTION

The Local Government Code, under Section 296, allows local government units
(LGUs) to create indebtedness and avail credit facilities to finance local infrastructure
and other socio-economic development projects, in accordance with the approved
local development plan. Credit financing enables LGUs to pursue development
projects and derive benefits immediately, at current prices, to be paid later (Celestino,
Malvar, & Zipagan, 1998).

One credit financing option available to LGUs is the Build-Operate-Transfer (BOT)

scheme. Per RA 6957, otherwise known as the Build-Operate-Transfer (BOT) Law, as
amended by RA 7718, BOT agreement is regarded as a contractual arrangement
whereby, the project proponent undertakes the construction, financing, and the
operation and maintenance of a given infrastructure facility. The project proponent
operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bids
or as negotiated and incorporated in the contract, to enable the project proponent to
recover its investment and operating and maintenance expenses in the project 1.

Per recent report of the Asian Development Bank (2016), thirteen (13) projects
have been implemented by LGUs using BOT scheme nationwide (Asian Development
Bank , 2016 ). These projects are categorized into four sectors, namely: 1) property
development, including public markets, slaughterhouses and city halls; 2) information
technology; 3) power; and 4) water. Out of the 13 projects, 6 of these are public
markets.

Today, the number of public markets under BOT is continually growing, the
Quezon City’s Dapitan Public Market, known today as the Suki Market being one of
them (Isolana, 2017).

1
RA 7718 The Philippine BOT Law and its Implementing Rules and Regulations
 In 1996, the Quezon City Government entered into a negotiated Build-Operate-
Transfer contract with ITHIEL Corporation, wherein the latter, submitted an unsolicited
bid to build the Dapitan public market. The estimated cost of the two-story building,
which would house a wet market as well as a supermarket was P 37.2 million (Asian
Development Bank , 2016 ). Construction started in December 1997 and was
completed by September 1, 1998. Commercial operations started on October 1, 1998
(Asian Development Bank , 2016 ).

II. MAIN POINTS

This paper aims to discuss the following:

1. The scope of services delivered by the ITHIEL Corporation based on its BOT
agreement with the Quezon City government and the incentives that the company
obtained from the said agreement;

2. The benefits that the Quezon City acquired from the agreement and their
obligations in executing the BOT project; and

3. Reasons why the city government agreed to enter into the BOT agreement for Suki
Market, formerly the Dapitan Public Market.

III. REVIEW OF RELATED LITERATURE

Credit Financing Options Available to LGUs

There are several credit financing options available to local government units
(LGUs) to advance their development: 1) loans from government financial institutions,
commercial banks, national government facilities and other LGUs, 2) issuance of
bonds, 3) entering into public-private partnership (PPP) agreement, and 4) grants and
donations from foreign institutions or the official development assistance (ODA)
(Celestino, Malvar, & Zipagan, 1998).

Credit financing provides numerous benefits to LGUs. With established credit lines,
LGUs can have a ready source of funds, making them more financially flexible without
having to wait for sufficient funds to accumulate from their savings (Celestino, Malvar,
& Zipagan, 1998). In terms of quality of local projects, through credit financing, LGUs
can promote early cost-recovery types of projects which can accelerate local
development and service delivery. They can develop, in cooperation with the private
sector, high quality investments with reliable yields to LGUs and investors (Celestino,
Malvar, & Zipagan, 1998).

Even though credit financing brings advantages to local governments especially in

boosting local developments, some LGUs, particularly those with lower income, don’t
find credit financing useful. Instead, they see it as “living beyond their means” or
“depriving future generations of resources due them” (Celestino, Malvar, & Zipagan,
1998). This mindset generally does hold true when the proceeds are being
indiscriminately utilized for non-productive endeavors, resulting in more hardships on
the part of the LGUs concerned.

Local Credit Policy Framework

To aid LGUs and other stakeholders in identifying the most appropriate credit
financing schemes that can be availed, the Department of Finance - Bureau of Local
Government Finance (BLGF) crafted the Local Credit Policy Framework, which
rationalizes and guides existing credit facilities. Said framework clusters LGUs into four
(4) groups based on their creditworthiness and kinds of projects that they intend to
pursue. For creditworthy LGUs that wish to pursue revenue-generating projects, they
can enter into BOT agreements, issue bonds, and avail loans from commercial bank
and GFIs. LGUs that wish to pursue revenue-generating projects but are non-
creditworthy can enter to BOT arrangement, loans from GFIs, limited Municipal
 Development Fund (MDF) grants and loans with TA. In pursuing social or
environmental projects, LGUs that are credit worthy can avail GFI and MDF loans,
limited MDF and grants while for non-creditworthy LGUs, the only available option to
them are MDF grants and TA with technical assistance.

Steps for Credit Availment

In order for an LGU to enter into credit availment, it has to first prepare its Local
Development Plan (LDP) and Annual Investment Plan to serve as basis for any credit
action (Celestino, Malvar, & Zipagan, 1998). Borrowing requires the authority of the
Sanggunian. The Sanggunian shall issue an Ordinance authorizing the LGU to borrow
and allowing the local chief executive (LCE) to negotiate on behalf of the local
government. As a representative, he or she can agree to the terms and conditions
which shall be binding to both the creditor and the LGU (Celestino, Malvar, & Zipagan,
1998). Given the LCE’s voluminous responsibilities, he or she can designate a person
or team who shall be assigned in preparing technical details of the project and other
necessary documents to be required by the creditor.

IV. RESEARCH METHODOLOGY

This paper employed documentation analysis wherein, two documents were

analyzed and examined - the Memorandum of Agreement (MOA) between the Quezon
City Government and Ithiel Corporation and the thesis dissertation of Jack B. Isolona,
DPA, dated February 27, 2015 on the Assessment of the Performance of PPP/BOT
Public Markets in the Phillipines. The former contains comprehensive information
about the construction and operation of the Dapitan Suki market consisting of: 1)
specifics of the unsolicited project proposal of Ithiel Corporation to QC government; 2)
availability of the site; 3) period; 4) use and rates; 5) obligation of Quezon City; 6)
obligation of Ithiel; 7) insurance during operation by Ithiel; 8) miscellaneous provisions;
9) remedies; 10) procedure for termination; 11) timetable; 12) cooperation period; 13)
consultations; and 14) completion buy out price. The latter assessed whether or not
 PPP, as an instrument in reforming public organizations like public markets, has
improved the operation of public markets.

The outcomes of the agreement and the issues and concerns faced by both parties
during the market construction and operation were originally intended to be covered in
this paper to provide further understanding on how the project influenced the citizens
of Quezon City and how BOT projects in general work in LGUs. However, because of
time constraints and the unavailability of the QC Market Development and
Administration Department (MDAD) for interviews, the researcher was not able obtain
information on these matters.

V. MAIN DISCUSSION

The Quezon City has fifty eight (58) public markets, eight (8) of these are managed
and operated by the city government, while the remaining fifty (50) are owned and
managed by private individuals, either natural or juridical, under a franchise from the
city government (Isolana, 2017). Among these public markets, the Suki Market,
formerly the Dapitan Public Market, is the only market in the city that is part of a BOT
agreement (Isolana, 2017). This market is located at Mayon Street, Barangay Santa
Teresita, and has a total land area of 5,200 square meters.

Prior to the BOT agreement, the old Dapitan Market was under a state of
deterioration which prompted the City Government to rehabilitate it (Isolana, 2017). On
December 1995, the Quezon City government, under the leadership of Mayor Ismael
Mathay Jr., received an unsolicited proposal from the Ithiel Corporation, represented
by its General Manager Mr. Delfin M. Sigua, for the construction, management and
operation of the dilapidated Dapitan Public Market in pursuance of a BOT scheme
under RA 6075.

The Quezon City government at the time believed in the viability of the project and
its necessity to pump-prime economic growth, improve the state of the building and
enhance the aesthetic character of the market, thus, on November 6, 1996, the
Prequalification Bids Awards Committee awarded the contract for the financing and
construction of the Dapitan Public Market to ITHIEL Corporation.

Pursuant to the MOA, Ithiel agreed to develop, construct, manage, maintain, and
operate the Dapitan Public Market in accordance with the plans and specifications duly
approved by the Office of Building Office of Quezon City. All project costs and
expenses were borne exclusively by ITHIEL. As part of the terms and conditions of the
contract, ITHIEL also committed the construction of a Health Center and Engineering
Office at the community park, adjacent to the market at a maximum cost of Eight
Hundred Thousand Pesos (Php 800, 000.00).

Further, in consonance with the MOA, the Quezon City commenced the removal
of the squatters and their shanties in the site and guaranteed the functioning of its
drainage system before turning over the ownership to ITHIEL. The agreement also
covered that ITHIEL shall provide financial assistance to these squatters and ensure
that all legitimate stallholders, duly accredited by the QC government will not be
dislocated and may continue with their trade during the market construction. In
compliance to said agreement, ITHIEL constructed a temporary stall at the vacant
portion of the community park (30 days from notice to proceed) which allowed city
government to temporarily relocate its legitimate stallholders. ITHIEL managed and
operated the temporary market and the stallholders continued to pay their current
rentals to ITHIEL during the construction period.

It was also specified in the agreement that ITHIEL has the right to operate the
Dapitan Public Market for a period of 49 years, counted from the date of notice to
proceed issued by the City Engineer. In order for ITHIEL to be compensated for its
advances on the costs and expenses in the construction of the Health center Building,
Engineering Office, temporary market, renovation and beautification of the community
park used as temporary market, and the financial assistance it has provided to the
informal settlers affected, Ithiel was free from paying for the use of the site for the first
three years, from the start of the construction of the Dapitan Public Market (Isolana,
2017).

From the 4th year up to the 8th year from the start of the construction, Ithiel paid
Quezon City a monthly fee of 60,000 pesos. This rate increased by 5% every five years,
from the 9th year up to the 15th year. On the 16th year to 49th year, the rate will be
adjusted every two (2) years based on the inflation rate per consumer price index
published by NEDA and/or Central bank.

It was Quezon City’s obligation to guarantee the peaceful and undisturbed

possession of ITHIEL of the project site for the entire duration of the construction and
operation period. In addition, the city government shall extend to ITHIEL such legal
assistance as may be necessary and indispensable for the early expenditure
completion of the construction works and efficient operation of the Public Market
assistance to facilitate securing license, permits from government agencies. QC also
agrees not to grant any third party any privilege and/or concession to construct and
operate a public market within a 3km radius from the Dapitan Market site until after the
ITHIEL recovered its investments with reasonable rates of return. It was also agreed
upon that Quezon City shall defend the Ithiel from any and all actions, claims, liabilities
and suits that may arise in connection with the project site and/or right of way.

To safeguard the completion of the project, a performance bond amounting to

seven million pesos (Php 7,000,000) was imposed for every delay in the execution of
the projects outside or beyond the contract time or in case of extension of time granted
(Isolana, 2017). This Performance Bond may either be in form of cash, manager’s
check, irrevocable standby letter of credit or a surely bond, callable on demand, issued
by a reputable and accredited insurance company by the Insurance Commission, or a
combination thereof. The Performance bond is to be valid and enforceable from the
effectivity of the contract and coterminous with the completion of the construction
works, including time extensions allowed, if any. ITHIEL was to obtain, at its own cost,
building, construction and other permits, licenses and approvals for the project. It is
also obliged to pay all electric bills, water, gas and other charges payable during the
construction and operation of the improved public market and had to secure the
necessary Environmental Compliance Certificate from the appropriate government
agency and strictly observe the requirements in the construction of the project (Isolana,
2017).

The agreement forbids ITHIEL from making any alterations or changes in the plans
and specifications during the operation period without the written consent of Quezon
City. It is also not allowed to make any unlawful, improper or otherwise use of the
premises other than the agreed on planned purpose of the facility.

ITHIEL is also under the obligation to keep the public market insured at its own
expense against accidental damage from all normal risks and is required to secure
adequate insurance to cover its employees as may be required by law (Isolana, 2017).
Except in cases of force majeure, ITHIEL is held responsible for any damage or loss
to the project during the project implementation. It also assumes full responsibility for
the cost arising from any adverse environmental effects or damages that may result
from the construction of the project.

At the end of the of the 49th year, ITHIEL is obliged to transfer to the Quezon City
Government the market, free from any lien or burden and without the payment of any
compensation from the city government. The Quezon City Government shall be
responsible for all costs and expenses, including legal and taxes or duties, incurred in
connection with said transfer and shall, at its own cost, obtain or effect all governmental
and other approvals, for any and all documents and take such other actions as may be
necessary to effectuate the transfer.

In terms of grant of lease to stallholder, ITHIEL must give priority to the legitimate
stallholders of the Dapitan Market as found in the list of the Market Master of the
Dapitan Public Market, provided that they qualify under ITHIEL’s tenancy criteria. With
regard to fees and rentals, it is agreed in the contract that ITHIEL shall charge fees,
 rentals, and charges not exceeding the rates prevailing in private markets. During the
first year of the operation of the Dapitan Market, ITHIEL did not increase the rental
rates of the duly accredit stallholders or vendors of Quezon City. However, on the
second year, ITHIEL increased the rentals/charges, with the approval of the Quezon
City Government, due to the increase in the costs of maintenance and operation of the
public market.

The Quezon City Government or its duly authorized representative has the right to
enter and examine the premises at all reasonable times upon written notice to ITHIEL
during the construction and operation periods. ITHIEL was required to make a warranty
that it has not given nor promised any gift or consideration to any officials of the City in
order to obtain the agreement, and that the execution of the agreement shall not result
directly in violation of RA 3019 (Anti-Grant and Corrupt Practices Act) or RA 6713
(Code of Ethical Standards for Public Officials and Employees).

Stipulated in the Agreement is the right of the Parties to terminate the Agreement
without resorting to legal procedures in case of any substantial breach of
conditions/obligations and responsibilities. A pattern of continuing or repeated non-
performance, willful violation or non-compliance of the terms and conditions can be
deemed a substantial breach of contract.

VI. SUMMARY AND CONCLUSION

Inefficient public enterprises are a fiscal burden to the state, thus, the New Public
Management (NPM), recommends privatization (Domingo & Reyes, 2011 ).
Privatization can take the form of sale of government assets such as real estate,
infrastructures, and facilities; abolition; mergers; built-operate-transfer (BOT); joint
ventures; commercialization; and surrendering government responsibilities and
functions as opportunities for private sector businesses (Domingo & Reyes, 2011 ).
The BOT Law, or RA 6957, otherwise known as “An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the Private
Sector, and for other Purposes” as amended by RA 7718, otherwise known as “An Act
Amending Certain Sections of RA 6957, is designed to push for sustainable national
and local development through the assistance of the private sector. The BOT scheme
outlines the infrastructures or development projects through partnerships between the
different public sector authorities and the private sector. Further, it was promulgated
by the government to make local industries competitive through infrastructure
development (Carino, 2006).

The Local Government Code allows LGUs to enter into BOT schemes to advance
local development. Using the BLGF’s Local Policy Reform Framework as foundation,
Quezon City was allowed to undertake the BOT agreement because of the city’s
creditworthiness—as it is known to be one of the richest LGUs in the country, and
because the project it pursued was revenue generating—a public market.

The main points of this study that were mentioned in the beginning part of this paper
are summarized in the following areas:

1. Scope of services delivered by the project proponent (ITHIEL Corporation)

and the incentives it obtained from the BOT project

ITHIEL Corporation developed and constructed the Suki Market in

accordance with the plans and specifications approved by the City Government. It
also constructed a Health and Engineering Office with a maximum cost of Php
800,000 for the city. ITHIEL also ensured the non-dislocation of the existing and
legitimate stallholders of the city and allowed them to continue with their business
activities even during market construction, by building a temporary stall in the park
in front of the market to house the affected vendors. Aside from the relocation of
the vendors, ITHIEL also gave financial assistance to the informal settlers who
were living in the site before the market construction/renovation.
 One of the incentives obtained by ITHIEL in this project was the immediate
authority to collect the rentals fees and other related commercial fees in the
operation of public markets and in the conduct of business in general. Another is
the exemption from paying rent and other fees for the first three years of its
operation.

2. Duties rendered by QC Government based on the Agreement and the

incentives it has acquired from the BOT project.

Based on the MOA, the Quezon City Government removed the informal settlers
and their shanties from the site prior to the construction and renovation of the
market. It also ensured that all ingress and egress necessary to and from the site
and the community park were available to ITHIEL, its employees, contractors,
subcontractors, and advisors, and that all necessary utilities such as electricity,
water and communication lines are likewise available at the site and the park as
required for the construction of the Dapitan Public Market, Health Center,
Engineering Office, temporary public market and the drainage systems
surrounding the site and park (Isolana, 2017).

The major incentives obtained by the Quezon City from this agreement were the
complete renovation of the dilapidated Dapitan Market and the ownership of the
health center and engineering office constructed by ITHIEL Corporation. The city’s
original and legitimate market vendors were also given priority in the occupancy of
the market, and the affected informal settlers formerly residing in the site were
given financial assistance.

Also, the Suki Market generates income for the city through business permits,
fees and other related charges together with its monthly rental amounting to Php
60,000.00 to be increase by 5% every 5 years starting on 9th year up to 15th year
and adjusted every 2 years beginning on the 16th year based on inflation rate per
 consumer price index. Starting 2015, the Suki Market pays a monthly rental fee
amounting to Php 70,875.262.

After 49 years, the Suki Market will be turned over completely to Quezon City
by the ITHIEL free from any liens or encumbrances and without payment of
compensation from the city government.

3. Conclusion

This paper shows that the BOT scheme allowed the QC government and the
ITHIEL Corporation to mutually benefit. The city government was able to have a
renovated public market and acquired new health and engineering office and
renovation of its community park while the ITHIEL Corporation was able to profit
due to the incentives provided and the low rental fees over time. With this, it can
be concluded the BOT is advantageous for LGUs because it gives them
opportunities to acquire other infrastructure facilities.

The city also received additional income from the market operation through
business permits and other related charges, plus the monthly rental of the market
which currently amounts to Php 70,875.26. The ITHIEL Corporation on the other
hand, has full authority for the operation of the market and the collection of rental
fees from the stallholders and has the right to modify the fee based on the price
that is advantageous to them but shall not exceed the cost of private market rates.

References:

Asian Development Bank . (2016 ). Philippines: Public-Private Partnerships by Local

Government Units . Mandaluying City : Asian Development Bank .

Carino, L. V. (2006). Introduction to Public Administration in the Philippines: A Reader.

Regulatory Governance in the Philippines: Lessons for Policy and Institutional
Reform, 249.
2
Based on the report obtained from the Quezon City’s Local Treasurer’s Office
Celestino, A. B., Malvar, N. G., & Zipagan, R. R. (1998, December). Handbook of Local
Fiscal Administration in the Philippines. Chapter 7: Non-Traditional Sources of
Local Funding, pp. 224-260.

Domingo , M. Z., & Reyes, D. R. (2011 ). Introduction of Public Administration in the

Philippines: A Reader . Performance Management Reforms in the Philippines ,
215-224.

Isolana, J. B. (2017). New Public Management (NPM) and Reiventing Government: An

Assessment of the Performance of PPP/BOT Public Markets In the Philippines.
Quezon City: NCPAG.