The Bot Law at The Crossroads Issues and Reforms

THE BOT LAW AT THE
CROSSROADS: ISSUES
AND REFORMS
Atty. Solomon Castro
December 2006
DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
Abstract
This report consolidates and examines the results of the consultation dialogues
organized by EPRA through its Multi-Stakeholder Team on Private Sector
Participation in Public Infrastructure, that were held from November 2005 to April
2006. It discusses main issues shared by most stakeholders such as the need for
greater transparency and accountability in the build-operate-transfer process,
complications associated with unsolicited proposals, managing fiscal risks and
exposure to large contingent liabilities and lack of regulatory capacity and conflicts of
interest in the performance of public functions. The Final Report finds that House Bill
5002, which seeks to amend the BOT law, shows a clear awareness of issues raised
by stakeholders and espouses a radical approach to addressing them.
The BOT Law at the Crossroads: Issues and Reforms
Final Report
TABLE OF CONTENTS
ABBREVIATIONS..............................................................................................................................................2
EXECUTIVE SUMMARY...................................................................................................................................3
INTRODUCTION ..............................................................................................................................................5
THE EPRA CONSULTATION DIALOGUES ....................................................................................................5
THE PHILIPPINE PSP PROGRAM..................................................................................................................6
THE BOT/PSP LEGAL FRAMEWORK ..........................................................................................................7
PREPARING FOR THE NEXT WAVE ..............................................................................................................9
RESULTS OF THE EPRA CONSULTATION DIALOGUES ...........................................................................10
DISCUSSION OF MAIN ISSUES .....................................................................................................................10
PROPOSED AMENDMENTS TO THE BOT LAW..........................................................................................29
HB 5002 RATIONALE AND FEATURES........................................................................................................29
THE EMERGE REPORT ON BOT LAW AMENDMENTS ............................................................................31
RESPONSIVENESS OF PROPOSED AMENDMENTS .......................................................................................33
ADDITIONAL INPUTS FROM EPRA CONSULTATION DIALOGUES .............................................................42
FINAL POINTS AND COMMENTS ON HB 5002 ............................................................................................42
CONCLUSION.................................................................................................................................................44
SOURCES ........................................................................................................................................................46
ANNEXES
EPRA CONSULTATION DIALOGUE PROCEEDINGS
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ABBREVIATIONS
ADB Asian Development Bank

BOI Board of Investments
BOT build-operate-and-transfer
BOT Law Republic Act No. 6957, as amended
BT build-transfer
DA Department of Agriculture
DOE Department of Energy
DOF Department of Finance
DOTC Department of Transportation and Communications
DTI Department of Trade and Industry
ECC Environmental Compliance Certificate

Electric Power Crisis Act Republic Act No. 7648
EMERGE Economic Modernization through Efficient Reforms and Governance
Enhancement
EPRA Economic Policy Reform and Advocacy
ERC Energy Regulatory Commission
ICT information and communication technology

IFC International Finance Corporation
IRR Implementing Rules and Regulations
Land Bank Land Bank of the Philippines
LGU local government unit
LWUA Local Water Utilities Administration
MTPDP Medium-Term Philippine Development Plan 2004-2010

MTPIP Medium-Term Public Investment Program 2005-2010
MWSS Metropolitan Water Supply and Sewerage System
NGO non-government organization
NPC National Power Corporation
ODA Official Development Assistance

PPP public-private partnerships
PSP private sector participation
RA Republic Act
USAID United States Agency for International Development
World Bank International Bank for Reconstruction and Development
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Final Report
EXECUTIVE SUMMARY
This Final Report consolidates and examines the results of the EPRA consultation dialogues which
were held from November 2005 to April 2006. In line with EPRA’s mission to widen and
strengthen the ownership of economic reforms through participatory processes in policy
formulation, the dialogues were conducted to bring out ideas and experiences from the key sectors
and known stakeholders involved in the development, provision or use of infrastructure and public
services that had been carried out on a PSP basis. Their views and comments were also intended to
serve as inputs to an ongoing congressional initiative to amend the BOT Law.
Several consultation dialogues were held which consisted of separate briefings, workshops and
round table discussions organized for the following groups:
Government agencies
Business/PSP proponents (water, energy, transportation, and ICT industries)
End users/consumers
Civil society groups/NGOs.
These sectors make up the principal stakeholders in the Philippine government’s program to use
public-private partnerships as a key development strategy and policy tool to improve the delivery
of public services. Since its inception, the Philippine PSP Program had brought in private
investments worth almost USD 19 billion that went directly into the development of new
infrastructure and the provision of improved services in power generation, transportation
(principally, toll roads and rail), water supply, ICT, and property development.
The BOT Law provides the basic legal framework for doing PSP transactions in the Philippines
from both policy and implementation standpoints. It is considered the seminal law that opened up
practically all types of infrastructure and development projects to PSP and which authorized
government implementing agencies to enter into partnerships with qualified proponents.
After more than ten years since the last major revision, House Bill No. 5002 seeks to further amend
the BOT Law to address factors that have impeded BOT project development and implementation.
The proposed reforms include: (i) establishing an independent and single BOT project review and
approval body; (ii) setting the terms for a more competitive and transparent procurement process;
and (iii) defining specific offenses and providing penalties for their violation, among others.
Consolidating the concerns raised by the participants to the EPRA dialogues, the main issues
shared by most of the identified stakeholders are:
Choosing suitable PSP modalities and lack of government capacity in developing PSP
projects
Lack of regulatory capacity and conflicts of interest in the performance of public functions
Need for better technical understanding and cooperation on the part of government, and for
greater public awareness and education
Lengthy approvals process and red tape; the process is also quite prone to political
influence/intervention which can cause delay
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Need for greater transparency and accountability in the BOT process
Complications and difficulties associated with developing infrastructure through

unsolicited proposals
Managing fiscal risks and exposure to potentially large contingent liabilities as a result of
government guarantees and support given to PSP projects, and finally,
Determining the true social development impact of PSP in infrastructure and protecting the
public welfare.
Serious questions, however, also hound the provisions of the congressional bill. There is a common
belief that the proposed BOT Authority will not be effective if it assumes its intended role as
promoter, facilitator, approving body, procurer, coordinator and monitoring agency for PSP
projects all at the same time. This is a clear conflict of interest to many.
Nevertheless, the Final Report confirms that the bill does well in covering the issues and concerns
raised by the different stakeholders. While the solutions suggested by the bill may be debatable, it
shows a clear awareness of the issues and conveys a genuine intent to resolve them. The bill
espouses a radical approach compared to other solutions. But what has been obviously shown is
that while there may be several options, the issues and goals are evidently the same.
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INTRODUCTION
The EPRA Consultation Dialogues
This Final Report consolidates and examines the results of the consultation dialogues organized by
EPRA through its Multi-Stakeholder Team on Private Sector Participation in Public Infrastructure,
that were held from November 2005 to April 2006 (the “EPRA Consultation Dialogues”). In line
with EPRA’s mission to widen and strengthen the ownership of economic reforms through
participatory processes in policy formulation, the EPRA Consultation Dialogues were conducted to
draw out ideas and experiences from key sectors and known stakeholders involved in the
development, provision or use of infrastructure and public services which had been carried out on a
PSP basis. Their views and comments were also intended to serve as inputs to an ongoing
congressional initiative to amend the more than decade-old BOT Law.
Several consultation dialogues were held which consisted of separate briefings, workshops and
round table discussions organized for the following targeted groups or audiences:
Government agencies
Business/PSP proponents (water, energy, transportation, and ICT industries)
End users/consumers
Civil society groups/NGOs.
Usually at each dialogue, a set of presentations on BOT/PSP project development experiences was
given to prompt discussions. Selected reactors, followed by the rest of the participants, were then
allowed to respond either in plenary or break-out sessions. During the exercise, participants were
asked these two basic questions:
What are the issues affecting PSP as an infrastructure modality?

Also, what matters were problematic in the application of past rules or policies that may
perhaps be improved or fixed through revisions to the BOT Law?
The merger of issues was done solely on the basis of the proceedings, summaries and notes
recorded by EPRA at each dialogue. The analysis, however, takes into account external
information that might not have been known at the time some of the issues had been discussed. As
a result, the issues either find support in the analysis or are candidly tested and placed in their
proper context.
In addition to reviewing the major PSP issues, the comments and recommendations of the various
sectors on the revisions to the BOT Law proposed under House Bill No. 5002 (“HB 5002”) 1 are
discussed and presented in this Final Report as well.
1
House Bill No. 5002 entitled “AN ACT CREATING THE BOT AUTHORITY, FURTHER AMENDING
REPUBLIC ACT NO. 6957, AS AMENDED BY REPUBLIC ACT NO. 7718, ENTITLED ‘AN ACT
AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF
INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES,”
introduced by Representative Joey Sarte Salceda and filed on 16 January 2006.
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Final Report
The Philippine PSP Program
For more than 20 years, the Philippine government has used public-private partnerships as a key
development strategy and policy tool to improve the delivery of public services in the country.
Since its inception, the Philippine PSP Program has brought in private investments worth almost
USD 19 billion that went into the development of new infrastructure and the provision of improved
services in critical areas such as power generation, transportation (principally, toll roads and rail),
water supply, ICT, and property development. 2 Additional infrastructure privatization projects
valued at around USD 514 million had also been awarded by the government and are currently at
different stages of implementation, about half of which are under actual construction.
Figure 1. Status of BOT Projects
Completed
Under
Projects
Construction
$1,000.50 M
$514 M
Operational
$17,800.72 M
Having been largely credited for solving the energy crisis that gripped the country during the late
80’s to mid-90’s, the Program, not surprisingly, channeled the largest chunk of recorded
investments to the power sector, drawing close to 51% of the total. The water sector got the next
highest share at 37% (owed largely to the two MWSS privatization transactions estimated to cost
around USD 7 billion), followed by transportation at 8%, while ICT and property development
projects combined for about 3% of the aggregate. 3
2
See DTI-BOT Center Public-Private Partnership Program List of Completed/ Operational and Awarded
Projects, 31 March 2005. This Final Report has excluded pre-terminated projects from the list such as the
San Pascual Co-generation Power Plant Project (worth USD 400 million) and the NAIA International
Passenger Terminal III Project (previously listed at a project cost of USD 440 million).
3
Id.
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Figure 2. Investm ents by Sector
60%
Pow er 51%
50%
Water 37%
40%
Percent 30%
20%
Transport 8%
10%
IT 1% Property 2%
0%
Sector
Government’s strategy for the delivery of infrastructure through PSP has been set as follows:
competition for a specific market or service is identified and a private sector provider is qualified
and selected either through a competitive bidding or an unsolicited tender process. The chosen
provider is then contracted to provide the planned service and is made subject to government
regulation either under applicable law or by contract on economic, technical, and other
performance-related aspects. Since the BOT Law correctly treats PSP as a financing scheme, the
proponent may be granted credit enhancements, incentives and other forms of government financial
support such as revenue guarantees, automatic fee adjustments, and tax relief. These are seemingly
justified so that the government would be able to attract the right private investors – an end made
more critical considering the inadequacy of public investments to meet the country’s growing
infrastructure requirements.
The BOT/PSP Legal Framework
Capital investments came at particular times when enabling laws had allowed private sector
initiatives in government infrastructure. Perhaps the earliest of these laws was RA 3741 (1963),
otherwise known as the Private Financing Law. The basic framework and spirit of that law make
it the sure precursor of modern PSP legislation. Under RA 3741, the then Department of Public
Works and Communications was authorized to enter into contracts with the private sector for the
construction, operation and maintenance of national highways, roads, bridges, public markets,
irrigation systems and other self-liquidating public improvements. The contractor, in turn, would be
entitled to the return of its capital with interest on the unpaid balance at a rate not exceeding 12%.
The developer was also authorized to charge and collect reasonable tolls or fees for the use of its
facilities.
The Private Financing Law was subsequently repealed by Presidential Decree No. 1005 (1976). To
justify the action, it was noted in the decree that the implementation of government infrastructure
projects under the Private Financing Law might distort government plans and priorities since the
law’s overriding consideration was the self-liquidating character of the project rather than its social
and economic benefits.
After more than ten years and, in what seemed to be a casual response to a looming energy crisis,
the government, pursuant to Executive Order No. 215 (1987), ended State monopoly in power
generation and permitted the building of private sector generation facilities throughout the country.
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Final Report
EO 215 was promulgated to make up for the lack of public investments in the power sector and to
help accelerate the development of new baseload capacity through private sector generators.
Efforts to further mobilize private sector investments in infrastructure led to the enactment of the
first version of the BOT Law in 1990. The law authorized government agencies to enter into
contracts with qualified private sector proponents for the financing, construction and operation of
financially viable infrastructure facilities through the build-operate-and-transfer (BOT) and build-
transfer (BT) schemes.
With the economy nearing breaking point as a result of the severe power shortage, the Congress
approved the Electric Power Crisis Act of 1993 which gave the President time-bound discretion
and authority to execute negotiated contracts for the construction, repair, improvement or
maintenance of power plants, projects and facilities. This was shortly followed by the substantial
revision of the BOT Law through RA 7718 (1994). The Amended BOT Law expanded the
different public-private partnership arrangements that could be lawfully entered into by
implementing agencies with private sector proponents, broadened the eligible types of
infrastructure facilities or development projects that may be carried out on a PSP basis, and
introduced the unsolicited proposal process as a valid mode of project implementation. It also
helped institutionalize the possible provision of government support arrangements to credit
enhance PSP projects and led to the recognition of the need for sponsors to make market-based
returns.
GOCC special legislative charters also became the legal bases for directly negotiated joint
venture agreements with private developers for some big-ticket toll road projects such as the Metro
Manila Skyway and North Luzon Expressway Projects.
In 1995, the National Water Crisis Act was passed which gave similar direct contracting powers
to the President for the financing, construction, rehabilitation and operation of water supply and
distribution facilities through BOT-type contracts, and sanctioned the reorganization and full
privatization of the MWSS including LWUA.
The latest enactment would be the Electric Power Industry Reform Act of 2001 (RA 9136 or the
EPIRA), which provided the policies and framework that would enhance the inflow of private
capital to the power sector and set an orderly and transparent divestment or privatization of the
assets and liabilities of NPC. The law also prohibited NPC from incurring new obligations to
purchase power through bilateral contracts with generation companies but retained NPC’s
missionary electrification function through its Small Power Utilities Group.
From this extensive list of special statutes that make up the BOT/PSP program framework, the
BOT Law may be considered the seminal law for doing PSP transactions in the Philippines from
both policy and implementation standpoints. While it cannot be credited for having mobilized
substantially all of the recorded investments, it is the law that opened up practically all types of
infrastructure and development projects to private sector participation and that authorized
government implementing agencies to enter into partnerships with qualified sponsors or project
proponents.
To address implementation issues and perceived weaknesses in the program, BOT regulation went
through two major revisions in 1998 and 2006. The 1998 revision focused on clarifying the
procurement requirements and procedures for the competitive bidding and Swiss challenge
processes, while changes to the implementing rules effected during the first half of 2006 principally
dealt with trying to accelerate the BOT government approvals.
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Preparing for the Next Wave
Undeniably, infrastructure plays an important part in meeting the country’s economic goals and in
maintaining overall competitiveness. Declining levels of public investment in infrastructure to
proportions below international benchmarks seem to have reinforced PSP’s crucial role in
economic development even more.
Under the MTPIP, the total infrastructure investment requirement for 2005-2010 in the
transportation, energy, water and ICT sectors is estimated to be PHP 1,048.8 billion (or USD 21
billion). Significantly, the government expects the private sector to finance or contribute about
28 % of that or around PHP 286.4 billion (or USD 5.7 billion).
Meeting that target has become more challenging in view of the serious issues that have surfaced
through the years and the hard lessons learned which have weighed down the entire BOT program.
Awarded contracts widely perceived to be “onerous and grossly disadvantageous,” glaring
allegations of corruption or wrongdoing, and failed transactions that had been judicially struck
down have collectively set off a negative impact on the conditions for doing PSP in the country.
One of the biggest hurdles is reversing the downtrend and marked drop in BOT/PSP investments
that started in 1998 (see Figure 3) and cultivating instead a robust project pipeline that will help
achieve the government’s MTPIP goals.
4
Figure 3. Annual BOT Investments (current prices)
$1,400,000,000 1,307,092,800
1,214,980,000
$1,200,000,000
1,137,802,800 1,156,310,300
$1,000,000,000
939,127,000
$800,000,000
743,270,000
$600,000,000 633,670,000
$400,000,000
$200,000,000 295,000,000
$0
1996 1997 1998 1999 2000 2001 2002 2003
Source: BOT Center (aggregate data)
It appears that HB 5002 is being packaged as a magic bullet. The bill seeks to directly resolve those
issues by proposing substantial amendments to the BOT Law which are intended to: (1) establish
an independent and single BOT project review and approval body; (2) set the terms for a more
competitive and transparent procurement process; and (3) define specific offenses and provide
4
The figures shown are an approximation of the annual investments and were derived by breaking down the
total project cost of a BOT project into equal annual investments during its implementation period.
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penalties for their violation, among others. While touted as a major piece of economic reform
legislation, it has not been certified as urgent by the President to Congress. It remains pending with
the Committee on Public Works and Highways at the House of Representatives.
Whether HB 5002 adequately addresses the factors cited by dialogue participants that have deterred
PSP infrastructure development is one of the main questions to be tackled in this Final Report as
well.
RESULTS OF THE EPRA CONSULTATION DIALOGUES
The holding of the EPRA Consultation Dialogues was a useful approach in eliciting the needed
inputs and comments from the concerned sectors. The exercise was not entirely novel, however,
since similar clinical discussions had already been organized in the past – the last one being the
series of public hearings called by the inter-agency committee that worked on the most recent
revisions to the BOT Law IRR. In fact, a lot of the issues raised during the EPRA Consultation
Dialogues had also been brought up during the public hearings and in earlier forums.
Nevertheless, what made the EPRA-initiated exchange unique was its wider subject coverage and
participant outreach. The discussion, for instance, not only covered experiences in the BOT
program but also included lessons learned from other privatization models. The participation of
civil society groups, NGOs and consumer organizations also provided a fresh perspective and
brought out materially different yet fundamental points such as the need for more transparency,
better regulation and protection of end users, and more rational government planning as a whole.
Discussion of Main Issues
For the purpose of having a more structured presentation and discussion, matrices are used to
integrate, classify and explain the issues and identify the particular stakeholder groups that have
cited them. After each issue is explained, an assessment is made from an academic or practical
viewpoint, which either helps validate the issue or places it in the proper context that may
consequently temper its gravity.
Table 1 synthesizes and describes the main issues that have been commonly raised or deemed
critical, at least on their face, by the participants to the EPRA Consultation Dialogues. There
appears to be unanimity in nearly all of the major concerns mentioned. Table 2, on the other hand,
lists the issues that a specific stakeholder group has brought up as worrying points for the sector it
represents which do not seem to be of significant interest to others.
For full and easy reference, the proceedings of the EPRA Consultation Dialogues, as documented
by the Multi-Stakeholder Team on PSP in Public Infrastructure, have been attached to this Final
Report as annexes.
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Table 1. Main Issues on BOT/PSP Project Development and Implementation
Issue Nature or Description Concerned Sectors Report Analysis and Assessment
1. Choosing suitable PSP There are different options for PSP and Business, Selecting a suitable PSP option depends on
modalities and lack of getting it wrong can be costly. A more Users/Consumers, several factors and the government must first be
government capacity in fundamental question for government is NGOs/Civil Society able to identify the problems in service
developing PSP whether PSP provides the solution. Thus, Groups provision that it wants to solve (e.g., operational
projects if the costs of doing PSP in infrastructure inefficiency, lack of capital investments, poor
are high, then would it not be better for maintenance). It should also evaluate how
the government to undertake these appropriate or responsive an option is in
projects directly instead? If the answer is addressing those problems, and assess its own
no, given the design, features and capacity to assume the obligations and risks that
objectives of a particular project, what each option entails. (World Bank, 1997)
would be the most suitable PSP modality
to undertake? What variables are But choosing the most appropriate PSP
involved? modality is just one of the many important
aspects of successfully crafting and developing
Related questions are how government an infrastructure privatization transaction. In all
capacity to develop PSP projects can be cases, the basic principle is that a BOT/PSP
improved and how can it be enhanced so project must be legally, technically, financially
that public interests are genuinely and politically feasible and sound. In the past,
considered and protected. poor or even irrational planning and uninformed
decision making have resulted in unfair deal
structures or expensive infrastructure.
The government is clearly aware of this issue

and recognizes the need to build capacity. The
BOT Center and the different BOT units of line
agencies had received extensive technical
assistance and support from donor agencies for
this purpose. This type of assistance continues
up to now. There are government agencies and
professionals who understand the requirements
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Final Report

of PSP infrastructure development and project
financing quite well. Also, as a functional tool,
the government has set up a small project
development facility or PDF (funded by USAID
and administered by the BOT Center) which
allows implementing agencies to engage
professional advisors to prepare project
feasibility studies and bid documents for the
public tender of BOT/PSP projects. Winning
bidders are then required to reimburse the
agency for the costs incurred in packaging and
tendering the projects. An ADB-funded private
infrastructure PDF loan facility for LGU
projects used to be in place as well. The facility
was administered by the Land Bank. Applying
the PDF concept, government sponsors have
been recently hiring international transaction
advisors (such as the IFC) on commercial terms
to help design and carry out priority public-
private partnership projects.
2. Lack of regulatory The government does not seem to have Business, Ideally, the regulatory framework should be
capacity and conflicts the technical capability and resources to Government, End conducive and prepared for private investments
of interest in the exercise regulatory functions over public Users and in infrastructure. Even if PSP projects are
performance of public services and infrastructure provided Consumers, competitively tendered, service providers
functions through PSP, which creates regulatory NGOs/Civil Society usually end up retaining or having some
risk and tends to put off investments. Groups monopoly power. Regulation is therefore
Regulatory offices appear to be unable to necessary to protect the social, environmental
act or decide independently. There is a and public interest or public policy aspects of
need to rationalize regulatory functions infrastructure and service provision such as
which include the grant of incentives and those relating to prices, operating efficiency,
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the protection of public interests. compliance with service level standards,
possible monopolistic behavior or unfair trading
How then can government regulatory practices, and consumer welfare and
capacity be enhanced? What would be satisfaction. Unfortunately, some sectors have
the appropriate institutional set-up for weak regulatory systems and are unable to cope
regulators? How can their independence due to inadequate laws or deficiencies in
be ensured? How can incentives for resources and technical capabilities. If sector
disclosure by regulated firms be laws have gaps, interim regulatory
strengthened? arrangements are normally formulated and
missing elements of regulation are incorporated
Even if most transactions lead to natural into PSP contracts.
or regular monopolies, some PSPs are
not subject to formal regulation. Should Government agencies sometimes find
they be? themselves in conflicted positions being asset
owners or revenue sharers but acting as
“independent” regulators at the same time. In
this situation, it would be hard to see the
fairness and logic of having a joint venture, for
instance, seek regulatory approval for a decision
it made with a partner-agency that is now asked
to independently review the merits of the
approval sought. The clear tendency is to favor
the results, more likely, at the expense of public
welfare or convenience.
The lack of capacity and independence also

leads to different forms and degrees of
regulatory capture.
Again, there is open recognition of these

problems. Some steps have been taken to
address them. For instance, the EPIRA was
intended to strengthen the capacity and ensure
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the independence of the ERC to serve as the
apex regulatory body for the power industry.
The NWRB was reorganized pursuant to EO
123 (2002) to exclude public agencies that had
direct claims on water resources and to bring
local water districts under its regulatory
supervision. Finally, the MTPDP mandates the
outsourcing by the LRTA of rail services while
retaining regulatory functions over the
operations of private concessionaires.
3. Need for better There is lack of technical and legal Business, Unpredictability and misguided interference in
technical understanding by government and other Government, End the BOT/PSP development and implementation
understanding and stakeholders about the BOT process and Users/Consumers, process may be usually traced to the lack of
cooperation on the part its requirements. This contributes to NGOs/Civil Society knowledge about applicable laws, little or no
of government, and for additional cost on the part of investors. Groups appreciation of the project financing scheme, or
greater public There should be better cooperation a failure in communication or consensus
awareness and among government agencies particularly building. These outcomes pose enormous risks
education in the sharing of information. Some on the part of investors, lenders and even
agencies intervene on the basis of wrong government sponsors themselves.
information which can adversely affect
the implementation of projects. It has happened several times. The cases cited
and complaints made by the participants to the
The role of local government units in the EPRA Consultation Dialogues, particularly, the
implementation of PSP projects has also business sector, are valid and real. But the
been a concern since LGUs exercise government has shown that it can take proper
regulatory functions and tax powers over action. For instance, to settle the issue on the
businesses. nature and treatment of fees payable to private
sector proponents that are collected by
Getting political and public support is implementing agencies from facility users, Joint
also important. If the public is well- Circular No. 03-01 (2003) was issued by the
informed on the BOT process, a lot of DOF, DBM, NEDA and BOT Center which
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misconceptions can be corrected. permitted agencies to deposit money collected
from end users in designated escrow accounts
and to pay the proponents’ fees directly from
those accounts. This circular implemented a
special provision in the General Appropriations
Act clarifying that such fees were not public
funds and could be paid to BOT proponents. It
helped eliminate payment risk and secured the
investors’ project cash flows.
Agencies and proponents also fail to identify

and consider the position of stakeholders who
support or oppose PSP initiatives during
planning and implementation. As a result,
safeguards for specific interest groups are not
provided in PSP transactions that can earn
support, widen public acceptance, or eliminate
opposition.
4. Lengthy approvals Bureaucracy and red tape in the project Business, While the IRR of the BOT Law has consistently
process and red tape; review and approval process have caused Government, End prescribed a 30-working day period for
the process is also delays in project implementation and Users/Consumers, government BOT approving bodies such as the
prone to political transaction closing which results in NGOs/Civil Society ICC to approve PSP projects (and has always
influence/intervention higher costs. How can delays in the Groups declared projects to be deemed approved if that
which causes delay project approval process be eliminated? deadline is not met), this prescription is
How can project approval and closure be contradicted by reality and is treated more as
facilitated to reduce cost? something directory rather than mandatory.
Is it possible to have a centralized Implementing agencies including proponents

government agency to approve projects, are never bold enough to formally invoke this
since, currently, there are several provision since most often the consent of other
agencies that proponents have to deal government agencies (that are members of the
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with separately? ICC) are required for key elements of the
project such as the provision of government
A lot of delays in project review, support and the setting of negotiating
approval, and implementation are caused parameters. There are no real consequences for
by political intervention. How can we delay, therefore, on the part of the approving
reduce undue political body.
intervention/influence/pressure in the
project development cycle? How can In any case, the technical, financial and
these risks be mitigated or avoided? economic review done by government of
BOT/PSP projects is not only a legal but also a
rational and practical requirement. Validating
the feasibility of any project is crucial. The
government must do its own due diligence for it
to come up with an informed decision. The
whole exercise in fact can be very predictable.
Nevertheless, one may still ask if the decision-
making process is transparent enough.
But there are qualifications that should be made.

Delays may be caused by many factors
including the non-compliance of agencies and
proponents with approval requirements and the
limited absorptive capacities of government
approving bodies. One other reason that could
hamper the smooth processing of project
approvals and could reverse logically expected
outcomes would be political intervention.
Questionable attempts to influence the results or
change risk sharing decisions at the public
approval stage typically originate from private
sector proponents and are coursed through
different government channels until the target of
the political pressure is reached and eventually
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Final Report

succumbs. Arrangements or findings at the
technical level deemed “unacceptable” are
questioned, fought over and eventually brought
to the attention of holders of political power. As
a result, the issue takes time to resolve and an
impasse occurs, delaying official action on
projects and altering development policies
significantly. This kind of dynamics is seen
mostly in unsolicited proposals, which by law
and experience, take so much longer to
complete. A simple processing time study done
by the BOT Center indicated that intrinsically
unsolicited proposals would take almost double
the time to close compared to publicly bid
projects. Since the contract is directly
negotiated and asymmetric information
problems abound, it is not uncommon for
unsolicited projects to be under development for
at least five years or more.
In an apparent effort to speed up the approvals

process, the President through the NEDA Board
issued a directive in April 2006 (1) instructing
the BOT IRR Committee to incorporate further
revisions in the Revised IRR by not requiring
first-pass approval from the ICC for unsolicited
proposals and just submitting the results of the
Swiss challenge to the NEDA Board for
appropriate action, and (2) fixing the rate of
return for all projects at a maximum of 12%,
after-tax. This order, however, had an opposite
effect and merely confused oversight bodies and
implementing agencies. Delays were caused
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Final Report

because line agencies had to grapple with
understanding and applying the directive as
faithfully as they could.
5. Need for greater There is a need for greater transparency Business, PSP projects that have failed, become
transparency and and accountability in the development of Government, End controversial or lacked political and popular
accountability in the PSP projects. One of the relevant Users/Consumers, support are mostly those which have been
BOT process questions is how can transparency be NGOs/Civil Society developed under less transparent terms, have
ensured and maintained throughout the Groups been awarded to incompetent bidders, or have
project review, approval, and deviated, one way or the other, from the
implementation process. How can the prescribed approvals or procurement process. It
government maintain the integrity of the is a widely accepted principle that the more
bidding process? What are the optimal competitive and transparent the processes or
procedures for bidding, contracting, and approaches are for awarding development rights
approval which can lead to a fair and forging strategic partnerships with
balancing of the interests of all competent partners, the more likely that the best
stakeholders? possible offer will be obtained from the market
and that the chosen deal will be publicly
Moreover, there is a need to look at how acceptable.
PSP contracts are reviewed and
implemented. Closer monitoring of Thus, it should not be surprising that most of
projects during the different stages of the contentious projects originated as
development and implementation is unsolicited proposals. These transactions had all
necessary. As an additional safeguard, been directly negotiated. CBK, Casecnan, and
how can the public have sure and free NAIA Terminal 3 are a few examples. These
access to contracts, records or are the familiar deals for many because of the
documents? controversy they provoked. The issue of
transparency and accountability, therefore, may
What are effective measures to ensure be more relevant for and targeted at unsolicited
that culpable persons/agencies are held proposals as a procurement and implementation
accountable for any illegal conduct or mode.
wrongdoing? It seems, for instance, that
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Final Report

the private sector does not have
accountability to the public or any
obligation to be transparent.
6. Complications and There should be more solicited projects Business, The statement that unsolicited proposals have
difficulties associated since unsolicited proposals generated Government, become the norm in developing PSP projects is
with developing most of the problems for government. Users/Consumers not factual. Out of the 70 PSP projects that have
infrastructure through Unsolicited proposals should be the been awarded by the government since the start
unsolicited proposals exception, rather than the norm. Instead of the BOT/PSP Program, only about four (4)
of complying with what had been were unsolicited proposals while three (3) were
envisioned in the BOT Law which called negotiated joint ventures. 5 Other sole-sourced
for tenders from the private sector, a lot proposals may be under development but unless
of unsolicited proposals had been these projects get approved, tendered and
implemented. There had also been issues closed, they should not be counted. Many
concerning the right to exclusivity and approved unsolicited projects had gone this path
the degree of legal protection afforded by and had fallen through.
the law on original proponents specially
when similar projects were involved. It is a common misimpression which may have
been set off by the controversy that has been
Related to this, there may be a lack of linked to unsolicited proposals at various stages.
incentives for the government to develop More attention may also be naturally drawn to
projects internally. them since unsolicited projects usually involve
big-ticket items. These “high profile” cases
have been investigated by government bodies
and have been closely reported in the media.
5
The negotiated projects are the Caliraya-Botocan-Kaliraya Power Plant Project, San Pascual Cogeneration Power Plant Project (awarded but terminated by the
government), Casecnan Multipurpose Project, NAIA International Passenger Terminal 3 Project (declared null and void), Metro Manila Skyway Project (joint
venture), Manila North Luzon Expressway Project (joint venture) and Manila-Cavite Toll Expressway Project (joint venture). The LRT Line 1 Extension
Project, which started out as a negotiated joint venture and unsolicited proposal, was repackaged for competitive bidding. The Bulacan Central Bulk Water
Supply Project was awarded as an unsolicited proposal but not implemented.
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Final Report

There was time too when a private proponent
was able to enter into non-binding agreements
with scores of local water districts outside
Metro Manila for the development of bulk
water supply or distribution system expansion
projects under the unsolicited process. No doubt
there are unsolicited projects that have been
approved (such as the LRT Line 7, Carmen
Bulk Water Supply Project, Philippine Postal
Modernization Project) but experience shows
that these transactions can still drop out unless
they actually close.
Implementing agencies cite the lack of

resources to conduct feasibility studies and
launch pre-investment activities which the
proponents offer to do for free (or at least
supposedly) as the reason why they are
constrained to entertain unsolicited proposals.
But problems are bound to happen because of

the nature of the process itself. The main
disadvantage of directly negotiated transactions
is the lack of transparency and, in the particular
case of unsolicited proposals under the BOT
Law, the effective suppression of fair
competition. Furthermore, as the agency
interacts and works with the proponent on a
regular basis, the relationship naturally evolves
into a proponent-captured one.
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Final Report
7. Managing fiscal risks; Government support given to PSP Business, PSP deal structures are usually highly leveraged
exposure to potentially contracts gives rise to significant fiscal Users/Consumers, and can reach up to 80 percent debt. Therefore,
large contingent risks, which are difficult to price and NGOs/Civil Society transactions must be bankable. For them to be
liabilities as a result of quantify. The request for a guarantee or Groups so, project risks have to be efficiently allocated
government guarantees other support compels government to and mitigated through credit enhancements. The
and support given to examine projects more carefully. This rule of thumb is that the party who can manage
PSP projects can lead to disputes and delays. The main the risk most efficiently (i.e., at the least
question is whether sovereign guarantees possible cost) should bear it. On the
or government subsidies are needed. In government’s side, it may be called upon to
this connection, what would justify the provide support to ensure project viability and
assumption of more risks or liabilities on achieve financial closing. This may involve the
the part of the public sector? Also, should provision of credit enhancements such as grants
government bear market risk? or direct upfront subsidies, guarantees on
revenues or on foreign exchange fluctuation and
convertibility, and protection from political risk.
Concerns over large contingent liabilities may

be primarily traced to the country’s experience
with the IPP contracts that were entered into by
the government during the 1990’s to solve the
power crisis. While only around 17 out of 41
IPP contracts were backstopped by full
performance guarantees issued by the national
government, most of the agreements had
minimum energy off-take or take-or-pay
obligations, guaranteed capacity payments (both
functioned more like hell-or-high water
commitments), and substantial support
provisions for fuel supply, site acquisition/right-
of-way, transmission lines, utilities and tax
relief or fiscal incentives.
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Final Report

The government, however, has become more
cautious in providing government guarantees to
PSP projects. There is a realization that
guarantees are a limited resource that has to be
effectively managed. The terms of current
guarantees (if one is even granted) are more
calibrated. Guarantees are limited, priced based
on risk, time-bound, and structured to credit
enhance and ensure project bankability only.
Efforts directed toward better fiscal risk

management by the government include taking
an inventory of government guarantees issued
to PSP projects and doing a qualitative analysis
of project risks covered by those guarantees. A
functional database of these risks including the
possible financial impact of guarantee calls is
also in place. These are the first elements of the
planned government guarantee management
system that the DOF would like to set up and
operate.
8. Determining the true What is the real impact of PSP in Government, Among the benefits that PSP is expected to
social development infrastructure on the Philippine Users/Consumers deliver are technical and managerial expertise,
impact of PSP in economy? What are the social costs operating efficiency, fresh capital and reduction
infrastructure and incurred and benefits derived from the of subsidies, accelerated implementation, and
protecting the public program? How can these be measured? responsiveness to consumer needs and
welfare Are these effects greater or less than the preferences. Unfortunately, no broad study has
effects of publicly provided been made on this subject so far. While there
infrastructure? are indications that public services in the
country have been improved through PSP,
How can consumer protection be winning stakeholder support and protecting the
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Final Report

assured? legitimate interests of consumers do not always
appear to be among the main considerations of
planners and sponsors in mapping out public-
private partnership modalities. If regulatory
entities are considered weak, then the protection
of consumers (in respect of service quality,
prices and tariff adjustments, market segment
outreach, subsidy policies, and complaint
mechanisms) may be even more compromised.
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Final Report
Table 2. BOT/PSP Development and Implementation Sector-Specific Issues
A. Business/Private Sector
Issues Nature or Description
Disputes regarding BOT projects may potentially find themselves before the
proper courts for resolution. What should be the role of the judiciary in BOT
1. Defining the role of the judiciary; ensuring
project development and implementation? Concerns have been raised
the validity of contracts
regarding signed contracts that were subsequently repudiated and declared
void by the government and/or the courts.
LGUs play important roles in facilitating or impeding the development of PSP

projects particularly in the area of local taxation and municipal licenses. The
2. Supporting role of host LGUs
private sector is often left on its own by the national government to deal with
local governments.
3. Conflict resolution What is the best way to deal with conflicts or disputes?
4. Political risk How can a project be insulated from any change in political leadership?
How will the government fund site/right-of-way acquisition for priority

infrastructure projects?
5. Site acquisition/ right-of-way It is also not always clear who should be liable for the payment of real
property taxes. The tendency of government is to shift this obligation to the
private sector which can be unfair particularly if it is the government that owns
the land.
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Final Report
A. Business/Private Sector
Developers are more concerned about completing the project but tend to
6. Public information and education
overlook that winning the support of the public is important as well.
The government should resolve the case of the MRT 4 Project in view of other
7. Competing projects in the rail sector proposed rail projects such as MRT 7 that seem to compete with or undermine
existing development rights.
Domestic banks still have a weak appetite for financing infrastructure projects
8. Availability of domestic long-term financing
though some of them have begun to provide loans with longer terms.
There is a need to update government policies, rules and procedures that

9. Coping with technology conform to the E-Commerce Law.
Telecommunication services and power supply are poor in some project areas
10. Inadequacy of basic infrastructure at project
which make projects difficult to implement. The situation causes delays and
sites
results in higher completion costs.
COA’s involvement in the BOT process should be timely to avoid any post-
11. Role of the Commission on Audit
audit finding that the executed contract is “grossly disadvantageous” to the
government.
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Final Report
B. Government
1. Contract re-opening There is a need for contract re-opener provisions under applicable BOT rules.
The provision of infrastructure should have a decentralized framework. There

2. Decentralization and regional coordination
should also be more coordination of development plans and investments in
infrastructure among LGUs.
3. Private sector technical and financial

How can private sector competence and efficiency be ensured or enhanced?
qualification, competence and efficiency
4. Strict monitoring of project/contract There should be a monitoring system in place that would be capable of
implementation triggering alarm bells before implementation problems actually happen.
There are specific issues on the regulatory framework for the development of
5. Water sector regulatory framework water resources and the provision of water supply services. These include
administering the water rights system, funding for small water utilities,
affordability of tariffs, and settling the legal nature of water districts.
6. Compliance with the nationality or

It is difficult to find Filipino partners for PSP projects that are covered by the
ownership requirements under the
60/40 equity investment limit set by the Constitution.
Constitution
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Final Report
C. NGOs/Civil Society and Advocacy Groups
1. Graft and corruption How can graft and corruption in BOT projects be curbed?
2. Overly stringent BOT rules and The BOT rules are too stringent and only big capitalists, usually foreign firms,
requirements which favor foreign investors are able to comply.
There should be more public participation and better representation of citizens’

3. Strengthening the role of the citizenry
groups in the PSP development process.
Infrastructure privatization projects are profit-driven. But while pricing should

4. Balancing profitability/sustainability with be sustainable, the perception is that private sector services do not consider the
affordability needs and affordability levels of the poor. Are there sufficient profit and price
controls?
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Final Report
D. Users/Consumers
Facility operations may have significant and detrimental impact on the

1. Environmental issues
environment.
How can consumer groups be further mobilized to identify actual needs and to
advocate improvements in the development framework and the delivery of
2. Consumer advocacy
public services through PSP? How can civic groups be more involved in
infrastructure and development policy planning and implementation? What
role should the media play?
3. Water industry regulation There is still no truly independent regulator for the water industry.
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Final Report
From the foregoing matrices, three central themes come into view. The principal factors generally
perceived to have an immense impact on successful PSP development and implementation are:
Transparency and accountability

Government origination, sponsorship and regulatory capacity, and
Consumer welfare and protection.
While these issues appear distinct, they are in fact very closely linked. Demand for public services
drives government efforts to deliver better infrastructure. But the lack of resources and weak
capacity eventually lead to poor planning on the part of implementing agencies. Instead of
developing projects as a policy and setting service level requirements on their own terms for open
competition, agencies are constrained to take on less transparent ways of obtaining private
investments in infrastructure. Inefficient risk sharing likely occurs and a more pronounced need for
accountability arises. However, serious gaps in the regulatory framework of major sectors exist
which leave end users without adequate protection afforded by fair and independent regulation. In
the end, the government is unable to measure and ensure that the infrastructure provided matches
or satisfies in a sustainable and affordable manner the demand or public need sought to be met in
the first place.
PROPOSED AMENDMENTS TO THE BOT LAW
HB 5002 Rationale and Features
HB 5002 proposes to further amend the BOT Law. While the bill’s explanatory note cites the
usefulness and success of the original law in significantly increasing private investments in
infrastructure, it also points out serious concerns that would have to be addressed. For the
government, the issues specifically mentioned by the bill include the good provision of public
services; adherence to environmental, health, safety and quality standards; and flexibility to
changing conditions. To the private sector, the key concerns include transparency of rules and
procedures; protection of private rights and property; and assurance to a reasonable return on
investment.
The proposed legislation, according to its author, aims to address those matters by providing a
clear-cut policy on government support, adhering to best practices on risk allocation, setting a
reasonable rate of return for solicited or unsolicited projects, and institutionalizing a fair, honest
and competitive procurement process. It also seeks to convert the current BOT Center, an attached
agency of the DTI, into the BOT Authority which shall act as the sole and exclusive approving
body for national government priority infrastructure and development projects.
The main features of the bill and the key reforms it hopes to introduce are the following:
Expanded PSP policies. – The proposed law declares: (1) the right of the private sector to
a reasonable return on investment, (2) the protection of the public interest through fair
pricing and the timely delivery of quality services to be ensured under the principle of full
public disclosure of transactions, and (3) the grant of government support through
judicious and transparent mechanisms, as additional State policies for the development and
implementation of PSP infrastructure projects.
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Final Report
Creation of the BOT Authority. – The bill proposes to convert the BOT Center into the
BOT Authority, which shall act as the central oversight and procurement body for national
infrastructure privatization projects. A Public-Private Infrastructure Development
Committee will also be created to provide broad policy directions and promotional help to
the new agency. The Committee will be chaired by the President and will be composed of
the heads of selected line agencies and the leagues of local chief executives, to be joined by
financial regulators and private sector organizations. In one of the hearings conducted by
the Committee on Public Works and Highways, it was explained that infrastructure
projects would only be placed under the responsibility of the BOT Authority if there would
be no sufficient public funding for them. There was also some discussion about limiting the
jurisdiction of the BOT Authority to unsolicited projects only. The creation of a separate
BOT oversight body appears principally intended to fast-track the project approvals
process through the specialization of agency functions. One of the criticisms leveled
against the ICC is its perceived inability to process BOT projects quickly since it handles
government and ODA-funded projects at the same time. ICC technical working group
members are also just seconded to do BOT review work on top of performing regular line
functions in their mother agencies.
Change in LGU project approvals process. – Only the approval of the sanggunian and
the local development council concerned will be required for all LGU projects. No national
government approval will be necessary. This revision seeks to uphold the local and fiscal
autonomy given to LGUs under the Constitution and the Local Government Code. It
eliminates the requirement under the current BOT Law for LGUs to secure ICC approval
for projects costing more than PHP 200 million.
Treatment of unsolicited proposals. – Unsolicited proposals will be subjected to a

“comparative or competitive tender process.” This is interpreted to mean that qualified
parties will be allowed to openly challenge the proposal. The bidder who offers the lowest
price will be the winning challenger. The winner, however, will be required to reimburse
the development cost of the original proponent. The change in treatment is a clear attempt
to make the unsolicited proposal process more competitive and evenhanded. More
challengers are expected to participate since the right to match of the original proponent is
taken away and the prescribed 60-working day bid preparation period is partially lifted.
Project development facility. – A project development facility (PDF) will be established

as a revolving fund to finance the identification, validation, development and packaging by
government agencies of BOT projects for competitive bidding. The fund will be
administered by an inter-agency steering committee under the proposed BOT Authority.
The purpose of the PDF is to provide implementing agencies with the needed technical
support and expertise in preparing and tendering legally, technically and financially viable
PSP projects. This will improve the quality of projects and help build a good project
pipeline developed internally by the government. It will reduce government’s reliance on
privately-packaged unsolicited proposals and avoid possible rent seeking behavior through
sole-sourced and supply-driven transactions.
Additional projects and PSP modalities. – New PSP contractual arrangements are made
eligible under HB 5002 including concession, joint venture, management or service
contract, and lease affermage. The amendment hopes to further expand the allowable PSP
options that may be lawfully adopted and carried out under the BOT Law. The inclusion of
joint ventures is specifically intended to provide clear and definitive guidelines for the
development and procurement of major infrastructure projects through this PSP variant.
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Final Report
Large joint venture projects in the past had been awarded without any form of competition
in cases where the special charters of GOCCs permitted their entering into commercial
agreements with counterparties.
One-stop shop office. – The BOT Authority will establish a one-stop shop for investors to
secure all the necessary national government licenses, permits and approvals. Full
information will also be provided regarding municipal licenses and permits. This
innovation hopes to accelerate the development and implementation process by reducing
the steps and providing a central location for the issuance of all necessary government
consents, permits and licenses.
Offenses and penalties. – Penalties are attached to specific offenses such as material
misrepresentation, contract falsification, and partiality or unauthorized assistance by a BOT
public officer. Defining offenses and providing penalties are meant to raise the duty of care
and accountability of public officials and other stakeholders involved in the PSP process.
Other proposed amendments include revenue sharing in projects to be co-financed by the

government, setting limits on rates of return, defining the types of possible government support,
and providing government warranties to uphold the validity of signed contracts. These revisions are
attempts to ensure fairness, clarity, predictability, and transparency in PSP project development.
The EMERGE Report on BOT Law Amendments
The EMERGE Activity, which provides technical assistance in support of economic policy reforms
aimed at sustainable economic growth and enhanced competitiveness, has prepared a technical
report entitled A Proposed BOT Bill to Enhance Public-Private Partnership in Infrastructure
Development. Its purpose is to help the DTI and its attached agencies (the BOI and the BOT
Center) study and draft possible amendments to the BOT Law.
The EMERGE Report presents an alternative bill amending the BOT Law. The main philosophy
behind its version is that weak capacity of implementing agencies results in poor project quality at
entry which causes delay or results in slow implementation. It highlights the need for agencies to
obtain sufficient technical, financial, and legal expertise so that they can take the lead in contract
writing and negotiations as well as in monitoring. Its basic proposition is that empowering
implementing agencies is the key to having successful PPPs.
The report therefore disagrees with the planned institutional framework envisioned under HB 5002,
which reduces the mandate of implementing agencies and bypasses the established functions of
existing oversight bodies. It questions whether HB 5002’s proposed institutional arrangement
heads toward better transparency, accountability, and fiscal soundness.
It recommends two strategies for improving the BOT process: (1) improving the capacity of
implementing agencies in developing BOT projects; and (2) reducing ICC requirements and
streamlining its functions and membership. It also suggests that BOT oversight tasks may be
delegated to an ICC subcommittee.
The EMERGE Report makes valid observations regarding major sections of HB 5002. These
points include the following:
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Final Report
Conflicted role of the proposed BOT Authority as promoter, facilitator, approving body,
procurer, coordinator and monitor for PSP projects at the national level
Possible undermining of the implementing agencies’ responsibilities and accountabilities

as BOT project sponsors
Need for more clarity on the additional PSP options proposed to be included
Need for more flexibility by keeping only broad policy directions and operating principles
in the law and relegating all other details to the IRR, and
Negative signals and legal risks associated with an express recognition of the right by the
new administration to review the terms of subsisting PSP contracts approved by previous
leaders.
The “conflict of interest” issue appears to be the most serious one. Thus, the draft bill prepared by
EMERGE takes an opposite view. Rather than forming a BOT Authority, it upholds the current
powers of the ICC, including the NEDA Board, as the public approving authority for PSP projects.
But in contrast to what had been propounded in the report, there are no directives in the proposed
bill that mandate the streamlining of ICC processes or memberships. The choice between creating a
new super body and reengineering an established agency is a policy decision, for sure. The first
option is radical but costly while the second is practical but not pioneering at all. Disappointingly,
there may always be doubts if the right decision can be made since no formal institutional study
supporting either side has been presented.
Other comments on the EMERGE version of an amendatory bill are:
References to RA 9184 or the Government Procurement Reform Act under Sections 1 and
7 of the EMERGE bill (permitting negotiated procurement under exceptional
circumstances) are inappropriate since PSP projects, by nature, are large and very complex
transactions. In general, it will not be a correct and timely solution to the problems
resulting from the exceptional circumstances described in the procurement law. One of the
difficult lessons learned in doing BOT projects is that directly negotiated agreements
actually take longer to implement than publicly bid ones. It also needlessly widens the
grounds for negotiated procurement under the current BOT Law which is presently limited
to unsolicited proposals (but still subject to competition through a Swiss challenge) or
public biddings that have only one complying bidder. Moreover, as a seeming recognition
of the distinctiveness between the BOT Law and RA 9184, the IRR of the procurement law
itself declares that its provisions do not apply to infrastructure privatization projects.
Generally, contractual arrangements cannot be negotiated by the parties as suggested in

Sections 2 and 3 of the bill since direct negotiations are only allowed in very few instances.
This is also the reason why expanded modalities have been included in HB 5002. The
purpose is to bring as many PSP options as possible within the scope of the BOT Law so
that uncompetitive and less transparent means of delivering infrastructure can be avoided.
Section 7 rules out the provision of any form of government guarantee, subsidy or equity,
whether direct or indirect, for unsolicited proposals. The current law allows indirect
guarantees to unsolicited projects. There are two sides to this issue – prohibiting all types
of guarantees could effectively shut down unsolicited proposals, which may be viewed as a
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Final Report
good policy in general, but it would take away government’s flexibility in structuring
bankable transactions for unsolicited projects that are fair and sensible.
Section 9 of the EMERGE bill, which seeks to limit the right of action to question the
legality of PSP contracts, has the right intention but may be overly broad. Getting project
approval means that the implementing agency can proceed with the bidding. Several
months pass until an award is made and the contract actually signed. Many events can still
happen which could erode the validity of the process. Restricting the time to examine a
deal in court to 90 days after publication of the approval may be too protective.
Finally, the main report states that most of the provisions in the law can be retained with
certain details to be relegated to the IRR. But the bill deletes important statutory provisions
such as the 50% ceiling on government co-financing, the 12% cap on the return on rate
base for negotiated contracts involving public utility projects that are natural monopolies,
the allowable repayment schemes for the private sector, and the various consequences or
legal remedies in case of contract termination. These are important principles that should
have an explicit basis in the law.
Responsiveness of Proposed Amendments
How responsive is HB 5002 to the issues raised by the different stakeholders? What other aspects
have been addressed by the EMERGE bill and, more concretely, by the recent revision to the BOT
Law IRR? Table 3, in the next page, provides a simple analysis and gauges how far off the current
reform proposals are from dealing with all these concerns. A short explanation is provided to
clarify why an issue may be considered fully or partially resolved by HB 5002, the EMERGE bill,
or the Revised IRR.
It should be noted, however, that in many instances an amendment to the BOT Law may not have
been the most appropriate way to tackle a particular issue. This may be the reason why it had not
been addressed by any of the draft bills or the IRR revisions. It does not also mean that the issue
cannot be properly handled when a more detailed IRR is crafted later on after the corrective law
has been enacted. Still in some other cases, the issue may have subsisted due to non-application or
poor enforcement of a pertinent rule and not necessarily because of the absence of one.
Overall, the matrix confirms that the three reform instruments have taken up substantially all of the
main issues, one way or another. HB 5002, in particular, as this Report’s official measuring stick,
does well in covering the subjects raised by stakeholders as their common points of concern. It
therefore shows a clear awareness of the critical issues and challenges, and conveys a genuine
intent to resolve them.
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Final Report
Table 3. Responsiveness of Reform Proposals to PSP Issues
A. All Sectors
Addressed by HB 5002? Addressed by EMERGE Addressed by Revised IRR?
Issue/Concern Report?
Yes No Yes No Yes No
1. Choosing suitable PSP Technical Technical Limited PDF is
modalities and lack of assistance and assistance and operational
government capacity in capacity building capacity building including on-
developing PSP projects through PDF through PDF; going technical
building assistance
government projects
capacity is a
declared policy
2. Lack of regulatory capacity Limited to Cites need Outside the

and conflicts of interest in the declaration of for better scope of IRR
performance of public policy regulation
functions but no
specific
proposal
3. Need for better technical Centralized BOT No specific Outside the

understanding and cooperation processing proposal scope of IRR
on the part of government, and functions
for greater public awareness
and education
4. Lengthy approvals process and Centralized Streamlining of Single-pass

red tape; the process is also processing with ICC processes approval for all
very prone to political fixed time limits; and types of PSP
influence/intervention which No national memberships; No projects
causes delay government national
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Final Report
A. All Sectors
approval for government
LGU projects approval for
LGU projects
5. Need for greater transparency Strict competitive Strict competitive Tighter entry
and accountability in the BOT bidding policy; bidding policy; rules for
process Imposition of Access to project unsolicited
penalties for information and proposals
specific offenses; contracts;
Express right of Regular auditing
action to question and monitoring;
anomalous deals; Express right of
Reporting action to question
function to contracts
Congress and the
President
6. Complications and difficulties Unsolicited Unsolicited Tighter entry

associated with developing proposal process proposal process rules for
infrastructure through made more made more unsolicited
unsolicited proposals competitive competitive proposals
7. Managing fiscal risks; Directive to make Not tackled Outside the

exposure to potentially large government scope of IRR
contingent liabilities as a result support provision
of government guarantees and more rational
support given to PSP projects
8. Determining the true social Protection of Affordability and Outside the

development impact of PSP in public interest is balancing of scope of IRR
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Final Report
A. All Sectors
infrastructure and protecting a declared policy social costs and
the public welfare but no specific benefits are
proposal declared policies
but no specific
proposal
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Final Report
B. Business/ Private Sector

Express right of Limited right No specific
action to question of action to proposal
1. Defining the role of the anomalous deals; question
judiciary and respecting the Executive anomalous
sanctity of contracts warranty on the deals/contracts
validity of
contracts
One stop shop No specific No specific

assistance in proposal proposal
2. Supporting role of host LGUs
securing LGU
permits
3. Conflict resolution Not tackled Not tackled No specific

proposal
With Limited time to No specific
heightened exercise right proposal
political risk of action to
4. Political risk
question the
validity of PSP
contracts
Provision for No specific Provision for

direct proposal direct
5. Site acquisition/ right-of-way
government government
subsidy subsidy
6. Public information and Membership of Access to No specific

education private sector project proposal
- 37 -
Final Report
B. Business/ Private Sector

representatives in information
Public-Private and contracts
Infrastructure
Development
Committee
(PPIDC)
Not tackled Only a Not tackled
comment in the
report against
7. Competing projects in the rail
government rail
sector
projects being
redeveloped as
unsolicited
proposals
BSP and BAP No specific Outside the
made members proposal scope of IRR
8. Availability of domestic long-
of PPIDC but
term financing
no specific
proposal
9. Coping with technology Not tackled Not tackled Not tackled
10. Inadequacy of basic Not tackled Not tackled Not tackled

infrastructure at project sites
COA made a Requirement COA audit

member of the for regular limited to
11. Role of the Commission on
PPIDC auditing government
Audit
following COA share of user
rules fees
- 38 -
Final Report
C. Government
No specific No specific Allows no-cost
proposal proposal contract
1. Contract re-opening
variations
No national No national No specific
government government proposal
approvals for approvals for
LGU projects; LGU projects
2. Decentralization and regional
BOT Authority to
coordination
establish regional
offices
PDF to provide PDF to provide Stricter

eligibility criteria eligibility financial
3. Private sector technical and to disqualify criteria to prequalification
financial qualification, incompetent disqualify requirement
competence and efficiency bidders incompetent
bidders
BOT Authority to Implementing Implementing
monitor projects agencies to agencies to
4. Strict monitoring of
monitor and monitor and
project/contract
supervise supervise
implementation
projects projects
Outside the Outside the Outside the
5. Water sector regulatory scope of the scope of the scope of the
framework bill bill IRR
6. Compliance with prescribed Outside the Outside the Outside the
nationality or ownership scope of the scope of the scope of the
requirements bill bill IRR
- 39 -
Final Report
D. NGO/ Civil Society

Penalties for No specific No specific
related corrupt proposal proposal
1. Graft and corruption
practices
2. Overly stringent BOT rules Not tackled Not tackled Not tackled
and requirements which favor
foreign investors
Private sector No specific Not tackled

representation in proposal
PPDIC;
3. Strengthening the role of the
Protection of
citizenry
public interest is
a declared policy
Not tackled but Affordability is Not tackled

the current a declared
4. Balancing
BOT Law policy but no
profitability/sustainability with
provides that specific
affordability
tolls, fees and proposal
charges must
be reasonable
- 40 -
Final Report
E. Users/ Consumers
Not tackled Not tackled Requirement
1. Environmental issues for ECC is
made explicit
2. Consumer advocacy Not tackled Not tackled Not tackled
Outside the Outside the Outside the

3. Water industry regulation scope of the scope of the scope of the
bill bill bill
- 41 -
Final Report
Additional Inputs from EPRA Consultation Dialogues
The discussions on HB 5002 during the consultation dialogues were relatively free and
unstructured. Because of that, the comments and recommendations given by the participants
regarding the bill were rough or general.
Excluding subjects that had already been covered by the issues matrices above and by the
EMERGE Report, the meaningful inputs from the represented sectors would be limited to the
following:
There should be a separate provision calling for the institutional strengthening of the
proposed BOT Authority.
The BOT Authority should be the central repository of all signed contracts.
The monitoring functions of the BOT Authority should be made specific and clear.
The proposed One-Stop Shop should have representatives from the different government
agencies such as DENR and DILG.
The proposed law should impose strict time limits and deadlines in the processing of PSP
projects.
The warranty to uphold the validity of a contract may not be upheld by the courts. It is also
dangerous for the executive branch to give that kind of an assurance since the government
may be subject to liability if that warranty is breached.
Misrepresentation and contract falsification are felonies that may be already covered by the
Revised Penal Code.
The amended BOT Law should have nationalist provisions and at the same time should
protect the public from the assumption of too many risks by the government.
Laws related to the BOT Law should also be amended.
Final Points and Comments on HB 5002
There are other material points that have not been covered but should be brought up to complete
the review of HB 5002. These last comments are explained following the order of the sections in
which they appear.
First, to strengthen the declared policy on the judicious and transparent grant of government
support to PSP development projects, a specific mandate for the establishment of a rational
government guarantee management framework may be included. Identifying fiscal risks and taking
stock of government guarantees given to BOT/PSP projects will be the first important task and
fortunately, the government has already done some work on this. These obligations to backstop
agency or GOCC contractual commitments make up the government’s contingent liability portfolio.
The legal and qualitative risk analysis will then be useful in coming up with reasonable estimates
- 42 -
Final Report
of government’s total exposure to potential losses. This is the next major step. These initiatives
would be the basis for the formulation of a coherent guarantee policy and rational program for
fiscal risk evaluation, monitoring and control.
Second, on government co-financing, requiring that a government revenue sharing scheme be

included in the contract for PSP projects which would be partly funded by ODA may reduce
government flexibility in structuring bankable transactions. Some projects may need direct
subsidies to make them financial viable from the investors’ viewpoint but mandating a splitting of
revenues can affect the needed cash flow streams to make them so. The same issue of flexibility
comes up when the share of government is directed to be used for the sole purpose of repaying
ODA loans. Earned revenues may not justify a government share during the project’s early stages
but outstanding obligations would have to be serviced in the meantime. When the government does
become entitled to share in the profits, providing for debt repayments may no longer be as
demanding at that point in which case the government should have the option of using the money
for other public purposes.
Third, on ensuring the financial capability of project proponents, there are several debt financing
options possible and limiting the form to a standby letter of credit will effectively rule out all other
choices leaving sponsors with less financial slack. Projects may be financed through syndicated
term loans or Rule 144A bond offerings, for example. To make sure that proponents are able to
fund project construction, implementing agencies, as a policy, could require financial closing to be
a condition precedent to contract effectiveness instead. This requirement has been adopted in recent
PSP projects under development.
Fourth, the reference to counterpart government funding is more appropriate under the definition of
“direct government subsidy” rather than “direct government guarantee.” Furthermore, indirect
government guarantees may be issued not only by government financial institutions but by line
agencies as well, in particular, the DOF. Finally, the terms “government guarantee,” “government
subsidy,” “credit enhancements,” and “project cost” may be more precisely defined.
Fifth, while eliminating national government approvals for LGU BOT/PSP projects is essentially
right, there may be instances where central government consent will be required such as in LGU
projects needing a government performance undertaking from the DOF. In this case, not only
sanggunian or local development council approval will be necessary but also some level of central
government authorization or endorsement.
Sixth, setting the reasonable rate of return at the proponent’s WACC plus a maximum of 6% (as a
“premium in doing business” in the Philippines) may be counterintuitive from a corporate finance
perspective. An investor’s WACC is its hurdle rate which represents the expected return on a
portfolio of all the firm’s securities and that keeps its business risk generally unchanged. The
expected returns demanded by the firm’s shareholders and lenders (taking into account all relevant
risk-return tradeoffs) are already imputed into that figure.
Seventh, the noticeable deletion of the first qualification for unsolicited proposals laid down in the
current BOT Law (that is, that such projects should involve a new concept or technology and/or
should not be part of the list of priority projects) effectively enlarges the scope of potential projects
that may be implemented on a negotiated basis. The only applicable condition left is that the
project does not require any direct government guarantee, subsidy or equity. In addition, to make
the reimbursement of development cost valuable and sensible for challengers, all project studies
and information owned by the original proponent should be made available to them at the bidding.
Moreover, the time to prepare comparative proposals during Swiss challenges may still be too short
- 43 -
Final Report
(which the bill fixes at a maximum of 120 days). In some ways, it may be considered worse than
before since implementing agencies will have the discretion to cut down the original bid
preparation period (set at 60 working days) to only 45 days.
Eighth, making the Toll Regulatory Board an attached agency of the proposed BOT Authority is
unwise since the board serves as the public regulator for toll operations in the country. There will
be an odd fusion of promotional, approval, and regulatory functions in one government agency at
least in so far as the toll road industry is concerned.
Ninth, the warranty to uphold the validity of contracts sends crossed signals. Giving that warranty
is quite bold. On the other hand, expressly acknowledging the prerogative of new political leaders
to inquire into and review the terms of BOT contracts executed by the past administration waves a
big red flag that would put future investors at risk and on guard.
Tenth, if the idea of establishing a Public-Private Infrastructure Development Committee is

accepted, its composition would have to be rethought and justified by the functions and objectives
that its creation is supposed to serve. Why is the DOF not among the line agencies represented, for
instance, since it has a direct stake in managing the government’s fiscal risks? Also, is there a
special reason why the DA is there but not the DOTC or the DOE? Energy and transportation
projects make up more than 80 percent of the country’s PSP/BOT investment portfolio. The
answers are not apparent and a lot of second-guessing can happen. Both are not good when the
time to construe the law finally comes.
Lastly, creating a new institution for PSP and designing a regulatory system to support it entail
answering other basic questions that have not been fully sorted out under the bill. How
decentralized should oversight be and how much discretion should the proposed BOT Authority
and its regional offices have? To reduce the danger of capture by proponents or short-term political
interests, the bill needs to address how independent the new agency should be. If achieving
independence is crucial, then the following elements should be considered: (1) professional criteria
for all appointments; (2) fixed tenure for key positions; (3) multisectoral representation; (4)
financial autonomy or funding out of levies or charges on client agencies or proponents, and not
out of legislated budgets; (4) salaries that are competitive or comparable with the private sector;
and (5) prohibitions against engaging in partisan political activity and taking financial interests in
sectors and parties subject to its oversight functions.
CONCLUSION
HB 5002 has presented an opportunity for all stakeholders to examine what the Philippine PSP
Program has achieved so far and to possibly chart either a fresh or a renewed course in light of
changing events and bigger challenges for the future. While getting new legislation approved is an
extremely deliberative process and, in most instances, meticulously slow, what has been revealed is
that the principal players know the legitimate issues confronting successful PSP development today.
To be fair, the government has taken some action, mainly through administrative revision, which
pursues similar ends sought permanently by the proposed reforms under HB 5002.
The bill espouses one approach. There are other positions, of course, but compared to them, it may
be considered the most extreme track to take. Just for that, it would almost surely be subjected to
closer scrutiny. But what has been obviously shown is that while the approaches may be different,
the issues and goals are evidently the same.
- 44 -
Final Report
Amidst deeper problems facing the country and bearing in mind the practical consideration of BOT
reform being part of a pecking order in a shifting congressional agenda, the best strategy to have at
this time would be to continue getting engaged in fruitful consensus building and a truthful and
sustained reform advocacy. The EPRA Consultation Dialogues and the consolidation done in this
Final Report should be both counted toward that effort.
- 45 -
Final Report
SOURCES
Canlas, Dante B., et al., A Proposed BOT Bill to Enhance Public-Private Partnership in
Infrastructure Development, EMERGE, Manila, 2006.
Castro, Solomon R. B., Identifying Fiscal Risks: Government Contingent Liabilities in BOT/PSP
Projects and under GOCC Charters, AGILE, Manila, 2001.
National Economic and Development Authority, Medium-Term Philippine Development Plan

2004-2010, Manila, 2004.
National Economic and Development Authority, Medium-Term Public Investment Program 2005-
2010, Manila, 2005.
The World Bank, Selecting an Option for Private Sector Participation, Washington, D.C., 1997.
- 46 -

The Bot Law at The Crossroads Issues and Reforms

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The Bot Law at The Crossroads Issues and Reforms

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THE BOT LAW AT THE

Atty. Solomon Castro

ADB Asian Development Bank

ECC Environmental Compliance Certificate

ICT information and communication technology

MTPDP Medium-Term Philippine Development Plan 2004-2010

ODA Official Development Assistance

 Need for greater transparency and accountability in the BOT process

 Complications and difficulties associated with developing infrastructure through

The EPRA Consultation Dialogues

 What are the issues affecting PSP as an infrastructure modality?

The Philippine PSP Program

Figure 2. Investm ents by Sector

The BOT/PSP Legal Framework

Preparing for the Next Wave

Source: BOT Center (aggregate data)

RESULTS OF THE EPRA CONSULTATION DIALOGUES

Discussion of Main Issues

Table 1. Main Issues on BOT/PSP Project Development and Implementation

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

The government is clearly aware of this issue

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

The lack of capacity and independence also

Again, there is open recognition of these

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Agencies and proponents also fail to identify

Is it possible to have a centralized Implementing agencies including proponents

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

But there are qualifications that should be made.

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

In an apparent effort to speed up the approvals

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Implementing agencies cite the lack of

But problems are bound to happen because of

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Concerns over large contingent liabilities may

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Efforts directed toward better fiscal risk

Issue Nature or Description Concerned Sectors Report Analysis and Assessment

Table 2. BOT/PSP Development and Implementation Sector-Specific Issues

Issues Nature or Description

LGUs play important roles in facilitating or impeding the development of PSP

How will the government fund site/right-of-way acquisition for priority

Issues Nature or Description

There is a need to update government policies, rules and procedures that

Issues Nature or Description

The provision of infrastructure should have a decentralized framework. There

3. Private sector technical and financial

6. Compliance with the nationality or

C. NGOs/Civil Society and Advocacy Groups

Issues Nature or Description

There should be more public participation and better representation of citizens’

Infrastructure privatization projects are profit-driven. But while pricing should

Issues Nature or Description

Facility operations may have significant and detrimental impact on the

 Transparency and accountability

PROPOSED AMENDMENTS TO THE BOT LAW

HB 5002 Rationale and Features

Need for greater transparency and accountability in the BOT process

Complications and difficulties associated with developing infrastructure through

What are the issues affecting PSP as an infrastructure modality?

Transparency and accountability

Treatment of unsolicited proposals. – Unsolicited proposals will be subjected to a

Project development facility. – A project development facility (PDF) will be established

Possible undermining of the implementing agencies’ responsibilities and accountabilities

Generally, contractual arrangements cannot be negotiated by the parties as suggested in

Laws related to the BOT Law should also be amended.