The Projects and Construction Review: Philippines

Introduction

Throughout recent Philippine history, past administrations have understood the importance of infrastructure development, but the measures taken to reach the ideal level and mixture of infrastructure spending have varied greatly. Even with its fast-growing economy in the past two decades prior to the covid-19 pandemic, an expanding population and rapid urbanisation, the Philippines lags behind its ASEAN counterparts in terms of infrastructure spending. Thus, the current government has made infrastructure development part of its priority development programme because it has identified infrastructure as one of the key drivers of economic growth. In 2017, the government launched the ambitious build, build, build (BBB) programme, which aims to raise infrastructure investments to 7.4 per cent of gross domestic product (GDP) by 2022 from 5.1 per cent in 2016.2 In 2019, the government's infrastructure spending reached an estimated 881.7 billion Philippine pesos, 2.6 per cent higher than the 859.4 billion pesos recorded during the previous year.3 However, the impact of the covid-19 pandemic has forced the government to recalibrate its priorities to first and foremost curb the global consequences brought about by the pandemic. As a result, the 2020 infrastructure spending target was reduced to 833 billion pesos from 989 billion pesos to account for funding realignments to contain the pandemic.4

Nevertheless, infrastructure development remains a key priority for the Philippines with plans to expand infrastructure spending in 2021 to stimulate growth. As part of the medium-term Philippine development plan, the BBB programme is estimated to require US$168 billion in investments for 100 high-impact priority projects nationwide. To finance this, the government plans to use an optimal funding mix composed of government spending, official development assistance (ODA) and private capital through public-private partnerships (PPPs).

PPPs, in the Philippine context, are a strategic mode of procurement that involves a long-term contractual agreement between the government and a private firm targeted towards financing, designing, implementing and operating infrastructure facilities and services that were traditionally provided by the public sector.5 Arguably, however, private capital to fund infrastructure projects is underused. Thus, the current administration identified PPPs in its 10-point socioeconomic agenda as one of the key strategies to accelerate annual infrastructure spending.

Since its official launch in 2010, the PPP programme has played a part in 86 PPP projects worth about 1.2 trillion pesos.6 According to the 2018 Infrascope Report by the Economist Intelligence Unit (EIU), the Philippines now ranks second out of the countries in Asia evaluated by the EIU, joining Thailand and China in the group of mature PPP markets based on both qualitative and quantitative criteria.7 In the World Bank Group's 'Procuring Infrastructure: Public-Private Partnerships Report 2018 – Assessing Government Capability to Prepare, Procure, and Manage PPPs', the Philippines is ranked first in the East Asia and Pacific Region in terms of preparation of PPPs, contract management and unsolicited proposals, and third in terms of the procurement of PPPs.

This chapter focuses on the legal and regulatory framework of infrastructure projects and project financing in the Philippines, issues commonly encountered in infrastructure projects, and both existing and proposed measures to address these issues. Where relevant, we highlight key projects and current events to provide context.

The year in review

i Leveraging PPPs to respond to the covid-19 pandemic

In March 2020, the government, through the Inter-Agency Task Force on Emerging Infectious Diseases, imposed a nationwide lockdown to reduce the transmission of covid-19 cases and ease the burden on the Philippines' healthcare system. Under the enhanced community quarantine status, the strictest form of lockdown, the movement of people was limited to accessing essential goods and services, and only certain industries and businesses were allowed to operate, thereby further delaying infrastructure projects. At its peak, unemployment levels reached 17.6 per cent (equivalent to 7.288 million individuals) in April 2020, although rates have since tapered off following the relaxation of community quarantine restrictions.8 Meanwhile, the country saw a real GDP decline of about 8.5 to 9.5 per cent in 2020.9

Infrastructure gaps in the country's healthcare system became readily apparent as data from the Philippine Institute for Development Studies reported only 61,000 available hospital and intensive care unit (ICU) beds and warned that even if government is able to isolate 70 per cent of infectious individuals, the Philippines would still need almost four times more hospital and ICU beds to meet the demand of cases requiring hospital intervention.10 Similarly, the education sector likewise highlighted the need to address gaps in digital infrastructure. For instance, 75 per cent of the public school system has no access to internet connectivity, while close to 4 million students did not enrol for the 2021–2022 academic year.11 In response to these key infrastructure gaps, the government reassessed its priority infrastructure projects to include health and digital infrastructure projects.12 Moreover, the National Economic and Development Authority (NEDA), the government's economic planning agency, expressed greater interest in PPPs as evidenced by 26 projects funded by PPPs, up from eight in the previous list.13 While the pandemic stifled the country's long period of growth of more than 6 per cent each year, with the continuous calibrated reopening of businesses and mass transportation, the relaxation of travel and mobility restrictions, and the rollout of the covid-19 vaccine programme, NEDA is confident of the Philippines' strong recovery by 2021.

ii Private participation opportunities in the health sector

Whereas the BBB programme focuses heavily on transport infrastructure, PPPs in the healthcare industry have been making headway in achieving the government's objectives to address the health service needs of the poor and respond to the covid-19 pandemic. Through the PPP Center, the government has encouraged private participation through PPPs with a focus on projects that will help in the delivery of universal healthcare for Filipinos and support the construction and rehabilitation of hospitals and quarantine facilities. One of the pioneering PPP projects in this sector is the development of the planned Philippine General Hospital in the University of the Philippines, Diliman (PGH Project). The PGH Project is also designed to be implemented as a hybrid project, wherein the operation and maintenance component will be put out for bidding to the private sector via the PPP model.14

With the enactment of the Universal Health Care Act in 2019 (UHCA), healthcare PPPs may bridge a funding gap of the 164 billion pesos needed to implement healthcare reforms during UHCA's first year of implementation.

Documents and transactional structures

i Transactional structures

The establishment of project companies, commonly known as special purpose vehicles (SPVs), has become common in financing infrastructure projects. To encourage private sector investments in non-performing assets, the Philippines enacted the Special Purpose Vehicle Act of 200215 (SPVA) to provide tax and other incentives for financial institutions to sell and dispose of their non-performing assets (NPAs) to SPVs and, subject to certain conditions, from SPVs to third parties. In February 2021, the government enacted the Financial Institutions Strategic Transfer Act), which amends the SPVA and aims to facilitate the disposal of NPAs of financial institutions (FI) through transfers to qualified financial institutions srategic transfer corporations (FISTC) that specialise in the management of NPAs. To encourage capital infusion and financial assistance by an FISTC for purposes of rehabilitating a borrower's business, the following additional tax exemptions shall be enjoyed for a period of not more than five years from date of acquisition of non-performing loans (NPLs): an exemption from income tax on net interest income, documentary stamp tax (DST), and mortgage registration fees of new loans in excess of existing loans extended to borrowers with NPLs that have been acquired by an FISTC; and an exemption from DST of capital infusion by the FISTC to the borrower with NPL.16

ii Documentation and standard form contracts

The drafting of contracts and relevant bidding documents for infrastructure projects vary according to the type of project involved, but implementing agencies may refer to model contracts prepared by NEDA and the PPP Center (an agency attached to NEDA). PPP contracts, for instance, typically involve the following sections: parties, project, modality, term, contributions, risks, governance, approvals, roles and amendments. Post-award requirements, on the other hand, often include financial closure, regulatory approvals, permits and clearances, right-of-way clauses and insurance.

Risk allocation and management

i Management of risks

For project finance transactions and construction projects, implementing agencies are given wide discretion in managing risks, and the allocation of these risks varies greatly from project to project.17 However, the allocation of functions and risks is closely related. Thus, the allocation of functions and risks generally follows the principle that a risk or the performance of a function should be allocated to the party that is best placed to perform the function or manage the risk.18

Specifically, for PPPs, the allocation of risks is evaluated through an iterative process, namely to identify and assess the risks and decide how to allocate those risks between the implementing agency and the private entity.19 For private proponents, the payment method constitutes a major factor since, normally, no government financial guarantees are provided by the implementing agency (IA) or national government – although, in some instances, the IA may allow the proponent to charge government fees or fares as a cost-recovery mechanism. The IA may likewise offer regulatory relief, subsidies as benefits or a guaranteed supply of certain nationalised resources. During the pre-development stage, the IA would test the market with private firms and adjust transactions based on market feedback.20 Still, the IA and the private entity often use different criteria for evaluating whether a transaction is viable and whether fairness is a business case to be made for the private proponent. Further, social costs and offtake risks are difficult to measure and quantify, thereby making the allocation of risks sub-optimal. Types of risks typically allocated between parties include legal and regulatory risks, financial risks (demand risks), economic risks, engineering and completion risks, inflation and foreign exchange risks, risks from uncertainty in assured revenues, competition risks and sovereign risks (i.e., expropriation and police power) and other risks.

ii Limitation of liability

The Philippines recognises the separate and distinct legal entity of a corporation, thus limiting the liability of its shareholders. Hence, infrastructure projects tend to be undertaken predominantly by corporations. However, the protection afforded by limitation of liability may be set aside in the case of fraud, deliberate default or reckless misconduct of the defaulting party. In such cases, the veil of corporate fiction is pierced, and the separate juridical personality of the corporation used to perpetuate fraud is disregarded.

iii External risks and the application of force majeure

Philippine law adopts a strict definition of force majeure or fortuitous event, and for the defence of force majeure to prosper, it is necessary that one has committed no negligence or misconduct that may have occasioned the loss.21 Examples of force majeure permitted include war, invasion, rebellion, terrorism, revolution, natural catastrophes or any other event that is unforeseeable or, although foreseeable, unavoidable.22 Nevertheless, parties are free to stipulate that any event constituting force majeure shall not excuse a party from its obligations. For instance, some PPP contracts state that the occurrence of any force majeure event shall not release any party from monetary obligations and that the parties shall continue their performance, with all due diligence, of all obligations not affected by force majeure. The principle of force majeure became a highly contested topic at the height of the covid-19 pandemic. To illustrate, government-imposed travel prohibitions, community quarantine and other similar restrictions disrupted much of the construction industry and infrastructure development in the Philippines. Moreover, the enactment of new laws and regulations such as the Bayanihan To Heal As One Act, which suspended the payment of all loans, led to contractors and employers alike invoking force majeure claims. While the covid-19 pandemic may likely qualify as a force majeure event, any party invoking the same would need to show that it is effectively impossible for it to perform its contractual duties as a result of the pandemic, whether directly, or indirectly, and that it has complied with any expressly stipulated notice or mitigation requirements.

iv Political risks

Since parties to a construction agreement are free to stipulate, they may adopt provisions to account for adjustments in any increase or decrease in cost resulting from a change in Philippine laws (including the introduction of new laws and the repeal or modification of existing laws) or in the judicial interpretation of such laws. Moreover, given the massive scale of imports of capital goods required for the country's infrastructure programme, parties may adopt payment stipulations to include fixed rates of exchange to be used for calculating payments.

Special restrictions during election year

With the upcoming national and local elections in 2022, the Commission on Elections (Comelec), the constitutionally created body tasked to regulate Philippine elections, issued Resolution No. 10695 (Resolution), which imposes special restrictions on government-funded infrastructure projects. These restrictions include a prohibition on the construction of public works, delivery of materials for public works, and the release, disbursement or expenditure of public funds from 25 March to 8 May 2022.23 The ban has, in the past, resulted in the suspension of the construction of farm-to-market roads, bridges and similar projects that were already close to completion.24 However, Comelec resolutions governing previous elections have allowed for narrow exceptions to the construction ban, including ongoing projects of national significance, projects procured through PPPs, as well as foreign-funded projects.25

Security and collateral

Typically, funders and lenders require a variety of security and collateral to protect them from defaulting borrowers, such as real estate mortgages, chattel mortgages (for personal property), pledges or guarantees.

For certain types of collateral, such as mortgages or pledges, registration with relevant government authorities is required to bind third parties. For instance, real estate mortgages must be registered on the Registry of Deeds where the property is located. In other instances, the law automatically creates a lien in favour of those involved in the construction or repair of the building. Article 2242 of the Civil Code, for example, grants preferential rights to labourers, architects, engineers and contractors regarding specific immovable property and real rights of the debtor, and this preferred lien constitutes an encumbrance on the immovable or real right.26

These provisions apply when the same property is subjected to the claims of several creditors and the value of the debtor's property is insufficient to pay all the creditors in full.27 Thus, to protect the creditor, contracts likewise regularly provide that debtors must warrant their solvency throughout the existence of the project, and any violation of such a warranty will entitle the creditor to damages and other remedies, such as forcing the debtor to deliver additional securities.

Bonds and insurance

For construction projects, standard contractual provisions typically include a defects liability period, a defects notification period, the imposition of retention money and the requirement of performance bonds. Moreover, Philippine law requires contractors to secure workmen's compensation insurance and public liability insurance. In addition to the legal requirements, principals commonly require contractors to secure an all-risk insurance policy and bank guarantees as additional forms of mitigation of risk. If a contractor constitutes a joint venture, consortium or other unincorporated grouping of two or more persons, the principal may require joint and solidary liability for the performance of the project.

Enforcement of security and bankruptcy proceedings

Registration of encumbrances on immovable property with the proper government authority is required to enforce the rights of a secured party over the collateral. Outside the context of bankruptcy, project lenders may enforce security rights extrajudicially or judicially, in either case through a foreclosure of the collateral or public auction (although private sale is allowed for certain types of movable property). In an extra-judicial foreclosure of a real estate mortgage, the mortgagor is granted a period of one year from registration of sale in the Register of Deeds to redeem the property before title is consolidated with the mortgagee-creditor. In cases of judicial foreclosure, however, a mortgagor-debtor is given a period of not less than 90 days, nor more than 120 days after the judgment becomes final, or even after the foreclosure but before the confirmation of sale, within which to redeem the property and extinguish the mortgage.28 By way of exception, the charters of the Philippine National Bank29 and the General Banking Act30 confer on the mortgagor the right to redeem the property sold on foreclosure within a period of one year from the date of registration of the certificate of sale in the Register of Deeds, provided that the mortgagee is a banking institution.

If a debtor becomes insolvent, whether voluntary or involuntary, or requires financial rehabilitation, the applicable law is the Financial Rehabilitation and Insolvency Act31 (FRIA). Insolvency proceedings require court intervention but, in limited cases, out-of-court informal restructuring (pre-negotiated or court-supervised) is allowed if approved by the court with the conformity of the required percentage of creditors. Special features of FRIA include:

  1. excluded assets that are exempt from execution;
  2. excluded entities (banks, insurance companies and pre-need companies covered by the New Central Bank Act) and government entities; and
  3. priority of credits, namely those provided by law such as taxes, claims for services rendered by employees or labourers, secured immovables, secured movables and unsecured obligations.

Socio-environmental issues

i Licensing and permits

Permit and licensing requirements vary depending on the type of project involved. By way of example, digital infrastructure developers may need to secure, at minimum, 37 different permits and licences before the construction of a cell site project may proceed.

Licences and permits from national and local government agencies32

RequirementPermit and ClearanceNo. of permitsTimeline
Right of wayNegotiations and documentation of prospective cell site location (both private and public)EightOne to two months
Social acceptabilityBarangay resolution (the basic political unit), homeowners' association consent and residents' conformityFiveOne to two months
Various local government unit (LGU) permitsZoning clearance from the Housing Land Use Regulatory Bord, city or municipal resolution, occupancy permit, mayor's permitEightTwo months
National permitsPermits from environmental, aviation, health, telecommunications, ICT and other national agencies EightOne to two months
Structural permitsZoning permits, locational clearance, building permits inclusive of electrical permits, sanitation and mechanical permitsEightThree to five months

The absence of any of the required permits or licences authorises the relevant government agency to suspend the project contract.

ii Government initiatives to streamline permitting processes

In recognition of the need to streamline the permitting process and reduce bureaucratic roadblocks to digital infrastructure development, several national government agencies issued Joint Memorandum Circular (Joint Circular) in 2020, which streamlines requirements and reduces procedural delays in securing necessary permits, licences and other requirements in constructing shared passive telecommunications tower infrastructures or common towers.33 The Joint Circular reduces the total processing time from more than 200 days to around 16 days, and requires agencies and LGUs to process, approve and issue permits within seven working days.34 Permits and clearances not approved within the prescribed periods will be deemed automatically approved, as stipulated in Section 10 of Republic Act No. 11032, otherwise known as the Ease of Doing Business and Efficient Government Service Delivery Act of 2018.

iii Measures to address socio-environmental issues

While environmental and social safeguards are normally part of a project's feasibility study, the sheer number of regulatory agencies involved in any given project creates inefficiencies and redundancies in compliance and reporting, thereby making monitoring compliance challenging. Thus, the PPP Center, acting as a central coordinating agency, has integrated environmental and social safeguards in infrastructure projects by identifying issues, evaluating mitigation measures, operating safeguards through the project contract, and monitoring the implementation of such measures and safeguards.35

Ppp and other public procurement methods

i PPP

PPPs address the limited funding resources for local infrastructure or development projects within the public sector, thereby releasing public funds for allocation to other local priorities. PPPs, as differentiated from other infrastructure projects, emphasise value for money, focusing on reduced long-term costs, better risk allocation, improved services and possible generation of additional revenue for both the government and private sector.

Apart from the implementing agency and the private proponent, the PPP Center also has a crucial role in facilitating the country's PPP programme and projects.36 This section focuses on national infrastructure projects that can be the subject of a PPP.

Framework

The Philippines' PPP framework encourages open competition and ensures a level playing field for all PPP players through transparent and credible processes. Local or foreign investors and large or small companies that participate in PPPs are properly scrutinised in terms of their legal, financial and technical capacities to ensure that they are able to finance, construct and implement large, complex infrastructure projects.37 In general, PPPs involve four stages:

  1. project development (project preparation, design and detailed feasibility study, finalisation of project structure);
  2. approval (evaluation, review and approval of the project, granting of original proponent status in cases of unsolicited proposals38);
  3. competition (preparation of bidding documents, prequalification to bid, bid submission and evaluation, awarding of the project to a private partner and issuance of a notice of award); and
  4. cooperation stage (submission of notice of award requirements, contract signing, financial close, construction, turnover of the facility or infrastructure).39

The table below summarises PPP projects in the pipeline as of August 2020:40

Mode of procurementNumberProject cost (in US$ billion)
Solicited250.32
Unsolicited3038.59

With respect to the laws that govern the framework of a PPP, the Build-Operate-Transfer Law of 1990, as amended, its implementing rules and regulations (IRR) and the NEDA Investment Coordination Committee Guidelines primarily govern national infrastructure projects,41 whereas special laws and local ordinances govern local projects. Joint ventures involving national projects are primarily governed by the 2013 NEDA Guidelines on Joint Ventures.

Types

PPP contract types include, but are not limited to, service contracts, management contracts, lease, build-operate-transfer (BOT) and its modalities, concessions, joint ventures and hybrid arrangements.

Typical procurement or tender process

In a project's life cycle, the IA typically identifies the infrastructure project, which is then evaluated and approved by an approving body.42 The IA then selects a private partner through competitive bidding. Criteria for awarding PPP projects to the private sector include the technical, financial, legal, economic, environmental and social viability of a project.

In addition, the BOT Law allows unsolicited proposals (USPs) for projects excluded from the current administration's list of priority projects, provided the following conditions are met:

  1. the project involves a new concept or technology or is not part of the list of priority projects as defined by law;
  2. the project is not a component of an approved project; and
  3. no direct government guarantee, subsidy or equity is required.

Although USPs, by law, are subject to Swiss challenge, some have criticised them for not undergoing a genuinely competitive and transparent bidding process. Further, many argue that the 60 working days for challengers to provide a better offer than the original proposal is insufficient to effectively conduct a thorough project study and challenge the original proponent. Nevertheless, in 2018, a private consortium submitted a USP for the rehabilitation of the Ninoy Aquino International Airport (NAIA) in Metro Manila, the country's main international gateway. A competing proponent challenged the USP one month later. After failed negotiations with the first proponent, the government eventually awarded the second proponent with original proponent status in July 2020, only to revoke the same in December 2020 citing lack of financial capability. The attempted USP of the NAIA rehabilitation project, which sought to address the decade-long problem of air traffic congestion, highlights the challenges of USPs and missed opportunities for the government.43 While the few projects that have been awarded under USPs have been shrouded in controversy, USPs may provide the advantage of faster implementation of projects. It is therefore recommended that the Philippines ensures stricter adherence to the processes set for USPs, and recalibrate the projects allowed to be the subject of USPs so that the needs of the public will be met.

Significant growth areas for PPPs

Apart from traditional infrastructure projects, the PPP Center has highlighted key areas of growth. In particular, the PPP Center has identified renewable energy infrastructure, such as waste-to-energy facilities, as the next wave of PPPs thanks to strong interest from local government and investors.44 Other emerging non-traditional PPP projects, such as health, food security, tourism, and digital and information technology (IT) infrastructure, stand to benefit from PPPs because of the efficiency gains, financing, technical expertise and innovative technologies more widely available in the private sector.

PPP as a tool for modernising the country's existing infrastructure

Joining the new wave of PPP projects are those featuring new technology to improve and enhance public services, and address the infrastructure gaps brought about by the pandemic. In particular, the government has replaced eight projects with 13 new projects under the build, build, build programme. These new projects are primarily a response to the pandemic and include IT (national broadband programme), water (water district development sector projects), transportation (North Luzon Expressway Harbour Link extension) and health (virology science and technology institute of the Philippines) projects.45 The current administration has listed more than 104 national priority infrastructure projects, of which only 29 have a PPP component.46 While PPPs undoubtedly have a role in addressing the country's infrastructure requirements, lack of institutional capacity among implementing agencies,47 apparent conflicting objectives between public and private stakeholders, and the highly politicised nature of awarding PPP projects make traditional PPPs the less preferred mode of procurement for big-ticket projects. Nevertheless, the private sector may have opportunities with the influx of the next wave of PPP projects, in which private sector participation is integral in the projects' success.

ii Other procurement methods

Funding of national infrastructure projects is secured primarily from the national budget, whereby bids for projects go through a public procurement process, and are governed by the Government Procurement Reform Act.48

As a developing country, the Philippines also receives funding from loans, grants and ODA from other states and multilateral organisations. In the past three years, Japan has continued to be the largest contributor of ODA, funding five of the administration's flagship infrastructure projects (or 36.5 per cent of the Philippines' ODA portfolio), followed by South Korea and China, which funded two projects each. A key infrastructure project funded from ODA is the Metro Manila Subway, which is expected to begin partial operations by end of 2021.49 The planned subway is regarded as the most expensive project under the government's build, build, build programme, with a total cost of 356.96 billion pesos.50

Foreign investment and cross-border issues

i Major foreign investors and investment areas

The Philippines is primarily a capital importing country with respect to many areas of industry. Total net inflows of foreign investment in 2020 amounted to US$6.5 billion, down from US$8.7 billion in 2019.51 Japan, China, Singapore, the Netherlands and South Korea were the countries with the largest foreign investment in 2020. The sectors that receive the highest level of foreign investment include manufacturing, real estate, administrative and support service activities, and electricity, gas, steam and air-conditioning.52

ii Limitations

One hundred per cent foreign participation is allowed in all areas of investment except for those industries that are subject to nationalisation requirements. In particular, the 1987 Constitution and the Negative List of the Foreign Investment Act53 specify the industries that are subject to limitations. For instance, the following are some of the areas in which up to 40 per cent equity participation is allowed:

  1. exploration, development and utilisation of natural resources;
  2. ownership of land;54
  3. ownership and operation of public utilities except power generation and supply of electricity (note that all the executive and managing officers of any such corporation or association must be citizens of the Philippines);55 and
  4. construction and repair of locally funded public works (up from 25 per cent in the previous list) except:
    • infrastructure or development projects covered by the Republic Act. No. 7718; and
    • projects that are foreign-funded or assisted and required to undergo international competitive bidding.

Conversely, 100 per cent foreign participation is allowed in insurance adjustment companies, lending companies, financing companies and investment houses.56 Even if a particular investment satisfies the equity restrictions, the type of investment is still subject to approval by the relevant government authority and, in some cases, the President of the Philippines.

iii Benefits and other incentives

The Philippines has the highest number of investment promotion agencies (IPAs) as compared with its Asian counterparts, with seven overall. These IPAs are authorised to award incentives to foreign investors. Common incentives include both the fiscal (income tax holidays ranging from four to eight years, exemption from or a reduced rate for imports of capital equipment ranging from four to 10 years, and additional tax deductions) and non-fiscal (simplified customs procedures, employment of foreigners). The Philippines likewise recognises property rights of foreigners and registered foreign companies, including the right to non-impairment of contracts, subject only to the constitutionally granted powers of expropriation and police power by the state.57

iv Shifting policies to ease foreign restrictions

During the past decade, the Philippines has recognised the critical role of foreign investors in boosting its economy, and in particular those projects that require significant capital investment and technical expertise. To spur investment in infrastructure projects, the country adopted the Investors' Lease Act58 to allow foreign investors to lease private land for up to 75 years (50 years, renewable once for another 25 years). Additionally, corporations with up to 40 per cent foreign equity ownership may secure special tenurial instruments for certain classes of lands needed for construction and infrastructure projects. These tenurial instruments, such as the foreshore lease, forest land use agreement and the special use agreement for protected areas, are typically valid for 25 years and renewable for another 25 years. For tourism projects, leases are limited to projects with an investment of not less than US$5 million, 70 per cent of which shall be infused in the project within three years of the lease contract being signed.

A foreign corporation seeking to do business in the Philippines may form a branch or representative office in the Philippines but must first secure a licence to transact with the Securities and Exchange Commission of the Philippines. The Revised Corporation Code further increased the capitalisation requirements for foreign branch offices from 100,000 pesos to 500,000 pesos.59 A licence to transact authorises a foreign corporation to sue in the Philippines, but there are recognised exceptions to the general rule that only foreign corporations licensed to do business in the Philippines may institute an action before the courts. These exceptions include if a party is estopped from questioning the capacity of a foreign corporation to sue; if a foreign corporation entered into an isolated transaction; and if an action involves the confirmation, recognition and enforcement of a foreign arbitral award. A foreign corporation will nevertheless have the right to sue if these exceptions can be proven.

v Concerns, progress and other matters

In 2018, the government passed the Tax Reform for Acceleration for Inclusion (TRAIN) Law, which resulted in mixed reactions and uncertainty among investors.60 According to the American Chamber of Commerce, the proposed second package of the TRAIN Law, which involves the rationalisation of incentives given to foreign investors, creates uncertainty for both existing and new investors as the measure is likely to lead to large-scale revenue reduction and job losses, which may be brought about by damaged investor confidence.

Moreover, even with the adoption of policies that ease restrictions on foreign investments, the Philippines ranks among the lowest in the ASEAN region in terms of total foreign direct investment, which suggests that restrictions still constrict the ideal inflow of foreign investment. Thus, assuming that foreign investments have a considerable role in supporting PPPs, the Philippines needs to find ways to attract foreign investment for such projects. Currently, many of the PPPs in the pipeline are considered public utilities and are thus limited to 40 per cent foreign ownership. As such, some government officials have called for the amendment of the 83-year-old Public Service Act to ease foreign restrictions by narrowing the definition of public utilities. To help attract more investors and allow the country's tax system to compete with its ASEAN neighbours, the government, in March 2021, passed Republic Act No. 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Law).61 The CREATE Law, which is the largest fiscal stimulus programme for the private sector in the country's history, lowered the regular corporate income tax for domestic, resident and non-resident foreign corporations from 30 to 25 per cent of taxable income effective from 1 July 2020 and 1 January 2021, respectively.62 In addition, investment incentives are now streamlined under the Fiscal Incentives Review Board.

Dispute resolution

i Special jurisdiction: Construction Industry Arbitration Commission

While disputes are still predominantly resolved by the regular courts, long delays, allegations of corruption and inefficiencies make recourse to the courts less than ideal. Thus, when significant financial losses are at stake, the parties involved in a construction dispute may enter into arbitration before the Construction Industry Arbitration Commission (CIAC), the Philippines' arbitration vehicle for the construction industry.63

However, a common issue between parties is the manner in which CIAC exercises its jurisdiction. To illustrate, in the case of China Chang Jiang Energy Corporation v. Rosal Infrastructure Builders (China Chang), decided by the Supreme Court, the high court held that as long as the parties to a construction dispute agree to submit to voluntary arbitration, regardless of what forum they may choose, their agreement will fall within CIAC's jurisdiction. In China Chang, the agreement specified that any dispute between the parties would be resolved by arbitration before the International Chamber of Commerce, but the Supreme Court upheld CIAC's jurisdiction over the dispute.

Despite some apparent gaps in CIAC's rules, including the rules on joinder of third parties and the enforcement of arbitral awards, parties to a construction dispute may favour CIAC's jurisdiction because of the flexible quantum of evidence required to prove facts, the relative leniency in the rules on admissibility of evidence and the high respect given by the appellate courts in relation to factual findings by CIAC, thereby making setting aside an arbitral award on appeal unlikely.

ii Arbitration and ADR

Other than CIAC, the main alternative dispute resolution (ADR) body is the Philippine Dispute Resolution Center, which is tasked with administering arbitration and mediation in specialist fields such as maritime, banking, finance, insurance, securities and intellectual property. Relevant laws that govern the substantive matters of ADR include the Arbitration Law64 and the Alternative Dispute Resolution Act of 2004,65 whereas the Supreme Court's Special Rules of Court on Alternative Dispute Resolution govern the procedure in arbitration and other ADR mechanisms in the Philippines.66 For disputes that have an international component, the Philippines recognises the UNCITRAL Model Law on International Commercial Arbitration67 and the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards.68

In 2012, through Executive Order No. 78, the Philippines mandated the inclusion of provisions on the use of ADR mechanisms in all contracts involving PPP projects, BOT projects, joint venture agreements between the government and private entities and those entered into by local government units.

In 2018, in Strickland v. Ernst & Young LLP,69 the Supreme Court reiterated the government's policy of pushing arbitration and ADR as a means to settle disputes. The Court allowed tortious claims to be resolved by arbitration despite Punongbayan & Araullo (the defendant) not being a party to the arbitration agreement. The Court ruled that Strickland's allegations against the defendant were 'undoubtedly hinged' and 'unavoidably linked' to the claimant's previous contractual relationship with Ernst & Young LLP, as agent of the defendant.

Clearly, therefore, the Philippines adopts a favourable view with respect to arbitration as a means of resolving disputes. Despite the push for arbitration, courts still have a crucial though limited role in confirming arbitral awards and providing interim and other injunctive relief. To illustrate, regular courts may enforce domestic and foreign arbitral awards and allow interim measures of protection before the constitution of the arbitral tribunal or after, to the extent that the arbitral tribunal has no power to act or is unable to act effectively.70 Prospective proponents must therefore understand their available remedies in order to protect their interests in the event a dispute occurs. Understanding the potential risks and cultural and political context when participating in infrastructure projects may also be necessary to avoid a full-blown dispute.

Outlook and conclusions

Private participation through PPPs has a critical role in reducing the infrastructure gap in the Philippines, especially in sectors that require technical expertise and innovative technologies. Traditional infrastructure still remains a priority for the government and the available capital augmented from ODA and domestic and foreign investors make traditional infrastructure projects highly competitive. The expansion of private participation in non-traditional areas of infrastructure, such as health, renewable energy projects, information and communications technology, and other social infrastructure, is a welcome step in the right direction towards achieving the government's ambitious infrastructure goal of 7.4 per cent of its GDP by 2022.

While the covid-19 pandemic has resulted in global business and economic disruption, the Philippines is expected to recover and reach 6.5 per cent GDP growth in 2021.71 It must, however, take more proactive steps towards fulfilling the Philippines' infrastructure needs that first and foremost address the pandemic and benefit the public. Specifically, the government must adopt better monitoring and evaluation mechanisms to ensure the proper implementation of a project, instil a robust regulatory regime and intensify its project assistance to implementing agencies and impose flexible yet consistent policies and standards for contract preparation to tailor-fit a project's needs.72 When evaluating project initiatives with a public dimension, the government should still regulate but not restrict the extent of profit generated by proponents especially with the creation of social benefit from the rollout and operation of completed projects.

At present, the private sector's risk appetite and willingness to participate in infrastructure development is far from satiated. Consequently, the government must leverage the private sector's efficient use of capital and resources by finding the means to allow faster or larger-scale project participation from the private sector. With the proper incentives and allocation of risks, private participation in infrastructure development will undoubtedly be integral to the Philippines surpassing its infrastructure goals.

Footnotes

1 Carlos Alfonso T Ocampo is a senior partner and Angela K Feria is a former associate at Ocampo Manalo Valdez & Lim who is now working as an in-house lawyer. The authors would like to extend their appreciation and thanks to Angeline B Salazar, currently an associate at Ocampo Manalo Valdez & Lim, for her contributions to and research for this chapter.

2 'Philippine PPP Policy Gets a Boost from ADB's $300 Million Loan', Asian Development Bank, 20 August 2018 (https://www.adb.org/news/philippine-ppp-policy-gets-boost-adbs-300-million-loan).

6 The Philippine PPP programme remains bullish in the face of the pandemic: https://ppp.gov.ph/press_releases/ph-ppp-program-remains-bullish-in-the-face-of-pandemic/.

7 The Economist Intelligence Unit. 2018. 'Evaluating the environment for public-private partnerships in Asia: The 2018 Infrascope'. The EIU, London (https://infrascope.eiu.com/evaluating-environment-public-private-partnerships-asia/).

8 'PH Labor Market Shows Further Signs of Recovery – NEDA'. (3 December 2020). National Economic Development Authority. https://www.neda.gov.ph/ph-labor-market-shows-further-signs-of-recovery-neda/.

9 'Q4 GDP Contraction Continues to Ease Calibrated Reopening, Key Reforms needed to Sustain Recovery Momentum – NEDA' (28 January 2021). National Economic Development Authority.https://www.neda.gov.ph/q4-gdp-contraction-continues-to-ease-calibrated-reopeningkey-reforms-needed-to-sustain-recovery-momentum-neda/.

10 'Projected Disease Transmission, Health System Requirements, and Macroeconomic Impacts of the Coronavirus Disease 2019 (COVID-19) in the Philippines', Philippine Institute for Development Studies, https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pidsdps2015.pdf.

11 DepEd official: 'Close to 4 million learners did not enroll for next school year due to covid-19 crisis', CNN Philippines, https://www.cnnphilippines.com/news/2020/8/12/4-million-out-of-school-youth-covid-crisis.html.

12 'We Recover As One Report', Inter-Agency Task Force Technical Working Group for Anticipatory and Forward Planning, https://www.neda.gov.ph/wp-content/uploads/2020/05/We-Recover-As-One.pdf.

13 See 'Build, Build, Build' priorities shifting in favour of health and digital, https://ppp.gov.ph/in_the_news/build-build-build-priorities-shifting-in-favor-of-health-digital/.

15 An Act Granting Tax Exemptions and Fee Privileges to Special Purpose Vehicles which Acquire or Invest in Non-Performing Assets, Setting the Regulatory Framework Therefor, and for Other Purposes (Special Purpose Vehicle Act), Republic Act No. 9182 (2002) as amended by Republic Act No. 9343.

16 An Act Ensuring Philippine Financial Industry Resiliency Against the covid-19, Pandemic. Republic Act No. 11523.

17 NEDA, Structuring Public-Private Partnerships (2009).

18 NEDA, Structuring Public-Private Partnerships (2009).

19 ibid.

20 Interview with Mia Sebastian, Deputy Executive Director of the Public-Private Partnership Center, on 22 January 2019.

21 Radio Communications of the Philippines, Inc (RCPI) v. Alfonso Verchez, Grace Verchez-Infante, Mardonio Infante, ZenaidaVerchez-Catibog, and Fortunato Catibog, G.R. No. 164349, 31 January 2006.

22 Civil Code, Article 1174.

23 Omnibus Election Code, as amended, Sec. 261; Commission on Elections Resolution No. 10695, 10 February 2021.

25 Election Ban on Public Works, https://business.inquirer.net/264916/election-ban-on-public-works; Comelec Resolution No. 18-1127-3, 14 November 2018.

26 Civil Code, Article 2242.

27 Jan-Dec Construction Corporation v. Court of Appeals, G.R. No. 146818, 6 February 2006.

28 Rule 68 of the Rules of Court, Section 2 (1997).

29 Acts No. 2747 and 2938.

30 Republic Act No. 337, An Act Regulating Banks and Banking Institutions and for Other Purposes, as amended.

31 An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals (Financial Rehabilitation and Insolvency Act), Republic Act No. 10142 (2010).

32 See Philippines Digital Economy Report, World Bank, http://documents1.worldbank.org/curated/en/796871601650398190/pdf/Philippines-Digital-Economy- Report-2020-A-Better-Normal-Under-covid-19-Digitalizing-the-Philippine-Economy-Now.pdf.

33 Joint Memorandum Circular No. 01, s. of 2020, Streamlined Guidelines for the Issuance of Permits, Licenses, and Certificates for the Construction of Shared Passive Telecommunications Tower Infrastructure (PTTIs), https://arta.gov.ph/wp-content/uploads/2020/10/JMC-No-01-series-of-2020.pdf.

34 ibid.

35 Department of Foreign Affairs and Trade (DFAT) Safeguard Policy for Aid Program, as cited in Public-Private Partnership Governing Board Resolution 2018-12-02, 14 December 2018.

36 Reorganizing and Renaming the Build-Operate and Transfer Center to the Public-Private Partnership Center of the Philippines and Transferring its Attachment from the Department of Trade and Industry to the National Economic and Development Authority and for Other Purposes (Executive Order No. 8, Series of 2010), as amended by Executive Order No. 136, Series of 2013.

38 Build-Operate-Transfer Law, Section 10.7.

41 An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes, Republic Act No. 6957, as amended by Republic Act No. 7718.

42 See 'PPPs in the Philippines: Myths vs Facts', Business World online (http://bworldonline.com/content.php?section=Opinion&title=ppps-in-the-philippines-myths-vs-facts&id=144303).

43 See 'TIMELINE: The NAIA rehabilitation project', CNN Philippines online (https://www.cnnphilippines.com/business/2020/12/16/NAIA-rehabilitation-project-timeline.html).

44 'ADB warns of barriers to waste-to-energy investment' Business World online, 18 December 2018 (https://www.bworldonline.com/adb-warns-of-barriers-to-waste-to-energy-investment/).

45 13 new in, 8 old out from flagship infrastructure projects, Dizon says, https://cnnphilippines.com/news/2020/8/6/BBB-13-additional-infra-projects.html.

47 Interview with Jonathan Uy, Assistant Secretary, NEDA Investment Programming Office, on 24 January 2019.

48 An Act Providing for the Modernization, Standarization and Regulation of the Procurement Activities of the Government and for Other Purposes (Government Procurement Reform Act), Republic Act No. 9184 (2003).

50 'Philippines, Japan tackle infra, flood management projects', Rappler, 22 November 2018 (https://www.rappler.com/business/217308-philippines-japan-deals-infrastructure-projects-november-2018).

51 'Foreign direct investments down 25% to $6.5 billion in 2020', Manila Standard online, https://manilastandard.net/mobile/article/349101.

52 Lisa Grace S Bersales, PhD, 'Total Approved Foreign Investments Reached PhP 14.2 billion in Q1 2018', Philippine Statistics Authority (https://psa.gov.ph/content/total-approved-foreign-investments-reached-php-142-billion-q1-2018).

53 An Act to Promote Foreign Investments, Prescribe the Procedures for Registering Enterprises Doing Business in the Philippines, and for Other Purposes (Foreign Investments Act of 1991), Republic Act No. 7042, amended by Republic Act No. 8179 (1991).

54 Except in cases of hereditary succession, where foreign individuals may own lands.

55 1987 Phil. Const., Article XII (11).

56 An Act Amending Investment Restrictions in Specific Laws Governing Adjustment Companies, Lending Companies, Financing Companies and Investment Houses Cited in the Foreign Investment Negative List and for Other Purposes, Republic Act No. 10881 (2016).

57 1987 Phil. Const. Article III (9).

58 An Act Allowing the Long-Term Lease of Private Lands by Foreign Investors (Investors' Lease Act), Republic Act. No. 7652 (1993).

59 Revised Corporation Code, Article 143 (2019).

60 'TRAIN 2 causing uncertainty among investors – AmCham', The Philippine Star, 29 August 2018 (https://www.philstar.com/headlines/2018/08/29/1846775/train-2-causing-uncertainty-among-investors-amcham).

61 Republic Act No. 11534 otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act.

62 DTI-BOI hails PRRD signing of CREATE Act, https://www.dti.gov.ph/news/signing-of-create-act/.

63 'Creating an Arbitration Machinery in the Construction Industry of The Philippines', Executive Order No. 1008, 4 February 1985.

64 An Act to Authorize the Making of Arbitration and Submission Agreements, to Provide for the Appointment of Arbitrators and the Procedure for Arbitration in Civil Controversies, and for Other Purposes (Arbitration Law), Republic Act No. 876 (1953).

65 An Act to Institutionalize the Use of an Alternative Dispute Resolution System in the Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other Purposes, Republic Act No. 9285 (2004).

66 A.M. No. 07-11-08-SC dated 1 September 2009, entitled 'Special Rules of Court on Alternative Dispute Resolution'.

67 UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006.

68 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).

69 Strickland v. Ernst & Young, G.R. Nos. 193782 and 210695, 18 August 2018.

70 Republic Act No. 9285 (2004), Chapter 7, Chapter 4, Section 28.

72 Interview with Mia Sebastian, Deputy Executive Director of the PPP Center, on 22 January 2019.

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