The Projects and Construction Review: Philippines
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 vary greatly. Even with its fast-growing economy, 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 Between January and November 2018, the government's infrastructure spending reached an estimated 728 billion Philippine pesos, 50 per cent higher than the 486.5 billion pesos recorded during the same period in the previous year.3
As part of the medium-term Philippine Development Plan, the BBB programme is estimated to require US$168 billion in investments for 75 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.
Arguably, however, private capital to fund infrastructure projects is underused. Thus, the current administration identified public-private partnerships (PPPs) in its 10-point socio-economic 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 17 national PPP projects worth about 328.67 billion pesos. According to the 2018 Infrascope Report by The Economist Intelligence Unit (The EIU), the Philippines now ranks second 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.4 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 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 From independent power producers to the hybrid PPP model
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
A major turning point in Philippine history, the importance of private participation in project financing came to light during the energy crisis of the late 1980s to early 1990s. At its worst, the Philippines experienced daily drops of voltage in the electricity supply lasting eight to 12 hours,6 resulting in an estimated 6 per cent decrease of the country's GDP. To address the crisis, then President Fidel V Ramos expanded the Build-Operate-Transfer Law (the BOT Law) in 1994, which shortened the procurement process and accommodated private sector participation. As a result of the expanded BOT Law, independent power producers (IPPs) were allowed to operate, which contributed to the resolution of the energy crisis.7 Traditional PPPs, such as those entered into by IPPs, have thus been a proven solution when government could not meet energy demands.
Recently, however, the government has shifted its preference to hybrid models, for which funding for the initial phase is secured through public procurement or ODA, while the operation and maintenance (O&M) of the project is allocated to the private sector through PPPs, a reversal of the procedure observed by previous administrations. As claimed by the government, hybrid models fast-track infrastructure projects and enable project costs to be cheaper in the long run. To illustrate, the Clark International Airport in Pampanga (the Clark Airport) features hybrid PPPs as the government seeks to decongest the Ninoy Aquino International Airport (NAIA) in Metro Manila by expanding the capacity of airports outside Metro Manila. The Clark Airport, in particular, was thrust into the national spotlight in August 2018, when NAIA's operations were paralysed for two days owing to an unplanned runway closure, costing the country's main airport millions in lost revenue. The Clark Airport Expansion Project is considered to be the first airport project using the hybrid PPP model.
However, some PPP proponents argue that there is no longer any incentive for private participants to raise revenues and provide O&M services efficiently in the absence of any capital risk. While shifting policies create some uncertainty in government support towards PPP projects, further comparative analysis is necessary to determine whether the traditional PPPs or their hybrid models will be best suited to finance a particular project.
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 to achieve the government's objectives of addressing the health service needs of the poor. Through the Public-Private Partnerships Center (the PPP Center), the government has encouraged private participation through PPPs with a focus on projects that would help in the delivery of universal healthcare for Filipinos. One of the pioneering PPP projects in this sector is the development of the planned Philippine General Hospital in University of the Philippines, Diliman (the PGH Project). The PGH Project is also designed to be implemented as a hybrid project, wherein the O&M component will be bid out to the private sector via PPP.8
With the enactment of the Universal Health Care Act in 2019 (UHCA), healthcare PPPs may bridge a funding gap of 164 billion pesos needed to implement healthcare reforms during UHCA's first year of implementation.
Risk allocation and management
i Management of risks
For project finance transactions or construction projects, implementing agencies are given wide discretion in managing risks and the allocation of these risks varies greatly from project to project.10 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.11
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.12 For private proponents, the payment method constitutes a major factor since, normally, no government financial guarantees are provided by the implementing agency – although in some instances, the implementing agency may offer subsidies as benefits or a guaranteed supply of certain nationalised resources. During the pre-development stage, the implementing agency would test the market with private firms and adjust transactions based on market feedback.13 Still, the implementing agency 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 allocation of risks sub-optimal. Types of risks typically allocated between parties include legal and regulatory risks, financial (demand risk), economic, engineering, 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.14 Examples of force majeure permitted include war, invasion, rebellion, terrorism, revolution, natural catastrophes or any other event that is unforeseeable or, although foreseeable, unavoidable.15 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 the parties shall continue their performance, with all due diligence, of all obligations not affected by force majeure.
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.
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.16
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.17 Thus, to protect the creditor, contracts likewise regularly provide that debtors must warrant its 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 provisions typically include defects liability period, defects notification period, 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. However, with respect to movable properties, the Personal Property Security Act18 (PPSA) was enacted to simplify the creation, perfection, registration and enforcement of movable collateral such as bank accounts, accounts receivable, inventory, equipment, vehicles and intellectual property rights.19 Under the PPSA, priority of interests depends on the time of registration with a centralised and nationwide electronic registry.
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 a foreclosure of real estate mortgage, the mortgagor is granted a period to redeem the property before title is consolidated with the mortgagee.
If a debtor becomes insolvent, whether voluntary or involuntary, or requires financial rehabilitation, the applicable law is the Financial Rehabilitation and Insolvency Act20 (FRIA). Insolvency proceedings require court intervention but, in limited cases, out-of -court informal restructuring is allowed if approved by the court with the conformity of the required percentage of creditors. Special features of the FRIA include:
- excluded assets that are exempt from execution;
- excluded entities (banks, insurance companies and pre-need companies covered by the New Central Bank Act) and government entities; and
- 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.
i Licensing and permits
Permit and licensing requirements vary depending on the type of project involved. By way of example, developers of renewable energy projects considered to critically affect the environment may need to secure the following permits and licences before development of a renewable energy project may proceed.
Licences and permits from national government agencies
- Environmental compliance certificate;
- environmental impact statement;
- tree cutting permit;
- acquisition of land or land use agreement such as a forest land use agreement or special land use permit;
- certificate of non-coverage from the national irrigation administration;
- water permit; and
- certificate of non-overlap or certificate of precondition from the National Commission on Indigenous Peoples.
Licences and permits from local government agencies
- Proof of public consultation;
- relevant resolution of support;
- relevant local permits (including for construction); and
- rights of way agreements (both private and public);
The absence of any of the required permits or licences authorises the relevant government agency, such as the Department of Energy, to suspend the project contract.
ii Applicability of the precautionary principle
To further ensure that an infrastructure project does not cause excessive harm to the environment, the Philippines adopts the precautionary principle as a minimum standard in evaluating the environmental impact of a project. The precautionary principle states: 'When there is a lack of full scientific certainty in establishing a causal link between human activity and environmental effect, the courts will resolve any doubts in favour of protecting the environment.' 21
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.22
PPP and other public procurement methods
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 Program and Projects.23 This section focuses on national infrastructure projects that can the subject of a PPP.
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.24 In general, PPPs involve four stages: project development (project preparation, finalisation of project structure); approval (evaluation, review and approval of the project); competition (preparation of bidding documents, prequalification to bid, bid submission and evaluation, awarding of project to private partner and issuance of Notice of Award); and cooperation stage (submission of Notice of Award requirements, contract signing, financial close, construction, turnover of the facility or infrastructure).25 The table below summarises PPP projects between 2010 and February 2019:26
|Stage||Mode of procurement||Number||Project cost (in PhP billion)|
|Projects under implementation||Solicited||15||242.77|
|Projects in the pipeline||Solicited||14||0.38|
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 (ICC) Guidelines primarily govern national infrastructure projects,27 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.
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 implementing agency typically identifies the infrastructure project, which is then evaluated and approved by an approving body.28 The implementing agency then selects a private partner through competitive bidding. Criteria for awarding PPP projects to 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:
- the project involves a new concept or technology or is not part of the List of Priority Projects as defined by law;
- the project is not a component of an approved project; and
- no direct government guarantee, subsidy or equity is required.
Although USPs, by law, are subject to Swiss challenge, they are criticised 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. To date, the sole instance of a project being awarded to a challenger (PIATCO) is the controversial NAIA Terminal 3 project, but the contract was subsequently declared null and void by the Supreme Court because of irregularities in the contract.
Thus, USPs may provide the advantage of faster implementation of projects but since the few that have been awarded have been shrouded in controversy, the Philippines needs to re-evaluate the process and vague standards set for USPs to give challengers a fair opportunity to participate.
Significant PPP transactions
Waste-to-energy facilities to supplement the energy needs of the Philippines
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 the strong interest from local government and investors.29 These non-traditional PPP projects, such as renewable energy infrastructure and digital infrastructure stand to benefit from PPPs because of the technical expertise and innovative technologies more widely available in the private sector.
This year, Metro Pacific Investments Corporation (MPIC) is expected to be awarded the 22 billion peso Quezon City Waste-to-Energy facility project since no counter-offers were submitted to challenge MPIC's unsolicited proposal. The facility will have the capacity to convert up to 3,000 metric tons a day from Quezon City's municipal solid waste (MSW) to 42 megawatts, which can power between 60,000 and 90,000 homes. As public partner for the project, the Quezon City government committed to deliver 1,700 metric tons of MSW per day, to acquire the right of way for access roads and other utilities and to expropriate the project site of the facility if required.30 The concession agreement will have a term of 35 years and originated from a USP from MPIC.
Projects such as the Quezon City waste-to-energy facility signify the Philippine government's commitment to diversifying its energy mix and maintain at least 30 per cent of the country's total energy mix from renewable energy sources until 2030.31
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. In 2016, the Philippines Statistics Authority (PSA) awarded a 1.59 billion peso project to computerise the civil registry operations of the PSA using imaging technology. Further, in January 2014, the Department of Transportation awarded the Automatic Fare Collection System (AFCS) project to a private consortium (from 33 initial prospective bidders). The consortium contributed the contactless-based smart card technology called the Beep Card on Light Rail Transit (LRT) Line 1 and 2 and Metro Rail Transit (MRT) Line 3. The project became fully operational in December 2015 and government officials reported improved collections and higher user satisfaction as a result of the AFCS.32
The current administration lists more than 70 national priority infrastructure projects, of which only seven have a PPP component. While PPPs undoubtedly have a role in addressing the country's infrastructure requirements, lack of institutional capacity among implementing agencies,33 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 project's 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 governed by the Government Procurement Reform Act.34
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 operations by May 2022. The planned subway is regarded as the most expensive project under the government's Build, Build, Build programme, with total cost of 356.96 billion pesos.35
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 foreign investment net inflows in 2018 amounted to US$9.8 billion, down 4.4 per cent from 2017. Japan, Taiwan, Singapore, the United States, the United Kingdom, Australia and South Korea are the countries with the largest foreign investment, although China has recently been catching up, with investment during the fourth quarter of 2018 accounting for 52.6 per cent of total approved investments compared with virtually nothing in the third quarter.36 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.37
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 Constitution and the Negative List of the Foreign Investment Act38 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:
- exploration, development and utilisation of natural resources;
- ownership of land;39
- 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);40 and
- 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.41 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 ofinvestment 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 offoreigners). 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.42
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 Act43 to allow foreign investors to lease private land for up to 75 years (50 years, renewable once 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 recently adopted Revised Corporation Code further increased the capitalisation requirements for foreign branch offices from 100,000 pesos to 500,000 pesos.44 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: (1) if a party is estopped from questioning the capacity of a foreign corporation to sue; (2) if a foreign corporation entered into an isolated transaction; and (3) 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 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.45 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. Thus, 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. Further, in 2018, the President called on Congress to propose amendments to the economic provisions of the Constitution, which may address concerns about making the Philippines more competitive and attractive to foreign investors.
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.46
However, a common issue between parties is the manner in which CIAC's 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 (PDRC), 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 Law47 and the Alternative Dispute Resolution Act of 200448 (the 2004 ADR Act), 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.49 For disputes that have an international component, the Philippines recognises the UNCITRAL Model Law on International Commercial Arbitration50 and the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards.51
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,52 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. Nevertheless, arbitration costs remain high. A case in point was the NAIA 3 Terminal project, in which the Supreme Court ordered PIATCO (the challenger to the USP that eventually won the bid) to pay 300 million pesos as arbitration costs.
Despite the push for arbitration, courts still have a crucial role in providing injunctive relief against erring government authorities. For instance, in 2009, the Light Rail Transit Authority initially awarded the Common Station Project to SM Prime Holdings, Inc (SMPHI). Five years later, however, the Department ofTransportation (a government partner) awarded the project to the Light Rail Manila Corporation (LRMC). As a result, SMPHI filed a temporary restraining order, which was granted by the Supreme Court in 2014. The controversial project was only resolved in 2016 when SMPHI and the LRMC agreed on a location mutually acceptable to both parties.
Prospective proponents must therefore be cautious in dealing with government partners. Fortunately, stricter sanctions, and criminal prosecution against erring government individuals, have made material breaches in contractual obligations less likely. Nevertheless, understanding the potential risks and cultural and political context when participating in infrastructure projects may 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 renewable energy projects 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.
With favourable economic conditions and a more relaxed fiscal policy, the Philippines should take advantage of these bullish conditions, but must likewise take more proactive steps towards fulfilling the Philippines' infrastructure needs that first and foremost 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.53
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.
1 Carlos Alfonso T Ocampo is a senior partner and Angela K Feria is an associate at Ocampo Manalo Valdez & Lim.
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).
3 'Despite 2018 setback, 'BBB' TRAIN seen to prop up 2019 growth', Business Mirror, 24 January 2019 (https://businessmirror.com.ph/2019/01/24/despite-2018-setback-bbb-train-seen-to-prop-up-2019-growth/).
4 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/).
6 Dante B Canlas, 'Political Governance, Economic Policy Reforms and Aid Effectiveness: The Case of the Philippines with Lessons from the Ramos Administration' (2007).
9 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.
10 National Economic Development Authority [NEDA], Structuring Public-Private Partnerships (2009).
11 NEDA, Structuring Public-Private Partnerships (2009).
13 Interview with Mia Sebastian, Deputy Executive Director of the Public-Private Partnership Center [the PPP Center], on 22 January 2019.
14 Radio Communications of the Philippines, Inc. (RCPI) v. Alfonso Verchez, Grace Verchez-Infante, Mardonio Infante, Zenaida Verchez-Catibog, and Fortunato Catibog, G.R. No. 164349, 31 January 2006.
15 Civil Code, Article 1174.
16 Civil Code, Article 2242.
17 Jan-Dec Construction Corporation v. Court of Appeals, G.R. No. 146818, 6 February 2006.
18 An Act Strengthening the Secured Transactions Legal Framework in the Philippines, which Shall Provide for the Creation, Perfection, Determination of Priority, Establishment of a Centralized Notice Registry, and Enforcement of Security Interests in Personal Property, and for Other Purposes, Republic Act No. 11057 (2017).
19 'Duterte signs new law allowing use of other personal properties as bank collateral', Manila Bulletin, August 2018 (https://news.mb.com.ph/2018/08/20/duterte-signs-new-law-allowing-use-of -other-personal-properties-as-bank-collateral/).
20 An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals (Financial Rehabilitation and Insolvency Act), Republic Act No. 10142 (2010).
21 2010 Rules of Environmental Procedure, Rule 20(1).
22 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.
23 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.
27 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.
28 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).
29 'ADB warns of barriers to waste-to-energy investment' Business World Online, 18 December 2018
30 'MPIC expects go signal for QC project within Q1', Business World Online, 26 February 2019
31 Philippine Energy Plan 2016-2030, available at https://www.doe.gov.ph/sites/default/files/pdf/pep/2016-2030_pep.pdf; Department of Energy, DC 2015-07-0014: Guidelines for the policy of maintaining the share of renewable energy in the country.
32 Automatic Fare Collection System: Project Brief, PPP Center (see https://ppp.gov.ph/ppp_projects/automatic-fare-collection-system/?wppa-occur=1&wppa-cover=0&wppa-album=85&wppa-photo=1171); United Nations Economic and Social Commission on Asia and the Pacific, Public-Private Partnerships Case Study #6: Automatic Fare Collection System (retrieved from https://www.unescap.org/sites/default/files/Case%206-%20Automated%20Fare%20Collection.pdf).
33 Interview with Jonathan Uy, Assistant Secretary, NEDA Investment Programming Office, on 24 January 2019.
34 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).
35 'Philippines, Japan tackle infra, flood management projects', Rappler, 22 November 2018 (https://www.rappler.com/business/217308-philippines-japan-deals-infrastructure-projects-november-2018).
36 'China's 2018 investment pledges to PH grow 20 times', Rappler, 1 March 2019 (https://www.rappler.com/business/224695-china-investment-pledges-2018'.
37 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).
38 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).
39 Except in cases of hereditary succession, where foreign individuals may own lands.
40 1987 Phil. Const., Article XII (11).
41 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).
42 1987 Phil. Const. Article III (9).
43 An Act Allowing the Long-Term Lease of Private Lands by Foreign Investors (Investors' Lease Act), Republic Act. No. 7652 (1993).
44 Revised Corporation Code, Article 143 (2019).
45 'TRAIN 2 causing uncertainty among investors – AmCham', The Philippine Star, 29 August 2018
46 'Creating an Arbitration Machinery in the Construction Industry of The Philippines', Executive Order No. 1008, 4 February 1985.
47 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 (The Arbitration Law), Republic Act No. 876 (1953).
48 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).
49 A.M. No. 07-11-08-SC dated 1 September 2009, entitled 'Special Rules of Court on Alternative Dispute Resolution'.
50 UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006.
51 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
52 Strickland v. Ernst & Young, G.R. Nos. 193782 and 210695, 18 August 2018.
53 Interview with Mia Sebastian, Deputy Executive Director of the PPP Center, on 22 January 2019.