‘Antimarket’ provisions in new BOT rules bucked

The outgoing administration plans to scrap arbitration as a means for settling disputes in public-private partnership (PPP) projects, raising concerns among economists and investors who also flagged other “antimarket” provisions in the new Build-Operate-Transfer (BOT) draft guidebook.

In separate letters to Economic Planning Secretary Karl Chua, copies of which were obtained by Inquirer, the Foundation for Economic Freedom (FEF) and Makati Business Club (MBC) both appealed against the removal of the “parametric” formula in setting rates and returns, that are in turn used to calculate adjustments in fees, tolls and charges.

These are some of the changes contained in the 106-page draft that overhauls the 2012 implementing rules and regulations (IRR) of the amended BOT Law.

Section 12.12 of the draft IRR on the resolution of disputes stated that “acts and decisions or regulators shall not be subject to arbitration.”

The draft also introduced a new condition “prohibiting the incorporation of onerous and one-sided provisions in the contracts.” The draft contract is defined onerous “if the cost of the project outweighs the advantages that the government and the public will receive from the project.”

To recall, private concessionaires Maynilad Water Services Inc. and Manila Water Co. earlier separately took their tariff dispute with the Metropolitan Waterworks and Sewerage System to arbitration proceedings. While they separately won their cases, they were forced to waive arbitral payments and negotiate a new contract with the government after President Duterte himself lashed out at what he deemed as “onerous” provisions.

FEF noted that arbitration was an internationally standard element in long-term contracts. “Rather than rejecting arbitration, the government should accept it as an apolitical mode of dispute resolution that should free government and local courts from populist pressures. Such pressures may lead to expedient short term benefits that hurt the country’s long term reputation as an investment destination and as a partner,” FEF said in its letter dated March 3.

While FEF agreed that that the existing BOT law would need refinement to factor in lessons learned in the last 20 years as well as global best practices, it said the proposed revisions would be “regressive” and the general tenor “anti-market”.

“The proposed amendments ignore the essence of ‘partnership’ and treats the ‘private’ as untrustworthy. To recover from the pandemic and the aftermath of Russia’s invasion of Ukraine, the Philippines will need more investments – public and private. Instead, these changes will discourage investments and negate recent and laudable reforms such as the amendments to the Foreign Investments Act and the Public Service Act,” it said.

There is also a bone of contention in the calculation of reasonable rate of return (RROR).

In a separate letter dated March 15, MBC proposed that the original parametric formula provision in the IRR be retained, instead of involving government financial institutions (GFIs), which the group said “may employ different criteria to calculate the RROR, thereby resulting in a potential inconsistent evaluation of different proposals.

“Investors, as you will appreciate, prefer a uniform formula which will guide all PPP contracts,” MBC said.

MBC also raised concerns on the proposed blueprint-defined Material Adverse Government Action (Maga).

“A significant point of concern for us are the exclusions from what Maga effectively covers. The BOT IRR exempts the following acts from Maga coverage: acts of the executive branch, acts of the agency/LGU (local government units) and approving body, acts of the legislative and judicial branches. This raises the question of what Maga actually covers. Given that there is a broad range of government acts not covered by the Maga clause, this may result in putting the burden of risks to the private sector when a PPP project is undertaken,” MBC said.

MBC also wrote that the review of parameters, terms and conditions (PTC) must be left to the implementing government agency or LGU involved as they would have more technical and background expertise in the project.

“Granting Neda (National Economic Development Authority) the authority to approve PTCs, can substantially be a bottleneck for the project and may cause further delay as the involvement of Neda ICC (Investment Coordination Committee) will serve as an additional bureaucratic layer,” it said.

MBC is also concerned on additional pre-qualification requirements which it said appeared to be onerous, restrictive and/or premature.”