The government has issued the revised rules on public-led projects with private-sector participation in a bid to lessen contingent liabilities.
The tighter rules overseeing public-private partnership (PPP) projects—earlier opposed by some business groups—were published by the state planning agency National Economic and Development Authority (Neda) as amendments to the implementing rules and regulations (IRR) of the Build-Operate-Transfer (BOT) law.
While the 72-page revised BOT law IRR acknowledged that the private sector was “the main engine for national growth and development”—including in the implementation of infrastructure projects, the new rules also sought to “protect the government and the public from excessive payments, undue guarantees, unnecessary fiscal risks and onerous contractual obligations” arising from PPP projects.
Economists and business leaders had criticized the amendments earlier proposed by Neda as being “antimarket.”
In particular, the amended BOT law IRR zeroed in on minimizing contingent liabilities, which it defined as “liabilities that may be incurred from events specified in a contract, the occurrence, timing, or amount of which are uncertain.”
Contingent liabilities included material adverse government action (Maga) clauses, force majeure and failure to deliver contractual obligations, the new IRR said.
It defined Maga as “any act of the executive branch, which the project proponent had no knowledge of, or could not reasonably be expected to have had knowledge of, prior to the effectivity of the contract; and that occurs after the effectivity of the contract, that: specifically discriminates against the project proponent; and has a material adverse effect on the ability of the project proponent to comply with any of its obligations under the contract.”
“For purposes of the contract, the provisions on Maga shall also provide for the rules on materiality or amount threshold, nature and compensation, cap on monetary compensation, conditions for termination and termination payment due to Maga,” it said.
The Makati Business Club (MBC) earlier expressed concern that the definition of Maga in the revised IRR “creates higher risks for businesses from a regulatory and political standpoint which would discourage private sector participation in infrastructure projects” as extensive exclusions practically absolve the government of all blame and responsibility for any changes and foist all project risks, such as increased costs and difficulties on the private-sector partner, the MBC had said.
In the revised BOT Law IRR, “contingent liabilities shall be set only for risks that the national or local government, whichever is applicable, is best able to control.”
“All contingent liabilities to be assumed by the government shall be transparent in terms of specific risk events that would trigger such liabilities; the probability or likelihood that such risks will occur; the manner of compensation for the economic impact on the project proponent, if compensation is financial; the method or principle of calculation of financial compensation; the materiality threshold; and the cap on compensation,” the rules read.
“For force majeure risks, contingent liabilities above the insurance proceeds shall be shared equally between parties to the contract,” it added.
Late last year, the Cabinet-level, interagency Investment Coordination Committee (ICC) ordered agencies and local governments implementing big-ticket PPP projects to ensure private proponents’ financial capacity by setting minimum equity requirements.
The Development Budget Coordination Committee (DBCC) had projected the contingent liabilities stock or the aggregate amount wrought by PPP projects to have risen to P456.2 billion in 2021 from the estimated P311.8 billion in 2020. It was on top of the P60.4-billion “flow” of contingent liabilities or the amount which “may materialize within a specific interval of time taking into consideration a project’s risk factors” among 18 national PPP contracts signed between 2008 and 2020.
The Duterte administration had previously shunned PPPs, especially unsolicited projects, as it did not want disadvantageous provisions like government guarantees, subsidies, and Maga clauses.
But the current pipeline of flagship infrastructure projects in the ambitious “Build, Build, Build” program included 20 unsolicited PPP projects worth P1.5 trillion, which will be financed by tycoons’ deep pockets.