Dispute resolution in PPP projects

In sharp deviation from the policy of his predecessor, President Marcos had said that public-private partnerships (PPP) shall be tapped by the government to finance some of its infrastructure projects.

According to the National Economic and Development Authority, 45 of those projects would be covered by that scheme.

In light of that development, the PPP Center, the government office tasked to facilitate the implementation of the country’s PPP program and projects, had called for the use of alternative dispute resolution (ADR) mechanisms to manage the disputes that may arise in carrying out those projects.

ADR refers to the means by which contracting parties can resolve their differences without going to court or availing of judicial relief. These processes include conciliation, mediation and arbitration.

In arbitration, the arbitrator may be someone the parties believe would be fair in his or her judgment, or a panel consisting of three members, with the parties naming a member each to represent them while the third member has no ties with any of the parties.

Unlike court proceedings that can take years before a final resolution can be reached, ADR is expeditious, less contentious and, most importantly, would not entail huge expenses that often accompany litigation cases.

It is common practice in local PPP projects, especially when foreign investors are involved, that when arbitration is agreed to as the ADR, the sole arbitrator or third member of the panel is a citizen of a country other than those of the parties and that the proceedings are held outside the Philippines.

A critical element in arbitration is the commitment of the parties to promptly and scrupulously comply with the letter and spirit of the arbitration ruling.

If the decision has become final, the losing party is legally and morally obliged to accept it and should not engage in acts that tend to denigrate its merit or cast aspersions on the integrity of the arbitrators.

This obligation assumes significance if the losing party is a government office and the ruling would require the payment of substantial sums of money for, say, delayed payments, compounded interest, surcharges and penalties.

Sore losers in arbitration cases are looked upon with grave disfavor in the business community. If foreign investors are adversely affected by that action, word about it spreads quickly in the financial world and the country that government office represents gets a black mark.

That happened in 2019 when a Singapore arbitration panel ordered the Philippine government to pay P7.4 billion to Manila Water Co. and P3.4 billion to Maynilad Water Services, Inc. for the losses they incurred due to unimplemented water rate increases.

Displeased with the awards, then President Rodrigo Duterte ranted against the two companies, threatened to have their executives charged with economic sabotage and the companies’ assets expropriated.

In the face of those threats, the companies waived the payment of the awards and agreed to revise their concession agreements with the government along the lines it demanded.

Although that arm-twisting sat well with the public, it sent shivers down the spine of the business community about the fragility of the arbitration process in the resolution of disputes.

Since a precedent on noncompliance by the government on arbitration awards in PPP-related issues had been created by that incident, there is a possibility that it can happen again in future PPP projects that may be similarly situated as Manila Water and Maynilad.

With that prospect looming as a sword of Damocles, businesses that want to participate in the proposed PPP projects may demand the inclusion of, among others, stringent “financial recovery” provisions in their agreements in anticipation of possible refusal by their government counterparty to comply with arbitration awards.

If that happens, the intended beneficiaries of the projects would shoulder the additional financial burden.

It has been said that a person’s word is his or her bond. That adage should govern the government’s actions when it enters into future PPP projects. The mistakes of the past administration on this matter should not be repeated. INQ

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