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Construction Delayed,
Services Denied

A look into the loopholes of the Build-Operate-and-Transfer Law

By: Emilio R. Gonzales III

Governments in developing countries share a common stumbling block in their efforts to improve their country’s public infrastructure – scarce financial resources. Tapping the private sector, thus, becomes their likely resort. After all, the private sector is imbued with innate advantages over government in terms of delivering services to the public. It has the financial resources and technological expertise needed to undertake major projects that, normally, cash-strapped governments like the Philippines’s are unable to deliver.

	Contractual Arrangements  under the BOT Law
• Build-operate-and-transfer   • Contract-add-and-operate   • Build-and-transfer   • Develop-operate-and-transfer   • Build-own-operate   • Rehabilitate-operate-and-transfer   • Build-lease-and-transfer   • Rehabilitate-own-and-operate   • Build-transfer-and-operate

An effective method of facilitating private sector participation in infrastructure development that is normally reserved to government is through the Build-Operate-and-Transfer (BOT) scheme. The BOT scheme transfers to the private sector the problem of raising capital for projects. Doing so not only helps government address its backlog in delivering services to the public, but also enables it to re-allocate scarce financial resources to more pressing concerns such as projects for healthcare and poverty alleviation.

With these things in mind and in an effort to put a halt to the power crisis in the early 1990s, former President Fidel V. Ramos signed the Expanded BOT Law (RA 7718) on 5 May 1994. The law includes other contractual schemes as well. As of December 2003, 41 BOT projects have been completed or operational, or both. An overwhelming majority of the completed BOT projects are under the power sector. On the other hand, the water sector has five completed BOT projects.

A multi purpose water and power project in Nueva Ecija is one of the controversial BOT projects

However, despite the number of BOT projects intended for the power and the water sectors, there still lies a looming power and water crises. Water supply is getting scarce especially in Metro Manila. Power supply disruption in the south is threatening major businesses. It would seem that the BOT Law has not been serving its purpose. Ten years after the law’s enactment, there still is a great need for more infrastructure and development projects. Moreover, several BOT projects have been questioned before the court. Some were even declared null and void.

The BOT law was passed to facilitate infrastructure
development in the country

Direct Government Guarantees

The BOT Law was passed to facilitate infrastructure development in the country. However, it seems that some provisions of the BOT Law and its Implementing Rules and Regulations (IRR) are adversely affecting the intention of the law.

For instance, although it is a government policy not to give direct government guarantee to the loans of BOT project proponents, certain provisions in the IRR of the BOT Law indirectly contravene this policy. For one, the law warrants BOT project proponents who have difficulty in sourcing funds to tap the Official Development Assistance (ODA) fund. The project proponent may avail of ODA funds up to 50 percent of the total project cost. This is ironic since BOT arrangements are meant to address the government’s inability to fund major infrastructure and development projects. Thus, when a private company enters into a BOT set-up, it is assumed that it has the financial capacity to undertake projects.

Worse, the law’s IRR gives BOT project proponents a guarantee that once they commit a breach in the BOT contract, all their liabilities will be assumed by government upon the take over of the facility. An alternative option given to government in case the BOT contract is rescinded is to allow creditors to assign the project to another company. But if the creditors refuse to assign the project to another company, the government has no other choice but to take over the facility and assume all the liabilities contracted by the BOT project proponent. This arrangement provided by the IRR of the BOT Law falls short of the definition of a direct government guarantee.

Such was the controversy behind the concession agreement granted to the Philippine International Air Terminal Co. (PIATCo) to build and operate for 25 years the Ninoy Aquino International Airport Terminal 3 (NAIA-3). A provision in the agreement states that in case PIATCo defaults on its loans, the government shall take over NAIA-3 as well as assume the attendant liabilities of PIATCo. The Supreme Court’s decision annulling the PIATCo contract may alarm prospective investors in BOT projects, but the High Tribunal has to stand by its constitutional mandate of interpreting and upholding the intention of the law.

	BOT Projects As of December 2003
Completed/   Operational  Publicity Bid Unsolicited Projects Completed Concessions TOTAL  Power 26 1 2 13 42  Transport 3 3 1 0 8  Information Technology 2 2 1 0 8  Water 5 0 0 0 5  Property Development 2 5 2 1 9  Health 1 0 0 O 1  Others 2 0 0 O 2              TOTAL 41 11 6 14 72  Source: BOT Center (Department of Trade and Industry)
Changing the Terms of Contract The IRR of the BOT Law also authorizes the government and the project proponent to re-open contracts if it is necessary to revise certain provisions. There is nothing wrong with contract re-opening per se, especially if contract revisions are necessary to protect the project proponents against the unstable market and political environment of the country. When a private company enters into a BOT setup, it is assumed that it has the financial capacity to undertake projects The irregularities only come in when the revisions of the contracts are not effectively scrutinized by the regulating government agencies. Unregulated renegotiations of the terms of BOT contracts set dangerous precedents. BOT project proponents could submit a low bid for a certain BOT project and later maximize project profitability by continuously changing the terms of the contract. Case in point. The Argentine firm Industrias Metalurgicas Pescarmona Sociedad Anonima (IMPSA) submitted an unsolicited proposal to rehabilitate the Kalayaan hydro plant in Laguna during the Ramos administration. The proposal was later amended to in clude the Caliraya and Botocan Plants in Laguna. The contract rehabilitation of the Caliraya-Botocan-Kalayaan (CBK) plants was signed during the Estrada administration. Since it was signed, the IMPSA contract has undergone various amendments and has since included several supplemental agreements. On 24 January 2001, then Justice Secretary Hernando Perez issued a ruling removing all legal obstacles to the implementation of the IMPSA contract and ordering the National Power Corporation (Napocor) to start the payment to IMPSA for the rehabilitation of the CBK plants. Note, however, that the original contract stipulated that Napocor would start paying IMPSA only after the third year of the CBK project. This deviation from the original terms of the contract entails an increase in the spending of Napocor and further translates into higher electricity prices for consumers. Page 1 | 2