Recent controversies about certain government infrastructure projects, especially those agreed upon under the framework of the build-operate-transfer (BOT) scheme, further raise the need to address various issues relating to both the legal and institutional aspects of the present BOT Law and its implementing rules and regulations. This Notes examines the matter more closely...BOT scheme, infrastructure development, BOT projects, BOT Law, public-private partnership (PPP), Investment Coordinating Committee (ICC)

Llanto, Gilberto M.

English

Research Papers in Economics

Reforming the BOT Law: a call of the times
Gilberto M. Llanto
Philippine Institute
for Development Studies
Surian sa mga Pag-aaral
Pangkaunlaran ng Pilipinas
Policy Notes
No. 2007-01 (October 2007) ISSN 1656-5266
ecent experience with the implemen-
tation of the build-operate-transfer (BOT)
Law indicates the need to address various
issues, starting from the legal framework to
the level of responsibilities of the govern-
ment institutions that are involved in the
project cycle, i.e., from entry level to imple-
mentation and completion. Improvements
may be done at the level of both the legal
and institutional frameworks, with the latter
referring to the role of the oversight agen-
cies and the implementing agencies.
Legal framework
On the whole, the BOT Law and its imple-
menting rules and regulations (IRR) have to
be reviewed. An indispensable condition for
the successful implementation of the BOT
Law is a legal environment where property
rights and contractual agreements are
protected and enforced. The present BOT
Law’s framework for private sector invest-
ment in infrastructure has to be clarified by
a clear allocation of roles, functions, and
duties across the spectrum of institutions.
At the minimum, an effective implementa-
tion of BOT projects hinges on the following:
(i) a legal and economic environment that is
conducive to a mutually beneficial partner-
ship; (ii) clarity in articulating the duties
and responsibilities of the parties to the
contract; (iii) certainty of recovering invest-
ments and availability of mechanisms for
dealing with risks and unforeseen events;
and (iv) transparency and credibility of the
government’s processes for review and
approval of proposed BOT projects and the
associated contracts for implementation.
R
PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-
tain policy issues. The treatise is holistic in approach and aims to provide useful inputs
for decisionmaking.
This Notes draws from Dante B. Canlas and Gilberto M. Llanto, “A Proposed BOT Bill
to Enhance Public-Private Partnership in Infrastructure Development,” unpublished
paper, 6 October 2006. The author is Senior Research Fellow at the Institute. The
views expressed are those of the author and do not necessarily reflect those of PIDS
or any of the study’s sponsors.PN 2007-01
Policy Notes
2
A primary consideration is to be able to
distinguish between the roles of the en-
abling legal framework (the BOT Law itself)
and the IRR. The BOT law should provide the
enabling framework and clearly allocate
roles, functions, powers, duties, and rights
among government agencies, namely, the
oversight agencies and the implementing
agencies involved in the project cycle. It is,
after all, a primary statute that establishes
government policy and the institutional
framework for implementing that policy.
On the other hand, the IRR are normally
technical or operational in nature. Thus,
they should never be a verbatim copy of the
enabling law. What we have now, however, is
a BOT law that contains both the enabling
policy framework and too many details that
are technical or operational in nature.
Ideally, the details should be in the IRR so
that the government may have the flexibility
to change any of them in view of rapid
changes in technology, financial markets,
and other factors that impact a BOT project.
Because it is hard to anticipate such future
changes, having a detailed BOT law may
therefore not work in favor of the country
inasmuch as the task of amending the law to
respond to changes and innovations could
be a complicated and time-consuming process.
Hence, it will be much more efficient to have
a primary statute that clearly specifies state
policy and assigns roles and functions to
government institutions and an administra-
tive procedure based on the IRR that may be
amended from time to time as the need arises.
At the same time, the past experience with
BOT implementation indicates the need to
provide a clear legal and regulatory frame-
work not only for BOT projects but also for
public-private partnerships (PPP) in general
in government infrastructure projects. Such
framework must give enough flexibility to
the implementing agencies and the oversight
body to adjust the rules and regulations
governing PPPs as may be required by the
passage of time and specific circumstances.
It would thus be useful to revisit the BOT IRR
from time to time to take into account
financial innovations and advances in
technology and engineering, among others,
which may change the investment and
implementation environment. Contract
renegotiation may also be called for and
should be provided for in the IRR. The IRR
can usually be amended more easily by way
of an administrative procedure, thereby
avoiding delays that may arise from a
usually lengthy and ponderous legislative
process.
Institutional framework
In terms of the institutional set-up, project
identification, review, and approval had
traditionally gone through the screening
process of the National Economic and
Development Authority-Investment Coordi-
nating Committee (NEDA-ICC) framework.
Under this framework, the oversight agencies
had the responsibility for project review and
approval while line agencies were respon-
sible for identifying and preparing project
proposals.PN 2007-01
Policy Notes
3
The government, however, has recently
proposed to change this framework—in
response to some concerns from certain
quarters that the approval process took so
long—by assigning to line agencies the
responsibility of identifying, selecting, and
approving projects.1 This clearly poses a
conflict-of-interest role for these agencies
because line agencies will now both identify,
review, and approve projects submitted to
the NEDA-ICC. Under the proposed amend-
ment, the line agencies will prepare and
submit their list of priority projects for
approval by the NEDA-ICC. This reduces this
oversight body into some sort of ‘clearing-
house’ for projects earlier identified as
priority by line agencies. While the intent of
the government was to facilitate the project
approval process, what it did not realize was
the conflict of interest situation to which the
change has cast line agencies. This is bad
public policy.
The government should therefore revert to
the traditional process of giving the over-
sight agencies the responsibility for project
review and approval and assigning line
agencies the role of identifying and prepar-
ing project proposals. To shorten the ap-
proval process, the endorsement by the
implementing agency of a BOT project
should already constitute a “first pass”
approval. ICC approval will be the “second
pass,” which will then mean the elevation of
the project to the NEDA Board, chaired by
the President, for final approval.
To further streamline the process, though,
certain improvements need to be made in
the overall ICC framework itself.
Aside from ensuring that the oversight
agencies (to be composed of the NEDA as
the primary agency responsible for overall
policy coordination, the Department of
Finance [DOF] and the Department of Budget
and Management [DBM]) will be responsible
for the review and approval of infrastructure
projects, it is proposed that representation
from the Department of Justice (DOJ) and
the Bangko Sentral ng Pilipinas (BSP) be
also retained to ensure that oversight
decisions conform with the country’s laws
and regulations.
At the same time, the membership of the ICC
has to be reformed by removing certain line
agencies, e.g., Department of Agriculture
(DA), Department of Energy (DOE), among
others, from the committee. This will elimi-
nate the conflict of interest situation where
line agencies that are members of the ICC
also propose projects for ICC approval from
time to time.
An effective implementation of the BOT Law
and, in general, public-private partnership
requires more accountability on the part of
the implementing agencies. Their officials
should be accountable for the procurement
contract as well as monitoring of the BOT
______________
1 Seven out of nine government agencies tasked to amend
and improve the BOT IRR have already given their approval
of this proposal. However, this amendment to the BOT IRR
together with other amendments have yet to be published in
newspapers of general circulation as required by law.PN 2007-01
Policy Notes
4
project. Monitoring requires vigilance over
delivery by the private proponent of its
contractual obligations.
The implementing agencies and the over-
sight agencies should observe transparency,
from project identification to procurement
to contract implementation. A copy of the
signed contract should be available to the
implementing agencies and the NEDA-ICC.
BOT contracts are imbued with public inter-
est and should likewise be accessible to the
public.
The government should also allow the
private proponent to levy user charges that
provide a return commensurate to the
opportunity cost of its invested funds. This
will ensure project viability. The proper
allocation of cost- and risk-sharing is
likewise vital. Some risks are uninsurable. In
this case, the partnership must allow for
some form of co-insurance that provides for
sharing of the identified risks.
Project quality at entry
Government agencies have found it difficult
to move BOT projects from the identification
to approval stage because of weak technical
capacity, and insufficient legal and financial
expertise. There are cases when a govern-
ment agency cannot even put together a
credible request for proposals, the first step
for competitive bidding, because of weak
capacities. What follows is the submission by
the private sector of unsolicited proposals.
This further burdens the ill-equipped gov-
ernment agency, which in the first place is
not capable of identifying projects for
competitive bidding. The government
agency’s inability to effectively evaluate
unsolicited bids is the source of frustration
on the part of legitimate investors; it pro-
vides as well a venue for nontransparent,
back room negotiations over ill-prepared
but politically vested projects submitted to
the agency for approval.
The lack of project identification and prepa-
ration capacity has resulted in the inconsis-
tent application of Section 4 (Priority
Projects) in the BOT process and has opened
up opportunities to crowd out projects in
the priority list. This has created the incen-
tive for the submission of unsolicited
proposals—the exceptional case under the
BOT law since there is policy preference for
solicited proposals, which will be tendered
for competition.
The NEDA-ICC has proposed the creation of a
project preparation facility since the late
1990s. Although the DBM has been support-
ive, severe budgetary constraints have
hampered the allocation of such funds to
the budget of implementing agencies. It is
timely to consider the provision of funding
for a project development facility from
budgetary resources or grant assistance
from ODA donor-partners to jumpstart the
process.
Contracts and regulation
Another difficult area is contract writing,PN 2007-01
Policy Notes
5
where implementing agencies must have a
good understanding of the obligations of
each party in a project; financial terms
(including guarantees, subsidies, or equity
to be provided if the project is eligible); and
contractual provisions on risk allocation,
including assisting the project secure
financing and ensuring its financial viability
and sustainability. Implementing agencies
do not necessarily have the skills for con-
tract writing.
The result is that during negotiations, the
implementing agencies may not be ad-
equately informed about the implications of
the contractual provisions they have com-
mitted to the private partner. Obviously, the
implementing agencies must develop capac-
ity not only for contract writing but also for
monitoring of contract implementation.
An example of a complex area is the provi-
sion on Contract Termination, a standard
provision in contracts here and abroad. The
language for the said provision should be
thoroughly understood by the government
agency concerned, reviewed and tailored to
ensure that the government’s (that is,
public) interest is protected. The private
investor interest will almost surely be
protected given their access to the best legal
advice that money can buy. On the other
hand, creditors normally demand provisions
on contract termination as a protection.
They do not lend to projects unless such
provisions are expressed with clarity and
could be enforceable.
Unsolicited proposals
There is a need to review whether or not it is
really useful to have a provision in the law
on unsolicited proposals. These have been
the source of controversy in many discus-
sions because their inclusion leads to a
situation where the element of competition
gets missing, notwithstanding the so-called
Swiss challenge that has been devised by
legislators as a “cure” to the lack of competi-
tion. Building capacities in the implement-
ing agencies for identifying projects for
competitive bidding will minimize, if not
eliminate, the need for a provision on
unsolicited proposals.
Third party evaluation of projects
It will also be good to introduce as a norm
the evaluation of projects during actual
implementation or after a period of time
following their review and approval. The
idea is to assess whether actual project
implementation delivers the development
outputs envisaged during the proposal and
approval stages or not. This should be done
by independent organizations such as
reputable research and academic institu-
tions. Relatedly, implementing agencies
should be compelled to share data to third
party evaluators.
Proposed amendments to the BOT
Law
In conclusion, it is proposed that RA 7718
be amended in pursuit of the goal of the
government to enhance PPP in infrastruc-
ture development, in general, and to pro-PN 2007-01
Policy Notes
6
mote the use of the BOT scheme and its
variants, in particular. The legal framework
must be conducive to the protection and
enforcement of property and contractual
rights, backed by a substantive and very
clear set of IRR. To make the IRR operation-
ally efficient, some institutional reforms, as
noted earlier, have to be made.
The main strategic approaches being pro-
posed to strengthen PPP and the use of BOT
are as follows:
z Transforming RA 7718 into the
principal legal framework for PPP in the
Philippines. The policy declaration in the law
must explicitly say that PPP is a develop-
ment strategy choice of the government. In
this regard, the role of the NEDA Board as
approving authority must be upheld.
z Emphasizing that competitive
bidding procedures remain the central tenet
of government procurement policy. Competi-
tive bidding enables the government to get
value for its money. The law should thus
forthrightly express the government’s
preference for competitive bidding, and
affirm that direct negotiation and unsolic-
ited proposals remain the exception.
z Asserting the sanctity of contract.
The law must affirm government’s binding
commitment to honor and defend contrac-
tual rights and obligations. The law must
also counter ruinous attacks on contracts—
especially after a relatively long period of
time has elapsed since the contract was
signed—by limiting options to annul
contracts on procedural grounds. This
includes providing for greater transparency
with regard to the content of contracts.
z Providing legal recognition to the
importance of building PPP implementation
capacity at all levels of government and
raising overall project quality. The entry point
of the private sector in partnering with the
government in an infrastructure project is at
the level of the International Accounting
Standard (IAS). In view of this, emphasis
must be given on the importance of building
and rebuilding capacity for project design
and implementation within an implementing
agency.
z Ensuring the formulation of a
substantive and operationally efficient set of
IRR. Granting that the desired legal frame-
work has been set up, the IRR with the
desired features follows as a matter of
course. The operational details must facili-
tate smooth implementation with hardly any
contractual dispute that requires court
intervention emerging.
z Requiring an independent evalua-
tion of the project during the implementa-
tion stage to assess whether it is delivering
the envisaged development outputs or not.

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Philippine Institute for Development Studies
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Telephone Nos: (63-2) 894-2584 and 893-5705
Fax Nos: (63-2) 893-9589 and 816-1091
E-mail: gllanto@pids.gov.ph; jliguton@pids.gov.ph
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Reforming the BOT Law: A Call of the Times

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Reforming the BOT Law: A Call of the Times

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