NSRP South Line: A Landmark Project for PPPs in the Philippines

09.2015
Construction Law International

This article provides a high-level summary of the legal framework for the implementation of public private partnerships (PPPs) in the Philippines. It draws upon the North-South Railway Project South Line (‘NSRP South Line’ or the ‘Project’) to illustrate the approval and implementation process of PPPs in the Philippines.

Many Southeast Asian governments have been actively looking to use PPPs to bring private sector financing and operations into much-needed infrastructure projects. The government of the Philippines is a leader in this respect. A newly industrialised country, the Republic of the Philippines is the seventh most populated Asian country and the 12th most-populated country in the world. From just 11 projects in 2010, the Philippines’ Public-Private Partnership Center has identified 56 potential PPPs, with nine of them (valued at about US$3bn or one per cent of gross domestic product) already awarded. Over the last five years, the Philippines has been one of the most successful PPP markets in Southeast Asia.

A recent report by Economist Intelligence Unit, entitled Evaluating the environment for public-private partnerships in Asia-Pacific: The 2014 Infrascope, recognised the Philippines as the most improved country in the Asia-Pacific region for PPP readiness. The report pointed out that significant regulatory reform in recent years, new bidding and selection procedures, and better dispute resolution mechanisms have resulted in the country recording the most-improved regulatory and institutional frameworks in the Asia-Pacific region.

The government of the Philippines has been working towards an improved legal framework for PPPs. Republic Act (RA) No 6957, as amended by 1994 RA No 7718, and its Revised Implementing Rules and Regulations issued in 2012 are otherwise known as the Philippine Build-Operate-Transfer Law (‘BOT Law’). The Philippines has one of the oldest BOT policies in the Asia-Pacific region and the current BOT Law provides requirements for fair, competitive bidding and rules governing transparency and oversight in the bidding process. It does not discriminate against foreign bidders and comparative bids are sought for unsolicited proposals that introduce a new technology or concept.

The BOT Law describes the requirements and procedures for the preparation, approval, tendering and implementation of PPP projects. For example, the aggregate cost of a national project determines the approval process required for implementation. Projects costing up to PHP300m must be submitted to the Investment Coordination Committee of the National Economic and Development Authority (NEDA) Board for approval. Projects costing more than PHP300m require the additional approval of the entire NEDA Board.

The BOT Law enumerates nine contractual arrangements that may be adopted in the implementation of a PPP project, including the build-transfer-and-operate (BTO) contractual arrangement. Variants of these contractual arrangements may also be approved by the President.

The NSRP South Line will be the largest PPP project ever tendered by the government of the Philippines. This PHP170.7bn (US$3.8bn as of July 2015) project was recently highlighted by the World Bank as one of 15 key projects for Association of Southeast Asian Nations connectivity. Comprising of both commuter (56 kilometres) and long-haul (653 kilometres) rail operations, the Project is intended to serve as the sole rail backbone connecting Metro Manila to currently underserved areas in Southern Luzon and promote inclusive growth.

As the NSRP South Line will cost more than PHP300m, it was submitted to the NEDA Board for approval upon the recommendation of the Investment Coordination Committee. The NEDA Board, chaired by President Benigno Aquino III, approved the Project on 16 February 2015 to be tendered either: (1) as a build-gradually-transfer-operate-and-maintain (BGTOM) contractual arrangement; or (2) as two separate build-transfer (BT) and operate-maintain (OM) contractual arrangements.

Typically in a BTO scheme, the private sector concessionaire is awarded an engineering, procurement and construction contract to build the facility on a turnkey basis, assuming all construction-related risks arising from cost overruns, delays and other performance risks connected to construction. Once the facility is commissioned satisfactorily, title will be transferred to the implementing agency. The concessionaire, however, will operate the facility on behalf of the implementing agency pursuant to the terms of a concession agreement. The concessionaire may be repaid either through amortisation or direct collection of tolls, fees, rentals and charges for a fixed term. In the former case, amortisation payments may include a management fee if the concessionaire is also the facility operator.

As for the NSRP South Line, it is expected that the Project will be awarded and implemented as a BGTOM contractual arrangement. The concessionaire will construct, operate and maintain both the commuter and long-haul railways. Title over the facility will be gradually transferred during the construction period, whereby the concessionaire will transfer the ownership of a portion of the NSRP South Line after it is constructed in exchange for a determined percentage of the construction costs. The refined repayment under the BGTOM scheme is expected to reduce finance costs that would otherwise be incurred if repayment was deferred and made available only after commissioning. The remaining balance for financing, constructing, operating and maintaining the Project will be paid through a combination of amortisation payments, farebox revenue, ancillary revenue and availability payments.

As discussed above, the BOT Law provides a valid legal framework for the government of the Philippines to implement the NSRP South Line under a BGTOM contractual arrangement.

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