There has been a decade-long attempt to revise the Build-Operate-and-Transfer (BOT) Law and transform it into a Public-Private Partnership (PPP) Law. The recent attempts to do so (i.e., Senate Bill No. 2074 or the proposed PPP Act and the proposed PPP Rationalization Act in the House of Representatives) have yet to move significantly forward.
In November, the National Economic and Development Authority (NEDA) announced that it was tasked to further amend the BOT Law’s implementing rules and regulations (IRR) to “facilitate the development of well-structured PPPs that deliver high-quality services to the people.” According to the agency, one of the objectives of the proposed amendments is to protect the government and the public from excessive payments, undue guarantees, unnecessary fiscal risk, and onerous contractual obligations arising from PPP projects.
Further amendment of the BOT IRR cannot come at a more opportune time, given the recent ratification by Congress of the Revised Public Service Act, and could serve to at least make some headway in updating the rules of the game sans the revision of the BOT Law. Section 13.3 of the current BOT IRR allows the government to provide any form of support or contribution to solicited projects such as, but not limited to: cost sharing, credit enhancements, direct government subsidy, direct government equity, performance undertaking, legal assistance, and/or security assistance. However, the total government undertakings must not exceed 50% of the total project cost. A hot topic on government undertakings is government liabilities arising from Material Adverse Government Action (MAGA). According to the World Bank’s Guidance on PPP Contractual Provisions (2019), MAGA may be defined as “any act or omission by the government contracting authority (GCA) or any relevant public authority, which occurs during the term of the PPP Contract and which directly causes the private sector partner (PSP) to be unable to comply with all or some of its obligations under the PPP Contract and/or has a material adverse effect on its costs or revenues.”
MAGA events are also referred to as political risk or political force majeure. The purpose of including a MAGA clause in a PPP Contract is to allocate political risk to the GCA, address the consequences of such risks occurring, and provide the PSP with appropriate relief and compensation. Since the PSP has little to no control over MAGA events, transferring any MAGA risk to the PSP (by unreasonably limiting the amount of compensation thereof) is likely to result in either a high-priced premium that would make the project unaffordable or an unbankable project that would fail to generate any interested bidders.
One question to ask is: would the government’s payment for MAGA be considered a government undertaking as defined under Section 13.3 of the BOT IRR? Section 13.3 makes it clear that its enumeration is by no means exhaustive. Technically, MAGA may take the form of a Performance Undertaking (Section 13.3 subsection [e]), which seems to cover a nearly similar situation, i.e., instances where another branch of government (often the Department of Finance) assumes the responsibility of performing the GCA’s obligations in the PPP Contract, including payment of monetary obligations, in case of default. Following this, MAGA may be recognized as an undertaking by the government to assure the PSP, as would a Performance Undertaking, that it will be compensated if such risk arises.
If the above view is adopted, however, two consequences arise. First, MAGA becomes a form of support or contribution that may only be extended to solicited projects. This means that original proponents of unsolicited proposals cannot be compensated for MAGA events. Second, MAGA can at most only cover liabilities up to 50% of the total project cost, since it is merely an additional form of “support” along with other government undertakings in the project (if any). Perhaps a different view may be adopted. Section 13.3 covers various forms of support or contribution to the project, which a MAGA clause is not. Instead, it is more akin to a form of compensation by way of damages arising from a contractual breach (committed by the government), where such payment is meant to indemnify the injured party (i.e., the PSP) for the damage or loss caused by the breach. As such, MAGA is more a form of penalty on government, and not an undertaking by it, for failure to abide by its obligations under the PPP contract.
This is consistent with the internationally accepted principle of MAGA compensation, which is typically required by PSPs when dealing with governments in less established markets where there is an actual or perceived increased likelihood of MAGA events or where there is a lack of track record in administering long-term contracts free from any political interference.
MAGA becomes even more of a concern for PPPs at the local government unit (LGU) level, where regime changes are much more frequent, where there’s less capacity to manage PPP contracts, and little to no funds to cover contingent liabilities. Oftentimes, PSPs in municipal PPPs are often left holding an empty bag in case the project is halted due to a regime change.
Hopefully, the implementation of the Mandanas Ruling, which increased the internal revenue allotment of LGUs, could also provide LGUs an allocation or a pool of funds that may answer for MAGA-related liabilities. The recently circulated draft proposed amendments to the BOT IRR by the PPP Center provides a definition of MAGA as well as additional provisions which classify MAGA as a government contingent liability, with the manner of compensation (including a cap) determined on a per-project basis.
Perhaps a provision that categorically indicates that MAGA clauses should not be considered a form of government undertaking would put the issue to rest. The inclusion of rules on the treatment of MAGA in the BOT IRR is as tricky as it is necessary. It must be approached with due care, otherwise we could all be paying a high price. After all, who would want to bear the consequences of the government’s failure to get its act together?
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Jose Patrick S. Rosales is a lawyer and an Infrastructure & Tax director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
jose.patrick.s.rosales@pwc.com
