NATIONAL GOVERNMENT AGENCY PUBLIC-PRIVATE PARTNERSHIP …€¦ · Corporation GSIS Government ... National Government Agency Public - Private Partnership MANUAL Volume 2 1 CHAPTER

NATIONAL GOVERNMENT AGENCY PUBLIC-PRIVATE PARTNERSHIP MANUAL

2V

OL

UM

EProject

Tenderingand

NegotiationsDRAFT

Draft Version as of 4 August 2014

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National Government Agency Public-Private Partnership

CHAPTERS

4 Overview of the Tender Procurement Process5 The PPP Contract Design - Key Considerations6 Steps and Issues Leading up to the Negotiation Stage7 Award of Contract and Implementation Steps8 Unsolicited Proposals9 Key Project Documents

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Acknowledgement

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Contents

4 Overview of the Tender/Procurement Process 1

Introduction 1 GeneralPPPProcurementProcessforSolicitedProposals 3 PPPProcurementProcessforUnsolicitedProposals 4 ManagingthePPPProcurementProcess 5 TheInformationMemorandum(otherwiseknownasthe InstructionstoBidders) 6

5 The PPP Contract Design – Key Considerations 9

Introduction 9 DesignofthePPPContract:KeyConsiderations 10 ProjectCommitteeandMeetings 11 Inspections 11 IndependentConsultant 12 Completion 13 ProtectionagainstLateorInsufficientServiceDelivery includingFailuretomeetPerformanceStandards 14 PerformanceMonitoringSystem 17 ForceMajeureEvents 17 ForceMajeureQualificationRequirements 18 ForceMajeureduringDesignandConstructionPhase 19 ForceMajeureduringOperatingTerm 19 MitigationofForceMajeureEffects 19 EffectonGovernment’sStep-InRights 20 TerminationEventforForceMajeure 20 MaterialAdverseGovernmentAction 20 ThresholdforCompensationforMaterialAdverseGovernmentAction 21 CircumstancesofStep-In:GovernmentandLenders 21 CostofStep-In 22 LiabilityorLimitationonGovernment’sRights 23 Stepping-Out 23 Insurance 24 Default 26 TerminationEvent 27 TerminationforForceMajeureandUninsurability 28 VoluntaryTermination 29 TerminationforGovernmentDefault 29

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ProcedureforTerminationEvent 29 ConsequencesofaTerminationEvent 29 TerminationPayments 29 DefaultTerminationCompensationAmount 30

6 Steps and Issues Leading Up to the Negotiation Stage 33

ClarificationorRejectionofProposals 33 RankingofallResponsiveBidsfromQualifiedBidders 34 DirectNegotiation 34

7 Award of Contract and Implementation Steps 37

PBACRecommendationtoAward 37 NoticeofAwardtoWinningBidder 37 FormationofaSpecialPurposeCompany(SPC) 38 Withdrawal/SubstitutionofaMember 39 ValidityofBids/ReturnofBidSecurity 39 Execution/ApprovaloftheContract 39 GrantofFranchise 40 NoticetoCommence 40

8 Unsolicited Proposals 41

ProcessingUnsolicitedProposals 41 PPPProcessforUnsolicitedProposal 42 PostTenderClarificationandNegotiation 49 PreparationsfortheNegotiationofthePPPContract 49 “CheckandBalance”oftheSupplementaryDocumentsinUnsolicited Proposals 51

9 Key Project Documents 53

ThePPPContract 54 AncillaryAgreementstoPPPContracts 55 ProjectFinanceVariationsinCostStructure 64

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Boxes, Figures, Tables

Box2.1 Non-RequirementofPerformanceSecurity 16Box2.2 ParentGuarantees 16

Figure2.1 PPPProcurementStageinthePPPCycle 2Figure2.2 PPPProcurementProcessOptionsforSolicitedProposals 3Figure2.3 OutlineofthePPPProcessforUnsolicitedProposals 43Figure2.4 IdealConcessionArrangements 10Figure2.5 GeneralStructureofaPPPConcessionContract 53 Table2.1 CoverageofVolume2 3Table2.2 AdvantagesandDisadvantagesofProcurementProcessOptions 4Table2.3 ElementsofDocumentationforPre-andPost-Tender 51

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Acronyms

BOT Build-Operate-and-TransferBTO Build-Transfer-and-OperateCOA CommissiononAuditDED DetailedEngineeringDesignDENR DepartmentofEnvironmentandNatural ResourcesDOF DepartmentofFinanceEPC Engineering,Procurementand ConstructionESIA EnvironmentalandSocialImpact AssessmentFM ForceMajeureGOCC GovernmentOwnedandControlled CorporationGSIS GovernmentServiceInsuranceSystemIA ImplementingAgencyIC IndependentConsultantICC InvestmentCoordinationCommitteeIDC InterestDuringConstructionIRR ImplementingRulesandRegulationsKPIs KeyPerformanceIndicatorsL/C LetterofCreditLD LiquidatedDamagesLGUs LocalGovernmentUnitsMAGA MaterialAdverseGovernmentActionMPSS MinimumPerformanceStandardsand SpecificationsNGA NationalGovernmentAgencyNEDA NationalEconomicandDevelopment AuthorityO&M operationsandmaintenanceOBA output-basedaidODA OfficialDevelopmentAssistanceOGCC OfficeoftheGovernmentCorporate Counsel

OSG OfficeoftheSolicitorGeneralPhilGEPS PhilippineGovernmentElectronic ProcurementSystemPMS PerformanceMonitoringSystemPPP Public-PrivatePartnershipPPPC PPPCenterRA RepublicActSCBA SocialCostBenefitAnalysisSPC SpecialPurposeCompanyTRB TollRegulatoryBoardUNDP UnitedNationsDevelopment Programme

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NationalGovernmentAgencyPublic-PrivatePartnershipMANUALVolume2 1

CHAPTER 4Overview of the Tender/Procurement Process

4.1 Introduction

Afteranimplementingagency(IA)obtainsapprovalofitsproposedPPPprojectfromtheApprovingBody,theproject

enterstheprocurementstageofthePPPprocess.ThekeyobjectivesoftheIAatthisstageofthePPPprocessaretoensure:

1. Adherencetotheprinciplesoftransparencyandequaltreatmentofbidderstobolstertheprofessionalismand

legitimacyoftheprocess;

2. Adequatecompetitivetensionbetweenbidderssoastoarriveatthebestbidfromthemostcompetentbidder;

3. Minimizecostanddelayswithoutsacrificingtherigororqualityoftheprocess;and

4. Selectionofabid.

ThePPPprocurementstagestartsattheadvertisementandendsatthestartofconstruction/groundbreaking.Construction

orimplementationbeginssoonafterfinancialclose(seeFigure2.1).

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2 NationalGovernmentAgencyPublic-PrivatePartnershipMANUALVolume2

Figure 2.1 PPP Procurement Stage in the PPP Cycle

AtStage3,thelevelofinteractionbetweentheIAandtheprivatesectorincreasesdramaticallywithdetailedinformation

abouttheprojectgiventopotentialbiddersandintheprocess,informationonpotentialbiddersisrevealedaswell.This

leadstoanimportanttaskofmanagingtheflowofinformationbetweentheIAandinterestedprivatesectorbiddersto

ensuretransparencyandadequatecompetitivetensionintheprocurementprocess.

ThischapterprovidesaverybriefoverviewofthePPPprocurementprocessinthePhilippinesprescribedundertheRevised

IRRoftheBOTLaw.Thesucceedingchaptersinthisvolume(seeTable2.1)willthendiscussbasiccontractandnegotiation

principlesthatwouldhelpIAsindealingwithissuesthatmayariseintheprocurementprocess.

Stage 1: Identification, Selection and Prioritization

Stage 4: Implementation, Operations and Handover

Stage 2: Project Preparation, Evaluation & Approval

Stage 3: Project Tendering and Negotiation(PPPContractandKeyDocuments,Negotiations)

Project Roll-out/Advertisement

Prequalification and/or Tendering, Submission and Receipt of Bids

Bid Evaluation

Award of Contract / Notice to Proceed

Finalize PPP Contract

Financial Close

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Table 2.1 Coverage of Volume 2

Figure 2.2 PPP Procurement Process Options for Solicited Proposals

4.2 General PPP Procurement Process for Solicited Proposals

Therearetwooptionsforundertakingtheprocurementofsolicitedproposals.Thefirstoption(atwo-stageprocurement

process)requiresapre-qualificationprocessbeforethe issuanceoftherequest forproposals.Thesecondoption isan

abbreviated (single-stage) process wherein the IAmay opt to do a simultaneous qualification/request for proposals

insteadofundertakingapre-qualificationprocess.Underthesimultaneousqualificationprocess,thebiddersareaskedto

submittheirqualificationrequirementsalongwiththeirbidproposalsonthefinancialandtechnicalaspectsoftheproject.

Figure2.2depictsthisprocess.

Section Topical Coverage

Chapter5 The PPP Contract Design: Key Considerations -Asthedraftcontractformsakeypartofthetenderdocumentation,thischapterprovidesanunderstandingofPPPcontracts,theirstructureandhowtheyworkandtheprocessofdraftingaPPPcontract.

Chapter6 Steps and Issues Leading up to Negotiation -ThischapterdealswithmanagingtheinterfacewiththeprivatesectorduringthestagewheretheIAundertakesthenecessaryduediligencebeforetherecommendationforawardofacontract.

Chapter7 Award of Contract and Implementation Steps -Afterfinancialevaluation,theIA’sPre-qualification,BidsandAwardsCommittee(PBAC)needstosubmitarecommendationofcontractawardandthischapteroutlinesthestepsrequired.

Chapter8 Unsolicited Proposals -Whilethegovernmentrecognizestheroleofprivatesectorinitiativesthroughunsolicitedproposals,therearehoweverstrictprovisionsthatenablethemtobeconsideredonlyonanegotiatedbasisinexceptionalcases.Thischapterdiscussestheseprovisions.

Chapter9 Key Project Documents -ThischapterdiscussesfeaturesofPPPprojectsandtheissuesthatIAsmayfaceafterthecontractawardwhenkeycontractdocumentsstartcomingtogetherandthepartiesprepareforfinancialclose.

Award ofContractBid EvaluationPre-Qualification

Advertisement / Invitation to

Pre-Qualify & Bid

Advertisement / Invitation to Bid

Tendering, Submission,

Receipt &Opening of Bids

Tendering, Submission,

Receipt &Opening of Bids

Two-StageProcess

Single-StageProcess

Award ofContract

Bid Evaluation

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Bothoptionshavetheirownadvantagesanddisadvantagesandthechoiceofprocurementprocessmaywelldependon

thestrategyoftheIAandthelevelofinterestshownbytheprivatesectorduringthemarketsoundingexercise.Theoverall

keyobjectiveistoattractalargeenoughnumberofbidderstoensurestrongcompetition.Thetablebelowprovidesa

summaryoftheadvantagesanddisadvantagesofthetwoprocurementoptionsandconsiderationsinchoosinganoption.

4.3 PPP Procurement Process for Unsolicited Proposals

TheRevised IRRof theBOTLawprescribesaprocess for theawardofunsolicitedproposals.Theprocess isdescribed

brieflyhereandinmoredetailinChapter8.AftertheApprovingBodyclearstheprojectfortender,theHeadofAgency

negotiatestheprojectscopeandcontractbasedoncontractparameterssetbytheICC.Oncethedraftcontractisreviewed

Procurement Process Advantages Disadvantages

Remarks/Considerations

Two-StageProcess • Discouragesbiddersthatareunlikelytodelivertheproject

• Createsmorecompetitivetensionasnumberofbiddersisreduced,providinganincentivetopre-qualifiedbidderstoputmoretimeandeffortintotheirsubmittedbid

• Maypresentthepossibilityofcollusionamongalimitednumberofpre-qualifiedbidders

• Subjectivescoringonthequalitativecharacteristicsofbidders,whichmaybechallengedtherebyfurtherlengtheningtheprocurementprocess

• Atthepre-qualificationprocess,IA’sevaluationfocusisonthequalityandthecapacityofthebidders

• Suitableforprojectswhereitisdesirabletohavebiddersthatpossessaleveloftechnicalskillsandpreviousconstructionoroperationalexperience

• Suitablewhenthereisalargenumberofprivatesectorentitiesthatarelikelytobid

• Alsosuitablewhenthenumberofpotentialbiddersislargelyunknownastheinvitationtopre-qualifycouldhelptestthelevelofinterestandavailabilityofpotentialbidders

• Appropriatewhentheprojectscopewouldneedtobefurtherrefinedordiscussedwiththeprivatesector–typicaloflargeorcomplexprojects

Single-StageProcess

• Shorterprocurementprocess,thusappropriateiftheprojectisunderatighttimeframe

• Attractswiderrangeofbidders

• Timeandeffortcanbewastedinevaluatingbidsfrombiddersthatmayclearlybeunlikelytodelivertheproject

• Unrealisticbidsofunqualifiedbidderscancrowdoutbetterbidders

• Suitableforsmallerprojectswhennumberofbiddersisrelativelyknownorthereisalimitednumberofprivateentitiesthatarelikelytobid,thusnotnecessarytoreducethenumberofpossiblebidders

• Appropriatewhentheprojectscopeandservicedeliveryoptionsareclearandwell-defined

• MaybeappropriateiftheIAhasfundlimitationsrelatedtotheprocurementprocess

Sources:UNDPPPPforUrbanEnvironment(http://pppue.undp.2margraf.com/en/16_2.htm);PPPToolkitinIndia–SolidWasteManagementSector(http://toolkit.pppinindia.com/solid-waste-management/module2-leapsfp-dotpp.php?links=ctbspm1b)andE.Farquharson,C.deMastle,andE.R.Yescombe(2011).HowtoEngagewiththePrivateSectorinPPPinEmergingMarkets,WorldBankandthePublic-PrivateInfrastructureAdvisoryFacility.

Table 2.2 Advantages and Disadvantages of Procurement Process Options

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Figure 2.3 Outline of the PPP Process for Unsolicited Proposals

Submission of Complete Proposal Invitation for ComparativeProposals

Evaluation of proposal by IA Preparation & submission of comparative proposals

Original proponent Right to Match

Negotiations after Original Proponenthas been Pre-Qualified Evaluation of proposals of Challenger/s

Award of contract

Adjustment of Terms / Fees / Rentals / Charges Determination of Winning Proponent

Acceptance of Terms & Conditions by Proponent

Approval by Approving Body

1 7

2 8

3 9

4 10

5 11

6 12

bytheOfficeoftheSolicitorGeneralorOfficeofGovernmentCorporateCounsel,andDOF(ifnecessary)andsubsequently

approvedbytheIA,acertificateofnegotiationissigned.Anelementofcompetitionisinjectedintheunsolicitedproposal

processthroughaSwissChallenge.TheagreementsonthedraftcontractformthebasisfortheSwissChallengeorthebid

termsofreferencewhereincomparativeorcompetitiveproposalsaresolicitedfromchallengers.

Proposalsfromchallengersarecomparativeiftheymeettheminimumtechnicalrequirements,andarecompliantwith

theprescribedtermsandconditionsofthebidtermsorreference;andarecompetitive if thefinancialproposaloffers

bettervalue,asdefinedinthebidtermsofreference.Ifthechallengerssubmitabetterproposal,theoriginalprivatesector

ProjectProponentisthengiventherighttomatchthelowestbid.Figure2.3presentstheoutlineoftheprocessbasedon

theRevisedIRRoftheBOTLaw.Chapter8ofthisManualdiscussesindetailtheprocessforUnsolicitedProposals.

4.4 Managing the PPP Procurement Process

AttheprocurementstageofthePPPproject,thePre-qualification,BidsandAwardsCommittee(PBAC)isresponsiblefor

overseeingallaspectsofthepre-biddingandbiddingprocessincludingthatoftheSwissChallengeprocessforunsolicited

proposals.AsindicatedinRule3oftheRevisedIRRoftheBOTLaw,thePBACiscomposedofthethirdrankingregular

officialof the IA; technicalexpertson legal, technicalandfinance; representatives fromtheprivatesector (contractors

associationandfacilityusers);arepresentativefromtheCommissiononAudit(COA);andarepresentativefromthePPP

Center.Therepresentativesfromtheprivatesector,COAandthePPPCenterareconsiderednon-votingmembers.

Thekeytasksundertheprocurementstagecanbebrokendownintotwophases:(i)BiddingProcess(fromProjectRoll-out

totheAwardofContract/NoticetoProceed)and(ii)FinalizationofthePPPcontractandFinancialClose.

At thebiddingprocessphase, the PBAC’s objective is to ensure that theprocurement activities complywithwhat is

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prescribedbytheRevisedIRRoftheBOTLaw.Thisiscrucialnotonlyfortheprojecttoachievevalueformoneybutalso

toensurethat legalchallengesandcostlydelaysareavoided.AbigpartofthePBAC’seffortsduringthisphaseofthe

procurementprocessliesinensuringthatcomparablebidsarereceivedandthatwell-qualifiedbidderssubmitquality

bids.ThiswouldentailundertakingadequateduediligenceasdiscussedinChapter8.

Oncethecontracthasbeenawarded,theobjectiveofthePBACinPhase2istofacilitatethefinalizationofaPPPcontract

thateffectivelyleadstofinancialclose.Chapter5providesdetailsonthekeyclausesofaPPPcontractwhileChapter7

providesamorethoroughdiscussionontheissuesthatmayarisebeforereachingfinancialclose.

4.5 The Information Memorandum and Instructions to BiddersTheProjectInformationMemorandumisthedocumentissuedbytheIAtodescribethePPPprojectandthePPPtransaction

that is being tendered to themarket. The development and provision of an InformationMemorandum is standard

internationalpractice.ItisadocumentthatthemarketexpectsfromtheIAwhenaPPPtransactionistobetendered.Itis

akeyaspectofthetransactiontransparencyarrangementstheGovernmentofthePhilippinesputsintoplace.

The InformationMemorandumdoesnothavea standard format,but thereareexpectationsabout the information it

shouldcontainattheminimum.AhighstandardInformationMemorandumwillprovidedetailsaboutthefollowing:

a) ProjectDescription:Typeofinfrastructureproject,theactualPPPtransactionproposed,theprojectdemand

andkeydemandfigures,thestandardsandspecifications,thescopeoftheprojectdesign.

b) Theprincipalriskallocationarrangementsfortheproject.

c) TheProjectImplementingAgencyandtheirroleandresponsibilities.

d) The legal frameworkforthePPPContract, includingaspecificstatementthattheprojectshallbeproposed

underRepublicAct6957,asamendedbyRepublicAct7718anditsIRR,contractualarrangements,thedraftPPP

ContractitselfandtheMinimumPerformanceStandardsandSpecifications.

e) Theprojectpackagingarrangements– landavailability, the formofGovernmentcontribution, resettlement

issues,environmentalissuesandclearancesandotherkeygovernmentpermissions/licensesthatarerequiredfor

theproject.

f) Bidderqualificationcriteria.

g) The taxation and investment regime of the Philippines with reference to relevant laws and responsible

departments. Foreign Investment constraints, including restrictions on foreign ownership or operation of

infrastructurearealsosetoutforthemarket.

Diagrams(includingprocessesanddecisionprocesses),keyfactsabout,andmapsof,theprojectlocationandalignments

arecriticaltothestructureandclarityoftheInformationMemorandum.

ThisissupplementedbyInstructionstoBidders,whichshallincludethefollowingminimuminformation:1

a. Bidsubmissionproceduresandrequirements,whichshallincludeinformationonthemannerofbidsubmission,

thenumberofcopiesofthebidproposaltobesubmitted,wherethebidsaretobesubmitted,thedeadlineforthe

submissionofbids,permissiblemodeoftransmissionofbidproposals,etc.;InvestmentIncentivesandGovernment

Undertakings;Bidsecurityandbidsecurityvalidityperiod;

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1Section4.2oftheImplementingRulesandRegulationsofRepublicAct7718

b. Milestones;

c. Methodandcriteriafortheevaluationofthetechnicalcomponentofthebids;

d. Parametersandcriteriaforevaluationoffinancialcomponentofthebids;

e. Anyoneormoreofthefollowingcriteriamaybeusedintheevaluationofthefinancialcomponentofthebid

fordeterminingthemostadvantageousbidfortheGovernment:

i. Lowestproposedtoll,fee,rentalorchargeatthestartofprojectoperation,ifapre-agreedparametrictariff

adjustmentformulaisprescribedinthebiddocument;

ii. Lowestpresentvalueofgovernmentsubsidytobeprovidedfortheperiodcoveredbythecontract;

iii. Highest present value of proposed payments to Government, such as: concession fees, lease/rental

payments,fixed/guaranteedpayments,and/orvariablepayments/percentagesharesofrevenuefortheperiod

coveredbythecontract;or

iv. AnyotherappropriatefinancialbidparameterasmaybeapprovedbytheApprovingBody.

f. MinimumamountofequityasprescribedbytheApprovingBody;

g. Formulaandappropriateindicestobeusedintheadjustmentsoftolls/fees/rentals/charges,whenapplicable.

Saidformulashalltakeintoaccountthereasonablenessofthesametousersoftheproject/facilityunderbidding;

h. Requirementsof concerned regulatorybodies, suchas,butnot limited to: theDepartmentofEnvironment

andNaturalResources(DENR),fortheissuanceofanEnvironmentalComplianceCertificate(ECC);NationalWater

Resources Board (NWRB), for the issuance of theWater Permit; the PCAB, for the registration requirements of

Contractors;and,theTollRegulatoryBoard(TRB),forthereviewoftollratesandadjustmentformula;

i. Requirementsandtimelines/milestonesofconcernedAgenciesingrantingoffranchise,ifapplicable;

j. CurrentrulesandregulationsoftheCentralBankofthePhilippines;

k. Revenuesharingarrangements,ifany;and

l. Expectedcommissioningdate.

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CHAPTER 5The PPP Contract Design – Key Considerations

5.1 Introduction

ThedraftPPPcontractisakeybiddocumentwhichallowsprospectivebidderstoreviewtheproposedtermsandconditions

andstructuretheirbidsaccordingly.ThepurposeofthischapteristoprovideanunderstandingofPPPcontracts,andan

understandingofthetypesofPPPcontracts,theirstructureandhowtheywork.

TheRevisedIRRoftheBOTLawdefinesaseriesofpotentialcontractualarrangementsforPPPstructures.Thesestructures

andtheirapplicabilitytoprojectsandrisktransfersaresetoutinVolume1oftheManual.

IntheprocessofdraftingaPPPcontract,thereareanumberofsignificantquestions/issuesthatneedtobeaddressed

tohelptheIAtodevelopaPPPcontractfittingforthetransaction.TheapprovalbytheNEDAICCoftheprojectandthe

proposedriskallocationprovidesfundamentalguidancetotheIA.

TheprocessofdraftingaPPPcontractwilladdressthefollowingkeyconsiderations:

1. Policyquestionsareidentifiedandanswered;

2. AllocationofriskadequatelyconsiderstherecommendedtransactionandFSisconsistentwiththeNEDAstandard

riskallocation;

3. Theconditionsprecedentareidentified;

4. Theroleoftheregulator(ifany);

5. Thestructureofthecontractismappedout;

6. Restrictionsthatexistintheblackletterlaw;and

7. Takeintoaccountwhathasbeendonebefore;whatotherprojectshavebeendone;whatisabouttobedone;and

identifylessonslearnedfrompriorexperience.

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ThestyleofdraftingisimportantandthePPPcontractmusthaveclarityandgoodstructure.Modernandplainlanguage

expressionispreferredasinternationalcompaniesarelookingforinternationalstandarddraftingandstyleinconcession

contracts.

ThestructureofaPPPconcessioncontractwillvaryfromprojecttoproject,butthegeneralapproachtocontractstructuring

canbepatternedafterthefollowingmodelinFigure2.4.

Figure 2.4 Ideal Concession Arrangements

5.2 Design of the PPP Contract: Key Considerations

Oneof the key aspectsof a PPP contract is appropriate allocationof risk for infrastructure construction anddelivery.

ConstructionriskisoneofthemostcommonlytransferredriskstotheProjectProponent.Inprinciple,theProjectProponent

isresponsible,atitsowncost,forconstructingthefacilityinaccordancewiththeMinimumPerformanceStandardsand

Specifications(MPSS)andotherrequirementsofthePPPcontractandwithintherequiredtimeperiod.

5.2.1 Construction Obligations

TheProjectProponentshallbearallcostsrelatedtotheconstructionofthefacility,asspecifiedinthePPPcontract.The

obligationsastofitnessforpurposewillalsoapplytoconstructionofthefacility.TheProjectProponentisnotrelievedof

itsobligationsandliabilitiesunderthePPPcontractbytheprivatepartiessubcontractingtheperformanceofanyworks.

Pre-Construction Period(ROW & DED) Construction Period Operation Period

Turnover

Asset transfer to IA

construction performance security

Construction insurance etc - up to CFC

construction performance security (12 months past CFC)OR

operation performance security

operation performance security

Operation: Property insurance etc - from CFC issue

defects liability

security double up period

defects security

Use right for Concessionaire & service charging

Issue Franchise Issue of NTP Issue CFC 2 inspections

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5.2.2 Construction Updates and Reports

Provision of construction progress reports

During the construction phase, the Project Proponent must provide government with written reports outlining the

progress of theworks by reference to the construction program, certified by an Independent Consultant (described

furtherbelow).The formof theconstructionprogress reportwillbeagreedwithgovernment,basedonan indicative

reportpreparedbytheProjectProponentpriortocontractexecution.

Effect of government involvement

Theprovisionofprogressreportsorupdatedconstructionprogramsandtheiracceptance(orotherwise)bygovernment

doesnotrelievetheProjectProponentofitsconstructionandcompletionobligations.

5.3 Project Committee and Meetings

5.3.1 Role of the project committee

AsmentionedinVolume1,Chapter3.2.1,itisadvisablefortheIAtoset-upaProjectSteeringCommitteetooverseethe

PPPprocess.Theprojectcommitteewillmeetregularlytodiscussanymattersrelatingtotheproject, includingissues

relatingtothedifferentphasesoftheproject(fromthepre-effectivephaseuptoandincludingtheturnoverphase)aswell

asissuesofpublicconcern,contractmonitoringandcommunityandmediarelationsissues.

TheProjectSteeringCommitteedoesnothaveanylegalresponsibilitytoeithertheProjectProponentorgovernmentand

willnothavethepowertorequireeitherpartytoactorrefrainfromactinginissuesassociatedwithsub-contracting.The

committee’sdecisionswillnotaffecttherightsorobligationsofeithertheProjectProponentorgovernmentunderthe

ProjectDocuments.

5.3.2 Composition of the project committee

AlthoughtheProjectSteeringCommittee’sformandmake-upmayvaryfromprojecttoproject,typicallythiscommittee

willcompriseoftheIA’sHeadofAgencynominee(referredtoastheProjectDirector)aschairperson,tworepresentatives

oftheProjectProponentandrepresentativesofgovernmentoversightagenciessuchasthePPPCenter(seeTable1.8in

Chapter3,Volume1forteamcomposition).Eachpartypaystheirownexpenses.TheIA’sPPPUnit/Teamprovidessupport

totheProjectCommittee.

TheProjectProponentmustensure that theProject SteeringCommittee’s chairperson is afforded theopportunity to

attendsitemeetingsinrespectoftheworks.

5.4 Inspections

5.4.1 Government’s right to inspect and test

AccordingtoSection12.10oftheRevisedIRRoftheBOTLaw,thegovernment(includingitsauthorizedrepresentative)

hastherighttoenter,inspectandtestanypartoftheworksduringtheconstructionphaseandtoinspectanydrawings,

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documents,testresults,samplesandspecificationsusedinrelationtosuchworks.Exceptinthecaseofanemergency

(wherenopriornoticeisrequired),governmentmustgivereasonablepriornotice.TheProjectProponentmustprovide

allreasonableassistancerequiredbygovernment.

Whenexercisingitsrighttoenter,inspectandtest,governmentmustprovidewrittennoticeofatleast3-workingdays

(orasmaybeagreedwiththeProjectProponentpriortoentrance,inspectionortesting)soasnottocauseunnecessary

disruptiontotheProjectProponent,anysub-contractororanyotherauthorizeduserofthesiteandwillcomplywiththe

reasonablesafetyandsecurityrequirementsoftheProjectProponentortherelevantconstructionsub-contractorthatare

notifiedtogovernmentbytheProjectProponent.

Thecostofanygovernmentinspectionandtestingwillbebornebythegovernmentunlesstheinspectionortestshows

thatthedesignand/orconstructionisnotconsistentwiththeMPSSorotherrequirementssetoutinthePPPcontract.

5.5 Independent Consultant

AnIndependentConsultant(IC)isoftenengagedinPPPcontractsinthePhilippines.Insomeothercountriestheposition

isreferredtoastheIndependentReviewer.

TheroleoftheICistoprotecttheinterestsoftheprojectitself.Theroleisdirectlyasitisstated:anIndependentConsultant

thatadvisesbothpartiestothePPPconcessionabouttheimplementationofthecontract.TheICmaybeengagedforthe

constructionperiodandinsomecasesforthedurationofthePPPconcession.

Keyaspectsofthisroleare:

1. ToreviewtheprojectDEDsubmittedbytheProjectProponenttoensurethat itconformstotheMPSSpriorto

construction;

2. Toadviseonconstructionofaproject,asapplicable,andcompliancewiththeprojectDEDand/orMPSS;

3. TosignofftheCertificateofFinalCompletion;

4. Tomonitordeliveryoftheprojecttoensurethatitisontimeandatbudget;

5. Toadviseoncontractvariationsandtheirimplications;and

6. Tohelpresolvedisputesspecifiedintheappointmentdocument.

International practice is to jointly appoint the IC following agreement between the Contracting Agency, the Project

ProponentandtheICitself.Appointment/procurementoftheICshouldideallycommenceaftertheawardofthecontract.

SpecificprovisionsoftheIC’sprocurement/appointmentshouldbeclearintheconcessioncontract.Rightsandduties,

andprocessandmechanisms,arecontainedinasideagreementsignedbythethreepartiesasatripartiteagreement.A

sideagreementisgenerallyrequiredbecausetheICcannotbeapartytothePPPconcessioncontract.

IfanIChasbeenappointedwithadutyofcaretoeachofthepartiestoactprofessionallyandindependently,theICmaybe

assignedthefunctionofdeterminingentitlementtoreliefarisingfromaforcemajeureevent.Thisisparticularlythecase

whereanICisappointedtomonitortheprogressoftheworksinaccordancewiththeirrelevantexpertiseandknowledge

ofthetimerelatedaspectsoftheproject.

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If the ICdeterminestheentitlementto forcemajeure, thenhe/shemustdosoactingreasonablyand, ifdisputed, the

matterwillbereferredtoanindependentexpertforresolution.

5.6 Completion

ForCompletiontobeachieved,anumberofcriteriawillneedtobemet,including:

1. Theworksmustbecompletedexceptforminordefectsandthefacilitymustbefitfortheintendedpurposes;

2. AllcommissioningtestsmustbecarriedoutinaccordancewiththeMPSSandthecommissioningplan;

3. All consents, approvals, authorizations and certificates required for the facility tobeoccupiedandused for its

intendedpurposes(includingacertificateofoccupancy)mustbeobtainedandcompliedwith;

4. Allconstructionmachinery,equipmentandmaterialsandwastemustberemovedfromthesite;

5. TheProjectProponentmustprovidethegovernmentwithallas-builtdocumentationincludingmaterialdocuments,

designwork,relevantreportsandas-builtdrawings;

6. The Project Proponent must have issued and provided to the government the operation performance bond

requiredundertheconcessioncontract;

7. The Project Proponentmust have provided copies of relevant insurance policies applicable to the operations

period;and

8. AllothertestsandrequirementsrequiredtosatisfytheIndependentConsultantthatoperations(inaccordance

withtheMPSS)cancommencemusthavebeensatisfied.

Withina specifiedperiodafter completionhasbeen reached, the IndependentConsultantmust issueaCertificateof

Completionandprovideadviceofanyminordefects remainingoutstanding. If the IndependentConsultantdoesnot

considerthatcompletionhasbeenachieved,he/shemustpromptlynotifytheProjectProponentandthegovernment;

CertificateofCompletionwillnotofitselfbeevidencethatanyworkshavebeencarriedoutinaccordancewiththePPP

Contract.

5.6.1 Failure to meet Completion

AnEventofDefault(allowingtheProjectProponentacureperiod)willoccurif:

1. TheProjectProponentfailstoreachcompletionbythedateforcompletion;or

2. AnICconsiders(onorafteraspecifiedperiodafterthesiteismadeavailabletotheProjectProponent)thatthereis

noreasonableprospectthattheProjectProponentwillachievecompletionbythedateforcompletion.

Further,ifthefacilitydoesnotbecomeavailablebytheLongstopDate2,andiftheIndependentConsultantdetermines(on

orafteraspecifiedperiodafterthesiteismadeavailabletotheProjectProponent)thatthereisnoreasonableprospect

thattheProjectProponentwillachievecompletionbytheLongstopDate,thiswillconstituteaDefaultTerminationEvent.

5.6.2 Minor Defects

Completionisnotachieved(andpaymentoftheservicefeedoesnotcommence)untilallidentifieddefectshavebeen

2LongstopdateisthatdatebywhichtimetheIAcanissueaNoticeofTerminationduringtheconstructionperiodforfailuretocompleteconstruction.ItisthedatespecifiedinthecontractwhenconstructionmustbecompletedordefaultoccursandaTerminationNoticecanbeissued.

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rectified.Theonlyexceptionsareminorpunchlistomissionsordefectswhichindividually,orinaggregate,donotprevent

thefacilityfrombeingusedforitsintendedpurposes.Althoughtheycannotbeimmediatelyrectified,rectificationcan

beachievedwithinanagreedperiodfollowingcommencementofoperationswithouthavinganadverseeffectonthe

facility.

WheretheProjectProponentfailstorectifythesedefects,thegovernmentmayeitherdirectrectificationbytheProject

Proponent(inwhichcaseafurtherdefectsliabilityperiodwillapplytosuchdefect),ormayitselfrectify(orhaveathird

partyrectify)suchdefectsattheProjectProponent’scost.SuchamountshallbeadebtdueandpayablebytheProject

Proponenttothegovernment.Thegovernmentmaysetoffsuchamountsagainstamountsowingtoitormakeademand

forsuchamountunderanyperformancebondprovidedinrespectoftheproject.

5.7 Protection against Late or Insufficient Service Delivery including Failure to meet Performance Standards

AspartoftheriskallocationthatoccursinaPPPtransaction,theProjectProponenthasanobligationtoperformagainst

thePPPContract.Toensuretheperformanceobligationsaremet,severalmechanismsareusuallyputintoplaceunderthe

PPPContract.Inprinciple,wherenon-paymentoftheservicefeeisinsufficienttocompensategovernmentforcostsand

lossesincurredasaresultoflateorinsufficientdeliveryofthefacilityorservices,thegovernmentwillrequireadditional

protectionfromtheProjectProponentsuchasliquidateddamages,performancebondsorparentguarantees.

5.7.1 Liquidated damages

Thegovernmentmayseekthepaymentof liquidateddamages(orKPIcharges)fordelayindeliveryofthefacilityand

complianceshortfall in theMPSSand/orKeyPerformance Indicators (KPIs). It isprovidedbyPhilippine lawthat those

whointheperformanceoftheirobligationsincurdelayorwhoinanymannercontravenethetenorthereofareliablefor

damages.3

Exceptasprovidedbylaworbystipulation,thegovernmentmayseekactualorcompensatorydamages,whichmeans

adequatecompensationonlyforsuchmonetarylosssufferedanddulyproved.4

Incasesofbreachofcontract,wherethepartyindefaultactedinliabilityforactualorcompensatorydamages,liquidated

damagesshallbelimitedtothosethatarethenaturalandprobableconsequencesofthebreachoftheobligation,and

whichthepartieshaveforeseenorcouldhavereasonablyforeseenatthetimetheobligationwasconstituted.5

UnderPhilippinelaw,liquidateddamagesarethoseagreeduponbythepartiestoacontracttobepaidincaseofbreach

thereof.6TheRevisedIRRoftheBOTLawprovidesthatwheretheProjectProponentfailstosatisfactorilycompletethe

workonorbefore completiondate, including any extensionorgraceperioddulygranted, ormeet theperformance

standardasprescribedinthecontract,wherePhilippinelawgoverns,theProjectProponentshallpaythegovernment

liquidateddamages,asspecifiedinthecontractasanindemnity.7

3NewCivilCodeofthePhilippines(CivilCode),Article1170.4CivilCode,Article2199.5CivilCode,Article2201.6CivilCode,Article2226.7RevisedIRRoftheBOTLaw,Section12.14

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AlthoughtheRevisedIRRoftheBOTLawindicatesthatitisnotapenalty,underPhilippinelaw,liquidateddamagesare

understoodtocoverpenaltyorindemnity.8

a. Rate of liquidated damages

Duringtheconstructionperiod–Theamountof liquidateddamagesdue foreverycalendardayofdelaybeyondthe

completiondatewillbedeterminedbytheIAbasedonaformulastipulatedinthecontract.

Duringtheoperationperiod–Theamountofliquidateddamages,whichwillbedeterminedbytheIA,shallbebasedon

theprincipleoffaircompensationfordamageswhichitwillsustainasaresultoftheProjectProponent’sfailuretomeet

itsobligations.9

Decided cases indicate that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably

reducediftheyareunconscionable(i.e.,soharshsoastobecontrarytogoodintent).

b. Operation of Liquidated Damages as a Remedy

IftheProjectProponentfailstosatisfactorilycompletetheworkonorbeforecompletiondate,includinganyextension

orgraceperioddulygranted,ormeet theoperatingperformance standardasprescribed in the contract, theProject

ProponentshallpaytheAgency/LGUconcernedliquidateddamages,asspecifiedinthecontractasanindemnityandnot

bywayofpenalty.10ThisisnotasoleremedyandtheIAisabletotorescindthecontract.

c. Security for liquidated damages

GovernmentgenerallyrequirestheProjectProponentorcontractortoprovidesecurityforliquidateddamagesthrough

bonds or guarantees. The Revised IRR of the BOT Law requires the Project Proponent to post separate performance

guarantees for constructionworks and for operations. Theperformance securitymaybe forfeited to answer for any

liquidateddamages.

5.7.2 Performance bonds

a. During the construction phase and defects liability period

Section12.8oftheRevisedIRRoftheBOTLawrequirestheProjectProponentasoneofitsobligationsunderthecontract,

topostaperformanceguaranteeinfavoroftheIA.TheIAshalldeterminetheformofperformancesecurityitwillrequire

whichmaybe in cash,bankdraft orguarantee confirmedby a localbank (in the caseof foreignbiddersbondedby

a foreignbank), letterofcredit issuedbya reputablebank, suretybondcallableondemand issuedby theGSISorby

suretyorinsurancecompaniesdulyaccreditedbytheOfficeoftheInsuranceCommissioner,oracombinationthereof,in

accordancewiththefollowing:

• Cash,irrevocableletterofcredit,bankdraft-aminimumoftwopercent(2%)ofthetotalProjectCost.

• BankGuarantee-aminimumoffivepercent(5%)ofthetotalProjectCost.

• SuretyBond-aminimumoftenpercent(10%)ofthetotalProjectCost.

Theamountofthebondmaybereducedfollowingcompletion(byanamountwhichappropriatelyreflectsthefactthat

theprojecthasmovedbeyondtheperiodwiththegreatestlevelofconstructionrisk).However,thebondwillremainfor

8CivilCode,Article2227.9RevisedIRRoftheBOTLaw,Section12.14.10Ibid.

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aspecifiedperiodaftercompletion(atareducedamount)tosecuretheProjectProponent’sperformanceofitsdefects

rectificationobligations.

Therequiredformofthebondwillbesetout inanappendixtothePPPcontractandmustnotbeamendedwithout

government’sapproval(suchapprovalnottobeunreasonablywithheld).

b. During the operation period

TheuseofPerformanceBonds(PerformanceSecurityforOperations)forPPPcontracts inthePhilippinesisdetailedin

theRevised IRRof theBOTLawatSection12.9. It is the roleof the IA todecide if theProjectProponent shallposta

performancesecuritytoguaranteetheproperoperationoftheprojectinaccordancewiththecontract.Inthisregardit

isalsousefultolookatinternationalpractice,particularlycircumstancesunderwhichperformancesecuritymaynotbe

required(discussedinBox5.1)andalsoontheuseofguaranteesfromtheparentcompanyoftheProjectProponent(Box

5.2)

Box 2.1 Non-Requirement of Performance Security Insomecountries,performancesecuritymightnotbenecessaryforthefollowingcircumstances:

• ThecomfortthatthegovernmentrequiresfortheproponenttodeliveritsContractedServiceswillgenerallybeprovidedbytheabatementregime,thegovernment’sterminationandstep-inrightsondefaultandthefactthatanyamountofcompensationonterminationwillbereducedbythecosttothegovernmentofremedyingdefectsand/orappointinganewcontractorandcollateralwarranties.However,wherethegovernmenthasconcernsastothecreditworthinessoftheoperationalsubcontractors,ortheirabilitytoperformtheirobligations,itmayrequiretheproponenttoprocureaperformancebondorparentcompanyguaranteeinrespectoftheoperatingsubcontractor’sobligations(orboth).

• Alternatively,althoughthegovernmentmaynotrequireperformancebondsorparentcompanyguaranteesatprojectcommencement,itmayreservetherighttorequirethatsuchbondsorguaranteesbeprovidedatanytimeduringtheoperatingtermwhenarepeatedorsevereservicedeliveryfailureoccurs.

• Wherethegovernmentreliesonthesubcontractor’sperformancebond,itmayrequirethefinanciers’directagreementtoenablethegovernmenttoclaimunderthebondtorectifyanydefaultbytheconstructionsubcontractor,totheextentthattheproponentorthesecuritytrustee(onbehalfofthefinanciers)failstorectifythedefault.Government’sabilitytoclaimwillbesubjecttothefinanciers’righttoaccessthebond.

Box 2.2 Parent GuaranteesParentGuaranteesarenotnormallysoughtinthePhilippinesthroughtheConcessionContract.Theguaranteesthataresoughtaregenerallythroughperformancebondsestablishedfortheconstructionandoperationphaseoftheconcessionperiod.

Inothercountries:

1. Governmentgenerallyseeksperformanceguaranteesfromtheparentcompaniesoftheproponentand/orofthematerialsubcontractors.However,thisdependsonwhetherthecommitmentofaparentcompanyisanimportantelementintheselectionoftheproponentoramaterialsubcontractor.

2. Generally,governmentprefersthatperformancebonds(whetherbankguaranteesorinsurancebonds)begivenbythecontractorandsubcontractors(infavoroftheproponent)asthisismorerobust.

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5.8 Performance Monitoring System

5.8.1 Requirement for audit

The IA isempoweredto requireanauditofanyperformancedata for,or resulting from, theperformancemonitoring

system(PMS)atanytimeuptosixmonthsaftertheendofthetermoftheproject.

5.8.2 Who will conduct the audit?

Theauditwill be conductedby an independentexpert appointedby the IAon termsand conditionsdeterminedby

government.

5.8.3 Who will pay for the audit?

The IAwillpay for thecostof theaudit.However, if anaudit identifies incorrect informationprovidedby theProject

Proponentthataffectstheservicefee,thelattermustpayforthecostoftheaudit.

5.8.4 Inaccurate PMS or performance data

Iftheauditor’swrittenreportshowsaninaccuracy,incorrectnessorincompletenessinthePMSoranyperformancedata

for,orresultingfrom,thePMS,thentheProjectProponentmust:

1. Correctandre-issuetheaffectedreportordataandtakestepstoremedythefaultinitsmonitoring,measuringand

reportingsystem;and

2. Iftheerrorhasaffectedtheamountofaservicefee,maketheappropriateadjustmentfromthenextscheduled

servicefee,or, ifthereisnofurtherservicefeescheduled,theamountwillbeadebtdueandpayablefromthe

ProjectProponenttothegovernment.

5.8.5 Fraudulent or false, misleading or negligent reporting

Ifanyfraudorfalse,misleadingordeceptivereportingisdisclosedintheauditor’sreport,thiswillconstituteanEventof

DefaultpotentiallyleadingtoterminationofthePPPcontract.

5.9 Force Majeure Events

These are events whichmay excuse parties from performance of the obligation, to the extent such performance is

hindered,delayed,orpreventedbyfactors fromacauseoutsidethereasonablecontroloftheparties.Thepurposeof

forcemajeureprovisionsistogivetheaffectedpartyrelieffromliabilityand,iftheeventcontinuesforacertainperiod,to

givethepartiesanopportunitytoterminatethePPPcontract.

ThereisalegaldefinitionforforcemajeurebasedonthePhilippineCivilCode,11butforpurposesofdrafting,thedefinition

offorcemajeureeventsshouldonlyincludeeventswhicharelikelytohaveacatastrophiceffectoneitherparty’sabilityto

fulfilltheobligationsunderthePPPcontract.Asneitherpartyislikelytobeinabetterpositionthantheothertomanage

theoccurrenceand theeffectsof forcemajeure,and theeventsmaycontinue fora longperiodof time thefinancial

consequencesaresharedinaccordancewiththemechanismprovidedinthecontract.12

11Definitionofthetermisprovidedindecidedcases.12ForceMajeureasasometimes‘difficultclause’isfurtherdiscussedinVolume3,Chapter12.

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5.9.1 Causes of Force Majeure

Causesofforcemajeureevents,thatmateriallyimpairtheimplementationofthePPPcontract,mayincludebutarenot

limitedto:

1. Anywar,whetherornotdeclared;

2. Hostilities,embargo,revolution,insurrection,riots,nationalstrikesorotherpublicdisorder,

3. Exportor import restrictions,closingofharbors,docks,canalsorotherassistance tooradjunctsof shippingor

navigation;

4. Rationing,allocation,whetherimposedbylaw,decreeorregulation,orbycomplianceofindustryattheinsistence

ofthegovernment;

5. Fire,flood,drought,earthquake,volcaniceruption,storm,tsunamiorothernaturaldisaster;

6. Aircrash;

7. Hazardousmaterials,unexplodedordnance,nuclearcontamination;

8. Epidemic,quarantine.

5.10 Force Majeure Qualification Requirements

5.10.1 Acts of Project Proponent

Inorderthataforcemajeureeventmayexemptapartyfromliability,itisnecessarythatthepartybefreefromanyprevious

negligenceormisconductbyreasonofwhichthelossmayhavebeenoccasioned.AnactofGodcannotbeinvokedforthe

protectionofapartywhichhasbeenguiltyofgrossnegligenceinnottryingtoforestallitspossibleadverseconsequences.

Whenaparty’snegligenceconcurswithanactofGodinproducingdamageorinjurytoanother,suchpartyisnotexempt

fromliabilitybyshowingthattheimmediateorproximatecauseofthedamageorinjurywasafortuitousevent.When

theeffectisfoundtobepartlytheresultoftheparticipationofman—whetheritbefromactiveintervention,orneglect,

orfailuretoact—thewholeoccurrenceistherebyhumanized,andremovedfromtherulesapplicabletoactsofGod.13

Further, theProject Proponentwill notbegranted relief from thoseobligationsgovernmentwouldordinarily expect

theProjectProponenttocomplywithduringaforcemajeureevent(i.e.,anyobligationtoreinstateortoprovidecertain

criticalfacilitymanagementserviceswhichthegovernmentwouldordinarilyexpecttobeprovidedduringsuchevents).

5.10.2 Notification

TheProjectProponentmustnotify thegovernmentwithina specified timeof theoccurrenceandeffectof theForce

Majeure Event and of the Project Proponent’s intention to claim. The Project Proponent must submit a claim to

governmentprovidingfulldetailsofthereliefclaimedstrictlyinaccordancewithspecifiedproceduresinthePPPContract

andaseparateplanaimedatmitigatingtheeffects.

IftheProjectProponentdoesnotnotifygovernmentoftheForceMajeureEventwithinthespecifiedtime,theProject

Proponentwillbebarredfrommakinganyclaiminrespectofthatforcemajeureevent.

TheProjectProponentmustcontinuetoupdategovernmentatspecifiedintervalsforthedurationoftheforcemajeure

eventandmustnotifythegovernmentimmediatelyafteritsobligationsceasetobeaffectedbythesame.13CivilCode,Article1174.

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5.11 Force Majeure during Design and Construction PhaseIftheforcemajeureeventoccursduringthedesignandconstructionphase,itmustcauseadelaytocompletion,i.e.,a

delayinanyactivityontheactualcriticalpathoftheproject.

Provided theProject Proponenthas compliedwith its obligations for claiming relief for the forcemajeure event, the

dateforcompletionwillbeextendedbythenumberofdaysbywhichcompletionwillbedelayedasaresultoftheforce

majeureevent.

GovernmentmayalsoexcusetheProjectProponentfromanyotherobligationsasisreasonablegiventhenatureofthe

forcemajeureevent.

InPPPcontracts,thepartyprovidingnoticeoftheforcemajeureeventhastheburdenofprovingthesame,includingthe

provisionofmitigatingmeasures.

5.12 Force Majeure during Operating Term

5.12.1 Project Proponent Entitlement from Force Majeure Event

If a forcemajeure event occurs during the operating term, reliefwill only be granted to the extent that the Project

Proponentcandemonstratetogovernment’sreasonablesatisfactionthatitispreventedfromprovidingthecontracted

servicesasadirectresultoftheforcemajeureeventandisotherwisecomplyingwithitscontractualobligations.

TotheextenttheforcemajeureeventaffectstheProjectProponent’sabilitytodeliverthecontractedservices(andother

thresholdrequirementsaremet),theProjectProponent’sobligationtodelivertheaffectedcontractedserviceswillbe

suspendedandnodefaultnoticemaybegiveninrespectofsuchinterruptionofservice,unlesstheforcemajeureevent

persistsforaperiodoftimethatgivesrisetocontractterminationwithoutdefault.

5.12.2 Alternative Service arrangements

DuringthesuspensionoftheProjectProponent’sobligationsthegovernmentmaymakealternativearrangementsforthe

deliveryofthecontractedservices.Theallocationofrisksassociatedwiththedeliveryofanyalternativearrangementswill

bedeterminedonaproject-specificbasisdependingonthenatureoftheadditionalservicesandtheirinterfacewiththe

existingcontractedservicesandthenatureoftheeventleadingtothesuspension.

5.13 Mitigation of Force Majeure Effects

TheProjectProponentmusttakeallproperandreasonablestepsandusereasonableendeavorstoprovidetemporary

measuresduringanyperiodofsuspension.TheProjectProponentmustalsorepair,replaceorimproveaffectedassetsto

returntheprojecttooperationassoonaspossible.

The insurance provisions of a PPP contractmay apply to forcemajeure events. As an example, theDaangHari Toll

ConcessionContractprovides:“Allinsuranceproceedsreceivedbyorpayableunderanyinsurancepolicycoveringforce

majeureshallbeutilizedtorepairorreconstructtheDaangHari-SLEXLinkRoad.Theconcessionaireshallberesponsible

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foranyrepairsorreconstructiontotheDaangHari-SLEXLinkRoadcausedbytheforcemajeureeventassoonaspossible”.

If insurance is inadequate to cover force majeure damages, then an additional option is to introduce a restitution

mechanismsuchasa ‘FMShortfall’provisiontosharethecostsbetweenthegovernmentandtheconcessionaire.The

DaangHariTollRoadmakesprovisionforanoccurrenceofthiskind:

“……..if the Concessionaire serves notice to the DPWH that the insurance proceeds received or to be

receivedorpayablebyreasonofanysuchdamagewillbeinsufficienttocoverthecostsoftherequired

reconstructionofrepairworkonthedamagetotheDaangHari-SLEXLinkRoad,theConcessionaireand

DPWHshallmeettodiscusshowtheConcessionairecanbecompensatedforthedifferencebetweenthese

costsandtheinsuranceproceedsreceivedortobereceived(the“FMShortfallAmount”).”

5.14 Effect on Government’s Step-In Rights

TheProjectProponent’srighttoreliefarisingfromaforcemajeureeventdoesnotaffectgovernment’sstep-inrights.In

otherwords,thegovernmentmaystep-inandoperatetheassetsduringaforcemajeureevent.

5.15 Termination Event for Force Majeure

Assoonaspracticablefollowingtheforcemajeureevent,thegovernmentandtheProjectProponentmustconsultwith

eachotherandusereasonableendeavorstoagreeuponappropriatetermstomitigatetheeffectsoftheforcemajeure

eventandfacilitatecontinuedperformanceofthePPPcontract.

IftheProjectProponentandgovernmentareunabletoagreeuponappropriatetermstomitigatetheeffectoftheforce

majeure event and facilitate the continued performance of the PPP contractwithin a specified period and the force

majeureevent(orthereliefeventgivingrisetotheforcemajeureevent)iscontinuingoritsconsequencesremainsuch

thattheaffectedpartyhasbeenorisunabletocomplywithalloramaterialpartofitsobligationsunderthePPPcontract

foraperiodofmorethanaspecifiedperiod,thenthiswillbea“ForceMajeureTerminationEvent”subjecttotheprovisions

ofthePPPcontract(terminationpaymentclause).

5.16 Material Adverse Government Action

Materialadversegovernmentactionmeansanynationalgovernmentagencyactionwhichhasamaterialadverseeffect

onanyoftherightsandprivilegesof,orontheenjoymentand/orexercisethereofby,theProjectProponentunderthis

concessioncontract,orwhichhasamaterialadverseeffectontheconstructionscheduleortheProjectProponent’sability

tocomplywithitsfinancialand/orothercontractualobligations,andmayincludebutisnotlimitedtoanyofthefollowing:

1. achangeinlaw;

2. thediscriminatoryimpositionofanynewnationalorlocaltax,orchangeinmaximumrateofanynationalorlocal

tax.

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5.17 Threshold for Compensation for Material Adverse Government Action

5.17.1 Notification of Material Adverse Government Action

1. TheProjectProponentmustnotify thegovernmentwithinaspecifiedtimeof theoccurrenceandeffectof the

Material Adverse Government Action (MAGA) and of the Project Proponent’s intention to claim. The Project

Proponentmust submit a claim to government providing full details of the compensation claimed strictly in

accordancewithspecifiedprocedures.

2. IftheProjectProponentdoesnotnotifygovernmentoftheMAGAwithinthespecifiedtime,theProjectProponent

willbebarredfrommakinganyclaimforsame.

5.17.2 Recovery of costs and losses

TheProjectProponentwillbeentitledtoclaimcompensationinaccordancewiththeprovisionofthePPPcontract.Where

MAGAoccursduringthedesignandconstructionphase,theProjectProponentisnormallyentitledtoanextensionoftime

only.IfMAGAoccursduringtheoperationandmaintenanceperiodtheProjectProponentisentitledtocompensation

equaltotheadditionalcostsincurredand/orlossofrevenue.

TheProjectProponentmusttakeallproperandreasonablestepstominimizethedurationandimpactofaMAGA.

5.18 Circumstances of Step-In: Government and Lenders

5.18.1 Circumstances of Government Step-in

Governmentmayassumeallorsomeof theservicedeliveryobligationsof theProjectProponent foraperiodof time

where:

1. Theproject(a)islikelytobeaseriousrisktotheenvironment,arisktothehealthorsafetyoftheusersofthefacility

orothermembersofthepublic,arisktothestructuralintegrityorsafetyofanypartsoftheworksorthefacility,

oraseriousriskofmaterialdamagetopublicorprivatepropertyorotherspecifiedemergency;or(b)requiresthe

governmenttotakeimmediateactiontodischargeorexerciseastatutorydutyorpower.Wheretheservicebeing

providedisanessentialservice,thegovernmentmaybegivenstep-inrightstoguaranteethecontinuityofthat

essentialservice.

2. Therehasbeenadefaultterminationevent.

5.18.2 Extent of rights in a Lender Step-in situation

1. The step-in rights which are contained in the PPP contract are assigned to the lender, who by virtue of this

assignmentthenassumestheserights.Beforeitstepsin,however,itmustadvisethegovernmentthatitintends

todoso.Besidesthisobligation,theremaybeotherrequirementsassociatedwiththelender’sstep-inrights,but

thesewouldbesetforthintheDirectAgreement,anagreementthatlaysouttherightsoflendersinrespectofthe

facilitytheyarefinancing,particularlytherightsofstep-in.

2. Howeverthegovernmentmayelectto:

a. takeoverthefacility,temporarilyassumetotalorpartialpossession,managementandcontrolofthefacilityand

theprovisionoftheservices;and

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b. takesuchotherstepsnecessaryordesirabletocontinuetheprovisionoftheservicesandtominimizetherisk

totheenvironment,thepublicorusersofthefacility,orofmaterialdamagetopublicorprivateproperty.

3. Ininternationaljurisdictions,asanalternativetoexercisingitsstep-inrights,insomecircumstances,thegovernment

mayrequiretheProjectProponentto:

a. immediatelyperformanycontractedserviceinrespectofwhichtheProjectProponentisinbreachwherethe

step-inrightsareexercisedduetoaneventofdefaultordefaultterminationevent;

b. doallthatitcantoprocureadditionaloralternativecontractedservices;or

c. suspendperformanceofthecontractedservicestoensurethattheeventisdealtwithandnormaloperationof

thefacilityresumesassoonasisreasonablypracticable.

4. Suchrightsareinadditiontothestep-inrightslistedabove,butshouldgenerallybetreatedanalogouslytostep-in

rightsunderthePPPcontract.

5.18.3 Assistance by Project Proponent

TheProjectProponentmustassistgovernmentwheneverandhoweverpossibletoexerciseitsstep-inrights.

5.18.4 Government Obligations

1. Governmentisnotobligedtoremedyorcureanybreachorterminationeventtoovercomeormitigateanyriskor

consequencesinrespectofwhichitexercisesstep-inrights.

2. Whenexercisingitsstep-inrights,thegovernmentmustexerciseallreasonableeffortstooperatethefacilityand

deliverthecontractedservicesinaccordancewiththePPPcontract.Whatisreasonableunderthecircumstances

willbedeterminedinthelightofthereasonforthegovernmentstepping-in.

5.18.5 Project Proponent’s rights and obligations suspended

TheProjectProponent’srightsandobligationsunderthePPPcontractaresuspendedtotheextentnecessarytopermit

governmenttoexerciseitsstep-inrights.

5.18.6 Power of Attorney

TheProjectProponentirrevocablyappointsgovernment(anditsnominees)asitsattorneywithfullpowertoexerciseits

step-inrights.ThepowerofattorneywillbeinthesecuritygrantedbytheProjectProponentinfavorofgovernment.The

securitywillsecuretheexerciseofthestep-inrightsandassociatedcosts.

5.19 Cost of Step-in

Whilegovernmenthasstepped-in,itmustcontinuetopaythefullservicefeereducedbythefollowingamounts:

1. Where thegovernmenthasstepped inasa resultofaneventofdefaultordefault terminationevent (without

doublecounting):

a. Thegovernment’sreasonableestimateofthecostsnotincurredbytheProjectProponentasaresultofnon-

provisionofthecontractedservices;and

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b. Thecostsincurredbythegovernmentinexercisingthatstep-inright,includingallreasonableandpropercosts

itincurredindeliveringtheaffectedservices(whetherdirectlyorthroughareplacementsubcontractor).

2. If theaggregateamount tobededucted isgreater than the service fee, thedifferencewillbeadebtdueand

payablefromtheProjectProponenttothegovernment;and

3. Where thegovernmenthas stepped inasa resultofanyother triggeringevent, theProjectProponentwillbe

entitledtocompensation.However,thegovernment’spaymentwillbereducedbytheoperatingorothercosts

whichwillnotbeincurredbytheProjectProponentasaresultoftheexerciseofthegovernment’sstep-inrights.

Volume3,Chapter12,citesanexampleofabest-practicestep-inrightclauseinaPPPcontract.

5.20 Liability or Limitation on Government’s Rights

5.20.1 Liability

ThegovernmentwillhavenoliabilitytotheProjectProponentandtheProjectProponentwillnotbeentitledtomake

anyclaimarisingoutofor in connectionwith theexerciseof step-in rightsunless thegovernmenthasactedgrossly

negligently(inrelationtoemergencystep-inonly),fraudulentlyorinbadfaithintheexerciseofthoserights.

5.20.2 Limitation on existing rights

Theexerciseofstep-inrightsdoesnotlimitanyotherrightofgovernmentunderthePPPContract,includingrightsarising

pursuanttoaneventofdefaultanddefaultterminationevent.

5.21 Stepping-Out

Thegovernmentmayceasetoexerciseitsstep-inrightsatanytime.ItmustgivetheProjectProponentreasonablewritten

noticeof its intenttocompleteorceasethestep-inandshallcomplete,orceasethestep-in, inaccordancewithsuch

writtennotice.

Thegovernmentmustceaseexercisingitsstep-inrightsunderthefollowingcircumstances:

1. Thegovernmenthasexerciseditsstep-inrightsasaresultofaneventofdefaultordefaultterminationevent,as

soonastheeventofdefaultordefaultterminationeventisremediedorgovernmentceasestopursuearemedy;or

2. Thegovernmenthasexerciseditsstep-inrightsasaresultofanyothertriggeringevent,therelevantmaterialrisk

isaverted,overcome,ormitigatedtogovernment’ssatisfaction,orthestatutorydutyhasbeenperformed.

Thegovernmentwillnotbeobligedtoceaseexercisingitsstep-inrightsinrespectofaparticularstep-ineventif,priorto

thedateuponwhichitwouldotherwisehavebeenrequiredtostep-out(inrespectofthatevent),thereoccursanother

step-inevententitlinggovernmenttostep-in.

Whenthegovernmentceasestoexerciseitsstep-inrights(subjecttogovernmentnothavingterminatedthePPPcontract)

theProjectProponentmustimmediatelyrecommenceperformanceofthesuspendedobligations;andthegovernment

will,atthecostandexpenseoftheProjectProponent,givereasonableassistancetoensureasmoothtransition.

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5.22 Insurance

Aspartof the riskallocationarrangements, insurance is a keyaspectof riskmanagement that theProjectProponent

needstoundertakeandmanage.ItisrequiredbyGovernmenttoensurethattheProjectProponentiscapableofmaking

paymentsandeffectingrepairsfrominsurableevents.Thisisacriticalaspectofcontinuingtodeliverservicessetoutin

theConcessionContract. Asaguidingprinciple,theProjectProponentmustobtainandmaintainformsofinsurances

infullforceandeffect(andonsuchterms)forthetypeoffacilityfromwhichthecoreservicesandcontractedservices

aredelivered,and/orinsurancesrequiredbylawandofakindonnolessfavorabletermsthantheminimuminsurance

requirementsspecifiedinthePPPcontract

5.22.1 Insurance generally

TheProject Proponentmust, at its own cost, effect andmaintain such insurances throughout the contract termas a

prudentownerorserviceproviderwouldobtainandmaintainforthefacility,theinsurancesandthetermsforinsurances

specifiedinthePPPcontract.

The Project Proponentmust also ensure that it and its subcontractors effect andmaintain appropriate insurances in

accordancewithgoodindustrypracticeandataprudent levelofcover,havingregardtothenatureandscopeofthe

serviceseachsubcontractoristoprovide.Levelsofcovershouldbelinkedtotherateofinflation,suchthattheamountof

insuranceincreasesovertime.

Insurancerequirementswillreflectthedegreeofrisktransfer,theabilityoftheProjectProponenttopaypremiums(relative

tothesizeoftherisk),valueformoneyconsiderationsandthespecificsoftheparticularprojectinquestion.Examplesof

requiredinsurancesduringboththeconstructionandoperatingperiodsincludeconstructionall-risksinsurance,workers

compensation insurance, property/material damage insurance, public/products liability insurance andmotor vehicle

insurance.

Incertaininstances,insurancesmaybeeffectedbymeansoftheProjectProponent’sexistinggroupinsurancepolicies,withappropriatecaretakenthattheseareextendedtoadequatelycovertherequiredprojectrisksonanindividualand

aggregatebasis.

5.22.2 Proof of insurance

By financial close, the Project Proponent must have provided the government with evidence from its insurers thatthe construction phase insurances are in effect. Throughout the contract term, the Project Proponentmust providegovernmentwithcopiesof insurancepolicies, certificatesofcurrency, renewalcertificatesandanyendorsementslipsinrelationtoallrequiredinsurances.Wherethegovernmentisnotrequiredtobeaninsuredunderthepolicy,andtheactualpolicycopiescannotbeprovided(duetocommercialconfidentiality),appropriatelywordedcertificatesconfirmingexpresslyalloftheinsurancetermsandconditions,assetoutinthePPPcontract,mustbeprovidedfromtheinsurerorinsurancebroker.

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5.22.3 Reputable insurer

Theinsurancesaretobeeffectedandmaintainedatalltimeswithreputableinsurersapprovedbygovernmentandon

conditionsrequiredbygovernment.

WhendeterminingwhethertoaccepttheinsurancesproposedbytheProjectProponentandwhatconditionsitmayseek

toimpose,thegovernmentmustconsider:

1. therating(ifany)oftheproposedinsurer;

2. thecontractingentityoftheproposedinsurerandtheirrelationshiptotheultimateunderwriter;

3. theproposedinsurer’sexposuretootherprojectsofasimilarnatureintherelevantjurisdiction;and

4. suchothermattersasthegovernmentconsidersrelevantinthecircumstances.

5.22.4 Amendments

Theapprovedinsurancesarenottobemateriallychanged(including,withoutlimitation,thescopeofcover,limits/sub

limitstoliabilityanddeductiblelevels)withoutthegovernment’spriorconsent(whichisnottobeunreasonablywithheld).

Indeterminingwhetherandonwhatbasistoprovideitsconsent,thegovernmentwillconsidertheproposedchanges

inthelightofmarketconditionsatthetime,theimpactofthechangesontheprojectriskprofileandvalueformoney

considerationsgenerally.

TheProjectProponentmustindemnifythegovernmentforitsreasonablelegalandothercosts(ifany)associatedwith

determiningwhetherornottoconsenttoanyrequestedchange.

5.22.5 Government may effect insurance policies

If theProjectProponent fails toeffectormaintain the required insurances,governmentmayeffect andmaintain the

relevantinsuranceandpaythepremiumsforthatinsurance.Anyamountpaidbygovernmentwillbeadebtdueand

payablefromtheProjectProponentandmaybedeductedfromamountsowingtotheProjectProponentunderthePPP

contract.

5.22.6 Terms of insurance

Allrequiredinsurancepoliciesmust,ataminimum,include:

1. abreachofconditionorwarranty/severability/non-vitiationprovisionacceptabletothegovernment;

2. aprovisionrequiringatleast30-days’noticetobegiventothegovernmentpriortocancellationoramendment;

and

3. wherethegovernmentisaninsuredunderthepolicy:

a. aprovisionrequiringthepolicytooperateasifeachwasaseparatepolicyofinsurancecoveringeachinsured

party;

b. failurebyanyinsuredtoobserveandfulfillthetermsofthepolicyortocomplywiththedutyofdisclosuredoes

notprejudicetheinsuranceofanyotherinsured;

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c. awaiverofsubrogationagainstanyoftheinsuredparties;and

d. noticeofaclaimbyanyinsuredwillbeacceptedbytheinsurerasnoticebyallinsured.

5.22.7 Government as insured under Project Proponent insurance

GovernmentshallbeanadditionalnamedinsuredpartyunderthepoliciesprocuredbytheProjectProponent,savein

respectofthosepoliciesunderwhichtypicallyonlytheProjectProponentoritsrelevantsubcontractorscanbeinsured,

suchasprofessionalindemnityinsurance.

Theextentofgovernment’s rights and interests in respectof specific insurancepolicies, suchaspublic andproducts

liabilityinsuranceandworkers’compensationinsurance,willbedetailedinthePPPcontract.Theactualtermsinwhich

government’sinterestissetoutinthepoliciesareveryimportant,asthewordsusedwilldefinetheextenttowhichcover

isextendedandthusthecircumstancesunderwhichgovernmentcanclaimontheinsurance.

5.22.8 Settlement of claims

Uponsettlementofaclaimforanyotherpropertylossordamageunderanyrequiredinsurance,wheregovernmentdid

nothavean insurable interest, theProjectProponentmustpass through togovernment thebenefitof the insurance

wheregovernmenthassufferedalossforwhichgovernmenthasbeenindemnifiedbytheProjectProponentunderthe

PPPcontract.

5.23 Default

It is normal for contracts to have clear provisions on defaults and the impact of defaults in delivering contractual

obligations. A PPP contract is no different to a normal commercial contract in that defaults should be built into the

contractingarrangement.Inprinciple,thePPPcontractwillcategorizecertaindefaultsandotherconductoftheProject

Proponent,oritssubcontractors,tobe:

(a)an‘eventofdefault’;or

(b)a‘defaultterminationevent’.

ThetypeofeventwilldeterminetheremediesavailabletogovernmentandtheopportunitygiventotheProjectProponent

tocurethedefaultbeforegovernmentcanexerciseitsremedies.

5.23.1 Events of Default

Aneventofdefaultgivesrisetovariousgovernmentremedies.However,itdoesnotofitselfgiverisetoanautomaticright

oftermination.

1. Aneventofdefaultmayoccurif:

a. thereisaseriousservicefailure;

b. duringthecontracttermarepresentationorwarrantygivenbytheProjectProponenttogovernmentprovesto

beuntrue;

c. duringthecontracttermthereisfraud,collusive,misleadingordeceptiveconductonthepartoftheProject

Proponentoritssubcontractorsintheperformanceoftheprojectoranypartofit(includinginrespectofreporting

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in the formoffinancial andpayment statementsand invoicesorotherbooksand recordsor in respectof the

masterworksprogramandsub-programs).Thisalsoincludesfraudorbreachingthelawinregardtoawardingthe

contract;

d. there isanyotherbreachby theProjectProponentof itsobligations in thePPPcontractorother specified

contractswithgovernment(althoughthiswillonlybeaneventofdefault ifthebreachhasnotbeenremedied

withinareasonableperiod,whichistraditionally,20businessdays);or

e. thereisanybreachofanyotherprojectcontract.

2. Inadditiontotheabove,governmentmayalsospecificallylistthefollowingeventsaseventsofdefault:

a. failuretoachievetechnicalcompletionbytheduedate;

b. the independent expert determines (following a reasonable period after financial close) that there is no

reasonableprospecttheProjectProponentwillachievetechnicalcompletionbytheduedate;

c. theworksnotbeingcommencedwithinsuchperiodafterfinancialclosewherethisislikelytohaveamaterial

adverseeffectontheabilityoftheProjectProponenttoachievecompletionbytheduedate;

d. abreachofthesub-contractorprovisions;

e. a failureby theProjectProponent to obtainconsent toor tocureanunauthorizedchange incontrolofa

relevantcompanyotherthantheProjectProponent(e.g.,amaterialsubcontractor)withinareasonabletime;

f. abreachbytheProjectProponentofitsassignmentobligations;

g. the Project Proponent failing to take out and maintain required insurances (subject to the uninsurability

provisions[seeinsuranceprovisionsinsection5.22above]);

h. wheretheProjectProponentassigns,transfersorotherwisedisposesofanyofitsrightsunderthePPPcontract

withouttheconsentofgovernment(otherthaninthepermittedcircumstancessetoutinthePPPcontract)or,

dependingonthenatureoftheproject,whereaspecifiedmajorsubcontractordisposesoftheir interest inthe

relevantsubcontract;or

i. the Project Proponent’s right to obtain finance or draw down funds under the finance agreements being

terminated,withdrawnorotherwisemateriallyrestricted.

5.23.2 Cure Periods and Remedies for Events of Default

ThegovernmentmaygiveadefaultnoticetotheProjectProponentspecifyingthataneventofdefaulthasoccurred.The

ProjectProponentisobligedtocurethedefaultwithinthespecifiedperiodintheNoticeofDefault;ifnot,thegovernment

mayaccordinglyexerciseitsrightstoissueaNoticeofTermination.

5.24 Termination Event

Asafollowondiscussionfromthedefaultprovisions,aterminationeventresultsfromacontractdefault.APPPcontract

needstoincludeclearterminationprovisionsandnotetheconsequencesofaterminationevent.Inprinciple,government

mayterminatethePPPContractontheoccurrenceofaDefaultTerminationEventoraForceMajeureTerminationEvent

ormayVoluntarilyTerminatethePPPContract,eachsubjecttopaymentofaTerminationPayment.

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5.24.1 Default Termination without cure

Subjecttothefinanciers’rightsunderthefunders’directagreement,ifadefaultterminationeventoccurs,thegovernment

hastherighttoterminatethePPPcontractwithoutanycureperiodbeinggiventotheProjectProponent.

5.24.2 What constitutes a Default Termination Event?

Thespecificeventsthatwillbecategorizedasdefaultterminationeventswillbedeterminedonaprojectbyprojectbasis

butwilltypicallyinclude:

1. theProjectProponentwhollyorsubstantiallyabandoningtheworks,thefacilityortheprovisionoftheservices,or

displayinganintentiontodoso;

2. aprojectdefault;

3. apersistentbreach;

4. theoccurrenceofanInsolvencyEventinrelationtotheProjectProponent;

5. the occurrence of an Insolvency Event in respect of anymember of the Project Proponent group, ormaterial

subcontractororanyguarantor,andthatmemberoftheProjectProponentgrouporguarantor isnotreplaced

withinaspecifiedperiodoftheInsolvencyEventbyapartywhichisreputable,solventandhastheresourcesand

experiencetoperformitsobligationsundertherelevantsub-contractsorguarantee(asapplicable);

6. abreachofthechangeofownership/controlprovisionsofthePPPcontractinrespectoftheProjectProponent;

7. completion not having occurred by the longstop date, or an IC reasonably forming the view that the Project

Proponentwillnotachievecompletionbythelongstopdate;

8. anIllegalityEventhasoccurred;

9. aspecifiedcaporaspecifiedpercentageofthecapbeingreachedinrespectofanyperformancebondsorparent

companyguaranteesprovidedtogovernmentasrequiredunderthePPPcontract,oranysuchbondorguarantee

ceasingtobevalidwithout,ineachcase,rectificationorreplacementwithinaspecifiedperiod;

10.thegovernmentdirectingtheProjectProponentnottoreinstateorrepairdamagewheretherelevantdamagewas

causedbyaProjectProponentdefault;

11.whereperformancepointsaccumulatedoverafixedperiod(i.e.duetoaseriesofservicefailures)exceedaspecified

level;and

12.theProjectProponentsufferingabatementsoveraspecifiednumberofconsecutivemonths,whichinvalueequate

toanamountwhichisatoraboveaspecifiedpercentageofthetotalservicesfee.

On certain projects the government may also include additional default termination events but only where this is

warrantedbytheuniquefeaturesoftherelevantProject.

5.25 Termination for Force Majeure and Uninsurability

5.25.1 Force Majeure Event

EitherpartymayterminatethePPPcontract:

1. foraforcemajeureeventthathasenduredforaspecifiedperiodandhasnotbeenextendedbymutualconsent;or

2. ifthegovernmentdirectstheProjectProponentnottoreinstateorrepairthedamagecausedbyaforcemajeure

event.

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5.25.2 Uninsurability Provisions

Thegovernment,atitssolediscretion,mayterminatethePPPcontractpursuanttotheuninsurabilityprovisions,referring

toeventsnotacceptabletooroutsidetheambitofeligiblecoverageofinsurancecompanies(forexample,civilunrest).

5.26 Voluntary Termination

In addition to default termination events and forcemajeure termination events, governmentmay at any time, in itssolediscretion,terminatethePPPcontractbygivingaspecifiedperiodofnotice(“voluntarytermination”). Wherethegovernmenthasdirected theProjectProponentnot to reinstateor repairdamage,and the relevantdamagewasnotcausedbyaforcemajeureeventorProjectProponentdefault,terminationofthePPPcontractbythegovernmentwillbe

treatedasavoluntarytermination.

5.27 Termination for Government Default

Governmentdefaultisaneventoftermination.Terminationpaymentsdependonwhetherthedefaultoccurredbeforeor

aftertheissueoftheCertificateofFinalCompletion.

5.28 Procedure for Termination Event

Following a default termination event, forcemajeure termination event or otherwise, the governmentmay elect to

terminatethePPPcontractbygivingnoticetotheProjectProponent.Terminationwilltakeeffectwithinaspecifiedtime

afterthedateofthenotice,orsuchearliertimeasspecifiedinthenotice.

5.29 Consequences of a Termination Event

Upontermination,theProjectProponentwillbeentitledtocompensationinaccordancewiththeprinciplessetoutunder

TerminationPayments,below.

TherightsandobligationsofthepartiestothePPPcontract(orotheragreementsthatmayberelevanttoincludehere,

suchasanyleasebetweentheProjectProponentandthegovernment)willceaseexceptfor:

1. anyaccruedrightsandobligations;and

2. anyrightsorobligationswhichareexpressedtocontinueaftertermination.

5.30 Termination Payments

Terminationprovisionsinanycontractanditsconsequencesmustbeclear.InPPPcontracts,terminationprovisionswilldependonthenatureandcomplexityoftheproject.Theycanalsochangedependingonthestageatwhichacontractisterminated,forexample,terminationatpre-constructioncanhaveadifferentimpactthanwhenterminationoccursduringconstructionorpostconstruction.Terminationprinciplesthereforeareestablishedtoallowforflexibility.Ingeneral,ontheearlyterminationofthePPPcontract,thegovernmentpaysaTerminationPaymenttotheProjectProponent.TheamountoftheTerminationPaymentisaffectedbytheunderlyingreasonsforterminationandthepartyresponsiblefor

termination.Thepartyresponsibleforterminationisliableforterminationcostsincurredbytheotherparty.

Moregenerally,terminationarrangementsshouldconsiderthespecificcircumstancesoftheprojectandmayincludethe

followingcircumstances:

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• Terminationforfailuretoreachfinancialclosure.

• TerminationduringpreconstructionwhereintheProjectProponentholdstherighttotheassetatthisstageofthe

PPPcontractperiod.

• Terminationduringtheconstructionperiodwhereinthereisacaseforfailuretomeetstandards,timeframes,among

others,andalsoforforcemajeure.TheProjectProponentholdstheassetunderconstructionandterminationsare

basedonassetvaluesandcompletion.

• Terminationduringtheoperationandmaintenanceperiodatastagewheretheassetshavebeentransferredto

theIAandsotheProjectProponentholdsnophysicalassetsbutratheruserightsandrightstocashflowsfromthe

project.Termination(eitherfordefaultorforforcemajeure)isbasedonvaluesrelatingtotheserightsandnotthe

physicalasset.

ThedetailedprovisionsandformulasshouldbedesignedtodeliverequitableresultsfortheIAandtheProjectProponent

basedon the stageof thePPPcontract itself.Most importantly, the IAand its advisers should seek specificguidance

from the considerable literature on this topic. The World Bank PPIAF Reference Guide14, pages 173 – 177, includes

referencestoanumberofusefulresourcesinprintandontheinternet.Morerecently,theEuropeanPPPExpertiseCentre

hascommissionedlawyers,Allen&Overytoresearchandpublish ‘TerminationandForceMajeure–Provisions inPPP

Contracts:ReviewofcurrentEuropeanpracticeandguidance’,March2013.15

5.31 Default Termination Compensation Amount

Thefollowingsectionsdiscussterminationcompensationamountsandthetheorybehindtheircalculation.Thediscussion

hasbeendevelopedwithaviewtoapplyinggeneralprinciplesforterminationeventcompensation.Specificsectorswill

needtoadapttheseprovisionsandapplythemonacase-by-casebasistosectorprojects.

5.31.1 Termination Payments – Project Proponent Default

Fundamentalcommercialandlegalprinciples,thetypeofprojectarrangement(BOO,BOT,BTOetc.,)andthestageof

theprojectatwhichtheProjectProponentdefaults(pre-orpost-finalcompletion),willdeterminethespecificprovisions

of the terminationpaymentarrangementandhow it is applied.Moreover, therewillbe threeparties involvedas the

financiers’ alsohave their interests at stakeand shouldbeallowed to try to rescue theproject toprotect their loans.

If thefinancierschoosenottostep-in, fail intheireffort tostep-in,oropttostep-out, itcanbeassumedthat inmost

circumstancestheprojectcompany’sequitywillbelost.However,intheeventthatthePPPprojectassets,ortherights

overthem,aretransferredbacktothegovernmentontermination,thefinancierswouldexpectcompensation.Hence,

thestructuringofterminationpaymentsbecomesanimportantcriterionfortheproject’sbankability.TheEuropeanPPP

ExpertiseCenter’sGuidetoGuidance16discussesanumberofmethodsforagreeingcompensationinthisevent;

• Repayment of all, or a pre-specifiedpart, of theoutstandingdebt that hasbeenproperly used to finance the

project’sassets;

• Thedepreciatedbookvalueoftheprojectassets(withvariationstotheapproachtaken);

• Thenetpresentvalueoftheexpectedfuturereturns,thatistheexpectedfuturenetcashvaluewhichwouldhave

beenpayablebythegovernmentiftheprojecthadnotdefaulted(thegovernmentwouldbeentitledtorecoverits

actualcostsasaresultoftheterminationevent);and

14WorldBank:Public-PrivateInfrastructureAdvisoryFacility(PPIAF),Public-PrivatePartnershipsReferenceGuideVersion1.0,201215www.eib.org/epec/resources/Termination_Report_public_version.pdf16EuropeanPPPExpertiseCenter–TheGuidetoGuidance:HowtoPrepare,Procure,andDeliverPPPProjects.EuropeanInvestmentBank,2011

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• Anopenmarketsaleunderwhichthegovernmentcouldre-tenderthePPPcontract,selectanewProjectProponent

andthenpayofftheoriginalprojectcompanyand/oritslenders,fromtheproceeds.

Eachoftheseapproacheshasprosandcons.Forexample,anagreementwhichpaidoffthefinanciers’debtinfull,whileattractivetolendersandpositiveforaproject’sbankability,couldhavethedownsideeffectofremovingtheincentiveforfinancierstodoproperduediligenceandtomonitortheprojectcompany’sperformance.WhereasanopenmarketsaleapproachisonlyviablewherethereisastrongmarketforPPPcontracts.Thenetpresentvalueapproachcouldbeconceptuallyappealing,howeverforecastingfuturerevenuesandcostsandagreeingdiscountratescanbeproblematic.Yescombe17providesadviceonhowthesevariousapproaches,oracombinationthereof,canbeturnedintoformulae

specifictocontractrequirementsandtheoperatingenvironmentforthesectorbeingconsidered.

Theoverridingprincipleshouldbetoremoveanyfinancialincentiveforthepublicsectortoseekanearlytermination,

whileatthesametimeensuringthattheprivatesectorisnotshieldedfromstandardcommercialrisksandappurtenant

lossesattheundueexpenseofthepublicsector.

5.31.2 Termination Payments – Government Default

Ifterminationoccursasaresultofdefaultbythegovernment,theunderlyingprincipleshouldbethatneithertheproject

company nor its financiers are financially disadvantaged. This is critical to the reputation of the PPP program in the

Philippines,andtoensureastrongPPPmarketcanreadilysecurebankabilityforprojectsputuptothefinancialmarkets.

Determiningcompensationtotheterminatedproject’sfinanciersisrelativelystraightforward,forexampleitcouldinclude

debtoutstanding,unpaidinterestandfeesandactualcostsofundoingtheloanandhedgingagreementscappedrelative

topreviouslydeterminedcapitalexpenditureandgearinglevels.However,calculatingcompensationduetotheequity

investorscanbemorecomplex.Again,citingtheEuropeanPPPExpertiseCenter,optionscouldinclude:

• Thenetpresentvalue(NPV)ofthefuturereturnshadterminationnotoccurred.Thecalculationwouldassessthe

cashflowstreamlikelyfromthedateofterminationthroughtotheoriginallyintendedexpirydateenvisagedin

thePPPcontract.Whileconceptuallythepreferredmethod,actuallyimplementingthecalculationandgettingall

partiestoreachagreementisinpracticecomplex;

• AvariationoftheNPVapproachistousethecashflowprojectedatfinancialclose;and

• A paymentwhich provides the equity investorswith the internal rate of return expected on their investment

atfinancialclose.Dependingonthestageatwhichtermination iscalled, thiscouldbebasedonthecashflow

receivedfromthebeginningofthecontractuptoandincludingtermination.

5.31.3 Voluntary Termination by Government

In addition to the underlying principles for termination by government default, on termination of the PPP contract

resultingfromagovernmentvoluntarytermination,governmentmustpaytotheProjectProponentanamountequalto

theaggregateof:

1. wheretheseniordebt18amounthasbeenfinancedbybankdebt,thelowerofseniordebtowingtofinanciersat

theterminationdatecappedrelativetopreviouslydeterminedcapitalexpenditureandgearinglevels;

17ERYescombe,(2002)PrinciplesofProjectFinance,AcademicPressandERYescombe,(2007)Public-PrivatePartnerships:PrinciplesofPolicyandFinance,Butterworth-Heinemann

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2. wheretheseniordebtamounthasbeenfinancedbycapitalmarketinstruments(bonds),thepresentvalueofthe

futurecashflowsunderthebondsforecasttobeoutstandingattheterminationdateinthebasecasefinancial

modelcapped relative topreviouslydeterminedcapitalexpenditureandgearing levels.This is calculatedwith

regardtotheyieldatwhichtheunderlyingcapitalmarketinstrumentsarepricedinthemarketatthetermination

date,usingstandardmarketconventionsforeachrelevantinstrument,onthebasisthatthePPPcontractandthe

otherprojectcontractsimmediatelypriortotheterminationdatecontinuetooperatetotheexpirydate.

3. a return to equity holders, being on both any share capital subscribed at financial close and any shareholder

subordinated debt not taken into account as debt above, (taking into account distributions already paid to

shareholders) capped relative to previously determined capital expenditure and gearing levels. This may be

calculatedastherealblendedequityinternalrateofreturninthebasecasefinancialmodel,orthemarketrateof

equityreturn.

4. thebreakcosts(i.e.feechargedbylenderswhenextrarepaymentsonafixedrateloanaremadeorwhentheloan

ispaidoutbeforethefixedtermhasexpired)andallotherreasonablecostsincurredbytheProjectProponentas

adirectresultofterminatingafinanceagreement,includingbankfees,pastdueinterest,hedgingarrangements

andwithanybreakgainsdeducted;and

5. demobilizationcostsincludinganyredundancypaymentsforemployeesoftheProjectProponentandamounts

owingtothesub-contractors,whichare,ineachcase,reasonablyandproperlyincurredandariseasadirectresult

ofthetermination.

5.31.4 Force Majeure Compensation Amount

Theunderlyingprinciple in thisevent is thatsinceneitherparty isat fault,andbecauseneitherpartycanchangethe

circumstances,theburdenofterminationshouldbeequallyshared.Theremayhoweverbecasesindevelopingcountries

whereforcemajeurecausedbypoliticalevents(war,terrorism,civilunrest,oranactionbythehostgovernmentsuchas

blockingthetransferoffunds)istreatedthesamewayasdefaultbygovernment.

Interminationclausestriggeredbynaturalforcemajeureevents,theterminationpaymentswillnormallybehigherthan

in thecaseofProjectProponentdefault,but lower than in thecaseofgovernmentdefault. Innormalcircumstances,

theterminationpaymentwouldcovertheoutstandingdebtandtheactualcostsofunwindingthe loanandhedging

agreements.Itcouldalsoincludethevalueofequitycontributions,butexcludeanyreturntothatequity.Thetreatment

ofsalvageassetvalueandinsuranceproceeds(assumingthatthereareany)wouldneedtobetreatedaccordingtothe

underlyingprinciplesstatedabove.

18Debtthatwillbepaidfirstincaseofdefault.

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CHAPTER 6Steps and Issues Leading Up to the Negotiation Stage

TheRevisedIRRoftheBOTLaw,startingatRule5,setsoutthetenderingprocessinconsiderabledetail,particularlyrelated

totheearlystagesofthetenderingprocessanditshouldbereadinconjunctionwiththisChapter.

ThisSectionpicksupthetenderingprocessatthetimeoftheClarificationorRejectionofProposalsandtracesstepsand

issuesleadinguptotheNegotiationStage.

6.1 Clarification or Rejection of Proposals

ClarificationofBids:AcomparisonoftheratingsassignedbyeachmemberofthePBACoftenbringstolightambiguities

inthebidwhichshouldbeclarifiedbythebidder:

i. ThePBACmayaskbiddersforclarificationoftheirbidsinordertoassist intheexamination,evaluationand

comparisonofbids.However,nochangeinamatterofsubstanceinthebid,includingchangesinpriceorchanges

aimedatmakinganunresponsivetenderresponsive,shallbesought,offeredorpermitted.

ii. Notwithstandingsubparagraph(i)above,thePBACshallcorrectpurelyarithmeticalerrorsthatarediscovered

duringtheexaminationofbids.ThePBACshallgivepromptnoticeofanysuchcorrectiontothebidder.

iii. Whentheclarificationofbids is required, the IAshallmaintainawrittenminutesof themeeting.Adequate

noticeshouldbegiventothebidderpriortoconductingthemeeting.Thelocationandsettingofthemeeting

shouldbeconducivetoprofessionallydiscussissuesleadingtoaresolutionofthemattertobeclarified.

Incertaincases,itmaybenecessaryfortheIAtorejectallbids;

i. SubjecttoapprovalbytheHeadofAgency,andifsospecifiedinthebiddocuments,theIAmayrejectallbids

atany timeprior to theacceptanceofabid.The IAshall communicatepromptly toallbidders that submitted

proposals,thegroundsforitsrejectionofallbids;

ii. TheIAshallincurnoliability,solelybyvirtueofitsinvokingthisprovisionandrejectingallsubmittedbids.The

IAisnotobligatedtorebidifbidsarerejected.

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6.2 Ranking of all Responsive Bids from Qualified Bidders

TheIAshallfairlyandimpartiallyrankthosebidsdeterminedtoberesponsibleandresponsive,fromqualifiedbidders.Bids

shouldnotberejectedduetominordeviationswhichdonotaffecttheprice,quality,scope,orcompletiondateofthe

PPPrequirementorlimitsinanymaterialwaytheresponsibilities,duties,orliabilitiesofthebidderoranyrightsoftheIA:

TheIAshallnotacceptnorrankabid:

a. Ifthebidderthatsubmittedthebidisnotqualified;or

b. Ifthebidisnotresponsive.

TheIAshallprepareareportdetailingthebidevaluationprocessandtherankingofallresponsivebids.Thereportshall

alsodetail:

a. Theevaluationcriteriaasstatedinthebiddocument;

b. Listallofbidderssubmittingbids;

c. Listofthosebiddersfoundtobequalified;

d. Detailtheevaluationofeachbidfoundtobequalified;

e. Listallbidsdeemedresponsiveintheorderranked,withthefirstrankedhereinafterreferredtoastheProject

Proponent.

6.3 Direct Negotiation

6.3.1 Single Complying Bid

Directnegotiationmaybeconductedwhenthereisonlyonecomplyingbidderleftasdefinedhereunder:

a. If, afteradvertisement,onlyoneprospective ProjectProponentapplies forpre-qualificationandmeets the

pre-qualificationrequirements,afterwhich,theProjectProponentisrequiredtosubmitabid/proposalwhichis

subsequentlyfoundbytheIAtobecomplying;

b. If,afteradvertisement,morethanoneprospective ProjectProponentappliedforpre-qualificationbutonly

onemeetsthepre-qualificationrequirements,afterwhichitsubmitsabidproposalthatisfoundbytheIAtobe

complying;

c. If, afterpre-qualificationofmore thanoneprospectiveProjectProponent,onlyone submits abidwhich is

foundbytheIAtobecomplying;

d. If,afterpre-qualification,morethanoneprospectiveProjectProponentsubmitbidsbutonlyoneisfoundby

theIAtobecomplying.

Insuchevents,however,anydisqualifiedbiddermayappealthedisqualificationtotheHeadofAgencyoftheconcerned

IA,incaseofnationalprojects,withinfifteen(15)workingdaysfromreceiptofthenoticeofdisqualification.TheHeadof

Agencyrepresentativeshallactontheappealwithinforty-five(45)workingdaysfromreceiptthereof.Thedecisionofthe

HeadofAgencyshallbefinalandimmediatelyexecuted.

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6.3.2 Unsolicited Proposal

Section9.2oftheRevisedIRRoftheBOTLawallowsunsolicitedproposalstobeacceptedonanegotiatedbasis.Chapter

8Sections8.2.3,8.3and8.4discussesthenegotiationstagesundertheprocurementprocessforunsolicitedproposals.

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CHAPTER 7Award of Contract and Implementation Steps

7.1 PBAC Recommendation to Award

Withinthree(3)calendardaysfromthedatethefinancialevaluationiscompleted,thePBACwillsubmittotheHeadofthe

IAarecommendationofaward.ThePBACwillprepareandsubmitadetailedevaluation/assessmentreportonitsdecision

regardingtheevaluationofthebidsandexplainincleartermsthebasisofitsrecommendations.

Withinthree(3)calendardaysfromthesubmissionbyPBACoftherecommendationtoaward,theHeadoftheIAshall

decideontheaward.

The approval shall bemanifestedby signing and issuing the “NoticeofAward” to thewinningbidderwithinfive (5)

calendardaysfromapprovalthereof.

AllunsuccessfulbiddersshallbeinformedinwritingofthedecisionoftheIAtoawardtheprojecttothewinningbidder.

Suchdecisionshallbemadeavailabletothepublic.

7.2 Notice of Award to Winning Bidder

TheHeadoftheIAshall issuea“NoticeofAward”toindicatethatthewinningbiddermustsubmitwithintwenty(20)

calendardaysfromofficialreceiptofthe“NoticeofAward”thefollowing:

a. Prescribemmitmentoftherequiredequitycontribution,asspecifiedbytheIA:

i. Inthecasewherethewinningbidderisacorporation-e.g.,treasurer’saffidavitattestingtoactualpaid-

up capital, subscription agreement(s) between a shareholder(s) of the Project Proponent and the Project

Proponentitselfcoveringsaidequitycontribution,orshareholdersagreementbetweenandamongst2ormore

shareholdersoftheProjectProponentundertakingtocontribute/subscribetherequiredequitycontribution;or

ii. In the case of a consortium - an undertaking of the members thereof to infuse the required equity

contributiontotheconsortium.

DRAFT



c. Proofoffirmcommitmentsfromareputablefinancialinstitutiontoprovidesufficientcreditlinestocoverthe

totalestimatedcostoftheproject;

d. Inthecaseofaconsortium,theagreementindicatingthatthemembersarejointlyandseverallyliableforthe

obligationsofthewinningbidderunderthecontract;or

e. IncaseaSpecialPurposeCompany(SPC)isformedforpurposesofundertakingtheproject,proofofregistration

inaccordancewithPhilippinelaws.

f. SuchotherconditionsimposedbytheIA.

Failuretosubmittherequirementswithintheprescribedtwenty(20)calendardayperiodwill result inconfiscationof

thebidsecurity.Withinfive(5)calendardaysuponreceiptoftheforegoingrequirementsforaward,theHeadofIAshall

determineandnotifythewinningbidderofitscomplianceofalltheconditionsstatedinthesaidnotice.

ThePBACshallpostthenoticeofawardinthePhilippineGovernmentElectronicProcurementSystem(PhilGEPS),andthe

websiteofPPPCwithinseven(7)calendardaysfromtheissuanceofNoticeofAward.

Theexecutionofthecontractshallbemadewithintheperiodofthevalidityofthebidsecurity.Thevalidityofthebid

securityshallinnocasegobeyondonehundredeighty(180)calendardaysfollowingtheopeningofthebids.

Whenanextensionofvalidityofbidsisconsiderednecessary,thosewhosubmittedbidsshallberequestedinwritingto

extendthevalidityoftheirbidsbeforetheexpirationdate.However,biddersshallnotbeallowedtomodifyorrevisethe

priceorothersubstanceoftheirbids.

Biddersshallhavetherighttorefusetograntsuchanextensionwithoutforfeitingtheirbidsecurity,butthosewhoare

willingtoextendthevalidityoftheirbidsshouldberequiredtoprovideasuitableextensionofbidsecurity.

7.3 Formation of a Special Purpose Company (SPC)

ThewinningProjectProponentmaycausetheincorporationofanSPCthatshallassumeandaccedetoalltherightsand

obligationsofthewinningProjectProponent,provided,that:

a. TheSPCisregisteredinaccordancewithapplicablePhilippinecorporate/commercial/investmentlaws;

b. ThewinningProjectProponentsubscribestoandpaysforasignificant/principalshareholdingorcontrolling

interest in the SPC, subject to the nationality and ownership requirements under the Constitution and other

applicablelaws.Therequiredlevelofshareownershipmaybeindicatedinthebiddocumentsordeterminedasa

conditionpriortocontractaward;

c. Inthecaseofaconsortium,allmembersthereofshallpresentproofofcontractualorotherlegallybindingties

toorrelationshipswiththeSPCforthedevelopmentandimplementationoftheprojectinaccordancewiththeir

submittedbusinessplan,e.g.,forfacilityowners/developers/equityinvestors-subscriptiontoandpaymentfora

significantnumberofsharesintheSPC;

d. AnagreementisexecutedbytheSPCandtheProjectProponentinfavoroftheIAmakingtheSPCprincipally

liablefortheperformanceofthewinningProjectProponent’sobligationsundertheNoticeofAwardand/orthe

contract;and

DRAFT



e. AwrittennoticetoformtheSPCandtheproposedagreementaresubmittedtotheIAwithinfive(5)calendar

daysfromdateofreceiptofNoticeofAward.

7.4 Withdrawal/Substitution of a Member

SubjecttotheapprovaloftheIA,anymemberoftheconsortiumorashareholderoftheSPCcreated(whowasamember

ofsuchconsortium),oritspre-qualifiedContractorsmaywithdrawpriortoawardoftheproject,oranytimeduringthe

contractterm.

Theremainingmembersorshareholdersmuststillbelegally,technically,andfinanciallycapableofsuccessfullycarrying

outtheimplementation/operationoftheprojectorasuitableandacceptablesubstitutewithequalorbetterqualifications

isfoundtoreplacethewithdrawingmemberorshareholder.

Awithdrawalmadeinviolationofthissectionshallbeagroundfordisqualificationorcancellationofthecontract,asthe

casemaybe,andforfeitureoftheProjectProponent’sbidorperformancesecurity.

TheIAshallinformthePPPCenterinwritingofsuchchanges.

7.5 Validity of Bids/Return of Bid Security

Theexecutionofthecontractshallbemadewithintheperiodofvalidityoftheproposalsecurity.Therequiredproposal

securityshallbevalidforareasonableperiodbutinnocasebeyondonehundredeighty(180)calendardaysfollowing

theopeningoftheproposals.ProposalsecuritiesshallbereturnedtotheunsuccessfulComparativeProjectProponentsas

soonasthecontractissignedbythewinningProjectProponent.Proposalsecurityshallalsobereturnedtothewinning

ProjectProponent,iftheinstrumentisnototherwisedeclarednullandvoid.

7.6 Execution/Approval of the Contract

Theauthorizedsignatory(ies)ofthewinningbidderandtheHeadoftheIAshallexecuteandsignthecontractforthe

project,withinfive(5)calendardaysfromreceiptbythewinningbidderofthenoticefromtheIAthatallconditionsstated

intheNoticeofAwardhavebeencompliedwith.ConsistentwithArticle1159oftheNewCivilCode,thecontractisthelaw

betweenthepartiesandthepartiesshallperformtheirrespectiveobligationsandundertakingsthereunderwithutmost

goodfaith.AnoriginalsignedcopyofthecontractshallbesubmittedtotheApprovingBodyandthePPPCenterwithin

five(5)calendardaysaftersigningthereofbytheagency.

Intheeventofrefusal,inabilityorfailureofthewinningProjectProponenttoenterintocontractwiththeIAwithinthe

timeprovided,theProjectProponentshallforfeititsbidsecurity.Insuchanevent,theIAconcernedshallconsiderthe

ProjectProponentwiththenextrankedcomplyingproposal.Ifthesameshalllikewiserefuseorfailtoenterintocontract

withtheIA,itsproposalsecurityshalllikewisebeforfeitedandtheIAconcernedshallconsiderthenextrankedcomplying

proposal,andsoonuntilacontractshallhavebeenenteredinto.

DRAFT



IftheconcernedIAisunabletoexecutethecontractwithanyofthecomplyingProjectProponents,afailureofcomparative

proposalswillbedeclaredandtheprojectmaybesubjectedtoasubmissionofnewcomparativeproposals.

TheProjectProponentshall,asmayberequiredundertheexistinglaws,rulesandregulationssecureanyandallother

approvalsforthecontractortheimplementationthereoffromgovernmentagenciesorbodiesincludingtheRegulator

inthecaseofPublicUtilityProjects.Thisincludessecuringthenecessaryandappropriateenvironmentalclearancesfrom

theDENRpriortoactualprojectconstruction.TheDENRshallactontheenvironmentalclearanceoftheprojectwithinthe

timeframeprescribedandfollowingtheguidelinesofDENRAdministrativeOrderNo.96-37andsubsequentguidelines

asmaybeissuedfromtimetotime.TheIAmayprovidethenecessaryassistancetotheProjectProponentinsecuringall

therequiredclearances.

Thecontractshallprovidemilestonesinsecuringsuchotherapprovalsrequiredfortheimplementationofthecontract.

7.7 Grant of Franchise

SubjecttotheprovisionsoftheConstitutionandotherexistinglaws,rulesandregulations,onceacontractisexecutedby

theProjectProponentandtheIA,apresumptionarisesthatthepublicinterestwillbeservedbytheimplementationofthe

projectcoveredthereby,andimmediatelyuponapplicationbytheProjectProponent,theRegulatorshallautomatically

grantinfavoroftheProjectProponentaFranchisetooperatethefacilityandcollectthetolls,fees,rentals,andother

chargesstipulatedunderthecontract.

7.8 Notice to Commence

Upon approval of the signed contract by the approving body, the agency shall issue the “Notice to Commence

Implementation”oftheprojecttotheProjectProponentnotlaterthanseven(7)calendardays.

DRAFT



CHAPTER 8Unsolicited Proposals

8.1 Processing Unsolicited Proposals

There isaproper role forprivatesector initiatives.However, in thecaseofunsolicitedproposals, thegovernmenthas

expressedapreferenceforthesolicitedproposalmodalitywhereverfeasible.Accordingly,thegovernmenthasdecided

tocraftverystrictprovisions toenableunsolicitedproposals tobeconsideredonlyonanegotiatedbasisandonly in

exceptional cases. Further, any component of an approved project shall not be eligible for an unsolicited proposal.

UnsolicitedproposalsmayonlybeacceptedforevaluationbytheIAif:

a. Suchprojects involveanewconceptor technology,asdeterminedby theagency,andarenot included in

the list of priority projects, the lists being the Public Investment Program, the Comprehensive and Integrated

Infrastructure Program for national projects, and Provincial/ LocalDevelopment Investment Programs for LGU

projects.However,projectsintheprioritylistmaybeeligibleifnewconceptsortechnologyareintroduced;

b. Nodirectgovernmentguarantee,subsidyorequityisrequired;and

c. TheIAhasinvited,bypublicationforthreeconsecutiveweeksinanewspaperofgeneralcirculation,comparative

orcompetitiveproposalsandnootherproposalisreceivedforaperiodofsixty(60)workingdays.

Section10.2oftheRevisedIRRoftheBOTLawprovidesthat“new”technologymustbecharacterizedbyatleastoneof

thefollowingattributes:

a. A recognized process, design,methodology or engineering conceptwhich has demonstrated its ability to

significantlyreduceimplementationorconstructioncosts,accelerateprojectexecution,improvesafety,enhance

projectperformance,extendeconomiclife,reducecostsoffacilitymaintenanceandoperations,orreducenegative

environmentalimpactorsocial/economicdisturbancesordisruptionseitherduringtheprojectimplementation/

constructionphaseortheoperationphase;

b. Aprocess forwhich theProjectProponentor anymemberof theProjectProponent consortiumpossesses

exclusiverights,eitherworld-wideorregionally;or

c. Adesign,methodologyorengineeringconceptforwhichtheProjectProponentoramemberoftheProject

Proponentconsortiumorassociationpossessesintellectualpropertyrights.

DRAFT



Concerningdirectgovernmentguarantee,equityorsubsidy,theRevisedIRRoftheBOTLawdefineseachoftheseterms,

asfollows:

a. A direct government guarantee refers to an agreement whereby the government guarantees to assume

responsibilityfortherepaymentofdebtdirectlyincurredbytheProjectProponentinimplementingtheprojectin

caseofaloandefault(Section1.3,itemj);

b. Adirectgovernmentsubsidyreferstoanagreementwherebythegovernmentwill:(i)defray,payfororshoulder

aportionoftheprojectcostortheexpensesandcosts inoperatingormaintainingtheproject; (ii)condoneor

postpone anypaymentsdue from theProject Proponent; (iii) contribute anypropertyor assets to theproject

(right-of-way,costofrelocationandresettlementincluded);(iv)inthecaseofLGUs,waiveorgrantspecialrates

onrealpropertytaxesontheprojectduringthetermofthecontractualarrangement;and/or(v)waivechargesor

feesrelativetobusinesspermitsorlicensesthataretobeobtainedfortheconstructionoftheproject,allwithout

receivingpaymentorvaluefromtheProjectProponentand/orfacilityoperatorforsuchpayment,contributionor

support(Section13.3,itemc);

c. Directgovernmentequityreferstothesubscriptionbythegovernmentofsharesofstockorothersecurities

convertibletosharesofstockoftheprojectcompany,whethersuchsubscriptionwillbepaidbymoneyorassets

(Section13.3,itemd).

Thesale,lease,orgrantofusufruct,ofgovernmentassets,includingamongothers,right-of-way,withcompensationfrom

theProjectProponentsshallnotbeconsideredasadirectsubsidyorequity.Thestandardsofvaluationofgovernment

assetswill be subject to RA 8974, “An Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National

GovernmentInfrastructureProjectsandforOtherPurposes”andotherexistinglaws,rulesandregulations.Theappraisal

shallbeundertakenbyathirdpartyaccreditedtoconductsuchappraisal.

8.2 PPP Process for Unsolicited Proposal

Figure2.3(fromChapter4,Section4.3)isrepeatedbelowandpresentstheprocessforunsolicitedproposalsunderRA

7718.Thesucceedingsectionsdiscussthestepsintheprocess.

DRAFT



8.2.1 Submission of Complete Proposal

Onlycompleteproposalswillbeprocessed,andacompleteproposalshouldinclude:

a. Coverletter,whichindicatesthebasicinformationontheunsolicitedproposalsuchasitsexpectedoutputand

outcome,implementationperiod,andgeneraldescriptionofthenewconceptortechnology;

b. Companyprofile;

c. Feasibilitystudy;

d. Draftcontract;and

e. Otherdocumentsthatareproprietaryinnature.

Uponreceiptofanunsolicitedproposal,theIAshall,firstacknowledgeinwritingthereceiptoftheUnsolicitedProposal

withinseven (7)calendardays.Thewrittenacknowledgementshallbesent to theProjectProponentstating that the

proposalwillbeadministrativelyprocessedtodetermineitscompleteness.

8.2.2 Evaluation of the Unsolicited Proposal by the IA

IA Review of Unsolicited Proposal

TheIAshallreviewtheproposalandadvisetheProjectProponentwhetheritiscompleteorincompletewithin30calendar

daysfromsubmissionthereof.Ifincomplete,itshallindicatewhatinformationislackingornecessary.Theagencymay

entertainsameorsimilarprojectproposalsatthispoint.

Theevaluationforcompletenessandadministrativecomplianceshalldeterminewhetherornottheproposedproject:

a. Involvesanewconceptortechnology;

b. Isnotincludedinthelistofpriorityprojects;

c. Doesnotrequireadirectgovernmentguarantee,subsidy,orequity;and

Figure 2.3 Outline of the PPP Process for Unsolicited Proposals

Submission of Complete Proposal Invitation for ComparativeProposals

Evaluation of proposal by IA Preparation & submission of comparative proposals

Original proponent Right to Match

Negotiations after Original Proponenthas been Pre-Qualified Evaluation of proposals of Challenger/s

Award of contract

Adjustment of Terms / Fees / Rentals / Charges Determination of Winning Proponent

Acceptance of Terms & Conditions by Proponent

Approval by Approving Body

1 7

2 8

3 9

4 10

5 11

6 12

DRAFT



In theevent the IA receivesmore thanoneunsolicitedproposal involving the sameor similarproject, the IAhas the

followingoptionstoacceptandvestoriginalProjectProponentstatus:

a. theIAmayrejectallsuchproposalsandinstead,competitivelytendertheproject.

b. the IA shall evaluate the proposals using a first in time approach. Under this approach, the first complete

proposalisevaluatedanddecidedupon.Thesecondcompleteproposalwillonlybeentertainedifthefirstoneis

rejected.Otherwise,thesecondproposalwillbeconsideredonlyifthereisafailureinthenegotiationofthefirst

proposalorduringthe“invitationforcomparativeproposals.”

Evaluation and Acceptance of Unsolicited Proposal

Intheeventtheproposalfulfillstheadministrativeevaluationandsubmissionisdeterminedcomplete,theIAshall:

a. Appraisethemeritsoftheproject;

b. QualifytheProjectProponent,inaccordancewiththerequirementsofRule5oftheRevisedIRRoftheBOTLaw,

tocarryouttheproject;

c. Assesstheappropriatenessofthecontractualarrangementandreasonablenessoftheriskallocation;

d. Recommendareasonablerateofreturn;

e. InformtheICCandPPPCofitsacceptanceoftheunsolicitedproposal;

f. Endorsetotheapprovingbodyallpertinentdocumentationtoseekapprovaltoproceedwiththenegotiation

withtheunsolicitedProjectProponent;and

g. AdvisetheProjectProponentinwritingwithin120daysofitsacceptanceoftheproposalandconfirmingits

OriginalProjectProponentstatus.AtthispointtheIAshallnolongerentertainsimilarproposalsuntilthisstatus

is revoked because of disagreements in negotiations or inability of the Project Proponent tomeet terms and

conditionssetbytheapprovingbody,oruntilsolicitationofcomparativeproposalshasbeenconcluded.

8.2.3 Negotiations after Original Project Proponent has been Pre-Qualified

TheIA,withinfive(5)calendardaysuponissuanceoftheletterofacceptancebytheIAtotheProjectProponent,thehead

ofagencyshallendorsetotheICCtheproposedunsolicitedproject.

Obtaining ICC Concurrence

TheICCshalldeterminethereasonablerateofreturnoninvestmentsandoperatingandmaintenancecostsbasedonthe

reasonablerateofreturnrecommendedbytheagency,priortonegotiationand/orcallforcomparativeproposals.

ICC shall determine such rate and other parameters for negotiationwithin thirty (30) working days upon receipt of

endorsement,resultsofduediligenceevaluationconductedandsubmissionofcompletedocumentationfromthehead

ofagency.TheICCshallformallyadvisetheagency,thereafter,thatsuchdeterminationisfinalandexecutable.

Withinseven(7)calendardaysuponreceiptbytheagencyoftheformaladviceofthe ICC,theagencyshall informin

writing the original Project Proponent of the mechanics of negotiation, including the commencement date and its

authorizedrepresentatives.

DRAFT



Appointment of a Pre-Qualification Bids and Awards Committee

IntheeventofadecisiontoaccepttheunsolicitedproposalandconcurrenceoftheApprovingBodytoproceed,thehead

oftheIAshallappointaPBAC.ThemembersofthePBACshallbeknowledgeableonprocurementproceduresand,more

importantly,ofthetypeofprojectbeingprocured.ThePBACshouldreflecttheappropriatemixofspecialistskillsand

includekeystakeholders(seeChapter4.4ondiscussiononthePBAC’sroleinmanagingthePPPprocurementprocess).

Preparing for PPP Contract Negotiations

AnoverviewofthetheoryofPPPContractNegotiationsisprovidedbelow.

Negotiations shall focus on the project scope, implementation arrangements, reasonable rate of return and other

parametersdeterminedbyICC,andthetermsandconditionsofthedraftcontract,amongothers.

TheIAandtheoriginalProjectProponentshallconcludenegotiationswithinaperiodofeighty(80)calendardaysfrom

receiptbytheProjectProponentofwrittennoticefromtheIAtocommencenegotiations.

TheIAandtheoriginalProjectProponentshallnegotiateingoodfaithandendeavortocompletethenegotiationwithin

theeighty(80)-dayperiod;provided,thatshouldtherebeirreconcilabledifferencesduringthenegotiationperiod,theIA

shallhavetheoptiontorejecttheproposalbyadvisingtheoriginalProjectProponentinwritingstatingthegroundsfor

rejectionandthereaftermayacceptanewUnsolicitedProposal,orbidouttheprojectasasolicitedproposal,orundertake

theprojectonitsown.

8.2.4 Approval of the Approving Body

Ifnegotiationissuccessful,theheadoftheIAandtheauthorizedsignatoryoftheoriginalProjectProponentshallissuea

signedcertificationthatanagreementhasbeenreachedbybothparties.Thecertificationshallstatethattheagencyshall

commenceactivitiesforthesolicitationofcomparativeproposals.Theagencyshallwithinseven(7)calendardaysafter

theeighty(80)calendardaynegotiationperiodsubmitareporttotheICCoftheresultofitsnegotiationwiththeoriginal

ProjectProponentforapproval/validation.

TheapprovaloftheunsolicitedprojectbytheApprovingBodyshallbevalidonlyforaperiodofeighteen(18)months

fromtheissuanceoftheapprovalunlesstheinvitationforcomparativeproposalshasbeenissued.

8.2.5 Adjustment of Tolls/Fees/Rentals/Charges

TheIAshallsecureeithertheadviceoftheRegulator(ifapplicable)ortheApprovingBodyorboth,asthecasemaybe,for

theparametricformulaandofficialpriceindicesfortheadjustmentoftolls,fees,rentalsandchargesthatmaybegranted

duringcontractadministration.

TheHeadoftheIAshallreviewandapprovethedraftcontractwhichshallbebasedontheparameters,andtermsand

conditionsstipulatedbytheApprovingBody.

PriortotheapprovaloftheHeadofAgency,thedraftcontractshallundergoreviewbytheOfficeoftheGovernment

DRAFT



CorporateCounsel(OGCC),andtheOfficeoftheSolicitorGeneral(OSG).Theprescribedstatutorycounsel,andifnecessary,

theDepartmentofFinanceshallissueanopiniononthedraftcontractwithinten(10)calendardaysuponreceiptofthe

draftcontract.

ChangestothedraftcontractasagreeduponbytheIAandoriginalProjectProponentandasapprovedbytheHeadof

Agencyshallnotbeallowedexceptforchangestocontracttermsaffectedordecidedbythewinningbidder’sbidduring

thesolicitationofcomparativeproposalsandmatchingbytheoriginalProjectProponent.

8.2.6 Acceptance of Terms and Conditions by the Original Project Proponent

Withinfortyfive(45)calendardaysfromthereceiptoftheapprovalissuedbytheApprovingBody,theoriginalProject

ProponentshallnotifytheIAinwritingofitsacceptanceofallthetermsandconditionsoftheapprovaloftheApproving

Body.FailurebytheoriginalProjectProponenttosubmitsuchacceptanceinwritingshallbedeemedarejectionofthe

unsolicitedproposal.

8.2.7 Invitation for Comparative Proposals (the Swiss Challenge)

Preparationofsolicitationandcontractualdocumentsshallbepreparedinaccordancewiththeprovisionsspecifiedunder

IRRRules4and5oftheRevisedIRRoftheBOTLaw.ThecontractexecutedwiththeProjectProponent,andasapproved

bytheApprovingBody,shallbepartoftheComparativeProposaldocuments,andshallbeconsideredfinalandnon-

negotiablebythecomparativeProjectProponents.

Proprietaryinformationshall,however,berespected,protectedandtreatedwithutmostconfidentiality.Assuch,itshall

notformpartofthebidding/tenderandrelateddocuments.

SolicitationDocumentsshallincludeadraftof:

a. PrequalificationQuestionnaire,usingthesamecriteriausedforqualifyingtheoriginalProjectProponent;

b. ComparativeProposalDocumentandthecriteriaforevaluatingproposals,andthethresholds,ifany,setbythe

IAforidentifyingnon-responsiveproposals;therelativeweighttobeaccordedtoeachevaluationcriterion;and

themannerinwhichthecriteriaandthresholdsaretobeappliedintheevaluationandrejectionofproposals;

c. AdvertisementAnnouncingtheAvailabilityofthePrequalificationQuestionnairesandComparativeProposal

Documents;and

d. AnnouncementofaPre-ProposalMeeting.

ThedecisionofwhetherornottodisclosetheOriginalProjectProponent’spriceoffinancialproposalintheSolicitation

Documents shall bediscussedbetween the IA and theOriginal Project Proponent. If they agree, theOriginal Project

Proponent’s price or financial proposalmay be disclosed. If the original Project Proponent’s price proposal was not

disclosedintheComparativeProposalDocuments,itshallberevealedupontheopeningofthefinancialproposalsofthe

ComparativeProjectProponents.

DRAFT



The Contractual Document clearly defines the basic legal relationship between the parties and their rights and

responsibilitiesincludingthespecificGovernmentUndertakingstobeprovidedbytheIArelativetotheproject.Thedraft

contractshallbethedraftapprovedbytheApprovingBodyandshallhavethefollowingmandatorytermsorconditions:

a. Specificcontractualarrangement,terms,andscopeofwork;

b. Projecttechnicalspecificationsandsystemfeatures;

c. Implementationmilestonesincludingthoseforsecuringotherapprovals,andprojectcompletiondate;

d. Costrecoveryschemeviaproposedtolls,fees,rentalsandcharges,asthecasemaybe;

e. LiquidateddamagesascontemplatedunderSection12.14oftheRevisedIRRoftheBOTLaw;

f. PerformanceandwarrantybondscontemplatedunderSections12.8and12.9oftheRevisedIRRoftheBOT

Law;

g. Minimum insurancecoverageas follows:Contractors’ all risk,motorvehicle,workmen’scompensation,and

thirdpartyliabilityfortheprojectincludingcomprehensivegeneralliabilityinsurance;

h. Acceptancetestsandprocedures;

i. Warrantyperiodandprocedures(aftertransfer);

j. Groundsforandeffectsofcontractterminationincludingmodesforsettlingdisputes;

k. Themannerandproceduresfortheresolutionofwarrantyagainstcorruption;and

l. Compliancewithallotherapplicablelaws,rules,andregulations.

Withinseven(7)daysuponissuanceofthecertificationofasuccessfulnegotiationinaccordancewithSection10.11of

theRevisedIRRoftheBOTLaw,theIAPBACshallpublishtheinvitationforcomparativeproposalsafterreceiptofthe

notificationfromtheOriginalProjectProponentthatthelatteracceptsallthetermsandconditionsindicatedintheNotice

ofApproval.

The invitation for comparative or competitive proposals shall be published at least once every week for three (3)

consecutiveweeksinatleastone(1)newspaperofgeneralcirculation.Theinvitationshouldalsobepostedcontinuously

inthewebsiteoftheIAconcerned,ifavailable,duringtheperiodstatedabove.

ForprojectscostingatleastPhP500million,theinvitationshouldalsobepublishedatleastonce(1)inatleastone(1)

internationalpublication.Itshallindicatethetime,whichshouldnotbeearlierthanthelastdateofpublication,andplace

wheretender/biddingdocumentscouldbeobtained.

The invitation shall explicitly specify a time of sixty (60) working days, calculated from the date of issuance of the

ComparativeProposaldocuments, forproposalstobereceivedbytheIA.Beyondthatdeadline,noproposalsshallbe

accepted.

8.2.8 Preparation and Submission of Comparative Proposals

Apre-bidconferenceshallbeconductedthirty (30)workingdaysafter thesimultaneous issuanceof theComparative

Proposaldocumentstoallbidders.

DRAFT



Tobeeligibletocompetefurther,theoriginalProjectProponentshallberequiredtosubmitabondequaltotheamount

andintheformrequiredofthecomparativeProjectProponents.ThesubmissionoftheBondshallbedueatthedateof

thefirstdayofthepublicationofthe“invitationforcomparativeproposals”.

To be eligible to compete further, each Comparative Project Proponent is required to submit its proposal in three

separately-sealedenvelopesatthetimeandplacespecifiedintheTenderDocuments.Thefirstenvelopeshallcontainthe

qualificationdocuments,thesecondenvelopethetechnicalproposalasrequiredunderSection7.1(b)oftheRevisedIRR

oftheBOTLaw,andthethirdenvelopethefinancialproposalasrequiredunderSection7.1(c)ofthesameIRR.

8.2.9 Evaluation of Proposals of Challenger/s

TheIAshallevaluateproposalsinthreestages:

• Stage1–ThequalificationsofeachComparativeProjectProponenttocarryouttheproject;

• Stage2–EachComparativeProjectProponent’stechnicalproposal;and

• Stage3–EachComparativeProjectProponent’sfinancialproposal.

Onlythoseproposalswhichpassthefirststagewillbeconsideredforthesecondstageandsimilarly,onlythosewhichpass

thesecondstagewillbeconsideredforthethirdstageofevaluation.

TheIAwillreturntothedisqualifiedComparativeProjectProponentstheremainingenvelopesunopened,togetherwith

aletterexplainingwhytheyweredisqualified.ThecriteriaforevaluationwillfollowRule5oftheRevisedIRRoftheBOT

LawforthequalificationofbiddersandinRule8ofthesameIRRforthetechnicalandfinancialproposals.Thetimeframes

underIRRRules5and8shalllikewisebefollowed.

8.2.10 Original Project Proponent Right to Match

TheoriginalProjectProponentshallbegiventherighttomatchthecomparativeProjectProponent’sbid.

8.2.11 Determination of Winning Project Proponent

IfthepriceofthewinningcomparativeProjectProponentisnotmatched,thewinningcomparativeProjectProponent

shallbeconsideredforaward.Butintheeventofrefusal,inabilityorfailureofthewinningcomparativeProjectProponent

toenter intocontractwiththe IA, the IAwillconsider forawardthenext-rankedcomplyingcomparativebidwhich is

betterthantheoriginalProjectProponent.TheoriginalProjectProponentshallagainbegiventherighttomatchthe

comparativeProjectProponent’sbid.Ifnoothercomparativebidisdeterminedtobebetterthantheofferoftheoriginal

ProjectProponent,theprojectshallimmediatelybeawardedtotheoriginalProjectProponent.

8.2.12 Award of contract

Rule11oftheRevisedIRRoftheBOTLawprescribestherequirementsandtimeframeoftheawardofcontract;thisalso

appliestoUnsolicitedProposals.Chapter7ofthisManualalreadydiscussedtheprocessfortheawardofthecontract.

DRAFT



8.3 Post Tender Clarification and Negotiation

TheProjectProponentcanbeassumedtohaveavestedinterestinamendingthegeneraloutlinesofrisktransferprovisions

agreedinthePPPContractoncethemoreintensemultiple-partynegotiationscommenceonsupplementarycontracts.

The Project Proponentwill likely have at its disposal aNegotiation Team, supportedby technical, legal and financial

advisors,whomay,ormaynot,bepresentatthenegotiationtablebutwillbeavailableforsupportfunctions.Together

withtheNegotiationTeam,theyformwhatiscommonlyknownastheProjectProponent’sTransactionTeam.

For the IA’s side, thePBAC is responsible for negotiatingwith theProject Proponent and itmay compriseof experts

in areas suchas legal, financial, engineering, operation, and riskmanagement. Forunsolicitedproposals, thePBAC is

comprisedofthe IA’sPPPUnitandthePPPCenter (observercapacityonly). Representatives fromthe IAandthePPP

CenterthatnormallycompriseaProjectStudyCommitteemayrepresenttheirrespectiveinstitutionsduringnegotiations

forunsolicitedproposals.

Atthisstageoftheprocess,thePBACwillconductafullduediligenceontheproject.Itisworthwhiletorecapthemore

importantpartsof thisduediligenceand its impactondevelopinganegotiationstrategy.Thereare twosteps in this

process: (a) thenegotiationof thePPPContract,whichhas tobecompletedbefore theprojectcanbeawarded;and

(b)participationand,whererelevant,negotiationinvolvingalltheothersupplementaryagreementsaftertheprojectis

awarded.

Thissectionsetsoutguidelinesfornegotiations,includinganessentialchecklistforthePBAC.

8.4 Preparations for the Negotiation of the PPP Contract

ThePBACwillreviewthevalueformoneyanalysisdoneontheproposalandotherevaluationparameters,including:

a. An SCBA, establishing that theproposedprojectmeets threshold criteria establishedbyNEDA andwill be

economicallybeneficialtothecountry;

b. The feasibility study and corresponding investment appraisal, establishing the commercial viability of the

project;

c. Asocialandenvironmentalimpactreport,identifyinganymajoradversesocialandenvironmentaleffectsof

theprojectinareassuchasenvironment,healthandsafetyofemployeesandcommunity,genderopportunities,

resettlementissues,concernsregardingindigenouspeoplesand,ifapplicable,affordabilityissuesandwillingness

topayfortheservicesthataretobeprovided.

Aspartofduediligence,itisalsoessentialtoundertakescrutinyofthefinancialmodelandthewinningbidder’sproposal

toestablishthereasonablenessoftheprojectedcapitalcosts,operatingcosts,tarifflevels,risksandotherrelatedaspects

oftheproposal.

DRAFT



ThePBACshoulddevelopaNegotiationPlan.Thisconfidentialplanshouldincludeataminimum,identificationof:

a. Non-negotiableitemsidentifiedassuchbytheapprovingbody;

b. Obstaclesthatarelikelytoimpedethesuccessfulnegotiationoftheproject;

c. Factorswhichhavechangedsincetheunsolicitedproposalhasbeenreceived;

d. Ariskmanagementstrategythatidentifies,quantifies,andprioritizesthedifferencesintheissuesbetweenthe

RequestforComparativeProposalsandtheproposal;

e. Parametersthatarenegotiable,asagreedbytheIAwiththeapprovingbody,andthescopeforvariance;

f. Anegotiatingstrategywithregardtotechnicalspecifications,particularlywheretheseimpactonprojectcost;

g. (g)renegotiationoptionsonspecificitems;

h. (h)otheritemsthatmaybespecifictotheparticularproject;and

i. Establishingacommonunderstandingandagreementonacomprehensiverangeofperformanceindicators,

how these aremeasuredand reported and clarity tobothpartiesof PPPContractprovisions. This is to avoid

contractdisputesduringtheoperationalstage.

TheIRRprescribesamaximumperiodof180daysforthenegotiation.Duringthisperiod,thekeytoasuccessfulnegotiation

istokeepthegovernment’smainobjectivesattheforefront,whileatthesametimemaintainingflexibilityinorderto

arriveatacontractualagreementthatisacceptabletoboththeIAandtheProjectProponent.

Ifbytheendof180daysthereislittleornoprogress,thePBACshouldconsiderbreakingoffnegotiations.Anydecisionto

breakoffnegotiations,however,shouldbemadebytheIAbasedontherecommendationbythePBAC.Ifthenegotiations

aresuccessfulandapprovalisextendedbytheIA,thedraftcontractwillbeupdatedandsenttotheICCforconcurrence.

ThesecrettosuccessfulPPPnegotiationsistoproceedasfaraspossibletomeettherequirementsoftheprivatesector

whileatthesametimeensuringthecostsandbenefitsandtheoptimalallocationofriskisachieved.Hence,thePBACwill

aimtonegotiateanagreedPPPContractthatwillhavenosubstantialshiftofrisktothegovernmentfromtheparameters,

termsandconditionssetbyICC.

8.4.1 An attitude of ‘doing business’

Inadditiontotheabove,itisessentialtoestablishanynon-permissiblevariationstothegovernmentpositionforcontract

negotiations.TheIAwillhaverecommended,andICCwillhaveapproved,whichitemsarenon-negotiableandshould

beidentifiedassuch.TheremayremainanumberofotheritemsintheRequestforComparativeProposalswhichthe

ProjectProponentmaynotmeetandwhichwillformthebasisofexplanation,discussionandnegotiation.Forexample,

negotiationsbetweentheProjectProponentandthegovernmentareoftenneededtoclarifyissues(usuallykeyissues)

thatariseasaresultofgapsorlackofclarityinthedraftPPPContract.

Wherenecessary, thePBACshouldbeabletoestablishtheparameters forpermissiblevariations,especiallytheupper

limit.ThatpositionmustbedocumentedandapprovedbytheIAbeforenegotiationscommencesotheleadnegotiator

isabletoconfirmanycontractvariationswiththesuccessfulbidderwithouthavingtoseekapprovalforeachvariation.

Thismakesforgoodpractice,asnegotiationismorelikelytoproceedsmoothlywithoutthenegotiatorhavingtoobtain

permissionfromthegovernmentside.

DRAFT



Ifnegotiationsareunsuccessful,theacceptanceoftheunsolicitedproposalwillberevoked.

8.5 “Check and Balance” of the Supplementary Documents in Unsolicited Proposals

Akeyquestion iswhoreviewsthedocumentation (other thanthe IA)beforefinancialclose.Sincethemajorityof the

projectdocumentationisdevelopedafterthePPPContractisinitialed,itisassumeditisjusttheIAwhoisawareofits

scopeandcontent.Thiscreatesaprocedural“checkandbalance”issue.

Table2.3followingdescribeswhatelementsofthedocumentationarepreparedpre-andpost-tender.

Table 2.3 Elements of Documentation for Pre- and Post-Tender

PPPContract Pre-tender,partofthetenderingpackagebutsubjecttoclarifications,theconditionsprecedenttoeffectivenessareusually180daysbutextendableattheoptionoftheParties

SchedulestothePPPContract Posttender

EPCContract Posttender

O&MContract,ifrequiredFuelSupplyAgreement,ifany

Posttender

JointVentureAgreement,ifrequired Posttender

SubordinationandFundingAgreement,ifrequired

Posttender

EquityGuaranteeorStandbyfundingarrangement

Posttender

TrusteeAgreement(s) Posttender

SideLetters,ifrequired Posttender

DirectAgreement Posttender

Theelementsofthedocumentationnegotiatedpost-tenderarepartiallyintendedtoclarifyrisktransferarrangementsthat

mayhavebeen(insomecases)obliquelyagreedduringconstructionoroperation.Forexample,theconstructioncontract

maycontainprovisionsrelatedtotheperformancebond-ortheunderlyingliquidateddamagesprovision-thatmaybe

suitablefortheproject(andacceptabletothelenders)butimplicitlyunfavorabletotheIA–thereby,latently,lesseningrisk

transfertotheprivatesectorduringconstructionandcreatingunwanted(andperhapscomplicated)contingentliabilities.

ThesameistrueoftheO&MAgreement,EquityGuarantee,orthestandbyfundingarrangements.EventheJointVenture

AgreementmayhaveprovisionslimitingthesupportthatparentcompanieswillgivetotheSPCcreatedtoimplement

theproject.Forexample,aJointVentureAgreementmayspecify that theparentcompanieswillbackuptheirequity

guaranteeonlywithseveral“guarantees”ratherthan“jointandseveral”guarantees,asisbestpractice.DRAFT



DRAFT



CHAPTER 9Key Project Documents

Thissectionaddressestheissueswhichariseinthepost-tenderperiod,whentheprojectdocumentsarecompiledandthe

partiesstartlookingforwardtofinancialclose.Theseissuesinclude:

• HowotherkeyprojectdocumentslinkwiththePPPContract.Thesedocumentsarenotnormallycreateduntilsome

monthsafterthefirstrankedbidderhasbeenselected.Thefocusinthediscussionbelowisontheshareholder

agreement,thePPPContract(usinganAvailabilityAgreementfortheElectricitySectorasanexample),theEPC

Contract,andtheOperationsandMaintenanceAgreement;

• What to look for in the structureofeachagreement (andparticularly theway that it relates to theAvailability

Contract)thatmakesitbankable;and

• The contractual variations in the EPCContract, and theO&MContract used for each of the documents,while

retainingtheelementofbankability.

Thegeneral structureofcontracts foraPPPConcession is setout inFigure2.5 following. Thecenterof theContract

StructureistheSpecialPurposeCompanythatundertakesthePPPConcessionContract.

Special PurposeCompany

(SPC)

Operators Agreement (O&M)

Financiers Agreement ShareholdersAgreement

Side Agreements (Utilities, etc.)

Engineering Procurement & Construction

(EPC)

PPP Contract(Government of the Philippines)

Input Contracts

AvailabilityAgreements

(Water/Power)

Figure 2.5 General Structure of a PPP Concession Contract

DRAFT



ThepurposeofthisChapteroftheManualistodescribebroadlythescopeofdocumentsthatarerequiredforafunctioning

PPParrangementandthetypesofcontractdocumentsthatarerequiredfromtheGovernmentandtheprivatesector

partner.

APPPProjectProponentinthePhilippinesisnormallyorganizedasastockcorporation.Inthecaseofaconsortium,the

ProjectProponentcanbeorganizedasalimitedorgeneralpartnership,butthepreferredbasisforlegalorganizationisa

jointventurestockcompany.

ThefollowingarethedefinitionssetforthintheCorporationCode:

a. Corporation-isestablishedundertheCorporationCodeandregulatedbytheSECwithapersonalityseparate

anddistinctfromthatofitsstockholders.Theliabilityoftheshareholdersofacorporationislimitedtotheamount

oftheirsharecapital. Itconsistsofat leastfiveto15incorporators,eachofwhommustholdat leastoneshare

andmustbe registeredwith theSEC.Acorporationcaneitherbeastock,ornon-stockcompanyregardlessof

nationality.Suchcompany,if60%Filipino-40%foreign-owned,isconsideredaFilipinocorporation;Ifmorethan

40%foreign-owned,itisconsideredadomesticforeign-ownedcorporation;

b. A stock company isacorporationwithcapital stockdivided intosharesandauthorizedtodistribute to the

holdersofsuchsharesdividendsorallotmentsofthesurplusprofitsonthebasisofthesharesheld;

c. Joint ventureisacommercialundertakingbytwoormorecorporateshareholders.

9.1 The PPP Contract

ThePPPcontractcantakeanumberofforms(themostcommonbeingAvailabilityandConcessionContractsrespectively).

Thoseformsarediscussedbelowwiththeirbasicprinciplesandstructures,includingriskallocationarrangements.

9.1.1 Issues Related to Finance

Both Concession and Availability Contracts share certain preconditions related to their finance-ability, including the

following:

a. Project-relatedpermitsandconsentsshouldbeissuedforthedurationoftheproject.Insomecases,counter-

partiesmaynotbeabletograntconsentsforsuchlongperiods.Ifso,thetermsforrenewalshouldbesubjectto

aslittlevariationbyregulatorsaspossible.Anacceptablemechanismisthattheconsentsshouldbeissuedfora

specifiedperiodoftimeandrenewed,subjecttomeetingsomeclearandpredefinedstandardsofoperation;

b. Projects should not be exposed to the possibility of discriminatory taxation. In developing countries and

indeed,inthePhilippines,infrastructureprojectsareusuallyawardedcorporatetaxholidaysforadefinedperiod.

Incaseswheretherearenocorporatetaxholidaysorsuchtaxholidaysexpire,lenderswilltaketheriskofachange

ingeneraltaxesbutnottheriskthattheirparticularprojectissingledoutfordiscriminatorytaxation;

c. Projectcompany’sliabilityforconsequentiallossfrombreachingitsobligationsunderaprojectcontractmust

becapped,notopen-ended;and

d. Projectsmaybe terminatedearly for anumberof reasons, includingeventsofdefault, orprolongedForce

Majeure(FM).Incaseofterminationbyeitherparty,compensationisgenerallytailoredtomeetthecircumstances.

DRAFT



However, theminimumterminationpayment shouldconsistof the sumofprincipal andall interest, including

defaultinterest,outstandingtothelendersunderthefinancingdocuments.TerminationEventsandcompensation

isdiscussedinconsiderabledetailinChapter5ofthisManual.

Banksmaybepreparedtoacceptvariouslevelsofriskdependingonthejurisdictioninwhichtheyaredealingandthe

trackrecordofthevariousregulatorsandissuingauthorities.

9.2 Ancillary Agreements to PPP Contracts

WhilesupplementarytothemainPPPcontract,theIAneedstonegotiatetheancillarycontractsjustasthoughtfullyas

themaincontract.

9.2.1 AVAILABILITY AGREEMENTS

Availabilityagreementsaretypicallylong-termpurchaseandsalecontractsinwhichacreditworthypurchaseragreesto

buytheoutputofafacilityonspecifictermsoveradefinedperiod(theoff-takeagreement).Anoff-takeagreementcan

applytocommodityprojectssuchastheproductionofgold,silver,copper,tin,oil,naturalgasorcoal;orindustrialprojects

suchasprocessingofvegetables,wood,packagedfoods,data,newsprintormedicalsupplies.

The Availability Agreement for Purchase of Electricity

ByfarthemostcommonagreementforthepurchaseofelectricityisanAvailabilityContract.ThisContractisanagreement

forthesaleofpower(usuallyonthebasisof“availablecapacity”and“netelectricaloutput”)betweentheutilityandthe

projectcompany.Thisstructureservestwoimportantfunctions:

a. Itguaranteesamarket,acostbasisforthepowerplantandcorrespondingpredictablerevenuestreamforthe

powertobeproducedbytheproject(therebyallowingthefacilitytobefinancedonaffordablepaymenttermsand

withareasonabletariff);

b. It defines in reasonable detail the rights, responsibilities and obligations of the project company and the

purchasingutilitythroughthefinancing,constructionandoperationalphasesoftheproject.UndertheAvailability

Contract,theprojectcompanyagreestomakethecontractedlevelofelectricitygenerationcapacityavailableto

theutility(subjecttoacertainamountofannualoutagetimeformaintenanceorotherdowntime)byanagreed

dateandforanagreedperiodoftime;andthepurchaseragreestopaytheagreedtariffforcapacitymadeavailable

to it and thenet electrical outputdispatched to it. TheAvailabilityContract includesprovisions related to the

arrangementsandmechanicsofpaymentsundertheContract.AlthoughthereareonlytwopartiestotheContract,

theresponsibilitiesandobligationsofeachpartyunderthisumbrellaagreementmustbeacceptabletotheutility,

sponsor(s), investors and lenders to the project and interface properlywith other PPPContracts. In particular,

provisionsthereinrelatedtotheallocationofriskmustbeacceptabletothefuelsupplier,constructioncontractor

andtheO&Mparties.Thisbroaderconsensusisimportantbecausethelenderswillrequirethattherisksassumed

bytheprojectcompanyundertheContract,whichpotentiallyaffectitscashflowadversely,bepassedthrough

theotherPPPContractstotheappropriateparties.Aspreviouslymentioned,thefundamentalprincipleapplied

isthatthepartybestpositionedtomanageaparticularriskshouldberesponsibleformanagingit,andtheparty

responsiblefortheriskshouldbecompensatedforitsacceptanceandbeliable(paycompensation)foritsfailure

toproperlymanagetherisk.

DRAFT



TheAvailabilityContractincludesprotections,incentivesanddamagesdesignedtoensurethatperformanceisrendered

aspromisedbyallocatingtherisksassociatedwithloadgrowthorshrinkageandfuelpricevariationstotheutilitywhile

construction,financingandoperationalrisksassociatedwiththeprojectareallocatedtotheprojectcompany.TheContract

alsoincludescompensationpayabletotheutilityortariffadjustmentsforperformance(reliabilityandavailability)notup

tocontractualrequirements.

OtherkeyprovisionsoftheAvailabilityContractinclude:

a. Thefirmpurchaseofcapacityandnetelectricaloutputatanagreedtariff,assumingthattheprojectcompany

meetstheperformancerequirementsintheContractincorporating:

i. Capacity price, payable per unit of dependable capacity at a level demonstrated through testing upon

commissioning of the facility and not less often than annually thereafter. Capacity price is usually fixed at

thetimeofexecutionoftheContract(oratthetimeofbidsubmissionifthecapacityisprocuredthrougha

competitivebiddingprocedure),butsomeadjustmentinthetariff,orinthetariffcomponents,isoftenallowed

atthetimeoffinancialclosingandperiodicallythereafter.Capacitypriceisusuallystructuredsoastoinclude

operatingexpenses,debtserviceandareturnonequity;

ii.Energyprice,includingsomeformof“pass-through”offuelcost,payableoneachunitofenergydispatched

byanddeliveredtotheutility.Energypricewillbepaidbytheutilityattheagreedpricefortheamountof

energyactuallydeliveredtotheutility.Energypaymentsarestructuredtocovertheriskoffuelpricevariations

sincethisisanunacceptableriskfortheprojectcompanytotakefromtheviewofsponsor(s)andlenders.Waste

fuelorby-productfuelprojectsmayrepresentanexceptiontothisgeneralrule;

b. Tariffadjustmentmechanisms,usuallylinkedtoinflationorchangeinparitybetweenthecurrencyofpayment

andthatofexternaldebtandequitymobilized;

c. Tariffadjustmentandliquidateddamagesleviedagainsttheprojectcompanyfordelaysandpoorperformance;

d. Project description (including the agreed capacity commitment), required completion date and electrical

specifications;

e. Description of type and location of interconnection facilities and the respective obligations of the parties

regardingthedesign,cost,constructionandmaintenanceofthefacilities,andtheconsequencesassumedbythe

utilityofnotcompletingsuchfacilitiesbytherequireddate;

f. Invoicingandpaymentproceduresaswellasmeteringrequirements;

g. Eventsofdefault,terminationoftheContract,rightsupontermination,includingarighttopurchaseorsellthe

project;

h. FMprovisions,asdiscussed inChapter5, including its impactonperformanceandpaymentobligations (as

discussedearlier,paymentobligationsarenotexcusedbyFM);

i. Testingandcommissioningprocedures;and

j. Dispute resolution (including arbitration in a neutral forum and if the government is involved, waiver of

sovereignimmunity).

9.2.2 INPUT CONTRACTS

InputcontractscoverarangeofcontractualissuesfortheSPC.TheyareenforcedtocoverservicestotheSPCsoitcan

deliverduringtheconstructionaswellastheoperationstagesofaPPPContract.

DRAFT



The InputAgreementscancover: specialist servicesduring theoperationandmaintenanceperiod (suchas road line

markingfortollroads),specialistservicesduringconstruction(geotechnicalservicesforspecialgroundconditions),and

supplycontractsthatarenotcrucialtotheoperationofinfrastructure.

9.2.3 SIDE AGREEMENTS

SideAgreementsarenotakeypartofthePhilippinePPPContractstructureatthistime,butwilllikelygainmoreuseas

morePPPcontractsareplacedintothemarket.Theyareimportantagreementsthatarenotincorporatedinto,butoperate

alongside,thePPPContract.SideAgreementsusuallycombinethreeparties–theProjectProponent,theIAandathird

party.SideAgreementscoverthefollowingissues:

• Removalorrelocationofutilities:water,telecoms,power;

• Brownfields(i.e.projectsthatbuildonpriorworkorrebuildfromanexistingone):assetallocationtotheproject

(consents);

• AppointmentoftheIndependentConsultant;and

• InteroperationandInterconnectionAgreements–tollroads,telecoms,power(intheabsenceofaformalindustry

regulator).

SomeexamplesofSideAgreementsandtheirusesare:

• Removalorrelocationofutilities:water,telecoms,power.

» TheProjectProponentisbetterplacedtomanagetheprocessandfititwithintheprojectplanandscheduling;

» Transferofriskmayormaynotoccur–ContractingAgencymaystillaccepttheriskortransferittotheProject

Proponent;

» Sideagreementmaybetripartite–ContractingAgency,ProjectProponentandUtilityOwner.

• Brownfieldprojectswhereassetallocationtotheproject(consents)isrequired:forexample,Governmentowners

needtotransferassetstotheProjectProponentortheContractingAgencyorGOCCJointVentureswithprivate

sectororLGUs–asset transferconsent iscritical toavalidPPPcontractand theContractingAgency’s right to

Contract.

• TheIndependentConsultantisnominatedinthePPPContracttoperformspecifieddutiesinrelationtothePPP

Contract.ItisinternationalbestpracticetojointlyconcludeatripartiteagreementbetweenContractingAgency,

ProjectProponentand the IndependentConsultant. The rightsanddutiesandprocessesandmechanismsare

containedinthesideagreement.

• Interoperationand InterconnectionAgreements for toll roadsthat interconnect: Interconnectionduringdesign

and construction leads to interoperation agreements. These canbe commercial agreementsbetweenProject

Proponents.

9.2.4 EPC CONTRACTS

Threegeneraltypesofconstructioncontractsexist:(a)engineering;(b)procurement;and(c)construction.Afourthisan

EPCcontractcoveringallthreephasesofconstruction.

Becauseitencompassesallphasesofconstruction,anEPCContractprovidessingle-pointresponsibilityforitsexecution.

Underitsterms,thecontractoracceptsfullresponsibilityfordeliveringtotheprojectcompanyafullyoperationalfacility

DRAFT



withagreedspecifications (on-spec)byacertaindate (fixedschedule)andataspecifiedprice (fixedprice).Moreover,

contractorswillbackuptheirperformanceobligationswithliquidateddamages(LDs)payablefornon-performance.In

returnforthisarrangement,anEPCContractwillcostaprojectcompanyapproximately10–20%morethanaconventional

lump-sumconstructioncontract.Despiteitshighercost,lenders(andsponsor/s)preferthearrangementbecauseofthe

single-pointofresponsibilityandbuilt-inhedgesagainstprice,scheduleandperformanceshortcomings.

IninternationalProjectFinancing,anEPCcontractisthemostimportantofthecost-basedcontractsbecause:

a. Itisthelargestsinglecomponentofcapitalcostandwillabsorb,therefore,themajorityoftheprojectcompany’s

capitalization;

b. Qualityandefficacyofthedesignandconstructionoftheplantwillimpactonprojectexpenditureandrevenues

throughoutprojectoperation;

c. Completionof construction and commissioningby a specificdate is often a fundamental conditionof the

concessionorlicense.Timeliness,ordelay,incompletionoftheconstructionwillimpactonprojecteconomics.

UnderanEPCcontract,thecontractorandtheprojectcompanyareallocatedrisksbasedonstandardriskmitigating

principles.Boththeparticipantshaveavestedinteresttoensurethattheprojectcompletionoccursontime.

Asconstructionproceeds,newrisksarisewhilesomeoftherisks(alreadyallocatedtotheparties)subside.Mostsevere

amongthepossibleconstructionrisksthroughouttheconstructionperiodarecostoverruns,delaysincompletion,start-

upandtestingproblems,hiddendefaultsandcontractorpaymentdefault.

Avoiding delays, cost-overruns and a failure tomeet performance specifications is a particularly important objective

for theproject company. If theproject takes longer tobuild thanwas anticipated, project costwill exceedfinancing

commitmentssincetheroll-upofinterestduetolenderswillbegreaterthanprojected.Aprojectcompanythatisexposed

todelaysandcostoverrunswillhavetoborrowmoremoneyatadditionalcostand/orinvestmoreequity.Normallythe

contractwouldhavebonusesforcostlessthanbudget,meetingorexceedingtimelydeliveryleadingtoearlydeliveryand

increasedrevenue.Conversely,penaltiesalsoapplyasnoted.

Additionalborrowings result in agreater-than-anticipateddragonoperating cashflows,whilemoreborrowings and

investingmoreequitybothcontributetoalowerinternalrateofreturn.Ifpronouncedenough,aseriousdelayorcost

overruncouldevenleadtodefault.Meetingtheagreedrangeofspecificationsisanequallyimportantobjectivebecause

ifthefacilityisrejectedtotally,itmaynevergetcommissioned.Inthatcase,itsvaluewillnotbesufficientinaliquidation

torepaythelendersorrecoverequityforthesponsor(s).

Theclassicconstructionriskisthatofcostoverrun,i.e.thethreatthattheproposedfacilitywillnotbeconstructedwithin

theoriginalbudgetallocated.Enteringintoafixed-priceturnkeyisthemostpowerfulmethodavailabletoshiftthisrisk

entirelyfromtheprojectcompanytothecontractor.

Asecondriskisthatofdelayincompletion.TheEPCContractwillspecifyadateforthecompletionoftheprojectwork

thatmatchestherequiredcommissioningdatespecifiedintheoff-takeorconcessionagreement.Ifnotmet,theturnkey

willprovideforthepaymentofLDsfromthecontractorforanyunexcuseddelayincompletingthefacilityontime.The

DRAFT



LDsaresetusuallyatalevelthatwillcoveratleastsix(6)tonine(9)monthsofdelay,althoughthereareexceptionstothis

rule.Beyondthelevelofcoverage,theprojectcompanyandthelendersareexposed.

Thefailuretomeetperformancespecificationsduringthetestingandcommissioning isanother important risk.Three

situationsmayoccurinthisregard,i.e.thefacility(a)isrejected;(b)achievesaperformancelevelbelowspecifications,

withintheacceptablerangeandissubjecttoLDs;and(c)meetsspecificationsandiscommissionedsuccessfully.

Still another source of risk is the contractor’s performance during the warranty period. The contractor should give

extensivewarrantyperiodguarantees.Inapowerplantoperation,thestartingpositionisusuallytwoyearsformechanical

andelectricalworks andfive years for civilworks commencing from the commissioningdate. Themore rigorous the

commissioningandreliabilitytests,andthelongerthewarrantyperiod,thesaferpositiontheprojectcompanyisin.

Summary: EPC Contract

The banks’ requirements for EPC Contracts are predictable. Although there are exceptions as discussed above, EPC

arrangementsmustexhibitthefollowingattributestobefinanceable:

a. FixedScheduleandOn-Spec.Completionsubjecttomeetingperformancespecificationsandafixedschedule

generally tied to the scheduled commissioning date under the appropriate off-take or concession agreement

withanagreedlevelofLDspayable ifthefacility isoff-specordelayed.LDsshouldbepayable ifcompletionis

notachievedbyafixeddatesufficienttomeet(a)LDspayableundertheserviceagreement;(b)interestduring

construction(IDC)rolled-upduringthedelay;(c)LDspayableundersomeothercontracts,ifappropriate;and(d)

fixedoverheadcoststhroughouttheperiodofdelay.Ifnodelayisexperienced,thereshouldbeclearlyspecified

proceduresforthetakeoveroftheworksbytheprojectcompanyfromthecontractor;

b. FixedPrice.Thecontractoragreestoperformtheentirecontractscopeofworkforalumpsum(fixedprice)

establishedatthetimethecontract isentered into,which isfinalandbindingandnotsubjecttoescalationor

adjustmentofanykindotherthanthatspecificallyprovidedforintheconstructionagreementoreventualchange

orders.Thecontractshouldbeincapableofbeingreopenedexceptforrelativelyfewsituationsandalwayssubject

toapprovalbythelenders;

c. Performancemilestones.Paymentstocontractortiedtotheachievementofperformancemilestones,generally

theScurve;

d. Single-point responsibility with respect to the whole works. Generally, one single contractor should be

responsible to the project company for the execution of the entire scope ofworks. If the EPC is divided into

morethanonecontract,oriftheprojectcompanyentersintomorethanonecontract(e.g.,oneforequipment

supply;theotherforinstallation,erectionandcommissioningservices),bothcontractorsmustprovidetheproject

companywithacross-guarantee,underwhicheachagreestoguaranteetheother’sperformance.Ifonecontractor

defaultsunderthetermsofitsportionoftheturnkey,theothermustcurethedefaultandensuretheappropriate

completionofthecontract;

e. AfullEPCcontract.Noaspectoftheconstructionshouldfallbetweenthecracks.Hence, ifthecontractor is

basing thedesignonanyplans,ordata, suppliedby theprojectcompany, thecontractorshouldbegiven the

opportunitytoverifytheiraccuracyandtake“ownershipresponsibility”,eventhoughtheyweresupplied,oreven

preparedby,theprojectcompany.Similarly,theremustbenosubcontractor,orequipment,thatisselectedbythe

projectcompany.Ifsuchspecificationexists,thecontractormusttakeresponsibility;

DRAFT



f. AfinanciallysolventEPCcontractor,unquestionablycreditworthyforitsobligationsundertheturnkey.Ifitis

not,acreditworthyentitymustbefoundtoguaranteethecontractor’sperformanceunderthecontract;

g. Pre-completion revenues applied against the project’s capital expenditures, thereby reducing the amount

thatneeds tobe fundedby the lenders. Forexample,apowergenerationplantmaybebuilt instageswhere

newsourcesofrevenuearerealizedatthecompletionofeachstage.Inthatcase,revenuesabovethoserequired

tooperatethepartiallycompletedfacilityshouldbeappliedtotheconstructioncostsoftheunfinishedportion

thereof.

9.2.5 O&M AGREEMENTS

A project sponsor(s) has the option of being the operator for the project company pursuant to a technical services

agreementorhavingthisfunctionperformedbysomeoneelse.TheO&Moftheprojectisoftendonebyanarms-length

participant.

TheOperatorhastobe,ataminimum,a60%Philippineownedcompanyifitisforinfrastructureoperation–tollroad,

powersupply,railprojectetc.InthecaseofaTollRoad,theOperatorwillberequiredtoholdaTollOperationCertificate

issuedbytheTRB.

TheO&MContractwillbegovernedbythePPPContractandtheMPSSthataresetfortheproject.TheMPSSwillbethe

majorsourceofobligationsandperformancestandardsthatwillapplytotheO&Mcontract.

TheservicesoftheoperatorinanO&Magreementareusuallyidentifiedinthreephases:mobilization,pre-operationsand

operations.Theagreementapportionsoperatingrisksbetweentheoperatorandtheprojectcompany forobligations

relatedtoO&Mcontractapprovalbythehostgovernment.Italsoreflectsagreementson(i)trainingoftheworkforce;(ii)

acceptanceofthefacility;(iii)enforcementofitswarranties;(iv)undertakingofresponsibilityforacceptableandefficient

performance thereof; (v)maintenanceof permits; (vi) drawingup andobservationof budgets for operations and for

routine,periodicandmajormaintenance;and(vii)ensuringinputavailability.

The IA and the lenderswill normally have to approve theO&Mcontractbefore it canbe implemented. In reviewing

thecontract, thehostgovernmentmaybeconcernedprimarilywithwhethertheprojectwilloperateasplannedand

complywithalllaws,includingenvironmentalandsafetylaws.Incontrast,thelendersmayfocusprimarilyonwhether

projectrevenueswillbesufficienttorepaytheirinvestmentwithinterestandthesponsor(s)maywantassurancethatthe

projectrevenueswillbesufficienttoprovideareasonablerateofreturn.Tosatisfythemselves,government,sponsor(s)

andlenderswillwantaminimumperformancestandarddefinedintheO&McontractgovernedbythePPPContractand

theProjectMPSS.Aperformancestandardshouldbedesignedtofacilitatemonitoring.

Aftercompletionofconstructionandinitialstart-upandtesting,theoperatorshouldberequiredtoinspectandcertify

thatthefacilitymeetstherequiredperformancespecificationsguaranteedbytheconstructioncontractorandcomplies

withtheMPSSsetfortheproject.Itshouldalsohavetheresponsibilityforobtainingandmanaginganywarrantedwork

asaresultofdefectiveconstructionorequipment.Sincetheoperatorhastheresponsibilityofoperatingthefacility,itisin

thebestpositiontodeterminewhetherornotithasbeenbuilttoperformproperly.

DRAFT



Inapowerplant,theperformancestandardshouldbesetinrelationtooperatingcapacity,whileinatollroadproject,it

willbesettoachievearangeofperformances,includingservicelevels,compliancewiththeprojectMPSS,minimizinglost

revenuefromuncollectedtollsandassetpreservation.Toensuregoodperformance,thereshouldbeprovisionsforgiving

incentivestotheoperatorundertheO&Magreement.Thereareseveraloptionsavailabletocompensatetheoperator

for itsservices.They includefixed-price,cost-plus-feeandperformance-basedcompensation. Inafixed-pricecontract,

theoperatorwillreceiveaflatfeeforprovidingitsservices.Whilethisoptionrepresentsthelowestriskalternativetothe

projectcompany,itisusuallyappropriateonlywherebothscopeandmagnitudeoftheservicetoberenderedcanbe

predictedwithsomeaccuracyandisunlikelytofluctuate.

Amorecommonarrangement isacost-plus-feecontract. “Cost-plus”could include(a)consumablesnecessary forthe

operationandmaintenanceofthefacility;(b)costsofanythird-partycontractsbeingadministeredorenteredintobythe

operator;and(c)costoftheoperator’semployees.Alsoincludedintheagreementarecorporateoverheadallocations,

changesinpersonnel,incentivesfortheuseoflocalstaff,andagreedpaymentrates.The“fee”iseitherafixedpercentage,

apercentage tied toperformanceor a combination, thereof. The fee canalsobe tied to specifiedcriteria to createa

performance-basedincentivefortheoperatortoprovidethebestavailableservice.Feeincreasesforsuperiorperformance

canbecoupledwithLDsforpoorperformance.Thesearrangementsareparticularlyusefulwhentheoperatorisanequity

investorintheprojectcompanywithasignificantstakeinthesuccessoftheproject.

Summary: O&M Agreement

Themajorconcernsforthebankscorrespondwiththoseoftheprojectcompanyandareasfollows:

a. Theoperatorshouldbegivenincentivestoruntheprojectproperlyandefficientlyinordertocomplywiththe

PPPContractTermsandtheProjectMPSSandoptimizetheprojectcompany’sprofit;

b. Conversely,theoperatorshouldbesubjecttotoughpenaltiesifcertainoperatingbudgetarytargetsarenot

met;

c. Thebanksshouldbeabletoremove(orbringabouttheremovalof)theoperatorforpoorperformance;and

d. Iftheoperatoristhesponsor(s),orastockholderintheprojectcompany,acontractmustbedrawnupbetween

thepartiesthatreflectsarms-lengthnegotiationsandagreements.

9.2.6 FINANCIERS’ AGREEMENTS

Financiers’AgreementsareacriticalelementoftheSPC’ssuiteofcontractualobligations.19Fullycommittedfinancing

packagesmaybedifficult toobtainat the timeofbidding.Thismaymeanthat thefinancingagreementswillnotbe

concludedimmediatelyoncethePPPcontractissigned.

Thestrengthofthefinanciers’commitmenttofundthePPPprojectatthebiddingstagewilldependontheprojectand

market.TheIAshouldatleastrequirethatbiddersprovideevidenceofareasonableanddeliverablefinancingplanintheir

proposals.Biddersshoulddemonstratethatthedebt,theequityand,whereapplicable,thegrantprovidershavereviewed

andaccepted thebroaddesignof thePPPand themajor contractualprovisions (e.g. theproposed riskallocation).A

fundingcommitmentfromthelenderswilloftenbeconditionalsincetheywillgenerallynotbeinapositiontocomplete

theirdetailedduediligenceandapprovalprocessuntilafewweeksbeforefinancialclose.

19Source:EuropeanPPPExpertiseCenterPPPguide

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A large number of financing agreements are needed for a project-financed PPP. These agreements have three basic

purposes:

• They are designed to protect the interests of senior lenders20 vis-à-vis other providers of finance (e.g. equity

investors)andsubcontractorsofthePPPCompany.Inparticular,theseniorlenderswillwanttoensurethattherisks

bornebytheirborrower(i.e.theSPC)aresatisfactorilymitigated.Inpractice,thismeansthat,tothegreatestextent

possible,therisksbornebythePPPCompanyunderthePPPcontractare‘passedthrough’tothesubcontractors.

• Theagreementsneedtoclearlyestablishthattheservicingofthedebttakespriorityovertheremunerationofall

otherformsoffinance(thisiswhat“senior”debtmeans).

• The suiteof financingagreements isdesigned toensure that, should therebeproblemswith theproject that

jeopardisetheservicingofthedebt,thelendershavethepowerstotaketheactiontheydeemnecessarytoprotect

theirloan.

Thetypicalfinancingagreementstobepreparedandconcludedcomprise:

• Seniorloanagreements:agreementsbetweenthelendersandtheSPCsettingouttherightsandobligationsof

eachpartyregardingtheseniordebt;

• AnagreementbetweenthefinancingpartiesandtheSPCwhichsetsoutthetermsthatarecommontoallthe

financinginstrumentsandtherelationshipbetweenthem(includingdefinitions,conditions,orderofdrawdowns,

projectaccounts,votingpowersforwaiversandamendments).Acommon‘termsagreement’greatlyclarifiesand

simplifiesthemulti-sourcingoffinanceforaPPPprojectandensuresthatthepartieshaveacommonunderstanding

ofkeydefinitionsandcriticalevents;

• Subordinatedloanagreements(wheresubordinatedormezzaninedebtisusedinthefinancingstructure);

• Ashareholders’agreement;

• Anaccountsagreement:thisinvolvesabankwhichwillcontrolthecashflowingtoandfromtheSPCinaccordance

withtherulessetoutintheagreement;

• An inter-creditor agreement: an agreement between the creditors of the SPC that spells out aspects of their

relationshipwithoneanotherandtheSPCitself,sothat,intheeventofaproblememerging,groundruleswillbe

inplace;

• Hedgingagreements:agreementswhichenabletheSPCtofixtheinterestrateonallorpartofitsdebtortolimit

itsexposuretoexchangeraterisks;

• Securityagreements(e.g.sharepledge,chargeoveraccounts,movablespledge,receivablespledge);

• Legalopinionsfromthelender’slegaladvisersontheenforceabilityofthecontracts.Enforceabilityofcontractsis

akeyissuethelenderswilltackleintheirduediligence.ThiswillincludethereviewofthepowersoftheIAtoenter

intotransactions(theso-calledviresissue).

9.2.7 SHAREHOLDERS AGREEMENT

Memorandumandarticlesofincorporationaretheconstitutingdocument(s)whichgovernacorporation.Sponsorsmay

wishtosupplementthese(largely)templateconstitutionstoincorporatemoresophisticatedapproachestoadministration

andoversight,andShareholdersAgreementsarethemostcommonwaytoachievethatinProjectFinance.

20HoldersofseniordebtorlendersthatwillberepaidfirstbeforeothercreditorsintheeventtheSPCbecomebankrupt.

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Ashareholdersagreementisthegenerictermforanycontractbetweentwoormoreshareholdersgoverningtheirconduct

inrelationtothecorporation,orpartnership,inwhichtheyownsharesandintherangeofcorporateactivitypermitted

tothem.Ashareholderagreementcancreatevotingagreements,votingtrustsandotherprovisionsforthegovernance,

ownershipstructure,andmanagementcontrolofaproject.Itisalsousedtosetforthobligationsbetweenandamong

theshareholdersinrelationtotheprojectcompany,establishproceduresfortheirexecution,anddefineremediesinthe

eventthatoneormoreshareholdersisunabletocomplywiththeirobligations.Finally,suchagreementsmaybeusedto

createprocessesforthearbitrationofdisputes,clarifyrightsofpre-emptionordescribeconditionsunderwhichtheSPC

wouldbesubjectedtoavoluntarywindingup.

Someoftheissuesarebestresolvedthroughtheprojectcompany’sconstitutionaldocumentsratherthanashareholders’

agreement,apointtotakeintoconsiderationonacase-by-casebasis.Areaswheretheshareholders,orstakeholders,must

seekcommongroundinordertoavoidfutureproblemsinclude:

a. Theprojectwillhavecreditriskrelativetoitssponsor(s)duringthedevelopmentperiodwhencallsforcapital

aremade,aswellastoitsshareholdersduringconstructionandoperation,whencallsforbaseorcontingentequity

aremade.Specifically,thisreferstothepossibilitythatoneormoreoftheseshareholderswillnotbeabletomake

acapitalcallwhendue.Ifanycapitalcontributionistobemadeduringthedevelopmentorconstructionperiods,

eachshareholderwillhavetotakeaviewonthecreditworthinessoftheothers.

b. Theissueinevitablyarisesastowhathappenswhenonepartywishestosellitsinterestsintheproject.Inthis

regard,acommonprovisionistoobligatethesellingpartytooffer its intereststotheotherparties inthe joint

venture.Iftheothersarenotinterested,thesellingshareholderisthenpermittedtonegotiateasalewithanon-

relatedthirdparty.Underthisprovision,existingshareholderswillhaveapre-emptiverighttotheshares,which

placestheminapositionofstrengthrelativetotheseller.Toavoidabuses,however,ifthesellingshareholderisnot

satisfiedwiththepriceofferedbyanexistingshareholder,itisusuallypermittedtoidentifyathirdpartywillingto

payahigherprice.Theexistingshareholdermustthenmatchthatpriceorforegoitspre-emptiveright.

c. Whereaprojectcompanyhas,or is likelytohave,acontractualrelationshipwithacontractingshareholder,

othershareholderswillwanttoeliminatethecontractingshareholder’sconflictofinterest.Conflictsarelikelytobe

mostpronouncedwhenissuesinrelationtothecontractareaddressedformallybytheBoardofDirectors.Typically,

theissueismitigatedbyasupplementalagreement(intheshareholders’agreementorelsewhere)excludingthe

contractingshareholderfromanydiscussion,orvote,relatedtothatspecificmatter.

Issues Related to Finance

Whileevaluatingashareholders’agreement,lenderswillbasetheirjudgmentsonthefinance-abilityoftheprojectonthe

followingfactors:

a. Lenders will undertake a thorough review of the shareholders’ agreement, as well as the balance of the

projectcompany’sorganizationaldocuments,toensurethatallofthecommonproblemareasareidentifiedand

proceduresforresolutionareaddressed.Theywillalsoensurethateachshareholderhastheauthoritytoenterinto

aloanandequitysupportagreementwiththeSPC;

b. Thegeneralexperienceandtrackrecordofthesponsor(s)withthetypeoffacilityunderconsideration,including

itsfeaturedtechnology,isthemostimportantcriterionrelatedtofinance-ability.Theidealcaseisonewhereevery

shareholderisexperiencedintheprojectanditstechnology,andisseentobecreditworthyforitscommitments.

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Atthevery leasttheleadsponsor(s)musthavepriorexperiencein implementingsimilarlysizedprojects inthe

countrywheretheproposedprojectislocated,orsomeothercountrywithsimilarattributes;

c. The proposed structure of project capitalization should meet acceptable ratios of debt to equity in the

internationalmarkets.Moreover,theproposalshouldalsoreflectlegalorstatutoryrequirementsofthePhilippines

inthatregard;

d. Ideally,thesponsor(s)entersintoanequitysupportagreementthatstipulatesthateachshareholder, jointly

andseverally,willprovideequitycontributionsupfrontasdescribedinaproperlydrawnsubscriptionagreement

conformedtotheCommercialCodewiththetimingofdisbursementsassetforthintheEPCcontract,priortoany

disbursementbythelendersunderthefacility(loan)agreement.Asafallback,payinganequitycontributionover

time,orevenback-endingthosecontributions,isacceptableprovidedthat:(a)TheIAandlendersaresatisfiedwith

each individual shareholder’screditworthinessandareprovidedwitha jointandseveralguarantee instrument

fromeach,effectivelybackstoppingallotherequitycommitments;or(b)EachshareholderdeliversastandbyL/C

fromabankacceptabletothefinancepartiesbackstoppingitsowncommitment;

e. Thesponsor(s)mustprovidesatisfactorycoverforcostoverruns.Ideally,thisisdonethrougharelativelyopen-

endedcommitmentreferredtoasacompletionguarantee.Alternatively,thesponsor(s)maynegotiatewiththe

lenderstoputatriskanagreedlevelofcontingentequitytosupporttheprojectcompletion;

f. Inadditiontocostoverruns,thesponsor(s)mustagreetocoveranygaps in insurancecoverage,or forthat

matter,anysignificantresidualriskthatoneormoremajorparticipantsarenotwillingtoabsorb.

9.3 Project Finance Variations in Cost Structure

This section discusses the common variations to the typical Project Finance structure. Depending on circumstances,

thesevariationscreateadditionaluncertaintiesforlendersinassessingthepredictabilityofrevenue,constructioncosts,

resourcesupplycostsandoperatingcosts.Specifically,thissectiondiscussesbasicvariationsincost-basedcontractsthat

haveprovedtobeacceptable inthemarket;whileothersections intheManualdiscusscreditenhancementsusedto

managerevenuerisks.

9.3.1 EPC Contract Variations

Currently,themostcommonpracticeisforlenderstoagreetoshareconstructionriskswiththeprojectcompany.When

lenders assume this risk, mitigation typically is in the form of a fixed-price, lump-sum, fixed-date EPC contract with

substantialLDs,asdescribedearlier.UsuallytheLDswillprotectlendersandtheprojectcompanyforsome,butnotall,of

themoreextremeoutcomes.

Thesponsor(s)isnormallyrequiredtocontributecontingentequitytotheprojecttocovercostoverruns.Strongerprojects

havefullcompletionguaranteesprovidedbysponsor(s).Whenthesponsor(s)providesafullcompletionguarantee, it

acceptsallrisksassociatedwiththecompletionoftheproject,regardlessofitscauseortheinabilityoftheEPCcontractor

tomitigatetheproblemwithLDsorotherremedies.

There are variations on how this is done. Some sponsors simply issue a performancebondor a letter of credit (L/C)

coveringtheirobligationstocompletetheproject;othersuseothermechanisms.Someyearsago,HopewellHoldingsof

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HongKong,forexample,undertooktobuildthecoal-firedpowerstationatShajiao,China,andthediesel-firedNavotasI

projectinthePhilippinesunderafixed-priceEPCcontractestablishingsingle-pointresponsibilitythroughoneofitsown

companies.Throughasubsidiary,thesponsorenteredintoanEPCcontractwitheachprojectcompany.Itthen“hedged”

itsriskbynegotiatingineachcasewithaconsortiumofequipmentsuppliersandcontractorsforguarantees,warranties

andothercoverthatwouldbackstopitscommitmentsundertheEPC.SydneyHarbourTunnel(Australia)andtheDartford

RiverCrossing(UK)areexamplesofprojectswherethesponsor(s)enteredintosimilararrangements.Inallthesecases,the

sponsor(s)throughitsownconstructionsubsidiary,providedthesinglepointresponsibilitythatisordinarilyundertaken

bytheEPCcontractor.

9.3.2 O&M Agreement Variations

Apartfromthethird-partyoperator,thereareothermethodsforstructuringtheprojectcompany.FortheO&Magreement:

(a)theprojectcompanycanperformtheO&Mitself;(b)itcanenterintoanO&Magreementwitharelatedthirdparty,e.g.

oneofitsshareholders,oritsaffiliate;or(c)itmaysharetheO&Mwithathirdpartybyenteringintoanagreementwith

thethirdpartytoprovideaworkforceand/ormaintenance.

Lenders generally prefer arms-length, third-party arrangements; however, this is not a strict requirement. When a

shareholderprovidesO&Mtotheprojectcompany,careistakentoavoidallconflictofinterests.

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