Chapter 12

Philippines
Carlos Alfonso T Ocampo and Angela K Feria1

I INTRODUCTION
Throughout recent Philippine history, past administrations have understood the importance of infrastructure development, but the
measures taken to reach the ideal level and mixture of  infrastructure spending vary greatly. Even with its fast-growing economy,
expanding population and rapid urbanisation, the Philippines lags behind its ASEAN counterparts in terms of  infrastructure
spending. Thus, the current government has made infrastructure development part of  its priority development programme because
it has identified infrastructure as one of  the key drivers of  economic growth. In 2017, the government launched the ambitious
Build, Build, Build (BBB) programme, which aims to raise infrastructure investments to 7.4 per cent of  gross domestic product
(GDP) by 2022 from 5.1 per cent in 2016.2 Between January and November 2018, the government’s infrastructure spending
reached an estimated 728 billion Philippine pesos, 50 per cent higher than the 486.5 billion pesos recorded during the same period
in the previous year.3
As part of  the medium-term Philippine Development Plan, the BBB programme is estimated to require US$168 billion in
investments for 75 high-impact priority projects nationwide. To finance this, the government plans to use an optimal funding mix
composed of  government spending, official development assistance (ODA) and private capital.
Arguably, however, private capital to fund infrastructure projects is underused. Thus, the current administration identified
public-private partnerships (PPPs) in its 10-point socio-economic agenda as one of  the key strategies to accelerate annual
infrastructure spending.
Since its official launch in 2010, the PPP programme has played a part in 17 national PPP projects worth about 328.67 billion
pesos. According to the 2018 Infrascope Report by The Economist Intelligence Unit (The EIU), the Philippines now ranks second
of the countries in Asia evaluated by The EIU, joining Thailand and China in the group of   mature PPP markets based on both
qualitative and quantitative criteria. 4 In the World Bank Group’s ‘Procuring Infrastructure: Public-Private Partnerships Report
2018 – Assessing Government Capability to Prepare, Procure, and Manage PPPs’, the Philippines is ranked first in the East Asia
and Pacific Region in terms of  preparation of  PPPs, contract management and unsolicited proposals, and third in terms of 
procurement of  PPPs.
This chapter focuses on the legal and regulatory framework of  infrastructure projects and project financing in the Philippines,
issues commonly encountered in infrastructure projects, and both existing and proposed measures to address these issues. Where
relevant, we highlight key projects and current events to provide context.

II THE YEAR IN REVIEW

i From independent power producers to the hybrid PPP model
PPPs, in the Philippine context, are a strategic mode of  procurement that involves a long-term contractual agreement between the
government and a private firm targeted towards financing, designing, implementing and operating infrastructure facilities and
services that were traditionally provided by the public sector.5
A major turning point in Philippine history, the importance of  private participation in project financing came to light during
the energy crisis of  the late 1980s to early 1990s. At its worst, the Philippines experienced daily drops of  voltage in the electricity
supply lasting eight to 12 hours,6 resulting in an estimated 6 per cent decrease of  the country’s GDP. To address the crisis, then
President Fidel V Ramos expanded the Build-Operate-Transfer Law (the BOT Law) in 1994, which shortened the procurement
1
Carlos Alfonso T Ocampo is a senior partner and Angela K Feria is an associate at Ocampo Manalo Valdez & Lim.

2
‘Philippine PPP Policy Gets a Boost from ADB’s $300 Million Loan’, Asian Development Bank, 20 August 2018 (https://www.adb.org/news/philippine-ppp-
policy-gets-boost-adbs-300-million-loan).

3
‘Despite 2018 setback, ‘BBB’ TRAIN seen to prop up 2019 growth’, Business Mirror, 24 January 2019 (https://businessmirror.com.ph/2019/01/24/despite-2018-
setback-bbb-train-seen-to-prop-up-2019-growth/).

4
The Economist Intelligence Unit. 2018. ‘Evaluating the environment for public-private partnerships in Asia: The 2018 Infrascope’. The EIU, London
(https://infrascope.eiu.com/evaluating-environment-public-private-partnerships-asia/).

5
See https://ppp.gov.ph/ppp-program/what-is-ppp/.
process and accommodated private sector participation. As a result of  the expanded BOT Law, independent power producers
(IPPs) were allowed to operate, which contributed to the resolution of  the energy crisis.7 Traditional PPPs, such as those entered
into by IPPs, have thus been a proven solution when government could not meet energy demands.
Recently, however, the government has shifted its preference to hybrid models, for which funding for the initial phase is
secured through public procurement or ODA, while the operation and maintenance (O&M) of  the project is allocated to the
private sector through PPPs, a reversal of  the procedure observed by previous administrations. As claimed by the government,
hybrid models fast-track infrastructure projects and enable project costs to be cheaper in the long run. To illustrate, the Clark
International Airport in Pampanga (the Clark Airport) features hybrid PPPs as the government seeks to decongest the Ninoy
Aquino International Airport (NAIA) in Metro Manila by expanding the capacity of  airports outside Metro Manila. The Clark
Airport, in particular, was thrust into the national spotlight in August 2018, when NAIA’s operations were paralysed for two days
owing to an unplanned runway closure, costing the country’s main airport millions in lost revenue. The Clark Airport Expansion
Project is considered to be the first airport project using the hybrid PPP model.
However, some PPP proponents argue that there is no longer any incentive for private participants to raise revenues and
provide O&M services efficiently in the absence of  any capital risk. While shifting policies create some uncertainty in
government support towards PPP projects, further comparative analysis is necessary to determine whether the traditional PPPs or
their hybrid models will be best suited to finance a particular project.

ii Private participation opportunities in the health sector

Whereas the BBB programme focuses heavily on transport infrastructure, PPPs in the healthcare industry have been making
headway to achieve the government’s objectives of  addressing the health service needs of  the poor. Through the Public-Private
Partnerships Center (the PPP Center), the government has encouraged private participation through PPPs with a focus on projects
that would help in the delivery of  universal healthcare for Filipinos. One of  the pioneering PPP projects in this sector is the
development of  the planned Philippine General Hospital in University of  the Philippines, Diliman (the PGH Project). The PGH
Project is also designed to be implemented as a hybrid project, wherein the O&M component will be bid out to the private sector
via PPP.8
With the enactment of  the Universal Health Care Act in 2019 (UHCA), healthcare PPPs may bridge a funding gap of 
164 billion pesos needed to implement healthcare reforms during UHCA’s first year of  implementation.

III DOCUMENTS AND TRANSACTIONAL STRUCTURES

i Common transactional structures
The establishment of  project companies, commonly known as special purpose vehicles (SPVs), has become common in financing
infrastructure projects. To encourage private sector investments in non-performing assets, the Philippines enacted the Special
Purpose Vehicle Act of  20029  (SPVA) to provide tax and other incentives for financial institutions to sell and dispose of  their
non-performing assets (NPAs) to SPVs and, subject to certain conditions, from SPVs to third parties. However, benefits under the
SPVA have since expired, thus prompting financial institutions to call on the Philippine Congress to revisit the SPVA.

ii Documentation and standard form contracts

The drafting of  contracts and relevant bidding documents for infrastructure projects vary according to the type of  project involved,
but implementing agencies may refer to model contracts prepared by the National Economic Development Authority (NEDA) and
the PPP Center (an agency attached to NEDA). PPP contracts, for instance, typically involve the following sections: parties, project,
modality, term, contributions, risks, governance, approvals, roles and amendments. Post-award requirements, on the other hand,
often include financial closure, regulatory approvals, permits and clearances, right-of -way clauses and insurance.

IV RISK ALLOCATION AND MANAGEMENT

i Management of  risks
For project finance transactions or construction projects, implementing agencies are given wide discretion in managing risks and
the allocation of  these risks varies greatly from project to project. 10 However, the allocation of  functions and risks is closely
6
Dante B Canlas, ‘Political Governance, Economic Policy Reforms and Aid Effectiveness: The Case of  the Philippines with Lessons from the Ramos
Administration’ (2007).

7
ibid.

8
See https://ppp.gov.ph/ppp_projects/philippine-general-hospital-pgh-diliman-om-ppp-project/.

9
An Act Granting Tax Exemptions and Fee Privileges to Special Purpose Vehicles which Acquire or Invest in Non-Performing Assets, Setting the Regulatory
Framework Therefor, and for Other Purposes (Special Purpose Vehicle Act), Republic Act No. 9182 (2002) as amended by Republic Act No. 9343.

10
National Economic Development Authority [NEDA], Structuring Public-Private Partnerships (2009).
related. Thus, the allocation of  functions and risks generally follows the principle that a  risk or the performance of  a function
should be allocated to the party that is best placed to perform the function or manage the risk.11
Specifically, for PPPs, the allocation of  risks is evaluated through an iterative process, namely to identify and assess the risks
and decide how to allocate those risks between the implementing agency and the private entity. 12 For private proponents, the
payment method constitutes a major factor since, normally, no government financial guarantees are provided by the implementing
agency – although in some instances, the implementing agency may offer subsidies as benefits or a guaranteed supply of   certain
nationalised resources. During the pre-development stage, the implementing agency would test the market with private firms and
adjust transactions based on market feedback. 13 Still, the implementing agency and the private entity often use different criteria for
evaluating whether a transaction is viable and whether fairness is a business case to be made for the private proponent. Further,
social costs and offtake risks are difficult to measure and quantify, thereby making allocation of  risks sub-optimal. Types of  risks
typically allocated between parties include legal and regulatory risks, financial (demand risk), economic, engineering, completion
risks, inflation and foreign exchange risks, risks from uncertainty in assured revenues, competition risks and sovereign risks (i.e.,
expropriation and police power) and other risks.

ii Limitation of  liability

The Philippines recognises the separate and distinct legal entity of  a corporation, thus limiting the liability of  its shareholders.
Hence, infrastructure projects tend to be undertaken predominantly by corporations. However, the protection afforded by
limitation of  liability may be set aside in the case of  fraud, deliberate default or reckless misconduct of  the defaulting party. In
such cases, the veil of  corporate fiction is pierced and the separate juridical personality of  the corporation used to perpetuate fraud
is disregarded.

iii External risks and the application of  force majeure

Philippine law adopts a strict definition of  force majeure or fortuitous event, and for the defence of  force majeure to prosper, it is
necessary that one has committed no negligence or misconduct that may have occasioned the loss. 14 Examples of  force majeure
permitted include war, invasion, rebellion, terrorism, revolution, natural catastrophes or any other event that is unforeseeable or,
although foreseeable, unavoidable.15 Nevertheless, parties are free to stipulate that any event constituting force majeure shall not
excuse a party from its obligations. For instance, some PPP contracts state that the occurrence of  any force majeure event shall not
release any party from monetary obligations and the parties shall continue their performance, with all due diligence, of  all
obligations not affected by force majeure.

iv Political risks
Since parties to a construction agreement are free to stipulate, they may adopt provisions to account for adjustments in any
increase or decrease in cost resulting from a change in Philippine laws (including the introduction of  new laws and the repeal or
modification of  existing laws) or in the judicial interpretation of  such laws. Moreover, given the massive scale of  imports of 
capital goods required for the country’s infrastructure programme, parties may adopt payment stipulations to include fixed rates of 
exchange to be used for calculating payments.

V SECURITY AND COLLATERAL

Typically, funders and lenders require a variety of  security and collateral to protect them from defaulting borrowers, such as real
estate mortgages, chattel mortgages (for personal property), pledges or guarantees.
For certain types of  collateral, such as mortgages or pledges, registration with relevant government authorities is required to
bind third parties. For instance, real estate mortgages must be registered on the Registry of  Deeds where the property is located. In
other instances, the law automatically creates a lien in favour of  those involved in the construction or repair of  the building.
Article 2242 of  the Civil Code, for example, grants preferential rights to labourers, architects, engineers and contractors regarding
specific immovable property and real rights of  the debtor, and this preferred lien constitutes an encumbrance on the immovable or
real right.16

11
NEDA, Structuring Public-Private Partnerships (2009).

12
ibid.

13
Interview with Mia Sebastian, Deputy Executive Director of  the Public-Private Partnership Center [the PPP Center], on 22 January 2019.

14
Radio Communications of  the Philippines, Inc.  (RCPI) v. Alfonso Verchez, Grace Verchez-Infante, Mardonio Infante, Zenaida Verchez-Catibog, and Fortunato
Catibog, G.R. No. 164349, 31 January 2006.

15
Civil Code, Article 1174.

16
Civil Code, Article 2242.
 These provisions apply when the same property is subjected to the claims of  several creditors and the value of  the debtor’s
property is insufficient to pay all the creditors in full. 17 Thus, to protect the creditor, contracts likewise regularly provide that
debtors must warrant its solvency throughout the existence of  the project and any violation of  such a warranty will entitle the
creditor to damages and other remedies, such as forcing the debtor to deliver additional securities.

VI BONDS AND INSURANCE

For construction projects, standard provisions typically include defects liability period, defects notification period, imposition of  
retention money and the requirement of  performance bonds. Moreover, Philippine law requires contractors to secure workmen’s
compensation insurance and public liability insurance. In addition to the legal requirements, principals commonly require
contractors to secure an all-risk insurance policy and bank guarantees as additional forms of  mitigation of  risk. If  a contractor
constitutes a joint venture, consortium or other unincorporated grouping of  two or more persons, the principal may require joint
and solidary liability for the performance of  the project.

VII ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

Registration of  encumbrances on immovable property with the proper government authority is required to enforce the rights of   a
secured party over the collateral. However, with respect to movable properties, the Personal Property Security Act 18 (PPSA) was
enacted to simplify the creation, perfection, registration and enforcement of  movable collateral such as bank accounts, accounts
receivable, inventory, equipment, vehicles and intellectual property rights. 19 Under the PPSA, priority of  interests depends on the
time of  registration with a centralised and nationwide electronic registry.
Outside the context of  bankruptcy, project lenders may enforce security rights extrajudicially or judicially, in either case,
through a foreclosure of  the collateral or public auction (although private sale is allowed for certain types of  movable property).
In a foreclosure of  real estate mortgage, the mortgagor is granted a period to redeem the property before title is consolidated with
the mortgagee.
If  a debtor becomes insolvent, whether voluntary or involuntary, or requires financial rehabilitation, the applicable law is the
Financial Rehabilitation and Insolvency Act20 (FRIA). Insolvency proceedings require court intervention but, in limited cases, out-
of -court informal restructuring is allowed if  approved by the court with the conformity of  the required percentage of  creditors.
Special features of  the FRIA include:
excluded assets that are exempt from execution;
excluded entities (banks, insurance companies and pre-need companies covered by the New Central Bank Act) and government
entities; and
priority of  credits, namely those provided by law such as taxes, claims for services rendered by employees or labourers, secured
immovables, secured movables and unsecured obligations.

VIII SOCIO-ENVIRONMENTAL ISSUES

i Licensing and permits
Permit and licensing requirements vary depending on the type of  project involved. By way of  example, developers of  renewable
energy projects considered to critically affect the environment may need to secure the following permits and licences before
development of  a renewable energy project may proceed.
Licences and permits from national government agencies
Environmental compliance certificate;
environmental impact statement;
tree cutting permit;
acquisition of  land or land use agreement such as a forest land use agreement or special land use permit;
certificate of  non-coverage from the national irrigation administration;
water permit; and
certificate of  non-overlap or certificate of  precondition from the National Commission on Indigenous Peoples.

17
Jan-Dec Construction Corporation v. Court of  Appeals, G.R. No. 146818, 6 February 2006.

18
An Act Strengthening the Secured Transactions Legal Framework in the Philippines, which Shall Provide for the Creation, Perfection, Determination of  Priority,
Establishment of  a Centralized Notice Registry, and Enforcement of  Security Interests in Personal Property, and for Other Purposes, Republic Act No. 11057
(2017).

19
‘Duterte signs new law allowing use of other personal properties as bank collateral’, Manila Bulletin, August 2018 (https://news.mb.com.ph/2018/08/20/duterte-
signs-new-law-allowing-use-of -other-personal-properties-as-bank-collateral/).

20
An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals (Financial Rehabilitation and Insolvency Act),
Republic Act No. 10142 (2010).
Licences and permits from local government agencies
Proof of  public consultation;
relevant resolution of  support;
relevant local permits (including for construction); and
rights of  way agreements (both private and public);

The absence of  any of  the required permits or licences authorises the relevant government agency, such as the Department of 
Energy, to suspend the project contract.

ii Applicability of  the precautionary principle

To further ensure that an infrastructure project does not cause excessive harm to the environment, the Philippines adopts the
precautionary principle as a minimum standard in evaluating the environmental impact of  a project. The precautionary principle
states: ‘When there is a lack of  full scientific certainty in establishing a causal link between human activity and environmental
effect, the courts will resolve any doubts in favour of  protecting the environment.’ 21

iii Measures to address socio-environmental issues

While environmental and social safeguards are normally part of  a project’s feasibility study, the sheer number of  regulatory
agencies involved in any given project creates inefficiencies and redundancies in compliance and reporting, thereby making
monitoring compliance challenging. Thus, the PPP Center, acting as a central coordinating agency, has integrated environmental
and social safeguards in infrastructure projects by identifying issues, evaluating mitigation measures, operating safeguards through
the project contract, and monitoring the implementation of  such measures and safeguards.22

IX PPP AND OTHER PUBLIC PROCUREMENT METHODS

i PPP
PPPs address the limited funding resources for local infrastructure or development projects within  the public sector, thereby
releasing  public funds for allocation to other local priorities. PPPs, as differentiated from other infrastructure projects, emphasise
value for money – focusing on reduced long-term costs, better risk allocation, improved services and possible generation of 
additional revenue for both the government and private sector.
Apart from the implementing agency and the private proponent, the PPP Center also has a crucial role in facilitating the
country’s PPP Program and Projects.23 This section focuses on national infrastructure projects that can the subject of  a PPP.

Framework
The Philippines’ PPP framework encourages open competition and ensures a level playing field for all PPP players through
transparent and credible processes. Local or foreign investors and large or small companies that participate in PPPs are properly
scrutinised in terms of  their legal, financial and technical capacities to ensure that they are able to finance, construct and implement
large, complex infrastructure projects.24 In general, PPPs involve four stages: project development (project preparation, finalisation of 
project structure); approval (evaluation, review and approval of  the project); competition (preparation of  bidding documents,
prequalification to bid, bid submission and evaluation, awarding of  project to private partner and issuance of  Notice of  Award); and
cooperation stage (submission of  Notice of  Award requirements, contract signing, financial close, construction, turnover of  the
facility or infrastructure).25 The table below summarises  PPP projects between 2010 and February 2019:26

21
2010 Rules of  Environmental Procedure, Rule 20(1).

22
Department of  Foreign Affairs and Trade (DFAT) Safeguard Policy for Aid Program, as cited in Public-Private Partnership Governing Board Resolution 2018-12-
02, 14 December 2018.

23
Reorganizing and Renaming the Build-Operate and Transfer Center to the Public-Private Partnership Center of  the Philippines and Transferring its Attachment
from the Department of  Trade and Industry to the National Economic and Development Authority and for Other Purposes (Executive Order No. 8, Series of  2010),
as amended by Executive Order No. 136, Series of  2013.

24
See https://ppp.gov.ph/view-from-the-center-ppps-in-the-philippines-myths-vs-facts/.

25
See https://ppp.gov.ph/ppp-program/ppp-processes/.

26
See https://ppp.gov.ph/wp-content/uploads/2019/03/PPPC_REP_PPP-Projects-20190228.pdf.
 Project cost (in PhP
Stage Mode of procurement Number
billion)

Projects under implementation Solicited 15 242.77

Unsolicited 2 85.90

Subtotal 17 328.67

Projects in the pipeline Solicited 14 0.38

Unsolicited 25 3,309.13

Subtotal 39 3,309.51

With respect to the laws that govern the framework of a PPP, the Build-Operate-Transfer Law of  1990, as amended, its implementing
rules and regulations (IRR) and the NEDA-Investment Coordination Committee (ICC) Guidelines primarily govern national
infrastructure projects,27 whereas special laws and local ordinances govern local projects. Joint ventures involving national projects
are primarily governed by the 2013 NEDA Guidelines on Joint Ventures.
Types
PPP contract types include, but are not limited to, service contracts, management contracts, lease, build-operate-transfer (BOT)
and its modalities, concessions, joint ventures and hybrid arrangements.

Typical procurement or tender process

In a project’s life cycle, the implementing agency typically identifies the infrastructure project, which is then evaluated and
approved by an approving body.28 The implementing agency then selects a private partner through competitive bidding. Criteria
for awarding PPP projects to private sector include the technical, financial, legal, economic, environmental, and social viability of 
a project.
In addition, the BOT Law allows unsolicited proposals (USPs) for projects excluded from the current administration’s list of  
priority projects, provided the following conditions are met:
the project involves a new concept or technology or is not part of  the List of  Priority Projects as defined by law;
the project is not a component of  an approved project; and
no direct government guarantee, subsidy or equity is required.

Although USPs, by law, are subject to Swiss challenge, they are criticised for not undergoing a genuinely competitive and
transparent bidding process. Further, many argue that the 60 working days for challengers to provide a better offer than the
original proposal is insufficient to effectively conduct a thorough project study and challenge the original proponent. To date, the
sole instance of a project being awarded to a challenger (PIATCO) is the controversial NAIA Terminal 3 project, but the contract
was subsequently declared null and void by the Supreme Court because of irregularities in the contract.
Thus, USPs may provide the advantage of  faster implementation of  projects but since the few that have been awarded have
been shrouded in controversy, the Philippines needs to re-evaluate the process and vague standards set for USPs to give challengers
a fair opportunity to participate.

Significant PPP transactions

Waste-to-energy facilities to supplement the energy needs of  the Philippines
Apart from traditional infrastructure projects, the PPP Center has highlighted key areas of  growth. In particular, the PPP Center
has identified renewable energy infrastructure, such as waste-to-energy facilities, as the ‘Next Wave of  PPPs’ thanks to the strong
interest from local government and investors. 29 These non-traditional PPP projects, such as renewable energy infrastructure and
digital infrastructure stand to benefit from PPPs because of  the technical expertise and innovative technologies more widely
available in the private sector.

27
An Act Authorizing the Financing, Construction, Operation and Maintenance of  Infrastructure Projects by the Private Sector, and for Other Purposes, Republic Act
No. 6957, as amended by Republic Act No. 7718.

28
See ‘PPPs in the Philippines: Myths vs Facts’, Business World Online (http://bworldonline.com/content.php?section=Opinion&title=ppps-in-the-philippines-
myths-vs-facts&id=144303).

29
‘ADB warns of  barriers to waste-to-energy investment’ Business World Online, 18 December 2018
(https://www.bworldonline.com/adb-warns-of -barriers-to-waste-to-energy-investment/).
 This year, Metro Pacific Investments Corporation (MPIC) is expected to be awarded the 22  billion peso Quezon City Waste-
to-Energy facility project since no counter-offers were submitted to challenge MPIC’s unsolicited proposal. The facility will have
the capacity to convert up to 3,000 metric tons a day from Quezon City’s municipal solid waste (MSW) to 42 megawatts, which
can power between 60,000 and 90,000 homes. As public partner for the project, the Quezon City government committed to deliver
1,700 metric tons of  MSW per day, to acquire the right of  way for access roads and other utilities and to expropriate the project
site of  the facility if  required.30 The concession agreement will have a term of  35 years and originated from a USP from MPIC.
Projects such as the Quezon City waste-to-energy facility signify the Philippine government’s commitment to diversifying its
energy mix and maintain at least 30 per cent of  the country’s total energy mix from renewable energy sources until 2030.31

PPP as a tool for modernising the country’s existing infrastructure

Joining the new wave of  PPP projects are those featuring new technology to improve and enhance public services. In 2016, the
Philippines Statistics Authority (PSA) awarded a 1.59 billion peso project to computerise the civil registry operations of  the PSA
using imaging technology. Further, in January 2014, the Department of  Transportation awarded the Automatic Fare Collection
System (AFCS) project to a private consortium (from 33 initial prospective bidders). The consortium contributed the contactless-
based smart card technology called the Beep Card on Light Rail Transit (LRT) Line 1 and 2 and Metro Rail Transit (MRT) Line  3.
The project became fully operational in December 2015 and government officials reported improved collections and higher user
satisfaction as a result of  the AFCS.32
The current administration lists more than 70 national priority infrastructure projects, of  which only seven have a PPP
component. While PPPs undoubtedly have a role in addressing the country’s infrastructure requirements, lack of   institutional
capacity among implementing agencies, 33 apparent conflicting objectives between public and private stakeholders, and the highly
politicised nature of  awarding PPP projects make traditional PPPs the less preferred mode of  procurement for big-ticket projects.
Nevertheless, the private sector may have opportunities with the influx of  the next wave of  PPP projects, in which private sector
participation is integral in the project’s success.

ii Other procurement methods

Funding of  national infrastructure projects is secured primarily from the national budget, whereby bids for projects go through a
public procurement process, and governed by the Government Procurement Reform Act.34
As a developing country, the Philippines also receives funding from loans, grants and ODA from other states and multilateral
organisations. In the past three years, Japan has continued to be the largest contributor of  ODA, funding five of  the
administration’s flagship infrastructure projects (or 36.5 per cent of  the Philippines’ ODA portfolio), followed by South Korea
and China, which funded two projects each. A key infrastructure project funded from ODA is the Metro Manila Subway, which is
expected to begin operations by May 2022. The planned subway is regarded as the most expensive project under the government’s
Build, Build, Build programme, with total cost of  356.96 billion pesos.35

X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

i Major foreign investors and investment areas
The Philippines is primarily a capital importing country with respect to many areas of  industry. Total foreign investment net
inflows in 2018 amounted to US$9.8 billion, down 4.4 per cent from 2017. Japan, Taiwan, Singapore, the United States, the
United Kingdom, Australia and South Korea are the countries with the largest foreign investment, although China has recently
been catching up, with investment during the fourth quarter of 2018 accounting for 52.6 per cent of  total approved investments

30
‘MPIC expects go signal for QC project within Q1’, Business World Online, 26 February 2019
(https://www.bworldonline.com/mpic-expects-go-signal-for-qc-project-within-q1/).

31
Philippine Energy Plan 2016-2030, available at https://www.doe.gov.ph/sites/default/files/pdf/pep/2016-2030_pep.pdf; Department of  Energy, DC 2015-07-0014:
Guidelines for the policy of  maintaining the share of  renewable energy in the country.

32
Automatic Fare Collection System: Project Brief, PPP Center (see https://ppp.gov.ph/ppp_projects/automatic-fare-collection-system/?wppa-occur=1&wppa-
cover=0&wppa-album=85&wppa-photo=1171); United Nations Economic and Social Commission on Asia and the Pacific, Public-Private Partnerships Case Study
#6: Automatic Fare Collection System (retrieved from https://www.unescap.org/sites/default/files/Case%206-%20Automated%20Fare%20Collection.pdf).

33
Interview with Jonathan Uy, Assistant Secretary, NEDA Investment Programming Office, on 24 January 2019.

34
An Act Providing for the Modernization, Standarization and Regulation of  the Procurement Activities of  the Government and for Other Purposes (Government
Procurement Reform Act), Republic Act No. 9184 (2003).

35
‘Philippines, Japan tackle infra, flood management projects’, Rappler, 22 November 2018 (https://www.rappler.com/business/217308-philippines-japan-deals-
infrastructure-projects-november-2018).
compared with virtually nothing in the third quarter. 36 The sectors that receive the highest level of  foreign investment include
manufacturing, real estate, administrative and support service activities, and electricity, gas, steam and air-conditioning. 37

ii Limitations
One hundred per cent  foreign participation is allowed in all areas of  investment except for those industries that are subject to
nationalisation requirements. In particular, the Constitution and the Negative List of  the Foreign Investment Act 38  specify the
industries that are subject to limitations. For instance, the following are some of the areas in which up to 40 per cent
equity participation is allowed:
exploration, development and utilisation of  natural resources;
ownership of  land;39
ownership and operation of  public utilities except power generation and supply of  electricity (note that all the executive and
managing officers of  any such corporation or association must be citizens of  the Philippines);40 and
construction and repair of  locally funded public works (up from 25 per cent in the previous list) except:
infrastructure or development projects covered by the Republic Act. No. 7718; and
projects that are foreign-funded or assisted and required to undergo international competitive bidding.

Conversely, 100 per cent foreign participation is allowed in insurance adjustment companies, lending companies, financing
companies and investment houses.41 Even if  a particular investment satisfies the equity restrictions, the type of  investment is still
subject to approval by the relevant government authority and, in some cases, the President of  the Philippines.

iii Benefits and other incentives

The Philippines has the highest number of   investment promotion agencies (IPAs) as compared with its Asian counterparts, with
seven overall. These IPAs are authorised to award incentives to foreign investors. Common incentives include both the fiscal
(income tax holidays ranging from four to eight years, exemption from or a reduced rate for imports of  capital equipment ranging
from four to 10 years, and additional tax deductions) and non-fiscal (simplified customs procedures, employment of   foreigners).
The Philippines likewise recognises property rights of  foreigners and registered foreign companies, including the right to non-
impairment of  contracts, subject only to the constitutionally granted powers of  expropriation and police power by the state.42

iv Shifting policies to ease foreign restrictions

During the past decade, the Philippines has recognised the critical role of  foreign investors in boosting its economy, and in
particular those projects that require significant capital investment and technical expertise. To spur investment in infrastructure
projects, the country adopted the Investors’ Lease Act43  to allow foreign investors to lease private land for up to 75 years (50
years, renewable once for another 25 years). For tourism projects, leases are limited to projects with an investment of   not less than
US$5 million, 70 per cent of  which shall be infused in the project within three years of  the lease contract being signed.
A foreign corporation seeking to do business in the Philippines may form a branch or representative office in the Philippines
but must first secure a licence to transact with the Securities and Exchange Commission of  the Philippines. The recently adopted
Revised Corporation Code further increased the capitalisation requirements for foreign branch offices from 100,000 pesos to
500,000 pesos.44 A licence to transact authorises a foreign corporation to sue in the Philippines but there are recognised exceptions
to the general rule that only foreign corporations licensed to do business in the Philippines may institute an action before the
courts. These exceptions include: (1) if  a party is estopped from questioning the capacity of  a foreign corporation to sue; (2) if  a

36
‘China’s 2018 investment pledges to PH grow 20 times’, Rappler, 1 March 2019 (https://www.rappler.com/business/224695-china-investment-pledges-2018’.

37
Lisa Grace S Bersales, PhD, ‘Total Approved Foreign Investments Reached PhP 14.2 billion in Q1 2018’, Philippine Statistics Authority
(https://psa.gov.ph/content/total-approved-foreign-investments-reached-php-142-billion-q1-2018).

38
An Act to Promote Foreign Investments, Prescribe the Procedures for Registering Enterprises Doing Business in the Philippines, and for Other Purposes (Foreign
Investments Act of  1991), Republic Act No. 7042, amended by Republic Act No. 8179 (1991).

39
Except in cases of  hereditary succession, where foreign individuals may own lands.

40
1987 Phil. Const., Article XII (11).

41
An Act Amending Investment Restrictions in Specific Laws Governing Adjustment Companies, Lending Companies, Financing Companies and Investment
Houses Cited in the Foreign Investment Negative List and for Other Purposes, Republic Act No. 10881 (2016).

42
1987 Phil. Const. Article III (9).

43
An Act Allowing the Long-Term Lease of  Private Lands by Foreign Investors (Investors’ Lease Act), Republic Act. No. 7652 (1993).

44
Revised Corporation Code, Article 143 (2019).
foreign corporation entered into an isolated transaction; and (3) if  an action involves the confirmation, recognition and
enforcement of  a foreign arbitral award. A foreign corporation will nevertheless have the right to sue if  these exceptions can be
proven.

v Concerns and other matters

In 2018, the government passed the Tax Reform for Acceleration for Inclusion (TRAIN) Law, which resulted in mixed reactions
and uncertainty among investors.45 According to the American Chamber of  Commerce, the proposed second package of  the
TRAIN Law, which involves the rationalisation of  incentives given to foreign investors, creates uncertainty for both existing and
new investors as the measure is likely to lead to large-scale revenue reduction and job losses, which may be brought about by
damaged investor confidence.
Moreover, even with the adoption of  policies that ease restrictions on foreign investments, the Philippines ranks among the
lowest in the ASEAN region in terms of  total foreign direct investment, which suggests that restrictions still constrict the ideal
inflow of  foreign investment. Thus, assuming that foreign investments have a considerable role in supporting PPPs, the
Philippines needs to find ways to attract foreign investment for such projects. Currently, many of  the PPPs in the pipeline are
considered public utilities and are thus limited to 40 per cent foreign ownership. Thus, some government officials have called for
the amendment of  the 83-year-old Public Service Act to ease foreign restrictions by narrowing the definition of   public utilities.
Further, in 2018, the President called on Congress to propose amendments to the economic provisions of  the Constitution, which
may address concerns about  making the Philippines more competitive and  attractive to foreign investors.

XI DISPUTE RESOLUTION
i Special jurisdiction – Construction Industry Arbitration Commission
While disputes are still predominantly resolved by the regular courts, long delays, allegations of  corruption and inefficiencies
make recourse to the courts less than ideal. Thus, when significant financial losses are at stake, the parties involved in a
construction dispute may enter into arbitration before the Construction Industry Arbitration Commission (CIAC), the Philippines’
arbitration vehicle for the construction industry.46
However, a common issue between parties is the manner in which CIAC’s exercises its jurisdiction. To illustrate, in the case
of  China Chang Jiang Energy Corporation v. Rosal Infrastructure Builders (China Chang), decided by the Supreme Court, the
high court held that as long as the parties to a construction dispute agree to submit to voluntary arbitration, regardless of   what
forum they may choose, their agreement will fall within CIAC’s jurisdiction. In China Chang, the agreement specified that any
dispute between the parties would be resolved by arbitration before the International Chamber of  Commerce but the Supreme
Court upheld CIAC’s jurisdiction over the dispute.
Despite some apparent gaps in CIAC’s rules, including the rules on joinder of  third parties and the enforcement of  arbitral
awards, parties to a construction dispute may favour CIAC’s jurisdiction because of  the flexible quantum of  evidence required to
prove facts, the relative leniency in the rules on admissibility of  evidence, and the high respect given by the appellate courts in
relation to factual findings by CIAC, thereby making setting aside an arbitral award on appeal unlikely.

ii Arbitration and ADR

Other than CIAC, the main alternative dispute resolution (ADR) body is the Philippine Dispute Resolution Center (PDRC), which
is tasked with administering arbitration and mediation in specialist fields such as maritime, banking, finance, insurance, securities
and intellectual property. Relevant laws that govern the substantive matters of  ADR include the Arbitration Law47 and the
Alternative Dispute Resolution Act of  200448 (the 2004 ADR Act), whereas the Supreme Court’s Special Rules of  Court on
Alternative Dispute Resolution govern the procedure in arbitration and other ADR mechanisms in the Philippines. 49 For disputes
that have an international component, the Philippines recognises the UNCITRAL Model Law on International Commercial
Arbitration50 and the New York Convention on Recognition and Enforcement of  Foreign Arbitration Awards.51
45
‘TRAIN 2 causing uncertainty among investors – AmCham’, The Philippine Star, 29 August 2018
(https://www.philstar.com/headlines/2018/08/29/1846775/train-2-causing-uncertainty-among-investors-amcham).

46
‘Creating an Arbitration Machinery in the Construction Industry of  The Philippines’, Executive Order No. 1008, 4 February 1985.

47
An Act to Authorize the Making of  Arbitration and Submission Agreements, to Provide for the Appointment of  Arbitrators and the Procedure for Arbitration in
Civil Controversies, and for Other Purposes (The Arbitration Law), Republic Act No. 876 (1953).

48
An Act to Institutionalize the Use of  an Alternative Dispute Resolution System in the Philippines and to Establish the Office for Alternative Dispute Resolution,
and for Other Purposes, Republic Act No. 9285 (2004).

49
A.M. No. 07-11-08-SC dated 1 September 2009, entitled ‘Special Rules of  Court on Alternative Dispute Resolution’.

50
UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006.

51
United Nations Convention on the Recognition and Enforcement of  Foreign Arbitral Awards (New York, 10 June 1958).
 In 2012, through Executive Order No. 78, the Philippines mandated the inclusion of  provisions on the use of  ADR
mechanisms in all contracts involving PPP projects, BOT projects, joint venture agreements between the government and private
entities and those entered into by local government units.
In 2018, in Strickland v. Ernst & Young LLP,52 the Supreme Court reiterated the government’s policy of  pushing arbitration
and ADR as a means to settle disputes. The Court allowed tortious claims to be resolved by arbitration despite Punongbayan &
Araullo (the defendant) not being a party to the arbitration agreement. The Court ruled that Strickland’s allegations against the
defendant were ‘undoubtedly hinged’ and ‘unavoidably linked’ to the claimant’s previous contractual relationship with Ernst &
Young LLP, as agent of  the defendant.
Clearly therefore, the Philippines adopts a favourable view with respect to arbitration as a means of  resolving disputes.
Nevertheless, arbitration costs remain high. A case in point was the NAIA 3 Terminal project, in which the Supreme Court
ordered PIATCO (the challenger to the USP that eventually won the bid) to pay 300 million pesos as arbitration costs.
Despite the push for arbitration, courts still have a crucial role in providing injunctive relief against erring government
authorities. For instance, in 2009, the Light Rail Transit Authority initially awarded the Common Station Project to SM Prime
Holdings, Inc (SMPHI). Five years later, however, the Department of   Transportation (a government partner) awarded the project
to the Light Rail Manila Corporation (LRMC). As a result, SMPHI filed a temporary restraining order, which was granted by the
Supreme Court in 2014. The controversial project was only resolved in 2016 when SMPHI and the LRMC agreed on a location
mutually acceptable to both parties.
Prospective proponents must therefore be cautious in dealing with government partners. Fortunately, stricter sanctions, and
criminal prosecution against erring government individuals, have made material breaches in contractual obligations less likely.
Nevertheless, understanding the potential risks and cultural and political context when participating in infrastructure projects may
be necessary to avoid a full-blown dispute.

XII OUTLOOK AND CONCLUSIONS

Private participation through PPPs has a critical role in reducing the infrastructure gap in the Philippines, especially in sectors that
require technical expertise and innovative technologies. Traditional infrastructure still remains a priority for the government and
the available capital augmented from ODA and domestic and foreign investors make traditional infrastructure projects highly
competitive. The expansion of  private participation in non-traditional areas of  infrastructure, such as renewable energy projects
and other social infrastructure, is a welcome step in the right direction towards achieving the government’s ambitious
infrastructure goal of  7.4 per cent of  its GDP by 2022.
With favourable economic conditions and a more relaxed fiscal policy, the Philippines should take advantage of  these bullish
conditions, but must likewise take more proactive steps towards fulfilling the Philippines’ infrastructure needs that first and
foremost benefit the public. Specifically, the government must adopt better monitoring and evaluation mechanisms to ensure the
proper implementation of  a project, instil a robust regulatory regime and intensify its project assistance to implementing agencies
and impose flexible yet consistent policies and standards for contract preparation to tailor-fit a project’s needs. 53
At present, the private sector’s risk appetite and willingness to participate in infrastructure development is far from satiated.
Consequently, the government must leverage the private sector’s efficient use of  capital and resources by finding the means to
allow faster or larger-scale project participation from the private sector. With the proper incentives and allocation of  risks, private
participation in infrastructure development will undoubtedly be integral to the Philippines surpassing its infrastructure goals.

Appendix 1

ABOUT THE AUTHORS

CARLOS ALFONSO T OCAMPO

Ocampo Manalo Valdez & Lim
Carlos Alfonso T Ocampo is the founding partner of  Ocampo & Manalo. He currently handles the firm’s commercial law practice
with an emphasis on infrastructure, public-private partnerships, energy and transportation law. He also supervises the conduct of 
due diligence audits and advises in mergers and acquisitions. In 2014, AsiaLaw named him as a market-leading lawyer in the
Philippines, primarily for his contributions in the field of commercial law. In June 2018, the Asia Business Law Journal
recognised him as one of the top 100 lawyers in the Philippines.

52
Strickland v. Ernst & Young, G.R. Nos. 193782 and 210695, 18 August 2018.

53
Interview with Mia Sebastian, Deputy Executive Director of  the PPP Center, on 22 January 2019.
 He obtained his Bachelor of  Arts degree in economics (cum laude) and his Bachelor of  Laws from the University of  the
Philippines. In 1997, he completed an executive management programme at the Asian Institute of   Management. He was also
awarded certificates from the Executive Education programme of the John F Kennedy School of  Government at Harvard
University for completion of  the Mastering Negotiation and Infrastructure in a Market Economy programmes, in April 2016 and
July 2017, respectively.
Mr Ocampo is a director of various private corporations and an independent director of  two publicly listed companies in the
Philippines. He is also a visiting lecturer in law at the Lanzhou University School of  Law.

ANGELA K FERIA
Ocampo Manalo Valdez & Lim
Angela K Feria is an associate at Ocampo Manalo Valdez & Lim. Her practice area focuses on aviation law, general corporate
law, special projects and dispute resolution and litigation. She has defended clients in expropriation proceedings relating to the
Calamba–Laguna Expressway PPP Project; advised clients in construction disputes arising from cross-border transactions; and
assisted clients with corporate restructuring and due diligence audits prior to the development of  renewable energy projects. She
has also appeared in proceedings before the Construction Industry Arbitration Commission.
She earned her juris doctor degree from Ateneo de Manila University School of  Law where she competed in international
moot court competitions such as the Asia Cup Moot and the Stetson International Environmental Moot. She was also part of   the
executive committee that helped spearhead the launch of  the school’s first edition of  its international law review, the Ateneo Law
Journal.

OCAMPO MANALO VALDEZ & LIM

28th Floor, Pacific Star Building
Makati Avenue (corner of
Senator Gil J Puyat Avenue)
Makati City 1227
Philippines
Tel: +632 7751 8889 / 7799
Fax: +632 7751 4000
[email protected]
www.omlawphil.com

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