CTIP-PPP PROGRAM OVERVIEW

CTIP-PPP Center Program Overview Building and Connecting the Bridge through Public-Private-Partnership (PPP)

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Council for Trade and Investment Promotion CTIP-PPP Center: Program Overview The Council for Trade and Investment Promotion (CTIP), is an international non-profit organization registered in the State of New Jersey. Its advocacy is more “trade and investments� through the promotion of the so-called Public-Private-Partnership (PPP). To attain this objective our campaign is to create a PPP Center in partnership with the Cities and Towns in the State of New Jersey and various local government units in many developing countries, where CTIP has Chapters.

CTIP recognizes the essential role of the private sector as the main engine for national and regional growth and development. While PPP is very popular in the United States in general, and in the State of New Jersey in particular, there are no local government infrastructure projects that are actually undertaken under the PPP Mode. This is because there is lack of understanding of the intricacies of PPP. PPP. PPP is not about a private property developer trying to develop a property into a housing project, or a hotel, or any facilities without government participation other than granting a building permit or a zoning approval. It is not about a City or a Town being a service oriented local government unit or having no manufacturing plants.

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Public-Private-Partnership (PPP) or some calls it Public-Private-Participation (PPP) concept has become extremely popular in many countries today. Although there are several contractual arrangements under PPP, many people both in Government and in Private has overlooked the importance of the word “partnership” or “participation” in a PPP concept. In other words, undertaking an infrastructure development Project is a joint undertaking between the government and the private sector. It is undertaking an infrastructure Project under the spirit of true “partnership”.

PPP is not the regular type of construction, where the government bids out the Project and pay the winning contractor on a monthly progress payment for its monthly accomplishments. That is not the case in a PPP mode. The principle in a PPP is that the “success of one is the success of all”. It is a team effort. It is a “partnership”.

Defining PPP Public Private Partnership is a contractual concept or arrangement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility. Under PPP, the private party provides public service or project and assumes substantial financial, technical and operational risk in the project.

Even in the best of times, governments at all levels are challenged to keep pace with the demands of their constituencies. During periods of slow growth, government revenues are frequently not sufficient their constituencies. During periods of slow growth, government revenues are frequently not sufficient to meet spending demands, necessitating painful spending cuts or tax increases. Partnerships can provide a continued or improved level of service, at reduced costs. And equally important, partnerships can also provide the capital needed for construction of major facilities. By developing partnerships with privatesector entities, governments can maintain quality services despite budget limitations.

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In the infrastructure sector, complex arrangements and contracts must guarantee and secure streams of cash flows, to make PPP projects prime candidate for “Project Financing”. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other nonmedical services while the hospital itself provides medical services.

A well-defined financing must be in placed to move forward with a project. And a well-defined “exit strategy” must be pre-determined to convince investors that this kind of project is not only viable but also “doable”.

Some Challenges in PPP Private sector participation in areas previously treated as the monopoly of the public sector has made major contributions to increasing the pace of growth and development in many countries. In contemplating to utilize this instrument, many governments encounter a number of challenges including: Lack of comprehensive policy or understanding of the legal and institutional frameworks that provide clear guidelines and procedures for development and implementation of PPPs. ▪ Lack of realistic and comprehensive technical, socio-economic and commercial feasibility analysis which leads to poor project design.

▪ Inadequate enabling environment which includes lack of long-term financing instruments and appropriate risk sharing mechanisms; and appropriate risk sharing mechanisms; and ▪ Insufficient capacity negotiations, procurement, implementation and management of PPPs”.

▪

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PPP encounters a number of challenges, some of which is the absence of a responsive “implementing guidelines” clear enough to be understood by various stakeholders, including sufficient and clear understanding of PPP, differentiating solicited and unsolicited proposal, from conception to project implementation and operation of the infrastructure facility, including Project Finance.

Legal Framework The government’s budgetary constraints and management of operational requirements are always a major concern by any State or local government units in undertaking infrastructure development projects. In this kind of environment, when the government is experiencing budgetary constraints, projects such as Transportation Infrastructure Projects and “renewable energy” is a good candidate for a Public-Private Partnership mode, where several contractual arrangements are available to fit the requirements of both the Public and the Private Sector.

An indispensable condition for the successful implementation of a PPP Mode is a legal environment where property rights and contractual agreements are protected and enforced. The legal framework for private sector investment in infrastructure has to be clarified by a clearly defined allocation of roles, functions, and duties across the spectrum of institutions and stake holders.

At the minimum, an effective implementation of a project under a PPP Mode hinges on the following: ▪ A legal and economic environment that is conducive to a mutually beneficial partnership.

▪ Clarity in articulating the duties and responsibilities of the parties to the contract.

▪ Certainty of recovering investments and availability of mechanisms for dealing with risks and unforeseen events.

▪ Transparency and credibility of the government’s processes for review and approval of proposed PPP Mode projects and the associated contracts for implementation.

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▪ The existing Legal Framework being responsive to the needs of time.

Asserting the Sanctity of the Contract The Government must affirm government’s binding commitment to honor and defend contractual rights and obligations.

In a PPP Project where it involves the participation of the Government, there must be a Law that will prohibit the Court to issue a Temporary Restraining Order (TRO) in favor of the Petitioner or the Complainant, to prevent the Private Proponent to implement the Project, in the spirit of “national interest”, most especially in a Project like Transportation Infrastructure, where public service is paramount. Should there be any perceived infirmities in the contract, the complainant can file a complaint without necessarily infirmities in the contract, the complainant can file a complaint without necessarily disrupting the construction works.

Any investigations conducted by an Oversight Committee created by the Government, related to suspicion of irregularities in the Project, it should continue without necessarily stopping the implementation of the Project. A case can be pursued if there is an iota of evidence or a probable cause, but the Project should continue, as this will affect the credibility of the Project, most especially if funding is participated by a Multilateral Financing Institutions or an Export Credit Agency (ECA) and similar institutions.

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The Solicited and Unsolicited Proposal?

Why is it important to distinguish between a “solicited proposal from an unsolicited proposal”?

It is important because the legal framework that governs the two proposals is different. Let us see what it is all about: Unsolicited Proposal – Refers to project proposals submitted by the private sector, not in response to a formal solicitation or request issued by an Agency of Government, to undertake Infrastructure or Development Projects which may be entered into by the said Agency subject to the requirements and conditions prescribed by Law; Solicited Proposal – Refers to project proposals submitted by the private sector, in response to an Solicited Proposal – Refers to project proposals submitted by the private sector, in response to an invitation, or formal solicitation, or request by a Government Agency to undertake Infrastructure or Development Projects which maybe entered into by the said Agency, subject to the requirements and conditions prescribed by Law; Generally, in an unsolicited proposal, the private proponent submits a proposed project and a term of reference (TOR), among others, not in response to a formal solicitation from the Government.

If the government accepts the proposal, they will both execute a Memorandum of Understanding (MOU) defining each other’s role, responsibilities, and obligations. The private proponent conducts a prefeasibility study at his cost. Then he submits it to the Government for approval. If approved, the Government conducts a tender for other interested parties to challenge the private proponent’s proposal.

The private proponent exercises his “right-to-match”, if the Government finds there is another proposal considered to be reasonable and advantageous to the Government.

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On the other hand, if there are no bidders, or other interested parties are disqualified to bid, or their bids are not advantageous to the Government, the original proponent will then become eligible for an award.

Requisites for Unsolicited Proposals: The project involves a new concept or technology promoting green energy.

1. The Government is not funding the conduct of pre-feasibility studies.

2. If no comparative or competitive proposal or no complying bid is received by the Government, assuming that the Government decides to call for a Tender at a later date to challenge the Private Proponent’s Proposal, subject to verification about reasonability, the Government is bound by moral duty, a right and is obliged to award the Project to the Private Proponent; 3. In the event that a another proponent submits a price proposal better and more reasonable than that submitted by the original proponent, the latter maybe granted the “right to match� such price proposal within thirty (30) working days from receipt of a notification from the Government of the result of the comparative or competitive bid; 4. Should the original proponent fail to match the price proposal of the comparative proponent within the specified period, the contract shall be awarded to the comparative proponent, subject to the prospective awardees' refunding the expenses incurred by the original proponent in the preparation of the prefeasibility studies and other related documents; 5. On the other hand, if the original proponent matches the price proposal of the comparative proponent within the specified period, the project shall immediately be awarded to the original proponent.

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The Project Flow Chart is illustrated below: 1.

2.

3.

4.

5.

6.

Project initiation stage.

Project planning and design stage.

Project execution and construction stage.

Project monitoring and controlling systems.

Project completion and turnover of the Project; and Operation and maintenance.

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

Project Initiation

Project Planning and Design

Project Execution and Construction

Project Completion and Turnover

Operation and Maintenance

Financial Closing

Start of Project Monitoring and Control Systems

In both Unsolicited and Solicited Proposal, the Private Sector Participation in PPP Mode, is paramount.

The Private Proponent if awarded does the design, finance, construct, and operate the Project. The Government’s responsibility is to acquire the Right-of-Way (ROW).

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Definition of Terms: 1. Private sector infrastructure or development projects – The general description of infrastructure or development projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects 2. Infrastructure development – is the construction of basic foundational services to stimulate economic growth and quality of life improvement. Most advanced economies have gone through periods of intensive infrastructure building that have improved the efficiency and competitiveness of regions.

3. Build-operate-and-transfer – A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term as provided for in the PPP Law of the Country otherwise called Concession Period. “The build-operate-andtransfer shall include a supply-and-operate situation which is a contractual arrangement whereby P a g e 11 | 20

the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to locals.

4. Build-and-transfer – A contractual arrangement whereby the project proponent undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the government agency or local government unit concerned, which shall pay the proponent on an agreed schedule its total investments expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government.

5. Build-own-and-operate – A contractual arrangement whereby a project proponent is authorized to finance, construct, own, operate and maintain an infrastructure or development facility from which the proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users: 6. Build-lease-and-transfer – A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

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7. Build-transfer-and-operate – A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming cost overrun, delay and specified performance risks. “Once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU. The private entity, however, operates the facility on behalf of the implementing agency/LGU under an agreement.

8. Contract-add-and-operate – A contractual arrangement whereby the project proponent adds to an existing infrastructure facility which it is renting from the government. It operates the expanded project over an agreed franchise period. There may, or may not be, a transfer arrangement regarding the facility.

9. Develop-operate-and-transfer – A contractual arrangement whereby favorable conditions external to a new infrastructure project which is to be built by a private project proponent are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits the investment creates such as higher property or rent values.

10.

Rehabilitate-operate-and-transfer – A contractual arrangement whereby an existing facility is turned over to the private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is turned over to the government. The term is also used to describe the purchase of an existing facility from abroad, importing, refurbishing, erecting, and consuming it within the host country.

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11.

Rehabilitate-own-and-operate – A contractual arrangement whereby an existing facility is turned over to the private sector to refurbish and operate with no time limitation imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility in perpetuity.

12.

Project proponent – The private sector entity which shall have contractual responsibility for the project and which shall have an adequate financial base to implement said project consisting of equity and firm commitments from reputable financial institutions to provide, upon award, sufficient credit lines to cover the total estimated cost of the project.

13.

Contractor – Any entity accredited under the Philippine laws which may or may not be the project proponent and which shall undertake the actual construction and/or supply of equipment for the project.

14.

Facility operator – A company registered with the Securities and Exchange Commission, which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users.

15.

Direct government guarantee – An agreement whereby the government or any of its agencies or local government units assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default.

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16.

Reasonable rate of return on investments and operating and maintenance cost – The rate of return that reflects the prevailing cost of capital in the domestic and international markets: Provided, That in case of negotiated contracts, such rate of return shall be determined by Government prior to the negotiation and/or call for proposals: Provided, further, That for negotiated contracts for public utility projects which are monopolies, the rate of return on rate base shall be determined by existing laws.

17.

Construction Refers to new construction, rehabilitation, improvement, expansion, alteration and related works and activities including the necessary supply of equipment, materials, labor and services and related items.

18.

Private Initiative in Infrastructure. – All government infrastructure agencies, including government-owned and-controlled corporations (GOCC) and local government units (LGUs) are hereby authorized to enter into contract with any duly pre-qualified project proponent for the financing, construction, operation and maintenance of any financially viable infrastructure or development facility through any of the projects authorized in this Act. Said agencies, when entering into such contracts, are enjoined to solicit the expertise of individuals, groups, or corporations in the private sector who have extensive experience in undertaking infrastructure or development projects.”

19.

Contract Termination. – In the event that a project is revoked, cancelled or terminated by the Government through no fault of the project proponent or by mutual agreement, the Government shall compensate the said project proponent for its actual expenses incurred in the project plus a reasonable rate of return thereon not exceeding that stated in the contract as of the date of such revocation, cancellation or termination: Provided, That the interest of the Government in these instances shall be duly insured with an P a g e 15 | 20

insurance entity duly accredited by the Government: Provided, finally, That the cost of the insurance coverage shall be included in the terms and conditions of the bidding referred to above. “In the event that the government defaults on certain major obligations in the contract and such failure is not remediable or if remediable shall remain unremedied for an unreasonable length of time, the project proponent/contractor may, by prior notice to the concerned national government agency or local government unit specifying the turn-over date, terminate the contract. The project proponent/contractor shall be reasonably compensated by the Government of equivalent or proportionate contract cost as defined in the contract.�

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Questions and Answers related to PPP: Question No. 1.

What is Public-Private-Partnership (PPP)?

Answer (A): Public-Private-Partnership is a contractual concept or arrangement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility. Under PPP, the private party provides public service or project and assumes substantial financial, technical and operational risk in the project. technical and operational risk in the project.

Question No. 2.

What is the advantage of PPP to the Government?

(A) Even in the best of times, governments at all levels are challenged to keep pace with the demands of their constituencies. During periods of slow growth, government revenues are frequently not enough to meet spending demands, necessitating painful spending cuts or tax increases. Partnerships can provide a continued or improved level of service, at reduced costs. And equally important, partnerships can also provide the capital needed for construction of major facilities. By developing partnerships with privatesector entities, governments can maintain quality services despite budget limitations.

Question No. 3.

How does PPP work that will entice the Private Sector to participate in such a “mode”?

(A) In the infrastructure sector, complex arrangements and contracts must guarantee and secure streams of cash flows, to make PPP projects prime candidate for “Project Financing”. A typical PPP example would P a g e 17 | 20

be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other nonmedical services while the hospital itself provides medical services.

Question No. 4.

If PPP is a mode or a concept, what are the contractual arrangements under the PPP Mode?

(A) There are several contractual arrangements under the PPP Mode. Some of which are: Build Operate and Transfer (BOT), Build-Transfer and Operate (BTO), Build Lease and Transfer (BLT), Build-Operate and Own (BOO); Design-Build-Operate-and Own (DBOO), and many more.

Question No. 5.

What is the risk of the Government if it agrees to enter into joint cooperation with CTIP in creating a “PPP Center”?

(A) The PPP Center will be created in cooperation with CTIP. The Center is not mandated to enter into PPP Contracts with potential developers. Therefore, Government does not have any legal or financial risks at all as the Center is tasked to promote the Country’s infrastructure development.

Question No. 6.

What is the difference between the Country or the City issuing so called “Municipal Bonds” as against applying PPP Mode in funding and developing an infrastructure project?

(A) Bonds are nothing but an I owe you. When the Government floats bonds, it is in effect borrowing money from the capital market or from investors to develop certain infrastructure development project. The cost prior to the actual issuance of the Municipal Bonds is skyrocketing. Failure to redeem the Bonds from the bondholders will create not only a financial disaster to the City, but also a political disaster to the leadership of the City.

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In the PPP Mode, the City Government does not have financial role or risks in the Project. It is in fact In the PPP Mode, the City Government does not have financial role or risks in the Project. It is in fact presenting to the public that the City could be an investment destination, if a Project is undertaken under the PPP Mode. The City improves not only its basic services to its constituents, but also improving its “credit worthiness�.

Question No. 7.

What are the potential possible projects that can be classified as PPP Projects of the City?

(A) Development of Renewable Energy such as Solar, Wind Energy, Waste to Energy Projects, etc.; Development of a Light Rail Transit (LRT) or a Bus Rapid Transit (BRT); Re-development of unused government buildings to commercial and entertainment venues, that can be under the Build Operate and Transfer (BOT) arrangements with the private developers; Hospitals; Development of Health Centers; Port development; Airport development; And many more.

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CTIP Global Consulting Group, LLC (CTIP-GCG) www.ctip-gcg.net

Contact Us: CTIP Global Consulting Group, LLC 37 Passaic Street, Garfield, New Jersey 07026 E: Fernando.m.sopot@ctip.info P: 1.908.463.9417 W: www.ctip-gcg.net

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