DOJ Opinion No. 025, s. 2003

DOJ OPINION NO. 025 , s. 2003 April 11, 2003 Secretary Jose Isidro N. Camacho Department of Finance Manila Sir : Subject herein is the request for confirmation: (a) of the authority of the Secretary of Finance to issue a Performance Undertaking for the obligations of the National Power Corporation (NPC) under a twenty-five (25)-year Build-Operate-Transfer (BOT) contract covered by a Power Purchase Agreement (PPA) entered into by and between NPC and the Consortium of State Investment Trust, Inc. and Harbin Power Engineering Company, Ltd. (Harbin); and (b) that the obligations expressed to be assumed by the Republic, through the Department of Finance, in the above-mentioned documents are, under the laws of the Philippines, legal, valid and binding obligations of the Republic enforceable against it in accordance with the terms thereof. Likewise, and consolidated herein for being related to your instant request, is the separate request of Finance Undersecretary Nieves L. Osorio "for the review of the draft PU and the relevant documents and the processing of the subsequent DOJ opinion". Specifically, review of the following documents is requested: "1. Draft PU in the form presented under the Tenth Schedule of the PPA Contract as agreed between DOF and SPDC; 2. Copy of the PPA dated 27 June 1998; and 3. Signed First and Second Amendment Agreements on the PPA dated 2 March 2001 and 4 February 2003, respectively, both as approved by the ICC on 29 November 2002 and confirmed by the NEDA Board on 10 December 2002". In connection with the above-mentioned queries, the following facts are given: The National Power Corporation and the Consortium of State Investment Trust, Inc. and Harbin Power Engineering Company, Ltd. entered into a Power Purchase Agreement (PPA) on 27 June 1998 for the construction of 200-MW baseload coal-fired power plant (the "Project"), the first of its kind in Mindanao, located in the coastal area of the Philippine Veteran Investment Development Corporation (PHIVIDEC) Industrial Authority in Tagoloan, Misamis Oriental. The project aims to augment the Mindanao grid's baseload generating capacity to meet projected demand starting year 2006. By virtue of an Accession Undertaking between the Consortium, NPC and State Power Development Corporation (SPDC) (collectively referred to as the "Parties") dated 27 June 1998, SPDC became a party to the PPA. The Parties executed a First Amendment Agreement dated 2 March 2001 and a Second Amendment Agreement dated 4 February 2003 by. virtue of which certain provisions of the PPA relating to, among others, the computation of Energy Fees, project Milestone Dates, equipment specifications and test procedures, the Operator's Nominated Capacity and the capital structure of SPDC, were amended. The First and Second Amendment Agreements were approved/provided clearance by the Investment Coordination Committee (ICC) on 29 November 2002 and confirmed by the NEDA Board in its 10 December 2002 meeting. Annex A gives the brief background of the project, nature of the approvals given by the ICC and NPC financial obligations under the PPA, as amended. The PPA, as amended, provides for the issuance of Performance Undertaking (the "PU") in the form presented in its Tenth Schedule and presented herein as Annex B . Her Excellency President Gloria Macapagal-Arroyo issued a Special Authority in favor of the Secretary of Finance Jose Isidro N. Camacho to conclude, sign, execute, and deliver, for and in behalf of the Republic of the Philippines, the PU in connection with the 200-MW Mindanao Coal-Fired Power Project and any other deed or document of whatsoever kind and nature which may be necessary or proper for the purpose of implementing the PU. In claiming that the Secretary of Finance has the authority to issue the PU, you quote pertinent provisions of Chapter I, Title II, Book IV of the Administrative Code of 1987 (E.O. No. 292), to wit: Sec. 1. Declaration of Policy . It is the policy of the State that the Department of Finance shall be primarily responsible for the sound and efficient management of the financial resources of the Government, its subdivisions, agencies and instrumentalities. Sec. 2. Mandate . The Department shall be responsible for the formulation, institutionalization and administration of fiscal policies in coordination with other concerned subdivisions, agencies and instrumentalities of government. Moreover, the Department shall be responsible for the generation and management of the financial resources of the government, ensuring that said resources are generated and managed judiciously and in a manner supportive of development objectives. xxx xxx xxx Sec. 3. Powers and Functions . To accomplish its goals, the Department shall: xxx xxx xxx (4) Act as custodian and manage all financial resources of the national government; xxx xxx xxx (8) Coordinate with other government agencies on matters concerning fiscal and monetary policies, credit, economic development, international finance, trade and investment; xxx xxx xxx You add that pursuant to Section 6, Chapter 2, Book IV of the same Code, "(t)he authority and responsibility for the exercise of the mandate of the Department (of Finance) and for the discharge of its powers and functions shall be vested in the Secretary". Moreover, you state that the PU will be issued pursuant to Section 13.2.b.ii of the Implementing Rules and Regulations of the BOT Law (R.A. No. 7718), which provides that: b. Government Undertakings Government may provide any form of direct or indirect support or contribution, such as but not limited to the following. . . xxx xxx xxx ii. Credit Enhancement This shall refer to direct and indirect support to a development facility by the project proponent and/or Agency/LGU concerned, the provision of which is contingent upon the occurrence of certain events and/or risks, as stipulated in the contract. Credit enhancements are allocated to the party that is best able to manage and assume the consequences of the risk involved. Credit enhancements may include, but are not limited to government guarantees on the performance, or the obligation of the Agency/LGU under its contract with the proponent subject to existing laws on indirect guarantees. . . ." You explain that the PU is a form of credit enhancement which, under the provisions of Section 13.2.b.ii, above-quoted, the Republic of the Philippines, acting through the Department of Finance, is authorized to provide; and that, as such, the obligation expressed to be assumed by the Republic, through the Department of Finance, under the PU is, under the laws of the Philippines, legal, valid and binding obligations of the Republic enforceable against it in accordance with the terms thereof. As to the Project proposed to be covered by the PU, you state that the same was a solicited proposal that went through the bidding process as provided under the BOT Law and a PU was contemplated when the government first reviewed the proposal; and that although the prohibition on direct government guarantee will not apply for this Project, you would like to emphasize that the subject PU is not a direct guarantee as defined under Section 2(n) of the BOT Law nor an assumption by the government or by the NPC of SPDC's liability to the latter's creditors but an affirmation and guarantee of NPC under its contract with the proponent . Based on the foregoing representations, and in the light of the applicable provisions of the 1987 Administrative Code, we confirm that the Secretary of Finance has the authority to issue the subject performance undertaking. In a previous opinion, this Department had the occasion to rule that a government performance undertaking may be validly issued for projects to be implemented under the BOT law. 1 The pertinent portions of the said opinion are hereunder quoted, viz : It is the declared policy of the State as embodied in Section 1 of the Amended BOT Law to 'recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate incentives to mobilize private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development projects normally financed and undertaken by the Government', and which 'shall include providing a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector'. A reading of the legislative deliberations on R.A. No. 7718 discloses that specific government undertakings may take the form of a performance undertaking that certain non-financial obligations of the contracting government agency shall be fulfilled. (Records of Senate Bill No. 1586) In this connection, we invite attention to the provision of Rule 13, Section 13.2(b) of the Implementing Rules and Regulations (IRR) of the Amended BOT Law, which provides: 'Sec. 13.2 Investment Incentives. The following incentives will be made available to project proponents: xxx xxx xxx b. Government Undertaking 2 . Government may provide any form of direct or indirect support or contribution such as but not limited to the following: xxx xxx xxx ii. Credit Enhancements. . . .. Credit enhancements may include a guarantee by the Government on the performance of the obligation of the agency/LGU under its contract with the proponent, subject to existing laws 3 ." The abovequoted provision of the IRR of the Amended BOT Law clearly authorizes the issuance of a performance undertaking by the government, subject to existing laws." In the instant case, it is our view that the performance undertaking may be issued for the project and that the execution of the performance undertaking is within the authority of the Secretary of Finance. Pursuant to the Administrative Code of 1987, the Department "shall be responsible for the formulation, institutionalization and administration of fiscal policies in coordination with other concerned subdivisions, agencies and instrumentalities of the government" 4 and "for the generation and management of the financial resources of the government . . ." 5 As earlier pointed out, "(t)he authority and responsibility for the exercise of the mandate of the Department (of Finance) and for the discharge of its powers and functions shall be vested in the Secretary". 6 In any case, any question as to the authority of the Secretary of Finance to execute the subject performance undertaking is very clear from the Special Authority issued by the President on January 7, 2003. Please note that the Special Authority explicitly designates and authorizes the Secretary of Finance to "negotiate, for and in behalf of the Republic of the Philippines, a Performance Undertaking in connection with the 200-MW Mindanao Coal-Fired Power Project" and "conclude, sign, execute and deliver, for and in behalf of the Republic of the Philippines, the Performance Undertaking in connection with the 200-MW Mindanao Coal-Fired Power project and other deed or document of whatsoever kind and nature which may be necessary or proper for the purpose of implementing the Performance Undertaking". This Department has consistently held that a presidential issuance, directive, proclamation or executive order, is presumed valid and binding upon all offices and bureaus under the executive branch. 7 On the requested review of the "draft PU and relevant documents", referring, we take it to the PPA dated June 27, 1998 and the First and Second Amendment Agreements dated March 2, 2001 and February 4, 2003, respectively, hereunder stated are our comments/suggestions: 1. With reference to the PPA and its Amendment Agreements, this Department generally accords respect to the findings of the agencies on matters falling within their primary jurisdiction such as in the instant case. We, therefore, defer to the Opinion of the General Counsel of the NPC stating that "the obligations expressed to be assumed by NPC in the Agreements are legal and valid obligations binding on NPC enforceable in accordance with the terms thereof" and the approval of said Agreements by the National Economic and Development Authority (NEDA). Moreover, it is noted that the subject documents involve highly technical and policy matters which, to our mind, are best addressed by that Department, NEDA and the NPC, in particular. Technical matters are beyond the official competence of this Department to review. 8 2. With respect to the PU, we suggest that the last sentence of the second paragraph which states that "[s]uch obligations are hereby affirmed and guaranteed by the Republic of the Philippines" be rephrased as follows: "The Republic of the Philippines hereby affirms and guarantees the performance by the NPC of its obligations under the Agreement". The suggestion is consistent with your representation that the PU is not a direct a guarantee but is merely "an affirmation and guarantee of NPC under its contract with the proponent". We also suggest the deletion of the last sentence in the third paragraph thereof which states that "[t]he parties exclude any right of application or appeal to any courts in connection with any question of law arising in the course of arbitration or with respect to any award made" and the inclusion, in lieu thereof, of this statement: "The arbitral award shall not be enforceable against the Republic of the Philippines when (a) the arbitral tribunal did not have jurisdiction in accordance with its jurisdictional rules, (b) the party against whom the award of such tribunal was obtained had no notice of the proceedings, (c) the award of the tribunal was obtained through collusion or fraud, or was based on a clear mistake of law or fact, or (d) such award is contrary to public policy in the Republic of the Philippines." IHCacT Please be guided accordingly. Very truly yours, (SGD.) SIMEON A. DATUMANONG Secretary Footnotes 1. Opinion No. 97, s. 1995 2. Now reads: "b. Government Undertakings. Government may provide any form of direct or indirect support or contribution such as but not limited to the following, subject to the conditions for unsolicited proposals as specified under Section 10.1 hereof:" (1999 IRR) 3. Now reads: "ii. Credit Enhancements. This shall refer to direct and indirect support to a development facility by the project proponent and/or Agency/LGU concerned, the provision of which is contingent upon the occurrence of certain events and/or risks, as stipulated in the contract. Credit enhancements are allocated to the party that is best able to manage and assume the consequences of the risk involved. Credit enhancements may include but are not limited government guarantees on the performance or the obligation of the Agency/LGU under its contract with the proponent, subject to existing laws on indirect guarantees. Indirect guarantee shall refer to an agreement whereby the Government or any of its agencies or local government units assumes full or partial responsibility for or assists in maintaining the financial standing of the project proponent or project company in order that the project company/proponent avoids defaulting of the project loans, subject to fulfillment of the project proponent/company of its undertakings and obligations under the project agreement" (1999 IRR). 4. Section 2, Chapter 1, Title II, Book IV. 5. Ibid . 6. Section 6, Chapter 2, Book IV, Executive Order No. 292, otherwise known as the Administrative Code of 1987. 7. Supra , No. 6, s. 2002; Nos. 73 and 64, s. 2001, and Nos. 100 and 99, s. 2000. 8. Ibid ., No. 153, s. 1981.