DOJ Opinion No. 057, s. 2002

DOJ OPINION NO. 057 , s. 2002 July 12, 2002 Secretary Jose Isidro N. Camacho Department of Finance Manila Sir : This refers to your request for clarification on the issue of whether or not performance, undertakings issued by the National Government (NG) in relation to contracts of the National Power Corporation (NPC) Faith Independent Power Producers , (IPP Contracts) are covered by the guarantee ceiling prescribed under Republic Act No. 4860, 1 as amended. DCTSEA You inform us that the said query is raised in connection with the projected transfer of ownership of all existing NPC generation assets, liabilities, IPP contracts, real estate and other disposable assets to the Power Sector Assets and Liabilities Management Corporation (PSALM Corp.) as mandated in Section 49 of Republic Act No. 9136 2 (EPIRA). You state that the position of the Department of Finance (DOF) on the matter is that the guarantee ceiling in the Foreign Borrowings Act applies only to government guarantees issued to loans and other direct financing agreements of the NPC to be transferred to PSALM Corp. and not to performance undertakings under the IPP Contracts, whether existing, renewed or future. In support thereof, you state the following: 1. The guarantee provisions of both R.A. No. 4860, as amended, and R.A. No. 6395, 3 as amended, cover "the payment of loans, credits or indebtedness". The performance undertakings issued by the NG to support NPC's project obligations in IPP Contracts are credit enhancements given by the NG to guarantee the performance of the project obligations of NPC under the IPP contracts and are governed by Executive Order No. 215, 4 Republic Act No. 6957, 5 and Republic Act No. 7718. 6 They are not part of the "loans, credits or, indebtedness" regulated by the Foreign Borrowings Act. 2. The loan obligations of NPC require NPC to repay its lenders in settlement of the debts incurred. The performance undertakings issued by the NG on the project obligations of the NPC seek to guarantee, among others, the payment by NPC of capacity and energy fees to the proponent as compensation for the delivery of electricity generated by the privately-built power plant and other government project obligations such as the provision of fuel and transmission lines. 3. The regulatory frameworks for loan guarantees and performance undertakings are distinct. Before a request for a loan guarantee can be approved, DOF Order No. 35-89 7 requires the following: (1) a certification from the Bureau of the Treasury (BTr) that the requested guarantee will still be within the authorized ceiling under the Foreign Borrowings Act; (2) the approval of the Monetary, Board of the Central Bank; and (3) a certification from the DOF which includes a statement of the outstanding balance of the ceiling of such guarantee. Under the said DOF Order No. 35-89, no such requirements apply to the taking out of performance undertakings under the BOT law. 4. When the government estimates its exposure vis-a-vis the guarantee ceiling, it does not include the government's contingent liabilities under the performance undertakings to the IPP contracts. Quoted below are pertinent provisions of laws which are relevant to your query: Section 3 of R.A. No. 4860, as amended SEC. 3. The President of the Philippines, . . ., is further authorized, in behalf of the Republic of the Philippines, to guarantee such loans, credits or indebtedness as may be necessary and upon such terms and conditions, not inconsistent with this Act, as may be agreed upon with the governments of foreign countries with whom the Philippines has diplomatic or trade relations . . . or international lending institutions, loans, credits or indebtedness extended directly to, or bonds, debentures, securities or other evidences of indebtedness for sale in international markets issued by: (A) Corporations-owned or controlled by the Government of the Philippines, . . . . (B) Government-owned or controlled financial institutions . . . xxx xxx xxx The total amount of loans, credits or indebtedness incurred, and the proceeds of bonds, securities or other evidences of indebtedness floated or issued , which may be guaranteed by the President under this Section shall not be more than Ten billion US dollars (US$10B) 8 . (emphasis supplied) R.A. No. 7718 (Amended BOT Law) SEC. 1. Declaration of Policy. It is the declared policy of the State 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. Such incentives, aside from financial incentives as provided by law, shall include providing a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector. (Emphasis supplied) Implementing Rules and Regulations of R.A. No. 7718 Sec. 13.2. Investment Incentives . xxx xxx xxx 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 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. (emphasis supplied) From the above-quoted provision of Section 3 of R.A. No. 4860, as amended, it could be gathered that the NG guarantee referred to in said law applies only to loans, credits or indebtedness extended by foreign governments or international organizations or lending institutions to government-owned or controlled corporations (GOCCs) and government financing institutions (GFIs) and proceeds of securities sold internationally by GOCCs and GFIs. The said guarantee should be within the guarantee ceiling provided for in the said law. Clarification is now being sought as to whether or not the NG guarantee ceiling under R.A. No. 4860, as amended, covers the performance undertakings issued by the NG in relation to the IPP Contracts of the NPC. We do not think so. As correctly stated in your query, the performance undertakings issued by the NG to support NPC's project obligations in IPP Contracts are credit enhancements given by the NG to guarantee the performance of the project obligations of NPC under the IPP contracts and are not part of the "loans, credits or indebtedness" regulated by the Foreign Borrowings Act. The term "indebtedness" refers to the "amount which one has contracted to pay for the use of borrowed money." 9 On the other hand, credit enhancements are forms of investment incentives given by the government to entice the private sector to invest in government infrastructure and development projects pursuant to the declared state policy enunciated in Section 1 of R.A. No. 7718, supra . As expressly provided in the IRR, 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", otherwise known as a performance undertaking. A performance undertaking is not a guarantee on the "loans, credits or indebtedness" extended by foreign lenders to NPC, but a guarantee on the performance by NPC of its project obligations under its contracts: For this reason, it is not deemed covered by the guarantee ceiling in R.A. No. 4860, as amended. HTCESI Very truly yours, (SGD.) HERNANDO B. PEREZ Secretary Footnotes 1. Foreign Borrowing Act. 2. Electric Power Industry Reform Act of 2001. 3. An Act Revising the Charter of the National Power Corporation. 4. Amending Presidential Decree no. 40 and Allowing the Private Sector to Generate Electricity. 5. An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector and for Other Purposes. 6. Amended Build-Operate-Transfer (BOT) Law. 7. Guidelines on Extension of Guarantee by the National Government for Borrowings of Government-Owned or Controlled Corporations. 8. Section 2, R.A. No. 4860, as amended; see also Section 7 of R.A. No. 8182 (Official Development Assistance Act of 1996). 9. Kuenzle & Streiff, Inc. vs. The Collector of Internal Revenue, 106 Phil. 355, 363 (1959).