DOJ Opinion No. 074, s. 2002

DOJ OPINION NO. 074 , s. 2002 September 4, 2002 The Honorable Secretary Department of Transportation and Communications The Columbia Tower, Ortigas Avenue Pasig City Sir : This refers to your request for opinion on whether or not the Joint Venture Agreement (JVA) dated September 4, 2000 between Light Rail Transit Authority (LRTA) and SNC-Lavalin International, Inc., (SLII) for the LRT Line 1 Extension Project (the Project) may be accepted by the Government of the Philippines as an unsolicited proposal under Section 4-A of Republic Act No. 6957, as amended by Republic Act No. 7718 (BOT Law). You state that under Section 4-A, an unsolicited proposal may be accepted under the following conditions: (1) The project must involve a new concept or technology and/or is not part of the concerned agency's list of priority projects approved by the NEDA Investment Coordination Committee (ICC); (2) No direct government guarantee, subsidy or equity is required; and (3) The proposal must be subjected to comparative or competitive proposals (price test or "Swiss challenge"). With respect to conditions 1 and 3, you state that at the time SLII proposed the Project to LRTA, the same was not part of LRTA's approved list of priority projects nor of the Government's Medium Term Philippine Development Plan; and assuming the JVA qualifies as an unsolicited proposal, LRTA will subject the JVA to comparative or competitive proposals (price test or "Swiss challenge") pursuant to the BOT Law. However, regarding condition 2, you seek confirmation that, given the structure of the Project and the terms of the JVA, the Project does not require any direct government guarantee, subsidy and equity and, therefore, the JVA can be considered as an unsolicited proposal under the BOT Law. In this connection, you also seek confirmation that, given that the government approvals already obtained for the Project and the JVA are the same government approvals required for BOT projects, the Project and the JVA are already considered as having secured the approvals required under the BOT Law for an unsolicited proposal. As a backgrounder, you give the following information: 1. A feasibility study conducted by SLII established that a three-phased extension of the existing LRT Line 1 from Baclaran to Cavite (Phase 1 up to Bacoor, Phase 2 up to Imus, and Phase 3 up to Dasmarias) was not only necessary to alleviate the traffic congestion in this corridor, but will also be viable technically, financially and economically if implemented under a joint venture agreement with the government. 2. Based on this feasibility study, SLII submitted to the Department of Transportation and Communications (DOTC) sometime in November, 1999, a proposal to implement the Project with private sector financing. The proposal contemplated a joint venture with the government for the purpose of developing, financing and constructing the extension of the existing LRT Line 1 system from Baclaran to Bacoor, Cavite; integrating the extension and the existing line (Integrated System); and operating and maintaining the Integrated System. The LRTA Board, after having evaluated the proposal and the legal, technical and financial capability and state of preparedness of SLII, chose SLII as LRTA's strategic joint venture partner for the Project. 3. On December 13, 1999, the Investment Coordination Committee-Cabinet Committee (ICC-CC) instructed LRTA to proceed with the process of securing Government Corporate Monitoring and Coordinating Committee (GCMCC) endorsement of the JVA pursuant to Memorandum Order No. 266 dated November 28, 1989 and subsequently to secure from the Department of Finance (DOF) and the ICC the required government performance undertakings. 4. On June 21, 2000, the GCMCC approved in principle the JVA subject to the review and approval of the financial guarantees and performance undertakings by the ICC. On July 14, 2000, the ICC-Technical Board recommended to the ICC-CC the approval of the JVA. The JVA was approved by the ICC-CC on August 25, 2000. Thereafter, on September 4, 2000, LRTA and SLII entered into and signed the JVA. 5. On December 20, 2001, LRTA and SLII entered into an Implementation Agreement (IA) that sets out the details of the Project's implementation and the respective rights and obligations of the parties in connection therewith. On January 22, 2002, the Cabinet and the NEDA Board approved the IA. 6. Under the JVA and the IA, SLII is responsible for designing, building and installing the civil works ("Civil Works") and the electro-mechanical systems (E&M Systems); financing the Civil Works, through loans to be obtained by SLII from private lenders, and the E&M Systems, through private loans and equity of SLII; and maintaining the Integrated System. Upon completion, the Civil Works will be transferred to LRTA. The E&M Systems will be transferred to LRTA for a nominal consideration at the end of the 30-year term of the joint venture. SLII will contract all the loans for financing of the Civil Works and raise the debt and equity required for the E&M Systems. 7. On the other hand, LRTA is responsible for contributing to the joint venture the use of the existing line and the completed Civil Works, including the required land and rights of way; repaying SLII for the Civil Works out of its share of the revenues derived from the operation of the Integrated System or otherwise; operating the Integrated System; and obtaining a Government Performance Undertaking for some of its obligations under the JVA and the IA. In this regard, LRTA has obtained a Government Performance Undertaking Civil Works Payment and a Government Performance Undertaking General. The first guarantees LRTA's Civil Works payment obligation to SLII, while the second guarantees certain other LRTA obligations under the JVA. cETDIA 8. The JVA and IA provide for the creation of a Joint Management Advisory Committee (JMAC) to be established by LRTA and SLII, which shall be responsible for the overall implementation of the Project. In this capacity, the JMAC will supervise all arrangements for the tendering, construction, installation, supply and financing of the Civil Works and the E&M Systems, as well as the Operation and Maintenance of the Integrated System. The JMAC will be composed of four members, two members to be appointed by LRTA, and two members to be appointed by SLII. The LRTA Administrator will be the Chairman of the Committee. 9. In the operation and maintenance of the Integrated System, LRTA and SLII will form an Operation and Maintenance Coordinating Team (OMCT) that will be responsible for operations and maintenance planning, and for ensuring that the day-to-day operation and maintenance of the Integrated System is performed according to the terms and provisions of the JVA and the IA. However, LRTA itself will remain ultimately responsible for operating the Integrated System, while SLII will be ultimately responsible for maintaining the same. 10. To minimize completion and integration risks, the JVA and the IA contemplate that SLII provide a single point of responsibility for the financing, execution and delivery of the Civil Works and the E&M Systems within a time-certain schedule. Under the terms of the JVA and the IA, SLII will control and guarantee the performance of Civil Works and E&M Systems construction contractors and suppliers. It will also take charge of integrating the existing line and the extension Civil Works and the E&M Systems. Based on the antecedents set forth above, this Department is of the view that the JVA may be accepted as an unsolicited proposal under Section 4-A of the BOT Law, subject to the required government approvals for unsolicited proposals under said law. As you state, to qualify as an unsolicited proposal under Section 4-A, it must be shown that: (1) the project involves a new concept or technology and/or is not in the list of priority projects; (2) no direct government guarantee, subsidy or equity is required; and (3) the proposal will be subjected to a price challenge. You represent that the SLII proposal was not in the list of LRTA's priority projects at the time it was presented to LRTA and, assuming the JVA may be accepted as an unsolicited proposal, that LRTA will invite other proponents to submit comparative or competitive proposals. Likewise, you submit the view that the Project does not involve any direct government guarantee, subsidy or equity, citing the following reasons: 1. There is no direct government guarantee because in issuing the performance undertakings for the Project, the government guarantees LRTA's obligations under the JVA, which is allowed under the BOT Law, and not SLII's obligations to its lenders, which is the one proscribed under the same law. 2. There is no direct government subsidy because in contributing the use of the Civil Works and the existing line to the Project, the government receives a share from the revenues of the Project and retains ownership of the Civil Works and the existing line. It will also become the owner of the E&M Systems at the end of the term of the Project without compensating SLII for it. 3. There is no direct government equity because LRTA's contributions to the Project are not given in exchange for shares of stock or other securities in the Project company. We find your arguments tenable under the BOT Law. We believe that the JVA, given the terms of its provisions and the undertakings of the parties thereunder, may qualify as an unsolicited proposal under Section 4-A of the BOT Law. It is stated that under the JVA, SLII shall be responsible for the design, construction and installation of the Civil Works with financing to be procured by SLII itself. Upon completion, the Civil Works shall be transferred by SLII to LRTA and SLII will be repaid by LRTA according to an agreed payment schedule. This is essentially a Build-and-Transfer arrangement under Section 2(c) of the BOT Law. An integral component of the Project under the JVA is the operation and maintenance of the existing line and the extension Civil Works. For this, LRTA and SLII have agreed that SLII shall be responsible for the integration of the existing line and the extension Civil Works and shall provide, at its expense, the needed E&M Systems for the operation of the Integrated System. After the integration, LRTA shall operate the system, while SLII shall be responsible for its management. The use of the existing line and the extension Civil Works is essential to the viability of the Project. This is LRTA's contribution, while SLII will contribute the E&M Systems and its technical expertise in managing the Integrated System. This contractual arrangement may be deemed a BOT variant which the President may authorize under the BOT Law. Given that the JVA qualifies as a variant under the BOT Law, it is our view that the JVA may be accepted as an unsolicited proposal under Section 4-A of the BOT Law which provides: "SEC. 4-A. Unsolicited Proposals . Unsolicited proposals for projects may be accepted by any government agency or local government unit on a negotiated basis: Provided, That, all the following conditions are met: (1) such projects involve a new concept or technology and/or are not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required , and (3) the government agency or local government unit has invited by publication, for three (3) consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of sixty (60) working days: Provided, further, that in the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price within thirty (30) working days." (Emphasis supplied.) Section 4-A of the BOT Law allows private participation in government projects on a negotiated basis provided the three conditions mentioned therein are met. It is said, however, that an essential feature of the unsolicited proposal mode is the fact that the proposal is an initiative of the private sector and not solicited by the government. From the facts given to us, it appears that the JVA between LRTA and SLII started with the proposal of SLII to conduct a feasibility study on the viability of extending the existing LRT Line 1 to Cavite. Based on the result of its feasibility study, SLII offered to implement the project with private sector financing, in joint venture with the government. As mentioned earlier, the features of the JVA are akin to a Build-Transfer arrangement which is expressly allowed under Section 2(c) of the BOT Law. It also has the features of a Build-Transfer-Operate scheme as defined in Section 2(f), except that operation, in this case, is left to LRTA, while management is in SLII. Clearly, therefore, the JVA may be considered a variation of the several modes of contractual arrangements enumerated in the BOT Law. The next issue is whether the JVA is acceptable as an unsolicited proposal under Section 4-A. Early on, we expressed our affirmative view. Indeed, the conceptualization of the Project started with the initiative of SLII. Also, as indicated, the Project was not in the priority list of LRTA when it was proposed, and LRTA will subject the proposal to a price challenge. The remaining and crucial issue is whether the undertakings of LRTA under the JVA constitute "direct government guarantee, subsidy or equity" within the meaning of Section 4-A. In an earlier opinion, this Department had the occasion to rule that the qualifying word "direct" preceding the phraseological term "guarantee, subsidy or equity" qualifies each of the term in the said phrase, hence, what is prohibited is "direct guarantee", "direct subsidy" or "direct equity" of government in a BOT project (Op. No. 62, s. 1995). The BOT Law defines "direct government guarantee" to mean "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" (Sec. 2 [n], BOT Law). On the other hand, the terms "direct government subsidy" and "government equity" are defined in the Implementing Rules and Regulations (IRR) as follows: Direct Government Subsidy This shall refer to an agreement whereby the Government, or any of its agencies or local government units will (a) defray, pay for or shoulder a portion of the project cost or the expenses and costs in operating the project, (b) condone or postpone any payments due from the proponent, or (c) contribute any property or assets to the project, all without receiving payment or value from the project company for such payment, contribution or support . (Emphasis supplied.) Government Equity This shall refer to the subscription by the Government or any of its agencies or local government units of shares of stock or other securities convertible to shares of stock of the project company, whether such subscription will be paid by money or assets (Sec. 13.2[b][ii] & [iv], Rule 13). Based on these definitions in the BOT Law and its IRR, we believe that the JVA does not involve any direct government guarantee, subsidy or equity. There is no direct government guarantee because we are made to understand that the government does not guarantee the repayment of the loans directly incurred by SLII to finance the Civil Works and the E&M Systems. The government has issued a performance undertaking to guarantee the performance by LRTA of its obligations under the JVA. But this is not the kind of government guarantee which is prohibited under Section 4-A. In fact, this is expressly denominated as an indirect guarantee, a form of credit enhancement, which is permitted under the IRR (Sec. 13.2[b][ii], Rule 13, IRR). In a previous opinion (Op. No. 62, s. 1995), this Department ruled that the issuance by the government of a performance undertaking is not prohibited under Section 4-A. Similarly, we believe that the JVA does not involve any direct government subsidy to the project proponent. A "subsidy" connotes aid or financial assistance given by the government in support of a private undertaking which is perceived to benefit the public (ref.: Bouvier's Law Dictionary; Black's Law Dictionary; West's Legal Thesaurus/Dictionary by William P. Statsky; Philippine Legal Encyclopedia by Jose Agaton Sibal). A subsidy is commonly understood as a grant where government gives something but does not receive anything in return. Thus, as defined in the IRR, to constitute "direct government subsidy", the contribution of the government to the project, whether in the form of defraying or shouldering a portion of the project cost or operational expenses; or condoning or postponing payments due from the proponent; or property or asset contributed to the project, must be "all without receiving payment or value from the project company for such payment, contribution or support". As we are informed, under the JVA, the Civil Works to be constructed and financed from loans obtained by SLII will be turned over upon its completion to LRTA as owner thereof, subject to repayment by LRTA of its cost. Obviously, the repayments to be made by LRTA do not constitute direct government subsidy to the Project because LRTA will own the Civil Works. In the same vein, when LRTA contributes the use of the completed Civil Works and the existing line for the integrated operation and maintenance of the System, it may not be said that the government is giving a direct subsidy to the Project since the government, through LRTA, will get a share in the revenues to be generated from said Project. In other words, its contribution is not for free. Likewise, we are convinced that the JVA does not involve any direct government equity. There is nothing said or on record to show that shares of stock are being issued in exchange for each party's contribution or undertaking under the JVA. There is no showing or indication that a joint venture corporation is being formed in which LRTA and SLII shall be equity owners. Under the IRR, there is government equity if the government or its agencies acquire shares of stock or other securities convertible to shares of stock in the project company. In an opinion rendered by then Chief Presidential Legal Counsel Antonio T. Carpio involving a similar issue, he opined that there is no "direct government equity" under Section 4-A of the BOT Law if the government or its agency does not hold or undertake to purchase or acquire shares of stock from the project proponent (Op. dtd. April 21, 1995 addressed to Undersecretary Gerochi of the ICC-Technical Board). The foregoing discussion dispose of the first clarificatory issue regarding the applicability of Section 4-A. In response to the second clarificatory issue on government approvals for the JVA under the BOT Law, our view is that if the Project, as contemplated in the JVA, will be undertaken under the BOT Law, then it is necessary to follow the approval process prescribed in the BOT Law and its IRR, to determine compliance or consistency of the JVA with the applicable provisions of the BOT Law. Needless to state, the government approvals obtained for the JVA were given looking at the agreement as a JVA. This time, the JVA will be evaluated as a BOT variant under the BOT Law. Finally, the foregoing opinion of this Department has only viewed the legal aspects of the issues raised and makes no finding or ruling on the financial and technical aspects of the agreement. DHEcCT Please be guided accordingly. Very truly yours, (SGD.) HERNANDO B. PEREZ Secretary