Establishment of joint ventures for undertaking PPP projects
The significant and indispensable role of the private sector in the delivery of high-quality infrastructure and basic services to the public has long been recognized. Pursuant to its Build-Better-More Program, the Philippine government aims to focus on developing infrastructure projects which are critical to the country’s development.
Republic Act No. 11966, or the Public-Private Partnership (PPP) Code of the Philippines, was signed into law on Dec. 5, 2023, providing for a unified and comprehensive legal framework which investors can refer to in establishing PPP projects at both national and local levels. The approval of the IRR (implementing rules and regulations) on March 21, 2024, further streamlines the approval process of PPP projects which would attract foreign investments and promote sustainable economic growth.
With the passage of the PPP Code, inconsistencies and ambiguities in previous laws seek to be addressed. The PPP Code and its IRR expressly repeals, among others, Republic Act No. 6957, as amended by Republic Act No. 7718, more popularly known as the “Build Operate and Transfer Law,” Local PPP Codes and Joint Venture (JV) Ordinances, and the 2023 Revised Guidelines and Procedures for Entering into Joint Venture Agreements between Government and Private Entities.
One of the salient features of the PPP Code is the express inclusion of JVs in its coverage. Under this law, a JV refers to a national or local PPP contractual arrangement, whether solicited or unsolicited, where resources are pooled to jointly undertake a specific investment activity within a specific period of cooperation to deliver an infrastructure or development project typically provided by the public sector.
The PPP Code does not cover JVs involving purely commercial arrangements that neither provide nor include public infrastructure or development services, and which do not satisfy the elements of a PPP. In such cases, these JVs shall be implemented in accordance with their relevant governing laws. To clearly determine whether a project falls within the coverage of the PPP Code, a request for a non-policy matter opinion may be submitted to the PPP Center for clarification.
For PPP projects, a JV may be undertaken through a contractual JV or by creating a JV company. However, in the case of a contractual JV, the government’s contribution shall not exceed 50% of the project cost or 50% of the outstanding capital stock of the JV company. All equity contributions shall be subject to fair valuation by a third-party appraiser.
The formation of the JV shall not prevent the parties from entering other JV PPP contracts or from profitably entering other business ventures or markets; provided, that such other ventures shall not compete with the first JV for the same product and geographic market.
The shares of the Implementing Agency* and the private partner in the profits, losses, assets, and other interests derived from the JV shall be proportionate to their respective contributions, unless a higher return for the government or more favorable terms may be agreed upon in the JV PPP contract.
Upon termination of the JV PPP contract, all properties covered by such an agreement shall be transferred to the Implementing Agency. In cases where the government deems that divestment from the JV is in the best interest of the public, JV PPP contracts may allow the private sector to take over the project in its entirety. Such a takeover shall be in accordance with the rules and regulations governing privatization. The PPP Center shall be informed in writing of such takeover.
Under the IRR, a penalty of imprisonment of three to six years and a fine ranging from P1 million to P5 million shall be imposed on a private individual or a public officer who commits any of the following: fails to observe the threshold requirements on equity contribution of JVs; creates a JV which competes for the same products and geographic market of any existing JV between the Implementing Agency and the private partner; or, creates a JV which alters the mandate of the Implementing Agency entering into such JV.
At present, investors must note that the rules and restrictions imposed in connection with the formulation and implementation of JVs for PPP projects are limited to those provided under the PPP Code and its IRR. In view of the express repeal of the abovementioned national and local issuances, it has yet to be seen whether the National Economic and Development Authority or the PPP Governing Board will enact guidelines which specifically cater to JVs in accordance with the passage of the PPP Code and its IRR.
* Implementing Agency refers to a department, bureau, office, instrumentality, commission, authority of the National Government, state university and college, local university and college, local government unit or governmentowned or -controlled corporation.