DOJ OPINION NO. 072, s.

2003

September 17, 2003

Hon. Leandro R. Mendoza

Secretary
Department of Transportation and Communications
17/F The Columbia Tower, Brgy. Wack-Wack
Ortigas Avenue, 1555 Mandaluyong City

Sir :

This refers to your request for opinion dated 28 August 2003 on the unsolicited proposal of
Universal LRT Corporation Limited in association with Alstom of France (the "Proponent") for the
MRT Line 7 Project (the "Project") which has been favorably endorsed to NEDA for First Pass
Approval as required by the Amended BOT Law (R.A. No. 6957, as amended by R.A. No. 7718).
IaAEHD

It is stated in your request by way of background, that:

"The Proponent has described the contractual arrangement proposed to be adopted by the
parties for the implementation of the Project as a Build-Gradual Transfer and Operate and
Maintain (or "BGTOM") Project which, we understand, is a modified Build-Transfer-Operate
("BTO") scheme. It is a modified BTO because ownership of the entire facility is not immediately
transferred to the agency after its commissioning, unlike a straight BTO where the project
proponent builds the infrastructure facility on a turnkey basis. (cf. Sec. 1.3.v, IRR) Instead, the
facility is proposed to be transferred gradually over twenty five (25) years. Since the Project is not
a straight BTO, it will require the approval of the President of the Philippines. (cf. Sec. 2.10, IRR)
The foregoing contractual arrangement is fleshed out in the proposed draft Concession
Agreement, to be entered into between the DOTC and the Proponent, the pertinent portions of
which read as follows:

"'3.1. The PROPONENT shall finance, design, construct, supply the required electro-mechanical
Systems, equipment and LRVs for, complete, commission and maintain the Project, and gradually
transfer ownership thereof to the DOTC upon every monthly payment actually made by the DOTC
and duly received by the PROPONENT during the Concession Period.

"'3.2. In consideration of the gradual transfer of ownership and Maintenance of the Project by
the PROPONENT during the Concession Period, the DOTC shall pay the PROPONENT the Capacity
Fee in accordance with the Schedule of Payment, Annex __ hereof. For every monthly payment
made by the DOTC, and actually received by the PROPONENT, the latter shall issue a transfer
certificate of ownership in favor of the former representing 1/300 pro-indiviso interest in the
Project. When all the payments due under this Agreement shall have been fully settled by the
DOTC, ownership of the Project shall be transferred to it, free from all liens and encumbrances.

"'3.3. The DOTC shall be the legal operator of the Project and shall appoint as its agent the
PROPONENT, or, at the PROPONENT's option, a duly designated facility operator/manager. The
management of the Project shall be in accordance with agreed standards, procedures, processes,
methods, practices and technology. Actual cost of operation shall be chargeable against the Gross
Revenues.

"'3.4. The Gross Revenues shall be directly deposited in the Escrow Account and disbursed
consistent with the terms and conditions in this Agreement and the Escrow Agreement.

xxx xxx xxx'

"As the operation and management of the Project, the proposed draft Concession Agreement
provides that the parties shall enter into a management contract, thus:

"'Sec. 8.1 The PROPONENT or its duly designated facility operator/manager, shall be, as it is
hereby, appointed agent of the DOTC to manage the operation of the Project throughout the
Concession Period, subject to the terms and conditions of a management contract to be entered
into by and between the Parties (the 'Management Contract').'

"Moreover, the proposed draft Concession Agreement specifies that the Proponent shall maintain
the Project over the Concession Period, to wit:

"'Sec. 9.1. During the Concession Period, the PROPONENT shall provide Maintenance to the
Project in accordance with Annex ___ hereof. Maintenance costs shall be charged to and
deducted from Gross Revenues."

"The proposed Schedules of Payment (referred to in Sec. 3.2 above) are so structured that the
amortization payments to be made by Government will be on a declining basis. It should be
pointed out, however, that from the 10th year onwards, Government is expected to earn
escalating income given its share in net revenues and the tax benefits that will be generated by
the Project. After the 25-year Concession Period, Government is projected to have fully recovered
all payments made, with interest thereon, apart from owning the entire infrastructure facility.
cDEHIC

"In order to secure Government's compliance with the proposed Schedules of Payment, as well as
all its other obligations under the proposed draft Concession Agreement, Government is expected
to put up a performance undertaking. Section 10.3 of the proposed draft Concession Agreement,
to wit:

"'10.3. As a condition for the effectiveness of this Agreement, the DOTC shall secure a
Performance Undertaking from the Government of the Republic of the Philippines, through the
DOF, in form and substance acceptable to the PROPONENT and its Lenders, guaranteeing the
performance of its obligations in this Agreement including, but not limited to, its payment
obligations under this Agreement.'

"However, the Parties recognize that the foregoing performance undertaking of the Government
shall, in no case be interpreted to mean a direct government guarantee, to wit:
"'18.2 Nothing in the foregoing payment obligations requires the DOTC or the Government to
guarantee the obligations of the PROPONENT to its Lenders or to assume responsibility for the
repayment of any debt directly incurred by the PROPONENT in implementing the Project in case
of loan default.'"

Clarification is now being sought by the NEDA with respect to certain obligations proposed to be
undertaken by the Government, particularly on the following:

"1. Whether or not the proposed performance undertaking under the draft Concession
Agreement would constitute a violation of the BOT prohibition on direct government guarantee";
and

"2. Whether or not the proposed payment of 'capacity fees' would tantamount to a direct
government subsidy which is likewise prohibited under the BOT Law."

It should first be pointed out that the draft Concession Agreement is still undergoing first pass
review by NEDA, and it appears that the parties are still negotiating the final terms and conditions
thereof. In addition, we have not been furnished with copies of the annexes mentioned in the
draft.

While the Secretary of Justice ordinarily does not render an opinion under such circumstances,
this opinion is nevertheless rendered so as not to impede the process of review and evaluation by
NEDA, and for the guidance of your Department with the end in view of avoiding potential
problems. This opinion, however, is without prejudice to a complete review of the entire
agreement or agreements should the same be submitted to this Department at the appropriate
time.

Furthermore, this opinion:

a. Is rendered without taking into consideration the financial and technical aspects of the
Project as these are within the jurisdiction of other government agencies, and this Department
does not have the competence to evaluate such matters;

b. Is based only on the documents submitted, in particular the draft Concession Agreement
without the annexes and the letter-request for opinion itself; and

c. Unless expressly stated otherwise, this opinion should not be interpreted as a review of
the entire draft Concession Agreement or any other provision thereof not related to the two
issues raised.

The particular provision which deals with both issues raised is Section 4-A of the Amended BOT
Law, thus:

"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 in 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).

Then Secretary of Justice Teofisto T. Guingona, Jr. already opined on similar questions involving
the above-quoted provision, thus:

"The qualifying word 'direct' preceding the phraseological term 'guarantee, subsidy or equity'
under the aforequoted provision qualifies each of the terms in the said phrase, hence, what is
prohibited is 'direct subsidy' or direct subsidy to the project proponent, in the same manner that
the 'direct guarantee' prohibited under the said provision, as defined in the Implementing Rules
and Regulations of the Amended BOT Law, refers to the direct assumption of responsibility by
Government/its Agencies/LGUs for the 'repayment of debt directly incurred by the project
proponent' (Sec. 1.3[g]).

"Relative to the foregoing, we understand that the required budgetary support is not intended to
provide the project proponent additional source of funding to defray the construction cost of the
project but that such support is required to enable NIA to comply with its undertaking to pay
water delivery fees, disturbance compensation in case of expropriation for right of way, and the
maintenance cost which is the responsibility of NIA but which NIA may sub-contract to the project
proponent. CIAcSa

"Clearly, the purpose for which the budgetary support is required do not qualify it as a "direct
subsidy" to the project proponent, hence, such budgetary support does not fall within the
prohibition in Section 4-A of the Amended BOT Law. The corresponding appropriation for the
subsidy is, however, a matter for Congress to decide." 1

xxx xxx xxx

"Reference is made to Your letter dated June 16, 1995 regarding the Casecnan Multipurpose
Transbasin Project which was discussed during the ICC-Cabinet meeting on June 6, 1995.

"We understand that the issuance of the legal opinion by the Secretary of Justice on the legality
and validity of the performance undertaking to be issued by the government for the project is one
of the conditions to facilitate the final approval of the ICC-Cabinet Committee of the project.

"In the light of the commitments of NIA under the Project Agreement to assume the payment of
certain taxes and fees, to provide the site and all necessary rights-of-way, and maintenance of the
Casecnan Watershed which will require budgetary support, our opinion is requested on whether
the performance undertaking may be validly issued considering that the project is in the nature of
an unsolicited proposal and under Section 4-A of the Amended BOT Law, an unsolicited proposal
may be accepted provided that there is no 'direct government guarantee, subsidy or equity'
involved.
"The preliminary issue to be resolved is whether the required budgetary support is a 'subsidy'
within the contemplation of Section 4-A of the Amended BOT Law.

"In this connection, we are furnishing you herewith a copy of our Opinion of even date, involving
the same issue.

"On the basis of the said opinion, we are of the view that Section 4-A does not pose any legal
obstacle to the issuance of the performance undertaking." 2

To the same effect is DOJ Opinion No. 97 s. 1995, thus:

"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
incentives '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 on 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. Government may provide any form of direct or indirect
support or contribution such as but not limited to the following: 3

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.' 4

"The abovequoted provision of the IRR of the Amended BOT Law clearly authorizes the issuance
of a performance undertaking by the government, subject to the existing law."

Opinion No. 97 s. 1995 was reiterated just recently in Opinion No. 25 s. 2003.

In light of the foregoing, and considering that nothing "in the . . . payment obligations requires the
DOTC or the Government to guarantee the obligations of the PROPONENT to its Lenders or to
assume responsibility for the repayment of any debt directly incurred by the PROPONENT in
implementing the Project in case of loan default", 5 the performance undertaking as proposed in
the draft Concession Agreement may be validly issued. Please note, however, that we have not
been furnished with a draft of the performance undertaking, if one has been prepared already.
Thus, this opinion is based only on Sections 10.3 and 18.2 of the draft Concession Agreement and
is without prejudice to a review of the actual performance undertaking should one be submitted
to this Department. ASHICc

As regards the Capacity Fee under Section 3.2 of the draft Concession Agreement, your attention
is called to Section 13.2.b (iii) of the IRR defining a "Direct Government Subsidy", thus:

"Section 13.2.b(iii) 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).

The Capacity Fee, as we have been made to understand, will be paid from the time the Project
becomes operational. Thus, no such fee will be paid during the construction period. The draft
Concession Agreement also provides that said fee is to be paid "In consideration of the gradual
transfer of ownership and Maintenance of the Project by the Proponent during the Concession
Period", which payments obligates the Proponent to "issue a transfer certificate of ownership in
favor of the (DOTC) representing 1/300 pro-indiviso interest in the Project", and upon full
payment of all obligations due, "ownership of the Project shall be transferred" to DOTC "free from
all liens and encumbrances." 6 The Capacity Fee, therefore, actually constitutes partial payment
for the transfer of ownership over the Project to DOTC, and DOTC will actually receive value from
the MRT Line 7 Consortium for each payment made since it acquires a pro-indiviso ownership
interest in the Project. As such, it cannot be construed as a "direct government subsidy"
prohibited by the Amended BOT Law.

In addition to the foregoing, which we trust satisfies your request, we find it appropriate to
comment on certain matters and provisions contained in the draft Concession Agreement, for
your guidance in the course of finalizing the same or in whatever further negotiations may be
undertaken by the parties, thus:

On the Payment Scheme

Various payment schemes are allowed under the Amended BOT Law. Section 6 thereof provides,
thus:

"Sec. 6. Repaying Scheme. — For the financing, construction, operation and maintenance of any
infrastructure projects undertaken through the build-operate-and-transfer arrangement or any of
its variations pursuant to the provisions of this Act, the project proponent shall be repaid by
authorizing it to charge and effect reasonable tolls, fees, and rentals for the use of the project
facility not exceeding those incorporated in the contract and, where applicable, the proponent
may likewise be repaid in the form of a share in the revenue of the project . . . " (Emphasis
supplied).

The IRR provides more detail, thus:

"Sec. 12.15. Repayment Scheme

12.15.1. General Classification. The repayment schemes for the projects shall depend on
the contractual arrangement used therefor, which shall be generally classified as follows:

xxx xxx xxx

c. Arrangements where the project proponent builds and transfers the facility to the Agency
or LGU concerned, but operates the facility on behalf of said Agency or LGU (BTO) through a
management contract;

xxx xxx xxx

Projects undertaken through arrangements described in letter (c) above, may be repaid by either
of the following two options. Under the first option, the Agency/LGU provides amortization
payments as may be appropriate and reasonable. Tolls, fees, rentals and charges that the project
proponent may collect while operating the facility on behalf of the agency may be applied directly
to the amortization payments. Moreover, the facility operator may be repaid by the Agency/LGU
through a management fee as may be incorporated in the management contract entered
between the Agency/LGU and the project proponent. Under the second option, the proponent
may be allowed to directly collect tolls, fees, rentals and charges for a fixed term."

If the contractual arrangement is not considered a BTO or any of the schemes expressly
enumerated in the Amended BOT Law, the IRR nevertheless authorizes the Government to repay
the proponent through any scheme provided that it is recommended by the NEDA-ICC and
approved/authorized by the President:

"Sec. 12.15. Repayment Scheme

12.15. General Classification. The repayment schemes for the projects shall depend on the
contractual arrangement used therefor, which shall be generally classified as follows:

xxx xxx xxx

e. Arrangements which are variations of the foregoing and/or which have been
approved/authorized by the President of the Philippines upon the recommendation of the ICC.

Projects undertaken through arrangements prescribed under (e) may be repaid through any
schemes as recommended by the ICC and approved/authorized by the President of the
Philippines."

Under the draft Concession Agreement, it appears that payment for the Project actually consists
of the Capacity Fee and the fifty (50%) percent share of the Proponent in the Net Revenue as
provided in Section 3.5. It should be noted in this regard that since revenue is a variable, the total
acquisition cost for the Project may not be ascertained or fixed when the proposed agreement is
signed. The price becomes certain only upon expiration of the term of the agreement since it is
only at this time that the total share of the Proponent in the revenues can be added up. aAHTDS

Mortgage of the Project

Under Section 4.3 of the draft Concession Agreement, the Project may be mortgaged by the
Proponent in order for it to obtain financing. If such mortgage is constituted and DOTC starts
paying the Capacity Fee, the corresponding ownership interest it will be acquiring might still be
covered by the mortgage. The effect is that DOTC will be owning property which is encumbered to
secure the Proponent's indebtedness. This may be construed as a direct government guarantee
under the ruling in Agan v. PIATCO, 7 where the Supreme Court held that a provision in the
contract which obligates the government to assume the indebtedness of the proponent in case of
default constitutes a direct government guarantee.

The Citizenship of the Proponent

The Project is a public utility and we have noted that the Proponent is one hundred (100%)
percent foreign-owned. This is not an obstacle for the Proponent to own the Project. However, if
it will actually undertake the operations of the Project, it will have to do so through a facility
operator who must be a Filipino citizen, or if a corporation, sixty (60%) percent of its capital must
be owned by Philippine citizens. 8 Such corporation should also be registered with the Securities
and Exchange Commission. 9 This is consistent with DOJ Opinion No. 37 s. 2002, thus:

". . . In the case of Tatad vs. Garcia (243 SCRA 436), the Supreme Court held that a wholly-owned
foreign company may own the facilities used to serve the public although it may not operate the
same.

"As the Court said, the right to operate a public utility may exist independently and separately
from the ownership of the facilities thereof . One can own said facilities without operating them
as a public utility, or conversely, one may operate a public utility without owning the facilities
used to serve the public." 10

In an opinion on "whether or not port service operators, port facility operators and port
development project proponents are covered by the Constitutional and statutory limitations on
foreign ownership of public utilities", former Justice Secretary Silvestre R. Bello, III stated:

"Clearly, PPA's private service contractors and port facility operators are engaged in the rendition
of public services at the ports and, as such, are themselves deemed to be public utility contractors
or operators subject to the nationality requirement under the Constitution.

"We hasten to add, however, that PPA's private service contractors and port facility operators
need not secure a legislative franchise for the purpose of engaging in such activities. As held in the
case of Albano vs. Reyes (175 SCRA 264), franchise issued by Congress are not required before
each and every public utility may operate. The license or authority to operate the public utility
given by the administrative agency duly empowered to grant the same will suffice to authorize
the operation of such public utility.

"Significantly, in the Albano case, the Supreme Court held that 'the contract between the PPA and
ICTSI, coupled with the President's written approval, constitute the necessary authorization for
ICTSI's operation and management of the MICP' on the theory that the PPA has been empowered
by the lawmaker to undertake by itself the operation of the MICP or, at its option, to authorize
another, by contract or other means, to manage and operate the same.

"'In the same vein, the individual contracts between PPA and its various private port service
contractors/operators constitute the authorization for the rendition by the said private port
service contractors/operators of public services at the port which the PPA is mandated, under its
Charter, to undertake by itself or by contract or otherwise (see Sec. 6, [v], P.D. 857)."

Thus, while private service contractors need not secure a legislative franchise for them to operate
a public utility, they are still subject to the nationality requirement earlier mentioned.

Section 3.3 of the draft Concession Agreement provides that DOTC will be the "legal operator" of
the Project while in Section 8.1 thereof, DOTC appoints the "Proponent or its duly designated
facility operator/manager" as "agent of DOTC to manage the operation of the Project". Thus, the
draft Concession Agreement allows for the operation of the Project by a "duly designated facility
operator/manager". A similar arrangement has been considered by the Supreme Court as valid in
a Resolution dated 08 January 1990 issued in Light Rail Transit Authority (LRTA) vs. COA, G.R. No.
88365. HIaTDS

Please be guided accordingly.

Very truly yours,

(SGD.) SIMEON A. DATUMANONG

Secretary

Footnotes

1. DOJ Opinion No. 062 s. 1995; emphasis supplied.

2. Letter dated 23 June 1995 addressed to Department of Finance Undersecretary Romeo L.

Bernardo signed by then Secretary of Justice Teofisto T. Guingona, Jr.; emphasis supplied.

3. 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)

4. 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).

5. Sec. 18.2, draft Concession Agreement.

6. Sec. 3.2, draft Concession Agreement.

7. G.R. No. 155001, 05 May 2003.

8. "Sec 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation
in public utilities by the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in its capital, and
all the executive and managing officers of such corporation or association must be citizens of the
Philippines." (Emphasis supplied).

9. Sec. 6 (b), Amended BOT Law.

10. DOJ Opinion No. 37 s. 2002; emphasis supplied.