In the News: Aquino Reassures Investors

Against Regulatory Risks
Posted on December 8, 2010 by Philbert E. Varona • Posted in Civil Law, Commercial Law •

The Philippine government sponsored the Infrastructure Philippines conference held on November 18-19,
2010 as part of its efforts to drum up investor interest in Philippine infrastructure projects and public-
private partnerships. The conference was generally met with optimism from both potential project
sponsors and financiers.

This was due at least in part to the government’s promise to insulate infrastructure projects from
regulatory risk. In his keynote address delivered on November 18 (copy available for viewing here),
President Benigno S. Aquino III stated that:

The government will provide investors with protection against regulatory risk. Infrastructure can only be
paid for from user fees or taxes. When government commits to allow investors to earn their return from
user fees, it is important that that commitment be reliable and enforceable. And if private investors are
impeded from collecting contractually agreed fees – by regulators, courts, or the legislature – then our
government will use its own resources to ensure that they are kept whole. …

Let me provide you an example of how regulatory risk protection may work: A contract between the
government and a private entity building a road or a bridge may specify a formula for rate adjustments.  If
for some reason, a court decision threatens the adjustment, the government will compensate the private
concessionaire for the difference between what the tariff should have been under the formula, and the
tariff which it is actually able to collect.  (Emphasis supplied.)

President Aquino and the members of his Cabinet stressed, however, that the commercial or market risk
of any infrastructure projects undertaken by the Aquino administration would be borne by the investors.

Significantly, just a month earlier, the Supreme Court had promulgated a decision in the case of Francisco
v. Toll Regulatory Board (G.R. Nos. 166910, 169917, 173630 and 183599; October 19, 2010) (copy
available for viewing here), which could very well give potential investors pause. One of the issues
involved in that case was whether a contractual stipulation between the government and the operator of a
tollway, whereby the Toll Regulatory Board (TRB) agreed to pay the operator the difference between a
pre-agreed amount of toll fees and the amount actually approved for collection from the public, was valid.
(In other words, the TRB had agreed that if the toll rates approved by the regulatory body were less than
the amount of toll fees set or as adjusted in accordance with the contract – say, for the sake of discussion,
an approved toll rate of P30.00 versus a contractually-set toll rate of P50.00 – then the TRB would pay
the operator the P20.00 shortfall.)

According to the Supreme Court, this type of contractual stipulation is void, because:
(a) it amounts to a “guarantee [by the government] of a security in the financing of the toll operator,”
which is expressly prohibited by Section 3(e)(5) of Presidential Decree No. 1112 (the charter of the
TRB); and

(b) it violates Article VI, Section 29 of the Constitution, which provides that “[n]o money shall be paid
out of the Treasury except in pursuance of an appropriation made by law,” and Sections 84 and 85 of
Presidential Decree No. 1445 (which impose the same requirement as the Constitution), and here, there
was no such Congressional appropriation.

In other words, the Supreme Court has recognized that there are Constitutional and statutory hurdles that
need to be overcome before project proponents may be insulated from regulatory risk. Although
the Francisco decision is not yet final and executory and it remains to be seen whether the foregoing
pronouncements will attain precedential weight, once the administration’s infrastructure program actually
gets off the ground, it would be interesting to see how the Aquino administration will implement its
undertaking to protect investors from regulatory risk.