PUBLIC-PRIVATE PARTNERSHIP (PPP) GOVERNING BOARD Resolution No. 2019-07-02 July 4, 2019 FOR: All Heads of Departments, Bureaus, Offices, Commissions, Authorities or Agencies of the National Government, Government Owned and/or Controlled Corporations, Government Finan: Institutions, State Universities and Colleges, Local Government Units SUBJECT: ‘SUGGESTED GUIDELINES ON MANAGING GREENFIELD SOLICITED HYBRID PUBLIC-PRIVATE PARTNERSHIP (PPP) PROJECTS 4. Background At the start of the current administration, the economic managers pushed for the use of hybrid PPPs as an option to implement infrastructure projects under the Build Build Build program, consistent with the Administration's efforts to address the infrastructure gap under the Philippine Development Plan 2016-2022. Under a hybrid PPP model, the capital expenditures for an infrastructure project may be financed through a combination of government appropriations, official development assistance, and even private financing. The operation and maintenance (O&M) of the infrastructure could be shared between the government and a private partner. In contrast, the financing of a traditional PPP project is borne entirely by the private sector. The two commonly articulated justifications for a hybrid PPP are lower cost of financing and faster project implementation, Given that there are a number of projects that are envisioned to be implemented in the form of hybrid PPPs, such as rail, airport, and hospital projects, among others, it is crucial for implementing agencies (IAs) to have a clear understanding of hybrid PPPs and of the critical factors that will ensure its success. Objective These suggested guidelines aim to: (2) Recommend a common definition of hybrid PPPs; (b) Assist IAs in ensuring the success of infrastructure projects implemented through hybrid PPPs; and (0) Provide guidance to IAs in maximizing Value for Money (VfM) through addressing risks inherent to hybrid projects. 3. Coverage 3.1, These suggested guidelines cover factors to consider in developing and implementing project/s as a hybrid PPP. Eligible projects for hybrid PPP include, but are not limited to infrastructure projects in the transportation, health, and solid waste management sectors. 3.2. These suggested guidelines focus only on solicited hybrid PPPs undertaken through any of the contractual arrangements or schemes (e.9., Build-Operate-Transfer, Build- Transfer-Operate) allowed under Republic Act No. 6957, as amended by Republic Act No. 7718 (otherwise known as the BOT Law). Page 1 of 83.2. In hybrid PPPs involving ODA financing, these suggested guidelines apply only when the government has the flexibility to choose which components of the project will be financed by the development partner. 3.4. These suggested guidelines do not cover: (a) brownfield projects, as defined in Section 4.1; and (b) greenfield projects where the O&M component is a separate project, as in the case of the Subic-Clark-Tarlac Expressway (SCTEX)' 3.5. While all relevant laws, rules, regulations, and policies (e.g. R.A. No. 6957, as amended by R.A. No. 7718, and its Implementing Rules and Regulations, Investment Coordination Committee rules, the Generic Preferred Risk Allocation Matrix, etc.) remain applicable in the development, approval, and implementation of hybrid projects, these are no longer discussed in these suggested guidelines. 4. Definition of Terms For purposes of these suggested guidelines, the following terms and phrases are understood as follows: 4.1. “Brownfield project" refers to a project which entails the improvement (e.g., expansion, rehabilitation, and/or upgrading) of an existing facility 4.2. "Greenfield project” refers to a project which entails the creation of an entirely new facility, which does not depend on the improvement of an existing facility. 4.3, "Engineering, Procurement, and Construction or “EPC” refers to a contractual ‘agreement where the engineering and construction contractor undertakes to carry out the detailed engineering design of the project, procure all the necessary equipment and materials, and construct the project. 4.4. ‘Hybrid PPP” refers to an arrangement whereby components of an infrastructure project are taken on by the government through official development assistance {ODA), through local public financing, or through a combination thereof, while the rest of the components (if applicable) and the O&M are done through a PPP contract. 4.5. “Implementing agency” or “IA” refers to any government entity with a mandate to enter into PPP contracts. 4.6, ‘Interface’ refers to a situation where the supply and operation of the various components of a project are distributed among multiple stakeholders. The most common example is the interface between a stakeholder responsible for O&M and a stakeholder responsible for construction. Another example would be the interface between the supplier of rolling stock and the builder of the rail 4.7. “Interface risk” refers to the risk that the project is delayed or the risk that project cost will increase due to poor coordination among interfacing stakeholders of a project. 4.8. "Key Performance Indicators” or “KPIs” refer to critical indicators of progress toward an intended result 4.9. “Lifecycle cost” or ‘whole-of-life cost’ refers to the total cost of the project over the |The SCTEX is a 94-km expressway which traverses the provinces of Bataan, Pampanga, and Tarlac, Itwas Constructed through the Japan Intemational Cooperation Agency's (JICA) ODA loan facility. In 2011, the Concession agreement for its management, operation, and maintenance was awarded to the NLEX Corporation (formerly known as the Manila North allways Corporation or MNT). Page 2 0f 8concession period or the total cost of owning an asset over the entire project life.” 4.10. ‘Minimum Performance Standards and Specifications” or "MPSS" refer to the detailed minimum technical specifications and minimum required performance levels of a project based on the demand study, as well as existing local and international industry standards and best practices. These could also be based on local laws and building regulations as well as service level targets determined by the IA. 4.11. “Official development assistance” or “ODA" refers to the definition provided in the ODA Act of 1996, and any amendments thereof. 4.12. “Operations and maintenance” or “O&M refers to @ contractual agreement where the implementing agency engages a private partner to operate and maintain a facility within a specified period of time. 4.13, "Public-private partnership” or “PPP” refers to a contractual agreement between the government and a private firm targeted towards financing, designing, implementing, ‘and operating infrastructure facilities and services that were traditionally provided by the public sector. It embodies optimal risk allocation between the parties — minimizing cost while realizing project developmental objectives. Thus, the project is to be structured in such a way that the private sector gets a reasonable rate of return on its investment. 4.14, "Project component” or “component” refers to any specific part or specific portion of the entirety of a project. See Section 5.2 for examples of project components. 4.15. “Value for money” or “VfM" refers to the optimum combination of the whole-of-life costs to the IA and the quality (or fitness for purpose) of the good or service to meet the user's requirement. It is not the choice of goods or services based on the lowest cost bid. 5. Factors to consider in developing and implementing a hybrid project The ideal time to determine whether a project may be implemented as a hybrid PPP is during the feasibility study (FS) stage. During the conduct of the FS, the IA may consider the following factors in developing and implementing a hybrid PPP: 5.1. Early establishment of the required levels of public service to be delivered using the infrastructure To ensure that the facility is builf to the right size and configuration, and that the facility, and equipment installed are of the right capacity and quality, the required level of public service over the life of the project needs to be based on a thorough demand projection and specified at the early part of the development stage. The level of public service is normally expressed in terms of a set of MPSS and KPIs. During project development, the IA may consider aligning the obligations set out for the construction phase with the MPSS and KPIs of the O&M phase, This ensures that the design and construction undertaken by the EPC contractor are fit for purpose, and enables the desired operational outcomes and end-user requirements to be met in the O&M phase. 2 PPP Governing Board Res Private Partnership Project lution No, 2016-06-08, tiled "Guidelines on Assessing Value for Money in Publio- Page 3 of 8In case the IA opts to use ODA to finance its contribution to the hybrid PPP, it is recommended that the MPSS and KPls, as described above, be among the terms to be negotiated with the development partner. Allocation of the components of the infrastructure among the various sources of financing ‘An infrastructure would typically consist of various components. In the case of railway projects, these would be civil works, station electro-mechanical works, rallway systems (such as power supply, signalling, etc.), and rolling stacks, among others. The process of allocating scope of works between contracts determines which components will be financed by the various sources of financing, In order to maximize VIM, the IA may consider the following in the allocation of project components among the various sources of financing: (a) Quality of public service delivery (6) Mapping out risks arising from the allocation of project components (c)_ Mitigating interface risks (see Section 4.7 for definition of interface risks) (d) Minimizing lifecycle costs and incentivizing whole-of-life costing (see Section 4.9 for definition of lifecyole cost) (e) Focusing design and construction on desired operational outcomes and end-user requirements, which may include allowing capacity augmentation to be accommodated in the O&M component (f) Maximizing commercial revenues and economic benefits (g) Aligning competencies of parties with the requirements of the project (h) Other considerations such as national security concerns and the common good With regard to specific component allocation, the table below illustrates how it can be done ina railway project. ‘Sample Allocation of Components in Railway Project Government Private Sector ‘= Givil works (e.g., viaducts, stations, rails)] » Rolling stocks ‘+ Station electro-mechanical systems + Signaling and train control systems (e.g., signaling lights and computers) _| » Commercial assets As illustrated above, the government, with its ability to borrow at lower cost, may take on the civil works and station electro-mechanical systems to reduce the overall capital expenditure cost. Meanwhile, as it is recognized that the private sector can perform better in O&M, then those components which are critical to a successful O&M, such as the rolling stocks, signaling, and train control systems, may be taken on by the private sector. Additionally, since the private sector is better at managing commercial operations and maximizing commercial revenues to improve overall VIM to the 1A, the commercial assets may be allocated to the private sector There are also strategic projects that may be best done through an integrated PPP, but due to high capital expenditure requirements, are not financially viable to the private sector. A hybrid PPP, whereby government takes on the core civil works assets while the private sector takes on the operating assets as well as commercial assets, could make the project commercially attractive to the private sector. This is an approach currently being applied by other jurisdictions to large underground rail projects. Allocation of components between the government and the private sector may also be done in social infrastructure projects. In other developing countries, an emerging Page 4 of 8trend is the use of blended financing in support of achieving the Sustainable Development Goals (SDG)°. This is an approach that mixes different forms of capital, including those from multilateral development banks (MDB). For example, in a public hospital catering mainly to the poor, the government can use MDB financing for the construction of the hospital building, while the private operator would then invest in the medical equipment and remaining facilities, and offer services under a regulated set-up to ensure coverage of the targeted population of poor patients. As part of its due diligence in allocating the components of a hybrid PPP, the [A may consider consulting with prospective bidders and lenders through market sounding activities to determine the most suitable allocation. IAs may also consider hiring the services of an expert transaction adviser, and solicit inputs from key agencies such as the Department of Finance (DOF), which has the mandate over matters regarding financing of projects; the National Economic and Development Authority (NEDA), which has the mandate over ODA programming; and the PPP Center, which has the mandate to assist IAs in developing the PPP ‘component of a project, including the conduct of FS and project structuring. 5.3. Addressing risks inherent to hybrid PPPs During project development, a whole-of-project risk allocation matrix may be crafted to ensure that the interfacing stakeholders will be looking at an integrated risk allocation matrix. This matrix contains a list of the risks expected from the project and the preferred allocation of these risks among the contracting patties. The contracts for each of the components may then be drafted consistently with the whole-of-project. tisk allocation. Furthermore, it is recommended that the IA ensure that the whole-of-project risk allocation is clearly communicated and accepted by interested bidders no laler than the bid submission date. The IAs may also take into consideration the following risks that are inherent to hybrid PPPs, as well as the measures that IAs may take to address these risks. These do not cover sector-specific risks as these are determined on a project-to-project basis. A. Risk of not having seamless coordination among the IA’s project teams handling different project components Having a single project team within the IA to procure and deliver all project components of a hybrid PPP may be beneficial in ensuring maximum coordination and knowledge transfer between team members. In case a single project team handling all project components is not possible or cost effective, itis advisable that the IA ensure strong coordination and cohesion between project teams such that everyone is working towards the same objectives. B. Systems integration risks In hybrid PPPs, where different components are allocated to different stakeholders, there is @ risk that the project components end up being incompatible with each other. For instance, in a railway system project where the civil works consisting of the viaducts, stations, and rails are allocated to the government, while the provision of rolling stocks is allocated to the private sector, hitps:!www.un.org/sustainabledevelopment/sustainable-development-goals! Page 5 of 8there is a risk that the rolling stocks provided by the private sector are not compatible with the rails built by the government. To prevent such risk from being realized, the systems and/or sub-systems that make up each of the different components of the project need to be managed and integrated properly. The IA may hite, in accordance with applicable laws, rules and regulations, a systems integrator to ensure that these systems and/or sub-systems. are brought together and are functioning as one. The systems integrator must be a specialist in the project's sector and must be independent (i.e., not affiliated with either the EPC contractor or the O&M provider) to avoid potential issues on conflict of interest. Interface risks Hybrid PPPs involve components allocated to different parties, with each ‘component employing procurement modalities governed by different procedures and timelines. Accordingly, there is a risk that the outputs and the delivery schedule of these components are not aligned, which may result to variations, and consequent project delays and cost-overruns, the cost of which would be borne by the IA (rather than a private sector concessionaire) under a typical hybrid model. To avoid these risks, the IA may: 1. Create incentives for the interfacing stakeholders to work together Below are sample mechanisms that may enable the IA to achieve this: a. Aligning bid documents and design requirements in the EPC contract with the MPSS and KPIs in the O&M contract. b. Commencing the procurement of the O&M provider prior to, or at least in parallel with, the procurement of the EPC contractor. This gives the O&M provider (or bidders for that role) an opportunity to input on the design being prepared by the EPC contractor, thereby ensuring that the facility to be built by the EPC contractor will allow the O8M provider to fulfill the project's required MPSS and KPIs during the O&M phase. ©. Permitting the O&M provider to specify its operational and maintenance requirements, which, if approved by the IA, would then be contractually imposed on the EPC contractor. Alternatively, the IA may require both the EPC: contractor and the O&M provider to execute in favor of the government complementary commitments, which, when taken together, places the government in the same position as if it obtained a single umbrella commitment from the Project proponent of an integrated PPP project. For example, the IA may require the EPC contractor to issue a warranty that the infrastructure will be built to meet the technical specification required by the government, and the O&M provider to issue a warranty that, it will be able to achieve its KPIs if the infrastructure is built by the EPC contractor to the prescribed technical specifications. The form or type of warranty to be issued by both the EPC and O&M providers should be specified in their respective contracts. d. Ensuring that the O&M provider has appropriate and direct recourse Page 6 of 8against the EPC contractor (supported by performance bonds, guarantees or other security), particularly in relation to defects, delays, and/or default . Exploring alliancing agreements* for projects with particularly complex interfaces which the private sector is unable to manage alone (see footnote 4 for illustration). These agreements provide joint incentive mechanisms to mitigate interface problems across a project, and encourage the private parties to work closely in attaining or even exceeding the performance targets set by the government 2. Establish protocols between interfacing stakeholders Interface protocols identify the interdependencies between the different ‘components of a hybrid project, the party responsible for each deliverable, its Tequired delivery schedule, and recourse against the party that fails to deliver its commitment. Particular attention should be given to how performance guarantees, warranties and liquidated damages will be transferred and enforced. These protocols may include allowing the O&M provider to inspect the infrastructure built by the EPC contractor after construction and before commencement of the O&M phase. Moreover, this may include rules on how disputes between interfacing stakeholders may be avoided, and how disputes may be resolved, including fault attributions, indemnifications, and events of default that take into account the interface between different project ‘components. ‘The independent consultant should also be tasked with handling alll interface concerns. As such, it is recommended that one independent consultant (most likely a firm) for both the EPC and O&M components of the project be procured, in accordance with applicable laws, rules and regulations. The independent consultant must not be affiliated with either the EPC contractor or the O&M Provider to avoid potential issues on conflict of interest. D. Risk of failing to handover the infrastructure In hybrid PPPs, there is a risk that the stakeholder in charge of the EPC component is, for one reason or another, unable to finish construction, resulting to the IA failing to handover the infrastructure to the O&M provider within the date stipulated in the O&M contract. This may result to the IA incurring either default payments or termination payments in favor of the O&M provider, in accordance with the O&M contract. Apart from these payments, the IA also has to deal with ensuring that the construction of the infrastructure is continued and finished; otherwise, it will continue incurring delays and cost overruns. Notwithstanding that the above costs do not merit an obligation on the part of the 1A pursuant to the suggested mechanisms identified in Sections 5.3(C)(1)(d) and 5.3(C)(2) of these suggested guidelines, the IA may further mitigate this risk by Alliancing agreements are implemented in other countries. An example is the Thames Tidewey Tunnel, a ‘complex water sanitation and sewerage project, where the London government gave the license to construct to Bazelgette Tunnel Limited, which, in tum, spit the project into twa components: (a) a design and construct ‘component; and (b) an operate and maintain component. Component (a) was further split into three contracts to increase competition. To minimize interface issues (since Bazalgette was dealing with three EPC contractors), the London govemment incentivized the three EPC contractors to work together by offering them a share In the bonus pool if the project is delivered eary or below the project price. (Dotails from PricewaterhouseCoopor Singapore). Page 7 of 8including in the O&M contract remedy provisions. These remedy provisions may include the process that the government and the O&M provider may exercise in the event the EPC contract is terminated prior to completion of construction. Subject to compliance with the provisions on variation under the BOT Law and its Implementing Rules and. Regulations, the O&M provider may take on the EPC contractor's Unfinished abtigations and complete the construction of the project. The value if this approach is thet it allows the O&M provider to finish the project without the government having to conduct another round of procurement because the risk of taking over the construction in case of pre-termination of the EPC contract is already reflected in the tender documents for the O&M component. This in effect also provides predictability in favor of the government since there will be no new interface risks that may othenwise result from the procurement of a new EPC contractor. If the O&M provider is unwilling and/or is not qualified to take on the construction of the project, the IA may procure a new EPC contractor. 6. Effectivity Date These suggested guidelines shall take effect immediately upon approval by the PPP Governing Board I hereby certify that these suggested guidelines were approved by the PPP Governing Board at its meeting held on July 4, 2019, Judo keer FERDINAND A. PECSON » Undersecretary and Executive Director Head, PPP Governing Board Secretariat Page 8 of 8