Practical Lessons from the Practical Lessons from the Philippine Experience in Philippine Experience in

Renegotiating and Renegotiating and Refinancing PPPsRefinancing PPPs

ExEx--post Management and Renegotiation post Management and Renegotiation of Publicof Public--Private Partnership ProjectsPrivate Partnership ProjectsThe World Bank and KDI International ConferenceThe World Bank and KDI International Conference

““I thought we had a contract!?!I thought we had a contract!?!””

If you have reached this point, where If you have reached this point, where you have been tasked to renegotiate a you have been tasked to renegotiate a PPP, then both parties have failed in PPP, then both parties have failed in

the concession design, where projects the concession design, where projects can manage to navigate through an can manage to navigate through an

uncertain worlduncertain world

Renegotiate? How?..Why?...Renegotiate? How?..Why?...

Shed your old role in the project and put Shed your old role in the project and put on your on your ““negotiators hatnegotiators hat””Retrace your steps back to Retrace your steps back to ““step onestep one”” and and work from therework from thereBe very clear what your Be very clear what your ““partyparty”” hoped to hoped to achieve, and where you went wrongachieve, and where you went wrongBe very transparent from this point on.Be very transparent from this point on.

Outline and ObjectivesOutline and Objectives

OBJECTIVE: Spark some lively discussion OBJECTIVE: Spark some lively discussion and exchange on how to manage and exchange on how to manage renegotiationsrenegotiations

1.1. Quick discussion of some Philippine cases Quick discussion of some Philippine cases of renegotiation of PPPs of renegotiation of PPPs

2.2. Some practical lessons learned from the Some practical lessons learned from the casescases

3.3. A PPP contract A PPP contract ““punch listpunch list”” that may save that may save you from renegotiationyou from renegotiation

4.4. Some practical tools in a PPP toolkitSome practical tools in a PPP toolkit

Refinancing PPPRefinancing PPP’’ss

If the renegotiation brings the Risk If the renegotiation brings the Risk ––Return profile of the project back in Return profile of the project back in balance, then and only then can rebalance, then and only then can re--financing follow.financing follow.

““War storiesWar stories”” from the Philippinesfrom the Philippines

The The ““PIATCO FiascoPIATCO Fiasco”” –– The legal outcome The legal outcome need not be the best economic outcome need not be the best economic outcome ””One step backward, two steps forwardOne step backward, two steps forward”” ––Salvaging a blunder in the concession Salvaging a blunder in the concession design design ““Someone should have caught that in the Someone should have caught that in the due diligencedue diligence”” -- Recovering from a killer Recovering from a killer provision in the PPP contractprovision in the PPP contractThe The ““Longest Toll RoadLongest Toll Road”” -- Working to Working to keep PPP structure alive keep PPP structure alive

War Stories War Stories –– Practical Lessons Practical Lessons Learned Learned

PIATCOPIATCO: Keep your : Keep your ““eye on the prizeeye on the prize””LRTLRT: Short cuts often result in the long way to : Short cuts often result in the long way to your objective.your objective.The Killer ProvisionThe Killer Provision: Surprise! Corporations : Surprise! Corporations can actually see longcan actually see long--term value in the fiscal term value in the fiscal health of the host country, but will always exact health of the host country, but will always exact their pound of flesh for poor design & due their pound of flesh for poor design & due diligencediligenceThe Longest RoadThe Longest Road: Understanding the parties : Understanding the parties interests, getting down to basics and interests, getting down to basics and ““Getting to Getting to Yes!Yes!””

A Practical Punch ListA Practical Punch List

A A ““punch listpunch list”” for Robust PPPs for Robust PPPs ––Simple to DifficultSimple to Difficult

Clear Deliverables for each PartyClear Deliverables for each PartyForce Majeure ProvisionsForce Majeure ProvisionsLiquidated DamagesLiquidated DamagesDispute Resolution ProcessDispute Resolution ProcessArbitration ProvisionsArbitration ProvisionsDefault ProvisionsDefault ProvisionsMechanisms embedded in the contract to Mechanisms embedded in the contract to strengthen regulation, public institutions and strengthen regulation, public institutions and contract monitoringcontract monitoringMechanisms embedded in the contract to Mechanisms embedded in the contract to proactively manage external political pressure proactively manage external political pressure that arethat are

Preparing the PPP ContractPreparing the PPP Contract

Buy the best legal advise you Buy the best legal advise you CANCAN’’T T afford! But just make sure you buy it.afford! But just make sure you buy it.It is the proponent/developer, either It is the proponent/developer, either public and private, who must integrate the public and private, who must integrate the business case into the PPP contract to business case into the PPP contract to avoid a legal case.avoid a legal case.Among the parties, it is government that Among the parties, it is government that can leverage their PPP experience, to can leverage their PPP experience, to capture the best practice in their contracts.capture the best practice in their contracts.

Tools from the PPP Tools from the PPP ToolkitToolkit

PPP = RRRPPP = RRR

Too often, governmentToo often, government’’s lose sight of the s lose sight of the fact that PPP = RRRfact that PPP = RRR

RRegulation that is clear from the onsetegulation that is clear from the onset

RRegulators that are independent and credibleegulators that are independent and credible

RRegulatory bodies that are competent, egulatory bodies that are competent, equipped and dynamic. equipped and dynamic.

Political Risk InsurancePolitical Risk Insurance

Bringing in multilateral and bilateral Bringing in multilateral and bilateral institutions that can mitigate private sector institutions that can mitigate private sector risk against political intervention.risk against political intervention.

MIGAMIGAADBADBNational Investment AgenciesNational Investment AgenciesPrivate PRIPrivate PRI

In the Philippines, even the best project In the Philippines, even the best project developers and negotiators cannot developers and negotiators cannot anticipate the political tidesanticipate the political tides

The Judicial SystemThe Judicial System

If the project reaches the courts, this is an If the project reaches the courts, this is an indication of a renegotiation gone bad.indication of a renegotiation gone bad.The courts in the Philippines, are not The courts in the Philippines, are not necessarily able to take a hardnecessarily able to take a hard--nosed nosed perspective in the business of delivering a perspective in the business of delivering a service through PPP.service through PPP.

PPP institutions with a PPP institutions with a ““big stickbig stick””

Much will be said in this conference on the Much will be said in this conference on the topic of PPP institutions. topic of PPP institutions. The effectivity of such institution is not in The effectivity of such institution is not in the mandate nor design, but rather in the mandate nor design, but rather in how big a stick it wields!how big a stick it wields!

ConclusionConclusion

““An ounce of prevention is worth a pound of cureAn ounce of prevention is worth a pound of cure””The public sector needs to leverage on its The public sector needs to leverage on its collective experience in PPPcollective experience in PPP’’s and bring best s and bring best practice into every PPP contract practice into every PPP contract –– so so ““we can we can stop meeting like this!stop meeting like this!””The private sector can be expected to be able to The private sector can be expected to be able to take care of itself in an environment that is take care of itself in an environment that is transparent, credible, fair and yet dynamic transparent, credible, fair and yet dynamic ––after all, they have their share holders to after all, they have their share holders to account to.account to.

Thank YouThank You

PIATCO FIASCO: Deal Structure PIATCO FIASCO: Deal Structure (1/4)(1/4)

BOT Contract for a new international airport BOT Contract for a new international airport terminal with 35terminal with 35--year concessionyear concessionTerminal fees would be increased to USD20.00, Terminal fees would be increased to USD20.00, 40% of which would go to government40% of which would go to governmentGuaranteed payments and revenue sharing to Guaranteed payments and revenue sharing to governmentgovernmentA monopoly was awarded for the international A monopoly was awarded for the international gateway terminal.gateway terminal.Defined capital invest standardsDefined capital invest standards

Project was 98% completed when renegotiations Project was 98% completed when renegotiations came to a headcame to a head

PIATCO Fiasco: The Issues PIATCO Fiasco: The Issues (2/4)(2/4)

PPP contract was amended after tenderPPP contract was amended after tenderThe deal gave monopolistic power to the The deal gave monopolistic power to the concessionaire to the detriment of other concessionaire to the detriment of other players in the industryplayers in the industryProject was Project was ““politicizedpoliticized”” and media wars and media wars weighed in on the debate prior to facility weighed in on the debate prior to facility operationoperation““The project found itself in the dockets of The project found itself in the dockets of

the Supreme Court of the Philippinesthe Supreme Court of the Philippines””

PIATCO Fiasco : The outcome PIATCO Fiasco : The outcome (3/4)(3/4)

Supreme Court findings:Supreme Court findings:““material and substantial amendmentsmaterial and substantial amendments……had the effect of converting the had the effect of converting the ……Agreement into an entirely different Agreement into an entirely different agreement from the contract biddedagreement from the contract bidded””5 years later5 years later –– The 98% completed The 98% completed structure stands unfinished with no one structure stands unfinished with no one able to predict when the it will open, while able to predict when the it will open, while Filipinos endure an outdated terminalFilipinos endure an outdated terminal

PIATCO Fiasco : Lessons Learned PIATCO Fiasco : Lessons Learned (4/4)(4/4)

Competitive bids have to be respected, and any Competitive bids have to be respected, and any renegotiations that substantially change the renegotiations that substantially change the structure after the fact, and behind the scrutiny structure after the fact, and behind the scrutiny of a tender, can be fatal for both partiesof a tender, can be fatal for both partiesManaging the project includes proactively Managing the project includes proactively managing those negatively affected by the managing those negatively affected by the projectprojectPoliticizing the project, often leads to Politicizing the project, often leads to government losing sight of the original objective.government losing sight of the original objective.

Manila LRT: Deal Structure Manila LRT: Deal Structure (1/4)(1/4)

BOT contract to extend an existing LRT BOT contract to extend an existing LRT line and take over operations line and take over operations Private Sector was in charge of civil works, Private Sector was in charge of civil works, new trains, and redeveloping and new trains, and redeveloping and integrating the new and existing lineintegrating the new and existing lineGovernment to assume payment of civil Government to assume payment of civil works debt, contribute the existing LRT works debt, contribute the existing LRT line to project, and receive A revenue line to project, and receive A revenue share.share.Project was structured as a Project was structured as a ““jointjoint--ventureventure””

Manila LRT: Issues Manila LRT: Issues (2/4)(2/4)

The Joint Venture structure was legally The Joint Venture structure was legally deficient due to lack of public biddingdeficient due to lack of public biddingThe Valuation of the existing asset was The Valuation of the existing asset was contentious without the benefit of public contentious without the benefit of public biddingbiddingCompetitiveness of civil works price, which Competitiveness of civil works price, which was to be paid by government, was was to be paid by government, was questionable without public bidding.questionable without public bidding.

Manila LRT: The Outcome Manila LRT: The Outcome (3/4)(3/4)

Resubmitting the project as an unsolicited BOT Resubmitting the project as an unsolicited BOT project addressed bidding issues, among othersproject addressed bidding issues, among othersFiscal measures were set in motion to address Fiscal measures were set in motion to address forecasted revenue shortfallsforecasted revenue shortfalls55--years lateryears later –– Project has been structured as Project has been structured as a BOT project for competitive tendera BOT project for competitive tender

Fiscal measure undertaken have translated into Fiscal measure undertaken have translated into increased revenues for the LRT lineincreased revenues for the LRT lineExisting project assets form basis for competitive Existing project assets form basis for competitive tendertender

Manila LRT: Lessons Learned Manila LRT: Lessons Learned (4/4)(4/4)

Keep It Simple! Keep It Simple! –– Use competitive bidding Use competitive bidding to select a private proponent. to select a private proponent. PPPs, because they require a viable PPPs, because they require a viable project return, can unexpectedly lead to project return, can unexpectedly lead to better pricing of infrastructure even prior better pricing of infrastructure even prior to private sector entry.to private sector entry.LowLow--key key ““back channelingback channeling”” with clear with clear accountability to superiors, proved accountability to superiors, proved effective in this case to break the impasse effective in this case to break the impasse on several occasionson several occasions

Killer Provision: Deal Structure Killer Provision: Deal Structure (1/4)(1/4)

BOT contract to construct a 26BOT contract to construct a 26--km km irrigation tunnel with a 150 MW power irrigation tunnel with a 150 MW power plantplantGovernment agreed to offGovernment agreed to off--take both take both power and water from the private sector power and water from the private sector for the life of the concession.for the life of the concession.Some 135,000 hectares of new or existing Some 135,000 hectares of new or existing rice farms would benefit from the projectrice farms would benefit from the project

Killer provision: The Issues Killer provision: The Issues (2/4)(2/4)

An inconspicuous provision in the contract allowed An inconspicuous provision in the contract allowed an automatic tariff adjustment of US$ 0.005/cu.m. an automatic tariff adjustment of US$ 0.005/cu.m. of water for every 1 million US$ in taxes paid to the of water for every 1 million US$ in taxes paid to the Philippine Government.Philippine Government.What seemed like a harmless tariff adjustment What seemed like a harmless tariff adjustment turned out to be the turned out to be the ““revenue driverrevenue driver”” when applied when applied annually to 800 million cu. m. over 30annually to 800 million cu. m. over 30--years.years.

This provision accounted for 40% of the project revenue.This provision accounted for 40% of the project revenue.

The IRR on the taxes paid was 37% while the The IRR on the taxes paid was 37% while the project return was only 18%project return was only 18%

Killer provision: The OutcomeKiller provision: The Outcome(3/4)(3/4)

At the highest level, the government sought to At the highest level, the government sought to renegotiate this one provision, as it reflected a renegotiate this one provision, as it reflected a US$877M cash flow from US$ 50M in taxes paid.US$877M cash flow from US$ 50M in taxes paid.After hard renegotiations, the private proponent After hard renegotiations, the private proponent agreed to a lower return on the contentious agreed to a lower return on the contentious component to match the overcomponent to match the over--all project return.all project return.In exchange, government agreed to capitalize this In exchange, government agreed to capitalize this revenue stream in an upfront payment.revenue stream in an upfront payment.5 years later5 years later –– the project is fully implemented, the project is fully implemented, fully operational and the project has dropped out fully operational and the project has dropped out of the radar screen of controversies.of the radar screen of controversies.

Killer Provision: Lessons LearnedKiller Provision: Lessons Learned(4/4)(4/4)

When broken down to manageable parts, When broken down to manageable parts, renegotiations can succeedrenegotiations can succeedThe private sector took a longThe private sector took a long--term view term view in compromising on their in compromising on their ““windwind--fallfall””profits, in fact after the renegotiation, they profits, in fact after the renegotiation, they continue to invest in the Philippines.continue to invest in the Philippines.The renegotiation was better for The renegotiation was better for government, but still subgovernment, but still sub--optimal to a optimal to a scenario where due diligence was scenario where due diligence was conducted properlyconducted properly

The Longest Road: Deal Structure The Longest Road: Deal Structure (1/4)(1/4)

A PPP concession agreement to upgrade an A PPP concession agreement to upgrade an existing 27km. toll road and extend it by 8 km.existing 27km. toll road and extend it by 8 km.The government owned franchisee corporation The government owned franchisee corporation would turn over a new 30 would turn over a new 30 ––year concession year concession upon completion of the investment in exchange upon completion of the investment in exchange for equity in the project and a share in the for equity in the project and a share in the revenue.revenue.The road provides a vital link to Manila and with The road provides a vital link to Manila and with its completion, would effectively extended the its completion, would effectively extended the expressway 48expressway 48--km beyond the metropolis. km beyond the metropolis. Toll rates would be tripled upon completionToll rates would be tripled upon completion

The Longest Road: The Issues The Longest Road: The Issues (2/4)(2/4)

The original share holders were unable to raise the The original share holders were unable to raise the equity due to the Asian Financial Crisisequity due to the Asian Financial CrisisBecause government knew that the proponent was Because government knew that the proponent was experiencing financial difficulties, itexperiencing financial difficulties, it’’s deliverables in s deliverables in the concession were not fulfilled eitherthe concession were not fulfilled eitherThe road was among three infra projects of national The road was among three infra projects of national priority. However, the concession agreement was priority. However, the concession agreement was ambiguous on project deadlines.ambiguous on project deadlines.GovernmentGovernment’’s investment company NDC, was s investment company NDC, was prepared to step in to complete the project.prepared to step in to complete the project.

The Longest Road: The The Longest Road: The OutcomeOutcome(3/4)(3/4)

With the government investment company as a With the government investment company as a fall back position, the government owned fall back position, the government owned franchisee gave the original proponents a hard franchisee gave the original proponents a hard deadline to prove their financial capabilitydeadline to prove their financial capabilityThe original proponents were able to secure a The original proponents were able to secure a ““white knightwhite knight”” that had the financial and technical that had the financial and technical capacity to complete the roadcapacity to complete the roadThe government investment company, quietly The government investment company, quietly withdrew from the projectwithdrew from the project55--year lateryear later –– The toll road is under construction The toll road is under construction with target completion for 2009.with target completion for 2009.

The Longest Road: Lessons The Longest Road: Lessons LearnedLearned(4/4)(4/4)

Government should start from a position of Government should start from a position of respecting the sanctity of contracts, and not bow respecting the sanctity of contracts, and not bow to the politically expedient option of making the to the politically expedient option of making the private sector the private sector the ““sacrificial lambsacrificial lamb”” when targets when targets are not met.are not met.GovernmentGovernment’’s goal is to get to yes, as the s goal is to get to yes, as the economic cost of a project in litigation is higheconomic cost of a project in litigation is highLeverage governments experience in PPPs to Leverage governments experience in PPPs to ensure best practice is reflected in each ensure best practice is reflected in each concessionconcession