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Recalibrating the Framework for LGU Joint Ventures

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Taxwise Or Otherwise

According to a 2017 report on Infrastructure Financing Strategies for Sustainable Development in the Philippines written for the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), one of the fast-emerging mechanisms utilized to implement infrastructure projects at the level of local government units (LGUs) is through joint ventures (JVs). Majority of LGU-level JV projects that have progressed to actual implementation have been initiated by the private sector in partnership with local government entities in the water sector, government offices, and given recent developments, in reclamation as well.

The 2013 JV Guidelines issued by the National Economic and Development Authority (NEDA) provide the applicable framework for implementing public-private JV projects at the national level. They define a JV as “an arrangement where a private sector entity and a government entity contribute money/capital, services, and/or assets, as well as share profits, risks, and losses, to undertake an investment activity that will facilitate private sector initiative in a particular industry or sector.” At the end of the JV, the activity may eventually be transferred either to the private sector under competitive market conditions or to the government.

Expediency and convenience seem to be the primary driving forces for adopting JVs as the preferred mode of implementing infrastructure projects through private participation at the LGU level. Since the 2013 NEDA JV Guidelines explicitly exclude LGUs, there is a lack of a mandatory framework for evaluating, approving, and tendering JV projects at the local level. Instead, LGUs are given free rein to craft the rules themselves. While this may result in the swift implementation of infrastructure projects, it might also be prone to undermine transparency and competition.

To bridge the gap, the Department of the Interior and Local Government (DILG) issued Memorandum Circular (MC) No. 2016-120 on Sept. 7, 2016, providing Guidelines for the Implementation of Public-Private Partnership for the People Initiative for Local Governments (LGU P4). The Circular encouraged LGUs to draft their respective “PPP for the People or P4 Codes” before undertaking Public-Private Partnership (PPP) projects and likewise provided a template P4 Code to guide them. Insofar as JVs are concerned, the template P4 Code provides the following key characteristics:

• Unlike in the 2013 NEDA JV Guidelines, ownership over the investment activity at the end of the JV may only be transferred to the private sector partner (PSP) under competitive market conditions — the LGU cannot take ownership.

• Apart from money, capital, services, personnel, and assets, the LGU may also extend goodwill, free carry, grant a franchise, concession, usufruct, right-of-way, equity, subsidy or guarantee, provide cost-sharing and credit enhancement mechanisms, exercise police power, grant tax incentives or tax holidays, perform devolved powers, expropriate and reclassify, and enact or integrate zoning ordinances.

• Subject to the terms of the competitive selection process and agreement of the parties, the LGU may be entitled to a greater share than its contribution or equity, among others.

On July 24, 2019, the PPP Center of the Philippines launched its Guidebook on Joint Venture for LGUs. In a sense, the Guidebook recalibrates some of the provisions in the template P4 Code. Specifically,

• The Guidebook openly recommends not adopting some of the restrictions inherent in the definition of JV provided by the template P4 Code – among which is the restriction in the transfer of the investment activity only to the PSP.

• It affirms the two types of JVs that may be established: Contractual and Corporate, which was not made clear in the Circular and its P4 Code.

• It suggests that the LGU’s contributions to the JV be limited only to its available resources, fiscal capacity, what laws and regulations allow, and specifically recommends that no credit guarantees be assumed by the LGU.

• Instead of following the tender process laid out in the P4 Code, the Guidebook recommends the procedures described in Annexes A and B of the 2013 NEDA JV Guidelines, while advising LGUs to tailor some of these procedures according to the proposed guiding principles for LGU-level PPPs (as indicated in Section 3 of the P4 Code).

• It adds an Alternative JV Process, where the LGU is only required to prepare a project concept note (instead of a full feasibility study) before proceeding to competitive tender.

These provisions were later adopted in a template LGU JV Code annexed in Joint Memorandum Circular (JMC) No. 2019-01 (Supplemental Guidelines for the Implementation of LGU P4) issued by the DILG and the PPP Center on Dec. 10, 2019. The JV Code likewise provides that the PSP is not allowed to recover its investment from payments made by the LGU over the lifetime of the JV contract.

The value of the Alternative JV Process cannot be stressed enough. Considering that LGUs have limited technical capabilities and financial resources, this alternative process will help facilitate the implementation of JV projects. Since the task of preparing the full feasibility study is shifted to interested PSPs, the LGU will only submit a concept note to serve as a guide to the PSP in further developing a project proposal.

The above measures, however helpful or relevant, are only recommendatory. Numerous LGUs have already adopted the P4 Code and are implementing JV projects accordingly. Only time will tell whether some would eventually adopt the proposed JV Code under the JMC or amend their existing PPP Codes to incorporate some of the JV Code’s provisions for their future projects.

In any case, whatever framework LGUs decide to utilize in the end, the focus should not stray away from what would serve the best interest of their constituents for whom these projects are implemented.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.

 

Jose Patrick S. Rosales is an Infrastructure & Tax Senior Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 8845-2728 ext. 2275

jose.patrick.s.rosales@pwc.com





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