What is BOT Scheme and What Did We Learn from the NBN Deal and the C-5 Project Scandal?

The corruption hustlers in the Philippines...

What are the similarities between the infamous National Broadband (NBN) Project that implicated President Gloria Macapagal-Arroyo, her husband and a number of high-ranking government officials and the embattled C-5 road project that is currently hounding billionaire Senator and presidentiable Manny Villar? The common denominator between the two multi-billion scams in recent political history of the country are the following:

1. Both were originally build-operate-and-transfer projects.
2. Both proposals were changed to government-funded projects.
3. Corrupt politicians and government personnel profited from both projects at the expense of taxpayers’ money.
4. Both projects were financially disadvantageous to the government.
5. The actions and decisions of corrupt politicians and government personnel on both projects were a breach of the free-market system and competition.
6. Both projects did not yield a win-win situation but rather a win-loss situation wherein the government and the people lost billions of taxpayers’ money that were poured into the deep pockets of our corrupt politicians and their accomplices.

R.A. 7718 is an indirect recognition of the indispensable role of the free enterprise system in wealth creation.

Corrupt politicians in the country are not comfortable with the BOT scheme because it precludes them from imposing their political power and influence to profit from public works and development projects. If a project were wholly or partly financed by private firms or contractors, corrupt politicians would have no excuse to access government coffers. This is the reason why former Commission on Elections Chairman Benjamin Abalos shamelessly brokered for the shift of the NBN Deal from being a BOT project to a government-funded undertaking. This is also the reason why Villar insisted on building the C-5 road despite the fact that there was an ongoing MCTEP or the Manila-Cavite Toll Express Way Project, which is a BOT project.

The build-operate-and-transfer (BOT) scheme is not a new phenomenon in the country. A law authorizing BOT and other types of public-private financing scheme was signed during the term of former President Fidel V. Ramos on May 8, 1994. Republic Act No. 7718, otherwise known as an Act Amending Certain Sections of Republic Act No. 6957, Entitled “an Act Authorizing the Financing, Construction, Operation an Maintenance of Infrastructure Projects by the Private Sector, and for other Purposes,” which aims to tap and mobilize private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development projects normally financed and undertaken by the national government.

Section 1 of the Act states: “Such incentives, aside from financial incentives as provided by law, shall include providing a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector.”

R.A. 7718 is an indirect recognition of the indispensable role of the free enterprise system in wealth creation. It is indirect because the national government still plays a major role in authorizing, approving, monitoring, and the transfer of privately funded projects to the government.

In layman’s term, BOT is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project. Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach a satisfactory internal rate return for its investment.

Some countries using BOT are the Philippines, Malaysia, China, Japan, Croatia, India, and Taiwan. Normally, private firms that constructed or undertook such projects are obliged by law to transfer them to the government after the end of a fixed period. In the Philippines, the concession period must not exceed 50 years.

Section 2(a) of R.A. 7718 defined what may be the subject of “private sector infrastructure or development projects. Projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, “power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act.”

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Financing for these projects may be obtained from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor. However, if an infrastructure or a development facility’s operation requires a public utility franchise, the following must be complied with:

1. The facility operator must be Filipino;
2. If a corporation, it must be duly registered with the Securities and Exchange Commission and owned up to at least 60 percent by Filipinos;
3. In case of foreign contractors, Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available. This means that for highly technical works where Filipino skills are not available, the foreign contractor may use foreign labor;

Projects which would have difficulty in sourcing funds may be financed partly from direct government corporations and/or from Official Development Assistance (ODA) of foreign governments or institutions not exceeding 50 percent of the project cost, and the balance to be provided by the project proponent.

Section 2(b) of the Act defines build-transfer-and-operate scheme. BOT is defined as the following:

“A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding these proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty [50] years: Provided, That in case of an infrastructure or development facility whose operation requires a public utility franchise, the proponent must be Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent [60%] by Filipinos.”

It shall also include a supply-and-operate situation which is a contractual arrangement whereby the supplier or equipment and machinery for a given infrastructure facility, if the interest of the government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals.

So now, did Villar who proposed the C-5 road project and President Arroyo who approved the NBN project despite the warning of whistle-blower Jun Lozada use their political connections and influence to enrich themselves? Records show that Villar forced his multi-billion C-5 road project despite the fact that there was an ongoing construction of the MCTEP or the Manila-Cavite Toll Express Way Project, which is a BOT project. On the other hand, Mrs. Arroyo approved the NBN project to be funded by the government despite an initial BOT proposal which would not cost the government a single cent of taxpayers’ money.