Joint Venture Agreements with Philippine Local Government Units as Public-Private Partnership Modality

By Franchette M. Acosta, Senior Partner, Villaraza & Angangco

E: fm.acosta@thefirmva.com l http://www.thefirmva.com

The Duterte Administration is poised to fund its aggressive infrastructure program internally and through official development assistance. In reaction to the shift in paradigm, the PPP Center has announced an intention to refocus public-private partnership on projects of local government units (LGUs). Considering the broad powers of LGUs to promote the general welfare of its constituents, PPP at the local level has much potential.

Of particular interest is the power of LGUs to enter into joint venture agreements. The National Economic and Development Authority has issued guidelines on the execution of joint venture agreements between private entities and the various agencies and instrumentalities of government. These guidelines ensure that partnerships between the government and the private sector are entered into pursuant to a competitive process. Unsolicited proposals are allowed under the guidelines, subject to subsequent challenge consistent with the policy of transparency. LGUs are not covered by these guidelines. However, there is a framework that allows LGUs to enter into joint venture agreements.

Section 35 of the Local Government Code authorizes LGUs to enter into joint ventures for the purpose of delivering basic services and capability-building and livelihood projects and in general, to promote the economic and social well-being of its constituents. Among the projects eligible for implementation through joint venture agreements are waste management facilities, water supply facilities, waste-to-energy projects, business hubs, socialized/low-cost housing, health centers and power projects and transit systems. The power is wielded by the local chief executive, with the concurrence of the local legislative body, or the Sanggunian. To implement Section 35 of the Local Government Code, LGUs have enacted their own PPP ordinances, which include specific provisions on joint venture agreement.

Local PPP ordinances are not uniform, although similar. Some distinctions lie in whether the ordinance expressly allows incorporated joint ventures (in addition to the contractual joint ventures) and unsolicited proposals for joint venture agreements. Several ordinances include a G2G clause, which allows local government units to collaborate on projects located within the territory of an LGU. Regardless of distinctions on detail, the PPP ordinances must mandate a competitive bidding process for choosing a qualified joint venture partner. Negotiated contracts may be allowed, but under specific conditions.

For guidance, the Department of Interior and Local Government previously issued a memorandum circular encouraging LGUs to adopt a public-private partnership code. Under this proposed code, a joint venture agreement is defined as an arrangement under which parties contribute assets, such as money, capital, services, personnel, equipment and intellectual property. For funding, the LGU may source its contribution from internal revenue allotment, real property tax collection, development funds and proceeds from utilization and development of national wealth. The LGU may enter into financing agreements, such as loans, official development assistance, issue securities and provide credit enhancements, the proceeds of which can be earmarked for the joint venture activity. Assets contributed by the LGU may include goodwill, franchise, concession, usufruct, right of way. The contribution of the LGU shall be subject to third party independent valuation.

The proposed code further suggests minority protection provisions for the LGU. Thus, notwithstanding that the LGU is a minority partner, the written consent of the LGU may be obtained in cases of divestment, sale or transfer of joint venture assets, purchases or expenditures exceeding a certain threshold and other activities that may affect the rights of the LGU in the joint venture and the project. Other detailed guidelines on the mutual obligations of parties to a joint venture are provided. While PPP ordinances may not adopt the proposed code in its entirety, it gives insight to prospective proponents on how to structure joint venture agreements whenever there may be a gap in the relevant PPP ordinance.

This article is information purposes only and is not intended to constitute legal advice.

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