Project Finance 2024 Comparisons

Sponsors

Local conglomerates typically act as sponsors for infrastructure projects. These include San Miguel Corporation, Metro Pacific Investments Corporation, Aboitiz Equity Ventures, Ayala Corporation and other groups. Local sponsors may also form consortia with foreign or local partners that have the technical expertise to undertake a particular component or phase of the project. However, given the relaxation of restrictions on foreign equity in public services and renewable energy (RE) (see 1.3 Structuring the Deal), foreign investors may be inclined to take a more active role and not limit themselves to acting as minority investors or technical partners.

Lenders

Local banks play a major role in arranging and financing infrastructure projects. Multilateral institutions (such as the Asian Development Bank) and other international financial institutions (such as the Japan Bank for International Cooperation, Korea Export-Import Bank, and China International Trade and Investment Corporation) also participate in financing infrastructure projects.

Public-Private Partnership Code of the Philippines

PPPs are governed by the Public-Private Partnership Code of the Philippines (Republic Act No 11966) (the “PPP Code”) and its implementing regulations (the “PPP Code IRR”). The PPP Code covers all contractual arrangements between the private sector and public sector to finance, design, construct, operate and/or maintain infrastructure or development projects and services that are typically provided by the public sector.

In a PPP arrangement, each party shares in the associated risks. These contractual arrangements include:

• joint ventures;
• toll operation agreements or any contractual arrangements involving the construction, operation, and/or maintenance of toll facilities;
• lease agreements, when such lease is a component of a PPP project; and
• build-operate-and-transfer (BOT), build-and-transfer, build-own-and-operate (BOO), build-lease-and-transfer and other variants.

PPP projects may include infrastructure or development projects, such as the following and their related facilities:

• highways and roads;
• port infrastructure and related services;
• airports;
• power generation, transmission and distribution;
• renewable energy and related infrastructure;
• telecommunications;
• IT networks and infrastructure;
• irrigation; and
• water supply, sewerage, and drainage.

PPP projects are subject to approval by different government approving bodies (each an approving body) as follows.

• National projects costing PHP15 billion (or approximately USD267 million) and more must be approved by the National Economic Development Authority (NEDA) Board upon the recommendation of the Investment Co-ordinating Committee (ICC).
• National projects costing less than PHP15 billion will be approved by the head of the Implementing Agency (IA) or its governing board, whichever applies. The ICC may still approve projects below PHP15 billion in specific instances provided by the PPP Code.
• Local PPP Projects shall be approved by the respective local legislative councils (or Sanggunians) in the case of local government units (LGUs). Prior to approval, the local development councils of the relevant LGU must confirm the local PPP projects that will be implemented by the LGU. Proposed government undertakings using national government funds for local PPP projects must be submitted to the ICC for approval, upon review and endorsement by the respective regional development councils (RDCs).

PPP projects may be awarded through public bidding (solicited projects) or by the submission of an unsolicited proposal.

Public Bidding of Solicited Projects

Public bidding may be initiated through pre-qualification or simultaneous qualification proceedings. The goal of the bidding process is to choose the private partner in an open, competitive, fair and efficient manner.

In a pre-qualification proceeding, upon approval of the parameters and terms of a PPP project, the procuring entity must publish a notice inviting prospective proponents to pre-qualify and bid. Prospective bidders have at least 15 calendar days from the last publication of the invitation to pre-qualify to prepare their pre-qualification requirements (eg, proof of due incorporation, experience or track record and financial capability). These will be evaluated by a Pre-qualification, Bids and Awards Committee (PBAC) within 20 to 30 calendar days following the opening of bids/comparative proposals. 

Alternatively, when necessary, the procuring entity may conduct a simultaneous qualification and call for the simultaneous submission of qualification requirements and bid proposals.

Unsolicited Proposals

Unsolicited proposals (USPs) for projects included in the list of PPP projects identified by the IAs and submitted to the appropriate oversight agencies (including the NEDA, the RDCs concerned, the local Sanggunian concerned, and the PPP Centre) may also be accepted from a private proponent. If the IA has already incurred any development costs for the past three years for projects subject to a USP, the private proponent must reimburse the IA in an amount not exceeding 6% of the project cost.

USPs shall be submitted to the PPP Centre. Within ten calendar days from receipt of the proposal, the PPP Centre shall determine the completeness thereof and endorse the same to the appropriate IA. The IA may reject the proposal if it is deemed not aligned with its development plans or if the IA is already developing a project with a similar scope or objective.

Within ten calendar days from receipt of the proposal, the IA may entertain similar proposals. The IA has 90 calendar days to evaluate the USP or similar proposals, as well as the qualifications of the private proponent. After such detailed evaluation, the IA may accept or reject the proposal. Where there are more than one complete USPs for the same or similar project, the IA will determine the most advantageous proposal. If the IA fails to act on a USP within the 90-day detailed evaluation period, the USP will be deemed accepted.

The IA and the private proponent of the accepted USP have 150 calendar days to negotiate the parameters, terms and conditions (PTCs) of the proposed PPP project with the assistance of the PPP Centre. If the IA and the private proponent reach a successful negotiation, the private proponent will be granted “original proponent” status (OPS), which shall be valid for one year. The IA will submit the USP, including the negotiated PTCs, for the approval of the appropriate approving body. For PPP projects wherein the approving body is the head of the IA, conferment of the OPS shall be deemed an approval of the USP.

Within seven calendar days from approval by the appropriate approving body, the IA shall publish an invitation for the submission of comparative proposals. The period for the comparative challenge shall not be less than 90 calendar days and shall not exceed one year. The original proponent shall have the right to match a proposal submitted during the comparative challenge within 30 calendar days from the date of submission by the challenger. If the original proponent is able to match the proposal of the challenger, the PPP project shall be awarded to the original proponent. Otherwise, the PPP project shall be awarded to the winning challenger.

Local PPPs

Under the Local Government Code (Republic Act No 7160) (LGC), LGUs are authorised to enter into contracts with any duly pre-qualified contractor for the financing, construction, operation and maintenance of infrastructure facilities under PPP arrangements, subject to the applicable provisions of the PPP Code and other relevant laws. Aside from the PPP Code, the LGC and the local PPP ordinances provide for the legal framework for the local PPP projects.

Some of the major issues that need to be considered when structuring PPP projects are as follows.

Contractual Arrangements

The most important factor in structuring the deal is choosing the best PPP contractual arrangement. The appropriate PPP contractual arrangement will depend on a project’s goals and coverage. Legal, tax, financial and financing needs and restrictions may influence the choice. The PPP Code outlines the typical PPP variants.

Financing of PPP Projects

Depending on the contractual arrangement, the PPP project may be solely or partially financed by the private partner. PPP projects may also be financed partly from direct government appropriations, government financial institutions, and/or from official development assistance of foreign governments.

Variations/Adjustments to Permitted Tariffs, Tolls or Charges

Under the PPP Code, the initial tolls, fares, fees, rentals and other charges or adjustments thereof shall be approved by the appropriate regulatory body. The approved initial tolls, fares, fees, rentals, and other charges shall be included in the final draft PPP contract, which – in the case of projects for public bidding – will be circulated to all bidders prior to the bid submission date set by the IA. During the implementation of the PPP project, the private partner will also have the right to apply for tolls, fares, fees, rentals and other charges or adjustments thereof.

The approval of tolls, fares, fees, rentals and other charges or adjustments thereof will be based on service quality, Key Performance Indicators (KPIs), the principles of fairness, transparency, predictability, and protection of public interest while providing for a reasonable rate of return on capital or investment by the private partner, and other stipulations in the PPP contract.

If the IA fails to implement the approved tolls, fares, fees, rentals and other charges (or adjustments thereof) as stipulated in the PPP contract, the private partner can recover the difference through measures consistent with the PPP contract and applicable laws, rules, and regulations.

Government Undertakings

The government may provide support or contributions to a private partner in the form of subsidy, guarantee on demand, and guarantee on loan repayment (among others) for the implementation of PPP projects. A subsidy is an agreement where the IA will:

• shoulder a portion of the project cost or the expenses and costs in operating or maintaining the project;
• bear a portion of capital expenditures associated with the establishment of an infrastructure or development project and services;
• contribute any property or assets to the project; and/or
• waive charges or fees relative to business permits or licences that are to be obtained for the construction of the project.

The IA may offer any government undertaking/s to a PPP project. However, for joint ventures, the total government undertakings must not exceed 50% of the project cost. An unsolicited proposal should not, as a rule, contain government undertakings.

Nationality Restrictions

Under the Constitution, public domain lands (including forests and other natural resources) are owned by the state. No natural resources may be alienated, except for agricultural land. The restrictions on the use and ownership of land are further discussed in 5.2 Licence Requirements.

Additionally, the exploration, development and utilisation of natural resources must be under the full control and supervision of the state. The state may either directly undertake such activities or enter into co-production, joint venture, or production sharing agreements with Filipino citizens or with corporations at least 60% owned by Filipino citizens. Such agreements may be for a period not exceeding 25 years, renewable for not more than 25 years, and under such terms and conditions as may be provided by law.

For public utilities, the Constitution requires that:

• the franchise or authorisation to operate public utilities must be held by Filipino citizens or corporations organised under Philippine law and at least 60% owned by Filipino citizens;
• the participation of foreign investors in the governing body of any public utility enterprise must be limited to their proportionate share in its capital; and
• all the executive and managing officers of such corporation or association must be Filipino citizens.

Moreover, any such franchise or authorisation for operation of a public utility may not exceed 50 years. Please see the following discussion on recent legislative amendments relating to the definition of “public utilities”, however.

Renewable Energy

The Renewable Energy Act (Republic Act No 9513) (the “RE Act”) establishes the framework for the accelerated development of RE resources and the development of a strategic programme to increase its utilisation.

RE resources refer to energy resources that do not have an upper limit on the total quantity to be used. Such resources are renewable on a regular basis and their renewal rate is too relatively rapid to consider availability over an indefinite period. These include biomass, solar, wind, geothermal, ocean energy, hydropower and other emerging renewable energy technologies.

Under the implementing rules of the RE Act (the “RE Rules”), RE developers must register with the Department of Energy (DOE). Registration is not possible unless the RE developer holds a valid RE service/operating contract (the “RE contract”). The RE Rules previously reserved the award of RE contracts to corporations whose capital is at least 60% owned by Filipino citizens.

Recently, the Department of Justice (DOJ) opined that the exploration, development and utilisation of certain RE resources (including solar and wind) are not covered by the foreign equity restrictions under the Constitution (see DOJ Opinion No 21, s 2022) (the “DOJ Opinion”). According to the DOJ, the term “natural resources” as used in the Constitution contemplates only those that are susceptible to appropriation and which are exhaustible in nature. The DOJ further explained that the term “all forces of potential energy”, which is reserved for Philippine nationals under the Constitution, does not include kinetic energy sources such as solar and wind energy.

The DOE issued DOE Department Circular No 2022-11-0034 (the “DOE Amendment”), amending the RE Rules and other related issuances. The DOE’s current position is that RE contracts for the exploration, development, production and utilisation of solar and wind energy may be awarded to 100% foreign-owned corporations.

However, the DOJ Opinion is not binding upon the courts. Actions of an administrative agency may be set aside by the courts if there is an error of law, lack of jurisdiction or grave abuse of discretion clearly conflicting with either the letter or the spirit of a legislative enactment. Thus, if a case is brought before the courts questioning the DOJ Opinion and the DOE Amendment, there is a risk that the Supreme Court may rule that the 60% minimum Filipino ownership requirement should still apply to RE projects.

Public Utilities

Public utilities were previously considered synonymous with public services. The Public Service Act (Commonwealth Act No 146) (PSA) provided a broad definition of public services. The PSA also provides that no “public service” may operate without possessing a valid and subsisting certificate known as the “certificate of public convenience” or “certificate of public convenience and necessity” (CPC/CPCN) issued by the relevant regulatory authority, confirming that the operation of said service and the authorisation to do business will promote the public interests in a proper and suitable manner. The PSA provides that CPCs/CPCNs may be issued only in favour of Filipino citizens or to corporations or other entities organised under Philippine law and at least 60% owned by Filipino citizens.

The recently enacted Republic Act No 11659 (the “PSA Amendment”) draws a distinction between “public utilities” and “public services”. That statute limited the term “public utilities” to a public service that operates, manages or controls for public use any of the following:

• distribution of electricity;
• transmission of electricity;
• petroleum and petroleum products pipeline transmission systems;
• water pipeline distribution systems and waste water pipeline systems, including sewerage pipeline systems;
• seaports; and
• public utility vehicles.

Consequently, it appears that the 60% minimum Filipino ownership requirement no longer applies to businesses that are not included in the new enumeration of public utilities under the PSA Amendment. Please note, however, that the 40% cap is not based solely on the PSA but primarily on Article XII of the Constitution (which cannot be amended by statute). There is some risk that the proposed amendment to the PSA may be challenged before courts on the ground that the same is unconstitutional.

There are still a number of restrictions upon foreign participation in the operation of public services, however. Under the PSA Amendment, any transaction that results in the grant of direct or indirect control to a foreigner over a public service may be suspended or prohibited by the President in the interest of national security.

The PSA Amendment also provides that businesses that are presently considered “public services” may subsequently be reclassified as “public utilities” by congressional act. The President may, upon recommendation of the NEDA, recommend to Congress the classification of a public service as a public utility on the basis of the following criteria:

• the provider regularly supplies and transmits and distributes a commodity or service of public consequence through a network to the public;
• the commodity or service is a natural monopoly that needs to be regulated when the common good so requires (a “natural monopoly” exists when the market demand for a commodity or service can be supplied by a single entity at a lower cost than by two or more entities);
• the commodity or service is necessary for the maintenance of life and occupation of the public; and
• the provider is obligated to provide adequate service to the public on demand.

Additionally, the PSA Amendment introduces the concept of “critical infrastructure” (ie, any public service that owns, uses or operates systems and assets – whether physical or virtual – so vital that the incapacity or destruction of such would have a detrimental impact on national security, including telecommunications and other such vital services as may be declared by the President). Public services that are engaged in the operation and management of “critical infrastructure” remain subject to foreign ownership restrictions – ie, foreign nationals may not own more than 50% of such entities unless their country grants reciprocal rights of ownership to Philippine nationals.

The PSA Amendment does not provide for an exclusive enumeration of what constitutes critical infrastructure. Only “telecommunications” is specifically cited as constituting critical infrastructure. Instead, the determination of which public services constitute critical infrastructure is left to the President.

Contractors’ Licence

Under the PPP Code IRR, for purposes of pre-qualification, the contractor proposed to undertake the construction of the project must be licensed and accredited by:

• the Philippine Contractors Accreditation Board (PCAB), in the case of a Filipino contractor; or
• an equivalent accreditation institution in the contractor’s country of origin, in the case of a foreign contractor.

Once the project proponent is awarded the project, such foreign contractor must also secure a licence and accreditation from the PCAB. Under the PCAB Law (Republic Act No 4566), no person or entity may engage in the construction contracting business without first obtaining a contractor’s licence from the PCAB.

The PCAB issues two types of licences:

• a Regular Licence, which authorises the licensee to engage in construction contracting within the field and scope of its licence classification(s) for as long as the licence validity is maintained; and
• a Special Licence, which authorises the licensee to engage only in the construction of a single specific undertaking or project.

Previously, the issuance of Regular Licences was generally reserved for Filipino contractors, or entities organised under Philippine law and at least 60% of whose capital is owned by Philippine nationals. Foreign contractors were only allowed to apply for and obtain Special Licences (for a specific project). The legality of this nationality restriction was recently struck down by the Supreme Court, which declared that these nationality restrictions were adopted by the PCAB in excess of its authority (as the PCAB Law does not provide for any nationality restrictions).

Due to the recent relaxation of restrictions on foreign investments in the RE sector and the operation of “public services”, it is expected that these sectors may be more active in next few years.

Based on the list of projects published by the PPP Centre, it currently appears that active sectors include transportation, roads, water, power and IT.

Security may be created over both real property and personal property.

Real Property

Real property generally refers to immovable property such as land and other real estate. (See Article 415 of the Civil Code (Republic Act No 386) for a list of the properties considered real or immovable property.)

Security interests over real properties located within the Philippines are typically documented in the form of a real estate mortgage. A registered mortgage creates a real right or lien over the property mortgaged – a right that is enforceable against the whole world.

To constitute a valid real estate mortgage, the following requisites must be present:

• the mortgage must be constituted to secure the fulfilment of a principal obligation;
• the mortgagor must be the absolute owner of the thing mortgaged;
• the mortgagor must have the free disposal of their property or they must at least be legally authorised to create the mortgage; and
• the mortgage appears in a public document that is duly recorded in the Register of Deeds where the property is located – however, if the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The Property Registration Decree (Presidential Decree No 1529) provides that a real estate mortgage must be signed by the persons executing the same and two witnesses and acknowledged before a notary public. Where the mortgage consists of two or more pages, each page must be signed on the left margin thereof by the signatories and their witnesses, and all the pages sealed with the notarial seal, and this must be stated in the acknowledgment.

Personal Property

Personal property generally refers to chattels and other movable properties. (See Articles 416 and 417 of the Civil Code for a list of the properties considered personal property.)

The Personal Property Security Act (Republic Act No 11057) (PPSA) provides for the creation, perfection, determination of priority, establishment of a centralised notice registry, and enforcement of security interests in personal property (tangible and intangible), except aircraft and ships.

Under the implementing regulations of the PPSA (the “PPSA Rules”), a security interest may be created by:

• a security agreement;
• an operating lease for not less than one year; or
• the sale of an account receivable (unless otherwise stipulated by the parties in the document of sale).

After a security interest has been created, it may be perfected by:

• registration of a notice with the registry;
• possession of the collateral by the secured creditor; or
• control of investment property and deposit account.

On perfection, a security interest becomes effective against third parties.

While the PPSA is already considered effective, the implementation of its provisions is conditioned upon the establishment and operation of a centralised and nationwide electronic registry, where security interests created under the PPSA may be registered. The Land Registration Authority (LRA) launched the Philippines Personal Property Security Registry (PPSR) on the LRA website. However, the LRA has clarified that the PPSR should not yet be considered as having been established and operational as contemplated by the PPSA. Nevertheless, the parties may agree to perfect the security interest over personal property through other modes of perfection, such as possession or control (through the execution of a control agreement).

Personal Property

Under the PPSA, a security agreement may provide for the creation of a security interest in future personal property or after-acquired assets, but the security interest in that personal property is created only when the grantor acquires rights in it or the power to encumber it.

Real Property

Future real property cannot be the object of a contract of mortgage because, under the Civil Code, the mortgagor must have absolute ownership and free disposal of the property mortgaged.

Personal Property

The fees for the registration of security interests under the PPSA will likely only be available once the PPSR is established. In the meantime, a security agreement over personal property may be registered with the Chattel Mortgage Registry in the principal place of business of the security grantor and in the place where the property is located. In such case, the fees for the registration of chattel mortgage are a base fee of PHP8,796 plus 0.45% of the amount secured in excess of PHP1.7 million.

Real Property

The fees for the registration of real estate mortgage are a base fee of PHP8,796 plus 0.45% of the amount secured in excess of PHP1.7 million.

Personal Property

Under the PPSA, the security agreement must be in writing and contain a general description of the collateral. To register the agreement in the PPSR, the relevant fees must be paid and a notice must be filed with the electronic registry. The notice must:

• identify the security interest;
• identify the grantor of the security interest;
• identify the secured creditor or an agent of the creditor; and
• describe the collateral.

The grantor of the security interest must also authorise registration of the agreement either:

• in a separate instrument in writing; or
• by signing the security agreement itself.

Real Property

The real estate mortgage must specify the subject property and be recorded in the Registry of Deeds to bind third persons.

The requirements for a valid corporate guarantee are:

• the guarantor’s articles of incorporation must expressly authorise it to guarantee obligations of third parties; and
• there must be some corporate benefit accruing to the guarantor.

Personal Property

Once the PPSR is operational, notices of security interest in personal property may be searched electronically.

Real Property

The existence of a lien over real property may be verified by conducting a search at the Register of Deeds with jurisdiction over the place where the property is located. Currently, there is no central registry of liens over real property, however.

Personal Property

Once the PPSR is operational, the effectiveness of the notice of security interest on personal property may be terminated by registering a termination notice that identifies:

• the initial notice by its registration number; and
• each secured creditor who authorises the registration of the termination notice.

Real Property

A mortgage on registered land may be discharged or cancelled by filing an instrument requesting the cancellation of the annotation with the Register of Deeds.

Personal Property

Under the PPSA, the secured creditor may enforce its security through:

• judicial process; or
• extrajudicial process, including:
1. the sale of the secured assets through public or private disposition; or
2. retention of collateral.

If judicial intervention is necessary to take possession of the collateral or if the grantor asserts that the retaking is wrongful or otherwise refuses to surrender possession, the secured creditor may file an action for replevin for the recovery of the collateral and ask the court to allow it to retain the collateral during the pendency of the action.

Real Property

Upon default by a debtor that has secured its obligations by a mortgage on real properties, the creditor is entitled to foreclose the real estate mortgage, either judicially (by filing a case in court) or extrajudicially (when the document of mortgage contains a stipulation irrevocably appointing the creditor as the debtor’s attorney-in-fact to sell the mortgaged property upon default).

The Supreme Court has recognised that parties to a contract may validly stipulate that such contract shall be governed by foreign law, provided that the law chosen does not violate Philippine law or public policy and bears a substantive relationship to the transaction.

However, a Philippine court may – in disregard of any provision of such law – apply the laws of the Philippines:

• with regard to the authority and capacity of a Philippine party to enter into and perform the contract;
• in determining compliance of the contract with applicable Philippine governmental approvals;
• in determining compliance of the contract with the formalities required under Philippine law for the conveyance of – and the creation of – security interests in property situated in the Philippines; and
• if it finds that the foreign law has no substantial connection with the transactions or insofar as Philippine law may have a closer connection to the transactions contemplated therein.

Further, under the rules of court, there is no judicial notice of any foreign law. Like any other fact, it must be pleaded and proved. If the foreign law is not properly pleaded or proved, the court will assume that the foreign law is the same as Philippine law.

Foreign Judgment

A judgment of a foreign court of competent jurisdiction is considered conclusive in the case of a judgment upon a specific thing and is considered presumptive evidence of a right as between the parties and their successors in interest in the case of a judgment against a person. However, the foreign judgment may be repelled by evidence of want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact.

Foreign Arbitral Award

The Philippines is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”). Thus, the Philippines applies the provisions of the New York Convention to the recognition and enforcement of foreign arbitral awards, and such arbitral awards will be recognised and enforced by Philippine courts – subject to the defences against recognition and enforcement of foreign arbitral awards set out in Article V of the New York Convention.

A foreign arbitral award, when confirmed by a local trial court, will be immediately executory and enforced in the same manner as final and executory decisions of local courts.

See 4.2 Restrictions on the Granting of Security.

Under the Manual of Regulations on Foreign Exchange Transactions (MORFXT) of the Central Bank of the Philippines (Bangko Sentral ng Pilipinas, or BSP), foreign loans are loans provided either by:

• local banks in foreign currency; or
• non-resident creditors (regardless of currency of denomination).

Generally, foreign loans that are obtained by or guaranteed by the public sector require prior BSP approval (ie, the terms of the loans must be approved by the BSP before the loan agreements are signed). In contrast, private sector foreign loans that are not publicly guaranteed do not need the prior approval of the BSP. However, note that each disbursement under both types of the foregoing loans should be registered with the BSP.

The non-registration (or where applicable, non-approval) of such loans or disbursements does not affect the legality or validity of the loan. Approval and registration are required only so that the payments of interest and principal on the loan will be eligible for servicing using foreign exchange purchased from the Philippine banking system.

Note that in the imminence of or during a foreign exchange crisis or in times of national emergency, the Monetary Board – with the approval of the President – may temporarily restrict sales of foreign exchange and gold by the BSP and require any resident to deliver any foreign exchange obtained by such person to the BSP (or to any bank or agent designated by the BSP) at the then-effective exchange rate or rates.

Under the Foreign Bank Liberalisation Act (Republic Act No. 10641), a foreign bank can participate in foreclosure sales of real property mortgaged in its favour, subject to the following limitations:

• the possession must be limited to five years;
• the property title must not be transferred to it; and
• within the five-year period, it must transfer its rights to a qualified Philippine national. In case a foreign bank fails to transfer the property, it will be liable to pay half of 1% per annum of the foreclosure price until it transfers the property.

In relation to shares of stock, generally, a security interest over shares of stock in a Philippine corporation may be created in favour of a foreign lender. However, if the Philippine corporation is subject to a foreign equity limitation, the foreign lender can acquire and take title to the shares only to the extent permitted under the applicable foreign equity limitation.

Generally, a foreign-owned entity will need to obtain a licence from the Securities and Exchange Commission (SEC) as a branch or set up a local entity. In the case of an establishment of a branch office or a domestic corporation that will have more than 40% foreign ownership (in instances when it is allowed), there is a minimum capitalisation requirement of USD200,000.

The Foreign Investments Act (Republic Act No 7042) (FIA) mandates the formulation of the Foreign Investment Negative List (FINL), which is a list of areas of economic activity whose foreign ownership is limited to a certain level of equity (generally 40%). The FINL contains (among others):

• List A, which enumerates the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws; and
• List B, which enumerates the areas of activities where foreign ownership is limited for reasons of security, defence, risk to health and morals, and protection of SMEs.

Certain requirements apply if the borrower will purchase foreign exchange from the Philippine banking system to pay the loan. The MORFXT requires prior BSP approval for the following:

• prepayment of public sector/publicly guaranteed private sector loans; and
• payment by the public sector:
1. for loans that are past due more than one month; and
2. under the guarantee covering publicly guaranteed private sector loans that are past due.

For private sector loans that are not publicly guaranteed, the borrower is required to submit a notice to the BSP at least one month prior to the target date of purchase of foreign exchange.

There are no Philippine restrictions upon the maintenance by Philippine companies of foreign exchange accounts offshore.

PPP contracts must be submitted to the PPP Centre for monitoring of implementation.

As discussed in 1.3 Structuring the Deal, all public domain lands (including forests and other natural resources) are owned by the state. No natural resources may be alienated, except for agricultural land.

Public domain lands are classified into agricultural, forest or timber, mineral, and national parks. Only agricultural land is alienable. Note that there are special rules applicable for the use of forest land, lands designated as protected areas, foreshore land, marshy land, and land covered with water bordering upon shores or riverbanks.

Public land remains part of the inalienable land of the public domain unless the state is shown to have reclassified or alienated it to private persons. A positive act by the Philippine government is necessary to enable such reclassification.

Public Agricultural Land

Alienable and disposable agricultural land of the public domain may be leased:

• by private corporations at least 60% owned by Filipino citizens for a period not exceeding 25 years, up to a maximum of 1,000 hectares; or
• by individual Filipino citizens, up to a maximum of 500 hectares.

Private Land

No private land may be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold public domain lands.

By way of an exception to the rule proscribing foreign ownership of private lands, individual foreigners may own private land if such foreigners:

• acquired the land by hereditary succession; or
• were previously natural-born citizens of the Philippines who have lost their citizenship, subject to a maximum area of 5,000 square metres in the case of urban land (or three hectares in the case of rural land to be used by them for business or other purposes).

Under Presidential Decree No 471, a lease of land to non-Philippine nationals may not exceed a term of 25 years (extendible for another 25 years). By way of exception, the Investors’ Lease Act (Republic Act No 7652) (ILA) and its implementing regulations provide that a foreign investor may lease private lands for not more than 50 years (renewable once for another 25 years), provided that:

• the leased area will be used solely for the purpose of the investment; and
• the leased premises must comprise such area as may reasonably be required for the purpose of the investment, subject to the Comprehensive Agrarian Reform Law (Republic Act No 6657) and the LGC.

This type of lease will be authorised only for purposes of – and in connection with – the establishment of industrial estates, factories, assembly or processing plants, agro-industrial enterprises, land development for tourism, industrial or commercial use and/or other similar priority-productive endeavours as determined by the Philippine Board of Investments.

Water Rights

Under Presidential Decree No 1067 (the “Water Code”), all water belongs to the state, and cannot be the subject of acquisition. However, the state may allow the use of water by administrative concession, which is under the regulation of the National Water Resources Board (NWRB).

Under the implementing regulations of the Water Code, only Philippine nationals or entities organised under Philippine law and at least 60% of whose capital is owned by Philippine nationals may file an application for a water permit.

Agent and trust concepts are recognised in the Philippines. The Civil Code provides that in an agency contract, a person binds themselves to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.

The Civil Code also recognises the concept of trusts. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary.

The BSP Manual of Regulations for Banks defines the trust business as any activity resulting from a trustor-trustee relationship involving the appointment of a trustee by a trustor for the administration and management of funds or properties of the trustor by the trustee for the benefit or advantage of the trustor or of others called beneficiaries. Banks which wish to engage in the business of a trust entity must first obtain authority to do so from the BSP.

In certain financing agreements, especially when the project loans are syndicated, the syndicate appoints a facility and/or paying agent to exercise powers delegated by the syndicate under the loan documents. The duties of the facility agent and paying agent under the loan documents are usually ministerial and administrative in nature. Such duties include receiving documents such as financial statements, notices, reports or other materials from the borrower. However, actions that require the exercise of discretion are referred to and require the approval of the syndicate.

PPP contracts generally allow concessionaires to assign – with the prior consent of the government – their revenues and receivables to the lender or, if the project loans are syndicated, to a common security trustee appointed by the syndicate of lenders to act for and on their behalf. Duties of the security trustee also include safe-keeping documents related to the loan and the project.

Preference of Credits

Liens on specific property of the borrower have preference on those assets and exclude all others to the extent of the value of the property to which the preference refers. If there are two or more credits with respect to the same movable or immovable property, they are to be satisfied in accordance with the order of preference set out in the Civil Code and other relevant statutes.

In satisfying several preferred credits that are registered with the Register of Deeds, the rule is that the credits take priority in the same order of their registration.

Under the PPSA, the priority of security interests and liens in the same collateral will, in general, be determined according to the time of registration of a notice or perfection by other means, without regard to the order of creation of the security interests and liens. There are also special rules on priority on specific types of property under the PPSA Rules.

Subordination of Debt

Parties to a contract are free to agree on such stipulations as they deem fit, provided that the contractual clauses in question are not contrary to law, morals, or public policy. An agreement that the debt will be subordinated to other claims is generally consistent with local law and, hence, should be valid.

A project company that engages in business in the Philippines will need to obtain a licence to do so, either by incorporating as a local company or establishing a Philippine branch with the approval of the SEC. Although there are a few projects in which the local project company is organised as a limited partnership, most project companies are organised as stock corporations.

In addition, with regard to projects to be implemented under a contractual arrangement that requires a public utility franchise for its operation, the project proponent must be duly registered with the SEC and at least 60% Filipino-owned, or ‒ if a consortium of local, foreign, or local and foreign firms ‒ Filipinos must have at least 60% interest in said consortium.

For projects that do not require a public utility franchise for its operation, the project proponent may be Filipino or foreign-owned, subject to other nationality restrictions as discussed in 1.3 Structuring the Deal and 5.2 Licence Requirements.

The general law on insolvency that applies to Philippine corporations is the Financial Rehabilitation and Insolvency Act (Republic Act No 10142) (FRIA).

A court-supervised rehabilitation proceeding will result in the issuance of a Commencement Order, which will (among other things):

• consolidate the resolution of all legal proceedings by and against the borrower to the rehabilitation court; and
• include a stay order, which will generally suspend the enforcement of any claim against the borrower and prohibit the borrower from making any payment of liabilities outstanding as of the commencement date.

The lien of a lender holding a security interest will not be impaired, except that the right to enforce said lien may be suspended during the term of the stay order. The court, upon recommendation of the rehabilitation receiver, may allow a secured creditor to enforce its security if said property is not necessary for the rehabilitation of the borrower.

Notably, a transaction that was entered into by the debtor with intent to defraud may be rescinded or declared null and void, even if it occurred prior to the issuance of the commencement order. Certain transactions are presumed to have been entered into with fraudulent intent (eg, those which involve an accelerated payment of a claim to a creditor within 90 days prior to the issuance of the commencement order).

Please see 5.4 Competing Security Interests. Generally, the rule is first in time, first in right – ie, credits take priority in the same order in which they were perfected as against third parties.

However, there are rules for determining priority for specific types of personal properties.

Please see 6.2 Impact of Insolvency Services.

The FRIA does not apply to banks, insurance companies, pre-need companies and national and local government agencies or units.

The Insurance Code prohibits Philippine corporations from procuring or obtaining insurance from a foreign insurance company that is not authorised to do insurance business in the Philippines.

There are no restrictions on foreign creditors receiving proceeds from insurance policies over project assets.

Generally, gross income derived by non-resident foreign corporations from sources within the Philippines (such as principal or interest payments) will be subject to a tax equal to 25%, subject to tax treaty relief.

A loan obtained by local companies is subject to documentary stamp taxes (DST) at the rate of 0.75% of the issue price of the loan agreement or debt instrument. A mortgage or pledge is subject to DST at the rate of 0.4% of the amount secured. Under local rules and practice, if the loan and security arrangements are integral parts of the same transaction, only one DST (at the higher rate) applies.

A loan agreement or debt instrument without the proof of payment of DST cannot be notarised and cannot be admitted or used in evidence in any court.

Rules on Interest

The Civil Code provides that without an express written stipulation to pay interest, no interest may be collected. However, this rule does not apply to compensatory interest collected as indemnity for damages when there is delay in discharging an obligation consisting of the payment of a sum or money. In such cases, even if there is no stipulation on interest, the creditor is entitled to collect legal interest at the rate of 6% per annum.

Although the parties may generally agree on the rate of interest, the courts may reduce such rate if it is found to be unconscionable or contrary to morals or public policy. Usurious interest stipulations may be declared void. Although currently the BSP has not prescribed a maximum interest rate, the Supreme Court has struck down interest rates for being excessive, unconscionable and exorbitant – and thus contrary to public policy, depending on the circumstances (eg, an interest rate of 17% per annum plus penalty interest of 12% per annum was declared void).

The Supreme Court’s guidelines for payment of interest in the concept of damages (ie, default interest) are as follows.

• The compensatory interest due shall be that which is stipulated by the parties in writing, provided it is not unconscionable. In the absence of a stipulated conventional interest rate, or if these rates are unconscionable, the compensatory interest shall be the prevailing legal interest rate (currently 6% per annum). Compensatory interest, in the absence of a stipulated reckoning date, shall be computed from default (ie, from extrajudicial or judicial demand) until full payment is made.
• Interest on stipulated interest shall accrue at the stipulated interest rate (compounded interest) from the stipulated reckoning point or –in the absence thereof – from extrajudicial or judicial demand until full payment, provided it is not unconscionable. In the absence of a stipulated compounded interest rate or if this rate is unconscionable, the prevailing legal interest rate shall apply from the time of judicial demand until full payment is made.

Other Protections Afforded to a Borrower

The following other protections are afforded to a borrower under Philippine law.

• There is no criminal liability for failure to pay a loan.
• Escalation clauses must not solely depend upon the will of the debtor but must be based on reasonable and valid grounds.
• A lender must furnish the borrower, prior to the consummation of the loan transaction, a clear statement in writing that discloses the true cost of borrowing (ie, itemised charges that allow the borrower to determine the effective cost of the credit/loan transaction).

Project agreements are typically governed by Philippine law and must comply with the requirements under the PPP Code and the PPP Code IRR.

Typically, financing agreements involving a cross-border element (eg, involving foreign lenders) are governed by New York or English law. However, the security agreements over property in the Philippines are governed by Philippine law, as required by the Civil Code.

Where the financing is provided by Philippine banks (or local branches of foreign banks) and/or is denominated in local currency, the agreements are typically governed by Philippine law.

The Philippines adheres to the rule of lex situs – ie, property is subject to the law of the country where it is situated. Thus, a security document over properties located in the Philippines will be governed by Philippine law even if the facility agreement is governed by foreign law.