ANNEX B

21 August 2007

Hon. Manny B. Villar

Senate President, Senate of the Philippines

Subject: Request for Legislation on Mandatory Implementation of the BOT Law

Dear Senate President Villar:

Ive heard your reaction to a proposal to grant emergency power to President Arroyo so she could
respond to the looming energy and water crisis. Your prescription to provide the required budget is
correct but is easier said than done because of several competing needs and the heavy leakage both
in our tax collection system as well as in the implementation of government funded projects.

An alternative solution is through a truly honest and competitive bidding of BOT contracts for
power and water resources development projects. President Ramos could have been successful in
addressing the power crisis of the last decade if the contracts were awarded without the emergency
power that is conducive to corruption.

BOT contract has several advantages as shown in the table below:

Contracting
Advantages Disadvantages
Options
No capital outlay/disbursement from
government thus grease money is not
BOT Contract needed.
(Contractor Contractor has incentive to design projects
designs, builds optimally, (i.e. minimize bid tariff) in order to NONE
and operates win the bidding.
projects) Contractor has self-compelling reason to
ensure quality of design and construction
because O&M is to his account.
Conducive to corruption because
government will be disbursing
money, percentage of which is
Traditional
traditional SOP.
Construction
Consultants have no incentive to
Contract
NONE design projects optimally. Some may
with Design
even oversize projects to maximize
contracted
fee.
separately
Contractors have no incentive to
strictly follow project specifications
because it will reduce their profit.

Despite the advantages of BOT contracts and the disadvantages of the traditional contracting, a loan
for the implementation of Laiban Dam Project via the traditional scheme is being negotiated with a
country noted in corrupting government officials and in delivering substandard projects.

In concession type contracts, a concessionaire who has a construction business would prefer the
traditional contracting because this would give his construction business a chance to earn more than

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Letter to Senate President Villar dated 21 August 2007 page 1 of 2
 ANNEX B

what is allowed by the regulated concession contract. This conflict of interest becomes doubly
immoral when the cost of gold-plated projects is passed on to the consumers.

Financial consultants of ADB and the World Bank are not promoting BOT contracts because they
prefer extending loans to government with automatic appropriation for servicing loans and
providing sovereign guarantee to the extent of raising taxes if the oversized project could not pay for
itself. Some prefer the traditional scheme so they or their friends can be employed either by the
banks or the implementing government agency.

With the above observations, I humbly request the Senate to pass a bill mandating all government
agencies and concessionaires of public utilities to procure power and water supply thru the BOT
contractual scheme. To facilitate the procurement of BOT contracts, the following actions are
suggested:

1. Revisit the IRR of the BOT Law to relax the requirements and shorten the processing time.
Minimum internal rate of return should be applied only to government subsidy, if ever it is
needed to attract investors. The cap on internal rate of return should be applied only in case
of negotiation with a lone bidder in order to minimize water or power tariff.

2. Water rights should be considered automatically granted once a BOT contract is awarded,
subject only to notice to NWRB prior to bidding to ensure that no prior grant of water rights
is being unduly curtailed.

3. The DENR should help in expediting the issuance of the ECC rather than making it hard to
press for grease money.

4. Means/incentives for pooling the capital resources of some billionaires/millionaires of the

country should be crafted to finance power and water supply projects so that the revenues
could be flowed back into the economy rather than being siphoned out. If local capital is not
enough, financing can be sourced from foreign banks through competitive bidding not
through negotiated tied loans as what is being done now. [Tied loans should be prohibited
by law as it is a way of perpetuating our economic dependency].

The above suggestions will facilitate the construction of Laiban Dam, which is very vital not only in
solving the looming water crisis but as a risk mitigating measure if Angat Dam breaks. To realize the
risk that we are facing, one should know that Angat Dam which supplies 97% of the water demand
of the economic hub of the Philippines has been reported to be on a fault line and was designed
below engineering standard. To avoid repeating the same mistake, Laiban Dam should be procured
through the BOT scheme because under a BOT contract, the contractor is self-compelled to ensure
the design and construction quality since the cost of O&M, including repair or reconstruction is to his
account and could not be passed on to the customers.

Very truly yours,

Bienvenido G. Gaurino

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Letter to Senate President Villar dated 21 August 2007 page 2 of 2