INSIDER VIEW | What the private sector fears most in long-term contracts with gov’t

Every time I lecture on Public-Private Partnerships (PPPs), whether to private sector players, government agencies, lawyers, or other professionals, I always ask this question: What do you fear most when entering into long-term contracts with the government?

Not surprisingly —but alarmingly — I receive the same set of responses:

• “Contracts are cancelled.”
• “The new head of the agency will change the policies.”
• “The agency will not pay.”
• “The rate adjustment under the contract will not be implemented.”

After the audience shares their answers and recounts their experiences, I point out that there is a technical term for this fear: Successor risk — so prevalent and well-recognized that it has a universally-accepted name.

Who in the government is responsible for this risk?

Successor risk is one of about 50 identified PPP risks, and one of about 10 classified as political risks. It can arise in PPP projects implemented by national government agencies (NGAs), government-owned and -controlled corporations (GOCCs), government instrumentalities with corporate powers (GICPs), and local government units (LGUs).

What is successor risk?

According to Hardcastle and Boothroyd, successor risk is “brought about by change of policies by the successor administration.” 

This may involve the unilateral rescission or modification of a signed PPP contract, disruption of ongoing projects, non-recognition of contractual obligations entered into by a previous administration, material changes in project parameters, a shift in development priorities, delays in approvals and payments, or outright non-payment of subsidies.

While changes to PPP contracts are expected over time, they must always be mutually agreed upon. Any unilateral change without the consent of the private sector constitutes impairment of contracts, which is prohibited by the Constitution.

When does this risk arise?

This risk is foreseeable, as public officials serve terms set by law. The president has a six-year term; Cabinet officials serve at the president’s pleasure; GOCC and GICP officials have one-year terms; and LGU officials serve for three years.

The newly elected officials from the May 12 elections will begin their terms this June 30. We will soon witness, especially at the provincial, city, and municipal levels, whether successor risk is a real threat or one that can be effectively mitigated.

How do we address this fear?

There are five key ways to future-proof a PPP contract and project:

•  The PPP must be for the People (PPPP) aimed at improving quality of life.
•  Inclusion of a Material Adverse Government Action (MAGA) clause in the PPP contract.
•  People’s participation where the people and communities co-create and co-own the PPP project.
•  Strict observance of relevant PPP laws, policies and procedures.
•  Secure all necessary regulatory approvals upfront.

The risk of adverse changes brought about by a new president, secretary, administrator, CEO, governor, or mayor must not dissuade us from pursuing PPPs. 

Genuine and sustainable development cannot be achieved without the private sector. By anticipating and mitigating successor risk, we can ensure that PPPs continue to thrive regardless of who holds public office.