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Miguel-Rañola Forensic Solutions
Introduction Corporatization is the transformation of a public entity into one that has the structure and attributes of a private corporation, such as a board of directors, officers, and shareholders. The objective is for the government to retain ownership of the entity, and at the same time ensure that goods and/ or services are delivered efficiently — a goal that is sometimes difficult to attain in a government bureaucracy.
Corporatization has been the policy of the People’s Republic of China and was used in New Zealand and in most states of Australia in the reform of their electricity markets. Corporatization was likewise used by many other countries and industries like the Dutch water supply companies.i In the United States of America, municipalities and counties form local government corporations for purposes of funding transportation, water and sewer infrastructure, economic development ventures, and other projects that will benefit the public. Corporatization has not, however, gained a foothold in the Philippines despite its inherent value as a form of public-private partnership (PPP). As a background, PPP is currently undertaken under the following frameworks:ii
1. Build-Operate-Transfer (BOT) - A contractual arrangement whereby the project proponent undertakes the construction and financing of a given infrastructure facility, and the subsequent 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 those 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. BOT arrangements are undertaken under Republic Act No. 6957, as amended by Republic Act No. 7718, otherwise known as the BOT Law;
2. Procurement - The acquisition of goods, consulting services, and the contracting for infrastructure projects by a procuring entity is called
On the other hand. assets (including equipment. 301 (1987). limited. not the GPRA but Executive Order No. 423 issued by then President Gloria MacapagalArroyo. In the case of joint ventures undertaken under the 2008 NEDA JV Guidelines. 9184. and to enter into such lease contracts without need of prior approval from higher authorities. when the government is the lessee. and eventually transferring ownership of the investment activity to the private sector under competitive market conditions. there is no statute governing joint ventures.When the government leases out its property as lessor. Republic Act No. GPRA provisions on negotiated procurement apply. Joint Venture (JV) . the National Economic Planning Agency (NEDA) issued the 2008 JV Guidelines and Procedures for Entering into Joint Venture Agreements between Government and Private Entities (2008 NEDA JV Guidelines) in consultation with the Government Procurement Policy Board. as mandated by Executive Order No. The applicable law is. However. or special goal or purpose. 3.” It also includes lease of goods and real estate. services. and a government entity (or group of government entities) on the other. Other than the general law on partnerships. 4. Parties to a JV share risks to jointly undertake an investment activity to accomplish a specific. subject to compliance with the uniform standards established by the Department of Public Works and Highways and to the audit jurisdiction of the Commission on Audit (COA). or the Government Procurement Reform Act (GPRA). with the end view of facilitating private sector initiative in a particular industry or sector. At present. land.A contractual arrangement whereby two or more parties pool their assets in undertaking a particular activity and agree to share in profits and losses. is the principal law on procurement. or a combination of all these. The lessee-government agency must conduct a cost-benefit analysis to assess the feasibility of entering into a . thus. or intellectual property). which contribute money/ capital. Lease . it does not disburse public funds to “procure.” but instead receives money as rentals.“procurement. there are no JV guidelines issued by the National Government applicable to local government units. Heads of agencies shall have the authority to determine the reasonableness of the terms of the lease and the rental rates thereof. it is a private sector entity (or group of private sector entities) on one hand.
as follows: (a) public auction. maintaining. the procuring entity shall determine the reasonableness of the proposed rate using a comparative price analysis. In the case of a proposed lease of a vacant lot or other land spaces. defines a “Concession Contract” as the award by the government to a qualified private entity of the responsibility for financing. 6. 89-296 dated January 27.An agreement between the state and a private corporation. 1989. Republic Act No.iii . 5. and operations from other government operations. otherwise known as the Electric Power Industry Reform Act. and 3. or withdrawing of an authority. (c) barter. business. or title. operating. 2. finances. The transformation from a public entity to one with the commercial orientation of a private company would typically include three ring-fencing activities: 1. The guiding principle of corporatization is the intent to capture the advantages of a privately run company — including efficiency. and (e) destruction or condemnation. wherein the state grants the private corporation the privilege of operating a public service.lease contract for privately-owned real estate as against purchasing or leasing government-owned real estate. Establishment of a distinct legal identity for the company under which the government’s role is clearly identified as owner. 9136. or government function. expanding. and managing specific government-owned assets. The government entity must also determine the reasonableness of the rate using either the computation based on the observed depreciation or straight-line depreciation. (d) transfer to other government agencies. productivity. or exercising a right which would otherwise be exclusive to the government. power.A manner or scheme of taking away. Concession . (b) sale thru negotiation. and financial sustainability —while retaining government accountability. Segregation of the company’s assets. depriving. The modes of disposition or divestment are enumerated in COA Circular No. Development of a commercial orientation and managerial independence while remaining accountable to the government or electorate. Disposition or Divestment .
The Province of Cebu formed CPVDC as a subsidiary corporation with an authorized capital stock of P1 Billion. records management.). When CPVDC started as a joint venture. school construction and maintenance. utilization. On November 29.2% partnership between the Province of Cebu and Ayala Land. tourism services. The company was registered with the Securities and Exchange Commission on August 2. and income-generating services such as parking buildings. and enhance profitability. 334 to provide and maintain an adequate and stable supply of oil. EDC became a private corporation under Red Vulcan Holdings Corporation after the successful sale of 60% of its controlling stakes. 2007. road maintenance and repair. Cebu Property Ventures Development Corporation (CPVDC) started as a joint venture corporation between the Province of Cebu and Ayala Land. EDC was incorporated as a subsidiary of PNOC to undertake the exploration.g.8% to 25. administrative human resource functions (e. In 1976. The Energy Development Corporation (EDC) can be cited as an example of successful corporatization undertaken by the national government. and marketing of geothermal and other viable energy sources in the country. training. 1973 through Presidential Decree No. The Province of Cebu contributed patrimonial properties as its equity contribution . In 2006. commissioning geothermal power plants and eventually entering the power generation business. etc. The Philippine National Oil Company (PNOC) was created on November 9. payroll services. benefits administration. its ownership profile showed a 74.. including convention center management. provide better services to the public. and conducted the flotation of Cebu Equity Bond Units and the Secondary Share Sale Program via a public offering through the local stock exchanges. These may include proprietary functions and services such as accounting and financial services. it launched its initial public offering (IPO) and was given the Bull Run Award by the Philippine Stock Exchange for launching the biggest IPO of 2006. Corporatization provides an avenue for private sector investment in these areas while at the same time ensuring or at least mitigating the risks inherent in private sector involvement in public affairs. recruitment/hiring.iv In the local government sphere.Scope and Corporatization Precedents There are many areas where corporatization may be explored to increase efficiencies. Inc. 1990 and started commercial operations on September 1. development. 1996. It can be undertaken both by the national government and by local government units. library services. For more than three decades. information technology. Inc. it has undertaken its mandate to lessen the country’s dependence on imported fuel.
initially contributed P63 Million as the initial 25% paid-up subscription for its 250 million shares. EDC and CPVDC. whether as a subsidiary. 1986 provided precedent for the practice that the creation of a new government corporation other than by special law may only be done with the approval of the President. and to acquire. with the understanding that the full payment would be called by the Board when the properties offered by the Province would be free and clear of occupants. Concededly.v Corporatization may be undertaken by national government agencies. however. The company is now 76% owned by Cebu Holdings. In addition. Letter of Instructions No. Incidentally. or otherwise dispose of real or personal property held by them in their proprietary capacity. for instance. . and to apply their resources and assets for productive. corporatization is also understood to be the process of diversifying financing sources and bridging the funding gap by involving private capital. program objectives and priorities. Evidently. For its part. In this sense. the government sector).8% ownership share). In the case of local government units. however. should be limited because of budgetary constraints. alienate. were incorporated as stock corporations registered with the Securities and Exchange Commission. For purposes of this paper. 1520 issued by President Ferdinand Marcos on February 4. Inc. encumber. government-owned and -controlled corporations (GOCC). to create their own sources of revenue and to allocate their resources in accordance with their own priorities. and thus ready for development. Corporatization The creation of a corporation other than by special charter or law is accomplished through incorporation under the Corporation Code of the Philippines. corporatization shall refer to a distinct PPP model entailing the creation of an entity separate from the national government or local government unit. another GOCC. there is a sentiment that the creation of new government corporations. including the 23-hectare site of what was formerly the Lahug Airport. and local government units (collectively. the creation of a new corporation. all the PPP variations discussed above may be considered as corporatization modalities. develop. or a quasimunicipal corporation in the case of local government units. Inc. lease. (CHI) after a successful tender offering undertaken in 1995.(comprising its 74. Section 18 of the Local Government Code of 1991 (LGC) expressly empowers them to establish an organization that shall be responsible for the efficient and effective implementation of their development plans. that corporatization as proposed in this paper enhances private sector participation and minimizes the government’s financial exposure in the areas where it is undertaken. It is submitted. should be by authority of law. Ayala Land. particularly those involved in entrepreneurial or proprietary activities.
equipment. but also the right to form private corporations to further their development goals. It should also be mentioned that no law or regulation specifically prohibits a local government unit. The government sector may take a majority or minority position depending on its contribution which may consist of money. to borrow money or to invest funds. This is consistent with the constitutional mandates of local autonomy and fiscal autonomy. The people admittedly lose a direct control in the issue of services. and specify the rights and obligations of the incorporators. This is intended to protect the government sector’s (other) assets from being used to discharge the liabilities of the corporation. It allows for governance by a board of directors. An ordinance enacted in accordance with the provisions of the LGC is therefore indispensable. by itself or together with other local government units. The LGC grants local government units full autonomy in the exercise of their proprietary functions and in the management of their economic enterprises. Incorporation also grants the entity formed the right to enter into contracts. consisting wholly or partially of the government sector itself. local government units are also increasingly asserting that local fiscal autonomy encompasses more than just the basic tenets of allowing local government units to create their own sources of revenue and to allocate their resources according to their priorities. or welfare purposes. corporatization does not limit the equity contribution of the government sector to less than fifty percent (50%) of the outstanding capital stock of the corporation. GOCC.developmental. land. directors. and adopting its articles of incorporation and by-laws. As the national policy veers more and more towards encouraging publicprivate partnerships in local development undertakings. in the exercise or in furtherance of their governmental or proprietary powers and functions and thereby ensure their development into self-reliant communities and active participants in the attainment of national goals. from forming a corporation in accordance with the Corporation Code. working . may provide for sources of funds or capital contribution. rates. The ordinance authorizing the creation of the corporation. to sue and be sued. A major struggle of corporatization is the view that it is a relinquishment of public control in favor of the private corporation. It allows the government sector to limit its liability up to the extent of its investment in the capital of the corporation. or any other thing or service of value. or local government unit. Incorporation imbues the new or offspring corporation with a legal personality separate from the parent national government agency. and shareholders vis-à-vis the local government unit. terms. which shall be accountable to the shareholders. The authority to create a corporation and to provide for its capitalization is evidently vested in the local legislative council. standards. intellectual property. In contrast with a joint venture undertaken under the 2008 NEDA JV Guidelines. and to own property.
and goals. e. technical. purposes. the government sector has to perform a delicate balancing act between its function as regulator of private business and as shareholder thereof. since such issues are being decided by the directors and corporate officers in the boardroom. because the structure allows the government to divest ownership of its shareholdings. corporatization can increase the value of the government sector’s share in the corporation. efficiency. with the use of indicators such as profitability. Performance is evaluated in the same way that private companies evaluate their performance. and provisions for independent audit. and public accountability. As a regulator. roles which have inherently different standards. corporations may also establish supervisory boards. As a shareholder. The presence of the board of directors and officers reduces political interference and intervention in the management of the corporation’s affairs. and performance expectations. etc. Corporate governance ensures the value and sustainability of the corporation through sound financial management. financial. transparency in the conduct of the corporation’s affairs. obligations.. to structure the corporation in a way that assures clarity in the responsibilities.g.vi Corporatization benefits the private sector through the opportunity to profit from its investment. transparent accounting processes. as in the case of CPVDC. It is important. legal. reducing the Province of Cebu’s ownership to 8. However. which undertook a public offering of its shares shortly after incorporation. The corporation may be structured to allow the government sector to participate in its management and operations over a period of time. marketing. as in the case of EDC.conditions. and investment. therefore. it hopes to maximize profits and dividends. Disposition/Eventual Privatization Corporatization is often viewed as a preliminary step to privatization.vii . It also benefits the government because it bridges the funding gap (in undertaking projects for which it does not have sufficient resources) by inviting private capital initially through equity participation. More significantly. and research and development departments which further contribute to the improvement of corporate governance. or initial public offering (IPO). often translating to the highest quality of goods or services at the lowest cost to the people.28%. It may also allow for the disposition of the government sector’s shares through public bidding. its objective is to ensure the public good. tender offer. because of the increased efficiency and profitability attendant to good corporate governance. Apart from the board of directors and officers.. enabling it to generate larger revenues from eventual privatization.
Alberto C. law reform. Forensic Law and Policy Strategies. He is an advocate of PPP. Miguel-Rañola is a former State Solicitor of the Office of the Solicitor General and Court Attorney of the Supreme Court. He teaches Law on Public Corporations. She is an expert on banking laws. Solicitor General and Government Corporate Counsel. administrative. Faye Josephine R. Inc. . BOT and JV: A Legal Annotation. giving our clients a crucial advantage in navigating executive. Agra was the immediate past Secretary of Justice. Law on Public Officers and Law on Local Governments.This is the position of Forensic Solutions. or Forensic Solutions is a think tank offering services in the fields of policy. Forensic Soluitions recently published a book on Knowing PPP. The group provides forensic study and viable policy options. legislative and judicial inquiries. Administrative Law. advocacy and governance.
and Jiaping Qiu. iv v http://www. Perez-Alabanza. by Varouj A. BOT.pwrf. Ying Ge.aspx. 2011. and Fong. June 2006.reachinformation. and JV--A Legal Annotation. iii United States Agency for International Development (USAID). 2011. Social Policy and Development Programme Paper Number 27.finance.com/investor-relations/ownership-structure. last viewed on February 18. Aivazian. last viewed on February 18. last viewed on February 18. Miguel-Rañola. People’s Republic of China Toll Roads Corporatization Strategy Toward Better Governance. last viewed on February 15.cpvdc. Ortilla-Mallari. Baltazar. Neither Public Nor Private--Unpacking the Johannesburg Water Corporatization Model.i R References: http://www.com/corporatization. 2011. by Xiaohong Yang and John Lee. 2004.energy. Asian Development Bank.ph/about-edc/milestones.com. Knowing PPP.com.pdf. November 2006. by Laila Smith. vii Journal of Corporate Finance. Bruce. www. 2011. last viewed on February 18. Can corporatization improve the performance of state-owned enterprises even without privatization?.cpvdc. 2008. vi http://www. 2011.info/Downloads/References/Contractualization/Good%20practices%20in%20public %20water%20utility%20corporatization. United Nations Research Institute for Social Development. . Good Practices in Public Water Utility Corporatization. http://www. ii Agra. 2011.
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