SECTION

three

Public Buildings
58 V OLUME 15: E XAMPLES OF S UCCESSFUL P UBLIC - PRIVATE PARTNERSHIPS
6 Public Market,
Mandaluyong City,
Philippines

PROJECT SUMMARY

Manila, the capital of the Philippines, has the eighteenth largest

metropolitan area in the world, which includes 15 cities and 2
municipalities. Mandaluyong City (fig. 1) is the smallest city of
the cities in Metro Manila, with an area of only 12 square kilo-
metres and a population of over 278,000 people.
A public market was located in the heart of Mandaluyong
City on a 7,500 square metre area along Kalentong Road, a main
transit route. In 1991, the market was destroyed in a major fire
in large part because most of the structure was made of wood. As
a temporary answer for the
displaced vendors, the gov-
ernment allowed about 500
of them to set up stalls along
the areas roads and side-
walks. This rapidly proved to
be impractical in that it led
to both traffic congestion
and sanitation problems.
Rebuilding the public market
became a high priority for
the city government, but
financing a project with an
estimated cost of 50 million Figure 1 Map of Mandaluyong City.

59
60 V OLUME 15: E XAMPLES OF S UCCESSFUL P UBLIC - PRIVATE PARTNERSHIPS

pesos was beyond the citys capability. created to operate The Marketplaces
Local interest rates were high, averaging many new businesses. With the vendors
approximately 18 per cent annually and relocated into this modern facility, traffic
the city was not prepared to take on the congestion was reduced on area streets
additional debt that construction of a and sanitation problems were eliminated.
new market would have required. The By using a PPP, the Mandaluyong City
city government was also concerned that government gained a modern public mar-
if the charges to stall owners became too ket at a much lower cost to the city, mak-
onerous, the increased costs would have ing the project possible when it had not
to be passed on to their customers, many been before.
of whom were lower-income residents of
the area.
The answer to this problem that the
city government decided to use was
based on the Philippines national Build-
Operate-Transfer Law (BOT) of 1991.
This provided the statutory basis for
developing a public-private partnership Figure 2 The Martketplace
(PPP) for the project. A business consor- in Mandaluyong City.
tium was created, called Macro Funders PROJECT OBJECTIVES
and Developers, Inc. (MFD), to complete
the project. A seven-story commercial
centre, named The Marketplace (fig. 2), The first objective of the partnership was
was designed to include a public market, to replace the lost public market space.
street-front stores, a parking garage, The fire displaced about 500 vendors,
commercial shops, department stores, a who could not be left on the sidewalks
bowling alley and a movie theatre. indefinitely because of the resulting traf-
Through this partnership, the commer- fic congestion and sanitation problems in
cial activity conducted in the new struc- an already-crowded metropolitan area.
ture generates incomes that are used to For the livelihood of the vendors and
recoup the capital investment by the pri- convenience of their customers, the mar-
vate sector. ket was considered a key component of
the local economy and accordingly had
The economic impact of this project to be replaced.
was significant. The construction of The
Marketplace led to a near-term doubling A second objective was to minimize
of the property value and to a significant the operational costs of the market, to
increase in city revenue from business provide the low-income population with
and entertainment taxes (an additional a viable and economically appropriate
$10 million pesos to $20 pesos million location for their shopping. The city gov-
per year). Hundreds of new jobs were ernment did not want to lose vendors as
 Public Market, Mandaluyong City, Philippine 61

a result of higher stall fees nor did it want Law) in 1991, which was amended in May
low-income customers to face the result- 1994 with the passage of Republic Act
ing higher prices, forcing them to shop 7718. This statute permits private compa-
elsewhere. nies to implement, both fully and partial-
ly, infrastructure projects but stipulates
that BOT contracts cannot exceed 50
PROJECT DESCRIPTION years. The law covers a wide array of sec-
tors. Included are power plants, highways,
PA R T N E R S ports, airports, canals, dams, hydropower
projects, water supply, irrigation,
A business consortium of several private-
telecommunications, railroads, transport
sector companies was formed to develop
systems, land reclamation projects, indus-
this project under the collective name of
trial real estate, housing, government
Macro Funders and Developers, Inc.
buildings, tourism projects, markets,
(MFD). Ten different companies had ini-
slaughterhouses, warehouses, solid waste
tially expressed interest in the project, but
management, information technology
with uncertainties about oil prices caused
networks and database infrastructure,
by the 1991 Gulf War and resulting eco-
education and health facilities, sewerage,
nomic uncertainties, their bids were not
drainage and dredging. (Also see
considered attractive. The mayor took a
the Manila Water case study: http://
strong leadership role in recruiting viable
www.ncppp.org/undp/manila.html)
private-sector partners to encourage them
to participate in the project. As a result of The Marketplace was one of the first
these discussions and negotiations, the projects in the Philippines to apply the
city government agreed to change the then recently passed BOT law.
project design to include a larger commer-
cial component, making the project more FINANCIAL AGREEMENT
attractive to investors. Most of those who
By adding the commercial component to
initially had submitted individual compa-
the project, the original estimated cost of
ny bids ultimately participated in the for-
50 million pesos increased to an estimat-
mation of MFD and bid collectively on the
ed 300 million pesos for the whole pro-
reconstituted project, which had a higher
ject. This was financed in three ways: 25
commercial potential than the initial con-
per cent in equity from MFD, 25 per cent
cept of replacing the original market. The
in advances from shops and charitable
bidding and negotiation process took
contributions and 50 per cent in general
about six months to complete.
debt held by the private companies. The
Asian Financing and Investment
I M P L E M E N TAT I O N E N V I R O N M E N T Corporation, a subsidiary of the Asian
L E G I S L AT I V E A N D A D M I N I S T R AT I V E
Development Bank, provided a ten-year
The national government passed Republic loan at concessional rates to MFD for
Act 6957 (the Build-Operate-Transfer the project.
62 V OLUME 15: E XAMPLES OF S UCCESSFUL P UBLIC - PRIVATE PARTNERSHIPS

Since most of the risk was borne by to recoup the capital and operating costs.
MFD, cost overruns were the responsibil- At the end of the 40 years, MFD will trans-
ity of the consortium. The final cost of fer the operation and maintenance of the
construction was 450 million pesos but commercial complex to the Mandaluyong
this 50 per cent increase in costs was paid City government.
for by the equity holders of MFD.
Construction and project risk for The
Marketplace was held by MFD, not the
CONTR ACT PROVISIONS Mandaluyong City government, because
The PPP project for The Marketplace was of the high commercial potential for this
based on two different but related con- project and the citys contribution of a
cepts: build-transfer (BT) and build-oper- site with high land value.
ate-transfer (BOT). MFD constructed the
public market on the ground floor of the I M P L E M E N TAT I O N M E T R I C S
commercial centre and transferred control
The desired metrics of Mandaluyong
to the Mandaluyong City government
City were simply for a new public market
immediately following completion. Half
to replace the one that was destroyed in a
of the stalls in the public market were
fire. MDF exceeded the citys expectation
constructed by the city government and
by updating the market to include a
the other half were built by the stall own-
greatly reduced number of wooden struc-
ers, per the agreement between the city
tures and adding efficient loading and
and the Association of Stall Owners. The
unloading facilities. The loading facilities
Mandaluyong City government was des-
for the public market were moved to the
ignated as the operator of the public mar-
back of the complex, away from the main
ket because it controls the collection of
thoroughfare, which led to a reduction in
stall fees (under Philippine law the opera-
congestion in front of the market.
tor is whoever collects the revenue).
Construction of the public market also
Maintenance and security for the public
included construction of a box culvert
market were outsourced to MFD.
from the main road to the San Juan River
The remainder of The Marketplace to help to solve the frequent flooding in
the commercial complex fell under the the area. MDF turned over the public
BOT scheme. MFD and the Mandaluyong market to the Mandaluyong City govern-
City government agreed to a 40-year con- ment upon completion and began con-
cession for the operation and maintenance struction on the six-story commercial
of this portion of the complex. The gov- complex above the market.
ernment retained ownership of the land
Once completed, the commercial
used in the project but did not require
complex contained four stories of retail
lease payments from MFD for its use. The
and entertainment space, two stories of
government does not share in any of the
parking, department stores, commercial
revenue generated by the commercial
shops, a movie theatre, a bowling alley
complex and this revenue is used by MFD
 Public Market, Mandaluyong City, Philippine 63

and a food court. The Marketplace involved, creating a consortium helped to

helped to generate about 600 jobs for spread the equity needs risk among the
Mandaluyong City as well as provide a companies, making it easier to raise the
stable location for the vendors who orig- requisite funds.
inally had been displaced by the fire. The
Mandaluyong City government collects
about P$10 million to P$20 million in
additional tax revenues from the business-
es (fig. 3) located in The Marketplace.
MFD and the city have seen major
increases in the property value: within the
first two years of the signing of the con-
tract, the property value doubled from Figure 3 A business in Mandaluyong City.
10,000 pesos per square metre to 20,000
pesos per square metre. The property
Another obstacle for MFD was the
value has continued to escalate and is now
increased construction costs for the
over 50,000 pesos.
project. Originally the project was esti-
mated at 300 million pesos, but final costs
C O M M E N TA R Y were 450 million pesos, a 50-per cent
increase. Because the project had such
high commercial potential, MFD took on
METHODS FOR OVERCOMING all the construction risk and absorbed this
IMPEDIMENTS increase.
There were several obstacles to the com-
pletion of this project. High local interest KEY POINTS OF SUCCESS
rates, coupled with uncertainties caused O R FA I L U R E
by the 1991 Gulf War, made businesses
Overall, the rebuilding of the public mar-
leery of funding a project with limited
ket in Mandaluyong City was a success.
revenue potential. Through persistence
By utilizing two PPP schemes, the gov-
on the part of the mayor and the govern-
ernment received a state-of-the-art public
ments flexibility in project design, a con-
market at minimal public costs and saw
sortium was able to develop to fund,
the value of the markets land more than
rebuild and expand the public market. By
double. It also gained about 10 million
allowing MFD to build a different type of
pesos to 20 million pesos in annual busi-
structure on the same site, the govern-
ness and entertainment taxes.
ment gained a modern public market at
lower costs and was able to reduce con- The project also helped to create
gestion and improve sanitation problems about 600 new jobs and restored the
once vendors relocated back within the livelihood of the displaced vendors. Stall
public market. For the private companies fees were kept low, which helped vendors
64 V OLUME 15: E XAMPLES OF S UCCESSFUL P UBLIC - PRIVATE PARTNERSHIPS

to keep their prices low for their low-

income customers.
A key lesson learned from this project
is the need for flexibility and negotiation
in project design. The citys original con-
cept of simply replacing the original mar-
ket did not provide enough revenue-gen-
erating potential to be commercially
viable. By transforming the concept into
a multi-store, mixed-use retail/entertain-
ment venue, the city achieved commer-
cial viability and much greater benefit to
the city and its citizens than a simple
market would have provided.
This project also demonstrates the
importance of appropriate risk allocation,
especially when world conditions are
uncertain. Had the risk been shared dif-
ferently on this project, the Mandaluyong
City government could have potentially
faced a dire situation from the 50-per cent
increase in project costs. Because of the
effective structuring of the partnership,
MFD was able to absorb the additional
costs. If this had not been the case, the
project might not have been completed.