PCAB licence a must for Philippine contracting projects

By Wang Jihong and Liu Ying, Zhong Lun Law Firm
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Chinese companies signed 5,611 new contracts for foreign contracted projects in 61 countries along the Belt and Road in 2020, maintaining steady growth despite the heavy blow to the global economy dealt by the pandemic. In the Philippines, the value of new project contracts signed by Chinese companies reached USD9.6 billion, a year-on-year increase of 53.8%.

More Chinese companies are seeking to enter the Philippine project contracting market, and the first hurdle for them is to obtain a licence issued by the Philippine Contractor Accreditation Board (PCAB).

Mandatory rule

王霁虹__Wang_Jihong__Zhonglun_BRI-s
Wang Jihong
Partner
Zhong Lun Law Firm

According to Republic Act No. 4566 of the Philippines, the Contractors’ Licence Law, a PCAB licence must be obtained to engage in engineering contracting projects. In the Philippines, nobody is allowed to engage in contracting work or act as a contractor without obtaining a PCAB licence, which includes contractors that participate in bidding. Even if the future contracting work in the Philippines is planned to be subcontracted to local contractors, participation in bidding activities is considered an act of contracting, and a PCAB licence is required.

If engaged in project contracting without obtaining the contracting qualifications, the violator may be fined 500 to 5,000 pesos by the PCAB, equivalent to a maximum of RMB630, or about USD100. Due to the small fine, many companies opt to breach this provision. To counter this, the Philippine government has strengthened compliance requirements in the field of contracting qualifications, adding the more serious consequence that it may hinder the future application for a business licence with the local government in subsequent project construction.

Most local governments require construction companies to provide a PCAB licence before applying for a business licence, and without a business licence, the local government may bar the contractor from carrying out construction work, causing the contractor to breach its contract with the owner.

Type and period

PCAB licences can be classified into regular and special. In the past, regular licences were issued only to local project contractors in the Philippines, and a minimum 60% equity of the applicant should be held by Filipino citizens.

刘瑛__Liu_Ying__Zhong_Lun-s
Liu Ying
Partner
Zhong Lun Law Firm

The licence holder has the right to engage in construction contracting services within the specified categories and the validity period of the licence. In 2020, the Supreme Court of the Philippines abolished the rule that the foreign contractor’s equity must not exceed 40%, which means that 100% foreign-invested Philippine companies have the right to apply for regular licences.

However, it should be noted that the PCAB has yet to issue any implementation rules on this, leaving a certain degree of uncertainty about how foreign-invested companies should apply for regular licences.

Special licences are issued to foreign contractors or project owners, generally for specific projects. According to PCAB’s regulations, foreign contractors must register with the Philippine Securities and Exchange Commission (SEC) before applying for a special licence, and must obtain a tax identification number (TIN) for business activities in the Philippines.

In practice, the application period for a PCAB licence may be as long as six to 12 months, depending on the time required for the applicant to prepare the documents required by the PCAB. After PCAB confirms that the documents submitted by the contractor are complete, it will generally issue a licence within one to two months. If affected by the pandemic, the actual application time may be even longer. Companies planning to engage in engineering business in the Philippines should make preparations early on.

Workarounds

Due to the lengthy application period for a PCAB licence, if a contractor intends to participate in a contracting project before obtaining the licence, it has the option of forming a consortium with a local qualified contractor to bid. A consortium is not an independent legal entity under the laws of the Philippines.

The “consortium” allowed by the PCAB to obtain a contractor’s licence refers to a specific type of co-operative arrangement between two entities that intend to engage in construction activities, and at least one of the consortium members must have a licence. In addition, the consortium itself, as the EPC general contractor, should also apply for a licence. Even if the actual construction is planned to be subcontracted to local qualified contractors in the future, it will not exempt the consortium from the licence requirements.

Some contractors split their EPC contract into an onshore agreement and an offshore agreement, and connect the two with a bridging agreement, hoping to avoid the PCAB licence requirement. Since the project is divided into offshore and onshore parts, in principle, only the onshore part should require a PCAB licence.

However, there are strict restrictions on such practice. A foreign contractor can only undertake offshore work, and cannot participate in any onshore work or undertake any work within the Philippines. If the foreign contractor acts as the EPC general contractor, and the local contractor is still a subcontractor, the foreign contractor will need to supervise, participate, and take responsibility for the onshore project. Therefore, such an arrangement will be recognised as an attempt to circumvent the provisions under the Contractors’ Licence Law, and the EPC contract runs the risk of invalidation.

To undertake contracting projects requires the corresponding licence, this applies to most countries in the world. The authors do not believe that Chinese companies opting to “go global” will be satisfied at only accepting offshore work, nor do we think this arrangement speaks to the strengths of Chinese companies.

For companies entering a foreign country, taking the time and energy to apply for local contracting licences is generally a better option for long-term market presence.

Wang Jihong and Liu Ying are partners at Zhong Lun Law Firm

Zhong Lun Law Firm

26/F, South Tower of CP Center

20 Jin He East Avenue

Beijing 100020, China

Tel: +86 10 5957 2288

Fax: +86 10 6568 1022

E-mail:

wangjihong@zhonglun.com

liuying@zhonglun.com

www.zhonglun.com

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