Second of three parts
Lucrative airport project is quickly mired in dispute and dubious activity
In part one of this special report, the story of how NAIA-3 was conceived as public-private partnership project for a consortium of the Philippines’ leading taipans was revealed. The plans of the group, Asia’s Emerging Dragon Corporation (AEDC) led by Philippine Airlines owner Lucio Tan, are thwarted, however, by an unexpected challenger.
ON February 13, 1996, the NEDA Board granted first pass approval of the Ninoy Aquino International Airport Terminal 3 project as conceived by AEDC in response to President Fidel Ramos’ lobbying. Under the Swiss challenge guidelines applied to the project, on September 20, 1996, a challenge bid was received from a consortium comprising People’s Air Cargo (Paircargo) owned by Vic Cheng Yong; Warehousing Co., Inc.; Philippine Air Ground Services; and Security Bank and Trust Co. Cheng Yong was the owner of the largest customs bonded warehouse business at the airport and a former college classmate of Lucio Tan.
On October 16, less than a month after receipt of the Paircargo group’s bid, the Prequalification, Bids and Awards Committee (PBAC) of the DOTC/Manila International Airport Authority (MIAA) opened the financial proposals to the government from AEDC and Paircargo and Associates. The bids for the construction of the terminal were the same at $350 million, but Paircargo and Associates were offering the government concession payments of Php 17.75 billion over a 27-year period, while AEDC’s proposal was for a mere Php 135 million for the same amount of time.
Being ambushed by a bunch of relative upstarts came as a nasty surprise for AEDC, but matching Paircargo’s extraordinary bid was apparently out of the question; in a breakfast meeting between AEDC’s Tan and Cheng Yong just days after the opening of the bids, Tan reportedly told Cheng Yong that Paircargo “was very silly to have submitted such a high financial offer of annual guaranteed payments to the government. He [Tan] considered such substantial payments a waste of money, and urged that Paircargo & Associates simply withdraw its bid,” even offering to reimburse Paircargo its Php 150 million bid bond if it did so.
What neither Tan nor anyone else knew at the time, however, was Paircargo and Associates’ financial capacity to undertake the project was questionable. The financial requirement for the NAIA-3 project was 30 percent of the bid amount, or Php 2.73 billion; because of a legal restriction on the amount of equity a bank (Security Bank in this case) could invest in a single project, the Paircargo group reportedly only had between Php 558 million and Php 925 million in hand, not enough to actually be a qualified bidder for the project. This point would lead to serious legal problems for PIATCO in years to come.
Those problems, however, were still in the future. No matter how much the Ramos government may have wished or assumed that AEDC would be building the new terminal, it had no choice but to accept the higher concession offer and award the contract to Paircargo and Associates.
Fraport enters the picture
On February 27, 1997 the Securities & Exchange Commission (SEC) issued a Certificate of Registration for Philippine Air Terminals Co. Inc. (PIATCO). The Cheng Yong-led Filipino group comprising Paircargo, Security Bank and Trust Company, Equitable Banking Corp., Chuah Huh Holdings Company, and Philippine Airport Ground Services (PAGS) initially held 80 percent of the shares of PIATCO, while 10 percent were owned by another Filipino company, SB Airport. The Japanese zaibatsu Nissho Iwai owned the remaining 10 percent of the company.
Fraport AG of Germany would take an initial 25 percent ownership stake in PIATCO from the Paircargo group in 1999, increasing its holdings to 30 percent by 2001. The deal struck between PIATCO and Fraport was complex; some of Fraport’s stake in PIATCO was indirect, obtained through taking 40 percent of both PAGS Terminal, Inc. (PTI), and PAGS Terminal Holdings Inc. (PTH).
Nevertheless, the ownership of PIATCO initially reflected— on paper at least—the constitutionally-required 40 percent limit on foreign equity in Philippine businesses.
In an attempt to forestall their loss of the NAIA-3 project, AEDC filed a lawsuit on April 18, 1997 in the Pasig City Regional Trial Court against the members of the DOTC/MIAA PBAC and the head of the PBAC Technical Committee, Pantaleon Alvarez, who would later briefly—and controversially—be DOTC Secretary under President Gloria Macapagal-Arroyo, charging them with collusion and gross malfeasance in awarding the NAIA-3 bid to the Paircargo-PIATCO group of Vic Cheng Yong. The case was still pending at the RTC on July 12, when the concessionaire contract was signed between the DOTC/MIAA, represented by DOTC Secretary Arturo Enrile, and PIATCO represented by Henry Go.
Amendments and anomalies
It was during his brief term of Ramos’ successor, President Joseph Estrada, that amendments to the NAIA-3 project contract which would eventually lead to its scuttling by President Gloria Macapagal-Arroyo were made. The first of these amendments was made in November 1998, a second just a week after the NEDA Board granted second pass approval on the contract in August 1999, and a third in September 2000, after Takenaka Corporation of Japan had been granted the construction contract for the Skidmore, Owings & Merrill-designed terminal building.
After Estrada’s ouster in January 2001, the Arroyo Administration conducted a review of many of the contracts and projects undertaken during his truncated term in office; as a result of that review, a final amendment to the NAIA-3 contract was added on June 22, 2001, which essentially confirmed the various changes made since 1997, as well as PIATCO’s 25-year concession to operate NAIA-3.
Sometime in early 2002, the Arroyo Administration raised the idea of buying out Fraport’s stake in PIATCO immediately for $400 million, a suggestion to which Fraport, which had invested about $375 million in the project to that point, was agreeable, particularly since Arroyo’s office reportedly raised the possibility that Fraport could return and operate the terminal under a new sub-contract, although the Administration later denied having made such a suggestion.
More significantly, the troublesome project had by this time grossly overrun its original contract cost, from $350 million to about $675 million, and Fraport was already reconsidering its involvement in it, according to a former company official. President Arroyo seemed to offer a way out, and ordered the formation of a committee to study the buyout proposal.
The story the Philippine public would later hear was that in the course of reviewing the NAIA-3 project and contract, the Presidential committee discovered dozens of anomalous provisions. This led to a “Blue Ribbon Committee” investigation in the Senate, where the anomalies were laid out; among other things, now-acting DOTC Secretary Pantaleon Alvarez was accused of having used his knowledge of the project in his former role as head of the PBAC Technical Committee to form a new company called Wintrack in October 1999, which was awarded a major sub-contract for site development and excavation work. To make matters worse, many of the board members of PIATCO, including a couple of officials from Fraport, were also board members of Wintrack.
Hounded by controversy and facing graft charges before the Ombudsman, Alvarez was denied confirmation as DOTC Secretary by the Commission on Appointments, and left public service (the graft case was later dropped for lack of evidence). In the interest of preventing further misbehavior, the public was informed, President Arroyo had no choice but to declare the NAIA-3 contract void, and order the government to take over the nearly-completed terminal.
The real story, however, was not quite so simple. After the withdrawal of AEDC’s case against Pantaleon Alvarez and the PABC in April 1999 Lucio Tan, who was in the process of buying out his AEDC partners and so was effectively acting on his own at this point, began looking elsewhere for airport-related business, and in 2000 the Tan Group’s MacroAsia opened Lufthansa Technik Philippines (LTP). But getting control of NAIA-3 was obviously not a lost cause from Tan’s point of view; it would give Tan a huge stake in the entire airport – Philippine Airlines was the sole tenant of NAIA-2, MacroAsia controlled the largest part of the airport’s ground service and catering business, and aircraft service through LTP was quickly proving to be another healthy income stream.
That the “anomalies” quickly came to the attention of the Palace and the Senate was no coincidence, thanks to Tan’s involvement. To pressure the Arroyo Administration, the Senate, and eventually the Supreme Court to scrap the PIATCO-Fraport contract, MacroAsia teamed up with Miascor (NAIA’s other large ground service operation) and engaged the services of PR firm Creative Point International, to produce an exposé of the shady dealings.
Tan’s hand in exposing the ‘anomalies’ of the NAIA-3 project was no secret; Creative Point International was so proud of their success that the PR case was highlighted on the homepage of the firm’s website for several years (the original website has since been taken down and replaced with a generic WordPress page). The final installment of this special report details how Fraport quickly found itself expelled from the project, several hundred million dollars poorer, and mired in a carnival for lawyers.