SPECIAL REPORT

Another page turns in the Terminal 3 saga

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Fraport falls victim to its own and others’ ambition

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Last of three parts

With the takeover of the NAIA-3 project by the Arroyo government and the beginning of court cases filed by PIATCO and its major partner Fraport AG to recover their investment, the mistakes and misdeeds that led to the expropriation began to be revealed.

FRAPORT AG’s foray into the Philippines had quickly turned from  a promising investment into a nightmare. The company aside from being  publicly accused of violating a number of  Philippine laws and faced  the very real possibility of losing its $400 million bet on the new terminal.

One complication that Fraport could not easily explain was the size of its indirect equity stake in the project, which could be (and has been on several occasions) interpreted as violating the constitutional prohibition against foreign ownership greater than 40 percent.
Fraport ran into trouble on this point after PIATCO created a spinoff of Philippines Air Ground Services (PAGS) called Philippines Air Ground Services Terminal Inc. (PTI), to serve as the eventual day-to-day operator of NAIA-3. PIATCO then prevailed upon the German company to take a 40 percent equity stake in PAGS (which had a direct equity stake of 11 percent in PIATCO), and through PAGS, increase PTI’s equity in PIATCO to 35 percent. Thus, even though each of Fraport AG’s investments—in both of PAGS shareholding companies, PTI and PTH, and in PIATCO directly—met the constitutional limit of no more than 40 percent foreign ownership of a Philippines company, the corporate interlocking gave Fraport an effective stake of over 60 percent in PIATCO.

That Fraport was aware that its stake in PIATCO could be interpreted as a violation of the Philippines’ Anti-Dummy Law and that they were treading carefully to try to avoid exceeding the limit became clear in the most recent hearings at the ICSID, when Fraport admitted that their total stake, on paper, did “slightly exceed” 60 percent. But given the greatly uneven balance of investment in the NAIA-3 project—Vic Cheng Yong’s group had only invested about $16.5 million to Fraport’s $375 million—Fraport had good reason to find ways to try to control and protect its own interest.

Prior to Arroyo’s decision to take over the ill-starred terminal, there were some efforts to keep Fraport in the picture, but some officials of the Arroyo Administration apparently had their own ideas about how to accomplish that. From taped conversations among Fraport officials and attorneys obtained in July 2003 by The Daily Tribune, it appeared that there was an attempt to extort from  Fraport in order to keep them from getting caught up in PIATCO’s impending doom. Arroyo’s personal attorney at that time, F. Arthur “Pancho” Villaraza, reportedly asked Fraport for $20 million to be paid to an offshore entity (presumably a Hong Kong account) to cover “in the background” legal and government services.

Although the alleged methodology and ulterior motives of those involved might have been questionable, the wish to keep the highly experienced airport operator Fraport in the NAIA-3 formula was understandable. But it faced one insurmountable obstacle: legally, there was no way to separate Fraport AG from PIATCO, the project contractor of which Fraport was a component, and still keep the contract intact. Buying out Fraport AG’s stake in PIATCO was actually an excellent solution – the issue of ‘effective control’ exceeding the constitutional ownership limitation would have become moot, and the Arroyo Administration would have been in a position to dictate to Cheng Yong and PIATCO certain desired arrangements – such as contracting Fraport AG separately as the airport operator.

The ‘payoff’ scheme was spearheaded by Arroyo’s Presidential Adviser for Strategic Projects Gloria Tan-Climaco, who would eventually produce the damning report accepted in its entirety by the Presidential and Senate committees in recommending the contract be nullified. The deal was this: Fraport would pay the $20 million and help ensure “the right partners” (i.e., most likely the MacroAsia/Miascor group) were brought in to replace Vic Cheng Yong and his son Jefferson. When Fraport refused, Tan-Climaco threatened them with finding them in violation of the Philippines’ Anti-Dummy Law. Though nonplussed, Fraport officials held their ground, and in her Bonifacio Day speech on November 30, 2002, President Arroyo declared the NAIA-3 contract null and void and announced that the government would expropriate the new terminal.

A carnival for lawyers

PIATCO immediately filed a case before the Philippines Supreme Court in 2003 to overturn the nullification, but was denied on four basic grounds:

1. Absence of the required financial capacity of at least 10 percent of the bid amount by the
Paircargo group at the time of the original bidding in 1996, in violation of the BOT Law.

2. Amendments to the 1997 Concession Agreement made under the Estrada Administration were contrary to public policy, since they changed the contract substantially from the original proposal for which the bid had been awarded.

3. Amendments in the 1997 Concession Agreement provided for a direct government guarantee of PIATCO’s debts, which is expressly prohibited by the BOT Law and its Implementing Rules and Regulations.

4. Violation of the Anti-Dummy Law and the Constitutional requirement for Filipino majority ownership in corporations dealing with natural monopolies and public services.

Finding no relief in the Philippine courts, and with negotiations on compensation from the government going nowhere, in 2004 Fraport AG cut loose from PIATCO to file a claim against the government for $425 million at the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) in Washington, D.C., in accordance with the terms covering dispute resolution in the German-Philippine bilateral investment treaty.

PIATCO, meanwhile, filed its own $564 million claim at the Singapore-based International Chamber of Commerce (ICC) Court of Arbitration.

By December 2004, the Office of the Solicitor General finally got around to filing a petition for expropriation of NAIA-3 in the Pasay RTC. The RTC issued a Writ of Possession to the government, but ordered an initial payment of $66 million to PIATCO in accordance with the Supreme Court’s 2003 ruling that PIATCO, as the builder of the terminal, was entitled to just compensation for the expropriated facilities. Compensation to Fraport separately, however, was not addressed by the ruling. The government delayed payment to PIATCO until September 2006, after which the Manila International Airport Authority was allowed to take possession of NAIA-3 and complete work for its opening, although PIATCO continued to contest ownership.

In August 2005 an apparent opportunity for Fraport to cut its losses in the NAIA-3 imbroglio was presented when the Manila Hotel Corporation, owned by Manila Bulletin publisher Emilio Yap, offered to buy Fraport’s stake in PIATCO for $200 million, half of what Fraport had been hoping to collect from the failed government buyout. Five months of negotiations failed to overcome what Fraport officials described as “substantial roadblocks” to completing the sale, however, and in February 2006 the deal was off.

In August 2007, the ICSID dismissed Fraport AG’s claim, ruling that it had no jurisdiction because Fraport’s investments were made illegally, in contravention of the Philippines’ Anti-Dummy and other laws, and that illegal investments are not entitled to treaty protection.

The supporting documents presented by the Philippines, however, consisted of the report filed by Tan-Climaco, the decision of the Presidential Committee (based solely on that report), the decision of the Senate committee (also based solely on that report), and the Supreme Court decision, which was a ruling against PIATCO as a respondent, and not specifically against Fraport AG. Since the report made by Tan-Climaco was apparently prejudiced by the alleged bid to extort Fraport AG, the ruling against Fraport was based on evidence that was perhaps questionable. The ICSID, however, could not act on that knowledge even if they had it, but only on what was a matter of the official records of proceedings in the Philippines.

In December 2010, however, the ICSID Ad Hoc Committee on Annulment voided the August 2007 decision, allowing both parties to present their cases again for arbitration.

The intention of the Committee’s action was to encourage the two parties to negotiate their own amicable settlement; but talks with the new government of Benigno S. Aquino 3rd proved fruitless, and so on April 1, 2011, Fraport AG announced it was re-filing its case against the Philippines at the ICSID.

Lessons learned

What steps Fraport will take next are uncertain; it seems likely that the company will return to the Philippine courts to seek compensation, but all Fraport officials will say at this point is that their attorneys are “carefully studying” the latest ruling from the ICSID.

Fraport AG became involved in the NAIA-3 project at a time when the company was aggressively seeking opportunities for expansion, and ambition may be to blame for the some of the mistakes Fraport made in the ensuing mess. One speculation raised by critics of Fraport is that the airport operator probably knew, or at least should have known, that Paircargo’s original bid was legally invalid, and that by getting involved with the plan in the first place was tantamount to engaging in corrupt practices, demonstrated by Fraport’s having taken advantage of loopholes to circumvent the Anti-Dummy Law.

Fraport also clearly had not considered an exit strategy or contingency plans for when things started to go wrong; cost overruns and encouragement from its partners in PIATCO to increase its level of equity investment should have been clear warning signs, and in hindsight, Fraport should have realized they were throwing good money after bad.

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