SPECIALREPORT

Another page turns in Terminal 3 saga

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PH claims victory in ICSID ruling, but it’s unlikely the nearly 20-yr drama will end there

First of three parts

IN a decision announced December 11, the International Centre for Settlement of Investment Disputes (ICSID) handed the government an apparent victory, declaring it has no jurisdiction in the claim for compensation against the Republic of the Philippines made by one-time Terminal 3 contractor Fraport AG.

The ruling by the Washington, D.C.-based ICSID was the second such setback in German airport operator Fraport’s long legal battle to collect $425 million (or more) in compensation for its part in building the controversial Terminal 3 at Ninoy Aquino International Airport. A similar ruling was handed down by an ICSID tribunal in 2007.


Then, as now, the panel ruled that Fraport violated the Philippines’ Anti-Dummy Law and disqualified the ICSID from jurisdiction over the case. In a 2010, an ICSID ad-hoc committee reversed the earlier decision, prompting Fraport to resubmit its claim; unsuccessfully, as it turned out.

History suggests, however, that this latest turn in the nearly 20-year-old NAIA-3 saga will not be the last. Both Fraport and its partner the Philippines International Air Terminal Corporation (PIATCO) are pursuing other legal cases here in the Philippines that will likely take years to resolve.

The experience of Fraport AG in the NAIA-3 project is an archetypical case showing the chaotically murky environment foreign investors sometimes face when doing business in the Philippines. By examining the chain of events, business investors and policymakers alike may take away lessons that can help them avoid costly pitfalls that ruin reputations and hinder productive economic development.

The birth of NAIA-3
One of the biggest initiatives of the 1993-1998 Medium-Term Development Plan created by the government of President Fidel V. Ramos, who took office in mid-1992, was to upgrade the rapidly-deteriorating Ninoy Aquino International Airport. The airport at the time consisted of two terminals, the international terminal (now known as NAIA-1) opened in 1981, and a small domestic terminal that had been built in 1948; between them the terminals had a design capacity of 6.3 million passengers per year, but by 1992 passenger numbers had passed eight million passengers per year and were increasing at about 11% per year.

The Medium-Term Development Plan envisioned the replacement of both of NAIA’s terminals as had been recommended by a French-government funded review of NAIA conducted by Aéroports de Paris (ADP) in 1989-1990. The immediate priority was placed on developing a replacement for the old domestic terminal.

That project would be the new NAIA Terminal 2, colloquially known as NAIA-2 or the “Centennial” Terminal (it formally opened in 1998, the centennial of the Philippines’ independence from Spain). ADP originally designed it as a domestic-only terminal – the future NAIA-3 would be dedicated to international flights – but modified the design to manage both domestic and international service. Design and construction costs were financed by a 30-million franc ($5.34 million) soft loan from the French government and an 18.12 billion yen ($165.93 million) Official Development Assistance (ODA) loan from Japan in August 1993. Because of the expanded design, construction took almost two years longer than planned, but was completed slightly under budget, and the terminal was formally turned over to the Manila International Airport Authority (MIAA) on December 28, 1998.

Even before construction began on NAIA-2, President Ramos was aggressively lobbying the Philippines’ most important power brokers – the Filipino-Chinese taipans – to develop proposals for the construction of the second new terminal called for by the ADP master plan. Having just committed the government to large debts – albeit ones with friendly terms – for the construction of part of the new airport, financing the second part of the master plan with further debt was an unappealing proposition, so Ramos turned to the Build-Operate-Transfer (BOT) Law that had helped solve relatively quickly the critical power shortage left behind by the Corazon Aquino administration.

Enter the Dragons
In September 1993, a group of six of the Philippines’ most powerful businessmen accompanied President Fidel Ramos on a state visit to China, and it was there that the proposal for the construction of NAIA-3 was first seriously discussed. This luminary group of taipans included Lucio Tan, chairman of the Lucio Tan Group of Companies with interests in liquor, tobacco, banking, real estate, and, significantly, owner of Philippine Airlines (PAL); Henry Sy, head of SM, the country’s largest retailer, and majority owner of Banco de Oro and China Banking Corporation; Alfonso Yuchengco, a former ambassador to China and head of the Yuchengco Group of Companies that included, among other businesses, Rizal Commercial Banking Corporation ; George K. Ty, founder of the Metropolitan Bank and Trust Company; Andrew Gotianun, head of the major real estate developer Filinvest Development Corporation and East-West Bank; and John Gokongwei, Jr., chairman of JG Summit Holdings, with varied business interests that would, from 1996 onwards, include Cebu Pacific Airlines.

Encouraged by Ramos, the taipans formed Asia’s Emerging Dragon Corporation (AEDC) with Yuchengco as its chairman for the express purpose of developing a project proposal for a new, large-capacity terminal to replace the outdated NAIA-1 and complete the master plan for the airport. On October 5, 1994, AEDC submitted an unsolicited proposal for a 10 million passengers-per-year Terminal 3 to the Department of Transportation and Communications (DOTC). In March 1995, the DOTC endorsed the AEDC proposal to the Investment Coordinating Council (ICC) for further study.

In November 1995, AEDC sought a meeting with President Fidel Ramos, and secured his approval for the terminal project. Strictly speaking, Ramos’ approval was just the signal for the appropriate government agencies to begin the bidding and contract process for NAIA-3, and not necessarily a specific endorsement of AEDC. AEDC, however, had several good reasons to believe the project would be awarded to their group. Ramos had been the one to first raise the subject of the NAIA-3 project with the taipans, and his formal approval in November 1995 carried some weight by the President’s being the ex officio head of the National Economic Development Authority (NEDA) Board. Having been the first to present a project proposal gave AEDC original proponent status, giving the group an advantage in the Swiss challenge bidding process to which the project would be subjected. And the AEDC group had a formidable array of resources, financially and politically, that they could apply to winning the project.

In part two of this special report tomorrow, AEDC’s well-laid plans are spoiled by a surprise challenger, a consortium that would eventually become PIATCO, of which Fraport AG would subsequently become the majority shareholder and chief financial backer. The project quickly becomes mired in controversy, leading to the expropriation of the new terminal by the Arroyo Administration in 2002.

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