In a reaction to comments by GMR Infrastructure’s Sidharath Kapur about the controversy the Indian airport developer has found itself in with its bid for the expansion of the Cebu-Mactan International Airport, Bloomberg this past weekend published a stinging analysis of the Philippines’ investment environment, saying that the latest snag “may threaten the country’s ability to compete with peers from Malaysia to Vietnam for investors.”
The problem for GMR is that its apparently winning bid for the Cebu-Mactan airport project, which it offered in partnership with local developer Megaworld, is being challenged by the losing consortium of Filinvest and Singapore’s Changi Airport Group on a technicality, further delaying the start of the project. According to GMR’s Kapur, he was warned by another of its development partners, “Don’t go to the Philippines,” advice that he may now regret not following.
That partner was the German airport operator Fraport AG, who has a joint venture in New Delhi’s airport with GMR. Fraport, of course, was the big loser in the decades-long (and still unresolved) controversy over Terminal 3 at Ninoy Aquino International Airport (NAIA 3). While it could appear that Fraport is just bitter over getting rooked for approximately $400 million by the Philippine government, the issue has already been raised to the sovereign level: In his otherwise reasonably productive high-level visit to Germany last summer, Vice President Jejomar Binay was informed in polite terms by German Foreign Minister Guido Westerwelle that German investment in the Philippines is not going to happen until the Fraport-NAIA 3 issue is put to rest.
Because the current president of the Philippines is stubbornly adhering to policy of committing gross human rights violations in his treatment of his predecessor, we tend to forget that two of the biggest problems the country now faces—a completely out-of-control energy sector and an unattractively risky and unreliable investment environment—are actually legacies of the Arroyo administration. The Electric Power Industry Reform Act of 2001 (Epira) was considered a signature achievement of Arroyo’s term, and it has, obviously, turned out to be an unmitigated disaster. The Fraport/Piatco/NAIA 3 controversy was a particularly ugly issue, but was just one part of a pattern—which the Bloomberg article describes—of ill-considered government intervention, loss of contract protections, and shifting regulations and procedures that largely took root during Arroyo’s time.
Be that as it may, Gloria Arroyo is no longer the president, but an ailing political prisoner—one for whom the conditions of her detention only appear even more unjustifiable because of her jailer’s complete failure to not only address the legitimate problems he inherited from her administration, but to actually put some effort into making them worse. Perhaps it is not entirely Noynoy Aquino’s fault, though: Having lived a maternally sheltered life that obviated the need for him to test his limited capabilities in a job of any substance, he likely never learned what basic strategic management ideas like a “mission” or a “vision” actually are. As a consequence, he has never been able to make up his mind whether he wants to be a populist or a commerce-friendly president, and the result of that has been that he doesn’t do either job very well, and is much worse at the latter.
Ironically, the big failure of the Arroyo era that the Fraport issue represents might become her “last laugh” against her oppressive successor. The arbitration case between the government and Fraport is in the hands of the International Center for Settlement of Investment Disputes (ICSID) in Washington, D.C., and if that case reaches a conclusion, it will spell disaster for the Philippines’ efforts to attract foreign direct investment. Essentially, Fraport is making a claim against the government to recover at least a reasonable part of its investment in the NAIA 3 project, which was roughly $400 million. If the ICSID rules against the company, the signal will be sent to other prospective investors that there is a significant risk that the Philippines will use legal avenues to avoid contractual obligations. If the ICSID rules against the government (which seems more likely, although what the ICSID will actually do is anyone’s guess at this point), then the perception will be that the Philippines dealt unfairly with Fraport; the legal correction will be small comfort, because the risk that an investor may face years of court proceedings and untold legal expenses to recover an investment is rather unappealing.
Allowing the 20-year-old ghost of NAIA 3 to continue to haunt the Philippines’ investment environment is exactly what the country doesn’t need—particularly now when there are signs that the Philippines, along with its regional neighbors like Indonesia, Malaysia, and Thailand is feeling the effects of the retreat of investors back to improving western economies, and the first indications of instability in the Chinese economy (to say nothing of the growing political tension the Big Red Neighbor of the North is creating). If GMR discovers that the advice it received from its German partner was correct, the implication is that the Philippines won’t lose just one big investor, it will lose a whole country; that will be a body-blow to the Philippine economy, because with investment from the West and China looking like increasingly shaky prospects, India is the biggest of the attractive alternatives despite being the Philippines’ strongest business process outsourcing competitor.
The Aquino administration could nip the potential investment crisis in the bud by taking two simple steps: Pay Fraport an amount they’ll be satisfied with before the issue is decided at the ICSID, and put a stop to the Filinvest-Changi sour-grapes protest over the Cebu-Mactan project bid. Indeed, these will be seen as costly and arbitrary moves, but making costly and arbitrary decisions is a habit the current occupant of Malacañang established a long time ago; this time, at least, practicing it will have a worthwhile point, and actual positive ramifications.