Philippines Aviation NEWS: January 2011

Grounded in the Philippines

MANILA - A tussle between the Philippine government and a private German company over the construction of a US$425 million airport has exposed the legal risks for foreigner investors in the Philippines at a time President Benigno Aquino is seeking foreign funds to finance badly needed infrastructure spending.

A recent ruling by a United States arbitration court in favor of Germany's Fraport AG Worldwide Services Inc over the Philippine government has raised diplomatic tensions between Berlin and

Manila and could jeopardize future development assistance if Aquino's administration doesn't find soon an amicable solution to the business conflict.

The Washington-based International Center for Settlement of Investment Disputes (ICSID) handed down a decision in late December to reinstate Fraport's right to file an arbitration and compensation case against the Philippine government. The decision marked a reversal of a 2007 ICSID ruling that found Fraport had violated Philippine laws that cap foreign ownership of key investments, including airports, at 40%.

In a previous ruling, ICSID found that the Filipino firms working in a consortium with Fraport had entered into a secret shareholder agreement that would have allowed the German company to maintain managerial, operational and financial control over NAIA-3, or Terminal 3, of Manila's Ninoy Aquino International Airport, in compensation for Fraport's financing most of the project.

In 2004, the Supreme Court declared the original contract null and void because it exceeded the legal foreign ownership cap. The government subsequently seized the terminal in 2007 and partially opened the new airport facility the following year. It has since hosted several concessionaires, including popular budget airline Cebu Pacific, at the new terminal. The Fraport-led consortium, known as PIATCO, has sent eviction letters to the airlines for "illegally" using the terminal.

The contested project has dragged on for over a decade, long enough to span four different Philippine administrations. German Ambassador to the Philippines Christian-Ludwig Weber-Lortsch recently said the 42 million euros (US$52 million) lost through a partial investment guarantee for the project is the biggest loss the federal German government has incurred in decades.

He claimed that the government cannot legally operate the terminal because it was privately funded and that the issue has dampened broad foreign investor sentiment towards the Philippines, particularly among Europeans. "It is a matter or credibility. You need to be sure what you signed will be honored," he said.

The saga has clouded Aquino's pitch to foreign investors to help finance new public infrastructure projects. He promised during a road show last year to promote public-private partnership development schemes that he would ensure a level playing field for foreigners and that the Philippines would be more foreign investor friendly under his watch.

Faced with perennial fiscal shortfalls, the Philippines needs lots of private funds to finance infrastructure spending and propel economic growth to its target rate of between 8% to 10%, a clip experts say is needed to reduce endemic poverty. Current infrastructure spending in the Philippines represents less than 3% of gross domestic product (GDP), well below the 5% average in other Asian countries.

The World Bank recently estimated that the Philippines needs some US$35 billion to $45 billion in fresh investments from the private sector to improve its infrastructure over the next 10 years, including upgrades for the country's aging and often decrepit airports. Domestic air traffic at NAIA is expected to reach 40 million passengers by 2017, double the 20.5 million passengers who flew in 2007, according to the Airport Council International, a global association of airport operators.

Investments are also needed to restore foreign confidence in Philippine aviation. In 2007, the US Federal Aviation Authority's International Aviation Safety Assessment downgraded the country's aviation ratings from Category 1 to Category 2 due to safety concerns of its airlines. Former Senator Mar Roxas II later estimated that the downgrade cost the country hundreds of millions of dollars in lost investment and tourism, mostly from the US and Europe.

Political contract
The PIATCO consortium won the NAIA-3 deal in 1997 during the administration of president Fidel Ramos. Fraport, which manages the Frankfurt airport, later joined in 1999 during the time of president Joseph Estrada. The contract was canceled in 2002 by president Gloria Macapagal-Arroyo on the vague grounds that it was disadvantageous to the government. The cancellation triggered legal cases in the Philippines and abroad that have now dragged on for almost a decade into the Aquino administration.

Under Aquino, the Justice Department recently announced that it has recommended the filing of criminal charges against Fraport and PIATCO officials. It claimed in its recommendation that Fraport used front companies, or dummies, to circumvent the foreign ownership limit law, known here as "anti-dummy" laws. It also said Fraport admitted during ICSID hearings that its direct and indirect stakes in PIATCO had reached 61%.

PIATCO officials responded in a statement saying that the Aquino government's lawyers are in "cahoots with their favored business personalities" and that "it will use the anti-dummy charge as its last card". The PIATCO statement, signed by Moises Tolentino Jr, vice president for legal and administrative affairs, did not give specific names.

However, it is known in industry circles that the original proponent and losing bidder for the project was a consortium composed of some of the country's top tycoons, including mall magnates John Gokongwei and Henry Sy, banking tycoon Alfonso Yuchengco, real estate mogul Andrew Gotianun and Philippine Airlines' owner Lucio Tan - some of whom are known corporate allies with the Aquino administration.

Meanwhile, German ambassador Lortsch said that he had privately asked the Aquino administration to "facilitate a legal, fair and timely solution" and that Berlin preferred an out-of-court settlement to the conflict. He suggested that a negotiated settlement "would help boost the credibility of the administration and the economy".

In comparison, Lortsch noted that the late president Corazon Aquino, Benigno's mother, honored the international debts incurred during the disgraced Ferdinand Marcos regime - a not-so-veiled suggestion that Aquino should restore the terms of the original contract brokered under Ramos.

The airport dispute has affected the provision of German soft loans for the Philippines, including funds earmarked earlier for combating HIV/AIDS, malaria and tuberculosis.

Lortsch downplayed reports in the local media that Germany was also reconsidering other financial assistance to the Philippines, including ongoing development and environment projects in Mindanao, to pressure the government over the dispute. Either way, bilateral relations and Aquino's credibility with foreign investors is sinking fast.

Joel D Adriano is an independent consultant and award-winning freelance journalist. He was a sub-editor for the business section of The Manila Times and writes for ASEAN BizTimes, Safe Democracy and People's Tonight.

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DOTC chief says 'Category 1 status within reach'

MANILA, Philippines – “We are leaving no stone unturned in getting back our Categoy 1 status,” declared Secretary Jose P. De Jesus of the Department of Transportation and Communications as he keynoted the 2nd Philippine Aviation Summit held at the Main Function Hall PAF Aerospace Museum Col. Jesus Villamor Airbase Pasay City, on Jan. 19, 2011.

In a speech read for him by DOTC Undersecretary Glicerio Sicat, Secretary de Jesus said only two key remaining items remain to be accomplished for Philippine aviation to get back to its Category 1 status – and thus enable Philippine carriers to expand routes in the United States and to be allowed once again to land on European soil.

“We are leaving no stone unturned in improving, upgrading, expanding and modernizing all aspects of Philippine aviation,” the secretary pointed out.

“The good news is that we are only a few steps away from getting back our Category 1 status,” De Jesus said.

De Jesus also cited a feasibility research entitled “Greater Capital Region Airport Rationalization Study” on a planned integration of operations of the NAIA in Metro Manila and the Diosdado Macapagal International Airport (DMIA) in Clark, Pampanga.

The scope of the study includes three key areas: analysis of issues on airport development in Metro Manila, formulation of an optimum airport security plan; and preparation of a development plan for DMIA and NAIA.

He added that the aviation sector is being geared up “for the next challenge which is the Open Skies policy that may govern our flying community whether in its pure or altered form.”

The Transportation chief also said changes in the aviation sector include strengthening the Civil Aviation Authority of the Philippines (CAAP) by separating its operational functions from its regulatory duties, resulting in “efficient, responsive, and even caring airport operations.”

“It is a maxim of good governance that the functions of regulation shall be distinct and separate from the purely operational in order to install a built-in check-and-balance system within one sector,” the secretary stressed.

De Jesus recently appointed seven aviation professionals to key posts in the CAAP while its database undergoes modernization “for easy access and retrieval” of vital information about Philippine aviation.

The package of reforms unwrapped by De Jesus during the aviation conference also consisted of the commissioning of the Ninoy Aquino International Airport Terminal 3 (NAIA3) for full commercial operations by yearend, and the construction or rehabilitation of many more international airports nationwide.

Underscoring the government’s thrust in developing further the country’s civil aviation sector, De Jesus described the projects he cited as “notable examples of our earnest and vigorous initiatives to build new international airports, to upgrade or modernize existing ones, and to pursue a sustainable program of airport improvements.”

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Mayor Amante hopeful of Butuan’s full recovery after the calamity

Following the sporadic floods experienced by Butuan brought about by the heavy rains during the first week of January, Mayor Ferdinand M. Amante Jr. is thankful that the city was able to withstand the threat and is now on the road to full recovery.
In fact, he stressed that it tests the readiness of the city in times of calamities and he is very grateful for the support of all line agencies and stakeholders for their dedication to help the people especially those belonging to the marginalized sector.
In his meeting with President Benigno Simeon C. Aquino III on January 14 of this year, at the Civil Aviation Authority of the Philippines (CAAP) Office, Bancasi, this city, he was assured of the national government’s commitment to assist in the rehabilitation of the city as well as the support for all developmental endeavors in building for a stable and economically-viable city.
The President visited the city to see the damages brought about by the said calamity and Mayor Amante personally apprise the President of the extent of the damage, particularly the agricultural sector, affecting most of the 59 rural barangays. During the President’s visit, he turned-over initial relief goods to assuage the concerns of the farmers over the state of their fields with the following items: 50 bags of certified seeds; 3 units water pump engine sets; 2 boxes assorted vegetable seeds; requisition and issue slip for 1 set of assorted medicines and medical supply.
It is of great significance that the President personally evaluated the damages brought about by the bad weather condition which unfortunately affected many areas in Visayas and Mindanao and he is thankful to note that among all the areas in Caraga region, Butuan City is the least hit by the calamity.
The President lauded the efforts of the local government of Butuan for its disaster management readiness in its immediate response to control or lessen the impact of the damages, brought about by the calamity.
Mayor amante assured all Butuanons especially those who were affected by the calamity that the local government will continue to assist them and extend help in whatever means possible until the city will fully recover.
The goods and items received for the mitigation program will be given to the respective departments or offices for distribution to the identified beneficiaries.

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