Philippines Aviation NEWS: 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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