With Due Respect

After 20 years, Naia 3 still unfinished

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After two decades of seemingly interminable disputes including several local litigations and international arbitration cases in Singapore and in Washington, DC, Terminal 3 of the Ninoy Aquino International Airport (Naia 3) is still mired in controversy and still unfinished both physically and legally.

Intertwined aspects. The physical and legal aspects are intertwined. The latest news in the physical is the announcement a few days ago of Transportation Secretary Joseph E. A. Abaya that the government will spend an additional P1.9 billion to complete the terminal in August 2014.

On the legal front, the latest is the Court of Appeals (CA) decision in Republic vs Piatco (Aug. 7, 2013, penned by Justice Apolinario D. Brusellas Jr.) holding that the “just compensation” for the partly finished Naia 3 is $371,426,688.24 ($371 million).

This CA decision modified an earlier judgment of the Regional Trial Court (RTC) of Pasay ordering the Republic to pay the Philippine International Air Terminal Co. (Piatco) $175,787,245.10 ($176 million).

Both courts initially used the Republic’s computation of $300 million as “replacement cost” as of December 2002 “when construction ceased.” But the RTC subtracted “deterioration and depreciation” and “deduction for noncompliance by Piatco with contract specifications.”

On the other hand, the CA did not make such deductions, ruling that they have already been factored in the Republic’s $300 million calculation. In addition, it imposed a 6-percent annual interest rate, on the ground that the applicable expropriation law (RA 8974) required the Republic to pay the $300 million when it took over the unfinished terminal in 2004. Since it did not, then it should pay interest at the legal rate of 6 percent. Both the CA and the RTC rejected Piatco’s “just compensation” claim of over $900 million plus 12-percent interest.

Review strategy. Before deciding whether to appeal to the Supreme Court, the government, in my humble view, should first review the arbitration proceedings.

Both the Singapore and Washington arbitration panels dismissed Piatco’s claims without any award. However, at the initiative of Fraport AG, the German shareholder of Piatco, a second panel was created by the World Bank-sponsored International Center for Settlement of Investment Disputes (Icsid) in Washington, DC, which annulled the decision of the first arbitral panel.

Thereafter, a third arbitral panel was created by Icsid, which is now hearing all over again the compensation claim. To prevent possible double payment, the input of our Philippine counsel, retired Justice Florentino P. Feliciano, should be sought.

In fact, I think the overall legal strategy of the Republic should be reviewed. Recall that in 1993, six taipans formed Asia’s Emerging Dragon Corporation (AEDC) which submitted an “unsolicited proposal” to construct and operate Naia 3 under the build-operate-transfer scheme of RA 6957.

However, the proposal was challenged by Piatco. Both offered (1) to build Naia 3 for at least $350 million at no cost to the government, and (2) to pay the government 5 percent (escalating to 10 percent) of the gross revenues of the airport for 25 years. AEDC guaranteed at least P135 million, but Piatco offered P17.75 billion! So, Piatco won the award.

But, after the concession contract was signed in 1997, the government executed a new agreement and three supplements which gave new substantial benefits to Piatco. On May 5, 2003, the Supreme Court (Agan vs Piatco, penned by Justice Reynato S. Puno) invalidated them due to their legal infirmities.

Instead of taking over the terminal and operating it “temporarily…  in the exercise of its police power, not the power of eminent domain…” as ruled by the Puno  ponencia, the government—for reasons I cannot fathom up to now—instituted the long-winded expropriation case in the RTC of Pasay (and later in the CA), as discussed earlier.

New international airport. I believe the more expeditious way was to ask the Supreme Court directly (in Agan vs Piatco) to fix the compensation to be given for the takeover. As a sitting member of the Court at that time, I wrote a separate opinion invalidating the Piatco contracts for “being riddled with irregularities galore and blatant violations of law and public policy, far too many to ignore.”

But to avoid unjust enrichment for the government, I also opined that Piatco, its subcontractors, investors and lenders should be reimbursed their actual and reasonable construction expenses.

Then, I suggested that the government should “bid out the operation of the facility under the same or analogous principles as build-operate-and-transfer projects… How the payment to the builder, funders, investors and contractors will be staggered and scheduled will have to be built into the bids, along with the annual guaranteed payments to government.”

In this way, the terminal could be completed and operated immediately without any expense but with sure income to the government. However, both the Supreme Court’s ruling on temporary takeover and my practical suggestion were ignored.

Naia 3 was conceived 20 years ago to fill the aviation needs of the country for the next 25 years. Obviously then, the terminal would be almost obsolete as soon as it is completed. Thus, our government should carefully plan the next step: a new international airport for the coming 25 years. And this time, let us do it right.

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  • ricelander

    A classic demonstration of how 60/40 restriction ruins a project.

    At the heart of the problem is really a bloody squabble over who takes control and who owns the entire project among local and foreign partners. And the attempt of powerful individuals to take a slice of what could have been a lucrative gold mine by exploiting a natural weakness in the contract like threatening to expose “unconstitutional”/”illegal” arrangements designed precisely to skirt the constitutional limits, itself facilitated through mediation authorized and guaranteed by whoever was then in power.

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