Sanctity of contracts

THE DECISION last week of the Supreme Court ordering the government to pay $510 million in “just compensation” to the original owner of the controversial Ninoy Aquino International Airport Terminal 3 is a boost to the Philippines’ reputation among investors. It would have been better, of course, had it come much earlier, and not after 11 years of legal wrangling that followed the government’s expropriation of the terminal.

No matter how adversely others view the airport contract between the government and Piatco (Philippine International Air Terminals Co. Inc.), the point is that a legally binding contract existed, one that was agreed upon and signed by the contracting parties.

The Naia 3 fiasco is not the only case of government flip-flopping on its policies or decisions. Administrations since the toppling of the Marcos dictatorship in 1986 received their share of criticism for changing rules midstream or reversing decisions to the dismay of investors. Take the privatization of the Manila Hotel during the Ramos regime. The bid was won by a Malaysian group, but a losing bidder questioned the awarding of what it labeled a national heritage to a foreigner. Sadly, the Supreme Court sided with the losing bidder.

Another controversy involving the contract with the Argentine firm Impsa to rehabilitate and operate old hydro power plants lingered through three administrations.

Impsa was offered the project to rehabilitate the Kalayaan hydro plant in Laguna, and its unsolicited proposal was cleared by the government in December 1994. Impsa was later allowed to amend its proposal to include the Caliraya and Botocan plants, all in Laguna. It was endorsed by the Ramos administration to President Joseph Estrada, under whose term a contract was signed to rehabilitate the Caliraya-Botocan-Kalayaan (CBK) plants, with Estrada himself as witness. Records later showed that the government had “bent over backwards” to accommodate Impsa. The Arroyo administration, which succeeded the short-lived Estrada regime, even granted its request for a government guarantee to assure Impsa’s lenders.

Then there is the more recent case involving the Metropolitan Waterworks and Sewerage System (MWSS) and the two private concessionaires in Metro Manila.

Ayala-led Manila Water Co. Inc. lost in its arbitration proceedings against the MWSS after the appeals panel ordered Manila Water to cut its basic water charge. In September 2013, the MWSS reduced Manila Water’s basic charge for the rate rebasing period 2013-2017, prompting the East Zone water concessionaire to dispute the rate reduction with the International Chamber of Commerce (ICC). However, the arbitration panel agreed with a rate reduction and ruled that Manila Water was a public utility and therefore could not pass on its corporate income tax to consumers. West Zone concessionaire Maynilad Water Services Inc., on the other hand, secured a favorable ruling from the appeals panel, which upheld its rate rebasing adjustment that would result in an increase in the 2013 average basic water charge. Maynilad was also allowed to recover its corporate income tax. Due to the conflicting decisions, the MWSS did not follow the ICC rulings and chose to bring the case to court.

Also a controversy under the Aquino administration is the case of the Metro Pacific group of businessman Manuel V. Pangilinan. Concerns were raised after the government decided to subject the Subic-Clark-Tarlac Expressway to a Swiss challenge, effectively setting aside the Arroyo administration’s award of the project to the Metro Pacific group. Manila North Tollways Corp. (MNTC), a unit of Metro Pacific, even offered to raise the government’s revenue share and a longer period within which it would subsidize payment of the Bases Conversion and Development Authority’s debt to a Japanese lender. MNTC was eventually awarded the project in the middle of this year, or after a delay of nearly five years.

At the end of the day, the government should remember that attracting investors requires certainty and predictability in its policies. Changing rules midstream will send the wrong signal about the business climate in the Philippines. The Supreme Court’s decision on Naia 3 will hopefully put closure to a long-running legal dispute and give the government valuable lessons on how to best deal with the private sector, the foremost lesson being: Uphold the sanctity of contracts.