‘This gov’t does not honor contracts’

(First of five parts)

THIS is quite a negative report, but it is based on the facts of the cases covered. It is, therefore, a report that the Aquino administration must act on and correct as it does not give a picture of a government that cares for investors and treats them well.

We have talked often of the sanctity of contracts and the need for the government to maintain consistency in what it does, particularly as it transits from one administration to the next.

Within this administration, there have been too many very worrying violations of contracts. Coupled with much delayed payments of value-added tax (VAT) refunds and other financial obligations, these send a disturbing message of a government whose word can’t be trusted, whose obligations can’t be expected to be met.

One wonders if President Aquino is aware of what’s going on.

The recent case that many people have brought up was the mess created at Metro Rail Transit 3 (MRT 3) when the Department of Transportation and Communications canceled a successful, working contract and gave it to an unknown, untested newcomer for supposedly potential cash savings that would now actually entail a huge cost.

Then, there’s the Manila Waterworks and Sewerage System violating its agreements with Maynilad and Manila Water, putting at risk a hugely successful turnover of a public utility.

Add to that is the fight between the Bases Conversion and Development Authority (BCDA) and its lessee, Camp John Hay Development Corp. Because of its actions, the BCDA is foregoing an estimated P5.2 billion worth of potential lease revenue in a deal that would have given Baguio City 25 percent of this amount.

Then, there’s the court ordering Philippine International Air Terminals Co. Inc. be paid—and the government ignoring the order.

Earlier, a critically important project, an air navigation system, was held up for 21 months for no valid reason.

PEACe bonds

There’s also the Poverty Eradication and Alleviation Certificates, or PEACe bonds, in which the Bureau of Internal Revenue (BIR) reneged on its promise that the bonds would be treated as tax-free.

Fortunately, the Supreme Court recently ruled against the BIR and favored the financial institutions that invested in the bonds.

But the attempt had been made, which a responsible government would never have done. Investors worry whether such an attempt might succeed in the future.

Then, there are VAT refunds—due to companies that were promised VAT-free transactions—that take months, even years to obtain—if ever the companies are refunded at all. No interest is paid on the overdue payment. But the government’s reputation has been damaged.

Even a simple thing like the issuance of a vehicle license plate gets bungled. Likewise, with an even simpler thing that can’t be done—the issuance of a driver’s license. A driver’s license applied for in the first week of July might—get this “might”—be available in September or October.

Puregold in remote Pagsanjan town in Laguna province issues a privilege card in four minutes. A government that can’t even issue a simple plastic card is a government that has failed in its job.

Very negative image

All these cases present a very negative image of this government—one that doesn’t keep its word, one that doesn’t honor contracts, and one that doesn’t obey court orders.

It’s a government one would hope the President is not happy with—and will now act forthrightly to correct as one would like to hope this is not a reputation he would want the Philippines to have, or a legacy he would like to leave behind.

But if he doesn’t act forthrightly now, it’s a reputation and a legacy he would leave behind.

The Arroyo administration also canceled or unilaterally amended contracts. We counted five such contracts, but we probably missed some.

Contracts are inviolate

There seems to be an inability of the Philippine government to understand that contracts are inviolate. Only courts can cancel contracts, or unilaterally amend them—but only for valid legal reasons upheld by a court of law.

Investors look for stability, consistency and predictability of the business environment. Rules must not be changed on a whim in the middle of the game. Contracts must be honored.

A study by Apec (Asia-Pacific Economic Cooperation) in 2007 indicated that a weak enforcement of contracts is among the most pernicious ways of turning off foreign investors.

It doesn’t do much good for getting local investments either. Since that report in 2007, there’s been no improvement.

Economies, businesses and societies are built on contracts held as sacrosanct. A man’s word should be enough, but in today’s modern, complicated world, clearly delineated terms between the two parties are needed. And once the parties have agreed to those terms, these cannot be changed without the willing agreement of both sides.

If that is not the case and the Philippines is a country today where that is not the case, then deals won’t be struck and investments won’t happen.

Which brings us to where we are today: nine contracts or promises changed in a questionable manner.

We put it down to a government that can only see things in terms of short-term cash, in what gives it the most money today regardless of the impact tomorrow, and regardless of agreements reached and of a decision’s wider ramifications.

(Next: Gov’t inept at running MRT)