Just Right
By Atty. Cyril Regalado

The Piatco Fiasco

The Supreme Court should not be thought of as having been tasked with the awesome responsibility of overseeing the entire bureaucracy.  Pervasive and limitless, such as it may seem to be under the 1987 Constitution, judicial power still succumbs to the paramount doctrine of separation of powers.  The Court may not at good liberty intrude, in the guise of sovereign imprimatur, into every affair of government.  What significance can still then remain of the time-honored and widely acclaimed principle of separation of powers if, at every turn, the Court allows itself to pass upon at will the disposition of a co-equal, independent and coordinate branch in our system of government.  I dread to think of the so varied uncertainties that such an undue interference can lead to.”—Justice Jose Vitug

Ask a foreign investor if he wants to invest in the Philippines and he will probably answer that it's too risky. It is not so much the lack of business opportunity as the volatility of government regulations. In fact, in a survey among foreign investors,    their chief complaint is that there are too many bureaucratic rules that tie down the smooth progress of organizing a business. Worse, just at the time when the investor has already infused substantial capital to the project, government changes the rules.   The recent Supreme Court ruling annulling the PIATCO contract in the construction of the new NAIA Airport has confirmed this type of foreign investor apprehension.

The facts are quite complicated because they span three presidential tenures. But the basic antecedents are simple.

On June 7, 14, and 21, 1996, DOTC/MIAA sent out invitations to bid for the construction of a new terminal. AEDC and Paircargo Consortium joined the bidding. AEDC, however, protested that Paircargo did not have the financial capability to pursue the project. DOTC ruled otherwise.

When the bids were opened it was shown that, on top of the construction cost AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion for the same period. Paircargo Consortium was awarded the contract and it incorporated into Philippine International Airport Terminals Co., Inc. (PIATCO) and proceeded with the project.

Later Airport workers, congressmen and other groups filed a case with the Supreme Court to annul the PIATCO Contract, which was amended three times. President Arroyo later declared that the PIATCO contract was null and void. In May 2003, the Supreme Court struck down the contract as null and void because Paircargo /PIATCO did not have the financial capability when it joined the public bidding.   The Supreme Court said that while it is true that the Bids and Awards Committee, ruled, prior to the bidding, that Paircargo /PIATCO had the financial capability, the Bids and Awards Committee failed to consider that one of the partner companies of the Paircargo consortium, Security Bank, was governed by the General Banking Act which provides that banks cannot invest more than 15% of its net worth in a single enterprise. Therefore, in computing the capitalization of Paircargo , the Bids and Awards Committee should only have computed 30% of Security Bank's capital. And, If only    30% of Security Bank's capital is computed into the total capital of Paircargo , it would fall short of the minimum capital requirement for bidders. For this reason, the Supreme Court ruled that Paircargo /PIATCO was undercapitalized, not qualified to participate in the bidding and, therefore, its bid and the ensuing contract it entered into with Government is null and void. When the Supreme declared the PIATCO contract null and void, the Airport was already completed. So there you are; the Bids and Awards Committee declaring that Paircargo was qualified on the one hand, and, on the other, the Supreme Court declaring that it was not because it was financially incapable. One wonders though how a business venture could have completed the airport terminal if it was not financially viable.

Law students can perhaps recall the case of USI Petrochemical. The Taiwan giant originally planned to build a $200-million petrochemicals plant in Bataan . However, after further study, it decided to transfer its site to Batangas . On Petition of Congressman Garcia of Bataan the Supreme Court ordered USI Petrochemical to set up its plant Bataan . USI Petrochemical pulled out in disgust. Who wouldn't? Was it proper to judicially determine where a business should be located?      Later, Taiwan 's Tuntex group also abandoned plans for a $4-billion petrochemicals complex in Pangasinan , home province of then President Fidel Ramos, because of regulatory delays at its $1-billion Philippine cement project.

And of course, there is the Manila Hotel Controversy. GSIS put on sale its 51% stake to the Manila Hotel. In the ensuing public bidding, Malaysia 's Renong Overseas Berhad won the bid. Losing bidder Manila Prince Hotel, a Filipino consortium headed by newspaper tycoon Emilio Yap, had offered to match Renong's higher bid. But the government pension fund GSIS, which owns the hotel, said the rules do not allow that option. Manila Prince went to the Supreme Court. It anchored its argument on Section 10, Article XII, of the Constitution: “In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos.”

In finding for the Filipino group, the justices ruled that the Manila Hotel is part of the nation's patrimony. “We are not talking about an ordinary piece of property in a commercial district,” said the decision. “We are talking about a historic relic that has hosted many of the most important events in the short history of the Philippines as a nation.” Foreigners could buy the hotel, ruled the justices, “only if no Filipino qualifies [in the bidding] or if the qualified Filipino fails to match the highest bid tendered by the foreign entity.”

That came as a surprise to many. “We've never thought of a hotel being part of the national patrimony,” observed lawyer Richard Romulo . GSIS chairman Cesar Sarino said the question of patrimony did not arise when the bidding was being planned.

The Philippines has been trying to invite investors to come to the country because it cannot fund all its infrastructure needs on its own. But the competition for foreign money is getting intense as giants like China, India and Indonesia continue opening their economies. Smaller countries like the Philippines need to scramble to get their share. But instead of providing a favorable climate for investment, government has been turning off investor confidence with a less than even playing field.