How a business rivalry over NAIA 3 turned into a landmark anti-corruption caseWritten by Roel Landingin
Friday, 14 September 2007
Reposted
THE TWO men only had lomi noodles but it was a power breakfast like no other. What transpired in that brief meeting more than ten years ago set the stage for a prolonged and bitter fight for a government project. It continues to this day, and the object of the battle is one of the first things that visitors see when they fly into the country—the new but unused international passenger terminal.
One of the men at that fateful breakfast meeting, Vic Cheng Yong, has been the subject of a criminal prosecution before the Sandiganbayan for graft and corruption. Prosecutors alleged he conspired with government officials to draft a supplement to a contract that gave unwarranted benefit to his company, Philippine International Air Terminal Co. (Piatco), which built the new airport facility. The anti-graft court dismissed the complaint for lack of probable cause but prosecutors said they will appeal the case to a higher court. The Supreme Court declared the concession agreement null and void in May 2003, affirming President Arroyo’s announcement revoking the contract six months earlier.
The other man, Lucio Tan, the Philippines’ second richest person and the owner of the flag carrier Philippine Airlines (PAL), is asserting the right to run and operate the airport terminal. He and five other Chinese-Filipino taipans put up the Asia Emerging Dragons Corp. (AEDC) and offered to build the terminal. But the Chengs’ Piatco submitted a more generous counter-offer and got the project in 1997. Tan now largely controls AEDC after buying out his partners. He is asking the government and the courts to award the project to AEDC after Piatco’s contract was nullified.
Cheng Yong and Tan were college classmates studying chemical engineering at Far Eastern University after World War II. Tan dropped out of college and went to work for a tobacco factory. He put up his own company, Fortune Tobacco, soon the country’s biggest cigarette maker, with generous support from then President Ferdinand Marcos. He also entered the banking, beer brewery, and liquor distillery business and bought the flag carrier, Philippine Airlines, from the government.
Cheng Yong went into chemicals trading and set up Glee Chemical Laboratories Inc. which imported and distributed paints, solvents, and other industrial chemicals. After 1986, he entered the air cargo warehousing business and became the biggest customs bonded warehouse operator at the Manila international airport.
According to Cheng Yong, who recounted the breakfast in a counter-affidavit filed with the Office of the Ombudsman in December 2003, the meeting took place in Tan’s office at the Allied Bank Building in Makati City just days after the Department of Transportation and Communication (DOTC) notified Piatco sometime in October 1996 that its offer for the project was accepted.
“Mr. Tan told me that Paircargo & Associates (Piatco’s predecessors) was very silly to have submitted such a high financial offer of annual guaranteed payments to the GRP (Government of the Republic of the Philippines),” Cheng Yong said. “He considered such substantial payments to GRP a waste of money and urged that Paircargo & Associates simply withdraw its bid.”
Tan even offered to reimburse the P150 million that Paircargo had paid as bid bond to the government, added Cheng Yong, who said he refused the offer. “I could not risk losing my reputation and good standing before the GRP,” he said. ‘Besides, this was not a matter that I could decide alone because I had joint venture partners.”
Tan pursued the matter in at least three more meetings with Cheng Yong but the Piatco owner’s response was the same. He recalled that Tan even issued an outright challenge to him in the presence of their former college classmates. Said Cheng Yong: “He said that I would never be able to see Piatco through to Naia 3’s operation. He was so convinced of this that, according to him, if he is ever proven wrong, then I could ask him for anything.”
Tan’s words proved prophetic. After the adverse Supreme Court ruling, Piatco has a snowball’s chance in hell of ever running Naia 3. But neither Tan, nor, for that matter, the government, has been able to operate the facility. The Manila International Airport Authority (MIAA) has taken possession of the airport terminal after filing an expropriation case in court in December 2004 but has so far failed to open it.
But Tan did more than prophesize. He also had a hand in blocking Piatco from operating the new terminal. MacroAsia, his inflight catering company, was one of the intervenors in the September 2002 suit that asked the Supreme Court to bar the government from implementing Piatco’s contract. The high court did so seven months later, in May 2003. The following month, June, the AEDC corporate secretary, Cecilia Pesayco, submitted a lengthy complaint that became the basis for the Office of the Ombudsman to file a string of criminal cases against DOTC officials and Piatco and Fraport executives in January 2005.
LANDMARK CASES
What started as Tan’s determined effort to prevent Piatco from operating Naia 3 eventually developed into a string of criminal and international arbitration cases.
The five criminal suits brought by the Ombudsman against people involved in the Naia 3 deal are a rare instance when a Supreme Court decision voiding a major government contract led to criminal prosecution not only of top officials but also prominent local businessmen and even foreign investors. Among Cheng Yong’s co-accused are two executives of a major European company, Fraport AG, the operator of the world-famous Frankfurt airport.
The high court has nullified other contracts before, notably multi-billion peso deals such as Public Estates Authority-Amari reclamation project in the Manila Bay, the Commission on Elections’ computerization deal with MegaPacific, Pagcor’s Jai-alai project, and others. But these did not always result in the criminal prosecution of public officials and private proponents for graft and corruption. Notably, the value of Naia 3—Piatco is claiming to have spent at least P22.7 billion before construction work stopped in December 2002—exceeds the worth of the other nullified projects combined.
Most of the pending ill-gotten wealth cases against the late dictator Ferdinand Marcos and his cronies are civil in nature. The few criminal suits against Marcos and his associates targeted mostly former government officials. Even the plunder case against former President Joseph Estrada sought the prosecution of mostly former government officials. A few private individuals were also accused but none of his prominent businessmen friends and advisers were indicted, no matter the serious allegations against them.
REMINDER TO INVESTORS
Whatever the eventual outcome, the Ombudsman’s criminal cases against government officials and company chiefs and directors behind the Naia 3 deals are an important reminder to businessmen and investors that entering into contracts patently disadvantageous to the government and the public could land them in trouble. Anti-corruption advocates believe the Philippines may need something like that to keep future deals clean.
The Naia 3 controversy is important for another reason. The revocation of the contract has given rise to two international arbitration suits seeking compensation and damages from the Philippines. One was filed by Fraport with the World Bank’s International Commission on the Settlement of Investment Disputes (ICSID) in Washington DC and the other by Piatco before the International Chamber of Commerce Arbitration Court (ICC) in Singapore.
Piatco and Fraport’s arbitration suits are not the usual commercial dispute between states and investors, as both sides are accusing each other corruption. The government’s defense is to claim that the Naia 3 contract was illegal, and that its implementation was tainted by corruption, money laundering, illegal schemes to get around restrictions on foreign investments, and other irregularities.
But Fraport also alleged that two top advisers of President Arroyo were engaged in corruption by forcing the German company to hire Arroyo’s private lawyer anonymously and pay him millions of dollars through offshore accounts.
ICSID has dismissed Fraport’s suit after concluding that the German airport operator’s $425 million investment in Piatco was unlawful. The World Bank-affiliated body found that secret shareholder agreements between Fraport and Cheng-family controlled companies that owned the rest of Piatco violated the Philippines’ anti-dummy law, a Commonwealth-era law that penalized attempts to circumvent Constitutional restrictions on the role of foreign investors in certain economic activities.
At this is being written, Fraport said it is scrutinizing the decision and has yet to decide on whether or not it will move to annul the ruling and move for fresh proceedings, one of its options under ICSID rules.
Meanwhile, the ICC arbitration panel in Singapore is scheduled to hold hearings on Piatco’s complaint in November. The outcome of the ICC arbitration case is being closely watched not just for the compensation, if any, that Piatco could extract from the Philippine government. The judgment of ICC will also be rare tests of whether or not the international community believes the Arroyo administration when it accuses local and foreign investors of corruption.
BIGGEST INVESTIGATION
After filing of the two arbitration suits against the Philippines, the government launched what could be its biggest antimoney laundering investigation yet when it sought permission from a Makati court in July 2005 and from a Manila court in January 2006 to look into bank accounts of many of the respondents, and their companies, in the anti-graft cases pending before the Sandiganbayan. The Anti-Money Laundering Council (AMLC) wanted to examine financial records in connection with 32 accounts of four individuals and four companies in 13 banks, both local and foreign.
In addition, the Philippines also sought assistance from government and police investigators in Hong Kong and Frankfurt to look into bank and company records that may point to links between Piatco and Fraport on one hand and public officials on the other who approved the various Naia 3 contracts.
There is widespread interest in the result of investigation, which may yet uncover the money trail that leads from the private proponents of the Naia 3 project to the DOTC and MIAA officials. But it has also become an important test case on the limits of the AMLC’s power, with the Supreme Court barring one of the investigations until after respondents had been given a chance to refute the underlying allegations.
A March 2007 Department of Justice (DOJ) resolution of an anti-dummy complaint against Piatco and Fraport executives also riled foreign company chiefs in Manila who fear it could create doubts about the legality of foreign investments in some of the country’s biggest companies.
In deciding to uphold a complaint accusing Piatco and Fraport executives of violating the anti-dummy law, the Joint Foreign Chambers of Commerce (JFC) said the DOJ revived the so-called “Grandfather Rule,” a stricter way of determining the extent of foreign ownership in a corporation. The JFC warned the ruling “has transcendental impact on existing corporations and business entities as well as overreaching effect on prospective foreign investments.”
Business consultant Peter Wallace was blunter: “If (the) ruling should prevail, it would negatively affect a number of major joint ventures in this country. They would suddenly, after all these years, become illegal. The chaos this would create can hardly be imagined.”
For these and other reasons, the Naia 3 controversy is now bigger than any of the people and companies directly involved. And it all began quite inauspiciously.
BEATING THE TAIPANS
In April1993, then President Fidel Ramos asked six of the wealthiest Chinese- Filipino businessmen to join together and invest in a major infrastructure project. Apart from Tan, the taipans include snack food maker John Gokongwei, shopping mall king Henry Sy, insurance magnate Alfonso Yuchengco, banker George Ty, and property developer Andrew Gotianun.
Ramos has just taken a trip to China with the six taipans and noted they were investing heavily in their forebears’ homeland. He challenged them to invest some of their money in a key infrastructure project in the Philippines.
The six businessmen agreed and, in September 1993, formed the AEDC, which submitted a proposal the following year to build a new passenger terminal for the Manila international airport as the existing one, built way back in 1981, was fast getting congested. The AEDC would shoulder all costs in constructing the facility but would collect the bulk of the revenue from passenger terminal fees, retail and airline leases, and aircraft docking fees.
The build-operate-transfer (BOT) law required the government to subject AEDC’s offer to a challenge, and notices were published in June 1996 inviting alternative offers to be submitted by September that year.
The project apparently piqued the interest of the Cheng family, who were already a big player in the air cargo handling and warehousing business at that time. AEDC president Antonio Henson recalled in a declaration issued March 2005 that shortly before the September 1996 bidding, Jefferson Cheng, Cheng Yong’s son, asked for an appointment. In the meeting, which was arranged by Pantaleon Alvarez, a member of the bidding committee, Cheng asked for his group of investors to join AEDC. His offer was refused because AEDC already had sufficient resources, Henson said. Both Cheng and Alvarez have denied any knowledge of the alleged meeting.
The Chengs then formed their own consortium composed of the People’s Aircargo & Warehousing Corp., Philippine Air and Ground Services (PAGS), and Security Bank. With Lufthansa AG as adviser, the consortium that would later become Piatco submitted an offer that promised the government guaranteed payments of P17.75 billion over a 27-year period, or P650 million a year.
Paircargo’s offer overshadowed the taipans’ bid, which guaranteed payments to the government of P135 million over the next 25 years, or P5 million a year.
Though the Chengs’ offer raised a lot of eyebrows —it’s not everyday that the six wealthiest Chinese-Filipino businessmen lose in a bidding—Jefferson Cheng, Piatco’s treasurer, said it was based on recent trends in airport design.
“It’s actually like a mall with an airport,” he said in an interview in August 2007. “All new airports in Europe such as Schiphol, Frankfurt, the UK—the trend has been more to be able help take the burden away from passengers. To pay for the improvements, they decided to have more retail space.” He said Piatco allotted extra space for retail to accommodate well-wishers. “Our conservative estimate is for every one passenger there are five or six family members,” he said.
NO BIDDING WAR
Regardless of the business model, government officials welcomed the Chengs’ higher offer. They were hoping for some kind of a bidding war that could press the AEDC to come up with a more generous proposal.
Indeed, officials were quite disappointed with the AEDC offer of only P5 million a year. “We informed the taipans that this was not acceptable to government because, in effect, we would be losing something like P115 million per year,” National Economic and Development Authority (NEDA) director Ruben Reinoso told the House of Representatives Transportation and Communications committee in November 1999.
He said that in 1993, the MIAA was earning net revenues of P120 million a year from the international passenger terminal. AEDC raised its offer but only to P27 million a year.
Gerry Cunanan, a former Philippine Air Force colonel tapped by Ramos to run MIAA from 1992 to 1995, recalled more than a decade later he tried to convince the Lopezes’ Benpres group to put in a bid of their own if only to give AEDC more competition. But the Lopez family was not interested, he said.
Cunanan left MIAA in 1995 and worked for a property company but when he heard the Chengs were preparing a counter-offer to AEDC’s, he volunteered to help them. Cunanan, who has a management degree from the Asian Institute of Management, later became the president of Piatco in 2001 and 2002.
The bidding war that officials were hoping for did not happen. AEDC refused to match Piatco’s offer, saying it was not given sufficient information by the government to do so. Besides, AEDC believed that the Paircargo group failed to meet the minimum requirement for financial capability, and was questioning the DOTC and MIAA’s decision to prequalify the group in the first place.
CHENGS’ BID ACCEPTED
The bidding committee headed by DOTC Undersecretary Primitivo Cal concluded that Paircargo, PAGS and Security Bank had a combined net worth of P3.9 billion, which was more than the minimum of P2.75 billion. Security Bank alone had a capitalization of P3.5 billion. The government wanted a terminal that cost no less than $350 million or P9.1 billion, and asked bidders to have a minimum equity equivalent to at least 30 percent of project cost.
But in AEDC’s view, Security Bank’s entire capital could not be counted as equity for the project because of central bank regulations limiting banks’ investment in any single business to just 15 percent of net worth. Adjusted for this rule, only P525 million of Security Bank’s capital could be counted as equity for the terminal project, and the Paircargo group’s total equity was no longer P3.9 billion but only P925 million, which was woefully short of the minimum needed.
The DOTC stuck to its decision. In a memorandum sent to AEDC on October 15, 1996, Cal insisted: “It is not a requirement that the net worth must be ‘unrestricted.’ To impose this as a requirement now will be nothing less than unfair.” He added: “The financial statement of the net worth is not the sole basis in establishing financial capability (which) may also be established by testimonial letters issued by reputable banks. The challenger (i.e. Paircargo group) has complied with this requirement.”
The following day, October 16, the bidding committee informed the Chengs that their offer was accepted. The DOTC then told AEDC to prepare a proposal matching the Chengs’ offer. A few days after, Tan sought a meeting with Cheng Yong, and asked him to withdraw Paircargo’s offer.
The six taipans never matched the Chengs’ offer, with the AEDC claiming the DOTC never gave it the pertinent data to make a counter-proposal. Instead, it continued to dispute the bidding committee’s decision to prequalify Paircargo, alleging that the company lacked capital and failed the nationality criteria because it designated Lufthansa AG, a German company, as its terminal operator.
Two months later, in December 1996, the DOTC awarded the project to Paircargo.
The prequalification of the Paircargo consortium amid questions about its financial capacity was one of grounds why the Supreme Court declared the NAIA 3 contracts null and void in May 2003. The high court rejected Cal’s explanation and upheld AEDC’s view that only 15 percent of Security Bank’s net worth should be counted in determining the Paircargo consortium’s capitalization.
It also led the Office of the Ombudsman in January 2005 to indict former DOTC undersecretary Primitivo Cal and Wilfrido Trinidad, and MIAA officials Francisco Atayde and Pantaleon Alvarez in the first of five criminal cases arising from the Naia 3 fiasco, Case No. 28089, filed with the Sandiganbayan.
1997 CONCESSION AGREEMENT
The first round of the battle for NAIA 3 was not just between rival business groups. It was also about competing visions of the project itself. Whereas AEDC thought of the terminal as essentially a public utility whose revenues were subject to strict government regulation, Piatco viewed it as moneymaking retail venture located at an airport terminal or “a mall with an airport,” as Cheng himself admitted. In Piatco’s business model, almost half of terminal revenue would come from leases and fees from retail businesses, including the duty-free shop which was expected to relocate to the new facility.
The 25-year Concession Agreement drafted in early 1997 by the Paircargo group—which had incorporated as the Philippine International Airport Terminal Co Inc. (Piatco)—and the DOTC reflected these pressures to boost the terminal’s revenues. For example, it cut the number of fees considered as public utility revenues from eight in the draft agreement to only four.
Public utility fees were subject to adjustment once every two years following a prescribed formula and the changes required MIAA’s written approval. Other fees could be adjusted at the discretion of Piatco. The currency denomination of three of the remaining four public utility fees was changed from Philippine pesos to US dollars. Some form of financial responsibility by the government was also contemplated.
Its protests with the DOTC dismissed, AEDC on April 16 filed a civil suit with the Pasig regional trial court seeking to nullify the award of the project to Paircargo and to stop the DOTC from further negotiating with the Chengs. It was to be the first of many legal suits and complaints to block the finalization and implementation of the contract.
The AEDC failed to secure a court injunction, and the DOTC and Piatco pushed ahead with finalizing the concession agreement, which was signed on July 12, 1997 by then DOTC Secretary Arturo Enrile and Piatco chairman Henry Go.
Like Paircargo’s prequalification, the signing of the 1997 concession agreement also proved highly contentious. The Supreme Court cited the deviations from the bid documents and draft concession agreement as another ground for nullifying the deal. Enrile and Go would later be charged by the Ombudsman in Criminal Case No. 28090 filed before the Sandiganbayan for signing the concession agreement.
Though AEDC’s civil suit did not stop the signing of the concession agreement, it weighed heavily on the minds of the Piatco owners. They wanted guarantees they could recover their initial investments and payments to government in case the AEDC won the case. They also wanted to have the right to terminate the concession agreement if AEDC’s suit was not resolved in favor of the government soon.
SIDE AGREEMENT
Thus, apart from the concession agreement, Enrile and Go signed a side agreement giving Piatco guarantees and protection from a delayed or adverse resolution of the AEDC suit. The side agreement gave Piatco the right to terminate the concession agreement and obliged the government to reimburse Piatco for all costs and expenses, including the P180 million advance, if AEDC’s civil case filed was not resolved by June 30, 1998. The side agreement was amended in April 1998 and the deadline was extended to June 30, 1999.
Gloria Tan Climaco, former chair of the accounting firm SGV and President Gloria Arroyo’s adviser on flagship projects in 2001- 2003, said the side agreement, which was not approved by the government’s Investment Coordinating Council even though it was part of the concession agreement, gave Piatco “blanket authority to incur costs to be reimbursed from public funds.”
The Office of the Ombudsman deemed the side agreement to be so disadvantageous to the government that it was the sole basis for a separate criminal suit, Case No. 28091, filed against Enrile and Go with the Sandiganbayan in January 2005. It was distinct from the main case against the two men for signing the concession agreement.
Marife Opulencia, a Piatco lawyer, said the side agreement was just meant to ensure that the Paircargo group could still get its money back in case the project was scuttled. She said: “There was a side agreement because we already gave P180 million to the government to clear the site for the relocation of Air Force facilities. We gave you P180 million and if we lose the project, how do we get our money back?”
ENTER ESTRADA: AEDC WITHDRAWS SUIT
Piatco’s worries about the AEDC civil suit were finally laid to rest the following year with the election in May 1998 of Joseph Estrada. Among the new president’s moves within two months of assuming power was to call representatives of the AEDC and Piatco to a meeting in Malacañang. In that meeting, held September 3, Estrada made an extraordinary request: for AEDC to drop the civil suit pending before the Pasig RTC against the award of the Naia 3 contract to the Paircargo group, now Piatco.
AEDC agreed but on condition that it be given a copy of the concession agreement and that the contract did not deviate from the DOTC’s original bid documents and draft concession agreement. Though AEDC clearly had reservations about the concession agreement, it eventually decided to withdraw the case and informed Estrada later that the suit had been withdrawn “in good faith.”
The withdrawal of AEDC’s civil suits against Piatco gave rise to public perception of the Chengs’ ascendance under the Estrada administration vis-à-vis the six Chinese-Filipino taipans. The Chengs did not just wrest the Naia 3 project away from the likes of Tan, Sy, and Gokongwei, who are some of the richest persons in the Philippines. They also had the taipans drop the AEDC’s civil suit against Piatco through the intervention of no less than the country’s president.
Congressmen investigating the Naia 3 concession agreement in 1999 referred to Piatco’s owners as Estrada cronies. When Myrna Borromeo, then the executive director of Nayong Pilipino Foundation, mentioned that one of the Zamora brothers, referring to Manuel and Ronaldo Zamora, was a stockholder or board member of Piatco, she was readily believed though she offered no proof. Ronaldo Zamora was then Estrada’s executive secretary while Manuel was mainly in business though he also served as the treasurer of Estrada’s political party.
When Ronaldo Zamora was asked about the matter in August 2007, the former executive secretary and now San Juan congressman said: “I was never involved in Piatco. I don’t know (the) Chengs, who the hell they are. I’m not sure they’re the people I’d like to be with.”
Indeed, the Zamoras did not appear as incorporators, board members, or even stockholders of Piatco but the impression they had something to do with the company persisted, perhaps because Security Bank, a bank that Manuel Zamora used to control, had the biggest equity position in the Paircargo consortium. He bought Security Bank, which used to be run by Marcos “financial executor” Rolando Gapud, after the dictator fled the country following the 1986 EDSA revolution. However, he sold most of his stake in the bank in the early 1990s, before Security Bank launched an initial public offering in 1995.
Ronaldo Zamora said: “Security Bank shouldn’t be owned by dilettantes like us so he (Manuel) sold, reduced his shares from 80 percent to about 20 percent.”
AMENDED CONCESSION AGREEMENT
Asking AEDC to drop the civil suit against the prequalification of Piatco was not the only help Piatco got from the Estrada administration.
When Piatco wanted to amend the 1997 Concession Agreement to accommodate concerns of international lenders, Estrada posed no objection, even though the changes covered 17 substantial items that included a sharp increase in terminal fees. Then DOTC Secretary Vicente Rivera signed the amended and restated concession agreement with Piatco chairman Henry Go in November 1998,
Piatco could not get a domestic loan and so had to turn to international lenders, who were unduly concerned with foreign exchange risks in the wake of the 1997-1998 region-wide currency meltdown.
The new agreement changed the currency denomination of the passenger terminal fee from pesos to dollars, and pegged it at $20 per traveler. The move effectively raised the terminal fee in peso terms by almost 60 percent to P790 from only P500 the year before because the peso fell against the dollar from P26/$1 to P40/$1 during the same period. Climaco said the change boosted Piatco’s projected returns to well beyond the 12 percent maximum allowable return on rate base.
Piatco defended the changes, saying they were necessary in the wake of the 1997 peso devaluation. Company spokesman Moises Tolentino said the move would also benefit the government, which is entitled to almost half of the terminal fees, which are only collected from tourists and other travelers but not from overseas Filipino workers. “Those who can afford them, let’s tax them so the government can benefit,” he said.
The Estrada administration’s approval of the amendments in Piatco’s concession agreement contrasted sharply with the ousted president’s objections against similar efforts to amend the Ayala and Lopez group’s concession agreement with the Metropolitan Waterworks and Sewerage System. Like Piatco, the Ayalas’ Manila Water Corp. and the Lopezes’ Maynilad Water Services Inc. wanted to amend their concession agreement to help them cope with the massive currency devaluation following the Asian financial crisis.
Estrada said he rejected the two big business groups’ requests, arguing that currency devaluations were a business risk that they, and not the government nor the water customers, should bear. Even though the Lopezes were his in-laws, he did not agree to their request, he said. The MWSS concession agreement was amended only after Estrada was out of power.
The Supreme Court later cited the amended and restated concession agreement as another ground for nullifying Piatco’s contracts. It also served as an impetus for the Ombudsman to file a separate criminal case, Case No. 28092, against the signatories—former DOTC secretary Vicente Rivera and Piatco president Henry Go.
The high court said the amended agreement effectively obliged the government to assume Piatco’s liabilities if the government steps in and takes over the project in the event of a loan default by Piatco. The new agreement also required the government to pay Piatco the appraised value of the facility or the sum of attendant liabilities, whichever is higher, in case the amended agreement is terminated due to Piatco’s fault, the court said.
FRAPORT JOINS PARTY
The Naia 3 project’s high returns, boosted by the amended and restated concession agreement attracted the notice of Fraport AG, the operator of the world-famous Frankfurt airport. It was invited by a Lufthansa unit as a consultant to Piatco in the middle of 1998 but was seriously contemplating investing in the company by the early part of 1999.
It was a perfect match. Piatco was running out of funds and was having a difficult time clinching a financing deal with international lenders because of its lack of technical capacity to operate an international airport terminal. On the other hand, Fraport was looking for international opportunities to offset an expected slowdown in domestic revenue and profit growth. It wanted to become one of the world’s three biggest international operators by 2005, and created a new business unit to pursue this strategy.
Though Fraport had been warned about the high levels of “country risk” surrounding the Naia 3 project, company chairman Wilhelm Bender, during the supervisory board’s meeting in March 1999, argued that the returns “are still far above the margin jointly agreed upon as any project’s minimum return,” according to minutes of the meeting cited by ICSID. Bender reportedly pointed out that “it will be difficult to present again a similar project having this kind of returns and this degree of maturity.”
Estrada’s all-out support for the Naia 3 project also helped quiet down doubts among Fraport directors. He issued a memorandum in February 1999 directing heads of 16 government agencies “to engage your full cooperation in ensuring into completion of the said project within the timetable set.” Bernd Struck told Fraport’s directors that Estrada’s directive showed that Manila considered Naia as “THE international airport of the Philippines” and should allay fears about competititve risks from new international airports in Luzon.
Struck then warned that Fraport risked losing the opportunity to invest in Piatco unless the board decided that day. The minutes of the meeting reported him as saying: “The equity contributed by Piatco is nearly exhausted. Without the professional leadership of Fraport, none of the current shareholders is willing to invest more funds into the project. Furthermore, the banks have asked Piatco to make room for a competent airport operator; only then can the lending be finalized.”
Bender and Struck won the day. Fraport’s supervisory board agreed in March 1999 to invest in Piatco. Four months later, in July, the German airport operator bought an initial 25 percent direct equity stake in Piatco. It also acquired a indirect stakes by buying 40 per cent of PAGS Terminal Inc (PTI) and 40 per cent of PAGS Terminal Holdings (PTH). PTI owned 11 per cent of Piatco while PTH owned 60 per cent of PTI.
That was also when it signed the secret shareholder deals with other Cheng family-held companies that owned big blocks of shares in Piatco: Paircargo, Philippine Airport Ground Services (PAGS), and PTI. The ICSID later decided that the secret shareholder deals—which allowed Fraport to control decision-making in Piatco and gave it extra voting powers beyond its direct equity stake—violated the Philippines’ anti-dummy law. It dismissed Fraport’s request for arbitration because its investment, being unlawful, was not suitable for ICSID proceedings.
SUPPLEMENTAL DEALS
More changes in the concession agreement would follow. The first supplement was signed in August 1999, less than two months after the amended and restated concession agreement was signed. The new agreement did away with Piatco’s obligation to build an underground tunnel across the taxiway that would link Naia Terminal 3 to Terminals 1 and 2, saving Piatco around P700 million, according to Climaco. The supplement also allegedly added 10 special obligations to the government potentially costing P10.1 billion.
Cheng maintained that the concession agreement was not definite on the access tunnel, saying it was something that had yet to be negotiated. “There was not even any detail like where to build it, the size, volume, capacity requirement,” he said. “Besides, why do we have to do an overkill? It will be expensive to build and operate because you have to provide lighting and ventilation. An access road is very suitable.”
But officials insisted the access tunnel was listed as one of the “required facilities” of the project. They agreed the cheaper access road was suitable but for another purpose: “to allow airport-wide access to a new—unauthorized—cargo terminal that Piatco intended to build illegally next to Terminal 3,” according to filings made by government lawyers in the arbitration cases.
A year after, in September 2000, the DOTC, MIAA and Piatco signed a second supplemental agreement transferring the responsibility for demolishing, removing, and disposing of subterranean structures and waste materials in the project site, which used to be part of the Philippine Air Force base from the government to Piatco. In turn, the government was obliged to compensate Piatco for such work by full deduction from annual payments due to the government.
In the concession agreement, the government was responsible for clearing the project site, but the scope of work turned out to be bigger than expected when the site was found to contain subterranean structures, including an underground fuel tank, according to Cunanan. The government lacked the money to do the work itself, and the delay was holding back the start of construction. Through most of 1999, Piatco was waiting for the government to clear the site.
Though it seemed a necessary adjustment to unforeseen events, the second supplemental agreement was viewed with suspicion by some Supreme Court magistrates. Justice Artemio Panganiban, echoing Climaco’s view, wrote in his concurring opinion: “Though denominated as Second Supplement, it was nothing less than an entirely new public works contract. Yet it, too, did not undergo any public bidding, for which reason it is also void and inoperative.”
WINTRACK BUILDERS
The second supplement led to one of Piatco’s most criticized decisions in building Naia 3—the hiring of Wintrack Builders Inc. as subcontractor to demolish and clean subterranean structures from the construction site.
Formed only in October 1999, Wintrack was incorporated by a group of investors that included the wife of Pantaleon Alvarez, the former head of the technical subcommittee of the MIAA bidding committee that prequalified and awarded the Naia 3 project to the Paircargo group. By then, Alvarez was a member of Congress representing the first district of Davao del Norte, and vice chairman of the House committee on transportation and communications. He was also Arroyo’s DOTC secretary from 2001 to 2002.
Emelita Alvarez owned a third of the company when it was formed. However, airport service operators who filed a complaint against Alvarez before the Office of the Ombudsman in 2001 claimed he actually owned and controlled the company. A Wintrack employee, Engr. Reynaldo Libutan, claimed in an affidavit that Alvarez “used his wife as a front for him in the company.”
Another Wintrack engineer, Venner Mendoza, also issued an affidavit in July 2001 claiming that the subcontractor deliberately overstated the amount of debris it was clearing from the project site, bloating its claims from Piatco, and ultimately, the government. Mendoza later retracted the affidavit, in September 2001, prompting the airport service operators to file a perjury complaint against him.
In Wintrack’s first year of operation, it grossed P113 million and netted P1.3 million from clearing the subterranean structures in the Naia 3 project site. In 2002, Alvarez’ last year in DOTC, about 80 percent of Wintrack’s revenues came from Terminal 3. The rest came from Smart Communications, another company under the purview of the DOTC.
As vice chairman of the House transportation and communications committee, Alvarez participated in committee hearings on the Naia 3 project between 1999 and 2000. The committee issued a report in March 2000 concluding that the contracts with Piatco were legal, and that the handling of the project itself was above board.
Although his wife was part owner of a firm that got the bulk of its business from a company being investigated by his committee, Alvarez said he did not find anything inappropriate in his committee membership. She was one of five incorporators of Wintrack while he was only one of about 15 committee members. “It would be next to impossible for me to influence all the members without them seeing the merits and demerits of the case,” he told NEWSBREAK in a written answer to questions in July 2007.
Still, the controversy hounded him until he resigned as DOTC secretary in the middle of 2002 after the Commission on Appointments bypassed him again.
Cheng said he did not know that Alvarez’s wife was part owner of Wintrack although he readily admitted he was a friend of Alvarez and was godfather to one of his children. The Piatco treasurer said he got to be friends with Alvarez when the former DOTC secretary and congressman was still MIAA assistant general manager.
But he said Wintrack was hired not because it was connected to Alvarez. “We picked the company because the people behind it are involved in the construction industry—Roger Mendoza, the Clavanos. They proved they could do the job at the right price,” he said. He added that he did not know the company was partly founded by the wife of Alvarez. “We did not check the incorporators. We were dealing more with the person managing the company—Roging Mercado.”
REGIME CHANGE AND THE LIONGSON CONTRACT
In January 2001, the country went through a regime change. Estrada was ousted after Angelo Reyes, then the armed forces chief of staff, led the military in withdrawing support for the embattled president who was impeached by the House of Representatives and was being tried by the Senate for corruption.
The abrupt change, which led to the rise of Gloria Macapagal Arroyo, did not initially hurt the Chengs, in spite of perceptions they enjoyed very close ties with the previous Estrada administration. Fortuitously, Arroyo appointed as DOTC secretary none other than Alvarez, who was already familiar with the Naia 3 project and former vice chairman of a House committee that defended the project. He was also a good friend of the Piatco treasurer to boot.
Arroyo apparently regarded the congressman from Davao very highly. She defended Alvarez’s appointment from criticisms she was fast filling up her Cabinet with politicians by saying she wanted to see more Mindanao leaders in positions of authority. Speaking just five days after she became president, she said: “It was only yesterday when I started getting the criticisms about so many congressmen in the Cabinet. And that’s why I felt it was because of Simeon Datumanong (who was named justice secretary) and Bebot Alvarez, and that’s why I am making a special appeal: Please give Mindanao a chance.”
Still, doubts were growing over the viability of the project under the new political dispensation. By the middle of 2001, Fraport was starting to worry about delayed government approvals. “Unforeseen changes in political relations, unrest or similar developments could have a negative impact on the project’s completion,” it said in the June 2001 circular for its initial public offering.
The uncertainty was all the more unnerving because Piatco and Fraport were in the middle of negotiations with creditors for the closing of a $440-million term loan for the project. The lenders, which included the International Finance Corp. and Asian Development Bank, were asking for conditions and assurances, including approvals and agreements from several government agencies, before agreeing to an initial loan drawdown.
It was around this time that Cheng Yong and Fraport executives Bernd Struck and Arthur Vogel made what perhaps turned out to be their most controversial decision—hiring the services of a little-known but highly-paid public relations consultant named Alfredo Liongson. The three signed a consultancy agreement with Liongson whereby they agreed to pay him a monthly retainer of $200,000 and close to $2 million in variable fees for helping secure at least nine approvals or agreements from the DOTC and other government units. The favorable government actions were needed for the release of the initial tranche of the $440-million loan.
The biggest fee of $600,000 was to be paid after the DOTC approved Piatco’s designation of the PAGS Terminals Inc. (PTI) as operator of the new passenger terminal.
Another $200,000 was to be paid to Liongson after the DOTC and MIAA executed a third supplement to the concession agreement. The new agreement designated Piatco as the designer and builder for the access road, and required the government to deliver clean possession of certain road sites to Piatco within 120 days from the effectivity of the supplemental agreement.
The Senate committee on accountability of public officers that conducted an investigation into the Naia 3 deals in August 2002, concluded that the Liongson contract and payments “are badges of fraud that raise very serious issues of corrupt business practices.” In a report that summarized the findings of the probe, the Senate committee said: “The monies paid to Liongson were used to buy favors from government officials as can be inferred from his report to Piatco.”
Piatco never adequately explained the role of Liongson during the Senate public hearings. Cheng Yong appeared before three Senate committees investigating the Naia 3 deal and admitted making a $2.1-million payment to Liongson but denied the amounts were bribes to government officials. He insisted that the highly paid consultant was hired not to buy government signatures but to do crisis public relations work for Piatco. Liongson, according to Cheng Yong, was engaged to “disseminate the good things of Piatco and to counter the bad and foul attacks from MASO,” or the MIAA Association of Service Operators whose contracts to provide airport services will be cut short by the operation of the new air terminal.
The senators were not convinced. Cheng Yong himself admitted that Liongson did not submit an accounting of how he spent the P100 million, nor clippings of the newspaper articles he helped put out, nor records of the advertisements that he placed in newspapers, and radio and television programs. Sen. Joker Arroyo quipped that for P100 million, Piatco could have bought “two newspapers” and a “string of radio stations.”
Liongson’s flight from the country affirmed his guilt, and Piatco’s, in the public’s eyes.
‘CREATE FAVORABLE MEDIA CLIMATE’
Five years after the Senate committee hearings, Jefferson Cheng continued to insist that Liongson was nothing but a PR expert hired to counter the mounting media attacks that were delaying government approvals needed to satisfy the conditions required by the creditors to release part of the $440 million loan. “At that time there was well-orchestrated attack through media against Piatco so we got a crisis PR to counter that. But unfortunately, the same media attacked him as corrupt and all that.”
Though Liongson’s contract tied the payment of his fees to government approvals, his real job was really to create a media climate favorable to the signing of the approvals, said Cheng. “It was written that way mainly as milestones—whatever positive publicity can have on certain approvals.”
Cheng said the press has the power to make or break deals with the government, pointing out that no less than former Supreme Court Chief Justice Artemio Panganiban had admitted in a recent forum with businessmen that corruption allegations in the media affect how the courts resolve cases. Speaking before members of the Philippine Chamber of Commerce and Industry in July 2007, Panganiban was reported to have said: “We could not be impervious to the attacks in the media about alleged corruption that have accompanied these contracts. If we do not strike them down, the judiciary might be suspected to be part of it.”
Refuting suggestions that Piatco hired Liongson to bribe officials because it was desperate to secure the government approvals needed for a loan drawdown, Cheng said the terminal at that point was already about 90 percent finished and that new financing was not very critical. He said: “Even without the drawdown we were able to pay more than $270 million to contractors and suppliers. It was not a matter of life and death for us to get the conditions precedent. It would be nice to have the drawdown but it was not something we were so desperate about that we would pay so much money just to get them.”
FRAPORT UNDER PRESSURE
Perhaps the Chengs did not need the fresh money but Fraport, which advanced and guaranteed bulk of the bridge financing for the project, wanted to be able to draw on the loan as soon as possible so it could recover some of its advances and reassure worried shareholders back home.
By this time, Fraport already accounted for bulk of Piatco’s equity capital. The Chengs and other shareholders such as SB Airports and Nissho Iwai did not have money for meet calls for fresh capital infusion. Security Bank, SB Airport’s parent, has investments tied up elsewhere while Nissho Iwai was still reeling from the recession in Japan.
In 2000 and 2001, Fraport raised its direct shareholdings by 5 per cent to 30 percent, and increased its indirect equity stake to 31.4 per cent for a total of 61.4 per cent. It did this by acquiring 40 per cent of PAGS and increasing PTI’s shareholdings in Piatco to 35 per cent. PAGS also has a direct equity stake in Piatco of 10 per cent.
Fraport has also entered contracts that made it the guarantor for up to $127.4 million of Piatco’s obligations to the turnkey contractor, Takenaka Corp of Japan, and its offshore supplier Asahikosan. It also guaranteed a bridge financing facility of $165 million from a group of German banks, of which $138.5 million were drawn down by Piatco.
The two partners obviously felt differently about the feasibility of meeting the lenders’ conditions precedent for the initial loan drawdown. In an answer to a lawsuit filed by Fraport against Piatco before the Pasay court for the recovery of a loan in December 2002, Piatco said it had “signed the long-term finance agreement on 27 July 2001 only upon Fraport’s endorsement and recommendation, even as all of Piatco’s shareholders entertained serious reservations about the accomplishments of the conditions precedent therein.”
Two months before the signing of the loan agreement in late July 2001, Piatco’s in-house counsel was said to have warned the company that some of the lenders’ conditions precedent may be difficult to comply with because they may or may not be granted by the government. Fraport, worried about the likely impact of a loan cancellation on its IPO that year, pushed for the signing of the loan agreement..
Reflecting the German company’s keen interest to secure the conditions precedent that would trigger the loan drawdown, Fraport executives Vogel and Struck co-signed the consultancy contract with Liongson in June 2001. Indeed, the money that went to pay the famed consultant came from Fraport, government investigators found later.
Like the earlier changes to the bid documents and draft concession agreement, the conditions precedent aimed to reassure international lenders and boost revenues of the terminal to meet Piatco’s high guaranteed payments to government. Among the conditions was a legally binding commitment letter from the Duty Free Philippines agreeing to: (a) close its flagship store, the Fiesta Mall; (b) relocate all duty-free operations in Metro Manila to NAIA 3; and (c) pay Piatco 15 percent of duty-free revenues at NAIA 3. Duty Free Philippines was resisting these impositions.
Another was a fourth supplement to the Amended and Restated Concession Agreement that, among others, expanded the government’s obligations in connection with attendant liabilities, force majeure, incremental and consequential costs, and other so-called “special obligations.”
Cunanan, a former Piatco president, insisted that allegations of bribery and corruption involving Liongson, even if proven, do not justify nullifying the contract. “If Liongson was involved in corruption, it was in the course of project implementation, not in securing the contract itself,” he said.
He also pointed out that the officials with whom Liongson dealt with were mostly officials appointed by Arroyo herself. Yet, none of these officials were indicted by the Ombudsman for corruption. For example, Edgar Manda, whom Arroyo appointed general manager of MIAA in 2001, was a signatory to the third supplemental agreement but was not charged by the Ombudsman.
Other signatories to the third supplemental agreement, however, were charged by the Ombudsman in a criminal case, Case No. 28093, filed before the Sandiganbayan almost four years later. The suit is particularly noteworthy because it is perhaps one of the few cases where executives of a large European company—Fraport officers Hans Arthur Vogel and Bernd Struck—are accused of conspiring to commit and abet graft and corruption in the Philippines.
The two German executives were not even signatories to the third supplement which bore the signatures of DOTC officer-in-charge Wilfredo Trinidad and Cheng Yong, the new Piatco president who replaced Henry Go. But Vogel and Struck, as members of the so-called Piatco special group, signed the highly controversial consultancy contract Liongson.
FRAPORT ASKS FOR HELP
Although Piatco managed to close the $440-million term loan agreement in July 2001, it was not able draw on the loan because it failed to satisfy all the conditions precedent in spite of Liongson’s best efforts.
Many of the conditions were difficult if not impossible to secure to begin with, such as signing a fourth supplement to the amended and restated concession agreement, getting Duty Free Philippines to close all Metro Manila outlets and relocate to Naia 3 and requiring Philippine Airlines to move its international operations to the new facility.
Adding to Piatco’s woes, international airport service operators belonging to a group called MASO (MIAA-NAIA Association of Service Operators) began to intensify a public campaign against the operation of Naia 3, fearing that exclusivity provisions in the concession agreement would force them out of business. MASO included companies owned by Tan and the group’s legal counsel was Perfecto Yasay, who later also lawyered for Tan’s AEDC.
MASO wrote Piatco’s potential lenders and government officials, including Arroyo, urging them to withdraw support from the Naia 3 project because it was illegal, corrupt and onerous. It published “open letters” to the DOTC in full-page advertisements in Manila’s leading English-language dailies attacking Piatco’s concession agreement.
Though MASO failed to stop the international lenders from firming a financing deal, the group’s public campaign created a contentious if not hostile atmosphere that made it even more difficult for Piatco to secure government approvals needed to satisfy the conditions spelled out by the creditors for a loan drawdown.
In November 2001, Fraport wrote Arroyo asking “for all possible political support for this Project, which support is urgently needed by the Project and Piatco to overcome the present standstill in relation to various aspects of the negotiations with the Philippine Government.”
Shortly after, Kreditanstalt für Wiederaufbau (KfW), one of Piatco’s long-term creditors, also wrote Arroyo saying it and other lenders were worried that certain issues “have arisen that may cause delays in the completion of the Project.” It also asked the president for her “support to resolve the open issues in a joint effort.”
NEGOTIATING WITH CLIMACO
The following month, Climaco met with Fraport executives shortly after Arroyo appointed her presidential adviser on flagship project on December 10. It was to be the first of many meetings that the Arroyo adviser will hold with both Fraport and Piatco in an effort to sort out the issues that have entangled the Naia 3 project and are blocking a drawing of the loan.
The meetings began cordially in December but with the Christmas season over by late January 2002, it was becoming clear that serious differences divided Climaco and the Naia 3 project proponents. Piatco and Fraport were looking to Climaco for assistance in securing up to 18 government approvals, 13 of which are among the lenders’ conditions precedents.
On the other hand, Climaco said she was willing to help but wanted to amend the concession agreement to correct its legal infirmities and remove provisions seen as onerous to the government and the public. She proposed that Piatco and the government sign a fifth supplement that will restore the terms of the bid documents and draft concession agreement.
By February, the tone of the exchanges between the two sides were turning cold if not hostile. In a February 4 letter, Piatco declared: “We are not in a position to agree on a reopening of the amended and restated concession agreement.”
Replying two days later, Climaco said: “It is disappointing that at this late stage of our negotiations, Piatco has taken the stance it has in this letter, as if it was caught unaware that its concession agreement with the Government requires the changes which the Government has proposed in the draft 5th Supplement to address infirmities which its concession has sustained because of changes initiated by Piatco every year since the time it was awarded the concession for the Naia Terminal 3 Project in 1997.”
Things turned for the worse when Climaco began to look more closely into the project’s financial model, particularly the “soft costs,”which she was told amounted $123 million. She and her staff asked several questions about the financial model but their queries were left unanswered.
The size of the “soft costs” came as a big surprise to Climaco and her staff, especially because at that time Piatco was known to have spent only $323 million for the project, suggesting that more than a third of the project outlays went to “soft” or non-construction related items.
Climaco’s efforts to dig deeper into the nature and purposes of the $123 million “soft costs” came to naught,” said Fermin D. Barrenechea III, a member of Climaco’s staff, in a statement. “I understand that the Chengs were upset that Fraport had shared financial documents with us. From that time on, the Chengs required that any contact or correspondence be coursed through them or their counsel,” he added.
That altered the nature and direction of Climaco’s efforts to resolve the problems surrounding the Naia 3 project. “When Secretary Climaco began uncovering irregularities and when Piatco refused to disclose requested financial information, we began to broaden our investigation and request assistance from the Philippine Bureau of Internal Revenue and the Commission on Audit,” said Barrenechea.
By March, prospects for amicably resolving Piatco’s difficulties have dimmed. In a March 1 letter, Climaco told Fraport that “it does not appear feasible to obtain a written consent between the Government and Fraport on further proceedings.” She also indicated that talks with Piatco had been “hampered”, in part due to her “project cost” inquiries.
RUNNING OUT OF MONEY
Failing to win the government’s help to satisfy the lenders conditions for drawing part of the $440 million loan, Piatco’s financial position was getting increasingly precarious.
Fraport estimated that some $165 million was needed to bring the Naia 3 project to completion by end-2002 but told the Chengs and other Piatco partners in early February that the German company can no longer advance the money. “Our Board of Directors and our Supervisory Board are, under the present conditions, no longer in a position to approve any further financial exposure for our company in the Project in addition to the already tremendous financial support that Fraport has extended to the Project,” Fraport told Piatco. It urged Piatco’s management to obtain interim financing.
In June, Fraport chief executive Dr. Wilhelm Bender said during the company’s annual stockholders’ meeting in June that the Manila project would be running out of funds soon, according to a report in the German business newspaper Handelsblatt. “The high financial demands of its local partner and a disagreement with President Gloria Macapagal-Arroyo of the Philippines have since turned the project into a real swallower of funds,” the report said.
Two months before, Fraport had replaced its people in Manila and sent Peter Henkel, the vice president of the company’s special projects division, to take charge of negotiating with the government. It also asked the vice chairman of its executive board, Manfred Schölch, to personally assess how things stood in Manila.
The change in Fraport representatives proved to be a turning point in the German company’s relations with the Cheng family. In an internal memorandum written shortly after meeting Climaco in April, Henkel concluded that the only way for Fraport to win government’s cooperation lay “in convincing the Cheng family to give up their shares in Piatco, if need be against payment of a reasonable amount, or to prove their criminal behavior and take court action against them.” He added: “It remains to be seen whether we could pull it off. It is difficult to conceive that we can without the Government’s help.”
Soon, Fraport was closely working with Climaco to hammer out a settlement that would allow the government to take over the facility, pay off Fraport, buy out the Chengs and other shareholders, and eventually sell or lease the terminal to another investor.
Outlined in a series of letters between Climaco and Fraport representative Peter Henkel in August 2002, the deal would have the government pay Fraport at least $300 million and another $100 million to the Chengs and other shareholders. Fraport would also help the Philippines raise the money and was expected to eventually manage the new airport terminal in behalf of the new owners.
However, the Chengs refused to sell their shares and accused Climaco of conniving with Fraport to plot their ouster from Piatco. Five years afterwards, a Piatco lawyer, Marife Opulencia said Climaco believed that Fraport called the shots in Piatco and that getting rid of the Chengs was very easy. “She demanded the ouster of the Chengs from Piatco. She believed that Fraport was in control of Piatco. But Fraport could not do that. It was just a minority shareholder,” she said.
But Climaco had said that it was Fraport that was asking for government’s help in getting the Chengs out of Piatco. “The government’s position has always been that this is an intra-corporate dispute and should be settled among the shareholders themselves,” she said back in September 2002.
TERMINATORS VS NEGOTIATORS IN THE CABINET
Amid severe financial and political woes, Piatco was still hard at work towards the mid-December opening of the new terminal. Even though it has not been paid since May 2002, Takenaka agreed to continue building the four-storey structure in the second half of the year. Under its turnkey contract, it can stop working if its receivables exceed $70 million, but it apparently waived this option.
But Piatco’s critics were equally hard at work too. In August 2002, the Senate committees on accountability of public officers, public works and constitutional amendments began to conduct hearings on the Naia 3 deal. The Senate hearings focused on the controversial contract with Liongson and his fabulous consultant’s fees, which were leaked by two Piatco insiders, including a Fraport consultant and an executive assistant of a former Piatco president.
In September, the following month, the labor unions of Miascor Groundhandling Corp. and Philippine Airlines filed a suit urging the Supreme Court to bar the DOTC and MIAA from implementing the concession agreement with Piatco. The petitioners, who were later joined by Lucio Tan’s aviation support companies Macroasia Eurest Services Inc. and Macroasia-Menzies Airport Services Corp., wanted to prevent the opening of the new terminal that was scheduled on December 15 that year.
Late August, the Senate committee investigating the Naia 3 project summoned Climaco to attend a hearing where she revealed that the government was in talks with Fraport towards a deal whereby the government would take over the facility. She also revealed that the Department of Justice was issuing an opinion that the contract was legally null and void.
Then Justice Secretary Hernando Perez loudly denied the DOJ was issuing such an opinion and cautioned against any talk of takeover, making public for the first time deep-seated internal divisions in the Arroyo Cabinet about what to do with the Naia 3 project.
Caught in the middle between her adviser on strategic projects and the justice secretary, Arroyo on September 9 formed a seven-person review committee to examine the government’s options and submit a recommendation in three weeks. Apart from Climaco and Perez, the committee included then Economic Planning Secretary Dante Canlas, Finance Secretary Jose Isidro Camacho, Tourism Secretary Richard Gordon, Trade and Industry Secretary Mar Roxas, and Transportation and Communication Secretary Leandro Mendoza, who had replaced Alvarez who resigned after being bypassed by the Commission on Appointments.
The following day, Climaco submitted an assessment of the Naia 3 project where she urged that government “must get court to declare contract is void.” She outlined several possible courses of action, including the DOJ/Office of Government Corporate counsel saying award and contract are void, declaration of nullity, and negotiate on mutual termination or amicable settlement.
But when the committee submitted its recommendation to Arroyo on September 25, it urged that the government engage in informal consultations with Piatco while the DOJ reviewed the legality of the concession agreement. It cautioned against nullifying the entire contract should a provision be found to be void. Instead the provision should be renegotiated, it added. A formal negotiating team should be constituted after the DOJ has completed the legal review, it also said.
Most of the committee members apparently disagreed with Climaco, who fired off a letter to Arroyo five days later urging she proceed with obtaining a declaration of nullity of the Naia 3 contracts. She also attached a copy of her memorandum to the Senate committee in which she concluded that Piatco’s agreements cannot be renegotiated because they were null and void from the beginning.
Arroyo by this time was still keen to open Naia 3, apparently ignoring not just Climaco’s position but also the review committee’s recommendation that the DOJ first conduct a legal review of the contract prior to opening formal renegotiations with Piatco and Fraport. In early October, she reportedly ordered the “soft opening” of Naia 3 on December 15.
Worried by the potentially adverse consequences of the President’s statement, Climaco on October 10 wrote Arroyo’s Executive Secretary Alberto Romulo and Chief Presidential Legal Counsel Avelino Cruz to warn against the “soft opening” of Naia 3. She said Arroyo’s statement “has caused confusion and directly and indirectly pre-empted and prejudiced Government’s position”.
The following weeks until late November were a period of intense debates and rapid shifts in prevailing opinion within the Arroyo administration on what to do with the Naia 3 contracts. As of November 11, the government’s position, as reflected in the filing made by the OSG before the Supreme Court, was that the 1997 concession agreement should be upheld. It said that only certain provision of the 1998 amended and restated concession agreement should be struck down.
A week later, on November 18, the OSG reversed its position and urged that all Piatco agreements should be declared null and void. For the first time, government lawyers officially adopted AEDC’s position that Piatco had failed to meet the bidding prequalification requirements back in September1997.
The “major reversal” in the government’s legal position came as Perez was under rising pressure to resign as justice secretary. Mark Jimenez, Estrada erstwhile financial adviser, accused the Cabinet member of extortion in return for excluding him from indictment in the plunder case against the former president. Perez went on a leave of absence on November 26.
On November 20, the government cancelled the December 15 opening of the new terminal, citing safety and security concerns. Mendoza, the new DOTC Secretary, explained that security systems at the new facility needed more rigid evaluation. Piatco also had yet to comply with aviation safety requirements of the Air Transportation Office, Mendoza said. He said the opening could be moved to April the following year.
Piatco complained, saying the company stood to lose millions of pesos because of the delayed opening. It spent $10,000 every day for electricity alone and at least P3 million for various services but could not immediately earn from commissions and rentals from over a hundred concessionaries that planned to relocate to the new facility, the company said.
But worse was yet to come. Ten days later, Arroyo announced she wanted Piatco’s contract nullified during a speech on November 29 before exporters in Malacañang, and remarks on November 30 amid National Heroes’ Day celebrations. The revocation of the Naia 3 deal, which she announced along with the firing of two Cabinet members and the abolition of a corruption-ridden government agency, the Public Estates Authority, was a “test case of the integrity and efficiency of the Republic in building infrastructure the nation requires,” she said.
People close to her then surmised that Arroyo’s public statements against Piatco’s contracts were prompted by expectations that the Senate Blue Ribbon Committee was to shortly issue a report concluding the 1997 deal was null and void.
Cheng said he learned of Arroyo’s statement only the next day when he read it in the papers. “Is this true? What does it mean?” were his first reactions to the announcement. “It was a speech. We consulted our lawyers. Normally when you cancel a contract, it’s the courts that cancel it. Is this an announcement that can change tomorrow?”
Three days later, Takenaka ceased work on Naia 3 and took possession of the almost completed air terminal.
FRESH TALKS WITH FRAPORT
Because it was still in talks with Climaco and other officials, Fraport was not worried about the government revoking Piatco’s concession agreements. It assured shareholders that Arroyo’s announcement would even improve Fraport’s chances of recovering its investment. A day before the President’s speech, it said in a statement: “As a result of this investigation, a Philippine court could declare this concession agreement partly or fully void.”
Fraport filed a collection suit against Piatco in December 2002 after it missed a payment for a bridge loan from the German airport operator. It blamed its partners, particularly the Chengs, for the lenders’ refusal to release the first tranche of the $440-million loan, saying that Piatco “had already been damaged before the local and international business community.”
It further alleged that Piatco “is associated locally with investigations of unethical business practices and government corruption.” It added: “As a result of its treatment of Fraport and delays in paying foreign contractors, (Piatco is) internationally known to be an unreliable partner and debtor.”
In early 2003, Fraport put forward a settlement proposal that called for a buyout of the Chengs and for the government to acquire the facility. No less than the Fraport chairman, Dr. Wilhelm Bender, sought a meeting in March 2003 with the Chengs to talk about the possibility of the family selling their Piatco shares, according to Liwayway Vinzons Chato, Cheng Yong’s personal lawyer.
She wrote an affidavit to document what transpired in the meeting. “Dr. Bender admitted that when Fraport made an investment anywhere in the world, it looked for a local partner who had the power and connections to lobby with government and get whatever was necessary for that project it invested in,” Chato said. “Dr. Bender proceeded by telling Mr. Cheng that, in his opinion and because of the feedback from Philippine government officials he talked to, the Cheng family was no longer in a position of influence to get a favorable resolution of the issues raised by the Philippine government against the Piatco concession.”
PIATCO GOES TO ICC
Again, the Chengs rejected the offer. Jefferson Cheng recalled telling Bender in that crucial meeting that given the circumstances, the family was not inclined to sell. He said: “We looked at the project as our baby. How can you sell your own child? In fairness to those who believed in us, in our leadership, I could not just leave them and all the hard work was gone. So I declined the offer. It was a nice offer but this was more about the principle of the thing.”
Instead, Piatco filed a request for arbitration with the ICC on March 4, 2003.
Two months later, in May 2003, the Supreme Court came up with its ruling nullifying the concession agreement, including the amendments and supplements, for substantially deviating from the bid documents and draft concession agreement. The high court also ruled that Paircargo & Associates, Piatco’s predecessor, was not financially qualified at the time it submitted its bid in 1996, and that the amended agreement effectively offered direct government guarantees to Piatco, which was prohibited by the BOT law for unsolicited projects.
The ruling initially raised fears among companies with BOT deals with the government that their contracts, which contained provisions similar to Piatco’s, could also be vulnerable to legal challenges.
“Expect somebody—an opposition politician, an NGO, anybody—to file a similar case to have our contract declared null and void,” a lawyer of a company building a toll road for the government told NEWSBREAK in May 2003. However, such worries eventually eased when the legal challenges did not materialize or prosper. Indeed, an NGO failed to get the Supreme Court to invalidate amendments to Maynilad Water Services Inc.’s 1997 concession agreement with MWSS.
Not a few laymen and experts alike found it extremely odd for the Supreme Court to conclude that Piatco was not financially qualified when it was able to build a new international passenger terminal that was 98 percent complete at the cost of over $500 million.
But to government lawyers in the ICC and ICSID arbitration suits, Piatco’s lack of financial capacity was the original sin that gave rise to many provisions of the concession agreement, the amended and restated concession agreements and supplements that the executive, legislative and even judicial branches found to be disadvantageous to the government and the public.
“Piatco’s lack of financial capacity and its increasingly desperate need for financing led to its negotiation of significant and material changes to the terms of the Draft Concession Agreement—in an attempt to satisfy its lenders by shifting more and more of the financial risk to the Government, in derogation of the BOT Law, the Constitution and public policy,” the Philippines’ lawyers said in one of their submissions before international arbitrators.
They added that Piatco’s failure to meet the minimum financial requirements back in 1997 ultimately led to “a drastic change of the project from a BOT project without any Government equity or guarantee to one for which the Government bears the ultimate responsibility. It further led to the collapse of the entire project and the construction of a substandard, perhaps unsafe and inoperable structure.”
Shortly after the Supreme Court issued its ruling, Arroyo formed an “oversight committee” composed of Trade and Industry Secretary Mar Roxas, DOTC Secretary Leandro Mendoza, and Tourism Secretary Richard Gordon to negotiate with Piatco and Fraport towards a settlement that would pave the way for the immediate opening of NAIA 3. But the negotiations failed time and again.
FRAPORT TURNS AGAINST GOVERNMENT
In September, Fraport filed a request for arbitration with the World Bank’s International Centre for Settlement of Investment Disputes in Washington DC. The move came as a big surprise, and marked the souring of relations between the German company and Climaco and other officials. Indeed, Fraport accused Climaco and other officials of corruption.
Fraport was not just seeking compensation from the Philippine government for rescinding the airport terminal contract, it also accused two of Arroyo’s top advisers of undermining the project to ease out the German company’s local partner and replace it with “government-favored interests.”
In a 35-page request for arbitration submitted to the World Bank’s investment dispute settlement unit, the Frankfurt airport operator named the two officials as Gloria Tan Climaco, President Arroyo’s adviser on strategic projects, and Avelino Cruz, the president’s chief legal counsel.
It said the two “made clear to Fraport that the government would not permit the (terminal project) to be successful as long as the Cheng family (Fraport’s local partners) played a central role.”
Fraport also alleged that one of President Arroyo’s private lawyers asked for millions of dollars as fees for agreeing to help Fraport ease out its local partners. However, the lawyer, Arthur Villaraza, reportedly insisted on working in the background through other law firms and requested that his fees be paid through an overseas bank account, said Fraport. It said it did not engage the lawyer’s services because of these unusual conditions.
All three rejected the allegations. Climaco said Fraport made the allegations to force the Philippines to make higher payments following the termination of the airport terminal contract. “This is pure and simple arm-twisting of the Philippine government,” she said. “This is their way of getting the Philippine government to pay them and to pay them more.’’
Villaraza’s law firm, considered one of the country’s most influential at that time, countered that it had in fact rejected a Fraport lawyer’s request to engage the firm back in February 2002. The law firm released a copy of a May 2003 letter written by Fraport lawyer, Dietrich Stiller of the US law firm Clifford Chance Punder, to the Villaraza & Angangco law firm.
In the letter, Stiller said: “This is to confirm that in the context of the Naia 3 project, I attended only one single meeting with the law firm Villaraza & Angangco, which was arranged on my request on behalf of my client, based on recommendations from various sources and based on my working relationship with you from another mandate. I further confirm that no US$20 million request or similar request was made by any member of your firm in or in the context of the meeting.”
The Philippine government is no stranger to international arbitration. But lawyers familiar with the cases say Fraport’s complaint is the first to hint at allegations of corruption against top government officials.
Fraport’s suit against the Philippines was sign that the German airport operators and the Chengs have reconciled, leaving the government out in the cold. Cheng said: “They also realized they were being taken for a ride, that in the end they would also lose everything.”
Liwayway Chato, Cheng Yong’s private lawyer, compared Fraport to a wayward husband who realized he loved his wife after all. “It’s like an erring husband who tells the wife: ‘I’m sorry, darling, but these were all the things I was asked by my mistress to do.’ Wouldn’t the wife think about giving him another chance?”
With the filing of the arbitration suits against the Philippines, Arroyo dissolved the “oversight committee” in March 2004. Negotiations were frozen though there are occasional attempts to begin talks towards a settlement of the dispute. Months passed with no breakthrough happening. Finally, the government filed an expropriation suit against Piatco on December 21 to facilitate taking possession and the opening of the new terminal.
ANTI-CORRUPTION CASES
In January 2005, the Office of the Ombudsman filed five criminal suits against former DOTC officials and Piatco and Fraport executives for violation of the antigraft and corrupt practices act. All the cases are based on the complaint filed by AEDC, represented by its corporate secretary Cecilia Pesayco, in June 2003, a month after the Supreme Court had voided Piatco’s concession agreement.
That AEDC still filed the complaint after the Supreme Court had already voided Piatco’s contract probably says a lot about the intensity of the conflict between Tan and the Chengs. Not satisfied with the nullification of Piatco’s concession agreement, Tan also wanted the former DOTC officials as well as the Chengs and their German partners criminally prosecuted.
Tan was even said to have approached then Ombudsman Aniano Desierto and offered him riches beyond his wildest dreams to elevate a complaint of plunder and corruption against Alvarez to the Sandiganbayan, according to Gerry Cunanan, a former Piatco president.
The complaint was filed by the MIAANAIA Association of Service Operators (MASO) which accused Alvarez of owning and controlling Wintrack, the construction company that allegedly bloated its claims from Piatco and the government in connection with the clearing of subterranean structures and debris in the project site. Desierto dismissed the complaint in July 2002.
In a speech before members of Rotary Club of Pasig in October 2006 where he defended Piatco’s contracts, Cunanan recalled a chance encounter with Desierto at the UCC Coffee Shop at the Podium shopping mall. He was with two friends, exmilitary officers like him, when Desierto joined them. Upon learning that Cunanan used to be with Piatco, Desierto then bragged about being offered P100 million, a house anywhere in the country or abroad and lucrative corporate directorships by Tan—all in exchange for indicting Alvarez before the Sandiganbayan.
“My head spun,” Desierto reportedly told Cunanan and his friends. But the former chief graft buster could not bring himself to indict Alvarez because the sole witness had withdrawn his affidavit against the former DOTC secretary, said Cunanan.
Neither Desierto nor Tan responded to NEWSBREAK’s requests for a comment on Cunanan’s statements but the former air force colonel stands by every word of his account of the meeting with the former graft buster.
Still, whether the alleged offer of fabulous sums of money, property and corporate directorships is true or not, it underscores the extraordinary power of the person at the helm of the Office of the Ombudsman. More often than not, decisions to prosecute or not depend on who the agency’s head is.
Under Aniano Desierto, the anti-graft agency dismissed five complaints against former DOTC officials and executives of Piatco and Fraport in connection with the Naia 3 project filed between 2000 and 2003.
All that changed when Simeon Marcelo, the former seminarian-turned-lawyer who helped prosecute the impeachment case against Estrada, became the Ombudsman in October 2002. A year and a half after AEDC filed a new complaint against former DOTC officials and Piatco and Fraport executives in June 2003, the Office of the Ombudsman brought criminal indictments against most of the accused before several divisions of the Sandiganbayan in January 2005.
Understandably, Piatco is saying that Marcelo was biased against the company because he used to be AEDC’s lawyer when he was a partner at Villaraza & Angangco. Aware that these allegations will crop up sooner or later, Marcelo said he inhibited himself from deciding on the complaints. The job of evaluating the complaints and overseeing the fact-finding and investigative work fell to one of his deputies.
But there is more to the Office of the Ombudsman indicting the people connected with the Naia 3 projects than Marcelo’s former role as AEDC lawyer. Many anti-corruption advocates are willing to give Marcelo the benefit of the doubt. He strikes them as earnest and they credit him for improving the anti-graft agency’s performance in securing convictions for those accused of graft and corruption.
Besides, the Supreme Court itself has concluded that Desierto was too hasty in dismissing at least one of the complaints against former DOTC and MIAA officials. In October 2005, the high court odered the Office of the Ombudsman to start a new investigation on the allegations against Alvarez and other transport and airport officials.
Even so, the criminal suits for graft and corruption filed by the Office of the Ombudsman under Marcelo against those involved in the Naia 3 project looked weak and pale compared to the publicized allegations of corruption that preceded the criminal indictments.
Both lawmakers and government officials investigating the deal have alleged that illicit payments, typified by the huge $2 million consultants’ fees coursed through Liongson and Wintrack’s subcontracting deal with Takenaka, lie at the heart of the project. In the government’s answer to Piatco’s ICC arbitration suit in 2003, the Office of the Solicitor General claimed that Piatco obtained the concession agreement because it had friends on the Prequalification, Bids, and Awards Committee (PBAC), namely Alvarez, Primitivo Cal, Wilfredo, Trinidad and Herminia Castillo who were allegedly corrupted by financial favors and unlawful payments.
Yet, none of the five criminal cases filed by the Office of the Ombudsman with the Sandiganbayan alleged outright bribery.
The criminal suits merely allege that the former DOTC officials and Naia 3 project proponents entered into contracts grossly disadvantageous to government, granting permits or licenses to unqualified parties, and causing undue injury to the government while giving private parties unwarranted benefits. The provisions of the Anti-Graft and Corrupt Practices Act cited were Sections 3(e), (g) and (j).
Considering the earlier accusations of bribery and illicit payments, none of the former DOTC officials and Piatco and Fraport executives were accused of violating Section 3(b) or (c) of the law, which bars the giving or asking of gifts or benefits for officials in connection with the approval of government contracts and approvals.
MIXED PICTURE
After two and a half years, the criminal prosecutions against those involved in the Naia 3 deal seem to be making little or no progress.
Of the five cases, three were quashed even before anti-graft prosecutors had a chance to present evidence.
The two cases against Piatco president Henry Go and former DOTC Secretary Arturo Enrile for signing the concession agreement and the side agreement in July 1997 were dismissed for lack of jurisdiction.
The Sandiganbayan, in decisions issued in 2005 and 2006, said that it had no jurisdiction over Go, a private individual, as the cases were filed after his alleged coconspirator, Enrile, had died. It said Go could still face the allegations but in another forum, not the anti-graft court which was set up primarily to try public officials for corruption.
Similarly the case against former DOTC acting Secretary Wilfredo Trinidad, Piatco president Vic Cheng Yong, Piatco consultant Alfredo Liongson, and Fraport executives Hans Arthur Vogel and Bernd Struck for entering into the third supplement was dismissed for lack of probable cause in February 2007.
The Ombudsman alleged the third supplement gave “immense or substantial savings” to Piatco by allowing it to build an access road connecting NAIA 3 to the two other terminals instead of an underground tunnel. However, the Sandiganbayan said anti-graft prosecutors failed to quantify such savings to be enjoyed by Piatco arising from the signing of the third supplement, and so dismissed the case.
Diosdado Calonge, the anti-graft prosecutor handling the case, said they plan to appeal the Sandiganbayan’s ruling before the Supreme Court, arguing that the rules of court did not yet require them to quantify the benefit to Piatco arising from the third supplement were to be presented during the trial of the case, they said.
He said the prosecutors did not mention the figures in the information or summary of allegations because it was not part of the “ultimate facts” of the case. It will be ironic for government to lose the case for not presenting information it already had. Climaco already noted that the cost savings to Piatco amounted to P700 million back in 2002 in her letter to the Senate Blue Ribbon Committee.
Neither has the Anti-Money Laundering Council made substantial strides in its attempt to examine the bank records of people and companies accused in the Naia 3 anti-corruption cases.
Although the council managed to begin an investigation in July 2005, attempts to expand the probe were successfully blocked by Alvarez and Lilia Cheng, the wife of Cheng Yong. The Court of Appeals and the Supreme Court, in a series of decisions issued between July and November 2006, agreed with their petition to bar the lower courts from allowing the AMLC to look into their bank accounts before they had a chance to challenge the allegations.
The Department of Justice dismissed in January 2007 a complaint filed by lawyer Jose Bernas against Piatco and Fraport officers for violating the country’s Anti-Dummy Law that prohibited foreigners from owning more than 40 percent of companies engaged in certain business, including utilities. The DOJ reinstated the case a few months later so the courts could rule on some of the complex legal issues on the determining foreign ownership in companies, but this, in turn, created a furor among the foreign chambers of commerce in Manila.
NO DETERRENT EFFECTS
Unable to open the NAIA 3 almost five years after Arroyo revoked Piatco’s concession agreement in November 2002 and almost three years after the MIAA expropriated the terminal in December 2004, enthusiasm for pursuing the anti-corruption allegations against people involved with the project is running low.
The government has incurred huge litigation costs. In the last three years to 2006, MIAA has shelled out P1.1 billion for arbitration expenses or almost a quarter of the international airport operator’s combined operating income for the same period of P3.8 billion. The bulk of the arbitration expenses went to fees of international lawyers defending the government before the ICC and ICSID arbitration panels in Singapore and Washington DC.
Even anti-corruption advocates are confused by the complex twists and turns of the Naia 3 cases. “It just seemed to us that none of the parties comes with clean hands,” said Antonio La Viña, a leader of the Transparency and Accountability Network and dean of the Ateneo School of Government.
At the Office of the Ombudsman, it’s been almost two years since the Supreme Court ordered it to reinvestigate complaints of plunder and corruption against Alvarez and other former DOTC officials, but the anti-graft agency has yet to complete the probe and issue a resolution. Officials were said to be going slow on anti-corruption investigations to help the contending parties arrive at a possible commercial settlement that would pave the way for the eventual opening of the terminal.
Widespread perception of graft and wrongdoing under the Arroyo administration has also made the Naia 3 cases less than the anti-corruption landmarks that they were in the beginning. Arroyo’s and her officials’ lack of forthrightness in addressing questions about the government expenses and projects such as Department of Agriculture’s fertilizer fund and the DOTC’s national broadband network project, for example, show little or no deterrent effects of the Naia 3 cases on future corruption.
Piatco and Fraport still have a lot of explaining to do— they haven’t told the full story of where the $2-million-plus payments to Liongson really went and they still have to account for the secret shareholder deals that ICSID has concluded violated the country’s anti-dummy law—but their accusers in the Arroyo administration are losing interest, and the moral standing, to demand answers.
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