Fraport wins NAIA 3 appeal

As Saga Continues

By Lala Rimando and Willard Cheng

January 3, 2010

MANILA, Philippines – An international tribunal has favored German firm Fraport AG in a case involving its reimbursement claim for its $425-million investment in NAIA-3, an international airport terminal facility in Manila.

According to the website of Washington-based International Center for the Settlement of Investment Disputes (ICSID), the decision was handed out last December 23, 2010.

According to sources intimately familiar with the case, the new decision favored Fraport which asked for the annulment of a previous ICSID decision that set aside Fraport’s $425 million claim from the Philippine government.

This brings the case back to square one.

This could also mean another legal setback to the Aquino government, which has been raring to fully operate the airport terminal to improve airport services in the country’s main gateway.

Solving NAIA 3’s many problems was one of the priorities of President Benigno Aquino III and his economic team who have vowed to show they can get their act together as they woo foreign investors to participate in funding and building key infrastructure projects.

Square one

Fraport AG Frankfurt Services Worldwide may opt to sue the Philippine government one more time at ICSID, a World Bank arm based in Washington DC that serves as an impartial forum for disputes between foreign investors and their host countries.

Fraport, a leading airport operator from Germany, filed a case with ICSID in September 2003 to seek protection for its investments in NAIA-3 citing the bilateral investment treaty between Germany and the Philippines. It said it had already spent $425 million in equity and shareholder loans.

The Philippine government unilaterally cancelled the contract it awarded in 1997 to Philippine International Airport Terminal Co. (Piatco), the consortium where Fraport, the foreign partner, has a 30% stake. A month after, in May 2003, the Supreme Court upheld the contract cancellation, citing irregularities in the contract amendments, among others.

The latest ICSID decision overturns the August 2007 decision by another set of arbitrators who had favored the Philippine government then.

The original set of arbitrators – composed of 3 individuals from Canada, Spain and US – had ruled that ICSID has no jurisdiction over the case since Fraport was found to have violated Philippine laws that limit foreign ownership and control of a facility like an airport terminal.

In a strongly worded decision, the arbitrators then wrote, “An investor that contravenes the law of the Host State of the investment must expect to suffer the consequences prescribed by law."

However, Fraport questioned that 2007 decision and asked the tribunal for a second set of arbitrators – an ad hoc committee – to review and annul the 2007 decision.

The ad hoc committee – composed of 3 individuals from Slovakia, France and New Zealand – reportedly found that there was a procedural lapse when the first set of arbitrators allegedly failed to allow Fraport to produce documents pertaining to agreements among Piatco shareholders.

These secret agreements between the Filipino shareholders (the Cheng family) and the foreign partner (Fraport) discussed how the German firm, which took care of most of the financing requirements during the building phase, would eventually assert financial and managerial control of the airport facility.

The Philippine Constitution and the Anti-Dummy Law require that only Filipinos could control a public facility such as an airport terminal.

Gov't to continue operating NAIA 3

Meanwhile, the government will continue to operate NAIA 3 despite the nullification of the ICSID decision that Fraport and Piatco violated the Anti-Dummy Law, presidential spokesperson Edwin Lacierda said Monday.

“We maintain and continue to possess NAIA 3. The decision in Washington— first of all, we do not have a copy yet—but our understanding, it was more procedure than substantive. So it will not affect our right of possession on NAIA 3."

Lacierda said Malacañang is hoping that NAIA 3 will be fully operational within this year.

Costly battle

The legal cases that have hounded NAIA-3 have made this terminal facility one of the government’s most expensive – if not the most expensive – legal battle.

The Arroyo government has hired individuals and a foreign law firm with expertise in international arbitration proceedings. Aside from Fraport’s $425 million suit (est. P18 billion) at ICSID, Piatco also made a $565 million compensation claim (est. P25 billion) before the International Chamber of Commerce (ICC) in Singapore.

Last July, barely a month after the Aquino government took over, ICC handed a decision in favor of the Philippine government.

Based on several accounts, the Philippine government, through different agencies, has spent about P2 billion since the local and international cases commenced in 2003.

Bolstered by the ICC decision in July 2010 and ICSID’s in 2007, the Aquino government has been proceeding with efforts to settle the “just compensation” issue with Piatco and Fraport. Talks between the government, Piatco and Fraport are part of the local court-supervised valuation of the terminal building.

The Aquino government hopes to complete the repair of some parts of the facility that are not strong enough to withstand tremors, and to fully operate the terminal by end-2011.

After repairs have been completed, the transportation department plans to bid out the operation and management of NAIA-3 to a private firm.

But as legal and compensation issues remain pending, Piatco continues to assert itself. It has asked the tenants, including Cebu Pacific, one of the two local airlines operating at NAIA-3, to remit lease payments to Piatco or face eviction.

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