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WB junks Fraport’s Naia 3 claim

Philippine Daily Inquirer | 18 August 2006

RP wins $425-M case

WB junks Fraport’s Naia 3 claim

By Michael Lim Ubac

THE WORLD Bank has dismissed the claim for compensation over the Naia Terminal 3 project of Germany’s Frankfurt Airport Services Worldwide (Fraport), clearing the way for the eventual operation of the mothballed facility, officials said Friday.

The bank’s International Center for Settlement of Investment Disputes (ICSID) decided it lacked the jurisdiction to hear Fraport’s claim brought against the Republic of the Philippines in 2003, an ecstatic Solicitor General Agnes Devanadera announced at a press briefing in Malacañang.

"Ladies and gentlemen, it’s bad weather but good news," she said.

She quoted President Gloria Macapagal-Arroyo as saying, "Wow!" when told of the news.

"The Philippines has won in the international arbitration case filed by Fraport against our government. This is a significant milestone in our quest for modernity and progress. Work on Naia Terminal 3 will continue with more vigor and sharp focus on safety and convenience. I commend the Office of the Solicitor General and the policy group led by Executive Secretary Eduardo Ermita for this hard-earned legal victory which has also vindicated us in the eyes of the world," the President later said in a statement.

Fraport, the principal investor in the Philippine International Air Terminals Corp. (Piatco) consortium that built Naia 3, went to the World Bank to recover the $425 million that it said it had invested in the project after the Philippine government seized the terminal in December 2004 following the Supreme Court’s voiding of the Piatco contract to build and operate the terminal.

The German firm also claimed protection for its investment under a bilateral investment treaty between Germany and the Philippines.

Devanadera said the ruling by the Washington, D.C.-based ICSID—an arbitration body set up by the World Bank to facilitate the settlement of investment disputes among member countries—"is not just a victory of an airport, it is a victory of a sovereign state, of the Philippine institutions [which] were maligned and accused of being unfair, of being corrupt."

Violations of RP laws

She said the moral victory which the government won in the eyes of the world was "the bigger victory" as Fraport had made the allegation that it was the Philippine government, its institutions and officials that had committed fraud.

"But in this case, the allegations of the Philippine government were actually affirmed and upheld by the ICSID, saying that the case filed by Fraport must be dismissed because in the first place, Fraport made a lot of violations of the laws of the Philippines," said Devanadera.

The ruling has "shown the world that foreign investors in the Philippines are given fair treatment and that if foreign investors are the ones guilty of violating the laws of the Philippines, there cannot be any protection that can be given," she said.

In Frankfurt, Fraport announced the ICSID decision on its suit, sending the firm’s shares down almost 5 percent.

Fraport said it was "investigating the decision as well as further actions in this matter," a Reuters report said.

Naia 3 was approved for construction in 1997 and was originally scheduled to open in late 2002.

In 2002, however, the Arroyo administration voided Piatco’s contract on the grounds that certain provisions were illegally renegotiated by ousted president Joseph Estrada in 1998 to the disadvantage of the government.

SC nullifies contract

The Supreme Court upheld the government, nullifying the Piatco contract in 2003. The Pasay City court issued a writ of possession in favor of the government the following year. However, it ordered the government to make an initial payment of P3 billion to Piatco while a study to determine the actual cost of the terminal to validate Piatco’s claim to compensation was pending.

Fraport brought its case for compensation to the World Bank while Piatco sought a separate arbitration with the Singapore-based International Chamber of Commerce Arbitration Tribunal. In August 2006, the ICC ordered the government to return the facility to Piatco or pay the P3 billion.

While the P3 billion has apparently been paid, the 189,000-sq.m. facility remains closed while various construction and repair works are being completed and lease contracts with airlines and concessionaires are being negotiated.

The President said last month that the terminal, with a capacity of 13 million passengers a year, would hopefully be ready for business by the end of the year.

The decision

In a 194-page decision, the ICSID sustained the Philippine government’s contention that the "dispute is not within its jurisdiction."

In its request for arbitration, Fraport claimed to own 44 percent of Piatco, "directly and indirectly through cascade companies that have equity ownership in Piatco," said Devanadera.

Fraport claimed that it was entitled to a refund of its investment of $425 million (P19.5 billion) and made imputations of unfair and inequitable treatment, violation of minimum standards of justice and expropriation against the Philippine government.

"If we add the other claims for interest and the cost of arbitration had we lost the case, the Philippines would have been liable for P27.6 billion," Devanadera said.

The Philippine government, however, refused to pay the amount and instead accused Fraport of wrongdoing.

It submitted to ICSID the Supreme Court ruling declaring the Piatco contract null and void ab initio for violating the Constitution, the build-operate-transfer law and the rules on public bidding.

The government challenged the ICSID’s jurisdiction over the case on the ground that the protection afforded by the Philippines’ bilateral investment treaty with Germany did not extend to investments made in violation of Philippine laws.

It argued that the Naia 3 concession was a public utility subject to nationality restrictions imposed by the Constitution and the prohibitions of the Anti-Dummy Law, and that Fraport openly sought to evade the nationality requirement limiting foreign ownership to 40 percent.

It also submitted the justice department finding that Fraport was guilty of violating the Anti-Dummy Law.

Piatco had claimed to be 60-percent owned by the Chinese-Filipino Cheng family, 30 percent by Fraport and 10 percent by the Nissho Iway Corp. of Japan.

But in the Anti-Dummy Law case it filed against Piatco and Fraport officials, the government alleged that through a fraudulent scheme of corporate layering, Fraport actually owned 61.4 percent of Piatco.

The ICSID decision, which Devanadera said would no longer be subject to motions for reconsideration, has removed a major legal obstacle to the operation of the Naia 3.

She said it would adversely affect Piatco’s case against the Philippines in Singapore although the Fraport issue was separate from Piatco’s.

Safety issues

Devanadera said hearings on the Piatco case at the ICC would be conducted during the first three weeks of November.

As for the expropriation case still pending with the Pasay City Regional Trial Court, Piatco’s claim for compensation is the subject of haggling, after the initial P3 billion was paid, she said.

Devanadera said it was no longer the legal issues that were standing in the way of opening the terminal but the safety issues. A long-delayed opening last year was delayed after a section of the ceiling collapsed and the facility was then found to be structurally defective.


According to lawyer Manuel Gaite, deputy executive secretary for legal affairs, the ICSID ruling would be favorable to the two-year negotiations with Takenaka Corp., Piatco’s Japan-based general contractor which has its own compensation claims against Piatco, to undertake repairs and complete the construction of the terminal.

"At least Takenaka will be more confident of dealing with the Philippine government. They were always afraid [of] Piatco getting back at them," said Gaite.

Alfonso Cusi, general manager of the Manila International Airport Authority, said the ICSID decision was "a big victory" and assured the public the Miaa would open Naia 3 "as promptly and expeditiously as possible within the parameters that the law allows us."

He said the terminal was "almost 98 percent complete."

The Villaraza & Angangco law office whose principal, Arthur Villaraza, the then private lawyer of Ms Arroyo, was accused by Fraport of demanding tens of millions of dollars in extortion money, said the ICSID decision was a "vindication for all Filipinos."

Several lawyers of the firm filed libel cases against Fraport officials for the extortion allegations which were included in the German firm’s submissions to the ICSID.

 source: PDI