NEW TERMINAL FACES LEGAL AND FINANCIAL HURDLES TO

UNCLAS SECTION 01 OF 02 MANILA 003955

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EAIR ECON RP
SUBJECT: NEW TERMINAL FACES LEGAL AND FINANCIAL HURDLES TO
OPENING

REF: MANILA 0250

SENSITIVE BUT UNCLASSIFIED -- NOT FOR INTERNET -- PROTECT
ACCORDINGLY.

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SUMMARY
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1. (SBU) Eight months after government took possession, the
new airport terminal in Manila continues to languish
unopened. A temporary restraining order issued by the
Supreme Court at the GRP's request continues to block a lower
court order on the GRP to begin paying "just compensation" to
the investor consortium. The GRP appears resistant to paying
even a first installment until the total cost is clarified.
Although the government is soliciting bids for
concessionaires, the airlines refuse to relocate to the new
terminal without a guarantee to cover potential losses
incurred by further delays. A World Bank-affiliate will
start arbitration hearings next year to determine the amount
owed investors; the government may float a bond to obtain the
necessary funds. The business community initially supported
the expropriation, but with multiple entanglements, the GRP
has done more harm than good to investor confidence. End
Summary.


2. (SBU) The new terminal at Ninoy Aquino International
Airport (NAIA) in Manila remains closed and idle, eight
months after the GRP expropriation and two months after the
government's projected opening date. Although the terminal
is "98 percent completed," according to German Embassy
Commercial Counselor Eike Sacksofsky, none of the airlines
have relocated to the new facilities and the government is
still taking bids from potential concessionaires and baggage
handlers. Sacksofsky speculated that the government is
having trouble learning how to operate the complex,
state-of-the-art technology. Earlier this month, the GRP
tried to hire the Japanese general contractor for the
terminal, Takenaka, to finish the construction and operate
the computer equipment in the terminal. The Japanese firm
declined the offer, Sacksofsky said, perhaps out of
allegiance to the investment consortium that hired them in
the first place. Sacksofsky said the investment consortium
PIATCO -- the Philippine International Airport Terminal
Company, which is 30% owned by the Germany company Fraport --
has not received any money from the government for building
the new terminal. The Japanese general contractor has
received about $200 million to date for its work and is owed
another $50-80 million, he said.


3. (SBU) In a meeting with Econoff August 17,
Undersecretary for Air Services Ed Pagunsan in the Department
of Transportation and Communication said the GRP is
constrained by several legal hurdles in operationalizing the
new terminal. The Philippine Constitution requires the
government to provide "just compensation" for any
expropriation. In January, the Manila trial court that
granted GRP permission to take over the airport also ordered
immediate payment of the $62 million deposit and selected a
panel to determine the full amount due. In the meantime, the
lower court's order prohibited the GRP from performing acts
of ownership, such as leasing and awarding concessions.
Although a Temporary Restraining Order (TRO) by the Supreme
Court that is still in effect blocks implementation of the
lower court order, the GRP may not feel free to open the new
terminal, Pagunsan said. In addition, airlines are unwilling
to relocated to the new terminal unless the GRP guarantees
payment for any lost income due to delays or closures as a
result of the pending arbitration hearings. The government
has refused this request, he said.


4. (SBU) Sacksofsky told Econoff on August 23 that the
parties held many discussions about payment, and considered
hiring an international accounting firm to assess
compensation after the GRP declared the BOT contract null and
void in November 2002 due to alleged corruption and cost
overruns. The consortium balked, however, at the GRP's
insistence upon capping the amount at $350 million, the
original price. Following the expropriation in December
2004, Fraport AG filed a case with the World Bank-affiliated
International Center for the Settlement of Investment
Disputes (ICSID),using the German-Philippine Investment
Treaty as the legal basis for a decision on compensation.
The ICSIC will hold a preliminary hearing next month and then
hear oral arguments starting early next year. In addition,
the company awarded the concession Chang also filed a case
with the International Chamber of Commerce (ICC) in
Singapore, based on a clause calling for ICC arbitration in
the concession agreement.

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COMMENT


5. (SBU) Although government officials still express hopes
for a soft opening in October, no one in the airline business
thinks the terminal will be ready to open this year. The GRP
may have planned on using the revenue stream from the new
terminal's operations to fund its construction. It now
appears the government must begin to resolve the compensation
issue before it can open the airport. Without the funds to
pay for the new terminal, the government has considered
issuing a bond, but this would require a sovereign guarantee
which the GRP is reluctant to provide. The government took
over the airport to reassure investors it would not allow
financial squabbles to hold up important new infrastructure
projects. GRP promises to pay just and fair compensation
sound hollow after eight months, however, and the
expropriation is now sending yet another negative signal to
investors about the machinery of government and the judicial
system in the Philippines.
JOHNSON