A big no-no

The incoming Duterte administration should address the uncertainty in business policies and the Philippine government’s penchant for dishonoring its contracts with the private sector.

The Philippines has failed to cash-in on the country’s status as one of the region’s best-performing economies, primarily because a lot of foreign businessmen find doing business here risky, with our penchant for changing rules midstream.

UP economics professor Benjamin Diokno pointed out that over the 2011-2015 period, the Philippines attracted just $20.4 billion in foreign direct investments (FDI), “a measly amount” compared to Singapore’s $305.6 billion, Indonesia’s $107.6 billion, Malaysia’s $56.6 billion and Thailand’s $42.0 billion.

The World Bank’s latest Ease of Doing Business report also showed that the Philippines fell six spots from Rank 97 in 2014 to Rank 103 last year.

As a business partner, our government sucks. Just take a look at President Aquino’s public-private partnership (PPP) program – only 12 of the 50 projects in the pipeline have actually started construction, no thanks to the protracted delays in the review processes of overseer-agencies and the failure of government to meet its contract commitments, like the delivery of right-of-way (ROW) or turnover of facilities, to name a few.

Take the case of government’s contracts with toll road operators and water concessionaires. It has failed to honor its obligations as stipulated in its contracts, prompting its private partners to file cases before arbitration tribunals abroad to force government to comply with its end of the deal.

The Manila North Tollways Corp. (MNTC) filed an arbitration case last April before the United Nations Commission on International Trade Law (UNCITRAL) in Geneva, Switzerland to recover about P3 billion in foregone revenues, arising from the Toll Regulatory Board (TRB)’s failure to grant its proposed toll fee adjustments at the North Luzon Expressway (NLEX) in 2012 and 2013, as stipulated in their operation and maintenance (O&M) agreement.

Then there is the Cavite Infrastructure Corp. (CIC)’s arbitration case that it filed in New York to recover P877 million in foregone revenues, brought about by TRB’s similar inaction on its contract-mandated rate-hike petitions since 2011.

Meanwhile, the Light Rail Management Corp. (LRMC), a joint venture between MPIC and the Ayala Corp. that won the PPP contract on the P64.9-billion Light Rail Transit Line 1 (LRT1) Cavite Extension Project, has a P1.9-billion claim against the government over certain contract breaches, including the state’s failure to carry out a fare adjustment, improve train platforms, and deliver 100 light rail vehicles (LRVs) in working condition to the LRMC. The government only managed to deliver 77 LRVs and LRMC was forced to shoulder the cost of rehabilitating the trains.

The water concessionaires are facing a similar battle.

In April of last year, Ayala Corp.’s Manila Water Co. (MWC) filed a case before the arbitral tribunal of the Internal Chamber of Commerce (ICC) in Singapore seeking to recover P79 billion that MWC expects to lose over the rest of its 25-year concession, resulting from the Metropolitan Waterworks and Sewerage System (MWSS)’ rejection of MWC’s petition for a rate adjustment in 2013 and its having disallowed MWC from passing on its income taxes to its customers in Metro Manila’s East Zone.

MWSS’ concession deal with MWC in 1997 allowed the concessionaire to pass-on such taxes to its customers and to adjust tariffs once every three years – as part of the sweeteners that the government had offered to attract big business groups to invest in Metro Manila’s water privatization program.

Maynilad Water Services Inc. (MWSI) also filed in October 2013 a case before the ICC court in Singapore following MWSS’ move that year to reject its petitioned tariff adjustment for its West Zone customers.

MWSI filed a second arbitration case also before the ICC in March 2015 seeking from the government P3.44 billion in foregone revenues after MWSS ignored a December 2014 decision by the ICC to grant this concessionaire’s petition for a rate hike.

To make matters worse, the Department of Justice has advised the Department of Finance to hold in abeyance the payment of P82.4 billion in claims to the two concessionaires – P79 billion to MWC and P3.44 billion to MWSI – because of the pending petition that Bayan Muna Reps. Neri Colmenares and Isagani Zarate filed last year asking the Supreme Court to stop payment of such claims for losses.

This would contradict the commitment made in April 2015 by Finance Secretary Purisima that the government would fulfill its obligation under the concession pacts it had signed with the water concessionaires in order to protect the credibility of government.

The West Zone concessionaire has invoked a government undertaking issued in March 2010 requiring the state to “indemnify the concessionaire in respect of any losses” incurred by a delay on the part of any government-owned agency in implementing any increase in the standard rates beyond the date for its implementation in accordance with the concession agreement.

The government’s rift with the water concessionaires and toll road operators have been aptly described by former finance undersecretary and privatization expert Romeo Bernardo as the “idiosyncratic reinterpretation” of contracts and Philippine laws.

Bernardo emphasized the credibility, and hence the success, of a PPP program hinges on government’s track record in complying with their contractual undertakings and that a perception of uncertainty in that respect constitutes the essence of political risk. It is therefore to a substantial extent within the control of the authorities to make sure that such risks do not materialize.

Henry Schumacher, European Chamber of Commerce of the Philippines vice president, noted that not only do the rules change midstream, the government does not even respect the decision to implement the arbitration ruling.

John Forbes, a senior advisor at the American Chamber of Commerce of the Philippines (AmCham), also pointed out that when a Philippine government-owned and -controlled corporation does not honor its contract even after an arbitration decision rules against its position, the investment climate of the country is harmed.

The Duterte administration says its plans to continue with the Aquino government’s economic and business policies. This penchant for changing rules in the middle of the game should not be one of them.

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