Bum deal

Anyone who has visited the social housing project in the old Smokey Mountain site in Vitas, Tondo will readily agree that the thing could not possibly have cost P6 billion. The tenements are rickety, its dwellers miserable.

That social housing project was conceived during the Ramos years. It was supposed to be a showcase project, underscoring the nation’s rise from poverty. For so many years, the Smokey Mountain settlement, populated by the direly poor eking out a living from trash, was the photogenic icon of the grinding poverty that afflicts so many Filipinos. It served as some sort of perverse tourist destination for those who wanted to see how badly our people had fared.

I recall that when Fidel V. Ramos took over as president in 1992, he was anxious to make-over Smokey Mountain as a symbol of poverty and transform it as a model of the nation’s rise from misery. A new “Harbor City” was designed to transform the muddy wharf into a modern port facility resembling Hong Kong. That was a project that would require extensive reclamation from the bay and begins with the establishment of humane settlements for the grey horde that had settled on the mound of garbage we nicknamed “Smokey Mountain” for the constant methane emitted by tons of decaying refuse.

The abhorrent and unhealthy odor of methane hung like a deathly cloak over that part of the city for years. It was a distinct odor that clung to one’s clothes and even more tightly to one’s hair after every visit to that place.

I once hosted a busload of Japanese students who had come to bring aid to the place. Snatchers immediately descended upon them and took off with a loot of necklaces and other fancy jewelry. This was hell on earth.

After many hitches and snags, a contract was sealed late in the Ramos administration to build a social housing program for Smokey Mountain. The counterparty to the contract was with Regis Romero-owned RII Builders Inc.

We now know this is a bum deal.

 Of the total project cost, RII Builders put in about P211.6 million of its own money and borrowed the rest of the project cost largely from public financial institutions such as the SSS. The lead government agency in the undertaking was the National Housing Authority (NHA) whose mandate is to provide for social housing. The financing was made possible by guarantees extended by the Home Guaranty Corporation (HGC).

The whole deal began to unravel from the start. The Asian financial contagion of 1997 eradicated many of the business assumptions that underpinned the project. The cost of money spiked. The Harbor City concept quickly nose-dived from one that made business sense to one that is utterly unworkable.

RII builders ran into financial problems. The reclamation of about 79 hectares from Manila Bay never happened. The social housing program was never completed to scale. For many years, the Harbor City project was pushed to the backburner.

The public agencies that lent money to the project, such as the SSS, wanted their money back. All the lending was guaranteed by the HGC, which was the mandate for that agency. But the HGC, as we know, has always teetered on the brink of bankruptcy since its inception. The mandate for a guarantee facility such as the HGC ought to be reviewed radically. By its design, it always seems destined to lose public money.

RII Builders filed a collection suit before the courts in 2005 or thereabouts. Given the terms of the contract, it might have a legally valid (even if morally scandalous) claim. The HGC, after all, provided a guarantee to the project financing — even if some items, such as the P111 million supposedly spent for “project studies”, might need some due diligence.

At any rate, the HGC decided the less costly way to deal with this mangled project was to cut a deal, by way of a MOA, with RII Builders. That deal, however, involves a huge payout that will readily seem to be disadvantageous to the public interest.

I have encountered many similar cases in my years in government. Faced with a court case where government is bound to lose, it is always tempting to cut a deal with plaintiffs ahead of a final court decision so that government ends up paying less that what is being demanded in court. But if such a deal is cut, the decision-maker will almost certainly be brought to the Ombudsman with a case for graft.

The more usual tendency, therefore, is for government decision-makers to allow the losing case to proceed and pay a higher cost after a final decision is rendered. It will cost the taxpayer more; but a final court ruling protects the decision-makers from being charged for graft.

In the case of the Smokey Mountain project, the HGC has apparently chosen to take the route of least cost and cut a deal with plaintiff RII Builders ahead of a final ruling on the collection case. The consequence of that, as we have seen, is that housing czar Vice-President Noli de Castro, Finance Secretary Margarito Teves, NHA General Manager Federico Laxa and HGC President Gonzalo Benjamin Bongolan now face charges for violation of the Anti-Graft and Corrupt Practices Act.

The MOA with the plaintiffs is certainly indefensible in the court of public opinion. RII Builders put out a total of only P211.6 million of it own money for the project. But interest costs, after over a decade of delay in payment, now amounts (by the plaintiff’s calculation) to P1.122 billion.

Government is certainly in a bind here. There is certainly no issue in the HGC repaying the SSS for the money it lent in good faith for a project that unraveled because of the Asian financial crisis. But there is much hay that could be made for the HGC paying RII Builders — possibly in the form of a quantity of reclaimed land if not in cash, which government is chronically short of.

 At any rate, in the face of public outcry, it now seems the decision-makers in this deal, along with the plaintiff, have agreed to put the out-of-court settlement in suspended animation and pass this on to the next administration to preside over.