Cautionary tale

The Philippines gets the smallest share of investment inflows to the Asean region. This is why, despite robust remittance flows that prop up domestic demand, our per capita income remains low while unemployment rises.

There are many reasons why investors tend to avoid us. Our infrastructure remains backward. This includes expensive power and clogged ports. Our bureaucratic red tape is legendary, and even if companies might get through the long process, they could still be stopped by arbitrary judicial intervention as in the case of the much-delayed Subic power plant.

Over and above that, investors have to contend with a constantly shifting policy environment and whimsical political intervention. This makes intolerable the level of risk and uncertainty investors must assume. Because of these, we attract few long-term investments and a lot of hot money taking advantage of profitable episodes before scampering back to safer markets.

The saga of the Camp John Hay Development Corporation (CJHDevCo) is a cautionary tale for other investors. It is nearly a litany of everything that could go wrong for investments when government fails to live up to its part of the bargain.

When bidding for the right to develop the Camp John Hay property in Baguio was announced, government sweetened the pot to attract investors.

Government promised absolutely no red tape. Moreover, according to the government offer, “the Leased Property will be operated like any other Special Economic Zone under R.A. 7227.” A “tax and duty incentive of 5% of gross income earned would be paid to the government in lieu of all other national and local taxes.” The property will be leased for 25 years, renewable for another 25.

CJHDevCo, won the bid. Its commitment was to pay government (through the BCDA) an annual rent of P425,001,380 or 5% of gross revenues, whichever is higher. The company promptly paid government P250 million as cash advance upon execution of the original lease agreement in 1997.

Then things started to go terribly wrong.

The BCDA failed to deliver possession of the entire 247 hectares defined in the lease agreement. The BCDA’s delivery of an Environmental Compliance Certificate for the development of the property was very much delayed.  The BCDA incurred undue delay in issuing rules and regulations for the John Hay Special Economic Zone. The BCDA was delayed in its job of coordinating with the Bureau of Customs promulgating rules for Customs operation within the zone. The BCDA was delayed in demolishing and clearing structures within the leased property.

The delays on the part of the BCDA fulfilling its end of the bargain notwithstanding, CJHDevCo promptly paid the P250 million cash advance as well as the first year’s rentals.

When the delays on the part of BCDA continued, and CJHDevCo could not commence its business operations according to plan, the private developers asked to defer (not forfeit) rentals for the second year of the contract. Government recognized this was a reasonable request and agreed to a supplemental memorandum of agreement (MOA) to restructure rental payments for 1998, 1999 and 2000.

Since the BCDA continued to lag and could not deliver on its commitments, another MOA was forged on May 31, 2000. This second MOA provided for land swapping to make up for the land in the original agreement that BCDA could not deliver.

The BCDA acknowledged its delays in a third MOA signed on July 14, 2000. In this document, the BCDA agreed to defer rental payments for 1998 and restructuring of the 1999 and 2000 rentals. In exchange, CJHDevCo paid BCDA P50 million and assigned golf club share and condotel units to the government agency worth another P75 million.

Another MOA was signed on July 18, 2003 again restructuring rental payments covering 2001 and 2002. For its part, CJHDevCo paid government another P100 million.

Meanwhile, on October 24, 2003, the Supreme Court revoked Camp John Hay’s special economic zone status. A principal feature of the original lease agreement and a key element in the private investor’s own business plan was thus voided.

As a consequence of the SC ruling, the City of Baguio assessed CJHDevCO P101.9 million in taxes. Applications for companies wishing to locate in the special economic zone were all frozen. The BIR tried to collect pending tax assessments and denied the developer authority to print non-VAT receipts. Residents threatened to sue CJHDevCo and potential property buyers backed out. The banks turned cold and refused to lend the private developer more money.

In a word, all the sweeteners government offered to bidders for the development of the property were gone at this point.

The nightmare grew even scarier. On March 30, 2005 the BCDA threatened to terminate the lease agreement unless past rentals were paid. The lease was in fact terminated on May 4, 2005. Only a court injunction prevented repossession.

After corrective legislation in March 2007 restored the property’s tax and financial incentives, another MOA was signed between BCDA and CJHDevCo. The private developer agreed to pay P2.6 billion in deferred rentals provided the BCDA set up a One Stop Action Center to speed up documentation.

When the BCDA again failed to set up that facility, CJHDevCo decided to deposit its lease payments equivalent to the developable area in escrow until the BCDA fulfills its part of the bargain. Due to BCDA’s inaction, the developer filed for arbitration. The BCDA had to be compelled by a court order to submit to such arbitration proceedings.

Current BCDA head Arnel Casanova, still refusing arbitration, instead filed personal charges of estafa against CJHDevCo chair Robert Sobrepena. Even without arbitration, BCDA now threatens once more to unilaterally abrogate the lease agreement.

There stands this horrendous saga.