US embassy cable - 05MANILA3955

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