Agan vs PIATCO Digested

8/3/2019 Agan vs PIATCO Digested

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AGAN JR. VS. PHILIPPINE INTERNATIONAL AIR TERMINAL CO., INC.

Facts: In August 1989 the DOTC had a study conducted to determine whether or not thepresent Ninoy Aquino International Airport (NAIA) can cope with traffic development up tothe year 2010. A draft final report was submitted to the DOTC in December 1989. Four yearslater, in 1993, six Filipino-Chinese business leaders met with then President Fidel Ramos to

explore the possibility of investing in the construction and operation of a new internationalairport terminal. The six later formed the Asias Emerging Dragon Corp (AEDC) whichsubmitted an unsolicited proposal for the development of NAIA International Passenger

Terminal III more than a year after the first meeting with Ramos, in October 1994. In March1995, the DOTC endorsed the AEDC proposal to the National Economic and DevelopmentAuthority (NEDA). In January 1996, NEDA passed Board Resolution No. 2 which approved theNAIA IPT III project. In June 1996, the DOTC published an invitation for competitive bidding intwo daily newspapers, as required by law (sec 4-A of RA6957). The alternative bidders hadto submit three envelopes. The first contains the prequalification documents, the second thetechnical proposal, and the third the financial proposal of the proponent. The bidding wasscheduled on September 20, 1996. The bid documents issued by the Prequalification Bidsand Awards Committee said the proponent must have adequate capability to sustain thefinancing requirement for the engineering, design, construction, operation, and maintenance

phases of the project. The proponent must have an equity that is at least 30% of the projectcost, and be able to secure external financing for the project. Government was alsoguaranteed a five percent share in the gross revenue of the project for the first five years;7.5% in the next 10 years, and 10% in the next 10 years. This would be in addition to a fixedannual guaranteed payment to the government. The basis for the prequalification shall bethe proponents compliance with the minimum technical and financial requirementsprovided in the bid documents and the IRR of the BOT (build operate and transfer) Law. Thebid documents allowed amendments to the draft concession agreement, but said that theseshould cover only items that would not materially affect the preparation of the proponentsproposal.

In August 1996, during the second pre-bid conference, the PBAC made several clarifications,upon the request of Peoples Air Cargo & Warehousing Co. Inc (PAIRCARGO), which wanted

to challenge the AEDC bid. The PBAC said the list of revenue sources mentioned in the biddocuments were merely indicative. The project proponent may add other revenue sources,subject to approval by the DOTC/MIAA. Also, only fees and charges denominated as publicutility fees would be subject to regulation, and these could still be revised, because thePBAC has a pending query with the justice department. In September 1996, PBAC issued abid bulletin in which it said that since PAIRCARGO could not meet the required minimumequity prescribed in the bid documents, it would accept instead an audited financialstatement of the financial capability of all member companies of the consortium.In September 1996, PAIRCARGO submitted their competitive proposal to the PBAC. The firstenvelope, containing the prequalification documents, was opened on September 23, 1996,and PBAC prequalified the PAIRCARGO consortium the following day. On September 26,AEDC filed with PBAC its reservations regarding PAIRCARGo, noting the lack of corporateapprovals and financial capability of PAIRCARGO. For one, PAIRCARGO included in the

computation of its financial capability the total net worth of Security Bank, when the BankingLaw limits to 15% the total investment that a bank may make on one project. It alsoquestioned the appointment of Lufthansa as facility operator, because Philippine laws limitto Filipinos the operation of a public utility. The PBAC, however, said on October 2, 1996 thatbased on the documents submitted and the prequalification criteria, PAIRCARGO wasprequalified. The DOTC secretary approved PBACs findings. The AEDC reiterated itsobjections two more times.On October 16, the third envelope containing the financial proposals were opened, andPAIRCARGO had offered to pay the government higher. Both PAIRCARGO and AEDC offeredto build the NAIA Passenger Terminal III for at least $350 million at no cost to the


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government and to pay the government a 5% share in gross revenues for the first five yearsof operation; a 7.5% share in gross revenues for the next 10 years of operation; and a 10%share in gross revenues for the last 10 years of operation. In addition to this, AEDC offeredto pay the government P135 million as guaranteed payment for 27 years. PaircargoConsortium offered a total of P17.75 billion for the same period. PBAC informed AEDC it hadaccepted Paircagos price proposal, and given AEDC 30 working days to match the bid.

When AEDC failed to do so, the DOTC issued a notice on December 11 1996 regardingAEDCs failure to match the proposal. In February 1997, Paircargo Consortium incorporatedinto Philippine International Airport Terminals Co Inc (PIATCO). AEDC protested the allegedundue preference given to PIATCO and reiterated its objections regarding theprequalification of PIATCO. In April 1997, it filed before the Pasig RTC a petition fordeclaration of nullity of the proceedings, mandamus and injunction against the DOTCsecretary, the PBAC chair and its voting members, and the chair of the PBAC technicalcommittee. On April 17, the NEDA ICC conducted an ad referendum to facilitate the approvalof the BOT agreement between the DOTC and PIATCO. Because there were only four insteadof the required six signatures, the NEDA merely noted the agreement.

On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO. TheConcession Agreement was signed on July 12, 1997, granting PIATCO the franchise to

operate and maintain the NAIA Passenger Terminal III for 25 years, with an option to renewfor a period not exceeding 25 years. PIATCO was allowed to collect fees, rentals and othercharges in accordance with the rates or schedules in the 1997 Concession Agreement. Atthe end of the concession period, PIATCO will transfer the airport to MIAA. In November1998, the government and PIATCO signed an Amended and Restated Concession Agreement(ARCA). The ARCA amended provisions on the special obligations of the government, theexclusivity of the franchise given to PIATCO, the proceeds of the insurance, the taxes, dutiesand other charges that may be levied PIATCO, and the provisions on the termination of thecontract. Three more supplements to the ARCA were signed afterwards: in August 1999, inSeptember 2000, and in June 2001.

The first redefined revenues, required government to construct an access road connectingNAIA II and III, and added to the special obligations of government. The second supplement

required government to clear structures at the construction site and to pay PIATCO forthese. The third provided for PIATCOs obligations regarding the construction of the surfaceroad connecting Terminals II and III.

In September 2002, workers of the international airline service providers filed before theSupreme Court a petition for prohibition enjoining the enforcement of the agreements. Theysaid the transfer to NAIA III could cost them their jobs, since under the agreements, PIATCOis not required to honor MIAAs existing concession contracts with various service providersfor international airline airport services. In October 2002, the service providers filed a motionfor intervention and a petition in intervention, joining the cause of the petitioning workers.

Three congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed asimilar petition shortly after.In November 2002, several MIAA employees also filed a petition questioning the legality of

the agreements.In December 2002, another group of congressmen Jacinto Paras, Rafael Nantes, EduardoZialcita, Willie Villarama, Prospero Nograles, Prospero Pichay Jr., Harlin Cast Abayon andBenasing Macarambon filed their comment in intervention defending the validity of theagreements and praying for the dismissal of the petitions.On December 10, 2002, the court heard the case on oral argument, the required the partiesto file their respective memoranda, and to explore the possibility of arbitration as providedin the challenged contracts.


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In their consolidated memorandum, the Office of the Solicitor General and the Office of theGovernment Corporate Counsel prayed that the petitions be given due course and that the1997 Concession Agreement, the ARCA and the supplements be declared void for beingcontrary to the Constitution, the BOT Law and its implementing rules and regulations. InMarch 2003, PIATCO commenced arbitration proceedings before the International Chamberof Commerce, International Court of Arbitration.

Issue: Did the PIATCO agreements the 1997 Concession Agreement, the ARCA, and thethree supplemental agreements violate the Constitution and the BOT Law?

Held/Decision: YES. In the first place, PIATCO was not a qualified bidder. The minimumproject cost was estimated to be P9.183 billion, which meant that Paircargo Consortium hadto prove it could provide at least P2.755 billion. Paircargos audited financial statement for1994 showed it had a net worth of P3.123 billion, but that was because it included in thecomputation the total net worth of Security Bank, which as of 1995 was at P3.523 billion.Since banks are allowed to invest only 15% of it entire net worth, Security Bank could onlyinvest P528 million, which brings down Paircargos equity to P558.384 million, or only 6% ofthe project cost. Disregarding the investment ceilings provided by applicable law would notresult in a proper evaluation of whether or not a bidder is pre-qualified to undertake the

project as for all intents and purposes, such ceiling or legal restriction determines the truemaximum amount which a bidder may invest in the projectIf the maximum amount ofequity that a bidder may invest in the project at the time the bids are submitted falls shortof the minimum amounts required to be put up by the bidder, said bidder should be properlydisqualifiedwe hold that Paircargo Consortium was not a qualified bidder. Thus the awardof the contract by the PBAC to the Paircargo consortium is null and void.

Other issues:1. The signed agreement was different from the draft that was bidded on. Under the law,substantial changes require another bidding. The three principles in public bidding are: anoffer to the public; opportunity for competition; and basis for the exact comparison of bids.Changing the parameters would change the agreement, which might have changed thetechnical and financial parameters of other bidders had they known that such terms were

available.

The 1997 Concession Agreement signed between PIATCO and the government wassubstantially different from the draft concession agreement that was bidded on. While it wasa draft and was expected to amended from time to time, the PBAC bid bulletin also said thatthe amendments should only cover items that would not materially affect the preparation ofthe proposal. The changes should not be substantial or material enough to alter the basicparameters of the contract, and constitute a denial to the other bidders of the opportunity tobid on the same terms.

There were two main differences between the draft agreement and the one that was signed.These concerned the fees that may be imposed and collected by PIATCO, and the extent ofcontrol and regulation that MIAA has over the fees that PIATCO will charge. The draft

agreement classified aircraft parking and tacking fees, groundhandling fees, rentals andairlines offices, check-in counter rentals and porterage fees under those that are regulated subject to periodic adjustment of once every two years and in accordance to a certainformula. The signed agreement said fees subject to MIAA approval are public utility feesand took out groundhandling and rentals and airlines offices from the list. There was alsoan obvious relaxation of the extent of control and regulation by MIAA with respect to theparticular fees that may be charged by PIATCO. The signed agreement also allowed PIATCOto charge in US dollars, while paying the government in pesos.


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When taken as a whole, the changes under the 1997 Concession Agreement with respect toreduction in the types of fees that are subject to MIAA regulation and the relaxation of suchregulation with respect to other fees are significant amendments that substantiallydistinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than whatwas available to other bidders at the time the contract was bidded out. It is not very difficult

to see that the changes in the 1997 Concession Agreement translate to direct and concretefinancial advantages for PIATCO which were not available at the time the contract wasoffered for bidding. It cannot be denied that under the 1997 Concession Agreement onlyPublic Utility Revenues are subject to MIAA regulation. Adjustments of all other feesimposed and collected by PIATCO are entirely within its control. Moreover, with respect toterminal fees, under the 1997 Concession Agreement, the same is further subject to InterimAdjustments not previously stipulated in the draft Concession Agreement. Finally, thechange in the currency stipulated for Public Utility Revenues under the 1997 ConcessionAgreement, except terminal fees, gives PIATCO an added benefit which was not available atthe time of bidding.

2. Under the draft Concession Agreement, default by PIATCO of its obligations does notresult in the assumption by government of these liabilities. Under the signed agreement,

default by PIATCO of its loans used to finance the project eventually leads to governmentassumption of the liability for the loans. This is in violation of the BOT Law, which prohibitsdirect government guarantees. If a proposal can be denied by reason of the existence ofdirect government guarantee, then its inclusion in the contract executed after the saidproposal has been accepted is likewise sufficient to invalidate the contract itselfTo declarethe PIATCO contracts valid despite the clear statutory prohibition against a directgovernment guarantee would not only make a mockery of what the BOT Law seeks toprevent which is to expose the government to the risk of incurring a monetary obligationresulting from a contract of loan between the project proponent and its lenders and to whichthe Government is not a party to but would also render the BOT Law useless for what itseeks to achieve to make use of the resources of the private sector in the financing,operation and maintenance of infrastructure and development projects which are necessaryfor national growth and development but which the government, unfortunately, could ill-

afford to finance at this point in time.

3. Sec. 5.10 of the 1997 Concession Agreement violates Article XII, Sec. 12 of the 1987Constitution.

The Constitutional provision allows for temporary takeover of public facilities in times ofnational emergency. Since the takeover is temporary and extends only to the operation ofthe business and not the ownership, government is not required to compensate the owner.Neither can the owner claim just compensation for the use of the business and its propertiesbecause the takeover is in exercise of the States police power and not of its power ofeminent domain. The 1997 Concession Agreement, on the other hand, says that in the eventof a takeover, Concessionaire shall be entitled to reasonable compensation for the durationof the temporary takeover PIATCO cannot, by mere contractual stipulation, contravenethe Constitutional provision on temporary government and obligate the government pay

reasonable cost for the use of Terminal and/or Terminal Complex. Police power is the mostessential, insistent, and illimitable of powers. Its exercise must not be unreasonablyhampered nor its exercise be a source of obligation by the government in the absence ofdamage due to arbitrariness of its exercise.

4. The 1987 Constitution strictly regulates monopolies. Art XII, Sec. 19 says: The State shallregulate or prohibit monopolies when the public interest so requires. The 1997 ConcessionAgreement gave PIATCO the exclusive right to operate a commercial internationalpassenger terminal within the island of Luzon, with the exception of already existingterminals such as those in the Subic Bay Freeport, Clark Special Economic Zone, and in


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Laoag City. This privilege, however, is subject to reasonable regulation and supervision andshould not violate the rights of third parties. There are service providers at the NAIA I withexisting contracts with the MIAA valid until 2010; since the 1997 Concession Agreementsays PIATCO is not bound to honor existing contracts with MIAA, transferring operations fromNAIA I to NAIA III would unduly prejudice them. PIATCO cannot, by law and certainly not bycontract, render a valid and binding contract nugatory. PIATCO, by the mere expedient

claiming an exclusive right to operate, cannot require the Government to break itscontractual obligations to the service providers.

IN SUM, THIS COURT RULES THAT IN VIEW OF THE ABSENCE OF THE REQUISITE FINANCIALCAPACITY OF THE PAIRCARGO CONSORTIUM, PREDECESSOR OF RESPONDENT PIATCO, THEAWARD BY THE PBAC OF THE CONTRACT FOR THE CONSTRUCTION, OPERATION ANDMAINTENANCE OF THE NAIA IPT III IS NULL AND VOID. FURTHER, CONSIDERING THAT THE1997 CONCESSION AGREEMENT CONTAINS MATERIAL AND SUBSTANTIAL AMENDMENTS,WHICH AMENDMENTS HAD THE EFFECT OF CONVERTING THE 1997 CONCESSIONAGREEMENT INTO AN ENTIRELY DIFFERENT AGREEMENT FROM THE CONTRACT BIDDEDUPON, THE 1997 CONCESSION AGREEMENT IS SIMILARLY NULL AND VOID FOR BEINGCONTRARY TO PUBLIC POLICY. THE PROVISIONS UNDER SECTIONS 4.04(B) AND (C) INRELATION TO SECTION 1.06 OF THE 1997 CONCESSION AGREEMENT AND SECTION 4.04 (C)

IN RELATION TO SECTION 1.06 OF THE ARCA, WHICH CONSTITUTE A DIRECT GOVERNMENTGUARANTEE EXPRESSLY PROHIBITED BY, AMONG OTHERS, THE BOT LAW AND ITSIMPLEMENTING RULES AND REGULATIONS ARE ALSO NULL AND VOID. THE SUPPLEMENTS,BEING ACCESSORY CONTRACTS TO THE ARCA, ARE LIKEWISE NULL AND VOID.

JUDGMENT: The 1997 Concession Agreement, the Amended and Restated ConcessionAgreement and the Supplements thereto are set aside for being null and void.

***VITUG: separate opinion court has no jurisdiction. Petition prays for nullification ofcontract and does not involve judicial, quasi-judicial or ministerial functions. The partiesallege contentious evidentiary facts and it would be difficult to decide the jurisdictionalissue on the basis of the contradictory factual submissions made by the parties.

***issues on standing: piatco tried to raise the issue of jurisdiction saying they had filed acase with the international chamber of commerce, international court of arbitration forarbitration. The court however pointed out that it includes multiple contracts and not all ofthe petitioners are parties to the contract.

Documents

Agan vs PIATCO Digested