I was a bit disappointed when I read that President Noynoy Aquino was jubilant over the government’s alleged win in the International Chamber of Commerce against the Philippine Air Terminals Corporation, builder of Ninoy Aquino International Airport Terminal 3. I was disappointed because obviously, the President was made to comment anew by his advisers on an issue that he is not completely familiar with. The arbitration is about how much the government should pay the builders of Terminal 3. It is not even about whether the Philippines should pay as the matter has already been answered affirmatively even by the Philippine Supreme Court. The only issue is how much and what law should govern the valuation of just compensation. There is no reason to be jubilant over a matter that has caused the country so much embarrassment, particularly in Europe.
The airport issue on compensation is hardly a novel issue. The matter of how much to pay a foreign investor when his investment is expropriated by a state is well settled under international law. It started with the famous Aramco arbitration where the British oil giant alleged that its exclusive concession to extract, explore and transport oil was breached when the Saudi leader of the day granted Aristotle Onassis, the oil tanker mogul, a contract likewise to transport Saudi oil. Because of an arbitration clause which said that all disputes arising from the contract should be settled with finality through arbitration, Saudi Arabia agreed to arbitrate but only to invoke the defense that the arbitration violated the country’s sovereign immunity from suits and on the merit, that the concession was in the nature of a franchise and hence, a privilege and not a right. Accordingly, it argued that it could be revoked at will.
In what would become arbitration’s shining moment, the arbitral tribunal, using “general principles of law”, including the Koran and Sharia law, ruled that the concession is in the nature of a contract between a state and a foreign investor. Accordingly, its terms must be complied with faithfully and in case of breach, the innocent party may ask for specific performance, damages, or both. On the issue of sovereign immunity, the tribunal ruled that the same may be waived. When Saudi Arabia entered into the concession agreement, the tribunal ruled that it voluntarily went down to the level of an ordinary contracting party and waived its immunity. On the merits, the tribunal held that Saudi Arabia was in breach of its obligations and must pay the oil giant damages, although critics of the decision argued that the tribunal should have ordered specific performance.
The Aramco arbitration was followed by other arbitrations when other Middle Eastern states also nationalized their respective oil industries. As a result of all these arbitral awards, the rule today is that states have the sovereign right to expropriate foreign investments. It can do so even if the taking is not for a public purpose. In fact, there is now only one simple rule in international law on when a taking is legal, that is: that the foreign investor must be paid prompt, adequate and just compensation.
There is “prompt” compensation when it is paid without delay. In the case of Terminal 3, the taking took place in 2005 when the Supreme Court promulgated its decision in the Agan case and declared the Build-Operate-Transfer contract of PIATCO as illegal, but ordering the national government nonetheless to pay PIATCO just compensation. Clearly, the duty to pay the builder of the structure has been delayed by at least five years reckoned from the taking. This is hardly what is required by international law when it requires “prompt” compensation.
There have been protestations too that the building allegedly is “structurally unsound”. If this is so, why is the terminal being used today for domestic flights? Seems to me that the remedy against unsound structures is to demolish them for being dangerous nuances. The fact that it remains to be used, and will allegedly become completely operational by December of this year, is ample proof of the structural integrity of the terminal. Any claim to the contrary is only for purposes of posturing for a lower cost of just compensation.
There is “adequate” compensation, on the other hand, when the compensation is in a form and currency that is fully convertible. Foreign investors, because they are not residents of the country where they have invested, naturally would require ease in bringing back their investments to their home countries.
Finally, the crux of the matter: how much is “just “compensation? In reality, all that the Philippine succeeded in, in having Fraport’s prior arbitration in the Washington DC-based International Center for the Settlement for Investment Disputes dismissed , and the recent decision of the ICC in Singapore also dismissing both PIATCO’s and the Philippine government’s claims and counter-claims, is to have the matter of how much just compensation is be determined by local courts and pursuant to local laws. This is not a victory because unlike in the past, the Philippine law on expropriation today, the so-called Villar law, adopts the same formula in the determination of just compensation as that provided under International law. In the past, just compensation on realty for both land and improvements was on the basis of the property’s declared value, for real property tax purposes, or the so-called “ameliar”. This was but a fraction of the market value of the property. Today, the Villar law provides that just compensation for land is its zonal valuation, which in most instances is even higher than market price. Improvements, on the other hand, are valued on the basis of is reconstruction cost reckoned at time of taking. In addition, the Villar law also allows for “damages” which can also be for incorporeal assets such as foregone income, a rule also found in international law.
Terminal 3 has been a sore issue with Europe because the foreign investor in PIATCO, Fraport, is not only a publicly listed German corporation, but also owned substantially by both Frankfurt Airport Authority and the City of Frankfurt. Imagine their anger when the Philippines described their project as “substandard”. This is also why ties are strained: for unless they are paid prompt, adequate, and just compensation for a terminal that the Philippines is already using, the taking of Terminal 3 is not only illegal under international law. It is airport robbery, plain and simple.