Press Release
February 25, 2014

Privilege Speech of Sen. Serge Osmena: "Shades of Piatco"

"SHADES OF PIATCO"

Mr. President, distinguished colleagues.

I rise on a matter of personal and collective privilege.

Personal because my brothers and sisters in Cebu and the Visayas and Mindanao may be negatively affected by the issue I am about to discuss.

Collective, because this is a matter of ensuring the proper management of the public bidding process particularly that which covers multi-billion peso, multi-year infrastructure projects which our economy requires.

Some 60 years ago, In Late 1954, the forces of the Red Chinese under the leadership of Mao Tse Tung began its incessant artillery bombardment of a chain of islands, prominent of which were the islands group of Quemoy and Matsu, merely 2 KM off the coast of mainland China.

Those islands had been heavily garrisoned by the retreating forces of Gen. Chiang Kai Shek who had established his government in exile on the large island of Formosa (now known as Taiwan). Formosa was about 106 miles further from the mainland than Quemoy and Matsu.

Because President Truman had earlier deployed 3 aircraft carrier battle fleets to position themselves between the mainland and Formosa, the whole world was expecting a new war to break out on the Asian front merely a year after the Korean War had ended.

At the time, the US Armed Forces maintained in the Philippines its two largest military bases outside the continental United States: Subic Naval Base (24,000 hectares) in Zambales and Clark Air Force Base (28,000 hectares) in Pampanga.

Both bases were about 90 minutes flying time by jet bombers from the mainland. The Reds were supplied Russian MIG jets. It was assumed that if hostilities were to break out, Subic and Clark would become primary targets of the Red Chinese forces.

Subic was home port (3R's rest, resupply and repair, 3C's - Communications, Command and Control) to the largest US Naval fleet - the 7th fleet. Clark was home base of the 13th Air Force.

At the same time, the Governor of Cebu province, was becoming increasingly concerned that his provincial aerodrome, known as the Lahug Airport, had no further room for expansion and definitely would become obsolete in a dozen years with the advent of large pure jet passenger airliners.

It was a sunny weekend when he asked his 10 yr. old son to drop him off at the airport. The so called airport was a Quonset Hut in Nichols Air Base (now known as Villamor Air Base) and served as the Presidential Airport lounge.

President Ramon Magsaysay arrived in an unmarked car and he, his Military Aide, a pilot and the governor took off in a small twin-engined four-seat civilian aircraft known as the Cessna Model 310.

The group of 4 returned about 4 hours later and in another month, the same trip was undertaken.

The governor told his inquisitive son that he was attempting to convince the President to propose to the U.S. government to construct a back-up aerodrome on Mactan island for joint use of Philippine and American aircraft. Mactan island was another 60 minute flying time from Clark and Subic and would serve as a safer haven for U.S. Air Force aircraft.

Pres. Magsaysay was able to get the American to agree. He authorized the Governor to purchase 300 hectares and the U.S. Dept. Of Defense hired an American contractor in Cebu, Paul Keiner, to build the aerodrome.

The succeeding president's Carlos Garcia's spouse, Leonila Dimataga was a native of the town of Opon (now known as Lapu-Lapu City) and thus the first airport terminal was built. It was the Mactan Airport which jump-started the tourism boom in Cebu.

I rise to try to prevent a grievous injury from being inflicted upon the people of Cebu; and on all future travellers to and from the Visayas and Mindanao.

The grievous injury which I refer to is a possible award for the construction and a 25 year management of the terminal at the Mactan-Cebu International Airport (MCIA) to a foreign firm with a questionable operating background and a currently unstable financial position. As a Cebuano, I am very much concerned because if this project is done well, it could send the people of Cebu soaring to higher levels of tourism and other commercial activity and would result in more jobs and higher incomes for tens of thousands.

If done badly, it could send our hopes and aspirations crashing to the ground, with serious repercussions on the national economy, and on our international image.

Should the project falter like the infamous PIATCO Terminal 3 of the Ninoy Aquino International Airport (NAIA), it is not only the people of Cebu province but all Filipinos who would suffer the consequences.

Thus, everything will depend on how judiciously the Department of Transportation will select the project concessionaire. I express at this time very serious misgivings about this foreign firm, the GMR Infrastructure Ltd. of India which is partnered with the Filipino-owned Megawide Construction Corporation in bidding for the construction of the new MCIA Passenger Terminal and the renovation of the existing terminal.

The GMR-Megawide consortium submitted a bid of P14.4 billion and was declared last month as having submitted the highest financial bid. The next highest bid is P 13.99 billion submitted by the joint venture of Changi International Airport of Singapore and the Filinvest Development Corporation. Placing third was the consortium of SM Investments Corporation and Zurich Airports whose bid was P 12.5 billion.

There were four other participants with lower bids.

The MCIA terminal is under the jurisdiction of Department of Transportation and Communications or DOTC. And is part of the Public-Private Partnership infrastructure program of the Aquino administration.

The cost of the construction itself will be P 17.5 billion and the GMR-Megawide bid is P 14.4 billion which is the upfront fee it pays to the government. Overall, therefore, the entire cost of the project, would run to almost P 32 billion.

The P 400 million difference between the 2 highest bids amounts to 1¼ % of the total upfront cost to the concessionaire.

The bid process calls for the DOTC's Pre-Qualification Bids and Awards Committee or PBAC to conduct a Post Qualification Review and if all is well, to issue a Notice of Award to the highest qualified bidder.

The Changi-Filinvest group had filed on January 2 a formal written protest against the GMR-Megawide bid because the GMR violated the Conflict of Interest provision in the Bidding Rules.

Aside from this, it further appears that GMR's corporate finances stand on shaky grounds if we are to believe reports from prestigious foreign publications and large financial institutions abroad.

These are solid grounds for the disqualification of GMR Infrastructure but let me cover these issues a little later.

For the moment, let me focus on something which I consider more disturbing.

GMR currently is part of a consortium operating 2 airports in India. The Delhi airport and the Hyderabad airport. It recently lost the Maldives contract and was forced to sell its share in the Istanbul airport.

One of GMR's partners in the Delhi International Airports Ltd. (DIAL) project in India is the German firm Frankfurt Airport Services Worldwide. Also known as FRAPORT. This information is included in GMR Infrastructure's Annual Report for 2011-12. And Fraport is not merely an investor but the operator of DELHI airport project.

By the way, Fraport is now quitting the Delhi joint venture after only 7 years, and is, at the same time questioning the competence of the Indian government.

Now, I believe we all know who Fraport is. Fraport was the operator partner and majority beneficial owner of the Philippine International Air Terminals Company, Inc. or PIATCO consortium of the NAIA Terminal 3 which became notorious because of the numerous post award amendments, flaws and shortcomings in PIATCO's contract, many of which remain unresolved to this date. Amidst charges of bribes, kickbacks and numerous illegal changes in the contract, the original Concession Agreement in 1997 morphed into 4 ARCA's (Amended and Restated Concession Agreement) by 2001. With the connivance of certain officials of the DOTC. Through corporate layering, Fraport also violated the Constitution by being the beneficial owner of 64% of PIATCO.

The Senate Blue Ribbon Committee in 2002, after having conducted seven hearings on the PIATCO contract, filed a committee report on December 10, 2002 found substantial evidence of irregularities to refer the matter to DOJ and Ombudsman.

In 2004, the Supreme Court of the Philippines declared the PIATCO-Fraport contract null and void.

The International Centre for Settlement of Investment Disputes (ICSID) ruled in favor of the Republic of the Philippines in the arbitration case filed by Fraport in Washington, D.C.

The International Chamber of Commerce in Singapore ruled in favor of the Philippines in the arbitration case filed by PIATCO.

So, Mr. President, if a person were to be judged by the company that he keeps, what does GMR's association with Fraport tell us? Moreover, did GMR learn any tricks from Fraport?

A Report of the Comptroller and Auditor General of India, found that GMR-Delhi International Airport enjoyed POST-CONTRACTUAL benefits that violated the tendering process which selected its joint venture partner. Shades of PIATCO!

The audit report also claimed that GMR failed to bring additional funds to the project, resulting in the levy of an Airport Development Fee on passengers amounting to 27% of project cost. The report discovered delayed payments of retirement compensation by GMR, highly concessional lease rent, irregular withdrawal from an escrow account and the diversion of funds from a passenger service fee escrow account for the purchase of security equipment.

As for its financial standing, GMR's own Audited Financial Statements reveal that the company had suffered operating losses for the past three years, from 2011 to 2013.

There was also a damning article in the August 13, 2013 issue of Forbes.com entitled "House of Debt," which stated that the GMR Group was one of the companies "that cannot even pay the interest on their debt on time." Equally disturbing is the report from the Wall Street Journal just two weeks ago which stated, among things that:

1) The GMR Group is one of the three biggest companies that India's banks have been pressuring to sell their assets to enable them to pay their debts.

2) The GMR Group agreed to sell 3 major assets, including its 40% holdings in its international airport in Istanbul, Turkey to Malaysian Airport.

3) The Wall Street Journal also said that GMR has a $6.2 billion debt, with a debt-to-equity of 4.9 which is considered very risky.

4) Sold its 50% equity share in InterGen of Denmark, one of the largest power companies in Europe fpr $1.2 billion.

5) Sold its 70% equity in a Singapore power station development for US$ 482 million.

6) Recently, GMR sold its 74% stake in a 73 km. ULUNDURPET highway for $110 million ($36 million in cash and $74 million in debt relief).

7) Sold JADCHERLA Expressway Expressway for $44 million.

8) 600 MW WARORA Power plant for $1.2 billion.

9) ISTANBUL Airport for $ 225 Million.

10) Cancelled their $350 million IPO for GMR Infrastructure.

Not only that, quoting from a Credit Suisse report entitled House of Debt, the Forbes article reveals: "While many of these groups have projects including several infrastructure projects under construction, the net debt increase has outpaced the capital expenditure during this period", the report says. Meaning, they are borrowing more than they are investing.

GMR has a history of not staying for the "long haul".

In fact, with its deluge of asset sales, the GMR Chair, in his message to shareholders, stated that the company planned to change its strategic direction and implement an "ASSET LIGHT, ASSET RIGHT (ALAR)" approach.

"The Asset Right strategy builds upon the Group's strength as a developer, where it follows the principle of "Develop, Build, Create Value, Divest, and Reinvest." Through regular portfolio reviews, the Group indentifies those assets which have already created maximum value, as well as those which are value eroding. Divesting these assets releases capital for better opportunities and also improves the quality of its portfolio."

Considering GMR's ALAR strategy, it therefore becomes imperative that its partner have experience in managing airports. Megawide has none.

The GMR Chairman admitted that liquidity is the key to financial success when he stated in his message to GMR shareholders found in the GMR Infrastructure Limited's 2012-2013 Annual Report:

"The GMR Group has recognized that the environment has changed over the last few years, and will continue to be volatile in the foreseeable future. In this context, profitability and liquidity will prove to be the critical differentiators for sustained financial performance."

My fellow senators, I fear that with its financial situation, GMR should not even be remotely considered a dependable investor to be entrusted with a long-term involvement in our Mactan Airport. I fear that GMR might merely flip its equity in this project for a profit. And where would that leave the Cebuanos?

On the other hand, Changi-Filinvest's protest may have been providential for us. It provides the DOTC's Bids and Awards Committee the distinct opportunity to conduct a more diligent evaluation not only of the capability and qualifications of GMR but of its conduct and corporate ethics as well.

Fortunately, the Bidding Rules clearly provide for a Post-Qualification process whereby the bidder is subjected to further scrutiny to verify and validate the representations the bidder made, including checking on conflicts of interest before any award can be made.

It is inevitable that Post-Qualification review and the petition to disqualify GMR-Megawide have resulted in a delay in the implementation of the project.

But what is the reason for the delay? And who is responsible for this?

The reason is that GMR tried to put one over the other bidders by disregarding the Conflict of Interest rule.

The reason is because GMR was less than forthright with respect to its interlocking interests in two separate bids, we refer to the participation of its airport partner, Malaysian Airports Holdings Berhad in the bidding of another consortium. Because of the involvement of a board member of GMR's affiliates in the bid of another consortium. This official is Tan Sri Bashir Ahmad, Managing Director of Malaysian Airports Holding Berhad who is also a director in four other GMR airport projects abroad.

The rule on Conflict of Interest may not be easily understandable to the layman. But for what it is worth, this is what it states in Rule 5.6:

"Each bidder may submit only one Bid Proposal. To ensure a level playing field and a competitive Bidding Process, Bidders (in the case of Consortia, each Consortium Member), including their affiliates, must not have any Conflict of Interest. Without limiting the generality of what would constitute a Conflict of Interest, any of the following will be considered a Conflict of Interest:

c. a member of the board of directors or partner ... of a bidder, of any Consortium Member, or any of their Affiliates (of either the bidder or any of its Consortium Members), is also directly involved in any capacity related to the Bidding Process for the Project for another Bidder, any Consortium Member or any of the Affiliates (of either the Bidder or of any of its Consortium Members) within a period of two years prior to the publication of the Invitation to Pre-Qualify and Bid and one (1) year after the award of the Project."

The violation is clear, the director and partner of GMR's airport affiliate Malaysia Airport is also directly involved in the bid of the First Philippine-Malaysia Airport consortium.

From the above, it is clear that:

1) A board member or partner of one bidder or its affiliates cannot be directly involved in the bid of another bidder.

2) There is no requirement that you actively participate in the bids of both bidders - you just need to be a director of one bidder and participate in the bid of another bidder. That's why the rule extends two years BEFORE and one year AFTER.

GMR represents that their partner Mr. Bashir Ahmad was not actively involved in the bid of GMR. But that's not the point.

The DOTC PBAC itself already issued a clarification of the conflict of interest rule in its special bid bulletin 11-2013. The PBAC had rejected a suggestion from one of the bidders to spell out that involvement in both bids is required to establish conflict of interest. It makes one wonder why, with such clarification and evidence of the conflict of interest, PBAC is delaying the disqualification of GMR. They have been conducting their post qualification review for over a month now.

The conflict of interest issue is not to be taken lightly as the provision is embedded in all government auctions. It aims to protect the government from colluding parties or related entities submitting several bids for one project. The mere existence of the relationship is enough to cause a conflict and the government is not required to prove collusion as the provision is preventive in nature.

I therefore appeal, to this body, Mr. President, to look into this matter and to add its voice to ensure a speedy resolution of the Conflict of Interest issue so an award can be made to the highest qualified bidder.

We appeal to the DOTC PBAC and MCIAA to follow the PPP bidding rules. This would be "Daang Matuwid" at its finest.

Finally, we also appeal to President Aquino to take an official interest in this matter, since it is the Office of the President that ultimately bears the responsibility for maintaining the admirable growth in economic development that we have attained so far.

60 years ago, a President with wisdom and foresight, Ramon Magsaysay, gifted generations of Cebuanos and Filipinos with the Mactan International Airport.

We pray that President Benigno Aquino, for whose family the people of Cebu have always been overwhelmingly supportive, will not saddle the Cebuanos for the next 25 years with a terminal that looks like a poultry farm managed by a consortium prone to operational and financial shortcuts. But to reward the Cebuano people with the best airport manager in the world!

The people of Cebu, the Visayas and Mindanao deserve no less.

Mr. President, I respectfully move that this speech be referred to the Committee on Public Services for an inquiry, in aid of legislation, to ascertain, among other things, whether the current process in undertaking public bidding fully protects the public interest.

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