Messier and messier
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - January 27, 2020 - 12:00am

I have nothing against a regular review of government contracts and fixing “onerous” provisions. After all, it can’t be denied that past administrations (or even the current one) have favorites who got contracts with rent-seeking privileges.

But there has to be an orderly process for reviews. It is now getting messier and messier. A presidential rant focused on a few “oligarchs” can so destabilize investor sentiment to the point of freezing potential investments.

We are not just talking of foreign investors getting cold feet. Local investors who are not Duterte cronies, oligarchs or not, will be very concerned about the stability of contracts. Is there such a thing as a government commitment that they can present to a bank?

The water concession contracts may have some controversial provisions like the one on the treatment of income tax. But on the whole, that contract went through a tough approval process that included getting legislative concurrence.

If all those procedures taken by the Ramos administration were not enough, investors will simply shun having anything to do with government projects. The PPP program will be good as dead. Maybe, that’s the idea since the Duterte economic managers aren’t enthusiastic about PPP anyway.

Onerous may seem like a simple enough word with just one meaning: unfair. But what Duterte sees as onerous now may have made good business sense for the private sector and was seen as a practical solution to a problem by the government when the contracts were signed.

Conditions change over time, which is why there are provisions in the water contracts to fix things as needed. It is disturbing for the business sector to have the President or a Cabinet member declare a contract onerous and that’s the end of it… no discussion… no impartial party to run to for a fair resolution. Duterte effectively controls the judicial system and even then, has often warned the courts not to interfere.

Now the DOF is also saying that a contract between Chevron (Caltex) and government’s National Development Corp. (NDC) on the lease for the land previously owned by Caltex for its Batangas oil refinery is also onerous. The DOF says it wants to get market value for the lease being paid by the oil company.

We have to go back over 40 years for a background of the deal.

The land was owned by Caltex, an American company. With the end of American parity rights under the Laurel Langley Agreement, Caltex can no longer own the land.

The solution agreed upon was to form a joint venture company 60 percent owned by NDC and 40 percent by Caltex. Since NDC didn’t pay a single centavo and will spend nothing to own the land, the lease back agreement was quite liberal in terms of lease payments.

Now after over 40 years, DOF said it is an onerous deal. Teka muna… libre na nga na binigay sa gobyerno, onerous pa rin?

I understand that DOF is saying the deal could have been re-negotiated in its 25th year so that the lease payments could have been substantially increased.

But a past administration didn’t do that, probably thinking the NDC ownership was just a convenient legal tool to allow the refinery to continue operating and keep the investment within the country.

There are many points to consider… Caltex closed the refinery 17 years ago and is now using the land more as an oil depot. The land has less commercial value to Caltex than when it was used to host the refinery.

But then again, the value of land in that part of Batangas has grown substantially. The lease payment for the land should reflect that increased value regardless of how Caltex is using the property.

I wonder if the contract has a provision that allows government to change terms after a contract renewal has been signed. Things like this can be discussed offline and I am sure a reasonable agreement can be reached. But initiating negotiations via press release rattles the entire business community. The resulting static causes problems beyond this one “onerous” contract.

That kind of Laurel Langley inspired deal is a common arrangement. Does this mean other similar arrangements are now subject to review and change?

I know for a fact that the Forbes Park mansion that is being used by Citibank to house its top local official is in a similar arrangement with UP. The house was owned by Citibank and upon expiration of the Laurel Langley Agreement, Citibank transferred the title to UP and now pays lease to UP for use of the house.

I wonder if UP is getting paid the going market rate for Forbes Park mansions. Probably not. But it is not a bad deal. UP paid Citibank nothing to own the house and lot and  is now getting something.

The mistake of Caltex and possibly of Citibank is to deal with a government entity. Two American companies donated two large industrial lots to the Rotary Club of Makati with a similar lease back agreement.

But after 25 years, the lease was renewed by mutual agreement at a higher rate to account for inflation and higher market value. The amount involved was still lower than market rates, but the club was satisfied because they got the lots for nothing.

That’s how to treat the original agreement. Fixing it now while Caltex is effectively under the gun from government and placed in the same category of other “onerous” contracts looks like simple bullying.

That makes people wonder if the administration is just harassing Caltex so it will sell out to a favored Duterte crony. The market share of Caltex should significantly boost the competitive position of Phoenix Petroleum and we all know who owns Phoenix.

As for the UP-Ayala Technopark, it probably deserves a second look. And so does the UP Town Center deal. The UP deals with Ayala are more commercial in character and not the same as the Laurel Langley inspired deals. I have a feeling UP was shortchanged.

Maybe UP should earn a percentage from gross revenues earned by Ayala on the properties.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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