Arbitration

It is always risky for companies to do business with the Philippine government. When faced with adverse public reaction, our government has a long and inglorious history of reneging on its contractual obligations.

 For some reason, our domestic politics has a way of preventing government from remaining faithful to its contractual obligations. This has been a major factor dissuading investors from coming in to do business. The lack of confidence in our government’s ability to hold contracts sacred is one of the reasons our economy has benefited least from direct investment flows.

When government fails to live up to its contractual obligations, investors have no recourse but to seek relief through international arbitration. In our case, the venue is the International Chamber of Commerce (ICC) based in Singapore. The Philippine government has a long and inglorious history of losing cases brought before the ICC.

Take the case of the PIATCO, for instance. The company that built Terminal 3 of the Manila International Airport went to the arbitration court after the Philippine government failed to pay them for work done. Government lost that case and was compelled to pay PIATCO.

Last year, government likewise lost in an arbitration case filed by Maynilad. The arbitration tribunal ruled unanimously the Philippine government was at fault for failing to abide by its contractual obligations. A First Partial Award was issued in favor of Maynilad on July 24, 2017. The Philippine government was ordered to pay the private water company several billion pesos to compensate for losses.

Recently, lawyers for the Philippine government brought the country’s credibility to a new low by writing the ICC to inform the tribunal that the partial award given Maynilad was being “set aside.” That basically means government is refusing to pay the water company the compensation due it.

No clear reason was offered by the Office of the Solicitor General for setting aside the ruling of the arbitration tribunal. For the international investment community, this can only be an act of absolute impunity.

In the normal order of things, the arbitration tribunal is a last resort for governments reneging on their contractual obligations. If the Philippine government can so casually “set aside” the ruling of the tribunal, investors are now told they have no recourse.

The sanctity of contracts is recognized everywhere business is done. If our government can get away violating contracts and then refusing to abide by the rulings of arbitration courts, why should investors trust contracts in this country?

In the olden days, kingdoms sent armies and navies to enforce obligations. Modern corporations have no armies and navies. How then may they compel governments to abide by their obligations? 

Modern corporations rely on lawyers and tribunals when governments renege. When governments arbitrarily ignore rulings, there can be no justice in this world and contracts will no longer be reliable instruments.

The arbitrary action of the Office of the Solicitor General degrades all of us. We are now an outlaw state.

Tariffs

The issue that brought us to this embarrassing point began during the previous administration. The two water concessionaires sought to increase water tariffs as provided for by their contracts. The increase would cover increased operations costs as well as enable the concessionaires to invest further in new sewerage facilities.

 The Manila Waterworks and Sewerage System (MWSS), manned by quirky appointees of the past quirky administration, denied the tariff adjustments even as these were guaranteed in the contract and justified by the operations costs.

 The decision of the previous MWSS administration was clearly political. It reflected the general disposition of the Noynoy administration, its unwillingness to act on anything that might cause diminution even if doing so might violate contracts.

 It was this unwarranted and petulant decision of the MWSS that brought us to this fiasco.

 Having failed to implement the tariff adjustments when they were due, the entire government is now accountable to pay for the damage that caused. The direct consumers of water may have been spared the marginal tariff adjustments. But now all taxpayers will bear the cost of compensating the concessionaires who performed their end of the bargain by delivering the water we all need despite the hostile business environment.

 At the moment, we are trying to attract the best investors for even larger infrastructure projects. That effort might have been compromised by the unseemly behavior of government lawyers in relation to the Maynilad case.

That unseemly behavior torpedoes business confidence in the sanctity of contracts in this country. In turn, this undermines our ability to get the best possible investors to help bridge our infrastructure gap.

The costs we all incur because of this unseemly case will continue expanding until the Solicitor General reverses his position and the Philippine government decides to respect the arbitral tribunal. True, we will be paying out a few billion pesos because of earlier mistakes. But that is the just thing to do.

We cannot continue making doing business here hell for investors and then expect them to doing even more projects in the country. All of government must do everything possible to assure investors the country remains bound to the rule of law. Uncertainty must be diminished if we want business to be done here.

The sanctity of contracts is not something important for big businesses alone. All citizens expect government to live up to its contractual obligations to all the people.

In fact it is more important for ordinary citizens to be so assured. They cannot afford to go to international tribunals to seek redress.