MANILA, Philippines — The Philippines is sliding into a dark path where it may be unable to attract new investors—except for “cronies” — if the government could easily disregard the sanctity of contracts and get away with it, according to an economist, who is also a national scientist.

Raul Fabella, professor emeritus at the University of the Philippines’ School of Economics, also said the offer of water concessionaires Maynilad Water Services Inc. and Manila Water Co. Inc. to waive about P11 billion in combined arbitral awards pertaining to their water tariff dispute with the regulator was “no solution,” even if accepted.

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It would, in fact, be a dangerous precedent, he said.

“One cannot blame the concessionaires for trying to buy peace — even if it is really cemetery peace. The problem is that the government reneged on its obligation in the contract (the tax holiday and the arbitral court being integral parts of the contract) and must pay the assessment under the rule of law!” Fabella said.

“If the government gets away with raping a contract now, what’s to prevent a repeat rape tomorrow?” he said in the research note, which he emailed to the Inquirer on Wednesday.

Fabella said the concessionaires, under tremendous duress, caved in and offered to waive the damages assessed in their favor.

Winning an arm

“The government has not tuned down on the fire and brimstone rhetoric. Why should it? It has won a hand; now it wants an arm,” he said.

Irked by the arbitral award and recent water supply problems, President Duterte has threatened to arrest officials of the concessionaires and charge them with economic sabotage on the grounds that the contracts were onerous and disadvantageous to the public.

He has also threatened to take over the assets of Maynilad and Manila Water.

On orders from the President, the regulator, Metropolitan Waterworks and Sewerage System (MWSS), canceled the 15-year extension of the water concessions that was approved during the term of President Gloria Macapagal-Arroyo in 2009.

The 25-year water distribution contracts with Maynilad and Manila Water were set to lapse in 2022.

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Among the “onerous” contract provisions cited by the Department of Justice (DOJ) were those that bar the government from interfering in setting water rates and allow the concessionaires to seek compensation in an arbitration court for losses should the government prevent it from raising tariffs.

Mr. Duterte’s rants have caused a massive sell-off of shares of Manila Water, Maynilad’s key investors Metro Pacific Investments Corp. and DMCI Holdings, and Manila Water’s parent company Ayala Corp.

The DOJ and the Department of Finance recently assured the public that they would not revoke the water concession agreements but only renegotiate for better terms.Fabella found it ludicrous that the concession contracts that had served Metro Manila well for the last two decades were now “onerous” and “disadvantageous” to Mr. Duterte.

Sanctity of contract

“The sanctity of the contract is onerous to the government? Onerous to violators, yes, and it better be or there is no contract. That the New Clark City concession contract has no similar onerous provisions is irrelevant: the Metro Manila concession contracts were signed in 1997 not in 2014; the concessionaires made a risky bet in 1997 not in 2014!” Fabella wrote.

“So if there is a renegotiation and revision, the government must pay the concessionaires for their loss and the amount must be negotiated not imposed!”

Fabella said the government had implicitly accepted the legitimacy of the Singapore arbitral court. Had the ruling been favorable, the same government would have hailed it as fair and based on the rule of law, it added.

“Lest we forget, our own Supreme Court decided in 2015 with finality that the Philippine government pay Piatco (Philippine International Air Terminals Co.) P24 billion [as of March 2016] for unlawful expropriation,” the economist said.

He was referring to the high court ruling, which became final and executory in 2016, ordering the government to pay Piatco at least $531.2 million (P24.5 billion) in just compensation plus interest as of this month for the construction of the controversial Ninoy Aquino International Airport Terminal 3.

“Who will invest long-term if the government can expropriate at will? What private banks will make loans? Only the cronies! Marcos cronies, recall, brought the country to its knees. The economic team’s first duty on competitiveness is to plug the hole not cosmetize it,” Fabella said.

MWSS to blame

On the water crisis in March, he said it was the government itself, through the MWSS, that was to blame.

Fabella believed that even the administration was partly to blame, citing its “waffled” stance on public-private partnerships versus official development assistance, as well as between the Japanese and Chinese, on bulk-water provision.

“The best water distribution network cannot deliver water if the dams are empty and long-planned impoundment projects remain plans,” he said.

“It was the intransigence of the water regulator, MWSS, toward the repeated offers by the concessionaires to construct water-security projects (example: delayed Cardona Water treatment and the Tayabasan East Water Source; the aborted Kaliwa Low Intake and Kaliwa Long Term Source projects) because it (MWSS) entertained the idea that it will deliver these projects itself!”

Fabella warned that the country might be heading on the same path as Venezuela, ruled by populist leaders Hugo Chávez (1999-2013) and Nicolás Maduro (2013 to date).

“Autocrats Hugo Chavez and successor Nicolas Maduro made life impossible for the market players and investors who promptly packed their bags for other climes. This emptied the supermarket shelves and brought inflation rate to 53 million percent from 2016! Maduro is waging a war against his own people. No wonder Venezuelans ravaged by hunger started for the border,” he said.

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