The Market Monitor Minding the Nation's Business
By Luis Leoncio
The unsound policies of past administrations will affect unprogrammed government payments amounting to at least P25 billion for this year alone, according to the Department of Finance (DOF), slicing off huge amounts that should otherwise be spent for infrastructure, human capital and social protection for the poor and other vulnerable sectors.
Several private companies have pending claims against the government worth tens of billions of pesos from bungled public-private partnership (PPP) projects dating as far back as the 1990s, the penalties for which are expected to catch up with the administration of President Duterte.
Controversial ventures such as the Poverty Eradication and Alleviation Certificates (PEACe) Bonds issued during the term of President Gloria Macapagal-Arroyo and the Ninoy Aquino International Airport Terminal 3 (Naia 3), both of which have been tarnished by legal debacles, are still awaiting full compensation.
The Duterte administration may also have to cough up hefty sums to compensate other private concessionaires if and when the various international arbitral tribunals rule in their favor in the cases that they had filed against their government partners for alleged violations of their concession agreements.
Finance Secretary Carlos Dominguez III said in an investments forum in Davao City last week that the Duterte presidency faces the unenviable task of literally paying for the “sins of the past,” courtesy of previous and possibly future court rulings favoring contractors or concessionaires that presumably have scores to settle with the state.
The government, Dominguez said, is liquid at this point, but paying for these claims will mean setting aside for such possible court-ordered payments of huge amounts of taxpayers’ money that should otherwise be used to augment the budget for the Duterte administration’s accelerated spending over the next six years on infrastructure, human capital and social protection for the poor and other vulnerable sectors.
The DOF is now looking at other cases that might similarly give the Duterte administration financial headaches in the near future, he added.
Dominguez said the government will likely have to cough up some P5 billion to pay Rizal Commercial Banking Corp. (RCBC) Capital for the amount that the Bureau of the Treasury (BTr) kept back as final withholding tax (FWT), as ruled by the Bureau of Internal Revenue (BIR), when the 10-year zero coupon PEACe bonds it had issued during the Arroyo administration matured in 2011.
The Supreme Court ruled that RCBC Capital was entitled to rely on a much earlier position issued by the BIR in 2001 that said the PEACe bonds were not deposit substitutes, and, thus, not subject to the 20-percent final tax.
The BTr sold these notes with a 10-year tenor in October 2001 through a public auction that was won by RCBC on behalf of the Caucus of Development NGO Network (CODE-NGO).
In the case of the Naia 3 project that got entangled in one legal dispute after another as an offshoot of the financial troubles that had buffeted the winning bidder, Philippine International Air Terminals Company (Piatco), the SC ruled last April 1 (entered in the book of entries of judgments on May 20 and upheld in a follow-up resolution on June 21) that the government must pay this contractor $326.93 million (P16.23 billion at the current rate of P49.65/$1) in just compensation.
The high court had nullified the Piatco contracts but ruled that just compensation was incidental because of the structures already built by Piatco before the deal was voided.
On top of this amount, the SC also directed the government to pay Piatco an extra amount equivalent to a 12-percent legal interest from September 2006 to June 2013, plus 6-percent interest from July 2013 up to the time the government will have made full payment.
Just recently, the BTr transferred some P20 billion to the Department of Transportation (DOTr) for payment to Piatco’s just compensation for the Naia 3 project as directed by the SC.
Dominguez said he had directed the BIR to review all tax-related issuances in the past to preclude potential legal challenges that could cost taxpayers billions of pesos more in payments to claimant-contractors.
When the BIR decided to impose the 20-percent FWT on the bondholders in 2011, “the banks did not take this sitting down and went to court. And recently, they won the case all the way up to the Supreme Court. The Supreme Court said we have to return the P4.9 billion…we have to pay P1.4 billion in interest,” Dominguez said.
“I think there are more cases of similar nature that will come up soon. So I asked the BIR to please review all the issuances so that we avoid burdening the public by collecting taxes that are not fair, that we are going to lose in court, anyway, and that we are going to burden our taxpayers by paying penalties and interest,” Dominguez added. “Every time I sign a check for some mistake that has been made in the past, my hands almost bleed.”
The Maynilad Water Services Inc. (MWSI) and the Manila Water Co. (MWC) had also filed separate arbitration cases against the Metropolitan Waterworks and Sewerage System (MWSS) before the ICC International Court of Arbitration in Singapore in 2013 for MWSS’s inaction that year on their toll-rate increase petitions, as provided for in their concession agreements that were both forged with the then-Ramos administration in 1997.
MWSI filed a second arbitration case last year, this time against the Republic of the Philippines, seeking compensation for P3.44 billion in foregone revenues after MWSS ignored an ICC decision in December 2014 granting this concessionaire’s 2013 petition for a rate adjustment. MWSI seeks to recover from the government on the basis of the performance undertakings it issued in 1997 and 2010.
In its separate arbitration case in 2015, MWC sought payment from the government of P79 billion for projected total losses from 2015 till the end of its concession in 2037, on the basis of similar performance undertakings which the Republic issued in 1997 and 2009.
Also, the Manila North Tollways Corp. (MNTC) and Cavite Infrastructure Corp. (CIC) have separately filed cases against the government before the United Nations Commission on International Trade Law (Uncitral) in Geneva, Switzerland, and the Permanent Court of Arbitration in New York, respectively, for the inaction of the Toll Regulatory Board (TRB) on their proposed toll Increases during the Aquino administration.
MNTC wants to recover P2.44 billion in foregone revenues arising from the TRB’s failure to grant its petitioned rate adjustment at the North Luzon Expressway (NLEX) in 2012 and 2014, while CIC is seeking to recover P877 million in losses resulting from TRB’s inaction on its rate-hike petitions since 2011.
As regards the PEACe Bonds issue, RCBC—as representative of CODE-NGO, participated and won in the Oct. 16, 2001, auction for the BTr-issued P35 billion worth of 10-year zero-coupon bonds with its bid of P10.17 billion, resulting in a discount of P24.83 billion.
Before the auction, the BIR issued rulings that the then-proposed PEACe Bonds were not “deposit substitutes” and, thus, not subject to the payment of the 20-percent FWT.
After RCBC won in this 2001 auction, RCBC Capital was appointed underwriter for the PEACe Bonds and distributed the notes among different entities on different dates.
However, the BIR issued two rulings on Oct. 7 and 17, 2011, that the bonds were “deposit substitutes,” prompting the bondholders to file a petition on Oct. 17 asking the SC to stop the government from slapping the FWT on their about-to-mature notes.
The SC issued a temporary restraining order on the Oct. 7 ruling of the BIR, which stated that the PEACe bonds are deposit substitutes and subject to the 20-percent FWT. The BTr, nonetheless, withheld the amount of P4.966 billion representing the 20-percent FWT from the face value of the bonds that matured that same day.
The SC granted on Jan. 13, 2015, the petition for review filed by several bank investors, and, in a resolution dated Aug. 16, 2016, which resolved the motions for reconsideration separately filed by the parties, ordered the BTr to immediately release and pay the bondholders the P4.966 billion that had been withheld from them in 2011, plus legal interest of 6 percent per annum computed from Oct. 19, 2011, until full payment.
These bank investors were Banco De Oro, Bank of Commerce, China Banking Corporation, Metropolitan Bank & Trust Company, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, and Planters Development Bank. The other petitioners were RCBC, RCBC Capital and CODE-NGO.
As mentioned earlier, the high court ruled that RCBC Capital was entitled to rely on the 2001 ruling of the BIR that the PEACe bonds were not deposit substitutes.
The high court also stated that in determining whether government securities are to be treated as deposit substitutes, the existence of 20 or more lenders should be considered at the time when the successful Government Securities Eligible Dealer (GSED)-bidder distributes the notes to the final holders.
In the case of the PEACe Bonds, the reckoning of the 20 or more lenders should be at the time when RCBC Capital sold the PEACe Bonds to investors. At the time, RCBC Capital had sold these notes to less than 20 investors, thus, the PEACe bonds cannot be classified as deposit substitutes.
The DOF has no recourse but to pay about P5 billion to the bondholders because of the SC’s final ruling.
The most it can do at this point is to pursue a motion for the SC to apply or compute the 6-percent annual interest on the withheld P4.966 billion in taxes from the finality of the SC decision last Aug. 16 and not from the time the BTr deducted the amount five years ago on Oct. 18, 2011.
It could do so on grounds that there was a presumption of good faith on the part of the government in honestly believing there was legal basis for the BTr to withhold the FWT amount, so that the interest payment should start on the date of the tribunal’s final ruling last October.