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When Wilhelm Bender flew out of Manila last month after a fruitless
week of negotiations, he felt he had no other choice. A few days later, Mr.
Bender's company, Fraport A.G., said it would write off its entire investment in
the Philippines. Mr. Bender needed only to gaze across the tarmac at Manila's
ramshackle airport to see the concrete evidence of his torment: a gleaming new
passenger terminal, standing idle and unused in the tropical haze. Fraport, a
German company that operates the Frankfurt airport, one of the world's busiest,
built the new terminal in Manila along with a Philippine partner.
Today, it closed the books on the venture, taking a $318 million charge that
wiped out its profits and left it with a $132 million net loss for 2002.
"It's a terrible personal experience to have to write down so much
money," Mr. Bender said in an interview. "But we have learned our
lesson. We are more cautious in looking at the political stability of a
country." As cautionary tales go, Fraport's misadventure in Manila has all
the elements: a confident, well-financed Western investor; a little-known local
partner with political connections; and a revolving-door regime with officials
who thought little of meddling with, or even annulling, a contract.
Fraport is still trying to recoup its investment. It has filed an arbitration
claim against the Philippine government with the World Bank. The Supreme Court
in Manila is reviewing the government's decision to cancel the 1999 contract
with Fraport to build and operate the terminal. "We are fighting for every
cent," said Mr. Bender, who is the chairman of the company's executive
board. "We're not giving the government in Manila the terminal as a
wonderful gift." But Fraport is already shifting its sights from ambitious
forays overseas to more prudent investments at home. It is planning a major
expansion of the Frankfurt airport, ranked second in Europe after Heathrow in
London. And it is benefiting from a surge in traffic at Hahn, a converted
military air base in southwestern Germany now served by the Irish discount
airline Ryanair.
Fraport, which went public in 2001, also operates airports in the German cities
of Hannover and Saarbrücken, as well as Antalya, Turkey, and Lima, Peru. It had
sales of nearly $2 billion last year. "There was a time a few years ago
when they wanted to be the No. 1 hub operator around the world," said
Andrew Light, an airline analyst at Salomon Smith Barney in London. "The
problem with building airports is that you have to pay a premium. There are no
economies of scale." Fraport learned this the hard way as it poured money -
$384 million in equity and loans - into a sprawling edifice with a saw-toothed
roof known as Terminal 3 at Ninoy Aquino International Airport. It was due to
open by 2003, which the Philippines has declared as the year of tourism.
Part of the problem, people involved in the deal said, is that the Philippines
International Air Terminal Company, as the joint venture that built the terminal
is known, is chronically short of capital. The Cheng family, with 60 percent of
the venture, is one of the smaller and less prominent of the ethnic-Chinese
trading families that play a central role in the Philippine economy. Moreover,
the contract awarded to the venture by President Fidel Ramos had provisions that
have been disputed by the current president, Gloria Macapagal Arroyo. The deal
gave the partners exclusive rights to run duty-free shops in the new terminal,
and mandated that all airlines serving the airport move to the new terminal even
though its fees would be higher than the old ones. As power changed hands in the
Philippines, the contract was amended, swelling its size and scope. But
officials of the current government say that some of the money was siphoned off
as bribes to officials in the administration of Joseph Estrada, who succeeded
Mr. Ramos. Mr. Estrada was disgraced and driven from power in a popular uprising
in 2001 and was succeeded by Mrs. Arroyo, who has made fighting corruption her
hallmark. The airport contract came under immediate scrutiny, with the
government demanding 28 changes. Then, last November, Fraport was told the
agreement was null and void. "We think they knew full well that the
contract they entered into was flawed," said Rigoberto D. Tiglao, the chief
of staff to President Arroyo. "The contract was fraught with
anomalies." Mr. Bender insisted that Fraport had negotiated in good faith,
and that the disputed provisions, including the duty-free rights and the higher
departure fees, were necessary to finance the project. "If you are
investing in a foreign country, you need the comfort and safety that a contract
signed by one government will be valid for other governments, too," he
said. "That was really a surprise to us." Now, Mr. Bender is trying to
extract reasonable compensation.
He said an outside study found the terminal was worth at least $350 million, the
bulk of it put up by Fraport. Mr. Tiglao said no settlement could be made before
the Supreme Court rules, adding, "the valuation of everything that went
into the airport is not clear." Until the court decides, the terminal
cannot open.
When Mr. Bender visited the Philippines recently to try to work out a
settlement, he got no satisfaction. President Arroyo, who has pledged to
compensate Fraport for its "legitimate investment," did not even meet
with him, delegating the matter to her transportation minister. For Mr. Bender,
the whole experience symbolizes why German and other foreign investors should
steer clear of the Philippines. The dispute has even tinged diplomatic relations
between the countries, after the German government lobbied unsuccessfully for
Fraport. Philippine businesspeople concede that the dispute could give the
country a black eye.
"Any time you have a highly visible project, it's a problem,"
said Guillermo M. Luz, executive director of the Makati Business Club. Foreign
direct investment in the Philippines sagged last year, not least because of
concerns about corruption and cronyism. Still, some Filipinos argue this is not
a black-and-white story of a Western investor being bilked in the murky East.
"The Germans have a right to complain but they went into this with their
eyes open," said Sheila Coronel, executive director of the Philippine
Center for Investigative Journalism. "They were playing the game."
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