Manila Thrilla The €500 Million Cancellation

Fraport, the German airport operator, may lose half a billion euros on a big airport terminal project that went bad in the Philippines. Compensation is looking increasingly unlikely.
Busy scenes at Manila's Ninoy Aquino airport.

For German airport operator Fraport, the modern glass and steel terminal at Ninoy Aquino International Airport in Manila is turning into an expensive disaster.

When it headed a group in the 1990s to build the new terminal in the Philippine capital, it expected to profit from upgrading an up-and-coming destination for global business travelers and tourists.

At the beginning of 1999, the Fraport supervisory board gave its blessing to the Manila airport project.

Fraport owns and operates Frankfurt airport in Germany and 12 others globally. The group, which is listed on the German stock exchange, bought a stake in Philippine International Air Terminals Co., or Piatco.

The German firm said it invested €353 million ($399 million) in the Philippine project.

Piatco had won a contract to build Manila’s new Terminal 3, which was designed to handle 13 million passengers a year and was to open in 2002.

Fraport hoped to advance its international expansion plans by becoming a partner in the project. But things didn’t work out.

The court found that Fraport deliberately violated Philippine laws which prohibit foreign investors from taking majority stakes in national companies.

In 2001, the Philippine government collapsed in a corruption scandal. The new government, headed by Gloria Macapagal-Arroyo, promptly nullified the contracts with Piatco for the terminal.

In 2004, the government seized the terminal and a bitter legal struggle began.

Piatco sued in state court, and Fraport took the Philippines to the ICSID, the international arbitration court of the World Bank.

Fraport demanded compensation of its €353 million investment, but the arbitration court instead issued a stunning blow.

The court found that the German airport group had deliberately violated Philippine's “anti-dummy” laws, which prohibit foreign investors from taking majority stakes in national companies. The ICSID concluded that it had no jurisdiction over Fraport’s compensation claims, a decision that Fraport first revealed in December, but the full details of which are only now coming to light.

According to research by Handelsblatt and the political magazine Panorama, a news show on German television station NDR, the ICSID ruling found that Fraport took 61.44 percent control of Piatco through convoluted company structures.

The arbitration court left no doubt that Fraport had deliberately violated the law. It said the airport group’s former executive board, led by Wilhelm Bender, and its supervisory board, led by then-state premier of Hessen, Roland Koch, had been informed of the details of the Manila project.

The verdict has been disastrous for Fraport.

Officially, the company has said it is “disappointed” by the decision.

“We will analyze it carefully, in order to determine the strategy for further prosecution,” a spokesperson for the airport operator said.

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It has been a bad week for Fraport. Back in Europe, its plan to take control of the operation of 14 airports in Greece has been placed in doubt by the new Greek government. The left-leaning Syriza party, which came to power in January, has said it is halting the purchase while it reviews a number of privatization deals around the country.

Fraport is also continuing to pursue compensation in the Philippine courts.

In 2013, a court of appeals in the Philippines said the government there owed Piatco $371 million in compensation for seizing the terminal. Up to now, however, the Philippine government had paid only $59 million.

The legal setback by the international arbitration court makes hope of more compensation doubtful. Fraport is seeking to win back at least $510 million, including legal costs, according to the ICSID verdict.

Following the verdict, the question of civil liability arises – and that could mean calling Fraport’s former executive board and supervisory board to account. That is a task for the current supervisory board, which has a fiduciary duty to shareholders.

Fraport officials would not comment on that. Neither would Mr. Koch and Mr. Bender for this article.

The Fraport setback might also draw attention of the German government.

In 2008, the airport operators obtained €41.9 million in German federal loans for capital investments abroad. Regardless of the outcome of Fraport’s terminal dispute, a repayment clause was part of those agreements.

Georg Wengert, an airport group shareholder who criticized the “Fraport-Manila scandal” at the company’s 2003 general meeting, is arming himself for Fraport's next shareholders meeting in May.

“I will demand that those responsible be called into account,” he said.

 

Volker Votsmeier is an editor at Handelsblatt. To contact him: [email protected]