POSTSCRIPT / September 14, 2006 / Thursday


Philippine STAR Columnist

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A bold formula to free PNCC from debt trap

PRIZED CATCH: By regular standards, the Philippine National Construction Corp. should have been among the first government-controlled corporations offered up for privatization.

With its strategic role in overseeing the operations of Luzon’s expressways, PNCC would have been a prized catch for any serious investor. It has real estate assets galore, and its franchise to operate the expressways should be a very deep source of revenues.

But that did not happen. Indeed, the government rejected all bids during the 1999 auction, for being too low. That auction carried “as is-where is” conditions. And that was where the cookie crumbled.

No respectable bid was tendered. Despite the lure of expressway mega-revenues — via fees collected by the Toll Regulatory Board — all the bidders knew that a sword of Damocles hang over PNCC’s head.

Debts have hounded PNCC, a heavy burden piled over years of having its accountabilities neglected. It was only last month that PNCC paid concession fees to the TRB since it was given a permit to operate in 1977!

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AGUILAR TEAM: The new management team at PNCC led by its chairman Art Aguilar has drawn up a bankable plan to make the firm viable. The idea is to enable government to eventually privatize it and recoup its huge exposure.

But PNCC would be attractive to investors only if it becomes profitable and freed of its crippling indebtedness. Cleaned of decades-old neglect and mismanagement, it would then be easier to sell it at the right price.

But adventurers waiting in the shadows would rather see PNCC lose its option for a new franchise when the present one expires next year — so they could grab it and its multi-billion-peso money-making potential.

This starve-to-death strategy would be disastrous for the government, which is cash-strapped itself — because the dizzying debts of PNCC had been guaranteed by it.

Mercy killing of PNCC would pass on to the government, meaning taxpayers, its unpaid debts. On the other hand, giving it a new lease on life via a renewed franchise would enable it to earn, from toll fees alone, more than enough to pay off all its creditors.

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WHY IT CAN’T PAY: The P40 million that PNCC coughed up last August is just a fraction of the P912 million it was supposed to pay TRB over its 30-year franchise period expiring next year.

With penalties included, PNCC now owes the board P2.1 billion, according to the corporation’s spokesman, Madel Tacardon.

There were many reasons why PNCC regularly reneged on its obligations. For one, Tacardon says, public opinion held back the government from granting requests for toll rate increases. Toll rates were raised for the first time in 1983 and then in 1996, or after a 13-year interval.

Considering the peso’s downward spiral during these turbulent years, which meant higher operations costs in pesos for all Philippine businesses, one can imagine how cash-starved PNCC has become.

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ROUGH ROADS: Even when it went into joint ventures, PNCC found the way rough. The North Luzon Expressway, at least, is now something to be proud of, though the motoring public initially balked at the toll fees.

Such is the price of progress. But even critics now acknowledge that the modern expressway has slashed commuting time and made dramatic improvements in the flow of trade and commerce between Central Luzon and the national capital.

The NLEx, under the operational control of the Manila North Tollways Corp., has begun to show some gains but PNCC’s share in revenues amounts to only 6 percent. (Government holds majority shares in PNCC through the National Development Co., which is also its biggest creditor.)

Since its inception, PNCC (then as the Construction Development Corporation of the Philippines controlled by then Marcos crony Rodolfo Cuenca) never has shown any profit. Its revenues are not even enough to pay its debts.

While there is a positive glow in the North, it has been a dim picture in the South Luzon Expressway. The PNCC has run into big problems with the Citra Metro Manila Tollway Corp.

Citra has managed to complete only Phase I of the project, from Buendia Ave. to Alabang. Delays have affected PNCC’s capability to pay its debts.

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NEW OPTIMISM: The new team under Aguilar, a professional manager, has rekindled optimism for a turnaround. His formula relies on the tough corporate restructuring decisions that analysts have always sought from this publicly listed corporation.

Aside from negotiating a substantial downsizing with PNCC’s workforce, slashing corporate expenses, and getting rid of non-core businesses, Aguilar finally focused on the corporation’s debt woes.

What former managers tried to sweep under the carpet, either because of pride or national government’s dictate, are finally being acknowledged and resolved.

Aside from its payables to the TRB, its other debt problems include a P5.6-billion obligation to the Bureau of Treasury for unremitted withheld taxes, a P2.4-billion debt to the Philippine National Bank, and its biggest headache, a P17-billion collection case by Radstock, a firm that had bought receivables of Japanese giant Marubeni.

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RADSTOCK DEAL: After a drawn-out legal battle, PNCC decided to forge a compromise agreement with Radstock. Some sectors, including operators plotting to grab PNCC’s franchise, have been trying their best to undermine it and force its collapse.

Its agreement with Radstock has been dubbed a midnight deal. How can it be sneaked in under the radar when it was even presented to the Supreme Court? The court, in turn, has asked COA to review it — in the interest of the government and PNCC’s shareholders.

Detractors are also calling it a sellout, because it involves the turnover of some prime properties and a portion of the government share from NLEx tolls, plus 20 percent of its outstanding capital stock. The compromise agreement places the total value of the exchange at P6.2 billion — with no immediate cash outlay.

This is a sellout? Remember, PNCC owes a P17-billion debt. This gives the deal a settlement value of 30 US cents on the dollar. That is comparable to any deal under the SPAV program.

(That stands for Special Purpose Assets Vehicle; a special law enacted some 4-5 years ago to enable banks to dispose of non-performing assets or properties taken from defaulting borrowers, one of which is PNCC, at a huge discount of 2-3 US cents to a dollar. The program unburdens the banks that spend more for maintaining the foreclosed assets.)

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INTEREST & PENALTY: Detractors also moan at the P17-billion debt figure, saying the original debt was less than a billion pesos in 1980.

Try using this argument with any bank to wriggle out of a long-due mortgage and see where that gets you. Debts are always computed at current exchange rates. Under this computation, the original debt would be P2.5-billion.

Why the big jump to P17 billion? Anybody who has transacted a loan will tell you that non-payment exacts a big price in interest and penalty. This particular debt has been unpaid for 25 years — a quarter of a century!

(To compare: The original debt owed to the Philippine National Bank was P800 million, which has jumped to P2.4 billion in just seven years!)

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LOGICAL RESPONSE: Critics say PNCC prematurely threw in the towel, citing a Supreme Court order lifting a garnishment order on PNCC’s assets. They failed to notice that the SC decision, which gave PNCC some breathing space, did not touch on the case itself.

In fact, the Supreme Court rejected PNCC’s plea to dismiss Radstock’s case – a case PNCC had lost in the Regional Trial Court as early as Dec. 10, 2002. The lower court had ordered it to pay P13 billion — an acceptable figure since in 2000 the PNCC board acknowledged that the debt was already at P10 billion.

The Court of Appeals also had rejected PNCC’s appeal to lift the garnishment. It was PNCC itself that elevated the case to the CA and then, midway, sought a shortcut escape. It was rebuffed. That was when legal experts started advising PNCC to seek a compromise settlement.

PNCC can continue fighting, and face the possible nightmare of losing a much bigger chunk of its assets (since interest and penalties are going to continue piling up). Although the SC lifted the attachment on PNCC properties, the corporation cannot use its properties as leverage in expansion or reconstruction without risking another TRO or another attachment pending resolution.

Aguilar has what looks like a logical response. He is going for a swift, surgical solution. This is a painful procedure, true, but it would allow PNCC to finally escape from its dark financial prison.

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(First published in the Philippine STAR of September 14, 2006)

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