John Hay fiasco: What went wrong

THE MANOR in Camp John Hay is one of the top earners inside the former American rest and recreation center in Baguio City. EV ESPIRITU

Camp John Hay has always been a source of conflict for Baguio City.

It drew Japanese war planes to the summer capital on Dec. 7, 1941, five hours after the Japanese Imperial Army attacked Pearl Harbor in Hawaii and ignited World War II in the Pacific.

The city had to rebuild everything, following another carpet bombing by American planes to liberate it from Japanese forces who were stationed at Camp John Hay.

In 2011, the former American rest and recreation center brought war once more to Baguio when a contractual dispute between the government administrator and the developer of John Hay erupted into a public battle.

This feud had been burning beneath the surface for decades, after the developer, Camp John Hay Development Corp. (CJHDevco), took over a lease contract which the state-owned Bases Conversion and Development Authority (BCDA) had awarded in 1996 to Manuela Lands and Housing Consortium.

Both the BCDA and CJHDevco, owned by businessman Robert John Sobrepeña, had been unhappy about how the contract to develop 274 hectares of the 690-hectare Camp John Hay reservation into a tourism estate had been implemented. This was in spite of several restructured deals undertaken in the span of 15 years.

In 2011, CJHDevco unilaterally rescinded its 2008 Restructured Memorandum of Agreement (RMOA) with the BCDA. It explained its actions to an arbitration tribunal formed by the Philippine Dispute Resolution Center Inc. (PDRCI) by claiming that the government “failed to deliver the property intended for the lease with all the investor-friendly incentives and the advantages of a special economic zone,” such as the absence of red tape and the benefits of preferential tax and financial incentives.

“For these alleged breaches, CJHDevco theorizes that the [BCDA] is not entitled to rentals [amounting to P3.3 billion], resulting in an impasse between the parties,” the tribunal said.

Last week, the PDRCI resolved the feud by “extinguishing” the lease after concluding that both parties violated the original Oct. 19, 1996 agreement.

The tribunal, composed of lawyers Mario Valderrama, Teodoro Kalaw IV and Rogelio Nicandro, also directed CJHDevco to vacate and “promptly deliver the leased property, inclusive of all new constructions and permanent improvements introduced during the term of the lease [to the BCDA] in good and tenable condition.”

It directed the BCDA to reimburse the P1.42-billion rent CJHDevco had paid to the government since 1996, ruling that the company was not liable for any unpaid back rent.

It was a decision from which Baguio alone proved to be this war’s biggest loser. The city government is entitled to 25 percent from CJHDevco’s lease rentals, or 30 percent from the net income of all operations within the John Hay Special Economic Zone (JHSEZ).

Had the arbiters sustained the contract, Baguio would have earned from CJHDevco’s projected cash inflow of P52.905 billion from 2012 to 2046, from the operations and transactions with 12,071 residential and condotel units, 1,357 residential lot pads, and 39,477 retail shops.

To make up for this loss, Sobrepeña, in a news conference on Monday, said the city could petition for 25 percent of the assets which CJHDevco would be ordered to relinquish to the BCDA, should a regional trial court confirm the arbiters’ ruling.

Judge Cecilia Corazon Archog of the Baguio Regional Trial Court had directed the government and the developer to undergo arbitration proceedings in July 2012.

But city government lawyers are studying how Baguio’s decision to support Camp John Hay’s privatization led to this latest outcome.

The 274-page PDRCI ruling provides a glimpse of the dealings that took place under the city’s collective noses. For example, it confirms that the BCDA and CJHDevco inserted a casino project inside the JHSEZ, despite Baguio’s prohibition which it prescribed in 19 conditions for endorsing the Camp John Hay lease.

What BCDA did wrong

The most relevant problem in the Camp John Hay project was the very foundation of the JHSEZ, the arbitration tribunal said.

Then President Fidel Ramos issued Proclamation No. 420 to establish the JHSEZ and to apply incentives offered by all special economic zones.

“The fact that the provision covering the tax incentive was included as an express provision in the [original 1996 lease agreement] shows that this was intended by the parties to be a benefit to be enjoyed by CJHDevco throughout the lease,” the arbiters said.

But Baguio residents composing the John Hay Alternative Development Coalition questioned Proclamation 420 in a lawsuit. In 2003, the Supreme Court legitimized the JHSEZ and invalidated the tax incentive and other privileges imposed by Ramos because only Congress has the power to impose tax exemptions.

The government rushed two new laws to restore JHSEZ’s tax incentive and to impose a one-time tax amnesty for the developer. But the time it took to pass the new laws had impaired CJHDevco’s finances, Sobrepeña said.

The arbitration tribunal said: “The Supreme Court decision could not be characterized as a fortuitous event for one simple reason: the defect was existing as early as the time the (original 1996 lease agreement) was signed. So, the Supreme Court decision was not a supervening event. It merely confirmed something that was in existence all along.”

It also ruled that the BCDA breached the 2008 RMOA “for its failure to set up the One Stop Action Center” in the manner the deal had stipulated, in order to speed up the release of government permits and clearances.

What CJHDevco did wrong

But the tribunal said CJHDevco was equally culpable for the ruined deal, for committing “substantial, material and consistent misrepresentations that it was financially incapable of paying its lease rentals in order to obtain a deferment in the payment of rentals.”

“As early as the second year of the lease, CJHDevco claimed that it could not make the second rental payment. However, CJHDevco’s financial statements would show that CJHDevco was financially capable of making the second year lease payment of P425 million,” the arbiters said.

“On Dec. 19, 1998, barely 14 days after Sobrepeña appeared before the BCDA board and claimed that CJHDevco did not have enough revenues to pay the second annual rent of P425 million and was supposedly incurring losses, CJHDevco’s board of directors passed a resolution declaring cash dividends of P378 million,” the decision said.

“Instead of paying what was due to the BCDA, CJHDevco paid its stockholders first,” it said.

“All in all, for the years 1998, 1999 and 2000, when CJHDevco was supposedly incapable of paying rentals, it was able to and did pay more than P1.274 billion as dividends and advances to its subsidiaries, affiliates, stockholders and others,” the tribunal said.

It said the developer also violated the 2008 RMOA when it failed to open escrow accounts to hold its deferred rent and its security deposit.

Kalaw, in a separate opinion, said CJHDevco should pay BCDA P2,406,140,525, representing the arrears which the company promised to pay when the 2008 RMOA was executed.

Kalaw had signed the main tribunal ruling, but his disagreement with the other arbiters over the reimbursements could be grounds for the BCDA to appeal a change in the ruling, said lawyer Michelle Regala-Niebres, vice president and chief operating officer of the BCDA’s John Hay Management Corp.

An arbiter’s ruling is binding, except for a limited set of grounds such as its impact on public interest, said Niebres, one of 50 government lawyers and accountants tasked to examine CJHDevco’s transactions.