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The Cebu City-Filinvest Joint Venture Agreement

PRIVILEGE SPEECH CONG. PABLO JOHN GARCIA Cebu Province, 3rd District 20 April 2009 Mr. Speaker: I rise today on a question of personal and collective privilege, on a multibillion-peso controversy that has rocked the city and entire province of Cebu, and assaults, in a direct way, the authority of this House, and of the Congress of the Philippines. I refer, Mr. Speaker, to the Joint Venture Agreement recently concluded between the City of Cebu and Filinvest Land, Inc., involving a 50.6 hectare area of the South Road Properties, formerly the South Reclamation Project, in Cebu City. News of a deal was welcomed by the people, and quickly touted by City Hall, as the single bright promise of salvation for a debtridden city whose basic services, the Mayor has more than once admitted, have been sacrified at the altar of a jealous billion-peso debt. A debt, incidentally, that was incurred to implement a reclamation project that had looked until news of this deal on its way to becoming a gigantic white elephant. Exactly how much this debt is, no one knows. The City of Cebu has more than once been cited by the Commission on Audit for failing to reflect the full extent of this obligation in its books. But the window-dressing has not stopped fairly accurate estimates: some running upwards of 6 billion pesos, with the people of Cebu paying in interest alone at least one million pesos a day. One million pesos a day. A full one-third of the City of Cebus annual budget is devoted to debt servicing. You can understand, therefore, Mr. Speaker, how news of this Filinvest joint venture deal was received with an overwhelming sense of relief. It was so overwhelming, in fact, that the Vice Mayor, who signed the deal in the absence of the Mayor, and the city counci,l which gave its authority, forgot a few, perhaps negligible details: to read the contract, to study its provisions, and to protect the interests of the City of Cebu. I do not exaggerate, Mr. Speaker. A full two months after the deal was approved and signed, the Vice Mayor in a published statement ordered the councilors to study the Joint Venture Agreement, to enable them to answer the questions that had, by then, begun trickling in. To study the agreement. Two months after it was approved and signed. As one of the very few who have had the opportunity to scrutinize the Joint Venture Agreement, I have been asked to summarize my objections to the deal. And I have answered: There are only a few things terribly wrong with this contract: what it purports to be, what it actually is, and what it is not. It started innocently enough: an unsolicited proposal from Filinvest Land, Inc. to develop, on a joint venture with the City, a 50.6 hectare portion of the South Reclamation Project. As published, the deal was: (1) for an unincorporated joint venture over 50.6 hectares; (2) to undertake a central business district type development; and (3) a commitment on the part of Filinvest, to pay 1.5 billion pesos, within the first three years. That is what it purported to be. Prospective bidders were asked to prequlify and to submit comparative proposals. The Province of Cebu applied, but was promptly disqualified because it was not a private developer. That is another story, however, and another question better addressed in a different forum. With no other bidders, the City of Cebu proceeded to negotiate a contract with Filinvest. The deal, which is now the Joint Venture Agreement, departs, and deviates, from what the deal purported to be in the published invitation to bid, not on a few points, but on all material points. Mr. Speaker, in the Piatco case, the Supreme Court warned us that while negotiating a contract with the winning proponent was an essential part of the process, the parties may not under any circumstance substantially depart from the original terms of reference of the bid. To do so would be contrary to public policy, as it would make a mockery of the bidding process, and render it futile.

To put in provisions that would make the contract essentially different from what was bid upon would put the winning proponent at an undue advantage, and allow him to reap concrete advantages that were unavailable to prospective bidders at the time the bid was called. But this is exactly what happened here. Instead of an unincorporated joint venture over 50.6 hecatares, the deal provides for an outright sale of 10.6 hectares to Filinvest, and only 40 hectares for the proposed joint venture. This is significant not only because it departs from the published invitation to bid, but also because its purpose is clearly to evade the sealed public bidding requirement under Section 197 of the COA Rules and Regulations in regard to the sale of properties belonging to local governments. 10.6 hectares of prime land virtually granted to Filinvest without public bidding. In the original terms of the bid, Filinvest committed to undertake a central business district type development. In the Joint Venture Agreement, Filinvest set its bar so much lower, abandoning the central business district model for a cheaper type of development it calls integrated and well-planned clusters of medium rise residential buildings and retirement and congregate care complexes whatever that means. Finally, in the published terms of the bidding, the City of Cebu claimed that Filinvest had committed to pay 1.5 billion pesos within the first three years. In the joint venture agreement, Filinvest would pay the City of Cebu not in three years, as originally committed, or in four years, or in five, but in seven annual installments. Double the term originally committed and published. This is the Piatco case all over again, except worse: At least, in the Piatco case, the contract eventually signed still called for the construction of an airport terminal. In the case of the Filinvest deal, Filinvest promised a Makati, and then, could only commit to deliver a cluster of homes and homes for the aged. Nor does this movable feast end there. Under Section 4 of the agreement, the City of Cebu agreed that the master development plan which, by the way, Filinvest has not even submitted may be changed anytime by Filinvest without approval from the City of Cebu, but upon mere 90 days notice. In short, Mr. Speaker, we never really know what Filinvest would put there and under the terms of the contract -- neither is it our business, nor the Citys. It is Filinvests choice alone. The outright sale of the 10.6 hectares to Filinvest without public bidding certainly has no place in an unsolicited proposal for a joint venture. But it does have a place in our history books: The sale is an unprecedented milking of the Citys properties, unparalleled in its nature, its scope, its degree, and its brazenness. Consider this, Mr. Speaker: The object of the sale is 10.6 hectares of prime land at 1.5 billion pesos, payable in seven annual installments (instead of the three it committed during the bidding). In the normal course of private and especially public transactions, the buyer gets title only upon payment of the last installment. A deed of conditional sale is drawn up, with a commitment to execute a deed of absolute sale upon full payment. Not here. Under this agreement, Filinvest gets piecemeal titles to two hectares of property upon payment of each installment of 300 million pesos or so. I challenged Filinvest to point me to any of its subdivision projects where I could buy, say, a 500 square meter property, payable in 10 installments, and with each installment, I would get title to 50 square meters maybe the kitchen first, then the living room, then the bedrooms. Filinvest has not responded. The evil here is that there is no penalty for default. In ordinary real estate transactions, if a buyer fails to pay any installment, the sale is cancelled, and he forfeits all his payments, and forfeits forever the right to own the property. But not here. If Filinvest decides on the second year to stop paying further installments, no problem: It already holds the title to 2 hectares which it could then sell, if it has not sold it already, even as we speak. If Filinvest decides not to honor its commitment to a joint venture over the 40 hectares, not to worry: it already holds title to the 10.6 hectares. Indeed, not only is there no penalty for default. This deal is structured in preparation for eventual default. Not only does Filinvest get titles piecemeal upon payment of each installment; Filinvest gets all the titles to the entire 10.6 hectares even before full payment of the purchase price. Section 20 of the Joint Venture Agreement provides that after payment of the fifth installment, and with two installments to go, Filinvest shall already have taken delivery of the titles to entire object of the sale. This, with 448.5 million close to half a billion pesos remaining unpaid.

I again challenged Filinvest to point me to any of its subdivision projects where it delivered title to the property to a buyer who still had outstanding obligations. Again, Filinvest has not responded. The evil is obvious: If Filinvest fails or refuses to pay the last two installments amounting to close to half a billion pesos, Filinvest does not only NOT suffer any penalty for its breach -- its payments are not fofeited, no interest, no penalties are assessed. No, Filinvest in fact shall already have been given the prize. The titles to the entire 10.6 hectares, at half a billion pesos off. I would call this a sweetheart deal, Mr. Speaker, were it not unfair to sweethearts. For never have I seen a relationship where one party is as committed to bleeding the other dry, and the other doesnt complain, but calls it unconditional love. One wishes it ended there, Mr. Speaker, but after virtually surrendering title to the property, before and without guarantee of full payment, the City saw it fit to give Filinvest another bonus: a hidden illegal discount of 112 million pesos. Under Section 23 of the Joint Venture Agreement, the City of Cebu undertook to shoulder all capital gains taxes and documentary stamp taxes, as well as survey fees and other expenses accruing in the sale and transfer of the properties to Filinvest. This may seem customary in the ordinary course of business. But not where the seller of the property is a local government unit. Section 197 of COA Circular No. 92-683 issued in implementation of the Section 383 of the Local Government Code -- clearly provides that expenses relative to the registration and transfer of ownership from the local government to the vendee shall be borne by the vendee. Filinvest under the agreement escapes payment of an obligation which it is, under the law, bound to pay. For a 1.5 billion sale transaction, this could add up to 112 million pesos. A lot of money to spread around. The City likewise agreed to secure and assign all foreshore rights to Filinvest, without demanding a single centavo by way of compensation or even reimbursement for expenses. If the City seems an uncomplaining martyr in the sale transaction portion of this agreement, it aspires to sainthood in the joint venture portion of the deal. In the usual joint venture agreements involving real estate, the property owner contributes property, nothing else. The joint venture partner, who is chosen precisely because it is qualified, financially and technically, to undertake the development works, shoulders the entire development cost. I am told that the industry standard is for the property owner to get a low of 40% and a high of 50% equity in the venture. Not here, Mr. Speaker. The City of Cebu under this agreement contributes not only 40 hectares of supposedly prime property, but has also undertaken to spend for the road network, the drainage system, and provision for utilities such as power and water. Now, one would think that under such an arrangement, the City of Cebu would get a bigger share of the pie. But, no: Under this Joint venture Agreemnt, the City of Cebu gets a measly 10% share in the proceeds. 10%, Mr. Speaker. I have publicly challenged Filinvest to name any development anywhere in the country, or even the world, where the property owner contributes property and spends hundreds of millions for infrastructure in return for only a 10% share. Again, however, Filinvest has not responded. I have purposely avoided using the word equity in referring to the City of Cebus interest in the venture. Because the city actually has no equity. Equity implies a proportionate interest in the venture and the right to participate, to the extent of ones interest, in the management of the venture. But here, the city has ceded, under Section 11 of the Joint Venture Agreement, sole administration of the Joint Development to Filinvest. We need not even rely on industry standard, Mr. Speaker, to show how grossly and criminally disadvantageous this joint venture scheme is to the City of Cebu. Especially because the City of Cebu claims, in an ad, that the 40%-50% share is applicable only to horizontal development, and does not apply where vertical development, like buildings, is involved. So I searched for a similar contract, executed around the same time, involving the substantially the same parties, to see how this 10% share compares.

And I found one. It involves a local government unit, a highly urbanized city like the City of Cebu, and a private developer, like Filinvest, and it was executed within two weeks of the Cebu City-Filinvest deal. I refer, Mr. Speaker, to the joint venture agreement between the City of Taguig and R-II Builders Inc., for the development of 11 hectares of idle lands into a mixed-use development with a mall and a strip of medium- and high-rise residential towers to be known as Skyline City. This is dated January 22, 2009, or exactly 12 days before the Cebu City-Filinvest deal was signed Under this agreement, Mr. Speaker, Taguig Citys equity in the joint venture is not 10%, but a full 49%. Almost five times what the City of Cebu agreed to, and yet it does not spend a single centavo aside from its contribution of raw land. The revenue sharing under the agreement entitles Taguig City to not 10%, or 20%, or 30%, or 40%. It is not even 50%, but a full 69% of the revenues generated from the joint venture. The private developer is not the sole administrator of the venture. The City of Taguig is represented in a steering committee appointed to manage the development. And, for the information of the City of Cebu, the joint venture involves the construction of vertical structures, such medium- and high-rise buildings and a mall with commercial areas. The difference is too glaring, Mr. Speaker, and we must congratulate the City of Taguig for boldly demanding what is due, where the City of Cebu dropped the whole pie in a mad effort to loosen some crumbs. Can the City of Cebu do as it pleases with this ridiculous10% share? No: Because under the agreement, Filinvest is appointed the sole administrator and sole marketing arm of the venture. So that even if the City of Cebu finds a buyer for a higher price, it cannot sell its share except with the consent of Filinvest. Not only that: If the share is, in fact, sold, the City of Cebu does not receive its entire value, because it committed to pay Filinvest 7% in what it calls sales commissions and marketing expenses. And 10% of what, Mr. Speaker? We dont know. As we have seen earlier, Filinvest has yet to submit the Master Development Plan next year. And even if it eventually did, it retains the right to change the master development plan without approval from the City, upon mere 90 days notice. There is no guaranteed minimum investment on the part of Filinvest under the contract. Filinvest can put a memorial park there, for all we know, and the City not only has no right to object, but has committed, under Section 22 (d) of the Joint Venture Agreement, to cause the approval by the Sangguniang Panlungsod of amendments to local zoning ordinances and land use regulations to conform to whatever Filinvest decides to put there. Ten percent when? We dont know, Mr. Speaker. The Joint Venture Agreement provides for development in phases within a highly adjustable timetable, determined almost solely upon the will, or even the whim, of Filinvest. Under Section 6 of the agreement, for instance, Filinvest may suspend or extend the timetable when there is unsold investory of at least 17,500 sq. m of built-up floor space. And what is the sole marketing arm that determines whether, and how many, units are to be sold? Filinvest. Indeed, at its own option, Filinvest may even suspend the joint venture and even further payments on the outright purchase of the 10.6 hectares -- should any suit, proceeding, investigation or other legal action be filed questioning the agreement. So what would stop Filinvest from asking any third party to file a suit, should it want some grace period in fulfilling its obligations? This is not a joint venture, Mr. Speaker. This is a negotiated sellout of the interests of the people of the City of Cebu. A question likewise arises, Mr. Speaker -- one that bears directly on the authority of this House, and of the Philippine Congress: How can the City of Cebu sell reclaimed land without the authority of Congress? In Chavez v. PEA and Amari, the Supreme Court reaffirmed the continuing validity of Section 60 of Commonwealth Act No. 141, which requires congressional authority for local government units to sell reclaimed lands of the public domain. Further, even if the City is able to somehow surmount that legal obstacle: How can the City of Cebu sell reclaimed land to a private corporation without violating Section 3 of Article XII of the Constitution, which prohibits the sale of lands of the public domain to private corporations? Indeed, Mr. Speaker, there is an urgent and compelling need for this Congress to conduct an investigation, in aid of legislation, on the Cebu City-Filinvest Land Inc. Joint Venture Agreemen, among otherst: (a) to set the parameters within which local government units may enter into joint venture agreements with the private sector: (b) to provide for stricter compliance with the requirement for congressional approval in the sale of lands of the public domain; (c) to provide stiffer penalties for violation of Section 3, Article XII of the Constitution, on the disposition of lands of the public domain. Thank you, Mr. Speaker. Thank you, distinguished colleagues