Pasay reclamation: Clash of the property giants

Judith Balea

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Other developers raise questions over Pasay City's deal with SM for a multibillion-peso reclamation project; nat'l government eyes bidding

MANILA, Philippines – Have you ever been to SM Mall of Asia?

That vibrant commercial area spanning over 400,000 square meters in Pasay City can become thrice as large as it is today if the group of tycoon Henry Sy would have its way. It wants to reclaim 300 hectares more of Manila Bay and use part of it to expand MOA.

The SM group came a big step closer to that when it bagged a joint venture (JV) deal with the Pasay local government. It beat other interested groups, like Ayala Land Inc., to it.

The battle, it turns out, isn’t over.

The national government is stepping in and, through the Philippine Reclamation Authority (PRA), eyes to bid out the project.

This will give other property developers, in tie-up with government-owned and -controlled corporations (GOCCs), another shot at it. This is after these developers raised questions on the Pasay-SM deal.

Regulators interviewed by Rappler were one in their conclusion: Pasay did not follow proper procedures when it signed the JV with SM.

This planned bidding by the national government has sparked a debate that threatens to further complicate the issue of the supposedly problematic JV.

Local government units (LGUs), along with their private sector partners, used to enjoy primary rights to undertake reclamation within their jurisdictions. 

But regulators said they are now allowed to bid out the projects under an executive order (EO) recently issued by Malacanang, essentially downplaying the LGUs’ authority.

Project details

SM Land Inc. submitted an unsolicited proposal to the Pasay LGU in July to reclaim 300 hectares of foreshore and onshore areas of the Manila Bay for a cost of P54 billion.

A map of the proposed project shows it is located at the western end of Pasay – right behind MOA, one of the Philippines’ biggest malls. Without divulging how it arrived at the cost, SM Land said in a statement the property to be reclaimed will be used to expand and replicate “the excitement, the professionalism now pervading at the MOA Complex a further three-fold.”

Under the proposal, SM will fully finance and undertake the reclamation project in 7 years and will award 51% of land reclaimed to the government right after. It will develop the rest of the area for commercial use.

Pasay’s Public-Private Partnership Selection Committee sought competing proposals from other property developers on October 1, but generated none before the November 4 deadline.

One month was not enough time to prepare a counter-proposal, according to the other developers interested in the project, namely Ayala Land of the Zobel family and S&P Construction Technology.

Ayala Land said it needed more time “to come up with a well thought-out development plan.”

“This is a large-scale, 300-hectare reclamation project of national significance that should take into serious consideration many factors, especially those that affect the environment,” Ayala Land chief operating officer Bobby Dy said in an email to Rappler.

The company asked the city to extend the deadline for submission by 60 days, but the request was denied.

Wrong guidelines?

Ayala and S&P questioned the guidelines the Pasay LGU followed in forging a JV deal with the SM group.

In denying Ayala’s request for an extension, Pasay’s Public-Private Partnership (PPP) Selection Committee cited a set of JV guidelines issued by the National Economic and Development Authority (NEDA) in 2008. The guidelines gave a 30-day period for submission of counter-proposals in any competitive challenge.

Dy said the city government should have used the revised set of guidelines, which took effect in 2013. These provided for a 120-day period for submission.

“The [2013 version] promotes a higher level of transparency which could have attracted more bidders and therefore served the best interests of Pasay City and the country,” Dy said.

S&P raised a different issue. It said that neither set of NEDA guidelines is applicable to the project, and Pasay should have instead used the Build-Operate-Transfer law.

In a phone interview with Rappler, Atty. Mark Perete of S&P also pointed out that the Pasay government did not provide a detailed technical description of the project. “How will we arrive at the pricing if we don’t know the technical components?”

Perete said it “raised grave suspicions” that Pasay proceeded with the award of the JV contract to SM on November 29 despite procedural and legal questions.

“We don’t see a problem going back one step when you already know the problem, but they insisted on going on with the project. We don’t want to speculate as to what happened. But the irregularities expose the project to grave legal challenges,” he said.

Insisting that the deal was aboveboard, PPP Selection Committee vice chair Atty. Severo Madrona Jr argued that LGUs have the right to determine their own rules as long as these are guided by law. “Besides, this (JV) is still subject to the approval of PRA and NEDA.”

The controversy led to a row at the Pasay local government, with the city council flip-flopping on its stance. Angering the mayor’s office, the council withdrew its support for the JV, only to give it back in the end.

SM Land senior vice president Dave Rafael maintained the company has “a perfected and legally binding contract” with the city that was duly approved by both the mayor’s office and the city council.

SM has experience

Pasay considers SM an “experienced” partner, according to Madrona. The group has been involved in business, commercial, and leisure developments in the city over the last 17 years.

MOA and another SM development in Pasay, the SMX Convention Center, sit atop a reclaimed land. SM has gotten approval for another 60-hectare development beside the mall.

Aside from the projects in Pasay, the group also submitted an unsolicited proposal for a 300-hectare reclamation project in Paranaque City.

On the other hand, Ayala Land has had no experience in reclamation, but it said it is willing to partner with a group that has the know-how.

It said the project could have been an opportunity to build another large-scale, mixed-use community – the same as the ones it successfully developed in Makati, Fort Bonifacio, and Laguna. It did not however provide details of its plan for Pasay or an estimated cost.

The two companies are among the largest property developers in the Philippines and, no doubt, have the financial muscles to undertake massive real estate projects.

This was not the first time that the two clashed over property deals in the country. They previously fought over a property company owned by the Ortigas family and the development of 7.7-hectare government property in Bacolod City in 2011.

What’s the right process?

The more contentious issue however isn’t what law or guidelines should have been applied in the JV, regulators said. 

NEDA Deputy Director General Rolando Tungpalan said while LGUs are not covered by NEDA JV guidelines, “they may create their own guidelines following the procedures of NEDA.” The BOT law’s implementing rules and regulations also allow LGUs to undertake reclamation projects through the BOT scheme, he added.

Pasay’s mistake lies in signing the JV contract without having regulators approved the project first.

“They shouldn’t have signed the JVA yet. They should have prepared a draft contract then submitted it to PRA for approval,” Engineer Elmer Dorado, chief of Value/Risk Analysis and Infrastructure Regulation Division of NEDA, told Rappler. “The process should be, if there’s an unsolicited proposal, you should have it approved by regulators first before you seek competing proposals.”

Section 1 of Executive Order 525 of 1979 states, “The Public Estates Authority (now PRA) shall be primarily responsible for integrating, directing, and coordinating all reclamation projects for and on behalf of national government. All reclamation projects shall be approved by the President upon recommendation of PEA.”

The authority of the President to approve reclamation projects was “delegated to the PRA, through its governing board,” under EO 543 of 2006.

PRA Assistant General Manager Atty. Joselito Gonzales confirmed no submission was made to the agency – the reason why they did not intervene in the JV deal undertaken by Pasay City. “Wala kaming right noon makialam dahil iyong LGU ay wala pang isina-submit sa amin.” (We had no right to meddle because the LGU had not submitted anything to us.)

Gonzales explained the practice was that LGUs normally approached the national government – represented by the PRA – with reclamation proposals. After a strict evaluation and approval process, the PRA and LGUs signed memoranda of agreement to proceed with the projects.

In the past, however, LGUs had no financial and technical capabilities to undertake such capital-intensive projects and, therefore, had to partner with the private sector by forging JV contracts. These contracts were bid out.

In the case of the Pasay reclamation project, the call for counter offers to SM’s unsolicited proposal comprised the bidding stage.

“But in all stages – from submission of proposal, to preliminary studies, to the terms and conditions of the project, to the detailed feasibility and technical studies – the regulator should always be involved,” he said.

Regulatory changes

At the height of the Pasay reclamation controversy, changes at the regulatory level were effected.

Malacanang issued EO 146 on November 13, transferring the authority to approve reclamation projects in the country to the NEDA Board from the PRA. In other words, the PRA’s powers are now limited to processing, evaluating, and recommending the approval of all reclamation projects to the NEDA Board, which is chaired by the President.

But, more importantly, the EO declared that “all reclamation projects shall undergo competitive public bidding consistent with the government’s thrust to promote transparency and competitiveness.”

This means the Pasay reclamation project – now covered by said EO – will have to be bid out.

Gonzales said they are bidding out the project, this time allowing GOCCs – like the Philippine Ports Authority, the Laguna Lake Development Authority, and the Bases Conversion and Development Authority, to name a few – to participate. “GOCCs may partner with the private sector.”

He said the Pasay-SM JV may join as one of the bidders. He said their JV may also be considered as an unsolicited proposal to jumpstart the bidding process.

Pasay may insist on its rights and privileges to reclaim land within its jurisdiction under the Local Government Code.

But Gonzales said the code only allows the city to do so if it will finance the project using its own funds, and if the specific area to be reclaimed will solely be for its own use. “That is not the case here,” he noted.

Gonzales however also recognized that because the project lies within the city’s jurisdiction, an endorsement from the LGU is needed before the bidding could proceed.

Asked what might happen if Pasay refused to give its endorsement, Gonzales said no project would be bid out at all. “If they want the project to push through and they’re confident in their bid, then they will give their consent. If not, then we won’t approve the project.”

Ayala Land’s Dy told Rappler the company remains open to bidding for the Pasay reclamation project. “However, this will depend on the results of a careful evaluation of the process and terms that will be followed.”

It’s a waiting game. – Rappler.com

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