Northrail settlement spares PH from payment of P5-B claims to Chinese firm: DOTr

November 6, 2017 - 6:25 PM
DOTr Secretary Arthur Tugade (L) and BCDA chief Vince Dizon (R) seal their agreement with SINOMACH, ending a protracted row that ended with international arbitration and cost the Philippine taxpayers dearly. DOTR HANDOUT PHOTO

MANILA – After a series of negotiations that started in January 2017, Philippine officials and the Chinese firm that had won the contract to build the Northern Luzon railway – conceived 22 years ago – have reached a settlement, sparing the country the obligation of having to pay P5 billion more in damages the next few years.

North Luzon Railways Corporation, represented by its ex-officio Chairman, Department of Transportation (DOTr) Secretary Arthur Tugade, together with Bases Conversion and Development Authority (BCDA) President Vivencio B. Dizon, recently concluded an out-of-court Settlement Agreement over NORTHRAIL’s dispute with China National Machinery & Equipment Corp. Group (now named China National Machinery Industry Corporation or SINOMACH). The latter is the former contractor of the 80-km Caloocan to Malolos segment of the NORTHRAIL Project.

The historic Settlement Agreement, approved by the Commission on Audit (COA), and likewise reviewed and certified legal and enforceable under Philippine law by the Office of the Government Corporate Counsel (OGCC), will save the Philippine government upwards of $100 Million, or more than P5 Billion in potential payment of claims to SINOMACH, as well as hundreds of millions of pesos in legal fees and arbitration costs, according to DOTr.

Under the terms of the Settlement Agreement, the parties have agreed to:

(1) waive their claims against each other and declared that there will be no more payment by NORTHRAIL to SINOMACH, and vice versa, and

(2) share the remaining arbitration fees in equal proportions.

As of March 2017, NORTHRAIL, a fully-owned subsidiary of BCDA, has already spent P161 million for its participation in arbitration proceedings, including fees for its legal consultants. Without the Settlement Agreement, NORTHRAIL expects to spend an additional P500 million if the arbitration hearings originally scheduled in November 2017 would take place.

The signing of the Settlement Agreement was witnessed by Foreign Affairs Secretary Allan Peter Cayetano, and Chinese Ambassador to the Philippines Zhao Jianhua. Also present in the event were Executive Secretary Salvador Medialdea and Budget Secretary Ben Diokno.

Manila to Clark Railway

Besides avoiding the potential $106-million liability and more than P500 million in additional legal expenses, the Settlement Agreement will ensure that there will be no more contractual issues that may hamper or compromise the development of the DOTr-Philippine National Railways (PNR) Manila to Clark Railway project. The latter is one of the top priorities under the Duterte Administration’s Build, Build, Build program.

The PNR Manila to Clark Railway project is expected to serve as a catalyst to decongesting Metro Manila, and at the same time bring growth to the regions north of the capital, particularly Central Luzon, where an estimated 11.22 million Filipinos reside and earn their living.

This railway project, which was conceptualized as early as 1995 when NORTHRAIL was incorporated, has long been delayed and was subject of many controversies. However, the Duterte administration, through the DOTr, has expressed its full commitment to finally deliver this project before the end of the President’s term, DOTr said.

Hong Kong arbitration

The settlement will put an end to the arbitration proceedings initiated by SINOMACH in 2012 after it was notified by NORTHRAIL that it can no longer proceed with the implementation of the project due to serious legal issues in the contracts. The seat of the arbitration proceedings is in Hong Kong, a special administrative region of China.

In February 2016, NORTHRAIL lost the first phase of the arbitration proceedings. The Arbitral Tribunal in Hong Kong published a Partial Award, which upheld the validity of the contracts with SINOMACH.

Having found SINOMACH’s claims meritorious, the Tribunal also ordered NORTHRAIL to bear all costs relating to the first phase of arbitration. It thereafter directed the parties to proceed with the next phase, which is the determination of liability and extent of liability. SINOMACH is claiming almost $106 million from NORTHRAIL for costs it incurred under the contracts and for damages.

Liability for overpricing

Despite the signing of the Settlement Agreement, both DOTr Secretary Tugade and BCDA President Dizon said that, in the spirit of truth and justice, the administration will still go after the government officials involved in the allegedly anomalous and/or overpriced contracts.