[Page 826]
INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT
DISPUTES
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
In the matter of Arbitration :
between: :
:
OMEGA ENGINEERING LLC AND :
MR. OSCAR RIVERA, :
:
Claimants, : ICSID Case No.
: ARB/16/42
and :
:
REPUBLIC OF PANAMÁ, :
:
Respondent. :
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x Volume 5
HEARING ON JURISDICTION, MERITS AND QUANTUM
Friday, February 28, 2020
The World Bank Group
1225 Connecticut Avenue, N.W.
C Building
Conference Room C1-450
Washington, D.C.
The hearing in the above-entitled matter
came on at 9:00 a.m. before:
MR. LAURENCE SHORE, President
PROF. HORACIO A. GRIGERA NAÓN, Co-Arbitrator
PROF. ZACHARY DOUGLAS, Co-Arbitrator
[Page 827]
ALSO PRESENT:
On behalf of ICSID:
MS. CATHERINE KETTLEWELL
Secretary of the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporter (RDR)
Certified Realtime Reporter (CRR)
B&B Reporters
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
MS. ELIZABETH CICORIA
MR. DIONISIO RINALDI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MS. SILVIA COLLA
MR. DANIEL GIGLIO
MR. CHARLES ROBERTS
[Page 828]
APPEARANCES:
On behalf of the Claimants:
MS. MELISSA GORSLINE
MR. CHARLES KOTUBY
MR. THOMAS CULLEN, JR.
MR. LEE COFFEY
MR. FAHAD HABIB
MR. PAUL HINES
MR. MICHAEL DALY
MS. MARIA PRADILLA PICAS
MS. CARLA GHARIBIAN
MS. PALOMA CIPOLLA MOGUILEVSKY
Jones Day
51 Louisiana Avenue, N.W.
Washington, D.C. 20001-2113
United States of America
MR. CARLOS CONCEPCIÓN
MR. RICARDO AMPUDIA
Shook Hardy & Bacon
Citigroup Center
201 S. Biscayne Boulevard
Suite 3200
Miami, Florida 33131
Party representative:
MR. OSCAR RIVERA
[Page 829]
APPEARANCES: (Continued)
On behalf of the Respondent:
MR. HENRY WEISBURG
MR. RICARDO ALARCON
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022-6069
United States of America
MR. CHRISTOPHER RYAN
MS. ANNA STOCKAMORE
MR. CARLTON MOSLEY
Shearman & Sterling LLP
401 9th Street, NW
Suite 800
Washington, D.C. 20004-2128
United States of America
Party representatives:
MS. LAURA CASTRO
MR. FRANCISCO OLIVARDIA
Republic of Panamá
[Page 830]
APPEARANCES: (Continued)
For the United States of America:
MS. NICOLE THORNTON
MR. JOHN BLANCK
Attorney-Advisers
Office of International Claims and
Investment Disputes
Office of the Legal Adviser
U.S. Department of State
Suite 203, South Building
2430 E Street, N.W.
Washington, D.C. 20037-2800
United States of America
[Page 831]
C O N T E N T S
PAGE
WITNESSES:
PABLO LOPEZ ZADICOFF
Direct presentation...................................834
Cross-examination by Mr. Ryan..........................855
Questions from the Tribunal............................922
Further cross-exam. by Mr. Ryan........................940
DANIEL FLORES and RYAN MCCANN
Direct presentation....................................943
Cross-examination by Mr. Hines.........................974
Questions from the Tribunal...........................1115
[Page 832]
P R O C E E D I N G S
PRESIDENT SHORE: Good morning, everyone.
Day 5 of the first week of our Hearing.
Ms. Gorsline, any procedural matters you need
to raise?
MS. GORSLINE: None for Claimants,
Mr. President.
PRESIDENT SHORE: Thank you.
Mr. Weisburg?
MR. WEISBURG: No, we're good. Thank you.
PRESIDENT SHORE: Thank you very much.
PABLO LOPEZ ZADICOFF, CLAIMANTS' WITNESS, CALLED
PRESIDENT SHORE: Mr. Lopez Zadicoff, good
morning.
THE WITNESS: Good morning.
PRESIDENT SHORE: I believe you have the Rule
35(3) Expert Declaration in front of you. Please,
could you read it out loud?
THE WITNESS: Sure. My name is Pablo Lopez
Zadicoff, and I solemnly declare, upon my honor and
conscience, that my statement will be in accordance
with my sincere belief.
[Page 833]
PRESIDENT SHORE: Thank you, sir.
I believe we have two Reports from you in the
record: The first dated June 25, 2018, and a
Supplemental Report dated May 27, 2019; is that right?
THE WITNESS: That is correct.
PRESIDENT SHORE: Thank you very much.
And I believe you have a presentation for us.
THE WITNESS: I do.
PRESIDENT SHORE: And I see that hard copies
are being distributed, if you wait one moment. Thank
you very much.
So, sir, we're in your hands for the next
30 minutes.
DIRECT PRESENTATION
THE WITNESS: Thank you very much.
Good morning, again, Members of the Tribunal.
I have prepared this 30-minute presentation,
which is divided into four models. The first one
deals with what is the valuation purpose, and what was
the task that we were asked to do. And if we move to
Slide Number 4, here you can see what is the object of
our valuation, which is the totality of Claimants'
[Page 834]
investment in Panamá, otherwise known as the Omega
Consortium.
Now, the Omega Consortium is composed both of
Omega Panamá itself, the local entity which was in
charge of the Project implementation, and the
intangible assets of Omega U.S. that were invested
into Panamá and put at risk in the bidding process
within the Omega Consortium.
Now, here, I will pause, because I noticed in
Respondent's Opening that we agreed there has been, at
some point, some confusion or mislabeling on our part
when we were referring to "Omega Panamá," and we were
ambiguous, and we should have mentioned "Omega
Consortium," but this is clear in our letter of
instruction, our Reports, analysis, and the
methodological discussion: What we have always valued
since the beginning is the totality of Omega
Consortium. And the reason for that is simple:
Because those are all the assets that allow the
consortium to win the 10 existing contracts--or,
actually, win 10 bids that resulted in 9
contracts--and are the same assets that would have
[Page 835]
allowed the Consortium to continue operating in the
public works construction market in Panamá.
Now, if we move to Slide Number 5, this is
how we approach our valuation exercise, and I don't
need to explain to the Tribunal what the Fair Market
Value standard is. It's "the price at which a
hypothetical Willing Buyer and a hypothetical Willing
Seller will exchange the asset for a monetary amount
without compulsion to sell." Now, both Dr. Flores and
us argue that we apply the Fair Market Value standard,
but Dr. Flores does it in a myopic way.
First, Dr. Flores is not using a hypothetical
Willing Buyer concept. He's using--in his mind, he
has a specific buyer in mind that would not be
interested in the totality of the assets of the Omega
Consortium, in particular, would not be attracted by
the intangible assets. And we believe that if you, by
definition, exclude the possibility of the Willing
Buyer to be interested in parts of the assets and
their valuation, you will not be able to achieve full
compensation in your valuation assessment.
The second difference is that Dr. Flores is,
[Page 836]
throughout his analysis, only looking at the Willing
Buyer perspective, and it's true that any Buyer in any
potential transaction will try to pay as little as
possible for an asset, but a seller, by the same
token, would never let go of a profitable asset for a
monetary amount that is less than it can collect by
holding the asset and not transacting. So, if you
don't look at Willing Seller, it's impossible to have
a hypothetical transaction.
So, I will now move to the actual
calculations we performed, and I will start with the
Discounted Cash Flow analysis we performed to value
losses on new contracts or future contracts of the
Omega Consortium. And in Slide Number 7, you can see
here the difference in valuation results, our
assessment at $42.5 million and Dr. Flores' assessment
at, in reality, zero, and in the subsidiary position,
$1.1 million.
Each of the rows in this table highlights
differences in valuation assumptions that I will
discuss next. In the right-most column, you can see
the stand-alone impact of introducing each of
[Page 837]
Dr. Flores' assumptions into our calculations.
So, for instance, if, regarding the valuation
horizon, you assume that cash flows need only to be
valued until Year 2019, as Dr. Flores suggests, that
would result in a decrease in our value assessment of
[Redacted] As I said, I will discuss Line Items 1
to 3 in detail in the following slides. In the
interest of time, I will not discuss in detail 4,
"Other Assumptions," which have a stand-alone impact
on value of [Redacted] I will just mention that
Dr. Flores unwarrantedly extends the period in which
cash flows are generated for each contract and
double-counts the general administrative expenses in
2015 and 2016.
So, in Slide Number 8, I will now explain
why, when looking at the value of the Omega Consortium
into the future, you need to look beyond Year 2019,
and I will do this by referring to Figure 4 of
Dr. Flores' Second Report, and it is here replicated
on the left. Here, Dr. Flores explains his
calculation methodology, and the red line would be the
cash flows from the new contracts that the Omega
[Page 838]
Consortium would generate into the future.
Now, the blue line is what Dr. Flores
suggests would be the cash flows that a start-up
company, initiating operations in 2015, would achieve,
and Dr. Flores assumes that, by 2020, those cash flows
would match those of established company Omega
Consortium. Dr. Flores then calculates potential
damages as the difference between the red and the blue
curve, which is shaded in gray.
So, there are at least three main problems
with this analysis by Dr. Flores. First, it is
completely arbitrary. There is no rationale
whatsoever of why, potentially, this start-up company
will be able to match the Omega Consortium cash flows
in five years, and not in seven, not in 10, not in 15.
Second, it's inconsistent with the Willing
Seller approach, or the Fair Market Value theory. As
you can see in the title of Figure 4, that's--the
title is--"A Willing Buyer's View."
So, Dr. Flores is neglecting the Willing
Seller perspective. And if you recall, let's assume
that the cash flows that--the person holding the asset
[Page 839]
are represented, in fact, by the red curve. No seller
will be willingly parted with this asset if it is only
complicated by cash flows truncated in 2019.
Third, even if we were to consider
Dr. Flores' Willing Buyer approach, there is no reason
why an established company would be valued in the same
way as a start-up company. Actually, Dr. Flores is
neglecting start-up risks. There are studies--for
instance, Dr. Damodaran has done a study saying that
around 50 percent of companies fail within the five
first years of operations. So, in principle, if a
Willing Buyer would be looking to replicate an asset,
will factor a start-up risk. And we have not measured
that in particular, but here, we are showing it from a
theoretical standpoint by adding this orange line,
because the cash flows that the analyst would look at
when analyzing a start-up company would be, certainly,
discounted by the risk of failure. As such, under any
theory, it is inappropriate to truncate the analysis
by 2019.
So, before going into the detail of this year
for the cash-flow analysis, first an overview of what
[Page 840]
is the performance, or what we know about the Omega
Consortium before 2014. In Slide Number 9, you see
that the Omega Consortium had been awarded contracts,
including change orders, for $159 million. That is
the result of winning 10 out of the 42 bids in the
public sector contracting that it participated in.
Not only that, Omega Consortium was able to achieve
the maximum score in financial capacity and experience
in most of the bids it participated in, which puts the
Consortium in equal footing within the target market
to the larger construction companies that Dr. Flores
mentions in his analysis. As a result--[Redacted]
[Redacted]
[Redacted]
[Redacted]
So, with this track record, how it is that
Dr. Flores arrives to a conclusion that the Company
was essentially worthless? Well, he does it by
changing each of the cash-flow analyses, and I will
start in Slide 10 with a target market.
As you know, the target market that we are
[Page 841]
considering in our valuation is small- to medium-sized
public infrastructure projects in Panamá, and our
assessment is that, based on history, that target
constitutes an average 5 percent of the capital
expenditures of the central Government. And we have
calculated here in the light blue bars what is the
5 percent of the central Government's capital
expenditures. And as you can see, our assessment,
which essentially extends the market by GDP growth,
represented in the blue bars, continues the historical
trend, while Dr. Flores' assessment reverses it,
represented in the red bars.
Now, to provide further comfort about the
reasonability of our assumptions, what we did in our
First Report is what you see in the gray bars here,
which is to look in the PanamaCompra website, which is
the procurement website of the Government of Panamá
where all public tenders are published, and see how
many were the bids that would have fit within Omega
Consortium's target market? And what we found is
that, for 2015, there were $517 million in bids that
would have matched that target market and 674 million
[Page 842]
in 2016. That is more than double our estimate and
provides comfort that our estimation is proper.
Second DCF calculation has to do with the
success rate, and the success rate is the way we
convert the target market into actual profit revenues.
So, the target market is where you bid. The success
rate, when it is multiplied, is how much projects you
will be able to win.
And our assessment of the success rate is
quite simple. Omega Consortium participated in 42
public tender bids. It won 10. That is a straight
success rate of 23.8 percent. If we do the same in
terms of value, you get a success rate of
21.4 percent.
Now, Dr. Flores argues that our analysis is
inappropriate, and you should only look at
certain years when calculating success rates. Now,
that is inappropriate, because it neglects first the
fact that bidding behavior is strategic. So, bidding
is costly. You need to research; you need to prepare
a budget; you need to submit a bid. So, you will only
present bids in times where you believe your
[Page 843]
qualifications are aligned with the Projects that are
subject to tender. So, in some years, there may be
more projects that are aligned with your
characteristics, other years less, but you should look
at the overall bidding decision as a whole.
Second, there is also a resource allocation;
right? If you have a backlog of nine projects, you
will be less incentivized or less prone to bidding
than if you don't have any projects in your pipeline.
But, be as it may, even if we were to
consider Dr. Flores' premise of only looking at the
success rates of 2011 and 2013--and here we have
flagged them in red in the first row that we have
added below the chart--you can see that the success
rate for 2011 in terms of bids is 29 percent, while in
2013 it is 25 percent, both numbers confirming the
reasonability of our 25 percent success rate.
Now, you may also notice that this slide
replicates one of Respondent's Opening Slides, and
Respondents used this slide to argue that the Company,
the Omega Consortium, was failing before the date of
valuation or the alleged Measures. We see this in a
[Page 844]
slightly different way.
So, first, it is true that bidding activity
decreased in 2012, but if you look at the amount of
contracts that were awarded in 2012, that's probably
the best year in the Omega Consortium history. So,
the proposition that this was a failing company in
2012 is not supported by the evidence.
Second it, is true that by 2013, you have
less bidding activity, but, as I said, bidding is
strategic, and by 2013, the Company had nine active
projects, and, actually, 2013 continued the increasing
trend in profitability and revenues. So, in our view,
this shows no evidence of a decaying company before
the date of valuation.
So, after we calculate the Project's
revenues, the next step is to get the gross
profitability, and in Slide Number 12 we use a
[Redacted], which is informed by
Mr. McKinnon's analysis. First, Mr. McKinnon
calculated expected profitability at inception, when
the Projects were priced at [Redacted], and he
calculated that the expected profitability of the
[Page 845]
eight outstanding contracts, when the full cycle of
the contracts would be completed, would be
13.2 percent. And we understand those numbers have
not been challenged.
Second, we contrast these with sectoral
evidence from international construction companies,
again calculated by Dr. Damodaran, who provides a
gross margin of 16 to 20 percent for construction
companies.
And, third, it is also supported by the
evidence of the only Contract that the Omega
Consortium was able to complete before the Measures,
the Tocumen Airport Contract, [Redacted]
[Redacted]
[Redacted].
Now, Dr. Flores points out that the
historical profitability, [Redacted],
[Redacted],
[Redacted], but we have two comments to that.
First, as we all know, there are sometimes slight
differences between economic and reporting variables;
but, more importantly, [Redacted]
[Page 846]
[Redacted]
[Redacted]
[Redacted],
[Redacted]
[Redacted]
[Redacted].
So, the last topic regarding the new
contracts analysis and the Discounted Cash Flow has to
do with risk, or the Cost of Equity, which is a way in
which risk is calculated in the Discounted Cash Flow,
or accounted for.
So, as you know, when performing a Discounted
Cash Flow analysis, what we do is look at market
variables and calculate the best estimates for each of
those variables, as I explained--for instance, a
13 percent profitability rate, the target market, and
so on and so forth.
Now, those are expected values. They are not
certain. So, that implies that they need to be
discounted by the expected volatility that the
forecast will have, and the way of doing that in the
DCF analysis is through the Discount Rate. Now, both
[Page 847]
Dr. Flores and us--there is now in the Second Report
general agreement that the Discount Rate that would
apply to a construction, large company operating in
the United States, would be around 10 percent. So,
here, in this chart, what we wanted to do is to show
you how we account for risk in our valuation or
additional risk beyond the U.S. market.
So, if you look at the first column, the gray
column, that is the result of taking our cash flow
assumptions, as-is, and discounting it by the
10 percent Discount Rate that would be applicable to a
U.S.-based large construction company, and the result
of that would be $54.70 million. We acknowledge that
this risk would be insufficient for the Omega
Consortium. Why? Because it operates in a smaller
economy, more volatile economy, and less developed.
So, that warrants the incorporation of a 1.89 percent
Country Risk Premium, which is commensurate with the
counterparty risk of the Omega Consortium, is
commensurate with the volatility in fiscal budgets.
And that is what results in our assessment of
[Redacted], which is a discount of 21 percent, had
[Page 848]
we only considered the risks that these cash flows
would have if they were located in the United States.
Now, in the third column, what we do is
contextualize Dr. Flores' 10 percent-plus Country Risk
Premium. And Dr. Flores' country risk effect is
compounded of two independent factors: First, a
direct, or what he phrases as a direct, country risk
measure of 4.52 percent, and that is actually
inconsistent with the observation--and here you have a
quote from one of our exhibits--that the cost of
credit in Panamá is not only among the lowest in Latin
America, but has been trending downwards for the last
15 years. And, actually, if you look at the Hausmann
exhibit, the total cost of credit--which includes time
value of money, industry risk, and country risk--is
4 percent, on average, for Panamanian companies. So,
that can never warrant a 4.52 percent country risk by
itself.
Second--and here I must clarify that
Dr. Flores doesn't believe--or doesn't portray this as
a Country Risk Premium, but we will explain why we
bundle it up with a country risk--Dr. Flores adds a
[Page 849]
Size Premium. Now, I would not enter into the
discussion as to whether half of the literature says
Size Premium is appropriate and half of the literature
says it's not. I will just say that the Size Premium
that Dr. Flores calculates is referenced to the U.S.
market and not to the Panamanian market.
The reality is that, once you account for
country risk, you have already moved the baseline of
your valuation to Panamá, and within Panamá, the Omega
Consortium would be a large company. So, no Size
Premium should apply. And this is the reason why we
say that, by comparing sizes with the U.S., he's
duplicating the effect of country risk.
I will now briefly touch upon the second
component of damages, losses on existing contracts.
And here we rely mostly on the opinion of
Mr. McKinnon. And, again, in Slide 15--this slide
should look familiar now--we are trying to reconcile
the valuation gap between our assessment, at
$8.69 million, and Dr. Flores' assessment at
$3.77 million.
Here, we only have two differences that
[Page 850]
explain the valuation gap. The one at the bottom is a
legal and factual issue. In his Second Report,
Dr. Flores is challenging the validity of some Change
Orders. That is something that he only did in his
Second Report and has a stand-alone impact on the
valuation of $3.2 million. As this is a legal and
factual issue, I will not comment on this, but I just
wanted to note that the largest difference in the
historical assessment has nothing to do with economic
issues but has to do with legal and factual issues.
So, the $1.6 million difference that is
explained by economic issues has to do with the time
value of cash flows and the risk assessments and, in
particular, with Dr. Flores' asymmetric treatment of
financing cost. And we can see that in Slide 16.
Historical damages on existing contracts are
based on three components: First, unpaid progress
billings. Those are billings that have been issued by
the Omega Consortium before the date of valuation, and
they have been unpaid for a time. As we know,
companies cannot finance their operations for free.
When they are missing cash, they need to replace that
[Page 851]
cash one way or another, and they pay a financing cost
for not having the cash. That is how companies
operate in the real world, and that is the essence of
why we discount cash flows.
To the contrary, Dr. Flores assumes that
there is no financial cost whatsoever, zero, for
unpaid billings. That is incorrect.
The second model of historical or existing
contract damages has to do with expected profits, and
here, these are the profits of completing the
Projects. Here, we agree with Dr. Flores that you
need to discount them by the financing costs.
Obviously, Dr. Flores uses his excessive Cost of
Equity, but at the end of the day, there is conceptual
agreement.
And third component of existing claim has to
do with net advance payments, and this is a deduction.
So, the damages for existing contracts are the sum of
unpaid bills plus expected profits, and less net
advance payments. And we believe that they should be
treated in the same way: They should be discounted by
the financing costs, because they are cash flows into
[Page 852]
the future, where Dr. Flores, as we will see in
Slide 17, uses--uses an asymmetric treatment.
So, as I mentioned, net advance payments are
the sum of two components. And you can see this in
the first column. First are the actual advance
payments--that is, money that the Omega Consortium has
collected in advance and is going to be credited or,
absent the Measures, was going to be credited against
future billings. So, it's money that is owed by the
Omega Consortium in the nominal amount of
[Redacted]. To that, you need to subtract
withheld payments or retainage--that is, balances from
previous invoices that were retained by the owners of
the Projects and were only to be reimbursed to the
Omega Consortium at completion.
Now, the nominal amount of these two
quantities is [Redacted]. In the middle column,
you can see our analysis, which recognizes that all
these exchanges of cash would take place into the
future. So, obviously, they both get discounted, and
the net advance payment is lower, at [Redacted].
Now, what does Dr. Flores does? He believes
[Page 853]
that advance payments that are owed by the Omega
Consortium need to be considered at face value, even
though they were going to be credited into the future,
but the amounts withheld need to be discounted,
because they were effectively going to be recovered
into the future. As a result, the Net Present Value
of the advance payments that Dr. Flores concludes at
[Redacted] is higher than the nominal amount, and
that--even now, we know that future amounts need to be
discounted cannot be right.
So, to conclude, I will briefly touch upon
the matter of pre-Award interest. And our view, from
an economic perspective, is that the Cost of Equity is
the only rate that recognizes the economic harm to
Claimants. Why is this? As I mentioned before,
companies cannot finance their operations for free.
So, if they are missing cash flows--as Claimants have
been doing since the date of Measures until
today--they had to replace them, and that is the
financing cost that needs to be compensated. It's a
cost that has already been incurred and it's linked to
the asset itself.
[Page 854]
Second--and this is more in response to a
criticism that is usually done against the argument of
the Cost of Equity--the Cost of Equity is independent
from Claimants' identity. So, the argument goes that,
if you would award damages at the Cost of Equity, you
would reward a risk-loving Claimant over a risk-averse
Claimant. But that is not true, because the Cost of
Equity of the Omega Consortium is independent from
Claimant's identity. So, it cannot be that it rewards
one Claimant over another.
Second--or third is commercially reasonable,
because, if we were to do a transaction in the
Panamanian market for a construction company, this is
the rate that we would consider as the relevant
financing cost of the operations. So, there are
transactions that take place at the Cost of Equity.
To the contrary, Dr. Flores' proposition of a
short-term risk-free rate does not even compensate for
the time value of money, because it's lower than
inflation, and it's not commercially reasonable
because no company in the world, much less a company
in Panamá, can finance its operations at a short-term
[Page 855]
risk-free rate.
With this, I move to Slide 20, where we
present or we summarize our damages assessments which
have been--remained unchanged since our First Report.
In total, damages with interest, as of April 1, 2020,
amount to [Redacted].
I thank you for your attention, and I
conclude my presentation.
PRESIDENT SHORE: Thank you, Mr. Lopez
Zadicoff. I believe that is in place of direct
examination, Ms. Gorsline?
MS. GORSLINE: Yes, sir.
PRESIDENT SHORE: And over on Respondent's
side?
MR. WEISBURG: Mr. Ryan.
PRESIDENT SHORE: Mr. Ryan, over to you.
MR. RYAN: Thank you, Mr. President.
We're handing out bundles of documents that
will be used in the examination, so I'll just wait
until those are handed.
CROSS-EXAMINATION
BY MR. RYAN:
[Page 856]
Q. Mr. Zadicoff, could you please turn to
Exhibit C-228 in the bundle that was handed to you?
A. Yes.
Q. This is the engagement letter that you--or
the letter of instruction that you referenced in your
Direct Presentation; correct?
A. Correct.
Q. And I note that this is dated June 25, 2018.
That's the date of your First Report; is that correct?
A. That's correct.
Q. What date was Compass Lexecon actually
engaged in this matter?
A. I don't recall, but it would be one month
before.
Q. Okay. So, sir, as I understand your
instructions, you were asked to assess the amount of
losses, if any, suffered by Claimants as a result of
certain actions, inactions, and measures, and the
Claimants informed you that the Measures constituted
those that are listed at Paragraphs A through C;
correct? Or, I'm sorry, A through D.
A. Correct.
[Page 857]
Q. And those Measures consisted of the Republic
of Panamá's failure to make contractual payments to
Omega Panamá for the completion of certain
construction milestones; correct?
A. Yes.
Q. And in B, we see it's the Republic of
Panamá's failure to provide required Construction
Permits and Change Orders, which impeded the
continuation of construction works by Panamá; correct?
A. That's what it says.
Q. Okay. And this includes two Projects of the
Peripheral Markets, which we've been referring to as
the Juan Díaz and Pacora Markets in the context of
this Arbitration, that they were delayed with no clear
date for reinitiation, and the Ciudad de las Artes
Project involved failure to approve a Change Order for
additional work it had requested and failed to
formalize agreed time extensions and approved
construction drawings; correct?
A. Yes. It says this includes but is not
limited to everything that you have read.
Q. Correct. And Item C, the Republic of
[Page 858]
Panamá's early and unilateral termination of
contracts, which includes the Ciudad de las Artes
Project, which was early and unilaterally terminated
by INAC on grounds of unjustified delays, and the
Peripheral Markets Contracts, which were terminated on
the grounds of alleged breaches of contract by
Claimants; correct?
A. That's what it says.
Q. And Item D is the initiation of the criminal
investigations by Panamá; correct?
A. Yes. And continues, but yes.
Q. Okay. So, initiation of criminal
investigations against Mr. Rivera and Omega Panamá
early and unilateral termination of contracts?
A. Correct.
Q. Is it fair to say that "early and unilateral
termination of contracts" may be a typo that is a
carryover from what is in C?
A. I don't know.
Q. Okay. Sir, can you take a look at
Paragraph 3 of your First Report.
Actually, when we get to your First Report,
[Page 859]
actually like to start at Paragraph 1 for a moment.
So, in Paragraph 1, you define Omega U.S. as
Omega Engineering, LLC, and Omega Panamá is defined as
Omega Engineering, Inc., and, in the third paragraph,
you define Omega Panamá and Omega U.S. together as the
Omega Consortium; correct?
A. Correct.
Q. So, it's fair to say at the time you wrote
this Report, you had a clear understanding of which
entities were which; correct?
A. I had a clear understanding, but, as I
mentioned in the first slide of my presentation,
unfortunately we have sometimes mislabeled Omega
Panamá or assumed that Omega Panamá included the Omega
Consortium. But my understanding is clear since they
won that what we are valuing is the Omega Consortium
as a whole.
Q. So, let's take a look at Paragraph 3, at
the--so, Paragraph 3, you repeat the instructions that
were given to you by counsel; correct?
A. I just copied them.
Q. You just copied them. Okay.
[Page 860]
So, then let's take a look at Item C here for
a second. Item C states: "The Republic of Panamá's
unlawful termination of two contracts and abandonment
of the remainder of the contracts obliging the
Claimants to voluntarily suspend them."
If we were to compare that to Item C in your
instruction letter, sir, there's no reference to
"unlawful termination of contracts" and there's no
reference to the "abandonment of the remainder of
contracts," is there?
A. Well, these are considered Measures, so.
Q. Sir, my question was, in Item C of your
instruction letter, there is no reference to "unlawful
termination" and no reference to "abandonment," and
you stated that you simply copied over your
instructions as provided to you in your letter. So,
you did not, in fact, copy them over, did you, sir?
A. I did not--you're right. I did not copy them
over exactly.
Q. But instead you made a value judgment as to
whether the termination of a contract was lawful or
unlawful, didn't you?
[Page 861]
A. Well, if it is considered a Measure, it has
to be unlawful.
Q. It has to be unlawful.
Isn't that a question for the Tribunal in
this case, sir?
A. No. I just taken the instructions that it
was a Measure, so by my instructions, it was unlawful.
I don't know if it was unlawful or not, if that's what
you asked.
Q. There is no reference in your instruction
letter as to the lawfulness or unlawfulness of these
Measures, is there?
A. Well, if there are Measures--
Q. Sir, my question is there is no reference to
the lawfulness or unlawfulness of these Measures in
your instruction letter, is there?
A. I don't see the word "unlawful" in the
instruction.
Q. And there's no reference in your instruction
letters to the "abandonment of the remainder of the
contracts," is there?
A. Well, I would say that--
[Page 862]
Q. It's a yes-or-no question, sir.
A. Well, you want to say if this is language
that is verbatim from one document to the other, the
answer is no.
Q. Thank you.
A. I think that the concepts are the same.
Q. Thank you.
PRESIDENT SHORE: He can add about the
concepts, Mr. Ryan.
BY MR. RYAN:
Q. Sir, if you could turn to Paragraph 9 of your
First Report.
Are you there?
A. I am.
Q. Okay. So, here you state that: "In order to
assess the losses suffered by Claimants in Omega
Panamá, you compare two scenarios: Counterfactual and
this a hypothetical scenario that reflects the value
that Claimants' interest in Omega Panamá would have
had as of December 23, 2014, in the absence of
Measures. And the Actual Scenario reflects the Actual
Value of Claimants' interest in Omega Panamá as of
[Page 863]
December 23, 2014, with the Measures in place";
correct?
A. You are reading. I would say that this would
have been better expressed if we had said "Omega
Consortium."
(Interruption.)
Q. Okay. In Paragraph 10, you go on to
say: "In the Counterfactual Scenario, the value of
Claimants' interest in Omega Panamá stems from two
sources. First, Claimants' value derives from the
completion and full collection of payments of eight
outstanding contracts awarded prior to December 2014.
"Second, Claimants' value derives from Omega
Panamá's ability to continue as a going concern,
bidding and winning further construction contracts in
Panamá from December 2014 onwards in a manner that
reasonably reflects its historical track record."
Correct?
A. You're reading, and, as I mentioned, again,
in my first slide, the problem is that Omega Panamá
was leveraging from the assets that were contributed
to the Consortium by Omega U.S. So, in actuality, to
[Page 864]
be exactly precise, we should have said Omega
Consortium, but the analysis remains unchanged.
Q. But, sir, you acknowledge that you knew at
the time of writing precisely which entities were
which, and despite that knowledge, you continued to
repeatedly reference Omega Panamá; correct?
A. Well, we made a mistake in these paragraphs
that you are citing. If you look at the
methodological explanation that we have, constantly we
are saying that the ability of generate new business
is linked to the fact that the Omega Panamá, through
the Omega Consortium, was able to leverage from the
intangible assets of Omega U.S.
So, that is what we valued. And the numbers
that we presented in our First and Second Report are
unchanged, and they have to do with the value of the
Omega Consortium.
And if you look at the title of our Report,
it is the "Assessment of Losses of Claimants'
Investments in Panamá," which include all the
investments in Panamá.
Q. Sir, I understand what your title says, but
[Page 865]
we're going to look at the substance of your Report,
both your First and your Second Report, to see what
you actually did.
So, if you could take a look at Paragraph 84
of your First Report as well. You say: "To compute
the losses by Claimants, we assess the value of
Claimants' interest in Omega Panamá would have had as
of December '14”; correct?
A. You said paragraph?
Q. 84.
A. 84. Yes.
Q. And to assess the Fair Market Value of Omega
Panamá as a going concern--to assess the value of
Omega Panamá as a going concern, you applied a Fair
Market Value principle; correct?
A. Omega Consortium, yes.
Q. Well, we've seen statements that say you are
assessing the Fair Market Value of Omega Panamá, and
you have applied the Fair Market Value principle to
assess the value of Omega Panamá; correct?
A. Well, if you want to point out the seven
instances in the First Report that I mentioned "Omega
[Page 866]
1 Panamá" instead of "Omega Consortium," we would agree.
2 But what I'm explaining is that the other
3 hundred references to Omega Consortium that exist in
4 the First Report clearly state that what we are
5 valuing is the Omega Consortium. If you look at, for
6 instance, Paragraph 86 immediately after this, "We
7 estimate the future revenues to Omega Consortium would
8 have generated in the future by analyzing and
9 forecasting two key variables."
10 We write, 88, "We estimate the potential
11 relevant target market for Omega Consortium through
12 market forecasts as Willing Buyer/Willing Seller would
13 do."
14 Q. Sir, I'm sorry. If Claimants' counsel wants
15 to take you through all the references to Omega
16 Consortium, that's their right to do so. But your
17 responsibility here to answer my questions, please.
18 A. Well, you are asking--
19 Q. So, my question to you was--
20 PRESIDENT SHORE: Hang on, Mr. Ryan.
21 Did you want to add something, Mr. Zadicoff?
22 THE WITNESS: What I was saying is that I
[Page 867]
1 heard to Respondent's Opening Presentation, that's why
2 Slide Number 1 in my Direct Presentation was to
3 acknowledge the confusion that could have been
4 generated, but in all honesty, the confusion is purely
5 semantic. In some places it is clear that what we are
6 valuing is the Omega Consortium.
7 BY MR. RYAN
8 Q. So, sir, again, that is not what it says in
9 your Report.
10 But it seems that the point you want to make
11 here is that Compass Lexecon's attention to detail,
12 and yours in particular, is so sloppy that throughout
13 both your First and Second Report, you had no idea who
14 you were referencing when you go wrote "Omega Panamá";
15 correct?
16 A. I would completely disagree with that.
17 The issue is that, as I said, the operating
18 company, the one handling the Projects, was Omega
19 Panamá. So, when we say Omega Panamá won the bids, it
20 is technically correct. We should have clarified
21 Omega Consortium.
22 If you look at Dr. Flores' First Report, he
[Page 868]
1 constantly refers to "Omega Panamá." He never
2 mentions Omega Consortium, and he even titles his
3 section "Compass Lexecon argues X or Y about Omega
4 Panamá," and then block cites our Report talking about
5 Omega Consortium.
6 So, the understanding, among the Experts, was
7 clear that what we were valuing was a totality of the
8 assets invested in Panamá, which constitute Omega
9 Panamá as the operating entity; but within Omega
10 Panamá, it has the ability to leverage the invested
11 assets of Omega U.S.
12 Q. Sir, so you agree that the Fair Market Value
13 principle is the one that you've applied in this case;
14 correct?
15 A. Correct.
16 Q. And the Fair Market Value requires an
17 assessment of the price a hypothetical Willing Buyer
18 would pay a hypothetical Willing Seller acting without
19 compulsion and with reasonable knowledge of the facts;
20 correct?
21 A. I would phrase it is the price at which a
22 transaction would take place between a Willing Buyer
[Page 869]
1 and a Willing Seller.
2 Q. So, you agree with my position; correct?
3 A. I phrase it slightly different. I think it
4 is slightly different.
5 If you want to repeat--
6 Q. So, sir, I'm just going to say at
7 Paragraph 61 of your First Report, you say: "Fair
8 Market Value is defined by the American Society of
9 Appraisers as: 'the price, expressed in terms of cash
10 equivalents, of which property would change hands
11 between a hypothetical willing and able buyer and a
12 hypothetical and able seller, acting at arm's length
13 in an open and unrestricted market, when neither is
14 under compulsion to sell and when both have reasonable
15 knowledge of relevant facts.'"
16 You agree with that standard; correct?
17 A. Yes.
18 Q. And you acknowledge that that is the standard
19 that is required by both the TPA and the Bilateral
20 Investment Treaty applicable in this case; correct?
21 A. We understand and we confirm that with
22 Claimants, with counsel, sorry, as expressed in
[Page 870]
1 Paragraph 6.
2 Q. All right. And in this context, the value
3 that a hypothetical--what you were looking for is the
4 value that a hypothetical buyer would pay a
5 hypothetical seller for Omega Panamá; correct?
6 A. No.
7 Q. Can you look at Paragraph 49 of your Second
8 Report.
9 Paragraph 49 you state: "The Fair Market
10 Value standard main purpose is to emulate the price at
11 which a Willing Buyer would agree to buy Omega Panamá
12 and the price that a Willing Seller would have
13 voluntarily agreed to sell it for."
14 Do you agree with that statement, sir?
15 A. I agree with that statement, which also
16 includes a Willing Seller.
17 Q. And for an entity like Omega Panamá, the
18 value is a function of the cash that the entity would
19 be expected to generate in the future; correct?
20 A. Well, again, we are valuing the Omega
21 Consortium. The value of any asset stems from its
22 ability to generate cash into the future.
[Page 871]
1 Q. Sir, you just agreed that "The Fair Market
2 Value's main purpose here is to emulate the price at
3 which a Willing Buyer would have agreed to pay Omega
4 Panamá and the price the Willing Seller would have
5 voluntarily agreed to sell for."
6 You agreed to that and you stated that it
7 includes the Willing Seller, which, of course, was
8 within context of what I read to you.
9 So, you would agree that, for an entity like
10 Omega Panamá, the value is a function of the cash that
11 Omega Panamá, the entity, would be expected to
12 generate in the future; correct?
13 A. Like any asset, what we are valuing is the
14 Omega Consortium.
15 Q. We'll talk about that. The Fair Market Value
16 standard assumes that both hypothetical Parties have
17 reasonable knowledge of the facts; correct?
18 A. Correct.
19 Q. And in the context of the going concern,
20 reasonable knowledge of the facts would include basic
21 items that could have been discovered or observed
22 through the diligence process; is that fair to say?
[Page 872]
1 A. Yes.
2 Q. So, for example, size of the Company?
3 A. Yes.
4 Q. The assets that the Company held?
5 A. Provided that's relevant, yes.
6 Q. The historical financial statements?
7 A. Correct.
8 Q. Its operating history?
9 A. That's another variable you consider, yes.
10 Q. Okay. So, you're aware that Omega Panama's
11 financial statement shows that it had roughly [Redacted]
12 in income generating assets as of December 31, 2013;
13 correct?
14 A. Can you repeat that?
15 Q. Well, maybe we can just take a look. Can you
16 take a look at C-136 in the bundle. It's the first
17 tab in your bundle, sir.
18 A. Thank you.
19 Q. You're welcome.
20 This is Omega Engineering, Inc.'s financial
21 statements and supplementary information as of
22 December 31, 2013, and 2012; correct?
[Page 873]
1 A. Correct.
2 Q. Have you seen this document before?
3 A. I have.
4 Q. And if you turn to Page 4, there is a balance
5 sheet, and under 2013, if you go just above "other
6 assets" where it says "equipment, net," it shows
7 [Redacted]; correct?
8 This is the total of assets, income
9 generating assets, that Omega Panamá had as of
10 December 31, 2013.
11 A. No. These are the total physical assets that
12 are registered in the financial statements of the
13 Omega Engineering, Inc., which is Omega Panamá. It is
14 not the totality of the assets that we are looking at
15 here.
16 Q. But these are the total physical assets of
17 Omega Panamá as of that date; correct?
18 A. These are--well, it depends how you define
19 "physical." Total assets worth [Redacted].
20 [Redacted]. These are the investments
21 in fixed assets that Omega Panamá by itself had.
22 Q. Okay. And there's a reference to Note 6
[Page 874]
1 that's there.
2 Could you take a look at Page 12. And you
3 see, it says, at the top, "Note 6, equipments, net
4 (continued)" and then it lists what this covers,
5 right: office equipment, computer equipment, motor
6 vehicles.
7 Do you see that?
8 A. I see that.
9 Q. And if we look at the balance at December 31,
10 2011, it showed office equipment, [Redacted]; computer
11 equipment, [Redacted]; motor vehicle is [Redacted]; and then
12 there are additions that are made that take you up to
13 the balance at December 31, 2012.
14 So, as of December 31, 2011, Omega Panamá had
15 zero office equipment; [Redacted] in computer equipment;
16 and maybe a truck or two, [Redacted] worth of motor
17 vehicles; is that correct?
18 A. And still it had [Redacted] of contracts.
19 Q. But at this point in time, these are the
20 assets that Omega Panamá as a company had?
21 A. Well, again--
22 Q. The equipment--let me clarify. The equipment
[Page 875]
1 that it had; correct?
2 A. Those are the physical assets that are
3 registered in the books.
4 Q. Okay. So, a hypothetical buyer would also be
5 aware of the fact that--aware of facts regarding the
6 country where the asset was located; correct?
7 A. Certainly.
8 Q. Issues such as political climate?
9 A. Yes.
10 Q. The regulatory environment?
11 A. Sure.
12 Q. Labor market?
13 A. Yes.
14 Q. Size and nature of the market itself;
15 correct?
16 A. Correct.
17 Q. And, in fact, you're aware that Mr. Rivera
18 based his decision to enter Panamá in large part on
19 the fact that it was--it had committed to spend
20 roughly $20 billion over a five-year period between
21 2009 and 2014 on public works infrastructure projects;
22 correct?
[Page 876]
1 A. I don't recall that specifically, but I have
2 an understanding that he decided that it was a good
3 investment project. I don't recall it specifically,
4 the words.
5 Q. So--
6 PRESIDENT SHORE: Well, the question is
7 rather more precise, that Mr. Rivera based his
8 decision to enter Panamá in large part on the fact
9 that it was--it had committed to spend roughly
10 $20 billion over a five-year period between 2009 and
11 2014 on public works infrastructure projects.
12 As you sit here today, do you recall that?
13 Yes or no?
14 THE WITNESS: I don't recall those words,
15 line by line, no.
16 PRESIDENT SHORE: Okay. Do you recall that
17 he entered because he believed that there was a boom
18 that might be taking place in Panamá construction,
19 public works contracts?
20 THE WITNESS: I don't recall his
21 characterization as a "boom." I recall that he
22 believed it was an attractive market.
[Page 877]
1 PRESIDENT SHORE: Yeah, but do you
2 believe--do you recall anything more specific than
3 that? Because people always invest in attractive
4 versus unattractive markets. Is there anything more
5 specific that you recall, if you do?
6 THE WITNESS: I don't recall it.
7 PRESIDENT SHORE: Okay.
8 THE WITNESS: It may very well be that he
9 said that, but I don't recall.
10 PRESIDENT SHORE: Okay. Thank you.
11 BY MR. RYAN:
12 Q. Let's take a look at what he said, sir.
13 So, in Paragraph 15 of Mr. Rivera's First
14 Witness Statement--I'm not sure it's in front of you,
15 but I'm going to read it and counsel will correct me
16 if I read it incorrectly.
17 PRESIDENT SHORE: Read it rather more slowly
18 than you tend to read other things, Mr. Ryan. There
19 is a speed limit which we're going to soon enforce
20 against you individually.
21 MR. RYAN: I will.
22 BY MR. RYAN
[Page 878]
1 Q. "In the end, I chose Panamá because I felt it
2 was the most suitable market in which to begin our
3 expansion and the Panamanian Government was of
4 particular interest, as we understood it was about to
5 initiate a significant public works program. This
6 included plans by the Government to invest
7 USD 20 billion in public infrastructure projects over
8 the next five years."
9 Were you aware of that at the time that you
10 wrote your Report?
11 A. Yes. He does not mention a "boom." He
12 mentions that is an increase in investment, but that's
13 different from a "boom."
14 Q. Okay. And are you aware that Mr. López, when
15 he testified, testified to the existence of a "boom"
16 in the Panamanian market?
17 A. I'm not aware of that.
18 Q. Are you aware that Mr. López, when he
19 testified here in this hearing, said that he
20 understood that that boom meant that there would be an
21 increase in spending on public works projects over
22 that five-year period as compared to what had been
[Page 879]
1 spent in the past?
2 A. You should ask Mr. López.
3 Q. I did ask Mr. López. I'm asking if you are
4 aware that he testified to that fact, sir?
5 A. No.
6 Q. Okay. And you were here during Opening
7 Submissions by the Parties on Monday; correct?
8 A. Correct.
9 Q. So, then you would have been here when
10 Mr. Concepción, who is Claimants' counsel,
11 acknowledged in his Opening Submission that Mr. Rivera
12 and Omega U.S. "were all set to service the
13 construction boom that was contributing to Panamá's
14 development"; correct?
15 A. I assume you're citing, so.
16 Q. There's a transcript in front of you. I'm
17 happy to take you to it, if you would like.
18 A. No, no. I have no reason to believe you are
19 misstating the transcript. I just don't recall by
20 heart.
21 Q. Okay. So, you're now aware that the intent
22 underlying Omega's decision to enter into Panamá was
[Page 880]
1 to service the construction boom which was, as
2 Mr. López stated, a period of time in which public
3 works spending was expected to exceed the past
4 historical levels?
5 A. I'm aware of what you just read to me. If
6 it's a question about facts, you should ask--you
7 already asked Mr. López, Mr. Rivera. I have nothing
8 to add.
9 Q. Now, sir, one of Compass Lexecon's criticisms
10 of Dr. Flores' analysis is that it was inconsistent
11 with the principle of full compensation because it
12 purportedly ignored the Willing Seller component of
13 the analysis; is that correct?
14 A. Yes, both because he doesn't look at the
15 Willing Seller and because he has a specific notion
16 that the Willing Buyer would not be interested or
17 would not ascribe value to the intangible assets of
18 the Omega Consortium.
19 Q. Okay. So, can we take a look at Paragraph 49
20 of your Second Expert Report, sir.
21 A. 49?
22 Q. Yes, sir. Now, this is a paragraph that
[Page 881]
1 we've already seen, in which you state: "The Fair
2 Market Value standards' main purpose is to emulate the
3 price at which a Willing Buyer would have agreed to
4 buy Omega Panamá and the price that the Willing Seller
5 would have voluntarily agreed for it."
6 Then in Paragraph 50 you state: "Dr. Flores'
7 approach contradicts this definition because it
8 assumes that, absent the Measures, there can be no
9 hypothetical transaction between a Buyer, Claimants',
10 were under no compulsion to sell, Claimants would have
11 assigned zero value to their company."
12 And then you go on in Paragraph 51 to
13 say: "This approach does not recognize that
14 Claimants, as a Willing Seller, would have assigned a
15 positive value of several million in their interest in
16 Omega Panamá."
17 So, sir, your criticism of Dr. Flores is
18 based on your insertion of the concept of Claimants
19 into the Fair Market Value analysis, which calls for a
20 hypothetical buyer and a hypothetical seller?
21 A. No. It's based on any Willing Seller. As it
22 is explained here clearly in the block quote in
[Page 882]
1 Paragraph 48, this means that the buyer must place
2 either the same or a higher value on the asset than
3 does the seller in order for the transaction to exist.
4 So, it's any--obviously we are talking now, we are
5 personalizing this in Claimants, but the standard is
6 "any."
7 Q. That's precisely it, sir. The standard is
8 "any," and by personalizing it with Claimants, you
9 are, in fact, interjecting variables into the analysis
10 that the hypothetical nature of this standard is
11 intended to strip away. The hypothetical seller is
12 one who is presumed to be willing and able and acting
13 without compulsion.
14 By your statement in here, by interjecting
15 "Claimants" into this, personalizes it in a way and
16 ascribes value to the asset, whether it's through
17 sentiment or history or whatever it may be, that a
18 hypothetical seller in this situation would not, in
19 fact, do?
20 A. No, that's not what it says here.
21 Q. That is, in fact, however, what you are doing
22 by stating that Dr. Flores is ignoring a transaction
[Page 883]
1 between a "Buyer" and "Claimants"?
2 A. No. Neither Dr. Flores nor us calculate any
3 sentimental value or any trajectory value that is
4 unrelated to market generation potential. We both
5 value the asset objectively. Now, we disagree on the
6 results of that valuation, but there is no sentimental
7 value. There is nothing that is linked to Claimants
8 in our valuation assessment.
9 Q. Well, sir--
10 PRESIDENT SHORE: I'm sorry, Mr. Ryan. I'm
11 sorry to interrupt.
12 MR. RYAN: Yes.
13 PRESIDENT SHORE: Can I ask, who is the
14 seller?
15 THE WITNESS: The seller in this hypothetical
16 transaction--
17 PRESIDENT SHORE: No, no, in the actual. Who
18 is the seller?
19 THE WITNESS: Well, the seller--there is no
20 Willing Seller, but the seller would be Claimants.
21 PRESIDENT SHORE: Yeah, but that's my
22 question. So, the Claimants would be selling
[Page 884]
1 themselves? I mean, would Omega U.S. be selling
2 itself? Because the distinction that you--and you
3 have explained it this morning that you have--in those
4 instances where you refer to "Panamá" you're usually
5 referring to the "Consortium." We've got that.
6 But the question I have is, if it's a Willing
7 Seller and it's not just Omega Panamá that is being
8 sold because it needs to be part of a consortium to
9 have value, then is Omega U.S. selling itself? Is the
10 investor selling itself?
11 THE WITNESS: It's a difficult answer because
12 there is a harm and we are entering into a
13 hypothetical transaction that is a standard to value
14 the harm.
15 Now, I don't know, you can think about it in
16 a way, like, okay, you're selling the boots on the
17 ground organization, and the support via consulting
18 agreement, no compete agreement, no-that all the
19 intangible assets that you were leveraging before in
20 order to win the bids, you will continue to be able to
21 leverage those assets. So, it would be a transaction
22 that compounds management transfer, it compounds
[Page 885]
1 support, availability of use, the financial backing of
2 the Company.
3 If you want to take it to the real life, it's
4 challenging. I recognize that. But that's the best
5 way I can conceptualize it as an actual market
6 transaction. You're transacting. You're buying the
7 boots on the ground organization plus a consulting
8 agreement, plus a management transfer, plus all the
9 assets that were effectively allegedly destroyed by
10 the Measures.
11 ARBITRATOR GRIGERA NAÓN: I don't want to put
12 words in your mouth or anybody's, but are you really
13 saying that there is a sort of unincorporated joint
14 venture between Omega Panamá and Omega U.S. so that
15 what is being sold is the interest in the joint
16 venture or not? Is that part of your analysis?
17 Because, if you are talking in those terms, then it is
18 the intangible contribution to the Joint Venture of
19 Omega U.S. or whatever contributions to the Joint
20 Venture could come from Omega Panamá. Is this your
21 analysis or is it not?
22 THE WITNESS: Well, as I said, I did not
[Page 886]
1 conceptualize a specific form of the transaction.
2 Eventually, the Omega Consortium bid as a block, so
3 you can think that there was some type of joint
4 venture there and, thus, all the contributions to the
5 joint venture effectively need to be valued because
6 that is what was destroyed.
7 Now, how you do it in a concrete transaction,
8 as the President asked, is a different step. But,
9 conceptually, I would generally agree with you.
10 BY MR. RYAN:
11 Q. Mr. Zadicoff, there is no reference to this
12 notion of a hypothetical joint venture in your Report
13 or in any of the Memorials in this case, is there?
14 A. I don't know about the Memorials. I know
15 about my Report, no.
16 Q. And there are no--what did you
17 say?-- consulting agreements or support agreements on
18 the record in this case, are there, between Omega U.S.
19 and Omega Panamá?
20 A. I think that there is a tacit agreement
21 between the Companies.
22 Q. Sir, my question was whether there are
[Page 887]
1 explicit written agreements between Omega U.S. and
2 Omega Panamá for the provision of the types of support
3 and consultation that you just testified to?
4 A. I think that when you bid as a consortium, I
5 think they are--
6 Q. Sir, could you please answer my question?
7 PRESIDENT SHORE: Answer and then explain,
8 Mr. Lopez Zadicoff, if you would.
9 THE WITNESS: Sure. No specific consulting
10 agreements. What I believe is relevant is that the
11 Bidding Documents or the bidding process, through
12 bidding as a consortium, the Parties are jointly
13 liable, and they need--so, effectively, they are
14 providing their support because they are supporting
15 the bidding document, and then they need to respond if
16 that Project does not work. So, implicitly, there is
17 a supporting agreement between the Parties.
18 BY MR. RYAN:
19 Q. Sir, the bids that were submitted by the
20 consortium, they included financial statements in the
21 balance sheets from Omega U.S.; correct?
22 A. Correct.
[Page 888]
1 Q. Those were the bases on which the bids were
2 determined; correct?
3 A. I don't know how--which weight was given by
4 the authorities to each of the bids. I know the
5 overall results of all the documents that were
6 presented.
7 Q. But in terms of the financial assessment, the
8 financial assessment that was done by each of the
9 Ministries and municipalities was done based off of
10 the balance sheets that were submitted by Omega U.S.;
11 correct?
12 A. I assume that all the members of the
13 consortiums provided financial statements and the
14 Decisions, how they are made, it is beyond my
15 knowledge.
16 Q. Okay. Well, let's take a look to see whether
17 your assumption is correct. If you take a look at
18 QE-115 in your binder.
19 Have you seen this before?
20 A. Yes, I have seen it.
21 Q. Okay. This is the Report of the evaluating
22 committee for the Municipality of Colón Province;
[Page 889]
1 correct? We see this on Page 1 of the Spanish
2 version.
3 A. Okay.
4 Q. And if you could turn to Page 4, this is the
5 letter from Avila & Asociados, stating that attached
6 are the financial statements of Omega Engineering LLC
7 as of February 28, 2010; correct?
8 A. Okay.
9 Q. And Omega Engineering LLC is Omega U.S.;
10 correct?
11 A. That's correct.
12 Q. Okay. And we then see that on the next page,
13 there is a--the English translations are at the
14 beginning. There's a solvency analysis for Omega
15 Engineering LLC, based off of financial accounts, and
16 it looks at the current assets and current
17 liabilities.
18 Do you see that?
19 A. I see that.
20 Q. And those are the current assets and
21 liabilities of Omega Engineering LLC, as represented
22 in this letter; correct?
[Page 890]
1 A. As represented in this letter, yes.
2 Q. I can take you to the financial statement if
3 you'd like to see that as well.
4 A. No.
5 Q. Okay. And there's no reference in here to a
6 financial statement submitted as part of this bid of
7 anybody else in the Consortium, is there?
8 A. I've seen many summaries of the valuation
9 commission, and they are multiple pages in most of the
10 cases. I don't know if this is the complete valuation
11 or not. The excerpt that you are showing me here, or
12 if it's complete, is--it doesn't seem to show any
13 financial statements from Omega Panamá itself.
14 Q. And if we look at QE-114, this is the Report
15 of the evaluating committee on the Juan Diaz and
16 Pacora Markets; is that correct?
17 A. Peripheral Market of Pacora and Juan Díaz.
18 (Interruption.)
19 Q. Yes, if you go to Page 6 of this document, we
20 see a letter from the same AVILA & Associates, dated
21 June 18, 2012, attaching financial information
22 regarding Omega Engineering LLC; correct?
[Page 891]
1 A. Correct.
2 Q. And there is no reference in that to Omega
3 Panamá, is there?
4 A. As I mentioned, there is no reference, but
5 Omega Consortium got evaluated in many dimensions, and
6 this has to be an excerpt of all the documents that
7 were presented. So, again, as I mentioned, I don't
8 know the basis, the overall basis that the valuation
9 commission took to get the different scores, but
10 certainly I would agree that the Omega U.S. financial
11 statements should have been considered by the
12 valuation commission.
13 But, here, you don't know--experience. You
14 don't have any support about experience, so you don't
15 have any support about any of the other variables, so
16 it has to be that the actual document was much longer
17 than what we are showing here.
18 Q. And we know, sir, that the Omega Panamá
19 financial statements were never the basis for a
20 successful bid; correct? Because we know that Omega
21 Panamá bid in at least 10 public sector--for at least
22 10 public-sector contracts as well as additional
[Page 892]
1 private-sector contracts, and you acknowledge that
2 Omega Panamá, as a stand-alone entity, never won a
3 single contract; correct?
4 A. Omega Panamá, without the support of Omega
5 Consortium, never won a single contract.
6 Q. And with respect to the hypothetical
7 transaction that is required as part of the Fair
8 Market Value analysis, once that transaction
9 completed, the Buyer, whomever it may be, would not
10 have been in a position to continue to put forward
11 Omega U.S. financial statements in support of its
12 future bids, would it have been?
13 A. I disagree.
14 Q. It is your position that a new owner of Omega
15 Panamá would have been able to continue to rely on
16 Omega U.S., which was an entire separate Company's
17 financial statements, for purposes of bidding on
18 future projects under the Omega Panamá name in Panamá?
19 A. That's the essence of the Omega Consortium,
20 the transactions should take place, encompassing all
21 the assets of the Omega Consortium, because the
22 position is that those are all the assets that were
[Page 893]
1 destroyed by the measures.
2 Q. Sir, you were asked the question earlier by
3 the Tribunal as to whether Omega U.S. was intending to
4 sell itself as part of this process. There is no
5 evidence on the record that Omega U.S. intended to
6 sell itself as part of any hypothetical transaction
7 involving Omega Panamá, is there?
8 A. There is no evidence whatsoever about any
9 hypothetical transaction. The only reason we are
10 discussing a transaction is because there is a
11 measure, so there is no evidence that Omega Panamá was
12 up for sale.
13 Q. And, in fact, Mr. Rivera had a plan in place
14 where he intended to replicate the Omega Panamá
15 structure of incorporating the local entity and then
16 expanding Omega U.S.'s presence in the Caribbean
17 region by opening other similar companies in other
18 countries; isn't that true?
19 A. You should ask Mr. Rivera about that.
20 Q. Okay. Okay. So, just so, I understand, your
21 position is that, after a hypothetical purchaser buys
22 Omega Panamá, it could still have access to and rely
[Page 894]
1 on the financial statements of an entirely separate
2 Company that it had not purchased in supporting its
3 future bids?
4 A. The valuation assumption is that we are
5 looking at the Omega Consortium, which includes the
6 totality of Omega Panamá and the support and the
7 ability to provide support that Omega U.S. was
8 providing to Omega Panamá through the Omega Consortium
9 and all the value potential that was going to be
10 generated within Panamá. We are not looking at the
11 value potential outside Panamá. We are looking
12 exclusively at Panamá.
13 Q. So, Omega Panamá is--it's an interesting
14 asset; right? It's not the equivalent--it is not like
15 you're attempting to sell a share of Apple, this is a
16 small, privately held Company, construction Company,
17 in a Central American country. So, the pool of
18 potential Buyers, actual or in this case hypothetical,
19 would be limited to those types of entities that would
20 believe that they could benefit from having--or who
21 are looking to expand into Panamá or believe they
22 could benefit from having an established resource on
[Page 895]
1 the ground in Panamá.
2 Would you agree with that?
3 A. No.
4 Q. So, is it your position that the hypothetical
5 analysis assumes that it would be reasonable for a
6 Buyer like me to purchase Omega Panamá, someone who
7 has absolutely no experience in the construction
8 industry?
9 A. No. It's a hypothetical Willing Buyer that
10 would look at the assets and will find value in those
11 assets and will provide a value that would be
12 acceptable to a hypothetical Willing Seller. So, it's
13 not you, me, or no one in particular. It has to
14 fulfill these conditions of desirability for the
15 assets subject to the valuation.
16 Q. There has to be a basis against which the
17 hypothetical buyer standard is measured, isn't there,
18 to determine whether that hypothetical buyer would see
19 value in particular components of what it is
20 purchasing.
21 So, for example, if the hypothetical
22 purchaser was a multinational construction company
[Page 896]
1 that had been in existence for 40 years with
2 $200 million of annual revenues, it would have no need
3 in purchasing Omega Panamá to rely on the financial
4 statements of Omega U.S. in bids going forward
5 because, in that scenario, you would agree, that that
6 purchaser could substitute in its own financial
7 statements and immediately step into the same types of
8 shoes that you claim the Omega Consortium was in as of
9 December 31, 2014; correct?
10 A. That's what I referred when I mentioned the
11 second slide of my Direct Presentation, the second
12 contents slide when I said that is exactly the example
13 Dr. Flores is providing because he has in mind a
14 specific Buyer. Your premise is that the specific
15 Buyer would not be interested in the assets subject to
16 the valuation. So, by definition, they will ascribe a
17 zero value to those assets. So, there is no need for
18 an exercise in valuation. It is, by definition,
19 you're not interested.
20 Q. Well, no, the exercise in valuation is the
21 exercise in value in what you say you are attempting
22 to value in your Second Report, which is the value of
[Page 897]
1 Omega Panamá as a physical entity capable of acting as
2 a going concern on a going-forward basis.
3 What value did Omega Panamá itself have to a
4 potential hypothetical buyer?
5 So, I just want to change topics for a
6 second. We've been talking about financial statements
7 and things, but the ability to obtain financing was a
8 particularly important part of the public
9 construction--or the public works bidding process in
10 Panamá; correct?
11 A. Financing and bonding, in particular.
12 Q. Right. And you're aware that Mr. Rivera
13 testified that most bids for public construction
14 projects required financing from the Contractor?
15 A. You can read me his testimony.
16 Q. If we look at Paragraph 29 of Mr. Rivera's
17 First Witness Statement. He states: "At the time in
18 Panamá, most bids for public construction projects
19 required financing from the Contractor."
20 A. Okay. It says that it was atypical, and I
21 don't know what--but, yes.
22 Q. Well--I'm sorry. Sorry, I did not mean to
[Page 898]
1 speak over you.
2 The sentence above it: "At the time in
3 Panamá, most bids for public construction contract
4 projects required financing from the contractor. This
5 was atypical for us as most public projects in which
6 we had been involved outside of Panamá only required
7 financing if they were structured as concessions."
8 So, his use of the word "atypical" there is
9 intended to contrast Panamá from the other projects he
10 had been involved with outside of Panamá; correct?
11 A. Well, that's what it says here.
12 Q. Okay.
13 A. I don't know what time; right? At that time.
14 It doesn't say "today."
15 Q. Well, okay. If you read--if we go on then it
16 says: "In Panamá, however, contractor financing was
17 generally required and, as I understand it, this
18 continues to be the case today."
19 A. Happy to work with that assumption.
20 Q. Okay. So, if a company was unable to obtain
21 financing on its own, it is unlikely that it would
22 have been able to score any points, many, if any
[Page 899]
1 points in the financial analysis portion of the tender
2 process.
3 Is that a fair statement?
4 A. I don't think "any points" probably would not
5 achieve maximum score, but I wouldn't say "any
6 points."
7 Q. So, you think if a company submitted a bid
8 that had no history of obtaining independent financing
9 for a project, and could not demonstrate its ability
10 to secure financing for a project, you think they
11 would receive some points?
12 A. Well, you just showed me two excerpts of two
13 bids in which what they were doing is stress tests and
14 liquidity ratios. And those were the basis, according
15 to you, to assign the points of financial capacity.
16 So, those points would have been assigned in any case
17 because they have nothing to do--there's an objective
18 criteria to award points, and the points would have
19 been assigned.
20 Q. Okay. So, a company like Omega Panamá, for
21 example, with its financial statements would
22 certainly, on a stand-alone basis, secure fewer points
[Page 900]
1 than a company that has a stronger financial history
2 and a larger financial sort of background; correct?
3 A. A company will show that Omega Consortium
4 obtained maximum points within the requirements of the
5 target market in most of the bids it participated in.
6 Q. Sir, my question was about Omega Panamá, not
7 the Omega Consortium.
8 A. Well, I need to look. There are only 10
9 bids. If we look at how much Omega Panamá scored, I
10 don't know, but it depends. You need to look at the
11 bidding qualifications, and they are not the same for
12 a 2 million project that they are for a 100 million
13 project or a billion-dollar project. So, it depends
14 on the guidelines.
15 What I can tell you is what I analyze, and
16 the Omega Consortium obtained maximum score in the
17 largest majority of all the bids it participated. So,
18 no one would be able to outpace the maximum score.
19 They could match it, but they could not outpace it.
20 Q. And as we see, those bids were submitted on
21 the basis of Omega U.S.'s financial statements.
22 A. No.
[Page 901]
1 Q. Omega Panamá's financial statements, those
2 financial statements reflected revenues generated from
3 Contracts that were won by the Omega Consortium;
4 correct?
5 A. Yes.
6 Q. And on Omega Panamá's financial statements,
7 there was no revenue or, at most, de minimis revenue
8 that was generated by Omega Panamá itself on a
9 stand-alone basis?
10 A. On a stand-alone basis without the Omega
11 Consortium? That's correct.
12 Q. Okay. Now, to determine Omega Panamá's Fair
13 Market Value, you used a DCF analysis; correct?
14 A. To determine Omega's Consortium Fair Market
15 Value, we use a DCF analysis.
16 Q. Well, we've seen multiple references, and we
17 can go through more multiple references in your Second
18 Report where you have stated that you are valuing
19 Omega Panamá. But you agree that you used the DCF
20 analysis; correct?
21 A. I agree we used the DCF analysis.
22 Q. And the DCF is an income-based valuation that
[Page 902]
1 looks--that effectively values a business on its
2 ability to generate future cash flows?
3 A. Correct. That's the meaning of economic
4 value, is the ability to derive value into the future
5 from an asset.
6 Q. And World Bank Guidelines explain that for a
7 going concern, that concern must have been in
8 operation long enough to generate data required for
9 the calculation of future income; correct?
10 A. You can show me that?
11 Q. Sure. If we can turn to QE-19.
12 Are you there, sir?
13 A. I'm here.
14 Q. Okay. So, if we look at the first page, you
15 see this is a document from the World Bank Group,
16 entitled "Legal Framework for the Treatment of Foreign
17 Investment, "Volume II, Guidelines."
18 Do you see that?
19 A. Yes, it's a 1992 document at the World Bank.
20 Q. I understand that. But you see that?
21 A. I see that.
22 Q. Okay. And you're familiar with this
[Page 903]
1 document?
2 A. I have seen it, yes.
3 Q. If we turn to Page 42. Are you there, sir?
4 A. I'm here.
5 Q. Okay. Paragraph 6 states: "Without implying
6 the exclusive validity of a single standard for the
7 fairness by which compensation is to be determined,
8 and as an illustration of the reasonable determination
9 by a State of the Market Value of the investment under
10 Section V above, such determination will be deemed
11 reasonable if conducted as follows."
12 (i) states: "For a going concern with proven
13 record of profitability on the basis of the Discounted
14 Cash Flow," and (ii) then says: "For an enterprise,
15 which is not of a proven going concern, demonstrates
16 lack of profitability on the basis of liquidation
17 value."
18 And then if we go down, says: "For the
19 purposes of this provision, a "going concern" means an
20 enterprise consisting of income-producing assets,
21 which has been in operation for a sufficient period of
22 time to generate the data required for the calculation
[Page 904]
1 of future income, and which could have been expected
2 with reasonable certainty."
3 Do you agree with that requirement?
4 A. I need to apologize because I was lost. You
5 were--I was at Paragraph 45, and you said Page 45?
6 Or--
7 Q. I didn't say page. I didn't say 45.
8 Page 42?
9 A. Okay.
10 Q. Paragraph 6.
11 A. Okay.
12 Q. So, if we look at--my question--my original
13 question--
14 PRESIDENT SHORE: Why don't you give him a
15 chance to read, Mr. Ryan. And then you can go back to
16 your question. If you take a look through the
17 passages on going concern, Mr. Lopez Zadicoff.
18 THE WITNESS: Okay. I've read it.
19 BY MR. RYAN:
20 Q. Okay. So, you would agree that, for purposes
21 of the DCF, a going concern must have been in
22 operation long enough to generate data required for
[Page 905]
1 the calculation of future income; correct?
2 A. I would agree that the legal framework
3 published in 1992 at the World Bank is what it says
4 here. I would disagree that that is what financial
5 and economic practice does, but that's what it says
6 here.
7 Q. Okay. We'll leave that for a moment.
8 Omega Panamá had, I believe, three years of
9 audited financial statements; is that correct?
10 A. Or started--it probably had a partial in '09,
11 '10, '11, '12, '13--four years.
12 Q. Probably had a partial in '09, or it had a
13 partial in '09?
14 A. I don't recall having seen the partial
15 in '09, but--
16 Q. Okay. So, you only recall seeing three?
17 A. Yes.
18 Q. Do you recall seeing any?
19 A. Yes. I recall seeing them.
20 Q. How many do you recall seeing?
21 A. Maybe three.
22 Q. Okay.
[Page 906]
A. Those are the ones on the record.
Q. Okay.
A. But one has a comparative; right?
Q. Omega--so, Omega Panamá has three years of
audited financial statements. It also--Omega Panamá
also has a limited bidding history; correct?
A. I would not say it has a limited bidding
history. It has 42 bids.
Q. Omega Panamá, if we were to look at--if you
go to the last tab in your binder, which is QE-1,
which is a demonstrative that was prepared by Quadrant
on the basis of the bid history that Compass Lexecon
used, we can see that Omega Panamá as opposed to the
Omega Consortium bid on the 10 MINSA CAPSI Projects;
correct?
A. In 2010.
Q. If you look at--if you turn to the first page
in that, do you see?
A. Okay.
Q. You've seen this exhibit since it was handed
out at the Opening?
A. I've seen it.
[Page 907]
Q. Okay. So, the fourth column over, fourth,
fifth, and sixth columns, indicate whether the bid was
made by Omega Panamá itself or a consortium of Omega
Panamá and some either Omega U.S. or some third Party.
We can see that the only bids by Omega Panamá itself
were Numbers 1 and 2--or, I'm sorry, no, that's not
true. I'm sorry. It is Numbers 4-13. Correct?
Do you see that?
A. By itself, yes.
Q. Okay. And all of those on this table
occurred in one year; correct? They were all in 2010?
A. Correct.
Q. And Omega Panamá as a stand-alone entity won
zero of those; correct?
A. Yes.
Q. And when we look at the consortium itself,
you see that there were 21 bids in 2011, three bids in
2012, four bids in 2013, and zero in 2014; correct?
A. Correct.
Q. And President Varela did not take office
until July 2014, yet there were no bids in the first
half of 2014; correct?
[Page 908]
A. Well, that's a little bit disingenuous
because the election took place, I think, in May, and
there are certain provisions in the Budget Law that
Dr. Flores introduced that explain that there are a
lot of limitations about what a Government can do in
the last six months of the Administration. So, that
to ensure a safe transition.
So, I would expect that the amount of new
Contracts in 2014 would be lower, that is subject to
Tender, and also as I explained bidding is strategic.
We have nine Contracts outstanding. So, yes, the
facts are that 2014 there was no bidding activity.
Q. What are the nine Contracts? Because we've
been talking about eight Contracts in this case up to
this point. You've now introduced a ninth.
What is the ninth?
A. I need to correct myself: 2014, there were
eight contracts outstanding. The ninth contract is an
Aeropuerto Tocumen Contract that was completed by
Omega Consortium itself, I think, in 2013. And that
is the reference that we provide in our Direct
Presentation about the [Redacted] profitability that
[Page 909]
comes out of the Omega Panamá financial statements.
Q. Okay. So, you reference the downward trend
in bidding. The downward trend in 2013 and 2014--I'm
sorry, 2012-2013, this also coincided with
difficulties that Omega U.S. was experiencing in works
that were ongoing in Puerto Rico; correct?
A. I'm not familiar with that.
Q. Were you aware that in 2012, Omega U.S.'
lines of credit were canceled as a result of having
being overdrawn and delinquent?
A. I think that is a factual issue. I've read
it in Dr. Flores' Report, but I don't--that's not
something that I analyzed. I know that there is a
dispute. I don't know what the outcome of that
dispute was or the risk.
Q. You didn't speak with Omega or Omega's
counsel about that in performing your analysis to see
the effect that it might have had on your conclusions?
A. I confirmed when I noticed it in the Second
Report that this was something that did not destroy
the intangible assets of Omega U.S., and they told me
that it was part of the normal course of business.
[Page 910]
Q. Okay. In your experience, is it part of the
normal course of business for a company to have its
lines of credits frozen or terminated?
A. It could happen if there are disputes. I
don't know if those are the facts, undisputed facts
that the lines of credits were frozen or terminated,
but you have commercial relationships with banks.
Sometimes--even those go sour. Sometimes contracts
don't go as planned but that doesn't destroy. It is
part of the normal business. On average, you can
continue because you source new lines of credits, you
source--I don't know. You do other contracts, and
that's part of the normal course of business. Okay?
PRESIDENT SHORE: Mr. Ryan, when you come to
a good point in the next few minutes, it would be, I
think, a morning break, when you come to a good point.
MR. RYAN: I only have a couple more
questions in this area.
PRESIDENT SHORE: That's fine. That's fine.
BY MR. RYAN:
Q. So, sir, were you aware that in 2012
Omega U.S. [Redacted]?
[Page 911]
A. I looked at that because you put it in your
Opening Presentation, and, yes, the [Redacted]
[Redacted], but it's not related to contract performance.
That is a job--the industry that we are looking at,
it's related to investments in other assets.
So, you look at the gross margin and the
profitability and the Contract works, and that is
positive, and then you have a lot of deductions and
additional costs because there were some investments
that were made and were not profitable. I don't know
what those investments are, but regarding the contract
business, it was still profitable.
Q. So, we saw that with respect to the bids that
were submitted, they were submitted on the basis of
U.S.--Omega U.S.'s financial statements, and it would
be fair to say that the reflection of [Redacted] for
that year would have an effect on the financial
statements that would be--be able to be submitted in
support of future bids; correct?
A. With the [Redacted] in the future bids that
were made, they not impact significantly the overall
financial score of the Omega Consortium, because we
[Page 912]
can see that they had excellent score in most of the
bids they participated.
Q. And you're aware that, in 2013, a Puerto
Rican court issued a judgment attaching Omega U.S.'s
assets due to an unpaid debt of [Redacted];
correct?
A. Again, I read that in Dr. Flores' Report.
That's a factual issue. What I know too is that
Omega U.S. was awarded another Contract in 2014 in
Puerto Rico, and that is one of other exhibits of
Dr. Flores. So, it has to be that it didn't impair
the ability of Omega U.S. to continue work.
Q. And, again, you're aware that, in 2013, Omega
suffered a [Redacted]--Omega U.S. [Redacted]
[Redacted]; correct?
A. Not on the construction business. In the
bottom line, after financial investments are
considered.
Q. Okay. Sir, one way of addressing
speculativeness in terms of the operating history of a
company when you're doing the DCF analysis is to
adjust upward the Discount Rate to reflect for
[Page 913]
uncertainties in future cash flows.
Do you agree with that?
A. I wouldn't characterize--how you said, that
there's a way to adjust for speculative assumptions.
There is no room for speculative assumptions in our
cash flow calculations. We do all our assumptions
based on market evidence and how we believe the market
will react. Those are expected variables. Then, you
adjust for risk that your reasonable expectations
would not turn as you have hoped, because that's how
businesses are, and that's the role of the Discount
Rate.
So, if there--more uncertainty in certain
valuations, or more risk in certain industries, you
look at the market price for risk for that specific
industry, and that's what we do by calculating the
Discount Rate.
Q. Just to be clear, you did not make any
adjustments to your Discount Rate calculation to
account for the very short operational history of
Omega Panamá, did you?
A. I don't think--neither of the Experts has
[Page 914]
done any adjustment for that factor, and because that
factor is not appropriate. In the case at hand, we
have sufficient certainty to be able to estimate cash
flows with reasonable certainty.
MR. RYAN: Okay. Mr. President, this would
be a good time for a break.
PRESIDENT SHORE: Thank you, Mr. Ryan.
Let's take a 15-minute break, and, Mr. Lopez
Zadicoff, you know the rule: Don't talk to anyone
about the case. Thank you.
THE WITNESS: Thanks.
(Brief recess.)
PRESIDENT SHORE: Back on the record.
Mr. Ryan.
MR. RYAN: Thank you, Mr. President.
BY MR. RYAN:
Q. Mr. Zadicoff, I'm going to ask you to take a
look at Exhibit QE-104, please, which is not in your
bundle but will be given to you by my colleague.
A. Okay.
Q. Do you see that?
This is the Consolidated Financial Statements
[Page 915]
and supplementary information for Omega Engineering
LLC and its subsidiary dated February 28, 2013, and
February 29, 2012; correct?
A. Correct.
Q. Have you seen this before?
A. I have.
Q. Can you turn to Page 7, which is marked in
the bottom right-hand corner "C," and it ends in "62"?
A. Correct. Yes, I'm here.
Q. Okay. So, you had stated earlier when we
were talking about [Redacted]
[Redacted] were unrelated
to the construction industry.
If you look at 2012, the--I'm sorry. To be
clear, the construction business, not the construction
industry.
If you look at 2012, we see a loss--under the
line "Earnings or Loss From Operation," [Redacted]
[Redacted] correct?
A. Yes. It was referring to the gross profit
that is positive, and that's what I recalled. But I
can see that after general and administrative expenses
[Page 916]
in 2012, there was this loss.
Q. Okay. And, of course, general and
administrative expenses are something that you need to
account for, generally, when considering whether a
company has earned or lost money in a particular year?
A. Yes. I don't know how--certainly you account
for them, and we account for those in the valuation.
Regarding Omega U.S., given that I have not had
insight into the projects, what I looked at was the
gross profit, and that's the profit you can directly
attribute to the construction projects that were in
place.
Q. When you said you don't have insight into the
projects, does that mean you don't have insight into
Omega U.S.'s projects, or what were you referring to
there?
A. I don't have insight into Omega U.S.'s
projects that are outside Panamá through the Omega
Consortium.
Q. Do you know whether there were any projects
ongoing outside of Panamá at this time?
A. Well, as I mentioned, I think I recall there
[Page 917]
is one of Dr. Flores' exhibits that mentions a project
that was awarded, I think, in 2014. It could be 2013,
but I'm pretty sure it was 2014.
Q. But you have no personal knowledge of
Omega U.S.'s business outside of Panamá, do you?
A. Personal knowledge? No, certainly not. I
can see the Financial Statements.
Q. Okay. If we look at 2013, it shows an
earnings of [Redacted] from operations, but then
it also shows bad debt expense, [Redacted]
[Redacted]. That bad debt, it was associated with
the operations; correct?
A. I'm sorry. Where?
Q. We're on the same page that we were on.
Page 7, ending in C-62.
Do you see that?
A. Well, not really. This is under
"Operations." So, it's a bad debt expense that is
registered in the same block, that realized gain on
sale on the investments. So, this is--my indication
is that all this is related to investment activities,
so trading activities that are outside the contracting
[Page 918]
industry.
Q. Sir, realized gain on sale of investments is
a completely separate item from bad debt expense.
They are not linked in this financial statement in any
way.
A. I disagree. They are all under other
revenues and expenses and below earnings from loss--or
loss from operations. So, I think that they are
linked.
Q. [Redacted]
[Redacted]?
A. I see that.
Q. Okay. So, those would be associated with the
construction business; correct?
A. There is a reason why they were expressed
below the line of [Redacted].
Q. Sir, my question, though, is: You agree that
the line [Redacted] is
related to the construction business?
A. Well, it could very well, but there is a
reason. It's not related to the actual performance of
the construction company, because otherwise it would
[Page 919]
be in the gross profit. It has to be--well, I'm just
speculating, but it could very well be that it is just
that clients stop paying and then you have a lawsuit,
so you register a bad debt, or you have other losses
for construction companies, but it's not related to
the operations. That's all that I'm saying.
Q. Okay. Sir, Compass Lexecon takes the
position that if, on a going-forward basis, the public
sector demand in Panamá that you had assessed was
overstated, there is no reason to believe that Omega
Panamá could not fill up its spare capacity with
private-sector projects; is that correct?
A. We mentioned that that's a possibility and
provides further comfort to our numbers, but our
assessment is done exclusively by looking at the
public works market. So, we don't have any cash flow
related to private bids or private projects in our
calculations.
Q. Okay. So, just to confirm, then, you're
aware that Omega Panamá did not win a single private
sector bid; correct?
A. The Omega Consortium in Panamá did not have
[Page 920]
any private sector bid.
Q. And you're aware that--there were
private-sector bids that were made, sir, but they were
lost; correct?
A. Yes.
Q. And you're aware that Mr. Rivera testified
that some of these bids were made with owners with
whom Omega U.S. had prior relationships in Puerto
Rico; correct?
A. I'm not aware of what he testified. I was
not here for his testimony, but it could very well be.
Q. Did you review the Transcript of any of the
testimony given to date?
A. I think that I reviewed a portion of
Mr. Rivera's Transcript where it mentioned--where he
was asked about something, or that with it, where
Compass Lexecon was mentioned, but I didn't review the
whole Transcript, no.
Q. Okay. Your Report does not analyze the size
or nature of the private sector construction market in
Panamá; correct?
A. We don't look at the private sector, no.
[Page 921]
Q. You don't look at growth trends in the
market?
A. Specifically, no. To the extent that we look
at the macroeconomy, that has implications for the
construction sector as a whole, but--
Q. You make no analysis of the size or nature of
the private construction market in Panamá; correct?
A. No.
Q. You do not analyze how Omega Panamá would
have fit into that private sector market, do you?
A. No.
Q. Now, Mr. Zadicoff, I just want to change
topics briefly and focus on an issue that affects
losses relating to existing contracts. And you had
said in your Opening--and I'm paraphrasing, but you'll
correct me if I mischaracterize anything that you
said--but you said that one of the issues that is
relevant to the difference between you and Dr. Flores
is the treatment of advance payments; is that correct?
A. That is correct.
Q. Now, the advance payments were made to Omega
Panamá at a very early portion of their projects;
[Page 922]
correct?
A. I think that's how it works. They collect a
portion of the total Project Costs at the onset of the
construction.
Q. And do you know how Omega Panamá used that
money?
A. How it used it? I assume it used it to--I
don't know for a fact. I didn't trace the money.
Q. What do you assume that they used it for?
A. Well, they hold it, and they finance--they
need to pay contractors. They have the money, and I
assume they can use it to perform the Contract. It's
part of the idea of providing an advance to your
contractor.
Q. And while they were holding the money, they
would have been free to put it into an
interest-bearing type of account; correct?
A. I don't know. There are probably regulations
that limit what you can do with advance payments, so
that they protect the owner, but I don't know, in
particular, in this matter.
Q. So, you have no idea as to whether there are
[Page 923]
any such regulations in Panamá that were in effect
here, do you?
A. I assume they existed, because it's normal,
but I don't know.
Q. You don't know. Okay.
Were you aware that Mr. Rivera, I believe,
testified that he used portions of the advance payment
to pay for other projects that were unrelated to the
construction industry in Panamá?
A. I'm not aware.
Q. Okay.
MR. RYAN: Mr. President, I have no further
questions.
PRESIDENT SHORE: Mr. Ryan, thank you very
much.
Ms. Gorsline?
MS. GORSLINE: Would the Tribunal prefer to
ask their questions first, Mr. President?
PRESIDENT SHORE: I think we should hear from
you, Ms. Gorsline, and then we will give--given that
it looks like we've got adequate time, then the
Tribunal will come back, ask questions, if we have
[Page 924]
any, and give both of you a chance to follow up.
MS. GORSLINE: Thank you, sir.
PRESIDENT SHORE: So, you won't be confined
now, nor will you, Mr. Ryan.
MS. GORSLINE: All right. Might I have just
a moment to confer with my colleagues?
PRESIDENT SHORE: Yes, of course. Yes.
Absolutely.
MS. GORSLINE: Thank you.
(Pause.)
PRESIDENT SHORE: Ms. Gorsline.
MS. GORSLINE: Thank you, Mr. President.
Claimants have no questions for the Witness.
PRESIDENT SHORE: Professor Douglas.
QUESTIONS FROM THE TRIBUNAL
ARBITRATOR DOUGLAS: I just want to go back
to this relationship between Omega U.S. and Omega
Panamá. During the bidding process when they bid
together, presumably you would describe this as
Omega U.S. giving something of value to Omega Panamá
and you could monetize that, you could calculate that
[Page 925]
if you really wanted to. There wasn't an agreement,
it seems, in this case, but you could certainly put an
economic value on that contribution to the bidding
process; is that correct?
THE WITNESS: Theoretically you could do it.
ARBITRATOR DOUGLAS: And so, when a
hypothetical buyer is looking at Omega Panamá, it
would be trying to put a value on that contribution.
THE WITNESS: So, if we were only looking at
Omega Panamá, we should try to parse what's the value
of the contribution is and how it contributes to the
overall [Redacted] value. So, [Redacted] value
that we calculate is the sum of all the assets. So,
theoretically, you can divide it through certain
analytical steps.
ARBITRATOR DOUGLAS: And if you can do that,
doesn't it make a difference--sorry, if we can do
that, doesn't the probability of whether or not that
contribution will continue, become relevant to the
value of the asset today assessed by its future
income-producing potential?
THE WITNESS: Well, it depends. Again, I get
[Page 926]
your question as coming, okay, let's assume that all
that it is to value is Omega Panamá and not the Omega
Consortium. Is that my correct reading?
ARBITRATOR DOUGLAS: Well, it is looking at
Omega Panamá, which may have value attached to it by
virtue of its relationship with another entity, and
the question is whether a buyer is--what value would
the buyer put on that value, that is derived because
of its relationship with another entity?
THE WITNESS: Right. But I'm trying to
understand whether you want me to assume that the
assets that I'm valuing are the totality that includes
Omega Panamá and this relationship or just Omega
Panamá. Because if it is the former, it is the
totality, given that this is a kind of subsidiary from
an international company, I will have no reason to
believe that this relationship will stop.
ARBITRATOR DOUGLAS: That's the point I was
getting to. So, yeah, I was absolutely asking about
as a totality, but then don't we need to make an
assessment of the likelihood that the relationship
will continue? Don't we have to make an
[Page 927]
evidence-based assessment of whether that's the case
because that, in turn, will affect the value of that
relationship which is a component of the thing that
you evaluate?
THE WITNESS: That is correct. As a factual
issue, I would suggest that when you're looking at
subsidiaries--if this would be an unrelated party with
whom you had a consulting agreement for 5 years or
10 years or sometime of supporting agreement that is
limited in time, then I would agree you would need to
assess a probability that that would renew.
But given that this is a direct investment in
a subsidiary form to capitalize on the same assets and
put them at risk to win new projects, I would--the
logical assumption in my valuation view is that you
would consider that the relationship would continue
into the future because the basis for doing the
subsidiary, the investment, is to capitalize on these
investments in the Panamanian market.
ARBITRATOR DOUGLAS: Okay. But if that's the
case, then doesn't the financial condition of the
parent--isn't that relevant, then, in assessing the
[Page 928]
probability or the likelihood that the relationship
will continue but also have value because
suppose--just taking a hypothetical, suppose
Omega U.S. becomes insolvent and we know that, at the
date of valuation, that that's likely, then obviously
the relationship wouldn't be worth much and that would
affect the Present Value.
So, I'm not saying that it was going to
become solvent, but the solvability or the financial
condition of the parent in that scenario, doesn't that
become a relevant consideration if you're trying to
value that relationship going forward?
THE WITNESS: Objectively or from an overall
standpoint, it does. So, obviously if Omega U.S.
would, for reasons that are not related to the
Measures won't be able to provide the support to Omega
Panamá into the future, that would be--would affect
the valuation assessment.
Now, I see no indication that, absent the
Measures, Omega U.S. would not have been able to
continue providing the support because the balance
sheet that it had was adequate, as we saw in the
[Page 929]
Bidding Documents, as of the date of valuation, and
the construction profits that it was achieving was
still positive and there was a positive equity value.
So, there is no reason to believe that Omega U.S.
would disappear and stop providing the support to the
Omega Consortium.
ARBITRATOR DOUGLAS: This may be more of a
factual issue in which case you're free not to answer
it, but when someone is looking at bids and they are
looking at the financial situation of the bidder, and
would be both entities in this case, I mean, what sort
of view are they taking of the accounts? Are they
doing a very careful analysis that you are but
distinguishing between its core construction business
and other aspects, or are they just looking at the
bottom line and saying, well, the operating profit or
loss for this year is positive or negative and be
satisfied with that sort of high-level analysis?
THE WITNESS: Well, it depends on the bid;
right? Each of the bids has defined certain criteria.
But overall, as we were discussing before, you have
certain liquidity ratios and solvency ratios, in which
[Page 930]
Omega U.S. was able to perform, and you also had the
requirement to have bonding capacity or sometimes
financing capacity.
To obtain bonding capacity, you need a track
record with financial institutions in which financial
institutions will know that every now and then one
project would go sour and you will have a bad debt
expense. But they will care about your overall
performance, and that's how they will decide to extend
letter of credits or not, act as a bonding agent or
not.
So, there is the objective criteria that is
outlined in each of the bidding processes where the
Omega U.S. or Omega Consortium was able to excel, so
we don't have reason to believe that that would stop.
And then you have the existence of bonding
capacity, which is also considered by the bid
documents, but the rationale that banks follow or
bonding agents follow to provide bonding capacity
looks at an overall long-term payability of the
Project, of the Company--sorry. And based on what I
have seen, there is no reason to believe that
[Page 931]
Omega U.S. would have become insolvent because it was
completing its Project. Maybe it didn't have many
more projects outside Panamá or--because if you look
at the financial statements, they are winding down in
projects in a way, but that would not generate a loss
by itself. It would just stabilize the financial
statement.
And the reason why actually you will expect
that Puerto Rico would be a stale market in a way is
because we need to remember that at this point it was
into a very long recession period; right? So, that's
why you go into other markets and you rededicate your
resources.
ARBITRATOR DOUGLAS: Thank you very much.
That is very helpful.
PRESIDENT SHORE: Professor Naón.
I think I just have one question following on
from Professor Douglas. It's the comment you just
made a minute ago, Mr. Lopez Zadicoff, that you--am I
right that you said you would see no reason in a
hypothetical sale and purchase that Omega U.S. would
refuse to provide support. That is, you would assume
[Page 932]
that it would continue to provide support. Is that
right?
THE WITNESS: Right. Given that it is a
subsidiary and it was--the Panamanian entity as a
subsidiary was created with the purpose of
capitalizing on the assets. That I would not expect
that support would be interrupted.
PRESIDENT SHORE: But it is a separate
entity--correct?--Omega U.S., and if it continues to
provide support, and a hypothetical purchaser of Omega
Panamá would understand that to be the case, would it
not also be understood, hypothetically, that it would
take a share of something to continue to provide
support? I mean, support wouldn't come free.
THE WITNESS: Well, I think it goes--it goes
to the distinction of what we are
valuing--right?--because in my view what you are
valuing is the support provided by Omega U.S. that
would continue being provided to Omega Panamá. If we
were valuing and splitting--so, that's why when you
asked me before, I said, okay, this is like buying--if
you want to conceptualize this, it is like buying a
[Page 933]
company that is operating boots on the ground, running
the Projects, plus an agreement that is an ironclad
agreement that you will continue receiving the support
of Omega U.S.
PRESIDENT SHORE: I follow that. Thank you.
Professor Naón.
ARBITRATOR GRIGERA NAÓN: Let me see if I
understand where we are after the questions of my
distinguished colleagues on the Tribunal.
Number one, you were referring to an
objective evaluation of the continuing support of
Omega U.S. to Omega Panamá, but wouldn't part of that
objective evaluation be the terms of the bidding
process itself on the basis on which the bids were
allocated to the Consortium? That's my question. To
which extent do we have to look into the bidding
process, the Bidding Documents, and the conditions
under which the Contracts were awarded?
THE WITNESS: Well, that could be one way of
attempting to parse away the value between the two
sets of assets that we are valuing within the Omega
Consortium. So, if you say, okay, you look at the
[Page 934]
bidding process as you are mentioning, and you have
different characteristics and you will say, okay, I
believe that Characteristic Number 1 is won because of
Omega Panamá. Characteristic Number 2 is won because
of the intangible assets and so on and so forth. You
could be able to do kind of an assessment of how much
each of the companies is contributing to winning, and
then try to attribute value in one way or another.
So, that could be one approach.
A different approach could also say, okay,
let's think about--I don't know if Omega Panamá is a
selling agent or a management agent of the assets that
were considered. So, you will look at it from another
different perspective. But I think that there is not
something that we have done and we will need to think
about it, how to parse away the value in detail. But
certainly there are valuations of intellectual
property or other intangible assets that are usually
done and they could be--we could attempt to perform
them.
ARBITRATOR GRIGERA NAÓN: If I understood
correctly the question of my Chairman here, he was
[Page 935]
trying to identify what was the benefit or
consideration for Omega U.S.A. to be in the picture.
But I don't want to put words in your mouth, but
wouldn't that be just the share participation, the
interest of Omega U.S.A. and Omega Panamá, because, of
course, if Omega Panamá gets money and benefits, it
will reflect in the dividends that would be paid to
Omega U.S.A.?
Wouldn't that be--
THE WITNESS: Well, that--that's how things
flow from a corporate structure, and it all
belongs--all the companies belong to the Claimants,
so, at the end of the day, all money goes to the same
place, if I understand correctly.
So, for me, this is--when I look at this,
this is an indivisible investment, because you did the
investment in Panamá in order to profit from your
capacity to generate new business, and that
materialized in the past in nine Contracts and will
continue to materialize in the future in more
contracts. So, overall, yes, at the end of the day is
how all of this would have been valued, generated in
[Page 936]
Panamá that would have reached Claimants.
ARBITRATOR GRIGERA NAÓN: Thank you.
PRESIDENT SHORE: So, on that last point,
Mr. Lopez Zadicoff, you would be purchasing--the
hypothetical Buyer would be purchasing the continued
participation of Omega U.S.?
THE WITNESS: Yes.
PRESIDENT SHORE: Because we're not talking
about shares here; right? We're not talking about a
normal subsidiary transaction. Let's say, for
example, there's a gas consortium, and it's all within
one group of companies, and you have a gas supply
company, and it has rebates within the group of
companies because they can all trade off their own
balance sheets.
Let's say there is no antitrust issue, and so
they can all trade off their own balance sheets, and
someone wants to purchase the gas supply portion in
that group of companies, but, if they do that, they
are not going to get the rebates, are they?--because
that can only work within the group of companies. So,
they would lower the purchase price; right?--that they
[Page 937]
would pay for the gas supply company because without
the rebates it is not as valuable.
And let's say in a hypothetical sale and
purchase, someone would know, without that
relationship, it's not as valuable.
So, in this instance, what you would be
purchasing is the continued relationship?
THE WITNESS: Yes. The relationship is
purchased by the--I would argue that, your example, if
I'm holding the segment against the rebates, I would
not be able--I would not willingly sell for something
that is less, that I can obtain in an objective way
because, here, the rebates are objective.
PRESIDENT SHORE: You know, the rebates are
actually within the--they only work within the group
of companies, because you can only trade off the same
balance sheets. It's a similar example here. I'm not
sure that it is objective in that way.
I'm not sure I follow that, because if you're
going to sell, you're going to understand that, if--if
the Willing Buyer know about the rebates, and let's
say there's transparency, you are going to understand
[Page 938]
that the Company is less valuable without the rebates.
Everyone is going to understand that, because the
Company has been built up and trading off other
balance sheets.
Here, it's a similar situation, isn't it?
Here, it's a similar situation in the sense that
anyone would know that the Company, Omega Panamá as
just Omega Panamá, in and of itself, is without the
relationship, without real value. Is that, I mean,
that's correct, isn't it?
THE WITNESS: I wouldn't say "without real
value." I would say that there is a value of the
boots-on-the-ground organization and the setup, but
it's now going to be the full $40 million. It's going
to be--I don't know. Certainly, it would not be the
majority of the value. I would agree with that.
PRESIDENT SHORE: Okay. Sorry. You're
right. There is some value, but not significant value
in the way that there would be significant value if
you're buying the entire relationship; right?
THE WITNESS: Well, it would not be the same
as valuing the entire relationship. I don't know
[Page 939]
if--how significant or how to define "significant."
It would not be $1. That's--so, it would not be--
PRESIDENT SHORE: It might not be $1. I
agree with that.
THE WITNESS: It would not be 30 million,
either, so I know that we haven't done the analysis.
We can do it, but I think that the analogy, if I may--
PRESIDENT SHORE: Yes.
THE WITNESS: --that you are doing is--okay.
I have a group of companies; okay?--so, you come and
you take out a piece of that group of companies and
always invested in Panamá; okay?--or invested in the
target market where you're analyzing it.
So, what is the damage or the harm that I
suffer? Well, I look at the value that I can derive
from the full group of companies, and then I calculate
what is my residual value. Okay. I now have two
segments of the distribution. What is that was taken
away? The delta between the two set of assets that
I'm left off. So, in that example, I will look at
it--that's the economic damage. Now, you can tell me
that's not how you would look at it from a legal
[Page 940]
standpoint or whatever.
PRESIDENT SHORE: Right. Right.
THE WITNESS: But, from an economic
standpoint, if I look at the damage and the harm that
I suffered, well, that's the way of looking at it,
because before the situation I have the three
companies. After the situation I only have two. So,
if there are some synergies that are lost, they are
part of the damages.
PRESIDENT SHORE: Right. And I think you're
right. That might be a legal issue, because it might
go to what the investment is. Because when you said
earlier, I think, in response to one of Mr. Ryan's
questions that you are considering the totality of
assets invested in Panamá, which can constitute Omega
Panamá as an operating entity, you are assuming that
the investment is also Omega U.S., because that's the
totality of the assets that are being invested in
Panamá.
THE WITNESS: I would caution, because it's
not the totality of Omega U.S., because we are not
looking at the potential of the Omega U.S. assets
[Page 941]
outside Panamá.
PRESIDENT SHORE: Yeah, let's say they are in
Panamá.
THE WITNESS: Okay. If there is nothing,
yet--that I would generally agree with you.
PRESIDENT SHORE: Okay. As promised, let's
go first to Ms. Gorsline. I think if you have
questions arising from the Tribunal's questions,
Ms. Gorsline.
MS. GORSLINE: Mr. President, we have no
questions arising from the Tribunal's questions.
PRESIDENT SHORE: Okay.
Mr. Ryan.
MR. RYAN: Yes, sir, I have small number of
questions.
PRESIDENT SHORE: Arising from the Tribunal's
questions?
MR. RYAN: Yes. Yes.
PRESIDENT SHORE: Only from that.
MR. RYAN: Yes.
PRESIDENT SHORE: Okay.
FURTHER CROSS-EXAMINATION
[Page 942]
BY MR. RYAN:
Q. Mr. Zadicoff, you answered at length to the
questions of--actually, each of the Tribunal Members
about the prospects that the continued support would
go on beyond the hypothetical transaction that we were
using as the basis for a valuation, and that it would
be reasonable, in this instance, given that there is a
subsidiary relationship, to expect this would
continue; correct?
A. Yes.
Q. Okay. Are you aware that Omega Panamá is not
a subsidiary of Omega U.S.?
A. Is not a direct subsidiary. They are owned
by Mr. Rivera, but it is not a subsidiary in the
strict form of the corporate relationship link, let's
say.
MR. RYAN: Thank you.
PRESIDENT SHORE: Thank you very much.
Mr. Lopez Zadicoff, thank you very much for
your testimony and appearance today. The Tribunal
appreciates it. And your testimony is concluded, and
you are hereby dismissed from that table that you're
[Page 943]
sitting at. And I understand that you'll continue in
the room, so it will be good to see you in the room.
THE WITNESS: Okay. Thank you for everybody,
for your patience.
(Witness steps down.)
PRESIDENT SHORE: Thank you. So, I have the
wrong time. So, we're at 11:43. May I suggest this:
That we put Dr. Flores on for his presentation and
then we take a lunch break after Dr. Flores's
presentation. Is that acceptable?
MR. RYAN: Yes, Mr. President.
MS. GORSLINE: Yes, sir.
PRESIDENT SHORE: Ms. Gorsline.
Dr. Flores.
(Pause.)
DANIEL FLORES and RYAN MCCANN,
RESPONDENT'S WITNESSES, CALLED
PRESIDENT SHORE: Good morning, Dr. Flores.
Mr. McCann, good morning.
I understand that since you're both there,
that you'll both potentially be speaking. Is that
correct?
[Page 944]
THE WITNESS: (Dr. Flores) Yes. Good
morning. My understanding is that, although we will
be splitting the Presentation duties, Claimants'
counsel will only be asking questions to me.
PRESIDENT SHORE: Is that your understanding,
Ms. Gorsline?
MS. GORSLINE: Yes, sir. Respondent's
counsel had requested that Mr. McCann be allowed to
participate in the Direct Presentation, and we have
agreed to that, on the understanding that only
Dr. Flores will be cross-examined, and that Dr. Flores
will be capable of answering all questions with
respect to the direct Presentation, even if it was a
portion delivered by Mr. McCann.
PRESIDENT SHORE: Okay. Thank you all very
much for that.
But, in light of that, let's first have
Dr. Flores, if you would read out loud the Expert
Declaration in front of you, and then Mr. McCann.
THE WITNESS: (Dr. Flores) Yes. My name is
Daniel Flores.
And I solemnly declare, upon my honor and
[Page 945]
conscience, that my statement will be in accordance
with my sincere belief.
THE WITNESS: (Mr. McCann) My name is Ryan
McCann.
I solemnly declare, upon my honor and
conscience, that my statement will be in accordance
with my sincere belief.
PRESIDENT SHORE: Thank you both. Over to
you, Dr. Flores.
I assume there is no questions before that
from you, Mr. Ryan?
MR. RYAN: Correct. This is in substitute of
a Direct by us.
PRESIDENT SHORE: Thank you very much.
Dr. Flores.
DIRECT PRESENTATION
THE WITNESS: (Dr. Flores) Thank you. In the
next 30 minutes we will present a summary of the work
that we have done in this arbitration. You have the
slides on the screen and in front of you. The
Presentation has three parts: I will be in charge of
Parts 1 and 3, and Ryan will be doing Part 2.
[Page 946]
So, if we go to Part 2, the Potential New Contracts Claim, we start at Slide 4, and you can see here is--so, this Presentation was prepared on the basis of what I had seen, or what we had seen in the Compass Lexecon Reports. It was clear to us that what Compass Lexecon was doing, at least, or what it has done in its Report is to value that--the Claimants' interests in Omega Panamá.
And the theory being that certain Measures allegedly taken by Panamá destroyed the value of Omega Panamá. It impeded Omega Panamá from continuing as a going concern. That's what Compass Lexecon wrote, reducing its value to zero. So, that's been the basis on which--upon which this Presentation has been prepared, the value of Omega Panamá itself as a going concern in Panamá.
We do agree with Compass Lexecon that the proper way to value a company is a Fair Market Value standard. You have a definition here in the middle of Slide 4, and it's a--the well-known standard of what a Willing Buyer and a Willing Seller with reasonable knowledge of all the relevant facts would agree to
[Page 947]
transact a property.
So, then the relevant question that we have sought to answer in this arbitration is: What is a Fair Market Value of Omega Panamá, as of the 23 December of 2014, but for the Measures?
So, before we go into that, let's take a look at what Omega Panamá was. And in Slide 5, we have two observations that we take from the last set of annual financial statements of Omega Panamá. On the left side you see that Omega Panamá had salaries, of about--salary expenses of about [Redacted]. And I heard testimony earlier this week that it had a handful of workers, so we are not talking about minimum-wage workers. We're talking about people being paid this [Redacted].
On the right-hand side, what we see is the physical equipment, the physical plant of Omega Panamá. And what we can see is that it had some vehicles, some computers, and some office equipment. This is as of the end of 2013, but we know--is that most of this equipment was bought in 2012, because, as of year-end 2011, it had much less than that.
[Page 948]
It had about [Redacted] in vehicles and just about [Redacted] in computers, maybe [Redacted] in computers. So, this is the reality of what Omega Panamá was.
So, in Slide 6, we show a little bit more detail. As you know, Omega Panamá was incorporated in October 2009, and five years later, as of December 2014, what we know is that it had won just nine Contracts. There was one Contract that it bid for. It had won, but it was canceled, so there was never any work performed.
And it had--those nine Contracts that it won had always been done when bidding in a Consortium with other companies, all the times with Omega U.S. and also sometimes third Parties. So, some of the bids, I think five of the winning bids were because there were three companies: Omega Panamá, Omega U.S., and a third Party that contributed some technical knowledge or some other thing.
These third-party companies, I understand they are not part of what today Compass Lexecon was referring to as the "Omega Consortium." So, the
[Page 949]
reality is that when a bid is submitted, if the bid in the requirements has seven specifications about what is required, then you can go out and you can borrow the expertise of someone else on a one-time basis.
For example, in the Tocumen Airport Bidding Documents, if you look at them you will see there were three companies, and one of them, which was not--neither of the Omega companies, had prior experience developing an airport or doing some construction work at an airport in Las Vegas and another one in Houston.
So, because the parameters of the Tocumen Airport said you need to provide certain experience having worked on airports, they went and they did a consortium, a one-time consortium with a company that did have that experience. So, here we're not always talking about just Omega Panamá and Omega U.S. And that's typical in the construction industry.
When you need a specific knowledge that you, yourself, or your parent company doesn't have, you do a temporal union of companies for the purposes of only that contract.
[Page 950]
Now, we know that as of the Valuation Date, Omega Panamá had only completed one contract, this one, the Tocumen Airport. And for the other eight ongoing contracts, the progress completion was just about 40 percent, and this is from data provided from Mr. McKinnon in his Report. So, it's very hard, as we will see, if we are talking about doing reliable estimates for the future, what do you do when you haven't even completed more than one contract. How do you know what your profit margins are going to be? Because, remember, in these contracts, the deal is that you bid and you win an amount. That's your revenue. That's your top line. And then it is up to you to build a project and to build it under budget.
If you go a lot under budget, you're going to have a huge profit margin. If you stay at budget, you make zero dollars in profit. If you go over budget because your work is suddenly--they want to renegotiate their Contract and they want higher salaries, or you realize that the ground is more difficult to treat and you need to spend more money doing the work, you may end up with a negative profit
[Page 951]
margin. How do we know what Omega Panamá would have done going forward if all we have is one completed project? That's an important point to take into account for valuation purposes.
In Slide 7, we show a sample of other companies that also were participating in the public-sector construction, the public construction sector in Panamá competing with Omega Panamá, and what we show is that these are companies that have many years of experience, presence in many countries, and they are many times larger than Omega Panamá.
With that brings us to the next point, which is in Slide 8, which is--this is very important for the exercise of valuation. There is no exclusive right to public works contracts in Panamá. That is very determinative. What I do mean by this? If you have a concession to provide mobile telephone services in a country--by the way, my colleague and I were in this same building just a few weeks ago talking about that same issue--a mobile telephone deal in one country. It was a deal for 25 years. That gives inherent value to the company because you are the only
[Page 952]
one that is going to be able to provide mobile telephone services for the remainder of the 25-year term. So, no one else can provide it.
But that's not the case with public works.
The only thing you had need to provide public works bids in Panamá is to register at the site that is called PanamaCompra. It's an online website that's publicly available. Of course, you need to be current in your taxes. You don't need to be delinquent with taxes, but most companies--we will assume they pay their taxes on time, and you need to have certain requirements specific to each bid.
But there is nothing that says Panamá is going to choose 10 companies, and these 10 companies are the only ones that can bid for public projects for the next 10 years. And one of them was Omega Panamá. That would make Omega Panamá valuable, of course, if you were only one out of 10 that was eligible. But this is not the case. Any of the companies in the prior slide could and did bid for projects whenever they felt they were up their alley, and they wanted to bid.
[Page 953]
So, that's the thing. So, having prior experience, having bid on nine projects, having won nine projects in the past three years is not a guarantee of anything because at the next bid that you provide, the authority that's going to be awarded in that contract will be who is the best out of the three that have applied for this Contract or out of the seven who have applied for this Contract.
So, there is not an acquired history that the fact that I won three contracts with some Ministries or some municipalities in Panamá over the last three years guarantees a stream of income for the future. There is no guarantee whatsoever. So, every new project is like a new enterprise. It's a new project. You're going to be bidding with the best people in the world to get that contract.
So, based on this, and based on the limited experience of Omega Panamá, our point of view is that no Willing Buyer looking to start an operation in the public works sector in Panamá would have found any compelling reason to pay anything to acquire Omega Panamá. Why would I pay to buy Omega Panamá for
[Page 954]
Mr. Rivera if I can do the same and just registering in the PanamaCompra website and start submitting my own bids? What's the advantage of submitting through Omega Panamá? So, that's why our conclusion is Omega Panamá--
ARBITRATOR DOUGLAS: Sorry, just to interrupt.
THE WITNESS: (Dr. Flores) Yes.
ARBITRATOR DOUGLAS: Surely, a track record counts for something?
THE WITNESS: (Dr. Flores) I'm sorry?
ARBITRATOR DOUGLAS: Surely, the track record counts for something in a bid if you've successfully completed contracts or bid for contracts in the past, surely that has a value going forward.
THE WITNESS: (Dr. Flores) If you look--and we have in the record, I think it is Exhibit QE-113--we have the bidding parameters for some of these contracts, and most of them that I recollect--I don't recollect any of them that says shows me evidence that you have submitted prior contracts in Panamá. What I was talking, the one for
[Page 955]
the airport in Tocumen is that show me evidence that you have completed a project in the airport arena anywhere in the world. But not necessarily in Panamá. No other contracts require prior experience having done a hospital in Panamá. If you did a hospital in Miami, okay, that may check the requirements.
So, that's our point. The Fair Market Value of Omega Panamá is zero because Omega Panamá, what it had to offer, what it would be selling, what is it? It's just the right to bid. Well, anyone has the right to bid for Omega Panamá.
So, then this is not part of the slides because I wasn't expecting Compass Lexecon to be talking about valuation or something different, but I'll just share a reflection that I had while I was listening to the prior examination, which is this: He says, well, there's an additional value brought by Omega U.S.--right?--the bonding capacity and the fact that Omega U.S. had a series of financial statements that could be provided as support.
I'll just make a quick reflection. If it is true that Omega Panamá was worth $40 million or
[Page 956]
whatever amount they are saying today, any Willing Buyer of Omega Panamá would be anyone willing and able to dispose $40 million. Are they really telling us that someone willing to pay $40 million doesn't have balance sheets and doesn't have bonding capacity? I mean, I cannot conceive of any company in the world that would be willing to pay $40 million, and we don't have the bonding capacity for a $2 million contract.
PRESIDENT SHORE: What about, Dr. Flores, I'm sure we'll come to this later, but, of course, you know the Compass Lexecon point is--one of their points is that they--that you know they haven't just separated out Omega Panamá, that you know they are talking about the Consortium when they say "Omega Panamá," and so the Willing Buyer/Willing Seller context is the Consortium, not the Company that's incorporated or registered in Panamá?
THE WITNESS: (Dr. Flores) But my point is the Willing Buyer would say "I don't need this other company in Puerto Rico. Why would I need a company in Puerto Rico? I can provide a bonding capacity myself." To the extent--we will go to that in the
[Page 957]
next slide.
PRESIDENT SHORE: Sorry.
THE WITNESS: (Dr. Flores) Let me go there to answer your question. Because our point is--well, let's imagine what the Willing Buyer would do; right? Say a Willing Buyer says, well let's acknowledge that Omega Panamá has been in business for three, four, five years, submitting bids in Panamá. Maybe it has acquired some knowledge--right?--I don't know, maybe some know-how or what. I don't know what time--what's the best time of day to submit the bid so there's less traffic on the website? I don't know. It's hard to evaluate, maybe, what is the fastest Notary Public in Panama City that can get you the papers done at 7:00 p.m. on a Friday? Could that have some value? Well, yes, hypothetically, yes.
And that's what we show in this slide, Number 9. In the top graph, we say if you are a new entrant, you know that you have the right to bid for new contracts in Panamá. You can do it on your own. You don't need the help of Omega Panamá.
PRESIDENT SHORE: What about the help of the
[Page 958]
Consortium?
THE WITNESS: (Dr. Flores) But what help does the Consortium provide? What does the Consortium provide? Because, remember, Omega Panamá itself didn't do much; right? When it got the Contract, it would merely find subcontractors.
So, one thing you could say is that, well, I'm going to need like 5,000 kilograms of cement; right? Where is the best cement supplier in Panamá? That may be some knowledge that may be worth paying someone to pay for that. You wouldn't pay $40 million for someone to tell you that; right? That's my point.
All the value we're talking about, it is miniscule. It is very small because, I mean, if I were--honestly, if I wanted to get into the sector, I wouldn't buy Omega Panamá. I would just make a job offer to Mr. López and say: "Hey, Mr. López, come work with me. I'll pay you $200,000 a year, and you tell me where the cement provider is and where the best crane operators are and who rents the cheapest and most reliable trucks." Because that's what Omega Panamá was doing. It was just putting together
[Page 959]
things, and that's why it did have some limited success, but that success--my point is it could be replicated by someone.
Remember, Omega Panamá had done nothing in Panamá until 2011; right? And--but whatever success it had by 2014, that's based on three years of experience. So, wouldn't a hypothetical buyer say, well, at most, in three years, I can do the same thing that Omega Panamá has done because that's what you need, the thing that comes from outside Panamá. So, what you need in Panamá is this: The knowledge what is the best cement provider, the cranes, the trucks, and the best workers that you can hire by the day. That's the knowledge that you need to do these projects well in Panamá.
What comes from outside is someone with bonding capacity and someone with a balance sheet of three or four years because you don't want to be a new entrant. But my point is, well, I don't need the company in Puerto Rico to provide those two assets. What I need is any company that can provide a balance sheet that is not in default for, like, two or
[Page 960]
three years, whatever the bidding parameters require, plus then you need the bonding capacity, which my point is any Willing Buyer would have bonding capacity or would be able to acquire bonding capacity without having to go and rely on Mr. Rivera's bonding capacity in Puerto Rico, whatever that may have been. So, that's our point.
And that's why we say, at most, you would pay for whatever differential in revenue you could obtain by leaping ahead instead of having to go through the growing pains of establishing a brand-new company in Panamá on your own. You buy Omega Panamá and, hopefully, if all the workers stay--you would buy Omega Panamá, and Mr. López would stay with Omega Panamá because he's the one that has the local knowledge acquired over the last three years. If you're able to do that, then it may be worth paying a little bit for the Company, and that's why we put this differential in the top graph, the shaded area in the top graph, at the right of Slide 9. That's what we think is the most someone would be willing pay.
Compass Lexecon says, no, a Willing Buyer
[Page 961]
would be willing to pay for cash flows in perpetuity. The graph ends in 2030, but, in fact, the model shows that they assume that the Willing Buyer will say Omega Panamá has something so valuable. With or without the Consortium, I don't get, but they say that is so valuable that no one would be able to replicate it, not in three years, not in five years, not in 10 years, not in 1,000 years. So, they say that Omega Panamá would be valuable ad infinitum. That's, to us, not reasonable.
Now, if you go a little bit into more detail about how Compass Lexecon has valued Omega Panamá, we think that that is not a reliable position at all.
Now, we are in Slide 11, and what we can see here is that to establish the pie of revenue for which Omega Panamá could bid, they look at the public spending on capital projects by the Government of Panamá--right?--and what you see, what they assume is that, going forward, starting in 2015 and forever more, that would be 8.5 percent of GDP. And they say that's the average of the last four years--sorry, last five years prior to the valuation date.
[Page 962]
The first thing a hypothetical buyer would do is look at the history, and then you realize that that's much higher than historically. You see historically it had been under 5 percent. It is true, the last five years were over 8.5 percent, but would that be sustainable? And I'm sure we all have heard the word "boom" several times this week, and this is the boom that you see. That's what the boom looks like.
And if you separate that by different Administrations, you hear in the Martinelli Administration spending went through the roof, much higher than the prior four administrations. What Compass Lexecon says is that this high level of the Martinelli Administration, the 8.5 percent, would continue for infinity, forever and ever more. We say, is that reasonable?
So, what we do is we look at the contemporaneous expectations as of 2014. Mr. Varela, when he was the presidential candidate--and you can see the date small here in Slide 13--he said that, as that's January 2014, he said the new Government will
[Page 963]
be obligated to have fiscal discipline. We need to prioritize responsible social spending. So, what he's announcing is, is going to have to come down, and this is in the context that public--that sector had increased by 66 percent during the Martinelli Administration. That's something a hypothetical buyer would look.
And that is not only a presidential candidate saying that. In Slide 13, we show that Mr. Moreira, who was the President of the National Association of Economists of Panamá, a little bit later in April 2014, says the same thing, said the new Government, whoever it will be, will be obligated to fiscal discipline. And he says that you will need to have the revenues in line with the debt, with the expenses. You cannot spend more than what you are receiving in revenues.
And, in fact, then there is the election, and then the Government is to issue, by law, a new strategic plan for the whole administration, meaning for five years. You can see here in the center, that is in December 2014, the new strategic plan is
[Page 964]
announced. And in fact, now President Varela delivers on what Candidate Varela had said. And if you look in this document, a hypothetical buyer would have projected public spending by the public sector in line with the blue line, that's what we assume for this year were to be done.
Compass Lexecon continues assuming a growth according to its red lines, and that's until forever. So, we think it's a major flaw. They are making a pie that is too big. The pie would not be that big, and anyone trying to consider buying Omega Panamá in 2014 would know that that pie will not be that big.
Now, the next step is a slice of the pie. Once you set the pie, you need to know what the slice of the pie that Omega Panamá may have been able to win. And you know the definition of the World Bank Guidelines. The whole point is about you need a track record that is sufficient to be able to forecast the future, and now it's important point--with reasonable certainty. DCF is very easy to do. Just put numbers on Excel spreadsheet, and it will spit out a result. Anyone can do DCF. But is it reasonably certain?
[Page 965]
That's the key point.
And our conclusion is no. You cannot do a reasonable certainty conclusion about the success of Omega Panamá. Why? Because you can't have here the results, and I don't think anything of this is in dispute.
In 2010, they bid for 14 contracts. They won none. In 2011, then they go out--they bid for much more, and they win 15 percent in dollar terms. Then the next year, if you look at the graph, yeah, 100 percent success but that's only on three contracts. And the next year they fall again and they only win 3 percent of what they had bid on. That's [Redacted]. That's one of the municipal markets.
And in 2014, they win nothing. And today Mr. Lopez Zadicoff was saying, well, 2014 was a transition and there was maybe less spending. Maybe there was some less spending but the Country still needs to spend money. He doesn't provide any analysis that the spending in Panamá fell to zero. There continues to be spending because public works need to be done, need to be awarded, and the Country cannot
[Page 966]
grind to a halt because there's an election.
But the fact is that if you give this slide to a hypothetical buyer, what will the hypothetical buyer say? Do you project 100 percent as in 2012 going forward or 0 percent? Or you say, look, I have no idea.
Compass Lexecon tells us that they are very confident that going forward the success rate will be 25 percent; of every $4 bid, they would win $1.
Our position is we have no confidence whatsoever that we can give to you without pure speculation about what the future would look like.
And these other things that we also disagree that have a smaller importance, just to mention--for example, the profit margin, I already referred to it in the presentation, that how can you estimate a profit margin if all you have done is to complete one project. That's not a sample. That is nothing you could do. And there is some other errors.
Now, we feel very strongly that this is not a case about Discount Rate. As you know, in many international arbitrations, there is big debates about
[Page 967]
calculating in the second decimal of the Discount Rate because billions of dollars depend on that estimation of the second decimal. We think a hypothetical buyer would not even care whether the Discount Rate is 18 percent or 23 percent. We think that that is probably the appropriate range, but the hypothetical buyer would never get there. The hypothetical buyer would say "I cannot just apply any Discount Rate to a projection. That's purely speculation." How do you know? The share of the pie is overestimated. The slice of the pie does not have a track record to project, so we believe that the buyer would not even dare value this based on the DCF analysis.
In Slide 18, we just have the conclusion. If we have to do a minimal number of corrections to the Compass Lexecon valuation, you would get to something de minimis in the order of $1 million, but the main point is we don't even think that the willing buyer would be willing to buy Omega Panamá with or without the Consortium because everything that Omega Panamá--you could do it yourself. That's the main point of our analysis of the future contracts.
[Page 968]
THE WITNESS: (Mr. McCann) Good morning, Members of the Tribunal. The second part of our presentation will cover the major issues in relation to the existing contracts' claim.
As Dr. Flores mentioned a few moments ago, as of the valuation date, Omega Panamá had eight ongoing projects, which were, on average, less than half complete. The Claimants are requesting damages in relation to the existing contracts, and the calculation of those damages are based on three main components.
The first component are the unpaid invoices. These relate to invoices for work, which Omega Panamá alleges that it completed prior to the Valuation Date, for which it invoiced the Contracting Parties, but for which it had not yet received payment. Compass Lexecon values these invoices at roughly [Redacted], and it updates that value by carrying that value to the Valuation Date using an interest rate that it deems as applicable.
The second component are the expected future profits on work not yet completed. So, for those
[Page 969]
projects that were ongoing, Omega Panamá expects that they were going to complete the work for those projects and that they would have generated certain profits. Compass Lexecon values those profits at a little over [Redacted], and it discounts that amount from the future back-to-the-valuation date using the Cost of Equity that it deems is appropriate.
The final amount actually offsets the first two amounts. The advance payments relate to amounts received by Omega Panamá prior to the Valuation Date. Compass Lexecon thinks that it is applicable to discount those amounts as though they were going to be received in the future back to the Valuation Date, even though they had actually been received prior to the Valuation Date.
The total requested by Claimants before applying any interest on past amounts or discounting future amounts is around [Redacted]. And after applying discounting and interest, Compass Lexecon values the existing contracts' claim at around [Redacted]. I&R assessment, that number should be closer to [Redacted].
[Page 970]
There are three main reasons for the difference in our assessment and Compass Lexecon's assessment. The first deals with interest rate, which Dr. Flores is going to take up in Section 3 of our presentation. And I'll be addressing the following two in the slides--in the following slides.
As I was explaining, the advance payments are amounts received by Omega Panamá from the Contracting Parties prior to the Valuation Date. Compass Lexecon argues that because these amounts relate to work that was to be done in the future, they should be discounted as though they were going to be received in the future. However, in our analysis, we acknowledge that those amounts had actually been received as of the Valuation Date.
Using the value of the advance payments as of the Valuation Date reduces the amount requested by Claimants by [Redacted]. A reasonable way of making sense of the existing contracts claim is to recognize that the Claimant is stating that it has not yet received amounts of [Redacted] for work that it had completed, but that it has received nearly [Redacted]
[Page 971]
for work that it hasn't yet done. So, a reasonable first step in understanding the existing contracts claim would be to look at the net between the [Redacted], at which point can you look at the expected future profits, and then that result is not complete without taking into consideration certain amounts that are in question that we present in the next slide.
As we noted in our Second Report, Compass Lexecon's calculation assumes that Omega Panamá would perform work relating to a power line that was part of the Kuna Yala Project. However, we've seen evidence, contemporaneous evidence as of the Valuation Date, that, in fact, that work had not been awarded to Omega Panamá. So, it does not make sense to include that work in the claim for the existing contracts. If you remove that work, that reduces the amount claimed by the Claimants by about [Redacted].
We also recognize that there were four addenda for work which did not have the endorsement of the Panamanian comptroller, and we've been instructed to assume that, without the endorsement of the
[Page 972]
Panamanian comptroller, that work should not be considered as part of the damages calculation.
Removing the amounts in relation to the work for those unendorsed addenda, taking into consideration offsetting costs would reduce the amount claimed by the Claimants by [Redacted], all else equal.
Finally, on the next slide, we summarize our results as they are presented in our Second Report, and we note that the amounts in this table may differ slightly from the numbers presented in the last few slides because these amounts take into account interaction affects.
THE WITNESS: (Dr. Flores) Okay. And now in the final minute of the presentation, I will deal with the topic of interest. I feel bad that we are only spending one minute on this because if you noticed this morning, the interest portion of the current claim of Claimants accounts for more than 50 percent of what they are asking. They are asking for [Redacted], and interest alone is in excess of [Redacted]. So, half of what they are asking is not existing claims, the [Redacted] as of the Valuation
[Page 973]
Date.
It is not the future work, which they value about 40-something million as of the Valuation Date. The largest part, the lion's share of this is interest. How do they get to an interest claim that is more than half of the total claim apart from moral damages that neither Compass nor us has been asked to quantify?
They get that because they compound the valuation. So, they do it as of February--sorry, as of December 2014, using the Cost of Equity of a Panamanian company in the construction sector. We do not agree that that is appropriate. From an economic perspective, what you should use is something that compensates the Claimants for the passing of time between the Valuation Date and the date on which payment is made. There's a famous paper by Fisher and Romaine that addresses with this issue, and it says you need to compensate for the fact that the process of justice takes time. We think that the commercially reasonable rate is the short-term U.S. Treasury Bill, which compensates for the time value of money.
[Page 974]
The WACC is not an appropriate rate--or the WACC, meaning weighted average cost of capital. Why? Because that rate incorporates ex ante risks, risks that an investor will require when risking its money for a future venture that may go better or worse than expected.
For example, if you invest in the Panamanian construction sector, you may have cost overruns, or you may have the Government deciding that the boom times have ended, and you have to spend less; or that you may not be successful in your bids because there is a lot of competition from companies coming from other countries. There is any number of reasons that any projection that you make looking forward a priority may not fulfill. So, that's why you want remuneration for taking that risk. But if you were to decide that there is an amount payable to the Claimants, once you decide that that amount is X dollars, that X dollars is fixed. And it doesn't depend on how many competitors there are in Panamá. So, all business risk is eliminated once you set the amount of the Award at X dollars.
[Page 975]
And that's why you cannot award damages, then, assuming the Cost of Capital that is enumerating four business risks. This has been widely discussed in the literature. You can have here Fisher and Romaine, Beharry, Kantor, Dolgoff. They make exactly the point that I just addressed.
And then we finish here with two quotations, that two Tribunals that capture exactly this economic meaning; right. I like this wording that one Tribunal had that said: "One cannot know what the Claimant would have done had it been paid an amount of money as of the Valuation Date. It may have made a spectacularly good or disastrously bad decisions with the investment of such a sum."
And now, that's what you would do, and to that you would apply the Cost of Capital. But the fact is that you have to realize that there is no business risk in an award, as the Tribunal in the Burlington Case said.
So, with this, we conclude this presentation. Thanking you for your time.
PRESIDENT SHORE: Thank you, Dr. Flores,
[Page 976]
Mr. McCann.
So, let's have an hour for lunch break, and then we will continue with cross-examination, Ms. Gorsline. Both of you know the drill: Don't speak to anyone about the case, and I would say don't speak to each other either.
(Whereupon, at 12:24 p.m., the Hearing was adjourned until 1:25 p.m., the same day.)
[Page 977]
PRESIDENT SHORE: Back on the record.
Ms. Gorsline?
MS. GORSLINE: Thank you, Mr. President.
Mr. Hines will be conducting the examination today.
PRESIDENT SHORE: Mr. Hines, good afternoon.
MR. HINES: Good afternoon, Mr. President. Thank you, Members of the Tribunal.
BY MR. HINES:
Q. Good afternoon, Dr. Flores.
A. Hello.
Q. As Ms. Gorsline said, my name is Paul Hines. I'm counsel for the Claimants.
And I see, if I'm not mistaken, you have your Reports there in front of you on the table?
A. Yes, I do.
Q. Okay. Great. I'm going to be primarily referencing those, but from time to time I'll show you other documents, and my colleague Ms. Gharibian is behind you. She will help guide you to those.
[Page 978]
So, you've already confirmed that you submitted two Reports in this Arbitration; correct?
A. Yes.
Q. The First was dated the 7th of January 2019?
A. Yes.
Q. And the Second was dated the 15th of November 2019?
A. Correct.
Q. And I note from those Reports--I understand that you were assisted in the preparation of them by Quadrant Economics staff, including, presumably, Mr. McCann, from whom we just heard?
A. Yes.
Q. But they were acting under your supervision; correct?
A. In the First Report, yes. In the Second Report, Mr. McCann was not under my supervision. We were just equals.
Q. Okay. But as to both Reports, you ensured that everything in them accurately reflected your personal opinions; correct?
A. Yes.
[Page 979]
Q. So, you are prepared and can testify to all aspects of both Reports?
A. To the best of my knowledge and recollection, yes.
Q. Certainly. Thank you.
I'd like to start by going over your curriculum vitae a bit, and that's an exhibit you submitted designated QE-0121.
Okay. Do you have that there?
A. Yes.
Q. Okay. Great. I see this is dated November 2019; correct?
A. Yes, in the bottom left corner.
Q. Does this still, however, accurately reflect your education, experience, and expertise?
A. Yes. There may be a few additional testifying experiences between November of 2019 and today that are not included here, but that would be the only change.
Q. Okay. So, looking at your education on Page 2, I note that you got a B.A. in economics from the University of Barcelona?
[Page 980]
A. Correct.
Q. And you got an M.A. in political economy from Boston University?
A. Yes.
Q. Followed by a Ph.D. in economics from Boston University?
A. Yes.
Q. So, it would be fair to say, then, that your educational background is in economics?
A. Yes.
Q. Okay. And professionally, it looks like you started out--some of this was likely during, maybe, your master's or doctoral program, but you started out teaching in the academic system, first at the University of Barcelona?
A. Yes.
Q. And then at Boston University?
A. Correct.
Q. And then at Skidmore?
A. Correct.
Q. And you were teaching economics at those universities?
[Page 981]
A. Economics. I also did some management classes, and I did some accounting classes also.
Q. Okay. And then after that, you went to Econ One Research where you held several positions until, I understand, you founded Quadrant Economics in 2018; correct?
A. Correct.
Q. And at Econ One and at Quadrant, your role has been that of a consulting economist?
A. I would say as an economist, yes.
Q. Yes. Okay.
So, then it seems fair to conclude, based on this, that you're not a lawyer?
A. Correct. I don't have a legal degree.
Q. Certainly you're not a Panamanian lawyer?
A. Correct.
Q. And you don't hold yourself out as being an expert in international law, do you?
A. Correct.
Q. You also don't hold yourself out as having any particular experience or expertise in Government procurement law or regulations, do you?
[Page 982]
A. You mean formal training? No.
Q. Or experiential training?
A. Well, experience, yes, because a lot of my work involves bidding for contracts with States.
Q. So, that, then, would constitute you having expertise in Government procurement law and regulations?
A. Not law as in having studied the law, but I think you said something like experiential.
Q. Sure.
A. Yes. So, I have had the experience of having to participate in many public tenders.
Q. Fair enough. You've never worked as an accountant; correct?
A. Actually, no, that's not true. One of my various jobs was to be the accountant for a hotel in my hometown.
Q. Okay. I just note that didn't make it to your CV here. Okay.
So, you worked as an accountant for your hotel. Are you a CPA?
A. No, I'm not a CPA.
[Page 983]
Q. Okay. And you did not list--you didn't represent here on your CV that you're an expert in accounting, did you?
A. No, but as I told you, I have taught classes in accounting. Part of my undergraduate degree in Spain was very heavy on accounting, so I do hold myself as having sufficient knowledge and expertise in accounting.
Q. Okay. But the only actual experience as an accountant you've had was in a hotel in Spain?
A. If you want actual full-time, yes. But, for example, now I'm very involved in the accounts of Quadrant Economics and, for example, right now you would think I'm going to relax this weekend and not have to think about anything; well, I have to deal with the closing of the 2019 annual accounts of Quadrant Economics.
Q. Sure. Understood.
(Comments off microphone.)
Q. It would also be fair to say that you're not an engineer; right?
A. Correct, I am not.
[Page 984]
Q. And you've never been employed by a construction company?
A. Correct.
Q. So, you've never, for example, prepared a bid for a construction contract?
A. Correct.
Q. And on the flip side, you've never, on behalf of the owner, evaluated bids to select the winning contractor?
A. As a full-time job, no, but I have evaluated bids submitted by contractors at that same hotel I was talking to you about.
Q. Oh, okay. At the hotel.
When did you work at the hotel?
A. That was during my years of undergraduate, so that was between 1990 and 1994.
Q. Okay. So, I note that, in reviewing this CV, you don't actually claim to have any substantial experience working on construction matters or in the construction sector in your role as a consulting Expert, either?
A. I mean, I'm primarily an economist who does
[Page 985]
valuations, and if--so, there's a specialty within consulting which is construction delays and construction overrides, and so that is not a specialty that I have pursued, but I do have--I have had some cases that involve construction issues.
Q. Okay. So, let's first take a look at the second paragraph on Page 1 of your CV, if we could.
A. Yes.
Q. And if we look at the third sentence, it begins: "His research and consulting activities." It goes on and it describes a variety of industries, and it notes agriculture, chemicals; it notes construction materials, which I'll return to in a minute; electricity generation and distribution, finance, banking, minerals and mining, oil and gas, pharmaceuticals, real estate, semiconductors, telecommunications, and transportation.
I note that not included there is construction.
A. Well, because I would put construction at a different level, because this was talking mostly about industries. For example, some of the cases I have
[Page 986]
participated in in the oil and gas industry involved
construction disputes. So--I don't know if I'm making
sense.
Q. No, no. What you say makes sense, but--so,
let's take a look at how you describe your testimonial
experience. You've listed your testimonial experience
here as well as your consulting experience, Pages 3
through Page 11, and I note that for each of those you
have a line at the bottom that describes the basic
nature, industry, topic of that consulting or
testimonial experience; correct?
A. Yes.
Q. And if we look at that--so, on Page 9, there
is a reference up at the top to this case, Grupo
Cementos de Chihuahua, and in the description you say
"construction materials, cement."
I'm guessing that is, presumably, what was
referenced in your paragraph that we just looked at
when it referenced construction materials?
A. That's one of them. I think I recall there's
another one having to do with construction materials.
Q. Okay. Well, I would note that I--perhaps I
[Page 987]
missed it. I didn't see it here, because when I went
through and looked at this, apart from the Omega Case,
which is here, the only other time that I see
construction mentioned is in regards to the
ATCO Pipelines Case on Page 3.
And if we look there, it describes the
subject matter as construction pipelines, gas, and
electricity; right?
A. Yes. The ATCO Case, that says "construction
pipelines, gas, and electricity."
Q. Okay. But is your representation here that
there are other engagements that you've had that have
involved construction that either are not listed here
or are not described here as involving the
construction industry or construction?
A. Yes. I would say construction issues.
Q. Construction issues?
A. Yes.
Q. And can you elaborate? What do you mean by
that?
A. For example, to give you an example--there's
a case here, for example, the Koch--on Page 8, third
[Page 988]
from the bottom.
Q. Okay.
A. There's a case that says "Koch Minerals,
et al., against Venezuela." That's a case that
involved a fertilizer plant in Venezuela, and a big
issue in that case was why had that plant cost so much
and why it hadn't been built on time. So, part of the
analysis there involved analyzing construction issues.
Q. Okay.
A. So, it was not about the construction
materials, like the other case we were talking about,
but this was a case in which I had to study issues
relating to construction. And there are other cases
like that. If you want, I can go through each one of
them.
Q. But to be clear, in that case, were you
yourself opining on, for example, why it took so long
for the project to be built or why it was over budget?
A. Yes. Umm-hmm.
Q. As an economist?
A. Yes. Umm-hmm.
Q. Okay. Fair enough.
[Page 989]
So, we're going to discuss some aspects of
your First Report in a moment, but I'd like to just
start by discussing the preparation of it, so if you'd
turn to your First Report on Page 7.
So, I note there in Paragraph 4 you list
several instructions you were given by counsel for
Respondent?
A. Yes.
Q. And the first was to analyze and comment on
the economic rationale and the methodology employed by
Compass Lexecon to value Claimants' interest in Omega
Panamá in relation to potential new contracts,
including the specific assumptions Compass Lexecon
makes regarding the DCF analysis it uses to arrive at
such value?
A. Yes.
Q. And the next one was to analyze and comment
on the methodology employed by Compass Lexecon with
respect to the existing contracts; correct?
A. You skipped a few words, but yes.
Q. I'm just summarizing in the interest of time.
A. Yes.
[Page 990]
Q. And then the third--again, just to
summarize--is to comment on the appropriate rate of
interest if any damages were awarded?
A. Correct.
Q. Correct. Okay.
So, obviously, then, to prepare your Report,
you had to analyze the Compass Lexecon Report and
supporting documentation; correct?
A. Yes.
Q. Okay. And with respect specifically to--
A. Among other things.
Q. Yes. Of course. Among other things. But,
at the very least, that.
So, with respect to the second instruction,
you set forth your analysis of the methodology
employed by Compass Lexecon as to the existing
contracts' damages, beginning on Page 50 with
Paragraph 97 in your Report?
A. Yes.
Q. I note there, in that paragraph towards the
bottom of the page, you say that Compass Lexecon was
instructed by counsel for Claimants to rely on the
[Page 991]
McKinnon Report to compute damages relating to the
existing contracts claim; correct?
A. Yes.
Q. And now, that refers to the First Expert
Report of Greg McKinnon; correct?
A. Yes.
Q. Okay. And if you look down, there's a
footnote there, 170, and in that you refer us to
Annex B below for comments relating to McKinnon's
analysis and the documents supporting it?
A. Yes.
Q. We don't have to turn there, but Annex B does
provide comments and observations on the documents
that Mr. McKinnon relies on?
A. Yes.
Q. So, in addition to reviewing Compass Lexecon
and the documents they relied on, you necessarily also
analyzed Mr. McKinnon's Report and the supporting
documentation?
A. Yes.
Q. Okay. And I note that both Mr. McKinnon's
First Report and the First Compass Lexecon Report are
[Page 992]
dated 25 June 2018; is that correct?
A. I don't recall, but--
Q. They are in your binder. We can take a look
at them, if you want.
A. No, I think it sounds about right. I don't
recall the day of the month.
Q. Sure. And do you recall--just roughly,
approximately--when you first received those Reports?
Would it have been around the same time, late June or
early July?
A. Around that time, yes.
Q. Okay. And you reviewed them to prepare your
First Report, which was then submitted on the 7th of
January 2019?
A. Yeah. Now that you say--yeah. I will need
to rephrase, because I do not remember having spent,
like, six months reviewing all of these. So, I'm not
sure if I got everything on that same date or if it
was at a later date.
Q. Okay.
A. Because my recollection is I did not spend,
like, almost seven months straight working on this.
[Page 993]
Q. Okay. Do you have any idea how long you did
spend?
A. I mean, it was several months, but--so,
again, I don't--before, I was very quick to tell you I
received it a few days after it was submitted.
Q. Sure.
A. Now, I don't recall. My recollection is that
we did not spend that much time, like half a year,
working on our First Report.
Q. Understood. Okay. Well, let's--I want to
look now at the Opinions with respect to the existing
Contracts that you formed during that time and
recorded in your First Report.
So, let's go to your First Report and to
Paragraph 97 again. You may still be there.
A. Yes.
Q. Okay. So, this is where you begin addressing
the existing contracts claim. And, as we just
discussed, in valuing Claimants' damages from the
existing contracts claim, Compass Lexecon relies,
effectively as the inputs for their analysis, on the
conclusions from Mr. McKinnon's First Expert Report;
[Page 994]
Correct?
A. In part. They also add their own economic
expertise to then arrive at a quantification of the
damage.
Q. Sure. Certainly. So, they add their own
economic analysis on top of it, but the primary source
of the inputs, the data, the factual background that
they rely on, are the conclusions that Mr. McKinnon
reaches in his First Report?
A. I do not recall exactly, because--so, there
were documents in the record. I don't remember the
extent to which Compass Lexecon looked at the
documents in the record or only took what Mr. McKinnon
said.
Q. Okay. But you do agree that they do rely on
Mr. McKinnon's Report, and they base computations of
damages on his conclusions, along with their economic
analysis?
A. Yes. They do that.
Q. Okay. And Mr. McKinnon--just by way of
background, you would have seen from his Report that
he's an accountant; correct?
[Page 995]
A. Yes.
Q. And that he holds himself out as having
substantial experience specifically with accounting as
to construction projects; correct?
A. I don't recall the exact words that he uses
to describe himself, but it rings familiar.
Q. Okay. Fair enough.
So, Mr. McKinnon in his Report, he analyzes
the existing contracts and, you know, the documents
pertaining to them--pay requests, change orders,
et cetera--and he reaches a number of conclusions, for
example, regarding unpaid balances and expected
earnings; correct?
A. He does have those opinions, yes.
Q. And those opinions regarding, for example,
unpaid balances and expected earnings, those are
specifically part of the inputs that Compass Lexecon
relies upon in ultimately computing their view of the
damages flowing from the existing Contracts?
A. I think that's a fair characterization.
Q. Okay. Now, if we look at this Section 4 of
your Report--it runs on for a few pages here--I note
[Page 996]
that you don't actually challenge any of
Mr. McKinnon's conclusions in this First Report
section here, do you?
A. Well, first, you said it goes for a few
pages. It is actually a brief section. You see it
goes Pages 50, 51, and 52.
Q. Right. So, about 2.5 pages?
A. Yes.
Q. Right.
A. I mean, the main thrust of here, I would
summarize it in Paragraph 97. It follows into
Page 51, and my main point is not that I challenge his
calculations, Mr. McKinnon's calculations, but my
observation was that he uses, or he used in his First
Report, incomplete information on Omega Panamá's
operation, and then that he supplemented that with
certain assumptions.
I'm reading. You see after where it says--
Q. Yes. No problem.
A. And then I say: "I may update my assessment
of the existing contracts claim as more information
regarding Omega Panamá's operations becomes
[Page 997]
available."
Q. Right.
A. So, I did not so much challenge his
calculations as observe that the calculations were
based not so much on hard data, but on assumptions.
Q. Okay. Fair enough. But let's look at what
you do do in these 2.5 pages.
You--what you do there is you offer some
criticisms of the methodology Compass Lexecon applied
to Mr. McKinnon's figures, his conclusions, to compute
the damages that Compass Lexecon says is owed;
correct?
A. Yes.
Q. Okay. So, I'm not going to ask you just yet
to comment on any particular details of any of these
individual criticisms. But just to sort of set the
framework, would it be fair to say that, in sum, you
take issue with three basic aspects of their analysis?
A. Of whose?
(Overlapping speakers.)
Q. Of Compass Lexecon's analysis.
A. It depends how you count them. If you can
[Page 998]
describe to me what the three are, I can agree or
disagree.
Q. Certainly. So, the first--and this is
Section A--is you take issue with Compass Lexecon's
discounting of the value of advance payments; correct?
A. That's correct. I take issue with that.
Q. And then the second--this is Section B on the
next page--you take issue with the particular Discount
Rate that Compass Lexecon applied to expected future
cash flows?
A. Correct.
Q. And then the final, this is in Section C on
the next page, where the section ends, is that you
take issue with the Cost of Equity that they use as an
interest rate to calculate the Present Value of unpaid
progress payments?
A. Not so much, no. That's not what I said.
So, they use the Cost of Equity as an interest rate.
That's my disagreement.
Q. Yes.
A. I think on amounts owed that are not subject
to risk, and there is just a fixed-dollar amount, you
[Page 999]
should not apply the Cost of Equity as an interest
rate.
Q. Right. Yes. And I recall you talking about
that during your Direct Presentation.
So, those are your three basic buckets or
categories of criticisms, and I note that for each of
those, you performed some calculations based on those
criticisms to arrive at an amount by which you say the
damages should be reduced; is that correct?
A. Where do I say that they should be reduced?
Q. So, for example, we can look first at
Paragraph 99.
A. Yes.
Q. At the end, you say: "Correcting this error
alone reduces Compass Lexecon's assessment of damages
relating to the Existing Contracts by [Redacted] to
[Redacted]."
A. Yes.
Q. And if we look at Paragraph 100, at the end
there, you suggest some additional adjustments. In
fact, you say that your adjustments would reduce
Compass Lexecon's calculation by between [Redacted] and
[Page 1000]
[Redacted]; correct?
A. No. I don't recall whether this adjustment
is what we call everything else being constant or
whether it already incorporates the adjustment
discussed in Section A. I need to review.
Yes. Okay. So, in Paragraph 100, there is a
sentence that says "taking into account the correction
to advances"--and that's the one discussed in Section
A. So, yes, that's a cumulative change--
Q. Correct. Yes.
A. --on top of the [Redacted], there would be
an additional, within [Redacted].
Q. Correct. And then if you look at
Paragraph 101, there at the end, you say by
inappropriately applying annual interest rate--
(Interruption.)
Q. Okay. Apologies.
You say that: "By inappropriately applying
annual interest of 11.65 percent to the unpaid
progress billings, Compass Lexecon improperly adds
[Redacted] in interest"?
A. Yes.
[Page 1001]
Q. Okay. And so, if you take those together,
that results in an adjustment downwards of about
[Redacted]; is that correct?
A. That sounds about right.
Q. Yeah. Okay.
A. I don't know the exact number, but it sounds
about right.
Q. Okay. And you're aware that Compass Lexecon
computed the existing contract damages at being
approximately 8.69 million?
A. Sounds about right.
Q. Okay. So, then we would adjust that down,
through your calculations, and it would be reduced to
approximately 7 million, a little over.
A. In the First Report, yes.
Q. Yeah. Okay. But as I think you're
suggesting, by the time of your Second Report, you
actually adopt some additional conclusions with
respect to the existing contracts; correct?
A. Yes.
Q. Okay. So, let's take a look at that. It
begins, I believe, on Page 72 of your Second Report.
[Page 1002]
So, the introduction is on Page 71, but the individual
sections begin on Page 72. And you begin--from
Page 72 to about 76, you start by, again, addressing
the three, sort of, generalized areas or buckets of
criticism that we just discussed that were in your
First Report; correct?
A. You said this is through page--
Q. 72. It looks like that goes through about
the top of Page 76 before you get to the summary.
A. Yeah. The summary and then the summaries on
Page 77, yes.
Q. Yeah. Yes.
And there you are addressing those same three
areas of criticism that we just talked about with
respect to the First Report; is that correct?
A. Yes.
Q. And would it be fair to say that your
opinions on those three issues are consistent with
those expressed in your First Report?
A. Yes.
Q. Okay. So now, though, if we turn to Page 78,
we look at subsection (c) and then this also continues
[Page 1003]
in subsection (d) on Page 79. Here, you've now added
two additional criticisms that you say require
adjustment, further adjustments down to the amount
these damages; correct?
A. Yes. To be clear, one is my own independent
opinion reading the documents. The other one is an
instruction from counsel for Panamá.
Q. Okay. So, one of them, you say, is not based
on an instruction from counsel.
A. No. I would--based on the proper way to
quantify damages, I would say that an adjustment has
to be done.
Q. Okay. So, let's look first with respect to
the first one. And so, if we look at subsection(c),
if I'm looking at Page 167--on 179 here, and beginning
on the second line, you note that you were--"You have
been instructed by counsel for Respondent to consider
the above-mentioned contract addenda as not valid for
inclusion in the calculation of alleged damages in
this Arbitration."
Correct?
A. Yes.
[Page 1004]
Q. So, that's--this is not based on your Expert
Opinion as an economist, this is essentially a factual
or legal instruction that you were given by counsel to
assume?
A. Correct.
Q. Okay.
PRESIDENT SHORE: I think the Transcript says
page. It is Paragraph 167.
MR. HINES: Oh. My apologies. Yes,
Paragraph 167. Thank you, Mr. President.
BY MR. HINES:
Q. And now if we look, then, at Paragraph 172,
which begins on Page 80 and stretches on to Page 81,
you start by saying: "We understand from counsel for
Respondent that Addendum Number 4 was meant to replace
Addendum Number 3."
So, here again, this is a factual assumption
that you've been instructed on from counsel; correct?
A. Yes.
Q. Okay. So, that's the basis, then, for the
conclusion that you reach regarding the further
downward adjustment, is that factual assumption that
[Page 1005]
you've been instructed on?
A. No, it's not. I mean, I wanted to reflect my
understanding that one amendment is supposed to
replace. So, Amendment Number 4 is supposed to
replace Amendment Number 3. But that's not the end of
it because I also reviewed a document. Let me see if
I can find it.
Yeah. It's in Footnote 264. I mention
Document QE-106. And that's a document from very late
in 2014. I think it was December 20-something in
2014, in which it is clear from there that the
Ministry representatives have not made any decision to
give additional work to Omega Panamá. And based on
that, from a valuation perspective, one cannot claim
damages for something that has not been awarded to it.
So, that was my basis for excluding and making that
adjustment.
Q. Okay. So, did you a factual assessment of
this document. Let me ask you, did you have that
document at the time of the First Report?
A. No.
Q. You did not. Okay.
[Page 1006]
So, you reviewed this document, and on the
basis of your expertise, you considered that it
demonstrated that Addendum Number 3 was not intended
to be implemented?
A. No. It is not about that. So, whether
Amendment Number 3 superseded by Amendment Number 4,
and so that's an understanding.
Q. Okay.
A. But what I see from the document--and that is
not just economic expertise. It's a plain reading of
the document. As of December 20-something, 2014, a
decision to give some power line work to Omega Panamá
had not been done, and there's a line in that
document, Exhibit QE-106, that says we have three
options. We have been talking to a company that is
not Omega Panamá. Let's see if they want to do it,
that's Number 1. Number 2, we could give it to Omega
Panamá, and, Number 3, we could open a public tender
process and then see what offers we get.
And that's the words that state what the
document says as of very late 2014. And so, then
neither Compass Lexecon nor I can assume that that
[Page 1007]
would 100 percent sure have gone to Omega Panamá.
There is no document in the record that shows that
Omega Panamá had won the right to do that power line
work.
Q. Okay. So, to be clear, though, your
conclusions here rest on that document and your
assumed fact that there has been no commitment for
that work to go to Omega Panamá?
A. I'm sorry. I missed the end. There has been
no what? No commitment?
Q. There has been no commitment that that power
line work would go to Omega Panamá?
A. That's correct. As of the Valuation Date, no
decision had been made regarding that.
Q. Okay. But so, would it be fair to say that,
if the Tribunal issues factual or legal findings that
are at odds with either your instruction in Section C
or your assessment of the evidence underlying
Assessment D, that your opinions would revert back to
that which is set forth in your First Report?
A. As always, if the Tribunals do not agree with
the Damages Experts' calculations, then the
[Page 1008]
calculations do not stand.
Q. Right. But I'm not so much asking what
happens if the Tribunal disagrees with your
calculations. What I'm specifically asking is, if the
Tribunal finds as to Section C that the instruction
you received from counsel, that on either a factual or
a legal basis they disagree that that's an appropriate
assumption, then this would fall out of your Report;
similarly, with Section D, if they find that your
factual construction of the evidence is incorrect,
this would fall out, and we would essentially be left
with the analysis you set forth your First Report?
A. I do not agree with the word "similar." I
think they are separate. For the adjustment I
proposed in Section C--what's the word?--it is based
purely on instruction, legal instruction. So, I do
not have any Expert Opinion or whatever that should be
included or not--otherwise instructed that it should
be--the adjustment should be made; right?
For Part D, the adjustment in Part D, that is
my own personal opinion. Of course, if the Tribunal
reads Document QE-106 and they do not read it the same
[Page 1009]
way I read it, then the result would be different.
Q. Right. And the result, then, if that
happens, would be that your opinion would then
effectively revert back to that set forth in your
First Report; is that correct?
A. Correct.
Q. Okay. Great. Thank you.
So, I want to shift gears now, and I want to
talk about the future--what has been called the Future
Contracts claim, the valuation of the value of
Claimants' investment apart from the existing
contracts.
Now, I note that in Paragraph 8(i) of your
First Report--we can turn back there. And that is on
Page 8. There, you state that: "With regard to the
Potential New Contracts Claim"--and this is right up
at the top of the paragraph--"the value of Claimants'
interest in Omega Panamá is zero."
Did I read that correctly?
A. Yes.
Q. Okay. And then a few sentences later in that
same paragraph, you go on to opine that--this, I
[Page 1010]
believe, is part of the basis for the statement we
just read--"Omega Panamá had no significant tangible
or intangible assets that add value to the company";
correct?
A. You didn't finish the sentence, but the part
that you read is correct.
Q. Sure. So, we can finish it: "add value to
the company such that a Willing Buyer could be found"?
A. Correct.
Q. Correct. Okay.
And if we turn, then, to your Second Report,
you make essentially the same points in Paragraph 8
also to that Report. And I'm looking at Page 10 here,
Paragraph 8 starts at the bottom.
Are you there?
A. Yes.
Q. Okay. So here, again, you're stating your
opinion on the Potential New Contracts Claim. And you
state that--and this in the first line: "From an
economic perspective, the Potential New Contracts
Claim should be dismissed"; correct?
A. Yes.
[Page 1011]
Q. And you go on to state: "No hypothetical
Willing Buyer would have paid to acquire Omega Panamá
because it did not possess any valuable tangible or
intangible assets."
Correct?
A. Yes.
Q. And then in that same paragraph but over on
the top of the next page where it continues, you state
that: "A fundamental conceptual flaw in Compass
Lexecon's valuation exercise is its conflation of
Omega Panamá with Omega Consortium."
Correct?
A. Yes.
Q. Now, I know this has been a topic of some
discussion today already as well as earlier in this
Hearing, but I want to spend a little bit of time
revisiting this. You read Claimants' Memorial, the
Opening Memorial dated 25 June 2018; correct?
A. Parts of it, not entirely.
Q. Okay. But we do know that you read at least
some substantial parts of it because you've cited in
footnotes throughout your two reports?
[Page 1012]
A. Yes.
Q. So, I'd like to turn to Claimants' Memorial,
to Paragraph 154 on Page 89. Let me know when you're
there, sir.
A. I'm there.
Q. Okay thanks, Dr. Flores.
PRESIDENT SHORE: Hang on. I'm not there.
MR. HINES: Okay. Sorry, Mr. President.
PRESIDENT SHORE: The page again.
MR. HINES: It's Page 89 and it's
Paragraph 154. It begins up towards the top of the
page.
PRESIDENT SHORE: Thank you.
BY MR. HINES:
Q. And I'm actually going to be looking down
towards the bottom of that paragraph. About four
lines from the bottom, it reads: "In the end, the
culmination of these actions destroyed not only Omega
Panamá, but both Claimants as well. A construction
company's goodwill, brand, and bonding ability is
essential to its success. Omega U.S. and Mr. Rivera
had invested their business goodwill into Panamá only
[Page 1013]
to see it ruined by Respondent's unwarranted,
unjustified, and unlawful acts."
Do you see that?
A. I see that.
Q. So, it would be fair to say that this is a
pretty clear statement of Claimants' view of how they
were impacted or damaged by the Measures, and that
that included more than just the loss of Omega Panamá,
but it also included the loss of their business
goodwill that they had invested into Panamá?
A. No. When I read this, to me, I understood
that this was the basis for Claimants' asking for
moral damages, which is something that neither Compass
Lexecon nor I and Quadrant have done. So, I did read
this statement, and I understand that that is
Claimants' position regarding destruction of
Omega U.S. and Mr. Rivera allegedly caused by Panamá,
and I understand that that's the basis for your claim
for moral damages, but that is something that we have
not analyzed from an economic perspective.
Q. Okay. Well, let's look a little bit more at
that. So, let's turn to Page 132, to Paragraph 216.
[Page 1014]
So, here, you can see that this is in a
section discussing the counterfactual but-for
situation; right? And this is under--if you flip back
a page, it is under a general section on "General
Approach to Calculating Damages." And Paragraph 216
begins by quoting Compass Lexecon to say that the
value of Claimants' interest in the Omega Consortium
stems from the value of its eight existing contracts
awarded prior to December 2014 and from its ability to
continue as a growing concern bidding and winning
further public service work contracts from
December 2014 on.
Accordingly, calculating the but-for
situation requires a two-part process.
And if you go over to the next page, the
second part of that process is that Compass Lexecon
applies a Fair Market Value approach to calculating
the value of Potential New Contracts in Panamá and,
thus, of Claimants' investment but for the
Government's unlawful conduct.
Do you see that?
A. You read it correctly.
[Page 1015]
Q. Okay. So, this, again, is telling you that
Claimants' view of the damages from their investments,
specifically these two heads of damages, the existing
contracts and the Fair Market Value of their lost
investment, relates to the value of the Potential New
Contracts that their investment would have obtained in
Panamá but for the Government's conduct; correct?
A. I mean, that is not exactly what this says,
this Paragraph 216.
Q. Okay.
A. So, it says the value of Claimants' interest
in the Omega Consortium has two parts; right? There
are eight existing contracts. Well, yeah, those eight
existing contracts were held by the Omega Consortium.
And then it says ability to keep going forward. And
then that cites to the Compass Lexecon Report. The
Compass Lexecon Report, for the ability to go forward,
it reads very clearly in their First Report, they do
refer to Omega Panamá.
Q. We'll get to that Report in just a moment.
But I do note that they are setting here their
approach to calculating the damages, the
[Page 1016]
counterfactual situation, they are saying that the
value of Claimants' interest in the Omega Consortium
stems not just from existing contracts but from the
Fair Market Value approach to the Potential New
Contracts that would be generated in Panamá. That's
what this paragraph says; right?
A. That's exactly--so, calculating the value of
Potential New Contracts in Panamá.
Q. Right.
A. That's what it says.
Q. Right. Under the topic sentence of the
paragraph, how you value the interest in the Omega
Consortium.
A. I mean, we are going in circles
here--right?--because the paragraph states what it
states.
Q. Okay. Fair enough.
A. I mean, it is the Claimants' Memorial. I
didn't write it, so it states what it states.
Q. Okay. So, let's turn to Compass Lexecon's
First Report then. And let's go, in particular,
first, to Paragraph 6.
[Page 1017]
Now, this section here is just actually
describing some of the information that they've
reviewed and relied on or examined in preparing their
Report. And down towards the bottom of the paragraph,
they state that some of the information that they
reviewed was information on public sector investment
and infrastructure projects during the period 2009 to
2014, as well as information on several tenders of
public sector works in Panamá during the period
2015-2016, which could have been potential sources of
business or targets for the Omega Consortium in the
absence of the Measures; correct?
A. You read it correctly.
Q. Okay. So, here, they are looking at
potential sources of business for the Omega Consortium
in absence of the Measures?
A. That's what they wrote.
Q. Yeah. Okay. So, let's turn to Paragraph 12.
And I note that you cited the first sentence of this
paragraph in your Opening Presentation, the first two
sentences. And I will agree that in the first
sentence it references Omega Panamá. It goes on,
[Page 1018]
though, to say that this valuation--so, this is how
they value it--corresponds to the Omega Consortium's
capacity to generate new contracts based on the
historical performance of the company, as well as on
the observed and expected evolution of public sector
investment in infrastructure in Panamá.
So, here, they are making a pretty clear
statement of how their valuation works. It
corresponds to the Omega Consortium's capacity to
generate new contracts; right?
A. I do not agree that it's pretty clear because
if you read the next sentence, it says: "In
particular, in absence of the Measures, Omega Panamá
would have:" and then it lists what Omega Panamá would
have done. And at the end of the day, if you flip the
page, Table 1 says: "Claimants' losses in Omega
Panamá."
So, at the end of the day, I go by tables.
And what Compass Lexecon did in the First Report is to
look at Claimants' losses in Omega Panamá. So, I took
that and I said, okay, well, let's look at the value
of Omega Panamá. Is Compass Lexecon right or not
[Page 1019]
right?
I thought there was a common understanding,
but you mentioned this morning about what it is that
Compass Lexecon and I were doing.
Q. So, you were here for Respondent's Opening
presentation, weren't you?
A. Yes, yes.
Q. You know that there were four slides whose
heading was "Compass Lexecon did not value Omega
Panamá"; right? That was--four slides of their
presentation made a pretty clear point that what
Compass Lexecon has valued here was not simply Omega
Panamá; correct?
A. Okay. So, I'll change it. I didn't learn it
this morning. I learned it on Monday morning.
Q. Okay. But you've reviewed all of these
reports, and you would agree that when they look at
the potential contracts that they are going to--that
are the source of the valuation, that they are looking
at what would be obtained by the Omega Consortium,
which includes with the goodwill of Omega U.S.
invested there in Panamá?
[Page 1020]
A. Can you point me in the Compass Lexecon
Report where do they talk about "goodwill"?
Q. Sure. Let me rephrase that to say the
"intangible assets."
A. No, but do they talk about goodwill in their
Reports.
Q. I would have to look, sir, and I'd rather
just move on for these purposes. They very well may,
but I don't think it's worth spending our time on
here.
A. Okay.
Q. So, let's look at--finally, just for one last
point because this, I think, gets to your moral
damages point. I'd like to turn to Page 30.
And if you're there--
A. Page what?
Q. Sorry. Page 30. So, here, this is under
their damages valuation methodology, principle of full
compensation. And they note at the beginning that:
"We've been instructed to provide our assessment of
the losses suffered by Claimants due to the Measures
undertaken by the Republic of Panamá, which first
[Page 1021]
interrupted the completion of eight public works
construction projects assigned to the Omega Consortium
and, ultimately, resulted in the indirect
expropriation without compensation of Claimants'
construction services in Panamá restricting their
ability to continue operating their business as a
going concern."
PRESIDENT SHORE: I think you left out one
word--construction services investment.
BY MR. HINES:
Q. Sorry. "Construction services investment."
Thank you, Mr. President.
It goes on to say: "In addition, Counsel
instructed to us assume that the Measures taken
against Omega Panamá and Claimants negatively affected
Omega U.S.' goodwill in Panamá" but then it goes on to
say, "and its reputation abroad, causing Omega U.S. to
lose its ability to secure financing for future
potential projects, as well as its ability to get new
projects in markets other than Panamá."
So, the final sentence--and I think this gets
to the point you were making regarding moral damages
[Page 1022]
says: "As a result of the Measures, Claimants also
suffered a loss for the value of investment
opportunities abroad, but we have been instructed not
to value these."
So, they are saying, as I read this, that
we've been instructed to value the loss of the
investment in Panamá, but we've been instructed not to
value the loss abroad. Would you say that that's an
accurate?
A. I don't know. At this point you should ask
Compass Lexecon what they intended to write here.
Q. Fair enough.
A. Because, I mean, apparently it is so full of
typos, and when they meant one word, they meant the
other. So, I'm not going to speak for what they
intended.
PRESIDENT SHORE: But you can say what you
understood this paragraph to be, if you can.
THE WITNESS: Yes. I mean, to me this means
that certainly that Compass Lexecon does not get into
the issue of moral damages. I understood that
clearly, and neither did we try to measure any moral
[Page 1023]
damages that may have happened.
BY MR. HINES:
Q. Okay. But you would agree that, throughout
the Compass Lexecon Reports they, as you put it,
conflate Omega Panamá and the Omega Consortium in
their valuation; correct?
A. Yeah. When they look at the history, the
fact is that the ten contracts that Omega Panamá won,
it won never alone but always in a consortium with
other companies. On five instances with Omega U.S.,
but in other five instances, with Omega U.S. plus a
third party.
So, if you want to talk about the history,
you are talking about several companies, you're
talking Omega Panamá, Omega U.S., and then several
third parties that also participated in order to
fulfill the requirements of the bidding process.
Q. Right. And just before I move on, I just
want to direct you, finally, to Paragraph 54 on that
same page where it states that: "The value of
Claimants' interest in the Omega Consortium stems from
the value of its eight existing contracts and from its
[Page 1024]
ability to continue as a going concern, bidding and
winning further public service work contracts from
December 2014 onwards."
So, did you not understand that paragraph in
the section on damages meant valuation methodology to
suggest that what they are valuing is the value of the
Omega Consortium, in part, stemming from its ability
to win future public service work?
A. Yeah. This paragraph does mention Omega
Consortium. But my reading of the entire first report
of Compass Lexecon and, especially if you look at the
summary table, the summary table is what you want the
reader to first see. In the Executive Summary, they
refer to Claimants' losses in Omega Panamá, and that's
what I went with.
Q. Okay. I want to just step back here a bit
for a minute. So, the purpose of the Fair Market
Value exercise that you and Compass Lexecon
discuss--right?--is to determine, you know, the full
compensation that would be owed for the losses due to
the Measures if there is liability found. Is that a
fair statement?
[Page 1025]
A. Sorry, could you repeat the statement?
Q. Sure. You and Compass Lexecon both agree
that you need to determine the full Market Value;
correct?
A. Yes.
Q. And the purpose of that full Market Value
exercise, what you are ultimately getting at here, is
what the value of full compensation is that Claimants
would be entitled to for their losses if liability is
found?
A. I mean, I understand full compensation to be
a legal term, so I am not in a position to opine what
full compensation means.
What I know is that the treaties that apply
in this case, they do call for Fair Market Value. But
I have not gone into legal research about what the
standards of compensation are to be. It was common
ground between the Parties, the Fair Market Value as
of a certain date, is what the Damages Experts ought
to calculate and that's what we did, but without
pretending that we know what that implies in the legal
setting.
[Page 1026]
Q. Okay. Fair enough. Let me ask this. If Claimants' view of what their loss is, is that they lost not only Omega Panamá as a stand-alone entity, but the value of what they had invested in Panamá in totality, which in their view would be the ability to work as a going consortium to gain new public contracts. If that's their view, wouldn't you necessarily assume that, if you're going to value what their losses are, you need to look at what the value of that particular damage is?
A. Potentially if that was your position, the Claimants' position, yes, but the fact is that is not what Compass Lexecon did in the end.
Q. Well, I think we're going to have to agree to disagree there.
So, I want to talk a little bit on this topic regarding--let's assume that that was Claimants' theory--right?--that they lost not only Omega Panamá but also the investment of intangible assets from Omega U.S. that allowed them to gain new contracts and to profit in the Panamanian market.
A. Well, if you're asking me to assume, but then
[Page 1027]
you have to identify what are those tangible assets that we are valuing. There is nowhere in the Compass Lexecon Reports where there's an attempt to, first, identify and, second, quantify those intangible assets. So, if you wanted to say let's put a value to that, what would have been the value of those intangible assets in a counterfactual without the Measures, then, sure, we could engage into a conversation to see whether that had been properly quantified. But there's not even an attempt to say these are the intangible assets and this is how much these assets were worth in a counterfactual world.
Q. But we did just look where they note that--particularly how they value the Omega Consortium and its ability to obtain new contracts; right?
A. No. What they valued is Omega Panamá.
Q. Okay. So, let me take you back to something that we just looked at then. So, in Paragraph 12, again, of their Report.
A. First Report.
Q. First Report. Actually, you know, let's look at 54 of their First Report, which is where we just
[Page 1028]
were. And this was the sentence that I read to you.
"The value of Claimants' interest in the Omega Consortium stems from the value of its eight existing contracts awarded prior to December 2014 and from its ability to continue as a going concern bidding and winning further public service work contracts from December 2014 onwards."
Right?
A. Right what? Are you asking me to agree what you read?
Q. Yes.
A. You read Paragraph 54 correctly.
Q. Okay. So, the point that I'm making here is when they are explaining their valuation methodology, they do very clearly explain that what they are valuing is the ability of the Omega Consortium to continue bidding and winning further public service work contracts from December 2014 onwards?
A. But you could replace the word "Omega Panamá" here. So, they say that they have made mistakes in the Report; right? So, I don't know where they stand now. Did they mean that this should be Omega Panamá
[Page 1029]
or Omega Consortium? At the end of the day, it doesn't make a difference because what the numerical exercise they have done is to look at Omega Panamá as a going concern, and that's what their calculations attempt to measure. There is no identification, and I think, honestly, Mr. Lopez Zadicoff seemed to be struggling this morning to answer questions in that regard. He has no way to identify this much is the value of the intangibles contributed by Omega U.S. and this is how much Omega Panamá is worth.
So, there has been no attempt whatsoever by the Claimants' Experts to identify and to assign value to that. So, the only thing we have is a valuation of Omega Panamá.
Q. Well, in fact, what we have is a valuation of Omega Consortium's ability to win further public service contracts; right?
A. That's not what Table 1 in page--that's not what Table 1 in Page 10 of the First Compass Lexecon Report says.
Q. Well, I understand you're looking at the heading of the chart. Can I ask you whether you read
[Page 1030]
the complete Report, not just the headings in the chart and the Executive Summary?
A. Yeah. I read the entire Report, and what I came away with is that Compass Lexecon had attempted to value Omega Panamá.
Q. Even though what they are actually valuing is the stream of contracts that the Omega Consortium would potentially gain in the future?
A. We don't know that because, I mean, first, as I mentioned, half of the Contracts that had been won historically was a different Omega Consortium. It was an Omega Consortium comprised of three companies. So, is that what they are valuing?
Q. You would agree with me that each of those consortiums that involved another company, that company had a 1 percent or less interest; correct?
A. As did Omega U.S.
Q. And that--
A. And Omega U.S., in all the contracts where Omega U.S. bid, in the bidding parameters, it required--it said if you bid as a consortium, you have to put your consortium documents. What is this
[Page 1031]
consortium about? And that goes to your question you asked earlier today. So, for each one of the winning bids, we have what the interests in the consortiums were. The interest of Omega U.S. and each one of the consortiums where it participated was 1 percent. It is Exhibit QE-113.
Q. But you were here for the questioning of your counsel on Mr. Lopez Zadicoff where he focused extensively on the role that, for example, the financials of Omega U.S. played in the Consortium's bids; correct?
A. What's the question? Whether I was in the room?
Q. Yes, and whether--
A. I was in the room.
Q. --whether you recall that emphasis that he placed in his questioning of Mr. Lopez Zadicoff?
A. I do not recall him--we'll have to look at the text, as to probably how extensive he was or not. But what I recall is that--well, that's fine. That's my answer.
Q. Okay. Well, let me ask you this. The track
[Page 1032]
record from which Omega--from which Compass Lexecon builds their Potential Contracts Valuation, that proceeds from the bids made and won by the Omega Consortium; correct?
A. Made by different consortiums. Each different contract had different combinations of partners.
Q. Understood.
A. So, there is not a one Omega Consortium that stayed frozen in time and it never changed. As you know, sometimes Omega Panamá bid on its own, sometimes it bid only Omega Panamá plus Omega U.S., and sometimes Omega Panamá plus Omega U.S. plus a third party. For each bid, depending on the requirement of the bid, they would assemble whoever was needed to qualify for the bidding process.
Q. But you would agree that it always included Omega Panamá and Omega U.S.; correct?
A. Not always. Sometimes Omega Panamá had bid alone.
Q. But that's not the Omega Consortium; right? That's Omega Panamá.
[Page 1033]
My question to you is the Omega Consortium always included Omega Panamá and Omega U.S.; right?
A. At least, yes, and sometimes other Parties.
Q. Okay. And you would also agree that Compass Lexecon did not attempt to value contracts that Omega Panamá would have won on its own; correct?
A. I think what Compass Lexecon tries to measure is how many contracts would have been available to bid.
Q. Bid by whom?
A. By the hypothetical buyer who would have bought the Company would then have been able to participate in bidding process.
Q. Right. But my question is, they are not valuing contracts that they say Omega Panamá would have been bidding on alone without Omega U.S., are they?
A. They don't say anything at all. I mean, because the fact is of the 10 contracts that Omega Panamá got, half were two companies, half were three companies. Compass Lexecon never tells us whether going forward what could be the split. Would all of
[Page 1034]
them be two companies, Omega U.S. plus Omega Panamá, or would it be all three companies? Or four companies? They don't make any determination about what would happen in the future.
Q. So, as you've pointed out, on a subset of the Omega Consortium bids, they brought in individual third parties to supplement expertise.
Do you have any reason sitting here today to doubt that they would have been able to do the same if necessary on contracts in the future?
A. Who is "they"?
Q. The Omega Consortium, Omega U.S. and Omega Panamá.
A. I mean, of course, you could find a third party. But that is precisely my point. My point is any hypothetical buyer would be able to assemble a team of people with the necessary technical, financial, and experience/knowledge to be able to bid for contracts in the PanamaCompra website. That's my point.
Q. Let's look at that point for a second because I note that your assumption is that--well, let's just
[Page 1035]
look at the Report. This is your Second Report, Paragraph 30.
Okay, so if we are there, this is going to be the--it's going to say--it says: "In the case of Omega Panamá, this was achieved through the Omega Consortium through the participation of Omega U.S., a company that put its reputation in industry standing at risk in Panamá. A hypothetical buyer of Omega Panamá would also need to bring these assets to Omega Panamá"; correct?
A. You read it as if I was--as if this is what I said; right? Not that--you read two sentences. One sentence I was quoting Compass Lexecon.
Q. Yes.
A. For the record.
Q. I apologize. You're right. That is fair. The first part was a quote.
The operative part I want to focus on, though, was your statement that "a hypothetical buyer of Omega Panamá would also need to bring these assets to Omega Panamá."
A. Correct.
[Page 1036]
Q. So, the hypothetical buyer that you're assuming for purposes of your valuation is necessarily a buyer that has those things to bring?
A. I mean, yes. Yes. But that's--I mean, it's what I said in my Direct Presentation. If you assume someone is going to get--any hypothetical buyer that is going to get into Panamá, certainly my mother will not go and buy Omega Panamá. It will not. It has to be someone that's a willing hypothetical buyer with reasonable knowledge of the relevant facts with something that has something to do in the construction industry; right? So, that person will have to necessarily--if someone is going to put--
Let's assume that Compass Lexecon valuation is correct and it's worth $40 million. Omega Panamá by itself is worth $40 million. If anyone willing to put $40 million on the table is not going to be my mother, I promise you. She doesn't have $40 million and she doesn't even know what to do with that; right? So, then what necessarily follows is going to be that the hypothetical buyer will be someone that will be able to do something with the Company.
[Page 1037]
Q. Okay. Well, so, I would note again that you were in the room when Plaintiffs' counsel took exception to Mr. Lopez Zadicoff's reference to Claimants' as Sellers because he noted that this injected into the hypothetical particular restrictions; right?
I'm sorry, Respondent's' counsel. I've been pointed out I misspoke.
A. I'm sorry. I got lost there. Could you repeat?
Q. Yes. Well, let me put this a different way.
Your assumption, then, is that this hypothetical assumes that the Willing Buyer is a specific narrow type of buyer, the sort of buyer that would have these assets to bring to Omega Panamá; correct?
A. No. I wouldn't agree with qualifying the hypothetical buyer as not already defined. But a hypothetical buyer, there is some conditions; right? A hypothetical buyer has to be someone who has, at its disposal, $40 million, if your valuation is correct. Otherwise, that is--so, you're not taking anywhere in
[Page 1038]
the world, like, out of 7 billion people. No. It has to be someone that at least has whatever you say the valuation is worth. So, you are always going to be restricting the universe of potential hypothetical buyers, but that doesn't mean, as Compass said incorrectly in their presentation, that you are focusing on an individual buyer. That is not what I mean. It is still a hypothetical. It's a hypothetical Willing Buyer. But it has to be someone that is capable of buying the Company.
Q. Correct. But my point is that that is the ability to have $40 million is not the only restriction you place on it. You also place on it the notion that that buyer would be able to bring what you refer to as these assets in this paragraph which refers back to years of experience, et cetera, that, Omega U.S. brought. So, your assumption is that the Willing Buyer that needs to be considered in this hypothetical would have those assets to bring?
A. Yes.
Q. Okay. So, what you exclude, for example, is a private equity company that has no construction
[Page 1039]
experience but is looking to expand its portfolio into the developing market and says, You know what, I'd like to buy Omega Panamá for you and as apart from you--and as a part of that transaction, I would like embedded in there a contract that requires only in Panamá that you, Omega U.S., continue to participate in the consortium and continue to bring your bonding, experience, et cetera, to the table as part of that Consortium.
You exclude that buyer from your hypothetical?
A. No, I do not exclude that Buyer because, you are right, that potentially a private equity firm may be interested in, if there were value, to buy a general contractor outfit in Panamá, but what I tell you is like I've worked--we've done cases with private equity firms. Bonding capacity is not an issue for those firms.
So, they have no need for the bonding capacity that Mr. Rivera could provide through his other Companies. There will be no need for that. So, why would you pay for something that you wouldn't
[Page 1040]
need?
Q. Well, you--
A. Let me finish. The private equity firm also has many investments, and one thing that you always need to provide is two years or three years' worth of financial statements. Financial statements--you don't need to show that you have millions and millions of dollars in assets, but at least you need to show that the Company has been in operation and that it's not bankrupt; right?
So, it's not illiquid or it's not about to go under. Any private equity firm will be able to provide any subsidiary--the financial statements of any subsidiary, and those financial statements could be used to fulfill the requirements of the bidding parameters.
Q. But, Dr. Flores, what they cannot bring, however, is experience--correct?--in the construction industry?
A. Experience in the construction industry you could also--so, I mean, what are you talking about? Is what I was saying in my Presentation is specific
[Page 1041]
knowledge about who is the best cement provider in Panamá. Is that what you're referring to?
Q. No, I'm not. What I'm talking about is, for example, what surety companies look for when issuing these bonds, which is: Is the Consortium, is the person I'm extending this bond to going to be capable of completing the works? And that is a question as to do they have the experience, am I convinced that if I post this bond and they get this Contract, they will actually be able to fulfill it. And my question to you is, isn't that something that the venture capital company cannot itself bring?
A. I don't think that's the case, because private equity firms that would get into this arena, it probably would not be their first rodeo, and they would have other investments in other Latin America companies as well, and then they would say, yes, we can provide a 1 percent partner in a new consortium, and this 1 percent partner has completed six projects in the Dominican Republic or in Colombia or in Perú, and that would serve as the bonding capacity.
Q. So, in your hypothetical, you've now just
[Page 1042]
introduced that the Buyer--okay, it could be a venture capital company, but only if this isn't "their first rodeo," to use your term and they also have all this experience throughout Latin America.
So, you're excluding a venture capital company where this is the first rodeo?
A. No. You are the one who started with the private equity. So, I'm trying to play along with your examples, because--come up with other examples.
But private equity firms usually do not have any problems coming up with bonding capacity. The problem with the bonding capacities, where if you have like a very tiny, small company that is brand new in the market. I have a company that is 18 months old, and I can provide bonds and, actually, many of my clients in South America, they ask for bonding, and I have no problems securing that, and I don't have that much experience. I only have 18 months' worth of experience in my company.
Q. You're aware, sir, that the sort of bonding and surety that is posted on a construction contract involves a different risk and a different type of
[Page 1043]
analysis than the sort of bond that you, Quadrant Economics, would be interested in that you just discussed; right?
A. I mean, but at the end of the day any bonding exercise is an assessment of risks.
Q. Right. And in this case it's an assessment of the risks of whether or not the construction will be completed. So, Quadrant Economics, for example, would not be granted a bond to complete a $12 million construction contract?
A. But what I'm telling you is that Quadrant Economics has very little experience completing testifying engagements; right? And it's still, even though when I go to the bonding companies in the local countries in South America, for example, recently I had to do one in Colombia.
And they said: Okay. How many cases have you done? And I said 60. And they said no, no, no, no. Those were in another company. How many bonds have you done in--under Quadrant Economics--how many cases have you finished under Quadrant Economics? I said six.
[Page 1044]
They said, oh, well, we'll have to look at it. But eventually you talk to the right people and you get it. So, what I'm telling you, bonding capacity by itself is not such an unsurmountable object that no one could surpass.
Q. But my point here is that we're talking, and in 30, your reference back to these assets includes the years of experience and levels of construction projects in the past.
And my question was, simply, if the venture capital company is looking for its first entrance into the construction market in Panamá, they cannot bring years of experience and a level of construction projects in the past, can they?
A. Well, here I'm quoting what Compass Lexecon says it would be necessary. But, again, what's the value of that? What's the value that you assigned to that. There has been no assessment to--no effort to value those independently and see how much that would be worth. Mr. Lopez Zadicoff said that this morning, that he hasn't been able--or he hasn't done the exercise to quantify how much that would be worth.
[Page 1045]
And you can always replace that by simply getting a new 1 percent partner in a new consortium.
Q. Right. But, Dr. Flores, my point here is that the losses--the way that the losses are being valued is based on the ability to generate future contracts. You would agree that, as a part of the bidding contract, bidding process, they are going to look at what experience the Consortium has brought to the table; right?
A. What I'm saying to you is that the hypothetical Buyer could, in short order, constitute a new, different consortium, Omega Panamá plus whatever was needed to supplement Omega Panamá.
Q. Right. But in that hypothetical, you are necessarily not valuing the experience that Omega U.S. brought to the consortium and on Claimants' view of the case lost in Panamá, because you are assuming that no one is going to purchase that. You are carving out of your valuation part of what Claimants say they lost?
A. No, because, I mean, if you are doing a valuation as of 2015, and the contract requires you to
[Page 1046]
provide, for example, five contracts. That's some of the bids here have seen that, that require three, four, five different prior completed engagements, well Omega Panamá, as of that point, had already that. So, it could provide that as evidence of having been in Panamá for a while. Whatever value that had, that I don't think it's very high, but that could be provided.
Q. Well, but in point of fact, part of your opinion--and this is just at the page prior on Page 18--is that in the Contracts that were won, Omega Panamá was not the basis for the experience or financial capacity?
A. Yes. Correct. The Contracts were won in 2011 '12, '13, and--
(Interruption.)
A. Now, we are doing a valuation as of the--sorry. December 2014.
Q. Yes. And if you look at Paragraph 8, this is on Page 10, you fault Compass Lexecon for conducting a DCF analysis of Omega Panamá, and so this is necessarily forward-looking, you would agree; right?
[Page 1047]
This is looking at Future Contracts.
A. I'm sorry. Where are you now?
Q. I'm sorry. Page 10, Paragraph 8, bottom of the page, you fault Compass Lexecon for conducting a DCF analysis of Omega Panamá, even though Omega Panamá does not have a history of operations or profitability as a stand-alone entity; correct?
A. Yes. My assessments--so, I'm trying to move from the framework that Compass Lexecon has followed and my framework. My framework of this has no value; right?--so, all this discussion that we have been doing is under the parameters of Compass Lexecon.
Q. Yes. But what you just said a moment ago, sir, is that moving forward with Future Contracts, we don't have to assume they would need Omega U.S., because by that point Omega Panamá had won Contracts, so they could say, well, we have got, you know, four years and five contracts.
That was what you just said; right?
A. Yes, and that's the basis for in the Presentation, that under that--that scenario, a hypothetical Buyer--let me see if I can find it. It's
[Page 1048]
what I showed in Slide 9 of my Presentation.
Which--yes. Under this parameter, as of 2015, you could say, well, there's going to be some growing pains if I start at it on my own.
Buying Omega Panamá may give me access to kind of a more accelerated ramp-up, because Omega Panamá has, as of 2015, has some local knowledge, some local experience that, if you are a brand-new entrant you may not have. So, I have contemplated that possibility, and that's what reflected in this sliver in the top figure in Slide 9 of my Presentation.
Q. Yes. And to be clear, your position is that any new entrant that a potential buyer might create could have replicated Omega Panamá's experience from 2010 through 2014 and possibly--sorry, and potentially have failed, even better, in its initial start-up years; correct? That's part of the basis for the graph that you just showed us.
A. Yes. And, of course. We could discuss whether the--this shaded area in the figure in Slide 9 would be smaller or thicker or bigger or faster or slower. That I'm open to quantify. But said at the
[Page 1049]
worst, in the most conservative, the most favorable scenario to Claimants would be to assume that a new entrant would do no business whatsoever for five full years, and that's what I use in the sensitivity to the Compass Lexecon model.
Q. But in point of fact, the new entrant A could fail; correct? That happens all the time.
A. And so, could Omega Panamá. In fact, based on the pattern that we show in here, and also even based on Omega U.S., a Buyer sitting there at the end of 2014--let me see if I can find it. Right? A Buyer sitting at the end of 2014 looks at the Slide 15 and says, well, the best year that Omega Panamá ever had, although mere consortium if you want was 2012. Since then they have gone downhill. And if I look at the backing, or the financial support of Omega U.S. in Puerto Rico, they don't even exist in Puerto Rico anymore. They disappeared from Puerto Rico.
Q. Yes. And you're aware that, on Claimants' case, that is because of the Measures; right?
A. I don't know if that's your case. That wouldn't be my assessment of the facts, but that's--
[Page 1050]
Q. Okay. Fair enough. And we're going to get to that in just a moment. But the fact of the matter is that your chart and your assumptions there are really based on no comparative analysis. Your analysis is, essentially, because Omega Panamá did it, anyone else could do it; correct?
A. No. I was answering a different question. The question that you asked me is a new entrant could fail. My answer to you was, like, well--it was not clear that Omega Panamá would succeed, either. This morning, Mr. Lopez Zadicoff said that, well, I haven't taken into account--I, Daniel Flores haven't taken into account that start-ups have a risk because they can fail.
He said 50 percent of companies fail after five years. That's what he said this morning. Well, how old was Omega Panamá as of the Valuation Date? Less than five years old. So, there's a reason that Omega Panamá itself would have failed.
Q. Well, to be clear, sir, you're pointing to these graphs on bids and assuming that that means that they are doing more poorly, but, in fact, they had a
[Page 1051]
backlog of eight Contracts with the Government--correct?--that they were working on.
A. They had a backlog of eight Contracts, but they were not experiencing any new additional contracts. I, as a businessperson, I know I always have to be concerned about--so, right now we are working on 10 cases, but I'm not concerned with 10 cases, I'm concerned about what's the pipeline--the new pipeline. If you don't get a new case every month, it means by the end of year I won't be able to pay the salaries of my people over here.
So, you are always--have to be forward looking. It is very alarming when you don't get any new engagements over 18 months.
Q. Well, but they did in fact; right? They got three new engagements in 2012, one in 2013?
A. No, I'm talking as of the valuation date.
Q. So, 2014--
(Interruption.)
PRESIDENT SHORE: You are beginning to speak over each other. Kind of slow down a bit. Okay?
Thank you both. Thank you.
[Page 1052]
THE WITNESS: So, I was talking as of the valuation date, at the end of 2014, what you know is that in 2013, they bid for--Omega Panamá bid for four cases. Only one won, and that one case was in the amount of $2 million, which represented 3 percent of everything they had bid for. And then in 2014 they don't get anything.
So, you are almost like, as of the end of 2014, you are for two years--let me finish. So, two full years, and the only new business that has come in the door of Omega Panamá is [Redacted]. That would be preoccupying to a potential buyer.
BY MR. HINES:
Q. Okay. And in 2014, you're aware that the Measures started in mid-2014; correct?
A. I understand that's the allegation.
Q. Yes.
A. But that's only half of the year.
Q. And you're also aware that you, yourself, cited and put in the record a law which significantly restricts the ability of the Government of Panamá to enter into new contracts in the six months preceding
[Page 1053]
an election, which would cover the entirety of the first part of 2014; correct?
A. I mean, that--there are some restrictions to avoid, for example, that an outgoing Administration would be just giving contracts to their friends and so on. That is correct. But the country doesn't stop working because there is an election. And contracts have to be awarded for things that have to be awarded.
So, I have seen no evidence that contracting or the issuing of new bids and new requests for public works, that those fell down to zero in the first six months of 2014. No evidence has have--I don't think there is any evidence on the record to that effect.
Q. You haven't but any evidence in of any bids that occurred during that period, did you?
A. Because I wasn't aware until Mr. Lopez Zadicoff said that this morning that he was having a contention about that.
Q. But you put in the law that actually restricts their bidding. That was your exhibit. It was QE-28.
A. Okay. Can we show exactly what it says?
[Page 1054]
Q. Please. Let's go to QE-28.
A. Does it say that no new bidding at all will ever occur in the six months before the election?
Q. It does not.
A. Okay.
Q. It restricts it to 50 percent--
A. That is my recollection.
(Interruption.)
A. That is my recollection.
Q. The Witness's question was does it say that no new bidding at all will never occur in the six months before the election. I said it does not. If we look at it, what it does is you severely curtail the amount of new Contracts that can be expended on the basis of the current amount of annual accessible budget.
And this begins at the beginning, at the bottom of Page 9--or, I'm sorry, at the bottom of Page 8. It is 9 of the PDF, and continues on to the bottom of Page 10 of the PDF, which I think is numbered 9 at the top.
A. So, are we looking at the Spanish or the
[Page 1055]
English?
Q. This is only in the Spanish. You didn't translate this portion when it was put in.
A. I'm sorry. What Article?
Q. It's going to be Article 15.
A. Let me read it to refresh my memory. Okay. May I translate from the Spanish into the English for the record?
Q. Certainly.
A. So, the relevant standards that I think you are meaning is that it says: "It is forbidden to the public entities set forth in this law that during the last six months of a Government they will enter into obligations that do not have the sufficient budget appropriation, and that will not be able to be paid during the same fiscal year."
This does not say anything about you can have no new contracting. This--what it's saying is that, if you bid for new projects, make sure there is a budget allowed to them.
Q. Please continue down to the end of Article, which appears at the top of the next page.
[Page 1056]
A. Well, I'm reading what I think it's--I think; right? Okay. So, it says--I'm going continue. I'm going to read the whole thing.
"In the determination of the availability of cash, it will be taken into account the revenues program and the commitments or the budget commitments for the year through the end of the exercise."
So, what this is saying is like you cannot make the budget through--spend everything for the whole year through midyear and then leave everything to be paid for the new Administration. It is--you need to be responsible.
And then if you turn to Year 1, and it says: "During the last six months of the Government mandate, you cannot use more than 50 percent of the annual budget," which means a year has 12 months, so in the first six months, you can only use half of what's for the whole year. I don't see what dramatic severe restriction is that.
Q. Well, can you name for me one single Contract that the Omega Consortium obtained whose budget lasted for less than a year?
[Page 1057]
A. No, no, but you understand, sir, you can have a budget and you can say this is going to be the amount allocated to 2014, and there's going to be amount allocated to 2015, amount located to 2016.
So, I have lots of contracts with governments and that's how they work. They don't give you--you cannot spend everything in this year. If I had a First Report, a Second Report, a hearing, and post-hearing, there is different budget allocations. And I cannot spend in 2020 the amount for the Second Report, that has to be filed in 2021.
PRESIDENT SHORE: I guess, can I interrupt for a moment, Mr. Hines. But I guess one could look and see what, as a matter of fact actually was bid out in the first six months of 2014, and just to confirm, that's not an exercise that you engaged in, and I understand your explanation. That is not an exercise you thought you needed to engage in. That wasn't an exercise that Mr. Lopez Zadicoff engaged in either.
Is that correct?
THE WITNESS: Yes. You are correct. The only restriction that I see here, at the end of the
[Page 1058]
day, is that in the first half of the year, you can only spend 50 percent. I think you misunderstood probably from the Spanish that this meant to be--that in that year you can only spend half of the normal amount. No. What this means is in the half year you can only spend half of the total.
PRESIDENT SHORE: But, and I understand the theoretical point on what the law says.
THE WITNESS: Yes. Yes.
PRESIDENT SHORE: But in terms of what was actually bid out, that we don't know.
THE WITNESS: We don't know. Yes. If Compass Lexecon was troubled about that point, I think I admit in my First Report the point that they didn't bid anything at all in 2014. If he had replied, I would certainly have gone and dealt with it.
PRESIDENT SHORE: Okay. Thank you very much. Over to you, back to you, Mr. Hines.
BY MR. HINES:
Q. Okay. One last question on that point. You recognize that the question is not just is the Government awarding some contracts in the last six
[Page 1059]
months of the administration; right?
The question is whether they are awarding any contracts, or tendering any contracts that fall within the universe or the scope of contracts that Omega actually bids for; right?
A. I think that would be a relevant question, potentially, yes.
Q. Right. And you have no basis to assume that the reason that they weren't bidding in early 2014 is simply that there were no contracts available. You are simply assuming that it shows a Company in distress?
A. I'm not assuming a Company in distress, but I said this would be worrisome. So, if you see in 2013 the fact is they bid, they wanted to get [Redacted]. in business. They only got [Redacted]. That's a [Redacted].
Q. Okay.
MR. HINES: Mr. President, I'm about to transition to another topic. If we're planning to take a break soon, this is a good time, but I'm happy to start it, if you'd prefer.
[Page 1060]
PRESIDENT SHORE: I lost track of the time, which is not what I'm supposed to do.
I think a 15-minute break now would be fine.
Same instruction, Dr. Flores.
THE WITNESS: Understood.
(Brief recess.)
PRESIDENT SHORE: Back on the record.
Mr. Hines?
MR. HINES: Thank you, Mr. President.
BY MR. HINES:
Q. So, Dr. Flores--
PRESIDENT SHORE: I think we need your microphone, Mr. Hines.
MR. HINES: Thank you, Mr. President.
BY MR. HINES:
Q. Dr. Flores, I'd like to turn to Page 42 of your Second Report. I'm going to transition now to this. What you deal with here is if the Omega brand and the Omega U.S. intangibles were included in the valuation.
So, here on Page 42, in Paragraph 80, you state that: "The foregoing examples help establish
[Page 1061]
that, even if it were methodologically correct to include the value of the Omega brand in the valuation of Omega Panamá, it is not. For the reasons set forth above, Compass Lexecon's argument that the Omega brand is one of the intangible assets that supports a [Redacted] valuation of Omega Panamá is unfounded and contrary to the facts."
Correct? That's what you stated there?
A. Do you mind if I read? Because it talks about foregoing examples.
Q. We're going to get to there.
A. No, but--
Q. Can you just confirm if I read that correctly?
A. You read that correctly.
Q. So, let's turn to the top of this section. We'll go through it methodically.
So, at Paragraph 74--this is on Page 40; this is where this section starts--in the second sentence, you state the basis for the conclusion we just looked at, which is that, in fact, the reputation of the Omega brand was in trouble long before the Measures
[Page 1062]
due to the problems encountered by Omega U.S. in Puerto Rico; correct?
A. Yes.
Q. And you go on to cite several facts that you say evidence that as support.
So, let's look first at Paragraph 75. This is the first example. Here you cite to a 2010 Report regarding purported issues with the Coliseo de Puerto Rico; correct?
A. Yes.
Q. Now, I know you were here in the room on Tuesday when Mr. Rivera provided testimony; right?
A. Yes.
Q. So, you heard Mr. Rivera note that the Report you cite does not mention Omega at all and is not clear as to whether it's discussing design deficiencies or who was responsible for the deficiencies.
Do you recall that testimony?
A. Not off the top of my head.
Q. We can pass out the Transcripts, if you'd like.
[Page 1063]
A. I take your word for it.
Q. Okay. Well, in fact, if you look at that Report, which you cite as QE-0092, you, in fact, can see that Mr. Rivera is entirely correct. It never mentions Omega in it at all, does it?
A. I would have to verify. It is possible it doesn't mention Omega at all. But I think it was well-known, and we all know, that there was an Omega Project.
Q. Sure, but--
A. So, if the document says the construction is substandard, the document may not say who constructed it, but if you have another document that tells you who the constructor was, then you can put two and two together.
Q. Well, to be clear, did you review Omega's scope of work under the Contract for that Project to see whether any of the deficiencies they are describing related to that scope of work?
A. I could not find Omega's scope of work, but I know in this Arbitration, in the Claimants' papers, the Claimants have portrayed themselves as the
[Page 1064]
developers of that Project.
Q. Right. Understood, but, to be clear, my point is: You have no idea whether the deficiencies described there actually fell within Omega's scope of work under the Contract or, for example, may have resulted from engineering diagrams that were contracted to an architectural firm or someone like that?
A. Yes. I have not verified that.
Q. Right. And, to be clear, as we talked about, you're not an engineer, so you really have no personal basis to construe design defects and allocate them to a responsible Contracting Party, do you?
A. No. I have not attempted to do that. My only point is that if you show as your biggest accomplishment a certain project, the Coliseum of Puerto Rico, and then this public document says that that project had defects--wrongly or rightly; I'm not making opinions--but at least that's something that puts into question the Omega brand.
So, if that's kind of like your showcase, one of your biggest projects, and that project has been
[Page 1065]
heavily criticized, that has to tarnish the reputation of the person that announces that project as its own project.
Q. So, to be clear, your construction that it was heavily criticized is based entirely on some assessments in this Report that aren't attributed to Omega Panamá and a couple of articles that relate to the deficiencies in that Report. Is that a fair statement?
A. It's an official Report by the Comptroller of Puerto Rico assessing the quality of that Project.
Q. Okay. Now, in Footnote 115, where you cite to this Report, you provide the date as April 2010; correct?
A. Yes.
Q. I'd like to take you to Exhibit C-348.
So, you can see from the first page here that this is a document from a bid for a MINSA Project, specifically the credentials of the bidder; correct?
A. Yes.
Q. So, let's turn to Page 229. And the page numbers are down at the bottom in brackets there.
[Page 1066]
1 There may be other page numbers scattered throughout
2 it, so I just want to focus on those.
3 Okay. This is a letter from the Puerto Rican
4 Infrastructure Financing Authority; correct?
5 A. It appears to be.
6 Q. Yes. Well, it says that right at the top;
7 right? Next to the logo AFI?
8 A. Yes.
9 Q. Okay. And it's dated December 23, 2010;
10 right?
11 A. Yes.
12 Q. So, that's going to be roughly eight months
13 after the report that we just discussed that you
14 cited; correct?
15 A. Yes.
16 Q. Okay. And the subject of this document, as
17 you can see in the gray line, is a
18 certificate--certification of technical competence;
19 correct?
20 A. Yes.
21 Q. Right. This is something that was presumably
22 solicited so it could be included in these bid
[Page 1067]
1 documents?
2 A. Yes.
3 Q. Right. And you can see that, in providing
4 this certification of competence--and this is in
5 one--they make reference to an Omega U.S. project in
6 Puerto Rico, an athletic stadium; correct?
7 A. Where does it say "Omega U.S."?
8 Q. Well, Omega Panamá didn't build stadiums in
9 Puerto Rico, did it?
10 A. No. But I don't see where it says--
11 Q. No, no, no. I'm just asking you: It's in
12 reference to an athletic stadium in Puerto Rico;
13 right?
14 A. Athletic stadium Mayagüez, yes.
15 Q. Right. So, presumably, that was not an Omega
16 Panamá project; right?
17 A. I would agree with that.
18 Q. Right. Okay. So, they provide this
19 certification, and if you look down at the bottom on
20 the opinion they provide, the opinion that they
21 provide is "excellent"; correct?
22 A. It says "excelente," yes.
[Page 1068]
1 Q. And that's an opinion of La Empresa of the
2 Company, not of the specific Project; right?
3 A. I don't know.
4 Q. Well, isn't that what the words tell you?
5 A. I'm not familiar with this document, so I
6 cannot--
7 Q. Well, no, I'm just asking you what the word
8 says.
9 A. The word says "Opinion about the Company
10 Omega Engineering Inc."
11 Q. Okay. And it says "excellent"?
12 A. But Omega Engineering Inc., that's Omega
13 Panamá; right?
14 Q. Correct. And I recognize that--
15 A. So, I'm--I don't know what this means.
16 Q. Okay. But you'll note in the "to" line that
17 they sent it to Omega Engineering Inc. in Panamá,
18 presumably for purposes of this bid; correct?
19 A. So, I don't know. I mean, they are saying
20 that Omega Engineering Inc., which we know as Omega
21 Panamá, is excellent?
22 Q. No, sir. I would submit to you--this is my
[Page 1069]
1 conclusion--that, given that they are clearly
2 discussing their opinion on a company that built a
3 stadium in Puerto Rico, that this is just an error and
4 they're talking about the Omega entity that actually
5 built the stadium for them?
6 A. I don't know.
7 Q. Okay. But you would agree that they note
8 that it's "excellent"; correct?
9 A. It says "Opinion about Omega Engineering
10 Inc.: Company is excelente."
11 Q. Okay.
12 A. Now, if I were to be reviewing this document,
13 I would ask, "So, what's going on here?" Yes. I
14 don't know. I mean, I cannot opine. I haven't
15 focused on this page before, but I don't know.
16 Q. Okay. But it's fair to say that eight months
17 after the Report you cite as being damaging to their
18 reputation, the Puerto Rican Government is willing to
19 give Omega a certification for purposes of another bid
20 that provides an opinion that the Company is
21 excellent; right?
22 A. I mean, this is what this one page seems to
[Page 1070]
1 be saying.
2 Q. Okay.
3 A. Again, so--if you will remember the other
4 document, it was a much longer document.
5 Again, I guess the State of Puerto Rico is
6 quite big. This is a gentleman which is the
7 Engineering Director sending a letter that at least
8 would appear to have typos. So, I don't know what's
9 the basis for him saying "excellent." I do not know.
10 Q. Okay. But so, it's your position, then, that
11 the Puerto Rican Government would issue a letter for
12 purposes of bid noting that a company is excellent if
13 another part of that Government had concluded that
14 that company had engaged in shoddy and deficient work?
15 A. No. My position is I don't know. I know
16 that the Comptroller document, it's a very large
17 document, and I reviewed it, and it has a lot of
18 detail and so on. And it is signed off by a person.
19 It is signed by the Comptroller itself. So, it has an
20 official bearing.
21 I don't know what's the--I do not know who
22 would have more weight, whether the Director of
[Page 1071]
1 Engineering in a letter with a typo, or whether the
2 full Comptroller Report that was issued on the other
3 hand. I'm not able to compare them.
4 Q. Right. So, let's just note again that the
5 comparison you would be doing, if you were to do it,
6 is between a Report that doesn't make mention of Omega
7 anywhere in it and which we have already established
8 you did no analysis to determine whether any of the
9 criticisms were within Omega's scope of work or
10 attributable to them--so, a report that says nothing
11 on its surface about Omega--and a letter from the
12 Government that says Omega, their Opinion of the
13 Company is excellent.
14 A. Again, I would not characterize it like you,
15 the way you did, because you said this is a letter
16 from the Government. I say this is the letter of one
17 person, on the letterhead of an authority, but I don't
18 know whether--so, he seems to be a Director of
19 Engineering.
20 So, the comptroller Report was issued
21 publicly. I don't know if it has some approval by the
22 legislative chamber of Puerto Rico; I don't recall
[Page 1072]
1 that. But it was probably signed in their presence.
2 So, I don't think this ever went to the press or was
3 publicly done--I don't know what the approval process
4 is. So, I'm not able to give you a legal opinion on
5 which document carries more weight.
6 Q. But do you agree that the Director of
7 Engineering from the AFI did issue this later letter
8 noting that the Company was excellent?
9 A. I did not know that.
10 Q. Okay. Let's move on. Let's turn to--I seem
11 to have lost my place here. Let's turn to Page 41, to
12 the next paragraph, Paragraph 76.
13 Okay. So, here you cite to a lawsuit between
14 Oriental Bank and Omega U.S. in relation to a line of
15 credit.
16 Now, did you do any research on the
17 background of this dispute beyond the one Opinion that
18 you cite to here in your Report?
19 A. No, I did not.
20 Q. Okay. So, you have no idea of the background
21 facts or the relationship between Omega and the bank
22 that gave rise to this dispute, what any of the other
[Page 1073]
1 details preceding this Appellate Opinion may have
2 been, nor what the ultimate resolution of that lawsuit
3 was?
4 A. No. I just, based on the fact that--I mean,
5 when you do an internet search and the first thing you
6 see is that you have problems with the bank that has
7 sued your company, that, to me, is worrisome. I
8 wouldn't want that to happen to Quadrant, and I hope
9 it never happens.
10 Q. Okay. And you were here on Monday when
11 Mr. Rivera explained that the resolution of the issues
12 with this credit line, and with respect to this
13 lawsuit in particular, could be seen in Note H to
14 Omega U.S.' 2014 audited financial statements?
15 Do you recall that testimony?
16 A. Not in particular, but--
17 Q. I can show it to you if you'd like, or you
18 can accept my representation that he did point to
19 Note H.
20 A. I accept your representation.
21 Q. Okay. So, let's take a look at that note.
22 Let's turn to Exhibit C-386.
[Page 1074]
1 Okay. So, looking at the first page, we can
2 see that these are the consolidated financial
3 statements for Omega U.S. for the years ending 28
4 February 2014 and 2013; correct?
5 A. Yes.
6 Q. And you reviewed this document in preparing
7 your Second Report; right?
8 A. Yes.
9 Q. So, turn to Page 21.
10 Okay. So, here is the Note H that Mr. Rivera
11 referred to on Tuesday. And the first paragraph,
12 which you can go ahead and read, describes [Redacted]
13 [Redacted].
14 A. So, I have read first paragraph.
15 Q. Okay. So, then the next paragraph notes
16 that--this is beginning at the top: "[Redacted]
17 [Redacted]
18 [Redacted]."
19 Do you see that?
20 A. Yes.
21 Q. And it goes on to say that: "[Redacted]
22 [Redacted]
[Page 1075]
1 [Redacted]
2 [Redacted],
3 [Redacted]
4 [Redacted]"; right?
5 A. Yes.
6 Q. Now, that [Redacted], that would be the
7 disputed Oriental loan, wouldn't it?
8 A. I'm not sure.
9 Q. Okay. If you want, we can look at the
10 Opinion that you cite, which makes clear what the
11 value of the loan in dispute in that lawsuit is. So,
12 we can take a look at it, if you want, or I can
13 represent to you that it says it's [Redacted]
14 A. Let's look at it, yes.
15 Q. Okay. It's at QE-0095. You'll want to turn
16 to Page 3 in the Spanish.
17 So, on Page 3, four paragraphs down you'll
18 see two paragraphs in a row. It begins: (In Spanish)
19 "2,400,000." And it goes on to describe the amount of
20 the principal and then interest in about 51,900 and
21 subsequent interest in $300 a day.
22 So, that would be an amount of 2.45 million?
[Page 1076]
1 A. Not exactly.
2 Q. But approximately; correct?
3 A. Well, in the financial statements, this
4 refers to a note payable with a balance of [Redacted]
5 even.
6 Q. Okay.
7 A. Here, it is talking about--in this here,
8 meaning Exhibit QE-0095, it is talking about
9 2.4 million, plus an interest at 51,900, plus then
10 $300 daily, plus then 10 percent for costs and
11 expenses of lawyers.
12 Q. Right. But Mr. Rivera--again, if you want to
13 see the testimony, we can point you to it
14 there--indicated that this note pertains to the
15 lawsuit in question.
16 Do you have any reason to doubt his testimony
17 in that regard?
18 A. I don't know. We do not have--we only have
19 his word, so that's what we have.
20 Q. Okay. Well, let's then just, I suppose,
21 assume that the [Redacted] loan addressed here is
22 the same loan as the slightly over 2.45 million in the
[Page 1077]
1 Opinion you cite. It notes that the Company entered
2 into an agreement with the financial institution in
3 which the company paid [Redacted] for the
4 cancellation for the total debt.
5 It then goes on to describe a second loan,
6 and it says as to that that the Company entered into a
7 Refinancing Agreement in which the Company paid
8 1 million, and the remaining balance of [Redacted]
9 was converted into long-term debt; correct?
10 A. Yes.
11 Q. Okay. And the date of these financial
12 statements--I will have to look at Page 4 for
13 these--the date of them is July 10, 2014; right?
14 A. Yes.
15 Q. Okay. So, presumably, the resolution of
16 these issues with the credit lines and the debt
17 happened sometime between year-end 28 February and the
18 date of this document, July 10; correct?
19 MR. RYAN: Mr. President, I'm going to
20 object, because I think we've gotten very far off from
21 what this note actually refers to. We have a
22 discrepancy between the amount that is referenced in
[Page 1078]
1 the lawsuit as the 2.45 million, a precise number
2 here, and then an amount that is above [Redacted],
3 as Dr. Flores pointed out.
4 I would also note that in this second
5 paragraph--well--
6 PRESIDENT SHORE: I've got the objection.
7 I'm going to let it continue, because Dr. Flores is
8 capable of doing exactly what you're doing, Mr. Ryan,
9 and looking at the document, which is one of his
10 exhibits, in any event.
11 I would say I think we have the point,
12 Mr. Hines. The critical point may be, for branding
13 purposes, what information is publicly available and
14 what people would publicly look at and be able to
15 research, and that might be something that you would
16 want to put to Dr. Flores--but you don't have to--in
17 order to get at his branding point.
18 But if you're going there, fine, and if
19 you're not, fine. But I would say--I think we have
20 the point on going through these documents.
21 MR. HINES: Absolutely. And I'm moving on
22 from there, because what I'm actually focusing on is
[Page 1079]
1 the relevant reputation here, which is the one that
2 factors into bidding, which is the reputation in front
3 of those evaluating the bids.
4 PRESIDENT SHORE: All right.
5 BY MR. HINES:
6 Q. So, I'd like you to look at Exhibit C-278.
7 Okay. If you look up at the top, you can see
8 the logo here. You can see that this is a document
9 from the ASSA Insurance Company; correct?
10 A. Yes.
11 Q. If you look down at the bottom above the
12 signature lines, you can see its dated May 5, 2014;
13 correct?
14 It says, "Signed as of today, May 15, 2014"?
15 A. Yes.
16 Q. If we look back up at the top, we can see
17 that this pertains to--and this is next to the word
18 "Contractor"--Omega Engineering Inc., Omega Panamá,
19 and Omega Engineering LLC--Omega U.S., in the parlance
20 of this Arbitration.
21 Now, this is an extension of the Performance
22 Bond issued by ASSA in connection with the City of
[Page 1080]
1 Colón contract; correct?
2 A. The public market in Colón?
3 Q. Correct.
4 A. Yes.
5 Q. And what this is is an extension of the bond
6 that had been issued by ASSA in connection with that
7 contract; right?
8 A. Can I read it? I don't recall having seen
9 this document before, so I would like to read it.
10 Q. Please. Absolutely.
11 A. Yes, I have read the document.
12 Q. Okay. So, you would agree, then, that this
13 is an extension of the bond issued by ASSA in
14 connection with the City of Colón Contract; correct?
15 A. It seems to be for an extension of 30 days.
16 It says "an additional term of 30 days."
17 Q. "After termination thereof." That would be
18 the termination of the Contract, but if you look up
19 above where there's the performance bond and term, it
20 says 1,170 days as of the date specified in the
21 following cases.
22 A. Okay. So, you're saying that this is an
[Page 1081]
1 extension?
2 Q. That's really my basic point. It's an
3 extension of the--
4 (Overlapping speakers.)
5 Q. My point is that you can tell from the top
6 that this is a term extension endorsement; right?
7 And it says, in the first paragraph, that
8 it's hereby understood and agreed--and it goes through
9 the bond and what it's for--that they have their term
10 extended; correct?
11 So, my simple question was: This is an
12 extension of the bond that was issued to Omega Panamá
13 and Omega U.S. in connection with the City of Colón
14 Contract?
15 A. Honestly, I haven't seen this document
16 before, so I'm reading it along with you. I don't
17 know.
18 Q. Okay. So, those words, you can't conclude
19 anything from them?
20 A. No, I'm just saying I haven't studied this
21 document before. So, I know it says in English "term
22 extension endorsement," but I don't have the context.
[Page 1082]
1 I don't know what was the prior document, that this is
2 an extension for two days or for two months, or under
3 what--so, I don't know anything about this document.
4 That's all I can tell you.
5 Q. Okay. But in any event, as of May 5, 2014,
6 their insurance company is willing to extend the bond
7 that had been issued to them. Is that a fair
8 statement?
9 A. It has some conditions here.
10 Q. Certainly. As I'm sure the original bond
11 did.
12 A. It says, like, this is--I see here it says:
13 "The effective nature of this endorsement is subject
14 to the absence of any reported or known breach to
15 date." And then it continues.
16 I don't have the context to tell you whether
17 this was--what this was about. I don't know.
18 Q. You don't have the context to tell me whether
19 or not this was an extension of the bond?
20 A. It would look like that, but I cannot tell
21 you--are we talking about the one-week extension? Or
22 the one-year extension? I don't have the facts.
[Page 1083]
1 Q. Okay. Well, let me ask you: You're not
2 aware of anything in the record whatsoever that
3 suggests that ASSA or Travelers, Omega's surety
4 providers, raised any issues or concerns with Omega
5 until after the Measures--correct?--when their surety
6 was pulled?
7 A. It's an issue that I have not studied, so I
8 cannot tell you one way or the other.
9 Q. Okay. But earlier, when we were talking, you
10 said that, for purposes of bonding, the important
11 thing is financing; right?
12 You have to be able to show your financial
13 wherewithal, more or less?
14 A. I don't remember if I said that, those exact
15 words. I put them as two separate issues.
16 Q. Okay. Fair enough.
17 But to return to the point: After this
18 lawsuit in 2013, you are not aware of any issues or
19 any evidence suggesting there were any issues or
20 concerns raised by any surety providers of Omega U.S.
21 until 2015, after the Measures had begun?
22 A. I repeat my answer: It is not an issue that
[Page 1084]
1 I have studied, so I cannot tell you either way.
2 Q. Okay. Then, in Paragraph 77, you cite to
3 purported issues with a bid Omega U.S. submitted for
4 the Puerta de Tierra Project; correct?
5 A. Yes.
6 Q. And you cite to a letter from the
7 Infrastructure Financing Authority submitted as QE-96?
8 A. Yes.
9 Q. Let's look at that.
10 A. You said QE?
11 Q. QE-96.
12 This letter is dated July 21, 2014; correct?
13 A. Yes.
14 Q. And if we look at the bottom, we can see the
15 letter was sent by María L. Santiago Rivera, the
16 President of the Auction or Bid Committee?
17 A. I'm sorry. One second.
18 Sorry. What's your question?
19 Q. My question is just: At the bottom, it is
20 signed by Ms. Maria L. Santiago Rivera, President of
21 the Auction Committee, although I'm informed that that
22 may more accurately be translated as "Bid Committee."
[Page 1085]
1 A. Okay.
2 Q. And if we look down Page 1, we can see here
3 that the authority cites to Note H in the financial
4 statements that we looked at a few minutes ago; right?
5 A. I'm not sure. So, the ones we are looking at
6 were the statements issued when? I don't recall.
7 Every statement will have a Note H. I don't
8 know if you are talking about the same year or a
9 different year.
10 Q. July 10, 2014; right?
11 And you can see that she references the
12 content of Note H, which matches what we looked at
13 regarding the balances of the line of credit, and she
14 refers to it as "your most recent financial
15 statements."
16 A. So, that's my question: Which ones are the
17 most recent financial statements--
18 (Overlapping speakers.)
19 Q. They would have been the ones that were
20 issued approximately, at that point, 11 days earlier
21 that we just looked at. The ones for year ending
22 February 28, 2014, that were issued in early
[Page 1086]
1 July 2014, which we just looked at.
2 A. Again, I'm not sure about that, because--
3 MR. RYAN: Perhaps it would be helpful to put
4 the financial statement in front of him again.
5 MR. HINES: Okay. If you need that, you can
6 look at Exhibit C--
7 PRESIDENT SHORE: It is not so much that.
8 Are you saying that you don't know which financial
9 statements were submitted to this particular entity--
10 THE WITNESS: Exactly.
11 PRESIDENT SHORE: --because it might not
12 necessarily have been the most recent in date?
13 THE WITNESS: Yes. Because the fact that--I
14 think it had a seal from an external auditor; right?
15 BY MR. HINES:
16 Q. Yes.
17 A. So, exactly. It has a seal as of July 10,
18 2014. What I don't know is whether a letter sent
19 11 years later, the more recent statements that the
20 person--this Miss Santiago Rivera--would have--would
21 be these that had been issued 10 days before or the
22 ones that had been issued about 365 days before. I do
[Page 1087]
1 not know that.
2 Q. Fair enough.
3 But let's look at the substance of her point,
4 whether it's that Note H or the Note H. Prior to
5 that, we agree that whatever Note H she is referencing
6 pertains to the statement that the lines of credit had
7 been canceled, just like the Note H we looked at;
8 right? So, regardless of whether it was the financial
9 statements we looked at or not, her concern is with
10 respect to a Note H that describes the cancellation of
11 lines of credit?
12 A. Yeah. Do we have the financial statements
13 for from a year earlier so that I can check them?
14 Q. Sure.
15 PRESIDENT SHORE: I'm not sure you need to
16 for the purposes of this question. Let's see. Maybe
17 we don't have to turn it up. Why don't you continue.
18 THE WITNESS: Okay.
19 PRESIDENT SHORE: If you can't answer, then
20 you'll say, Dr. Flores, that you need those Financial
21 Statements.
22 THE WITNESS: Okay.
[Page 1088]
1 BY MR. HINES:
2 Q. Okay. So, my question is simply,
3 irrespective of which Note H and which year she's
4 referencing, we can agree that the issue she's raising
5 is that that [Redacted]
6 [Redacted]; correct?
7 A. Yes.
8 Q. Okay. And, as a result, she then--at the top
9 of the next page, she goes on to say that the
10 documents in Omega's proposal, in those documents, the
11 principal Executive Officer of Omega informs us that
12 you currently maintain lines of credit with the Banco
13 Popular de Puerto Rico and Doral Bank with available
14 balances of [Redacted] and [Redacted] respectively.
15 Do you see that?
16 A. Yes.
17 Q. And she goes to say that: "Given the
18 information presented in Note H of your financial
19 statements, we need this information to be cleared by
20 a certificate from the credit official of the banks
21 where you maintain those lines of credit."?
22 A. Yes.
[Page 1089]
1 Q. Okay. And this, as you point out in your
2 Report, is a letter issued in connection with a bid
3 that Omega U.S. had submitted for the Paseo Puerta de
4 Tierra Project, which you can also see from the bolded
5 language on Page 1; correct?
6 A. Yes.
7 Q. Okay. Now, you don't mention in your Report
8 in that paragraph whether Omega actually did submit
9 the required certifications proving that they had
10 those lines of credits with those balances, do you?
11 A. According to the available information from
12 Puerto Rico, there was no more information on this
13 point.
14 Q. Okay.
15 A. So, this was a publicly available document
16 that I found on the internet.
17 Q. Okay.
18 A. So, there was no follow-up. I assumed that,
19 if a letter would have been replied, it would have
20 been attached to this same letter here.
21 Q. But you are aware that following this letter,
22 Omega actually received the Contract; right? It was
[Page 1090]
1 awarded the Contract for this Project?
2 A. Let me check.
3 Q. We know that because in the next paragraph
4 you claim that they abandoned it at some point later.
5 PRESIDENT SHORE: Yes. In the previous
6 paragraph, you say they obtained it, and in the next
7 paragraph, you say they abandoned it.
8 THE WITNESS: Yes.
9 PRESIDENT SHORE: Okay. Next question,
10 Mr. Hines.
11 BY MR. HINES:
12 Q. Okay. So, the answer is, yes, they obtained
13 this.
14 A. I mean, sorry, I was trying to--
15 Q. Right.
16 A. --find my way around the documents.
17 Yeah, it's true, so the Contract was awarded
18 to Omega Panama, sorry - Omega U.S.
19 Q. So, whatever concerns the Contracting
20 Authority had as of the date of that letter,
21 you--clearly, those concerns were not sufficient for
22 them to deny Omega the Contract; correct?
[Page 1091]
1 A. Apparently not.
2 Q. Yes.
3 Okay. You then go on in Paragraph 78 to say
4 that they abandoned the [Redacted] contract, and you
5 cite--
6 A. One second. I have too many.
7 Q. I'm sorry. Yes.
8 A. What paragraph?
9 Q. Paragraph 78. So, this is the fourth of five
10 paragraphs in which you set forth the bases for your
11 Expert Opinion that the reputation of the Omega
12 brand--
13 PRESIDENT SHORE: Let's just go to
14 Paragraph 78. We know what the context is.
15 Paragraph 78. If you have a question, ask it.
16 MR. HINES: Okay. Yes, Mr. President.
17 BY MR. HINES:
18 Q. So, you cite here, for purposes of this
19 proposition, that it abandoned the Contract, a letter
20 cited in Paragraph 119, QE-0097.
21 A. Yes.
22 Q. Okay. Let's take a look at that.
[Page 1092]
1 You there?
2 A. Yes.
3 Q. Okay. So, this is the article that you cite
4 here, and I note that you don't provide a full
5 translation to English, but if we--let's first look at
6 Page 1 of the Spanish, the date of this there is
7 March 8, 2016; correct?
8 A. Yes.
9 Q. Okay. Now, let's look at--you can look at it
10 in the Spanish. I'm going rely on what's translated
11 in the English on Page 2 here. And here we can see
12 that the Infrastructure Financing Authority is quoted.
13 This is in the second paragraph. Sorry. The Director
14 of AFI is quoted as saying: "The CPA, not us, makes an
15 evaluation and assumes a position and says if the
16 Company has enough liquidity to continue."
17 Right?
18 A. Yes.
19 Q. And then the article goes on to note that:
20 "The CPA, Armando Suárez, was the consultant who
21 evaluated the financial statements of the companies
22 that competed for the Contract," and that Mr. Suárez
[Page 1093]
1 said in his Report: "The proponent (Omega) has
2 adequate liquidity to build any project."
3 Do you see that?
4 A. Yes.
5 Q. Now, I note that the author of the article
6 goes on to criticize that decision below based on his
7 analysis of the financial statements; correct?
8 A. My recollection is, yes.
9 Q. Yeah. So, let me ask you, the author of this
10 article is Joel Cintrón Arbasetti; right?
11 A. Yes.
12 Q. You don't have any idea whether he has got an
13 accounting background?
14 A. No. But, I mean, you don't need much of an
15 accounting background to see whether the P&L reports
16 profits or losses, and I think that's what this
17 journalist was reporting, that the Company had losses.
18 Q. Right. But in point of fact that the CPA
19 specifically hired to look at the most relevant
20 portions of that document for purposes of the bid
21 concluded that what those financial documents showed
22 demonstrated that the proponent Omega had adequate
[Page 1094]
1 liquidity to build any project; correct?
2 A. Yeah. The CPA made their assessment, and it
3 proved to be a wrong assessment.
4 Q. Okay.
5 Okay. And I'd like to look now at some of
6 the stuff you didn't translate here. The first
7 paragraph in Spanish, if you look at--it begins on
8 Page 1 and continues over to Page 2. The end of that
9 first paragraph is describing the criminal allegations
10 against Omega in Panamá; correct? I should say Omega
11 and Mr. Rivera.
12 PRESIDENT SHORE: I'm sorry, could you help
13 me. I got lost in the paragraph. Remind me where.
14 MR. HINES: Sure. I'm sorry, so this part
15 wasn't translated when they submitted it. It is the
16 first paragraph of the article. It starts at the--the
17 portion I'm referencing starts at the bottom of Page 1
18 and continues over to Page 2.
19 PRESIDENT SHORE: I got it. Got it. Okay.
20 Thank you. Sorry.
21 BY MR. HINES:
22 Q. And you can see--my Spanish isn't great, but
[Page 1095]
1 I can tell that they are referencing Mr. Rivera,
2 Omega, the Supreme Court's accusations,
3 Justice Moncada Luna, et cetera.
4 So, you would agree that here this first
5 paragraph at the end is describing the criminal
6 allegations against Omega and Mr. Rivera in Panamá;
7 correct?
8 A. It doesn't say Omega. It says--I mean, I can
9 translate from the Spanish, but it is talking about an
10 accusation against Mr. Rivera personally.
11 Q. Who it describes as the principal and
12 executive of Omega; right?
13 A. Yes. But it doesn't say that the Supreme
14 Court--
15 Q. Well, but then if you go to page--
16 PRESIDENT SHORE: Go ahead and finish,
17 Dr. Flores. It doesn't say--
18 THE WITNESS: So, in the first page, it
19 says--so, it says there, meaning in Panamá, the
20 Supreme Court accuses him, meaning Oscar Rivera, of
21 having a part of a money-laundering scheme by which
22 the ex-judge, President of the Supreme Court of
[Page 1096]
1 Justice of Panamá, Alejandro Moncada Luna, was
2 sentenced to five years in jail. And it said to
3 Omega, there is also an accusation of receiving an
4 advance of [Redacted] to develop a market, a
5 farmer's market that was never built.
6 BY MR. HINES:
7 Q. So, you would agree that that last sentence
8 that you just read said that there is an accusation
9 against Omega; right?
10 A. It seems so, yes.
11 Q. Okay. Yeah. Right.
12 A. Yeah.
13 Q. And if we look down further through this
14 article, there is a picture of Mr. Rivera. But
15 starting on Page 8, you'll see that basically the rest
16 of the article goes on to describe all of these issues
17 in Panamá. This begins on Page 8.
18 A. So, what's the question?
19 Q. I'm just asking, do you agree that the rest
20 of that article goes on to discuss at length the
21 issues being faced at that point in Panamá?
22 A. No, but it started before--it does mention
[Page 1097]
1 things in Panamá, but it also discusses all the
2 problems with the linear part--
3 Q. Which I will come to right now.
4 A. Yes.
5 Q. Okay. So, let's look at the first translated
6 paragraph of this article now. You can look at
7 Spanish equivalent, that's fine, but my Spanish isn't
8 good enough. So, I'm going to rely on the English,
9 and you'll see at the very last--starting midway
10 through the second-to-last line of that paragraph, it
11 says that: "The Contract was signed on November 18,
12 2014, and canceled by AFI on December 1, 2015,
13 allegedly due to lack of liquidity in Omega's
14 accounts."
15 Correct?
16 A. Yes. So, you're reading from the first
17 English translated--
18 Q. Correct. Yes. That's correct.
19 And if we look at Page 3 of the Spanish
20 document--and this is right next to the picture of
21 Mr. Rivera--you can see that it says that: "After
22 Omega was in charge of construction for 12 month, AFI
[Page 1098]
1 sent them a notification to notify them in a formal
2 way that he was incurring serious delays in the
3 execution of the work due to lack of resources and
4 financial capacity and gave him seven days to present
5 a work plan to recover lost days under penalty of
6 canceling the Contract."
7 A. Yes.
8 Q. Okay.
9 A. And then it continues.
10 Q. Yes, it does continue. And if we look down,
11 you--at the very bottom, it said that--it suggests
12 that the Project was delayed by 260 calendar days.
13 A. It doesn't suggest. It states that the
14 Project was delayed by 260 calendar days, and that
15 there were several defects, mostly in the area of the
16 terrace overlooking the sea thus shown in the Annex to
17 the Contract.
18 Q. Fair enough. Fair enough.
19 A. And it continues. So, that was my point,
20 that it doesn't jump to just focus on what had
21 happened or the criminal investigations in Panamá. It
22 goes at great length to say what were the problems in
[Page 1099]
1 the Project in Puerto Rico.
2 Q. I never suggested it did jump. My point is
3 that this article makes very clear that it's written
4 in the context of the measures, and, in fact, if we do
5 the math, 12 months from when they took over the
6 contract--which was what was referenced there when
7 they received that letter--would have been
8 November 18, 2015; correct?
9 A. I'm sorry. I lost the math. You said--
10 Q. Okay. So, we read in this section we just
11 looked at, it starts saying that they received this
12 letter about the delays, et cetera, 12 months after
13 Omega was put in charge of the construction; right?
14 A. Yes.
15 Q. And we know from the paragraph we looked at
16 before that the Contract was signed on November 2014;
17 right?
18 A. Yes.
19 Q. So, that means that this letter was sent
20 sometime in November 2015; correct?
21 A. Yes.
22 Q. And even if we do the math backwards to this
[Page 1100]
1 260 calendar days' delay, that only takes us back to
2 sometime in March 2015; correct?
3 A. Yes, correct.
4 Q. So, my point is that all of this happens
5 after the Valuation Date and after the Measures.
6 A. Okay. If what you are telling me is that
7 because of measures in Panamá, then Omega U.S. entered
8 into Contracts that it could not do and that it was
9 doing in--with several defects--I don't know. You
10 cannot blame that on Panamá.
11 Q. Well, I'll note that--and we looked at some
12 of this verbiage earlier, and you ascribed it to moral
13 damages, that, in fact, Claimants' case is that the
14 Measures in Panamá destroyed Omega U.S.' ability to
15 operate far beyond Panamá.
16 A. But then the responsible thing to do for any
17 contractor in the world would be to say, I'm sorry,
18 AFI, the Puerto Rican authority, I'm in a very bad
19 situation. I'm not able to do the Contract. I
20 respectfully withdraw. To instead keep going and then
21 keep accumulating delays and then keep trying to build
22 it but build in a shoddily way, I don't think that's
[Page 1101]
1 the responsible thing to do.
2 Q. Well, but in point of fact, the article--and
3 I'm looking for it now--describes what happened in
4 the--as characterized by AFI as being an amicable
5 termination, seemingly exactly what you are
6 describing.
7 A. But it is only after a year. And so, the
8 point is that things were built, they were built
9 poorly, and you can see if you turn at the top of
10 Page 4, it says there were problems in the way that
11 the columns were built. They were not made to
12 specification. The length was not what the blueprints
13 indicated. There were problems with the wall, the
14 installation of tubes for the water supply, the
15 waterproofing, and also like some people need to be
16 corrected in intersection with the street.
17 PRESIDENT SHORE: I'm going to stop you
18 there, Dr. Flores.
19 THE WITNESS: Yes.
20 PRESIDENT SHORE: I think we've got the point
21 on this letter. We don't need to hear you gentlemen,
22 as interesting as it may be in other respects, debate
[Page 1102]
1 the contents of this letter.
2 We have the point on dates from your side,
3 Mr. Hines, and we have the point from your side on
4 what this may or may not have been a consequence of,
5 Dr. Flores.
6 MR. HINES: Yes. Thank you, Mr. President.
7 I was actually looking to get back to his Report as
8 you said that.
9 BY MR. HINES:
10 Q. So, I want to go on now to the last paragraph
11 in this section, Paragraph 79. Okay.
12 Do you see that?
13 A. Yes.
14 Q. Okay. So, here, you state that there are
15 currently 54 cases on the Puerto Rican judicial
16 database where Omega U.S. is listed as a defendant;
17 right?
18 A. Yes.
19 Q. And you go on to say the cases against
20 Omega U.S. include several construction firms and
21 contractors and suppliers and the Salvation Army, a
22 client whose project Claimant counts among its list of
[Page 1103]
1 accomplishments; right?
2 A. Yes.
3 Q. Okay. So, you were here on Tuesday when
4 Mr. Rivera explained that in his opinion, quite
5 unfortunately, construction is a very contentious line
6 of work?
7 A. I recall him saying that.
8 Q. And he said that most of these were
9 subcontractors, and most of them got settled or thrown
10 out; correct?
11 A. He said something to that effect.
12 Q. Okay. I note in your Report that you don't
13 explain any analysis that you did to determine, on
14 average, how frequently a construction company of
15 Omega's size and productivity generally gets sued, do
16 you?
17 A. Maybe it's not stated, but to us, in
18 analyzing this, it struck us as rather high,
19 especially because the volume of business of
20 Omega U.S. at that time was not that high. So, it is
21 surprising that it would have this level of
22 litigation. I agree that in big construction
[Page 1104]
1 projects, there sometimes is some litigation. But,
2 for example, when the Panama Canal was widened, there
3 was a big arbitration relating to that. But there's
4 also construction companies that are able to conduct
5 their day-to-day business pretty much with no
6 litigation. Of course, if someone falls and dies at
7 your work site, probably the estate of the deceased
8 will sue you, but that doesn't happen every day.
9 Q. Right. But to be clear here, you present no
10 basis of comparison to determine whether the lawsuits
11 that you are presenting here--which span quite a
12 number of years--would be abnormal in the context of
13 similarly situated construction companies, do you?
14 A. That's true. There is no specific analysis,
15 but to us, we have analyzed other situations, and this
16 seems high to us.
17 Q. And I note that you don't give any
18 explanation in your Report as to what the nature,
19 background, or disposition of any of those cases were?
20 A. No. They are publicly available. You could
21 go into them.
22 Q. Okay.
[Page 1105]
1 A. We didn't want to go into that all that much
2 level of detail.
3 Q. Okay. Let's look at QE-0053, which you
4 submitted. And in the electronic version, if you're
5 looking at it, it's on a page, or a tab, rather,
6 titled "4-Omega U.S. Lawsuits." In the paper version,
7 there's a title on the first page that says
8 "Supporting Figures, Table 4, Lawsuits involving U.S.
9 and Puerto Rico."
10 A. Yes.
11 Q. Okay. So, I would like to look down to the
12 line that you've numbered 43 here.
13 A. Yes.
14 Q. Okay. So, that's the Salvation Army lawsuit
15 that you referenced in the paragraph of your Report we
16 just looked at; right?
17 A. Yes.
18 Q. Okay. And what's the date next to it that it
19 says it was presented?
20 A. The 24th of September 2015.
21 Q. Okay. So, the 24th of September 2015, again,
22 would be after the Measures; correct?
[Page 1106]
A. Yes.
Q. Okay. And I'd like to look at the detailed docket information that you provided, which is in QE--actually, I'm sorry, before we do that, let's just look as a general matter here and note--so, the first date of--the first lawsuit you indicate here dates back to May of 1994; correct?
A. That's correct. The three first lines are from the 1990s.
Q. Okay. And then the last goes to 10th of August 2017; right?
A. Yes.
Q. Okay. So, that's a span of over 20 years; right?
A. Yes. But if you review distribution, most of them happen between the last--latter part of the first decade and the second decade of this century.
Q. Right.
A. If you put between 2005 and 2015, that is most of them.
Q. Okay. And if, in fact, if we look--so, this would, I guess, be--Row 28 is the last one in 2009, so
[Page 1107]
28 of these, more than half of them, occurred before 2010; right?
A. Yes.
Q. And you would agree with me that Omega Panamá--the Omega Consortium, including Omega U.S., won a number of bids in Panamá after that date, notwithstanding the 28 lawsuits?
A. Yes.
Q. And, in fact, Omega U.S. itself, as we know, at least with respect to the 2014 project, continued winning projects into late 2014; correct?
A. I'm sorry. Say again?
Q. Omega U.S. continued to win projects in Puerto Rico, at least as far as November 2014, based on the article that we just looked at; right?
A. I only have--the only evidence I have of Omega U.S. winning a contract outside of Panamá is this one, the linear work, so I wouldn't say projects.
Q. Okay. Fair enough.
A. I think they only one won, which they abandoned.
Q. Okay. And they won that, notwithstanding the
[Page 1108]
fact that at that time--if we're looking at 42--42 of the lawsuits you cited were already on the books in Puerto Rico where they were awarded that contract?
A. Yes, the Project that eventually failed.
Q. Okay. And then if we look down further, we can see, from Line 43 down, a dozen of these are lawsuits that took place after the Measures had occurred; correct?
A. Well, but, again, the fact that the litigation starts after the Measures doesn't mean--of course, this would be obvious--that the underlying event that is being sued pertains to after the Measures. For example, the Salvation Army that you say, yeah, the Salvation Army started the process in September 2015, but there was a project that was completed earlier; right?
So, you can have something built, and then four years after it was handed to you, you realize that the foundation is shaking and that the building is about to collapse, and then you start the lawsuit.
So, the distinction you're making regarding the time of the filing of a lawsuit, I don't understand why you
[Page 1109]
relate that to before or after the alleged Measures by Panamá.
Q. Well, I do that, sir, because you cite the existence of these 54 lawsuits as evidence that the reputation of Omega was in trouble long before the Measures?
A. Yes. My main point is--remember what I said this morning. You are someone who wants to enter into bidding for public contracts in Panamá. Do you go at it alone by yourself, or do you buy Omega Panamá?
And if you are--if you want the reputation of Omega U.S., you say--my point is, when you say all these things together, which may be true or may not be true, they may be settled out of court or not settled out of court. But the fact is, it is a baggage. If you were to acquire intangibles of Omega U.S., you're getting the good and you're getting the bad.
And that's my point. I don't think a hypothetical buyer, seeing all of this evidence would take caution about deciding, yes, it's going to be so good if I can go with it with the brand name and with the reputation of Omega U.S. That's my point.
[Page 1110]
Q. This hypothetical seller, though, would do due diligence; correct? So, it would look into what the nature and disposition of these lawsuits would be?
PRESIDENT SHORE: Hypothetical buyer.
MR. HINES: I'm sorry. Thank you, Mr. President.
PRESIDENT SHORE: It's late in the afternoon.
MR. HINES: It is and you'll be happy to know I'm almost done.
THE WITNESS: The hypothetical buyer would certainly do due diligence, but, again, so if you see all of this--when you deal with third parties, you have to think, every time I deal with someone, I'm going to have explain, yes, you know, my company was sued last year. There was no merit to that, but I had to go fight it in court. Then the bank came and they called my lines of credit. There was no merit to that. I had to redo it. And, yes, in Puerto Rico, I had to abandon the Project, but that's because of this reason.
There is so much baggage that I don't see much economic value to acquiring whatever it is that
[Page 1111]
Omega U.S. were to contribute to Panamá. Start brand new. At the end of the day, most of this--the only thing you need is financial statements, two or three years of financial statements, bonding capacity, and the specific ability that you are required for that particular contract, and that you can put together in the same way that Omega in Panamá started doing that in 2010-2011. That's my main point.
PRESIDENT SHORE: I'm sorry, Mr. Hines, if I may. But your conclusion there, isn't it, Dr. Flores, based on--you can only make that conclusion based on your review of bid documents?
THE WITNESS: Say again?
PRESIDENT SHORE: That your review of the bidding process--
THE WITNESS: Yes.
PRESIDENT SHORE: --to say that all you need is financial statements here.
THE WITNESS: Yes. Of course, yes.
PRESIDENT SHORE: It's your review of the bidding process--
THE WITNESS: The bidding materials are in
[Page 1112]
the record. They are attached to our--
PRESIDENT SHORE: Right.
THE WITNESS: --I don't recall the exhibit numbers. We can give them to you later. And you can see what, and in fact, usually every bidding, at the end of the day, comes to 100 points; right? And the 100 points are all allocated by different categories, and then you have--the category will have--do you have the right personnel? 15 points. Do you have the bonding? 10 points. Financial statements, and so on; right?
So, that is always--and that's--we have those in the record, and you can see what is--what was required and not required. And my point is, the things that Omega U.S. could bring in order to win those bids is not that much.
PRESIDENT SHORE: I understand.
THE WITNESS: Yeah.
PRESIDENT SHORE: I understand that, but--I mean, it does rely on your assessment of how the bidding points are awarded.
THE WITNESS: Yes.
[Page 1113]
PRESIDENT SHORE: And you're saying, essentially, it's a very clear-cut lack of discretion point whereby reputation in the industry or experience in completing a project successfully with few change orders, little delay, wouldn't necessarily matter. But are you confident in making that--in reaching that Opinion--
THE WITNESS: Yes.
PRESIDENT SHORE: --based on your review of the bidding document?
THE WITNESS: Yes. Yes. So, if you look at the eight--the bidding those years, for the eight Contracts that the Omega Panamá won, with Omega U.S. and with the third Parties and so on, you can see that--I mean, they all require--for example--I have one in mind--the airport one, the Tocumen Airport; right?--it said the bidding permit says 15 points for having completed similar airport construction projects. And Omega Panamá provided that and it got 15 points. Right?
But it doesn't like a long history of like, you're the best constructor company, look at my
[Page 1114]
coliseum. For example, having built a coliseum in Puerto Rico, poorly or excellently, does not even appear in the bidding punctuation, the bidding discourse for these contracts that we won. And those are in the record. You can look at them.
PRESIDENT SHORE: Did you speak to anyone, for example, as part of your research who actually does make those Decisions?
THE WITNESS: I met--
PRESIDENT SHORE: In Panamá.
THE WITNESS: Yes. Yes. When I was in Panamá, I met with the people that ran PanamaCompra, because I wanted to understand how this bidding platform works, and what they told me is that there is no--there is no, like, historical record, because otherwise if you want to--if you were to give always--so, let me give you an example.
If you give more points to someone that has bid already three times that person is going to win. And in the next contract they say, well, that person has won four times. So, would tend to create kind of almost like a dependency and transpiring bidding
[Page 1115]
platforms, and that's where--the World Bank recommends that.
You don't want to create systems that would create a--I think it is called "endogamic," that you always have the same people winning, the same people winning, so you want to create mechanisms that would allow for competition. And, of course, you need to know that the person will be able to build the project; right? And that's why you ask, well, can you show me that you or your partners have built three construction projects in the network?
But if you ask, "I want someone who has worked with the Government of Panamá 25 times," that will--there is only going to be one guy that's going to fulfill that requirement, and that always exclude the competition. So, that's why the bidding parameters want to incentivate competition.
PRESIDENT SHORE: No, no. I get the competition point, I guess, but in your Reports, I don't recall seeing you explain this conversation that you had with the--
THE WITNESS: Yes, it's true. I did not. I
[Page 1116]
mean, I think we refer in a paragraph about the whole PanamaCompra works, how the platform works.
PRESIDENT SHORE: Okay, but you appreciate that counsel can't really cross-examine on it if it's not in your Reports.
THE WITNESS: That is correct, yes.
PRESIDENT SHORE: Okay.
ARBITRATOR DOUGLAS: Just to continue on that, it is also assuming that this is a very mechanical exercise and is entirely objective? I mean, surely when the people actually sit around the table and award points, there's a level of subjectivity that creeps in there and household names, construction names, maybe, feature in their considerations as opposed to a complete unknown entity they had never heard before. So, one would have to get inside how these processes actually work.
THE WITNESS: I mean, most of the bidding results--is usually the bidding result is not so-and-so won; right. That's a memo, and I think we have them in the--I mean, I think they are in the record somewhere. I can look for them. That explains
[Page 1117]
the Decision process followed, and it says for these things they were up to 15 points. We gave only 12 points, because A, B, and C. And they explain their reasons why.
For example, sometimes--and we discussed that in the Report extensively that, for example, for the financial capacity, you have to submit it in a certain form, and there was a bidder that didn't use the right form. He provided the financial statements, but without the exact form that was needed. And then he got points discounted.
So, there is some--of course, there is always subjectivity when you award the points, but the rationale for the arriving at the final points has to be disclosed and explained, and we have that as part of these bidding results.
PRESIDENT SHORE: It's like grading, though, a lot of it is post hoc, isn't it?
I mean, you know, you have 50 grades in a class and, yeah, you can always justify how you've given the points, especially when you need to justify it, but that doesn't mean that a lot of subjectivity
[Page 1118]
and discretion wouldn't have gone into the actual award of the points, and you would have expected in the--in an infrastructure context where the Government is on the hook for how the country is going to look, that it will be swayed by certain reputational and factors of experience; is that fair?
THE WITNESS: Yes. It is a very fair point. And that's why in Slide 7, and in my Report, I mention that to the extent that someone in a decision-making power at the Ministry or the municipality or so on, would be concerned about making sure to choosing a brand name that will make--get it done without defects, on time, on budget. Look at the competitors they are talking about: SES, ACCIONA, FCC, Sacyr. All of those are the Spanish companies, Spain, all of this time of--from Spain--
(Overlapping speakers.)
PRESIDENT SHORE: Yeah.
A. But they are big companies. They have been around for decades, and they have landed heavily in Latin America. And if, to the extent that the Government official in Panamá who says, I want--within
[Page 1119]
the budget, I'm going to give a little bit more points to whoever does it, I think it is going to do the best. I think these brand names would carry much more weight than Omega Panamá or Omega U.S.
MR. HINES: So, Dr. Flores--
PRESIDENT SHORE: Back to you, Mr. Hines.
MR. HINES: Thank you, Mr. President.
BY MR. HINES:
Q. Dr. Flores, just to close out this discussion of the lawsuits here, I note that you also don't tell the Tribunal that the majority of the lawsuits that you cite here were either withdrawn, dismissed, desisted or revoked, do you? All you note is that at some point someone filed a lawsuit.
A. Yes.
Q. Okay.
MR. HINES: Okay. No further questions.
PRESIDENT SHORE: Thank you, Mr. Hines.
Mr. Ryan.
MR. RYAN: Mr. President, I have no questions for Dr. Flores, but Dr. Flores was referencing the bid documents being in the record, and just for the
[Page 1120]
record--
PRESIDENT SHORE: Sure.
MR. HINES: --I would note that they are cited at the Second Quadrant Economics Report, Footnote 31.
PRESIDENT SHORE: Hang on, Dr. Flores. I think we have a few more.
ARBITRATOR DOUGLAS: I just have one question about something you weren't asked, actually, about the existing Contracts.
THE WITNESS: Yes.
ARBITRATOR DOUGLAS: And I just--because it's a point that is challenging my comprehension slightly. I didn't say completely. I said slightly, but still. And that is, if I can find the slide on the Compass Lexecon. Right. It is Slide 15, if you have Compass Lexecon's.
THE WITNESS: No, this is--I'm sorry, you said the slide?
ARBITRATOR DOUGLAS: Slide 15.
THE WITNESS: Yes.
[Page 1121]
ARBITRATOR DOUGLAS: And this sets out the differences between you on two levels. I don't want to go into the change orders, because I do think that is more of a legal/factual issue, but the economic issue which is listed here that creates a [Redacted] difference, I heard the explanation provided this morning. And I just wonder if I could have your response to it in terms of why financial costs are considered consistently or inconsistently in this respect?
THE WITNESS: So, the main source of difference, which is about [Redacted], out of this [Redacted].
ARBITRATOR DOUGLAS: Is discounting the money that was paid on account.
THE WITNESS: Exactly.
ARBITRATOR DOUGLAS: Yeah.
THE WITNESS: And that's--it's for you to decide, but from my perspective, and from my colleague, Mr. McCann's perspective, it is pretty clear. This is money that was given to Omega Panamá. And Omega Panamá, of course, the intended use was to use it to build and complete the Projects; right?--but
[Page 1122]
was the money that was--you had it. It was yours.
So, if you had in your checking accounts X million dollars, and the value that--so, I look, I see in the checking account, X million dollars. To me, the value is X million dollars. Compass Lexecon says, no, I have X million dollars in the checking account, but I'm going to assume that I don't have that money. I will be given that money a year or two years from now and I am discounting it from two years from now to the present.
That different treatment creates [Redacted].
ARBITRATOR DOUGLAS: I guess if it was somehow in an escrow and could be released with the permission of--
(Overlapping speakers.)
THE WITNESS: But the point is that it was not.
ARBITRATOR DOUGLAS: I said, if the money was somehow in escrow and its use was restricted by--until consent was given by an agency or something, that might--
[Page 1123]
(Overlapping speakers.)
THE WITNESS: Exactly. But the point is that it was not. It was in the checking account of Omega Panamá.
ARBITRATOR DOUGLAS: What about the remaining [Redacted]?
THE WITNESS: The remaining [Redacted] has to do with the amounts--so, there is about [Redacted] of work--of profit resulting from work to be completed in the future, in the next 2.5 years or so, because the Project was halfway through, right.
And the way it works is it would have a revenue line that would come from payments from the different Municipalities and Ministries, and then Omega would have to pay its costs--workers, cranes, all of that--and then you would have a profit. And then so there would be profit in the future over the next two years or so. We need to discount it back to the Valuation Date.
And then the difference here is simply do you use a Discount Rate of closer to 10 percent as Compass Lexecon says or closer to 20 percent as we say.
[Page 1124]
That's the difference.
ARBITRATOR DOUGLAS: I see.
THE WITNESS: Because, remember, a big point--it is not that money was--that was not money in the bank, right, because it would be money coming, but what if you had to complete the Project and you realize, "Oh, my God"--I don't know, "the foundation--it's rained a lot, the foundation is weak, I need to put 10 tons more cement," and that has extra cost. That--you may have to bear the cost. So, there's business risk there, so that--we think that the proper Discount Rate would be 20 percent. So, that's the second one.
And the third one is for the amounts that were owed outstanding. If you considered those amounts outstanding--there is no dispute about what the outstanding amount is. The issue is how do you bring those from the payment date in which they should have been paid through the date of the Award. We say U.S. Treasury bills and they say, no, Cost of Equity or something like 12 percent.
So, these are the three differences.
[Page 1125]
PRESIDENT SHORE: Counsel, anything arising from the Tribunal questions? Mr. Hines?
MR. HINES: No.
PRESIDENT SHORE: Mr. Ryan?
MR. RYAN: No, sir.
PRESIDENT SHORE: Dr. Flores, thank you very much for your appearance and your testimony today.
THE WITNESS: Thank you.
(Witness steps down.)
PRESIDENT SHORE: So, thank you, Counsel, for getting us in a timely basis to the end of Week 1.
There are a couple of points that the Tribunal wants to raise with you, and then, by all means, take five minutes to confer if there is anything you need to raise with us at this stage.
One point is the timing for your preparation of documents that go public, the redaction issue. One question is when you want to do that. Do you want to do that before Week 2 or do you want to take the more sensible approach and do it after Week 2?
You don't have to tell us now, but you should discuss that with each other on how that would work.
[Page 1126]
MR. WEISBURG: We probably have a shared view.
MS. GORSLINE: I think so, too. Go ahead.
MR. WEISBURG: After Week 2.
MS. GORSLINE: Absolutely.
PRESIDENT SHORE: After Week 2.
(Comments off microphone.)
MR. WEISBURG: I think the Tribunal Chair was suggesting that.
PRESIDENT SHORE: You know, I'm happy I don't have to reach that decision.
The second issue, and Ms. Kettlewell will help me if I get this wrong, but my understanding is that the streaming room is not available. So, there's no delay that would potentially be available in Week 2.
Now, what this means is that, if the matter is to be publicly available, it's got to be publicly available. There is no delay. And, therefore, you would be subject to a lot of the constraints and disruption on material if you're going to have it publicly. We can't have any delay.
[Page 1127]
So, the question is whether you want the hearing--with the possible exception of the United States, which I'm not sure would even want to attend in Week 2. Of course, they are interested in legal arguments solely--whether you want to have anything open to the public on Week 2 or whether, similarly to now, would you make, after you've had a chance to review, you would make the audio or the Transcript, all the documents publicly available. Again, after you've had a chance to review. Because otherwise, without the streaming room, people are here.
SECRETARY KETTLEWELL: Internet.
PRESIDENT SHORE: Internet. Yeah. The people are live. There is no delay I guess is what I want to say.
MS. GORSLINE: I mean, on behalf of Claimants, my sense is that it would be very difficult to conduct an efficient and orderly hearing, given the protected information and the procedures--I suppose I should question how it would work. Would we have to clear the room whenever protected information was about to be raised?
[Page 1128]
SECRETARY KETTLEWELL: No. So, what the President is proposing or what he is explaining is that it would work normally. The session would be closed at the moment that the Parties would address any confidential information. It is not that people are going to be here attending at the Hearing. It will be--the option is to have it streamed online, which would mean that there would not be a possibility of whether confidential information is exposed at some point without closing the session, that we would be able to go back and cut that part, which was basically the purpose of the delay of one hour.
MS. GORSLINE: So, as I understand it, any protected information accidently disclosed would immediately become public? There would be no calling it back?
PRESIDENT SHORE: Correct. Maybe you want to think about that, and then the best thing to do is to get in touch with Ms. Kettlewell about that. Because I think it is only--you want to give that some consideration about if you're going to leave things live on the Internet.
[Page 1129]
MR. WEISBURG: I would just suggest that Claimants should think about it--we both think about it, but they should tell us what their position is--report to us what their position is going to be, and then we think about it for 10 minutes further and then we can report to Ms. Kettlewell.
PRESIDENT SHORE: That's something I wouldn't want to direct Claimants to do.
MR. WEISBURG: Understood.
PRESIDENT SHORE: It's a suggestion that Ms. Gorsline is free to consider or not.
MR. WEISBURG: Sure. Okay.
PRESIDENT SHORE: And, certainly, you can talk to each other, and we can take a short break.
Again, you don't need to decide it today, but it may be best if you are both together to do it.
MR. WEISBURG: Okay.
PRESIDENT SHORE: Okay. Now, we have, again, a very helpful schedule from counsel on what would happen, what will happen in Week 2. We know that there is the issue of, as far as I'm aware, just former President Varela, about fitting him into the
[Page 1130]
schedule in the event that he's appearing in Week 2, and I wonder if you have any further information about this that you can share at this time on his appearance in Week 2.
MR. RYAN: Mr. President, at this time, we continue to expect that President Varela will testify, and as we've talked with Claimants' counsel about, subject to a conversation with him about ordering, we would expect that he would go first, he would be the first Fact Witness called, with Mr. Zarak to follow.
PRESIDENT SHORE: I'm sorry, say the last part again. He would be--
MR. RYAN: --the first Witness to be called on the first day of the second week of the Hearing, with Mr. Zarak to follow immediately after.
PRESIDENT SHORE: I see.
MR. WEISBURG: Can I direct a question to counsel? Perhaps it didn't go to the Tribunal.
Didn't you do an alternative schedule?
MS. GORSLINE: I did. I sent it to you, and I understand that we were all preparing for hearing, but I have not received a response. So, that's why it
[Page 1131]
hasn't gone to the Tribunal.
MR. WEISBURG: I thought we did respond. I have to look. Let me look at it again. I thought it was fine. I mean--
PRESIDENT SHORE: Take a look and come back to us. Again, that needn't be told to us today, but it would be useful to know because--I mean, you've, on both sides, been extremely efficient, and if you are slotting the Witness in then and I see that we have closing--I mean, we have a closing time at 3:15 on Wednesday the 1st, as the Tribunal promised you, we are holding the 2nd in reserve because we appreciate things could change in the interim. But see what you can do on an alternative schedule based on his appearance.
MR. WEISBURG: Yeah, I think we'll look at it. I thought the alternative just added one or two hours to that Wednesday and otherwise was the same.
PRESIDENT SHORE: All right. That would be--okay. We would be interested in knowing that because based on what you did for first week, that one
[Page 1132]
or two hours looks on the low side. And I don't want anyone to have to commit right now on how much they would want to take on cross.
So, that's not something that you should commit to now, I would suggest, and--so, we do have flexibility. We do have that reserve day. But look at the schedule for Week 2.
MS. GORSLINE: If I may, Mr. President.
PRESIDENT SHORE: Yes.
MS. GORSLINE: The revised schedule that Claimants had put together, we had reserved three hours for President Varela.
PRESIDENT SHORE: Right.
MS. GORSLINE: And so, there is three additional hours in the afternoon on the 1st, so what we had proposed is, you know, if we stay a little bit later than we have been staying during this hearing session each night, that would allow us to make up the time and still only sit for the three scheduled days. But I don't know what the Tribunal's preference would be, if it would prefer not to sit slightly later each night and rather to go into the morning of the fourth
[Page 1133]
day.
PRESIDENT SHORE: Let's see the schedule that you both might be comfortable with as an alternative.
We should take a couple of minutes' break to see if you--there are any points you want to raise or anything, you can talk to each other, wish to talk to each other about first, but is there something right now that you wanted to raise? Ms. Gorsline?
MS. GORSLINE: No, Mr. President.
PRESIDENT SHORE: Mr. Weisburg?
MR. WEISBURG: Sir, we think this has gone very well, and we expect the next week to go very well as well in terms of organization.
PRESIDENT SHORE: We are grateful to Counsel and to the Witnesses and, most of all, to the Court Reporters and Interpreters, but let's give you three minutes to see if there is anything while we're all in the room that you wish to raise. Otherwise, we can adjourn for the day and say that we've adjourned for the first week. But, take a couple of minutes to confer with your colleagues.
Back in, let's say, give it eight minutes.
[Page 1134]
(Brief recess.)
PRESIDENT SHORE: Back on the record.
So the Tribunal just wants to confirm that counsel will confer with each other, but we will plan to have April 2--some portion of examination on April 2 so that the first three days of Week 2 do not go into the early evening in any burdensome way. So, we will await word from counsel, both on a revised schedule and a schedule that shows some part of time on April 2.
The Tribunal at this time doesn't have anything more to raise with the Parties.
Ms. Gorsline, for Claimants, anything at this time?
MS. GORSLINE: No, Mr. President.
PRESIDENT SHORE: Mr. Weisburg.
MR. WEISBURG: No, sir. No, we have nothing further, and we just want to let you know how much we appreciate the attention we've gotten from the Tribunal.
MS. GORSLINE: Yes.
PRESIDENT SHORE: Thank you.
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MS. GORSLINE: Claimants would like to reiterate that, sir.
PRESIDENT SHORE: Counsel on both sides, we are very grateful. I know I speak on behalf of the professors, Professor Naón and Professor Douglas, and Ms. Kettlewell, and we look forward to seeing you on the 30th of March, and, of course, we know we'll be in communication before then. Counsel do need to address the issue that we discussed before on open or a closed hearing on the second week, and I understand that counsel have decided, at least to wait past the second week for the redactions in relation to this week's testimony.
With that, unless anyone has anything else, thank you all. For those who live outside D.C., have a safe trip. And the first week in our Final Hearing is concluded. Thank you.
(Whereupon, at 4:55 p.m., the Hearing was concluded until 9:00 a.m. on March 30, 2020.)
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I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson