Debt trap?

The contract is aboveboard, the projects are sound, we’re not walking into a debt trap, and we’ve never defaulted on foreign loans so we’re not going to lose Recto (Reed) Bank to Chinese creditors.

In case problems arise that compel the Philippines and China to resort to arbitration, Chinese laws will apply and the venue will be in Beijing (for Kaliwa Dam) and Hong Kong (for Chico River). But whatever the outcome of the arbitration will require a review and approval by Philippine courts before it can be enforced. And the outcome cannot go against provisions of the Philippine Constitution.

Do you feel reassured yet?

That’s what the government is hoping for as it pitches to the public the merits of its loan agreement with China to finance the construction of another source of fresh water for Metro Manila as well as a source of irrigation for farmlands in Northern Luzon.

Undersecretary Bayani Agabin and Assistant Secretary Antonio Lambino of the Department of Finance (DOF) faced The Chiefs the other day on Cignal TV’s One News.

This was a few days after the DOF uploaded on its website the loan agreement with China for the Kaliwa Dam project in the Sierra Madre and the Chico River Pump Irrigation project in Mountain Province.

Their message: Filipinos have no cause for concern over the Chinese loans.

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The factors fueling those concerns, of course, are even more complicated than a financing agreement. The DOF officials are aware of this. While nowhere in the loan agreement is Recto Bank mentioned, they must deal with certain basic questions:

The cost of the Kaliwa Dam project is placed at $248 million. Do we really need to take out a foreign loan for this? Where do our taxes go – especially with TRAIN 1 and TRABAHO?

And if we’re securing a loan, why source it from China? Because of the unique circumstances of bilateral relations, this question cannot be answered simply with “why not?”

Agabin and Lambino knew enough not to ask that question. Instead Lambino explained that the country needs a “very healthy balance” in its loan portfolio for financing government projects – from public coffers, the private sector and foreign sources.

Japan has long been the single largest source of official development assistance for the Philippines. The other major ODA sources are the United States, South Korea, Australia and, as a group, the European Union.

Japan in fact offered to build a weir instead of a dam in the Kaliwa site, with a concessional loan payable in 40 years, at an annual interest rate of 0.08 percent in Japanese yen, compared to the 2 percent in US dollars payable in 20 years under the Chinese loan.

Lambino explained that if you computed the interest payments in terms of US dollars, with projections of foreign exchange fluctuations factored in, over 40 years, the Japanese offer would amount to about 2.7 percent interest over 20 years. Plus China has experience in dam construction in the Philippines, having been involved in Angat Dam.

The X factor here is how anyone can accurately project foreign currency movements over 40 years. But Lambino assured us that there are professionals who do this with pretty reliable results.

How about South Korea, which is funding the new Cebu international container port project at an interest rate of just 1.36 percent in US dollar terms?

Each ODA source has credit thresholds, the DOF officials told us, and they might not cover the construction of dams.

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What about that Japan-proposed weir, which, because of its smaller specs, will cost much less and can be finished faster than a dam?

Even a weir won’t be finished as fast as the waterless residents of Metro Manila’s east sector would wish, the DOF officials stressed.

A weir does not store water like a dam, but merely redirects the water from the river or lake, so there must be a constant flow from the source. The government decided that a water storage facility is better, considering the periodic droughts. A dam can also distribute water in volumes several times greater than a weir, Lambino explained.  

The wait for a dam, of course, will also be longer than for a weir – and perhaps even longer, if it becomes bogged down in another corruption scandal, as we have seen in several big-ticket Chinese-funded projects.

In case a dispute arises over the dam contract and its implementation, the Philippines’ agreement to a “waiver of sovereign immunity” does not mean that the foreign lender can seize the country’s natural resources, the DOF officials said. What it simply means is that the Philippines is allowing the counterparty to bring the case to an arbitration court.

Agabin and Lambino said a similar clause is also in the French loan for the Cebu BRT project signed in 2015 during Noynoy Aquino’s presidency, and in the Chinese loan for Angat in 2010 under Gloria Macapagal-Arroyo.

It’s standard practice for the governing laws of the creditor country to be followed in case of arbitration, the DOF officials said. This is the case in the French loan for the Cebu BRT, Japan’s loan for the North-South Commuter Rail and South Korea’s funding for the Cebu container port.

Once the arbitral court has ruled on a dispute, the ruling will be reviewed for enforcement by a Philippine court. It can be approved only if the Philippine government was duly notified of the proceedings; the arbitral award was not obtained through collusion or fraud, and was not based on a “clear mistake of fact or law; and it is “not contrary to public policy” in the Philippines.

If China wins the arbitration, it can have only up to 60 percent of natural gas taken from Recto Bank, and it ends when it has extracted sufficient amounts as repayment for the loan.

Do you feel reassured?

“In the end, we look at which country has the best terms,” Agabin said.

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PS: Supreme Court Senior Associate Justice Antonio Carpio texted yesterday that the Philippines did default on foreign debt repayments in 1983, “because the Central Bank did not have sufficient foreign exchange to service its foreign debts.”

“Under Article 7.1(6) of the Chico River loan agreement, there is an ‘event of default’ when ‘the borrower stops or suspends repayment to its creditors generally,’ ” Carpio wrote. “So it is not correct to say that the Philippines never defaulted on its debt because the mere suspension of repayment, like declaring a debt moratorium is already an ‘event of default.’”