Onerous contracts

"The Finance secretary insists it is unlikely we would default on our loans."


President Rodrigo Duterte told his Cabinet April 1, to review the contracts of the government—with companies and other countries, including “concession agreements on public utilities and foreign loan contracts.” 

Some quarters have denounced the terms of the Chinese loan for the P12-billion Kaliwa Dam, which will provide backup water supply (600 million liters a day) to Metro Manila when completed, and the Chico River loan agreement.  Specifically, the Department of Justice and the Office of the Solicitor General are to do the review.

“Even if it [the loan] is executed, if it’s in violation of the Constitution, you can rescind and strike it down. We’ll ask the court to rescind it,” Presidential Spokesman Salvador Panelo told a press conference.

It seems to me Duterte’s contract review order is very comprehensive.  It could include not just the Kaliwa Dam and the Chico River loans—both provided by the Chinese, who Duterte said just want to be friends with the Philippines.   It could include contracts of the two water concessionaires—Manila Water and Maynilad Water, whose contracts include sovereign guarantees, unlimited pass-on costs to consumers, and it seems, a ban on their payments of penalties for non-delivery of contracted water to consumers.

Senior Associate Justice Antonio Carpio told the Integrated Bar of the Philippines that in the Chico River loan agreement, China can seize, to satisfy any arbitral award in favor of China, “patrimonial assets and assets dedicated to commercial use” of the Philippine government, in case of default.

Such patrimonial assets include oil-and-gas-rich Reed Bank in the West Philippine Sea. According to Carpio, it will be easy for the Chinese to get hold of them because according to the loan agreement, (1) any arbitration will be held in Beijing; and (2) any court cases will have to be brought in China, because Chinese law will apply. 

“The Chinese loans are onerous,” maintains Inquirer columnist Solita Monsod. The (loans) say specifically that the laws of China will obtain in any disagreement, and we have to go through their courts; their grounds for default are definitely in favor of China; arbitration is to be held in Beijing (Chico River) or Hong Kong (Kaliwa Dam); and the waiver of immunity over patrimonial assets is not mentioned in any other contract.

Japan and Korea loans carry a 40-year tenor (with 10 or 12 years grace), before you pay the principal), at interest rates ranging from 0.09 percent to 0.26 percent per year.

China gives 20 years to pay (with seven years’ grace), at an interest of 2 percent per year.

Finance Secretary Carlos Dominguez III has denounced critics who he says have raised the false spectre of the Philippines defaulting on its concessional loans to China have no faith in their own country.

“Fears of the Philippines defaulting on any of its loans are unfounded, given that the government has never failed to pay its debts even during the worst of times,” the DOF chief insisted.

“The Philippines has never, never defaulted on its loans. The Philippines has not done it even in the worst time and the worst time was right after Marcos,” Dominguez told  reporters.

He recalled that even when the Philippines was cash-strapped, it never defaulted on any of its loans, recalling that the country paid its obligations on the $2.2-billion Bataan Nuclear Power Plant project despite it turning out to be a “white elephant.”

“The Philippines has no history of defaulting on its loans. So why are people saying now that we will default? They have no faith in the Philippines? I don’t know why people are saying ‘There might be a default.’ That means to say those people have no faith in their own country,” Dominguez sneered.

The Finance chief also said there is no collateral involved in the loans that the government has entered into with any country. He invited the public to examine the terms of all the loan accords that the Philippines has signed with its development partners, which are available for viewing at the Department of Finance website,

Meanwhile, lawmakers have dismissed concerns about the Philippines defaulting on its loans and China seizing the country’s public assets. Senate Minority Leader Franklin Drilon points out “default will never happen.” 

Presidential Decree 1177 mandates the automatic appropriations for debt servicing, which means the Philippines will always have to pay its debts.

Earlier, Dominguez assured the public that the Philippines will not fall into a “debt trap” to any country as the government expands its infrastructure investments through concessional loan financing from its development partners in the region.

He also reiterated that in conformity with the Constitution and our laws, none of the pipeline projects funded with official development assistance from countries like Japan and China allow for the appropriation or takeover of domestic assets in the event of failure to pay, which is unlikely.

The government’s borrowing program, Dominguez pointed out, remains “very conservative in the sense that we only borrow to invest in projects that will generate economic gains which are greater than the borrowing cost.”

According to Dominguez, no infrastructure project is funded through ODA without going through a rigorous system of reviews and approvals by the Cabinet and the President, and unless there is certainty that the project is economically viable and highly beneficial for the Filipino people.

Dominguez said the government’s debt is carefully structured to ensure that it does not borrow without raising its own capital for infrastructure projects, while at the same time sourcing a significant portion of financing from the local debt market to minimize exposure to adverse external factors.

He said that as of 2018, the government’s project debt exposure was only 0.66 percent to China and 9 percent to Japan in relation to the total debt. By 2022, when most of the financing for the “Build, Build, Build” program will have been accessed, the country’s project debt to China will account for 4.5 percent, while that of Japan’s will be twice as large at 9.5 percent of the total debt. 

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Topics: Tony Lopez , Onerous contracts , President Rodrigo Duterte , Chinese loan
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