China projects in Philippines found riddled with secretive conditions

President Rodrigo Duterte and Chinese President Xi Jinping are seen waiving in this undated file photo

AdChoiceTV News — Contracts for three China-funded projects under the Duterte administration’s infrastructure program were found riddled with highly secretive conditions that give Beijing undue advantage in debt settlement.

The Kaliwa Dam Project, Chico River Pump Irrigation Project, and technical assistance for the Philippine National Railway (PNR) South Long Haul Project were among the 100 Chinese contracts worth $36.3 billion analyzed by researchers and found to contain grossly disadvantageous provisions against 24 developing economies.

These “Build, Build, Build” projects were cumulatively worth $493.08 million.

The findings were contained in an 85-page report drawn up by AidData, a research unit at the William & Mary’s Global Research Institute, together with the Kiel Institute for the World Economy, Center for Global Development and the Peterson Institute for International Economics.

While the Philippines overall is minimally leveraged to China — only 0.002% of state debt last year came from Beijing — overall liabilities have increased over the past year due to pandemic costs, and liabilities from already-signed China loans are only adding to the burden.

None of the 3 projects named in the report is completed, hit by construction delays not only emanating from the health crisis, but also opposition from grassroots and those that worried about President Rodrigo Duterte’s cozying up to China. Five years into this however, there are little economic gains to dangle, and the persistent threat of a debt trap— no matter how unlikely— is consistently re-surfacing.

Finance Secretary Carlos Dominguez III, whose agency manages official development assistance, did not respond to request for comment. Former socioeconomic planning chief Ernesto Pernia, under whose term these contracts were signed, also did not respond.

Confidentiality

The report said that all China-funded ventures from 2014, which inevitably included the 3 local projects in 2018 and 2019, contained confidentiality clauses. The terms prohibit the disclosure of contracts to anyone and had been a source of worry In 2019 for many lawmakers who pressured government to divulge contract details. The finance department, in response, managed to win concessions from the Chinese that allowed making public the loans.

Full payment ensured

But problems go beyond confidentiality, according to the latest report. In the $211.2 million Kaliwa Dam project for instance, the Philippines was mandated to funnel “profit accruing from the Project…to repay the principal and interest” in the Chinese loan used to build it. The dam’s construction has dragged due to concerns it would damage the environment and tribal lands.

It appears however that this is a counterpart provision to tighter ones found in other contracts that mandated opening a bank account with sufficient balance for repayment at all times.

On top of these, in the three Philippine projects as well are “cross-default clauses” that trigger full repayment of Chinese loans if and when the Philippines defaults in any foreign debts even from different creditors. For Kaliwa Dam and Chico River Irrigation, the trigger will activate if outsider debts worth at least $25 million get unpaid, while a bigger $100 million was set for PNR South Railway.

This clause ensures that China is guaranteed automatic full payment even when the borrower is supposedly already encountering difficulties paying up other obligations.  “A commercial cross-default clause helps protect creditors from falling behind in the payment queue,” it said.

“They adapt legal and financial engineering tools—some new and others over a century old—to protect their investments and climb the ‘seniority ladder,’ potentially gaining repayment advantage over other creditors,” the report said.

Worse, Chinese loans may not be restructured. They are exempted under the Paris Club, a group of large creditor countries that aim to ease the burden of indebtedness among their borrowers. While China is indeed not a member of the club, it is a G-20 country, and being committed to help poor but eligible borrower countries ease their debt load. This provision runs counter to that obligation.

“Several contracts with Chinese lenders contain novel terms, and many adapt standard commercial terms in ways that can go beyond maximizing commercial advantage,” the report said.

“Some of the debt contracts in our sample could pose a challenge for multilateral cooperation in debt or financial crises, since so many of their terms run directly counter to recent multilateral commitments, long-established practices, and institutional policies,” it said.

Reporting by Albert Rovic Tan

2 comments

  1. I don’t know if my last comment was posted since it looks like it just disappeared, but the findings by the think tank were rebuked by the Department of Finance. Check the dof gov ph website if any reader’s interested

    Liked by 1 person

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