Illustration by Luciano Sardea Ramirez

Of the multitude of issues raised by opposition candidates and critics of the government during the campaign period for the 2019 midterm elections, a number seem to have struck a raw nerve in the administration—among these, the administration’s close ties with China. Of particular interest has been the apparent favoritism given to Chinese companies in a number of big-ticket infrastructure projects. More importantly, the prospect that the financing for these projects will be sourced from China has become a cause for concern.

In 2017, Sri Lanka formally handed over the strategic port of Hambantota and 15,000 acres of the adjoining land to the China Merchants Ports Holdings (a Chinese company) on a 99-year lease agreement. Faced with a cash shortage, Sri Lanka agreed to the lease as payment for the debt used to finance the construction of the port. Eighty-five percent of the cost had been loaned from the Exim Bank of China. Critics have said that the lease threatens the country’s sovereignty. At the same time, the case of Hambantota has become the illustration of Chinese hardball tacticsin seeking to gain influence and geopolitical positioning globally. In an article posted on June 25, 2018, the New York Times accused China of using “global investment and lending program[s] . . . [as] a debt trap for vulnerable countries around the world, fueling corruption and autocratic behavior in struggling democracies.”

It is this image of a “debt trap” that the political opposition to and critics of the Duterte administration have latched on to as a way of putting the latter on the defensive. With its “Build, Build, Build” program, the Duterte administration’s infrastructure-based development policy fits into the emphasis (but not sole focus) given to infrastructure by the Belt and Road Initiative of China under Xi Jinping. A list of projects approved by the National Economic and Development Authority (NEDA) posted in September 2018 included 15 projects amounting to PhP225.825 trillion that were to be financed through loans from Chinese financial institutions. Of these projects, a number have been approved for implementation into 2019, including the New Centennial Water Source, also known as the Kaliwa Dam Project. This is supposed to include the design and construction of an additional raw water supply source with a capacity of 600 million liters per day through the commissioning of Kaliwa Dam. It will include the construction of intake and other pertinent facilities. In 2019, the NEDA Board approved an increase in the total project cost for the Kaliwa Dam Project from PhP10.857 billion to PhP12.2 billion to cover the addition of taxes and the cost of environmental and social management safeguards. The bidding for the design and construction work for this project was won by the China Energy Engineering Corporation. The loan agreement was signed during the state visit of President Xi Jinping in November 2018.

While the Kaliwa Dam Project constitutes serious financial outlay, it is not really of an amount that could bankrupt the Philippines. To be certain, China is not the largest provider of official development assistance (ODA)—a large part of which comes as loans—to the Philippines. That honor goes to Japan, which accounts for 41.2% of the country’s ODA portfolio as of the end of 2018. The World Bank, the Asian Development Bank, and the United States account for 21.6%, 15.4%, and 5.6%, respectively. South Korea rounds up the top five with 4.6%. The Philippines has dealt with these countries for a long time and knows how to do business with them. On theother hand, there is the sense that while doing business with these five is just that, “doing business,” entering into a business arrangement with China is to become (wittingly or unwittingly) part of its plan to achieve its ambitions of restructuring global order to suit its interests and status as a great power (even a hegemonic power). And the Hambantota Port project is a constant reminder of this scenario.

The question for the Philippines is: What will happen if it is unable to keep up with its payments on all its loans from China?

Of course, Kaliwa Dam is hardly on the scale of Hambantota Port. The latter project cost around USD 1.4 billion. In comparison, the Kaliwa Dam project is slated for a little more than USD 231 million, of which around USD 224 million will be sourced from Chinese loans. What has been raised as a concern is that the projected cost of all the projects that is supposed to be financed by loans from China is around USD 13 billion. The 99-year lease on Hambantota Port was a result of the inability of the Sri Lankan government to restructure its loan payments at a time when it was short on cash. Never mind that this seems hypocritical on the part of China since it had complained about the “unequal treaties” that had been imposed upon it by Western powers at the beginning of its “Century of Humiliation” that had included treaty port arrangements with 99-year leases. It did have to endure the constant reminder of this humiliation until Hongkong was finally reverted to China in 1997. The question for the Philippines is: What will happen if it is unable to keep up with its payments on all its loans to China?

According to Supreme Court Associate Justice Antonio Carpio, the loan agreement signed for the Kaliwa Dam project as well as a second project on the Chico River (worth around USD 62 million; still far from the cost of the Hambantota Port project) contain language that will allow China to demand collateral on the Philippines’ patrimonial assets in the event of a default on its payments. These assets include the gas and oil in the fields in Recto Bank near Palawan—a part of the West Philippine Sea claimed by the Philippines to be part of its Exclusive Economic Zone (and confirmed in the Arbitral Award of 2017). According to Carpio, the loan agreement on the Chico River project “expressly waived any sovereign immunity over all its assets.” And similar language is present in the loan agreement for the Kaliwa Dam project.

While criticizing Carpio, Presidential Spokesperson Salvador Panelo did not deny the scenario described by the former. He only said that this was unlikely to happen because the country continues to maintain a good credit standing. The Department of Finance (DOF) likewise maintained that the doomsday scenario that Carpio pointed to was not likely to happen. In a press briefing held on March 27, 2019 on loan agreements that the country has entered into, it was stressed that there is no collateral in any of the loan agreements signed by the Philippine government. This is most likely true, but what Associate Justice Carpio has stated is that the loan agreements have language that may allow China to demand as collateral access to patrimonial assets. The fact is, the DOF press briefing did not deny the pertinent part of the agreement that Carpio claims opens up this scenario. In its website, the DOF described in a summary of the highlights of the press briefing that, “[a] waiver of immunity is standard across loan agreements the Philippines has signed, whether explicitly stated or implied via an agreement to arbitral proceedings. A waiver of immunity only allows the Philippines’ counterparty in an agreement to take the country to arbitration, in the unlikely event that the Philippines defaults on its loans.”

It has been pointed out that the Philippines already has some gains from these loan agreements as they come with a relatively low interest rate of 2%. It was emphasized by no less than NEDA Director General Ernesto Pernia that this rate is currently below commercial rates of 3-5%. There are additional fees such as a “commitment fee” worth 0.3% per annum and a USD186,260 management fee. The Philippines has 20 years, inclusive of a seven-year grace period, to pay back the loan. Some commentators have pointed out, however, that loans from Japan are assessed interest ratesof only 0.25-0.75%—well below the interest rate given by China, and competitive with the “commitment fee” mentioned. As noted above, though, Japan also accounts for a large share of ODA received by the Philippines, and the prospect of getting more from Japan at this point is probably difficult. Furthermore, Pernia noted that Japan is slow in processing its ODA and it takes some time before a project financed by Japanese ODA can get off the ground.

A lack of denial on what a waiver of immunity means seems to indicate that Associate Justice Carpio’s concern is not without basis. In the event of a default of payment on the part of the Philippines, therefore, China can use this waiver of immunity to access Philippine national assets as “collateral”—something that Presidential Spokesperson Panelo has justified as a “natural” thing for them to do. Before China can, however, seek to take advantage of this waiver of immunity, it will have to submit the case to arbitration. Carpio raised the concern that the Philippines has agreed that any arbitration will be adjudicated by Beijing-based China International Economic and Trade Arbitration Commission—which seems to stack the odds against the Philippines. Philippine officials have responded by saying that arbitral rulings are still subject to the Philippine Constitution, court system, and public policy. In other words, political will on the part of the Philippine political leadership not to sell the Philippines down the drain is still going to play a major part in coming up with any decision.

In the end, the issues raised by Carpio and fears of falling into a debt trap remain a hypothetical scenario—but only as long as the Philippines manages its debt responsibly. If we fail in this, the hypothetical scenario becomes the prospective winter coming from the North. — HERMAN JOSEPH S. KRAFT

*The writer is currently a Taiwan Fellow at the Center for Southeast Asian Studies at National Sun Yat-sen University in Kaohsiung, Taiwan. He is an Associate Professor at the Department of Political Science at the University of the Philippines in Diliman, Quezon City.


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