OPINION: This is where your taxes will be going

Jose Galang - Your Business

Posted at Jun 12 2017 04:39 PM

A recent hearing conducted by the Senate economic affairs committee on the investment and official assistance agreements secured by the Philippines from China uncovered some troubling aspects of the Chinese aid scheme.

The committee headed by Senator Sherwin Gatchalian discovered that under the agreements signed in Beijing by Philippine economic officials during President Duterte’s state visit in October of last year, the Export-Import Bank of China, as the principal source of the financing, has been given the privilege of selecting pre-qualified Chinese suppliers or contractors for the projects in the Philippines.

This provision in the Philippines-China agreements effectively “tied the hands of the Philippine government from doing an in-depth ‘due diligence’ check on the corporate history of the handpicked foreign firms,” Gatchalian lamented in a statement he issued on June 4 after the Senate committee hearing.

Reaction to Gatchalian’s revelation has been surprisingly muted, possibly even lost in the din of the siege on Marawi City in Mindanao and the grisly result of the attack on the Resorts World casino in Manila during the past weeks. Gatchalian’s discovery deserves a deeper and urgent scrutiny. 

New taxes

The House of Representatives has hurriedly passed new tax measures—part of a package that also includes cuts in personal income taxes—intended to raise funds precisely to shoulder the local costs of the expected Chinese-assisted projects, mostly big-ticket infrastructure facilities. The potential for an unfair advantage given to Chinese contractors and suppliers could also result in the Filipino taxpayers suffering in the event of poorly implemented projects.

“We look for financing agencies, and when we find one, these financiers are given the free hand to name their chosen contractors and suppliers as part of the trade packages,” Gatchalian noted.

“A number of these [China-favored potential] contractors have been discovered to have bad history, bad records in doing business in our country. Some of them are facing corruption cases or are in trouble with other agencies, some have been barred by other multilateral loan agencies like the Asian Development Bank and the World Bank,” added the senator.

Gatchalian argued for a need to improve the assessment of foreign financing agreements and official development assistance (ODA) to “make sure that these investments are beneficial to Filipinos.” He said newly discovered issues with the much-heralded Chinese ODA would have been prevented with a strict vetting system—which he said he will propose to be built into the law on external financing.

“It is important that we make sure that these [foreign] loans are beneficial to our country, and at the same time, that those contractors who will undertake projects are capable and unquestionable,” Gatchalian said.

The real beneficiaries?

Gatchalian’s worries coincide with concerns raised in other countries about China’s financial assistance seemingly benefiting more Chinese state-owned companies that get project contracts abroad as well as companies in China that provide equipment and materials supplies.

Also, some of the China-financed projects in resource-rich developing countries are tied to securing supplies of key commodities such as oil or minerals that the aid-receiving states produce. 

Based on these reports (by academics and research institutions), a scenario for the Philippines could look like this: China extends large amounts of “tied” loans and related financing to the Philippines that funds collected from the Filipino taxpayers will eventually be paying. Chinese contractors, which could include companies owned by the Chinese government, will be awarded juicy contracts, and agricultural commodities and natural resources produced by Chinese investors in the Philippines could be shipped in large volumes to China (such as recently seen in the base of bananas and pineapples).

Chinese loans are also said to be expensive. In many of the developing countries that receive such financing, such terms as interest rates are not revealed. These loans are extended to governments, which also are suspected to eventually face situations where they agree to certain political commitments.

Cambodia, for instance, has been able to secure large amounts of loans and ODA because aid-giving multilateral institutions frown upon the Southeast Asian nation’s record on human rights and environmental protection. In more recent policy positions taken by the ASEAN, Cambodia has succeeded in blocking a common regional position on issues that are not favorable to China, particularly the South China Sea dispute. When China started building dams on the Upper Mekong River that now threaten Cambodia’s own water systems, Cambodia opted to only keep its mouth shut.

These days, there are lingering fears about Chinese corporations facing rough times. Official assistance extended to developing countries like the Philippines, analysts point out, is now being skewed in favor of Chinese beneficiaries.

The ODA vetting system proposed by Senator Gatchalian could be a way of averting any financing arrangement that may put the Philippines in a position of overdependence on a single foreign power.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.