Brokers stalk talks, contracting so tedious
AT THE close of his four-day state visit in Beijing last October, a pleased President Rodrigo R. Duterte proclaimed to the world that the Philippines and China were now besties, or the best of friends.
As proof positive, Duterte and his Cabinet secretaries showed off to reporters and businessmen from 300 Philippine-based companies who joined the Beijing entourage sheafs of paper --13 various bilateral agreements (via memoranda of agreement or MOA and memoranda of understanding or MOU) that they had signed with their Chinese counterparts.
The documents supposedly testify to Beijing’s love for Manila. These papers, though, offer only indicative values of how much in pesos and centavos that love is worth. That love, too, has to move beyond intention to reality, across months or even years of negotiations between Manila and Beijing.
Yet Duterte and his Cabinet secretaries were quick to quote a fabulous figure at the end of the visit: They pegged the agreements to be a total of $24 billion or about PhP1.2 trillion in loans and grants for mostly infrastructure projects that the Duterte administration plans to roll out, as well as for investment projects that Filipino and Chinese companies want to launch.
Duterte's senior officials would later clarify that the amount consists of two major parts:
- $9 billion or around PhP450 billion for about 40 proposed government-to-government or G2G projects that have been proposed to be funded with loans from China; and
- $15 billion or about PhP750 billion for 27 proposed business-to-business or B2B projects that will come from "direct investments" of China companies in partnership with Philippine companies.
The $9-billion facility for the G2G projects consists of $6 billion in Official Development Assistance (ODA) and $3 billion in commercial tied loans, according to the Department of Finance (DOF).
The National Economic and Development Authority (NEDA) says, however, that the total amount consists of $7 billion in commercial tied loans [through the China Development Bank and Bank of China) and $2 billion in concessional loans [through the Export-Import Bank of China, which is entirely owned by the government of China].
In addition, China has offered small "gifts" or grants: at least $91 million (PhP4.56 billion) for two bridges along Pasig River, anti-illegal drugs and security cooperation, and for Surigao earthquake victims. This amount has been coursed through the DOF.
During a two-day mission to Beijing last January, Philippine officials also submitted for possible financing by China some 40 “small and large” infrastructure projects.
A pittance for PH
The $9 billion in Official Development Assistance or ODA for G2G projects will actually stretch across the full term of the Duterte administration, or until 2022. That redounds to an average annual value of $1.5 billion -- surely a pittance if weighed against China's total overseas investments and construction activities across the world that reached $1.5 trillion in 2015, according to the American Enterprise Institute and the Heritage Foundation’s "China Global Investment Tracker" portal.
Last year, China's overseas investments alone doubled in size since 2012, "due primarily to investment in the United States, which exceeded $50 billion in 2016,” said the Tracker. “Acquisitions by private enterprises are at its heart."
Still, the new fund pledges for Manila at the very least indicate progress in terms of Beijing's openness to resume doing business with a neighbor over which it has locked horns on maritime and territorial disputes in the West Philippine Sea.
What the Duterte party has secured -- $1.5 billion in loan and grant pledges on average per year -- merely restores the value of China's assistance program for the Philippines to its 2010 levels.
Data from the NEDA show that the Philippines had $1.94 million in grants from China in 2010, which then fell to $1.59 million in 2013, and rose to $5.7 million in 2014. From 2010 to September 2016, the Philippines had only $1.14 billion in active loans from China; the figure was actually at zero in 2015. As of September 2016, China’s remaining ODA to the Philippines was $1.56 million in the form of grants. (See infographic)
With the new fund pledges, Philippine officials have been quick to lionize China as the country's emerging top trade partner. But this may be all talk. Official data show over the last five years, for every dollar that the Philippines gets from its exports to China, China gets a dollar more for its exports to the Philippines.
What may be true only is that with the new fund pledges, China will soon emerge as the Philippines' No. 1 lender, eclipsing Japan, which currently has $5.8 billion in active loans and grants for the Philippines. (See infographic)
By 2015, China had already become the Philippines' second largest trading partner, after Japan. Data from the Philippine Statistics Authority showed that total trade between Manila and Beijing amounted to $17.646 billion, or 13.6 percent of the Philippines' total external trade of $129.894 billion that year.
The Philippines, however, raised only $6.175 billion for its exports to China, even as it paid $11.471 billion for its imports from that country. The result: a $5.296-billion trade deficit for the Philippines.
The Philippines in 2015 was selling to China only 10.6 percent of its total exports (984 products), but also buying from China 16.36 percent of total imports -- 3,803 products, according to the World International Trade Statistics portal of the World Bank and United Nations agencies.
By all indications, thus, China's touted generosity to the Philippines
is just a lot of intentions, the MOUs mere "frameworks for cooperation," and the projects that China has pledged to finance, mere concepts for now.
Put another way, a lot of money had been pledged in Beijing for a lot of stillborn or still-to-be-born project ideas from Manila. But the situation has not stopped those on the lookout for quick fixes and quick bucks, to join in the fray this early.
A senior government official privy to the discussions between Manila and Beijing told PCIJ recently that the supposed windfall from the China state visit consists of "a lot of tied loans, a sprinkling of grants, and unclear investment prospects."
"These are not done deals, not solid yet," the official said, stressing though that the signal message of the agreement was that "basically, economics will drive the relationship now, trade, tourism, then infrastructure, public investments."
The official also said that the so-called reboot in China-Philippine relations and the projects "will not be this month or this year, but during his whole term of the Duterte administration. We must look at it as a timeline."
Yet while the official said that what Manila has offered to donor countries is a veritable "wish list," there are already various personalities angling for pieces of the big pie of funding to be had for the projects.
"Ang daming brokers, they are all over the place,” said the official who asked not to be named, citing the supposed sensitivity of ongoing talks between Manila and Beijing. “There are more brokers than there are principals." To be fair, though, the official added that the brokers are plying their trade in both Manila and Beijing.
PCIJ asked if these "brokers" possibly include senior government officials, relatives, and friends of senior officials, or those from the private sector. The official's reply: "All of the above... they take the usual approach -- not just Chinese but all businessmen. Lapit sa kamag-anak, lapit sa kaibigan... Naghahanap ng padrino, sino malakas (They are approaching relatives, friends…they’re looking for sponsors, those who have clout)."
The official's prognosis about the new China deals is not totally bright: "I expect some amount of corruption, lagayan (bribery), scandal, kamag-anak na sasabit (relatives who will get interested). That is human nature perhaps. We are not saints."
The Philippine side, the official said, is worried that another scandal over kickbacks fleeced from past deals with China could happen.
"Dapat iwasan (It should be avoided). Whether they will succeed, it's too early to tell. There are forces at work on both sides... we really need to keep our eyes and ears open."
Keeping watch, however, may mean a considerable investment of time. Duterte's own Cabinet officials acknowledge that at least one to at most three of the government projects may approach groundbreaking only late this year to early next year.
Last month, NEDA Director-General and Socioeconomic Planning Secretary Ernesto M. Pernia said that in all, the Duterte administration has lined up a total of 57 "game-changing” or “flagship projects" that it wants to implement until Duterte’s term ends in 2022.
Yet while some of the 57 had been pitched to China, others have been discussed with Japan, and the rest will probably be taken up with other bilateral donors still unknown or unnamed for now.
No quick rollout
The so-called project brokers are not only what could cause confusion and delay in the projects' rollout. The long, testy process of procurement and project implementation, by Philippine laws, is also a big hurdle for both donor and donee governments.
It is only after the two sides finish work on a series of tedious requirements of procurement and public contracting laws that the Philippines' deals with China could become a reality. These requirements, under Philippine laws, apply most especially to the procurement of infrastructure projects, including those funded by ODA.
They include, for instance, the conduct of feasibility study/ies by the proponent agency/ies for each of the projects. This, by the record of previous big-ticket infrastructure projects of the government, may take from four to seven months on average.
The Department of Public Works and Highways (DPWH) has pegged the allowable cost for feasibility studies at three percent only of indicative project cost. China has already expressed willingness to finance the conduct of the feasibility studies for some of the projects. Among the documents signed in Beijing last October, in fact, was the "MOU Supporting the Conduct of Feasibility Studies for Major Projects," in which China offered “financing and/or support” to the Philippines in undertaking feasibility studies "for big-ticket projects in infrastructure, agriculture and rural development."
(Just last March, the Asian Development Bank also committed to extend to the Philippines this year another $100-million "soft loan" to finance feasibility studies for rail, bridge, irrigation, and road projects. “We have so many projects in the pipeline, they need feasibility studies,” press reports quoted Pernia – whose other title is Director General of NEDA -- as saying. “It [loan] will be available this year for sure.”)
What is an FS?
In 2014, NEDA issued "Guidelines on the Utilization of the Feasibility Studies (F/S) Fund" for projects to be funded with ODA, local funding under government appropriations, or combination of both.
It explained that Project Feasibility Study refers to "the culmination of all the preparatory work that provides a comprehensive review of all aspects of the project before a final decision about its viability is taken."
"An ideal F/S," the manual stated, contains eight modules to provide the basis for project evaluation: demand-and-supply or market; technical or engineering; manpower and administrative support; financial; economic; social; institutional; and environmental.
Once done, the feasibility studies will have to be submitted to Project Evaluation Review by NEDA. The task may run from four to six months, depending on the scale or complexity of the project.
NEDA's Investment Coordination Committee (NEDA-ICC) must
approve the Project Evaluation Review before the proponent agency can work on the financing requirements (i.e. if funding will be secured via a loan from bilateral partners like China). Among the many caveats, however, is that like Japan, China typically offers tied loans, which means that the contractor will have to be Chinese or Japanese, or based in the country lending the money.
The financial kinks have to be sorted out before the agency can proceed to conduct a bidding for the supply contract for the project/s or to open it to a Swiss challenge by other interested companies.
The company/ies or entity/ies and the proponent state agency will then enter into a supply contract, but only after completion of numerous required documents and permits (i.e. detailed engineering study, environmental compliance certificate, community impact assessment, etc.).
Of bananas and tourists
For sure, ahead of the big-ticket projects that will be funded by China loans, the "sprinkling of grants" from China has been deployed relatively faster. In recent months, there has been quick turnaround in the construction of a drug rehabilitation facility in Nueva Ecija, discussions on the export of local bananas and other fruits, and the lifting of a travel advisory against visits to the Philippines that China had issued two years ago.
Remarked the senior official interviewed by PCIJ: "Nagtutulakan na sila, hindi ganoon kabilis ang hard projects, matagal talaga. Ang mabilis lang, drug rehab, saging at prutas, tourism (They’ve been pushing each other, but the hard projects just aren’t moving fast, they are really taking a long time to process. What has been done fast are [projects involving] drug rehab, bananas and fruits, and tourism)."
But the legal requirements have left the bulk of the projects supposedly with China and Chinese businesses mostly tied up for the time being. As a result, from the euphoria and bluster that marked their press releases on the $24-billion that China had supposedly pledged to the Philippines, caution and sobriety now mark the tone of senior Duterte officials when they talk about the China deals, half a year after the state visit.
For the government projects, it was Finance Secretary Carlos Dominguez III who signed on behalf of the Philippines’ three agreements with China.
According to the Finance department, these are:
- The Agreement on Economic and Technical Cooperation, which provides Manila with a RMB Yuan 100-million grant to implement projects for “anti-illegal drugs and law enforcement security cooperation";
- The MOU Supporting the Conduct of Feasibility Studies for Major Projects, in which China will provide financing support to the Philippines in undertaking feasibility studies for big-ticket projects in infrastructure, agriculture, and rural development; and
- The MOU signed by Dominguez on Financing Cooperation with China EXIM that would allow the Philippines to tap EXIM Bank China funds for its major projects through the usual approval processes.
Three priority projects
In the meantime, it was only on Jan. 28, 2016 -- or three months after the Beijing state visit -- when Pernia announced the approval by the NEDA-ICC of only three of the 12 "priority" projects to be submitted for loan financing by China EXIM. (See infographic)
Nine other projects, from a list of 23 with no feasibility studies as yet, have also been proposed for China funding. The MOU for this activity states that China will make available “financing and/or support through dispatch of technical experts and consultants within its comparative advantage to undertake the conduct feasibility studies for major projects.”
Press reports have quoted Dominguez as saying that "the Philippine government will apply the three priority projects for loan financing under the $3.4-billion assistance made available by the Export-Import Bank of China (China EXIM) to the Philippines, of which $2 billion represents new commitments."
The three projects the NEDA-ICC had approved for funding by China are:
- The 653-kilometer south line of North-South Railway. Estimated project cost: PhP151 billion or $3.01 billion. This project involves the construction and subsequent operation and maintenance (O&M) of a 581-kilometer, standard-gauge, long-haul railway operations from Manila to Legazpi, Albay, with an extension line from Legazpi to Matnog, Sorsogon; and a branch line from Calamba, Laguna to Batangas. The project aims to achieve less than five-hour travel time from Manila to Legazpi.
- Status as of January 2017: The NEDA Board during its Nov. 14, 2016 meeting approved the project. The Department of Transportation (DOTr), in a letter to DOF dated Jan. 13, 2017, said the DOTr is preparing to procure a consultant to update the Detailed Feasibility Study for the long-haul segment.
- The New Centennial Water Source-Kaliwa dam in Quezon province. Estimated project cost: PhP18.724 billion or $374 million. This project proposed by the Metropolitan Waterworks and Sewerage System (MWSS) involves the construction of a dam and conveyance tunnel that will provide additional 600 million liters of raw water to ensure water security in the whole of Metro Manila and parts of Cavite and Rizal. It aims to meet future potable water demand and as a redundant water source, thereby reducing the dependence on the Angat Dam Reservoir.
- Status as of January 2017: The feasibility study for this project is done, and preparation of bid documents is underway, and two bidders have been pre-qualified.
- The Chico River pump irrigation project in Cagayan and Kalinga provinces. Estimated project cost: PhP2.696 billion or $53.6 million. This project involves the installation of pump and construction of sump pump with the proposed pumping station located at the right bank facing downstream of the Chico River. The project will irrigate 8,700 hectares of land and will benefit 4,350 farmers in the area. It targets 21 barangays in Cagayan and Kalinga and is expected to be finished within a three-year period.
- Status as of January 2017: The NEDA Board during its Nov. 14, 2016 meeting deferred confirmation of the project’s ICC approval, with the instruction for the proponent agency, the National Irrigation Administration, to include a hydropower-energy component and in coordination with the Department of Agriculture, introduce the production of high-value crops in the area.
In addition, the Philippines has requested grant assistance from China for the conduct of feasibility studies for nine other projects.
These are the:
- Agus 3 hydroelectric plant;
- Ambal-Simuay sub-basin of the Mindanao River basin flood control and river protection project;
- Camarines Sur expressway;
- Davao City expressway;
- Dinagat (Leyte)-Surigao link bridge;
- Luzon-Samar link bridge;
- North Luzon Expressway east project;
- Panay Guimaras-Negros Island bridges, and
- Pasacao-Balatan tourism coastal development program.
What fits, what doesn't
Dominguez and Pernia were among those PCIJ recently interviewed on the China deals. According to Dominguez, the three “priority projects” and 35 other infrastructure projects they brought to the table in Beijing in January are a mix of those pitched in the past and the present. "There were already projects from the past,” he told PCIJ. “And we added some more."
"We added the Agus-Pulangui Dam (because it) has to be rehabilitated,” Dominguez said. “So we took some of their projects and we got some of our own and then we made that list. You go back to our 0-10 point economic program. So we said, this is our program."
Asked how the Duterte Cabinet chose which projects to prioritize, Dominguez replied, "What fits that and what doesn't fit? So (what) doesn't fit, out.”
He said that the government is “looking for projects outside the mega-Manila area to create jobs. We're looking at projects that will improve logistics, investments that will improve productivity, agricultural or otherwise. We are also looking for projects that will improve the traffic here in Manila. But basically we want to invest outside so a railway to Bicol, which one of the most depressed regions in the country, makes sense, doesn't it?.... Now, this Kaliwa dam, we need water here in the Mega Manila area. So that also makes sense. Of course this pump project in the Chico River in the Cagayan Valley makes sense."
For projects in the China pipeline, DOF and NEDA met with agencies to draw up the list. Projects were assigned priority based on their consistency with the Philippine Development Program (PDP) or Public Investment Program (PIP), impact of financing to targets, geographic spread, applicability of Chinese technology, and cost of feasibility study proposals for those without one yet. Studies for some of the projects had been completed during the Aquino administration.
“The development strategy of the Duterte administration is regional and rural development so disbursing development outside the mega-urban industrial region of Metro Manila, Calabarzon, and Central Luzon (was prioritized),” said Secretary Pernia. “And the projects that are going to be put up for Metro Manila will be mostly to address the traffic congestion.”
The selection of ODA-funded projects was also reportedly based on the country-assistance frameworks of development partners, including bilaterals such as the Australian Agency for International Development (AusAID) for Australia, Japan International Cooperation Agency (JICA) for Japan, and the U.S. Agency for International Development (USAID) for the United States, as well as multilaterals like the Asian Development Bank (ADB), World Bank (WB), and the United Nations (UN).
By procurement rules
Pernia, meanwhile, noted that if the projects involve government, then these would have to go through ICC and follow Philippine procurement rules.
The Government Procurement Reform Act (Republic Act No. 10667) requires the procurement of goods, infrastructure projects, and consulting services to undergo competitive and public bidding.
As a general rule, agencies need to adopt competitive bidding as the general method of procurement and see to it that the procurement program allows sufficient lead-time for such bidding to be conducted. While there are alternative modes of procurement such as limited-source bidding, direct contracting, repeat order, shopping, and negotiated procurement, agencies can resort to these only under highly exceptional cases following procurement rules.
In truth, Dominguez said, the MOUs and MOAs signed during Duterte's state visit were just agreements, or statements of intention or willingness of the two nations to do business with each other. "Those are just general, you know, we are willing to fund project studies,” he said. “‘We are willing to help you in rehab. We are willing to do this.’ Willing-willing lang 'yun."
Dominguez said that the projects have yet to be worked out, and are "not in the bag" because the two sides have to move from agreement stage "and then we start to work on the real things already." That means not only contending with Philippine rules, but also with those of China.
Recounted Dominguez: "So the next meeting we had was with the NDRC (National Development and Reform Commission), which is like the NEDA, although in steroids. This is a real big agency. They have their own auditor, project management, talagang malaki."
After the NEDA-ICC has approved the projects for funding by China, loan programming will take at least four to at most 14 months, according to NEDA.
And so, beyond pledges of loan and grant support, the government-to-government or G2G projects will have to take a slow, tedious path to project rollout, with the feasibility studies for most not yet begun, and many others still without NEDA-ICC approval.
The business-to-business (B2B) deals, though, are barely doing much better, and are turning hazier by the day.
Pernia told PCIJ that the B2Bs are "commercial" projects, "parang foreign direct investment.”
But Dominguez said that companies identified in the deals could just be “forming to bid,” with possibly no concrete plans set yet. “They are entrepreneurs trying to look for business opportunities in this infrastructure,” he said.
In any case, he said that the companies identified in the deals may also propose a project to a government agency, and convince the latter to submit the project to the ICC for review.
The Build-Operate-Transfer Law provides guidelines for “unsolicited proposals,” wherein project proposals may be submitted by the private sector, not in response to a formal solicitation or request by the government. But such projects need to involve a new concept or technology that is also not part of the government’s list of priority projects. No direct government guarantee, subsidy, or equity is required in these proposals. The project need not be a component of an approved project as well.
According to the Public-Private Partnership Center’s Guidelines for Unsolicited Proposals, unsolicited proposals require a greater need to combat the perception of “lack of transparency in the process, avoidance of competition and proper due diligence during Swiss Challenge, opportunities for corruption and political patronage; and acceptance of poor quality projects.”
DTI clams up
Budget Secretary Benjamin E. Diokno said that the best state agency to talk about the B2B projects would be the Department of Trade and Industry or DTI. The Department of Foreign Affairs (DFA) had also told PCIJ earlier that it had referred the Center’s letter requesting access to documents on the China deals to DTI.
Indeed, it was Trade and Industry Secretary Ramon Lopez and the DTI who made public the list of 27 projects with Filipino and Chinese firms already identified or paired as potential contractors at the close of Duterte's state visit in Beijing. It was also the DTI that coordinated signing of memoranda of understanding pertaining to these proposed investments.
On Oct. 21 last year in Beijing, Lopez had even waxed ecstatic about what he said they were about to bring home from China. He told reporters, "Based on the numbers we are putting together now, in terms of investment, credit facilities opened, $24 billion."
This was even though a day earlier, Lopez was quoting a total take-home windfall from the Duterte's state visit of only $13.5 billion, in apparent reference to only the initial agreement on the business-to-business deals that are a separate portfolio of projects from the government-to-government ones.
Yet still, Lopez said the China deals were projected to create two million jobs, and even more in the next five years. He called Duterte's state visit "highly successful," and described Manila's renewal of friendship and economic ties with Beijing as "like opening a faucet."
No money, no track record
But PCIJ's review of the corporate records of the 22 companies listed as proponents or partners in the business-to-business deals shows that some of them have no track record in doing big-ticket infrastructure projects, have negative or scant operating profit or reporting losses, and have significantly small asset bases. (See “Duterte's China Deals, Dissected,” which accompanies this story)
Two of the companies are not even registered with either the Securities and Exchange Commission (SEC) or DTI. Two other firms registered with the SEC only in November 2016 and January 2017 -- or after the Beijing state visit where they apparently signed MOUs already with their Chinese counterparts.
Moreover, only four of the 22 companies appear in the database of government contracts of the Philippine Government Electronic Procurement System or PhilGEPS, for the period 2012-2016. These four are “Expedition Construction Corporation,” “R-II Builders, Inc.,” “SL Agritech Corporation,” and “Trademaster Resources Corporation,” which altogether won a total of PhP1.03 billion worth of projects during the five-year period.
A big chunk of this total amount or PhP607.2 million was paid to SL Agritech Corporation to provide agricultural products, mostly “hybrid rice seeds” to various regional offices of the Department of Agriculture, Philippine Rice Research Institute, Central Luzon State University, and at least 15 local government units.
SL Agritech’s biggest contract in the last five years amounted to PhP136.6 million for the supply and delivery of 97,638 packs of hybrid palay seeds to DA-Region 1 in 2015. This was procured through public bidding, similar to how 64 percent of SL Agritech’s contracts in the covered period were processed. Some of other contracts were awarded to the company through negotiated procurement (19 percent) and direct contracting (15 percent).
Trademaster Resources Corporation, meanwhile, implemented PhP352.8 million worth of projects from 2012 to 2016. The supply and delivery of solar home systems and other electrical systems and lighting components make up 80 percent of these contracts, in addition to airconditioning systems and office equipment.
Trademaster Resources’s top project worth PhP104.8 million was for the “supply, delivery, installation, testing, and commissioning of 6,460 units of photovoltaic solar home systems” to the Department of Energy in 2012.
R-II Builders Inc. only implemented two contracts – both in Quezon City and in 2014 – between 2012 and 2016. PhilGEPS data show the contractor bagged P68.9 million for the “Construction of Four Storey School Building (15 Classrooms w/ Multi-purpose Room) at Payatas B Elementary School including Land Development and another P3.9 million for “Airconditioning Unit with Installation” of the city government. These two projects were both procured through public bidding.
As for “Expedition Construction Corporation,” it is listed as having been awarded a PhP5.7 million contract for the “Proposed Road Improvement of 5th St. (Burgos St.) & 7th St. (Dagohoy St.), located at Brgy. West Rembo, Makati City.” This was procured through public bidding in 2012.
The rest of the 18 companies that signed on to the MOUs on the business-to-business deals with China, as well their name variations, do not appear in PhilGEPS database from 2012 to 2016, raising the possibility that they may not have done regular business with the government. (The PhilGEPS database relies on agencies supplying the information and so may not cover all awarded contracts.)
Last March 8, PCIJ wrote Lopez to request documents on the business-to-business deals, confident of a positive outcome. After all, the Departments of Finance and Budget had granted similar requests from the Center, as had NEDA. DFA for its part said that it had no copies of the documents, which was why it pointed PCIJ to DTI.
Three weeks later, on March 27, Lopez's chief of staff, DTI Undersecretary Rowel S. Barba, replied in his stead. Barba turned down PCIJ's request, writing: "Since the agreements listed in the letter are business-to-business agreements, and this Department is not a signatory to the said documents, we suggest that PCIJ directly request for copies of the agreements from their respective proponents/signatories."
Still and all, the B2B projects mostly remain project concepts for now. If the B2B projects will focus on infrastructure or require government support, are unsolicited proposals, or involve to right-of-way issues, the government will unavoidably have to step in, and the projects enrolled in the investment plans of the partner or procurement agencies. – PCIJ, May 2017