Romancing China under DU30: Part 2

Malou Mangahas, Philippine Center for Investigative Journalism

Posted at May 09 2017 04:50 PM

Last of Two Parts

Read the first part: 

Manila, Beijing friends again: 'Who is the screwer, screwed?'

THEY CALL it "Dutertenomics." Its tagline: "Build, build, build." Its boast: "The golden age of Philippine infrastructure." Its estimated bill: PhP8.4 trillion, to be sourced from taxes, foreign and local loans, and Official Development Assistance (ODA) from bilateral partners.

By 2022, senior officials of the Duterte administration promise that roads, bridges, skyways, and rapid mass transport systems will rise and connect the 7,000-plus islands of the Philippines. The full bundle consists of 57 mostly infrastructure projects that the current government plans to implement, courtesy of money pledged by minted friends like China and Japan.
 
It has become a peculiar habit of President Rodrigo R. Duterte and his men to brag about the bacon they say they bring home from state and official visits overseas. Going by their press statements alone, they have already raised tens of billions of dollars -- in pledges at least.

From his trip to the Middle East last month, Duterte has reportedly secured $925 million in potential investments from Saudi Arabia, Bahrain, and Qatar.

There has also been China's assurance of $9 billion (about PhP452 billion) in loan and grants for government-to-government projects, and the possibility of $15.3 billion (PhP753.5 billion) more in joint ventures and investments by private companies (still on the drawing boards), across a six-year period.

Then there is Japan’s offer of a trillion yen or another $9 billion in ODA and investments in the next five years. 

On May 14, Duterte will fly again to Beijing to attend the conference on the "One Belt, One Road" flagship project of China's President Xi Jinping. It envisions, like "Dutertenomics," the launch of major and massive China-funded infrastructure projects, across Asia, Europe, and Africa. 

Duterte, Russian President Vladimir Putin, Turkish President Recep Tayyip Erdogan, Malaysian Prime Minister Najib Razak, Indonesian President Joko Widodo, Vietnamese President Tran Dai Quang, and Myanmar’s leader Aung San Suu Kyi are among the 28 world leaders who have reportedly confirmed their attendance at the summit. It may not be farfetched to assume that Duterte and his men will return home from Beijing with new tales of fabulous deals.

Duterte's bacon: $34B?

Finance Secretary Carlos Dominguez III himself says that Duterte has raised $33 billion in combined aid and investments from China and Japan alone. The claimed windfall from the recent Middle East trip brings the total to $34 billion. But the operative word, Dominguez agrees, is "pledges."

In just nine months in office, the peripatetic President has already visited 16 countries, albeit mostly quick trips. Apart from China, Japan, and Saudi Arabia, Bahrain, and Qatar, Duterte has also visited the nine other members of the Association of Southeast Asian Nations or ASEAN that the Philippines chairs this year: Brunei, Laos, Indonesia, Vietnam, Malaysia, Thailand, Cambodia, Singapore, and Myanmar. He has also been to Peru and New Zealand.

Excluding the President’s latest journey to the Middle East, the government has so far incurred total expenses of $5.5 million or about PhP270 million for his travels overseas, news reports have quoted Dominguez as saying. That is supposedly a small investment with big return value. 

But do the aid pledges that Duterte has sought and secured make for a truly seamless story of goodwill between nations, yielding good results for all their citizens? The checkered past of China-funded projects in particular has had observers worried and raising questions regarding ODA-supported ones in general, and especially those marked for funding from Beijing. 

Among the questions are: Will these pledges of aid and loans translate to good projects contracted with integrity, and how, where, and when in fact would they be started and finished?

What additional taxes, debt-service burden, or other relocation or dislocation costs must the citizens bear to pay for the loans that Dutertenomics would acquire, even after Duterte's term ends in 2022?

And does China now deserve the full trust of an old friend like the Philippines? Will the new projects be spared of the corruption and scandal that marred past projects? 

A senior official queried by PCIJ, however, said it all boils down to this: "The question only is, who is the screwer, who is the screwed? The relationship should be mutually beneficial."

'Plan big, achieve big'

Dominguez, though, told PCIJ recently, "Look, we are just beginning to date again. There was a six-year hiatus. This is confidence-building time."

"Basically, the President has decided that one item of dispute should not decide our relations (with China),” Dominguez said, referring to the territorial squabbles Manila has with Beijing. He added that there would always be economic, commercial, political, and security issues that unite or divide nations. Said Dominguez: "It's okay to have disputes, but we must not focus the relationship on that."

"Every relationship is like that, you have to work at it," he also said. "It's not going to stay sweet if you don't work at it."
 
Dominguez said that he has offered the President this counsel: "I told him, look, China is not doing this solely because they love us. They have an overcapacity of their steel mills industry." 

Rather than have China close its factories, Dominguez said, the Philippines could get steel from China. He pointed out, "We're helping each other. It's an opportunity for them, it's an opportunity for us. He (President) understands."
 
The aid bonanza is not about "oversell" or press release, said Dominguez. Rather, he said, it is about setting higher goals. "If you don't plan big, you will not achieve big," he said.

This has prompted the government to use its own money to roll out the first three "priority projects" on its list of 57 projects. "The big ones,” Dominguez said, “we have decided to start projects on our own.” 

The three projects are the south line of the North-South Railway, the New Centennial Water Source-Kaliwa Dam in Quezon province, and the Chico River pump irrigation project in Cagayan and Kalinga provinces. They have been allotted a PhP10-billion starting budget altogether, and their groundbreaking will supposedly take place between June and October this year. 

"We will do these on our own budget and start project groundbreaking," Dominguez told PCIJ. "We're borrowing at low cost, 80 percent pesos, 20 percent foreign (loans)."

The rest of the projects could take some time later to launch, however. Dominguez acknowledged that the completion of project feasibility studies to the award of supply contracts may take 18 months in all. That would come in October 2018 -- at which time the political pot could start boiling on account of the scheduled midterm elections in May 2019 or, should legislation for the proposed shift to federalism pass, the conduct of a national plebiscite. 

Dominguez noted, though, that 18 months is a much shorter period than the 30 months it reportedly took the administration of President Benigno S. Aquino III to launch projects under its Private-Public Partnership Program or PPP.

Avoid 'abject lessons'

But Dominguez admits to one thing. He worries about what might, but should not, happen again: two failed and foiled China-funded projects approved by then President Gloria Macapagal-Arroyo, a close ally of both Duterte and China. These projects, which Dominguez calls "abject lessons that must be avoided," are:

  • The $330-million NBN-ZTE national broadband project that was aborted in 2006 amid allegations of kickbacks sought and received by certain senior officials close to Arroyo; and 
  • The $400-million loan from China Export-Import Bank for the 32-kilometer first section of the North Luzon Railways Corp. (Northrail) project that the Arroyo administration awarded in 2003 to a subsidiary of a China state-owned enterprise or SOE. Hailed then as China's biggest loan ever extended to the Philippines, the second section of the Northrail project was to have been funded by another $500 million loan from the Export-Import Bank of China (China EXIM).

In 2012, because of supposed project revisions and delays, the Aquino administration cancelled the supply contract for the Northrail project. In a decision dated Feb. 7, 2012, the Philippine Supreme Court en banc declared the contract invalid because it had been awarded without public bidding. The total loan value for Northrail's Section 1 component came up to $503 million in combined principal and interest payments.

But Beijing said that what happened was not a "justified cancellation" and threatened to declare the Philippines in default of its loan. Beijing then submitted the case for arbitration proceedings in Hong Kong, which have yet to be finished. 

In the meantime, to avoid being declared in default, Manila in 2012 agreed to pay Beijing installment amounts on more than half the total loan that had already been disbursed, or $180.8 million plus annual interest of three percent.

By September 2013, a Philippine treasury official was telling reporters that instead of one lump-sum payment, Manila had opted to pay equal tranches starting 2012 to 2014. By then, Manila had already paid China about $46.1 million.

Millions for nothing 

Manila is still paying for the botched Northrail project, according to Dominguez. "My hand bleeds every time I sign checks for that loan because we got nothing, nothing at all,” he told PCIJ. “It's okay to pay if we got something, but we got nothing."

It was on Sept. 14, 2002 when China National Machinery & Equipment Corp. (Group) or CNMEG, represented by its chairperson Ren Hongbin, entered into a Memorandum of Understanding with the North Luzon Railways Corporation (Northrail), represented by its then president Jose L. Cortes Jr., for the conduct of a feasibility study on a possible railway line from Manila to San Fernando, La Union. 

CNMEG itself did the project's feasibility study for the NEDA, for free.

Eleven months later, on Aug. 30, 2003, the state-owned China EXIM and the Philippines’ Department of Finance (DOF) entered into a Memorandum of Understanding wherein China agreed to extend "Preferential Buyers Credit" to the Philippine government to finance the project. 

Under this MOU, China EXIM agreed to extend a $400-million loan to the DOF as borrower payable in 20 years, with a five-year grace period and an annual interest rate of three percent. (In contrast, ODA loans from Japan typically carry a 0.5-percent interest rate per year.)

On Oct. 1, 2003, then Chinese Ambassador to the Philippines Wang Chungui informed Arroyo's finance secretary, Jose Isidro Camacho, in a letter that Beijing had designated CNMEG as the Prime Contractor of the Northrail Project. No bidding for the supply contract was conducted.

On Dec. 30, 2003, Northrail and CNMEG executed a Contract Agreement for the construction of Section I, Phase I of the North Luzon Railway System from Caloocan to Malolos on a turnkey basis, at a contract price pegged at $421.05 million. The project was envisioned to ferry over 150,000 passengers daily to and from Manila.

Northrail's second section costing about $673 million would have extended the line by another 48 kilometers and connect Manila to the former U.S. air force base in Clark, Pampanga that is now an international airport and a special economic zone. Another $500-million loan from China EXIM was to have funded the second section, bringing total Chinese funding for the venture to $900 million and making the entire Northrail project one of the biggest Chinese-funded projects in Southeast Asia.

Dominguez knows full well that the loan burden for the scuttled Northrail project and the kickbacks-ridden NBN-ZTE project continue to spook the recently rekindled China-Philippines relations.

Reputations at risk

By all means possible, Dominguez said, the Duterte administration wants to prevent a repeat of the NBN-ZTE and Northrail projects. "We must protect everyone's reputation here,” he said. “Everybody's reputation is at risk here." 

As a key step, Philippine officials have reportedly served notice that only the principal companies with good track record and which China has designated would be considered for the supply contracts for the new projects.

For another, Philippine officials remain on guard about the now multiple brokers who have started to negotiate for their supposed Chinese principals.

"The Chinese usually have three or four brokers,” said one official who requested anonymity. “We said, we don’t like that. We told the Chinese government that's why and how we ended up with Northrail and ZTE. We know about your projects in Africa." 

Personal and cultural conflicts had also marred relations between the Filipino-led North Rail Corporation and the management of the Chinese contractor CNMEG, which by 2010 had changed its name to Sinomach.

According to Aquino's public-works secretary Rogelio 'Babes' Singson, the Arroyo government had realized too late that the state-owned CNMEG had at least four subsidiaries, and that Sinomach was just one of them. In truth, Singson told PCIJ in a recent interview, Arroyo's officials had entered into contract with "just a subsidiary" of CNMEG. 

Without a doubt, Singson said, China has a lot of competent contractors and "they do have capacity for these projects as they have built the longest railway network than any other country in the world had."

The greed of brokers

But, he said, "the key is to tap into the expertise of contractors with track record, and talk to principals, not their representatives or subsidiaries.”

He also said that the government must parry the influence of brokers who claim to represent, truthfully or not, project proponents and potential contractors. "Brokers?” said Singson. “Talagang ganoon, you will have to accept that, even for some other donor countries, not just China, so long as the amount is not too far from the estimated (project) cost."
 
Contractors unaware or unsure of how project contracting unfolds in the Philippines tend to hire consultants or representatives or brokers, Singson explained. As for the brokers, “they’re after the commission, of course,” he said. "And that would depend on how greedy they are.” 
 
Dominguez said that Manila intends to keep the new projects clean; hence it has sent new, clear messages to Beijing. "We have spoken with the Chinese government,” he said. “We told them we don't know your SOEs, the subsidiaries of your SOEs, the subsidiaries of their subsidiaries. We told them we would much prefer that the Chinese decide to nominate three bidders for a particular project."

China for its part has been amenable to conducting limited competitive bidding among Chinese firms for projects to be funded by China money. It used to insist on unilaterally nominating contractors for all Chinese-funded projects. For the Northrail project, for instance, Beijing designated a single contractor, CNMEG. To this day, it remains the nightmare that would not go away.

Six years after the China signed and sealed its loan for the Philippines, Sinomach had accomplished only 15 percent of the Northrail project, PCIJ reported in its 2010 story "Chinese foreign aid goes offtrack in the Philippines."

A tragic tale

PCIJ had exposed how nearly nothing came of the project, noting in the story: "There are neither trains, stations, nor even a single kilometer of track. Many segments of the line are still occupied by illegal structures, including multi-story office buildings and factories. But even on most segments cleared of illegal dwellers, there is no construction activity. Only in a handful of sites can one see heavy equipment and laborers working to drive or bore huge concrete piles to lay the foundation of the giant posts for the elevated segments of the railway."

How or why did China's loans turn off-track at the time? PCIJ's story presents a portent what might happen again under Duterte: "At heart, the Northrail project is a tragic tale of what happens when cheap Chinese aid money hooks up with weak governance in a borrowing country. From talks with current and former Philippine planning and Northrail officials, it is clear that a major driver for the project was the extreme concessionality of Chinese financing: an unprecedented three-percent annual interest rate, five-year grace period, and 20-year maturity."

As it was under Arroyo, under Duterte, the same terms may apply for the new China loans. According to Dominguez: "About three-percent interest rate, roughly the same 20-year payment period."

He then said that the Philippine proposal for the terms of the loans from China is ready and that PCIJ should just get this from his staff. As of this writing, however, multiple PCIJ requests for the information have yielded no response from Dominguez and his staff. 

Tussle over a grid

Aside from the Northrail and NBN-ZTE projects, though, there was a third, equally big, bone that the Aquino administration had picked with China: the transfer to Manila of full control over the operations of the National Grid Corporation of the Philippines (NGCP) in which China's State Grid Corporation has 40-percent equity control. This happened on account of a 25-year concession agreement that SGCC obtained from the Arroyo government in 2007 and which the Philippine Senate ratified in 2008.

The SGCC concession agreement expires in 2033 yet, or beyond the terms of two more Philippine presidents after Duterte.
Technical management of the operations of the grid -- a high-voltage power transmission network that supplies electricity to millions of households, -- came under full control of Filipinos only in July 2016. Manila had started negotiations with Beijing for the grid's turnover as early as 2013 but it was only in 2014 when Manila decided against renewing the visas of 18 Chinese technical experts working at NGCP.

Apart from China's SGCC, two Filipino firms -- the Monte Oro Grid Corp. and Calaca High Power Corp. -- own 30 percent equity each in NGCP.

In September 2013, Aquino sent to Beijing then Transportation and Communication Secretary Manuel 'Mar' Roxas II to discuss "some of the conflicts that exist" over the Northrail and NGCP contracts.

In both cases, Roxas said that Manila had wanted to disengage from Beijing.

Press reports had quoted Roxas as saying that the Philippine government wanted China to transfer the NGCP's operations and technology, and train Filipinos on "how to control “our national electric grid.”

“It’s not comfortable that foreigners are the ones handling the (electric grid),” Roxas had said.

The loan & the sea row

When Aquino visited China in 2012, Roxas said that Manila had proposed to "reconfigure" or rebid or continue the Northrail project loan, and even allow China to still participate in it, according to Philippine procurement rules. 

“In short, both sides were trying to push through with the anomalous project by reconfiguring some of the elements so it would pass our Procurement Law,” media reports quoted Roxas as saying in September 2013. “But since then and until now, there was really no progress that transpired.” 

It was amid the testy words exchanged over the Scarborough (Panatag) Shoal that Roxas said China decided to “call” the loan it had extended for the Northrail project.

“It was ‘called’ – meaning it became due and demandable,” Roxas said. “So it was discussed how we would pay for it and since we got the money, we would settle it... in installments over the next two years." 

According to the Public Investment Staff of the National Economic and Development Authority or NEDA, only four projects had been assisted by grants from China from 2012 to 2017: the Philippine-Sino Center for Agricultural Technology (PhilSCAT) Technical Cooperation Phase II; Bilateral Seminar on Disaster Mitigation and Management; Rice Donation for Haiyan Victims; and 540 Units of Prefabricated Houses for Haiyan Victims.

In addition, NEDA said at least eight Philippine projects had been funded by loans from China from 2001 to 2014. These are the:

  • Non-Intrusive Container Inspection System Project;
  • Non-Intrusive Container Inspection Project II;
  • Angat Water Utilization and Aqueduct Improvement Project Phase II;
  • Northrail Project Phase I, Section I;
  • Banaoang Pump Irrigation Project;
  • General Santos Fishing Port Complex Expansion/Improvement Project;
  • Northrail Project Phase I, Section II (cancelled); and
  • Agno River Integrated Irrigation Project.

The NBN-ZTE National Broadband Deal was supposed to be on that list, but in the end it didn’t push through. There was also the Cyber-Education Project or CEP, but that failed to even start as well. 

Described as "a satellite-based distance-education program that provides real-time interactivity to public schools" and supposedly separate from the NBN-ZTE project, the CEP would have been funded by a $466-million or PhP22-billion loan from China. Plans also called for the Philippine Treasury to contribute PhP4 billion more to implement it.

Scuttled, too

CEP was designed to be a partnership between the Department of Education (DepEd) and the Tsinghua University, China’s top technology university, which manages the China Education and Research Network that covers 320 million beneficiaries.

It planned to link all DepEd administrative units, including the central office, 17 regional offices, 187 division offices, and 37,792 public schools, as well as provide 12 video channels, wireless wide-area networking, local-area networking, and wireless Internet to even the most remote parts of the country.

But in their review of the NBN and the CEP projects, University of the Philippines professors Raul Fabella and Emmanuel de Dios noted that the CEP "was scaled up to entail a government-operated backbone which consequently amplified its cost to P26.48 billion from its original no-separate backbone project estimate of P5.2 billion."

The academics suggested that the P26.48 billion that would go to CEP could be put to better use. For example, they said, the amount could build 48,145 classrooms at P550,000 per classroom. Fabella and de Dios noted that the estimated classroom shortage for 2008 was 11,862 but had a budgetary requirement of only P6.52 billion. 
NEDA approved the CEP in March 2007, or just two months after officials of the two nations signed a Framework Agreement on Bilateral Economic and Trade Cooperation. 

In August 2007, then opposition congressman Teofisto ‘TG’ Guingona III of Bukidnon asked NEDA for copies of the contracts on the CEP, NBN-ZTE, and other projects that Arroyo and her officials had signed during their brief visit to China in April that year.

Told by NEDA's staff that the documents had gone missing, Guingona remarked, “It is bad enough that many citizens do not trust their government in matters of state like elections, foreign affairs, the dispensation of justice, human rights, and all that is important to us Filipinos. It is dismaying when our government can’t even be trusted with safeguarding public documents.”

In October 2007, amid the public outcry and congressional inquiry into the kickbacks-laden NBN-ZTE project, Arroyo finally suspended the CEP project.

Trojan-horse trap?

These days, the Duterte administration is willing to bet that China can turn around its dismal record of projects in the Philippines. But some Filipino scholars on China say the Philippines should be more cautious when dealing with its giant neighbor.

"These are people, companies that felt that just because they have political connections, they can bribe, they can bring all their hanky-panky in our country,” commented U.P. political science assistant professor Jaime Naval. “Huwag naman tayo pagisa sa sarili nating bansa (We shouldn’t let ourselves be taken advantage of in our own country)."

China is "also very astute like the West and we have to be as astute as them,” said Naval, a China and ASEAN specialist. “They're not giving because they love us, they're giving because they take something back."

He recalled reading a study that asserted that “for every one renminbi that China gives as ODA, it gets back six renminbi.” Said Naval: “It's a political tool. It's a given. I accept that. But we should not be naive that China is benevolent, that it hasn’t wrung us dry.” 

"There's a big difference between ODA coming from China and ODA coming from Europe, and U.S., and Japan,” Naval continued. He said that while “ODA from these developed countries are normally on health and education and certain advocacies that have something to do with the politics of the land and democracy…when it's an ODA from China, it is extractive. There will be digging for minerals, they will get lumber, they will be harvesting natural resources." 

Dr. Renato de Castro, who holds the Charles Lui Chi Keung Professorial Chair in China Studies at De la Salle University, for his part observed, "With Chinese deals,'yung binigay ng mga Greeks, sabi nga...'beware of the Greeks giving gifts, it's a trap.’ You become dependent on Chinese aid. You become dependent on Chinese market. That's why we become strategically and politically vulnerable to Chinese agenda." 

In de Castro's view, "you don't allow someone whom you have a territorial dispute (with) to dominate... this is very dangerous kasi we still have territorial disputes with China so that will give China a leverage in resolving those disputes. That would favor China (and) solve those disputes on Chinese terms, because China has economic leverage." -- With research and reporting by Karol Ilagan, PCIJ, May 2017