OPINION: Beware of huge waste from ‘golden era’ haste

Jose Galang - Your Business

Posted at Jul 31 2017 10:12 PM

In a period of volatility in the global environment, the economic managers of the Duterte administration are seeking to secure from foreign governments and from the domestic capital market huge amounts of loans that will support ambitions of pushing the Philippine economy toward a so-called “golden age of infrastructure”.

Finance Secretary Carlos Dominguez says this strategy will enable the Philippines to “achieve a breakout, a shift to a higher plane of economic growth” that, with a grand infrastructure program, will “transform our country into Asia’s next economic powerhouse.”

For this, the government plans to spend around P9 trillion of its planned borrowings on hard infrastructure (highways, railways, airports, and shipping ports) alone. To repay these debts, the government wants to impose a variety of taxes on wage earners and on a number of business activities.

Taxes that will be collected from this scheme—targeted at up to P1 trillion a year—will support government spending that will push the Philippines into “high middle-income” status by 2022, according to Dominguez. It’s a tantalizing scenario that, if achieved, will raise the relative purchasing power of the average Filipino income to at least $5,000 from around $3,500 at present.

An envisioned catalyst for this is a “build, build, build” infrastructure program that will include big construction projects to be financed with official loans mostly from China, via its so-called “One Belt, One Road” initiative that seeks to expand its trade routes with massive highways and railroads. Currently the Philippines’ other big sources of such financing are the World Bank, Japan International Cooperation Agency (JICA), and Asian Development Bank.

This oversized dependence on Chinese financing, which comes with a large number of conditionalities, makes the “golden age” goal a high-risk venture. Many studies by scholars and independent economists around the world have pointed out that, based on China’s record in pouring large loans into developing economies, resource-rich countries are getting caught in a debt trap and later becoming vulnerable to China’s political and economic demands.

Venezuela and Chinese aid

These days, Venezuela is an oft-cited example of a China-backed development strategy gone awry. “Politicized loans” have left the South American country under a mountain of Chinese debt, Christopher Balding, an associate professor of business and economics at the HSBC Business in Shenzhen, wrote in last month’s issue of Foreign Policy magazine.

Since 2007, Venezuela has shifted economic ties away from the United States and its bias for human rights, environmental protection and anti-corruption policies. Under socialist leaders Hugo Chavez (who died in 2013 after a nearly 15-year rule) and successor Nicolas Maduro, China granted loans of over $63 billion to Venezuela with a condition that payments will be in crude oil, the South American nation’s largest export.

Problems cropped up when the price of oil plummeted, hitting a low $30 per barrel three years ago compared to $100 per barrel at the height of Venezuela’s borrowing binge. The price slump resulted in a doubling of the volume of oil the Venezuela has to ship to China to meet strict repayment schedules.

Venezuela collapsed “thanks to a malevolent dictatorship pushing disastrous economic policies aided by a benefactor willing to extend near bottomless credit,” notes Balding, who now believes that Chinese lending under the B&R initiative is exploiting weaknesses of “autocrats who see an opportunity to drive economic growth by borrowing from China to fund white elephant projects regardless of long-term consequences.”

Large-scale lending projects without a real focus on their economic viability and the repayment capacity of the borrowers are hardly the soundest basis for financial diplomacy of the sort China is attempting to practice, Balding argues.

“At best, it will lead to mutual suspicions and tensions between lender and borrower. At worst, it will prove financially ruinous for countries burdened with debts they cannot repay in foreign currency they do not possess,” he concludes.

The news today from Venezuela is that Maduro, claiming support in a national election last weekend, is moving for a revision of the nation’s constitution in a bid to form a new legislative assembly that will install his authoritarian government. The election, which was marred by violence that left 14 people dead, has been described by his critics as a “sham”, which points to more instability and economic erosion in the days ahead.

Vietnam’s two metro lines

In Vietnam, a booming Southeast Asian economy, elevated railway systems are now being constructed in its two major cities. One, a 19.7-kilometer line in Ho Chi Minh City, is being put up by a partnership of the Sumitomo and Shimizu-Maeda conglomerates with the aid of JICA financing and collaboration from French, Italian and Korean companies. The second railway project, a 13.1-km line in the capital Hanoi, is being handled by a consortium of Chinese companies led by the China Railway Sixth Group.

“The construction processes pursued by these different investors has led to very different outcomes,” said a report in last Sunday’s edition of the Hong Kong daily South China Morning Post. 

A series of “high-profile accidents” has cast a large shadow over the Chinese-led effort in Hanoi, while the Japanese-led project in Ho Chi Minh has been “accident-free”, appearing to support perceptions in Vietnam about “the superiority of Japanese workmanship and engineering”, the Post reported. Both projects, the report also said, are delayed.

In the China-backed Hanoi metro construction, steel reels fell from a flyover construction site in November 2014, killing a passing motorbike rider and injuring two others. In the following December, a section of a scaffolding on the same flyover fell to the ground, hitting a passing taxi with three passengers inside. In August 2015, a steel bar in another construction site fell onto a car, killing its driver.

The Hong Kong Daily reported further that people have noticed the train tracks “looked wavy, raising concerns over its safety” and that a government inspection team last May detected rust on sections of the track as well as “loose joints”.

In contrast, in the accident-free construction in Ho Chi Minh City the bulk of the work is being carried out by Vietnamese companies with the help of foreign technical experts although financing is from the Japanese. The project has also taken into consideration suggestions from pedestrians on making the train stations more accessible to prospective riders.

‘Bleeding with money’

Elsewhere in Asia, several of China-funded infrastructure projects have been completed and “are now bleeding money,” says Brahma Chellaney, professor of strategic studies at the New Delhi-based Center for Policy Research and and fellow at the Robert Bosch Academy in Berlin.

In a commentary published early this year by the Australian Strategic Policy Institute and Project Syndicate, Chellaney noted that while extending loans for infrastructure projects is “not inherently bad”, the projects that China is supporting are “often intended not to support the local economy, but to facilitate Chinese access to natural resources, or to open the market for low-cost and shoddy Chinese goods.”

In many cases, Chellaney added, China “even sends its own construction workers, minimizing the number of local jobs that are created.”

An example of China-financed projects that now are “bleeding money”, Chellaney said, is Sri Lanka’s Mattala Rajapaksa International Airport. Opened in 2013, the airport is now dubbed “the world’s emptiest”, together with the Magampura Mahinda Rajapaksa Port in Hambatota which “remains largely idle.”

Chellaney laments that “the heavier the debt burden is on smaller countries, the greater China’s own leverage becomes.” China has used its clout to push Cambodia, Laos, Myanmar, and Thailand to “block a united ASEAN stand against China’s aggressive pursuit of its territorial claims in the South China Sea,” he said.

Some countries, overwhelmed by their debts to China, are being forced to sell its stakes in Chinese-financed projects or hand over their management to Chinese state-owned firms, Chellaney said, adding that in financially risky countries, China now “demands majority ownership up front.”

The literature is brimming with examples of unfair deals that China imposes on developing countries for big loans it grants to them. If the economic managers of the Duterte administration refuses to recognize these risks in their desire to fuel “golden era” infrastructure projects, Congress may have to require that it retains the right to vet agreements that are entered into with China, along with the proposed tax program that will raise funds for the infrastructure program.

The congressional examination can perhaps start with the “oral commitments and written memoranda of understanding” that the Philippine economic team entered into with Chinese officials during the President Duterte’s state visit in October of last year.

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