Philippines wakes to debt-trap peril

The Philippines seems to have caught up with its neighbours like Malaysia in waking to the perils of signing up to Chinese infrastructure projects.

Supreme Court Justice Antonio Carpio has warned of potential Chinese confiscation of Philippine territory and resources under the proposed Chico River Pump Irrigation project.

“This 3.6-billion peso [US$69 million] loan may just be one of the many secret loan agreements between the Philippines and China which could run in the billions,” Carpio said.

He claimed the Luzon irrigation deal was expected to serve as a “template” for China’s multibillion dollar investment plans in the Philippines, including for major infrastructure spending on dams, roads and train lines under the Chinese Belt and Road Initiative (BRI).

China has offered investment of up to US$26 billion in aid, loans and investment to fund President Rodrigo Duterte’s “build, build, build” infrastructure projects. But of 10 proposed major Chinese infrastructure projects, only the irrigation scheme has completed the preliminaries. China’s promised investment appears to have bought Duterte’s surrender of the Philippine islands in the South China Sea.

His 2016 campaign promise to retake an island on a jet ski now seems a distant memory.

Manila has dismissed the judge’s concerns as a “pure hypothetical”. But the example of Sri Lanka, where China took control of a strategic port after the government failed to keep up payments, show how tangible Carpio’s concerns are.

US Vice President Mike Pence in November called on nations to avoid BRI loans that would leave them indebted to China.

The Philippine constitution required an automatic allocation of funds for annual debt payments, Finance Undersecretary Bayani Agabin said this week in an attempt to ease anxiety. “We’ve never had a history that we’ve reneged on our obligations even through the hardest times,” Agabin said.

The government says the contract agreement is “standard” and that the Philippines is more than capable of servicing its international debts.

But the agreement also requires the Philippines to waive “any immunity” on sovereign or other grounds regarding national property put up as collateral should a repayment dispute emerge over the irrigation project.

China is expected to fund up to 85 per cent of the US$80 million (4.37 billion peso) scheme.

The deal comes at a competitive rate of 2 per cent, below commercial rates of between 3-5 per cent, alongside a “commitment fee” of 0.3 per cent each year.

But an opposition senate candidate, Neri Colmenares, has also raised concerns over the interest rates attached to the loans and Manila’s concealment of loan terms for another China-backed dam project at Kaliwa which was signed in 2018.

The Department of Finance said all agreements with China went through thorough scrutiny to ensure they complied with domestic regulations and protocols on transparency and good governance standards.

“They also emphasised the attractiveness of Chinese loans. The rate of our loan is concessional. It means that it is still lower than accessing funds from the private market or from a multilateral development bank,” said departmental spokesman Antonio Lambino.

The Philippines has 20 years to pay back the loan and China can seize assets as collateral should the government default, according to the loan contract.

Carpio warned that any debt settlement dispute would favour China because the Beijing-based China International Economic and Trade Arbitration Commission would adjudicate any cases.

There has been a wave of criticism towards governments from Malaysia to Djibouti who have signed up to the BRI. Since taking power last May, the returning nationalist prime minister, Mahathir Mohamad, is renegotiating the previous administration’s BRI deals.

“In case of default by the Philippines in repayment of the loan, China can seize, to satisfy any arbitral award in favour of China, ‘patrimonial assets and assets dedicated to commercial use’ of the Philippine government,” Carpio said, quoting the loan agreement.

He subsequently alleged the China-funded Kaliwa dam could offer Reed Bank gas in the South China Sea as collateral.

“Well it’s the same, our assets are also collateralized in Kaliwa dam, patrimonial assets also, a different language but it means the same,” Carpio said at a legal convention in Iloilo yesterday (Thursday).

The Chico river loan agreement mentions “patrimonial asset” as collateral while the Kaliwa Dam loan agreement does not. But Colmenares claimed the Kaliwa dam loan agreement was as “onerous” as the Chico River irrigation project.

Handing the Chinese control of Philippine assets will not appeal to Duterte’s voter base, who were attracted by his tough-talking populist swagger during the 2016 presidential campaign. Maybe he knows his successors will have to deal with the consequences of his deal making with Beijing

Rural Filipinos would benefit from infrastructural spending. Picture credit: Wikimedia