The meager truth of China’s aid to the Philippines

When Chinese President Xi Jinping made a landmark visit to the Philippines last month, many expected the leader to make good on a previous reported pledge to deliver as much as US$24 billion in aid and investment on his host.

Despite a slew of new signed agreements, Xi’s visit failed to clarify China’s commitment to Philippine President Rodrigo Duterte’s expansionary economic agenda, including his much ballyhooed “Build, Build, Build” infrastructure-building scheme.

Until now, despite Duterte’s bullish pronouncements, China is not a big donor to the Philippines in terms of foreign aid and official development assistance (ODA). Indeed, as of June, China has only one outstanding loan project in the Philippines, namely the Chico river pump irrigation project worth US$62.1 million.

As a percentage of total ODA received by the Philippines as of June 2018, China accounted for a mere .8% of the estimated US$13 billion received, according to National Economic and Development Authority (NEDA) statistics.

Japan, on the other hand, accounted for 40.3% of the total, while the World Bank and Asian Development Bank extended 20.6% and 17.7% respectively. China also trails Australia, South Korea, the European Union and France in total ODA given.

When Duterte visited China in October 2016, his administration boasted of a coming aid and investment bonanza, proof of his trip’s self-professed “success.”

The US$24 billion sum was supposed to be delivered in 13 cooperation, financial assistance and investment pledges, with US$15 bill in business to business contracts and US$9 billion in ODA, US$7 billion of which were to be tied loans and US$2 billion in concessional loans.

The proposed projects included a US$3 billion memorandum of understanding (MoU) commitment with the MVP Global Infrastructure Group and Tianjin Suli Cable to produce high-end cables in the Philippines.

Another vague MoU with MVP Global Infrastructure and China’s Railway Engineering Group vowed to spend US$2.5 billion in infrastructure. Another memorandum with the Green Energy Development Corporation and PowerChina Guizhou aimed to build a US$1 billion power plant.

In March 2017, China’s Vice Premier Wang Yang visited Davao City, Duterte’s hometown, to reaffirm Beijing’s commitment to building and co-financing a southern railway projected to cost around US$4 billion on the southern island.

In November 2017, China Prime Minister Li Keqiang visited Manila and vowed to fund two projects, namely the Chico river pump irrigation project for US$62.1 million at 2% interest over a 20 year repayment period, and the so-called New Centennial Water Source Project, or Kaliwa Dam, for US$374 million.

When President Xi visited Manila last month, he and Duterte formalized and signed 29 additional agreements, including a MoU cooperation agreement on China’s US$1 trillion Belt and Road Initiative (BRI) and joint oil and gas development in the contested South China Sea.

Yet nearly all of China’s ODA and investment promises to Duterte remain unfunded. And many of the proposed deals, if ever actualized, are on less-than-generous terms. The interest rates on the proposed projects range between 2-3% per annum, versus only 0.25-0.75% interest for Japanese ODA funded projects.

Moreover, the terms of the 29 new agreements agreed to when Xi visited Duterte have not been publicly disclosed, raising criticism about the lack of transparency surrounding the deals.

The NEDA approved last year the first phase of the China-backed Mindanao rail project for US$726 million. Construction was targeted to start in the third quarter of 2018, though so far for unclear reasons no ground has been broken.

China’s ODA projects in the Philippines have been hounded by controversy in the past.

For instance, a China-backed North Rail Project was terminated under a previous administration before the loan was closed after the Supreme Court has that it was a commercial deal and not a government-to-government one that should have undergone competitive bidding.

The Gloria Macapagal-Arroyo administration was hounded by irregularities in a US$329 million government national broadband project with China’s ZTE Corporation. That project was cancelled in 2007 due to corruption allegations, including alleged kickbacks paid to the first family.

China’s ODA funneled through the Export-Import Bank of China prescribes that no less than 50% of total procurement for concessional loans should be done through Chinese contractors, often making them more costly compared to using local contractors.

The Kaliwa Dam project, which aims to supply an additional 600 million liters per day of drinking water for Metro Manila and surrounding provinces and augment the 4,000 million liters from the existing Angat Dam, will be much more costly to build under China’s proposed terms than Japan’s competing offer.

A Japanese firm, Global Utility Development Corporation (GUDC), previously submitted an unsolicited proposal for the project as part of an Integrated Public-Private Partnership (PPP) scheme.

That proposed deal would have seen the Japanese company finance all of the construction, operation and maintenance, and thus would not have entailed any foreign borrowing from Manila.

China’s proposed funding agreed during Xi’s visit for the same though revised project will be done under a so-called hybrid PPP, with construction led by China contractors and operation and maintenance done by a local firm.

Eighty-five percent of the construction costs, unlike under the self-funded Japanese proposal, will come from ODA and thus be shouldered by Filipino taxpayers.

The cost of the China-backed project, including a proposed waste water treatment, will be US$640 million, compared to Japan’s more modest and less environmentally impactful US$410 million proposal. It will also take five years to build compared to Japan’s faster four year plan.

Meanwhile, there are ongoing negotiations for more China ODA, including funding for a long haul North-South Railway Project and the Bases Conversion and Development Authority’s Subic-Clark Railway project.

While Duterte aims to “build, build, build” the country to a “golden age of infrastructure,” it’s not clear China is the best or most reliable source for financing that vision.