Enter the Philippines on the growing global list of countries where Chinese loans and investments are being castigated by critics as potential sovereignty-eroding “debt traps.”
In a widely publicized presentation this week, Supreme Court Senior Associate Justice Antonio Carpio warned of potential Chinese confiscation of Philippine territory and resources under the proposed Chico River Pump Irrigation project.
The court justice claimed that the deal is expected to serve as a “template” for China’s multi-billion dollar investment plans in the Philippines, including for big ticket infrastructure schemes under Beijing’s US$1 trillion Belt and Road Initiative (BRI).
China has offered as much as US$26 billion in aid, loans and investments to fuel President Rodrigo Duterte’s “build, build, build” infrastructure building spree. Those big ticket promises were reiterated during Chinese President Xi Jinping’s visit to Manila last November.
Among 10 proposed big-ticket Chinese infrastructure projects, only one so far has cleared the preliminary stages of implementation.
Yet critics believe China’s promised investment bonanza has come in quiet exchange for Duterte’s strategic acquiescence in the South China Sea, where the two countries’ have competing claims and China is militarizing its controlled features.
Carpio’s warnings were thus immediately echoed via apoplectic headlines by mainstream Philippine media, which has taken a broadly critical view of Duterte’s widely perceived as overly cozy relations with Beijing.
The Philippine government has sought to downplay concerns raised by the magistrate as “pure hypothetical” paranoia.
Government officials assert that the revealed contract agreement was a “standard” practice and that the country is more than capable of servicing its debts to China and others.
China is expected to fund up to 85% of the $80 million (4.37 billion peso) project, one of the 10 big-ticket infrastructure projects proposed by Beijing.
The loan agreement comes with a relatively low interest rate of 2%, currently below commercial rates of between 3-5%, a “commitment fee” worth 0.3% per annum and a $186,260 “management fee.”
The Philippines has 20 years, inclusive of a seven-year grace period, to pay back the loan. Should it default, however, China could take over national assets as collateral, according to the loan agreement.
“In case of default by the Philippines in repayment of the loan, China can seize, to satisfy any arbitral award in favor of China, ‘patrimonial assets and assets dedicated to commercial use’ of the Philippine government,” the Filipino magistrate said, citing the loan agreement’s language.
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.
Carpio warned that any debt settlement dispute would automatically favor China because the Beijing-based China International Economic and Trade Arbitration Commission will adjudicate any such cases.
He also highlighted the controversial confidentiality clause of the loan agreement, which apparently violates the Philippine 1987 Constitution’s provisions on the need for consultation with other branches of the state and key stakeholders in such matters.
The ultimate threat, Carpio said, was the possibility that China will ask for control of the disputed Reed Bank, an energy-rich area in the South China Sea, as part of any future Beijing-imposed debt settlement arrangement.
Last month, veteran lawmaker and senatorial candidate Neri Colmenares, a prominent public interest lawyer, also lashed out at the loan agreement as lopsided and “onerous.”
“The loan agreement for the Chico River Pump Irrigation Project is onerous and highly favors China. It is a disaster for the Philippines.” Colmenares said, noting the possibility that other Chinese projects could have similar terms and conditions.
“This 3.6 billion peso loan may just be one of the many secret loan agreements between China Philippines and China which could run in the billions,” he said.
Government officials have been quick to play down and dismiss the debt trap concerns.
According to the Department of Finance (DOF), all agreements with China go through rigorous scrutiny to ensure compliance with domestic regulations and protocols on transparency and good governance standards.
“They also emphasized 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,” DOF spokesman Antonio Lambino told the media.
“I think we’re just really jumping the gun. [We are] too well ahead of what may happen. I think we really don’t have much to worry,” Justice Secretary Menardo Guevarra told reporters on March 26.
“According to the DOF, [there is] nothing unusual about this contract. It’s something like a template that has been used in so many other loan agreements. So, I guess we are just really worrying too much.”
Presidential spokesman Salvador Panelo went a step further in justifying the loan agreement, stating “It’s natural for them [China] to do such things so that they will make sure that they will not lose what they lent us.”
He also assured the public that the Reed Bank will not be part of any debt settlement arrangement, even if, as Carpio showed, it is considered as a national patrimony asset.
But those official reassurances have so far failed to ease rising public skepticism over the real terms and conditions behind Duterte’s rich dealings with China.