China’s Loan Agreements with Philippines Skewed in Beijing’s Favor, Contracts Show

Nithin Coca
China’s Loan Agreements with Philippines Skewed in Beijing’s Favor, Contracts Show Members of a Philippine tribal community join students during a protest in Manila against a Chinese-backed dam project which, critics say, would destroy the environment in the Sierra Mountain range in Luzon Island, April 9, 2019.
Jason Gutierrez/BenarNews

Two Chinese debt contracts with the Philippines contain dispute arbitration and asset seizure clauses that unduly favor Beijing, according to analysts and loan agreements recently digitized and published by a U.S. think-tank.

Agreements to fund the 12.2 billion peso (U.S. $255 million) Kaliwa Dam and 4.3 billion peso ($90 million) Chico River Pump Irrigation Project were two of 100 Chinese debt contracts published and analyzed by the authors of “How China Lends,” according to a report released in March by the Washington-based Center for Global Development.

The Philippine contracts were the only ones from Southeast Asia included in the research.

“There are relatively few Southeast Asian countries in this database, and that’s largely a function of those borrowing countries not being fairly transparent,” said Scott Morris, a senior fellow at the Center for Global Development and one of the authors to the report.

Morris said the data likely points to similar concerning clauses in Indonesian, Cambodian, Malaysian, or Laotian deals. “We do see consistent behavior on [the] part of the Chinese lenders,” said Morris.

BenarNews contacted the Malaysian and Indonesia finance ministries to ask if Chinese loan contracts to their countries were publicly available, but did not hear back.

The two Philippines’ deals availability is due to domestic political pressure and transparency provisions in the country’s constitution, an analyst said.

“The details of the loans were revealed since public pressure erupted,” said Alvin Camba, a Filipino scholar and incoming assistant professor at the University of Denver in the United States.

“The terms of the China deals in the Philippines aren’t that different from what most countries get.”

Skewed toward China

Clauses in the two contracts give China power over the settlement of disputes, said Renato de Castro, a researcher at the Philippines’ Stratbase ADR Institute, which analyzes strategic issues influencing the Philippines and the Indo-Pacific region.

“If there are issues in terms of the implementation of the contract, it has to be arbitrated in Beijing,” de Castro told BenarNews, referring to the Chico River Pump Irrigation Project.

“During the arbitration, each side picks one of the three members, but if they can’t agree on the third member, CIETAC can choose that member, giving China overt control of the process.”

Under the 2018 loan agreement for the Chico River project, in which the Export-Import Bank of China agreed to lend Manila $62 million, disputes are to be arbitrated by the Beijing-based China International Economic and Trade Arbitration Commission (CEITAC), the document says.

Similarly, under the 2018 contract on China’s $211 million loan for the Kaliwa Dam project, a dispute between the Philippines and China would be arbitrated by the Hong Kong International Arbitration Center.

These clauses contrast with arbitration practice for World Bank loans. The Washington-based global financial institution uses the International Center for Settlement of Investment Disputes, a multilateral body in which 163 member countries have a stake.

While the center has been criticized for favoring investors’ rights over those of states, it is an autonomous institution.

BenarNews contacted Philippine Finance Secretary Sonny Dominguez for comment on these issues, but did not hear back.

However, a 2019 Facebook post from the Department of Finance defends the arbitration clause. It says that a loan agreement with France in 2015 – signed under the Aquino administration – requires arbitration to be held in Paris at the International Chamber of Commerce.

Some critics online commented on the post, asking why the government – any party’s government – would agree to such arbitration terms at all.

Commercial assets as collateral

The Chico River project has also raised concerns, with critics saying it placed the Philippines’  “patrimonial assets” as collateral.

The contract states that the Philippines “irrevocably waives any immunity” on “patrimonial assets and assets dedicated to commercial use.”

210611_PH_CH_contracts_article 8.jpg
This clause of the April 2018 lending agreement between the Export-Import Bank of China and the government of the Philippines states that national assets dedicated to commercial use could be claimed by the lender as part of the settlement of a dispute arising from the loan. [Loan Agreement]

Patrimonial assets are properties owned by the Philippines that are not for public use, public service, or the development of national wealth, legal sources say.

That means under the Chico River loan contract, the Philippines has no immunity on assets it owns that are used for commercial purposes.

Antonio Carpio, a former senior associate justice at the Philippine Supreme Court, believes Beijing could end up taking over assets such as the gas-rich Reed Bank in the disputed South China Sea, if Manila failed to pay back the loan.

In March 2019, then-Finance Assistant Secretary Antonio Lambino told CNN Philippines that Reed Bank could not be classified as a patrimonial asset because its exploitation would increase national wealth.

But Carpio told BenarNews that Reed Bank must be considered a commercial use asset because the government would sell gas obtained from it to the market,

There are “many … laws authorizing the sale of oil and gas to private parties under Service Contracts. Once covered by a Service Contract, [they] are patrimonial assets, they can now be collateralized and subject to seizure by creditors,” he said.

Other countries that lend do not employ such clauses in their loan agreements.

For instance, Japan, also a major investor of infrastructure projects in the Philippines, does not require waivers of immunity, or the use of Japanese law. Japan also doesn’t require waiving rights to patrimonial assets in its general terms and conditions for overseas development loans.

Dominguez had pushed back on criticism of these Chinese deals in April, after local media outlet the Philippine Star published an article on the report “How China Lends.”

In a letter to the publication, he said the article contained “several inaccuracies and falsehoods in connection with Chinese-funded projects in the Philippines.” 

The letter did not address concerns around patrimonial assets. But in 2019, the Department of Finance pointed out that the French contract, too, waived Philippine rights to patrimonial assets.

Randy dela Cruz’s son peeks into his father’s coffin, March 16, 2021. Tribal communities have protested displacement due to the Kaliwa dam project, and have faced sometimes violent reprisals, including the killing of two Dumagat community members during an “anti-communist” crackdown. [Jojo Riñoza/BenarNews]

The need for transparency

The Philippines example shows that countries borrowing from China could do more to make deals public, said Morris, of the Center for Global Development.

“I hope [the database] provides a roadmap for those who want to hold their governments accountable and ask for the nature of the commitments their government has made.”

Over the past decade, through its One Belt One Road (OBOR) infrastructure initiative, China has vastly increased the funding and construction of infrastructure projects across Southeast Asia.

Ongoing construction in the region includes the $6 billion Bandung-Jakarta high-speed rail project in Indonesia and the $1.3 billion Kyaukphyu deep-water port in Myanmar, among others.

According to Baker McKenzie, a multinational law firm, at least $166 billion has been invested by China as part of the OBOR in the region.

But OBOR memoranda of understanding “have [mostly] yet to be made publicly available,” Angus Lam, an OBOR expert at the U.S.-Asia Institute in Washington, told BenarNews.

“It is no wonder that citizens across Southeast Asia generally disapprove of Chinese investment.”

Jason Gutierrez in Manila, Ahmad Syamsudin in Jakarta, and Hadi Azmi in Kuala Lumpur contributed to this report.


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