Finance dept.: Provisions in China loan deals 'standard' in deals with other states, institutions

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Finance dept.: Provisions in China loan deals 'standard' in deals with other states, institutions

Metro Manila (CNN Philippines, April 17) — The Department of Finance (DOF) said Wednesday provisions in the country's loan with China are not new as the are present in similar deals with other states, as well as multilateral institutions such as the World Bank and Asian Development Bank (ADB).

Finance Undersecretary Bayani Agabin, head of DOF's legal affairs group, said in a statement waiver-of-immunity and arbitration clauses are standard in any loan deals between states.

"These clauses are present not only in the loan agreements between the Philippines and China under the current government, but also in other loans accords entered into by previous administrations, with, among others, France, and China," he said.

Agabin also allayed concerns over the waiver-of-sovereignty immunity clause in the ₱3.69-billion Chico River Pump Irrigation Project deal with Beijing. He said these concerns are "unfounded" as these provisions only allow the "counterparties" to seek arbitration in case of a loan default, but not a Chinese takeover of patrimonial assets.

“The waiver-of-immunity clause are usually included as a standard provision in loan agreements to enable the lender to bring the borrower before an arbitral court in case of a default on the loan,” Agabin said. “No takeover of our state assets is possible because we do not provide any collateral for any of the loan agreements we have entered into with any government.”

He said while waivers of immunity are not explicitly stated in some accords, all have arbitration clauses which are "effectively an implied waiver of immunity."

This stance, he added, had been affirmed by the Supreme Court.

"Thus, even if the loan agreements with China do not contain the waiver-of-immunity provision, the arbitration clause in the accords already imply a waiver of immunity from suit," Agabin said.

Article 8.4 of the China-funded loan deal states the project agreement shall be "governed by and construed in accordance with the laws of China." If the two countries figure in a dispute, they can opt to go to arbitration. For the Chico River project, China International Economic and Trade Arbitration Commission will handle the arbitration, which will take place in Beijing, China.

Finance Undersecretary Mark Dennis Joven pointed out that the waiver-of-immunity clause in the loan accord with China is almost the same as that in the credit facility agreement entered into by the Aquino administration with France for the Cebu Bus Rapid Transit (BRT) project.

“Comparing the China provision with the French provision, which was signed during the Benigno Aquino III administration, the wording is identical. So in that Cebu BRT Project, there was also a waiver of sovereign immunity provision as far as arbitration is concerned,” Joven, who heads the DOF international finance group, said.

Senior Associate Justice Antonio Carpio earlier warned "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." He explained the assets may pertain to oil and gas resources in the exclusive economic zone in the West Philippine Sea, including the gas-rich Reed bank.

On governing laws of the deals

The DOF said governing law in the deals for the China-funded Chico River Irrigation and the New Centennial Water Source-Kaliwa Dam projects are based on the laws of Beijing. But for similar projects, the governing law in the deals are from where the funding partially came from.

For the North-South Commuter Rail project with funding support from Japan, the deal is based on the laws and regulations of the Japanese government. For the Cebu BRT during the (Benigno) Aquino administration, French laws governed the accord, while the Angat aqueduct improvement project during the Arroyo administration was also funded by China.

Joven said the interest rates of the China loans are similar or can be lower than those in similar deals with other countries.

He said in dollar terms, the Chinese loans for the Kaliwa dam and Chico River irrigation projects have a nominal interest rate of 2% with a 20-year maturity period and a seven-year grace period, while the Angat aqueduct project of the Arroyo administration has a higher interest rate of 3% with a 20-year maturity period and five-year grace period.

Japan’s loan for the North-South Commuter Rail project has a 2.7 percent interest rate if converted to dollars with the same China loan terms.

Agabin said the Philippines is "farfetched" from defaulting on its loans, with its low debt-to-GDP (gross domestic product) and economic performance.

Should the Philippines default on the loans, Agabin said any ruling by the corresponding arbitral court on government paying its debt would still have to conform with the Philippine Constitution and can only be enforced if local courts rule that such an arbitral decision is binding on the Philippines.

Joven said it is incorrect to compare the Philippines with other countries like Sri Lanka which had failed to pay its loans to China, because of the starkly different numbers when it comes to what they owe and what their respective economies produce.

In terms of the debt-to-GDP ratio, Sri Lanka’s is almost 80 percent, while the Philippine ratio is roughly half at around 40 percent. The debt-to-GDP ratio shows the country's ability to pay its debts. A high debt-to-GDP ratio indicates a high probability of a country defaulting on its loan.

In the World Economic Forum’s Global Competitiveness Index 2017-2018, the Philippines ranks among the top 40 countries with low debt-to-GDP ratios of less than 40%. The Philippines ranks 33rd with a debt-to-GDP ratio of 33.7 percent while Sri Lanka ranked 109th with 77.3 percent.