Carpio insists China can seize gas in Reed Bank if PH fails to pay loans

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Supreme Court Senior Associate Justice Antonio Carpio insists that China can seize gas from the Reed Bank, contrary to assertions made by the Finance department. (FILE PHOTO)

Metro Manila (CNN Philippines, March 26) — Senior Associate Justice Antonio Carpio insisted that Beijing can seize gas from the Reed Bank, a sea feature within the Philippines' exclusive economic zone, should Manila fail to pay its debt to the Asian giant under multi-billion peso loan deals.

"[The gas] is not used by government to operate the government. It is not used by government in dispensing public service. So the gas is not property for public use, governmental use or public service. So the gas could only be patrimonial asset of government," Carpio said in a text message.

Carpio had earlier warned that under the loan deal for the ₱3.69 billion Chico River Pump Irrigation Project, China can seize "patrimonial assets and assets dedicated to commercial use" of the Philippines.

However, Malacañang and the Finance department cast doubt on Carpio's opinion.

Presidential Spokesperson Salvador Panelo and Finance Assistant Secretary Tony Lambino said Reed Bank could not be classified as a patrimonial asset because it is for public use. They even cited a 2002 Supreme Court ruling penned by Carpio to back up their claim.

"He said assets that are for public use, that have a public purpose or increase the national wealth are not patrimonial assets," Lambino told CNN Philippines' The Source on Tuesday.

Panelo said a law or a proclamation is needed for public property, like Reed Bank, to be declared as a patrimonial asset. He added that President Rodrigo Duterte would not declare it as such.

Lambino said gas would increase national wealth and therefore would not fall under the definition of patrimonial assets, but Carpio differed, saying that gas is for commercial use as the government sells it to the market.

For Lambino, who is not a lawyer but said he has consulted the "best lawyers" on this matter, patrimonial assets include cars seized by the Bureau of Customs, money and gold. "These are things that we can use to repay a loan," he said.

But he added that critics are getting ahead of themselves, assuring that it is highly unlikely that the Philippines will default on the loan from China.

He reiterated that loans from China have interest rates which are more or less equal to what Japan has offered. He explained that it only appears that interest rates on Chinese loans are heftier compared to Japanese loans because they are pegged to the dollar.

This despite the loan deals setting an annual interest rate of two percent and an annual "commitment fee" of 0.3 percent and a "management fee" of 0.3 percent.

"We are managing our debt very responsibly and investing in things that we actually need," he said, adding that the ratio of the Philippines' debt to its economic growth is shrinking. He said this is projected to go down to 36.8 percent by 2022.

The Bureau of Treasury reported last month that the government's outstanding debt stood at ₱7.49 trillion by the end of January, or 2.8 percent (₱201.66 billion) more than the ₱7.29-trillion mark by the end of December 2018.

But some senators have balked at the government waiving patrimonial assets should it default on the loans.

"Malacañang should never use our patrimonial assets as collateral. We have already seen the negative effects of this type of arrangement with China in a number of countries where China eventually ended up controlling the resources and critical assets of a country," Senator Joel Villanueva said.

Senate President Pro Tempore Ralph Recto said China should be the last country tapped for project financing, "if at all."

China arbitration

Panelo and Lambino added that should the Philippines default on the loans from China, Beijing and Manila would have to undergo a lengthy process to get to a resolution.

"We will go into some sort of conversation. If we are not able to resolve the situation based on that conversation and that effort, then we can agree to go into arbitration," he said.

He said that if China gets a favorable ruling from the arbitration, it would have to go to a Philippine court to have this affirmed, which can be appealed all the way to the Supreme Court.

Under the Chico River irrigation project deal, Beijing and Manila would head to the China International Economic and Trade Arbitration Commission if any dispute regarding the agreement cannot be settled through "friendly consultation."

Meanwhile, the agreement on the loan for the Kaliwa Dam states that Beijing and Manila would turn to the Hong Kong International Arbitration Centre.

In both deals, the arbitration ruling is recognized and enforceable in the Philippines provided that the arbitral tribunal had jurisdiction over the matter, China or the Philippines were notified of the proceedings, the arbitral award was not obtained through collusion or fraud or is not contrary to the Philippines' public policy.

Disputes arising from both of the deals would have to be tackled in accordance with Chinese law.

Critics have raised concerns about these provisions, worrying that it would tip the scales against the Philippines.

The Finance department admitted it is not usual for the lender country to impose that arbitration proceedings be held in their territory.

"In this case, what was negotiated was a Chinese location, Beijing, but of course, we will continue to try to find other options as we move forward," Lambino said.

CNN Philippines Correspondents Anjo Alimario and Joyce Ilas contributed to this report.