The Philippine Experience: Chinese Official Development Assistance Tied Loans

Slide 1 © 2003 By Default!
The Philippine Experience:

Chinese Official Development Assistance Tied Loans
Rommel C. Gavieta MA (URP) MSc (Eng)

Vice President, Metro Rail Transit Corporation Professor,
Graduate School of Business, De La Salle University
Research Associate York Centre for Asian Research
A Free sample background from www.awesomebackgrounds.com

The State of Philippine Economy

Fiscal constraints for
Public Sector Investment in Infrastructure Development

Evolution of Development Policy in the Philippines

 Pre-1986
In the 1950s, the country’s development policy was centered around an industrialization strategy
based on import substitution. The strategy was able to raise the level of capital per worker, allowing
GDP to grow by about 6.4% annually during the decade.
Import substitution, however, soon lost steam and, during 1960–1970, GDP growth slowed to an
annual average of 4.9%. The Philippines adhered to import substitution well into the 1970s and the first
half of the 1980s, long after the four Asian NIEs had shifted to export-led industrialization.
 Post-1986 (1989 Washington Consensus)

Key policies and reform agendas of the administrations since 1986 were mostly documented in the
Medium-Term Philippine Development Plans A review of the MTPDPs reveals that policies and reforms
pursued since the restoration of democracy broadly fall into the following areas: monetary and fiscal
reforms for restoring and maintaining macroeconomic stability; trade, industrial, and financial reforms
for improving economic efficiency and competitiveness; governance reform and decentralization for
improving the effectiveness of the national and local governments; and social policies and programs for
fighting poverty, improving income distribution, and achieving the Millennium Development Goals
(MDGs)

Overseas Development Assistance in the Philippines

Harmonized Development Policies between DAC Member and
Multilateral Donor Countries with Reciepient Countries
Multi-lateral agencies like the UN and the OECD have already taken steps to harmonize its ODA
development policies and procedures. DAC Donor Countries’ policies and procedures has not been
harmonized with the development policies and procedures of the Millennium Development Goal (MDG) of
the United Nations (UN) and the Poverty Reduction Strategy (PRS) of the World Bank (WB). The degree of
harmonization of development policy and procedures among ODA Donor Countries can be described as
follows:
 There is a degree of harmonization of development policies and procedures between DAC Donor
Countries but no harmonization of procedures even between DAC Donor Countries and Recipient
Countries.
 There is little information about the harmonization of development policies amongst the other Non-DAC
Donor Countries.
 There are variations in development policies and procedures between Multilateral and Donor Countries
which does not promote partnership and project ownership by Recipient Countries. This dilutes the
effectiveness of ODA in meeting the objectives of the MDG and the PRS.
 The Rome Declaration is an effort by the DAC Donor Countries to harmonize the delivery of ODA in
accordance with Recipient Country priorities and around Recipient Countries’ project administration
systems. (Rome Declaration on Harmonization, High-Level Forum on Harmonization, February 25,
2003, Rome, Italy)
Non_DAC Donor Coutries like the Brazil, Russia, India and China (BRIC) Block does not comply with ODA
Tied Loan Covenants and have not complied with harmonizing its ODA administration policy with MDG or
the PRS.
Primary Areas of ODA Donors Bilateral and Multilateral (2003)

ODA Projects in the Philippines
In 2008 a review of ODA project in the Philippines has

shown that 7 in 10 ODA projects fails to deliver Benefits
China is 5th ranking ODA Donor to the Philippines in the

2006 OA review of the NEDA

General Critique of ODA Tied Loan Projects
 General Cost to Recipients of Tied ODA Loans
The two usual criticism about tied ODA are higher costs of goods and services and distortion of
the theoretical benefits of tied ODA. OECD studies have estimated that limiting the purchasing
power of the Recipient Country to goods and services of the Donor Country can increase the cost of
goods and services to between 15% and 30% more than if they were procured through international
competition. The over-pricing is due to the fact that competition for tied ODA contracts is usually
limited to a few Donor Country firms. As a consequence of the higher cost, the Recipient Country
will have less value for aid money. (La Chimia, Annamaria; International steps to untied loan The
DAC/OECD Recommendation on Untying ODA to the Least Developed Countries; (2004) 13 Public
Procurement Law Review Issue 1; Sweet & Maxwell and contributors)
 Corruption in ODA projects

ODAs have been a huge source of corruption in the Third World. Rampant corruption in ODA
transactions has been a serious concern, especially in case of ODA loans where the people would
shoulder the debt burden in the form of less social services, higher public service fees and more
taxes. The members of the DAC “share a concern with corruption.” A 2006 perception survey
conducted by the ADB in Indonesia and the Philippines shows that 82 % of the respondents
(“opinion leaders”) feel that “corruption is to blame for waste in ODA.” (Padilla, Arnold; Issues
hound China as new major ODA player; http://www. businessmirror.com.ph/1005&062007/
nation01.html)

Philippine Critique of Implementation ODA Tied Loan Projects
 Lack of a coherent industrial policy and rational matching of Non-Market Driven Projects for ODA
Tied Loan Financing. This is an area that has been overlooked because of the controversy it
generates. Since 1972, Philippine economic managers followed a program that largely mimicked
the Washington Consensus and did not allow for strategic intervention on the part of the
government.
 Low investments in infrastructure – According to World Bank estimates, a middle income country in
East Asia will need to spend at least 5 percent of GDP on infrastructure to promote development,
attract investments and reduce production costs in the next 10 years. Infrastructure expenditures in
the Philippines is only accounts for 2.8 percent of GDP. The lack of infrastructure program is largely
related to the fragile fiscal situation of the government.
 High Transaction Costs – Transaction costs refer to market-related infrastructure, facilities and
services needed to conduct business. It also includes costs in acquiring information and exchanging
information in transactions and contract enforcement. It has been argued that the relatively poor
performance of Philippine export may be explained by high transaction costs in the country rather
than market access issues.
 Gaps in the implementation of good governance reforms in corrupt institutions continues to erode
the potential for growth of the Philippines.
 The developing country debt crisis marked a dramatic watershed in ODA Tied Loan financing as it
brought home reality that ODA Tied Loans have accumulated into unsustainable debt thus
questioning the use of loans to finance development. Moreover, it also suggested that development
institutions had indulged in “defensive lending” by using ODA Tied Loans to finance the repayment
of earlier loans thus feeding spiraling debt (Cohen, Daniel, Jacquet, Pierre and Reisen, Helmut;
Beyond “Grants versus Loans”: How to use ODA and debt for development; AFD/EUDN
international conference, Paris, Dec. 15 2005

Chinese Overseas Development Assistance

in the Philippines

Chinese Foreign and ODA Policy Linkages
 Major Sea-Lanes Transiting Southeast Asia China’s
GDP has grown four times since 1978, making China
the world’s sixth largest economy by some measures.
China is now the world’s second largest importer of oil.
Ninety % of China’s imported oil is estimated to come
by sea. In addition, China also consumes half the
world’s cement, a third of the world’s steel, a quarter of
the world’s copper, and a fifth of the world’s aluminum.
 South China Sea Dispute the South China Sea, this

vast body of water is an abundant source of aquatic
resources and is thought to hold extensive oil
resources. Earlier reports have estimated reserves to
hold 100 billion barrels of oil and 25 billion cubic
meters of natural gas in the region around the Spratly
Islands. (Vaughn, Bruce and Morrison, Wayne M;
China-Southeast Asia Relations: Trends, Issues, and
Implications for the United States; Congressional
Research Service ˜ The Library of Congress; Order
Code RL32688; Updated April 4, 2006)
 Soft Diplomacy Policy Approach with ODA Financing:

The 15th Annual ODA Portfolio Review of the National
Economic and Development Authority reported that
China is funding three projects worth $459.99 million
as of December 2006. While still far behind traditional
leading donors, China is increasingly becoming one of
the important foreign sources of development funds in
the country. Last year it accounted for 5 % of total
ODA loan commitments of $9.51 billion, ranking fifth
behind Japan, the Asian Development Bank (ADB), the
World Bank and the United Kingdom.
Spratly Island Joint Marine Seismic Undertaking
and the North Luzon Railways Project
 The Joint Marine Seismic Undertaking (JMSU)

refers survey for oil in the Spratly Islands as
signed last March 14, 2005 by the PNOC
Exploration Corporation (PNOC-EC), China
National Offshore Oil Corporation (CNOOC)
and Vietnam Oil and Gas Corporation
(PetroVietnam).
 The JMSU covers an area of 142,886
kilometers west of Palawan.”
 The first phase was between September 1 to
November 16, 2005 covering 11,000 line
kilometers. The Chinese seismic vessel M/V
Nan Hai 502 conducted the survey. Data
gathered from the first phase of the survey was
processed in Vietnam. Data interpretation was
done in Manila by the PNOC-EC.
 The second phase of seismic acquisition, The Geology and Mineral Resources Ministry of the
covering 11,800 kilometers, started October People's Republic of China (PRC) has estimated that the
2007. It was supposed to be completed Spratly area holds oil and natural gas reserves of 17.7
January 2008. billion tons (1.60 × 1010 kg), as compared to the 13
billion tons (1.17 × 1010 kg) held by Kuwait, placing it as
 A condition for the finalization of the North
the fourth largest reserve bed in the world.
Luzon Railway Project is the finalization of the
JMSU.

Chinese ODA administration Policy
 Chinese ODA Tied Loan program is modeled after

the old Japanese ODA Tied Loan Model where
Japanese firms often came up with projects for
Tied Loan financing, it takes the project to a
Recipient Country which would then request it from
the Japanese Govcernment as a Donor Country. If
the Japanese government agreed, it would ask
those same firms to implement the project.
 It is not clear that such a tight system yet exists in

China but they may be moving toward such a
system. In the first several decades of its aid-
giving, the Japanese government used its
assistance to secure needed raw materials
imports, promote its exports, strengthen its
business sector and ensure friendly relations with
countries whose products and markets were
potentially important to the Japanese economy.
China appears to be moving in the same direction.
However, the Japanese never actually located their
aid program in their Ministry of Economy, Trade
and Industry, although until recently, that ministry
had a considerable say over
Japan’s aid.

East Asia Pacific, Sub-Saharan Africa and Philippines Statistics
 People’s Republic of China foreign policy East Asia Sub-Saharan Philippines

is consistent with the theory of defensive
realism. China is trying to secure its Clic k o n the indic ato r to vie w a
Pacific
2000 2005
Africa
2000 2005 2000 2005
Asian sphere of influence and acquire de finitio n

P e o ple P e o ple P e o ple
what it sees fit as necessary to defend a Population, total 1.8 billion 1.9 billion 668.9 million 752.6 million 75.8 million 83.1million
Population growth (annual %) 0.9 0.9 2.6 2.3 2 1.7
developing nation. Ec o no my Ec o no my
GDP (current US$) 1.7 trillion 3.0 trillion 341.7 billion 630.8 billion 75.9 billion 98.4 billion
GDP growth (annual %) 7.6 9 3.5 5.7 6 5
 Freed from threatening Russian forces to GDP per capita (current US$) 944.44 1,578.95 510.84 838.16 1,001.32 1,184.12
the north and Soviet client Vietnam to the

S tate s and marke ts S tate s and marke ts
south, China is expanding its strategic Time required to start a .. 55 .. 61.5 .. 48
business (days)
reach by claiming rights over the whole Glo bal links
South China Sea and increasing its Foreign direct investment, net 45.1billion 96.9 billion 6.8 billion 16.6 billion 2.2 billion 1.1billion
influence in Southeast Asia. China is inflows (BoP, current US$)
demanding a free hand in East Asia from Long-term debt (DOD, current 418.7 billion 400.2 billion 172.7 billion 176.7 billion 50.8 billion 54.7 billion
US$)
other powers in South East Asia. Total debt service (% of 11.4 6.1 11.4 8.8 14.3 16.7
exports of goods, services
and income)
Official development 8.6 billion 9.5 billion 13.2 billion 32.6 billion 575.2 million 561.8 million
 China’s foreign policy motives in Afraica: assistance and official aid
(current US$)
Oil, commercial outlet for Chinese goods Workers' remittances and 16.7 billion 45.0 billion 4.6 billion 8.8 billion 6.2 billion 13.6 billion
and diplomatic support. compensation of employees,

received (US$)
Source: World Development Indicators database, April 2007
IMF Debt & Reserve Related 24.63% 13.34% 50.54% 28.01% 66.93% 55.59%
Indicator of External Vulnerability
(50% limit debt to GDP ratio)

2007 Preliminary Report on
Chinese ODA Commitments to the Philippines
 As of June 2007 , Japan’s total ODA commitment amounted to $3.2 billion, followed by the ADB at $1.98
billion and the World Bank at $1.7 billion.
 For infrastructure projects alone, Beijing and Manila have signed $1.11 billion in loan accords involving
many big-ticket priority projects of the Arroyo administration.
 The projects include the $35-million Banaoang Pump Irrigation Project of the National Irrigation
Administration in 2002, the $27.6-million General Santos Fish Port Complex Expansion Project of the
Department of Agriculture, and the $50-million Non-Intrusive Container Inspection Project Phase 1 of the
Bureau of Customs.
 The Chinese government also provided $400-million financing for the $503.05-million NorthRail Project
Phase 1 from Caloocan to Malolos, Bulacan; and a separate $500-million loan for the $573.66- million
NorthRail’s Phase 2 from Malolos to Clark.
 Also included in the $2.21 billion are the controversial $329.48-million National Broadband Network Project,
the $474-million Cyber Education Project, the $910-million Laiban Dam Project, the$260-million Philippine
National Railway’s Main Line South Railway Project Phase 1 from Calamba to Lucena, the $118.77-million
Angat Water Utilization and Aqueduct Improvement Project of Metropolitan Waterworks and Sewerage
System, the $57.56-million funding shortfall of the NorthRail Project Phase 1 Section 2 from Malolos to
Clark, and the $63.67-million Mass Housing Program of the Housing and Urban Development Coordinating
Council.

Review of
North Luzon Railways Corporation’s Project

History of the North Luzon Railways
 In 1875, Don Eduardo Lopez Navarro, Inspector of
Public Works of the Philippine Islands, submitted a
plan for a railway system on the island of Luzon. The
plan was approved in June 1, 1887. A concession was
granted to Don Edmundo Sykes of the Ferrocarril de
Manila-Dagupan.
 In 1916 the Manila Railways Corporation (MRC) was

nationalized and its assets were acquired and operated
by the Philippine colonial government until 1940.
 Between 1954 and 1957, the MRC fleet of trains

converted from steam to diesel engines. The
conversion was a financial burden from 1957 to 1963.
 In June 20, 1964, MRC was given a new charter, and

the company changed its corporate name to the
present-day PNR.
 In July 23, 1979, PNR was placed under the

Department of Transportation and Communications
(DOTC) as an attached agency.
 In 1996, a high speed rail was envisioned to link Clark

International Airport to the present Ninoy Aquino
International Airport.
 Today a Chinese ODA Tied loan changed the project

from a high speed rail link into a narrow gauge
commuter line.
Clark Special Economic Zone formerly the Clark Air Force
 Clark Air Force Base (CAB) was the largest
US Military Base Overseas.
 Main Base is is 4,200 hectares and the Clark
Crow Valley Air Force Bombing Range is
32,000 hectares
 US Air Force left the Pinatubo Eruption in 1992
 CAB was converted into the Clark Special
Economic Zone
 Clark Air Force Base is now being developed
into the Premier International Airport of the
Philippines
 Offsite infrastructure includes Expansion of the
ongoing North Luzon Expressway (NLE), NLE
link to C-5 (ROW ongoing) and the North
Luzon Railways high speed link to Fort
Bonifacio-NAIA

North Luzon Railway Project Service Comparison
North Luzon Railways 1997 proposal (Spanish North Luzon Railways 2005 proposal (China
Railways Group and Construcciones y Auxiliar National Machinery Group now known as Sinomach)
Ferrocarriles)
The components of the project are: The components of the project are:
Phase I - 102-kilometer rail line between Caloocan and Clark Phase I - 80-kilometer rail line between Caloocan and Clark
International Airport (McArthur Corridor) International Airport (McArthur Corridor)
Phase II – Caloocan to Bonifacio Global City Phase II - Caloocan to Fort Bonifacio (EDSA Corridor)
Phase III – Clark to Poro Point in San Fernando, La Union Phase III - Clark to Subic Freeport Zone;
Phase IV - Clark to Poro Point in San Fernando, La Union
The initial phase of the North Rail Project entails the
upgrading of the line from the existing Caloocan Station to The initial phase of the Northrail Project entails the
the Clark International Airport. reconstruction and upgrading of the line from the existing
Caloocan Station to the Clark International Airport.
This was born out of a plan to reactivate rail service to the
North to develop the Clark Special Economic Zone (CSEZ) This was born out of a plan to reactivate rail service to the
as Asia Pacific's regional transshipment logistics hub. North to develop the CSEZ as Asia Pacific's regional
transshipment logistics hub.
Phase I is further divided into two sections: Section 1 from
Caloocan to Malolos and Section 2 from Malolos to DMIA.
Construction of Section 1, Phase 1 began in October 2006

following the successful relocation of almost 20,000 project-
affected families occupying the site of the Philippine National
Railways (PNR).

North Luzon Railways Project Description Comparison
Ferrocarriles)
The Project entails the following features and estimates: The Project entails the following features and estimates:
Electric High Speed Units Diesel Multiple Units (DMUs)

 Double Track and Standard Gauge  Double Track and Narrow Gauge
 Operating Speed Approximately 80 to 250 kph (high speed  Operating Speed Approximately 80 t0 130 kph (for Inter-
Inter- Urban Service) Urban Service)
 No. of Stations & Depot 6 train stations (NAIA, Fort  No. of Stations & Depot 6 train stations (Caloocan,
Bonifacio, Bocaue, Malolos and Clark) Valenzuela, Marilao, Bocaue, Guiguinto, Malolos)
 Depot in Clark and Fort Bonifacio  1 depot in Valenzuela
 Estimated daily number of passengers 41,186 passengers  Estimated daily number of passengers 41,186 passengers
per day (based on an estimate that the Northrail System per day (based on an estimate that the Northrail System
would only be able to attract 25% of total number of would only be able to attract 25% of total number of
commuters estimated at 164,745 passengers commuting commuters estimated at 164,745 passengers commuting
daily in the north and south bound directions) daily in the north and south bound directions)

North Luzon Railways Financial Comparison
Ferrocarriles)
A high speed rail is needs to ensure the operational viability A commuter line serving the McArthur Traffic Corridor
of the 25 million passenger a Clark International Airport (Joint
Foreign Chambers of the Philippines)
The total cost of the project is $2.0 billion from Fort Bonifacio The total project cost is US$ 2.0 billion from Fort Bonifacio to
to Clark (105km). Clark (130 km).
Phase1 cost from Caloocan to Clark is US$ 530 million Phase 1a cost of the project is $503 million from Caloocan to
(100 km) Malolos (50km)
 $2.0 billion million project cost will be funded by the  $421 million will be funded by the Export-Import Bank of
US$ 500 billion Obuchi Fund with a 0.75% interest rate per China with a 3.0 % interest rate per annum, 20 year
annum, 25 year repayment and a ten-year grace period repayment and a five-year grace period.
 $82 million will be funded by the Philippine Government as  $82 million will be funded by the Philippine Government as
counterpart fund and will be used for right-of-way counterpart fund and will be used for right-of-way
acquisition and relocation; among others. acquisition and relocation; among others.

North Luzon Railways Project Legal Comparison
Ferrocarriles)
Spanish Railways Group and Construcciones y The North Rail Supply Agreement (NRSA) between the North
Auxiliar Ferrocarriles proposal will be procured Luzon Railways Corporation (NLRC) & the Sinomach and the
under the ODA and GPRA Laws Bilateral Country Loan Agreement (BCLA) between the
Philippine Government and Chinese Exim Bank was
represented as a Treaty or an Executive Agreement and
therefore exempt from bidding under the Government
Procurement Reform Act (RA 9184).
A treaty, as defined by the Vienna Convention on the Law of

Treaties, is an international agreement concluded between
States in written form and governed by international law.
NRSA provides that it be read and construed in accordance

with Philippine laws. BCLA, on the other hand, requires that it
shall be governed and construed in accordance with PROC
rules.
As a treaty, it will require concurrence of the Senate by at

least two-thirds of all its members.

North Luzon Railways Project Proponents Qualification Comparison
Ferrocarriles)
The projects related to High Speed rail projects includes: The projects related to Sinomach’s engineering construction
Hong Kong Airport High Speed Rail Link and supervisory work includes:
350 Kph Spanish High-Speed Train (AVE) for the Madrid-  Tianjin Television Tower
Seville line.
 MEGA Steel Plant in Malaysia
RENFE Shuttle Service Trains, which run at 250/270 Km/h
on intermediate sections of the same line.  Hue Huks Cement Co., Ltd. in Vietnam
CAF designs, develops and produces 250 Km/h Self-  300T Gantry Crane Installed at the Xiamen Shipyard
Propelled Variable Gauge Trains with BRAVA trucks.  Steel Structural Welding (80,000 Capacity Stadium in
This type of train allows better use of rail infrastructures,
enabling trains to run on both 1.435m international gauge Shanghai)
tracks and 1.668m Spanish gauge tracks, thereby achieving  Steel Structural Project of Bangkok SV Garden in Thailand
greater service capillarity and versatility.  Installation of Oil Tanks of Baiyun Airport in Guangzhou
 Modernization Project of the Great Hall of People
Others products includes Regional trains, Commuter trains,
 Kabirwala Power Station in Pakistan
Metro Train, Streetcar/LRT and Locomotives are providing
service in Europe, North America, South America and Asia  Zhejiang People’s Hall
 Hangzhou International Building (2nd Phase)
Concession agreements in Metro De Seville and Valle De  Capital Time Square Plaza in Beijing
Mexico Suburban Rail System  Food Preparation Center, Shanghai Pudong International
Airport
Services includes Turnkey, project financing, leasing,
 Office Building of the Ministry of Foreign Affairs
refurbishment, guarantee and maintenance
China National Electric Equipment Corporation (CNEEC), a

branch corporation of CNMEG, is reported to
have “completed a number of large projects, such as Tehran
Metro Lines 1 and 2 (Iran).”

Review of the
National Broadband Network (NBN) Project

National Broadband Network Project Service Comparison
Build Operate and Transfer National Broadband Overseas Development Assistance National
Network Proposal of Amsterdam Holding Inc. Broadband Network Proposal of Zhong Xing
(AHI) Telecommunications Equipment Company Limited
(ZTE)
AHI BOT National Broadband Network Project

Proposal is US$ 240.0 million
 Access up to 2nd class municipalities and some
3rd class depending on the distance to cell sites
Arescom ODA Satellite National Broadband

Network Project Proposal is US$ 130 million
 21 selected Department of Interior and Local
Government
US$ 260 million and currently US$ 329 million

for coverage of Government offices up to 6th
class municipalities
 Local experts estimate of the total project of the
ZTE National Broadband Network is US$ 135.0
million

National Broadband Network Project Scope Issues

Network Proposal of Amsterdam Holding Inc. (AHI) Broadband Network Proposal of Zhong Xing
Telecommunications Equipment Company Limited
(ZTE)
Information and Communication Technology (ICT) pointed The government needs a dedicated state-owned and
out that the major constraint to connectedness in the country controlled Intranet and separate backbone for “national
is the “last mile” problem. The government, should take care security” reasons.
of the “last mile” connection from the broadband backbone to
the 6th barangay government hall that the market cannot
The government, DOTC officials say—and echoed by Neda
provide. —has to own and control that backbone so that neither a
snoop nor a malevolent hacker could do mayhem.
Poor track record of government in maintaining
telecommunication networks (e.g. the failed Telepono ng First, the $329 million project cost included a budget of US$
Barangay project) 120 million for project facilitation. From copies of the contract
made available to the public, that amount is divided in
There are already existing government controlled backbones several ways — $194M for equipments of 300 base stations
pre-existing before this proposal, 1. DOST ASTI’s (WiMAX), 300 backbone stations, 30 IPMPLS nodes and
PREGINET and 2. Office of the Press Secretary Satellite 24,844 customer premise equipment; $118.6M for
System. Engineering Services; $14.8M for Managed Services; and
$1.9M for Training.
There are two private backbone and existing needs can be
address by private telcos. PLDT and Globe stated that they
each now have 98% coverage of the Philippines (population-
based, not area-based).
Former DOTC Secretary Josefina Lichauco criticized the

government turnaround from making the private sector
provide public telecommunication services as mandated by
the
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National Broadband Network Project Description Comparison
(ZTE)
Amsterdam Holding Inc (AHI) will provide coverage for all Total Project Cost US$329M
urban areas and give government a by 25 percent discount  3000 Base Station
for broadband services compared to the rates offered by  300 WIMAX Backbone Station
private telcos.
 30 IPMPLS Nodes
 25,844 CPEs with IAD/VOIP Terminals
Total Project Cost US$240M
 1 IDC & NOC with back up
87 Base Stations
 Managed Services & Trainings
500 Cell Sites
 bandwidth of 622 Mb/s
Note: Government will buy its own cellphone from AHI or
other vendors
ZTE initially proposed 30% coverage of the Philippines and
Arescom Satellite National Broadband Network will provide a then revised to provide 100% of the 6 th class municipalities or
Nationwide coverage barangays or 25,000 barangays and government agencies
21 Base Stations

83 CPEs
Satellite Central
Hub Station
Project Cost Overrun due to liberal provisions for variation orders can be calculated through World Bank study:
1. Public sector projects has a 50% to 70 % time overrun and 20% to 50% cost overrun
2. Private sector has incorporated a 5% to 10% transaction cost in total project cost.
(Klien, M, So, J, Shin B; Worldbank Viewpoint; 1996)
National Broadband Network Operating Comparison
(ZTE)
Amesterdam Holding Inc (AHI) National Broadband ZTE National Broadband Network total project cost
Network total project cost is US$ 242.0 million. is US$ 325.0 million
Current cost of government telecommunications: Current cost of government telecommunications:

more than P4 billion a year more than P4 billion a year
Government’s Operating Cost will be only P 3 billion Government’s Operating Cost with ZTE proposal
a year with AHI proposal based on 25% discount on NBN amortization cost: Less than P1 billion a year
take & pay basis for services used. Operation, maintenance, and upgrading: P1 billion
a year, using current Telecommunications Office
Arescom Satellite National Broadband Network total budget — hence, no additional cost
project cost is US$ 135.0 million Savings over 25 years: P20 billion in first five
years, P60 billion in next 20 years
Financial obligation of the government will include Even more, in fact, since current telecom costs will
debt payment and operating expenses. rise when more government agencies get connected

National Broadband Network Financial Comparison
(ZTE)
Amesterdam Holding Inc (AHI) National Broadband Total project cost is US$ 325.0 million will be
Network total project cost is US$ 242.0 million with funded by the Chinese Exim Bank with a 3.0 %
no government counterpart fund.
interest rate per annum, 20 year repayment and a
five-year grace period.
Arescom Satellite National Broadband Network total
project cost is US$ 135.0 million with a US EXIM
soft loan with a 6.0% interest rate per annum and 20
year repayment.
US$ 325.0 million

Estimated actual project cost is US$ 130.0 million
Estimated local transaction cost is $130.0 million
local
Estimated foreign transaction cost is US$ 65.0
million

National Broadband Network Legal Comparison
(ZTE)
Indeed, on 21 November 2006 while presiding over The National Broadband Network Supply of Equipment and
a Services Agreement (NBN-SESRSA) between the
NEDA Board meeting which she chairs, Department of Transportation & Communication and ZTE
was represented as a Treaty or an Executive Agreement
President Arroyo laid down the following conditions
and therefore exempt from bidding under the Government
for a government broadband network: Procurement Reform Act (RA 9184).
Itshould be established along a build-operate- A treaty, as defined by the Vienna Convention on the Law of
transfer or such similar undertaking using private Treaties, is an international agreement concluded between
funding; States in written form and governed by international law.
There should be no government subsidies;
There should be no “take or pay” conditionalities NBN-SESRA provides that it be read and construed in
and instead a “pay for use” facility; accordance with Philippine laws. However, the Bilateral Loan
And it should result in a substantial reduction of Country Agreement (BCLA) has not been finalized therefore
government telecommunications expenses. it does constitute a treaty of an executive agreement.
As a treaty, it will require concurrence of the Senate by at

least two-thirds of all its members.
AHI proposal will be procured under the Build, ZTE proposal will be procured under the legal
Operate and Transfer law framework of a Treaty and executive Privilege.
Arescom
A Free proposal
sample background will be procured under
from www.awesomebackgrounds.com the ODA
Conclusion and Recommendation

Cancellation of ODA Projects aftermath of NBN and North Rail Fallout
President Arroyo ordered the Department of Budget and

7 in 10 ODA projects fails to deliver Benefits
Management (DBM) to financing for 11 major development
projects worth P104 billion and use local funds instead.  The core issue, however, is the sharp surge in official
development assistance (ODA) in recent years that
 New Communications, Navigation, Surveillance and Air has sparked scandals and allegations of corruption,
Traffic Management Systems Development Project in and threatens to drag Filipino taxpayers deeper in
North Luzon, worth P2.64 billion; debt. The Philippines received an average of new ODA
 Regionalization of Mental Health Services in Luzon loans of $741 million in 2003 and 2005. In 2006, this
Urban Beltway, P1.32 billion; soared to $1.3 billion.
 Redevelopment of Tacloban Airport Development
Project Phase II, P1.12 billion;
 construction of elementary and secondary classrooms
in acute shortage, P45.67 million;
 Cyber Education Project, P26.48 billion;
 Light Rail Transit Line 1 South extension (Pasay-
Bacoor) Phase 1 and 2, $ 683 million;
 Mainline South Railway Project Phase 1A (Laguna-
Quezon), P15.30 billion;
 LRT Line 2 Phase 2 East Extension (Santolan-Masinag,
Antipolo), P10.33 billion;
 Bataan Manila Pipeline Project, $ 180 million;
 LRT Line 1 North Extension (closing the MRT-LRT
loop), P5.98 billion;
 Angat Water Utilization and Aqueduct Improvement A two-lane steel bridge that leads to nowhere, the
Project Phase 2 Metro Manila, P5.75 billion. Natan Bridge in Diplahan, Zamboanga Sibugay, was
funded by a loan from the United Kingdom. [photo
courtesy of Sinag ng Bayan Foundation]

Recommendation
Harmonize ODA Development Policy and Procedures to meet the Targets of Millennium Development
Goals
and Poverty Reduction Strategies
 Multilateral Agencies and DAC member ODA Tied Loan Countries can apply soft diplomacy on
Recipient Countries to comply with good governance practice in the implementation of project in the
meeting MDG and PRS covenants. DAC Member ODA Tied Loan made up 95% of ODA Tied Loans
globally.
 World Trade Organization should impose trade sanctions against predatory Tied ODA Loans that does
not comply with DAC-OECD rules and regulation.
 Multilateral Agencies should link good governance practice to forgiveness of ODA Tied Loans to
Recipient Countries
DAC Member ODA Tied Loan Donor Countries should promote sustainable ODA Debt Levels
Strengthen Link between DAC Member ODA Tied Loan Donor Countries with ASEAN Regional Forum to
resolve political issues regarding the development of the Spratly Islands.
Harmonize Industrial Development Policy National and the Washington Consensus policy formulation
frameworks and strengthen linkage in listing projects for ODA Tied Loan Financing.
Focus ODA Tied Loan Projects to Non-Market Driven Projects

The End

Review of ODA Project by Philippines Public Sector Agencies (1/3)
National Economic Development Authority (NEDA)’s Commission on Audit (COA) 2006 Report on Sectoral
Annual ODA Portfolio Review Performance
Audit Report on Public Debt
Project Administration Issues Project Policy Issues
Political instability, insecure national leadership, and NEDA needs to monitor the implementation and
questions about the legitimacy of the government have effectiveness of its recommendation to address perennial
characterized Philippine governance the past years. problems that delays the implementation of foreign funded
projects.
These has resulted in frequent “changes in heads of
agencies/ management” which “impacts on the NEDA’s evaluation and monitoring focused only on on-
implementation of ODA projects.” going projects leaving no opportunity to assess the
condition of completed projects and their impact and
The results are “delays in award of contracts, because of sustainability. The success or failure of these projects to
repeated reviews of contracts for due diligence, or in certain attain their objectives could guide NEDA in their evaluation
cases, even changes in project design.” of newly proposed projects similarly situated.
Implementing Agencies should ensure that the feasibility

study particularly the project design had been
studied/reviewed thoroughly and the amount of required
financing estimated/determined reasonably.

ODA Project Review by Public Sector Agencies (2/3)
Annual ODA Portfolio Review Performance Audit Report on Public Debt
Project Cost Overruns Project Cost Overruns

In 2005, an additional P29 billion was added to the project costs Reports by the Department of Finance (DOF) on public sector
of seventeen projects. debt for fiscal management could not be relied upon as there are
two records that reflects different amounts public sector debt.
In terms of funding, 15 projects were funded by JBIC while the
World Bank and China accounted for one project each. The Despite differences in figures, there was no reconciliation
reasons given for the project overruns are: conducted to detect errors and correct records.
a. additional civil works (changes in scope/ variation orders/ ODA Projects were approved without adequate evaluation thus
supplemental agreements); risks in project implementation were not addressed before the
b. increase in right-of way land acquisition/ resettlement projects were started such as:
costs;
c. increase in unit cost of labor, materials and equipment; a. Project implementation were either delayed or loans totally
d. high bids (bids above Approved Budget for the cancelled due to unpreparedness of implementing
Contract/Approved Agency Estimate); agencies
e. currency exchange rate movement; b. unresolved right-of-way (ROW) problems,
f. claims for price escalation.” c. lack of funds or incomplete facilities after incurring
substantial amount of project expenditures including
World Bank study showed that commitment fees, thus, wasting limited government
1. public sector projects has a 50% to 70 % resources.
time overrun and 20% to 50% cost d. Evaluation failed to cover adequacy of planning and
overrun project designs to ensure that projects would be
2. Private sector has incorporated a 5% to completed, operational and could be properly maintained.
10% transaction cost in total project cost.
(Klien, M, So, J, Shin B; Worldbank Viewpoint; 1996) There are projects funded from previous loans with
substantial balances that are already being rehabilitated
using funds from other foreign loans.

ODA Project Review by Public Sector Agencies (3/3)
Annual ODA Portfolio Review Performance Audit Report on Public Debt
Corruption and Transparency Issues, Duration of No close Counterpart Issues or Concerns

Procurement Process, Budget Availability and Right of Way
Acquisition
Prior to 1986, Japanese ODA project funds included payment for

rebates (or commissions) to facilitate project implementation.
Japanese companies regard commissions or rebates as "normal
procedure in ordinary commercial transactions" and are known
worldwide for such practices. (Tadem, Eduardo C. Ph.D.;
“Official Development Assistance to the Philippines: Can it be
Reformed?”, Public Policy, Vol. VII, No. 1,
January-June 2003.)
Recent move by President Macapagal Arroyo to remove from

NEDA Investment Coordinating Committee (ICC) the authority to
screen and approve all foreign-assisted infrastructure projects.

Myth number 1—DOTC officials say it’s the best deal the President Arroyo herself clarified that the bulk of those
government could ever have. It will save the government communications expenses by government are accounted for
bureaucracy close to P4 billion in government expenses on by mobile- phone calls, and government officials are going to
communications, including landline calls, cellular-phone calls continue using the facilities of the telcos.
and Internet connections.
The fact is that the DOTC’s technical working group has
always proposed a single backbone for both the NBN and
CEP and has opposed satellite-based technology.
Myth number 2—The NBN will address the “digital divide.” In truth, the NBN won’t address the digital divide. The
This is Neda’s line, a dig at the private telcos, which officials backbone the NBN is going to build will be used solely by
say make money by concentrating their operations in the government agencies, including about 50 percent of the
major cities but neglect the countryside. Neda officials say barangay halls.
the NBN is a perfect foil to this trend.
Yes, barangay halls, but not the barangay residents!
Residents in remote barangays will have to wait for the
rollout of private telecoms before they can even fantasize
about flying in the ethereal realm of the digital world.
Myth number 3—The government needs a dedicated state- The truth is that government has been using private networks
owned and controlled Intranet and separate backbone for for its e-mail and other communications needs since time
“national security” reasons. The government, DOTC officials immemorial, but “security issues” was never a problem. It has
say—and echoed by Neda—has to own and control that never been a problem during the time of President Fidel V.
backbone so that neither a snoop nor a malevolent hacker Ramos, a former general who probably appreciates “national
could do mayhem. security” more than anybody else in the DOTC. Besides, if
“national security” were an issue here, then wouldn’t it be
riskier to entrust government’s information to a foreign state?
Unless they’re saying a foreign government is trusted more
than the Filipino private sector.

 At least three major myths or lies are easily detectable.
This argument is really the craziest.
In our midst today are huge multinationals owning sensitive intellectual property, including patents and
trade secrets worth billions of dollars greater than the Philippine GDP. Yet these MNCs never felt
compelled to build their own separate fiber-optic backbone. Imagine a situation where everybody lays
down fiber-optic cables for “security reasons.” Wouldn’t that be the ultimate “spaghetti sa ibaba,”
underneath our soil and the seas?
But private firms do have their own private and secure network, not by having their own separate
physical backbone, but by buying capacities from existing privately run backbones—PLDT and
Telecphil. For instance, it’s not uncommon for these huge firms to use Telecphil facilities for their
Philippine operations while connecting to the PLDT backbone for their fiber-optic link to their
headquarters in the US. And security has never been an issue because there are a thousand and one
ways of securing them.
If there’s one agency that should be crazy about having a “secure network,” it should be the
Department of Interior and the Local Government (DILG). The truth, according to sources from Neda, is
that the DILG was never enthusiastic about the project, and this is why Arescom’s proposal, initially
offered to the DILG, went nowhere. According to Neda sources, DILG officials thought the backbone
was not their priority, thus giving DOTC officials the opportunity to disregard Arescom and endorse
ZTE to the Neda Investment Coordination Committee.


Philippine Macroeconomic and Good Governance Indicators

Fiscal constraints for
Public Sector Investment in Infrastructure Development

Transition

The Philippine Experience: Chinese Official Development Assistance Tied Loans

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Slide 1 © 2003 By Default!

The Philippine Experience:

Rommel C. Gavieta MA (URP) MSc (Eng)

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The State of Philippine Economy

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Evolution of Development Policy in the Philippines

 Post-1986 (1989 Washington Consensus)

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Overseas Development Assistance in the Philippines

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In 2008 a review of ODA project in the Philippines has

China is 5th ranking ODA Donor to the Philippines in the

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 Corruption in ODA projects

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Chinese Overseas Development Assistance

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 South China Sea Dispute the South China Sea, this

 Soft Diplomacy Policy Approach with ODA Financing:

 The Joint Marine Seismic Undertaking (JMSU)

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Chinese ODA administration Policy

 Chinese ODA Tied Loan program is modeled after

 It is not clear that such a tight system yet exists in

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 People’s Republic of China foreign policy East Asia Sub-Saharan Philippines

Asian sphere of influence and acquire de finitio n

the north and Soviet client Vietnam to the

influence in Southeast Asia. China is inflows (BoP, current US$)

and diplomatic support. compensation of employees,

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 In 1916 the Manila Railways Corporation (MRC) was

 Between 1954 and 1957, the MRC fleet of trains

 In June 20, 1964, MRC was given a new charter, and

 In July 23, 1979, PNR was placed under the

 In 1996, a high speed rail was envisioned to link Clark

 Today a Chinese ODA Tied loan changed the project

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Construction of Section 1, Phase 1 began in October 2006

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Electric High Speed Units Diesel Multiple Units (DMUs)

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A treaty, as defined by the Vienna Convention on the Law of

NRSA provides that it be read and construed in accordance

As a treaty, it will require concurrence of the Senate by at

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China National Electric Equipment Corporation (CNEEC), a

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AHI BOT National Broadband Network Project

Arescom ODA Satellite National Broadband

US$ 260 million and currently US$ 329 million

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National Broadband Network Project Scope Issues

Former DOTC Secretary Josefina Lichauco criticized the

21 Base Stations