SONA 2017: What’s in it for China in Duterte’s ‘Build, Build, Build’?

Big infrastructure lenders like China and Japan profit not only from the interests accruing from their loans to build rails and roads. The larger gains they make are from the conditionalities they tie to these loans.

President Rodrigo Duterte with President Xi Jinping of China (Photo from Etienne Oliveau/Reuters, Aljazeera)

In his second State of the Nation Address (SONA), President Duterte as expected mentioned his grand infrastructure plan. There was special mention of China that Duterte said generously offered money for his “Build, Build, Build” program.

“If your Congress has no money, we will give you money” was what the Chinese supposedly told him, the President said in his speech.

Duterte in his SONA made the Chinese offer look like simple altruism and generosity. But in reality, on top of making Chinese imperialism appear benign, using soft power by bankrolling the country’s hard infrastructure profits China’s economy in various ways.

No debt crisis?

The concerns that Duterte’s infrastructure plan would result in a heavy debt burden are valid. After all, the price tag of what economic managers call as the “boldest infrastructure development program” in recent history is a whopping Php8 to 9 trillion.

Economic managers, however, assure the public that they have everything figured out. The plan is that government appropriations, not debt, will mainly fund the so-called “golden age of infrastructure”. The Finance department’s tax reform package aims to raise Php157 billion in additional revenues a year; the version passed by the House could generate Php130 billion.

At Php8 to 9 trillion, the annual cost of building infrastructure from 2017 to 2022 would be Php1.6 to 1.8 trillion. Clearly, the additional revenues from the tax package will not be enough even as it bleeds the poor dry.

In reality, the infrastructure program would be mostly debt-funded. But again, the public is being told that a debt crisis will not rear its ugly head. In fact, the Budget department expects that by the end of President Duterte’s term, the debt-to-GDP ratio would even fall to 38.1% from 40.6% in 2016.

Such optimism hinges on the economy not only sustaining its expansion but posting even more rapid growth. To outpace debt, the gross domestic product (GDP) must grow by 6.5 to 7.5% this year and 7-8% between 2018 and 2022.

It is tough to be as upbeat as administration officials given the structural weaknesses of the economy and amid a global crisis. For this year, debt watchers and creditors put Philippine GDP growth at 6.4 to 6.8% – below the range being hoped for by the economic managers. That’s the most bullish the projections could get.

Whatever rate the GDP grows by, the budget deficit is sure to increase as government ramps up infrastructure spending. The plan is to let the budget shortfall climb to 3% of GDP as infrastructure spending reaches as high as 7.4% of GDP.

While a bigger deficit means greater borrowing, there is supposedly no need to be anxious as the Budget department claims they will borrow in a fiscally sustainable way. Eighty percent of the deficit would be funded by domestic debt and only 20% foreign. Such borrowing mix lessens foreign exchange risks that could cause public debt to balloon.

Chinese and Japanese loans

But a review of what the Duterte administration has identified as its flagship infrastructure projects tells a different story. To be sure, the flagships – numbering 75 as of June – are just a fraction of the more than 4,000 infrastructure projects that government plans to do. They nonetheless represent the largest ones in terms of cost and are the top priorities for implementation.

Of the 75 flagship projects listed by the National Economic and Development Authority (NEDA), 48 will be funded by foreign debt or official development assistance (ODA). Only 14 will be bankrolled through the national budget or General Appropriations Act (GAA). Just two projects are planned to be implemented via public-private partnership (PPP) while 11 have yet to be identified which mode to use.

As of June, only 53 out of the 75 flagships have estimated costs totaling PhpPhp1.58 trillion. Of the 53, 41 are ODA-funded projects worth Php1.40 trillion. The remaining Php181 billion would be funded through the GAA. In other words, almost 89% of the total cost of projects with already determined amounts will be paid for by foreign debt. (See Tables below)

Flagship infra summary

Notes: ODA – Official Development Assistance; GAA – General Appropriations Act; PPP – public-private partnership; TBD – to be determined (Based on data from NEDA) 

Just nine of the 41 ODA-funded flagship projects have identified donors/creditors, based on NEDA’s June list. These are Japan with three projects worth Php226.89 billion; China, three projects (Php164.55 billion); South Korea, two projects (Php14.06 billion); and World Bank, one project (Php4.79 billion).

The Chinese and Japanese are backing the Duterte administration’s largest mega-projects, an indication of how the two economic behemoths see “development cooperation” as one of the key arenas of their competition in the region. Japan is funding the Php211.46-billion PNR North 2 (Malolos-Clark Airport-Clark Green City Rail); Php9.99-billion Cavite Industrial Area Flood Management Project; and the Php5.44-billion Malitubog-Maridagao Irrigation Project, Phase II.

Meanwhile, China is bankrolling the Php151-billion PNR Long-haul (Calamba-Bicol); Php10.86-billion New Centennial Water Source – Kaliwa Dam Project; and Php2.70-billion Chico River Pump Irrigation Project.

Although not yet identified in the latest NEDA list, various media reports also link Chinese and Japanese loans to other big-ticket rail projects. These include the Php134-billion PNR South Commuter Line (Tutuban-Los Baños); the Php230-billion Manila Metro Line 9 (Mega Manila Subway Project – Phase 1); as well as the Mindanao Rail Project, of which the first phase (Tagum-Davao-Digos) costing Php35.26 billion will be funded via the GAA. (See Table below)

ODA flagship 1

ODA flagship 2

ODA flagship 3.png

Source: NEDA

Download NEDA’s entire list here

Gains beyond interests

Over-reliance on debt is obviously problematic but by itself tapping concessional loans to build much needed infrastructure is not a wrong policy. Sadly, ODA is shaped not by genuine development cooperation but by the narrow agenda of lending governments and the corporate interests they represent. Thus, potential economic and social development gains for a borrowing country are greatly weighed down by bloated costs of ODA-funded infrastructure.

Big infrastructure lenders like China and Japan profit not only from the interests accruing from their loans to build rails and roads. The larger gains they make are from the conditionalities they tie to these loans such as requiring the Philippines to exclusively source from Chinese and Japanese firms the goods and services needed to build the rails and roads.

Lenders dictate the technology, design and construction of the infrastructure to accommodate their own suppliers and infrastructure firms. As such, Chinese and Japanese contractors are also favorably positioned to corner operation and maintenance contracts once the rail systems and other infrastructure are privatized under the Duterte administration’s hybrid PPP scheme.

Lastly, creditors also favor the development of infrastructure in areas where they have business interests. This explains the concentration of Japan-funded infrastructure in Central and Southern Luzon where export zones with Japanese investments are concentrated. China’s interest in building infrastructure in Mindanao is tied to its plantation and mining interests in the region.

All these make the cost of infrastructure development in the Philippines more expensive and the debt burden onerous. Tied loans for infrastructure development creates commercial opportunities for Japanese and Chinese companies that are otherwise not available to them. In China’s case, infrastructure lending in poor countries is even used to create employment for their own workforce at the expense of local labor.

At a time of prolonged global recession and slowdown in profit rates of the industrial economies, these opportunities become even more important. Alas, these opportunities only arise by undermining the debtor’s own development needs. ###

(This is a slightly revised version of an article first published as IBON Features)

Junking the Marcosian debt policy for people’s needs

Despite its trappings of reformist language, the Aquino administration’s budget proposals are still reflective of the same anti-people and anti-development policy thinking of the past regimes; and still emasculated by the Marcosian automatic debt servicing

Continued from Part 1

Until today, under post-Martial Law so-called democratic regimes, the Marcosian policy of automatic debt servicing and the heavy debt burden continue to cripple the capacity of government to provide sufficient social services and attend to the basic needs of the people. In an earlier research, think tank Ibon Foundation noted that Filipino taxpayers will continue to shoulder the Marcos debts until 2025, more than half a century since the late strongman imposed Martial Law.

The most controversial and biggest white elephant funded by Marcos debts and paid for by taxpayers was the $2.3-billion Bataan Nuclear Power Plant (BNPP). While we have already completed the payment for the BNPP that has never produced a single kilowatt of electricity, government continues to look for funding sources for the maintenance of the mothballed nuke plant.

These issues take more significance every time Congress prepares the national budget. Since taking over, the Aquino administration has been peddling the deception that unlike in the past, government’s priority now is the provision of social services and empowerment of the people through well-funded programs that directly benefit the poor. But as already noted, automatic payments for principal and interest continue to eat up the largest portion of public resources, including in the so-called 2013 “Empowerment Budget” of the Aquino administration.

Still way short

The Department of Budget and Management (DBM) describes its proposed 2013 national budget as an “Empowerment Budget” because it supposedly heeds the people’s demand to ensure that government resources are used for their benefit. One indicator, said the DBM, is the increase in the budget allocation for social services, which will get the lion’s share of the proposed ₱2.006-trillion budget at 34.8%, up from last year’s 33.8 percent.

Of the proposed budget for social services (₱698.4 billion), the combined allocation for basic education, health and housing is pegged at ₱365.6 billion, which represent the proposed budget for the Education and Health departments, and government’s housing programs excluding those for the soldiers and police. But this amount is just about ¼ of the needed budget to reasonably meet the demands of the people for such services. Based on urgent needs as well as international standards, it is estimated that the budget for basic education, health and housing alone should be about ₱1.4 trillion. Of the said amount, basic education accounts for ₱885 billion (as estimated by the ACT Teachers); health, ₱440 billion (Coalition for Health Budget Increase or CBHI); and housing ₱ 97billion (Ibon).

Resources for social services

There are possible sources of funding for such huge needs of basic social services but it requires a substantial reorientation in government policies and shift in priorities. Based on the 2013 budget, for instance, there are some ₱860 billion that can be tapped, partially or wholly, to fund basic education, health and housing.

Of the said amount, the largest portion is comprised of the national government’s debt service burden, which is pegged at ₱782.2 billion for principal amortization and interest payments. The rest comes from programs and projects whose concept and/or expected benefits are disputed such as the conditional cash transfer (CCT) program, public-private partnership (PPP), counterinsurgency-related initiatives, privatization obligations from past projects, and tourism promotion and development. (See Table 3)

Debt servicing still represents the biggest drain in the country’s already limited resources. Adding principal amortization to interest payments, debt servicing comprises almost 32% of what the Aquino administration is planning to spend in 2013. At ₱782.2 billion, debt servicing is bigger than the budget for all social services in the current budget proposal, pegged at ₱698.4 billion or 28% of the budget including principal amortization.

As pointed out, the culprit is the Martial Law-era automatic debt servicing policy of government. This policy has greatly undermined the constitutional duty of Congress to allocate funds that will meet the pressing needs of the people. Under EO 292, government computes all public debt obligations that have to be settled and automatically sets aside the needed amount to ensure timely payments.

Meanwhile, Congress has to make do with whatever is left of government’s meager resources to budget for the social and development needs of the people. What makes this whole situation more unjust and oppressive is that most of the country’s public debt has been used for projects and/or programs that were tainted with corruption, did not benefit the people or worse, had caused more hardship to the poor. Examples include the power privatization loans from the Asian Development Bank (ADB) which have already reached around $1.3 billion since 2002.

There are many other odious loans that should be reviewed, renegotiated and/or altogether cancelled to reduce the debt burden. But EO 292 deprives Congress and the Filipino people of this policy option.

Debt-funded dole

Even the much ballyhooed CCT program is being partly funded by foreign debt worth $805 million from the ADB and the World Bank, adding to the country’s debilitating debt burden. And while adding to the debt burden, the CCT’s positive impact on alleviating poverty is also suspect. Between 2009 and 2012, the number of CCT beneficiaries ballooned from 594,356 households to more than 3 million (or an enormous 407% increase); the national budget for CCT during the same period also swelled from ₱5 billion to ₱39.4 billion (or a whopping 688% hike). But self-rated poverty, as measured by the Social Weather Stations (SWS) worsened from an average of 48% in 2010 to 51% this year.

Privatization and debt

Funding PPP initiatives, on the other hand, is problematic given the country’s experience with privatization in the past two decades. PPP schemes in the water and power sectors, for instance, have resulted in soaring and exorbitant user fees. Aquino’s plan to tap PPP to construct school buildings and health facilities is fe

ared to further marginalize the poor as fees skyrocket to ensure the profits of participating private contractors while aggravating the indebtedness of government.

In fact, the national budget has long been being undermined by the impact of such onerous PPP contracts. Case in point is the controversial build-lease-transfer (BLT) contract to run the metro rail transit (MRT) where the Aquino administration is pushing to implement a fare hike of as much as 100% to pass on to commuters the government’s debt obligations and guaranteed profits of the private investor. Another is the National Power Corp. (Napocor) which after a decade of privatization and doubling of electricity rates is still mired in deep debts reaching almost P1 trillion, portion of which will be directly shouldered by consumers through the universal charge.

Other reforms

Budget items related to government’s counterinsurgency campaign can also be diverted to basic social services. Poverty alleviation initiatives like the Payapa at Masaganang Pamayanan (Pamana) and CCT being used as part of the Oplan Bayanihan actually undermines the peace and development process by marginalizing efforts to address the root causes of insurgency (i.e. peasant landlessness) based on the fundamental principle of social justice while perpetuating the conflict and rampant human rights violations.

Aside from these items in the proposed 2013 budget, revenue generation can also be significantly increased by improving collection efficiency, reforming the tax system to maximize collections from the rich and reversing the neoliberal policies that deprived government of revenues such as trade liberalization as well as the numerous fiscal incentives to attract investors. Around ₱867 billion in new revenues can be raised from these reforms, based on Ibon estimates.

Fiscal policy for development

A national budget is important because it sets how government will use its resources. For backward countries, the issue of budget takes a more crucial role considering the scant public resources available amid the massive needs of the people and economy. In fact, for the Philippines, government needs to take a bigger responsibility to ensure that the people’s most basic needs such as education, health and housing, among others are met adequately given the chronic poverty and job scarcity.

At the same time, government must sensibly use the budget to invest in programs and policies which create the most favorable conditions for sustainable development and industrialization that will, in turn, create long-term jobs and address poverty. To achieve this, government needs a fiscal policy – tools on raising revenues and ways to spend them – that redistributes wealth and best serves the interests of the people, in particular the poor and marginalized.

Alas, despite its trappings of reformist language and deceptive increases in allocation for social services, the Aquino administration’s budget proposals, including the 2013 budget, are still reflective of the same anti-people and anti-development policy thinking of the past regimes; and still emasculated by the Marcosian automatic debt servicing. (end)

Martial Law legacy: debt servicing, top priority from Macoy to Noynoy

Image from gmanetwork.com

Last September 21, the country marked the 40th anniversary of the imposition of Martial Law by the late strongman Ferdinand Marcos. Those dark years were notorious for the numerous cases of human rights atrocities committed by the military; for the unprecedented cronyism; and for the massive and flagrant ransacking of state coffers by Marcos, his relatives and friends.

Seldom pointed out is how the Marcos dictatorship also instituted national policies that further tied our pre-industrial economy to perpetual backwardness and bound a great majority of our people to acute poverty. Seldom pointed out is how the anti-Marcos faction of the ruling elite led by Cory Aquino who supposedly restored democracy, and her successors – including son, incumbent President Benigno Aquino – have upheld and continued these policies to the serious detriment of the country and the people.

One such policy was automatic debt servicing. Guaranteed payments of the national debt, even if they were incurred under questionable circumstances; went to the pockets of corrupt government officials; and/or used to fund programs and projects that harmed the economy and the people is a testament to the still dismal state of governance and democracy in the country 40 years after Martial Law was imposed.

That the Marcosian policy of automatic debt servicing continues to deprive the people of much needed social services contradicts assertions by the Aquino government of a pro-people national budget. It has hyped, for instance, its proposed 2013 ₱2.006-trillion national budget as “Empowerment Budget”, building on its previous packaging of “Reform Budget” (2011) and “Results-Focused Budget” (2012). Underlying all these budget proposals is the theme of “daang matuwid” (straight path) and “kung walang corrupt, walang mahirap” (without corruption, there’s no poverty).

But behind the pro-people packaging is the reality that the priorities and programs of government, as reflected in its national budget, remain unresponsive to the urgent social needs of the poor and development requirements of the country. From the late strongman Macoy to the son of supposed democracy icons Noynoy, keeping the creditors assured has always been the top priority in crafting the national budget.

Current debt data

Marcos’s borrowing spree – from less than $1 billion when he first became President in 1966, the foreign debt ballooned to $28 billion by the time he was kicked out of Malacañang twenty-years later – set off the crippling debt burden that the country has had to endure. To keep the foreign loans coming, which had become the dictatorship’s largest source of corruption (one estimate claimed that Marcos pocketed at least ⅓ of foreign loans), Marcos issued Presidential Decree (PD) 1177 or the Budget Reform Decree of 1977 that automatically appropriates for debt servicing regardless of how much is left of the country’s resources to fund basic social services. The late President Corazon Aquino affirmed this policy through Executive Order (EO) 292 or the Administrative Code of 1987.

As of July 2012, the outstanding debt of the national government, according to the Bureau of the Treasury (BTr) stood at ₱5.16 trillion, of which ₱3.12 trillion (61%) come from domestic creditors and the rest, ₱2.04 trillion (39%) from foreign lenders.  When President Aquino assumed office in June 2010, that debt was pegged at ₱4.58 trillion (₱2.59 trillion, domestic; ₱1.99 trillion, foreign). Since taking over, the Aquino administration has added more than ₱580 billion to the debt burden, or an average of more than ₱23 billion a month (July 2010 to July 2012). During the Arroyo administration, the outstanding debt of the national government was growing by a monthly average of ₱21 billion (January 2001 to June 2010).

Meanwhile, looking at the foreign debt data (which include public and private debt, with the former accounting for 77% of the $62.9-billion total as of March 2012) as monitored by the Bangko Sentral ng Pilipinas (BSP), it appears that the country’s external loans have been accumulating most rapidly under the current Aquino administration with an average of $268.81 million per month. It is the largest monthly growth in foreign debt among all post-Marcos administrations. (See Chart)

A news report on the latest debt data noted that each Filipino now owes the national government’s creditors some ₱53,715 (based on the latest estimated population of 96 million by the National Statistical Coordination Board of NSCB). A minimum wage earner in the National Capital Region (NCR) will need to give his salary for 120 to 131 workdays if he will be forced to pay for his share of this debt; or 232 days if he is from the Autonomous Region in Muslim Mindanao (ARMM).

Meager allocation for social services

But the real impact of such heavy debt burden is felt by the poor in the meager allocation that important social services get from government because limited resources are being siphoned off by automatic debt servicing. And Aquino is proving to be worse than Arroyo in this respect. Under the Aquino administration, government has already shelled out ₱1.45 trillion for debt servicing from July 2010 to July 2012. It’s equivalent to ₱58.05 billion a month, almost ₱10 billion bigger than Arroyo’s ₱48.18 billion a month during her prolonged 9 ½-year term. (See Table 1)

Further, debt servicing relative to total expenditures (including principal repayments) is pegged at almost 59% under Aquino, compared to 42% under Arroyo; and relative to total revenues collected, it’s 76% under Aquino and 66% under Arroyo. These figures mean that that the absolute increase in debt servicing in the past two years is exerting more pressure on public resources which could not cope with the country’s growing expenses, including the need to pay for government’s mounting debts. To finance its expenses, including payments for past debts, the Aquino administration is borrowing more.

Debt servicing continues to eat up a huge portion of the national budget despite claims by the Aquino administration that social services are now being prioritized by government. The expenditure program from 2011 to the proposed 2013 national budget, for instance, shows that the budget for debt servicing (including principal amortization) is equivalent to an average of 2.5 times that of the budget for education; 6.4 times, health; and 11.2 times, housing. (See Table 2)

To be concluded

ADB: Anti-Development Bank

The Asian Development Bank (ADB) is holding its 45th annual meeting from May 2 to 5 in Manila. Some 4,000 delegates including finance ministers and central bank governors from ADB’s member-countries; as well as representatives of big business, international financial institutions (IFIs), transnational banks, credit rating agencies, global media, and even so-called civil society are attending the said event. With the theme “inclusive growth through better governance and partnerships”, the event will mark the 15th time that the ADB has held its annual meeting in Manila. Venues have been arranged at the Philippine International Convention Center (PICC).

The ADB was founded in 1966 and now has 67 members. It’s one of the global financial institutions set up by the industrial powers to fund their programs and projects in backward countries. Together with the International Monetary Fund (IMF), the World Bank and other IFIs, the ADB bankrolled numerous restructuring efforts that aim to liberalize, deregulate and privatize the economies of many countries in the Asia Pacific. These reforms have been implemented through huge and burdensome debts. The Philippines is a founding member of the ADB and has been hosting the bank’s main headquarters since its inception.

ADB’s 45th meeting is an opportune time for the Filipino people to register its strongest condemnation of the multilateral bank that has been funding numerous anti-poor economic reforms and destructive projects in the country.

Neoliberal offensive in energy

In the Philippines, ADB’s disastrous impact is most felt in the energy sector through the Electric Power Industry Reform Act of 2001 (Epira) and the neoliberal reforms implemented in the sector in the past two decades. The ADB started funding the power sector reforms through loans and equity investments to independent power producers (IPPs) as well as guarantees for bonds issued by the National Power Corp. (Napocor). Due to sweetheart deals with the IPPs, Napocor further went deeper in debt, which the ADB used to justify its total privatization.

As Napocor’s largest creditor, the ADB aggressively pressured the national government to fully privatize the state-owned power firm and enact the Epira. In 1994, it funded a study that eventually became the basis of the then Ramos administration’s blueprint for power sector restructuring. This blueprint took the form of an Omnibus Power Bill that was filed in 1996 that aimed to privatize Napocor and restructure the power industry. The Omnibus Power Bill would later become the Epira, a process that was bankrolled by the ADB’s $300-million 1998 Power Sector Restructuring Program (PSRP). To access the loan, the ADB listed 61 specific conditionalities that the government should follow, including designing content and legislation of the Epira.

Even Epira’s actual implementation is being funded by the ADB. Since 2002, the ADB has approved an estimated $1.3 billion in loans to support the various programs and projects under Epira. These include debts to guarantee the bond issuance and improve the creditworthiness of the Power Sector Assets and Liabilities Management Corp. (Psalm), which Epira put up to oversee the privatization of Napocor, and establish the wholesale electricity spot market (WESM).

Under Epira, electricity bills have soared amid energy insecurity such as the case in Mindanao. According to one study, the power rates for residential users in Manila and Cebu are the first and third most expensive in Asia, respectively. Even the supposedly “cheap” electricity rates in Mindanao are still much more expensive than the rates in more progressive Asian cities like Hong Kong, Beijing, Kuala Lumpur and Seoul. Since Epira was implemented, the rates of the Manila Electric Co. (Meralco) have jumped by 112% while the rates of the Napocor have increased by 95 percent.

Meanwhile, the lack of energy security is the result of government’s abandonment of its mandate to invest in the rehabilitation of existing plants and construction of new ones. Instead of ensuring that there is enough energy supply consistent with a long-term industrialization plan, government used its time and resources to dispose the generation and transmission assets of Napocor as mandated by Epira.

Anti-poor reforms

Aside from the neoliberal restructuring of the power sector, the ADB has also aggressively promoted various privatization and commercialization initiatives including in water utilities, irrigation, dam, and the National Food Authority (NFA), among others. These reforms have resulted in food insecurity and in skyrocketing cost of living.

Privatization is one of the major programs of the ADB in the Philippines, including the public-private partnership (PPP) initiative of the Aquino administration. ADB is the main funder of the Project Development and Monitoring Facility (PDMF), which is government’s revolving fund for feasibility studies for projects under the PPP scheme. The ADB has already committed $21 million for the PDMF.

Furthermore, the ADB also bankrolled a 1993-1994 study that became the basis of the destructive Mining Act of 1995. This program, which liberalized the Philippine mining industry, has paved the way for the further wanton plunder of the country’s mineral resources, the destruction of the environment, and dislocation of communities.

Oppressive debt

Worse, these anti-development and anti-poor programs have been funded by onerous ADB loans. The ADB is now the country’s single largest foreign creditor. As of 2011, the country owes the ADB around $5.84 billion, which is almost 10% of the total foreign debt of the Philippines pegged at $16.71 billion. Among the multilateral creditors, the ADB accounts for more than 50% of the country’s total multilateral debt. All in all, the country has accumulated the fifth largest debt from the ADB, accounting for about 8% of total sovereign lending.

Due to automatic debt servicing, a huge portion of the national budget is being siphoned off by debt servicing, leaving almost nothing for social services. For 2012, for instance, the Aquino administration is ready to spend P738.6 billion for debt servicing, including interest payments and principal amortization. This is much bigger than the P575.8 billion that government is willing to spend for education, social security, health services, housing, land reform, and other social services.

To smokescreen the harsh effects of the neoliberal reforms that it has been sponsoring and the lack of resources for social services due to debt servicing, the ADB – together with the World Bank – is also funding the conditional cash transfer (CCT) program of the Aquino administration. Under the CCT, government provides direct cash assistance of as much as P1,400 to selected poor families on the condition that pregnant mothers will have their regular checkup and school age children will regularly go to class. But aside from being highly temporary and limited, the CCT also further deepens the indebtedness of the Philippines. The ADB is funding the CCT to the tune of $400 million in loans while the World Bank is also lending $405 million for the program.

Strong protest

ADB’s theme of inclusive growth for its meeting this year reflects the main theme of the host government’s Philippine Development Plan (PDP) 2011-2016. Under the PDP, inclusive growth is supposed to be achieved by expanding the domestic economy by 7-8%, which will generate jobs and livelihood and alleviate poverty. But Aquino’s inclusive growth means the implementation of the same policies and programs of liberalization, deregulation and privatization that the ADB – together with the IMF, World Bank and other global imperialist institutions – has long been imposing on the country.

We should not let the ADB meeting pass without registering our strong opposition to its decades of intervention in Philippine policy making and to the many programs that it has bankrolled through odious debts that perpetuate the backwardness of our economy and the poverty of our people. (end)

Aquino’s 2012 budget: Diretso sa tubo

Far from being Diretso sa Tao, the 2012 budget is in reality Diretso sa Tubo. Instead of the government’s meager resources going straight to the needs of the people, taxpayers’ money will actually go straight to the pockets of creditors while creating the most favorable environment and profit-making opportunities for private business. (Photo from The Philippine Star)

First published by The Philippine Online Chronicles

In the President’s 2012 Budget Message, President Benigno S. Aquino III boldly proclaimed: “Noong nakaraang taon, tinangkilik po ninyo ang aming pakay na tahakin ang landas Tungo sa Paggugol na Matuwid. Sa paparating na taon, hinihikayat ko po kayong patuloy na sumama at lumahok sa biyaheng ito: sa pagsiguro na ang benepisyo ng Paggugol na Matuwid ay nakatutok sa ating prayoridad at Diretso sa Tao.”

Aquino also called the P1.816-trillion budget a Results-Focused Budget, with sharp focus on the so-called A Social Contract with the Filipino People, which he used as campaign platform in last year’s elections. In sum, the Social Contract and thus the proposed budget supposedly have five priorities: (1) Transparent, accountable, and participatory governance; (2) Poverty reduction and empowerment of the poor and vulnerable; (3) Rapid, inclusive, and sustained economic growth; (4) Just and lasting peace and rule of law; and (5) Integrity of environment and climate change adaptation and mitigation. The spending and efforts of the administration will purportedly focus on these five priorities.

But far from being Diretso sa Tao, the 2012 budget is in reality Diretso sa Tubo. Instead of the government’s meager resources going straight to the ever growing and urgent needs of the people, taxpayers’ money will actually go straight to the pockets of creditors while creating the most favorable environment and profit-making opportunities for private business.

Debt servicing remains top priority

In hyping the budget, Aquino declared that a substantial portion of it – about 20.3% or P368.8 billion – will be spent directly on programs for poverty reduction and empowerment of the poor. Of this amount, the Pantawid Pamilyang Pilipino Program (4Ps) accounts for a considerable share with P39.5 billion. Another major portion comes from the P61.9 billion allocated for public education sector’s scholarship programs, financial assistance programs, training programs, hiring of additional teachers, construction and rehabilitation of facilities, procurement of textbooks, and support to State Universities and Colleges (SUCs). It also allotted P44.4 billion for undertakings meant to achieve the health targets under the Millennium Development Goals (MDGs). There’s also the P5.6 billion intended for the resettlement of families residing along danger areas and families affected by calamities and so-called “slum upgrading.”

While Aquino and his budget officials try to paint these numbers as impressive, the truth is they still pale in comparison to the huge amount of public money that will again go to debt servicing in 2012. The P368.8 billion is just a little higher than the P333.1 billion in Interest Payments in the proposed budget. Including the Principal Amortization (P405.5 billion), Debt Service Expenditures for 2012 will reach P738.6 billion, or more than twice the P368.8 billion that Aquino said will directly go to the poor and marginalized sectors. To further illustrate how big the budget is for debt servicing, the total Debt Service Expenditures is also much larger than the combined P575.8-billion Social Services budget that includes Education (P308.9 billion); Social Security, Welfare, and Employment (P104.5 billion); Health (P49.9 billion); Housing and Community Development (P7.1 billion); Land Distribution (P2.5 billion); and Other Social Services and Subsidy to Local Government Units (P102.9 billion).

Aquino, in his first year in office, has already proven to creditors that his administration is a reliable and good borrower, even better than his immediate predecessor. From July 2010 to July 2011, Aquino has shelled out P735.6 billion for debt servicing. This translates to about P61.3 billion on a per month basis, or P13.1 billion bigger than the monthly debt servicing under the Arroyo administration (from January 2001 to June 2010). Furthermore, from July 2010 to May 2011 (latest available data), Aquino’s debt servicing is equivalent to 46.6% of government expenditures (including its principal payments), as compared to Arroyo’s 41.5 percent.

Facilitating more privatization of infrastructure and services

It is true that debt servicing will decline in the 2012 budget while increases will be made in Social Services and Economic Services. The P1.816-trillion budget is higher than the present budget of P1.645 trillion by P171 billion, with the budget for Social Services going up by P54.3 billion (from P521.5 billion to P575.8 billion) and Economic Services increasing by P77 billion (from P361.9 billion to P438.9 billion). The budget for Defense will also go up by P11.6 billion (from P101.5 billion to P113.1 billion), General Public Services, by P44 billion (from P288.1 billion to P332.1 billion), and Net Lending, P8 billion (from P15 billion to P23 billion). Interest Payments, on the other hand, will go down by P24 billion (from P357.1 billion to P333.1 billion). In terms of percentage share, Economic Services will improve by two points (22 to 24%) and Interest Payments will slide by the same amount (20 to 18%), while the expenditure program of the rest of the sectors will maintain their share – Social Services (32%), Defense (6%), General Public Services (18%), and Net Lending (1%).

As pointed out, however, debt servicing will continue to be the single biggest expenditure item in the 2012 budget despite its decline both in absolute terms and as a percentage of the total. Furthermore, aside from the increase in quantity, it is also important to examine the quality of the increases. The budget increase in Social Services and Economic Services are deceiving because they do not guarantee improved access and better quality of life for the people. In reality, the increases are meant to facilitate the privatization of infrastructure development and social services in the country in line with Aquino’s centerpiece program – the Public-Private Partnership (PPP). (Read more about the PPP here and here) As the President said in his budget message, after introducing PPP through the 2011 budget as an innovative way to address the perennial lack of funds for infrastructure, the government will not only sustain it but even expand to include social services.

For the 2012 budget, Aquino is proposing P22.1 billion as counterpart funding from the national government for various infrastructure and capital outlay support for the PPP initiatives of the Department of Public Works and Highways (DPWH), Department of Agriculture (DA), Department of Transportation and Communications (DOTC), Department of Health (DOH), and Department of Education (DepEd).

(To be continued) 

SONA 2011: Making sense of Aquino’s facts and figures (part 2)

Aquino missed in his SONA the facts and figures that matter to the people (Photo from pinoypower.net)

Continued from part 1

Aquino also claimed that in his first year as President, the Philippines got upgraded four times by credit rating agencies. Compare this, said Aquino, to the lone credit upgrade and six downgrades the country had in the nine and a half years of the Arroyo administration. A high credit rating means lower interest payments. According to Aquino, the country spent P23 billion less in interest payments from January to April 2011 compared to the same period last year. This amount can supposedly already cover the 2.3 million families in target beneficiaries of the CCT program until the end of the year.

Debt servicing

A credit rating is simply the measure of the credit worthiness of government. Credit worthiness, meanwhile, pertains to the ability of government to repay its debt obligations. A high or favorable credit rating indicates that there is less or no risk of defaulting on our loans. Thus, creditors are more willing to lend with lower interest rates and therefore “less” debt burden for the borrower.

But the credit rating upgrades came at a high cost for the people. To obtain the upgrades, the Aquino administration ensured that debt obligations are being paid dutifully and at the same time resorted to massive under-spending. The result is that an ever increasing portion of spending by the national government went to debt servicing. Since Aquino became President, total debt servicing has already reached P668.65 billion (from July 2010 to May 2011). Until April this year, 49.3 percent of what the Aquino administration has spent went to debt servicing.

Worse than Arroyo

Compare these figures to those under Arroyo, who has been criticized as a heavy borrower and payer. Monthly debt servicing during the Arroyo administration was P48.18 billion while in the first 11 months of the Aquino presidency, it went up to P60.79 billion.  As a percentage of total government spending (including principal payments), the average during the Arroyo administration was 41.5 percent while under Aquino, it has increased to 49.3 percent (until April 2011). (See Table)

Despite the bigger debt servicing, the total outstanding debt of government (including contingent debt) still rose from P5.19 trillion in June 2010 to P5.23 trillion as of April 2011. The P40-billion rise in government debt includes $400 million (about P18 billion) in loans from the Asian Development Bank (ADB) approved last September 2010 to help bankroll the expanded CCT program. This means that the P23 billion mentioned by Aquino as savings from lower interest payments will just be used to pay for the rising debt obligations of government, including those incurred for the CCT.

Fiscal deficit

The credit rating upgrades were also achieved due to the improvement in the national budget deficit, another indicator closely watched to determine a country’s creditworthiness. From an all-time high (in absolute terms) of P314.5 billion in deficit in 2010, the Aquino administration has been able to substantially reduce the shortfall so far this year. From January to May 2011, the fiscal deficit was pegged at just P9.54 billion or 94.1 percent below the deficit during the same period in 2010. It is also way below the programmed deficit of P152.13 billion for the first half of the year.

This lower deficit was made possible by higher revenues and lower spending during the period. As compared to the first five months of 2010, revenues are higher by P81.5 billion while spending is down by P71.08 billion. Furthermore, monthly collections are more than P1.89 billion higher than expected while monthly expenditures are almost P21.55 billion lower than programmed.

At the people’s expense

But the improved fiscal situation was achieved at the expense of the people who are being deprived of social services as government under-spent and much of what it spent went to debt servicing. At the same time, the people are being squeezed dry with burdensome taxes to raise revenues.

To keep credit rating agencies and creditors impressed, Aquino rejected the growing public clamor to scrap or at least suspend the 12 percent value-added tax (VAT) on oil amid soaring pump prices. According to Aquino, “suspending the VAT might trigger a credit downgrade because credit rating agencies would likely deem such a move as ‘fiscally imprudent’.”

The oil VAT has become one of the most important sources of revenues for government since Arroyo introduced it in 2005. But it is also the most oppressive. Revenues from the oil VAT rise dramatically as prices of petroleum products increase. Due to higher oil prices this year, for instance, the Department of Finance (DOF) expects government to earn an additional P18 billion in revenues. From an original forecast of P52 billion in oil VAT earnings based on a global crude price of $80 per barrel, the DOF revised its projection to P70 billion based on $110 per barrel.

High pump prices made a significant contribution to higher tax collections this year. In the first two months of 2011, oil VAT revenues increased by P1.2 billion because of the oil price hikes. Aside from the 12 percent VAT, gasoline products are also charged with excise tax, which generated P4.03 billion for government from January to May this year – P389 million higher than during the same period in 2010.

Facts & figures that matter

Meanwhile, facts and figures that truly matter to the people have been ignored in Aquino’s SONA – P125 or the amount of legislated minimum wage hike workers have long been demanding to help them cope with ever rising cost of living; 6,453 hectares or the size of Hacienda Luisita lands that should have long been owned and controlled by farmers and farm workers; 556,526 or the number of families living in informal settlements in Metro Manila and face the threat of forced eviction; 27 or the number of times that diesel prices have gone up since Aquino became President; and 48 or the number of victims of extrajudicial killings in his first year as Chief Executive, among others.

By using numbers, the President hoped to be objective in presenting his administration’s supposed achievements during the SONA. But he ended up ignorant of the numbers that truly matter. (End)

The curious case of NAPOCOR debts

The deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA (Photo from Kevin Collins on flickr.com)

Continued from Part 1

Proponents of EPIRA made us believe that privatization will solve the financial woes of state-owned NAPOCOR. In fact, the deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA. If state coffers are being bled dry by the debts of NAPOCOR, then why not just sell its assets to wipe out its obligations? Obviously, the public was deceived by this simple line of reasoning.

Drain in public resources

Such argument by the then Arroyo administration sounded persuasive for some because government was facing a swelling budget deficit and debt. In 2001, the budget shortfall was P147.02 billion. Including the deficit of other government units, the consolidated public sector deficit was P174.27 billion. Meanwhile, the outstanding national government debt during the period was P2.38 trillion. NAPOCOR represented the biggest drain in public resources. Its 2001 debt of $16.39 billion or some P834.29 billion (at P50.99 per US dollar) accounted for 34.9 percent of government’s outstanding debt. With the EPIRA, the Arroyo administration promised to reverse the situation.

Fast forward to 2011. According to the PSALM Corp., the remaining debt of NAPOCOR as of 2010 is $15.82 billion. Thus, after 10 years, only $570 million have been shaved from the state power firm’s 2001 debt of $16.39 billion. At $15.82 billion or P713.64 billion (at P45.11 per US dollar), the debt of NAPOCOR comprised a still a significant 15 percent of government’s outstanding debt. Meanwhile, the budget deficit ballooned to P314.5 billion in 2010, a new high in absolute terms.

While its IPP obligations have been reduced by $1.63 billion between 2001 and 2010, NAPOCOR’s debt also increased by $1.02 billion during the same period. This implies that IPP obligations have been mainly financed by new debts. (See Chart 3)

Worse, PSALM has already shelled out $18 billion to settle the obligations of NAPOCOR from 2001 to 2010. Of the said amount, $6.7 billion went to principal amortization; $4.3 billion for interest payments; and $7 billion for obligations to independent power producers (IPPs). (See Chart 4) But if government spent $18 billion in the past 10 years, why then did the debt of NAPOCOR was reduced by a mere $570 million?

New debts

PSALM itself provided the explanation. According to it, NAPOCOR contracted new debts in the past 10 years. From 2001 to 2010, NAPOCOR accumulated new debts of $12 billion, on top of its $16.39-billion pre-EPIRA debt. Of the $12 billion, 73 percent represented operational losses while the commissioning of new IPP plants accounted for the remaining 27 percent. PSALM noted that the commissioning of new IPP plants bloated the total financial obligations of NAPOCOR to $22.35 billion by 2003.

The question now is why did officials tasked to privatize NAPOCOR have to resort to more borrowings? Doesn’t it defeat the purpose of power sector reform which is to free up government from its debilitating financial woes?

Under the EPIRA, eliminating NAPOCOR’s debts primarily involves using the proceeds from the privatization of the state power firm’s generation and transmission assets and liabilities. Apparently, this has not happened because earnings from power privatization were not enough to compensate the huge financial obligations of NAPOCOR.

According to the PSALM, government has earned $10.65 billion as of October 2010 from the sale of its generation plants, transmission assets, and IPP contracts. Of the said amount, the largest, $3.95 billion, came from the privatization of the National Transmission Corporation (TRANSCO). The sale of generating plants, on the other hand, yielded $3.47 billion. Finally, the transfer of NAPOCOR’s IPP contracts to IPP Administrators (IPPAs) accounted for the remaining $3.23 billion.

Privatization debacle

However, of the $10.65 billion in total privatization proceeds, only $4.85 billion was actually collected and used to pay for NAPOCOR’s debt. PSALM reasoned that earnings from the privatization of TRANSCO and the IPP contracts will be fully collected in a number of years through a staggered collection scheme. “But in any year when maturing debts exceed privatization collections, PSALM will have no recourse but to raise funds through new loans to pay for maturing obligations,” PSALM said. This explains the $12 billion in new debts incurred by NAPOCOR in the past 10 years.

It appears that the supposed benefits of privatization in terms of addressing NAPOCOR’s financial bleeding will not be felt anytime soon. PSALM said that the debt of NAPOCOR will be significantly reduced only by 2026, with a projected residual debt of $3.78 billion. The amount is exclusively based on privatization proceeds as of 2010 and maturing financial obligations. Depending on future privatization proceeds and earnings from the universal charge, PSALM claimed that it may even liquidate the $3.78 billion before its corporate life ends in 2026.

But it doesn’t mean that NAPOCOR will be debt-free by the time PSALM expires 15 years from now. This will depend on how much government can earn from the privatization of its remaining assets and IPP contracts. If the experience of the past 10 years is to serve as indicator, it seems that there is nothing much to hope in EPIRA even in just mitigating the public sector’s fiscal burden. Why is this so?

NAPOCOR’s financial bleeding

Even prior to the EPIRA, there were already initial efforts by government to privatize the power industry. But even then, officials already knew that power privatization can only be successful if government could package it in the most attractive way for businesses to take notice. One factor going against efforts to privatize the power sector was the small energy market of the Philippines. Being a pre-industrial, backward economy, Philippine energy consumption is not as huge as those of other countries even compared to our neighbors in Southeast Asia.

To remedy the concern over a small market, government had to offer incentives and other benefits that will guarantee the profits of private investors. IPPs, for instance, were offered a guaranteed market that was much larger than the actual electricity consumption of the country through take-or-pay contracts, on top of other benefits. These guarantees and perks were the underlying reasons for NAPOCOR’s financial hemorrhage.

Legitimizing onerous contracts & debts

Alas, EPIRA even legitimized these burdensome and unjust contracts and debts. To entice investors, Section 32 of the law mandated the government (and ultimately, the taxpayers) to automatically assume P200 billion in financial obligations of NAPOCOR.

Section 68 of EPIRA did mandate the “thorough review” all IPP contracts by an inter-agency committee headed by the Department of Finance (DOF). It also tasked the committee to take necessary actions in cases where contracts are found to be grossly disadvantageous or onerous to the government. Implementing this provision, then President Arroyo ordered a review of 35 IPP contracts. In 2002, the DOF-led review committee said that a total of 27 contracts have financial issues. A financial issue pertained to an instance when the government agency that entered into the contract agreed to shoulder financial obligations “beyond what is necessary”.

But instead of rescinding these financially onerous IPP contracts, government opted to simply renegotiate them. PSALM claimed that the renegotiations have resulted in some $1.03 billion in savings for the government Such savings, however, were not the result of striking out the take-or-pay provisions in the contracts, which remained even after the renegotiations. The reported savings mostly came from IPPs reducing their nominated capacity, or the capacity that government agreed to pay for whether electricity is actually produced or not. The renegotiations were done not to substantially rewrite the contracts. On the contrary, discussions were carried out by PSALM officials with the IPPs within the parameters set by the contracts.

Consumers’ burden

Even worse, EPIRA mandated that all the costs resulting from these contracts be borne by the hapless consumers. Section 34 of the law states that “a universal charge to be determined, fixed, and approved by the ERC shall be imposed on all electricity end-users”. The universal charge shall be collected for, among others, the recovery of so-called stranded debt and stranded contract costs of NAPOCOR.

Section 4 of EPIRA defines stranded debts as any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sales and privatization of its assets. On the other hand, stranded contract costs refer to the excess of contracted cost of electricity under eligible contracts (i.e. those approved by the ERC as of December 2000) over the actual selling price of the contracted energy output of such contracts in the market. Stranded contract costs are basically the take-or-pay capacity payments that will not be offset by the privatization of the IPP contracts and thus will still be shouldered by NAPOCOR.

In June 2009, PSALM had filed petitions before the ERC to recover almost P470.87 billion in NAPOCOR stranded debts and almost P22.26 billion in stranded contract costs for the Luzon grid. The recovery of stranded debts translates to a rate hike of 30.49 centavos per kilowatt-hour (kWh) based on a recovery period of 17 years. Meanwhile, the petition to recover the stranded contract costs in five years will translate to a rate hike of 9.20 centavos per kWh. PSALM filed another set of petitions in June 2010 to recover stranded debts for 2010 (projected at almost P54.90 billion), equivalent to almost 86.77 centavos per kWh. It also proposed to recover in three years stranded contract costs for 2009 estimated at almost P26.69 billion, equivalent to 18.79 centavos per kWh.

Fortunately, the ERC dismissed these petitions last November 15, 2010. The dismissal, however, was not because they had no basis (EPIRA allows such recoveries through the universal charge) but due to PSALM’s failure to submit supporting documents and information. In fact, the ERC decision clearly stated that the dismissal was “without prejudice to the re-filing of the same after conforming to the pertinent ERC regulations”. The relief for consumers is indeed just temporary. On or before June 30 this year, PSALM is expected to file another set of petitions to recover NAPOCOR’s stranded debts and stranded contract costs. Reportedly, PSALM is filing for 12 to 15 centavos per kWh-hike in the universal charge. (To be concluded)

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform