Chinese-funded infrastructure projects could lead to debt crisis, expert warns

MANILA, Philippines — The Philippines could be burying itself in substantial debt from infrastructure projects funded by Chinese official development assistance (ODA), an expert in geopolitics and geoeconomics has warned.

Speaking at Stratbase ADR Institute’s forum on Friday, President Dindo Manhit stressed the importance of implementing safeguard mechanisms to protect against corrosive capital, which encompasses private financing with underlying political motives.

Such financial arrangements, lacking transparency and accountability, have "the potential to incite debt dependencies," Manhit said during the think tank's forum "Revitalizing the Philippines’ Infrastructure Development through Public-Private Partnerships."

"Without proper oversight, investments in infrastructure flagship projects, particularly those funded by Chinese ODA or through the Belt and Road Initiative (BRI), could be exploited to circumvent Philippine laws. These could then undermine the country’s democratic institutions and make it vulnerable to political and economic manipulation,” Manhit said. 

Manhit's warning comes in the wake of recent developments related to projects funded through Chinese ODA. 

In early September, the Department of Transportation announced the possibility of terminating loan contracts for three major railway projects financed through Chinese ODA by the end of this year. These projects include the Subic-Clark Railway Project, the Philippine National Railways South Long-Haul Project (PNR Bicol Express), and the Davao-Digos segment of the Mindanao Railway Project.

ODA vs PPP

The think tank on Friday released the results of a study comparing two significant infrastructure projects funded in different ways: one through an ODA loan from China, and the other through a public-private-partnership (PPP).

The study involved a comparative assessment of the Kaliwa Dam Project, funded by a concessional ODA loan from China during the previous administration, and the Wawa Bulk Water Supply Project-Upper Wawa Dam, funded through PPP. The study was conducted in collaboration with the Center for International Private Enterprise.

One of the primary findings of the study is the country's overdependence on foreign loans for infrastructure projects, which can lead to a significant debt burden. 

This makes the Philippines more sensitive to sudden shifts in the global economy, which could threaten our financial stability, Manhit said.

"The Philippines has experienced this vulnerability during times of global economic uncertainty, highlighting the risks associated with dependence on foreign capital,” Manhit added.

PPP-funded projects were also forwarded by Manhit as a safer financing option to prevent debt dependencies.

The Kaliwa Dam project carries a hefty interest rate of 2% and a relatively short repayment period of 20 years, and all Filipinos will share the responsibility of repaying the loan, regardless of whether they benefit from the water produced by the Kaliwa Dam, Manhit noted.

Rather than going for ODA-funded projects, Manhit said that it is more strategic to pursue PPP projects, which combine the strengths of the private sector with the government's incentives to ensure efficiency of large-scale project development.

Highlighting the fiscal constraints faced by the government in financing major infrastructure projects, Manhit emphasized that public-private partnerships offer a viable solution for expediting the completion of projects that aim to bring essential services to people.

Makabayan bloc lawmaker Rep. Arlene Brosas (Gabriela Women's Party) previously criticized the government's increasing number of PPP projects in the pipeline, saying that its "profit-driven" nature could lead to increased charges and toll hikes to be shouldered by ordinary citizens.

In a statement in July, in response to toll hikes in NLEX, Brosas opposed the government's reliance on PPPs, which she said "primarily serve the interests of private partners and can lead to higher end-user fees," emphasizing that such projects are more advantageous to corporations.

'Solve right-of-way problems for PPP reform to flourish'

With the proposed Public-Private Partnership Act expected to clear the Senate next week, business representatives have also prodded on government to solve perennial right-of-way problems and its high resettlement costs, which have delayed some major infrastructure PPP projects.

Mike Toledo, head of Government Relations & Public Affairs at the Metro Pacific Investment Corp., stressed that challenges related to "right of way" delays have long hindered project progress.

“The success of the (PPP Act) would depend on how it is put into practice,” Toledo said.

Sen. JV Ejercito said during the event that he expects that the Senate would pass the measure on final reading early next week and that Congress would ratify the PPP Act on Wednesday.

Ejercito, sponsor of Senate Bill 1974, emphasized that the reforms to be introduced by the PPP Act would clear the backlogs in the country's public works and infrastructure development program while giving the government the flexibility to choose the best, most cost-efficient projects.

Toledo, who welcomed the Senate’s close consultations with the private sector in crafting the bill, underscored right-of-way and regulation issues that could hinder the development of infrastructure projects in the pipeline.

“The current right of way in government causes a lot problems, be it financial, economic and/or practical. When theres a delay in the project, the costs will go up, causing overruns, and this will be passed on to consumers,” Toledo said.

Toledo also said that “outdated” rules covering tollways and interoperability could be disincentivizing potential investors from doing business in the country.

“The regulation governing tollways and interoperability, the rules are outdated and need to be up to date. Sometimes the (Implementing Rules and Regulations) is even more advanced than the law itself,” he said.

“The flip-flopping - just like in mining - that’s what we don't want. Businessmen, we want predictability, we have to know so we can plan accordingly. You cannot change rules midstream, which discourages domestic and foreign investors,” he added.

Key features of PPP bill 

Ejercito said the reforms embedded in the bill aim to address longstanding issues that have hindered the growth of PPP projects in the country since the 1990s. 

One of the notable reforms involves the removal of the provision that granted priority to the first proponent to submit a proposal, the senator said.

Under the proposed measure, the government will have the flexibility to evaluate all proposals without being bound by the sequence in which they were submitted. This change aims to ensure that the government can make more informed decisions and select the most advantageous options available. 

“We changed all of that so the implementing agency will have the chance of choosing the best option,” Ejercito said. “At least now we will make sure that through this reform, that we will get the best possible offer for the government.”

Ejercito also stressed that the reform process aims to maximize the government's benefits while fostering a more favorable environment for private sector participation. The ultimate goal is to secure the best possible offers for the government, which will translate into better infrastructure and services for the Filipino people, he added.

President Ferdinand “Bongbong” Marcos Jr. ceritified the PPP Act as urgent in June.

The House version of the PPP Act hurdled final reading in 2022.

Rep. Joey Salceda (Albay, 2nd District) has estimated that for infrastructure projects, the proposed PPP Act will make available at least P27 trillion in financial resources from banks and at least P600 billion annually in just the “large conglomerates.”