Made in China: Loan terms with waivers, shrouded in secrecy

AT A GLANCE

MANILA, Philippines – The Philippine government has repeatedly downplayed fears of the country falling into what is dubbed as the Chinese debt trap.

However, critics like senatorial bet Neri Colmenares pointed out that the loan agreements had waivers, which were “onerous” and “one-sided.”

To understand the issues on the Chinese contracts, Rappler reviewed all 9 loan agreements recently made public by the Department of Finance (DOF) and looked for clauses pertaining to waivers, confidentiality, and arbitration. We also reviewed publicly-available loan agreements entered into with other countries involving the Export-Import Bank of China (Eximbank).

Currently, there are two signed loans with China, two with South Korea, 4 with Japan, and one with the World Bank for the big-ticket infrastructure projects. We found that of the 9 contracts, only deals with China had specific waivers on sovereign immunity and mentioned patrimonial assets.

Rappler also found that Chinese contracts were templated to include confidentiality clauses, but the Philippine government was able to negotiate striking these off. Other countries had no clauses on confidentiality at all. China was also very explicit where it wants arbitration to be held in case of a dispute, and specified that its laws should be followed in such proceedings.

Meanwhile, we also found some form of waivers in deals with South Korea and Japan, which were implied in arbitration clauses. Literature on waivers in government-to-government loans also suggest that waivers are present in most loan agreements, whether explicit or implicit.

The Philippine government maintains that it is managing debt well and the numbers back this claim. While this may be the case, the case of Chinese loans should be appreciated in the context of how Beijing continued to lend to countries which had bad loan management records. 

China, positioning itself to be a global superpower, should have foreseen the downward spiral of countries like Sri Lanka.

Moreover, while the two loan agreements entered into by the Philippines with China are relatively smaller than other infrastructure project costs, the choice of words and demands of China in its contracts, as well as its cunning strategies, must always be taken into consideration as the Philippines moves forward with its ambitious infrastructure push.

The Duterte administration aims to strike a total of 75 major projects on or before 2022, when the President's term ends. About one-fourth or 19 of these will be funded by China. If not managed well, these can put the country at a huge disadvantage.

China’s style

The DOF said that waivers on sovereign immunity are usual, while Malacañang said such terms are but “standard” clauses in loan agreements. The Palace even went on to say that the Philippines "had no say" on the terms.

Waivers. Rappler found out that indeed, waivers on sovereign immunity are standard in Chinese contracts. 

In the case of the Kaliwa Dam project worth $211 million, it had this provision:

Article 8.1 Waiver of immunity. The borrower hereby irrevocably waives any immunity on the grounds of sovereignty or otherwise for itself or its property in connection with any arbitration proceeding…or with the enforcement of any arbitral award pursuant thereto, except any other assets of the borrower located within the territory of the Philippines to the extent that the borrower is prohibited by the laws or public policies having force of law in the Republic of the Philippines, applicable and in effect at the signing date of this agreement from waiving such immunity.

Such provision was very similar to that in the contract of Eximbank for Guyana’s road improvement project worth around $46.7 million in 2017:

Article 8.1. The borrower hereby irrevocably waives any immunity on the grounds of sovereignty or otherwise for itself or its property in connection with any arbitration proceeding…or with the enforcement of any arbitral award pursuant thereto.

A similar clause waiving sovereign immunity can also be found in a contract between Eximbank and Kyrgyzstan made in 2013 for a thermal power plant worth $386 million. 

The Center for Global Development, a non-profit research organization looking into China's Belt and Road initiative, cited Kyrgyzstan as among the countries vulnerable to above-average debt. 

The contract for the Chico River irrigation project worth $186 million, where 85% of the cost will be loaned from Eximbank, included more provisions. 

In particular, it made mention of patrimonial assets, which Supreme Court Associate Justice Antonio Carpio said would put the Philippines at risk of losing gas-rich Reed Bank.

The clause in the Chico River project states:

8.1 Waiver of Immunity. The borrower hereby irrevocably waives any immunity on the grounds of sovereign or otherwise for itself or its property in connection with any arbitration proceeding…or with the enforcement of any arbitral award thereto. Notwithstanding the foregoing, the borrower does not waive any immunity of its assets which are (i) used by a diplomatic or consular mission of the Republic of the Philippines, (ii) or a military character and under control of a military authority or defense agency of the Republic of the Philippines, or (iii) located in the Philippines and dedicated to a public or governmental use (as distinguished from patrimonial assets and assets dedicated to commercial use).

Such clauses were cited by various international news outlets as the reason why some countries like Sri Lanka coughed up its port to pay off loans. (READ: Lessons for Manila from Sri Lanka's 'debt-trap' experience)

Arbitration. Should a “friendly consultation” fail between the Philippines and China, an arbitration will take place.

For the Kaliwa dam project, the contract was clear that arbitration will be held in the Hong Kong International Arbitration Center (HKIAC) for arbitration. Under its rules, both parties can either agree on the number of arbitrators, follow the usual 3-member tribunal, or just choose a single arbitrator.

In the likely case that parties choose a 3-member setup, one member will come from each party. The 3rd member shall be decided upon by the two selected members.

Should the two fail to designate a 3rd member who will act as presiding arbitrator within 30 days from appointment of the 2nd arbitrator, HKIAC will appoint the 3rd member.

As for the Chico River project, the rules of the China International Economic and Trade Arbitration Commission (CIETAC) will be followed.

According to CIETAC’s rules, the tribunal shall be composed of 3 arbitrators. However, CIETAC’s rules state that the parties involved in the arbitration shall nominate arbitrators from a list provided by CIETAC.

Article 26. Nomination or Appointment of Arbitrator

1. CIETAC maintains a Panel of Arbitrators which uniformly applies to itself and all its subcommissions/arbitration centers. The parties shall nominate arbitrators from the Panel of Arbitrators provided by CIETAC. 

2. Where the parties have agreed to nominate arbitrators from outside CIETAC’s Panel of Arbitrators, an arbitrator so nominated by the parties or nominated according to the agreement of the parties may act as arbitrator subject to the confirmation by the Chairman of CIETAC. 

Carpio earlier warned that the venue and rules put the Philippines at a great disadvantage, even calling them “lutong Macau” (rigged in favor of China).

Meanwhile, Finance Undersecretary Bayani Agabin clarified on Wednesday, March 27, that the Philippines did not provide a collateral for any loans with China. The contracts confirm this claim, as there were no clauses pertaining to collaterals.

"Collateral is, you know, when you want to take out a loan and the [lender] wants security for payment of the loan. Usually – private example, you want to borrow for your business, banks will require you to put up collateral," Agabin said.

"The collateral is agreed upon by the parties at the start of the loan. The loans we have, regardless of which country, the Philippines does not offer any collateral," he added.

Moreover, Agabin said that enforcement of any arbitral decision will still have to be taken to Philippine courts.

Confidentiality. Critics have repeatedly asked for loan documents to be made public for them to be scrutinized.

The Freedom of Information website already had various requests for the loan agreements as early as 2018. Even senators demanded more transparency.

The DOF made public all 9 infrastructure loan agreements, including the two funded by China.

Finance Assistant Secretary Antonio Lambino said the Philippines was able to “negotiate” transparency. 

He pointed out that the government was able to include lines which allow the documents to be made public using Philippine laws:

8.9 Confidentiality. The borrower shall keep all the terms, conditions, and the standard of fees hereunder or in connection with this agreement strictly confidential. Without the prior written consent of the lender, the borrower shall not disclose any information hereunder or in connection with this agreement to any third party unless required by any applicable Philippine laws, regulations, and rules, or by order of any courts, tribunals, or agencies of competent jurisdiction, or relevant regulatory bodies.

A similar clause can also be found in the Chico River project contract.

The loan documents of Guyana and Kyrgyzstan also had clauses similar to that of the Philippines, which made the agreements available to the public.

However, sources told Rappler that China likely lobbied for the confidentiality clause for other agreements with other countries, which is why they could not be easily accessed by those who want to scrutinize the deals.

Loans with South Korea, Japan

Rappler also reviewed the loan agreements with South Korea and contracts with Japan. We found that the loans implied some sort of waiver, but were not explicitly stated as such. 

Lambino said that in general, loan agreements have waivers, but are worded “differently.”

In a press briefing on Wednesday, March 27, DOF Undersecretary Mark Joven emphasized that past administrations had already agreed to similar sovereign immunity waivers.

For instance, Joven said a very similar provision can be found in a loan agreement with France for the Cebu bus rapid transport system.

In various journal articles by Mark Weidemaier, a legal expert on sovereign immunity and debt, he emphasized that loan agreements almost always include some forms of waivers of immunity from suit and other terms designed to facilitate legal enforcement.

Weidemaier argued that before such immunity waivers got popular in the 20th century, lenders could only impose informal sanctions such as denying the borrower-country future loans until it resumed payments or relied on diplomatic or military means.

He said that the waivers provided strong legal enforcement rights and thus helped reduce the risk of a default or countries being unable to pay loans.

Meanwhile, arbitration clauses were also specified in loans with South Korea and Japan, but were clear that each disputing party had equal representation. They likewise did not specify where arbitration will be held.

South Korea. Loans with South Korea governed by the general terms and conditions of its Economic Development Cooperation Fund (EDCF) specified that Seoul’s laws would be applied in case of a dispute. 

This is the only clause in the EDCF rules which somewhat acts as a waiver, as it implies that the Philippines agrees that South Korean law would be used for resolution:

Section 10.01. Governing Law. The Loan Agreement and the Guarantee, if any, shall be governed by and construed in accordance with the laws of the Republic of Korea.

The contracts made no mention at all of immunity on the basis of sovereignty or those pertaining to patrimonial assets.

The EDCF’s rules also included an arbitration clause. But unlike China, it did not specify where the arbitration will take place.

The agreement said the tribunal shall consist of 3 arbitrators – one appointed by the bank, one appointed by the borrower, and one “umpire” either appointed by both parties or by an appropriate organ for the settlement of international disputes.

Japan. Meanwhile, the general terms and conditions in the Japan International Cooperation Agency (JICA) also did not mention waivers of immunity on the basis of sovereignty. Nor did they tackle issues related to patrimony.

JICA’s terms only said that all claims or disputes shall be settled among the parties. 

Similar to South Korea, Japan’s arbitration procedure also involves 3 arbitrators – one appointed by JICA, one from the Philippines, and one umpire either appointed by both parties or an appropriate organ for the settlement of international disputes.

If either party fails to appoint an arbitrator, that arbitrator shall be appointed by the umpire.

The JICA rules also specified that the umpire will not be a person of the same nationality as either of the parties to arbitration.

Hypothetical, but still worrying

The economic team's messaging is clear and simple: the scenario of the Philippines being unable to pay debt is “highly unlikely.”

The DOF repeatedly emphasized that the country’s debt-to-gross domestic product (GDP) ratio, the measure of a country’s debt obligations relative to the size of its economy, is at 41.9%, much better than countries like Sri Lanka with over 75%.

However, the government should always check what the numbers cannot fully capture: political instability.

In the case of Sri Lanka, it needed money to get back on its feet after a long civil war. However, the projects failed to generate sufficient revenues and corruption made debt unmanageable.

Analysts said that the debt translated into strategic concessions to China.

The Philippines needs to be extra cautious. In 2018, its GDP growth stood at 6.2%, missing its original target of 7% to 8%. 

Another case of politics creating a ripple effect in the economy is the budget impasse. Due to the late passage of the 2019 budget, the economic team revised its growth outlook to just 6% to 7%. A full-year reenacted budget, according to the National Economic and Development Authority, would mean growth dropping to as low as 4.2%.

Another potential threat is the possible shift to federalism. Socioeconomic Planning Secretary Ernesto Pernia warned that the change of government will "wreak havoc” on the economy if politicians are not careful.

The Marcos years – when the country paid off loans for overpriced projects for decades – should also be enough cautionary tale for Filipinos.

Domestic political factors, as well as China’s global maneuvers using economic power and the fine print of its contracts, should be enough reasons for government not to be complacent. – Rappler.com

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.

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