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In reset, Marcos drops Duterte’s Chinese loans

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MANILA — Just weeks into Ferdinand Marcos Jr’s presidency, the Philippines is seriously recalibrating its once intimate relationship with China.

The Philippine Department of Transportation (DOTr) announced that it had effectively canceled three major rail projects with Chinese counterparts initiated under the previous administration of Rodrigo Duterte.

According to Undersecretary of Railways Cesar Chavez, Beijing has failed to respond to repeated requests for funding from the previous Duterte government, which relied heavily on support from China’s Belt and Road for its massive spending spree. infrastructure “Build Build Build”.

Negotiations for major Chinese infrastructure projects began in 2018 and were later approved by the National Economic and Development Authority (NEDA). Most of the financing for the projects was supposed to be based on official development assistance (ODA) loans from China, which promised up to $24 billion in investments during Duterte’s first visit to Beijing in 2016. .

Of 27 agreements signed between China and the Philippines during Duterte’s visit to Beijing in October 2016, China initially agreed to provide $9 billion in loans on favorable terms, including a $3 billion line of credit. with the Bank of China, with an additional $15 billion in direct investment. Chinese companies in railway, port, energy and mining projects. The agreement did not specify a timeline, according to reports at the time.

Incoming government Marcos Jr has expressed a commitment to reviving outdated projects worth 276 billion pesos ($5 billion) spanning the main Philippine islands, but raised concerns about the rates of interest perceived as exorbitant compared to other donors such as Japan. Earlier this year, the Philippines also suspended long-running negotiations with China over disputed energy resources in the South China Sea.

China has tried to play down the setbacks by insisting that bilateral relations are on a good trajectory and speaking of “a new era of Sino-Philippine friendship” under the new Philippine president.

The Asian powerhouse, however, has probably already realized that things won’t be business as usual under Marcos Jr, who has already taken a tougher stance on South China Sea disputes and pursued a much more balanced approach to disputes. great powers than its Beijing. – friendly predecessor.

Mere months before the presidential victory of Marcos Jr, China remained very optimistic about the new administration.

The new Filipino leader Ferdinand ‘Bongbong’ Marcos. Photo: Twitter/Rappler

After all, the Marcos, the lords of the northwestern province of Ilocos Norte, have enjoyed cordial and commercially successful diplomatic relations with China over the decades. Former Filipino strongman Ferdinand Marcos (1965-1986), the father of Marcos Jr, was also among the first American allies to establish formal diplomatic relations with Maoist China in the mid-1970s.

Earlier this year, Chinese Ambassador to Manila Huang Xilian poetically described the positive trajectory of bilateral relations in recent years, noting how “[bilateral] cooperation projects and investment projects from China to the Philippines [come] Ultimately, more opportunities and dividends will be generated for the benefit of the peoples of both countries and contribute to the economic recovery and livelihoods of the people in the Philippines.

In 2020, bilateral trade reached $61.2 billion, with China becoming the Philippines’ second largest export destination. China’s non-financial direct investment in the Philippines reached $140 million that year.

The Chinese ambassador spoke of several multi-billion dollar investments in the Philippine telecommunications, manufacturing and steel industry, which could elevate the bilateral relationship to new heights.

Following his election victory, Marcos Jr broadly shared Beijing’s optimism by describing China as the Philippines’ “strongest partner”, which will be crucial in maintaining “the stability of our economic recovery” amid the coronavirus pandemic. Covid-19.

Between 2023 and 2028, the Marcos administration aims to keep infrastructure spending as a percentage of gross domestic product (GDP) between 5 and 6 percent.

So far, the Department of Public Works and Highways (DPWH) has announced that the previous administration had only completed 12 of 119 Flagship Projects (IFPs) under its “Build Build Build” initiative, which n failed to meet its total price tag of $5.08 trillion. pesos ($100 billion).

But with debt levels reaching a 16-year high last year and a budget deficit expanding amid pandemic stimulus spending, the Marcos administration urgently needs external financing for its ambitious infrastructure program.

China Pawn Trap

The problem, however, is that China has so far proven to be a largely unreliable ally on this front.

While China’s flagship infrastructure investment projects under the government of Gloria Macapagal Arroyo (2001-2010) were mired in corruption scandals, the Duterte administration (2016-2022) largely failed to succeeded in attracting significant Chinese investment.

Instead of a “debt trap,” where countries are drowned in unsustainable debt, the Philippines found itself caught in China’s “pledge trap,” a series of empty promises that convinced the former Philippine president to slow down disputes in the South China Sea.

As current finance minister Benjamin Diokno, who previously served as budget secretary and central banker under Duterte, recently admitted, “there was a lot of promise but [not] a lot has been delivered.

Chinese President Xi Jinping shows then-Philippine President Rodrigo Duterte the way in a file photo. Photo: AFP

Today, new DOTr Undersecretary Cesar Chavez, who also served in the Duterte administration, also highlighted concerns about China’s previous empty promises.

The Marcos administration recently announced that China has effectively withdrawn from its involvement in three big-budget projects, namely the Subic-Clark railway project; the Philippine National Railways (PNR) Southern Long-Haul Project; and the Mindanao Railway Project (MRP).

The 142 billion peso ($2.5 billion) PNR South Long-Haul project – also known as PNR Bicol Express – was previously awarded to a joint venture of China Railway Group Ltd, China Railway No 3 Engineering Group Co Ltd and China Railway Engineering Consulting Group Co Ltd.

Meanwhile, the 83 billion peso Tagum-Davao-Digos segment of the MRP has also been awarded to Chinese counterparts. The 51 billion peso Subic-Clark railway project has been awarded to China Harbor Engineering Co.

Yet China has repeatedly failed to respond to funding requests for expensive projects, which relied heavily on Chinese engineering, equipment, labor and design.

“In short, China has backed off,” DOTr Undersecretary Chavez said in a recent public address. Nevertheless, the transport official underlined the commitment of the new government to reactivate the projects in the absence of other bidders.

“The policy discussion on the way forward for the above three Chinese ODA railway projects was also launched at the Cabinet meeting on July 12, during which [Marcos Jr] said that as a policy we should encourage more investment in rail and we should focus more on rail transport,” he said.

The Marcos administration has also raised concerns about China’s perceived high interest rates of up to 3%, which is well above Japan’s 0.01% for oil-based infrastructure projects. ODA. Even former finance secretary Sonny Dominguez publicly warned the new administration against taking out Chinese loans at high interest rates lest the country fall into a “debt trap”.

In response, the Chinese Embassy tried to play down the situation by citing the extraordinary circumstances caused by the Covid-19 pandemic.

“Over the past two years, Covid-19 has impacted the implementation of some projects, hampering site availability, causing supply delays, affecting the mobility of goods, etc. Despite these difficulties and challenges, our two sides have worked tirelessly to move projects forward and achieved rich results, ranging from anti-pandemic response, disaster relief to infrastructure, agriculture and development. ‘other areas,’ the embassy said.

China argued that “[o]Our two parties have negotiated technical issues and made positive progress in moving projects forward,” and that Beijing “is open to technical discussions on our G-to-G [government-to-government] projects and is ready to continue our cooperation in close communication with the new Philippine administration.

A Filipino road construction crew on the northern island of Luzon. Photo: Twitter

Armed with this track record, the Marcos administration is seeking alternative options, including investment from established partners such as Japan, as well as private funding. In particular, the new Philippine government is considering public-private partnership (PPP) programs for the $1 billion Subic-Clark Railway project and the Mindanao Railway Phase 1 projects.

“We will continue BBB (Build Build Build). We will therefore look at all possible sources of funding,” said NEDA Secretary Arsenio Balisacan, who also oversaw PPP projects under the Benigno Aquino III administration (2010-2016).

“Ideally, we would like the PPP to review the list of solicited public investment projects, and our immediate concern is to expand that list, update it, make it responsive to the private sector and to the needs of our country.

“But at the same time of course, [we are] open to unsolicited projects as long as it does not distort, the unsolicited project does not distort, for example, the infrastructure roadmap,” Balisacan added, pointing to a more calibrated approach to infrastructure investments based on a diversified funding pool under the new administration.

Follow Richard Javad Heydarian on Twitter at @richeydarian