PUBLIC ASSUMPTION OF PRIVATE DEBTS

Witness:  Jean Enriquez (PHILIPPINES)

Introduction

At P4.389 trillion ($83.809 billion), the total Philippine debt¹ remains one of the biggest challenges to our development as a people. That a substantial part of this debt burden is of a private, even odious and fraudulent nature makes the yoke all the more unjust and oppressive.

Over P50 billion of private debts already passed on to public hands in 1992 because crony firms defaulted on state guaranteed loans extended at the behest of top government officials. The practice, however, of granting sovereign guarantees continues unabated, with government risking people's futures as never before. Contingent liabilities, for instance, from new state-guaranteed loans stood at P496 billion by end 2001, an amount that by government's own reckoning could swell to actual obligations of PhP600 billion in the next 20 years.²  

Beginnings in the context of the global debt crisis

Stuck in a rut of economic sluggishness and political instability in the early 70s, the Marcos regime and its US government backers decided to take the authoritarian option and thus, declared martial law in 1971. Immediately, the regime set out to advertise an investment climate made favorable to foreign investors with cheap labor, generous tax incentives, and lax labor and environmental laws, among others.  The new export orientation, however, called for infrastructure investments that domestic savings alone could not finance.³ 

Other blows came in the form of the global economic crisis in 1974-75 and then again in 1980-81, which set the stage for South countries like the Philippines, Brazil, Argentina and Mexico to access more foreign borrowings. Gripped by crisis, governments lapped up loans being vigorously pushed by North American, Japanese and European banks awash with billions of petrodollars.  The low-interest credit schemes were offers they could ill refuse.

A major global shock would come with the unilateral decision of the US, a major creditor, to raise interest rates in 1979-80. Countries that had played into the easy credit schemes of Northern banks found themselves trapped in a vicious cycle of settling old, dubious debts with fresh ones.

The role of government

By the time of its collapse in 1986, the Marcos regime had built a $28.206-billion debt legacy for the Filipino people from $3.053 billion in 1975.⁴  The problem, however, was not only the over-indulgence of foreign creditors and the over-borrowing syndrome of government.  The problem was also how the Marcos regime allowed a sizable amount of the massive foreign debts it had incurred at the people's expense to end up as crony capital abroad or in unproductive investments of crony firms at home.

According to a Commission on Audit (COA) report, Marcos "…authorized government-owned banks and corporations to beef up the capital of private corporate borrowers identified with his close associates and to extend the government's guarantee on foreign loans directly contracted by government banks like the PNB⁵ and the DBP ⁶."

When foreign creditors called on the guarantees, Government Owned and Controlled Corporations (GOCCs)⁷ siphoned funds from the National Treasury to then privately owned firms.⁸

Not surprisingly, the debt crisis reached its gravest proportions under the Marcos dictatorship. One of the reasons for the debt build-up during this period was the Marcos regime's need to preserve its economic prop - crony capitalism.  So all-encompassing was this system of crony capitalism that many of the country's 500 state agencies at the time took off as private ventures of Marcos' friends and associates.⁹  Then after cronies had their fill of state-guaranteed financing and bled their own ventures dry, their bankrupt, debt-strapped firms passed on to the national government.

Huge amounts of public funds poured into salvaging firms whose common feature was their close connection with the Marcos regime. As the firms eventually foreclosed, government financial institutions (GFIs) had to borrow more from the national government to continue running them. In less than five years, from 1978-1982, net lending (representing national government infusions into GFIs and other GOCCs like the National Power Corporation) rose from 9.9 percent to 22 percent of total government expenditures or tenfold from $2.6 billion to $22 billion.¹⁰

Initially, a P1-billion rescue fund for "distressed" corporations was put up, ostensibly to prevent layoffs in the face of an impending recession. Government went a step farther by offering sovereign guarantees that sped up the approval of foreign loans of these firms. The money eventually ended up being relent by GFIs like the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB), to firms that were having difficulties in meeting loan payments to these same GFIs, including the Social Security System, or directly to foreign banks.

With this system of bestowing sovereign guarantees in place, there was no urgency for foreign lenders to carefully probe loan applications. After all, government or the Central Bank (now the Bangko Sentral ng Pilipinas) had bound itself to repaying the loans, regardless of the viability of the projects it financed. During the period 1978 to 1982, the proportion of total medium and long-term debts relent by the public sector to the private sector more than doubled from $901 million to $2,105 million.

The Aquino years:  honoring private, dishonorable debts

"Growth must take priority, for the plain and simple reason that we have no money to pay, we can't," Corazon Aquino said of her debt policy.  "And if we starve the nation of essential services, there may be no one around willing to honor the debt." ¹¹  Faced however with the challenge of averting an economic crisis on one hand and honoring the Marcos regime's debts on the other, the Aquino administration opted to take upon itself - or rather the Filipino people - the decision of paying them all, "if only for honor".   Thus, despite pronouncements against extending any more sovereign guarantees, the Aquino administration would take on up to $2,740-million of private sector debts before the end of 1986.¹²   Two years later, assumed debts accounted for 38 percent of the increase in the national government's foreign debt.¹³ 

"It will not be a good picture for the government if these banks…were closed due to unpaid debts," then Central Bank Governor Jose Ongpin reportedly told Aquino. On his part, former Secretary Franklin Drilon clarified that "'the law vests upon the chief executive's discretion whether or not to undertake such assumption of debts,'"…even if "'the value of assets transferred is less than the amount of the liabilities assumed.'" ¹⁴ 

By the time Fidel Ramos came to power, total foreign and domestic obligations assumed by the national government amounted to P194.857 billion (See Table 13, Annexes, for foreign exchange rates). Of these liabilities, 419 loan accounts guaranteed by GFIs costing P147 billion were then transferred to the Assets Privatization Trust for disposal. Some 384 public and private creditors incurred these loans from foreign and domestic creditors, confident that they were covered by guarantees of such GFIs as DBP, PNB, the Philippine Export and Foreign Loan Guaranty Corporation (PhilGuarantee) and the National Development Corporation.¹⁵

The collaterals that turned out to be grossly overvalued were foreclosed and later privatized or sold at one-fifth their value. Moreover, because of sovereign guarantees, the national government had to directly pay all their foreign and domestic debts.¹⁶ 

New ways of picking the public purse: capitalism without risk

As government continues to bear the Build-Operate-Transfer (BOT) standard of Ramos and his technocrats, the practice of assuming private liabilities has remained very much in place in the post-Marcos years. It exists both in the old form and in a more subtle form, and by all indication, will continue under the present dispensation.  Some P12 billion worth of liabilities fell due in 2001 and had to be settled within the year. Contingent liabilities also increased by 2.8 percent due to new state-guaranteed loans, pushing the level from P482.1 billion a year ago to P495.78 billion by end-2001.¹⁷

The BOT scheme offered another way of loading business risks on to the public. Under this arrangement, the private sector is contracted to build and operate infrastructure projects for a number of years, after which time the completed projects and facilities are turned over to government. Sweetening BOT deals are the so-called "performance guarantees" which include:  a fixed peso-dollar exchange rate; guaranteed cost of fuel; guarantees against market and credit risks; and a pledge that government would purchase all of the output of the project, whether or not it needed all the output  (such as generated power) or could retail it to the public. ¹⁸

Armed with emergency powers granted by Congress, Ramos committed government to enter into BOT contracts called power purchase agreements as a quick way out of the severe energy crisis that hit in the early 90s. Lasting anywhere from 15-25 years, these contracts ensured IPPs payment for whatever power they generated, at dollar-denominated rates agreed in advance. Thirty-three contracts were signed from 1988 to 1995, and even as the power market reached a situation of oversupply, 10 more contracts were inked from 1996 to 1999. ¹⁹ 

An amount that is over 100 percent of the monthly basic electricity charge now goes into this seemingly innocuous item called the PPA or purchase power adjustment because of highly onerous terms that include:

• Take or pay agreement - NPC agrees to take or pay a minimum percentage of the IPPs' available capacity, regardless whether NPC or its customers needs such capacity and whether said capacity is actually generated by the IPP concerned. Guarantees range from 70-90 percent of available capacity.
• Fuel cost guarantee - NPC will supply fuel to the IPP and absorb any fluctuations in the cost of fuel. The number of contracts with a fuel guarantee rose from 10 in 1993 to 27 in 1998 out of 33 IPP contracts in place at that time.
• Absorption of exchange rate fluctuations - IPPs enjoy a forex guarantee since all contracts are quoted in dollars.

The popularly elected Joseph Ejercito Estrada simply took up its predecessor's BOT way of doing business. Private investments for completed BOT projects nearly doubled from $3.5 billion in CY 1997 to $6.6 billion during his short-lived presidency, while $13.4 billion more was estimated to be in the pipeline. ²⁰

Visiting the Casecnan Multi-Purpose Irrigation and Power Plant in Northern Luzon, the former president explained to affected communities that the project would be of no cost to the government. In truth, however, this unsolicited proposal that by law requires no direct government guarantee, subsidy or equity,²¹ has already committed the National Irrigation Administration (NIA) to pay for 801.9 million cubic meters of water/year and NPC to 19 million kWh/month, whether or not these outputs are actually generated.²²  CE Casecnan Water and Energy Co. is assured of $23.3 million from NIA and  $36.4 million from NPC, regardless of actual delivery of the contracted water and power, respectively.²³  Proponents are now calling on the project's P145-billion guarantee.

A similar BOT project - the San Roque Hydropower and Irrigation Project - is being built in Pangasinan Province in the Cordillera region of Northern Luzon and will be the tallest and largest private hydropower facility in Asia once completed. NPC has forged a power purchase agreement with the Japanese and American-owned San Roque Power Corporation to buy the electricity that the facility will generate, at fixed rates for a period of 25 years.²⁴

Only three months into her presidency, Gloria Macapagal Arroyo was quick to announce her willingness to grant more guarantees to projects, as long as stricter measures can be ensured. This contradicted a previous policy of the Finance Department against extending anymore guarantees in order to reach the 2001 target of reducing the consolidated public sector deficit to only P148.1 billion.²⁵  She was soon brokering the passage of the omnibus electric reform bill, leaving no doubt as to what her government's position on publicly assumed liabilities would be.  With the Electric Industry Reform Act in place, the P406.2-billion lease obligation of the National Power Corporation (NPC) as of 2000 ²⁶, arising mainly from over-priced contracts with independent power producers (IPPs) has now been loaded on to the public.

"…[W]e see a new form of indebtedness emerging, the magnitude of which threatens to surpass anything and everything we have ever experienced in our debacle-filled history," warned FDC president Maitet Diokno-Pascual, referring to government's non-loan pledges that sweetened BOT contracts with private sector firms.²⁷   

Total interest payments on the P10.4 billion loan of the Metro Rail Transit Corporation (MRTC), another major BOT project, was expected to rise by 11.7 percent from P129.8 billion last year to P140 billion in 2001.  The Budget of Expenditures and Sources of Financing Survey attributed this in large part to the effect of incorporating P3.43 billion in MRTC loan payments that had been guaranteed by the government as part of the debt service.²⁸  Liabilities reportedly shot up because government guaranteed MRTC a 15-percent return-on-equity in addition to an assured ridership of 400,000 daily. Simply, this means that the Filipino people will foot the difference if the return-on-equity and ridership fall below what has been pledged by government.²⁹ 

Other issues

Passing on to the public the burden of settling largely private debts raises enough ethical and equity issues, but that a large part of these debts were possibly incurred under fraudulent circumstances and now saddle the Filipino people with onerous conditions, raises even stronger arguments against honoring them any further.

Of the 419 assumed loan accounts that passed on to government in 1992, at least 130 accounts amounting to P50.29 billion have been found to be behest loans. This means that they are positive for at least two of the indicators defined by Ramos when he created the Presidential Ad Hoc Fact Finding Committee on Behest Loans (PAFFCBL): undercollateralized loans, undercapitalized borrowers, endorsements by high government officials (presence of marginal notes), extraordinary speed in release of loans, stockholders or management closely associated with the Marcos cronies, corporate layering, and diversion of loans proceeds to other purposes.³⁰ Topping the list are Marinduque Mining Corporation with total loans from the PNB of P7.03 billion; the Philippine National Construction Corporation with P6.17 billion (P5.18 billion from the PNB and P.099 billion from the DBP) and Batong Buhay Gold Mines with P49.3 billion from PNB.³¹  

Until today, the Filipino people fight an uphill battle to prosecute those who incurred these bad debts, in the absence of strong political will on the part of government to deal with this matter decisively. As early as 1987, Aquino issued Executive Order 150 creating the Presidential Blue Ribbon Committee for purposes of initiating a probe. However, this was soon replaced by the Senate Blue Ribbon investigation body led by former senator (now vice president) Teofisto Guingona. COA also embarked on its own probe of 16 corporations in 1992 but failed to gather enough basis to warrant the filing of charges. ³²  

Meanwhile, efforts of the PAFFCBL to recover at least a part of old behest loans are meeting with little success at the Ombudsman's office, which must first establish probable cause for any case to prosper. Significantly, in 2001, the Ombudsman Aniano Disierto was found by the Supreme Court to have exercised grave abuse of authority when he threw out the case of Philippine Seeds, Inc. on a technicality, and not on the merits of the case. Some 44 cases of a strongly behest nature will prescribe in 2002 if the PCGG does not file them within the year.³³ 

Legitimizing the debt burden: other instruments

Several instruments made it possible to pass on private debts to the Filipino people, as loans assumed by the National Government.

A major instrument, the only one of its kind in the world, is a bequest of the Marcos regime - specifically Section 31 of Presidential Decree 1177, or the Budget Reform Decree of 1977 - that provides for the automatic appropriation of tax revenues for debt service payments.  The Aquino government went a step further by instituting Section 26 (Book 6) of the Revised Administrative Code of 1987 which provides "(a) personal retirement premiums, government service insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national government guarantees of obligations which are drawn upon, are automatically appropriated"(boldface italics supplied). Effectively, this measure -

•   gives highest priority to debt service over all government spending, such as education, health, agrarian reform, poverty reduction, disaster relief, social safety nets, rural infrastructure, etc.
•   disempowers Congress of its constitutional authority to appropriate and allocate over 60 percent of the national government's tax revenues

The significant growth of the public sector's domestic debt during Aquino's term also bears looking into. Despite wooing prospective creditors, Aquino failed to attract new loans from creditors. This scarcity in foreign financing and failed efforts at tax reform prompted heavy borrowings from the domestic market to pay for an oppressive debt burden.  While the foreign debt grew only slightly, domestic debt ballooned from P118.4 billion in 1986 to P656,590 in 1993.

"The shift from foreign to domestic debt meant that a large amount of fraudulent and behest loans had been securitized and therefore legitimized." ³⁴

In 1992, the Ramos government converted into Brady bonds³⁵ $4 billion of commercial bank debts. The blanket guarantee included the very loans for a project that government contended was overpriced and attended by bribery and fraud. As part of the conditions of the International Monetary Fund on a new debt restructuring agreement,  "securitization"³⁶ enabled all BNPP creditor banks to wash their hands of any responsibility for participating in the fraud.

The swelling of the domestic debt -- P1.1 trillion by end-2000 -- exposed the country to a new vulnerability.  This meant that each time interest rates went up by one percent, annual interest on domestic debt climbed up by at least P10 billion. ³⁷

The culpability of the IMF and the World Bank

The Philippine debt would not have ballooned without the support of US-dominated multilateral financial institutions (MFIs) like the International Monetary Fund and the World Bank, which singled out the Philippines as worthy of foreign financing for its steadfast adherence to their development prescriptions, particularly privatization. ³⁸ 

For many developing countries, privatization of state-owned firms has been a basic requisite for the release of structural adjustment loan packages of the IMF and World Bank. But the very problems of debt and budgetary crisis that fuels the IFIs' push for privatization has given rise to conditions that bury the country deeper in debt.

In the Philippines, the privatization program started formally on December 8, 1986 with President Corazon Aquino's signing into law of Proclamation 50. At the time, the debt equity swaps and disposal of non-performing assets (NPAs), including behest loans extended to crony firms and foreign obligations absorbed by the Central Bank, seemed a fair way of lessening the burden of the Filipino people who were already chained to a huge foreign debt left behind by the Marcos dictatorship. But the problem was that nobody wanted to buy these GFIs or NPAs, unproductive as they were and mired in huge debts.³⁹ 

Making way for the rehabilitation of the heavily indebted NPAs, Proclamation 50 vested on the President the sole discretion whether to undertake assumption of such bad debts, even where the value of the assets transferred was less than the liabilities assumed.⁴⁰  Thus, in a bid to make the NPAs more tempting to foreign buyers and bring in more revenues to service an-ever swelling debt burden, government not only sold them at bargain prices but even sopped up many of their liabilities.⁴¹

MFIs turn a blind eye to dictatorial and corrupt regimes as it suits their convenience, and show no qualms about pumping in more loans that they very well know would also line private coffers.  Bringing the question of lenders' responsibility to the fore, writers Norel and Saint-Alary pointed out: "How many bankers so much as batted an eyelid when they saw that loans destined for Mexican or Filipino state firms were actually deposited directly in the Boston and Geneva accounts of highly placed government officials?" ⁴²

Impacts: the social and human costs of government's debt policies

 The blanket assumption of all debts and the resulting heavy debt service have bred yet another problem -  warped government priorities -  that are clearly reflected in how allocations for debt payments are prioritized by Congress.

Debt service got the lion's share of the P780.8 billion national budget for 2002 recently approved by Congress or 46 percent. At least P204.2 million was allocated for interest payments while P155.6 million was allotted for principal payments. Compare this with the P95.290 billion allocation of the Department of Education.

• Foregone social spending. Between 1990 and 1997, an average of 38.82 percent was set aside for debt service while economic and social services had to make do with only 27.64 and 19.57 percent, respectively.
• Erosion of tax revenues.  Government's single biggest source of revenues is taxpayers' money, but up to an average of 73 percent for the period 1990 - 2000, for instance, poured into debt service.   What little remained of scarce tax resources had to be divided among other budgetary expenses.
• Human costs.  Prioritizing payments on what are largely private debts means that the quality of education, health, housing and other basic social and economic services are sacrificed.  This also explains why the government remains inutile in achieving economic growth that will address poverty and income disparities. From 1997 to 1998, poverty incidence rose in practically all regions, registering an overall average drop of 45.8 percent.

Other Pertinent Tables

TAXPAYER'S DEBT BURDER (Click the link to view the chart)

WHAT'S LEFT OF TAX REVENUES AFTER SERVICING
OF PHILIPPINE GOVERNMENT DEBT (Click the link to view the chart)

 ¹ Bangko Sentral ng Pilipinas, Bureau of Treasury, end-June 2001.

² Clarissa S. Batino, Philippine Daily Inquirer, "Gov't guaranteed debts hit P496 billion."