The perils and pitfalls of aid

ODA surge sparks scandals for Arroyo, debt woes for RP

The $329-million national broadband network (NBN) project has been scrapped but over the last seven months, it continues to cause a frenzy among executive and legislative officials, and sparked allegations of abduction in apparent official attempts to cover up the corruption that marred the project.

The core issue, however, is the sharp surge in official development assistance (ODA) in recent years that has sparked scandals and allegations of corruption, and threatens to drag Filipino taxpayers deeper in debt. The Philippines received an average of new ODA loans of $741 million in 2003 and 2005. In 2006, this soared to $1.3 billion.

Financial experts warn that given the unbridled corruption and what Senate star witness Rodolfo Lozada Jr. calls a “dysfunctional procurement system,” foreign-funded projects may sink the Philippines in a debt crisis similar to that of the 1980s.

This three-part series written by Roel R. Landingin, Manila senior correspondent of The Financial Times of London, caps a six-month review by the PCIJ of project and official documents covering 71 ODA projects funded by the Philippines biggest ODA lenders.

Part 1 looks at how the National Economic and Development Authority (NEDA) and its project evaluation process have been weakened and violated by pressure from lobbyists and political sponsors of some projects.

FOREIGN AID inflows to the Philippines are soaring to their highest levels in about six years, but the availability of more money for government projects has not made life any easier for President Gloria Macapagal Arroyo and Filipino taxpayers.

Resigned Comelec chair Benjamin Abalos and former NEDA chief Romulo Neri testify before the Senate Blue Ribbon Committee on the scrapped multibillion-peso NBN project in September 2007. [photo courtesy of Senate website]

Indeed, the latest controversy to rock her seven-year reign stems from the sharp surge in official development assistance (ODA) from China, an emerging economic behemoth, and the Philippines’s growing inability to impose its procurement policies and procedures on ODA projects.

A six-month study of project documents by the Philippine Center for Investigative Journalism (PCIJ) also showed that seven of 10 projects reviewed fall short of economic benefits promised, even after completion and roll-out.

Serious flaws in the identification, design, evaluation, and implementation of government projects have resulted in failed or bad projects. Too often, lenders tie up ODA outlays to contractors of their choice. Worst of all, kickbacks exacted by political sponsors in some cases have yielded overpriced projects.

The $329-million National Broadband Network (NBN) project, which was to be funded by the Export-Import Bank of China, was cancelled following reports of alleged commissions demanded by a close political ally of the president, Commission on Elections (Comelec) Chairman Benjamin Abalos Sr. The President’s husband was accused of meddling in favor of ZTE Corp., the Chinese telecommunications supplier. Abalos was also forced to resign last September despite his and the First Gentleman’s denials of irregular participation in the deal.

But revelations of alleged anomalies in the project continue, even as the scandal sparked the ouster of Speaker Jose de Venecia Jr. — father of whistleblower Jose de Venecia III — in a Congress coup last week.

NEDA a casualty

Perhaps the most serious casualty in the NBN scandal, however, is the National Economic and Development Authority (NEDA), the economic planning agency tasked to weed out the bad from the good among proposed large-scale government projects funded by foreign loans and private investors.

One of the most bizarre twists to the NBN saga involves a contractless consultant tapped by then NEDA Director General Romulo Neri to look into the deal: electronics and communications engineer Rodolfo Lozada Jr., president of the state-owned Philippine Forest Corporation (Philforest) at the time.

Last week, unidentified men spirited Lozada away from the airport after he arrived from an overseas trip. The police later said Lozada had requested security, but furious senators said authorities were trying to keep him from testifying about NBN at the Senate. Lozada has resigned from Philforest. Last Friday at the Senate, he corroborated Jose de Venecia III’s testimonies on multimillion-dollar kickbacks demanded from the project.

Table 1: New ODA Loans (US$ Million)
Source: NEDA
* PCIJ estimates

2000 1,300
2001 1,300
2002 1,000
2003 763
2004 733
2005 727
2006 1,291
2007 1,256*

Yet even before that, NEDA’s public standing had already been hit hard. Last August at the Senate, Neri had failed miserably to explain how he and NEDA’s staff exercised due diligence in evaluating the NBN project. This, even as the Arroyo administration continues to attempt to scale down NEDA’s central role and authority to evaluate major government projects, especially those funded by ODA loans or carried out by private investors under build-operate-transfer (BOT) or similar arrangements.

In part, this explains why in some policy advocacy circles, the surge in aid money in the last two years has been met with unease rather than optimism.

From an average of only $741 million between 2003 and 2005, new ODA loan commitments to the Philippine almost doubled to $1.3 billion in 2006. Last year, new loan approvals reached at least $1.26 billion, according to data from the government and the foreign lenders compiled by PCIJ.

ODA loans are long-term money lent by foreign governments or multilateral bodies at easy repayment terms to fund development projects.

So much money

The Philippines has so much fresh loan commitments it even backed out of a $70-million loan deal for a water supply project with the Asian Development Bank (ADB) last year. The government instead turned to China, which was offering cheaper money while imposing less stringent environmental and social conditions.

Table 2: New Loans in 2007 (US$ Million)

Source: NEDA

ADB 250.0 8 February
ADB 300.0 17 December
ADB 300.0 17 December
World Bank 33.8 23 January
World Bank 50.0 29 August
World Bank 83.8 29 March
World Bank 250.0 21 December
World Bank 38.4 no date given
JBIC 76.4 27 February
JBIC 173.8 3 December
TOTAL 1,256.0

Far from being pleased, a worried Roberto de Ocampo, former finance secretary, recalls a similar flood of cheap credits in the early 1970s that ended in a debt crisis for the country a decade later. He notes:“A lot of the alleged hanky-panky that took place during the Marcos administration with respect to loans to some extent had their roots with the easy money that was floating around from commercial banks that were awash with cash from Arab liquidity. That is a lesson to be learned.”

De Ocampo believes that China, like the West before it, will sooner or later adopt strict and formal credit policies as befits an emerging economic power. But he warns that the deal struck with the Chinese telecommunications firm ZTE Corporation for the NBN project underscores a number of trends that could increase credit risks.

Informal system

“The lending arrangements that you find in the case of ZTE are a reflection of, again, the informality of a system that is taking advantage of liquidity, a rising economy’s desire to expand its sphere of economic and political influence, and the pressing need of third world countries like the Philippines to have access to them,” says De Ocampo. “And finally you sprinkle it with a lower than desired sensitivity to good governance in transacting these relationships.”

Japan, the Philippines’ biggest ODA provider, resumed fresh lending to Manila last year after ceasing loan approvals since April 2004 because of the government’s low absorptive capacity.

In 2006, ADB approved a record $650 million worth of loans, a sign of the lender’s growing confidence in the government’s financial position after Arroyo imposed new and higher taxes following a brush with fiscal crisis the previous year.

Doubts linger about whether the Arroyo administration is keen or able to spend the growing amounts of aid money wisely.

President Arroyo inaugurates Bohol’s P3.6-billion Bayongan Dam, said to be “the most expensive irrigation dam” ever constructed in the Philippines, October 13, 2007. [photo courtesy of Bohol Chronicle]

Supply-driven loans

“Many economists are worried if the government is still interested in using funds efficiently,” says Benjamin Diokno, former budget secretary and professor of public finance at the University of the Philippines School of Economics. “The government is becoming lax in project evaluation because the loans are supply-driven.”

Diokno notes an avalanche of Chinese ODA loans going into projects of doubtful social or economic value, citing as example the Cyber Education Project, which assigns more weight to information technology than to the training of teachers. Studies show, he cites, that good teachers account for 60 percent of improvements in student performance.

“It’s like the U.S. subprime crisis in effect because they (lenders) are lending to debtors or projects that are not really qualified,” says Diokno, referring to turmoil in global financial markets that stemmed from excessive lending by American banks to home buyers without capacity to pay back the mortgage loans.

At the core of the doubts is NEDA, which used to command a reputation of being fiercely independent and competent, an agency that stood up to top officials and politicians pushing ill-conceived if not corrupt projects. The late journalist Luis Beltran Jr. once even called NEDA as the only agency that could not be bribed.

For sure, its former chief Neri earned praise for his moral courage when he told the Senate last August that then Comelec Chairman Abalos offered him P200 million to approve the NBN project. Neri, however, was also rebuked for approving the project anyway with perfunctory scrutiny.

From Neri’s account, it seemed like the NEDA staff just limited themselves to validating the cost-benefit analysis submitted by the project proponent, the Department of Transportation and Communications (DOTC), and its supplier, ZTE Corp. Little effort was made to verify the project’s costs. Worse, NEDA did not examine alternative financing methods, such as build-operate-transfer (BOT) or other schemes.

A rubber stamp

Felipe Medalla, former dean of the UP School of Economics who also served as NEDA head, commented later at a forum: “What he (Neri) said about the NEDA process was very disappointing. His statement that NEDA was not looking at the financing side was a total distortion of what it should be doing. Although I admired him for testifying against Abalos, he did present NEDA as a rubber stamp.”

AHI partner Jose de Venecia III names First Gentleman Jose Miguel Arroyo as the ‘mystery man’ who told him to back off from the NBN-ZTE project, at the Senate hearing in September 2007. [photo courtesy of Senate website]

Medalla could be in for more disappointment. According to Lozada, the information technology expert who helped Neri evaluate the NBN deal, Neri was aware of, and even abetted demands for, bribery in the project. Lozada says bribes amounting to $130 million accounted for half the project’s original cost of $262 million. The project cost has since risen to $329 million.

“His instruction to me was very clear. Sabi niya, ‘Jun, you moderate their greed,’” Lozada said in a press conference conducted in the wee hours of Thursday last week. “I was naive to accept that order. I do not know what moderating greed means, but I followed Secretary Neri.”

From evaluating government projects to “moderating greed,” the role of NEDA and the economic planning secretary has evolved in ways that may shock its former officials. Among them is Ruperto Alonzo, a former NEDA deputy director-general, who says that until the 1990s, NEDA staff refused to entertain phone calls from officials of implementing agencies, instructing them instead to communicate in writing. He himself “was hiding every so often from consultants of implementing agencies.”

The transformation in NEDA’s role was not sudden. Long before the NBN project, the Arroyo administration had been moving to give implementing agencies more power to approve big state projects, without going through the strict but often time-consuming evaluation process of NEDA and the Investment Coordinating Committee (ICC).

Clipped powers

Early last year, Arroyo proposed new BOT law implementing rules that would diminish NEDA-ICC’s powers in approving infrastructure projects funded and implemented by the private sector. Under these rules, which ostensibly aim to hasten the BOT evaluation process, implementing agencies such as government departments, state-owned firms, and local government units would have the authority to approve the projects.

The new BOT rules followed previous moves by Arroyo “to authorize agencies to approve contracts (worth) less than P500 million, except BOT, without going through the NEDA-ICC process, as long as the DBM (Department of Budget and Management) can certify the availability of funds,” according to a March 2005 ICC policy directive.

Malacañang has put off issuing the new BOT rules after multilateral lenders and the foreign chambers of commerce objected to clipping the powers of the NEDA-ICC.

But the erosion of NEDA’s powers and independence continues, with the creation of new Cabinet groupings with powers that overstep those of existing NEDA bodies.

In May 2007, Arroyo issued an administrative order creating the so-called NEDA Cabinet Group that makes major economic decisions, including the approval of proposed projects, in between the monthly meetings of the NEDA Board.

She also set up the Pro-Performance System Steering Committee that would monitor and evaluate “all increases in project cost, whether local or foreign funded.” Until then, it was the NEDA-ICC that approved cost increases in foreign-assisted projects, without which the Department of Budget and Management could not release additional funding.

Lax, relaxed

Tough standards for project approval are being relaxed. In a memorandum issued after the October 9 meeting of the NEDA Cabinet group, Cabinet Secretary Ricardo Saludo told NEDA to review the 15-percent minimum economic internal rate of return (EIRR) required for ICC approval of proposed projects “with the end in view of reducing it.”

Alonzo, who notes that other administrations also had ad hoc economic policy groups, nonetheless warns they create opportunities for “forum shopping” for officials and agencies pushing for projects that do not pass muster with the ICC or NEDA staff.

The erosion of NEDA’s power and independence diminishes the gains made by the agency in recent years to improve the project evaluation system.

Jonathan Uy, public investment staff head, recounts that NEDA has adopted tougher standards in the way the agency approves projects. He says, “Before we were looking at projects as projects. We were looking at the trees. Now, we’re looking at the forest. When you submit a proposal you don’t just justify it as a good project alone. You have to show why it’s a good project in the whole program of things.”

Pressure, fudged numbers

NEDA personnel tell of being subjected to varying degrees of pressure to tweak project evaluation numbers toward improving projected returns of favored projects.

For instance, members of NEDA’s project monitoring staff working on a Japanese-funded irrigation project in Bohol recall receiving “a suggestion” to count the dam’s beneficial impact on counter-insurgency efforts to boost the project’s returns, which fell below the 15-percent hurdle rate after costs soared by half. (See sidebar)

Roderick Planta, head of the NEDA project monitoring staff, recalls being told by a Cabinet member, “Kargahan n’yo na lang. Ilagay n’yo na lang ang benefits sa counter-insurgency (Just boost the numbers. Include the benefits to the counter-insurgency program).”

The NEDA economist says he refused, since no data or econometric model exists that would help them decide how much monetary value to put on quelling the communist insurgency.

Recounting the incident months later, Planta explains his refusal to fudge the numbers: “We are not blind to that. You can still pass the project even if EIRR is only 12 percent. That’s okay but don’t prostitute the process. It will hurt everybody’s credibility.”

Fuzzy logic

Still, the NEDA personnel are not always successful in resisting instructions from higher officials to improve cost-benefit numbers of projects, especially those enjoying strong backing from what Lozada calls “good political sponsors.” That may help explain the fuzzy economic logic that underscored the NEDA-ICC’s approval of the NBN project.

As initially conceived by the DOTC and the Commission on Information and Communication Technology (CICT), a major NBN component was to provide Internet connection to 23,549 schools nationwide. This was on top of a telecommunications network linking close to 2,300 national government offices.

The Chinese government, however, refused to finance the education component, dealing the project a potentially fatal blow. The NEDA staff had estimated that economic return on the project would fall from 20 percent to only 13.01 percent, below the 15-percent hurdle rate, if the schools’ Internet connection were taken out of the project.

To keep project returns above 15 percent, DOTC and CICT proposed to substitute exactly 23,549 municipalities and barangay offices for the schools that would be taken out of the project. The NEDA-ICC Technical Board and Cabinet Committee, in a joint meeting on March 26, 2007, agreed with the project proponents.

“The option to provide connectivity to local government offices such as barangay offices may be explored, so as to optimize utilization of the NBN infrastructure,” the NEDA-ICC Technical Board and Cabinet Committee concluded, according to the meeting’s minutes.

NEDA’s evaluation report showed that benefits, consisting largely of savings in government’s phone, Internet and mobile expenses, are higher than costs over the next 15 years or so.

But in estimating savings, the NEDA staff largely adopted the optimistic assumptions of the project proponents. For example, all schools or offices covered by the project that do not currently spend for Internet access are assumed to have Internet connection through a private Internet service provider.

Even Neri found the assumption too optimistic and questioned it in one of the meetings of the NEDA-ICC Technical Board and Cabinet Committee. “Savings in Internet connection cannot be considered as a benefit given that the government does not have much Internet connection,” Neri had pointed out, according to minutes of the meeting.

Too bad Neri did not pursue the point further. It could have made all the difference in how the public and his former colleagues should regard him now.