Myth of development loans

THE DEPARTMENT of Transportation and Communications released the other week its audit findings on the past administration’s project to construct 72 roll-on, roll-off ports around the country.

According to the report, the ports to be built would each cost P143.4 million. If the same ports were built locally with the same quality, the cost would be P60 million only.

Funded by an overseas development assistance (ODA) loan from French bank BNP Paribas, the project gave the bank, in consideration for supposedly lower interest rates, the authority to choose the contractor.

As to be expected in loans of this nature, the bank chose a compatriot—French industrial conglomerate Eiffel Matiere—to build the ports.

The higher cost, according to the contractor, is justified by the fact that the ports have to be built and assembled in France before being brought to the Philippines using copyrighted designs.

Since the blueprint, materials and professional services for the project will be paid for in expensive euro, the high cost should not come as a surprise.

Deftly, no mention was made about the terms and conditions of the ODA loan underlying the project whose proceeds will go directly to the contractor after the completion of the project.

Liberal terms

For developed countries, ODA loans, also known as concessional or missionary loans, are the most effective means of winning big-ticket projects in countries that have limited access to international funding sources.

The loans are often denominated in the lender-country’s currency, with the US dollar used as the benchmark for purposes of computing the exchange and interest rates.

The interest rates and repayment terms of these loans are usually two or three percent lower, or more liberal, than those offered by private lenders for projects of similar nature.

The term of the loans ranges from 20 to 25 years, with a grace period (meaning, no payments have to be made until after the lapse of a certain number of years from the date of the loan signing or completion of the project) tacked on as sweetener.

For example, in a highway project, the principal or interest will be paid only after the road has been in use for several years and the benefits arising from faster traffic flow of trade and commerce are already being enjoyed by the beneficiaries.

At first blush, given the liberal terms and conditions, the impression is created that the ODA lender is doing the borrower a big favor from the goodness of its heart, or in consideration of their historic special ties.

The same feel-good lines are often used by the lender-country when it announces the signing of the loan documents or inauguration of the project.

Benefits

There is no question that ODA loans, when used properly, benefit their recipients.

The low interest rates and extended repayment period enable the borrower country to finance expensive infrastructure projects without sacrificing the funding requirements of other equally important economic and social programs.

But the reality on the ground is, it is not a one-way traffic going in the borrower’s direction. The lender also gains or benefits, like any other ordinary banking transaction, from ODA loan arrangements.

The underlying projects of ODA loans are either supply-and-build projects or supplier’s credit, i.e., materials are delivered and the recipient government handles their installation.

The rule of the thumb in these deals is, the materials to be supplied and the services needed to complete the project should come from the country of the government or bank that extended the loan.

So, in a highway project where the lender is, say, the French government or a French bank, the steel fittings, machinery and other components of the project will come from France.

Also, the engineers, supervisors and other technical staff would be French citizens who, except for their living expenses during the construction of the project, will be paid in euro credited to their bank accounts in France.

Reciprocal

At best, the share of Philippine-based businesses during the project implementation would be the supply of gravel and sand, food, transportation, housing and unskilled labor.

Thus, from the proceeds of the ODA loan disbursed in France, the manufacture of construction materials is stimulated in France and, in the process, jobs are created and wages are paid to French workers and professionals.

The benefits of sustained manufacturing and continued employment spread to the French companies that produce the components of the materials and the goods and services that can be acquired from the wages received.

That “contribution” to the French economy would be enhanced when the obligation to pay the principal and interest of the ODA loan sets in.

Although the interest rates may be low, it’s still money coming in to the coffers of France.

There is reason to be thankful for ODA loans extended to us by other countries. But that is no excuse to adopt a beggars-are-not-choosers attitude in the handling of these loans.

Since both parties stand to benefit from these loans, although in varying degrees, there is room for negotiating better terms and conditions, not simply accepting what is offered.

(For feedback, write to .)