ODA lessons

Terminal 3 of the Ninoy Aquino International Airport is not the only symbol of much that is wrong in the investment environment in this country.

Another one is the North Rail project, which has languished for nearly a decade, with less than a kilometer of tracks completed since construction started in 2004. The entire project is just 80 kilometers long; the South Koreans completed the interconnection with the South Rail system ages ago.

China’s Sinomach Corp. was awarded the contract. The project was financed through a $500-million soft loan from China’s Export-Import Bank, so the Chinese got to pick the contractor, which of course was a Chinese firm.

Bogged down in insinuations of corruption, the project is indefinitely derailed. Philippine officials want another type of modern railway system and think Sinomach is not up to the job.

With the two countries’ territorial dispute turning ugly, China has decided to pull out of the rail project and demand payment for $184 million that the Philippines has actually tapped from the $500-million loan facility. The $184 million, which will be repaid over two years, was used for project preparation including land acquisition and right-of-way expenses, according to Philippine officials.

This is a costly mistake our developing country can’t afford to keep making. The North Rail project should provide indelible lessons to the government on utilization of official development assistance. Because of opaque Philippine rules governing ODA, foreign aid offers opportunities for corruption that crooks in government readily grab.

In recent years when Chinese projects in the country became synonymous with corrupt deals, Chinese officials told me that they were also learning painful lessons in dealing with the Philippine government and providing ODA.

China is a relative newcomer in the international donor community. Back then I was told that the Philippines – for a long time a close friend of China – was the largest recipient in the world of Chinese ODA. I’m not sure if this is still true today. After the ZTE broadband scandal, no one in the Philippines wanted to touch Chinese ODA.

Back then Chinese officials also sat in on gatherings of international donors in this country for tips on aid disbursement. I don’t know if the meetings imparted any lessons to the Chinese, whose ODA is remarkable for the lack of attached conditionalities that beneficiaries must meet, save one: projects funded with Chinese ODA must be undertaken by Chinese firms. The Chinese see political and economic conditionalities in ODA as interference in the internal affairs of sovereign states.

Corruption scandals have tainted Chinese ODA-funded development projects not just in the Philippines but also in other countries particularly in Africa. If China wants to become a respected leader in world affairs, it will have to clean up its act as a member of the donor community.

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Other donors don’t mind “interfering” in the affairs of aid beneficiaries.

The United States, through its Millennium Challenge Corp. (MCC), assists the poorest countries in the fight against poverty, but only those committed to good governance, economic freedom and investments in their citizens.

I’m not sure we should be happy to be classified among the “world’s poorest” and deserving of large amounts of aid, but the Philippines, as one of 24 countries with MCC compacts, is receiving $434 million until 2016 from the Millennium Challenge Account (MCA).

Unlike the United States Agency for International Development, MCA-Philippines is managed by Filipinos, with the projects for funding proposed by the Philippine government.

During the Arroyo administration, the Philippines had a “threshold program” with the MCC, with smaller funding. The MCC held off approval of the compact in the final months of the Arroyo administration (incidentally an election period), preferring to wait for a new government. The compact was signed on Sept. 23, 2010, when President Aquino went to the US.

The compact has three major projects: the $214.4-million rehabilitation of a 222- kilometer road running from Eastern to Western Samar, the $120-million KALAHI micro social services project in rural areas, administered together with the Department of Social Welfare and Development, and a $54.3-million reform project to improve revenue administration and reduce tax evasion and corruption.

MCA-Philippines conducts regular monitoring and reporting of progress in the projects. Each MCC country is assessed according to performance in three policy categories: ruling justly, investing in people, and economic freedom.

“Ruling justly” includes political rights, civil liberties, control of corruption, government effectiveness, rule of law, and voice and accountability.

“Investing in people” refers to immunization rates, health expenditures, primary education expenditures, girls’ primary education completion, and natural resource management.

“Economic freedom” covers regulatory quality, land rights and access, business start-up, trade policy, inflation and fiscal policy.

For 2011, the Philippines had red marks – meaning the scores did not meet performance standards – in health and primary education expenditures.

The P-Noy administration may want to note that for this year, the red marks are in control of corruption, rule of law, immunization rates, health and primary education expenditures, girls’ primary education completion, land rights and access, business start-up and fiscal policy.

Despite the low marks in those areas, MCA-Philippines officials are happy with the government under President Aquino. MCA personnel are working with the government to address those red marks.

“We want this to be the best MCA in the world. We want it to be held up as an example. We want to show that the Philippines can,” MCA-P managing director Marivic Anonuevo told several STAR editors the other day. “Now is really the best time. The stars are all aligned.”

We can be sure the MCA-P’s Samar road project won’t take a decade to complete.