Manila, China inked rail loan payment deal amid row over contract's legality

Official says repayments made in September despite appeal to Hong Kong arbitration centre

PUBLISHED : Friday, 01 February, 2013, 12:00am
UPDATED : Friday, 01 February, 2013, 3:25am

The Philippine government and China's Export-Import Bank quietly signed an agreement last year for Manila to repay a concessional loan for the now-scuttled Northrail project.

The railway project, with Chinese state-owned contractor Sinomach as the supply contractor, would have linked Manila to Clark International Airport some 80 kilometres north of the capital.

National Treasurer Lea de Leon yesterday confirmed to the South China Morning Post that Export-Import Bank of China (Eximbank) and Manila have agreed on the repayment of the loan amount disbursed, which amounted to US$180.8 million, plus interest of three per cent due yearly.

"Instead of payment in one lump sum, this would be paid in four equal tranches starting 2012 to 2014," De Leon said. "We have already paid about US$46.1 million last September."

Even as Manila is repaying the loan, the Philippine government has confirmed that the row between state-owned North Luzon Railways Corporation (Northrail) and its contractor Sinomach over the controversial railway project has been submitted before the Hong Kong International Arbitration Centre.

Northrail was originally intended to be China's showcase project in Southeast Asia. Eximbank had extended a US$400 million loan facility during President Hu Jintao's visit to Manila in 2005. This was for the upgrading of the first 32 kilometres of an old 80-kilometre railway line.

De Leon said the original loan facility was repayable in 15 years but this was later revised to 12 years with an interest-free grace period of eight years.

With the upgrade only 15 per cent completed, a taxpayers' lawsuit was filed in court to void the contract after details emerged that then president Gloria Macapagal-Arroyo had agreed for Northrail to renegotiate the entire contract with Sinomach upwards - from US$1.18 billion to US$1.3 billion, despite a reduction in Sinomach's civil works.

The lawsuit also claimed the contract was void from the start because it was a commercial deal that required public bidding under the law.

Last year, the Philippine Supreme Court threw out a plea by Sinomach to stop the lawsuit. Sinomach had claimed that it was a deal between the governments of both countries and was therefore not subject to competitive public bidding.

Following Sinomach's legal setback, Northrail said last year that it was suspending the project "pending review".

Both governments tried to "reconfigure" Northrail's design and funding terms. But when this also fell through, Eximbank cancelled the loan facility and sought the repayment of the amount already disbursed.

It did not help bilateral ties that the growing dispute occurred during rising tensions between China and the Philippines over territorial disputes in the South China Sea.