Controversy over Chinese assistance to Philippines is far-fetched

By Song Wei Source:Global Times Published: 2017/10/24 21:28:39

Philippines Vice President Leni Robredo recently criticized President Rodrigo Duterte administration's ambitious infrastructure projects, such as the new Bicol Express, a railway system connecting Manila and Bicol. The new financing from China could lead the country into a "debt trap," Robredo warned. This triggered attention in the Western media, which reported many projects funded by Chinese loans turned out unprofitable and thus increased foreign debt for the recipient countries.

In mid-October, Western media cited a source from AidData, a development research and innovation lab based at the College of William & Mary in the US, that tracked China's official financing, including foreign aid, concessional and non-concessional state financing, between 2000 and 2014. They claimed China would garner considerable profits from funding earmarked for foreign assistance.

The research and comments came about as a result of confusion about the boundary between foreign assistance and development financing.

To be specific, the high-speed rail project - different from general public infrastructure - demands a relatively high operating capacity, support facilities and consumption levels for the recipient countries. It is in this sense that the high-speed rail system is taken as a commercial program around the globe.

Up to now, China has never utilized any foreign aid funds in support of building high-speed railways overseas. Obviously Robredo confused commercial loans with foreign aid.

China's foreign assistance mostly goes to infrastructure construction, which enjoys less priority with Western aid donors because of the high demand for finance and maintenance fees. It is estimated that demands for infrastructure investment will stand at $9 trillion worldwide by 2025.

Based on its own development experience, China offers aid funds to developing countries in support of their infrastructure and provides public products to boost their independent development. But Western media deliberately discussed the profitability of China-funded public facility projects for the recipients, which is absolutely far-fetched.

China's foreign assistance is to provide financing support for developing nations under the framework of South-South cooperation. Instead of directly offering funds to the recipient governments, China mainly funds assistance schemes so as to avoid bribery and corruption in the circulation of funds.

Assistance projects are in line with the recipient's development plans and needs, and are designed through bilateral negotiations. In recent years, China's preferential loan programs have been focused more on the recipient country's ability to operate and manage projects in an effort to enhance its capability of developing on its own and paying back the loan.

As the world economy suffers a sluggish recovery from the global financial crisis of 2008, infrastructure investment in both developed and developing countries remains slack. This engenders a need for reform in the financing of global development. Against this backdrop, some financial institutions have embarked on a journey to explore reform.

For example, the Asian Development Bank sourced its hard and soft loans from ordinary capital resources to reduce restrictions on the recipient countries. However, some countries - rather than addressing their own limited abilities to offer foreign aid - constantly ramp up pressure on multilateral development institutions and recipient countries, as can be seen by the criticism of China's foreign assistance.

These critics often, intentionally or not, confuse concessional loans with other development funds offered by China, creating an unnecessary moral hazard.

Against the backdrop of limited fiscal expenditure, we need to set a clear boundary for foreign aid and create a new financing model for development. Preferential loans can be excluded from foreign aid to serve as a method of development financing. Development financial institutions must be endowed with more rights to decide, appraise and review. They must also improve their accountability in order to speed up capital flow and reduce the risks of collecting loans.

More efforts should be made to combine commercial loans with development financing: free assistance, interest-free loans and sovereign wealth funds. Private capital can be channeled into recipient countries in the form of bond issues and private placement. Government assistance and private capital can be combined through private-public partnership and build-operate-transfer.

The author is an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation.


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