On expensive China loans/ODA

On February 21, 2018, Philippines Defense Forces Forum posted this photo and brief note:

NEDA secretary Ernesto Pernia admits China's interest rate of 3% is much higher than Japan's 0.25%-0.75%, in talk in front of businessmen and economists this afternoon.

Asked why the government is availing more of China's expensive loans than Japan's cheaper offer Pernia could only reply "Because we need more friends". #IdolNiDuterte #ChinaPuppet

It was Dr. Ciel Habito who asked Pernia that questions. Now notice this statement: 

"Pernia admits China's interest rate of 3% is much higher than Japan's 0.25%-0.75%... because 'we need more friends.'"

Ok, PH taxpayers are "less friends" of the Duterte administration that is why we must pay more taxes via TRAIN and they will give more money to their "more friends" China Communist Party. Magaleeeng.

To the Dutertenomists and TRAIN rah-rah boys and girls -- eto abangan nyo: the main purpose of "more revenues via TRAIN" is not exactly more infra but more payment for China loans. We have NLEX, SCTEX, TPLEX, SLEX, STAR, CAVITEX, NAIAEX, Skyways, etc even without big tax hikes. Lots of "hybrid PPP" were actually integrated PPP before President Duterte came to power.

Integrated PPP means no need for new ODA, new loans from China or elsewhere, no need for tax-tax-tax because the private builders of those big infra have the financial, technical and engineering resources, network to build those behemoth structures at minimal cost to taxpayers (only right of way cost, etc). Hybrid PPP means more loans, especially from the China communist party.

Recall also that when Ernesto Pernia was newly appointed as NEDA chief, he justified the series of drugs murders as "necessary evil." 

Tweets February 21:

@bendeveraINQ (Ben Arnold de Vera)

@SecPernia: First basket of infra projects for Chinese financing includes Kaliwa Dam, Chico River Pump Irrigation, North-South Railway south line between Manila and Bicol.

@Noysky

Replying to @bendeveraINQ @SecPernia @InquirerBiz

Wow, tax-tax-tax de TRAIN so that PH govt can pay these big loans fr China? Horrible. These shd be integrated PPPs and not charged to taxpayers.

Gus Cosio @gus_cosio

Replying to @ClaireJiao @Noysky @cnnphilippines

Japan offers better quality performance at cheaper cost. Why in heaven’s name will you burden us with this preposterous idea?

@bendeveraINQ

@SecPernia: But the Japanese had been slow in process of financing projects, while the Chinese has become more aggresive @InquirerBiz

@bendeveraINQ

@SecPernia: Chinese loans, at best, slapped 2-3% interest per annum vs. Japan soft loans/ODA at 0.25-0.75%, but we haven’t signed loan agreements with China yet DD-biz-INQUIRES_

@bendeveraINQ

Pernia: We don’t want a repeat of our previous experience with China (referring to NBN-ZTE deal), that’s why PH and Chinese govts established vetting process for Chinese firms bidding for PH projects under @NEDAhq ICC @InquirerBiz.

Now see this report,

http://bworldonline.com/3-chinese-firms-interested-kaliwa-dam/

3 Chinese firms interested in Kaliwa dam

February 16, 2018 | 12:15 am

"Under the previous administration, the P18.72-billion Kaliwa dam had two pre-qualified bidders, which are now out of the picture... It used to be a public-private partnership, with MWSS as implementing agency.

Since the project is funded by ODA from China, Mr. Velasco said there will be no pre-qualification stage since the Chinese embassy identifies the three pre-qualified companies."

Another big China loan, contractors and suppliers identified by China embassy, very likely cronies of the China Communist Party. PH goverment agencies will wait for the terms and say "Yes", and PH taxpayers will pay for the bill, courtesy of TRAIN de tax-tax-tax. 

From sir Doy Segundo E Romero, Feb. 22:

"ON CHINA'S HEGEMONIC ACTIONS AGAINST THE PHILIPPINES

A few weeks ago, an EU ambassador posted in Sri Lanka repeated to me what a Chinese diplomat told him: 'No big deal. The Philippines is not even a real country.' Nasaktan talaga ako."

Last week, Dr. Pernia replied in my fb wall where I tagged him on this subject. He wrote,

"Nonoy Oplas got it all wrong — making a comment without even knowing the context. Rather unscholarly and malicious!"

I replied, "Ok Sir Ernie, what is the non-malicious explanation why (a) PH government should get new foreign loans when many projects were already under integrated PPP (not "hybrid" that require new loans, or new public spending and hence, new taxes), and (b) why China loans considering that China interest rates are high, and China Communist Party is a theft of PH territory?

I will apologize for my statements above if these can be clarified. Thank you."

As I expected, no further reply or clarification.

PPP vs ODA tax-tax-tax

Related to my BWorld article yesterday, Build-build-build is possible without new taxes, are the following articles and reports, all from BWorld.

1. Last week, an article by a friend Romy Bernardo. I disagree with his position of course. Hi Romy :-) http://bworldonline.com/bye-bye-build-build-build/

2. Related article from another friend, Karla Michelle Yu of AER. I disagree also with AER's  "halleluiah tax-tax-tax Dutertah" position. http://bworldonline.com/angaras-train-deception/

3. Two weeks ago, this paper was well-shared and circulated because of the hard facts narrated by the author -- many foreign investors are taking the wait-see or abandon-PH stance. Mainly because of Du30. http://bworldonline.com/investors-shifting-sentiments/

4. No need for tax-tax-tax in this huge, multi-billion CALAX project. The private consortium has the money, eng'g expertise and other corporate network to finance, build and operate these big infra.

"The P35.43-billion CALAX project involves the construction of a 44.6-kilometer four-lane toll road between the Cavite Expressway (CAVITEx) in Kawit, Cavite and the SLEx-Mamplasan Interchange." http://bworldonline.com/calax-cavite-segment.../

5. Also the Cavite-Tagaytay-Batangas Expway (CTBeX), 49 kms long, P22.4 B. http://bworldonline.com/dpwh-may-approve-ctbex-project.../

6. And the P18.7 B Kaliwa dam, zero need for tax-tax-tax as it will be an integrated PPP project but Du30 insists we should pay more taxes because we will pay more China loans. BBB (build-build-build) can also mean Beijing-borrowings-barkada ni Dutertah.

http://bworldonline.com/san-miguel-mulls-legal-steps.../

7. The Mactan-Cebu airport new passenger terminal is a PPP, Megawide contract, P17.5 B project cost. Bigger, construction period shorter, compared to ODA-funded Iloilo airport project. Zero need for tax-tax-tax to build this big, modern, passenger terminal.

http://bworldonline.com/mactan-airport-operator-aims-double-number-airlines/

The DOF and Dutertenomists are sad in this report, that they cannot confiscate more money from the pockets of citizens. They badly need hundreds of billions of new tax money per year on top of trillions of tax money, so there will be more economic central planning, more social engineering. After all, they are very bright people. http://bworldonline.com/tax-reform-legislation-hurdles.../

The tax-tax-tax policy will further sour the business sentiment here. Less money in the pockets of citizens, more money in the coffers of Du30, Alvarez, and thousands of their minions in the Executive and Legislative branches.

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See also:
BWorld 142, PPP vs ODA, Part 3, August 08, 2017 
BWorld 156, Integrated PPP vs hybrid PPP, October 04, 2017 
BWorld 157, Build-build-build is possible without new taxes, October 09, 2017

BWorld 142, PPP vs ODA, Part 3

* This is my article in BusinessWorld on June 30, 2017.

This is a continuation of two earlier pieces I wrote about that compared two funding schemes of government infrastructure projects in the Philippines -- through public-private partnership and official development assistance.

In this vein, I wish to correct the numbers I previously cited in my second piece, entitled “PPP vs. ODA: Part 2.” I wrote that “Vaughn Montes cited the big contrast between ODA-funded SCTEx and the PPP-funded TPLEx. SCTEx... cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.”

Recently, Dr. Bong Montes sent me his presentation during a Management Association of the Philippines (MAP) meeting. The correct numbers about SCTEx are: Cost overruns are from P18.7B to P32.8B; Cost per kilometer is P349M vs. TPLEx P274M. Thanks for this, Bong.

The same presentation indicated a summary of the delineation of risks and values between Public Private Partnership (PPP) funding and government funding (see Table 1).

The main beef of PPP project funding therefore is the transfer of significant risks to the private sector. The shared risks for both private and government are bankability and force majeure.

The “hybrid PPP” plan of Dutertenomics is to award the construction of many big infrastructure projects via foreign aid or Official Development Assistance (ODA) mostly from China, or the annual General Appropriations Act (GAA), then invite local private operators later for the operation and maintenance (O&M).

This plan will invite big current and future controversies for the following reasons.

One, private O&M operators will not take over a facility that they did not design and construct without prior intensive due diligence. If project quality is poor and thus O&M will be high, then bidders will demand high prices for the O&M. The government-contracted construction company (from China) may have undercut the design and quality to maximize profit and potential kickbacks and leave the headache of high maintenance costs to the separate O&M operator/s.

The most optimal scheme is a straight, integrated PPP funding from design and construction to O&M. The private party mobilizes its internal financial muscle and borrows to fund capex, and make sure that construction is of high quality so that O&M will be lower. As a result, the public and the taxpayers benefit, which also means a lower tax burden to pay for the project cost. Moreover, frequent users of the facility will pay every time they use it and taxpayers from far away provinces and regions who seldom or do not even benefit from it will not be burdened.

Two, Dutertenomics’ sudden pivot to China ODA is highly anomalous because China is not exactly a good source of foreign aid even in the recent past. Its share in total ODA in 2014 and 2015 (latest data available from NEDA) is miniscule, only $123M out of total $30.08 billion (see Table 2).

Only ODA with at least $70M in two years are included here. Other sources of ODA at smaller amount are Austria, Spain, Norway, New Zealand.

Three, PPP projects are generally the fastest way to do things compared to ODA funding, especially China ODA. Project development to groundbreaking takes 27 months through the PPP, 37 months through Korean ODA, 38 months through Japanese government funding, and 40 months on Chinese aid.

The most famous tollway in the Philippines, the North Luzon Expressway (NLEx) was built via World Bank ODA in the 1970s. O&M is private, currently the Manila North Tollways Corp. (MNTC). The independent design checker and certification engineer on its rehabilitation is Norconsult Philippines, probably the first Norwegian company to do business in the country since the ’70s. NLEx toll fee of around P2.50/kilometer from Sta. Ines to Balintawak is the lowest among the many tollways in the country.

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See also:
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 
BWorld 139, State central planning vs household decentralized planning, June 22, 2017 
BWorld 140, Mineral rent and taxation, June 23, 2017 
BWorld 141, Reducing system loss, Part 2, June 30, 2017

BWorld 138, PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

-- Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.

2. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.

3. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport -- which was funded by ODA -- took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.

4. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

5. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.

6. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

7. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”

8. The China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden -- North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers -- even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects -- may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

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See also: 

BWorld 135, On reducing the distribution system loss, June 9, 2017 
BWorld 136, Income tax and the politics of envy, June 12, 2017 
BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017

BWorld 134, PPP vs ODA

* This is my article in BusinessWorld last week.

Among the important characteristics of the user-pay principle is that only those who use the service or facility will pay for its construction and maintenance while the rest of the population -- who won’t use them -- will be spared of such cost. This characteristic is embedded in the public-private partnership (PPP) mode of construction, procurement, and maintenance of big infrastructure projects.

In contrast, projects that are funded through the annual general appropriations act (GAA) and official development assistance (ODA) are under all-taxpayers-pay principle. More specifically, GAA are paid by current taxpayers while ODA are to be paid by future taxpayers.

Last month, the government through the Department of Transportation (DoTr) and Civil Aviation Authority of the Philippines (CAAP) has terminated the PPP mode of Development, Operations and Maintenance for five regional airport projects -- New Bohol [Panglao], Davao, Iloilo, Laguindingan and Bacolod-Silay. These five projects are projected to have a total cost of P108 billion.

There are other projects that suffered from policy reversals from PPP to ODA-funding, like the Kaliwa Dam project in Quezon, and the PNR South Railway project.

Since late 2016, the Duterte administration has announced that it will avoid PPP modes whenever possible and shift to government funding via GAA or ODA or a mixture of both. The reason given is that it will be faster and cheaper to build via government funding. This will cover mostly the P8-trillion infrastructure programs then auction off the operation and maintenance (O&M) contracts to the private sector.

Recall that in my previous piece, the DOTr said during the BusinessWorld Economic Forum last May 19 that these four big projects will all be ODA-funded:

1. PNR North Railway (Manila-Clark), Q4 2017 -- Q4 2021, P255B.

2. PNR South Railway (Manila-Bicol), Q3 2018 -- 2021, P270B.

3. Mega-Manila subway (Phase 1, QC-Taguig), Q4 2019 -- 2024, P225B.

4. Edsa-Central Corridor Bus Rapid Transit BRT, Q1 2019 -- Q1 2021, P38B.

Now the basic question -- is it true that GAA or ODA-funded are more efficient, faster, and cheaper to build, than PPP-funded projects?

In the same BusinessWorld Economic Forum last May 19, one of the speakers was Oliver Tan, Chief Financial Officer of Megawide Construction Corp. He showed two tables comparing the construction of two airports in the Visayas, the New Iloilo and expanded Mactan-Cebu airports (see table).

Mactan Cebu airport terminal -- whose awarding was delayed for 18 months but will still be completed on time -- is almost five times the size of the New Iloilo airport and yet construction time is almost half that of the latter. The Cebu airport serves 17 international destinations, 27 domestic destinations, by 20 partner airlines. When this new terminal is finished middle of 2018, passengers are projected to enjoy these benefits: check in time will be reduced from 10.5 minutes to 6.85 minutes; getting luggage from 11 to 6.5 minutes; while retail outlets will rise from 17 to 28 and dining options from 17 to 31.

From this example alone, it is NOT true that burdening all taxpayers with government-implemented infra projects is more beneficial to the public.

There are inherent problems and risks to the public if GAA- and ODA-funding become the dominant mode in building important infrastructure projects.

One, a government administration is short term, limited to only six years term and thus, it has little political or corporate brand to build and protect, it can worry less of what the people would say after its term has ended especially if the project is later discovered to be of inferior quality and tainted with corruption. In contrast, a corporation has a brand to protect and it would not risk this brand that has been built for decades to be tainted with corruption and wastes.

Two, ODA funding normally have tight strings attached, like a China-ODA would mean only Chinese contractors, suppliers, managers, and even workers would do the work. Local firms would be relegated to O&M and their purchase of equipment and supplies might be constrained by the project specifications so that they will be forced to source these from China again.

Three, there are recently finished and ongoing PPP projects that are yielding positive results, like the Mactan-Cebu Airport terminal building, NAIA Expressway, Tarlac-Pangasinan-La Union Expressway (TPLEx), school buildings, and automated fare collection system for the trains. These gains cannot simply be dismissed as inferior to government-promised better infra, especially under the environment of bad governance culture in the country.

Four, the user-pay principle means that a tollway or an airport in northern Luzon will be paid only by those who frequently use those facilities. So the people and taxpayers in southern Luzon, Visayas, and Mindanao who seldom or do not use these facilities will be spared of servicing the cost of construction and O&M.

The shift from PPP to GAA and ODA funding of the build-build-build plan of Dutertenomics does not bode well for Filipinos.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET, both members of Economic Freedom Network (EFN) Asia.

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See also: 

BWorld 131, Why the FiT-All is a burden to consumers, May 18, 2017

BWorld 132, Global commodity prices, trade and growth, May 27, 2017 
BWorld 133, Dissecting Dutertenomics' overspending plan, June 01, 2017

BWorld 133, Dissecting Dutertenomics' overspending plan

* This is my article in BusinessWorld last Tuesday.

During the BusinessWorld Economic Forum held last May 19, Budget Secretary Benjamin E. Diokno showed two interesting charts: (1) sustained overspending and borrowings, budget deficit/GDP ratio from -0.9% in 2015 to -2.7% in 2016 then -3.0% from 2017-2022. And yet (2) debt/GDP ratio was expected to decline from 44.8% in 2015 to 40.2% in 2017 and further down to 36.7% in 2022.

Is this possible? That one overspends and over-borrows and yet the debt/GDP ratio will keep falling?

DBM, NEDA, and Malacañang say yes because the projected taxes/GDP ratio will increase via the proposed Tax Reform bill of 2017. Sec. Diokno said in the same forum that “We will continue to guard against underspending, the Waterloo of the previous administration.”

“Underspending” for me should mean that expenditures are lesser than revenues, resulting in a fiscal surplus. When expenditures are larger than revenues but the deficit is only at -1% or below -3% of GDP, that is still overspending, not underspending. So the previous administration did not really underspend, just that it did not go into an uncontrolled spending spree.

Here are relevant numbers about the Philippines’ fiscal position and levels of outstanding public debt, and comparative debt/GDP ratio of seven ASEAN countries (see table). 

The numbers above show three important facts:

One, the average deficit in the previous administration, 2010-2015 was only P185 B/year or -1.8% of GDP, benign and considered as “underspending” by many fiscal hawks, especially when compared with deficit in 2009 (last year of the Gloria Macapagal-Arroyo administration) and 2016 (first year of Duterte administration).

Two, low annual budget deficit and borrowings in the same period means the country’s outstanding debt stock has risen only mildly, with the average of P260 B/year.

Three, partly a result of this, the Philippines’ debt/GDP ratio over the same period showed significant decline, similar to the experience of Myanmar while other neighbors posted deficits, owing to increased borrowing.

Fewer borrowing means less debt service payments for both principal and interest. It was during the same six-year period that Philippines’ GDP growth was 6.2% per year, much higher than Thailand’s 3.7%, Indonesia and Malaysia’s 5.7%, Vietnam’s 6.0%.

In the same BW Economic Forum, the DoTr showed that these projects will be ODA (government loans) funded, not PPP.

1. PNR North Railway (Manila-Clark), construction Q4 2017 -- Q4 2021, P255 B.

2. PNR South Railway (Manila-Bicol), construction Q3 2018 -- 2021, P270 B (originally a PPP).

3. Mega-Manila subway (Phase 1, QC-Taguig), construction Q4 2019 -- 2024, P225 B.

4. Edsa-Central Corridor Bus Rapid Transit BRT (Edsa, Ayala, Ortigas, BGC, NAIA), construction Q1 2019 -- Q1 2021, P38 B.

Other big projects were identified but it wasn’t specified whether these would be funded by official development assistance (ODA) or via Public-Private Partnership (PPP). In December 2016, DoF Secretary Sonny Dominguez already indicated that infrastructure projects under the Duterte administration will avoid PPP whenever possible. And the massive China and Japan ODAs came into the picture.

Then there are tweaks in some major projects, from PPP to ODA. Like the PNR South Railway and the Kaliwa Dam project in Quezon province of Maynilad Water. What would pre-qualified players like San Miguel do with this policy reversal?

The Dutertenomics’ spending plan is detrimental to taxpayers in general and the investment environment in particular, for the following reasons.

1. Bigger annual budget deficit would mean more government loans, higher public debt stock, and will lead to higher taxes now and the future to service those huge loans to be contracted. Soon the P6/liter increase in oil excise tax will not be enough, it will further rise.

2. Massive shift from PPP (private investment) to ODA of major infrastructure projects will result in more loans which mean more public debt, more taxes, and fees in the future.

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See also: 

BWorld 130, Mobility of goods, capital, and people in Asia, May 13, 2017 

BWorld 131, Why the FiT-All is a burden to consumers, May 18, 2017

BWorld 132, Global commodity prices, trade and growth, May 27, 2017

Business 360 10: Foreign Aid as Band Aid Solution

* This is my article for the August 2013 issue of Business 360, published in Kathmandu, Nepal. The two figures below, ADB and WB lending to Nepal respectively, were not included in the published article due to space limitations.
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Official Development Assistance (ODA) or simply Foreign Aid, is a government to government transfer of resources, meant to hasten the development of a poor country. If one or both governments, the donor and recipient governments, is/are corrupt, then waste is huge. The money would only fatten the pockets and personal bank accounts of politicians, bureaucrats and consultants of recipient governments.

For many years, the singer from the Irish band U2, Bono, has been at the forefront, pressuring governments of rich countries of North America, Europe, Japan and a few others, to keep pouring foreign aid to Africa and other poor continents of the planet. Africa is often a test case because since about 1950, many governments of that continent have been receiving  an average of $10 billion a year for six decades, and poverty has remained rampant.

In 2005, Bono and another British rock star, Bob Geldoff, were among the pioneers of “Make Poverty History” movement. Since then, most economic indicators show that poverty has remained if not expanded in  many target countries. Recently though, Bono seems to have changed tune. In a speech at Georgetown University, he said, “Aid is just a stop-gap. Commerce and entrepreneurial capitalism takes more people out of poverty than aid.”

And rightly so. Being a government to government transfer of money, and since most recipient governments are corrupt and dictatorial, foreign aid is a circuitous and leaky process.  It is the “pork barrel” by politicians and governments of rich countries to buy the loyalty of corrupt leaders of poorer countries. For instance, Myanmar and North Korea governments, and slowly some African governments, cannot disobey China, because of the aid they receive. The same can be said of foreign aid by the US and European governments to many countries in Asia, Africa and South America.

There are some “outliers” among African leaders. The President of Rwanda, Paul Kagame, among the  early proponents of private investment and improved rule of law, said that “Entrepreneurship is the most sure way of development.” *

The US government’s aid policy via huge funding from the WB, USAID, the UN and others, is itself highly wasteful if not corrupt. The federal government is borrowing hundreds of billions of dollars every year  just to fill a huge revenue gap every year, and yet it is spending tens of billions of dollars yearly to other governments via those aid institutions. Many foreign governments, aid officials and bureaucrats and local consultants in other countries are feasting on this huge amount of borrowed money.

The government of Nepal is among the recipients of such aid, but not as big as what other governments received. From the Asian Development Bank, the Nepal government has received nearly $2 billion of loan. 

Source: ADB and Nepal Fact Sheet, http://www.adb.org/sites/default/files/pub/2013/NEP.pdf

And from the World Bank group, the Nepal government has received disbursement of $1.88 billion in loans plus $0.56 billion in grants. 

There are other sources of foreign aid, like loans and grants from the European Union, WHO, UNDP and other agencies of the UN. 

Sources: WB.

Aid is a band-aid solution and it should be a short-term and not forever solution. The aid institutions should have a “sunset” provision in their respective charters, meaning a section when they should close shop. But there is none as they intend to stay forever, expand forever.

A more direct people to people transfer of money and resources at the global level is through international trade, investments, tourism and people mobility. A company abroad likes certain products by a local producer, the goods are shipped and the producer gets paid, the producer pays its workers, managers and suppliers, and those who work and work efficiently are rewarded. The same applies to investments, tourism and movement of people across countries and continents.

The people in poor countries need more entrepreneurship and less bureaucracy and taxation. They need more free trade, not more aid and more public debt.

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* Source of quotes from Bono and Kagame is Values and Capitalism blog, November 2012.

See also:
Business 360 6: Peace and Prosperity in Asia, April 13, 2013 
Business 360 7: Jeju Forum for Peace, May 10, 2013 
Business 360 8: TPP, RCEP, SAARC and Free Trade, June 17, 2013 
Business 360 9: Free Trade and Economic Prosperity, July 03, 2013

Foreign Aid 13: Freedom from Borrowing, July 05, 2011

Foreign Aid 14: ADB's Electric Tricycles, April 07, 2012 

Fat-Free Econ 40: IMF Irrelevance, March 16, 2013 

Foreign Aid 15: Shrink the IMF, March 21, 2013

Foreign Aid 11: People Mobility and Aid Hypocrisy

Mobility = Freedom. A person living in an unfree society or culture can free himself by leaving that place or cultural village and move to another place where unnecessary restrictions and prohibitions are absent or at a minimum.

International mobility of people, their goods and services, is an attempt by people to find personal and economic freedom. If they find a good job or education and training abroad that makes them more productive, then both their origin and destination countries will benefit.

Remittances from migrants to their folks back home is growing fast every year. It is estimated that in 2009 alone, they sent $319 billion. That's several times bigger than official development aid (ODA) or foreign to developing countries, and bigger than foreign direct investments (FDI) inflow into those countries.

The Philippine peso also has been appreciating (aka "getting stronger") recently. One important factor is the huge inflow of foreign remittances by Filipinos working abroad. Last year, total remittance via the financial institutions was about $16.3 billion. This year, it should hit between $18 to $19 billion.

With international and local migration of people, the mutual beneficiaries are people to people.

With more foreign aid like MDGs, WB and ADB loans, mutual beneficiaries are government to government, and indirectly, bureaucrats to bureaucrats.

A sick or aged person in the US or Europe -- if there are no qualified locals, or there are qualified locals but not interested to do the work or asking too high salaries -- will remain sick if foreign health workers and professionals are not allowed to come in. Thus, it's people to people mutual beneficiaries.

Foreign aid is government to government. Politicians of rich countries tax-tax-tax their citizens, a portion of which will be given to politicians and bureaucrats of poorer countries through foreign aid. If one or both parties is/are corrupt and/or wasteful, foreign aid is immediately wasted. And there is a tendency on the part of politicians and bureaucrats of poorer countries to become more complacent and wasteful with foreign aid money. If they can be wasteful with their own citizens' tax money, why not be more wasteful with tax money of rich countries?

Implication: free market groups should demand less or no foreign aid, and more international mobility of people, their goods and services, with the least restrictions possible.
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Meanwhile, one Filipino bureaucrat from the ADB who is also a member of one of my discussion ygroups irritatingly asked,

"Nonoy why are you so upset (putting it mildly) with ADB, WB, USAID etc. employees & consultants? Like everyone else we work our asses off to deserve our salaries, fees."

The lady was wrong. I was not upset with ADB, WB, USAID, UN employees and consultants. Neither am I upset with Globe, Smart, Google, Jollibee, Victory, PAL, Cebu Pac, Chinabank, Teotico arts and gallery, Dome coffee, etc. employees and consultants.

What I was criticizing was the exemption from mandatory, obligatory, withholding personal income tax system for employees and consultants of foreign aid bodies. Aren't the UN, ADB, WB, USAID, IMF, etc. living off on tax money, both for their operations and the salaries and perks of their staff and officials?

Contrast it with us, workers in the private sector -- we live off on clients' money. No clients, no money, we go hungry. Yet we are subjected to mandatory witholding personal income tax.

Rule of law means no exception. The law applies to all, governors and governed; administrators and the administered. But for the foreign aid establishment, the law on mandatory personal withholding income tax does not apply to them. They are not ordinary mortals, they are above us.

Such hypocrisy of public policy. If we want the rule of law, then we should abolish personal income tax. Fair is fair. Whether one works in tax-hungry foreign aid bodies or not, no one should be forced and coerced to surrender up to 1/3 (or 4 months out of 12 months work) of his/her monthly income to the state.

A friend Paul H. commented:

From these debates you not only see the differences between statists and the anti-statists, but the diversity among anti-statists as well, in that they would counter the statists' arguments in a variety of ways.

For instance, you mention that you cite everyday examples to make your point, while others will go the other way and discuss matters in a strictly theoretical manner. It's all good!

Yes, the free market movement and philosophy rests on spontaneity and diversity, never on uniformity, monotony and central planning.
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See also:
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 7: Wolfowitzoellickation of the WB, May 30, 2007
Foreign Aid 8: Abolish the IMF, August 08, 2007
Foreign Aid 9: WB Wants Hike in Gasoline Excise Tax, July 10, 2009
Foreign Aid 10: Why We Don't Need It, February 15, 2010

Foreign Aid 6: IMF is Engineerable and Abolishable

A news report last August 29 at the IHT has this story,
http://www.iht.com/articles/2006/08/28/business/trade.php

U.S. urges the IMF to reflect new order
By Steven R. Weisman The New York Times
Published: August 28, 2006


Washington. The United States is seeking to increase the power of China and other countries within the International Monetary Fund to reflect their growing weight on the world economic stage, an effort that is
being resisted by some European countries whose voices could be weakened within the organization.


The Bush administration, arguing that the IMF has been "asleep" as the world economy changed, is seeking a first step that would grant more voting power immediately to four countries - China, South Korea, Turkey and Mexico - on the grounds that their economic growth entitles them to more influence.


But because the administration's proposal would mean less representation by some countries in Europe, it has run into objections and questions, especially among European countries that could lose power.


Resistance has come from Belgium, the Netherlands and Scandinavian countries, which might lose voting share to Spain, Ireland and other rapidly growing countries in Europe. In general, Europe would lose voting share to Asia and the United States. Poor countries in Africa also fear a loss of power...


Voting at the IMF is determined in part by a quota system that defines how much a country must contribute to the fund and how much it can borrow in emergencies. The United States has 30 percent of the world economy but only 17 percent share of the quotas; Europe's share of 23 percent is roughly equal to its share of the world economy.


The IMF, along with the World Bank, was created in 1944 at BrettonWoods, New Hampshire, as part of a postwar financial structure designed to avoid a repetition of the economic crises of the 1930s that preceded World War II. The fund has $28 billion in loansoutstanding to 74 of its 184 member countries, given out over the years to avert defaults, bankruptcies and other crises. In the early1990s, the fund was involved in bailing out Mexico.


Later in the decade it helped rescue Thailand, South Korea and several other Asian countries from insolvency. But since then the fund has had no major crises to deal with, and many recipients of its previous efforts have paid off their loans. Some economists joke that with little to do, board members have theluxury of squabbling among themselves for power over an organizationwith an ill- defined mission....
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I think the IMF is an abolishable institute that has become more of an expensive and intrusive bureaucracy to taxpayers around the world, than any help in terms of macroeconomic stabilization function that it used to do. But since IMF abolition is next to impossible in the minds of national politicians, Finance/Treasury, and Central Bank bureaucrats around the world, "re-engineering" its quota composition is the next best alternative.

Nonetheless, even the bureaucrats in the US Treasury Department still peddle a number of misconceptions about China and other industrializing developing economies. For instance, China's "overvalued" currency (the yuan) as the bane for the US' high trade deficit ($200B from China alone out of its $800+ B total trade deficitin 2005) and growing unemployment.

Come on guys, many US consumers buy China-made products (often by US multinational companies locating there) not so much because the yuan is "cheap", but mainly because of rigid US labor laws, ala-Europe's "expensive to hire, difficult to fire" policies, and paranoid immigration policies. Many potential migrants are willing to offer their cheap labor for US companies in the US mainland, so that said US companies can produce cheap and competitive goods and services, reducing the need to import a lot from China, Korea, Mexico, and soon.

Majority if not all bureaucrats at the IMF, as well as the US TreasuryDepartment and EU Finance Ministries, look like broken records in blaming China's (and India's and Turkey's and Korea's and Mexico's and many other countries') over-valued currencies and other global inflationary pressures (like the spiralling world oil prices) for theUS' and Europe's anemic growth and high unemployment rates. Why can't they look inwards and ask their own consumers, their very own citizens, why these people prefer bargains from abroad at the expense of local jobs and slow domestic growth? Should they blame their owncountrymen and consumers why they prefer to buy cheaper clothes and shoes, cheaper food and drinks, cheaper toys and vehicles, available from industrializing poor countries, or they blame the politicians andFinance/Central Bank bureaucrats of the latter?

As many people hunt for bargains everywhere, from bargain hotels and restaurants to bargain computers and shoes, the high-taxes countries of Europe and north America should expect slower economic growth and high unemployment rate. Because demand for their hotels and restaurants is not big, and demand for computers and shoes made in their countries is not big. High and multiple taxes -- to finance expensive welfare and bureaucracies, including internationalbureaucracies like the IMF, UN and the WB -- are inflationary. They make the prices of many goods and services produced in high taxes economies very expensive, and hence, far from bargains.

A re-engineering of the quota system at the IMF maybe a 2nd best alternative. And even such alternative meets fierce opposition by Finance bureaucrats of a number of European countries. They've gotten use to over-taxing their citizens and over-extending their power in the lives of citizens of poorer economies who borrow from the IMF.

There are not much relevance for the IMF even among fiscally irresponsible governments, like the Philippine government. Every year, the Phil. government makes about $7B foreign loans and another $7-8B domestic loans (in Peso value). About 60-70% ofthose foreign loans are from private bondholders abroad, the rest are mostly from the ADB and JBIC (Japan government's ODA lender), a few others from the WB and other government's foreign aid bodies. The Philippine government's Department of Finance (DOF) and central bank(BSP), even the Office of the President (OP) are more afraid of ratings downgrade by Standard & Poors, or by Fitch, or by another ratings firm, than from any visiting IMF bureaucrats makingmacroeconomic and external account reviews.
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Last June 21, 2006, I wrote this,

Why the IMF Should be Abolished

The IMF should ultimately be disbanded and abolished. I only have 2 main reasons for saying so: taxes and growing IMF irrelevance.

1) High cost to taxpayers of many international bureaucracies.
There are already so many government clubs now -- IMF, WB, UN, WTO, OECD, ADB, AfDB, APEC, G-77, EU, ASEAN, MERCUSOR, various other regional and bilateral clubs of governments. Such international and regional clubs cost money to taxpayers, and national and international bureaucrats just spend such tax money, from fat salaries and per diems to endless travels and conferences. Yes, they have various "development" projects, but for many taxpayers, the benefits of those projects are often less visible compared to their reduced welfare through high and multiple taxes removed from their pockets.

2) Growing irrelevance of the IMF.
Private bondholders, the main lenders to many fiscally-irresponsible governments, both rich and poor countries alike, do not look much to the IMF for macroeconomic scanning of governments wanting to float new bonds (ie, borrow from them), but to ratings agencies and big investment banks.

Such fiscally irresponsible governments spend more than what they can collect from taxes and privatization, so they borrow left and right and get more indebted. And irresponsible poor governments cannot borrow much from governments of rich countries either because many of them, the G7 countries's governments in particular, are themselves highly indebted.

General government gross debt as % of GDP, G7, 2005:

1) Japan 175.5%
2) Italy 106.3%
3) Canada 85.0%
4) Germany 67.5%
5) France 67.3%
6) US 62.9%
7) UK 43.3%
(source: IMF, World Economic Outlook, April 2006 database)

So, those spend-and-borrow governments, especially poor-country governments, turn to private bondholders, from individuals to corporations and banks. Bondholders would rather wait for Moody's or S&P or Fitch, whether they would downgrade or upgrade the credit ratings of a borrowing government, than look up to the IMF.

Not much relevance for IMF and many other government clubs. The money of taxpayers siphoned off by governments to sustain those international bureaucracies are better diverted as tax cuts, so taxpayers can better take care of themselves and their families, rather than be dependent on various subsidies from indebted and fiscally-irresponsible governments.
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See also:
Foreign Aid 4: Easterly vs. Sachs, May 01, 2006
Foreign Aid 5: Failure in East Timor, May 31, 2006

Foreign Aid 2: Circuitous and Leaky Process

Official Development Assistance (ODA), or more popularly known as "foreign aid", is government to government; more specifically, resource transfer from rich country governments to poor country governments. The aid or assistance is in the forms of technical assistance, grants and loans. The first two forms of aid are small compared to foreign loans.

The biggest aid-giving bodies are the multilateral institutions -- the United Nations (UN) through its various agencies (UNDP, FAO, UNICEF, WHO,...), the World Bank (WB), the International Monetary Fund (IMF), and the regional development banks like the Asian Development Bank (ADB), European and African Development Banks. Some bilateral institutions like the US Agency for International Development (USAID) and Japan Bank for International Cooperation (JBIC) are also big lenders to many poor country governments. Except for the IMF which gives out loans to countries experiencing balance of payment crisis like hemorrhaging foreign debt and downward spiralling currency depreciation, the above foreign aid banks and institutions are mainly engaged in project financing, mostly in physical and social infrastructure projects.

Citizens of rich countries finance those foreign aid institutions in the form of high taxes. The target beneficiaries are supposedly the citizens of poor countries. This does not happen all the time. Before foreign aid money reaches the poor in the developing countries, the money passes through several layers of bureaucracies first. These are (a) the legislators and Foreign Affairs Ministry of donor countries, (b) the personnel and consultants of multilateral and bilateral aid institutions, (c) the presidents and legislators of poor country governments who prepare and appropriate budgets, and (d) the local politicians and national bureaucrats of poor country governments who implement the projects.

This circuitous process often results in a number of wastes, if not outright theft by corrupt and irresponsible government leaders, and high spending on salaries and perks of consultants, from economists to engineers, from physicians to agriculturists, and so on. So that while American taxpayers shoulder some $16 billion per year of foreign aid to many governments around the world through the UN, WB, IMF, ADB and other regional development banks, and its own US Agency for International Development (USAID), only a fraction (often a small fraction) of this money really reach the poor in developing countries in the form of roads and medicines for malaria.

What is noticeable in these foreign aid institutions is that while their existence, including the salaries and perks of their personnel and consultants, are 100% financed by taxes, said people are not subject to income taxes; their importations like vehicles are not subject to import tax and possibly, other consumption taxes like or excise tax and value-added tax.

Foreign loans almost always require counterpart funds. Hence, taxes by citizens of rich countries should be matched by taxes of citizens of poor countries. Often, the ratio of foreign loans to counterpart funds is 50-50. This partly explains why leaders and consultants of foreign aid institutions and banks are either silent if not outrightly supporting tax hikes in poor countries. The case of expanded and hike in value added tax (VAT) in the Philippines is one example. The WB's country director is very vocal in supporting the VAT expansion and hike, along with a number of local consultants who have regular consulting work with foreign aid institutions and government agencies.

If foreign aid is circuitous and leaky, what are the alternatives?

Cut taxes in both rich and poor countries, let the citizens spend their own money on things and services they deem important. If citizens of rich countries experience income tax cuts, they will not burn the savings. They will use the money to buy more products and services from other countries, including poor countries, from mangos and bananas to hiring more nurses and food shop waiters. Or they will use the money to visit more tropical beaches and mountain resorts in the poor countries, which expands employment opportunities in the developing world. The money transfer here is more direct from rich country citizens to poor country citizens. The middlemen under "more foreign aid" framework -- the politicians and bureaucrats in both donor and borrowing countries, the consultants and bureaucrats in foreign aid institutions -- will not go hungry because many of them are talented enough to find other jobs, to shift to entrepreneurship under a regime of low taxes, small bureaucracy economy.