Need for prudence

Dennis Uy, a Davao-based businessman and friend of President Duterte’s, is seeking government guarantee cover for a P700-million loan that his shipping and logistics firm will use to acquire a new vessel.

This fact came by way of a clarification letter to the Philippine Stock Exchange stating that Uy had requested the state-owned Philippine Guarantee Corp. (PhilGuarantee) for cover only on this particular loan, not on his conglomerate’s P16-billion debt load.

But the amount is not the issue. What is wrong here is that a private entity is seeking government guarantee for a private undertaking. The P700 million in question was borrowed by Uy’s Chelsea Logistics and Infrastructure Holdings Corp. from a local bank with which it is about to reach its single borrower’s limit. The limit is an imposition of the Bangko Sentral ng Pilipinas on all banks to prevent their overexposure on a single company or individual borrower.

The money is to be used to buy a vessel for use in Chelsea’s for-profit operations, not to assist farmers or fishers, or even to build essential public infrastructure such as a hospital or a school.

In defense, Uy’s camp has argued that it was able to obtain state guarantee seven years ago, before President Duterte’s term. In 2009, it said, an affiliate secured a guarantee for a P400-million loan from the then Philippine Export-Import Credit Agency, which was consolidated with Home Guaranty Corp. in 2018 and renamed to PhilGuarantee after also absorbing the guarantee functions of the state-run Small Business Corp., the Agricultural Guarantee Fund Pool, and the Industrial Guarantee and Loan Fund.

However, there is now a government policy that eschews all forms of sovereign guarantees for private-sector undertakings. This is evident in the Duterte administration’s massive “Build, build, build” infrastructure program.

Finance Secretary Carlos Dominguez III and Socioeconomic Planning Secretary Ernesto Pernia have time and again emphasized that unsolicited proposals from the private sector or big infrastructure projects being bid out should not require sovereign guarantees.

In recently allowing public-private partnership (PPP) projects as part of the “Build, build, build” program, Dominguez reiterated that the Department of Finance would steer clear of similar government guarantees such as automatic rate increases, non-compete clauses, commitments of non-interference and concessionaire-required government guarantees that had plagued PPP contracts during the Aquino administration.

This is the correct policy stance because the government should not be exposed to such hidden risks, as it was especially during the Marcos era. The International Monetary Fund (IMF) has always cautioned governments against providing such guarantees to private entities.

Entered in the government’s books as contingent liabilities, these sovereign guarantees become legal obligations for governments to make payments only if particular events occur, which, in the case of PhilGuarantee, is a default by Uy’s firm.

The IMF warned that since their fiscal cost is invisible until they come due, these contingent liabilities “represent a hidden subsidy and a drain on future government finances,” not to mention the fact that they also complicate fiscal analysis to determine the financial health of governments.

This has happened in the past. The then Philguarantee (Philippine Export and Foreign Loan Guarantee Corp.) was forced in the late 1970s by the Marcoses to extend a guarantee on the $25-million loan of crony Vicente Chuidian’s Asian Reliability Co. Inc. The state-owned company was later ordered not to go after the private firm when it defaulted on its loan due to the global economic crisis at the start of the 1980s.

There were other foreign loans that defaulted then, and the lenders had to go after the Philippine government’s guarantee cover, some of it from the defunct Central Bank of the Philippines, the predecessor of today’s Bangko Sentral.

Clearly, there is a need for prudence on the part of PhilGuarantee. It is best that it desist from guaranteeing private undertakings, particularly if these would not directly benefit the public.