Northrail got $500M more in China loans

TOTAL COST OF PROJECT BLOATS TO $1B

Northrail got $500M more in China loans

Daily Tribune
By Chito Lozada Associate Editor

09/22/2008

The government acquired another $500 million official loan from China in Jan. 15 last year on top of the $421.5 million initial borrowings in 2004 for the controversial North Luzon Railways project, jacking up the cost of the project to more than a mind-boggling $1 billion, including the penalties for the delays on the project�s first phase, documents obtained by The Tribune showed.

The new loan was a preferential buyer�s credit loan agreement signed between the Chinese state funding agency Export Import Bank of China (China Exim Bank) and the Department of Finance (DoF) on Jan. 15, 2007.

A source said the signing of the agreement was made during the Association of Southeast Asian Nations (Asean) summit in Cebu City that was being held at that time where Chinese Prime Minister Wen Jiabao was in attendance.

Based on the documents, the state-owned North Luzon Railways Corp., which is undertaking the project, obtained the loan to fund a contract with China National Machinery Industry (SinoMach), which was the former China National Machinery and

Equipment Corp. (CNMEG), for the development, rehabilitation, construction, supply of equipment and diesel multiple units for Northrail project phase 1, section 2 which has a total cost of $586.91 million.

Phase 1, section 1 of the project worth $503 million was also commissioned with CNMEG and a separate $400-million Buyer�s Credit Loan Agreement from China�s Eximbank was obtained on Feb. 26, 2004 for its funding.

The Commission on Audit (CoA) had questioned the signing of the second contract because of the various problems encountered in the local counterpart financing for the initial phase of the project.

�No Certificate of Availability of Funds (CAF) was issued for the contract entered into by and between Northrail and Sinomach for the construction of Northrail Project phase 1, section 2 as required under Section 86 of PD 1445,� the CA stated.

The contract was also executed despite the various unresolved issues on the previous supply contract agreement between CNMEG and Northrail and the delayed implementation of Phase 1, Section 1 of the project, it added.

The National Economic Development Authority (Neda) board and the Cabinet-level Investment Coordinating Council approved phase 1, section 1 on December, 2003 which covered the construction of the railway from Caloocan City to Malolos, Bulacan. The Neda-Regional Development Council (RDC) III also endorsed the Project under its Resolution No. 03-96-2003. On Dec. 30, 2003, a Supply Contract Agreement with CNMEG was executed, which became effective on July 23, 2004.

The CoA stated that Northrail needed to issue a CAF for the local counterpart financing of the project amounting to $86.91 million.

CoA noted that Northrail also failed to issue the CAF for phase 1, section 1 of the project �wherein (Northrail) management claimed that 95 percent of the cost of the supply contract will be sourced from loans provided by the China EximBank while the local counterpart will be covered by loans to be guaranteed and arranged by PhilExim and later by the Development Bank of the Philippines.�

The initial phase of the project was bugged by the inability of Northrail to secure the local counterpart financing.

Despite this, Northrail proceeded with the execution of the contract for Phase1, Section 2, CoA said.

�In the absence of the CAF, there is no assurance that the project will be implemented on time and Northrail might face the same problems previously encountered in Phase I, Section 1, particularly in incurring of higher commitment fees,� according to the CoA.

The delay in obtaining the local counterpart fund for the project�s initial phase resulted in the jacking up of commitment fees, which are paid on unused loans, that reached P25.7 million.

�Northrail also did not benefit on the additional cost of P6.2 million incurred as processing fee for the application of guarantee with PhilExim due to the termination of the fund arranging agreement,� the CoA noted.

As early as 2003, Northrail started looking for the local counterpart funds needed to finance the Northrail Project Phase I, Section I, according to CoA. �On Sept. 26, 2003, Northrail applied for a guarantee facility with PhilExim wherein it paid P6,198,232 as processing fee in compliance with the pre-evaluation requirements,� it said.

The negotiation for the guarantee took time due to conditions such as chattel mortgage on the project assets, real estate mortgage, BCDA guarantee to PhilExim, cash intercept mechanism or waterfall account or debt service account with payment of the guaranteed PhilExim obligation as first priority.

Also required were written consents from the Department of Finance, Philippine National Railways, National Housing Authority, Department of Budget and Management and other concerned government agencies on the structure of the escrow or waterfall Account.

Negotiations with PhilExim on Northrail�s guarantee facility as well as the fund arranging activities reached an impasse after one of the funders for the project management support team, First Metro Investment Corporation (FMIC), refused to accept the latter�s guarantee because of a court order subjecting a similar guarantee of PhilExim to a stay order and suspending payment of the obligation in the case of the Nations Granary Inc., according to CoA.

The fund arranging agreement with PhilExim was consequently terminated on March 30, 2007, after accepting the proposal of DBP to provide arranger and underwriting services to the Northrail Project, Phase I, Sections I and 2 and requesting for DOF�s willingness to guarantee.

�To date, Northrail is still in the final stage of the loan negotiation,� according to CoA.

The CoA also found other anomalies in the project:

* The contract was granted to CNMEG without the benefit of a public bidding;

* One of the requirements for the release of the first drawdown by China EximBank was the release by Northrail of the five percent downpayment for CNMEG. Aside from the five percent downpayment released to CNMEG, advance payment equivalent to 25 percent of the contract price was also provided in the supply contract agreement for the cost of preparation, mobilization, relocation, etc. The advance payment included the amount of $27.5 million for the right of way (ROW) expenses and public utilities diversion which shall be borne by CNMEG, but the actual works, relocation and diversion shall be the responsibilities of Northrail;

* No surety bond, bank guarantee or irrevocable standby letter of credit of equivalent value was posted by CNMEG for the advance payment although they submitted a performance bank guarantee corresponding to 10 percent of the contract price as down0payment;

* No Certificate of Availability of Funds was issued prior to signing of the contract;

* All taxes, duties and other charges levied by the Government of the Philippines shall be borne by Northrail;

* The contract agreement with CNMEG includes design. However, said design has not been prepared and submitted before the implementation of the contract agreement, hence, said provision may be considered disadvan-tageous since Northrail is deprived of the option to determine whether the design conforms with the requirement of Northrail vis-�-vis the contract cost;

* The supply contract agreement between Northrail and CNMEG dated December 2003 preceded the buyer�s credit loan agreement dated February 26, 2004;

* �Tied loan� which requires China EximBank to nominate the contractor for the project to be financed by the loan is illegal because it is not among the alternative methods of procurement as enumerated under Sec. 48 of RA 9184;

* The amount of $421 million is a loan to the Republic of the Philippines and after the loan contract has been concluded, the amount should have been deposited to the account of the Republic of the Philippines;

* Additional one percent will be charged to the project by the Philippine government through the DOF as provided under the subsidiary loan agreement between the Government of the Republic of the Philippines and Northrail for the Export-Import Bank of China Loan for the Northrail Project, Phase 1, Section 1.

Chinese contractor threatens to pull out of Northrail project

A China-owned contractor working on the $503-million Northrail project has threatened to pull out of the project over the nonpayment of cost overruns worth $299 million and other breaches of the original agreement, according to documents obtained by ABS-CBN News Channel (ANC).

Last June 3, the China National Machinery and Equipment Corp. Group (CNMEG) sent a demand letter to North Luzon Railways Corporation (NLRC), saying that it would terminate the contract within 30 to 60 days if Northrail fails to take steps to comply with the terms of the contract and remedy several breaches of the original agreement.

Among the breaches of contract mentioned in the June 3 letter obtained by ANC were:

- failure to provide contractor access to the site and the necessary right of way;

- failure to remove all residents living along the right of way and to dismantle and remove all obstacles including trees, shelter and building facilities;

- failure to provide land to contractor for temporary use;

- failure to approve the design document and technical specifications;

- failure to make payments to the contractor;

- failure to provide the diagram of existing undergound networks pertaining to the electricity, gas, water and sewerage facilities in the working area;

- failure to compensate the contractor for extra costs;

- failure to adjust the contract price.

The letter was signed by Zhang Chun, director general for International Engineering Projects of CNMEG.

The Northrail project started in 2004 after the Arroyo administration entered into a deal with the Chinese government to build a railway connecting Manila to Northern Luzon. Phase 1 of the Northrail project would begin in Caloocan and stretch out to Clark, Pampanga.

The $503 million project cost would be funded by the Chinese government through a loan, with the provision that the project would be handled by a Chinese contractor.

Last May 13, CNMEG executive project manager Ren Junan wrote to then NLRC president Arsenio Bartolome III to ask for a $299.4 million increase in the original contract price. The price adjustment includes $210,770,635 in "contractor's extra costs" and $88,634,975 for "variations of scope of works from the original contract."

If approved, the price adjustment would inflate the project cost to more than $800 million. ABS-CBN News

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