Remembering the controversy

Next year, the controversial P10-billion PEACe Bonds, or Poverty Eradication and Alleviation Certificates which implicated a nongovernment organization that helped put former President Gloria Arroyo in power are set to mature, requiring the government to repay some P35 billion in obligations. Sold in October 2001, the 10-year bonds benefited the Caucus of NGO Networks (CODE-NGO) with a commission of P140 million and the foundation it set up—the Peace, Equity, and Access for Community Empowerment Foundation (Peace and Equity Foundation)—with an endowment of P1.3 billion.

CODE-NGO acted as the secretariat of Kompil II, the umbrella organization through which many civil society groups called for the removal, impeachment and ouster of then President Joseph Estrada.

Debt watchdog Freedom from Debt Coalition (FDC) made a thorough review of the deal and found that “the rules were bent and influence was used,” putting both the national government and taxpayers at a disadvantage.

In a lengthy statement issued on 30 January 2002, FDC revealed that the “claimed interest savings by government are actually less than the foregone tax” and that “the yearly amount that the Peace and Equity Foundation intends to earmark for poverty alleviation, P100 million, is far less than the P2.5 billion that the national government has to pay in interest each year for the next 10 years.”

Furthermore, the claimed interest savings turned out to be illusory; the yield on 10-year Government Securities has fallen to below 12.75 percent—the yield on the 10-year PEACe Bonds—since 200. And if the government had simply issued shorter-term Treasury bills, the interest it would have to pay would be far lower than what it will pay next year.

Maitet Diokno-Pascual, then FDC president, said: “Surely the motive was to alleviate poverty, not to be rewarded for its role in the downfall of the Estrada presidency. But the manner in which the endowment was transacted smacks of a sweetheart deal.”

In its investigation, FDC learned the following:

• First, CODE-NGO lobbied hard with the Arroyo government to sweeten the bond with tax exemptions and other eligibilities.

• Second, it then tried to ensure its targeted P1.0-billion profit by keeping the deal all to itself in a negotiated sale.

• Third, when that was not possible, it, together with government authorities, played the information game: It made sure that the timing and process of disclosure would favor the most prepared CODE-NGO who had worked on the deal longer than anyone else, who was intimately familiar with the details, and whose bank was prepared way ahead of its rivals.

• Fourth, it kept the sweetest eligibilities to itself—the security/statutory deposit eligibility, asset admissibility for insurance companies and use of the bonds to write down banks’ nonperforming assets, and sought its approval only after it had won the auction in its entirety.

• Fifth, it purchased the bonds with money it did not have and sold it to investors affiliated with the very bank that underwrote the deal, namely, the Rizal Commercial Banking Corp. (RCBC). For this it earned a staggering amount of P1.8 billion in gross profits. CODE-NGO then distributed its windfall, paying its financial advisers and RCBC at least P400 million in fees.

• Sixth, the remaining amount went to CODE-NGO and Peace and Equity Foundation.

At the height of the controversy, CODE-NGO leaders tried to face-save by explaining their side before the members of FDC.

However, FDC said: “It is obvious to us that steps were taken to carefully avoid illegalities but the deal remains fishy. It appears no different from the behest transactions that epitomize the cronyism in government.”

Aside from those mentioned above, FDC observed the following:

• Even if the negotiated acquisition of the PEACe bonds did not push through—the bonds were eventually auctioned on October 16, 2001, CODE-NGO’s intent was clear. This was to get the Arroyo government to float a bond with all its sweeteners so that CODE-NGO could profit by at least a billion pesos. Furthermore, although an electronic auction could have been undertaken then, this was foregone in favor of a fax auction—the outcome of which could still be influenced.

• Then National Treasurer Sergio Edeza questioned the negotiated acquisition and the tax exemption. His 12 July 2001 memo to Finance Secretary Jose Camacho warned about the danger of violating the anti-graft law. Nonetheless the deal was officially accommodated. And when the National Treasurer left his government post, his first job in the private sector was as Treasurer of the Rizal Commercial Banking Corp.—CODE-NGO’s partner in this deal.

• Secretary Camacho’s self-imposed inhibition was doubtful. There were policy decisions, not just ministerial functions, that needed to be settled and could only be settled by the Finance Secretary himself—or, in his absence, the President. The National Treasurer still addressed his concerns regarding the bonds to Secretary Camacho who by this time had inhibited himself for more than a month. Secretary Camacho, who should have objected to the deal from the start, instead helped to make it possible despite his so-called self-inhibition.

• The Treasury should have rejected the bids because the gap between the purchase price and ultimate market value was too wide. Instead of using a 14.14-percent interest rate as the benchmark, the Treasury should have aimed for an amount that was closer to 9 percent—the going yield of financial assets that are eligible to be used as bank reserves mandated by the Bangko Sentral ng Pilipinas.

• Claimed interest savings by government are only part of the story, and a miniscule part at that. The complete profit story will show that RCBC did not act out of altruism. Also, that CODE-NGO’s P1.4 billion was never RCBC’s to take.

• This deal casts serious doubts about the integrity of the Treasury market, the banking system, the government, and the credibility of civil society.

Despite this, FDC still believes that the PEACe Bonds controversy goes beyond CODE-NGO as it exposed the sad reality of Philippine socioeconomic and political life—a classic case of the line “What are we in power for?” which made former Senate President Jose Avelino “popular” more than 60 years ago.

In the same statement, FDC said: “As civil society, we aspire to present by our example an alternative to a system and practices that civil society has long found to be repulsive and completely disadvantageous to our people. As civil society, our influence can only stem from our moral authority, as we do not exercise any control, nor do we aspire to gain control over government, economy and society. For this reason, the standards we in civil society must apply to ourselves should be as stringent as, if not superior to, the standards we demand from government, public servants, politicians and political parties. Adherence to these standards sets civil society apart from the system it condemns. If these standards are compromised, even to achieve the noblest of ends, civil society’s credibility is lost.” –Bobby Diciembre Freedom from Debt Coalition, Manila Times