COMMENT:

TREATIES, CHINESE TIED LOANS, GOVERNMENT

PROCUREMENT AND GOOD GOVERNANCE
Herminio Harry L. Roque, Jr.
The Philippines recently witnessed a scandal that rocked the very
foundations of its constitutional democracy. Two whistle blowers, Joey de
Venecia, son of former Speaker Jose de Venecia, and Rodolfo Jun Lozada,
a minor functionary of a little heard government office, the Philippine
Forest Corporation, exposed the mother of all government scams.
Together, de Venecia and Lozada described how a US$328 million
contract for the creation of a national broadband network was anomalously
awarded to the ZTE Corporation of China, saying that under-the-table
payoffs were responsible for bloating the contract price to more than double
the actual cost. Kristie Kenney, American Ambassador to the Philippines,
declared that scandals like the NBN-ZTE contract could have been avoided
had government procurement undergone a transparent process of an open,
public and competitive bidding.1
The details provided by de Venecia and Lozada were so lurid that at
one point, political pundits were sure that it would lead to the ouster of
President Arroyo. Lending color to the controversy was the fact that no less
than the Presidential First Husband was personally interested in the contract,
as evidenced by the fact that he warned de Venecia to back off.2 In the
preliminary hearing of an impeachment complaint, the former Speaker
delivered a bombshell when he confirmed that he was invited by the
President and her Spouse to go to the premises of the ZTE Corporation in

Paper delivered during the Asian Law Institute Conference (ASLI), 2009, Hong Kong. Cite as
Herminio Harry Roque Jr., Treaties, Chinese Tied Loans, Government Procurement and Good Governance, 84 PHIL.
L.J. 1037, (page cited) (2010).

Of the Philippine Bar. B.A. (Mich), LL.B. (UP), LL.M. (LSE). Assistant Professor, University of the
Philippines College of Law; Professor 1, Philippine Judicial Academy; Chairman, Center for International Law
(CENTERLAW).
1 See Volt Contreras, Case filed vs DOTC Chief over broadband deal, PHIL. DAILY INQUIRER, Aug. 29, 2007,
available at http://www.inquirer.net/specialreports/nbndeal/view.php?db=1&article=20070829-85271.
2 See Dona Pazzibugan & Gil Cabacungan Jr., Mike Arroyo is mystery man, PHIL. DAILY INQUIRER, Sep.
19, 2007, available at http://newsinfo.inquirer.net/breakingnews/nation/view_article.php?article_id=89399.

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Shenzhen, China, to play a round of golf and to partake of the famous

Shanghai crabs. The Speaker would later ask: What was the President doing
in the premises of a company that was interested in supplying a multi-million
dollar project to the Philippine government? What was the Presidents
husband doing in the premises of that Company? What was the Chairman of
the Elections Commission doing in the same premises? What and why was
he himself invited there?3
According to the Speaker, the Philippines originally planned to lay a
National Broadband Network (NBN) on a Build Operate Transfer (BOT)
scheme where the government will not have to pay even a single centavo for
the project. Under these terms, the Speaker's son, Joey, through the USbased Amsterdam Holdings company, made a proposal to build this NBN.
In his statement before the House of Representatives, the Speaker then
claimed that the fateful meeting on the golfing green changed the NBN
scheme from a BOT to a government-to-government transaction. Under
this revised scheme, the Peoples Republic of China would finance the
building of this network for the sum of 380 Million dollars under a loan
payable with an interest of 3% per annum. In turn, because it was going to
be a tied loan, or one financed by the Chinese Exim-Bank, the Chinese
would now have the prerogative to designate the project contractor, which
in this case, was the ZTE Corporation.
The drama behind the ZTE scandal was in large part due to the fact
that the one of the whistle blowers who set the stage had intimate
knowledge of the schemes and stratagems behind the project. Rodolfo
Jun Lozada was a close confidant of, Romulo Neri, the Director-General
of the National Economic Development Authority (NEDA), the agency
tasked with reviewing the financial and economic viability of projects
undertaken by the Philippine government. Professor Cielito Habito, a
former NEDA Director General, described the agency in this wise:
A Nosy Agency
The NEDA is actually two things. It is the NEDA Board, chaired by
the President and composed of most members of the Cabinet plus
the Bangko Sentral governor, which meets once a month in lieu of
the regular Cabinet meeting. It is also the NEDA Secretariat--the
agency housed in Pasig City formerly headed by Neri, along with its
3 See Juliet Labog-Javellana, JDV details secret Arroyo-ZTE meeting, PHIL. DAILY INQUIRER, Nov. 23, 2008,
available at http://www.inquirer.net/specialreports/nbndeal/view.php?db=1&article=20081123-173809; See
Leila Salaverria & Gil Cabacungan Jr., De Venecia: Arroyo bribes total P100M' , PHIL. DAILY INQUIRER, Nov.
25, 2008 available at http://www.inquirer.net/specialfeatures/2ndimpeachment/view.php?db=1&article=20081125-174171.

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regional offices all around the country, which provides technical

secretariat support to the NEDA Board. The Neda's legal charter
describes it as the highest policy-making body in the country. Thus, it
cannot be as weak as it seemed to have been implied in some parts of
last week's hearings.
It is the NEDA Secretariat's job to ensure that all decisions of the
NEDA Board are implemented. To do this effectively, it must have
the authority for oversight--that is precisely the reason for the
agency's name--and as I often describe it, NEDA must necessarily
"poke its nose into everybody else's business." That is why the
NEDA and its director general can be so unpopular, and would
rather be bypassed by Cabinet colleagues, local executives and
legislators if they can.
Projects vs. Contracts
This is particularly so in the context of Neda's role in the evaluation
and approval of ODA (expand) projects by the Investment
Coordination Committee (ICC), prior to elevation to the full NEDA
Board. The ICC, while chaired by the secretary of finance, relies on
the full complement of the NEDA staff, including its regional
offices, for its technical secretariat support. ODA-funded projects
must thus undergo NEDA scrutiny.
On this, Neri repeatedly asserts that it is the projects' substance (he
used the word "concept," which is too weak a word)--not the specific
contracts--that the ICC and NEDA Board approve. But he is not
completely right to insist that in the case of the NBN project, the
DOTC "could do whatever it liked" in deciding how to implement it.
Section 9 of the ODA Law (R.A. 8182) states: "All concerned
implementing and oversight agencies shall submit to the NEDA all
information and reports as may be required by it to review draft
contracts (emphasis mine).4

It was in this capacity that he acquired personal knowledge of the

greed of high-ranking officials in the Arroyo administration, including that
of the First Gentleman. According to him, his job was to moderate their
greed.5

4See Cielito Habito, NEDA, ODA, NBN and ZTE, PHIL. DAILY INQUIRER, Sep. 30, 2007, available at
http://inquirer.net/specialreports/nbndeal/view.php?db=1&article=20070930-91652. See also NEDA
Functions and Organizations, available at http://www.neda.gov.ph/about/functions_and_organization.htm#IAC.
5See Nikko Dizon, Moderate their greed Instruction refers to Mike Arroyo, Abalos, PHIL. DAILY INQUIRER, Feb.
8, 2008, available at http://newsinfo.inquirer.net/inquirerheadlines/nation/view/20080208-117484/Moderate-their-greed.

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The sense of melodrama was even heightened when Lozada was

forcibly taken from the airport upon his return to the country.6 Lozada and
his family believed that his abductors would have killed him had there not
been a vigilant media that widely broadcasted news of his abduction.
In the meantime, critics of the contract began speaking up. The
University of the Philippines School of Economics issued a study that
concluded that investment in an NBN network was not economically and
technically feasible because the government had neither capital nor technical
know-how to adapt to fast developing technological advancements.7 To
quote the said study:
It is typical of network economies, of which ICT backbones are an
instance, that the unit-cost of service falls with increasing capacityutilization (measured, say by number of users). This is because fixed
costs are high while variable costs are low. As already noted, there are
now already two operational backbones, both privately-owned and run.
Increasing these to three (and possibly four) would saddle the entire
industry with excess capacity that was entirely of the governments
making. Once implemented, the expanded NBN would steer demand
away from private backbones and effectively raise the cost for all
users. Even if half of government demand hives off from private
providers towards the cheaper government backbone, costs become
higher for the telcos private customers, including business. Ironically
one of those to suffer would be government itself. For it is virtually
certain that government agencies will nonetheless continue to spend
the rest of their telecommunications budgets (e.g., half of their
spending on landline calls and 92 percent of their cell-phone
expenses) on the private telcos services. Therefore they too become
affected by higher costs. Hence it is not even entirely assured that
total government telecoms costs will even be reduced.
Anticipating congestion

6See Dennis Gadil, ZTE witness 'abducted' at airport, MALAYA, Feb. 6, 2008, available at
http://www.malaya.com.ph/feb06/news1.htm. See also Alcuin Papa, Christine Avendao & Tarra
Quismundo, PNP: We are protecting Lozada at kins request, PHIL. DAILY INQUIRER, Feb. 7, 2008, available at
http://newsinfo.inquirer.net/breakingnews/nation/view/20080207-117260/PNP-We-are-protecting-Lozadaat-kins-request; Leila Salaverria & Juliet Labog-Javellana, Lozadas wife runs to SC for help, PHIL. DAILY
INQUIRER, Feb. 7, 2008, available at http://newsinfo.inquirer.net/inquirerheadlines/metro/view/20080207117261/Lozadas-wife-runs-to-SC-for-help and Senate takes custody of Lozada, INQUIRER.NET, Feb. 7, 2008,
available at
http://newsinfo.inquirer.net/breakingnews/nation/view/20080207-117281/Lozada-surfacesrecounts-NBN-deal-in-press-conference.
7See RAUL FABELLA & EMMANUEL DE DIOS, LACKING A BACKBONE: THE CONTROVERSY OVER THE
NATIONAL BROADBAND NETWORK AND CYBER-EDUCATION PROJECTS (2007), available at
http://www.econ.upd.edu.ph/respub/dp/pdf/DP2007-07.pdf.

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The possibility of congestion (leading to slow connections) is likely
the only valid economic rationale for an extra backbone (not to
mention two), and possibly some allowance for redundancy in an
emergency. At present, however, no congestion is in sight. Quite the
contrary, current fiber-optic pipelines are hugely under-utilized,
implying zero marginal cost of additional traffic.
Even assuming the point of congestion is reached, however, there is
no reason to doubt that private telcos would scramble quickly
enough to absorb excess demand, as they did upon inter-connecting
the country under competitive pressure. To be sure, there will remain
missionary areas that remain unconnected.
But can government do the job better on its own?
Concentrating on governments core competence
From the 1990s up to until recently, the government seems to have
adhered to the concept of core competence, which implies
progressively outsourcing all non-core needs to those who specialize
in such non-core needs. Government agencies that have followed
this formula have realized good savings. Private concessionaires now
run canteens in state offices. Property security is now contracted out.
Government has left (or is leaving) to the private sector the task of
direct services-provision in power-generation and transmission,
airlines, telephony, tollways construction, and all sorts of industrial
ventures. In the meantime, government concentrates on its more
important regulatory task of preserving competition; then rather than
bother to run a single firm, it comes to influence the entire sector.
This strategy has clearly yielded more success than the previous one:
the most iconic is the outsourcing of water distribution services
themselves to private concessionaires in Metro Manila.
But the loan-powered versions of NBN and CEP require the
government to abandon this painfully-won strategy and resurrects the
zombie of a government-run communications system (recall
Telepono sa Barangay!). Can this be sound?
Preserving flexibility and keeping pace with technical change
The ICT sector is characterized by extremely rapid technological
change. Competitive market pressures will typically prod firms to
invest in cutting-edge technology. But it is precisely such competitive
pressures that are suspended in a government-owned facility.
Hence there is real danger that the expanded NBN, particularly its
last-mile segment, will be saddled with increasingly obsolete
technology that government users themselves will progressively shun
in favor of market providers. Alternatively, if government makes the
use of the NBN compulsory in order to validate its past mistakes, e-

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Government program could shrivel from sheer inefficiency. This is

one lesson the former USSR failed to learn and which hastened its
demise.
The pace of technological advance is admittedly different for various
segments of the ICT sector. It is probably least rapid in the backbone
segment, where the best opinion still considers optic fiber the gold
standard and obsolescence may come only slowly. It is probably
more rapid in the (wireless) last mile distribution segment of the
network. At any rate, once NBN is on stream, government agencies
will be largely wedded to a state provider from which they cannot
readily shift. Unfree to fail government or quasigovernment entities
have little regard for quality of service. Nor is there an incentive for
technological change. The specter of old PLDT monopoly and its
associated abominations loom very large. A good idea of how it will
be run is provided by the career of Telof itself. Here the soft budget
constraint rules, and deficits and state subsidies are almost
inevitable. Government ends up paying higher for low quality service.
To reiterate, flexibility, or the capacity to switch suppliers is an
enormous competitive advantage. The government is vast, its needs
myriads and constantly changing. The mismatch between demand
and supply is the inevitable of central procurement.

The study concluded that by the time the network is installed, the
technology would already be obsolete. It was further opined that the NBN
should be left to the hands of private sector players who already had existing
networks. Former Department of Transportation and Industry Secretary
Josefina Lichauco also stated that the NBN project was contrary to existing
legislative policies enshrined in the telecoms law and the e-commerce act
that recognized that investments in the telecoms industry should be led by
the private sector.8 Lawyers also objected to the NBN ZTE Contract on
the ground that it did not comply with the mandatory public and
competitive bidding as required by Republic Act No. 9184 (R.A 9184) or the
countrys government procurement law.9 The fact that the project did not
have the prior concurrence of the Monetary Board despite the constitutional
provision requiring such in cases where the country's foreign indebtedness is
increased also became an issue. Finally, the contract was also objected to on
the ground that it had no certificate of availability of funds which according
to the Government Auditing Code made the contract null and void.10

8 See Jo. Florendo Lontoc, NBN, CyberEd projects lack economic sense, legal basis, and transparency
critics, U.P. NEWSLETTER, available at http://www.up.edu.ph/upnewsletter.php?i=518&archive=yes&yr=2007&mn=9.
9 Section 10 explicitly provides the All procurement shall be done through Competitive bidding except
as provided for in Article XVI of this Act. Article XVI lists the alternative methods of procurement.
10 See University of the Philippines Center for Integrative and Development Studies, China as an Emergent
Global Power, Nov. 26, 2008 Proceedings.

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The NBN-ZTE is not the first controversy involving a Chinese

funded project. Four years earlier, the President issued Executive Order
Number (E.O.) 464, which forbade members of the executive branch of
government from appearing before Senate investigations.11 The E.O. was
issued because of a hearing that was being conducted by the Senate on the
so-called Northrail project. This project concerned a 32-km railroad that was
to be financed by the Chinese Exim-Bank for US$603 million.
Prior to the scheduled public hearing of the Northrail project in the
Senate, then Senate President Franklin Drilon requested a legal opinion
from the UP Law Center. The latter concluded that the project was legally
infirm.12 The UP Law Center based its opinion on the lack of public and
competitive bidding as required by R.A. 9184. At the time, the Executive
departments justification was that the Northrail contracts, consisting of a
Supply Agreement and a Loan Agreement, are Executive Agreements
which are exempt from the provisions of R.A. 9184. Eerily, the
government's defense of the NBN-ZTE contract is along the same lines.
The UP Law Center, on the basis of the opinions of three of its specialists in
the field of International Law, belied this on the basis of a literal reading of
the definition of a treaty, international agreement or an executive agreement
under the Vienna Convention on the Law of Treaties (VCLOT). There, the
definition of a treaty is a written agreement entered into by sovereign states
and governed by international law. The UP Law Center study then declared
that the two contracts comprising the Northrail projects were not executive
agreements because they were entered into by Government-Owned and/or Controlled Corporations (GOCCs) and not sovereign states and that they
were governed by domestic law, to wit; Philippine laws for the supply
agreement and Chinese law for the loan agreement.
Like later criticisms leveled against the NBN-ZTE contract, the UP
Law Center study concluded that Northrail was infirmed for the further
reasons that there was no prior Monetary Board concurrence and no
certificate of availability of funds contrary to the provisions of the
Government Auditing Code. The Center also specifically identified
provisions that it claimed were grossly disadvantageous to government.
Some of these were provisions in the loan agreement included one that
11 See Senate of the Philippines vs. Exec. Sec., G.R. No. 169777, 488 SCRA 1, Apr. 20, 2006, available at
http://www.supremecourt.gov.ph/DECISION%20EO%20464%20Final.htm.
12 See LEGAL, ECONOMIC, FINANCIAL AND TECHNICAL OPINION ON THE: (1) CONTRACT BETWEEN
NORTH LUZON RAILWAYS CORPORATION AND CHINA MACHINERY AND EQUIPMENT CORPORATION; AND
(2) BUYER CREDIT LOAN AGREEMENT NO. BLA 4055 DATED 26 FEBRUARY 2004 BETWEEN THE EXPORT
IMPORT BANK OF CHINA AND THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES [hereinafter UP
LAW CENTER STUDY] available at http://pcij.org/blog/wp-docs/up-study-northrail.pdf.

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surrendered the Republic of the Philippiness immunity from suit and

enforcement in the event of non-payment of the loan. Another such
provision allowed the Chinese Exim-Bank to directly release loan proceeds
to the Chinese contractor without need of the funds to enter first into the
national coffers.
The Commission on Audit would repeat these exact observations
four years later in its 2007 annual report on Northrail Inc.13 To quote the
pertinent portions of the report:
5. Supply Contract Agreement entered into by and between
Northrail and China National Machinery and Equipment
Corporation (Group) (CNMEG) and the Buyers Credit Loan
Agreement (BCLA) between the DOF- RP and China EXIM Bank
In December 2003, the NEDA Board and the NEDA Investment
Coordinating Council approved Phase 1, Section 1 of the Northrail
Project covering the alignment 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
December 30, 2003, a Supply Contract Agreement with CNMEG
was executed, which became effective on July 23, 2004 after all the
conditions precedent to the effectivity of the said agreement were
complied with.
To finance the project, a US$400 million Buyers Credit Loan
Agreement between the DOF-RP (Borrower) and China EXIM Bank
(Lender) was executed on February 26, 2004. As provided in the
BCLA, the Lender agrees to make available a loan facility to the
Borrower in an aggregate principal amount not exceeding US$400
million or 95% of the Contract Price for the purpose of financing the
construction of the Northrail Project. The remaining 5% or
US$21.05 million shall be the Philippine counterpart. The term of the
agreement is 20 years from the date of Notice of Approval of
Contract to the Final Repayment Date with an interest rate of 3% per
annum. The loan agreement also provides that the Borrower shall pay
to the Lender a Management Fee of 0.2% of the Facility which is
equivalent to US$800,000 within 60 days from the date of the
Agreement and a Commitment Fee of 0.2% per annum on the daily
unutilized portion of the Facility.

13 See COMMISSION ON AUDIT 2007 Audited Annual Reports Government Owned and Controlled
Corporations Cluster IV Industrial & Area Development And Regulatory North Luzon Railways Corporation
available at http://www.coa.gov.ph/Audit/AAR.htm.

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Review of the abovementioned Supply Contract Agreement disclosed
the following observations:
a) The contract was granted to CNMEG without the benefit of a
public bidding.
b) One of the requirements for the release of the first drawdown by
China EXIM Bank is the release by Northrail of the 5% down
payment for the CNMEG. Aside from the 5% down payment
released to CNMEG, advance payment equivalent to 25% of the
contract price was also provided in the Supply Contract Agreement
under Sec. 11.2 for the cost of preparation, mobilization, relocation,
etc. The advance payment shall include the amount of $27.540
million for the 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.
c) 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% of Contract Price for the down payment.
d) No Certificate of Availability of Funds was issued prior to signing
of the contract.
e) All taxes, duties and other charges levied by the Government of
the Philippines shall be borne by Northrail (Sec. 7.1)
f) 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 disadvantageous since Northrail is deprived of the
option to determine whether the design conforms with the
requirement of Northrail vis--vis the contract cost.
With regard to the Buyer Credit Loan Agreement, the following
provisions appear to be disadvantageous to the Philippine
government:

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a) Sec. 9.1, Art. 9

The no tax deductions clause appears

disadvantageous to the Government of
the Republic of the Philippines as it
prevents the imposition of taxes or
charges that may be required by law.

b) Sec. 11.2 (j), Art. 11

The provision which cancels the right

to immunity or other such privilege
(sovereign or otherwise) of the
Borrower and its assets is grossly
adverse to the Government of the
Republic of the Philippines and may
violate constitutional or statutory
provisions on immunity.

c) Sec. 11.2 (k), Art.

11

Same comments as that of Section

11.2(j). This submission to the laws of
the PROC may be contrary to the
Philippine laws, particularly since the
PROC, a communist state, has a
different legal system.

d) Sec. 15.1, Art 15

15.3, Art. 15
15.4, Art. 15
15.5, Art 15

The governing law of PROC,

submission to its courts and waiver of
immunity are disadvantageous to the
Government of the Republic of the
Philippines as commented above.

e) Sec. 17.1, Art. 17

The assignment of rights by the

Borrower requires the prior written
consent of the Lender but the
assignment of rights by the Lender
requires a mere notice to the Borrower.
This is partial to the PROC.

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We have also noted the following:

I. Supply Contract Agreement between Northrail and CNMEG
dated December 2003 preceded the Buyers Credit Loan Agreement
dated February 26, 2004
II. Tied loan which requires China EXIM Bank 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.

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III. The amount of US$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.
IV. Additional 1% 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.
We recommended that Management explain/justify why these
provisions/observations in the Supply Contract Agreement and
Buyers Credit Loan Agreement should not be considered
disadvantageous to the government.14

At the core of the twin Chinese Exim-Bank controversies is the

insistence of both the Chinese government and the Arroyo administration
that since these are tied loans, these agreements are exempt from public
bidding requirements as required by law.15 Said provision reads:
Section 4.Scope and Application. - This act shall apply to the
Procurement of Infrastructure Projects, Goods and Consulting
Services, regardless of source of funds, whether local of foreign, by
all branches and instrumentalities of government, its departments,
offices and agencies, including government-owned and/or-controlled
corporations and local government units, subject to the provisions of
Commonwealth Act No. 138. Any treaty or international or executive
agreement affecting the subject matter of this Act to which the
Philippine government is signatory shall be observed.

The Executive Branch has also argued that in addition to being tied
loans, contracts entered into with political organs of a Socialist state are
executive agreements and hence, exempt from bidding. To quote the
pertinent portions of the Opinion of the Secretary of Justice on the matter:
In several instances, this Department had the occasion to rule that
commercial agreements concerning loans, guarantees or other credit
accommodations are in the nature of an executive agreement because
they embody arrangements of a more or less temporary nature; that
is, they become functus officio upon settlement of the obligors'
liabilities.

14
15

Id.
See note 9.

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Thus, in Opinion No. 102, series of 2004, involving a project covered by

a Loan Agreement with the Japan Bank for International
Cooperation (JBIC), this Department ruled:
. . . Considering that the subject matter of the original Loan
Agreement involves agreements of a more or less temporary nature,
the said Agreement is deemed an executive agreement, not a treaty,
under international law.
In Opinion No. 17, series of 2005, the request for opinion involves the
Philippine Rural Electrification Service (PRES) Project which was (1)
approved for funding by the French Government in a Loan
Agreement entered into by and between the Government of the
French Republic and the Government of the Republic of the
Philippines and (2) covered under the Memorandum of Undertaking
(MOU) executed by and between the Department of Energy (DOE)
and National Power Corporation (NPC), on one part, and the
Consortium of Paris Manila Technology Corporation (PAMATEC)
and ETDE of Bouygues Construction (the "Consortium"), on the
other. The Department ruled in this case that the requirement of the
law on public bidding does not apply to the PRES Project because it
is governed by an international or executive agreement. To support
our opinion, we cited, in particular, (1) the Loan Agreement which
provides, as a condition, that the fund shall be used to purchase in
France French goods and services and (2) the letter of the French
Ambassadress to the Philippines which states, among others, that the
Consortium, which will undertake the Project, had been rigorously
assessed and evaluated by a French Government expert.
We note that, unlike the facts involved in the foregoing opinions of
this Department, the proposed NBN Project subject of the instant
opinion is not yet covered by any loan agreement between the
Government of the Republic of the Philippines and Government of
the People's Republic of China.
To buttress the importance of a loan agreement in the determination
of whether or not a certain project is covered by an executive
agreement, we point that the document denominated as "Exchange
of Notes" in the case of Abaya v. Ebdane, which was invoked by
your Department to support your aforesaid view on the matter,
contains the salient terms and conditions of the loan to be extended
by the Government of Japan to the Government of the Republic of
the Philippines.
Moreover, the Supreme Court in Abaya ruled that the subsequent
Loan Agreement that was entered into between the Government of
the Republic of the Philippines and the Japan Bank of International
Cooperation (JBIC) forms part of the Exchange of Notes and cannot
be properly taken independent thereof, thus:

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GOVT PROCUREMENT AND GOOD GOVERNANCE

Loan Agreement No. PH-P204 was subsequently executed and it
declared that it was so entered by the parties "[i]n the light of the
contents of the Exchange of Notes between the Government of
Japan and the Government of the Republic of the Philippines dated
December 27, 1999, concerning Japanese loans to be extended with a
view to promoting the economic stabilization and development
efforts of the Republic of the Philippines." Under the circumstances,
the JBIC may well be considered an adjunct of the Japanese
Government. Further Loan Agreement No. PH-P204 is indubitably
an integral part of the Exchange of Notes. It forms part of the
Exchange of Notes such that it cannot be properly taken
independent thereof. (emphasis ours)
In effect, therefore, it is the ruling in Abaya v. Ebdane that the
Exchange of Notes, which was considered by the Supreme Court as
an executive agreement, includes, as an integral part thereof, the Loan
Agreement between the JBIC and the Government of the Republic
of the Philippines.
In this connection, it is this Department's opinion that the exchange
of correspondence between Presidential Chief of Staff Michael
Defensor and Chinese Minister of Commerce Bo XiLai/Chinese
Ambassador Li Jinjun may be considered as an executive agreement,
provided that, the Loan Agreement between the Government of the
Republic of the Philippines and the China Exim Bank is subsequently
concluded, considering that said loan agreement is considered an
integral part of the executive agreement with the Government of the
People's Republic of China.
To be sure, as ruled by the Supreme Court in Abaya v. Ebdane, an
exchange of notes is considered a form of an executive agreement,
which becomes binding through executive action without need of a
vote by the Senate and that like treaties and conventions, it is an
international instrument binding at international law.
The second issue involves an examination of the coverage of
Republic Act No. 9184, otherwise known as the "Government
Procurement Reform Act". Section 4 of the said Act provides that it
shall apply to:
. . . the Procurement of Infrastructure Projects, Goods and
Consulting Services, regardless of source of funds, whether local or
foreign, by all branches and instrumentalities of government, its
departments, offices and agencies, including government-owned
and/or -controlled corporations and local government units, subject
to the provisions of Commonwealth Act No. 138. Any treaty or
international or executive agreement affecting the subject matter of

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this Act to which the Philippine government is a signatory shall be

observed. (emphasis ours)
Clearly, therefore, executive agreements involving infrastructure
projects to be funded by a foreign lending institution do not fall
within the scope of R.A. No. 9184 which mandates that all
procurement activities must be made through public bidding.
In the present case, no public bidding is required because based on
the exchange of correspondence between Chinese Ambassador Li
Jinjun and Presidential Chief of Staff Michael Defensor, the Chinese
Government has designated ZTE Corporation as the project's prime
contractor, thus:
It may interest Your Honorable to know that ZTE Corporation, a
reputable and established telecommunications Company in China,
responded to this worthwhile undertaking and, consequently, the
People's Republic of China through the Chinese Ministry of
Commerce designated it as the NBN project's prime contractor.
Moreover, Chinese Ambassador Li Jinjun also confirmed in the said
exchange of correspondence that the NBN Project will be funded by
the Chinese Government through the China Exim Bank, thus:
. . . Instructed by Chinese government, I would like to inform you
and the Philippine Government that we intend to support your
priority initiative, the NBN Project and agree to provide preferential
buyer's credit financing support through the China Exim Bank.
In Opinion No. 102, series of 2004, this Department adopted the
comments of the Government Procurement Policy Board (GPPB)
and ruled that since R.A. No. 9184 has yet no implementing rules and
regulations on procurement activities that are foreign-funded (to be
called "Implementing Rules and Regulations Part B" or "IRR-B"), 5
said foreign-funded procurement activities may be conducted
following the guidelines set by the foreign lending institution
concerned in the loan agreement. The reason for this is that although
R.A. No. 9184 covers all types of government procurement
regardless of source of funds, Section 4 thereof recognizes the
Government's international commitments and obligations in
requiring that any treaty or international or executive agreement shall
be observed, in accordance with the international law principle of
pacta sunt servanda. The only exception to this, according to the
GPPB, is if the subject loan agreement is silent as to the governing
guidelines, the provisions of the Implementing Rules and Regulations
Part A (IRR-A) of R.A. No. 9184 covering domestically-funded
procurement activities may apply.

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GOVT PROCUREMENT AND GOOD GOVERNANCE

1051

Thus, since, as represented by your Department, the NBN Project

will be funded by a foreign lending institution, specifically, the China
Exim Bank, the guidelines of said bank on procurement shall be
followed, unless the loan agreement with said bank is silent as to the
governing guidelines. In which case, the IRR-A of R.A. No. 9184
may apply.
In sum, it is the opinion of this Department that: (1) the exchange of
correspondence between Presidential Chief of Staff Michael
Defensor and Chinese Minister of Commerce Bo XiLai/Chinese
Ambassador Li Jinjun may be considered as an executive agreement
pursuant to the case of Abaya v. Ebdane, provided that, the Loan
Agreement between the Government of the Republic of the
Philippines and the China Exim Bank is subsequently concluded, (2)
the designation of ZTE Corporation as the project's prime contractor
in the exchange of notes has to be observed pursuant to Section 4 of
R.A. No. 9184 and the principle of pacta sunt servanda; and (3) the
guidelines of the foreign lending institution, which in this case is the
China Exim Bank, on procurement shall be followed, unless the loan
agreement with said institution is silent as to the governing
guidelines; in which case, the IRR-A of R.A. No. 9184 may apply.16
(citations omitted)

But apart from the thorny issue of the definition of an Executive

Agreement, a further issue would be whether or not the last sentence of
Section 4 of R.A. 9184 may be construed to mean that all treaties,
international or executive agreements are excluded from the coverage of the
law, if in fact they are altogether excluded. To reiterate a treaty is:
[A]n international agreement concluded between States in written
form and governed by international law, whether embodied in a
single instrument or in two or more related instruments and whatever
its particular designation.17

Since the law itself mentions treaties, the first step in resolving the
issue of whether or not Chinese tied loans are exempt from public and
competitive bidding lies in the definition of a treaty as provided by the
VCLOT, and as has been incorporated into Philippine Law.
In the case of Bayan,18 the issue submitted before the court
concerned the constitutionality of the Visiting Forces Agreement (VFA).

DEPARTMENT OF JUSTICE Opinion No. 46 series of 2007 dated July 26, 2007.
Vienna Convention on the Law of Treaties, May 23 1969, 1155 U.N.T.S. 331. Entered into force Jan.
27, 1980.
18 Bayan v. Exec. Sec., G.R. No. 138570, 342 SCRA 449, Oct. 10, 2000.
16
17

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The express language of the 1987 constitution provides that upon expiration
of the US-Philippine Bases Agreement, no foreign troops or bases shall be
allowed in the territory of the country unless pursuant to a treaty duly
recognized by the contracting parties as such. The drafting history of this
provision will show that what the provision intended to avoid was the
anomaly under the 1954 bases agreement wherein the Philippine Senate
alone gave its concurrence to the Treaty while its US counterpart did not.
Petitioners impugned the constitutionality of the VFA since the US Senate
again failed to give its concurrence to the same.
In determining whether the concurrence of the US Senate was
required, the Supreme Court justices first had to address the nature of the
VFA itself. To begin with, the constitution provides that foreign troops
would only be allowed in the Philippines pursuant to a treaty duly
recognized by the other contracting party as such.
In ruling the VFA, was such a treaty, the court cited verbatim the
definition of a Treaty under the VCLOT:
[A]n international agreement concluded between States in written
form and governed by international law, whether embodied in a
single instrument or in two or more related instruments and whatever
its particular designation.19

As a matter of jurisprudence, Bayan is therefore valid authority for

saying that the exact same definition of a treaty as defined in the VCLOT is
incorporated into Philippine law:
A treaty, as defined by the Vienna Convention on the Law of
Treaties, is an international instrument concluded between States in
written form and governed by international law, whether embodied
in a single instrument or in two or more related instruments, and
whatever its particular designation. There are many other terms used
for a treaty or international agreement, some of which are: act,
protocol, agreement, compromis d arbitrage, concordat, convention,
declaration, exchange of notes, pact, statute, charter and modus
vivendi. All writers, from Hugo Grotius onward, have pointed out
that the names or titles of international agreements included under
the general term treaty have little or no legal significance. Certain
terms are useful, but they furnish little more than mere description.

19

See note 17.

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1053

Article 2(2) of the Vienna Convention provides that the provisions of

paragraph 1 regarding the use of terms in the present Convention are
without prejudice to the use of those terms, or to the meanings which
may be given to them in the internal law of the State.
Thus, in international law, there is no difference between treaties and
executive agreements in their binding effect upon states concerned,
as long as the negotiating functionaries have remained within their
powers. International law continues to make no distinction between
treaties and executive agreements: they are equally binding
obligations upon nations.20 (citations omitted)

The next, and probably more important issue is: whether all
procurements done through a treaty, international agreement or an executive
agreement are wholly exempt from the coverage of R.A. 9184.
Here, it would be instructive to look at the legislative intent of the
framers of the law and a case recently decided by the Philippine Supreme
Court, which ironically, was filed by the law's principal author, Rep. Plaridel
Abaya of the third district of Cavite.21
During the Bicameral Conference deliberation of R.A. 9184, it
became apparent that the only exclusions from R.A. 9184 were Official
Development Assistance (ODAs) or projects that the government would
not have to pay for:
REP. ABAYA. Mr. Chairman, can we just propose additional
amendments? Can we go back to Section 4, Mr. Chairman?
THE CHAIRMAN (SEN. ANGARA). Section? Section ano, Del, 4?
Definition ? definition of terms.
REP. ABAYA. Sa House bill, it is sa scope and application.
THE CHAIRMAN (SEN. ANGARA). Okay.
REP. ABAYA. It should read as follows: "This Act shall apply to the
procurement of goods, supplies and materials, infrastructure projects
and consulting services regardless of funding source whether local or
foreign by the government."
THE CHAIRMAN (SEN. ANGARA). Okay, accepted. We accept.
The Senate accepts it.

20
21

See note 18.

Abaya v. Ebdane, G.R. No. 167919, 515 SCRA 720, Feb. 14, 2007.

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xxx
THE CHAIRMAN (SEN ANGARA). Just take note of that ano.
Medyo nga problematic 'yan eh. Now, just for the record Del, can
you repeat again the justification for including foreign funded
contracts within the scope para malinaw because the World Bank
daw might raise some objection to it.
REP. ABAYA. Well, Mr. Chairman, we should include foreign
funded projects kasi these are the big projects. To give an example, if
you allow bids above government estimate, let's say take the case of
500 million project, included in that 500 million is the 20 percent
profit. If you allow them to bid above government estimate, they will
add another say 28 percent of (sic) 30 percent, 30 percent of 500
million is another 150 million. Ito, this is a rich source of graft
money, aregluhan na lang, 150 million, five contractors will gather,
"O eto 20 million, 20 million, 20 million." So, it is rigged. Yun ang
practice na nangyayari. If we eliminate that, if we have a ceiling then,
it will not be very tempting kasi walang extra money na pwedeng
ibigay sa ibang contractor. So this promote (sic) collusion among
bidders, of course, with the cooperation of irresponsible officials of
some agencies. So we should have a ceiling to include foreign funded
projects.

In his Petition later before the Supreme Court, Rep. Abaya

correlated this with the second sentence of Section 4 of R.A. 9184 arguing
that this was the import of the phrase: regardless of source of funding,
whether local or foreign, that is, to emphasize that all procurements,
regardless of source of funding, should comply with the provisions of the
said law.
This22 was a situation wherein the principal author of the law wanted
to seek judicial confirmation of the legislative intent in order to invalidate
contracts that did not comply with mandatory provisions of the
procurement law. Almost immediately upon the effectivity of R.A. 9184,
Rep. Abaya, guided by his desire to see a level playing field between local
and foreign contractors particularly on the so-called maximum price ceiling
provision of the law, sought to declare a Japanese-funded project, the
Catanduanes Circumferential Road as null and void because the proponent
in that project submitted a bid over and above the maximum price ceiling as
provided by R.A. 9184 quoted below:

22

Id.

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Section 31. Ceiling for Bid Prices. - The ABC23 shall be the upper limit or
ceiling for the Bid prices. Bid prices that exceed this ceiling shall be
disqualified outright from further participating in the bidding. There
shall be no lower limit to the amount of the award.

This ceiling is a maximum price computation determined by the

project proponent on how much an infrastructure project should cost. And
since the computation already includes a healthy provision for a 30% return
on investment for the project contractor, the law disqualified all bids above
the price ceiling for the project in an effort to limit graft and corruption.
Rep. Abaya arbitrarily chose the object of his test case (Abaya, later
on). Simply put, the Catanduanes Circumferential Road Project was chosen
not only because it was one project where the foreign contractor exceeded
the maximum price ceiling but also because it was the only such project that
the Congressman had records of.
The choice of the project proved fatal for Rep. Abaya. While he was
certain that the court would declare the project as null and void for failure to
comply with section 31 of the very same law that he authored, the Court
ruled that he chose the wrong project because he chose one that was bid out
and awarded to its contractor prior to the effectivity of R.A. 9184. And
because the law applicable was still an E.O. promulgated by then President
Corazon Aquino that did not require foreign contractors to comply with the
maximum price ceiling provision, the ruling was that the Petition was
dismissed because R.A. 9184 was not yet the applicable law:
R.A. 9184 cannot be applied retroactively to govern the procurement
process relative to the CP I project because it is well settled that a law
or regulation has no retroactive application unless it expressly
provides for retroactivity. Indeed, Article 4 of the Civil Code is clear
on the matter: "[l]aws shall have no retroactive effect, unless the
contrary is provided." In the absence of such categorical provision,
R.A. 9184 will not be applied retroactively to the CP I project whose
procurement process commenced even before the said law took
effect.

23 Section 5. Definition of Terms.- For purposes of this Act, the following terms or words and phrases
shall mean or be understood as follows:
(a) Approved Budget for the Contract (ABC) - refers to the budget for the contract duly
approved by the Head of the Procuring Entity, as provided for in the General Appropriations Act
and/or continuing appropriations, in the National Government Agencies; the Corporate Budget
for the contract approved by the governing Boards, pursuant to E.O.No.518, series of 1979, in the
case of Government Financial Institutions and State Universities and Colleges; and the Budget for
the contract approved by the respective Sanggunian, in the case of Local Government Units.

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That the legislators did not intend RA 9184 to have retroactive effect
could be gleaned from the IRR-A formulated by the Joint
Congressional Oversight Committee (composed of the Chairman of
the Senate Committee on Constitutional Amendments and Revision
of Laws, and two members thereof appointed by the Senate
President and the Chairman of the House Committee on
Appropriations, and two members thereof appointed by the Speaker
of the House of Representatives) and the Government Procurement
Policy Board (GPPB). Section 77 of the IRR-A states, thus:
SEC. 77. Transitory Clause
In all procurement activities, if the advertisement or invitation for
bids was issued prior to the effectivity of the Act, the provisions of
E.O. 40 and its IRR, P.D. 1594 and its IRR, R.A. 7160 and its IRR,
or other applicable laws, as the case may be, shall govern.
In cases where the advertisements or invitations for bids were issued
after the effectivity of the Act but before the effectivity of this IRRA, procuring entities may continue adopting the procurement
procedures, rules and regulations provided in E.O. 40 and its IRR,
P.D. 1594 and its IRR, R.A. 7160 and its IRR, or other applicable
laws, as the case may be.
In other words, under IRR-A, if the advertisement of the invitation
for bids was issued prior to the effectivity of R.A. 9184, such as in
the case of the CP I project, the provisions of E.O. 40 and its IRR,
and P.D. 1594 and its IRR in the case of national government
agencies, and R.A. 7160 and its IRR in the case of local government
units, shall govern.
Admittedly, IRR-A covers only fully domestically-funded
procurement activities from procurement planning up to contract
implementation and that it is expressly stated that IRR-B for foreignfunded procurement activities shall be subject of a subsequent
issuance. Nonetheless, there is no reason why the policy behind
Section 77 of IRR-A cannot be applied to foreign-funded
procurement projects like the CP I project. Stated differently, the
policy on the prospective or non-retroactive application of R.A. 9184
with respect to domestically-funded procurement projects cannot be
any different with respect to foreign-funded procurement projects
like the CP I project. It would be incongruous, even absurd, to
provide for the prospective application of R.A. 9184 with respect to
domestically-funded procurement projects and, on the other hand, as
urged by the petitioners, apply R.A. 9184 retroactively with respect to
foreign- funded procurement projects. To be sure, the lawmakers
could not have intended such an absurdity.

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Thus, in the light of Section 1 of E.O. 40, Section 77 of IRR-A, as

well as the fundamental rule embodied in Article 4 of the Civil Code
on prospectivity of laws, the Court holds that the procurement
process for the implementation of the CP I project is governed by
E.O. 40 and its IRR, not R.A. 9184.24 (citations omitted)

By way of obiter dictum, the Court though ruled that assuming the
law to already be the applicable law, still the circumferential road project was
included in an exchange of note signed by the Philippine government and
the Japanese government identifying the projects to be financed by the
Japanese funding agency, the JBIC:
Significantly, an exchange of notes is considered a form of an
executive agreement, which becomes binding through executive
action without the need of a vote by the Senate or Congress. The
following disquisition by Francis B. Sayre, former United States High
Commissioner to the Philippines, entitled "The Constitutionality of
Trade Agreement Acts," quoted in Commissioner of Customs v.
Eastern Sea Trading, is apropos:
Agreements concluded by the President which fall short of treaties
are commonly referred to as executive agreements and are no less
common in our scheme of government than are the more formal
instruments, treaties and conventions. They sometimes take the form
of exchange of notes and at other times that of more formal
documents denominated "agreements" or "protocols". The point
where ordinary correspondence between this and other governments
ends and agreements, whether denominated executive agreements or
exchange of notes or otherwise begin, may sometimes be difficult of
ready ascertainment. It would be useless to undertake to discuss here
the large variety of executive agreements as such, concluded from
time to time. Hundreds of executive agreements, other than those
entered into under the trade-agreements act, have been negotiated
with foreign governments.
xxx
The Exchange of Notes dated December 27, 1999, stated, inter alia,
that the Government of Japan would extend loans to the Philippines
with a view to promoting its economic stabilization and development
efforts; Loan I in the amount of Y79,8651,000,000 would be
extended by the JBIC to the Philippine Government to implement
the projects in the List A (including the Arterial Road Links
Development Project - Phase IV); and that such loan (Loan I) would
be used to cover payments to be made by the Philippine executing

24

See note 21.

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agencies to suppliers, contractors and/or consultants of eligible

source countries under such contracts as may be entered into
between them for purchases of products and/or services required for
the implementation of the projects enumerated in the List A.
With respect to the procurement of the goods and services for the
projects, it bears reiterating that as stipulated:
3. The Government of the Republic of the Philippines will ensure
that the products and/or services mentioned in sub-paragraph (1) of
paragraph 3 of Part I and sub-paragraph (1) of paragraph 4 of Part II
are procured in accordance with the guidelines for procurement of
the Bank, which set forth, inter alia, the procedures of international
tendering to be followed except where such procedures are
inapplicable or inappropriate.
The JBIC Procurements Guidelines, as quoted earlier, forbids any
procedure under which bids above or below a predetermined bid
value assessment are automatically disqualified. Succinctly put, it
absolutely prohibits the imposition of ceilings on bids.
Under the fundamental principle of international law of pacta sunt
servanda, which is, in fact, embodied in Section 4 of R.A. 9184 as it
provides that "[a]ny treaty or international or executive agreement
affecting the subject matter of this Act to which the Philippine
government is a signatory shall be observed," the DPWH, as the
executing agency of the projects financed by Loan Agreement No.
PH-P204, rightfully awarded the contract for the implementation of
civil works for the CP I project to private respondent China Road &
Bridge Corporation.25 (citations omitted)

While the Court could have further clarified its construction of the
penultimate sentence of section 4 of R.A. 9184, there was, unfortunately, no
categorical statement that only treaties already in existence at the time of the
effectivity of the law could be excluded from the coverage of R.A. 9184.
Shortly after the Abaya decision (Abaya) was promulgated, but
before it could become final and executory26, the Court had an occasion to
already cite it as a legal precedent. This was in the case of Department of Budget
Id.
Petitioners Abaya et.al. received the Notice of Judgment on March 3, 2007. Under the provisions of
Philippines Rules of Court, a Motion for Reconsideration can be filed with 15 days from receipt of notice;
afterwards the judgment becomes final and executory. A Motion for Reconsideration was within the 15 day
period on 22 March 2007 and a Notice denying the Motion for Reconsideration was received on 21
September 2007. The Supreme Court Entry of Judgment states that the decision became final and executory
on 25 September 2007. Law and Jurisprudence dictates that only Supreme Court decisions that have become
final and executory can be sighted as the correct interpretation of a legal matter.
25
26

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1059

and Management (DBM) et. al vs. Kolonwel Trading et. al.27 This case involved an
annual World Bank-funded loan of around 500 Million pesos intended to
buy textbooks for grade school and high school students. While the issue
there was the legality of a Notice of Award made by the Inter-Agency
Bidding and Awards Committee that awarded the 2006 textbook contract to
Vibal Publishing despite an earlier Resolution disqualifying the said
proponent for conflict of interest,28 the Supreme Court nonetheless
included as one of the issues for resolution which, as between the World
Bank Guidelines on international Competitive Bidding and the Government
Procurement Reform Act (R.A. 9184) has primacy in the conduct,
performance and implementation of bidding procedures for foreign-funded
procurement projects.29 While the Respondent thereat argued that no such
conflict exists since a conflict of interest is prohibited by both R.A. 9184
and World Bank Guidelines,30 the Court nonetheless held:
Under the fundamental international law principle of pacta sunt
servanda, which is in fact embodied in the afore-quoted Section 4 of
R.A. No. 9184, the RP, as borrower, bound itself to perform in good
faith its duties and obligation under Loan No. 7118- PH. Applying
this postulate in the concrete to this case, the IABAC was legally
obliged to comply with, or accord primacy to, the WB Guidelines on
the conduct and implementation of the bidding/procurement
process in question.31

How a non-state entity such as the World Bank could become a

party to a treaty is open to question32. What appears even more perplexing is
how the Court applied the doctrine of Abaya which at the time of its
promulgation, was not even final and executory, but worse, was applied
apparently under a wrong context:

27 Dept of Budget and Management Procurement Service (DBM-PS) v. Kolonwel Trading, G.R. No.
175608, 524 SCRA 591, Jun. 8, 2007.
28 Defined under Section 65 of Rep. Act No. 9186 as: "When a bidder maliciously submits different Bids
through two or more persons, corporations, partnerships or any other business entity in which he has interest
to create the appearance of competition that does not in fact exist so as to be adjudged as the winning bidder.
29 See note 27, Resolution dated Feb. 6, 2007, G.R. No. 175608.
30 See note 27, Respondents Memorandum, April 20, 2007, G.R. No. 175608, at 45. See Part 1 of World
Bank Guidelines and Appendix 3 of World Bank Guidelines providing that the implementation of World
Bank funded projects are lodged with the member country and not the Bank available at
http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement-May-2004.pdf.
31 See note 27, at 14
32 The Vienna Convention on Diplomatic Relations Between States and International Organizations
drafted by the International Law Commission sought to vest International Organizations treaty making
powers. The said convention has not come into effect because only 25 states have thus far ratified it. The
Convention specifies that at least 40 states must ratify before it could come into effect. For a text of the treaty,
see http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_2_1986.pdf.

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The question as to whether or not foreign loan agreements with

international financial institutions, such as Loan No. 7118-PH,
partake of an executive or international agreement within the purview
of the Section 4 of R.A. No. 9184, has been answered by the Court in
the affirmative in Abaya, supra. Significantly, Abaya declared that the
RP-JBIC loan agreement was to be of governing application over the
CP I project and that the JBIC Procurement Guidelines, as stipulated
in the loan agreement, shall primarily govern the procurement of
goods necessary to implement the main project.33

The criticism being made is that while the Court in DBM, purportedly
citing Abaya ruled that loan agreements are in the nature of Executive
agreements, Abaya itself is clear that what made the Catanduanes
Circumferential Road Project part of an Executive Agreement was the Exchange
of Notes entered into by the Philippine Government with the Japanese
Ambassador identifying the projects to be financed by the JBIC that included
the said project. Loan agreements, standing alone, at least pursuant to the
doctrine in Abaya, could not qualify as executive agreements.
It was this context of the Abaya ruling that the executive would cite
as a justification for the non-bidding of the NBN ZTE contract.34 The
public furor that ensued at the height of the Senate investigation of the
NBN-ZTE contract obviously led to President Arroyos order canceling the
project. But this was not after she herself admitted that she knew of the
alleged bribery the night before she signed the said deal.35 It was during her
trip to the Boao Forum for Asia last April 2007 that she witnessed the
signing of five economic agreements with China that included Northrail, the
CyberEd, and the NBN-ZTE contract.36
Through its express declarations and contemporaneous acts, the
Executive has now taken the position that Abaya has given prospective
application to Section 4 of R.A. 9184 and will hence be the legal basis to
exclude any and all procurements through treaties, international agreements

Id.
See note 16; See also Action for Economic Reforms, A REVIEW OF THE NATIONAL BROADBAND
NETWORK -ZTE SUPPLY CONTRACT
Policy paper dated Oct. 19, 2007 available at
http://www.aer.ph/pdf/papers/NBNSupplyContract_review.pdf, Senate Hearing dated Sep. 20, 2007,
Transcript
available
at
http://images.gmanews.tv/pdf/nbnzte/senate%20transcripts/ZTE_Senate_Transcript--09202007.pdf
and
Riza Olchondra & Gil Cabacungan Jr., Nature of NBN deal debated in Senate, PHIL. DAILY INQUIRER, Sep. 21,
2007, available at http://newsinfo.inquirer.net/inquirerheadlines/nation/view_article.php?article_id=89815.
35 Dave Cagahastian, GMA denies condoning bribery in NBN-ZTE deal, MANILA BULLETIN, February 24,
2008 available at http://www.articlearchives.com/law-legal-system/evidence-witnesses/163221-1.html.
36
So
much
investments,
so
little
time
for
PGMA
in
China,
available
at
http://www.ops.gov.ph/boaoforum2007/news3.htm.
33
34

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and executive agreements entered into by the government. 37 This is

erroneous given the language of section 4, that only agreements that the
country IS a party to are covered, and the fact that had Congress intended
the same to have prospective application, then it should have used words to
that effect. Furthermore, this construction also runs contrary to the express
coverage of the law to include any and all forms of procurement, by all
branches, instrumentalities of government, including local government units
and GOCCs and regardless of source of funding.
The later Suplico Petition impugning the validity of the NBN-ZTE
contract also on the ground of lack of public bidding could have been the
opportunity for the court to further clarify its construction of section 4. 38 In
this case, Vice-Governor Suplico, while successful in procuring a Temporary
Restraining Order which temporarily enjoined the government from
implementing the NBN-ZTE project during the course of the Senate
investigation, lost the case on the merit on the ground that the controversy
has become moot and academic because the government has communicated
to the Court its resolve to permanently shelve the project. The Court
decided in this manner:
When President Gloria Macapagal-Arroyo, acting in her official
capacity during the meeting held on October 2, 2007 in China,
informed Chinas President Hu Jintao that the Philippine
Government had decided not to continue with the ZTE-National
Broadband Network (ZTE-NBN) Project due to several reasons and
constraints, there is no doubt that all the other principal prayers in
the three petitions (to annul, set aside, and enjoin the implementation
of the ZTE-NBN Project) had also become moot.
Contrary to petitioners contentions that these declarations made by
officials belonging to the executive branch on the Philippine
Governments decision not to continue with the ZTE-NBN Project
are self-serving, hence, inadmissible, the Court has no alternative but
to take judicial notice of this official act of the President of the
Philippines.
Section 1, Rule 129 of the Rules of Court provides:
SECTION 1. Judicial Notice, when mandatory. A court shall take
judicial notice, without introduction of evidence, of the existence and
37 September 20, 2007 Senate Hearing Testimonies of DOTC Secretary Leandro Mendoza, DOTC
Asssistant Secretary Lorenzo Formoso III, Department of Justice Chief State Counsel Paras, Transcript
available at http://images.gmanews.tv/pdf/nbnzte/senate%20transcripts/ZTE_Senate_Transcript--09202007.pdf.
38 Suplico v. Natl Econ. Devt Authority, G.R. No. 178830, Jul. 14, 2008, available at
http://sc.judiciary.gov.ph/jurisprudence/2008/july2008/178830.htm.

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territorial extent of states, their political history, forms of government

and symbols of nationality, the law of nations, the admiralty and
maritime courts of the world and their seals, the political constitution
and history of the Philippines, the official acts of the legislative,
executive and judicial departments of the Philippines, the laws of
nature, the measure of time, and the geographical divisions.
(Emphasis supplied)
Under the rules, it is mandatory and the Court has no alternative but
to take judicial notice of the official acts of the President of the
Philippines, who heads the executive branch of our government. It is
further provided in the above-quoted rule that the court shall take
judicial notice of the foregoing facts without introduction of
evidence. Since we consider the act of cancellation by President
Macapagal-Arroyo of the proposed ZTE-NBN Project during the
meeting of October 2, 2007 with the Chinese President in China as
an official act of the executive department, the Court must take
judicial notice of such official act without need of evidence.

In his dissenting opinion, Justice Antonio Carpio voted to rule on

the merits on the ground that any contract entered into without complying
with the mandatory provisions of law should be declared null and void.
Apparently, he was of the opinion that Section 4 only covers existing treaties
at the time R.A. 9184 took effect and not those entered into after the
effectivity of the law. Justice Carpio elucidated the point in this manner:
The Government Procurement Reform Act requires public bidding
in all procurement of infrastructure, goods and services. Section 10,
Article IV of the Government Procurement Reform Act provides:
Section 10. Competitive Bidding All procurement shall be done through
Competitive Bidding, except as provided for in Article XVI of this
Act. (Emphasis supplied)
In addition, Section 4 of the Government Procurement Reform Act
provides that the Act applies to government procurement regardless
of source of funds, whether local or foreign. Hence, the
requirement of public bidding applies to foreign-funded contracts
like the ZTE Supply Contract.
Respondents admit that there was no public bidding for the ZTE
Supply Contract. Respondents do not claim that the ZTE Supply
Contract falls under any of the exceptions to public bidding in Article
XVI of the Government Procurement Reform Act. Instead, private
respondent ZTE Corporation claims that the ZTE Supply Contract,
being part of an executive agreement, is exempt from public bidding
under the last sentence of Section 4 of the Government Procurement
Reform Act. Thus, private respondent ZTE Corporation argues:

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xxx
Section 4 of R.A. 9184 itself expressly provides that executive
agreements that deal on subject matters covered by said law shall be
observed. Hence, the requirement of competitive bidding under
section 10 of the law is not applicable. Section 4 of R.A. 9184
provides:
Section 4. Scope and Application. - This Act shall apply to the
procurement of Infrastructure Projects, Goods and Consulting
Services, regardless of source of funds, whether local or foreign, by
all branches and instrumentalities of government, its departments,
offices and agencies, including government-owned and/or controlled corporations and local government units, subject to the
provisions of Commonwealth Act No. 138. Any treaty or
international or executive agreement affecting the subject matter of
this Act to which the Philippine government is a signatory shall be
observed.
xxx
There is no provision in the Executive Agreement that requires the
conduct of competitive public bidding before the award of the NBN
Project, or any project envisioned in the RP-China MNOU for that
matter. The subsequent exchange of notes between China and the
Philippines clearly shows that ZTE was chosen as the contractor for
the NBN Project. This was formalized through the DTI-ZTE MOU
and the ZTE Supply Contract. (Boldfacing and underlining in the
original)
Private respondent ZTE Corporations argument will hold water if an
executive agreement can amend the mandatory statutory requirement
of public bidding in the Government Procurement Reform Act. In
short, the issue turns on the novel question of whether an executive
agreement can amend or repeal a prior law. The obvious answer is
that an executive agreement cannot amend or repeal a prior law.
Admittedly, an executive agreement has the force and effect of law,
just like implementing rules of executive agencies. However, just like
implementing rules of executive agencies, executive agreements
cannot amend or repeal prior laws but must comply with the laws
they implement. Only a treaty, upon ratification by the Senate,
acquires the status of a municipal law. Thus, a treaty may amend or
repeal a prior law and vice-versa. Hence, a treaty may change state
policy embodied in a prior law.
In sharp contrast, an executive agreement, being an exclusive act of
the Executive branch, does not have the status of a municipal law.
Acting alone, the Executive has no law-making power. While the

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Executive does possess rule-making power, such power must be

exercised consistent with the law it seeks to implement.
Consequently, an executive agreement cannot amend or repeal a
prior law. An executive agreement must comply with state policy
embodied in existing municipal law. This Court has declared:
International agreements involving political issues or changes of
national policy and those involving international arrangements of a
permanent character usually take the form of treaties. But
international agreements embodying adjustments of detail carrying
out well-established national policies and traditions and those
involving arrangements of a more or less temporary nature usually
take the form of executive agreements. (Emphasis supplied)
Executive agreements are intended to carry out well-established
national policies, and these are found in statutes.
In the United States, from where we adopted the concept of
executive agreements, the prevailing view is that executive
agreements cannot alter existing law but must conform with all
statutory requirements. The U.S. State Department has explained the
distinction between treaties and executive agreements in this manner:
x x x it may be desirable to point out here the well-recognized
distinction between an executive agreement and a treaty. In brief, it
is that the former cannot alter the existing law and must conform to
all statutory enactments, whereas a treaty, if ratified by and with the
advice and consent of two-thirds of the Senate, as required by the
Constitution, itself becomes the supreme law of the land and takes
precedence over any prior statutory enactments. (Emphasis
supplied)
As Professor Erwin Chemerinsksy states, So long as the (U.S.)
president is not violating another constitutional provision or a federal
statute, there seems little basis for challenging the constitutionality of
an executive agreement. In the United States, while an executive
agreement cannot alter a federal law, an executive agreement prevails
over state law.
Likewise, Professor Laurence H. Tribe states that an executive
agreement cannot override a prior act of Congress even as it prevails
over state law. Thus:
x x x Although it seems clear that an unratified executive agreement,
unlike a treaty, cannot override a prior act of Congress, executive
agreements, even without Senate ratification, have the same weight as
formal treaties in their effect upon conflicting state laws.

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Professor Tribe cited United States v. Gary W. Capps, Inc., where the
Court of Appeals (4th Circuit) ruled that an unratified executive
agreement could not prevail over a conflicting federal law. The U.S.
Supreme Court affirmed the appellate courts decision but on nonconstitutional grounds.
Clearly, an executive agreement must comply with well-established
state policies, and these state policies are laid down in statutes. The
Government Procurement Reform Act has laid down a categorical
state policy All procurement shall be done through Competitive
Bidding, subject only to narrowly defined exceptions that
respondents do not invoke here. Consequently, the executive
agreement between China and the Philippines cannot exempt the
ZTE Supply Contract from the state policy of public bidding.
Private respondent ZTE Corporation further claims that the ZTE
Supply Contract is part of the executive agreement between China
and the Philippines. This is plain error. An executive agreement is
an agreement between governments. The Executive branch has
defined an international agreement, which includes an executive
agreement, to refer to a contract or an understanding entered into
between the Philippines and another government.
That the Chinese Government handpicked the ZTE Corporation to
supply the goods and services to the Philippine Government does
not make the ZTE Supply Contract an executive agreement. ZTE
Corporation is not a government or even a government agency
performing governmental or developmental functions like the
Export-Import Bank of China or the Japan Bank for International
Cooperation, or a multilateral lending agency organized by
governments like the World Bank. ZTE Corporation is a business
enterprise performing purely commercial functions. ZTE
Corporation is publicly listed in the Hong Kong and Shenzhen stock
exchanges, with individual and juridical stockholders that receive
dividends from the corporation.
Moreover, an executive agreement is governed by international law.
However, the ZTE Supply Contract expressly provides that it shall be
governed by Philippine law. Thus, the ZTE Supply Contract is not an
executive agreement but simply a commercial contract, which must
comply with public bidding as mandated by the governing law, which
is Philippine law.
Finally, respondents seek refuge in the second sentence of Section 4
of the Government Procurement Reform Act:
Section 4. Scope and Application - This Act shall apply to the
Procurement of Infrastructure Projects, Goods and Consulting
Services, regardless of the source of funds, whether local or foreign,

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by all branches of the government, its departments, offices and

agencies,
including
government-owned
and/or-controlled
corporations and local government units, subject to the provisions of
Commonwealth Act No. 138. Any treaty or international or
executive agreement affecting the subject matter of this Act to which
the Philippine government is a signatory shall be observed.
(Emphasis supplied)
Respondents argue that the second sentence of Section 4 allows an
executive agreement to override the mandatory public bidding in
Section 10 of the Government Procurement Reform Act.
Respondents argument is flawed. First, an executive agreement,
being an exclusive act of the Executive branch, cannot amend or
repeal a mandatory provision of law requiring public bidding in
government procurement contracts. To construe otherwise the
second sentence of Section 4 would constitute an undue delegation
of legislative powers to the President, making such sentence
unconstitutional. There are no standards prescribed in the
Government Procurement Reform Act that would guide the
President in exercising such alleged delegated legislative power.
Thus, the second sentence of Section 4 cannot be construed to
delegate to the President the legislative power to amend or repeal
mandatory requirements in the Government Procurement Reform
Act.
Second, under Section 10 of the Government Procurement Reform
Act, the only exceptions to mandatory public bidding are those
specified in Article XVI of the Act. These specified exceptions do
not include purchases from foreign suppliers handpicked by foreign
governments, or from suppliers owned or controlled by foreign
governments.
Moreover, Section 4 of the Government
Procurement Reform Act mandates that the Act shall apply to the
Procurement of Infrastructure Projects, Goods and Consulting
Services, regardless of source of funds, whether local or foreign x x
x.
Third, the second sentence of Section 4 should be read in
conjunction with Section 4 of the Foreign Borrowings Act, which
provides:
Section 4. In the contracting of any loan, credit or indebtedness
under this Act, the President of the Philippines may, when necessary,
agree to waive or modify the application of any law granting
preferences or imposing restrictions on international competitive
bidding, including among others, Act Numbered Four Thousand
Two Hundred Thirty-Nine, Commonwealth Act Numbered One
Hundred Thirty-Eight, the provisions of Commonwealth Act
Numbered Five Hundred Forty-One, insofar as such provisions do

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not pertain to constructions primarily for national defense or security
purposes, Republic Act Numbered Five Thousand One Hundred
Eighty-Three: Provided, however, That as far as practicable,
utilization of the services of qualified domestic firms in the
prosecution of projects financed under this Act shall be encouraged:
Provided, further, That in case where international competitive
bidding shall be conducted preference of at least fifteen per centum
shall be granted in favor of articles, materials, or supplies of the
growth, production or manufacture of the Philippines: Provided,
finally, That the method and procedure in the comparison of bids
shall be the subject of agreement between the Philippine
Government and the lending institution. (Emphasis supplied)
Likewise, Section 4 of the Government Procurement Reform Act
should be read in conjunction with Section 11-A of the Official
Development Assistance Act of 1996:
Section 11-A. In the contracting of any loan, credit or indebtedness
under this Act or any law, the President of the Philippines may, when
necessary, agree to waive or modify the application of any provision
of law granting preferences in connection with, or imposing
restrictions on, the procurement of goods or services: Provided,
however, That as far as practicable, utilization of the services of
qualified Filipino citizens or corporations or associations owned by
such citizens in the prosecution of projects financed under this Act
shall be prepared on the basis of the standards set for a particular
project: Provided, further, That the matter of preference in favor of
articles, materials, or supplies of the growth, production or
manufacture of the Philippines, including the method or procedure in
the comparison of bids for purposes therefor, shall be the subject of
agreement between the Philippine Government and the lending
institution. (Emphasis supplied)
Consequently, as construed together, the executive agreements
mentioned in the second sentence of Section 4 of the Government
Procurement Reform Act should refer to executive agreements on (1)
the waiver or modification of preferences to local goods or domestic
suppliers; (2) the waiver or modification of restrictions on
international competitive bidding; and (3) the method or procedure
in the comparison of bids.
The executive agreements cannot refer to the waiver of public
bidding for two reasons. First, the law only allows the President to
waive or modify, the application of any law x x x imposing
restrictions on international competitive bidding. The law does not
authorize the President to waive entirely public bidding but only the
restrictions on public bidding. Thus, the President may restrict the
public bidding to suppliers domiciled in the country of the creditor.
This is the usual modification on restrictions imposed by creditor

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countries. Second, when the law speaks of executive agreements on

the method or procedure in the comparison of bids, the obvious
assumption is there will be competitive bidding. Third, there is no
provision of law allowing waiver of public bidding outside of the
well-defined exceptions in Article XVI of the Government
Procurement Reform Act.
Respondents, while not raising this argument, cannot also rely on
Section 1 of the Foreign Borrowings Act, which provides:
Section 1. The President of the Philippines is hereby authorized, in
behalf of the Republic of the Philippines, to contract such loans,
credits, including supplier's credit, deferred payment arrangements, or
indebtedness as may be necessary and upon terms and conditions as
may be agreed upon, not inconsistent with this Act, with
Governments of foreign countries with whom the Philippines has
diplomatic or trade relations or which are members of the United
Nations, their agencies, instrumentalities or financial institutions or
with reputable international organizations or non-governmental
national or international lending institutions or firms extending
supplier's credit deferred payment arrangements x x x . (Emphasis
supplied)
A solitary Department of Justice opinion has ventured that the
phrase as may be necessary and upon terms and conditions as may
be agreed upon serves as statutory basis for the President to exempt
foreign-funded government procurement contracts from public
bidding. This is a mistake. This phrase means that the President has
discretion to decide the terms and conditions of the loan, such as the
rate of interest, the maturity period, amortization amounts, and
similar matters. This phrase does not delegate to the President the
legislative power to amend or repeal mandatory provisions of law like
compulsory public bidding of government procurement contracts.
Otherwise, this phrase would constitute undue delegation of
legislative power since there are no standards that would guide the
President in exercising this alleged delegated legislative power.
What governs the waiver or modification of restrictions on public
bidding is Section 4-A of the Foreign Borrowings Act, which
authorizes the President to, when necessary, agree to modify the
application of any law x x x imposing restrictions on international
competitive bidding. Section 4 is the specific provision of the
Foreign Borrowings Act that deals with the Presidents authority to
waive or modify restrictions on public bidding. Section 1 of the Act
does not deal with the requirement of public bidding. Besides, if
Section 1 is construed as granting the President full authority to
waive or limit public bidding, Section 4 becomes a superfluous
provision.

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In any event, whatever doubt may have existed before has been
erased by the enactment in 2003 of the Government Procurement
Reform Act, which reformed the laws regulating government
procurement. The following provisions of the Act clearly prescribe
the rule that government procurement contracts shall be subject to
mandatory public bidding:
Section 3. Governing Principles on Government Procurement. - All
procurement of the national government, its departments, bureaus,
offices and agencies, including state universities and colleges,
government-owned and/or -controlled corporations, government
financial institutions and local government units shall, in all cases, be
governed by these principles:
(a) Transparency in the procurement process x x x.
(b) Competitiveness by extending equal opportunity to enable private
contracting parties who are eligible and qualified to participate in
public bidding.
x x x.
Section 4. Scope and Application. - This Act shall apply to the
Procurement of Infrastructure Projects, Goods and Consulting
Services, regardless of source of funds, whether local or foreign, by
all branches and instrumentalities of government, its departments,
offices and agencies, including government-owned and/or controlled
corporations and local government units, x x x.
Section 10. Competitive Bidding. - All procurement shall be done
through Competitive Bidding, except as provided for in Article XVI
of this Act. (Emphasis supplied)
The only exceptions to mandatory public bidding are procurements
falling under any of the narrowly defined situations in Article XVI of
the Act, which respondents do not invoke.
Foreign-funded projects of the government are not exempt from
public bidding despite executive agreements entered into by the
Philippines with creditor countries or lending institutions. In Abaya
v. Ebdane, Jr., the Court cited Memorandum Circular No. 104 dated
21 August 1989 issued by the President:
x x x it is hereby clarified that foreign-assisted infrastructure projects
may be exempted from the application of the pertinent provisions of
the Implementing Rules and Regulations (IRR) of Presidential
Decree (P.D.) No. 1594 relative to the method and procedure in the
comparison of bids, which may be the subject of agreement between
the infrastructure agency concerned and the lending institution. It
should be made clear however that public bidding is still required and

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can only be waived pursuant to existing laws. (Italicization in the

original of the Memorandum Circular; boldfacing supplied)
Executive agreements with lending institutions have never been
understood to allow exemptions from public bidding. What the
executive agreements can modify are the methods or procedures in
the comparison of bids, such as the adoption of the competitive
bidding procedures or guidelines of the Japan Bank for International
Cooperation or the World Bank on the method or procedure in the
evaluation or comparison of bids. It is self-evident that these
procedures or guidelines require public bidding.
Even so-called tied loans from creditor countries cannot justify
exemption from public bidding although the bidders may be limited
to suppliers domiciled in the creditor countries. Such a geographic
restriction on the domicile of suppliers can be the subject of an
executive agreement as a modification of restrictions on international
competitive bidding. A publication issued by public respondent
National Economic and Development Authority summarizes the
international practice on tied loans with respect to public bidding:
The conditions imposed by the donor on the recipient with respect
to ODA utilization provide another basis for differentiating ODA.
In particular, restriction of the geographic areas where procurement
of goods and services are eligible for ODA funding make ODA
loan/grant tied or untied with respect to source of procurement.
Usually, bilateral ODA is tied to the donor country in terms of
procurement. While competitive bidding is still practiced, qualified
bidders for the supply of goods and services are confined to those
firms which are owned or controlled by nationals of the donor
country. x x x (Emphasis supplied)
Even for tied loans, the international practice still requires public
bidding although the public bidding is restricted only among
suppliers that are nationals of the creditor country. In the present
case, there was no such public bidding because the Export-Import
Bank of China simply handpicked ZTE Corporation as the supplier
of the goods and services to the Philippine Government.
That the funding for the ZTE Supply Contract will come from a
foreign loan does not negate the rationale for public bidding.
Filipino taxpayers will still pay for the loan with interest. The need to
safeguard public interest against anomalies exists in all government
procurement contracts, regardless of the source of funding. Public
bidding is the most effective means to prevent anomalies in the
award of government contracts. Public bidding promotes
transparency and honesty in the expenditure of public funds. Public
bidding is accepted as the best means of securing the most
advantageous price for the government, whether in procuring

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1071

infrastructure, goods or services, or in disposing off government

assets.
Even in a Build-Operate-Transfer project where the proponent
provides all the capital with no government guarantee on project
loans, the law requires public bidding in the form of a Swiss
challenge. With more reason should a project financed by a tied loan
to the government be subject to public bidding. There is no sound
reason why the Philippine government should allow its foreign
creditor in an already tied loan to handpick the supplier of goods and
services.
A tied loan, driven by a handpicked supplier, violates the principle of
fair and open process in government procurement transactions.
Such a tied loan, which arbitrarily reserves a contract to a predetermined supplier, will likely lead to anomalies. This is contrary to
the state policies enunciated in Sections 27 and 28, Article II of the
Constitution:
Section 27. The State shall maintain honesty and integrity in the
public service and take positive and effective measures against graft
and corruption.
Section 28. Subject to reasonable conditions prescribed by law, the
State adopts and implements a policy of full public disclosure of all
its transactions involving public interest.39

There is still a pending case where the Court could finally clarify this
A challenge against the legality of the Northrail contract is
currently pending before the Regional Trial Court of Makati. Immediately
upon its filing, CNMEG, the designated Chinese contractor, filed a motion
to dismiss41 on the ground that the contract is an executive agreement and as
such, immune from suits before Philippine courts. The Regional Trial Court
ruled that the contracts comprising the Northrail project were not treaties
on two grounds 1) they are governed by domestic laws; and 2) the States
did not treat them as treaties. The Regional Trial Court states:
matter.40

It is significant to note that in all these Agreements, the principal

parties are Northrail and CNMEG without any specific reference or
mention of the Peoples Republic of China and the Republic of the

39
See note 38, Dissenting Opinion of Justice Antonio Carpio, available at
http://sc.judiciary.gov.ph/jurisprudence/2008/july2008/178830-carpio.htm.
40 See China National Machinery and Equipment Corp. v. Hon. Cesar Santamaria Presiding Judge
Regional Trial Court Branch 145 Makati City et.al., CA-G.R. SP NO. 103551, Sep. 30, 2008.
41 See Roque Jr., v. Office of the Exec. Sec., Civil Case No. 06-203 docketed at Regional Trial Court
Branch 145 Makati City. Omnibus Order dated May 15, 2007.

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Philippines as parties in the said Agreement. On this point, it is more

preponderant that these Agreements cannot be validly and effectively
classified as an Executive Agreement to place it beyond the ambit of
suability. As they are not directly concluded between the two
Sovereign States. Additionally, the claim that CNMEG is an agent of
the Peoples Republic of China cannot likewise be given due course in
the absence of Certification from the Department of Foreign Affairs
of the Government to the effect that the said defendant is entitled to
immunity being a bonafide agent of the Sovereign State in
accordance with the cites case of Holy See vs. Rosario Jr., 282 SCRA
524, 531,532.

Anent the claim of immunity from suit, the court ruled that since
the building of a railway is proprietary in nature, CNMEG cannot be in the
discharge of a sovereign function and is therefore not immune from local
jurisdiction:
As earlier stated, it is not the public purpose which is determinative
of the particular act of the sovereign but the nature and character of
its activity. Again, an examination of these Memoranda of
Understanding referred to above will readily disclose that the
Transactions between Northrail and CNMEG are business and
commercial activities between the two of them as explicitly shown by
the terms and conditions of Agreements, particularly the
Memorandum of Understanding of 30 August 2003, which states that
the Import-Export Bank of China will make available to the
Philippines a loan in the amount of P400,000,000.00 payable within
the period of twenty (20) years inclusive of the five-year grace period,
with the rate of interest of three (3%) percent per annum.
Similarly, the succeeding Agreement between Northrail and CNMEG
relative to the Implementation of the Project (Section 1, page 1,
Caloocan-Malolos) provides for the imposition of financing charges
compounded monthly, on the amount unpaid during the period of
delay, upon Northrail at the rate of five (5%) percent annually. These
are all irrefragable indicia of business or commercial transaction
between the two corporate entities.
Corollarily, contrary to the contention of the defendant CNMEG is
not in pursuit of a sovereign activity or an incident thereof, thus, an
act jure gestiones. This illation is buttressed by the fact that the
transaction in question was definitely concluded by CNMEG for gain
or profit as shown by their explicit terms and conditions particularly
as regards to the payment of the loan with interest and financing
charges compounded at that.

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CNMEG has since filed a Petition for Certiorari with the Court of
Appeals on the same issues.42 Using similar reasoning, the Court of Appeals
also dismissed the case, adding that the matter of immunity from local
jurisdiction should have been certified to by the Department of Foreign
Affairs. The Court of Appeals stated:
The manner of securing such executive endorsement varies in this
country. But the bottomline is, it must come from the DFA which is
the proper government agency with administrative competence to
perform the task associated with diplomacy and foreign relations.
In Holy See vs. Rosario, the DFA discussed the varied ways on how
said endorsement was done citing several cases, thus: In International
Catholic Migration Commission v. Calleja, the Secretary of Foreign Affairs
just sent a letter directly to the Secretary of Labor and Employment,
informing the latter that the respondent-employer could not be sued
because it enjoyed diplomatic immunity. In World Health Organization
v. Aquino, the Secretary of Foreign Affairs sent the trial court a
telegram to that effect. In Baer v. Tizon, the U.S. Embassy asked the
Secretary of Foreign Affairs to request the Solicitor General to make,
in behalf of the Commander of the United States Naval Base at
Olongapo City, Zambales, a "suggestion" to respondent Judge. The
Solicitor General embodied the "suggestion" in a Manifestation and
Memorandum as amicus curiae.
Executive Order No. 292, otherwise known as the Administrative
Code of 1987 and Executive Order No. 459 provide that all treaties
and executive agreements shall be negotiated by the DFA.
The authority and competence of the DFA regarding this matter was
even recognized by Commercial Counselor Yu Shizhong of the
Economic and Commercial Office of the Embassy of the Peoples
Republic of China in his certification when it stated that Any and all
matters which the Philippino (sic) would like to raise to the mandated
Prime Contractor must be brought to the attention of our
Government through the Department of Foreign Affairs of the
Republic of the Philippines so that proper discussions can be made
between the two governments at the appropriate diplomatic levels.
In Holy See, the Supreme Court went further to state that in cases
where foreign states bypass the Foreign Office, the courts can inquire
into the facts and make their own determination as to the nature of
the acts and transactions involved. Petitioner CNMECs assertion
that its status as an agent of PROC was already recognized by the
other department/branches of the executive which is of co-equal

42

See note 40.

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rank of the DFA is of no moment since other offices do not have the
competence to do the work involving diplomatic and foreign
relations. This matter should be coursed through the DFA and not
with any other branches of the executive department.

The subsequent motion for reconsideration filed by CNMEG was

also dismissed for having utter lack of merit. CNMEG has since filed a
Motion for an Extension of Time to File Petition for review with the
Supreme Court.
With the Northrail controversy now pending in the Supreme Court,
it is hoped that it will result in the Court making a definitive ruling on the
construction of Section 4 of R.A. 9184, particularly on the issue of whether
or not it applies to all treaties, executive agreements or international
agreements entered into by the Philippine Government relative to its
procurement requirements, or whether it should be limited to those already
existing at the time R.A. 9184 took effect. This is of paramount importance
given the Executives propensity to insist on its prospective application,
constituting yet another ground for deviating from the mandatory provision
of law requiring public bidding in all government procurement.
This clarification is especially necessary because the DBM ruling,
citing the Abaya case, unequivocally stated that loan agreements are
executive agreements and hence beyond the coverage of RA 9184. Unless
clarifications are made on these issues, controversies such as those attendant
to the NBN-ZTE and the Northrail contracts will hound the Philippines
and will continue to be a source of political discord in the country.
In any event, the Court in resolving the Northrail controversy is
bound to uphold existing policies provided in R.A. 9184 itself. These
policies include:
Section 3.Governing Principles on Government Procurement.
(a) Transparency in the procurement process and in the
implementation of procurement contracts.
(b) Competitiveness by extending equal opportunity to enable private
contracting parties who are eligible and qualified to participate in
public bidding.
(c) Streamlined procurement process that will uniformly apply to all
government procurement. The procurement process shall simple and
made adaptable to advances in modern technology in order to ensure
an effective and efficient method.

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(d) System of accountability where both the public officials directly or

indirectly involved in the procurement process as well as in the
implementation of procurement contracts and the private parties that
deal with government are, when warranted by circumstances,
investigated and held liable for their actions relative thereto.
(e) Public monitoring of the procurement process and the
implementation of awarded contracts with the end in view of
guaranteeing that these contracts are awarded pursuant to the
provisions of this Act and its implementing rules and regulations, and
that all these contracts are performed strictly according to
specifications.

Stated differently, if the Court were to uphold the Executives

construction of R.A. 9184, how would doing away with open and
competitive biddings promote established legislative policies of
transparency, competitiveness and accountability in government
procurement?
Meanwhile, with China in possession of no less than 20 trillion yuan
in Gross Domestic Product as of 200743 and as much as $1.2 trillion foreign
reserves-backed foreign assets in 200744, the question remains: if China will
insist on its current policy of designating project contractors to its tied loans,
should we continue to avail of these Chinese tied loans amidst these legal
uncertainties? Are there alternatives? And in the event there are none, which
should we prevail: Chinese conditionalities or Philippine laws? Answers
should be found soon for China continues to utilize its surplus capital in
pursuit of its soft power. 45
CONCLUSION
Developing countries like the Philippines face an acute dilemma:
while it is undeniable that capital is needed to finance infrastructure- and
capital-intensive projects, there is an equally important need to create
mechanisms that will ensure transparency and accountability in government

43
Peoples Daily Online, China's GDP tops 20 trillion yuan last year, available at
http://english.peopledaily.com.cn/200701/14/eng20070114_341079.html.
44 Clay Chandler, China's $1.2 trillion cash hoard, FORTUNE MAGAZINE, May 3, 2007 available at
http://money.cnn.com/magazines/fortune/fortune_archive/2007/05/14/100024842/index.htm.
45 JOSHUA KURLANTZICK, CHARM OFFENSIVE: HOW CHINA'S SOFT POWER IS TRANSFORMING THE
WORLD 6 (2007). Kurlantzick defines soft power from the Chinese perspective as "soft power means anything
outside of the military and security realm, including not only popular culture and public diplomacy but also
more coercive economic and diplomatic levers like aid and investment and participation in multilateral
organizations-Nyes carrots and sticks."

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procurement contracts. This dilemma is compounded by the fact that with

todays economic downturn, even developed countries like the United States
are looking to China as a source of financing and investment. Given China's
insistence in designating contractors as a loan condition, should developing
countries bite the bullet?
The Philippine experience is instructive. For while the Philippine
President sought to justify these Chinese-funded projects on the basis of
economics and feasibility, the Filipino people spoke out against it.
Ultimately, the President had no recourse but to heed the popular sentiment
and cancel at least one of these projects. This was political brilliance.
Otherwise, entering into a grossly disadvantageous Chinese tied loan
could have given the public yet another reason to resort to people power,
a peaceful uprising that has in the past been used by the Filipino people as a
statement against the government.

-o0o-