On the matter of the PEACe Bonds

We belong to civil society in whose name the Caucus of Development NGO Networks (CODE-NGO) made P1.4 billion through the flotation by the Arroyo government of the so-called PEACe Bonds or Poverty Eradication and Alleviation Certificates. We issue this statement to CODE-NGO, to the rest of our colleagues and co-organizations in civil society, the financial community, the Arroyo government, and to the general public, on the matter of the PEACe Bonds.

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

We believe that CODE-NGO, like the rest of civil society, aims to do only what is best for the country. The purpose of this statement is not to cast any aspersions on the motives of CODE-NGO in relation to the PEACe Bonds. To aspire to help the poor is laudable. But should this end justify the means? After a thorough review we find that rules were bent, influence was used, so that an endowment of P1.3 billion and a commission of P140 million would go to CODE-NGO.

CODE-NGO acted as the secretariat of Kompil II, the umbrella organization through which many civil society groups, including ours, called for the removal, impeachment and ouster of then President Joseph Estrada. Three months into office, CODE-NGO approached the Arroyo government seeking this endowment. Surely the motive was to alleviate poverty, not to be rewarded for its role in the downfall of the Estrada presidency. But the manner in which the endowment was transacted smacks of a sweetheart deal.

Consider the following:

• First, CODE-NGO lobbied hard with the Arroyo government to sweeten the bond with tax exemptions and eligibilities.
• Second, it then tried to ensure its targeted P1.0 billion profit by keeping the deal all to itself in a negotiated sale.
• Third, when that was not possible, it, together with government authorities, played the information game: It made sure that the timing and process of disclosure would favor the most prepared_CODE-NGO who had worked on the deal longer than anyone else, who was intimately familiar with the details, and whose bank was prepared way ahead of its rivals.
• Fourth, it kept the sweetest eligibility to itself -- the security/statutory deposit eligibility and asset admissibility for insurance companies and sought its approval only after it had won the auction in its entirety.
• Fifth, it purchased the bonds with money it did not have and sold it to investors affiliated with the very bank that underwrote the deal, namely, the Rizal Commercial Banking Corporation (RCBC). For this it earned a staggering amount of P1.8 billion in gross profits. CODE-NGO then distributed its windfall, paying its financial advisers and RCBC at least P400 million in fees.
• Finally, it kept 10% of the P1.4 billion, roughly P140 million, for itself, then set up the Peace, Equity, and Access for Community Empowerment Foundation (Peace and Equity Foundation) with a permanent endowment of roughly P1.3 billion.

• Even if the negotiated acquisition of the PEACe bonds did not push through -- the bonds were eventually auctioned on October 16, 2001, CODE-NGO’s intent was clear. This was to get the Arroyo government to float a bond with all its sweeteners so that CODE-NGO could profit by at least a billion pesos. In other words, to float a bond at the behest of CODE-NGO and at the risk of the National Treasury entering into a questionable deal.
• The National Treasurer questioned the negotiated acquisition and the tax exemption. His memo to Finance Secretary Jose Camacho (July 12, 2001) warned about the danger of violating the anti-graft law. Nonetheless the deal was officially accommodated. (See sections entitled "Edeza Questions Tax Exemption" and "What CODE-NGO Needed to Obtain P1.4 Billion" on pages 1-2 and 4, respectively, of the Annex.)
• Secretary Camacho’s self-imposed inhibition was doubtful. There were policy decisions, not just ministerial functions, that needed to be settled and could only be settled by the Finance Secretary himself—or, in his absence, the President. The National Treasurer still addressed his concerns regarding the bonds to Secretary Camacho who by this time had inhibited himself for more than a month. Secretary Camacho should have objected to the deal, including the auction. (See pages 1-2 of the Annex.)
• The Treasury should have rejected the bids because the gap between the purchase price and ultimate market value was too wide. Instead of using a 14.14 percent interest rate as the benchmark, the Treasury should have aimed for an amount that was closer to 9 percent—the going yield of financial assets that are eligible to be used as bank reserves mandated by the BSP. (See section entitled "The Profit" on pages 5-6 of the Annex.)
• Claimed interest savings by government are only part of the story, and a miniscule part at that. The complete profit story will show that RCBC did not act out of altruism. Also, that CODE-NGO's P1.4 billion was never RCBC’s to take. (See section entitled "Earnings from Margin: Incredible!" on pages 5-6 of Annex.)
• Claimed interest savings by government are actually less than the foregone tax. Government was put at a disadvantage. (See section entitled "Crouching Profits, Hidden Losses?" on page 6 of Annex.)
• The yearly amount that the Peace and Equity Foundation intends to earmark for poverty alleviation, P100 million, is far less than the P2.5 billion that the National Government has to pay in interest each year for the next 10 years. Taxpayers -- the poor among them -- are disadvantaged. (See page 7 of Annex.)
• This deal casts serious doubts about the integrity of the Treasury market, the banking system, the government, and the credibility of civil society.

The Problem is Systemic

The PEACe Bonds controversy goes beyond CODE-NGO. It exposes the weaknesses of Philippine socioeconomic and political life:

He who holds the gold makes the rules: There was a failed attempt at a negotiated deal. An auction proceeded despite the risk of foul play through improper disclosure and manual bidding. Benefits and added features to the instrument were granted even after the auction was made. There were doubtful inhibitions of key participants related by blood; a hushed quality to the deal before and after the auction; an unfortunate selection of institutions affiliated with CODE-NGO as the foundation’s first beneficiaries. All these fuel speculations that this was a deal that would get done despite the rules.

For the funds of it: The PEACe Bonds deal is complex; the financial tedium that accompanies it is not normal fare for most NGOs. This is perhaps why, during fora that promoted the Peace and Equity Foundation, most of the participants were more concerned with how they could avail of funds than how the endowment was obtained in the first place. Although the funds are accessible to all, not all will be able to secure funding. And how to select projects and beneficiaries will rest entirely with the board of the Foundation. We must guard against the opportunity for patronage.

Weather weather lang yan: If the deal had been transacted by an interest group such as a political party, especially one that had helped steer a president into office, we would surely have objected to it. And if that political party were to hand out the first grants/loans to its own NGOs, we would have accused those politicians of serving their own interests. We believe that civil society should not only be different, but better. What credibility would civil society then have to rail against the BW Resources scandal (1999) or any other, for that matter, if civil society were itself to loosen the standards?

Dancing with the devil: If a thorough investigation confirms our initial findings, the PEACe Bonds controversy may even surpass the BW Resources scandal (1999) and the Bancap scam (1994) in eroding the confidence and integrity of the Philippine capital markets. Those scandals were perpetrated by private individuals who manipulated the capital markets for private gain with only the tacit approval or regulatory leniency of government institutions. This scandal is much worse. It involved the active participation and approval of authorities in high echelons of government who 1) determined the features and eligibilities that would affect the marketability of the bonds; and 2) controlled the timing and process of disclosure as well as the auction itself. And to think this happened in the market for government securities—the cornerstone of any fledgling or developed financial system.

Credibility can only be restored by undertaking serious reforms now.

Our Calls

• We need a thorough and impartial investigation of this deal. We call on all in civil society and the banking community to welcome such an investigation and cooperate with it.
• We need an Anti-Crony Capitalism Bill, including mechanisms that ensure open economic opportunities based on impartial systems and procedures that ensure transparency and public accountability.
• We strongly caution political opportunists against exploiting this issue to gain political leverage for themselves or secure concessions. The Freedom from Debt Coalition (FDC) is not prepared to align itself with such political interests.
• We also call for a thorough review of policies such as rulings of the BIR, BSP/Monetary Board, SEC, Insurance Commission and other agencies with regulatory or quasi-regulatory powers, which tend to facilitate sweetheart deals. Both government and non-government organizations should take part in this review.
• The Senate and Lower House Committee on Banks, Currency and Financial Institutions is morally obliged to examine the hazardous manner of conducting government securities auctions. The government securities market is the financial bastion of any economy.
• Moreover, the PEACe Bonds issue is material and relevant to Secretary Camacho’s confirmation. It puts to question more than just his technical competence; his ethics must be considered. Mr. Camacho does not deserve to be confirmed as finance secretary.
• Lastly, we invite all in civil society to examine ourselves and learn from our own weaknesses. It is the only way forward.

See annexes:

Annex 1: Anatomy of the PEACe Bonds Controversy
Annex 2: PEACe Bonds: A Chronology