Following is the position paper presented by Ricardo B. Reyes, national president of the Freedom from Debt Coalition, during the re-opening of the public hearing on the PEACe Bonds conducted by the House Committee on Good Governance and Public Accountability on 06 December 2011 at the Conference Room Nos. 7 & 8, Ramon Mitra Building, House of Representatives, Quezon City.

Ten years ago,  when the PEACe bonds were issued, the Freedom from Debt Coalition (FDC) was among the first to oppose these bonds, raising  governance, financial and ethical issues that ran counter to public interest.  Now, after the Filipino people through the Government have just paid a gigantic sum of PhP35 billion (PhP25 billion in interest payments plus the principal of PhP10 billion), we believe that the issues FDC raised have remained unresolved.

Today, we reaffirm our position on the PEACe Bonds.


While floating of Treasury bonds is a regular financing scheme of the government, this particular transaction is an exceptional case—it was conducted primarily to favor a particular party. The grant of exemptions and eligibilities was fast-tracked, and tax rules were curbed precisely to favor CODE-NGO/RCBC.

It should be stressed that Code NGO earned PhP1.8B from zero money. Their role, as they themselves admit, was to get all the perks and special features of the bond, for which the banking community through RCBC was prepared to pay them a big commission.

While RCBC/RCBC-Capital had the capital to purchase the bonds, CODE-NGO had the necessary connections in government and political capital to make the transactions possible. Without CODE-NGO, not only will RCBC/RCBC-Capital not win the auction, the PEACe bonds deal, with all its sweeteners, might not have even been possible.

What is this political capital of CODE-NGO that we refer to?

CODE-NGO acted as the secretariat of Kompil II that spearheaded the Erap Resign Movement and became a major participant in EDSA II, which eventually led to the ouster of President Joseph Estrada and catapulted Gloria Macapagal-Arroyo to the presidency. Three months into office, CODE-NGO approached the Arroyo government seeking this endowment.

Moreover, then-CODE-NGO Chairperson Marissa Camacho-Reyes is the sister of then-DOF Secretary Jose Isidro Camacho whose department conducted the auction and awarded the bonds. His self-imposed inhibition was doubtful. There were policy questions, not just ministerial functions, like the tax treatment of the bonds, that needed to be settled and could only be settled by the Finance Secretary himself— or in his absence, the President. In fact, the National Treasurer still addressed his concerns regarding the bonds to Secretary Camacho.

What were the manifestations of this rent-seeking activity?

CODE-NGO tried to ensure its targeted PhP1 billion profit by keeping the deal all to itself in a negotiated sale. Government agencies and officials welcomed and entertained the issuance of the PEACe bonds with appropriate features and eligibilities leading to an attempted exclusive sale or negotiated deal.

When that was not possible, the ensuing bidding revealed features that would favor the most prepared. CODE-NGO had worked on the deal longer than anyone else was intimately familiar with the details, and RCBC, CODE-NGO’s partner bank for this deal, was prepared way ahead of its rivals. There are indications that the bidding process itself may be simulated than real.

In its 09 October memo to the GSEDs, the Treasury announced that it would use manual bidding rather than electronic bidding at the 16 October auction. The reason for the manual bid, according to the Treasury and RCBC, was that the software cannot handle zero-coupons. But in its 12 October memo to the GSEDs the Treasury indicated that the formula to be used in the manual bid was that of a bond with semi-annual payments (two coupons) rather than zero payments. If so then the software could have handled that formula, and the bidding could have been done electronically.

The real reason for the manual bid was the 19-lender limit, without which there would be no basis for the tax exemption. Unlike an electronic auction where there is no possibility of knowing before cut-off time what rival bidders are bidding, the manual bidding process of the Treasury leaves room for leakage that could influence the outcome of the results.

According to Ms. Camacho-Reyes, the dealers were instructed to fax their bids to two separate numbers. The fax machines, according to the Treasury, were located in the room of the Treasury’s Securities Origination Division. This room was adjacent to the Auction Room. Staff of this division would receive these bids as they come in and encode them into the computer. The bids were faxed over a period of time (from 10 AM to 12 NN) and they were open for staff of the SOD to see. When all the bids come in and when all were finally encoded, this is when the bids were flashed onto the screen in the Auction Room, minus the names of the bidders. But during the bidding time and until the cutoff time for the bids, it was highly possible for information to be leaked that could determine who would win the auction.

The Treasury reported having received 45 bids from 15 GSEDs. CODE-NGO and RCBC would not readily admit it, but they won the entire auction. If the auction were a ‘level playing field’ where GSEDs have the same competencies and access to the same information, the chances of RCBC winning all its four bids is 24 in 3,575,880 (0.0007 percent). Despite such odds RCBC won all its four bids. This means that RCBC operated on either a tremendous advantage, or on a dire need far greater than its competitors, or both.

Moreover, the auction may not have been competitive. If it were, the other financial institutions would not have been willing to pay more than the acquisition price of RCBC. However, soon after the October 16 auction the banks who took part in the auction were willing to buy the bonds from RCBC capital. This means that they were willing to buy them at a price higher than RCBC’s acquisition price.

To explain this, either one of these assertions is true: that there could have been collusion among the buyers; or that the other bidders were not well-apprised about the properties of the bond, thus there was an information asymmetry between RCBC/CODE-NGO and the rest of the bidders. If one of this is true, there is a clear loss for the government since at that time the banks could have given the treasury more proceeds from the auction.

Tax loss

There is another loss which was not readily visible then but we have long warned the government about. Today, this is the subject of the case pending before the Supreme Court—the 20% final withholding tax. A possible loss of PhP4.86 billion for the government in supposed tax revenues looms.

BIR Commissioner Rene Bañez erred in granting the PEACe bonds exemption from the 20% final withholding tax in his May 31 BIR Ruling No. 020-2001. Proof of this error is the BIR’s subsequent ruling (BIR Ruling No. 007-2004, affirmed by BIR Ruling No. 491-2004, BIR Ruling No. 008-2005, BIR Ruling No. 370-2011 and BIR Ruling No. 378-2011) overturning and correcting its 2001 ruling. It held the issuance of the government debt instruments and securities falls within the coverage of “deposit substitutes” irrespective of the number of lenders at the time of origination, interest income derived from such investment shall be subject to 20% final withholding tax.

At the very least, Secretary Camacho, by inhibition or by omission, failed to protect the interest of the government. Current DOF Secretary Cesar Purisima even said this deal would have not even reached first base under the current administration.

A strong proof of their partiality to giving a tax exemption is the 19-lender rule for the bidding. Since according to Bañez’s interpretation then of the Tax code, the 20% final withholding tax exemption could only be granted provided there are less than 20 lenders, DoF resorted to a manual auction so that the number of bidders would be regulated not to exceed 19. An electronic bidding process, which is the standard procedure, would not in any way cut off the number of bidders to 19.

This would make one wonder, why were they so keen in retaining the tax break? What was the compelling economic reason for the Arroyo government to give a tax break at a time when it had a serious fiscal deficit to overcome?

Because the BIR is not tasked with the economic analysis of policy, its opinion on these matters should have mattered less compared to a policy determination by the Secretary of Finance. It is at this juncture that the Secretary of Finance should have rendered his analysis and judgment as an economic manager rather than a plain and simple bureaucrat, and stopped the auction instead of merely inhibiting himself. His inhibition was costly because it led to a policy that benefitted CODE-NGO at great cost to the government.

What were the PEACe Bonds really for?

In the first place, what was the intention of the government in floating the ten-year zero-coupon bonds? Was it to simply execute its regular borrowing scheme, to really raise money for poverty alleviation projects, or primarily and only to bestow a financial favor upon a particular party?

Consider that while this type of bonds is not new to other countries, the PEACe bonds are one of the only three and the first of its kind floated by the Philippine government. Moreover, the proposal did not come originally from a government entity, rather the idea was conceptualized and lobbied for by private entities—CODE-NGO, CAPEX, Seed Capital Ventures, RCBC, and RCBC Capital.

On the first proposition, did the government need the money? More interestingly, did the government need the money that badly to justify the need for the sweeteners? The answer is no. There was already a regular borrowing program set for 2001, and the zeroes, which were proposed only on March 3 and endorsed on August 10, were not part of that program. Even without the zeroes, the government could raise the cash it needed.

Was it then intended for poverty-alleviation?

The name ‘PEACe Bonds’ (Poverty Eradication and Alleviation Certificate Bonds) was devised by CODE-NGO. It was adopted by the Monetary Board, the Treasury, the BIR, and the Insurance Commission, in their respective rulings/resolutions/decisions regarding the flotation. But it seems that the name can only have any meaning if it is CODE-NGO that can secure it.

For the Php10 billion proceeds of the bonds, they would go to the government’s general fund which would not necessarily fund the government’s anti-poverty programs. In fact, there were no particular poverty alleviation programs for which the proceeds were earmarked. It is only CODE-NGO which had the clear intention to use the profit it will raise for itself and its members’ anti-poverty projects. If the bonds had been issued as a negotiated deal between the government and CODE-NGO, the name PEACe Bonds would make some sense. But such was not possible.

So what happens when the award of the bonds had to be done through auction won by bidders other than the CODE-NGO/RCBC/RCBC Capital? CODE-NGO had to win to make the PEACe bonds PEACe bonds.

Moreover, consider also that among similarly situated groups, CODE-NGO had the privilege if not sole access to the auction. The Arroyo government failed to do a road show for the bonds similar to what the deposed Estrada government did when it offered small-denominated bonds. This point to one logical conclusion—this particular deal was not just intended to raise funds for private entities for their anti-poverty projects; this deal was intended specifically for CODE-NGO.


First, the timing and process of disclosure by the financial and regulatory players in this deal did little to level the information field among rival bidders vis-à-vis CODE-NGO/RCBC. This casts doubt on the government’s seriousness in understanding even enforcing reforms that will improve the integrity and credibility of the Philippine capital markets. The means, which is the development of honest-to-goodness market mechanisms that ensure a level playing field, is more important than the ends, which are zero-coupon bonds laden with sweeteners.

Second, the behest nature of the deal is yet another indication that the Philippine government is still very much a ‘soft’ state. Rules exist only to govern those outside the so-called ‘circle of power’. Those within that circle can bend, subvert, or openly break these rules to favor a select few.

The deal also shows that cronyism, which Marcos propagated and reinforced, has not died. Nor are civil society organizations immune to it.

Third, there is a clear moral hazard of incurring a debt that favors a particular organization, then passing on the burden of repaying that debt to a successor government. If the responsibility of facing the creditors will be borne by the next administration, then the current administration need not worry about how prudently it spends and how judiciously it collects revenues especially from those who will fund its re-election campaign. Nor does it have to worry about whatever concessions and collaborative efforts it could have possibly made towards the billion-peso profit of CODE-NGO. Last month, the government paid PhP 25 billion in interest payments aside from the PhP 10 billion principal.

Fourth, the Peace and Equity Foundation says the amount it will use every year to support poverty alleviation and poverty reduction is PhP100 million. This is minuscule in comparison to the amount the National Government had to set aside each year—at least PhP2.5 billion—for ten years as interest payment on these debt papers.

Sixth, unless steps are taken to prevent this, the temptation will be strong to use these funds in exchange for political favors, political patronage, and familiar forms of leverage.

And lastly, it shows that the Filipino’s greatest enemy is himself. For when he is thrust into a position of power and influence, he abandons the virtues he previously upheld and embraces the vices he so vociferously despised.


1. Freedom from Debt Coalition (FDC). Statement on the Matter of the PEACe Bonds;  PEACe Bonds: Unresolved, Ten Years On.
2. KAAKBAY. CODE-NGO’s PEACe Bonds: Right Intentions, Right Connections (A Case of Pluder, Graft and Corruption)
3. Action for Economic Reforms (AER). The CODE-NGO Peace Bonds: A Case of Impermissible Rent-Seeking.
4. Caucus of Development NGO Network (CODE-NGO). The PEACe Bonds: Frequently Asked Questions; The Peace Bonds: A Retrospective; Response to AER's Statement on the PEACe Bonds; Civil Society Works to Finance Fight Against Poverty.
5. Senate Committee on Finance. Documents and Minutes of Public Hearings on the PEACe Bonds, January 29, February 5 and 12, 2002.
6. Bureau of Internal Revenue. BIR Ruling No. 370-2011 dated October 7, 2011 and BIR Ruling No. 378-2011 dated October 17, 2011.
7. Philippine Daily Inquirer, Vera Files, Business World, Business World, ABS-CBN News, GMA News, TV5 InterAksyon, Philippine Star, Malaya, Today, Manila Standard & Manila Bulletin. Various News and Feature Articles on PEACe Bonds, January 2002-November 2011.

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