By Raissa Robles
[I’d like to share this investigative story I wrote for South China Morning Post in 2002, to help shed light on the Peace Bonds controversy. This is how they did it and why they did it.
And if you’re wondering why top banks and businessmen are now supporting the tax breaks given to the Peace Bonds issue, perhaps it’s because it’s not very well-known that the Philippine Business for Social Progress or PBSP now chaired by Manny Pangilinan and whose executive director is Rafael C. Lopa is actually part of CODE-NGO, which benefited from the Peace Bonds.
Were the bonds a good idea to raise money for anti-poverty projects? You be the judge.]
A dead cell phone starts the story of how a non-government organization (NGO) got its hands on over a billion pesos – and triggered a controversy that embroiled the Philippine President in yet another scandal.
When his mobile phone’s battery ran out one day in late February 2001, businessman Cesar Mayo ducked into a hotel to use a pay phone. On his way out, he bumped into a friend, Roberto Guevara, who wanted to know how to raise money fast to help out a childhood friend who was a veteran NGO worker.
From that chance meeting came the idea of a government bond float that was successfully concluded on October 16, 2001.
It enabled the Caucus of Development NGO Networks (CODE-NGO) to gross P1.8 billion – making it the wealthiest NGO in Philippine history.
To get an idea of CODE-NGO’s windfall, consider that the local branches of Deutsche Bank AG and The Chase Manhattan Bank grossed 1.5 billion pesos and 1.089 billion pesos, respectively in the year 2000.
Mayo was a designer of market instruments. His stint at the Federal Reserve Bank of Philadelphia, AIA Capital in Jakarta, Ayala Investments and Jardine Fleming Philippines, had sensitized him to the nuances of the market. To produce such a bond, he sketched out a process that needed the cooperation of key government officials and a private dealer of government securities.
It is that process which bothers critics of the bond float. They say that CODE-NGO took advantage of its connections to President Gloria Macapagal-Arroyo and Finance Secretary Jose Camacho.
The 11-year-old CODE-NGO itself is a respected network with an established track record. Steven Rood, country representative of the United States government-funded Asia Foundation, described it as “the largest network of networks in the Philippines”.
“Fly by night? Absolutely not,” Rood said. “You can see their attempts over the years to come up with a code of ethics and code of conduct for NGOs.”
Among CODE-NGO’s member networks is the Philippine Business for Social Progress (PBSP) whose members in turn are the Philippines’ to 100 corporations which contribute part of their profits to social development.
CODE-NGO has closely stuck to its vision of “social justice, an equitable distribution of wealth, power and access to resources in Philippine society”.
The bond float sprung from that vision. And so did its high-profile role in the 2001 military-backed people power revolt that replaced President Joseph Estrada with Vice-President Gloria Macapagal-Arroyo.
Arroyo appointed CODE-NGO’s previous chair Corazon “Dinky” Soliman to hold the social welfare portfolio. Soliman resigned from CODE-NGO and was replaced by Marissa Camacho-Reyes, who happened to be the finance secretary’s older sister.
Its hugely profitable transaction is now under scrutiny by the Senate finance committee after fellow NGOs slammed it for ”rent-seeking”, “profiteering” and “influence-peddling”.
But its national coordinator Danilo Songco insisted to me that they did everything legally and openly and never involved Secretary Camacho. He lamented the crab mentality:
If we succeeded, what we hoped would happen was, there would be bonds for agrarian reform, for housing, other NGOs could do the same thing.
It was not the first time the government had issued bonds for anti-poverty projects, but it was the first time the proceeds had gone, not to a government agency, but to a private entity.
Bond designer Mayo initially met the idea of a non-profit organization playing the capital market with “extreme skepticism”. But being the chairman and chief executive officer of Capital Advisors for Private Enterprises Expansion (Capex), he was intrigued by the request of Guevara of Seed Capital Ventures to help out Marissa Camacho-Reyes.
Foreign funding for NGOs had been slowly drying up in the last decade, not only locally but also worldwide, Rood said. Which was why, he said:
The Asia foundation and other foreign donors in the past several years have been encouraging civil society groups to diversify funding sources. We’ve been working on how we can raise money domestically and be less dependent on donors.
Still, he found the idea of an NGO tapping the capital markets rather unexpected and unusual.
Initially, Mayo designed a derivative instrument backed on a one-to-one correspondence by 10-year government Treasury Notes (TNs) to be bought from the secondary market. For marketing purposes, these derivatives, to be issued by CODE-NGO, would be called Peace Bonds – short for Poverty Eradication and Alleviation Certificates.
“We were going to purchase TNs at the prevailing market rate and enhance these,” he said.
The sweetener he sought was the Central Bank Monetary Board’s approval for such bonds to be eligible as bank reserves. “We ran into a brick wall. We were told there was no precedent for these eligibilities to be granted to instruments other than government issues.”
Mayo then decided that only government-issued zero coupon bonds would do. But first, Manila’s Bureau of Treasury had to be persuaded to make a maiden offering. National treasurer Sergio Edeza was open to the idea since he himself was considering zeroes.
Security dealers interviewed said the market had little appetite for securities maturing beyond five years. Buyers had to be coaxed into buying them with interest or coupon payments every six months.
Zero coupon bonds paid no interest at all but were sold at a deep discount from face value, which Government paid in full upon maturity.
Problem was, the government accounting method would have to book the entire issue all at once, thus distorting debt service payments. Luckily, this problem was quickly resolved: Commission on Audit Chairman Guillermo Carague was then putting in place a new accounting system that would book big lump sum payments – like those for zeroes – yearly, and accrue these in a bond sinking fund.
CODE-NGO wanted to net over one billion pesos
Because of this stipulation made by CODE-NGO, Mayo, a Math degree holder, calculated backwards. He estimated that given market rates for regular coupon bonds, the NGO would have to buy 35 billion pesos worth of zeroes.
It mattered little that it had little money. Mayo knew that Deutsche Bank-trained Jimmy Panganiban of Rizal Commercial Banking Corporation (RCBC) might be open to a back-to-back deal.
He said:
I happened to know he was on the lookout for zeroes” because for one, RCBC owned one of the country’s biggest insurers and leading pre-need group. These types of companies have a voracious appetite for long-dated instruments that they can back up against their endowment policies.
An accredited securities dealer, RCBC would act as CODE-NGO’s agent in buying the bonds from Treasury at a negotiated price, then turn over the bonds to CODE- NGO without demanding payment. CODE-NGO would promptly resell these to an RCBC subsidiary – RCBC Capital – which would pay quickly. Only then would CODE-NGO turn around and pay RCBC.
Mayo believed that for zeroes to be attractive, these had to be enhanced with certain features, for which CODE-NGO lobbied top government officials from March to September last year.
National Treasurer Edeza predicted firestorm over Peace Bonds
Internal Revenue Commissioner Rene Bañez agreed with CODE-NGO that an existing tax provision exempted zeroes from capital gains tax because these matured beyond five years and did not pay interest.
The Monetary Board agreed Peace Bonds dedicated to fighting poverty could be used as bank reserves. This coincided with the Central Bank’s anti-poverty thrust through micro-finance.
Despite such enhancements, Treasurer Edeza balked at a negotiated sale even if CODE-NGO had offered to buy at the Bloomberg wire agency quoted rate for 10-year notes on sale date.
“Mr Edeza”, Songco recalled, “insisted on an auction to be transparent and to discover the real price of zeroes.”
With keen foresight, Mr Edeza had warned them:
We will be attacked by media and Congress.
More bad news came suddenly – Energy Secretary Jose Camacho was handed the finance portfolio, creating a direct conflict of interest situation for him and his older sister, Marissa, then the CODE-NGO chairman.
An auction it had to be. “At this point we stood to lose everything even if we had done all the work, but we had no choice,” Songco said.
Edeza prepared the dealers for the maiden auction by explaining the enhanced zeroes to them a week before. He also decided on a Dutch auction, which meant he would set a uniform rate at which the issue could be sold and all those who bid at or below this rate would win.
With the finance secretary inhibiting himself from the issue, Edeza sought and got President Gloria Macapagal-Arroyo’s approval to issue P50 billion worth of 10-year enhanced zeroes.
On auction day, October 16, 2002, thousands of CODE-NGO members stormed the heavens with prayers.
“We were not at all that confident,” Mayo said.
About a week before the auction, Mayo and Guevara had closely watched the issuance of 10-year Treasury Notes , which they felt Edeza had used to benchmark the zeroes. Their yield to maturity came to 16.5% and the post-tax yield to 13.2%. Even if these paid semi-annual coupon rates, they felt the tax-exempt zeroes would be more attractive to banks because of their reserve eligibility. Which meant they would have to bid even lower than 13.2%
RCBC subdivided its bid for 35 billion pesos into four lots ranging from a low of 12.24% to a high of 12.75%. Another securities dealer offered 13% for the entire 50 billion pesos issue. Following the nature of Dutch auctions, the Treasury chose to award only 35 billion pesos to RCBC but at its highest bid of 12.75%.
How CODE-NGO got a cool P1.8 billion with no money down
That same afternoon, RCBC paid Treasury P10 billion and handed the same amount to CODE-NGO, which passed these on to RCBC Capital. A day or two later, CODE-NGO received P1.8 billion from RCBC Capital.
From out of the P1.8 billion, CODE-NGO then paid back the following:
- RCBC a 2% commission amounting to P239.9 million;
- Mayo was paid P59.98 million; and
- Guevara was paid PP39.59 million
Songco claimed:
Everybody made money except Marissa and myself.
CODE-NGO got P1.4B and turned this over to a foundation
As for the rest of the money amounting to some P1.4 billion pesos, CODE-NGO turned this over to the Peace and Equity Foundation, a separate entity it had created specifically to handle the money. It is chaired by a Jesuit priest and neither Marissa Camacho-Reyes nor Songco was ever an officer or trustee.
This foundation has reinvested most of the money in five-year and six-year Treasury Notes to serve as a permanent endowment fund “to fight against poverty”. Only interest earnings of P70 million to P100 million pesos yearly were to be used.
Various NGOs have submitted 103 proposals for funding, and 11 of these worth P16 million were approved.
The success of the Peace Bonds has raised much envy and questions on the morality of non-profit organizations making a lot of money.
The Estrada-led opposition has seized on this as a way to get back at President Gloria Macapagal-Arroyo.
But Steve Rood of Asia Foundation said:
At least two international entities concerned with philanthropy have expressed interest in studying this exercise to find out if it’s a good idea. It certainly has aroused interest, not just in the Philippines.
che marty says
thank you for this very informative piece. :)
raissa says
You’re welcome.
Mark Pere Madrona says
Miss Raissa, I just became a bigger fan of yours because of this very incisive piece. Aside from the extensive analysis of the paper trail, you also displayed an excellent knowledge of how billion-peso transactions are closed. Thank you so much for making this seemingly complicated issue more understandable for all of us.
I am just wondering po if this article provoked a thorough investigation about the matter. It must have been very frustrating for you to see that after working hard to expose a clear case of irregularity, nothing eventually happened to it.
raissa says
Salamat.
Tet Lorenz says
Thank you for the report. I am curious to know how and where the proceeds were and are being spent. The accomplishments and the socio-economic impact of their programs. Thanks.
raissa says
I’m curious, too.
David Carl Grimes says
The PEACe Bonds is not a matter of Filipino crab mentality. There are many aspects which are questionable which is why the transaction remains controversial ten years after.
First of all, it was the worst 10 year Treasury Bond Auction on record from 1998 to 2011. The yield-to-maturity (YTM) bid differential (from top winning bid to bottom losing bid) of 5.752% for the PEACe Bond auction was ten times the historic differential of 0.422% in YTMs for the 10 year Treasury Bond from 1998 to 2001. So what should have been a failed auction because of such widely disparate bids still pushed through. The wide differences in bids throughout the auction resulted in widely disparate values assigned by the bidders to the bonds. The bond values of the top winning bid was as much as 71% higher than the bond values of the bottom losing bid. This indicates that the bidders didn’t know exactly how to value the bonds or the other bidders colluded to give the auction to RCBC.
Second, RCBC (the GSED) purchased the bonds for CODE-NGO at a YTM of 12.75% then RCBC Capital purchased the bonds from CODE-NGO at a YTM of 11%, allowing CODE-NGO to make gross profits of PHP 1.827 billion with no money down.
Third, RCBC sold down 10% of the bonds to institutional investors at YTMs ranging from 8.17% to 9.37%, allowing RCBC to lock in gross trading profits of PHP 201.32 million to PHP 374.94 million, in addition to their underwriting commission of PHP 240 million. This transaction also established that institutional investors were willing to buy the bonds at much lower YTMs than the 12.75% YTM that Treasury received or the 11% YTM that RCBC Capital received on the PEACe Bonds. RCBC’s potential gross profits could be as much as PHP 3.749 billion or double CODE-NGOs.
In other words, had the Bureau of Treasury been able to sell the PEACe Bonds directly to the ultimate buyers, institutional investors, it could have gotten an additional PHP 5.75 billion in Treasury Bond proceeds.
For a more information, visit: http://systemisbroken.blogspot.com/2011/10/revisiting-peace-bonds.html
raissa says
Thanks for this.
The profits of RCBC from selling off the bonds are one angle that I didn’t tackle. I concentrated on the CODE-NGO angle.
Mel says
Was the PEACE bonds scheme a good idea to raise money for anti-poverty projects?
Yes err no. It depends on how you look and judge at the players that be.
For those not in the know, money is created by Central Banks out of thin air, sold back to gov’t with interest, in turn are loaned to ‘private sector’ banks for an interest.
This PEACE bonds are but some of the schemes practiced in the OECD countries to legitimize ‘ponzi’ schemes, albeit to put a legal color dressing for what is morally corrupt but businesslike.
Mac McCarty says
Thank you Raissa, for this detailed and insightful look into such a complex issue. I have been watching the Peace Bonds controversy carefully from several angles and while I object to “crab mentality” as a distinctly Filipino explanation, I do believe doing damage to anti-poverty programs—especially those that to some extent work—has become a characteristic of out-of-power political action in the era in which we live. Politicians seem more committed to seeing their opposition fail or appear to fail than in creating long term programs that improve people’s chances to escape poverty. That’s sad.
Rallie F. Cruz says
Mr. McCarty, your last two sentences about Politicians seem more committed to seeing their opposition fall or appear to fail than creating long term programs that improve people’s chances to escape poverty, has been so visibly true among our leaders including those we considered great. We have seen many government sponsored housing projects where every time there is a change of leadership each is not given continuity and another similar project will come out with the same aim and program. Look at the present condition of Diosdado Macapagal’s Tenement housing and Bliss Housing of the first Lady, Imelda Marcos, and many other projects that were left mothballed and decrepit. It is sad to see that money initially spent on those projects were only used as a channel to their hidden agenda of raking a huge amount for their pocket than how it should be spend on the projects and people who taught they benefited from it are now left with hardly a mean to make it truly enjoyable to live in.
oscar gomez says
Hi, Raissa. What a fine piece of reporting as always. Am working now with the Peace and Equity Foundation and in reply to the query on how our endowment fund has been utilized:
Since being established as a grant-making foundation 10 years ago, PEF has directed its assistance to provinces with the lowest incomes, the largest magnitude of poor residents, and the most inadequate basic services.
Out of the fund’s interest earnings, PEF has channeled P1.2 billion to date to 1,325 different socio-economic projects of NGOs, people’s organizations, faith-based groups and cooperatives. The projects range from potable water systems and renewable energy to livelihood and employment, relief assistance during calamities, social services, and microfinance. By our count, these projects have benefited at least 336,000 poor households. Nearly 40 percent of the assistance went to Mindanao thru renewable energy, farm aid, water, education and health services—some of the basic pre-requisites to peace in the region.
Our endowment fund, meanwhile, stood at about P1.8 billion as of last month (October 2011). Early this year, the PEF trustees adopted a new strategic focus of enabling rural households to earn better incomes, through social enterprise. As a social investor, we have always encouraged the rural NGOs we work with to become economically sustainable through their very own social enterprises. This does not mean the NGOs will abandon their original causes; they just need to ensure the continuity of their programs. About 80 percent of PEF assistance in the next five years will therefore go into promoting and seeding social enterprises.
raissa says
Hi Oca,
Wasn’t aware you were there. Thought you were still covering basketball.
Why don’t you send me a financial report?
Mel says
Hi, Raissa.
That will be good if Oca supplies you with a modest financial report to establish PROBITY regarding the Peace and Equity Foundation on how the endowment fund are being utilized.
GOOD LUCK. If it eventuates, can you share your analysis with your blog followers? THANKS.
Kudos to you – Raissa and David Carl Grimes for the PEACe debacle exposé.
May your tribe increase, and may MORE filipinos follow in your footsteps.
oscar gomez says
I no longer cover basketball, Raissa, but am still keeping score: PEACe Bonds critics/detractors slightly ahead, but the game’s still wide open :)
You may access PEF’s annual audited financial statements at the link below:
http://pef.ph/downloads2.php#other
Oca