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December 23, 1988

Excellency,

I have the honour to confirm the following understanding recently reached between the representatives of the Government of Japan and of the Government of the Republic of the Philippines concerning Japanese loans to be extended with a view to promoting the economic development and stabilization efforts of the Republic of the Philippines:

I

1. A project loan in Japanese yen up to the amount of thirty-six billion and sixty-one million yen (¥36,061,000,000) (hereinafter referred to as "the Project Loan") will be extended, in accordance with the relevant laws and regulations of Japan, to the Government of the Republic of the Philippines by the Overseas Economic Cooperation Fund (hereinafter referred to as "the Fund") to implement the projects enumerated in the Project List attached hereto (hereinafter referred to as "the Project List") according to the allocation for each project as specified in the Project List.

2. (1) The Project Loan will be made available by loan agreements to be concluded between the Government of the Republic of the Philippines and the Fund. The terms and conditions of the Project Loan as well as the procedures for its utilization will be governed by the said loan agreements which will contain, inter alia, the following principles:

(a) The repayment period will be twenty (20) years after the grace period of ten (10) years.

(b) The rate of interest will be two and seven-tenths per cent (2.7%) per annum.

(c) The disbursement period will be three (3) years with regard to the project mentioned in 9 of the Project List, four (4) years with regard to the project mentioned in 4 of the Project List, five (5) years with regard to the projects mentioned in 6, 7 and 8 of the Project List, six (6) years with regard to the projects mentioned in 1 and 2 of the Project List, seven (7) years with regard to the projects mentioned in 3 and 5 of the Project List from the date of coming into force of the relevant loan agreement

(2) Each of the loan agreements mentioned in sub-paragraph (1) above will be concluded after the Fund is satisfied of the feasibility of the projects to which such loan agreement relates.

3. (1) The Project Loan will be made available to cover payments to be made by the Philippine executing 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 Project List, provided that such purchases are made in such eligible source countries for products produced in and/or services supplied from those countries.

(2) The Project Loan will also be made available to cover payments already made by a Philippine executing agency to suppliers, contractors and/or consultants of eligible source countries, under such contracts as have been entered into between them for purchases of products and/or services required for the implementation of the project mentioned in 9 of the Project List, provided that such purchases are made in such eligible source countries for products produced in and/or services supplied from those countries.

(3) A part of the Project Loan may be used to cover eligible local currency requirements for the implementation of the projects enumerated in the Project List.

4. (1) The Government of the Republic of the Philippines will, upon request, furnish the Government of Japan with reports on the progress of the projects enumerated in the Project List.

(2) The two Governments will jointly review from time to time, on the basis of the reports mentioned in sub-paragraph (1) above, the progress of the implementation of the Project Loan and take, if necessary, appropriate measures to secure smooth and effective utilization of the Project Loan. The Fund will be invited to participate in such review.

5. Japanese nationals whose services may be required in the Philippines in connection with the supply of products and/or services to be provided under the contracts referred to in paragraph 3 will be accorded such facilities as may be necessary for their entry into the Republic of the Philippines and stay therein for the performance of their work.

II

1. A loan for a reform program for government corporations in Japanese yen up to the amount of twenty-five billion yen (¥25,000,000,000) (hereinafter referred to as "the Reform Program Loan") will be extended under the Financial Recycling Scheme, in accordance with the relevant laws and regulations of Japan, to the Government of the Republic of the Philippines by the Fund.

2. The Reform Program Loan will be made available by a loan agreement to be concluded between the Government of the Republic of the Philippines and the Fund. The terms and conditions of the Reform Program Loan as well as the procedures for its utilization will be governed by the said loan agreement which will contain, inter alia, the following principles:

(a) The repayment period will be eighteen (18) years after the grace period of seven (7) years.

(b) The rate of interest will be two and seven-tenths per cent (2.7%) per annum.

(c) The disbursement period will be two (2) years from the date of coming into force of the loan agreement.

3. (1) The Reform Program Loan will be made available to cover payments to suppliers of eligible source countries by importers in the Republic of the Philippines under such contracts as have been or may be entered into between them for purchases of such products as will be enumerated in a list to be mutually agreed upon between the authorities concerned of the two Governments and for purchases of services incidental to the purchases of those products, provided that such purchases are made in such eligible source countries for products produced in and services supplied from those countries.

(2) The list mentioned in sub-paragraph (1) above may be modified by agreement between the authorities concerned of the two Governments.

4. (1) The Government of the Republic of the Philippines will take measures to have the equivalent in Philippine currency of the amount of yen disbursements of the Reform Program Loan transferred by the Central Bank of the Philippines (hereinafter referred to as "the Central Bank") to the counterpart fund account opened in the name of the Government of the Republic of the Philippine in the Central Bank. The amount of Philippine currency thus transferred shall be used to cover local currency requirements of the development projects of Philippine Government Corporations, except where the authorities concerned of the two Governments agree that the said amount of Philippine currency mentioned above will be used will be those separately agreed upon between the authorities concerned of the two Governments.

(2) The Government of the Republic of the Philippines will, upon request, furnish the Government of Japan with reports on the use of the counterpart fund mentioned in sub-paragraph (1) above.

III

1. A forestry sector program loan in Japanese yen up to the amount of fifteen billion yen (¥15,000,000,000) (hereinafter referred to as "the Forestry Program Loan") will be extended under the Financial Recycling Scheme, in accordance with the relevant laws and regulations of Japan, to the Government of the Republic of the Philippines by the Fund.

2. The Forestry Program Loan will be made available by a loan agreement to be concluded between the Government of the Republic of the Philippines and the Fund. The terms and conditions of the Forestry Program Loan as well as the procedures for its utilization will be governed by the said loan agreement which will contain, inter alia, the following principles:

(a) The repayment period will be eighteen (18) years after the grace period of seven (7) years.

(b) The rate of interest will be two and seven-tenths per cent (2.7%) per annum.

(c) The disbursement period will be three (3) years from the date of coming into force of the loan agreement.

3. (1) The Forestry Program Loan will be made available to cover payments to suppliers of eligible source countries by importers in the Republic of the Philippines under such contracts as have been or may be entered into between them for purchases of such products as will be enumerated in a list to be mutually agreed upon between the authorities concerned of the two Governments and for purchases of services incidental to the purchases of those products, provided that such purchases are made in such eligible source countries for products produced in and services supplied from those countries.

(2) The list mentioned in sub-paragraph (1) above may be modified by agreement between the authorities concerned of the two Governments.

4. (1) The Government of the Republic of the Philippines will take measures to have the equivalent in Philippine currency of the amount of yen disbursements of the Forestry Program Loan transferred by the Central Bank to the counterpart fund account opened in the name of the Government of the Republic of the Philippines in the Central Bank. The amount of Philippine currency thus transferred shall be used to cover local currency requirements of the forestry sector development projects of the Republic of the Philippines, except where the authorities concerned of the two Governments agree that the said amount of Philippine currency may be used for other development projects of the Republic of the Philippines. The development projects for which the amount of Philippine currency mentioned above will be used will be those separately agreed upon between the authorities concerned of the two Governments.

(2) The Government of the Republic of the Philippines will, upon request, furnish the Government of Japan with reports on the use of the counterpart fund mentioned in sub-paragraph (1) above.

IV

1. A sector program loan in Japanese yen up to the amount of twelve billion and five hundred million yen (¥12,500,000,000) (hereinafter referred to as "the Sector Program Loan") will be extended, in accordance with the relevant laws and regulations of Japan, to the Government of the Republic of the Philippines by the Fund for the development of the sectors enumerated in the Sector List attached hereto.

2. The Sector Program Loan will be made available by a loan agreement to be concluded between the Government of the Republic of the Philippines and the Fund. The terms and conditions of the Sector Program Loan as well as the procedures for its utilization will be governed by the said loan agreement which will contain, inter alia, the following principles:

(a) The repayment period will be eighteen (18) years after the grace period of seven (7) years.

(b) The rate of interest will be two and seven-tenths per cent (2.7%) per annum.

(c) The disbursement period will be two (2) years from the date of coming into force of the loan agreement.

3. (1) The Sector Program Loan will be made available to cover payments to suppliers of eligible source countries by importers in the Republic of the Philippines under such contracts as have been or may be entered into between them for purchases of such products as will be enumerated in a list to be mutually agreed upon between the authorities concerned of the two Governments and for purchases of services incidental to the purchases of those products, provided that such purchases are made in such eligible source countries for products produced in and services supplied from those countries.

(2) The list mentioned in sub-paragraph (1) above may be modified by agreement between the authorities concerned of the two Governments.

4. (1) The Government of the Republic of the Philippines will take measures to have the equivalent in Philippine currency of the amount of yen disbursements of the Sector Program Loan transferred by the Central Bank to the counterpart fund special account (hereinafter referred to as "the Special Account") opened in the name of the Government of the Republic of the Philippines in the Central Bank. A sub-account will be set up in the Special Account for each sector mentioned in paragraph 1 respectively.

(2) The counterpart fund thus transferred will be allocated by the Government of the Republic of the Philippines to each sub-account of the corresponding sector in Philippine currency up to the amount equivalent to the amount of yen according to the allocation as mentioned in the Sector List. The Government of the Republic of the Philippines shall duly inform the Government of Japan on the progress of the allocation of the counterpart fund.

(3) The allocated counterpart fund will be used to cover local currency requirements of the development projects of the corresponding sectors. The Government of the Republic of the Philippines will submit to the Fund the notice of the counterpart fund financing.

(4) The allocation as mentioned in the Sector List may be modified by agreement between the authorities concerned of the two Governments.

V

1. The respective disbursement periods mentioned in sub-paragraph (l)(c), paragraph 2 of part I, sub-paragraph (c), paragraph 2 of part II, sub-paragraph (c), paragraph 2 of part III and sub-paragraph (c), paragraph 2 of part IV may be extended with the consent of the authorities concerned of the two Governments.

2. The respective scopes of eligible source countries mentioned in sub-paragraph (1) and (2), paragraph 3 of part I, sub-paragraph (1), paragraph 3 of part II, sub-paragraph (1), paragraph 3 of part III and sub-paragraph (1), paragraph 3 of part IV will be agreed upon between the authorities concerned of the two Governments.

3. The Government of the Republic of the Philippines will ensure that products and/or services mentioned respectively in sub-paragraph (1) and (2), paragraph 3 of part I, sub-paragraph (1), paragraph 3 of part II, sub-paragraph (1), paragraph 3 of part III and sub-paragraph (1), paragraph 3 of part IV are procured in accordance with the guidelines for procurement of the Fund, which set forth, inter alia, the procedures of international tendering to be followed except where such procedures are inapplicable or inappropriate.

4. (1) The Government of the Republic of the Philippines will exempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan as well as interest accruing therefrom.

(2) The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan.

5. (1) With regard to the shipping of products purchased under the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan, the two Governments will promote mutual cooperation for the development of shipping, under the Treaty of Amity, Commerce and Navigation between Japan and the Republic of the Philippines signed at Manila on 10 May, 1979.

(2) With regard to the marine insurance of products purchased under the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan, the two Governments will refrain, within the scope of the relevant laws and regulations of their respective countries, from imposing any restrictions that may hinder fair and free competition between the marine insurance companies of the two countries.

6. The Government of the Republic of the Philippines will take necessary measures to ensure that:

(a) the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan be used properly and exclusively for purchases of products and/or services mentioned respectively in sub-paragraph (1) and (2), paragraph 3 of part I, sub-paragraph (1), paragraph 3 of part III and sub-paragraph (1), paragraph 3 of part IV;

(b) the facilities constructed under the Project Loan be maintained and used properly and effectively for the purposes prescribed in this understanding.

7. The two Governments will consult with each other with respect to any matter that may arise from or in connection with this understanding.

I should be grateful if Your Excellency would confirm the foregoing understanding on behalf of the Government of the Republic of the Philippines.

I avail myself of this opportunity to renew to Your Excellency the assurance of my highest consideration.

(Sgd.) TSUNEO TANAKA
Ambassador Extraordinary and Plenipotentiary
of Japan to the Republic of the Philippines

His Excellency RAUL S. MANGLAPUS
Secretary of Foreign Affairs
  Department of Foreign Affairs
Republic of the Philippine

RECORD OF DISCUSSIONS

In connection with the Exchange of Notes dated 23 December 1988, concerning Japanese loans to be extended with a view to promoting the economic development and stabilization efforts of the Republic of the Philippines (hereinafter referred to as "the Exchange of Notes"), the representatives of the Japanese Delegation and of the Philippine Delegation wish to record the following with respect to the project loan mentioned in part I of the Exchange of Notes (hereinafter referred to as "the Project Loan"), the loan for a reform program for government corporations mentioned in part II of the Exchange of Notes (hereinafter referred to as "the Reform Program Loan"), the forestry sector program loan mentioned in part III of the Exchange of Notes (hereinafter referred to as "the Forestry Program Loan11) and the sector program loan mentioned in part IV of the Exchange of Notes (hereinafter referred to as "the Sector Program Loan”):

1. With reference to sub-paragraph (1) and (2), paragraph 3, part I of the Exchange of Notes, the representative of the Japanese Delegation stated that, even if purchases are made for products produced in and/or services supplied from the Republic of the Philippines, the financing will be made from the Project Loan for those products and/or services in cases where they fall under the category classified as "foreign currency portion" in the relevant loan agreement.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

2. The representative of the Japanese Delegation stated that the products which contain components originating from countries other than the eligible source countries will be eligible for the financing under the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan, if they meet the following:

(1) The total cost of components imported into the country of production from countries other than the eligible source countries will be less than fifty (50) percent of the price per unit of such products.

(2) For the purposes of (1) above:

(a) “The total cost of components” means the price C.I.F. of the imported plus import duties levied thereon in the country of production; and

(b) “Price per unit of such products” means:

(i) in the case of the Project Loan, the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan, where the country of production is not the Republic of the Philippines, the price F.O.B. of such products, and

(ii) in the case of the Project Loan, where the country of production is the Republic of the Philippines, the price ex-factory of such products.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

3. With reference to sub-paragraph (1) and (2), paragraph 3 of part I, sub-paragraph (1), paragraph 3 of part II, sub-paragraph (1), paragraph 3 of part III and sub-paragraph (1), paragraph 3 of part IV of the Exchange of Notes, it was the shared view of the two Delegations that suppliers and contractors of eligible source countries mean nationals of eligible source countries or juridical persons incorporated and registered in the mentioned countries, and which have their appropriate facilities for producing or providing the goods and services in those countries, and actually conduct their business there, and that the consultants of eligible source countries mean nationals of the eligible source countries or juridical persons controlled by the nationals of the mentioned countries.

4. The representative of the Japanese Delegation stated that the Philippine side should give such due consideration to the importation of the products required for the implementation of the projects under the Project Loan as it has given in the course of the implementation of the projects under the successive Japanese loans for projects.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

5. With reference to sub-paragraph (3), paragraph 3 of part I of the Exchange of Notes concerning the financing of eligible local currency requirements for the implementation of the projects mentioned in the said sub-paragraph of the Exchange of Notes, the representative of the Japanese Delegation stated that:

(1) The amount to be used to cover the local currency requirements for the implementation of the following projects should not exceed in any case the following amounts for each of the projects:

(2) Such requirement of local currency as general administrative expenses, interest during construction, taxes and duties, expenses concerning office, remuneration to employees of the executing agencies and housing, not directly related to the implementation of the projects, as well as purchase of land properties, compensation and the like, however, will not be considered as eligible for financing under the Project Loan.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

6. With reference to sub-paragraph (2), paragraph 3 of part I of the Exchange of Notes, the representative of the Japanese Delegation stated that the Project Loan will also be made available, in accordance with the loan agreement mentioned in paragraph 2 of part I of the Exchange of Notes, to cover payments already made since January 1, 1988 for the implementation of the Project mentioned in 9 of the Project List attached to the Exchange of Notes (hereinafter referred to as "the Irrigation Operations Support Project" ).

With regard to the Loan for the Irrigation Operations Support Project, the representative of the Japanese Delegation further stated that the Loan for the Irrigation Operations Support Project could be characterized as the parallel co-financing with the Irrigation Operations Support Project Loan extended by the World Bank.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

7. With reference to sub-paragraph (1), paragraph 3 of part II, sub-paragraph (1), paragraph 3 of part III and sub-paragraph (1), paragraph 3 of part IV of the Exchange of Notes, it was the shared view of the two Delegations that the Reform Program Loan, the Forestry Program Loan and the Sector Program Loan will be used, in accordance with the loan agreement mentioned in paragraph 2 of part II, paragraph 2 of part III and paragraph 2 of part IV of the Exchange of Notes, to cover payments already made since January 1, 1988, or to be made for purchases of products mentioned in the lists attached to the Notes Verbales Nos. 885397, 885398, 885399 of the Department of Foreign Affairs of the Republic of the Philippines dated 23 December 1988 and for the purchases of services incidental to the purchases of those products.

8. With regard to the Reform Program Loan mentioned in part II of the Exchange of Notes, the representative of the Japanese Delegation stated that the Reform Program Loan could be characterized as the parallel co-financing with the loan for a Reform Program for Government Corporations extended by the World Bank.

The Japanese Delegation further stated that the said Reform Program Loan will be extended in consideration of the current economic difficulties faced by the Government of the Republic of the Philippines with a view to not only contributing to the improvement of its balance of payments but also encouraging the Government of the Republic of the Philippines to continue the implementation of the current economic policies which have been endorsed by the World Bank under its loan for a Reform Program for Government Corporations.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

9. With reference to sub-paragraph (1), paragraph 3 of part II of the Exchange of Notes, the representative of the Japanese Delegation stated that the Government of Japan will make the disbursement to be made confirming that the Government of the Republic of the Philippines continues to observe the conditions imposed by the World Bank under its loan for a Reform Program for Government Corporations.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

10. With regard to the Forestry Program Loan mentioned in part III of the Exchange of Notes, the representative of the Japanese Delegation stated that the Forestry Program Loan could be characterized as the parallel co-financing with the Forestry Sector Program Loan extended by the Asian Development Bank.

The Japanese Delegation further stated that the said Forestry Program Loan will be extended in consideration of the current economic difficulties faced by the Government of the Republic of the Philippines with a view to not only contributing to the improvement of its balance of payments but also encouraging the Government of the Republic of the Philippines to continue the implementation of the current economic policies related to the forestry sector which have been endorsed by the Asian Development Bank under its Forestry Sector Program Loan.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.

11. With reference to sub-paragraph (1), paragraph 3 of part III of the Exchange of Notes, the representative of the Japanese Delegation stated that the Government of Japan will make the disbursement to be made confirming that the Government of the Republic of the Philippines continues to observe the conditions imposed by the Asian Development Bank under its Forestry Sector Program Loan.

The representative of the Philippine Delegation stated that the Philippine side had no objection to the above-mentioned statement.