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September 07, 1998

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 stabilization and development efforts of the Republic of the Philippines.

I

1. (1) A loan in Japanese yen up to the amount of ninety-four billion six hundred and forty-nine million yen (Y 94,649,000,000) (hereinafter referred to as "the Loan I") will be extended, in accordance with the relevant laws and regulations of Japan, to the Government of the Republic of the Philippines and the Government Owned and Controlled Corporations of the Republic of the Philippines (hereinafter jointly referred to as "the Borrowers I") by the Overseas Economic Cooperation Fund (hereinafter referred to as "the Fund") to implement the projects enumerated in the List A attached hereto (hereinafter referred to as "the List A") according to the allocation for each project as specified in the List A.

(2) A part of the Loan I for which eligible source countries are all countries and areas will be extended in line with sub-paragraph (2) of paragraph 2 of the "Funds for Development" Initiative announced by the Government of Japan on June 25, 1993.

2. (1) The Loan I will be made available by loan agreements to be concluded between the Borrowers I and the Fund. The terms and conditions of the Loan I 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) (i) the repayment period will be twenty (20) years after the grace period often (10) years;

(ii) the rate of interest will be two and two-tenths per cent (2.2%) per annum;

(b) notwithstanding sub-paragraph (a) above, where a part of the Loan I is made available to cover payments to environmental portions of the projects mentioned in 7, 8, 9 and 11 of the List A, then the rate of interest of the said part will be one and seven-tenths percent (1.7%) per annum;

(c) notwithstanding sub-paragraphs (a) and (b) above, where a part of the Loan I is made available to cover payments to the global environment project mentioned in 1 of the List A and payments to global environment and anti-pollution portions of the projects mentioned in 6, 9 and 11 of the List A and payments to consultants of the projects mentioned in 2 to 11 of the List A, then:

(i) the repayment period of the said part will be thirty (30) years after the grace period often (10) years;

(ii) the rate of interest of the said part will be seventy-five-hundredths per cent (0.75%) per annum; and

(d) the disbursement period will be three (3) years with regard to the project mentioned in 7 of the List A, five (5) years with regard to the projects mentioned in 1 and 2 of the List A, six (6) years with regard to the project mentioned in 3 of the List A, seven (7) years with regard to the projects mentioned in 4 and 5 of the List A, eight (8) years with regard to the projects mentioned in 8, 9, 10 and 11 of the List A, and nine (9) years with regard to the project mentioned in 6 of the List A from the dates of coming into force of the relevant loan agreements.

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

3. (1) The Loan I will be made available to cover payments already made and/or to be made by the Philippine executing agencies to suppliers, contractors and/or consultants of eligible source countries under such contracts as have been or 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, provided that such purchases are made in such eligible source countries for products produced in and/or services supplied from those countries.

(2) The scope of eligible source countries mentioned in sub-paragraph (1) above will be agreed upon between the authorities concerned of the two Governments.

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

4. The Government of the Republic of the Philippines will ensure that the products and/or services mentioned in sub-paragraph (1) of paragraph 3 above 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.

5. With regard to the shipping and marine insurance of the products purchased under the Loan I, the Government of the Republic of the Philippines will refrain from imposing any restrictions that may hinder fair and free competition among the shipping and marine insurance companies.

6. Japanese nationals whose services may be required in the Republic of the Philippines in connection with the supply of the products and/or services to be provided under the contracts referred to in sub-paragraph (1) of paragraph 3 above 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. (1) A loan in Japanese yen up to the amount of twenty-six billion sixty-two million yen (Y 26,062,000,000) (hereinafter referred to as "the Loan II") will be extended, in accordance with the relevant laws and regulations of Japan, to the Development Bank of the Philippines and the Land Bank of the Philippines (hereinafter jointly referred to as "the Borrowers N") by the Fund to implement the programs enumerated in the List B attached hereto (hereinafter referred to as "the List B") according to the allocation for each program as specified in the List B.

(2) A part of the Loan II for which eligible source countries are all countries and areas will be extended in line with sub-paragraph (2) of paragraph 2 of the "Funds for Development" Initiative announced by the Government of Japan on June 25, 1993.

2. (1) The Loan II will be made available by loan agreements to be concluded between the Borrowers II and the Fund. The terms and conditions of the Loan II 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) (i) the repayment period will be twenty (20) years after the grace period often (10) years;

(ii) the rate of interest will be two and two-tenths per cent (2,2%) per annum;

(b) notwithstanding sub-paragraph (a) above, where a part of the Loan II is made available to cover payments to environmental portions of the program mentioned in 2 of the List B, then the rate of interest of the said part will be one and seven-tenths percent (1.7%) per annum;

(c) notwithstanding sub-paragraphs (a) and (b) above, where a part of the Loan II is made available to cover payments to global environment and anti-pollution portions of the program mentioned in 2 of the List B and payments to consultants of the programs mentioned in 1 and 2 of the List B, then:

(i) the repayment period of the said part will be thirty (30) years after the grace period of ten (10) years;

(ii) the rate of interest of the said part will be seventy-five-hundredths per cent (0.75%) per annum; and

(d) the disbursement period will be six (6) years from the dates of coming into force of the relevant loan agreements.

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

3. (1) The Loan II for the program mentioned in 1 of the List B will be made available to cover credits already extended and/or to be extended by the Development Bank of the Philippines to sub-borrowers under the said program.

(2) The Loan II for the program mentioned in 2 of the List B will be made available to cover credits to be extended by the Land Bank of the Philippines to sub-borrowers under the said program.

4. (1) Notwithstanding the provisions of paragraph 3 above, a part of the Loan II will be made available to cover payments to be made by the Borrowers II to consultants of eligible source countries under such contracts as may be entered into between them for purchases of services required for the implementation of the programs enumerated in the List B, provided that such purchases are made in such eligible source countries for services supplied from those countries.

(2) The scope of eligible source countries mentioned in sub-paragraph (1) above will be agreed upon between the authorities concerned of the two Governments.

5. The Government of the Republic of the Philippines will ensure that the services mentioned in sub-paragraph (1) of paragraph 4 above 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.

6. Japanese nationals whose services may be required in the Republic of the Philippines in connection with the supply of the services mentioned in sub-paragraph (1) of paragraph 4 above 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.

III

1. The repayment of principal of the Loan I extended to the Government Owned and Controlled Corporations of the Republic of the Philippines and of the Loan II, as well as the payment of interest thereon, shall be guaranteed by the Government of the Republic of the Philippines.

2. The respective disbursement periods mentioned in sub-paragraph (1) (d) of paragraph 2 of Part 1and sub-paragraph (1) (d) of paragraph 2 of Part II may be extended with the consent of the authorities concerned of the two Governments.

3. (1) The Government of the Republic of the Philippines will exempt the Fund from all fiscal levies and taxes imposed in the Republic of the Philippines on and/or in connection with the Loan I and the Loan II 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 and 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 the products and/or services to be provided under the Loan I and the Loan II.

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

(a) the Loan I and the Loan II be used properly and exclusively for the projects enumerated in the List A and programs enumerated in the List B respectively.

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

5. (1) The Government of the Republic of the Philippines will, upon request, furnish the Government of Japan and the Fund with reports on the progress of the implementation of the projects enumerated in the List A and the programs enumerated in the List B respectively.

(2) The two Government 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 Loan I and the Loan II and take, if necessary, appropriate measure to secure their smooth and effective utilization. The Fund will be invited to participate in such review.

6. 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.) HIROYUKI YUSHITA

Ambassador Extraordinary and Plenipotentiary
of Japan to the Republic of the Philippines

LIST A

LIST B

RECORD OF DISCUSSIONS

In connection with the Exchange of Notes dated September 07, 1998, (hereinafter referred to as "the Exchange of Notes"), concerning Japanese loans to be extended with a view to promoting the economic stabilization and development efforts of the Republic of the Philippines (hereinafter referred to as "the Loans"), the representatives of the Japanese Delegation and of the Philippine Delegation wish to record the following:

1. With reference to sub-paragraph (3) of 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, the representative of the Japanese Delegation stated that:

(1) such requirements 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 said projects, as well as purchase of land properties, compensation and the like, however, will not be considered as eligible for financing under the Loans; and

(2) the procurement of products and/or services will be made in accordance with the procedures of international competitive tendering except where such procedures are inapplicable or inappropriate.

2. With reference to sub-paragraph (1) of paragraph 3 of Part I and sub-paragraph (1) of paragraph 4 of Part II of the Exchange of Notes, the representative of the Japanese Delegation stated that:

(1) the suppliers and contractors of eligible source countries mean nationals of the 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

(2) the consultants of eligible source countries shall be nationals of the eligible source countries or juridical persons controlled by the nationals of the mentioned countries.

3. 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 Loans, 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) per cent 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 components plus import duties levied thereon in the country of production; and

(b) "the price per unit of such products" means;

(i) where the country of production is not the Philippines, the price F.O.B. of such products; and

(ii) where the country of production is the Philippines, the price exfactory of such products.

4. With regard to the Loans, the representative of the Japanese Delegation stated that any financial requirements of the projects and programs not being covered with the proceeds of the Loans under the loan agreements mentioned in sub-paragraph (1) of paragraph 2 of Part I and Part II of the Exchange of Notes, will be duly met by the Government of the Republic of the Philippines to assure the smooth implementation of the said projects and programs.

5. The representative of the Japanese Delegation stated that the Philippine side should give such due consideration to the due and prompt procedure of importation of the products required for the implementation of the projects and programs under the Loans, as it has given in the course of the implementation of the projects and programs under the successive Japanese loans for projects and programs.

6. The representative of the Japanese Delegation stated that the Philippine side should give due consideration to the local residents' support for the projects enumerated in the List A attached to the Exchange of Notes and to the environmental impact which the said projects have, in order to assure the smooth implementation of the said projects.

7. With reference to sub-paragraph (1) of paragraph 3 of Part I of the Exchange of Notes, the representative of the Japanese Delegation stated that the Loan I may be made available to cover payments already made and/or to be made between December 19, 1997 and the previous day of coming into force of the loan agreement mentioned in sub-paragraph (1) of paragraph 2 of Part I of the Exchange of Notes, as well as payments to be made on and after the day of coming into force of the said loan agreement, for purchases of the products and/or services referred to in the said sub-paragraph.

8. With reference to sub-paragraph (1) of paragraph 3 of Part II of the Exchange of Notes, the representative of the Japanese Delegation stated that the Loan II for the program mentioned in 1 of the List B may be made available to cover credits already extended and/or to be extended between December 19, 1997 and the previous day of coming into force of the loan agreement mentioned in sub-paragraph (1) of paragraph 2 of Part II of the Exchange of Notes, as well as credits to be extended on and after the day of coming into force of the said loan agreement, to sub-borrowers referred to in the said sub-paragraph.

9. The representative of the Philippine Delegation stated that the Philippine side had no objection to all of the above mentioned statements.

His Excellency DOMINGO L. SIAZON, JR.
Secretary of Foreign Affairs
Department of Foreign Affairs
Republic of the Philippines