ANALYSIS OF THE RP-CHINA MEMORANDUM OF UNDERSTANDING (MOU) ON THE DEVELOPMENT OF 1 MILLION HECTARES OF LAND FOR HYBRID CORN, HYBRID RICE, AND HYBRID SORGHUM FARMING[1]

On January 15, 2007, the Government of the Philippines and the Fuhua Corporation entered into a Memorandum of Agreement involving the ‘development’ of One Million(1,000,000) hectares of land for the production of hybrids of corn, rice and sorghum. While the vastness of land the Government of thePhilippinescommitted boggles the mind, the lack of transparency, obfuscation of the terms and conditions of the MOU, the willingness of the Philippine negotiating panel to give away Philippine interests, and their apparent disregard of Philippine laws are a source of great discomfort, to say the least.

The People’s Government of Jilin Province, China Development Bank, and Jilin Fuhua Agricultural and Technology Development Co. Ltd. (Fuhua Co.) are the First party to the MOU with the primary undertaking to build an agriculture technology transfer center and a grain production and processing base, while the DA, DAR, and DENR (the “Convergence Group) signed as the Second party thereto, with primary obligation to assist the Chinese in identifying one million hectares of land “lawfully owned by the Philippines.”

This critique of the RP-China MOU on the development of 1 Million hectares of land is just one of the several reviews IDEALS, Inc. conducted of the thirty-one (31) RP-China agreements.

I. ‘WHAT LANDS?’

The lease agreement will cover “one million hectares of land which is lawfully owned by the Philippines.” This gives the impression that the land intended to be covered by the project are alienable and disposable lands of the public domain or public lands.

However, another provision states that one of the undertakings of the Philippine group is that it would “organize qualified ARBs and landowners who are interested in the project and extend to them adequate information and technical support in order to allow them to actively participate in the project.” This gives the impression that the lands to be covered are private lands: those that have been awarded to qualified Agrarian Reform beneficiaries and those in the name of private persons. This inference is supported by the commitment of Fuhua Co. to “assist the Second Party in providing ARBs and landowners with new opportunities to engage their landholdings to productive use and in providing employment opportunities as needed and encourage them to earn additional income xxx.”

Explanations from the representatives of the DA have been inconsistent. There is thus a need to clarify  the intention of the parties in regard to the type of lands to be covered. The classification of the lands is necessary to determine which parts of the Constitution and relevant laws would be applicable in the assessment of the legality of the contractual terms.

II. ‘CONSTITUTIONAL AND POLICY QUESTIONS’

The MOU allows for the lease, by a Chinese corporation, of one million hectares of land that is lawfully owned by thePhilippines, for a period of 25 years; renewable for another 25 years.

If the lands referred to are those of the public domain

The following provisions of the Philippine Constitution should be considered:

a) Section 3, Article XII, which pertinently states that:

“Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of thePhilippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant.

xxx    xxx    xxx.”

b) Section 2, Article XII, which, in part, provides that:

“[A]ll lands of the public domain xxx and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. xxx”

xxx    xxx    xxx

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution.”

Based on those provisions:

(1) Only corporations or associations at least sixty per centum of whose capital is owned by such citizens may lease these alienable lands of the public domain.  Fuhua Co. is a “company of limited liability legally registered in JilinProvinceof the People’s Republic of China” (2nd Prefatory Clause, MOU).  On the assumption that the company is 100% foreign-owned, it would be illegal for the same to lease alienable lands of the public domain.

(2) Even if Fuhua Co. complies with the capital requirement, it still cannot lease more than 1,000 hectares of land.

We note the statement in the MOU that the performance by the Second Party of its specific undertakings is qualified by the capacity of its members (the pertinent government agencies) to legally comply with them.  Hence, under the premises discussed, the Second Party must assert that it may not legally pursue the lease to Fuhua Co.

If the lands referred to are those titled in the name of the Republic of the Philippines or any of its instrumentalities or agencies

Should the phrase “lawfully owned by the Philippines xxx” refer to lands titled in the name of the Republic or any of its instrumentalities and agencies (and may be argued as owned by the state in its proprietary capacity and no longer part of the mass of lands open for disposition – i.e. alienable and disposable lands of the public domain), and yet the same are devoted or suitable for agriculture, the lease would still be questionable as the agrarian reform goals of the state should be prioritized over the “investment” opportunity presented by the MOU.

Without any other provision or stipulation relating to how the rights of farmers and farmworkers in these lands are to be protected or enforced, it is feared that the lease of one million hectares by the Second Party to Fuhua Co. would, at least throughout the period of the lease agreement, exclude the effective redistribution of the these vast tracts of land to ARBs, a repudiation of the policy of the state to undertake a genuine agrarian reform program.

III. ‘DEFEATING AGRARIAN REFORM’

The Constitution repeatedly cites the importance of agrarian reform for the realization of the country’s goals of national development and social justice, among others.   It specifically mandated the enactment of a law on agrarian reform that will ensure the rights of farmers and farmworkers. Thus, RA 6657, the Comprehensive Agrarian Reform Law of 1988 was passed even as it was touted as the centerpiece legislation of the Aquino government. Section 4 of the law provides for its scope which includes both public and private agricultural lands.[2]

In regard to the land acquisition and distribution component of CARP, the government reports that around   85% of the program scope has been distributed.  However, calls for the conduct of an honest to goodness validation of the distribution reports figure in dialogues and other forums with the DAR, the lead implementing agency of RA 6657.  These calls are based on accounts of much lower actual distribution rates and the existence of lands – not included in the CARP’s operational scope – that should be included in a validated operational scope of the program. Some of these accounts have been documented in formal studies on the status of agrarian reform implementation in the country.   Meanwhile, the DAR’s recent Inventory of CARP Scope (ICS) confirms a larger actual balance (compared to the account of CARP balances using the original operational scope less area distributed).  The bottom line is that there are huge tracts of land left for distribution and there still are many farmers and farmworkers who are yet to acquire titles to and/or enjoy peaceful and productive possession of land to which they are entitled under the agrarian reform program.  There is no question that the Constitutional and legal mandate for agrarian reform must be completed.  Under the premises,

a) The MOU’s proposed lease of one million hectares of land will effectively disenfranchise farmers and farmworkers working these lands; on the unlikely possibility that there are no such farmers / farmworkers present in these areas, it still behooves CARP implementers to distribute the lands to farmers and farmworkers that were not accommodated in the respective landholdings  (due to land availability limitations) or to qualified ARBs who were unduly dislocated from their areas or because of undue land conversions, CARP exemption, or CLOA/ EP cancellations;

b) Insofar as the lands of ARBs are also meant to be covered by the provisions of the MOU, it must be noted that the policy of government is that lease arrangements of awarded lands should be the “last resort” (RA 7905[3]).  And as the title of the ARBs to these lands was acquired by them under the state’s agrarian reform program, the same deserves special protection from the state to ensure that CARP gains are not so easily reversed or undermined.  To a certain extent, government protection of CARP-awarded lands has been set in place through the adoption of pertinent administrative regulations.  DAR AO 9, Series of 2006[4] , for instance, provides for rules intended to protect these lands and the ARB-owners thereof even while the said lands are allowed to be leased (among other arrangements) for agribusiness purposes.  These are provisions on:  (a)  minimum amount rental – and the factors to arrive at that value;  (b) mandatory inputs from the investor, including an item on the investor’s assumption of the risk of loss of agricultural operations, to include crop failure due to natural calamities or force majeure (where the lessee –ARB is still assured of the payment of the lease rental);  (c) specifics of tax payments;  (d) priority to qualified and willing ARBs and their dependents for employment in the enterprise;  (d) interim nature of the lease agreement – i.e. that the same shall only be intended to enable the ARBs or their organization to develop skills necessary to assume general control and management of the farm;  (e) etc.

On the contrary, the MOU is sorely lacking provisions that prescribe certain minimum standards for the protection of the interests of ARBs willing to participate in the Project.  For example, there are no provisions that ensure the employment of willing and able ARBs (or even non-ARB landowners) in the ventures to be set up in the areas to be leased out to Fuhua.Co.  Even if one of the undertakings of the company under the MOU is to “assist the Second Party in providing ARBs and landowners with new opportunities to engage their landholdings to productive use and providing employment opportunities as needed xxx” (Item II.1), there is nothing in that statement that commits to employ, much less promises priority for employment of willing and able ARBs and landowners in connection with Fuhua Co.’s business/es in such lands.

While we note that possible “private agreements” between the Fuhua Co. and the interested ARBs may stipulate on these matters, the freedom to negotiate does not answer the needs for minimum standards or parameters for negotiation.  At the very least, the Philippine agencies involved in the MOU should have explicitly stated therein that the agribusiness arrangement should be in compliance with the Philippine laws and rules and regulations thereon.

In general, while the Second Party undertakes to “protect the investment of Fuhua Co. to the extent provided in Philippine laws (Item IV.7), much is left to be desired in relation to the expression in the MOU of the Second Party’s obligation to protect the interests and welfare of ARBs who might participate in the project (in regard to the land awarded to them), much less of non-ARB farmers and farmworkers who are otherwise qualified to own lands pursuant to the CARP, including the 1 million hectares of land that may be leased out to Fuhua Co.

c) Insofar as non-ARB landowners’ lands may also be included in the project

The stipulation in the MOU that the Second Party agrees to  “provide Fuhua Co. with vital information as to their legal status, susceptibility to Comprehensive Agrarian Reform Program (CARP) coverage and other critical information to allow the Fuhua Co. to adequately evaluate their potential to participate in the Project. xxx” 9Item IV.4) begs questions on the intentions or policy of government relative to CARPable lands that are still in the name of “original landowners,” who may be interested to participate in the Project.

Informing the Fuhua Co. of the susceptibility to CARP coverage of a particular landholding falls short of a statement of a policy that lands determined to be CARP-covered will actually be subjected to the processes of the CARP for distribution to agrarian reform beneficiaries, even if they may be ideal for the production of the hybrid crops subject of the MOU and even if there may be expressions of interest on the part of their respective landowners to have the lands included in the project.

With the way CARP has been avoided or resisted over almost twenty years of implementation, nothing short of an assurance from the DAR, that it will redistribute “CARPable” lands to ARBs even if the landowners may be interested in joining the Project, is needed to firmly ensure the rights of qualified beneficiaries to these landholdings.   In fact, more specific rules to the effect that these lands will not be exempted from CARP or deferred for later acquisition and distribution under the program would have been called for considering our country’s current challenges in CARP implementation, including the propensity of recalcitrant landowners to use every available reason to avoid the program.

IV. OTHER ISSUES AND CONCERNS

a) Need to clarify the nature and purpose/s of the Credit Platform Company. — Fuhua Co. undertakes to “establish a credit platform company and organize the implementation of the Project and loans repayment (Item XX).”

Set within the framework of a lease arrangement, wherein the Fuhua Co. is the intended lessee of agricultural lands “legally owned by the Republic of thePhilippines” or, perhaps, those owned by ARBs and non-ARB landowners, the nature and purpose of this undertaking are, at best, vague.  Numerous provisions of the MOU indicate that the Fuhua Co. is going to lease the land and invest therein specifically to produce hybrid corn, hybrid rice, or hybrid sorghum.  Necessarily, the financial cost of the Project is part of the investment requirements. And Fuhua Co., as the apparent investor, should shoulder such financial cost.  In this situation, what then is the role of the credit platform company (which we assume to simply be an entity providing credit to borrowers) to be established by Fuhua Co?  That the same is to be established by Fuhua Co. to provide for its own needs to finance the Project is not very plausible, at least as part of its undertakings in the MOU.  On the other hand, the MOU does not clearly state anything to indicate the intended clientele (borrowers) of the credit platform company.  The vagueness of this provision only heightens one’s suspicions of the real score the role of the investor under the MOU. Was the vagueness deliberately done so both signatories can deflect future criticisms or opposition to the MOU? Is this another classic case of policy obfuscation?

At any rate, the creation of such credit platform renders suspect Fuhua Co.’s  undertaking to “provide funds, seeds, technologies, fertilizers, equipments and other agricultural inputs (Item II.8) and other requirements for implementing the Project”  It raises the issue as to the nature of the funds supposed to be infused by Fuhua Co. to the Project.  Under common lease arrangements, the lessee-investor provides the financial requirements of the business venture to be set up in the leased premises.  But this provision on the establishment of the credit company – assuming the same are intended for Philippine counterparts – is a disturbing provision.  Does the MOU contemplate a scheme wherein participating ARBs and non-ARB landowners would actually shoulder the investment cost (apart from the lease rental) except that they are going to be allowed to take on a loan for this purpose through a credit company to be set up by the lessee?  This may be a fair stipulation if the arrangement between Fuhua Co., on the one hand, and the ARBs / non-ARB cooperators, on the other is not merely that of a lessee-lessor arrangement;  the arrangement should be one wherein the Filipino participants are a part of the decision-making process (including the aspect of marketing of produce) within the enterprise and are allowed a portion of the profits thereof corresponding to their stake in the investment cost.  There is nothing in the MOU that even hints on this kind of relationship between the Fuhua Co. and possible ARB and non-ARB project participants.

Then again, the credit company may merely be intended to ensure funding for the Second Party’s undertaking to provide basic infrastructure and other commitments.  Otherwise, the credit company may simply be an additional support facility which could be utilized by participating farmers and landowners to support activities / livelihood unrelated to the Project contemplated in the MOU.

Given the foregoing, it makes sense to call on the parties to this MOU, particularly the “convergence group” to make necessary clarifications.

b) The credit / loan repayment policies and the system for product quality are left to the discretion of Fuhua Co. There are no provisions on the participation of the government and local grains producers in the setting of up policies, mediation and arbitration, grievance mechanisms, and all business related transactions and details. This is surprising considering the envisioned size of the Project.

c) The provision “protect the investment of Fuhua Co. to the extent provided by Philippine laws xxx” (Item IV.7) raises the question as to the kind and extent of protection the Philippine government will give to Fuhua Co. For example, will the Philippine government act as guarantor for the repayment of loans incurred by “third party” participants in the Project?

This protection clause afforded to Fuhua Co. is highly questionable. Fuhua Co.’s investment is limited to funds, seeds, techonologies, fertilizers, equipments, other agricultural inputs, and agricultural constructions. Their “investment” is suspect, as earlier pointed out. The funds they will release could be in the nature of a loan in favor of participating ARBs and landowners. Whatever production materials it will import is probably exempt from duties for the DAR, DA, and DENR will coordinate for the exemption of Fuhua Co.’s imports (ItemIV.10). This is in addition to the grant of tariff treatment for the export of grains produced under the Project (Item IV.11).  In general, the MOU simply gives Fuhua Co. too much discretion and too much accommodation in exchange for amorphous benefits for the Philippines or Filipino project participants except, perhaps, for the amount of lease rental, the parameters for the determination of which is not even provided in the agreement.

d) The Philippine government committed to shoulder a big chunk of the investment requirements. It will answer the costs for farm to market roads, irrigation facilities, security arrangements for Fuhua Co.’s employees, organizing the ARBs and landowners, social mobilization. The government will also provide the technical, financial and managerial support for the Project (Item IV, par. 5).

Having agreed to these undertakings, one could only wonder as to how the Philippine government expects to recoup its investments in the Project. As a rule, there are bound to be risks in any investment venture.  At any rate to our mind the prospective investor, Fuhua Co., should bear solely for the loss incurred in the course of doing business in the country.

CONCLUSION

A careful study of the document reveals not only serious ambiguities, but provisions so patently skewed against Philippine interests that nothing less than a comprehensive review is in order. On its own, the undertakings embodied in the Agreement will have immediate deleterious consequences on the lives of our ordinary countrymen. As a precedent, it alters a policy framework where land is protected for Filipinos, domestic industries are nurtured and agrarian reform is of the highest order.

The MOU has a lifespan of twenty five years, renewable upon termination. Its effects, however – whether on people or policy – may well prove to be irreversible.


[1] This analysis is based on the document IDEALS, Inc. obtained from contacts in the Department of Agriculture. To date, the Department of Agriculture failed to give a copy of the final version of the MOU despite requests from different organizations.

[2] SECTION 4.          Scope. — The Comprehensive Agrarian Reform Law of 1989 shall cover, regardless of tenurial arrangement and commodity produced, all public and private agricultural lands xxx, including other lands of the public domain suitable for agriculture.

More specifically the following lands are covered by the Comprehensive Agrarian Reform Program:

(a) All alienable and disposable lands of the public domain devoted to or suitable for agriculture. No reclassification of forest or mineral lands to agricultural lands shall be undertaken after the approval of this Act until Congress, taking into account ecological, developmental and equity considerations, shall have determined by law, the specific limits of the public domain.

(b) All lands of the public domain in excess of the specific limits as determined by Congress in the preceding paragraph;

(c) All other lands owned by the Government devoted to or suitable for agriculture; and

(d) All private lands devoted to or suitable for agriculture regardless of the agricultural products raised or that can be raised thereon.

[3] AN ACT TO STRENGTHEN THE IMPLEMENTATION OF THE COMPREHENSIVE AGRARIAN REFORM PROGRAM, AND FOR OTHER PURPOSES (February 3, 1995)

[4] Revised Rules and Regulations Governing Agri-business Venture Arrangements (AVAs) in Agrarian Reform Areas

AR Dialogues No. 3-07 / 24 July 2007

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