Bigger loans eyed for Phl defense buildup

A Senate panel on Tuesday urged an increase in defense spending, tapping of foreign loans more aggressively, and restructuring the country's military modernization financing to strengthen the Philippine defense build-up.

Defense Secretary Gilbert “Gibo” Teodoro Jr. faced the Senate Finance Committee to defend the proposed 2026 budget of the Department of National Defense and its attached agencies, including the Revised AFP Modernization Program. 

During the deliberations, Senator Sherwin Gatchalian lamented that out of the P40 billion earmarked for defense modernization in 2026, P37 billion is already committed to pay for previously contracted projects under the Multi-Year Contractual Authority, leaving just P3 billion in free cash for new acquisitions.

“So we won’t be able to buy anything from that,” Gatchalian pointed out.

Teodoro replied. “No, your Honor.”

Teodoro explained that under current laws, the defense sector faces a cap on total debt exposure, limiting its borrowing capacity even as the country needs to expand military capabilities. 

He noted that this financing model, with 5-year repayment windows, is outdated and places the Philippines at a disadvantage compared to countries that amortize payments over 25 to 30 years.

“Because the model, even in infrastructure, is five years. Whereas in infrastructure, you need it to be two to three years for project completion. Because for the first year, 10% mobilization. So, if the awardee mobilizes for one year, he won't be paid. So there's nothing to do if it's not just mobilization,” Teodoro explained.

He continued, “When you mobilize, you want to be starting work already, finish what you mobilize so you can deploy somewhere else.”

“So the project horizon for infrastructure should be two to three years, while for acquisitions, because as you know, your honor, it's capital expenditures, capital equipment. There's a life. And you can amortize payments throughout 70 percent of the useful life, perhaps,” he further said. 

Gatchalian then inquired whether the government now has an available window to secure loans specifically for financing the military modernization program.

Teodoro confirmed there is a legal window for the government to borrow from foreign funders for defense, but such borrowing must stay within caps set by law and compete with other projects, such as disaster resilience under the Official Development Assistance (ODA) program.

“It can be, just as long as we do not exceed that cap. But it's still very tedious because we have to fight with the other ODA and foreign-funded projects, for example, for disaster resilience and the like,” he said. 

Still, he emphasized that tapping capital markets with sovereign guarantees, while engaging private financial institutions, could multiply the impact of the current budget.

“Actually, if we limit it to 5 years, we're actually really financing the production of others who have acquired because of our window of 5 years, while other countries can finance it for 25 or 30 years,” he further explained. 

“So pera pa natin ang ginagamit because mabilis tayo magbayad (so we still use our money because we are paying  fast) and then because of contracting gap sometimes pag may kulang palaga na hindi mo naisip kailangan ipagdikit-dikit mo, sasabihin bayad ka pa. So dapat ibago na po natin, and we were going to submit for his honor's information the limiting law on foreign loans for defense purposes,” Teodoro stressed. 

He added that the DND is drafting a proposal to amend existing laws limiting foreign loans for defense purposes. 

A special provision is being considered to enable this, subject to concurrence from the Department of Finance (DOF) and the Office of the President.

“We even engaged the private financial system so that they can participate also to spread the risk of the loan and to make the terms, the tenor of the loans more affordable,” Teodoro said. 

Gatchalian further asked. “So P40B natin pwede na ngayon mas lumaki pa siya? Marami pa tayo mabibili?”

Teodoro replied. “Yes, your honor… So ang unprogrammed at programmed, instead of acquisition, pambayad na lang natin ng utang pero at least mas marami tayo nakuha.”

The Defense Chief added that his department is drafting a proposal to amend existing laws limiting foreign loans for defense purposes. 

A special provision is being considered to enable this, subject to concurrence from the Department of Finance (DOF) and the Office of the President.