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fll~!fck-5Jf7 ItJ15'L/()
* LGU FINANCING PRESENT SOURCES,
AVAILABILITY AND TERMS
by
CARLOS B. GAVINO LGU BOT Financial Adviser
CCPAP BOT Center June 1998
United States Agency for International Development (USAID) Philippine Host Country Contract
• Local Government Umt (LGU)
LGU Financing Present Sources, Avazlabzlzty and Terms
TABLE OF CONTENTS
Preface 1
Introduction 3
Objectives 5
Chapter I - Framework for LGU Financing 7 Government's New VIsion and Policy Framework 9
Chapter II - Current Sources and Assessment of LGU Financing 13 Internal Revenue Allotments 13 Local Resource Mobilization 14 Debt FinanCing 15 Public Sources 15
- Government Financial Institutions 15 - OffiCial Development ASSistance 19 - Municipal Development Fund 20 - Bilateral Sources 22
Private Sources 22 - Pnvate Commercial Banks 23 - Municipal Bond Flotations 26
Other Pnvate Sources 29 - BUlld-Operate-Transfer Schemes 29 - Provincial EqUity Funds 35 - LGU Guarantee Corporation (LGUGC) 35 - Other Forms of Private Sector PartiCipation 36 - Joint Ventures 37
New Proposed Multilateral Initiatives on LGU FinanCing 38 - LGU Infrastructure FaCility (LGUIF) 38 - LGU Infrastructure Finance and Development Project 38
Bilateral Programs Involving LGU FinanCing 39 - Governance and Local Democracy Project (GOLD) 39 - Growth with EqUity In Mindanao Project (GEM) 40
Chapter III - Constraints to LGU Access to Private Capital 41
Chapter IV - Recommendations 45
Conclusions 49
Annexes 51
LGU Fmancing- Present Sources, Availability and Terms
ABBREVIATIONS AND ACRONYMS
ADB BAC BOT BSP CCPAP COA CPVDC DBP DOF GEM GFI GOLD GSIS HIGC ICC LBP LGC LOGOFIND LGU LGUGC LGUIF LWUA MDF NCR NEDA ODA PIDS PNB ROI SSS USAID
ASian Development Bank Batangas Assets Corporation Build-Operate-Transfer Bangko Sentral ng Pillplnas Coordinating Council of the Philippine Assistance Program Commission on Audit Cebu Property Ventures Development Corporation Development Bank of the Philippines Department of Finance Growth with Equity In Mindanao Government Financial Institution Governance and Local Democracy Project Government Service Insurance System Home Insurance Guarantee Corporation Investment Coordination Committee Land Bank of the Philippines Local Government Code LGU Finance and Development Project Local Government Unit Local Government Unit Guarantee Corporation Local Government Unit Infrastructure FaCility Local Water Utilities Administration Municipal Development Fund National Capital Region National Economic and Development Authonty Official Development Assistance Philippine Institute for Development Studies Philippine National Bank Rate of Return on Investments SOCial Secunty System United States Agency for International Development
LGU Financing Present Sources, Availabillty and Terms
PREFACE
This paper presents a compilation
and assessment of current
sources of financing for Local
Government Unit (LGU) Infrastructure
projects It was derived mainly from the
presentations of speakers at the 1997 year
long Regional LGU Flnancmg Seminar se
ries sponsored by the Bureau of Local Gov
ernment Fmance (BLGF) of the Department
of Finance (DOF) and the Coord mating
Council of the Philippine Assistance Pro
gram (CCPAP) BUild-Operate-Transfer Cen
ter. The semmar series IS the brainchild of
the Department of Fmance and the CCPAP.
Inspired by the SPirit of the Local Govern
ment Code, the message was clear "Devo
lution has brought the burden of flnancmg
basIc services and development squarely
on the shoulders of each LGU. Let's help
ease the burden through an Information
campaign by brlngmg the LGU flnancmg
programs of both public and private sector
fmancmg agencies directly to LGUs, start
Ing from region to region until the whole
country IS covered" Profound gratitude
IS due to the three sponsoring financial in
stitutions, the Development Bank of the
Philippines (DBP), the Land Bank of the
Phlllppmes (LBP) and the PhilipPine Na
tional Bank (PNB) whose support has made
the seminar series possible. Gratitude is
also due to my co-speakers m the seminar
series, mcludmg Ms CeCilia Borromeo of
the Land Bank, Mr. Josefmo R. Gamboa of
1
the Philippine National Bank, Mr Armando
O. Samla of the Development Bank of the
Philippines, Mr. Raul Nlvera of the Multina
tional Investment Bancorporatlon, and
Director Erllto Pardo of BLGF, and others
too numerous to cite. Special thanks goes
to Undersecretary CeCilia G. SOriano of the
Department of Finance (DOF) for frammg
the Government's new Vision for LGU financ
mg whose implementation she IS vigorously
pursumg The author also Wishes to recog
nize the assistance provided by Mr Jorge
M Briones, Deputy Executive Director of
the BOT Center, and Mmes. Soledad J Cruz
and Rosalia V. de Leon, Directors of DOF,
who proVided comments on the drafts of
the paper Gratitude IS also expressed to
Messrs. Michael S. Gould and Joseph S
Ryan, Jr of the USAID for their mvaluable
support to the project. Fmally, a word of
thanks to Rommel A. Canuto of the CCPAP
and Mmes Vilma Lopez, Lam P. Barlongay
and Ayan Hazelle L. Flores of the BOT Cen
ter who helped In the production of thiS
document Any shortcomings m the paper
are purely my own.
Carlos B. Gavino
LGU BOT Financial Adviser
CCPAP BOT Center
LGU Fmancing Present Sources, Availability and Terms
INTRODUCTION
The enactment of Republic Act
No 7160 otherwise known as
the Local Government Code of
1991(LGC) represents a major shift In local
governance In the Philippines It mandates
the devolution to the local government
Units (LGUs) of many functions previously
carried out by the National Government
Implementing Agencies (lAs) SpeCifically,
the LGC's policy declaration states: ". The
State shall proVide for a more responsive
and accountable local government
structure instituted through a system of
decentralization whereby local government
Units shall be given more powers, authority,
responsibility, and resources "1 The LGC
prOVides greater autonomy to the LGUs In
mobiliZing resources and allocating these
for the efficient delivery of basIc serVices,
facilities and other needs To carry out
these functions, the LGC calls for the es-
tabllshment In every local government Unit,
an efficient and dynamic organizational
structure and operating mechanism that
will deliver the basIc services and meet the
Priority needs and reqUirements of ItS
communities.
financing LGUs have traditionally relied on
their share of national government wealth
through the internal revenue allotments
(IRA), their own local resource generation,
and loans from the Government Financial
Institutions (GFls) and the Municipal
Development Fund (MDF). While these
sources adequately served the financing
needs of the 80's and the early 90's, they
have proven to be Inadequate In responding
to the increasing needs of the LGUs today
and In the future This IS eVidenced by the
growing popularity of non-traditional
sources offlnanclng such as Bulld-Operate
Transfer schemes (BaTs), mUnicipal bonds,
JOint ventures, and lately, the emergence
of an LGU guarantee facility to guarantee
private commercial loans. In addition, a
private sector provincial equity fund has
been established for the first time In the
country While the private sector LGU credit
market IS gradually evolving, the Govern
ment continues to playa key role In LGU
credit markets by providing the overall
policy framework for LGU financing and
vigorously promoting private sector parti
cipation In LGU Infrastructure financing.
The paper discusses these tOPICS In detail,
The history of LGU financing and prOVides a directory of sources of LGU
demonstrates the need for new avenues of financing at the end of the paper.
1 Local Government Code of 1991 (Repubhc Act No 7160), SectIOn 2
Previous Pag~ Blank 3
LGU Financing Present Sources, Avmlabllzty and Terms
OB.lECTIVES
The audience of the paper IS
directed mainly to the chief
executives, planning and
development officers, treasurers, assessors
and members of the Sanggunlan Body of
the LGUs and all other local officials
Involved In financing basIc services and
Infrastructure projects of LGUs Through
o
o
proVide an assessment of the current
sources of LGU finanCing terms and
prospects;
d,scuss the constraints In LGU access
of expanded fInanCing sources,
pnmanly from the pnvate sector; and,
these individuals, the commUnities at large 0 formulate recommendatIOns to en
In the countryside would benefit most from hance financing of LGU basIc services
the Information on the resources available
to LGUs for funding projects In their
respective communities The specific
objectives of the paper are four-fold
and Infrastructure reqUIrements,
The paper IS diVided Into four chapters'
Chapter I sets the framework and the
Government's new vIsion for LGU finanCing,
o update the LGUs on the fmanclng Chapter II descnbes the different sources
programs and polICies of major of long-term finance for LGU projects and
InstttutlOns Involved In LGU flnancmg, proVides an assessment of these sources
including the NatIonal Government and and future prospects Chapter III discusses
Its agencIes, GFls, commercIal banks, the constraints to LGU access of pnvate
multtlateral and bilateral agencies, capital markets, and Chapter IV gives the
mUnicIpal bond underwriters, and summary recommendations and
public and pnvate finanCing sources; conclUSion
PreVious Page ':IIQ'n J,. 5
LGU Financing Present Sources, Availability and Terms
Chapter I - Framework for LGU Financing
, ,
local Government Code of 1991 financial autonomy provided to LGUs, many
(lGC) innovative approaches In financing and
Implementation are now being explored by
Prior to the passage of the LGC, the the more progressive LGUs.
delivery of basIc services and other activi-
ties ofthe LGUs were financed from resour
ces provided by the National Government
(NG) Thus, Investment plans and PriOrity
development programs were determined by
the national agencies with minimal
consultation and Involvement of the LGUs.
Development In the countryside was
essentially a national activity. This arrange
ment and budgeting system proved to be
cumbersome and ineffiCient, and subject
to political lobbYing In Manila. The lAs,
rather than the LGUs, determined pnorlties
and plans Realizing this predicament, the
country's legislators drafted the LGC.
To ensure the effective and timely
delivery of basIc services and other
activities, the LGC decentralized the
functions of basIc service delivery,
investment planning and development, and
program formulation, consolidating most
ofthe eXisting laws and regulations covering
local government operations and
Intergovernmental relationships With
decentralized planning, local offiCials have
taken the lead In shaping the pattern of
local development, and Implementing
Priority projects and delivery of basIc
Infrastructure, health, social and
environmental services. Inspired by the
Devolution of basIc services and other
activities as provided for In the LGC IS
expected to lead to a more effective means
for addreSSing the minimum basIc needs
of the local communities. The devolved
activities Include the provIsion of mUnicipal
Infrastructure such as public markets, bus
terminals and roads, water supply and
Sanitation, solid waste management, school
construction, basIc health services, social
welfare, environmental protection and
agricultural extension. While the medium
and long-term prospects for delivering these
basIc services are bright, so far, most
devolved projects that have been or are
being Implemented by LGUs Involve public
markets, water supply and bus terminals
However, many LGUs are now developing
projects In other PriOrity areas such as
airports, land reclamation, small power
projects, and environmental projects
Legal Framework. The legal framework
for LGU financing lies In the LGC, which
provides for the sharing of LGUs In the
proceeds of national taxes, local taxation
and fiscal matters, credit financing, and
build-operate-transfer schemes These
resources and forms of financing are
described as follows
PreyfoWi Page Blank 7
LGU Financing Present Sources, AVailability and Terms
o Internal Revenue Allotments (IRAs) -
These consist of local governments'
share In the proceeds of national taxes
which constitute 40% of total national
Internal revenue taxes, with fixed
percentage allocations to LGUs:
provinces (23%); cities (23%);
municipalities (34%) and barangays
(20%), and for each LGU, on the basIs
of population (50%), land area (25%)
and equal sharing (25%),
o Local Taxation and FIscal Matters -
Local governments have been given the
authority to exerCise their power to
create their own sources of revenue,
and to levy taxes, fees, and charges
subject to specific provIsions,
consistent with the basIc policy of local
autonomy. They also have been given
more responsibility for operating the
real property tax system;
o CredIt Financmg - The LGC provides
more liberal rules for LGU borrowing
loans, credits and other forms of
indebtedness with any government or
domestic private bank and other
lending institutions, deferred payment
and other Investment schemes, bonds
and other long-term securities, Inter
LGU loans, grants and subsidies, and
loans from foreign sources onlent by
the National Government The process
for availing of credit financing has also
been liberalized No longer are LGUs
required to seek Department of Finance
(DOF) approval before seeking bank
credit approval. Furthermore, they no
longer need Commission on Audit
(COA) certification of their borrowing
capacity prior to applYing for a loan
However, the Code sets a limit on LGU
Indebtedness "the amount of
appropriatIOn for debt servlcmg shall
not exceed 20 percent of the regular
Income of the LGU concerned" 2,
effectively putting a cap on the total
Indebtedness capacity of LGUs,
The basIc policy provides for any LGU 0 BUlld-Operate-Transfer(BOT) Schemes
to create Indebtedness, and avail of
credit facilities to finance local
Infrastructure and other SOCIO
economic development projects In
accordance With the approved local
development plan and publiC
Investment program The policy allows
2 Local Government Code of 1991 (Republic Act No 7160), SectIOn 324 (b)
8
- The LGC also allows LGUs to enter
Into contracts for financing, construc
tion, operation, and maintenance of
Viable Infrastructure projects under the
bUild-operate-transfer schemes as
proVided by R.A No 7718 (BOT Law).
LGU Fznancing Present Sources, Avazlabllzty and Terms
Government's New Vision and Policy The vIsion and policy framework
Framework for LGU Financing statement rests on two mam premises
Spurred by the mcreasmg need by 0
LGUs to fmance the devolved services
within the framework of the LGC, the DOF
formulated a new vision and policy
LGUs have varying levels and records
of credItworthiness and bankabillty,
and theIr financing needs are huge; and
framework for fmanclng local governments' 0 the private sector (BOT Investors,
basIc services and development projects
predicated on promoting self-reliance for
LGUs 3. The policy framework defmes the
respective roles of various players Involved
In LGU fmanclng, I.e. the NG, government
financial Institutions (GFls), private
commercial banks and fmanclal sources,
municipal bond market players, the
multilateral agencies, the Municipal
Development Fund (MDF), and BOT
proponents.
The ultimate objective IS to encourage
LGUs to rely less on transfers from the NG,
and more on locally generated resources,
and to mcrease LGU access to private
funds. In order to do thiS, the policy
framework makes recommendations on
rationalizing Official Development
Assistance (ODA), encouragmg LGUs to
raise more locally-generated funds,
enhancmg pnvate sector participation m
flnancmg LGU mfrastructure projects,
building-up project management capacity,
and promotmg LGU creditworthiness.
bondholders, commercIal banks), the
GFls and MDF all have an Important
role to play In meeting LGU financing
reqUIrements.
Taking these Into account, the
Government passed a resolution (the
Investment Coordination Committee or ICC
resolutlon 4) that governs national
government grants, I e that these grants
will be given selectively on the baSIS of
equity, externalities, and economies of
scale
In addition, the Government is puttmg
m place a program to rationalize lendmg of
GFls to LGUs as well as ODA assistance.
The program IS premised on re-focuslng GFI
and ODA lendmgto less-creditworthy LGUs
with limited access to pnvate sources of
financing, and to finance SOCial and
environmental projects. Finally, the
Government IS actively pursuing a program
to expand LGU access to private capital
markets to complement the traditional
3 LGU Financmg of BasIc ServIces and Infrastructure Projects, A New VISIOn and Policy Framework, Department of Fmance, October 1996
4 The ICC resolutIOn prOVIdes NatIOnal Government (NG) support III the form of matching, speCIfic and close-ended grants for LGU devolved
actlvltles WIth SOCtal and/or envIronmental obJectlves III four sectors water supply, health, envIronment and ru~al Illfrastructure (rural roads, communal lITIgatIOn, public markets and slaughterhouse) The grants are gIven to LGUs on a matchmg baSIS by Illcome class and type of devolved aCtlvlty, e.g. for watershed protectIOn or mumclpal fishery management, 4th - 6th class LGUs WIll receIVe NG grants on a 70 30 shanng baSIS
9
LGU Financing Present Sources, AvailabilIty and Terms
sources of LGU financing. The program
Includes the following specific courses of
action·
a. Increase LGUs' use of BOT - like
arrangements and other forms of
private sector participation. BOT
arrangements provide unique
advantages to LGUs which are not
found In other sources of financing.
Among these are little or no initial
Investment requirements; proper risk
allocation where the financing, design
and construction risks are borne by the
private sector; transfer of technology;
effiCiency In operations and financing
of capital requirements through the
long-term concession agreement.
Other forms of privatization (page 36)
are also being promoted by the
Government
b. Develop the LGU municipal bond
market. The Government has
recognized the potential of one
untapped finanCial source - the
muniCipal bond market. Thus, the
Government IS keen on developing,
through the private sector, a credit
rating system for LGUs to support an
LGU muniCipal bond market, and
supporting the credit guarantee
corporation being spearheaded by the
Development Bank of the Philippines
and the Bankers Association of the
Philippines which would provide
guarantees to muniCipal bonds and
commercial credit Instruments
c. Promote LGU access to private
sources. The Government considers
LGU access to private sources of
financing as a key measure In
sustaining long-term economic growth
In the countryside One Issue raised
by pnvate sources IS the lack of a
business relationship between
commercial sources offlnance and the
LGUs due to the eOA ruling on LGU
deposlts5 . To address thiS, two market
based measures are being explored by
the Government to Improve access to
private sources: (I) liberalizing the LGU
depOSitory bank regulations to explicitly
allow LGUs to establish depOSitory
banking relationships with Bangko
Sentral ng Pillplnas (BSP)-accredlted
private banks, and (II) extending the IRA
Intercept mechanism (allOWing GFls to
hold LGUs' I RAs against debt service
obligations) to Include accredited
private banks.
d. Optimize the involvement of GFls in
LGU financing. Although GFls'
Involvement In LGU finanCing IS
extensive, some measures can be
undertaken to further optimize the GFls
Involvement such as (I) adopting a
graduation scheme to move the more
creditworthy LGUs to the pnvate credit
markets; (II) developing co-financing
5 COA CIrcular 92 mstructs LGUs to open and mamtam depOSItory accounts wIth banks "preferably government-owned" located m or nearest
to thelr respectIve areas of JunsdIctIOn
10
LGU Financing' Present Sources, Avallabiltty and Terms
schemes with private commercial
banks; (III) Improving LGU credit
worthiness through technical assIs
tance; (IV) coordinating GFI LGU credit
programs with the MuniCipal
Development Fund (MDF). and (v) g
structuring ODA- sourced lending
programs for non-revenue generating
SOCial projects or for revenue
generating but long-gestating projects
and (IV) proposing amendments to the
LGC to strengthen local treasury
operations and prOViding incentives for
greater local revenue mobilization
e. Restructure and reorient the MOE
As a disbursement mechanism for
ODA-supported loans and grants
administered by the Bureau of Local
Government Finance under the DOF,
the MDF's role can be enhanced to
Implement an LGU graduation policy,
I.e. graduating more creditworthy LGUs
from concesslonal MDF funds toward
GFls or the private sector, and helping
LGUs build a track record of
creditworthiness.
Tap ODA technical assistance and
financing. ODA financing plays a key
role In the Implementation of economic
development programs of LGUs.
Closer coordination between the
donors and the concerned government
agencies and LGUs will faCIlitate the
flow of funds to the LGUs. The
Government IS contemplating ways of
uSing ODA funds to Increase the
partnership with the private sector, and
to target ODA funds so that creditworthy
LGUs are encouraged to tap
commercial sources of funds, and
financial and managerial capacity is
gradually bUilt-up In the less
creditworthy LGUs.
f Improve the capacity of LGUs to
raise their own rev~nues. The
Government recognizes that an
Important factor In enhancing LGU
The Government IS vigorously pursuing
the Implementation of these actions and
recommendations to ensure access of
LGUs to a Wider range offinanclng sources,
and to develop LGU capability for
creditworthiness IS to Increase the Implementing Priority Infrastructure
capacity and Willingness of LGUs to projects.
raise local revenues. Steps are being
taken by the Government to achieve
thiS objective, including: (I) Improving
the mOnitoring of LGU revenues and
expenditures; (il) IntensifYing the
training and supervIsion of local
finance offiCials; (IIi) reviewing real
property taxation rules and procedures,
11
With regard to National Government
guarantees, the Government's poliCY IS
clear toward risk management and
guarantee provIsions for projects
undertaken by LGUs In cooperation with the
private sector Consistent with ItS vIsion
and poliCY framework to wean away the
LGU Fmancmg Present Sources. AVa/labllity and Terms
LGUs from dependence on the National
Government and to support the principle
of devolution espoused by the Local
Government Code, the National
Government IS advocating a proper
unbundling of risk and appropnate nsk
sharing between the pnvate sector and the
LGUs concerned. For example, In the water
sector, It IS advocating to limit concesslonal
funding and National Government
resources to those smaller I marginal water
dlstncts which are unable to attract pnvate
Investors, but which will eventually graduate
to creditworthy status sometime In the
future. Water dlstncts which are able to
attract pnvate sector investments, would
be directed to tap the private credit market,
the GFls and the pnvate sector for financing
dlstnbutlon system Improvements and bulk
water supply. Advocating the pnnclples of
project finance, the Government believes
that projects with strong private sector
Interest should rely on project cash flows
and project-related credit enhancements
(e.g. escrow accounts, assignment of
receivables and "step-in" nghts) to proVide
comfort to ItS Investors.
12
LGU Fmancing Present Sources, Availability and Terms
Chapter II - Current Sources and Assessment of LGU Financing
The passage of the 1991 Local sources of financing. The current sources
Government Code signaled the emergence of LGU Financing are shown In Chart A
of a new market for credit financing - the
LGUs No longer confined to sourcing their Internal Revenue Allotments (IRA)
requirements from the GFls and the
MUnicipal Development Fund, which over
the years, has been the LGUs' major source
of long-term credit finance, the LGUs have
taken a keen Interest In tapping vanous
other sources of financing to meet their
financial requirements. The Code allows
the LGUs to directly Incur Indebtedness on
their own account without pnor clearance
from the National Government Thus, LGUs
have floated their own bonds, entered Into
BOT contracts and JOint ventures, and
signed lease agreements with private
Chart A. LGU Financing Options
'--_--' G
13
As a result of devolution, the main
source of LGU finances has been the IRA,
the share of LGUs In the national taxes. In
1996, over P56 billion was transferred to
the LGUs as their share of the national
taxes Over the years, the share of IRA as
a percentage of total LGU revenues
(combined for prOVinces, cities and
municipalities) has been increasing as
shown In Chart B.
In 1991, the percentage of IRA to total
revenues was only 40.7%, gradually nSlng
to 61.9% In 1993, and 61 4% In 1995,
Signaling the LGUs' reliance on the IRA to
fund ItS expenditures However, the
situation has reversed as of late. In 1996,
the share of IRA to total revenues has fallen
to 53.8%, slgnrfylng that LGUs have started
to mobilize financing from other sources
(local resource mobilization and loans). The
annual percentage of IRA to total Income
for the penod 1991-1996 IS shown In Annex
1. If this trend continues, LGUs will, In
future, rely less on the National Government
for financing basIc services and
Infrastructure requirements and more on
other sources of flnancln!5 However, the
LGU Financing Present Sources. AVailability and Terms
Chart B.
Source
Note
Chart C.
IRA as Percentage of Total LGU Revenues (%)
55.9 61.9 61.2 61.4
1991 1992 1993 1994 1995 1996
Bureau of Local Government Fmance (OOF)
Barangay data are not mcluded m the chart
53.8
IRA allocation formula continues to favor
large highly urbanized LGUs For example,
the City of Makatl, which IS finanCially self
suffiCient, continues to receive substantial
amounts of IRA. Another city In Metro
Manila was able to borrow more than P1.5
billion last year from a GFI while stili
receiVing substantial IRA Many LGUs, on
Local Resources as Percent of Total LGU Revenues (%)
1991 1992 1993 1994 1995 1996
Source:
Note
Bureau of Local Government Fmance (OOF).
Barangay data are not Included m the chart
the other hand, which have limited access
to private resources, receive much less IRA
than these cities. The other Issue with
regard to the IRA formula IS the lack of
incentives for LGUs to generate more local
resources as the formula IS based on
population, land area and equal shanng
Therefore, there has been clamor from
some LGUs for the Government to review
the IRA allocation formula to promote equity
and effiCiency
Local Resource Mobilization
LGUs' local resource mobilization
followed a pattern consistent with that of
the IRA. As shown In Chart C, the LGUs'
local resources In 1991 were about 56.1%
of theIr total Income. The succeeding years
witnessed a gradual decline In the
percentage share of local resources to
36.9% In 1993 and In 1995 Among the
reasons for the decline are the Increases
In IRA allocations and the decline In
revenues from low tax assessments. In a
preliminary study conducted by the World
Bank6, the paper concluded that many large
cities and small towns rely substantially on
non-tax revenues and IRA allocations for
sourcing revenues, and that tax
assessments and business tax compliance
appear to be extremely low. However, the
analYSIS shows that there IS ample
opportunity for LGUs to greatly Improve
financial performance. In fact, the LGUs'
revenue generating performance In 1996
6 LGU Urban Water and SamtatIons Project PreparatIOn MISSIon, World Bank Alde-MemOlre, June 1997
14
LGU Financzng' Present Sources, AVallabzlity and Terms
bears this observation, where LGUs' own
resources as a percentage of total
resources made a dramatic Improvement
to 45 3% from 36 8% the year before. The
annual percentage of locally generated
funds to total LGU Income by type of LGU
IS shown In Annex 2.
considering plans for expanding Into direct
LGU financing.
Private sources consist of financing
provided by the commercial banks
[primarily by the Philippine National Bank
(PNB) which was a GFI until recently
privatized], and mUniCipal bond flotations,
In general, many mUniCipalities also which so far has been In the hOUSing sector
tend to horde surpluses In cash, foregOing but IS now geared to prOVide funding for
the opportunity to leverage funds Into other LGU Infrastructure projects.
higher yielding Investments Furthermore,
Increases In local revenues through more Public Sources of Debt Financing effiCient taxation could prOVide the
necessary resources for LGUs to make Government Financial Institutions
worthwhile Investments In baSIC services (GFls)
such as water and sanitation, health,
education and rural Infrastructure. Thus, Background. Traditionally, the LGUs
opportunities are there for LGUs to expand have turned to the GFls for their short to
their local resource base and benefit from intermediate credit finance requirements
leveraging eXisting resources. GFI lending served the LGUs well until the
mld-1980s, when many LGUs began to
Debt Financing
Apart from IRAs and local revenues,
LGUs have availed of debt finanCing to
finance their capital requirements. Debt
finanCing for LGU projects come from two
main sources
o publiC sources; and,
o private sources
Public sources of debt finanCing
continue to come primarily from the GFls,
I e. the Land Bank of the Philippines (LBP)
and the Development Bank of the
default on their obligations due to the severe
economic slump resulting from the political
uncertainty In the country. Despite the IRA
Intercept mechanism, unpaid obligations to
the GFls rose to as much as P2 1 billion In
1985, which led to the cessation of lending
by GFls to the LGUs. As a result, the
National Government had to carry out a
debt relief program for the LGUs. Since
then, however, With the Increase In IRA
allocations and better fiscal management,
the repayment track record of LGUs has
Improved, allOWing GFls to resume lending
to LGUs.
Philippines (DBP) However, pension funds, To carry out the government's mandate
notably the Government Service Insurance to promote sustainable development In the
System, and the Social Security System are countryside, and encouraged by the
15
LGU FInancing Present Sources, Availability and Terms
Chart D.
8000
7000
6000
5000
4000
3000
2000
1000
decentralization and the greater autonomy
accorded the LGUs, the GFls established
loan funds specifically targeted to LGU
lending The Land Bank of the Philippines'
LGU financing program was In place from
the time of establishment of the Bank In
1963 To date, It has lent over Pll.6 billion
In the country with total resources of some
P134 billion, has been lending actively to
LGUs over the years It has a social mission
of promoting countryside development and
has been a major contributor to rural credit
delivery in the Philippines Though LBP's
main portfolio of loans IS In the agrarian
to LGUs. The Development Bank of the sector, It has a very active LGU finanCing
Philippines established its Countryside
Lending (Window III) to extend loans
exclusively to countryside projects. Two
other government agencies, the Social
Security System (SSS) and the Government
Service Insurance System (GSIS) were also
active, but did not finance capital or
Infrastructure projects The SSS targeted
livelihood and hOUSing projects, while the
GSIS proVided Insurance coverage for LGU
Investments as well as hOUSing loans for
government service personnel
Land Bank ofthe Philippines. Created
In 1963, the Land Bank of the Philippines
(LBP), one of the top five universal banks
Land Bank LGU Financing Portfolio as of March 1997 In Peso Millions
16
program consistent With ItS mission.
Foremost In LBP's LGU finanCing program
IS ItS "Total Development Options - Unified
Land Bank Approach to Development or
TODO-UNLAD program." The program
offers a comprehenSive package of loans
that links farmers' cooperatives, private
companies, rural banks, non-governmental
institutions and LGUs around an Income
generating project In a speCifiC area
The Land Bank's LGU program has
financed projects In various sectors
amounting to over Pll 6 billion as of March
1997, primarily In Infrastructure, bus
terminals, public markets, telecommu
niCations, hOUSing, water systems, road
construction and traffiC systems Chart D
shows the distribution of the LGU portfoliO
of Land Bank.
The chart indicates that majority of
Land Bank lending to LGUs has been
directed to Infrastructure finanCing (61%).
These projects Included Integrated
development projects In Metro Manila and
Metro Cebu consisting of roads,
reclamation, ports, schools, mUniCipal and
commercial bUildings, etc. The next major
exposure of Land Bank was In heavy
machinery (15%), which are used by LGUs
In carrYing out their development and
LGU Fznancing Present Sources, Avazlabilzty and Terms
Infrastructure projects Lending to Land Bank assistance. Eligible loans
construction projects amounted to 7% and
the rest were for sport complexes, public
markets, bus terminals and others Annex
3 shows the geographical distribution of
Land Bank's LGU lending To assist Land
Bank In making their Investment deCISions,
It has developed a creditworthiness ranking
system for LGUs. This system claSSifies
LGUs Into four credit categories:
LGU Number of
Classification LGUs
Prime 41 J (17.4%) High Grade 252
Medium Grade 666 (395%)
Low Grade 726 (431%)
Total 1685 (100.0%)
Land Bank utilizes a set of criteria for
ItS LGU credit rating system, including
financial capability, socio-economlc profile,
political stability and the technical,
economic and financial Viability of the
proposed project. As shown In the above
table, about 17% of LGUs are classified by
the LBP as prime clients and high grade,
while 40% are claSSified as medium grade.
Land Bank's lending policy IS limited to
LGUs With a medium-grade or higher
claSSification
Terms of Credit. As mentioned In the
prevIous paragraph, Land Bank lends to
proVinces, cities and municipalities that are
rated medium-grade or higher. USing thiS
criterion, some 960 LGUs are eligible for
finance local Infrastructure and other SOCIO
economic development projects under
LGUs' local development plans. The
maximum loan amount IS based on the
reqUirement of the project but does not
exceed the "Net BorrOWing Capacity"
calculated for LGUs as defined In the Local
Government Code. LGUs tYPically will
contribute 25% of the total project cost; the
terms of the loan will not exceed 5 years
and the maximum grace period on principal
IS two years. Interest rate charged IS the
prevailing market rate. Collateral
requirements can Include a holdout on LGU
depOSits; real estate property, machinery
and equipment and a deed of assignment
on IRA, regular taxes or net Income. The
LGU lending program requirements and
procedures of Land Bank are reproduced
In Annex 4.
Development Bank of the Philippines
(DBP). The Development Bank of the Philip
pines has been lending to LGUs since its
inception The centerpiece of DBP's coun
trYSide assistance strategy IS ItS Window III
program which assists activities that
facilitate the delivery of baSIC services that
enhance the quality of life of Filipinos, parti
cularly those of the disadvantaged groups
In the rural areas. To fulfill ItS commitment
to countryside development, DBP sets aSide
30% of ItS annual net after-tax Income for
ItS Window III program As of the end of
March 1997, a total of 1,517 loans had been
approved under the Program and total loan
releases amounted to P3.4 blillon7 •
7 Although DBP's Wmdow III aSSIsts projects m the countrysIde, only about 15% IS actually lent to LGUs
17
LGU Financing Present Sources, Availabllily'and Terms
Some of the LGU projects supported
by the DBP Include:
0 Expanded Public Transportation
Boundary Hulog Program
0 Schools and Hospitals Financing
0 Rural Electnc Cooperatives Special
Program
0 Damayan sa Pamumuhunan
Program
U Cattle Financing Program
0 Flshenes Sector Financing Program 0 LGU Financing Program
Compared to loans extended to coun
tryside projects, DBP's direct loans to LGUs
have been fairly limited. As of March 1997,
It has financed some 20 projects amoun
ting to P395 million as shown In Chart E.
Majonty of DBP's LGU assistance were
for projects Involving heavy equipment or
Chart E. Development Bank of the Philippines LGU Financing Portfolio As of March 1997 In Peso Millions
18
for construction projects amounting to
P85.0 million (21.5%). Next to these are
public market projects amountingto P54 3
million (138%) The DBP also lent for a
diagnostic center (P58 0 million), a major
resettlement project of P50.0 million and
water supply systems costing P45 5 million
(11.5%). The LGU lending program
requirements and procedures of the DBP
are reproduced In Annex 5.
Assessment of GFI Lending
Current Volume and Prospects for
Growth. The portfolio of loans granted to
LGUs between the DBP and the LBP as of
March 1997 amounted to some P12 0
billion, majonty of which was lent by the
Land Bank GFls remain the major source
of credit finance for LGUs Furthermore,
the LGU programs remain a profitable
portfolio for GFls and current recovery rates,
as well as prospects for longer-term
profitability, are good. LGUs have begun to
pursue new Investments In Infrastructure
as the economic development In the
countryside has started to take root The
DBP, In particular, IS a major force behind
the establishment of the LGU Guarantee
Corporation (discussed later In the paper),
which Will enhance commercial lending to
LGUs. The Land Bank, for ItS part,
continues to be a major source of financing
for LGU projects. Because of the presence
of GFI branches In most localities In the
countryside, GFls have established close
relationships with LGUs. Thus, GFI lending
to LGUs IS expected to expand dramatically
LGU Fmancing' Present Sources, Avmlablhty and Terms
over the next couple of years, because of
the market niche It has established.
Loan Distribution and Terms. The
GFls have lent to all classes of
municipalities. Geographically, the
distribution is skewed towards Luzon and
In particular the National Capital Region
(NCR) with over 50% of total LGU lending
because ofthe concentration of commerce
and Industry. The terms of lending ranges
from 3 years to 5 years (In some cases, up
to 7 years) which IS stili short to medlum
term 8. ThiS IS a major constraint to
Infrastructure project finanCing as the
gestation period of many Infrastructure
projects IS longer In the case of BOT
projects, the concession period goes
beyond (up to 25 years), although cash flow
recovery may be for a much shorter period.
In thiS case, the GFI loans, If availed, Will
need to be re-flnanced or rolled over at the
time the loan repayment IS due
The GFls at the moment are not
Inclined to lend beyond seven years until
such time as the repayment track record
of LGUs IS fully established or once credit
enhancements are In place. One way of
accomplishing thiS IS the establishment of
an LGU credit rating system, which Will
mOnitor, among others, the repayment
capability of LGUs The Government IS
currently pursuing the establishment of an
LGU credit rating agency. As far as the cost
of borroWing IS concerned, market Interest
rates Will continue to favor the more credit-
worthy LGUs (first to third class mUniCipa
lities). Fourth and fifth class mUniCipalities
Will have to access the more concessionary
terms of the MUniCipal Development Fund
discussed In succeeding paragraphs.
Sector Coverage. For the time being,
the sectoral focus of GFI lending (In terms
of number of projects) continues to be the
small-scale, traditional projects such as
publiC markets, heavy eqUipment/machi
nery, bus terminals, small waterworks
systems, and others. However, Land Bank
has lent to major Infrastructure projects In
the NCR and In the Vlsayas. As GFls
become more and more comfortable
lending to LGUs, we should expect other
sectors to benefit from GFI lending and the
size of projects to Increase. These sectors
Include transportation, airports, solid waste
management and bigger waterworks
systems or bulk water supply from the
private sector Collateral and loan security
Will continue to figure prominently In LGU
lending and assignment of IRA Will be the
main form of security. However With the
advent of BOT schemes and as more LGUs
and GFls alike become familiar With project
finance, It IS expected that cash flows from
revenue-generating projects Will be the
main criterion for extending GFI loans.
Official Development Assistance
(ODA)
Another major source of public debt
finanCing for LGUs IS OffiCial Development
8 The DBP however, has a limIted loan program for LGUs under Its Wmdow III program that can extend terms up to 12 years
19
LGU Financing Present Sources. AVallabllity and Terms
Assistance (ODA) from multilateral financial
institutions such as the World Bank and
the ASian Development Bank (ADB) which
are channeled through the MUnicipal
Development Fund (MDF). In addition,
there IS also loan funding available through
financial Intermedlanes and counterpart
agencies, and from Bilateral Fmanclal
Agencies such as the Overseas Economic
Cooperation Fund (OECF) of Japan.
Board chaired by the DOF with three other
Government agencies as members, I e. the
National Economic and Development
Authority (NEDA), the Department of Interior
and Local Government (DILG) and the
Department of Budget and Management
(DBM). The MDF consists of two major
units, the Financial Unit, headed by the
Executive Director of the BLGF and the
Central Projects Office (CPO), the project
Implementation Unit for each project located
Municipal Development Fund (MDF) In participating agencies In the MDF ASide
from providing loans, the MDF also
Multilateral lending sources for LGU proVides technical assistance to LGUs for
projects have pnnclpally come from three project Identification and feasibility studies
main sources, the World Bank, the ASian and for other projects such as the Real
Development Bank and the Overseas Property Tax Administration Project, which
Economic Cooperation Fund of Japan aSSisted more than 800 LGUs In Improving
(OECF). The funds have been channeled their real property tax collection
through the MDF, a revolVing fund created
by a Presidential Decree in March 1984 to
consolidate the fragmented and
uncoordinated borrowing and grant system
to the LGUs The MDF is administered by
the Bureau of Local Government Finance
(BLGF) under the DOF Before the creation
of the M OF, the donor agencies reqUired a
central agency for monitonng the foreign
loans and grants With the establishment
of the MDF, a separate monitoring agency
was no longer needed, and thus, the MDF
became the condUit for foreign loans and
grants The MDF also played the role of a
monltonng unit and project accounting
support for foreign funds directed to the
LGUs.
Organization. The MDF operates
under the direction of a Policy Governing
20
Lending Operations. The MDF was
created as a revolVing fund and made
available to LGUs In undertaking their SOCIO-
economic development programs. It was
active in prOViding loans to LGUs In the
1980s when the GFls stopped lending to
the LGUs on account of mounting
uncollectible accounts Dunng thiS time,
the MDF channeled some P79 billion of
long-term finance to LGUs. LGU projects
that have benefited from assistance from
the MDF Include'
0 public markets
0 heavy eqUipment and machinery
0 bus terminals
0 sla ughterhouses
0 drainage and waterworks
0 roads
LGU Financzng Present Sources, Avaziability and Terms
o solid waste
o telephone systems
o health centers
At present, nine loans have been
provided by the World Bank, ADB, OECF
and Eximbank of Korea through the MDF
as shown In Annex 6.
Total loans extended under the nine
projects for all regions amounts to $290
million (PIO.7 billion at current exchange
guarantees the loan repayment. ASide
from providing loans, the MDF can also
provide a package of a loan and a grant,
which effectively lowers the LGUs'
borroWing costs. The loan component
carries the terms and conditions set by the
lender through the MDF Because of the
liberal terms of the MDF, particularly the
long-term prinCipal repayment feature, the
MDF has been extremely attractive to LGUs
Funding Limitation. At the moment,
rates) The greater access by higher MDF funding to the LGUs IS experiencing
Income LGUs to the MDF credit facility can constraints for several reasons:
be attributed to the requirement of financial
capacity and the ability ofthe LGU to repay 0 the Increased demand for MDF credits
the loans Other criteria also favor the
higher Income LGUs, such as urban
population minimum reqUirements and
annual population growth rates, annual
Income and equity requirements, and
by other developing countnes;
o funding limitations of the multilateral
institutions that support the MDF;
commitment to establish a separate project 0 constraints Imposed by the government
office With full-time staff With thiS In mind, budgetary process, and
and considering that the higher Income
LGUs have access to other sources of
funding, the Government, In Implementing
ItS new vIsion for LGU finanCing, IS
diSCUSSing With the multilateral finanCing
agencies, re-focuslng MDF assistance
toward less creditworthy LGUs.
Terms of Credit. The MDF IS, at
present, the only source of credit finance
that IS offering long-term finanCing With a
maturity penod of 15-25 years The Interest
rate IS currently set at 2 percent above the
weighted average Interest rate of 61-90 day
domestic time depOSits. No collateral IS
required since the IRA intercept mechanism
21
o Increasingly limited eligibility for MDF
assistance to the Philippines due to the
Increased economic development of
the country.
First, the worldwide demand for MDF
assistance and the Increase In
requirements by other less-developed
countries In the world has constrained the
availability of funds to meet the Increased
demand for MDF~funds from the
Philippines. The multilateral agencies, In
the pursuit of poverty alleViation objectives,
are shifting attention to poorer regions of
the world such as Africa. Second, the
LGU Financing' Present Sources, AVailability and Terms
multilateral mstltutlons that support the
MDF are expenencmg fundmg limitations
themselves and are encouragmg LGUs to
tap private sources of financing for
development assistance worldWide. Third,
the MDF's present lending capacity IS
constramed by the budgetary process of
the Government Each department of the
national government observes a budgetary
ceiling Imposed by Congress and the
Development Budget Coordinating
Government for LGU fmanclng, the MDF IS
bemg re-onented to be a more effective
Instrument In lending to lower class
municipalities, which have limited access
to pnvate sources of capital Reform of the
MDF IS bemg undertaken with World Bank
assistance. Because of the favorable terms
of MDF lendmg, the MDF IS expected to
continue to be attractive to LGUs for
fmancmg basIc services and mfrastructure
Committee. In practice, the budget Bilateral Sources of Debt Financing
submissions of the National Government
departments, which mclude budgetary
requests for MDF counterpart funds, are
subject to the ceilmg Fmally, as the
Philippine economy progresses, ItS
eligibility for mcreased MDF assistance IS
adversely affected, as one of the principal
cnterla for MDF assistance IS the economic
standing of the recIpient country
Assessment
Prospects for Growth. The MDF
continues to be a major source of
concessionary credit finance for LGUs
Smce ItS first loan (MUnicipal Development
Project I of the World Bank), the MDF has
been actively contnbutmg to the economic
development of LGUs by provldmg long
term fmanclng for LGU projects. It IS the
Another source of flnancmg for LGU
projects IS proVided by bilateral agencies
such as the Overseas Economic
Cooperation Fund of Japan (OECF) which
channels funds to national Implementmg
agencies for national projects In addition
to ItS assistance to agnculture and transport
projects at the local level, the OECF has
been active m proViding concessionary long
term lendmg to Water Dlstncts (WDs) all
over the country through the Local Water
Utilities Administration (LWUA) as described
m Box A. Although the WDs are stnctly not
a part of the LGUs (although ItS Board
members are appomted by the LGU chief
executive), they proVide basIc water services
to LGUs by constructmg, operating and
mamtammg the water systems of LGUs.
long-term feature of MDF loans and the Private Sources of Debt Financing
concessionary rate that has attracted the
LGUs Lately, however, some LGUs have Before the passage of the LGC, pnvate
vOiced concern regarding the long fmancmgfor LGU projects has been virtually
processmg time of MDF loans Therefore, non-existent as the LGU credit market was
steps need to be taken to streamline the dominated by the traditional "offiCial"
approval process. At the same time, sources offmancmg, I e the GFls and ODA
consistent With the new Vision of the However, smce then, pnvate fmanclng has
22
LGU Financing' Present Sources, AVailability and Terms
Box A
Local Water Utilities Administration (LWUA)
In order to promote, develop and finance local water utilities, optimIze public service water operations, and facIlitate the Improvement of local water servIces, the Local Water UtilitIes AdministratIOn (LWUA) was created m September 1972 under the Provincial Water Utilities Act. The LWUA is a specialized lending institution, which provides financing to water districts for water supply development, expansion and improvement. L WUA has evolved to be primarily a financmg agency wIth the following functions: .
• provide loans to quahfied local water utlhtles for theIr capital expenditure programs;
• establish standards for local water utIlities such as water quahty, design and construction of new or addItional facilities for water supply, treatment, transmission and dIStribution, and for wastewater collection, treatment and disposal;
• furnish technical assIstance and personnel traming programs for local water utilities;
• effect systems integratIOn, joint investments, water district annexatIOn and de-annexatIOn.
L WUA has, over the years, on-lent funds from ODA sources at concessionary rates. As of February 1998, L WUA has given loans of about P12.3 billion to 462 water districts. LWUA has also extended loans to rural waterworks and sanitation associations, whIch are non-stock, non-profit cooperative associatIOns, and franchised to operate rural water supply systems in remote areas where access to a water district is dIfficult. Many water distrIcts have benefited from low-interest, long-term loans of up to twenty-five years with ample grace periods. However, because of funding source constramts from its Donor agencies, L WUA has not been able to accommodate fundmg requests from all the water districts. As a result, some water districts (Bulacan, Metro Cebu, Puerto Princesa and Batangas CIty) have turned to alternative sources of financing such as BOT schemes and jomt ventures.
23
began to gain a foothold In the LGU credit
market as a result of the expanded
borrowing powers under the LGC, and as
the resource requirements of the LGUs
grew, creating a new, untapped market
With these developments, the LGU credit
market has opened up vast financing
opportunities for the private sector. For the
first time, the LGUs have a variety of private
funding sources for their projects. These
Include commercial bank lending which IS
expected to materialize with the creation
of a guarantee faCility, lending from the
Philippine National Bank, now clasSified as
a private commercial bank, and mUniCipal
bond flotations With adequate credit
enhancements these funding sources are
expected to fill a major gap In LGU
financing. These sources are discussed In
the follOWing paragraphs
Private Commercial Banks
Commercial Banks' Lack of
Interest in LGU Financing. In the past
and to some extent the present, there was
little Interest by the private banks In LGU
financing There were vanous reasons
including:
o the lack of expenence In dealing with
LGUs. Traditionally, private commercial
banks served pnvate corporate clients
who formed part of their deposit base.
The relationship resulted In a regular
exchange of information regarding
projects and the banks were able to
periodically assess the continued
finanCial viability of the clients'
business With the absence of a
LGU Financing' Present Sources, Avallabllzty and Terms
Chart F.
6000
4000
2000
0
~ ~.~ '" " ~ C' :t:<'l
banking relationship, the commercial
banks had little Incentive to lend to
LGUs;
o the dearth of information about the
creditworthiness of LGUs. An LGU
credit rating agency IS yet to be
established which could provide
Information on the credit-worthiness of
LGUs which IS one of the basIc
requirements of commercial lenders;
o the short-term orientation of most
commercial banks' lending policies.
Commercial bank loans are mostly
short-term (letters of credit, export
credits, working capital loans) which
do not suitthe long-term nature of LGU
Infrastructure projects,
poses unnecessarily high risks because
of the political succession Issue
However, one commercial bank
(previously a GFI) that has been very active
in lending to the LGUs IS the Philippine
National Bank.
Philippine National Bank (PNB).
Consistent With ItS mission of achieving an
"endUring Involvement In SOCIO-CIVIC
endeavors that uplift the quality of life", the
PNB IS among the largest, most active
institutions lending to LGUs Until recently
a GFI, PNB, which was privatized In May
1996, has total resources amounting to
P197 billion as ofthe end of 1996 Its loans
to LGUs have reached Pll 4 billion as of
end-March 1997 for 225 different projects
(See Chart F).
o the high transaction cost of lending to
LGUs, and The types of projects that were lent to
LGUs Include Income-generating and cost
o the perception that lending to LGUs saving projects such as commercial
centers, public markets, transport Philippine National Bank LGU Financing Portfolio As of March 1997 In Peso Millions
~ ~ • ~ :E~ .
5 . .f~ ""
;S
= 0
".
'"
P 1460M
24
terminals, slaughterhouses, power
generators, water systems, construction
projects and acquIsition of heavy
eqUipment Other projects supported by
PNB lending Include telecommunications
facIlities, grains procurement, and post
harvest facilities. As shown In Chart G,
lending to the NCR accounted for 56% of
the total amount (P6 3 billion) Luzon
projects accounted for 26% (P3 0 billion),
Vlsayas, 10% (Pl.l billion), and the rest was
for Mindanao, 8% (PO 8 billion). On a per
project basIs, Luzon projects averaged
P3l.0 million per project, Mindanao, P22.2
million and the Vlsayas at P20.6 million per
Chart G.
LGU FmancIng' Present Sources, AVailability and Terms
project Majority of the loans lent to LGUs
were for heavy eqUipment, Infrastructure
and publiC markets Annex 7 'shows the
geographical distribution of PNB's LGU
lending.
term If Justified. The Interest rate IS pnme
rate-based subject to periodic Interest
resetting. Collateral requirements can
Include the assignment of applicable
regular Income of the LGU, IRA share and
the revenues generated by the project
Terms of Credit. Eligible loans for financed. Other collateral can Include the
PNB finanCing under ItS LGU finanCing chattel mortgage of eqUipmentflnanced by
program Include those which finance the the loan and real estate mortgage on
establishment, development or expansion patrimonial property of LGUs. The LGU
of income-generating projects. Other lending program requirements and
projects that qualify Include Irrigation, procedures of the PNB are reproduced In
construction of municipal halls, sports Annex 8
complex, medical diagnostic eqUipment,
road construction, hospitals and school Prospects for Commercial Bank
buildings. Lending to LGUs. Recently, commercial
banks' attitude toward LGU finanCing has
undergone a transformation. Indications
Philippine National Bank LGU Lending as of March 1997
Mindanao - 8%
The maximum loanable amount can
from commercial banks are that a shift In
attitude towards LGU lending IS In the offing.
Some commercial banks now recognize
that LGUs represent a potential market for
credit lending because ofthe large finanCing
requirements of LGUs associated With the
devolutIOn of baSIC services and
Infrastructure requirements Other reasons
for the attractiveness of LGUs as a growing
market for commercial lending are.
o the Increase In LGUs' share of the
national wealth;
be as much as 100% of the project 0 presence of a legal framework for LGU
requirements but Will not exceed the
aggregate of five times the sum of the 20%
portion of the annual regular Income and
the IRA share of the LGU The term of the
loan IS generally up to 7 years, but the
finanCing;
o flexibility and expanded borrOWing
powers of LGUs under the LGC,
Board of Directors may consider a longer 0 increasing finanCial sophistication of
25
LGU Fznancing Present Sources, AVailability and Terms
some LGUs (some provinces are regulations of the Bangko Sentral ng
exploring private foreign financial Plilplnas (BSP) and the Securities and
Instruments), and Exchange Commission (SEC), to "Issue
bonds, debentures, secuntles, collateral,
o the growing market opportunity In notes and other obligatIOns to finance self
financing LGU Infrastructure requlre- liqUidating, income-producing development
ments (some P20 billion are In the or livelihood projects pursuant to the
project pipeline of LGU BOT Projects). pnontles established In the approved local
Commercial lending to LGUs will also
get a boost from the establishment of the
LGU Guarantee Corporation, which will gua
rantee commercial loans to LGUs. In the
past, the lack of a guarantee faCility was a
major factor that inhibited commercial
lending to LGUs as commercial banks were
concerned with the certainty of repayment.
As the guarantee faCIlity will prOVide the
repayment "comfort" to commercial banks,
It IS expected that private commercial
lending to LGUs Will finally develop.
Municipal Bond Flotations
Municipal bond flotation IS another
pnvate source of debt finanCing that IS gene
rating a lot of Interestfrom LGUs. MUniCipal
bonds represent an additional source of
finanCing for LGUs, which hitherto had not
been tapped. To date, SIX LGU bond flota
tions have been successfully floated, the
first one In Infrastructure development
(Cebu equity bonds), and the rest In
hOUSing
Legal Framework for Bond
Flotations. The 1991 Local Government
Code allows, subject to the rules and
9 Local Government Code of 1991 (Republic Act No 7160), SectIOn 299
26
development plan or the public Investment
program"9. ProVinces, cities and
mUniCipalities are authOrized under the
LGC to Issue mUniCipal bonds under two
conditions: (I) the obligation should finance
self-liqUidating, Income prodUCing
development or livelihood projects; and (II)
the projects to be financed must be In
accordance With pnontles established In the
approved local development plan or the
public Investment program.
Thus, at the moment, LGUs cannot
utilize a bond flotation for recurrent
obligations or general obligations of LGUs
and other non-revenue earning expen
ditures such as the construction of a City
or muniCipal hall or payment of staff
salaries. In addition, the LGU concerned
IS obligated to formally adopt a public
Investment program for the province, City
or muniCipality, and the project to be
financed through a bond flotation must be
part of the publiC Investment program.
Bond flotations require endorsement;
approval of the BSP.
National ~overnment Guarantee.
In order to enhance the market prospects
of bond flotations, some LGUs, such as the
LGU Fznanczng Present Sources, AVa/labilzty and Terms
province of Palawan, have requested a
national government guarantee for their
planned foreign bond flotations, However,
the national government IS not empowered
to grant a guarantee to LGU foreign bond
Issues by virtue of R.A. 4860 (Foreign
Borrowings Act) which limits the Issuance
of sovereign guarantees to loans of
government-owned or government
controlled corporations and government
financial institutions With regard to local
bond flotations, there have been Instances
where a national government agency has
guaranteed the obligations of an LGU. Of
the fl ve LGU housing bond Issues floated
In the country, four have carned a partial
guarantee from the Home Insurance
Guarantee Corporation (HIGC), a national
successfully float the first few non-hOUSing
mUnicipal bond flotations.
Bond Flotations Issued. The
Province of Cebu pioneered LGU bond
flotations In the country when they floated
the first bond Issue in July 1990 (Cebu
Equity Bond Unit). The P300 million Issue
had a term of three years, tax free Interest
Income at 16 percent and called for
principal repayments In five (5) equal semi
annual installments In the form of class "A"
shares of Cebu Property Ventures and
Development Corporation (CPVDC), a JOint
venture of Cebu Province and Ayala Land,
Inc (ALI) Cebu had contributed land and
ALI contributed cash for their shares In
CPVDC. With the tax-free feature, the
government agency. The hOUSing bond Investors effectively earned 20% on their
issue floated In Sto Domingo, Nueva ECIJa,
however, did not carry an H IGC guarantee,
but nevertheless was fully subscribed.
For non-hOUSing bond Issues, It IS
unlikely that a National Guarantee would
be granted primarily because such
guarantees run counter to the principles
laid down In the Local Government Code,
I.e. with the Increase In the share of LGUs
In the national wealth, and allOWing LGUs
the freedom to obtain finanCing from
various sources, the LGUs should assume
responsibility for finanCing baSIC services
and Infrastructure requirements In
addition, the Government's fiscal poliCY IS
to limit extension of guarantees In order to
protect ItS fiscal position. Because of the
absence of a National Government
guarantee, one can surmise that only the
most creditworthy LGUs would be able to
27
Investment plus the capital appreciation
prospects of the CPVDC shares.
Since the Cebu bond flotation, there
have been five more Issues (all In the
hOUSing sector):
o Victorias Pabahay Bonds - Negros
OCCidental (P8.0 million)
o Legazpl Suerte Bonds - Albay (P26 0
million)
o Clavena HOUSing Bonds - Mlsamls
Oriental (P20.0 million)
o Sto. Domingo HOUSing Bonds - Nueva
Ecija (PlO 0 million)
o Puerto Pnncesa HOUSing Bond -
Palawan (P20 0 million)
LGU Financmg Present Sources, Avazlabilzty and Terms
These bonds were issued on a taxable
basIs with Interest rates ranging from 14-
16%. The term of the Issues ranged from
2-3 years. All Issues carned the guarantee
of HIGC except the Sto. Domingo housing
bonds. A description of the bond Issuance
process IS presented by the Multinational
Investment Bancorporatlon, one of the
major underwriters in the mUnicipal bond
market (Annex 9). Since the bonds floated
were of relatively small size and short in
maturity, It IS clear that additional Incentives
are needed to promote development of a
broader mUnicipal bond market. In this
regard, the Government IS taking concrete
steps through ItS policy initiative, New VIsion
and PoliCY Framework for LGU Financing,
to initiate poliCies that Will develop the
mUnicipal bond market.
Assessment
that It could be a cheaper source of
financing, for example, when bank lending
Interest rates are very high.
One Issue that has been raised by
some quarters IS the taxation of mUnicipal
bonds At the moment, Interest Income
from bond flotations IS subject to a 20%
withholding tax. Proponents of the tax
exemption of municipal bonds cite the
experience In the United States, where most
municipal bonds are tax-exempt The
Government IS presently looking Into the
revenue Implications to the national
treasury of the tax exemption. Another Issue
IS the short-term nature of the mUnicipal
bonds so far floated (2-3 years). Better
terms have to be sought for the bonds to
finance long-gestating Infrastructure
projects However, there eXists the POSSI
bility that credit enhancements such as the
proposed LGU Guarantee Corporation can
Prospects for Growth. As shown be used to lengthen the maturity of bonds
above, municipal bonds that have been
Issued so far have been limited to housing
projects. ThiS was partly because there
was a government agency that guaranteed
part or all of the repayment of the bond
Issues The other reason IS that many
Investors have a greater propensity to Invest
In time-tested treasury bills or in housing
and property development However, the
situation IS changing. From a social
ViewpOint, many LGUs are beginning to see
the advantages of floating project revenue
bonds (the project will likely get community
support If ItS members partiCipate In the
finanCing of the project), the addltlonality
of an untapped source of financing for
Infrastructure projects, and the possibility
28
through the guarantee mechanism Finally,
the lack of a secondary market for bond
flotations limits the liqUidity of the bonds
In many cases, the bondholders have to
hold on to the bonds until maturity because
of the absence of a secondary market.
Despite these factors, bond flotation offers
great advantages for LGUs ASide from the
community support mentioned earlier,
mUnicipal bonds offer a distinctly separate
and additional source of financing for LGU
Infrastructure projects, and could be a
cheaper source of financing depending on
the terms of the bond flotation
Sector coverage. Municipal bond
Issues offer good prospects for projects In
LGU Financing' Present Sources, AVaIlability and Terms
sectors other than housing Based on bond system In the United States, where
recent mandates received by private sector most municipal projects are financed
municipal bond underwriters, different through mUnicipal bonds.
Box B
sectors are now being explored for
municipal bond offerings, Including
airports, water supply, and food terminals.
For example, a P40 million bond flotation
IS now being packaged to finance general
Infrastructure requirements of the province
of Aklan It IS expected that once poliCY
issues are resolved, (tax exemption, credit
rating agency, etc ) municipal bond
flotations Will go the way of the mUnicipal
Characteristics and Advantages of BOT Schemes
Characteristics:
A private company or consortium is given the right to bUlld and operate a facility previously provided for by the government; The private company is responsIble for financing, designing, constructing, operatlllg and mallltaining the project; Lenders look to the project's assets and revenue stream for repayment; Concession period is agreed (typically 20-25 yrs.) afterwhich the facilIty IS transferred to the LGD.
Advantages:
BOT offers an alternative source of financing; A transparent legal framework already exists for BOT financing; LGUs benefit from a project wIth typically no or very lIttle imtiallllvestment; BOT schemes offer proper allocation of risks; BOT projects usually result in better and reliable service and consistent supply; Long conceSSIOn period and contractual agreements assure project sustainability; Technology and skills transfer usually result from BOT projects; BOT Projects may stimulate local capital market development.
29
Other Private Sources of LGU Financing: BOT Schemes and Provincial Equity Funds
Build-Operate-Transfer (BOT)
Schemes
Background. BOT or "Bulld-Operate
Transfer" IS a project finanCing scheme that
uses private Investment to undertake
mfrastructure projects histOrically fmanced
and Implemented by the public sector Box
B Illustrates some characteristics and
advantages of a BOT scheme.
BOT schemes are generally
charactenzed by the participation of the
pnvate sector as the major sponsor of the
project The pnvate sector proponent IS
given the nghts and pnvlleges by the publiC
sector (the LGU) to build and operate the
faCility, transferring the faCility to the LGU
after the concession penod. One very
Important characteristic of BOT schemes
IS that they allow proper allocation of nsks.
The pnvate sector proponent assumes
certam nsks, which are traditionally borne
by the public sector, e g the finanCing risk,
the deSign, construction, and operating and
maintenance nsks
In addition, BOT schemes, by virtue of
requiring little or no upfront Investments,
prOVide local governments With a Viable
vehicle to overcome their budgetary
resource constramts and accelerate the
LGU Financing Present Sources, AVailability and Terms
Implementation of Infrastructure projects.
With BOTs, local govemment Units need not
depend on financial assistance from the
National Government. If a local
government Unit can develop and package
a financially viable project, It only needs to
solicit Investor Interest in the project and
undergo the processing procedures
prescribed under the BOT Law and the
LGC
Legal Framework of the LGU BOT
Scheme. The Local Government Code of
1991 allows the LGUs to tap both
Government and private sources of capital
to finance basIc serVices, local
Infrastructure and other development
projects Reallzlngthatthe cost offlnanclng
these services and Infrastructure projects
IS huge and consldenngthatthe Philippines
had a highly successful BOT program at
the national level, the LGC made speCifiC
and liberal provIsions for the use of BOT
schemes by LGUs. Section 302 of the
LGC states; " Local government Units may
enter Into contracts with any duly pre
qualifIed indIVIdual contractor for the
fmanclng, constructIOn, operation and
maintenance of any financIally-vIable
mfrastructure facility, under the bUlld
operate-transfer agreement, subject to the
applicable prOVISIOns of RA 6957, as
amended by R.A. 7718 (the BOT Law)."
Coverage of LGU BOT Scheme and
LGU BOT Pipeline. In the late 1980s
and early 1990s, the BOT scheme was the
Government's answer to solving the power
CriSIS. Since then, the BOT scheme has
been utilized to finance other Infrastructure
30
projects at the national level (transportation,
information technology and water) Under
the BOT law, LGUs would be able to utilize
the BOT scheme In many sectors so long
as they are revenue-generating Thus far,
BOT schemes are being planned for
Infrastructure requirements In the LGUs
such as water supply and sewerage, solid
waste management, commercial centers,
public markets, slaughterhouses, and
telecommunications. One example of a
successful LGU project Implemented under
a BOT scheme IS the Mandaluyong Public
Market (Box C).
Concerning countrywide LGU BOT
projects, there are a number of projects In
an advanced development stage These
projects are In the following areas bulk
water supply, solid waste management,
public markets, slaughterhouse, Integrated
bus terminals, and commercial complexes
The largest projects are the Batangas Water
Supply Project which IS at the conceptual
stage ($275 million), the Metro Manila Solid
Waste Management Project under
negotiation (US$270 million); the Metro
Cebu Water Supply Project ($1l0 million)
and the Bulacan Bulk Water Supply Project
($50 million). The current pipeline of LGU
BOT projects and their status IS shown In
Annex 10. There are eight projects In an
advanced stage of development with a
project cost of US$188 million or about P7
billion, consisting of commercial centers,
public markets, a waste recycling plant,
slaughterhouse, solid waste management
and a combined power and water supply
project. In addition, there are 21 other
shortllsted projects amounting to $690
LGU Financing Present Sources, Avazlabllzty and Terms
Box C
MANDALUYONG PUBLIC MARKET
Objective:
To bulld a publIc market and multi-story commercial complex to replace the market gutted by fire m 1990
Project Description:
A seven story commercial complex with a publJc market, banks, pawnshops, grocery, service shops at the ground floor; eatenes and dry goods stores at the second and third floors; two parkmg floors at the fourth and fifth floors; four cmemas at the sixth floor, and fast foods, billIard hall, bowlmg lane, amusement center and a multi-purpose center at the sixth and seventh floors
Contracting Method: PublIc Blddmg
Method of Financing: BT Scheme (BUIld and Transfer) for the Pubhc Market
DOT (Develop-Operate-Transfer) for the Commercial Complex
In August 1990, the Mandaluyong pubhc market was totally razed down by fire. The City of Mandaluyong needed to rebUIld the market Immediately, but was confronted wIth a major problem -- financing. Mandaluyong's Mayor Benjamm Abalos scouted for developers, mvestors and busmessmen, Imtlally attracting ten contractors but eventually reduced to two who were wlllmg to finance the proJect. Of the two, Macro Funders and Developers, Inc. was selected to construct the proJ ect The tenns ofthe agreement between the City and Macro Funders (Contractor) were as follows
• The Contractor wlll develop, finance, construct a public market cum commerCial complex on a land owned by the City
• The City will operate, mamtam, control and supervise the public market. • The Contractor wlll operate the commerCial complex for a penod of forty (40)
years. • Upon completion ( of construction), the ownership of the BUIlding Will be trans
ferred to the City. The operatIOn of the commerCial complex wlll be transferred to the City after forty years
• The City will lease the bUlldmg (except the public market) to the Contractor
The publIc market was turned over to the City forJree for Its exclusive supervisIOn and control m 1993 The City government constructed half of the stalls mSlde the market with the rest constructed by the stallholders themselves. The City collects the stall fees and mamtains the pubhc market The rest of the complex wlll be operated and managed by the pnvate sector contractor for 40 years, leasmg tenantable areas to third parties to enable It to recover the cost of Its mvestment and to realIze a reasonable return on ItS mvestment. Afttjr the concessIOn penod, the operation of the commercial complex (including collection of fees) will be transferred to the City. Without any imtial investment, the City IS now generatmg additIOnal revenues from new taxes, hcenses and fees charged to lessees of the commercial complex as well as revenues from the operation of the wet pubhc market
31
million or about P27 6 billion, which
are In vanous stages of processing
Coordinating Council of the
Philippine Assistance Program
(CCPAP) - BOT Center. The
CCPAP, an agency attached to the
Office of the President, was created
to facilitate mobilization and
administration offunds generated by
the Philippine AssIStance Program
(PAP) and to ensure ItS successful
Implementation Under the CCPAP
IS the BOT Center whose main
functions Include:
o promoting the BOT Program,
o providing technical assistance to
LGUs as well as lAs on project
evaluation and preparation of
bidding documents;
o providing adVice on project
finanCing and finanCing sources;
o BOT project processing, and
o conducting institutional capa
bility seminars and BOT training
sessions for national Imple
menting agencies (lAs), LGUs
and the private sector
As a background, PreSident
Fidei V. Ramos, In September 1993,
Issued Memorandum Order No 166
deSignating the CCPAP Chairman as
Action Officer for the BOT Program
and subsequently tasked the CCPAP
Secretariat to establish a BOT
Center With thiS mandate, the BOT
Center's main functions initially
focused on the promotion of the BOT
LGU Financing. Present Sources, Availability and Terms
Program (also known as the Philippine
Infrastructure Privatization Program or
PIPP) and the conduct of BOT Training
programs to lAs, LGUs and the private
sector. With the passage of R.A. 7718 (An
Act Authorizing the Financing,
Construction, Operation and Maintenance
of Infrastructure Projects by the Pnvate
coordinate and mOnitor the Implementation
of BOT projects Box D describes the
vanous functions and services offered by
the CCPAP BOT Center.
The CCPAP BOT Center's core units
consist of:
Sector and for other purposes), otherwise 0 The National Projects Desk. Provides
known as the amended BOT Law, CCPAP technical assistance to national
BOT Center was further tasked to
Box D
CCPAP BOT CENTER FUNCTIONS AND SERVICES
Functions: • promote the BOT Program, also known as the Philippme
Infrastructure Privatization Program; • provide technical assistance to executing agencies in pack
aging and promoting proJects; • conduct BOT tramlllg to national Implementing Agencies,
LOUs, and the pnvate sector, • coordinate and mOllitor the implementatIOn of BOT projects;
and • facilitate the development and ImplementatIOn of BOT
proJects.
Services Offered: • BOT Database: project information
- project monitoring - data commUllicatlOns
• Marketlllg / Promotion - Investment roadshows
•
•
- seminars and conferences - brochures/publications Technical Assistance - project development - evaluation/negotiation - preparation of bidding documents Training - advance project development and management program - LOU-BOT trainlllg program - train-the-trainer program - on-the-Job trailling
32
Implementing agencies In the
generation, development, evaluation
and Implementation of viable
Infrastructure projects In the power,
transportation, information technology
and tounsm sectors
o Environmental Projects Desk.
Provides technical assistance
specifically to government entities
Involved In the generation,
development, evaluation and
Implementation of viable water,
wastewater, and solid waste projects.
o Local Government Unit (LGU) Desk.
The BOT Center believes that
Implementation of vanous projects for
the LGUs would be a feasible alternative
In the scarcity of funds for a nationWide
sustained economic growth Thus, the
LGU Desk provides technical
assistance to LGUs In the generation,
development, evaluation and
Implementation of BOTabie
Infrastructure projects
o Training and Promotions Desk.
ResponSible for the development and
conduct of training programs for
LGU Financzng. Present Sources, Avazlabllzty and Terms
instItutIonal strengthening and capa
bJlJty building of vanous government
agencIes and LGUs. Also promotes the
PhilIppine BOT program and assIsts In
the marketIng of projects In the
pIpeline.
Center are now being developed.
USAID BOT Assistance Program. USAI D IS proVIding technical assIstance to
LGUs through consultants In support of the
LGU BOT assIstance program ofthe CCPAP
BOT Center The objectIves of the program The assIstance proVIded by the BOT are as follows:
Center to promote BOT projects throughout
the whole country has been WIdely recog
nIzed In a study commIssIoned by
USAIDJO, the study concluded that the BOT
Center had a "sIgnifIcantly posItIve Impact
on the mobIlizatIon of efforts to develop
the publlc-pnvate partnershIp In infrastruc
ture projects". Furthermore, the study also
added that the BOT Center "plays a key
role In the success of pubhc tender offenngs
acceptable to private Investors and In
negotiated contract terms" ASIde from thIS
role, the BOT Center has filled an Important
gap by acting as a useful source of
Information on the BOT program for pnvate
foreIgn and natIonal companIes.
o ProVIde LGUs with the capabIlIty to
undertake BOT projects, partIcularly for
environmental Infrastructure;
o Demonstrate the feasIbilIty of
undertakIng envIronmental infrastruc
ture projects through BOT schemes;
o Promote and aggressIvely market the
PhilIPPine BOT Program;
o Address POlICY, legal, regulatory and
adminIstratIve constraints that Impede
LGU BOT ImplementatIon.
The program IS beIng Implemented
satlsfactonly. Focused on development of
LGU BOT envIronmental Infrastructure
projects such as water supply, wastewater WIth regard to specIfIc regions where and solId waste facilItIes, the consultants
the NatIonal Government has attached have so far provIded assIstance In the
pnonty, the Government IS makIng a special follOWing areas:
effort to dIsseminate the functIons and
servIces provided by the BOT Center. Thus
In MIndanao, former PresIdent Ramos
Issued Memorandum Order No. M970160
to create a BOT center In the SpecIal Zone
for Peace and Development (SZOPAD)
covenngfourteen provInces In the area. The
mechanIcs and admInIstratIve
arrangements for the establishment of the
o Policy advocacy - the consultants
developed for the BOT Center the fIrst
AVOIded Cost Methodology (ACM)
model The ACM IS a computer-based
evaluatIon tool whIch will allow Water
Dlstncts (WDs) In the LGUs to compare
BOT Investment proposals wIth the cost
of the project If constructed by the WDs
10 Phlhppmes EvaluatIOn of the BOT Center, USAID Project No 2352-003, July 1997
33
LGU Fmancing Present Sources, Availability and Terms
themselves. A series of seminars was urban transport projects, sewerage,
conducted by the BOT Center to train housing, resort development and multl
the WDs on the use of this computer purpose power schemes are being
model Implemented At the local level, there are
a total of 29 LGU projects currently In the
o Project development - the BOT Center pipeline with a project cost of about $900
with the assistance of ItS consultants
has provided advice to LGUs on finan
cial modeling, preparation of bid docu
ments and bid evaluation critena,
negotiations support, review of conces
sion agreements, evaluation of unsoli
cited proposals and assessment of
pnce challenges;
million or P36.0 billion About a third are
In an advanced stage of processing, either
under bidding or negotiation, or an unsoli
cited proposal from a pnvate sector propo
nent IS under evaluation These projects are
part of the provincial, city or mUnicipal
master plan and are sanctioned by the res
pective Sanggunlan Bodies It IS
anticipated that as more and more LGU
o InstitutIOn buildmg - the BOT Center BOT projects are successfully Implemented,
has provided training to LGUs to
develop the capability In prepanng and
Implementing environmental infra
structure projects under the BOT
scheme. The BOT Center designed and
conducted several Infrastructure
training sessions In Luzon, Vlsayas and
Mindanao, and
o Marketing and promotIOns - various
Investment missions have been held
both locally and overseas to promote
the Philippine BOT program.
Assessment
Prospects for Growth. The BOT
scheme has been one of the recent success
stones In financing Infrastructure projects
In the PhilipPines At the national level,
some 27 power projects have been
Implemented, helping solve the power cnsis
that gnpped the country In the late 80s and
many LGUs will follow SUIt and finance their
Infrastructure requirements uSing the BOT
scheme Because of the recognition by the
LGUs of the work so far accomplished by
the BOT Center located In Manila, some
regions have called for regional BOT centers
to be established, and one center IS planned
to be set up In Mindanao.
Sector Coverage. BOT projects offer
the best prospects for vaned sectoral
coverage GFls or other financing inStitu
tions may have a preference for certain
types of projects where collateral IS a major
consideration. However, under the BOT law,
practically all developmental and revenue
generating projects are eligible for BOT
financing (Annex 11) By definition, what
are attractive to pnvate sector entrepre
neurs can generally be financed under BOT
arrangements and ItS vanants. However,
Infrastructure projects are espeCially
attractive because of the steady cash flows
the early 90s At the moment, various through user charges associated with these
34
LGU Fmancing Present Sources, Availability and Terms
Box E
types of projects.
Provincial Equity Funds
One commercial bank, (Bank of the
Philippine Islands) has taken an innovative
approach toward LGU finanCing. Its wholly-
Batangas Assets Corporation
To promote the economic development of the provmce of Batangas, the BPI Capital CorporatIOn created the Batangas Assets Corporation (BAC) m December 1996 The SEC-registered corporatIOn capltahzed at PI 0 b!llion will Illvest III eqUity and quasi-eqUIty of private unhsted compames, mfrastrucrurelBOT-type projects and real estate companies m the provmce of Batangas. The shareholders of BAC are some 16 major mstlrutlOnal mvestors, mcludmg Ayala CorporatIOn, EEl CorporatIOn, First Batangas Industnal Park, Inc , First Phllippme Holdmgs, etc who see slgmficant retl!ms from domg busmess m the provmce of Batangas. BPI Capital CorporatIOn acts as the AdVisor and Manager of the Company. The mvestment targets for BAC are:
• BOT-type infrastructure projects • export-onented mdustnes • food processmg companies and manufacrurmg firms • real estate and property development • tounsm and leisure-related projects • education and human capital development
The Manager of the Company discharges the followmg responsibilities: (I) Identlfymg mvestment opportunities and projects for finanCial partiCipatIOn; (il) recommending investment/divestment deciSIOns; (ni) determmmg additional eqUIty calls, and (iv) mvestmg short-term unused funds. The adVISOry services of BAC mclude
• targetmg potential proJects, • asslstmg m the preparation of feaslbihty srudles, • analyzmg vJablhty of alternative finanCIal structures; • strucrunng of appropnate financing vehicles and formulat
ing a project financmg plan;
The benefits afforded by the BAC are numerous. The company will generate economic actiVity and prOVide employment opportumtles for resIdents ofBatangas; It w!ll provide seed capital to Batangas-based compames, and m general, improve the hving standards of ItS cItizens. For the mvestors ofBAC, the project Will generate good prospects for earnmg higher rates of rerum than traditIOnal mstruments, focus mvestments m high-growth areas, and promote good relatIOns With the commumty at large
35
owned investment banking subSidiary (BPI
Capital Corporation) created a separate
speCial-purpose corporation, the Batangas
Assets Corporation (BAC) to prOVide equity
finanCing for development projects In the
province of Batangas (Box E).
Depending on the success of the BAC
In attracting finanCing for various
Investment opportunities In Batangas, the
concept of proVinCial eqUity funds can be
replicated In other provinces What IS
needed IS a vIsion and commitment from
the chief executives of a proVince, and the
services of an Investment adVisory firm to
initiate the establishment of a prOVinCial
eqUity fund
LGU Guarantee Corporation
(LGUGC)
Aware of the funding problems
besettlngthe LGUs, particularly their limited
access to commercial finance, the
Development Bank of the Philippines (DBP)
and the Bankers ASSOCiation of the
Philippines (BAP) took the initiative In
establishing the LGU Guarantee
Corporation (LGUGC) The LGUGC IS
expected to enhance the flow of commercial
funds to the LGUs, and playa "catalytiC"
role by proViding a guarantee on loans and
credits granted to LGUs from commercial
funding sources, and to municipal bond
flotations. Box F gives details on the role
and proposed administration ofthe LGUGC.
Ultimately, the LGUGC Will enable
LGUs to expand their borrOWing capaCity,
develop their ability to Issue a variety of
LGU Financing Present Sources, AVailability and Terms
BoxF The LGU Guaranty Corporation (LGUGC)
The establishment of the LGUGC was necessItated by the mability of LGUs to access prIvate sector fundmg chIefly because of the perception of lack of credItworthmess and political succession risk. To rmtIgate these "perceived" rIsks, the DBP and the BAP, composed of some 53 different universal and commerCIal banks operating in the country, established the LGU Guaranty CorporatIOn to guarantee loans and credIts granted by partICIpating member commercIal banks for vanous capital investment projects ofLGUs. The jomt venture partnershIp between DBP and the BAP IS geared towards acceleratmg the competlttve access of LGUs to financial markets, especially private sector credit. So far, twenty local banks and three foreIgn banks have signed up as partIcipating investmg banks The specific objectives ofthe LGUGC are as follows:
• expand the LGUs' borrowing capacIty and credit availabIlity; • reduce the LGUs' financing costs; • improve the operatmg and financial flexlbihty of the LGUs; • reduce the credIt and other perceived risks (e.g. polittcal risk)
of lenders; and • contrIbute to the development of the local capItal market by
creattng a market for a vanety of credIt instnunents.
The corporation is capitahzed at P500 million WIth paId-up capItal of P250 million. As a first step, the LGUGC will set-up an LGU database, and develop an internal LGU credit ratmg system. Next, the LGUGC will accredit financial mstitutlOns whIch have expressed mterest III partlclpatmg m the guarantee program as Illvestmg banks Fmally, the LGUGC will receIve and process the guarantee applicatIOns from the appropnate bank under the BAP, which WIll provide financing for the LGU project. In case of default by the LGU on the loan, the guarantee can be called or a restructJmng exerCIse undertaken by the lendmg financial mstitution. The guarantee facility will have a geanng ratIO of 10 times Its paId-in capItal, therefore, It can provide guarantees of up to P2.5 bllhon. Initially, the LGUGC can provide a credit guarantee of up to 85% of the LGU loan untt! a credit rating mechanism IS put m place Based on recent discussions, LGUs are excited about the prospects of obtaimng a guarantee faclhty for ItS loans to finance ItS vanous projects.
credit Instruments, reduce their finanCing
costs and improve their operating fleXibility
The LGUGC's Implementing rules and
regulations, gUidelines and by-laws are
being drafted, and formal Incorporation was
completed In March 1998. It IS expected
that the guarantee facility will begin
operations by the mid-part of 1998.
36
Others Forms of Private Sector
Participation in LGU Infrastructure
Projects
ASide from BOT schemes and the
Innovative prOVinCial equity funds, there are
other forms of private sector participation
In LGU Infrastructure projects (mostly In the
water sector) which have Improved service
delivery and facilitated Increased access to
finance for new Investments Table 1 lists
these other forms of private sector
participation. It shows how responSibility
for certain funcbons are allocated, such as
asset ownership and how these different
schemes Impact on certain parameters
such as level of Investments by LGUs and
consumer tariffs These schemes vary In
the type of private sector participation'
o Service contracts are short-duration
engagements for specific tasks to be
undertaken by the private sector
participant The purpose IS to utilize
certain expertise considered to be more
cost-effectively undertaken by the
private sector Overall coordination
remains to be the function of the utility
o Management contracts have a longer
term duration giving the private sector
a larger operational role In the utility.
Similar to the purposes of service
contracts but In more expanded form,
management contracts allow the
private sector to Introduce effiCiency In
operations (usually through perfor
mance obJectives) for a management
fee. Responsibility for Investments
remain With the Government.
LGU Financing Present Sources, Availabzlzty and Terms
Table 1. Alternative Water and Wastewater Public/Private Partnerships 11
Type
ServIce Contract
Management Contract
Lease (affermage)
BOT
ConcessIOn
DIVestIture
Asset LGU Investment Technology Ownerhip Requirements Transfer
PublIc MedIUm Low
PublIc HIgh MedIUm
PublIc MedIUm-HIgh HIgh
PrIvate & PublIc Low MedIUm
PublIc MedIUm HIgh
PrIvate Low Low
o Leases or affermage contracts allow
the private sector to lease the assets
of a utility and takes on the respon
sibility for operating and maintaining
them. The contractor (lessor) makes
Service Tariff Improvement Impact Duration
Operating Efficiency
HIgh Low I - 2 years
HIgh Medium 3 - 5 years
HIgh MedIUm 8 - 15 years
MedIUm MedIUm 20 - 30 years
HIgh Low-MedIUm 25 - 30 years
MedIUm-HIgh MedIUm Indefimte
the right to bUild, operate and transfer
the facility to the utility or the
Govemment after a fixed period oftlme
(see section on BOT schemes).
lease payments to the utility in 0 Dlvesttture involves the outright sale of
exchange for the operation of the
assets and the revenue collections
a utility's assets to the private sector
from operations. Similar to manage- It IS Important that the LGUs truly
ment contracts, responsibility for understand the different forms of private
Investments remain with the sector participation and evaluate which of
Government. Commercial nsk IS borne these schemes IS most sUitable and cost
by the contractor. effective for achieVing their objective of
Improving the delivery of baSIC services.
o ConcessIons give the private sector the
right to operate and maintain the Joint Ventures
assets of the utility and to make
necessary Investments In exchange for Many LGUs also contemplate on
fixed concession payments paid to the entenng Into JOint venture partnerships with
utility or the Government the pnvate sector. Indeed, what IS reqUired
In a JOint venture undertaking IS the
o BOT contracts give the private sector consummation of the legal agreements and
11 Based on a report prepared by the World Bank entItled "ToolkIts for PrIvate Sector PartICIpatIOn In Water and SamtatlOn" The author has
Introduced some vanatIons In the table whIch are purely hIS own
37
LGU Financing' Present Sources, Avazlabillty and Terms
once the financing and the contractors are
In place, the project can commence.
However, JOint ventures do not have any
specific legal framework at the moment
such as the one for BOTs, which makes
the arrangement subject to potential legal
difficulties In companson, BOT schemes
have the legal framework with ItS own
specific law and Implementing rules and
regulations, mitigating the likelihood of a
protracted legal challenge if legal Issues
anse.
New Proposed Multilateral Initiatives on LGU Financing
LGU Infrastructure Development
Facility (LGUlF) - Asian
Development Bank (ADB)
In order to further enhance financing
of development projects In the countryside,
the ADB IS spearheading the establishment
of a proposed US$50 million facility
managed by DBP to support Infrastructure
development In the LGUs. The facility
would finance revenue-generating
Infrastructure projects sponsored by the
private sector and/or by creditworthy LGUs
Under the proposed LGU Infrastructure
Facility, the ADB would provide limited long
term funds for LGU projects to. (I)
complement commercial short and
medium-term sources of funds WhiCh, on
their own, would not meet the term
requirements of most Infrastructure
projects; and (ij) facilitate the underwriting
financing for Infrastructure projects at
competitive market rates The facIlity will
finance up to 30% of the total project cost.
The project sponsors will finance at least
25% of the total project cost and the balance
of 45% will be financed from commercial
borrowings and/or mUnicipal revenue bond
Issues
To complement the facility, a technical
assistance loan that will help LGUs manage
private sector participation Irl Infrastructure
projects IS being conSidered. ThiS assIs
tance would offer LGU adVisory services
and training In the preparation of feaSibility
studies, the preparation of bidding docu
ments Including appropriate performance
criteria and risk-sharing arrangements, the
evaluation of bids, the preparation of BOT
contracts and the negotiation With private
sector promoters A pipeline of pOSSible
LGU Infrastructure projects IS currently
being reviewed
LGU Finance and Development
Project (LOGOFIND) - World Bank
Consistent With the objective of assIs
ting LGUs Implement their development
plans, the World Bank IS proposing a project
that would assist In financing Infrastructure
and environmental projects and In bUlldlng
up LGU institutional capacity for finanCial
planning and management. The proposed
LOGOFIND project has the follOWing
objectives:
of bonds Issued by LGUs and project 0 assist participating LGUs In expanding
companies. It IS currently contemplated
that the Facility will provide long-term
38
and upgrading their Infrastructure and
LGU Fznancmg Present Sources. Avazlabllzty and Terms
In pnontizlngenvlronmental and social by USAID to bnng about more responsive
Investments;
o Improve the financial performance of
participating LGUs, and thus enhance
their creditworthiness, and
o strengthen the National Government's
LGU programs to develop LGU
Institutional capacity
LOGOFIND will prOVide long-term
financing on a "demand basIs" to LGUs
for a wide range of both revenue and non
revenue-generating Infrastructure projects,
selected SOCial and environmental projects,
and for Improving LGU financial perfor
mance to enable LGUs to eventually grad
uate to GFI or pnvate sector financing. The
Project will also assess, strengthen and
Improve the MUnicipal Training Program
under the MDF, and help enhance the
democratic institutions with greater citizen
participation for local governance and
development. The project has Identified
three action areas In local governance.
o Fmanclal mobilIzatIOn and manage
ment - the project supports actions to
Increase the amount of finanCial
resources available to local commu
nities and to Improve the local technical
and administrative capabilities to
manage such funds. In thiS respect,
technical support IS being proVided to
LGUs for project development
financing, to Institutionalize a
transparent and rational budget
process, and to Improve LGUs' tax
collection efforts;
ability of the BLGF to mOnitor and assess 0 Development Investment assIstance -
the fiscal performance of LGUs. Finally, Includes development Investment
the Project will assist the Government In
Implementing ItS New Policy Framework for
LGU Credit FinanCing discussed In the early
part of the report. The Project IS now In ItS
preparatory stage.
Bilateral Programs Involving LGU Financing
Governance and Local Democracy
Project (GOLD) Project - United
States Agency for International
Development (USAID)
Cognizant of the need to accelerate the
development process and Improve govern
ment performance in the delivery of baSIC
serVices, the GOLD project was launched
39
priOritization, project identification,
feaSibility assessment, financial
adVisory aSSistance, and Investment
promotion through local government
Initiatives and public/private
partnerships The program has
published occasional papers With
assistance from conSUltants on:
financial management, local taxation
and other revenue generation, local
Investment planning, budgeting, and
revenue shanng and grants. Recently,
GOLD completed ItS mUnicipal bond
Simulation study entitled, "BUilding a
Stronger Municipal Bond Market In the
Philippines". The study proVides an
overview of major concerns about the
state of muniCipal bond use In the
LGU Fznanczng Present Sources, AVaIlability and Terms
country and presents recommen
dations for developing the bond
market The simulations also consider
the Impact of tax exemption of LGU
bond flotations.
o EnvIronmental planning and
management - the GOLD project
With respect to Infrastructure, It provides
technical assistance to LGUs on project
Identification, pnontlzlng and Implementa
tIOn of projects, Including those to be
implemented under BOT schemes Further
more, GEM provides assistance In market
Identification and access, JOint venture
matching, technology transfer and training,
intervention also focuses on assisting and financial packaging to cooperatives,
local governments to better understand Investors, sma II and med I u m sca Ie
the local environmental situation, businesses and producer associations
develop and prioritize options and
undertake actions to promote
environmental planning and
management
Growth with Equity in Mindanao Project (GEM) - USAID
GEM IS a bilateral program of the
United States Intended to accelerate
economic growth In Mindanao, focusing on
development of pnvate enterpnse, essential
Infrastructure, and needed policy changes.
GEM provides limited, "deal-specific"
financial support on a cost-shanng basIs
for technical assistance and training to
groups and organizations working toward
equitable economic growth In Mindanao.
40
As of June 1997, GEM has assisted a
total of 109 "on the ground" projects In
Mindanao with an aggregate Investment
level of P6 2 billion. These projects are In
the areas of agnbuslness development,
support to small and medium enterpnses,
Investment promotion and job creation and
Infrastructure assistance With regard to
the latter, GEM developed a comprehensive
database of eXisting Infrastructure In
Mindanao, prepared 19 detailed BOT
Infrastructure Investment profiles and
proVided assistance to twelve Infrastructure
projects leading to over P5.0 billion of new
investment In telecommunications
LGU Financing Present Sources, Avazlabllzty and Terms
Chapter 111- Constraints to LGU Access to Private Capital
The recent Interest generated by the
private sector In providing financing for LGU
Infrastructure projects highlights the need
to address constraints to LGU access
private capital. Some of these Include
o regulatory constraints on LGU
deposits
o IRA allocation formula and local
resource mobilization efforts
o remaining policy Issues on LGU
financing
o creditworthiness of LGUs
o political risk
o limited Investment planning
capacity and project pipeline
o limited capacity for project and
financial management
Some of these constraints are of a
policy nature, e.g. regulatory constraints to
LGU deposits and other remaining poliCY
Issues. Others are embedded In law and
therefore would need legislative action (IRA
formula). The rest are constraints that are
inherent In many LGUs (lack of capacity
for Investment planning, project and
financial management, etc.). These are
desCribed in more detail In the following
paragraphs.
12 Local Government Code of 1991 (RepublIc Act No 7160), SectIOn 311
41
Regulatory Constraints to LGU
Deposits. It IS a general commercial
banking practice that bank borrowers
maintain deposits with the lending
institution This IS to ensure that the
lending institution can utilize part of the
deposits to secure the borrower's obligation,
and also proVide the mechanism to obtain
regular credit information regarding the
borrower In the case of LGUs, however,
CGA Circular No. 92 Instructs LGUs to open
and maintain depository accounts "With a
government-owned bank located In or
nearest the locality" It also states that In
case there is no government-owned bank
located In the nearest locality, depository
accounts may be opened with a bank duly
designated as government depository by the
Bangko Sentral ng Plllplnas, upon prior
authority of the Sanggunlan Body and the
approval of the chief executive The CGA
Circular IS based on the provIsion In the
LGC pertaining to depository accounts,
which states, "Local treasurers shall
mamtain depository accounts in the name
of their respective local government umts
with banks, preferably government-owned,
located m or nearest to their respective
areas of JunsdlctlOn" 12. The CGA Circular
appears to Interpret the LGC provIsion
narrowly.
LGU Financing' Present Sources. AVailability and Terms
Thus, LGUs, because of the stnct
Interpretation of the LGC prOVISion, are
constrained to maintain deposits only with
government or government-designated
banks. As a result, the information on the
finanCial standing and performance of
LGUs, the collateral that LGUs can offer,
remedies In case of default, and other
Information are not available with lending
Institutions other than govemment financial
institutions Without these Information,
many private commercial banks and
finanCial institutions are reluctant to lend
to LGUs, constraining the extension of
pnvate commercial credit to the LGUs.
IRA Allocation Formula and local
Resource Mobilization Efforts. There IS
concern thatthe IRA allocation formula, not
being linked to resource mobilization efforts
or to priority sector efforts, has resulted in
the decline of LGU local revenue generation
efforts as LGUs seem to substitute allot
ments for revenue that should have been
locally raised It IS noteworthy, however, that
based on recent data, the share of IRA to
total LGU revenues has declined (53.8% In
1996 compared to 61 4 % dUring the pre
VIOUS year), while local resource mobiliza
tion Improved to 45.3% compared to 36.8%
In 1995. Although a positive trend toward
more self-reliance may be developing, there
IS stili room for revIsing the formula to
further promote local resource mobilization
efforts, possibly linking IRA allocation to
local revenue generation performance.
Moreover, resource mobIlization efforts
In order for LGUs to finance not only the
delivery of basIc serVices, but also proVide
the ability to finance critical development
projects and timely maintenance and
operation of existing projects LGUs must
take full advantage of the taxing autonomy
provided under the LGC, and review
Individual tax rates, property value
assessments and tax collection effiCiency
regularly. ThiS Will effectively narrow the
revenue-expenditure gap or resource
mismatch that plagues many LGUs
Remaining Policy Issues on lGU
Financing. Until the Government
formulated ItS New VIsion and PoliCY
Framework for LGU Financing, there was
no clear policy and institutional framework
to promote LGU access to private capital
The GFls continued to favor the large,
creditworthy LGUs for their lending
programs With limited coordination With
other offiCial sources of financing for LGUs,
and very little coflnanclng With private
sources of funding LikeWise, the MUnicipal
Development Fund, which was adminiS
tered by the Government, focused ItS
lending on the creditworthy LGUs, resulting
In an excellent repayment record, but
unable to address the needs of the less
creditworthy LGUs. Other poliCY Issues
remain such as the tax exempt status of
LGU bonds and development of a credit
rating agency for LGUs, the lack of a
secondary market for mUniCipal bonds, and
the ability of private banks to avail of the
IRA Intercept mechanism
of LGUs through cost-recovery, charges, Creditworthiness of lGUs. Because
fees and tax revenues need to be enhanced of the absence of readily available Indicators
42
LGU Financing· Present Sources, Avazlabilzty and Terms
of LGU credltworthmess coupled with the
absence of any formal relationships with
LGUs, private commercial banks and other
sources of fmancIng find It difficult to
determme the loan repayment capacity of
LGUs. Atthe moment, an LGU's repayment
capacity IS determined on the basIs of the
LGU's IRA and local taxes and fees
generated In general, the varymg mcome
generated by LGUs determme the varymg
capacities to service debt Since the LGUs'
share of the national wealth IS a fixed
percentage, the capacity to repay
obligations m a particular project IS, to a
large extent, determined by the ability of
the LGUs to Implement user fees as a cost-
recovery mechanism for timely debt
service
has remamed m the mmds of many pnvate
commercial lenders and mvestors In 1991,
the province of Cebu floated a P300 million
equity bond Issue to raise development
funds The bond Issue had mnovatlve
features where the City government, 1he
pnvate busmess and the fmanclal sector
all participated m the bond Issue. After
the bonds were successfully floated in the
market, a new provmclal admmlstratlon
took over, and raised some legal Issues on
the appropnateness of the transaction,
threatenmg to repudiate the obligations
entered Into by its predecessor Though
the fears of the Investors, m the end, were
unfounded as the Province honored the
mterest payment obligations as they fell
due, the perception of political risk
associated with LGUs has remained.
However, the reluctance of many LGUs However, there has not been an mCldent
to raise local tax rates has not helped on record to substantiate a similar sltuatloh.
enhance their fmanclal capacity, and hence
their creditworthiness For example,
although the LGC allows LGUs to charge
real estate taxes of up to 1% ofthe assessed
value, some LGUs have cut this rate to % %,
reducing their revenue Intake. Though
politically popular, these measures have
resulted in a weakening of the LGU's
revenue base, limiting the prospects for
lendmg from pnvate sources Lenders
generally are not as much concerned With
foreclosure of collateral to recover loan
losses of LGUs, as With the commitment
and ability of LGUs to service their debt
obligations out of local revenues generated.
Misconception of Political Risk.
LGUs contmue to be plagued by the "Cebu
Equity Bond" syndrome, a perception that
43
Limited Investment Planning
Capacity and Project Pipeline. A
carefully conceived medium to long-term
investment plan can translate goals and
strategies Into specific implementable
programs. Histoncally, local mvestment
planning at the LGU level was limited to
hasty annual preparation of a capital
Improvement program, though now they are
required by the COA to develop medium to
long-term Investment targets. ThiS has led
to a haphazard list of projects, which the
LGUs wanted to Implement but was unable
to attract mvestors or creditors. To some
extent, thiS is stIlI happenmg m some of
the LGUs. The LGC sought to significantly
strengthen local Investment planning,
providmg for the establishment of local and
LGU Financing Present Sources, AVailability and Terms
regional development councils charged with
formulating "the medium-term and annual
Investment programs" of the LGUs
Though some LGUs have formulated
master plans for their communities and In
the process, developed a robust project
pipeline, the majority of LGUs continue to
be hampered by limited investment
planning capacity. In addition, many LGUs
do not have the resources to develop
master plans and to conduct proper
feaSibility studies In some sectors such
as water and wastewater, feaSibility studies
can cost up to P20 million depending on
the size and complexity of the projects.
Thus, a mechanism must be developed to
allow LGUs to finance feaSibility studies for
their development projects.
Limited LGU Capacity for Project
and Financial Management. It IS widely
perceived that capacity for service delivery,
project and finanCial planning, project
implementation and project monitoring
varies greatly among LGUs. Thus, while
some LGUs (principally large urban cities)
are advanced In their financial planning and
project execution capability and are able
to access private sources of capital, many
others do not have the capacity to prepare
project feasibility studies, much less
detailed master plans for their
communities. ThiS weakness has
dampened the attractiveness of LGU
flnanclngto the pnvate sector. One example
44
IS In the area of accounting. Pnvate
finanCing sources require accounting
methods In accordance with commercial
accounting pnnclples. However, many LGU
accounts are not. Thus, there IS difficulty
for the private sector to reconCile and
analyze the LGU accounts and thiS
Jeopardizes the LGU 's chances of attracting
financing Another area IS budgeting.
Many LGU offiCials have a limited view of
the development process, and the practice
of planning for a single-year period remains
common. Furthermore, many capital
expenditures are spent for "unfunded
mandates" with little real analysIs, resulting
In sub-optimal Investment deCISions.
Though some LGUs are turning to local
consultants and Investment adVisers for
speCific-prOject assistance, thiS appears to
be only a short-term solution What IS
reqUired IS upgrading of the permanent
staffing complement of LGUs through
proper recrUitment, training and
educational opportunities Although
training In project management and
finanCial analysIs IS being proVided to LGUs
by respective agencies Involved In local
governance, e.g. the Local Government
Academy of the Department of Intenor and
Local Government and other agencies and
organizations such as the NEDA and the
CCPAP BOT Center, much work IS stili to
be done to bUild-up the technical and
finanCial capability of LGUs
LGU Financing Present Sources, AvazlabIllty and Terms
Chapter IV - Summary of Recommendations
The devolution of basIc services and
Infrastructure development to the local
government units poses both an
opportunrty and a challenge for LGUs. They
now formulate and implement their own
development plans, which hitherto was
done by National Government agencies;
this opportunity cames the greater
challenge of securing finanCing for these
proJects. The paper has provided the
framework for LGU finanCing, and has given
an assessment of the different sources of
finanCing currently available to local
government units. The assessment of each
finanCing source discussed the prospects
for expanding the fmancing sources and
identified the constramts that need to be
addressed and offered some
recommendations. FollOWing IS a summary
of these recommendations and specific
courses of action that can be undertaken
to expand the sources of fmancmg for LGUs
and develop their financial capacity:
a. Government to Implement it's New
Vision and Policy Framework for
LGU Financing. The Government's
new vIsion and poliCY recommen
dations to enhance LGU finanCing
provide an excellent list of
recommendations to enhance
finanCing for LGU Infrastructure
projects and develop local managerial
capability. The recommendations
45
Which are now In various stages of
implementation, include the follOWing:
(I) Increase LGU use of BOT
arrangements and other forms of
private sector participation In
coordination with the CCPAP-BOT
Center; (II) develop the LGU muniCipal
bond market; (III) promote LGU access
to private credit markets; (iv) optimize
and expand GFI mvolvement In LGU
flnancmg; (v) restructure and re-onent
the MDF, (VI) Improve the capacity of
LGUs to raise their own revenues, and
(vii) tap ODA technical assistance and
flnancmg These proposed measures
are embodied in the Government's New
ViSion and Policy Framework on LGU
Fmanclng reproduced in Annex 12.
b. Government to recommend
legislative action to rationalize IRA
formula (possibly link IRA to resource mobilization efforts) and
to promote equity in distribution in
favor of lesser-creditworthy LGUs.
The LGC proVides for the proportionate
sharing of IRA resources to proVinces,
cities and mUnicipalities regardless of
local Income generated or financial self
suffiCiency. Because the IRA formula
IS not Imked to the financial capacity of
LGUs, meqUitles prevail as some cIties
that are fmanclally self-sufficient receive
more IRA allocations than some
LGU Financzng Present Sources, AVailability and Terms
municipalities that have insufficient
financial resources and limited access
to finanCing.
c. LGUs to improve local resource
mobilization and enhance credit
worthiness through progressive
expansion of their local resource
base. LGUs should Implement steps
to enhance their local resource base,
Including timely review and update of
property assessment rates, efficient
collection of business, community and
assistance to LGUs should Include thiS
type oftechnlcal assistance. LGUs will
require Institutional development
assistance, In financial planning,
treasury management, budgeting,
Investment PriOritization, project
development and evaluation ASide
from thiS, stand-alone LGU capaclty
bUilding programs coordinated with
different agencies such as the DILG and
the DOF, GFls and private sector
agencies, should be explored
real property taxes and prudent, e. Government and private sector to
transparent and JudicIous use of LGU
resources and proper financial
planning The National Government
thru the DOF, should also review the
tax administration policies embodied
In the LGC to maximize the tax
revenues for LGUs such as the extent
of exemptions, differential tax rates, tax
collection and tax collection costs and
revenue administration among
different local governments.
d. Government and Multilateral and
Bilateral Agencies to formulate
together with the LGUs, programs
to develop a "fast-track" LGU
"capability building" training
program. DISCUSSions are now being
conducted between the OOF and
multilateral and bilateral agencies to
provide technical assistance to LGUs
for project preparation and execution,
financial capacity building and
performance monitoring. The
Government has to ensure that new
programs extending financial
46
aggressively promote alternative
LGU financing schemes and
establish an LGU credit rating
agency. The paper analyzed different
finanCing options and credit
enhancements available to LGUs, for
example, municipal bond finanCing,
multilateral Infrastructure funds, and a
private sector guarantee faCility
Current efforts to promote these
alternative finanCing options such as
the monthly LGU finanCing seminar
series sponsored by the OOF and the
CCPAP BOT Center should be
expanded A systematic and sustained
promotional effort should be developed
With participation of the government
and the private sector financial
Institutions Current efforts to establish
an LGU credit rating agency must be
pursued to gUide lenders and Investors
In making good Investment deCISions.
The DILG and OOF should formulate
programs to enhance the credit
worthiness of LGUs, and to Improve the
credit rating of the less-creditworthy
LGU Financing Present Sources, Avatlabilzty and Terms
LGUs to Improve their access to
financing sources
f. CCPAP BOT Center to continue to
participation To effectively carry out
these tasks, the BOT Center staff
complement should be strengthened.
aggressively promote BOT schemes g. Government to explore creation of suitable for LGU infrastructure a fee-based "Project Development
projects. BOT schemes provide the Fund" for LGUs. The lack of financing
LGUs an alternative source offlnanclng
that has proven to be efficient,
attractive and effective The CCPAP
BOT Center should continue to expand
Its efforts to promote BOT schemes to
LGUs Because of the recent Initiatives
of LGUs to consider other forms of
private secto r pa rtl c I patio n In
Infrastructure development, such as
JOint ventures, leasing and
conceSSions, the mandate of the BOT
Center should be expanded to promote
and provide technical assistance on
these other forms of private sector
47
for project feasibility studies has been
a major Impediment In Implementing
Infrastructure projects by LGUs. One
possible solution IS to explore
establishment of a revolving fund that
will finance project feasibility studies
for LGU projects. The fund could be
participated In by a number of Investors
Including GFls, multi-lateral and
bilateral agencies, and private sector
Investors. The funds disbursed to
finance the feasibility studies could be
repaid by the successful proponent of
the project to ensure sustalnabllity.
LGU Financmg Present Sources, Avazlabihty and Terms
CONCLUSION
The Local Government Code (LGC)
represents landmark legislation In the local
economic and political governance In the
Philippines Consistent with the objectives
ofthe LGC, the devolution of baSIC services
and Infrastructure developmentto the LGUs
has brought these progra ms closer to those
who would directly benefit from It, I.e the
LGUs and ultimately, the people at large
Local officials In prOVinces, cities,
municipalities and barangays are
increasingly taking the lead In shaping the
Bilateral and multilateral institutions are
now actively Involved in proViding long-term
finanCing with their various programs. New
financing options for the LGUs are gaining
a foothold - BOT schemes, mUniCipal bond
finanCing, and provincial equity funds.
These should be further refined, enhanced
and promoted. Lastly, the Government IS
actively pursuing institutional development
and capacity-building programs for LGUs
Now the challenge IS for the LGUs to
pattern of development. However, the do their share. They must Improve their
main challenge of how to finance thiS
Increased responsibility remains The
paper assessed the means and
recommendations to address thiS
challenge; what IS needed IS for those
Involved In LGU financing to be Vigilant In
pursuing their objectives and Implementing
their respective programs
The Government, through the OOF, IS
setting the pace for developing the LGU
finanCing market. It's new viSion and policy
framework for LGU finanCing has been
widely disseminated, and Implementation
IS being vigorously pursued. Government
financial institutions continue to be In the
forefront, plaYing an active role In the
finanCing of LGUs' development projects
creditworthiness by Intensifying their
revenue-collection efforts to increase local
finanCial resources. They must proactively
strive to correct the market perception that
lending to LGUs entails high risks because
ofthe political succession issue They must
build-up their operational and financial
capacity to be able to take full advantage
ofthe finanCing programs offered by various
financial institutions. Finally they must
come up with financially viable and
economically sustainable projects to attract
various sources of finanCing. It IS with the
cooperation of every Individual entity
Involved In LGU flnanclngthatthe LGUs will
be able to successfully Implement their
development programs and Improve
delivery of baSIC services and Infrastructure
Commercial banks are now becoming requirements
aware ofthe large and lucrative LGU market
and with the advent of the LGUGC, are 0 0 0
expected to playa major role in the market.
Previous-Page :Blank 49
~ I I
PERCENTAGE OF IRA TO TOTAL LGU INCOME 1991-1996
YEAR PROVINCES CITIES
1991 46.6 33.0 1992 70.2 47.2 1993 75.7 52.5 1994 76.1 50.8 1995 74.9 45.9 1996 72.9 32.5
Source: Bureau of Local Government Finance, Department of Finance (DOF)
MUNICIPALITIES ALL LGUs
43.6 40.7 55.1 55.9 62.6 61.9 61.3 61.2 67.8 61.4 64,3 53.8
~ >< .......
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PERCENTAGE OF LOCALLY GENERATED FUNDS TO TOTAL LGU INCOME
1991-1996
YEAR PROVINCES CITIES
1991 31.2 66.2 1992 28.0 52.6 1993 22.9 47.0 1994 22.1 48.9 1995 21.3 53.7 1996 26.5 67.1
Source: Bureau of Local Government Finance, Department of Finance (DOF)
MUNICIPALITIES
54.0 42.8 35.8 36.9 30.1 34.0
ALL LGUs
56.1 42.8 37.0 , 37.6 36.8 45.3
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55
~LANDBANK LAND BANK OF THE PHILIPPINES LGU LENDING PROGRAM
ELIGIBLE BORROWER
Provinces Cities Municipalities
LOAN PURPOSE
That are rated Medium grade or higher
ANNEX 4 Page 2 of 8
To finance local infrastructure and other socio-economic development projects under the LGU's local development plan
LOAN AMOUNT
Based on the requirement of the project, but not to exceed the Net Borrowing Capacity as defined in Art. 419 of the Local Gov't Code.
LOAN TERM
Based on LGU's cash flow, but not to exceed 5 years.
Maximum grace period on the principal is 2 years.
INTEREST RATE
Prevailing Market Rate
COLLATERAL
• Hold-out on Deposits
• Real Estate Properties - not devoted or intended for public use or public service for the development of national wealth.
• Machineries & Equipment
• Deed of Assignment on:
LANDBANK OF THE PHILIPPINES 319 Sen Gil PuyatAvenue Ext MakatiCity Tel Nos. 818-9411t029
58
IRA Regular Taxes Net Profit I Income
P.O. BOX 1108 Cable "LANDBANK"
~LANDBANK ANNEX 4 Page 3 of 8
CONSIDERATIONS LGUs MUST TAKE FOR CREDIT FINANCING TO PROSPER
• Project a strong image political leadership. Local government officials must assume the role of marketing managers -- projecting a lot of sense and a lot of savvy.
• Have the right projects. In the final analysis, the financial market will support only those bond issues which will be used for productive markets. In the same say, project viability is a major criteria used by banks in evaluating loan applications.
• Project a positive image in the market. Clean, peaceful, and working communities attract the markets attention.
• Have the properties to back up the security.
• Display disciplined and progressive management of its financial resources.
• Exhibit continued improvement in its non-debt related finances. LGU capacity to pay will be determined by the taxes and fees it can collect.
The potential for LGU credit financing are vast ifLGU s pursue the appropriate structures conducive to the market and a stable macroeconomic environment for savings and investment is established.
LANDBANK OF THE PHILIPPINES 319Sen Gil PuyatAvenue Ext. MakatiCrty Tel. Nos. 818-9411 to 29
59
PO. BOX 1108 Cable "LANDBANK"
~LANDBANK ANNEX 4 Page 4 of 8
SPECIFIC ACTIONS LGUs MUST TAKE PRIOR TO AVAILING OF A CREDIT FINANCING SCHEME.
• prepare an inventory ofLGU assets which can serve as collateral or security to credit or bond finance.
• establish and maintain a local revenue data which is the key to an effective and efficient revenue collection system.
• create a team to identify and evaluate projects.
• task the Local Development Council and the Local Finance committee to: 1. formulate realistic, cost effective, long-term and medium
term economic development plans and policies. 2. formulate medium-term and annual public investment pro
grams. 3. conduct an inventory of critically needed, potential high
return, revenue-generating projects.
• get the attention of banks and other potential investors.
• seek and respond to special training and orientation oportunities that will be established on credit finance by varied institutions.
• have sustained public information system that will educate the LGU populace.
• provide for an improved and efficient fiscal administration system.
LANDBANK OF THE PHILIPPINES 319 Sen Gil PuyatAvenue Ext. MakatlCrty Tel. Nos 818-9411 to 29
60
P.O. BOX 1108 Cable "LANDBANK"
•
(i)LANDBANK ANNEX 4 Page 5 of 8
GENERAL PRINCIPLES LGU POLICY MAKERS SHOULD CONSIDER
LGU must maintain its fiscal credibility always.
It must aim to have a sound record of meeting programmed fiscal obligations at all times.
•
•
•
Accept that expanded local financial resources will be essential in order to meet increased local powers and obligations.
Consider a second policy judgement that in all probability the LGU by itself will lack the human and financial resources to mobilize and operate the necessary development and revenue-generating projects essential to support effective local economic and social growth under the new Code. Hence, it will have to engage the private banking and business sectors with vigor and care.
The LGU leadership (executive, legislative & technical) MUST start and sustain the initiative.
LANDBANK OFTHE PHILIPPINES 319 Sen Gil Puyat Avenue Ext MakatlCrty Tel Nos. 818-9411 to 29
61
P.O. BOX 1108 Cable "LANDBANK"
~LANDBANK ANNEX 4 Page 6 of 8
LANDBANK OF THE PHILIPPINES LGU LENDING PROGRAM
PRE-RELEASE REQUIREMENTS
Loans to LGUs shall be covered by the regular documentary requirements for regular loan accounts. In addition, the following documents shall be required.
a. BORROWING RESOLUTION passed by the Sangguniang Panglungsod and expressly: • confirming, approving and ratifying all previous representations and warran
ties and all the terms and condjtions of the loan, and authorizing the Local Chief Executive to sign all documents pertaining to the loan;
• designating the person authorized to negotiate and sign all documents pertaining to the loan;
• authorizing the mortgage/assignment of certain personal and/or real properties and declaring that the properties offered as collateral are patrimonial and not actually devoted to public use and prohibiting the conversion of said properties to public use or service;
• committing not to contract other loans/credits with other creditors/banks as to impair the LGU's paying capacity for the duration of the loan;
• directing the LGU Treasurer and the accountant to enter the loan in the appropriate books of the LGU;
• designating LBP as the LGU's major depository bank for IRA and for its other deposits which designation shall be revoked while the loan obligations remain outstanding and directing the LGU Secretary to provide a copy of this Resolution to DBM or other IRA-administering office;
• appropriating the amount for loan repayment in the LGU's annual budget until the loan, interest and other charges are fully paid;
• undertaking by the LGU to secure from DBM a written certification of its commitment to withhold the LGU's IRA in favor of LBP in the event of payment default;
• authorizing LBP to deduct for set-off and/or deduct amounts from any deposits or funds of the LGU with LBP and apply the same to the payment of the loan or any portion thereof, or interest and penalties thereon as may be deemed necessary to LBP.
LANDBANK OF THE PHILIPPINES 319 Sen Gil Puyat Avenue Ext. Makati City Tel. Nos. 818-9411 to 29
62
P.O. BOX 1108 Cable "LANDBANK"
(i)LANDBANK
LAND BANK OF THE PHILIPPINES LGU LENDING PROGRAM
PROCESSING REQUIREMENTS:
ANNEX 4 Page 1 of 8'
• Sangguniang Resolution authorizing the Local Chief Executive to negotiate a loan with LBP
• Budget for the Current Year • COA Audited Financial Statements for the past 3 years • List of Elected Officials and Key officers • Schedule ofLGU's IRA for the past 2 years • Feasibility Study • Regular Documentary Requirements pertaining to offered collaterls • F or Projects involving Construction
• Cost Estimates • Plans and Specifications • Bill of Materials • Work Program / Schedule duly approved by the Local Chief Executive and the
CitylDistrict Engineer • F or Acquisition of Machinery and Equipment
• List of Machinery and Equipment, its Description & Estimated Cost based on firm Quotation
• Guarantee from the Dealers/Suppliers as to the Availability of Spare parts in the Local Market
LANDBANK OF THE PHILIPPINES 319 Sen. Gil PuyatAvenue Ext. MakatiCrty Tel Nos. 818-9411 to 29
63
P.O. BOX 1108 Cable "LANDBANK"
~LANDBANK ANNEX 4 Page 8 of 8
• authorizing the local chief executive to sign, execute, endorse and deliver any and all deed of assignments, loan agreements, real estate mortgage and other documents, papers and deeds as may be necessary and proper for the implementatIOn of the authorities and directives contained in the resolution.
• authorizing DBM to deposit and remit directly the LGU's IRA to LBP for the LGU's account.
b. BUDGET APPROPRIATION OR CERTIFICATION of the budget officer and local treasurer, noted by the Governor that; • the prmcipal and interest repayments on the loan have been duly appropriated,
and • full provision has been made by the LGU for all its obligations.
The LOU shall annually appropriate in their respective budgets such amounts sufficient to pay the loans and other indebtedness or contractual obligations. For this purpose the LGU shall annually submit to LBP a certification on the appropriation.
C. CERTIFICATION BY THE LGU TREASURER, noted by the Local Chief Executive, that the proposed sources of repayment are available and not restricted by law or Its other obligations.
d. DEED OF ASSIGNMENT OF THE IRA in favor ofLBP containing the following: • Said assignment shall be irrevocable until the loan, including interest and other
charges due thereon is fully paid; • In the event the IRA is directly remitted by the DBM to the LGU, the LGU shall
agree to deposit immediately to LBP the proceeds of the said IRA;
e. DEED OF UNDERTAKING by the LGU to secure from DBM a written certfication of its commitment to withhold the LOU's IA in favor of LBP in the event of payment default;
f. CERTIFICATION BY THE LGU'S TREASURER AND ACCOUNTANT, noted by the Governor, that the contractual obligation I loan was entered in the LGU books of account.
LANDBANK OF THE PHILIPPINES 319 Sen Gil PuyatAvenue Ext Makati City Tel Nos 818-9411 to 29
64
P.O. BOX 1108 Cable "LANDBANK"
ANNEX 5 Page 1 of 6
DEVELOPMENT BANK OF THE PHILIPPINES
LENDING PROGRAM FOR
LOCAL GOVERNMENT UNITS (LGUs)
65
ANNEX 5 Page 2 of 6
I. Objective:
Provide loans to qualified LGUs for projects which will enhance/facilitate the delivery of basic services to their constituents and at the same time, capture sizeable deposits from LGUs.
ll. Pregualification Criteria for Eligible LGUs:
To qualify under the Program, the province, municipality or city shall:
1. have beneficiary population of at least 10,000;
2. perform important local, commercial, transportation, industrial, educational or similar activities;
3. have gross annual average revenues of at least P3. 0 MM over the last three years;
4. have balanced or surplus prospective income streams for the next three years (computation to be validated by the concerned RMTlBranch;
5. have no adverse findings from banks and major suppliers both for the LGU and the current Chief Executive and Treasurer; and
6. have shown efficiency in the collection of real estate and other local taxes based on the steady growth rates over the last three (3) years.
ID. Eligible Projects:
1. Revenue-generating projects include, but not limited to public markets, slaughterhouses, transport terminals, municipal water systems, storage/refrigeration facilities, and hospitallhealth facilities which are selfliquidating;
2. Projects under the PCCD-CEP are primarily designed for income generation by barangay residents who will be organized into 4 to 6 member groups which will be funded by the LGUs out of the loan proceeds from GFIs like DBP. Initially, the pilot operation will cover 40 pre-identified barangays located at the 20 priority provinces. For the expanded operation, 4,000 out of 42,000 barangays will be targeted annually;
3. Non-revenue generating projects include but not limited to construction of roads and bridges, and acquisition of heavy equipment which are not intended to generate revenues but to enhance efficiency in the provision of services to their constituents;
66
ANNEX 5 Page 3 of 6
4. The project to be financed shall have passed the first and second screenings following the Simplified Screening Criteria of World Bank (available with DBP);
5. The project to be financed shall be included in the approved local development plan and public investment program (Local Government Code Section 296);
6. The project shall be duly endorsed by the local council as evidenced by the relevant enabling resolution.
"IV. Features ofthe Loan:
1. Amount of Loan:
a Window ill Loans
I. Revenue-Generating Projects - The minimum-maximum loan limits shall be PIMM and P50MM, respectively, subject to periodic review by WINCOM, and with a minimum equity participation of at least 15% of the total project cost;
2. PCCD-CEP Projects - P1.5MM per Barangay Business Center
b. Loans Secured by Deposits - Total project cost but not to exceed 50% of the ADB deposits of the past six-month period reckoned from the preceding month which shall be maintained during the term of the loan and covered by a "Hold Out Agreement".
2. Terms of Payment:
a. Window ill Loans
1. Revenue-Generating Projects - The term of the loan shall be kept within project requirements and projected cashflows. Maximum term of the loan is twelve (12) years inclusive of a maximum grace period of two (2) years. The loan shall be payable monthly, quarterly or semi-annually depending on the cash generation of the project.
2. PCCD-CEP Projects - Maximum of 5 years inclusive of up to one year grace period payable quarterly. The on-lending terms from Barangay Business Centers to their respective group members is maximum of 2 years inclusive of up to 6 months grace period payable monthly.
b. Loans Secured by Deposits - Maximum of five (5) years payable monthly.
67
ANNEX 5 Page 4 of 6
3. Interest Rate:
a. Window III Loans -_ Variable and reviewable every January 1 and July 1 based on prevailing 91-day T -Bill rate plus two (2 %) provided that the rate is not higher than "AAAA" .
PCCDP-CEP - The LGU shall be charged 12% p.a. to be passed on to the BBC without spread. The on-lending rate by BBC is 14% p.a.
b. Loans Secured by Deposits - Based on the formula prescribed in ALMA Circular No. 01-95 covering the Revised Guidelines for Loans Secured by Deposits.
4. Drawdown:
Drawdown shall be one time or in multiple basis. The loan proceeds shall be credited to a special project account to be opened by the LGU with DBP, withdrawals of which shall be subject to approved operating guidelines of the loan.
5. Collateral Requirements:
F or Window III Loans:
Loans with maturities beyond 5 years shall be secured by:
a. Registered fIrst real estate mortgage andlor registered fIrst chattel mortgage in favor ofDBP, with loan values based on existing DBP policy, subject to fInal verifIcation by DBP;
b. Such other collateral or security arrangements as may be acceptable toDBP.
Loans with maturities of up to 5 years shall be on best efforts basis. In addition, the following shall be obtained:
a. Assignment of a specifIed portion/amount of the LGU's Internal Revenue Allotment (IRA) in favor ofDBP in an amount at least equivalent to one (1) amortization payment which shall be maintained while the loan is outstanding. For PCCD-CEP Projects, this would be sufficient;
b. Assignment of profIts or income from the project to be fInanced until the loan is fully paid;
68
ANNEX 5 Page 5 of 6
c. Endorsement in favor ofDBP of insurance policies on mOr):gaged properties. The insurance shall be placed, based on sound value, by DBP, through its appointed insurance broker.
For Loans Secured by Deposits :
Project assets and deposit agreement with a minimum balance of 200% of the outstanding balance of the loan and shall automatically be applied to the loan in the event of default.
6. Other Conditions:
a. The LGU shall include appropriation for debt amortizations in its annual budget in accordance with the LGC until the loan shall have been fully paid.
b. The LGU shall maintain a Special Depository Account under the General Fund, where repayment of obligations to DBP shall take precedence after operating expenses of the project. Only when the debt amortizations have been satisfied will excess form part of the General Fund.
c. The LGU shall open a CASA account for the assigned IRA with the understanding that DBP shall automatically offset the amortization for the period against this deposit account. A minimum balance equivalent to one amortization payment shall be imposed.
d. The LGU shall execute a Deed of Undertaking making DBP its main depository bank.
e. The LGU shall maintain a debt service cover of at least 1.2 times. Debt service coverage is defined as yearly revenue from all sources less operating costs and maintenance expenditures, divided by yearly debt service to all creditors.
f. The LGU shall constitute a Local Prequalification, Bids and Awards Committee (pBAC), which shall primarily be responsible for the conduct and prequalification of contractors, bidding, evaluation of bids and recommendation of awards concerning the Project, with at least one (1) DBP representative as an observer.
g. The LGU shall constitute a Local Technical Committee, which shall primarily be concerned with providing technical assistance to the local PBAC, with at least one (1) DBP representative.
69
ANNEX 5 Page 6 of 6
h. The LGU shall commit to establish a project office with full-time staff and operating budget for project preparation/implementation.
1. The LGU shall constitute and commission a competent consultancy firm to be tasked with validating and certifying the acceptability and compliance with the approved specifications of all acquired materials and supplies.
J. The LGU shall only engage the professional services of such parties and commission such works as are customary for industrial development operations and projects similar to the financed project, which services must be reasonably priced, considering the quality and competence of the parties rendering them and in case of works, the technical quality and competitive costs of the same, if approved in writing by the DBP.
k. The LGU shall submit resolution passed by the appropriate Sangunnian Board (panlalawigan, Panlunsod or Pambayan) expressly authorizing the ff.:
1. The loan being contracted by the local Chief Executive;
2. The Authority of the local Chief Executive (Governor or Mayor) to negotiate and enter into the contract of the loan applied for and to mortgage or assign or otherwise into a collateral agreement to secure the payment of the loan applied for;
3. The continuing assignment of the LGU's applicable portion of its IRA, realty taxes and all other revenues to DBP until the loan is fully paid;
4. The continuing assignment of profits or income from the project/economic undertaking to be financed until the loan is fully paid;
5. Authorization to the DBM for it to remit the IRA for deposit to the account of the LGU with DBP duly acknowledged/received by
DBM, Manila;
6. The authority for the Mayor and/or Treasurer to open and maintain deposit account with DBP where its IRA and revenues shall be deposited during the term of the loan; and
7. Authority for DBP to debit the LGU's deposit account to cover payments of its loan obligation with the Bank.
70
;fl
"-I 1-1
MUNICIPAL DEVELOPMENT FUND LENDING (MDF) As of March 1998
PROJECT
Regional Cities Development Project
Program for Essential Municipal Infrastructure Utilities, Maintenance and Engineering Development I (PREMIUMED I)
PREMIUMED II Project
Second Municipal Development Project
Metro Cebu Development Project I
Metro Cebu Development Project I
Bukidnon Integrated Area Development Project
Philippine Regional Municipal Development Project
Misamis Oriental Telephone Extension Project
TOTAL
11 At current exchange rates. 21 Overseas Economic Cooperation Fund of Japan
AGENCY
World Bank
World Bank
World Bank
World Bank
OECF 21
OECF
Asian Development Bank
Asian Development Bank
Korean Exlm Bank
AMOUNT OF LOAN (US DOLLAR EQUIVALENT) 11
39.5
40.0
68.0
40.0
16.0
33.5
20.0
30.0
3.0
290.0
§ ~
0\
ANNEX 7
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72
ANNEX 8 Page 2 of 13
PNB LOANS TO LOCAL
Go UN II'S
L Purpose of the Loan
II Eligible Borrowers
ill. Amount of the Loan
N. Term of the Loan
v. Interest Rate
VI. Collaterals
VII. Other Terms and Conditions
VTII. CJhecklistofProcessb1g Requirements
:IX. Pre-Approved Credit Facility for all LGU's
74
L Purpose of the Loan
1. To imance the establishment,
development, or expansion of income
generating projects
such as:
a. ) Revenue-Generating / Cost Savings
• Public Market
• Trading Center / Tenninal
• Water System (Construction /
Expansion)
• Asphalt Plant
• Heavy Equipment
• Telephone System
• Commercial Center
• Slaughter House
• Grains Procurement / Trading
• Post-Harvest Facilities
75
ANNEX 8 Page 3 of 13
ANNEX 8 Page 4 of 13
b) Others
• Irrigation
• Renovation / Construction of City /
Capital Town's Municipal Hall
• Purchase of Lots
• Reclamation
• Sports Complex
• Diagnostic Equipment / Building
• Road Construction / Repair
• Hospital Building with Pay Wards
• School Building
2.) To finance acquisition of property, plant, machinery, equipment, and necessary accessories for the implementation of the items enumerated in the preceding section.
Note: Combination of revenue & non-revenue generating project in one loan package.
76
II. Eligible Borrowers
•
•
•
Municipality
City
Province
III. Amount of the Loan
ANNEX 8 Page 5 of 13
The amount of the loan is equivalent to
the project's requirement (100%) but not
to exceed the aggregate of five times (5x)
the sum of the 20% portion of the Annual
regular income and the Annual Internal
Revenue Allotment (IRA) share of the
LGU.
77
ANNEX 8 Page 6 of 13
IV. Term of Loan
Maximum of seven (7) years provided
that amortizations shall be payable on a
monthly or quarterly basis. A longer
term may be considered by PNB Board
of Directors, if justified.
v. Interest Rate
Interest rates shall be Prime Rate Based subject to periodic interest resetting.
78
ANNEX 8 Page 7 of 13
VI. Collaterals
Assignment of applicable regular income
of the LGU, Internal Revenue Allotment
share of LGU and Net Revenue
generated by the project financed.
Chattel Mortgage of Equipment Financed by the Loan.
Real Estate Mortgage on Patrimonial property of Local Government Units.
79
ANNEX 8 Page 8 of 13
VII. Standard Conditions
A. COIYfMON CONDmON
1. Submission of a Resolution of the Sangguniang Bayan / Panlungsod authorizing the loan and designating the Local Chief Executive (LCE) as the authorized signatory. The resolution should also
contain the following:
a) The continuing assignment to PNB of the project revenue (if applicable), LGU's applicable portions of the Internal Revenue Allotment (IRA), realty taxes and all other revenues until the loan is fully paid;
b.) The authorization of the LGU to the Department of Budget and Management (DBM) for the remittance of all its IRA thru PNB for deposit to the LGU's account maintained WIth PNB;
c.) The duly notarized undertaking of the LCE and / or Treasurer to remit to PNB applicable portion of the LGU's realty taxes and other revenues on a monthly basis as payment of the amortIZations on the loan~
d.) The authority for the LCE and/ or Treasmerto maintain the LGU's deposit account with PNB wherein the project's revenues, the LGU's IRA and other revenues shall be deposited until the loan is fully paid and the PNB to debit the LGU's deposit accounts to cover payment of its obligations;
e.) The duly notarized undertaking of the LGU to include in its annual budget its loan obligations with PNB:
80
ANNEX 8 Page 9 of 13
9.) All insurable improvements fInanced by the loan shall be insured up to the full insurable value and policy endorsed in favor of the Bank.
10.) All applicable provisions ofPNB's standard loan conditions and such other conditions our Legal Department may impose to protect the interest of the Bank.
B.) LOANS FOR MACHINERY / EQUIPMENT / VEHICLE
1.) Loan proceeds shall be paid directly to the supplier I seller of the equipment I vehicle in an amount equal to the selling price or amount of the approved loan whichever is lower.
2.) If to be imported, the letter of credit shall be opened at the Bank and the loan proceeds be equivalent to the:
a) corresponding import bill upon negotiation .computed at the prevailing selling rate at the time of negotiation.
b. ) amOlmt of the LC in case of cash LC computed at the prevailing selling rate on LC opening date.
3. ) LGU to execute a chattel mortgage on the equipment within 60 days upon acquisition.
4.) Submission of a duly notarized certification that all government policies rules and regulations in the award of the contract to the local supplier have been complied with.
81
ANNEX 8 Page 10 of 13
2. Submission of the LGU~s letter-authorization to the DBM forthe latter to remit all IRA directly to PNB for deposit to the LGU's account with PNB until the loan is fully paId, duly aclmowledged / received by DBM, Manila
3.Submission of a duly notarized-certification by LGU that:
a.) the 20% limit provided under Law in the servicmg of loan obligations have not been exceeded;
b.) Legible copies of the Loan Agreement and Secmity Agreement have been posted at the conspicuous place in the Municipality / City Hall / Provincial Capitol;
c.) The proposed sources of repayment of the loan are available and not restricted by law.
4.PNB shall continue to be the LGU's principle depository Bank until such time the loan is fully paid.
5. Approval and confirmation by the Sangguniang BayaniPanlungsod of the terms of the covering Credit Agreement and all other documents executed by the LeE in the implementation of the loan.
6. Undertaking by the LGU that they will not incur additional obligation/indebtedness without the written consent ofPNB which consent will not be unreasonably withheld.
7. Any amount :in excess of the approved amount of loan shall be shouldered by the LGU.
8. S ubj ect to SEL C ir. 4-3 15/94 Of May 1 7, 1994 on Interest Rate Setting and Adjustments.
82
ANNEX 8 Page 11 of 13
C. FOR CONSTRUCTIONIDEVELOPMENT LOANS
1. Releases shall be on staggered basis which are to be made only upon presentation of progress report and billing certified by the project engineer and the MunicipallCity/Provincial Engineer and approved by the project owner and to be validated by the Bank appraisers.
2. Where the contract calls for a mobilization outlay, such amount for initial release shall not exceed 15% of the approved loan.
3. SubmissIOn of a duly notarized certification that all f!ovem-~ -
ment policies, rules and regulations in the award of the project to the contractor have been complied with.
4. PNB shall have the option to buy or lease a space of its choice for a branch site within the project to be financed.
83
ANNEX 8 Page 12 of 13
CHECKLIST OF PROCESSING REQUIREMENTS
Name of Applicant Loan Applied for
1. Application letter or duly accomplished application for loan.
2. Sangguniang Resolution authorizing the Chief Executive of the LGU to negotiate and enter into a contract in behalf of the LGU for the purpose of securing a loan with PNB.
3. Charter or equivalent document creating the LGU.
4. Profile of the LGU. (Background, locatio~ land area., population, economic activity~ etc.)
5. List of elected and key officers.
6. COA audited financial statement for the past three (3) years.
7. In case there are COA exceptions in the financial statements, submIt eOA certifications and/or LGU's statement of compliance / actions being taken on these exceptions, duly noted by e~A.
8. Notarized Summary Statement of all Statutory and Contractual Obligations certified by the CitylMunicipa1i Provincial Treasurer/Accountant.
9. Budget for the current year and Projected Income Statement for the term of the loan applied for (max. of7 years).
10. LGU's Internal Revenue Allotm~t (IRA) for the past three (3) years and PrQjected IRA for the term of the loan (max. 7 years).
84
ANNEX 8 Pag-c.; 13 of 13
11. Project Feasibility Study and Projected Cash Flows of the project.
12. Summary of Projects and Acnvlties to be accomplished.
13. A Certification from the LGD that the proposed sources of repayment are available and not restricted by law or its other obligations.
If the purpose of loan IS for the acquzsitzon of machinery and eqUlpment:
14. Price quotations from at least three (3) suppliers. Provision for spare parts maintenance (Motor pool) team for the preservation & service of machinery and equipment
If [he purpose of loan IS for the constractzon of a commercIal building:
15. Canvass of prevailing lease rates of similar commercial/ stalls/spaces in neighboring towns/cities.
If collateral offered znclude real estate property:
16. a) Torrens Title; b) Building plans, ifland has improvements; c) Certified location plan~ d) Real Estate Tax receipts for the current year; e) Tax Declaration; f) Photographs of improve ments.
17. Others: (CIR.;lAR; to be conducted by the nearest PNB Branch).
NOTE: Processing of loan application will start only upon submission of the complete requirements.
85
ANNEX 9 Page 1. or S
BRIEFING ON MUNICIPAL BOND ISSUANCE
1. What is a Municipal Bond? 2. Legal Basis for Bond Issuance 3. Advantages of Issuing a Municipal Bond 4. Participants and their Roles 5. Bond Flotation Mechanics 6. Timetable for Bond Issuance 7. Collateral for Bond Issuance 8. Approval/Clearances required from Government Agencies 9. Constraints of Bond Flotation on the part of the LGUs & the Investors
FINANCING OPTIONS FOR LGUs
LGUPROJECT
BOND
A promise to pay a specified sum of money at a fixed time in the future at a given number of years from issuance and a promise to pay interest periodically at specified dates at a fixed rate or floating rate.
A bond similar to a promissory note but is made in standard denominations and is negotiable.
88
MUNICIPAL BOND
ANNEX 9 Page 3 of8
A Bond issued by a Province, City or Municipality to finance self-liquidating, income-producing development or livelihood projects as provided for by the Local Government Code of 1991 (RA 7160)
ADVANTAGES OF MUN1CIPAL BONDS
o Generates people participation in Local Governance o Enhances transparency in Project Development o Enables LGUs to establish Creditworthiness in the financial market o Eases pressure on taxes as primary source of funding o Stimulates Local Economy o Harnesses Countryside Capital o Contributes to the country's Capital Markets
LEGAL BASIS FOR BOND ISSUANCE
o Republic Act 7160 - Local Government Code of 1991
o Section 296. General Policy - (a) It shall be the basic policy that any local government unit may create indebtedness, and avail of credit facilities to finance local infrastructure and other socio-economic development projects in accordance with the approved local development plan and public investment program.
o Section 299. Bonds and other Long Term Securities - Subject to rules and regulations of the Central Bank and the Securities and Exchange Commission, provinces, cities and municIpalities are hereby authorized to issue bonds, debentures, securities, collaterals, notes and other obligations to finance self-liquidating, income-producing development and livelihood projects.
89
ANNEX 9 P,lge 4 of 8
BASIC P ARTICIP ANTS AND BOND MECHANICS
TIlE BORROWERS TIlE INVESTORS BORROW FROM ... ...
Indivlduals Provinces .. CorporatlOns Cities LEND TO Municipalities Financial Institutions
Other Accounts
WITH THE ASSISTANCE
TIlE UNDERWRITING TEAM
Financial Advisor Managing Underwriter
Guarantor Trustee Bank Bond Counsel
LEGAZPI CITY SUERTE BONDS
o ISSUER o PURPOSE
o AMOUNT o TERM o INTEREST
o PRINCIPALPAYMENT o SECURITY o DENOMINATION
City of Legazpi To partially fund a Socialized Housing Project Php 26 Million 2 years 15% per annum payable Quarterly in arrears Bullet Guaranteed by the HIGC Php 5,000; Php 10,000; Php 100,000 & Php 500,000
COLLATERALS THAT CAN BE USED FOR A BOND ISSUE
o 20% of the IRA o For housing projects - an HIGC guarantee o For other projects - guarantee by LGU guarantee Corporation o A standby LC issued by a GFI o Prime Real Estate Property
90
1HE BOND ISSUANCE PROCESS
1 PROJECf IDENTIFICATION & EVALUATION 0 Type of ProJect/Busmess Activity
0 Project SIZe .. 2 SANGGUNIAN APPROVAL FOR THE PROJECf AND AUTHORITY TO
ISSUE BONDS TO PARTIALLY FINANCE THE PROJECT .. 3 HllUNG OF FINANCIAL ADVISOR
• 4 DESIGN OF A FINANCIAL PLAN
.... 5 SELECfION OF THE UNDERWRITING TEAM ..
6. NEGOTIATION ON BOND TERMS AND CONDITIONS .. 7. PREPARATION OF DOCUMENTS AND AGREEMENTS
... 8 SANGGUNIAN APPROVAL ON FINAL BOND TERMS AND
INCLUSION IN THE BUDGET
... 9. IF A HOUSING PROJECf, ARRANGE GUARANTEE BY HIGC
... 10 SECURE APPROVAL FOR CONVERSION OF AND FROM
AGRICULTURAL TO HOUSING COMMERCIAL PROPERTY IF REAL ESTATE WILL BE INVOLVED ..
11 PREPARATION OF UNDERWRITING DOCUMENTS AND OFFERING PROSPECIDS ..
12. OBTAIN BSP'S FAVORABLE OPINION ON BOND ISSUE
... 13. GET SANGGUNIANG PANLALAWIGAN APPROVAL ON THE ISSUE
IF A CITY OR MUNICIPALITY
.... 14 BOND OFFERING SALE AND ISSUANCE
+ 15 DEBT SERVICING BY THE ISSUER
91
ANNEX 9 Page 5 of 8
ANNEX 9 Page 6 of 8
GOVERNMENT AFPROV ALS/CLEARANCES
o Sangguniang Panlalawigan approval of Bond Issuance by the LGU o BSP opinion on effects on monetary aggregates, price level and balance of payments o DAR clearance for conversion of land from agricultural to residential
CONSTRAINTS IN A BOND ISSUE
A. On the part of the LGUs:
o Some projects have long payback periods o LGUs want to tie up non-revenue infrastructure projects with self liquidating
projects o Preparation of project studies o Self liquidating projects are less than Php 10 million o LGUs do not have sufficient collaterals o Bond term is too short
B. On the part ofthe Investor:
o Interest income is subject to 20% withholding tax o No guarantee on loans (other than housing) o No secondary market for bonds o Issue size is small
ENHANCING THE BOND'S A TIRACTIVENESS
A. Making the interest income tax exempt
o Without tax exemption: 15 x .8 equals 12% effective rate
o With tax exemption: 15 x 8.5% (tax exemption) equals 6.5% x.8 equals 5.2% 8.5 % plus 5.2% equals 13.7% effective rate
B. Adding eligibilities to the Issue
o As liquidity floor reserves for banks o As quasi-bank deposit liabilities for non-bank financial institutions o As security deposit for insurance companies
92
EFFECT OF 20% WITHOLDING TAX ON INVESTORS WITHOUT TAX EXEMPTIONS
o 20% final witholding tax means: 15 % Interest Income
x 20% Witholding tax
3 % Tax wit held
o Therefore, effective interest rate is: 15% Interest Income
less 3 % Tax withheld
equals 12% Effective interest rate
INVESTORS WITH TAX EXEMPTIONS AS PER RA 580 "HOME FINANCING ACT"
o Sec. 25 (a) and (b) EO 535 Sec. 15 provides tax exemptions on their interest income to the extent of 9.5% these are:
o Banking and finance institutions o Trust Companies o Personal Finance and Mortgage Companies o GSIS, SSS, DBP and other GFIs o Building, Loan and Savings Association
EFFECT OF 20% WITHOLDING TAX ON INVESTORS WITH TAX EXEMPTIONS
o
o
less equals
x
less
15.0% Interest income 8.5% Tax exemptions 6.5% Interest income subject to witholding tax
20.0% Witholding tax
1.3% Tax witheld
15.0% Interest income 1.3% Tax witheld
equals 13.7% Effective interest rate
93
ANNEX 9 Page 7 of 8
ANNEX 9 Page 8 of 8
COST OF BOND FLOTATION 17.25% PER ANNUM
o Assumptions:
Php 10M 15% per annum
o Payments
1. Trustee 2. HIGC 3. Interest
% of Issue
1.00% 1.25%
15.00%
Pesos
100,000 125,000
1,500,000
COST OF BOND FLOTATION FRONT-END FEES
o Out of Pocket Expense o Printing Costs o Documentary Stamps o Advisory Fee (2.5%) o Underwriter's Fee (2%) o Selling Commission (1 %) o Bond Counsel
TOTAL Php
50,000 75,000 15,000
250,000 200,000 100,000 100,000
790,000
NET PROCEEDS OF BOND FLOTATION
Php 10,000,000 Less 790,000 Front End Fees
Php 9,210,000
94
PHILIPPINE INFRASTRUCTURE PRIVATIZATION PROGRAM PROJECT SUMMARY LIST
LOCAL GOVERNMENT UNITS (as of May 1998)
PROJECT NAME PROJECT SITE! EST. REMARKS! IMPLEMENTING COST STATUS
AGENCY (In US$ M)
ANNEX 10 Page 1 of 2
A. Completed 1. Mandaluyong Marketplace Mandaluyong Clty/ 23 Completed/operational
City Government Sub-total 23
PROJECT NAME PROJECT SITE! EST. REMARKS! IMPLEMENTING COST STATUS
AGENCY (rn US$ M)
B. Projects Under Development 1 Dapltan Public Market Dapitan, Quezon City/ 1.25 Construction on-going.
City Government 2. Binlrayan Adminrstratlve/ Blnirayan, San Jose, 3.75 Contract Awarded to
Commercial Center Antlque/ Provincial PrrmeTek Konstrukt Devt. Corp., Government Construction on-going.
3. Pateros Commercial Center Pateros, Metro Manila! 1.8 Contract awarded to Municipal Government Mega Gen.Bullders on Dec. 19, 1997;
Construction on-going. 4 Bocaue Public Market! Bocaue, Bulacan/ 5 Contract awarded to Medltech, Inc
Commercial Center Municipal Government on March 27, 1998. 5. Bacolod City Slaughterhouse Bacolod Clty/ 125 Under re-biddrng;
City Government Pre-qualification of bidders on-going. 6. Manlao Public Market! Marilao, Bulacan/ 5 Project approved by
Commercial Center Municipal Government Mun Devt Council and Sanggunrang Bayan; Study under preparation.
7. Batangas City Solid Waste Batangas Clty/ 1.6 Conceptual plan/project studycompleted; Management City Government For approval of project by city government.
Sub-total 19.65
95
ANNEX 10 Page 2 of 2
PROJECT NAME PROJECT SITE! IMPLEMENTING
AGENCY
C. Other Potential Projects Shortlisted 1. Waste Recycling Plant Payatas, Quezon Clty/
City Government 2. Caplz Hydro-Power and Water Panay River, Capizl
Supply Project Provincial Government 3 Batangas Water Supply Batangas/Provincial
Government
4 110110 City Central Public Market! Iloilo City/ CommerCial Complex City Government
5. Iloilo City Bagsakan Center/ Iloilo City/ Bus Terminal City Government
6. Butuan City Solid Waste Butuan City, Agusan Management del Norte/ City
Government 7 Butuan City Toll Bridge Butuan City, Agusan
del Norte/ City Government
8. GSC Bagsakan Center/ Bus General Santos City/ Terminal City Government
9 Solid Waste Management San Jose del Monte, Improvement Project Bulacan/ Municipal
Government 10. Bacolod City Sanitary Landfill Bacolod Clty/
City Government 11. Cotabato City Sanitary Landfill Cotabato City/
City Government 12. Davao City Sanitary Landfill Davao City/
City Government 13. Bacolod City Public Market & Bacolod City/
Commercial Center City Government Sub-total
96
EST. REMARKSI COST STATUS
(In US$ M)
106 UnsoliCited proposal of Guoco Holdings under evaluation by ICC-Technical Board
60 Updating of project study on-going
161 Updated unsoliCited proposal by H. Lawson Associates under evaluation by provincial government
22.5 Unsolicited proposal by S-Mart Centre Construction Group and RSBS; Complete proposal to be submitted
3.75 Unsolicited proposal by S-Mart Centre Construction Group under evaluation by city government
3 Feasibility study being revised; For bidding
30 Feasibility study under evaluation by city mayor
6.25 Feasibility study under preparation by Sunshine Agri-Industrial Marketing
0.5 Pre-feasibility study completed; Geo-technical study under preparation by municipal government
475 Feasibility study under preparation
1.75 Feasibility study under preparation by Vector Engg., Inc.
10.84 Preliminary proposal submitted by ECFM under review by city government
125 Feasibility study under preparation
422.84
• Power Plants
• Highways/Toll Roads
• Ports
• Land Reclamation
• Sewerage, Dredging,
Solid Waste Management ~I • Railways
• Airports
• Tourism, Education, Health Facilities
• Water Supply
• Transport Systems
• Telecommunications
• Industrial Estates
• Public Markets, Slaughterhouses
• Information Technology· Housing • Canals, dams, irrigation· Other Infrastructure
Projects ~ trJ ~
i-' i-'
ANNEX 12 Page 2 of 15
LGU fiNANciNG of BAsic SERvicES ANd INfRASTRUCTURE PROjECTS:
A NEW VISION OF POLICY FRAMEWORK
Introduction
Devolution of Services and Financing Sources
The enactment of the Local Government Code (LGC) of 1991 represents a major paradigm shift in governance. It mandates the devolution to local government units (LGUs) of many functions previously carried out by national government agencies (NGAs). It provides for a higher LGU share in internal revenue taxes and taxes on national wealth. It also allows LGUs greater autonomy not only in mobilizing resources but also in allocating these resources to their various needs. This new scenario calls for LGUs to learn new ways of doing things. They must establish an accountable, efficient and dynamic organizational and management structure. They must formulate a local development plan and prioritize investment projects. Lastly, they should have access to financial resources to implement these plans and projects.
This paper discusses the Department of Finance (DOF) vision and policy framework for LGU financing of basic services and infrastructure projects and presents a plan of action to realize the envisaged framework.
The devolution of certain services and activities to LGUs is expected to lead to a more effective mechanism for addressing the minimum basic needs of the people and advancing the Social Reform Agenda of the government. The devolved activities include the provision of municipal infrastructure such as public markets, bus terminals and roads, water supply and sanitation, solid waste management, school construction, basic health services, social welfare, environmental protection and agricultural extension.
To realize the objectives of devolution, the LGC has empowered the LGUs to access various financing sources such as the internal revenue allotment (IRA), official development assistance (ODA), loans from government and private banks, bonds, local taxes and enterprise revenues and build-operate-transfer (BOT) arrangements. Using a variety of financing instruments,
100
ANNEX 12 Page 3 of 15
LGU FiNANCiNG of BAsic SERvicES ANd INfRASTRUCTURE PRojECTS: A NEW VISION OF POLICY FRAMEWORK
the LGUs are expected to depend less on transfers from the national government (such as the IRA and other grants) and eventually, ODA and to rely more on locallygenerated revenues and private sector participation through commercial bank loans, bonds and BOT -like arrangements.
Since the passage of the LGC in 1991, there have been many positive steps in the right direction. However, the following had been noted with concern:
• continued involvement of national government agencies in devolved activities;
• increased financial burden on some LGU s despite the increase in IRA;
• increased risks in service and delivery; and
• lack of clear policies, programs and mechanisms for channeling funds to LGUs beyond the IRA.
Recent Initiatives of the To address these concerns, the National Government Government (NG) with World Bank support undertook the
preparation of two policy studies on: (1) the financing of local government projects with environmental and/or social objectives; and (2) local government units' access to the private capital markets. The first study was undertaken by a team of professors from the University of the Philippines under the direction of the National Economic and Development Authority. The second study was done for the Department of Finance by a team of economists from the Philippine Institute of Development Studies.
(1) ICC Policy Resolution on National Govemment Grants
101
ANNEX 12 Page 4 of 15
lGU FiNANciNG of BAsic SERVicES ANd INfRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
On the basis of findings from the first study, a Policy Framework for National Government Assistance for the Financing of Local Government Projects with Environmental andlor Social Objectives was formulated and approved in May 1996 by the Investments Coordination Committee (ICC) of the NEDA Board (please see Annex A). The basic objective of the ICC Policy Resolution is "to define appropriate financing policies and assignment of roles in government to facilitate the transition towards new arrangements by the LGC."
The new ICC resolution provides for a co-financing scheme under which the NG would support devolved activities with social andlor environmental objectives and which meet one or more of the three criteria: equity, externalities and economies of scale. This support which is over and above the IRA would be in the form of matching, specific and closed-ended grants. These grants could be sourced either from foreign grants, concessional loans or internally generated revenues. While equal sharing between the LGUs and NG is the rule of thumb, NG share could be bigger for the poorer LGU s or smaller for revenue-generating projects. LGU share can be in the form of equity, funds onlent by the national government or in kind.
While upholding the basic principles of the devolution policy and supporting local autonomy, accountability and prionties, the ICC resolution defines a transitional role for NGAs as "champions" of sectoral co-financing programs. The NGA champion would be responsible for program development, securing ICC approval, and program monitoring. The participating LGUs would undertake project identification, planning and implementation. The specific arrangements for each program will be embodied in a Memorandum of Agreement between the NGA champion and each participating LGU.
102
Present Situation of LGU Financing
ANNEX 12 Page 5 of 15
LGU FiNANciNG of BASic SERvicES ANd INFRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
(2) Expanding LGU Access to PrIvate Capltal Markets
The second study was conducted in order to identify policy and institutional measures that will enable LGu's to tap the private capital markets for local development and infrastructure projects The rationale is clear. Government resources are insufficient given various competing demands for them and limits on resource mobilization. LGUs should therefore be encouraged to tap private sources of capital for their financing needs.
However, there was no clear policy and institutional framework that would help and encourage LGUs to gain access to private capital. Some of the constraints identified by the study were: (a) lack of infonnation on the financial situation of the LGUs; (b) uncertainty about the ability of LGUs to manage projects, (c) risk of LGUs not honoring their debts after a change in administration; and (d) inability of LGU s to service their debts from internally generated funds.
There is, thus, a need to define the "catalytic" role of government including government financial institutions (GFIs) and the Municipal Development Fund (MDF) At the same time, there is a need to rationalize the various ongoing credit programs of the government for LGUs and to harmonize the new co-financing system approved by the ICC with the proposed credit policy framework (please see Annex B)
The LGU credit market is still undeveloped. The GFIs have fe-opened LGU loan windows but these are mostly for medium-term, revenue-generating projects. Private banks are generally adopting a '\vait and see" attitude. While BOT projects are being actively explored, only a handful have materialized so far<D
Q) For example, Mandaluyong City had a public market constructed under a BOT arrangement. Lucena City has a public market operated thro~h a concession. Other proposed BOT projects are the water supply of Cebu City and Zamboanga City.
103
ANNEX 12 Page 6 of 15
LGU FiNANCING of BASic SERvicES ANd INfRASTRUCTURE PROjECTS:
A NEW VISION OF POLICY FRAMEWORK
A New Vision and Credit Policy Framework
While a few LGUs have floated bonds, the bond market is yet to be fully developed ~. Thus, only the GFIs and the MDF are there to provide medium and long-tenn financing to LGU s, with the latter serving as the main conduit for ODA funding to LGUs.
Based on the above, the Department of Finance has developed a new vision and credit policy framework that will wean away the LGUs from dependence on the national government, and promote effective partnership with the private sector. This vision is anchored on two preIDlses:
First, LGUs have varying levels and records of creditworthiness and bankability. Second, their financing needs are huge.
Therefore, the private sector (BOT investors, bondholders, commercial banks), the GFIs and MDF all have a role to play in meeting LGU financing needs.
The ultimate objective is to graduate the more creditworthy LGUs to private sources of capital which are vast and promising but remain largely untapped.
To achieve this objective, the national government can use the GFls and MDF as catalysts to bring LGUs to the mainstream of the private capital markets in the following manner:
Role oj Government Financial Institutions (GFIs)
1. GFls will lend to creditworthy LGU s that cannot yet tap private capital.
<2>The following have floated bonds: Cebu provmce, the City of Legaspi, and the municipalities of Victoria and Claveria. The last three LGUs lIoated hOUSIng bonds guaranteed by the HIGC and purchased by HDMF. Cagayan de Oro City and the provinces of Palawan, Pangaslnan and Laguna are ecpIonng the issuance of bonds for revenue generating projects.
104
ANNEX 12 Page 7 of 15
lGlJ FiNANciNG of BAsic SERvicES ANd INfRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
2. GFis will develop co-financing arrangements or project referral schemes with commercial banks.
3. GFls will provide limited technical asSistance to enhance LGU creditworthiness, particularly in the areas of financial and project management.
Role ~llhc lvilf1llClpal D~vel(}p111e711 Fund (A,fDF)
1. The 1v.IDF will target its financing to less creditworthy LGUs and to
somali environmental projects
2. The MDF will refrain from providing grants and credits to LGUs that are qualified to obtain GFI loans or have viable BOT projects.
3 The MDF will link its fundmg to techmcal assistance to improve LGU capacity and creditworthiness for graduation to other sources of credit
4. The 1v.IDF will promote more direct access of LGUs to ODA sources.
Figure 1 summarizes the new vision and credit policy framework for LGUs.
105
ANNEX 12 Page 8 of 15
lr,U FiNANciNG of BASic SERvicES ANd INfRASTRUCTURE PROJECTS: A NEW VISION OF POLICY FRAMEWORK
On the vertical axis, LGUs are classified according to creditworthiness, with the most creditworthy on the top and the marginally or non-creditworthy at the lower end. On the horizontal axis, revenue-generating projects are on the right hand side and projects with social and/or environmental objectives, usually with long gestation, are on the left hand side.
The first quadrant shows that creditlVorthy LGUs with revenue-generating projects can get financing from GFIs (from their own funds), private commercial banks, the bond market or enter into BOT arrangements. The rationale is clear: revenue-generating projects of creditworthy LGUs can be funded mostly from private sources of capital.
The second quadrant shows that margznally or 11011-
creditworthy LGUs wUh revenue-generatmg projects could have funding from BOT arrangements, GFI loans with technical assistance, and limited MDF loans and technical assistance. The key element here is the revenue-generating nature of the project. With viable and sustainable projects, the LGU could enter into BOT arrangements or obtain GFI or MDF loans with supplementary technical assistance grants to improve creditworthiness. The LGUs may have the financial resources but lack the project management capability to be truly creditworthy.
In the third quadrant, creditworthy LGUs undertaking social/environmental projects whose return are low or long in coming could be allowed to tap longterm, lower-cost ODA funds through the GFls or MDF
In the fourth quadrant, the margznally 01' 11011-
creditworthy LGUs with social/environmental projects could be assisted by matching grants through the MDF, in accordance with the approved policy of the NEDAICC.
106
Program of Action
ANNEX 12 Page 9 of 15
LGU FiNANciNG of BASic SERvicES ANd INfRASTRUCTURE PROjECTS. A NEW VISION OF POLICY FRAMEWORK
The following are recommended to fulfill the new vision and credit policy framework:
1. Increase LGU use of BO T GlTangements.
There is a need to coordinate and pursue the government's overall efforts through the CCP AP BOT Center. Some of its ongoing activities for LGUs are the following: (a) development of market-oriented financing techniques to reduce BOT project risks; (b) promotion and educational campaign for BOT projects, (c) promotion of LGU/private sector partnership projects and «blended" project financing; (d) assistance in arranging financing for BOT projects; and ( e) exploring new longterm financing instruments such as infrastructure funds and asset participation certificates
2 Develop the LGU bond market.
The 1991 Code did not provide for tax exempt status for LGU bonds and this has often been cited as a major impediment to the development of the LGU bond market However, the DOF believes that lack of information on or track-record of the LGUs contemplating a bond issue or the arrangement fees being charged for these issuances could just as well be the major disincentives to bond market development.
Streamlining regulations and procedures for municipal bond issuances with the cooperation of the Bangko SentraI ng Pilipinas, Securities and Exchange Commission and the Commission on Audit will also encourage such issuances. Development of a credit rating system for LGUs or even a private sector credit guarantee corporation could also be very useful.
Already, the Land Bank of the Philippines (LBP) has developed a systematic credit appraisal
107
ANNEX 12 Page 10 of 15
lGU FiNANCiNG of BASic SERvicES ANd INfRASTRUCTURE PRojECTS: A NEW VISION OF POLICY FRAMEWORK
system for LGUs. The other GFls also have their own credit evaluation schemes. Together with an improved monitoring system for LGU revenues and expenditures by the concerned national government agencies, these existing systems could be further developed into a credit information and rating system that could be shared with the private sector. For its part, the Development Bank of the Philippines (DBP) is working with the private sector to jointly establish a credit guarantee corporation for LGU borrowings.
3. Promote LGU access to private banks.
The main issue which has led to the perception that lending to LGUs is a risky business is the possibility that a new local chief executive would refuse to service debts incurred by his predecessors. Two market -based mechanisms for reducing political succession risk are the liberalization of LGU depository bank regulations and extension of the IRA intercept mechanism to include private banks. While the LGC allows the use of private banks as depository banks but gives preference to government banks, the Commission on Audit has chosen to interpret this provision strictly in favor of GFls. For its part, the Monetary Board of the Bangko Sentral ng Pilipinas which has to accredit banks first before they could accept government deposits has so far allowed only the Philippine National Bank (PNB) which used to be majorityowned by the national government and which continues to be partly owned by the government.
On the IRA intercept provision, there is a need for closer coordination with the Department of Budget and Management, the government agency presently tasked with the release of the IRA, to make it a more effective instrument in securing LGU loans. However, care must be exercised to avoid the situation where lenders
108
ANNEX 12 Page 11 of 15
LGU FiNANciNG of BASic SERvicES ANd INFRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
become less careful with loan appraisal because of the assurance provided by the IRA intercept mechanism. The economic and financial viability of the project and creditworthiness of the LGU should still be the main considerations for lending toLGUs.
4. Optimize the involvement of GFIs In LGU financing.
The GFIs have recently become very active in lending to LGUs The PNB alone has allocated some P8.S billion for loans to LGUs. It has already provided some P4.3 billion to 140 LGUs, mostly for heavy equipment purchases and revenue - generating projects. The LBP has provided over P5 billion to some 100 LGUs, also for revenue-generating projects. This has been facilitated by its familiarity with LGUs whose deposits it services. The DBP has about P500 milhon in LGU loans and is very active in catalyzing private sector resources through the creation of a credit guarantee corporation.
The following could still be done: (a) adopt a built-in graduation scheme to move the more creditworthy LGU s to the private credit markets; (b) develop co-financing schemes or project referral systems with private commercial banks; ( c) improve LGU creditworthiness through limited technical assistance, (d) coordinate their LGU credit programs with the MDF; and (e) structure their ODA-sourced relending programs to make optimal use of these funds for nonrevenue generating or long-gestating projects. They should also continue with their marketoriented interest rate policy.
5. Restructure and reorient the A1DF
The Municipal Development Fund or MDF was created in 1984 by Presidential Decree No.
109
ANNEX 12 Page 12 of 15
LGU FiNANCiNG of BASic SERvicES ANd INfRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
1914 as a revolving fund for ODA-supported projects. It is presently a disbursement mechanism for ODA loans and grants to over a thousand LGUs. It charges market-based interest rates and has excellent loan recovery. It is being administered by the Bureau of Local Government Finance under the Department of Finance.
Under the new framework, the 1IDF has an enhanced role of implementing the graduation policy and helping LGUs build a track record of creditworthiness. Towards this end, it needs to work more closely with the GFls, private banks, leagues of local government officials and concerned national government agencies in order to harmonize lending policies and address capacity-building needs. It must strengthen its own technical capacity to evaluate project proposals, assess credit risk and monitor project implementation.
While its lending operations had been aimed primarily at helping rapidly urbanizing areas meet their infrastructure requirements, the 1IDF will be focusing on less creditworthy LGUs and sociaVenvironmental projects in accordance with Figure L To also promote more direct access of LGUs to ODA, the 1IDF will be opening "windows" for urban, rural and social projects. While initially these windows are groupings of similar types of projects which have their own selection criteria and operating guidelines, the long-term goal is to have each of these windows have just one set of rules for LGU availment of resources that may be made available by more than one donor. Each framework would reflect the best practices in the relevant sector and allow the LGU s the maximum flexibility in approaching the lending windows whenever they want to and for whatever priority projects they would like to undertake. The loan application and approval process would be sped up by the use of prototype projects, simplified evaluation
110
ANNEX 12 Page 13 of 15
LGU FiNANciNG of BASic SERVICES ANd INfRASTRUCTURE PROjECTS. A NEW VISION OF POLICY FRAMEWORK
procedures and streamlined disbursement procedures but with adequate safeguards for proper accounting and reporting on the use funds While the interest rate for loans would continue to be market -based, the matching grants policy of the government could be used to provide transparent subsidies to the poorer LGUs for the softer project components such as social preparation or capacity building or for social/environmental projects.
6 Improve the capacity of LGUs to raise own revenues.
The linchpin of LGU creditworthiness is the increased capacity and willingness of LGUs to raise local revenues. Although the increased IRA has to some extent been a windfall to many LGUs, this is clearly not enough if the infrastructure requirements for local development and basic needs of a growing popUlation are to be met. While IRA flows could be leveraged into investment funds through availment of credit, loans will still have to be paid over time and it is important to build up ability to pay at an early stage There is therefore no substitute for sustained local revenue mobilization, including the collection of user charges both for revenue and project maintenance purposes
The following actions will help achieve this objective' (a) improve the monitoring of LGU revenues and expenditure; (b) intensify training and supervision of local finance officials; ( c) review/revise real property taxation rules and procedures, and (d) propose amendments to the 1991 Local Goverment Code to strengthen local treasury operations and provide incentives for greater local revenue mobilization.
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LGU FiNANCi,'1G of BASIC SERvicES ANd INfRASTRUCTURE PROjECTS:
A NEW VISION OF POLICY FRAMEWORK
7. Tap ODA techmcal assistance andjinancing.
Clearly, the above-stated vision and policy framework on LGU financing will have wideranging effects on how ODA funds are channeled to LGUs. This calls for closer coordination between the donors and the concerned goverment agencies including the oversight agencies so that projects are developed along mutually satisfactory lines. Thought should also be given as to how ODA funds could be used to increase partnership with the private sector not just in implementing projects but also in financing them. ODA funds should also be carefully targeted so that creditworthy LGU s are encouraged to tap market sources of funds and capacity is gradually built up in the less creditworthy ones. Creditworthy LGUs could also be encouraged to undertake social/environmental projects by making ODA funds available to them through GFls. The MDF could also be assisted in its effort to rise up the challenge of disbursing loans and grants to the less creditworthy LGUs for a variety of projects in the urban, rural and social sectors and of monitoring project implementation and funds utilization by LGU s.
New directions for ODA support include the following:
• Participate in building up the LGUs' infrastructure pipeline by providing technical assistance to finance project feasibility studies
• Support an LGU capacity building fund to promote LGU institutional development in the areas of revenue mobilization, budget administration, development planning, capital budgeting and investment programming, project preparation, contract management and construction supervision
• Participate in establishing market-based credit enhancement mechanisms for LGU BOT
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LGU FiNANciNG of BAsic SERvicES ANd INfRASTRUCTURE PROjECTS: A NEW VISION OF POLICY FRAMEWORK
infrastructure projects
• Provide grants and long-term credits for poorer LGDs and for social/environmental projects through the l\1DF, GFIs and other facilities and promote innovative LGUimplemented projects and/or greater LGU participation in NGA-sponsored projects
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ANNEX 13 Page 1 of 3
DIRECTORY OF SOURCES OF LGU FINANCING AND CONTACT PERSONS
BATANGAS ASSETS CORPORATION and PROVINCIAL EQUITY FUNDS
Mr. Senen L. Matoto Executive Director, BPI Capital Corporation 6th Floor, BPI Building Ayala Ave., cor. Paseo de Roxas Makati City, M.M. Tel. Nos. 816-9387/891-0188/845-5446 Fax No. 818-7809 E-Mail: [email protected]
BUILD-OPERATE-TRANSFER CENTER
Mr. Jorge M. Briones Deputy Executive Director, BOT Center E-Mail: [email protected]
Mr. Ignacio F. Santos-Diaz, Jr. Project Manager LGU Desk, BOT Center
Mr. Carlos B. Gavino LGU BOT Financial Adviser, BOT Center E-Mail: [email protected]
CCP AP BOT Center Podium Level, Department of Finance Bldg. Bangko Sentral ng Pilipinas Complex A. Mabini, Errnita Manila Tel. No. 526-2237 to 40 Fax No. 521-4263 or 525-7126 Internet homepage: http://www3.admu.edu.ph/ccpap/
DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
Mr. Armando O. Samia Senior Vice President, Merchant Banking Group Development Bank of the Philippines Sen. Gil Puyat Ave., cor. Makati Ave. Makati City Tel. No. 812-6536 Fax. No. 817-1639
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ANNEX 13 Page 2 of 3
GROWTH WITH EQUITY IN MINDANAO (GEM - USAID)
Mr. Charles E. Feibel Chief of Party Growth with Equity in Mindanao (GEM) Program CFC Bldg., Lot 22, Block 3 Phase 7, Ecoland Subdivision Matina, Davao City Tel. No. (082) 298-2192 to 94 Fax No. (082) 298-2195
GOVERNANCE AND LOCAL DEMOCRACY PROJECT (GOLD - USAID)
Mr. Kenneth Ellison, Ph. D. Associates in Rural Development 7th Floor, ALPAP 1 Building 140 Alfaro Street, Salcedo Village Makati City, M.M. Tel. No. 893-9647/9760 19766 Fax. No. 893-9602 E-Mail: [email protected]
LAND BANK OF THE PHILIPPINES (LBP)
Ms. Cecilia C. Borromeo Vice President, Branch Credit Management Land Bank of the Philippines 315 Sen. Gil Puyat Avenue Extension Makati City Tel. No. 818-9411 to 2910c. 2240/2501 Fax. No. 812-4056
LGU INFRASTRUCTURE FACILITY (LGUIF)
Mr. Marietto A. Enecio Vice President, Industrial Restructuring and Special Programs Office Development Bank of the Philippines Sen. Gil J. PuyatAve., Makati City P.O. Box 1996, Makati Central Post Office, Makati City, M. M. Tel. No. 819-1409/817-0473 Fax No. 815-1517
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LGU GUARANTEE CORPORATION (LGUGC)
Mr. Jesus G. Tirona President/CEO LGU Guarantee Corporation 28IF, Antel 2000 Corporate Center 121 Valero St., Salcedo Village Makati City TellFax No. 750-4166
ANNEX 13 Page 3 of 3
LOCAL GOVERNMENT FINANCE AND DEVELOPMENT PROJECT (LOGOFIND - WORLD BANK)
Mr. Jose Antonio League Operations Officer World Bank 23rd Floor, Taipan Place Bldg. Emerald Avenue, Ortigas Center Pasig City Tel. No. 637-5855 to 64 Fax No. 637-5870/917-3050 E-Mail: [email protected]
MULTINATIONAL INVESTMENT BANCORPORATION
Ms. Ellen L. Magtira Senior General Manager Multinational Investment Bancorporation 9th Floor Prudential Bank Bldg. Ayala Avenue, Makati City Tel. No. 817-1511 to 15 Fax No. 819-0347
PHILIPPINE NATIONAL BANK (PNB)
Mr. Josefino R. Gamboa Senior Vice President-Government Banking Group Philippine National Bank PNB Financial Center Roxas Blvd., Pasay City Tel.lFax No. 526-3488
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