Credit Financing for Local Development
The Subnational Debt in the Philippines
NINO RAYMOND B. ALVINABureau of Local Government FinanceDepartment of Finance, The Philippines
Workshop on Public Resource Mobilization17 December 2019,
UN ESCAP, Bangkok, Thailand
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4 Pillars of Fiscal DecentralizationP H ID O FBLGF
1. Revenue Assignment & Local Revenue AdministrationRevenue Potential, Economic Efficiency, Equity, Administrative Feasibility, Politically Acceptability
2. Functions & Expenditure ResponsibilitiesEfficiency Criteria/Subsidiary Principle, Service of Benefit Area, Economies of Scale, Cultural Values, Size and diversity
3. Intergovernmental TransfersBridging the vertical fiscal gap, Improve horizontal fiscal balance, fund national priorities, and compensate for spillovers or externalities
4. Subnational Borrowing & Capital FinanceAddressing financing gaps, fast track development & capital investments, cover expenditure responsibilities and devolved functions
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SNG Structure in the PhilippinesP H ID O FBLGF
§ Provinces, cities, municipalities, and barangays form the SNGs in the Philippines. They are headed by locally elected chief executives
§ Each local government level has a local legislative council called “Sanggunian” (Provincial Board; City/Municipal/Barangay Council) composed of locally elected councilors, with the Vice Governor/Vice Mayor/Punong Barangay serving as Presiding Officer
Municipalities (1,489)
Component Cities (107)
Barangays(34,108)
Barangays (4,678)
Independent Cities (38)Highly Urbanized Cities (33)
Independent Component Cities (5)
Barangays(3,248)
HUC – 3,006; ICC-242
Provinces (81)
• Build capacity of local governments to borrow money to cover their expenditure responsibilities, devolved functions
• Prioritize financing capital infrastructure expenditure and tax flows and to foster political accountability out of these decisions
• National Government has to manage LGU debts to:ü Prevent a systemic LGU debt crisis that could force the National
Government to bail out heavily indebted LGUs;ü Strengthen the implementation of the statutory limit on LGU debts; andü Promote responsible and credible debt management among LGUs.
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Government’s Policy on LGU DebtsP H ID O FBLGF
Legal Framework of PHI Subnational Debts
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Sec. 296 of LGC, Art. 395 LGC IRR LGUs may create indebtedness and avail of
credit facilities for local infra and socio-economic development projects with government
or private banks and lending institutions
Sec. 324 of LGCProviding for the statutory limit on the
appropriations for debt servicing up to 20% of the LGU’s regular income
Art. 403 LGC IRRDOF mandated to render technical assistance to any LGU in the availment of credit facilities, flotation of bonds, contracting of loans and issue
guidelines for the purpose
EO No. 127BLGF to develop and promote plans and programs for the improvement of resource
management systems, collection enforcement mechanisms and credit utilization schemes at
the local levels
Subnational Debts in the Philippines
P H ID O FBLGF
Purposes, Forms of LGU Debts
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Forms of Local Indebtedness
ü Loans, Credits and Other Forms of Indebtedness
ü Deferred Payment and Other Financial Schemes
ü Bonds and Other Long-Term Securities
ü Inter-Local Government Loans, Grants, and Other Subsidies
ü Loans from funds secured by National Government from foreign sources
Limited Purposes
ü Construction, installation, improvement, expansion, operation, or maintenance of public facilities, infrastructure facilities, housing projects, acquisition of real property, and the implementation of other capital investment projects
ü Establishment, development, or expansion of agricultural, industrial, commercial, house financing projects, livelihood projects, and other economic enterprises
ü Acquire property, plant, machinery, equipment, and such necessary accessories
ü Finance self-liquidating, income-producing development or livelihood projects
P H ID O FBLGF
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Creditworthy LGUs: 1st - 3rd Income Class
Marginal or Non-Creditworthy LGUs: 4th - 6th Income Class
3GFI Loans MDF Loans
Limited MDF Grants
1BOT Projects Bonds
Commercial Bank/GFI Loans
4MDF Loans
Grants and TA
2BOT Projects
GFI Loans and TALimited MDF Loans and
TA
Social/ Environmental
Projects
Revenue Generating
Projects
LGU Financing Framework
Ex Ante Controls of Government
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Local legislative authorization and
inclusion in the annual investment plans and priorities are required
LGC Sections 22 (5); 296; 389 (b)(2); 447(a)(2)(iii); 458(a)(2)(iii); and 468(a)(2)(iii),Setting the bases and requirements for the grant of authority to the Local Chief Executive to negotiate and contract loans and other forms of indebtedness.
Proposed project to be financed by the loan is included in the Approved Annual Investment Plan (AIP) for the current year
LGU debt service ceiling and net
borrowing capacity determined and
certified by BLGF
BSP Circular No. 926, s. 2016Guidelines in Processing Requests for MB Opinion
BSP also requires the submission of a duly executed ordinance approving the proposed borrowing, its purpose, terms and conditions for the release of Loan Proceeds
Monetary Board opinion on the
monetary and balance of payments implications
DOF Department Order No. 54.2016 Streamlined requirements and process: 4 documents; Well-defined computational parameters; Improved certification process; Verification/ validation delegated to BLGF ROs
P H ID O FBLGF
Certification by the Lender stating that it shall not require LGU deposits as compensating balance for the loan (for non-authorized government depository banks)
LGU Debt Certification System in the BLGF
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Documentary Requirements
1
2
3
4Letter Request from the Local Chief Executive indicating the specificü Lending institution (LI);ü Terms and condition
of proposed loan; andü The purpose/s of the
loan.
Certification of existing of loan/s duly certified by the Local Treasurer indicatingü Types and purpose of loans &
other obligations contracted;ü Name of the LI;ü Date of approval & maturity;ü Terms & conditionsü Remaining balances of loans and
other obligations; andü Annual amortization schedules
from the LI
Commission on Audit (COA) Annual Audit Certificate for the most recent year showing no adverse finding against the LGU, and supported by the year-end financial reportsü Pre-closing trial balance;ü Detailed Statement of
Financial Performance
ü For LGUs with adverse findings on its latest COA Annual Audit Report, an Agency Action and Status of Implementation (AAPSI)duly received by COA shall be required.
P H ID O FBLGF
LGU Loan Application Process 10
P H ID O FBLGF Evaluate LGU request and supporting
documentary requirements
Local Government Unit Lending Institution Bureau of Local Government Finance Bangko Sentral ng Pilipinas
Submit Letter of Intent and negotiate with the lending institution
Submit to BLGF a written request for certification of LGU Net Debt Service Ceiling and Borrowing Capacity, with complete supporting
documents pursuant to DOF Department Order 054.2016
Local Council, through a Resolution/Ordinance, authorizes
the Local Chief Executive to negotiate and contract loans and
other forms of indebtedness
Pre-Evaluation/Setting of Terms and Conditions
ROs CO
Documents Complete/ Compliant?
Submit the required additional documents
Evaluate financial reports of the LGU
Compute preliminarily LGU Net Debt Service Ceiling and Borrowing Capacity (NDSCBC)Renegotiate with the lending institution for lower interest rate,
longer tenor, or consider other lending institutions, then resubmit to BLGF
Proposed Loan Higher than BLGF Certification?
Submit to BSP a written request for MB Opinion
No
Submit to BLGF-CO all documentary requirements and the preliminary computation for the issuance
of certificate of NDSCBC
Final computation
and issuance of certificate of
NDSCBC
Evaluate LGU request and supporting documentary
requirements
Monetary Board renders Opinion on the Monetary Balance and Payments implications of the proposed LGU borrowing, per BSP
Circular No.926 s. 2016
Submit to the Lending Institutions the BLGF Certification, MB Opinion and Other
Requirements
Approval and Signing of Loan Agreement
with the LGU
Release of LoanRecord receipt of Loan Proceeds and
prepare borrowing reports for submission to BLGF-RO and BSP
Receive LGU Post Borrowing Report
Receive LGU Post-Borrowing Report
Yes
Yes
No
Determining the Net Debt Service Ceiling and Borrowing Capacity of LGUs
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1 Debt Service Ceiling (DSC)• 20% x Annual Regular Income (ARI)
ARI is the average previous 3-year locally sourced income + other shares from national taxes based on COA data, + actual annual IRA based on DBM data
2 Net DSC (NDSC)• DSC less All amortizations payable
during the year
3 Borrowing Capacity (BC)• NDSC x Annuity Factor
P H ID O FBLGF
Features of the BLGF Certificate
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§ 3 Parts: Letter to the Local Chief Executive, Certificate, and Directives to the Local Treasurer
§ Controlled; original issued each for LGU, Lending Institution, and BSP
§ Valid for One (1) Year from Date of Issuance; but Two (2) Years for those affected by Calamities
§ Issued free of charge by BLGF
P H ID O FBLGF
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Local Debt Profile and TrendsAnnual Debt Servicing < 20% Statutory Limit
LGU Outstanding Loans
4.67%4.14%
4.54%4.45%4.37%4.54%3.98%3.71%3.65%
4.87%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
-
5,000
10,000
15,000
20,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Debt Service Ratio of Debt Service to Total Expenditures
57,523
68,239 69,899
69,984 70,887 68,115
75,914 86,020
86,364 94,161
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Debt servicing of LGUs are always generally below the 20% statutory expenditure limits averaging only 4.3% for the past nine (9) years
LGU outstanding loans has been increasing yearly fromPhp57.5 Billion in 2009 to Php94.2 Billion in 2018
P H ID O FBLGF
30.45%27.93%
15.72%
0.04%0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Province City Municipality Barangay
Yearly Average
284
516
279
157
384 413
177
340291
2010 2011 2012 2013 2014 2015 2016 2017 2018
Seasonality
- - - Election Year
BLGF issued a total of 2,841 certificates for the last 9 Years
8%13%
74%
5%
IssuedCertificates
Province CityMunicipality Barangay ü Annual Ave. of 316 certificates issued (2010-2018)
ü Of the 361 certificates issued in the last 9 years, 234 or 74.1% were issued to municipalities
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Local Debt Profile and Trends
LGU Loans and Borrowings to GDP and Total Revenues
LGUs Outstanding Loans to GDP
0.14% 0.15% 0.11% 0.07% 0.09% 0.07% 0.10% 0.10% 0.07% 0.09%
3.43%3.77%
2.80%
2.12%2.60%
1.91%
2.42%
2.57%
1.69%
3.66%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LGUs Receipts from Loans and BorrowingsRatio of LGU Loans and Borrowings to GDP
0.72%0.76%
0.72%0.66%
0.61%
0.54%0.57%0.59%
0.55%0.54%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LGUs Outstanding Loans
Ratio of LGUs Outstanding Loans to GDP
LGUs are conservative in tapping credit financing as demonstrated by the low ratio of loans to total revenues
which was recorded to reach by only 3.66% in 2018
This was also evident if the ratio of outstanding LGU loans to GDP is measured. In 2018, the ratio of LGU outstanding loans
was recorded at only 0.54% of GDP
P H ID O FBLGF
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Local Debt Profile and Trends
Financial Institution Outstanding Balances (Php B)
Government Financial Institutions:Land Bank of the Philippines 48.20Development Bank of the Philippines 26.45 Municipal Development Fund Office 8.41 Overseas Filipino Bank 0.32
Sub-total 83.38
Private Financial Institutions:Philippine National Bank 6.98 Philippine Veterans Bank 2.85Allied Bank* 0.02Bank of the Philippine Islands* 0.02EastWest Bank* 0.57
Sub-total 10.43 Grand Total 93.81
Financial Institution Outstanding Balances (Php B)
Philippine Veterans Bank 0.31LGU Guarantee Corporation 0.04
Grand Total 0.35
LO
AN
SB
ON
DS
88.55%
11.45%GovernmentFinancialInstitutions
Private FinancialInstitutions
Profile of Lending Institutions
2018 LGU Loan Statistics
51%
17%
11%
9%
5%4% 3%
Profile of Loan Purpose
Economic Services
General Public Services
Capital/ InvestmentExpenditureEducation, Culture, andSportsHealth, Nutrition, andPopulation ControlHousing and CommunityDevelopmentOthers
In terms of loan purpose, more than half or 51% of the total outstanding balance are for Economic Services
More than 88% of total outstanding balance of LGU loans are with GFIs
P H ID O FBLGF
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CRI as a Performance Measurethe level of confidence that financial institutions have that a local government unit will pay its debts
Financial Management
Revenue Generation
Investment and Debt Capacity
Borrowing History
Rigidity of Expendi-
tures
Intended for
§ NG: Identify the status of LGUs in terms of credit
§ Banks: Comparison with their own credit rating system
§ LGUs: Know debt standing and complement other
performance metrics and standards;
§ BLGF: Improve revenue supervision and debt
management oversight for LGUs
Indicators being Considered
35%
35%
10%
15%
5%
Revenue GenerationInvestment and Debt CapacityRigidity of ExpendituresFinancial Management Capacity
Proposed Subnational Government Creditworthiness Rating Index (CRI)
Ongoing reforms
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Points Rating Category Description
90 - 100 AAA Best Quality
80 - 89 AA Better Quality
70 - 79 A Good Quality
60 - 69 BBB Average Quality
50 - 59 BB Medium Quality
40 - 49 B Below Average Quality
< 40 C Poor Quality
AAA to A
BBB
BB
B
C
• 100%
• 90%
• 80%
• 70%
• 60%
Possible Capping on Borrowing Capacity
Proposed SNG CRI Rating
Benefits
§ Promotes responsible debt mindset, fiscal discipline among LGUs. Poor LGUs will need to start small.
§ CRI will give confidence to banks in offering better loan terms advantageous to the LGUs.
§ This will impact on local planning and improve prioritization of projects to be financed by credit financing.
Ongoing reforms
1. Improve regulatory policies to address overspread of borrowing capacity, and minimize haphazard borrowing behavior
2. Incentivize good debtors and replicate best practices.
3. Invigorate the subnational bond market
4. Strengthen institutional oversight and stakeholders coordination
5. Adopt ex-post remedies, subnational insolvency system
6. Consider debt service cap based not solely on regular income
7. Continuously improve the revenue generation capacity of local governments
8. Broaden investments and cooperation in transport and trade facilitation: national, regional, sub-regional economic corridors
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Recommendations, Way Forward
§ Credit financing has a vital role in local development when used responsibly and strategically.
§ It must also always be viewed in the context of building local revenue autonomy and improving the quality of public service delivery.
Sa lamat !Thank You!
W W W. B L G F. G O V. P H