NTRC Tax Research Journal Vol. XXV4 Tuly-August 2013 LOCAL GOVERNMENT CREDIT FINANCING’ I. INTRODUCTION Local credit financing refers to the power of local government units (LGUs) to ereate indebtedness and to enter into credit and other financial transactions. It allows LGUs to accomplish development projects and gain benefits, at current prices, with the cost of the projects being paid later. The legal basis authorizing LGUs to avail of credit financing for local development is provided in Book II Title IV of the Local Government Code (LGC) of 1991, which governs the power of local government units 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. Moreover, LGUs may avail of credit lines from government or private banks and lending institutions for the purpose of stabilizing local finances. The study discusses alternative sources that LGUs with limited funds can tap to finance local infrastructure and other socioeconomic development projects. ‘The study also describes unconventional ways and means that may be deemed as effective methods in financing these projects. I, BACKGROUND INFORMATION Prior to the LGC of 1991, Presidential Decree (PD) No. 752! was issued to answer the increasing demands for additional sources of LGUs’ financing. PD 752 authorized any LGU to avail of credit facilities and resort to borrowings if the local funds were not sufficient to finance the prosecution, completion, expansion, operation and maintenance of local Prepared by Madonna Claire V. Aguilar, Tax Specialist 1, reviewed and approved by Ms. Teresita L. Solomon, OIC Deputy Director of the NTRC. * Entitled, “Decree on Credit Financing for Local Governments” (Issued 25 July 1975), ‘Local Government Credit Financing i[RTRCTax Research Jourad Val ERWA TuyAugus 2013 infrastructure and other socio-economic developmental projects. However said law provides that, LGUs may incur loans only with government financial institutions (GFls). Since the GF could not provide them enough program loans LGUs continued to deal with insufficient funds. Moreover, PD 752 required unwarranted control on the credit transactions of LGUs and strictly limited the amount LGUs may borrow. The restrictions enforced evidently served as deterrents for LGUs to borrow. ‘The LGC, on the other hand, broadens the power of the LGUs to create indebtedness and to enter into credit and other financial transactions. LGUs may avail of credit lines from the government or private banks and other lending institutions for purposes of stabilizing local finances. ‘Thus, under the LGC, LGUs are authorized to: (a) 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;? and (b) contract loans, credits, and other forms of indebtedness not only with government financial institutions (GFIs) but also from domestic private banks, The loans are subject to such terms and conditions as may be agreed upon by the LGU and the lender.* LGUs are required to submit a written request to the Bangko Sentral ng Pilipinas (BSP) for Monetary Board Opinion on the monetary and balance of payments (BP) implications of its proposed borrowing prior to the loan release. The LGU shall also submit to the BSP a post borrowing report and other reports as may be required by the BSP. The LGC also authorizes LGUs to acquire property, plants, machinery, equipment, and such necessary accessories under a supplier’s eredit, deferred payment plan, or other financial scheme. * As for the issuance of local government bonds, PD 752 stipulated that projects must be certified by the National Economic and Development Authority (NEDA) as pursuant to the priorities established in the development programs. It also restricted LGUs to limit the aggregate amount of bonds to 1/2 of 1% of the total assessed value of taxable real property within its jurisdiction.’ Moreover, a resolution must be passed by the local council and has, to be approved by the President upon the recommendation of the Secretary of Finance after consultation with the Monetary Board of the Central Bank and NEDA. Under the LGC, the issuance of bonds, debentures, securities and other long term securities are subject to the rules and regulations of the BSP and the Securities and Exchange ‘Commission (SEC). Bonds issuances are used to finance self-liquidating, ineome-producing development and livelihood projects pursuant to the local development plan or the public investment program.* * ‘Section 296, LGC. Section 297, Ibid * Section 298, Ibid. * Section 6(a), Ibid. © Seetion 299, LGC. a ‘Local Government Credit FinanchNTRC Tax Research Journal Vol. XXV4 Tuly-August 2013 | ‘The LGC incorporates relevant provisions of RA No. 6957’ on the build-operate~ transfer (BOT) and build-and-transfer schemes. The BOT scheme is primarily a fina scheme where through contractual agreement, a contractor undertakes the financing of an infrastructure facility and turns this over to the LGU based on an arranged schedule. ® Again, the Code makes it simpler for LGUs to opt for this scheme since LGUs only need the approval of the NEDA, upon the recommendation of the Secretary of Finance, to enter into such arrangements. Although the financial and operational aspect of the BOT is handled by the private sector, LGUs regulate and standardize the progress of the BOT scheme. LGUs may even acquire ownership of the facilities at the end of the contract. For the LGUs to become effective and efficient partners of the national government they should be provided with sufficient latitude and the opportunity 1o utilize their authority as public corporations. Thus, the LGC eases the restrictions on LGU borrowings and credit transactions imposed under PD 752. It encourages LGUs to explore and tap sources of funds other than the traditional sources of revenues and central government grants, Nonetheless, it provides for sanctions and remedies to ascertain that LGUs are able to pay their loans, and other indebtedness incurred, redeem or retire bond debentures and other obligations ensued.” Il, BENEFITS OF CREDIT FINANCING Credit financing offers a number of benefits to LGU financial operations, among which are the following: 1. LGUs can have a ready source of funds during low revenue collection periods; 2. They can attain flexible financial capabilities without having to wait for sufficient funds to accumulate from their savings; 3. With the participation of the private sector, LGUs can augment quality investments with consistent and viable yields to investors and LGUs; 4. LGUs can promote early cost-recovery types of projects, thus crafting a faster and quicker way in processing local development and service delivery; 5. Having access to private loan sources and investor markets benefits the LGUs as creditworthiness standards applied permit only the most viable undertakings to be financed; and * Entitled, “An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes (approved July 9, 1990). * Section 302, LGC. * Section 303, Ibid. ‘Local Government Credit Financing 3