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NTRC Tax Research Journal Vol. XXVa July-August 2013, 6. Private loan and investor market potential sources are relatively large compared to what might be available through central government-operated firms and institutions of subsidized credit". IV. INITIATING LGU CREDIT AVAILMENT LGUs may consider a four-step method to initiate the availment of credit’! Step 1. Prepare a Local Development Plan (LDP) and an Annual Investment Plan (AIP) As a pre-requisite, a basis for local credit is necessary. The identified and proposed project should be a part and component of the local development strategy. It should also be in the list of priority projects for the period. Step 2. Secure Authority from the Sanggunian The Sanggunian shall issue an Ordinance authorizing the LGU concerned to borrow. Information and documents, duly signed by the Sanggunian, must include purpose, source, amount, terms and conditions of the borrowing and the commitments of the LGU. Step 3. Empower the Local Chief Executive to Negotiate ‘The Ordinance shall authorize the Local Chief Executive (LCE) to negotiate for and in behalf of the LGU. As a representative, the LCE can agree to such terms and conditions which shall be binding to both the creditor and the LGU. Step 4. Assign a person or team to coordinate and prepare the requirements in detail The LCE shall designate a person or team to direct and prepare the technical aspects. The assigned persor/team shall report directly to the LCE on the task at hand. Article 403 of the IRR of the LGC authorizes the Department of Finance (DOF) to extend technical assistance to any LGU interested in availing of credit financing and to issue the necessary guidelines for this purpose. In this regard, the DOF issued Local Finance Circular (LFC) No. 1-2000 (January 19, 2000) mandating the Bureau of Local Government and Finance (BLGF) to issue Certificates of Maximum Borrowing and Debt Service Capacities upon compliance of the LGU concermed with the requirements prescribed thereunder. On April 16, 2012, LFC No. 1-2012" was issued revising LFC No. 1-2000 to ° Celestino, Alicia B., etal, “Handbook of Local Fiseal_Administration_in_the Philippines”, Philippines. Kadena Press Foundation. December 1988, p. 225, ™ Colestino, Alicia B., etal, Op.cit. pp. 229-230. "? Entitled, “Certificates of Maximum Borrowing and Debt Service Capacities of Local Government Units". z Local Government Credit Financing |NTRC Tax Research Journal Vol XXV-4 July-August 2013 ensure a more accurate and proper evaluation by the BLGF of the maximum borrowing and debt servicing capacities of LGUs. The LGU Debt Monitoring System and the Creditworthiness Rating System are used in concurrence with the LGU Debt Service Certification System. These establish and verify the maximum amount an LGU can allocate for debt service by assessing the following: revenue generation capacity of the LGU, strict protocol on its spending, financial management capacity, investment and debt competency, and financial integrity.'* Certificates that are issued to LGUs have a validity period of one (1) year from the date of their issuance (Local Finance Circular No. 2-2012)." In 2010, the BLGF issued certifications to a total of 280 LGUs as a requirement for Joan projects under the GFIs, Municipal Development Fund-Financial Assistance Program MDF-FAP), Assessment Loan Revolving Fund (ALRF), and for bond flotation. Region IIT has the topmost number of LGUs (40) followed by Regions IV-A (33) and VI (22). In 2011, the number of LGUs inereased by 65%. Region III maintained the highest number of LGUs that were issued certifications in 2011, with 67 LGUs. It should be noted that Region XIII LGUs have no records of certificates being issued to them for CYs 2010-2011 [Table 1]. Table 1. NUMBER OF LGUS THAT WERE ISSUED CERTIFICATES OF MAXIMUM BORROWING AND DEBT SERVICES CAPACITIES, BY REGION: CYs 2010-2011 Region 2010 2011 Total NCR 20 2 32 CAR 8 19 27 CARAGA 2 20 27 1 18 33 st W 14 27 1 UL 40 7 IV-A 33 42 8 VB ° 14 23 Vv 18 47 68 vi 22 41 8 Vil 10 31 4 2 29 38. 1X 19 40 59. x 16 52 XI 20 40 Xd 7 53 Xi = ~ TOTAL 280 Source: Bureau of Local Government Finance Ramos, Norman R. “Creditwortiness Rating System’, based on the BLGF Creditworthiness Rating Manual developed under ADB TA 4556-PHI Local Government Finance and Budget Reform. ‘epi authorstream.com/Presentation/narramos88-13057S6-7-creditworthiness-rating-systenv. ' Entitled, “Validity Period of Certificates of Maximum Borrowing and Debt Service Capacities Issued to Local Government Units” (Released 5 October 2012) Local Government Credit Financing S(INTRO Tax Research Journal Vol. XXV4 July-August 2013 By income class, there were 308 1* class cities, provinces and municipalities that were issued certificates; 162 4" class LGUs; 138 3° class; 103 2™ class; and 69 5" class LGUs from 2010 to 2011. On the other hand, there were two 6" class municipalities (ie. Burgos. Surigao Del Norte (Region VIII) and Butig, Lanao Del Sur (ARMM)), five (5) special class LGUs and seven (7) LGUs with unknown classes that were issued certifications during the same period. (Table 2) ‘Table 2, NUMBER OF LGUS THAT WERE ISSUED CERTIFICATES OF MAXIMUM BORROWING AND DEBT SERVICES CAPACITIES, BY INCOME CLASS CYs 2010-2011 Income Class 2010 2011 Total 129 179 308, 36 67 103 L 47. 91 138, 44 | 8 162 _ 19 | so 69 2 2 Special Class 4 1 No Class 1 6 7 Total 280 514 794 Source: Bureau of Local Government Finance V. CREDIT FINANCING OPTIONS AVAILABLE TO LGUS. Loans Loan refers to a debt for a specific period, repaid with interest, usually by regular periodic payments. The principal is the amount borrowed and the interest is the charge for the use of capital over a specific period, Loan can be classified in various ways. It may be according to maturity, such as short term (loans with not more than one year repayment), medium term (loans with maturity between one and five years), and long term (those with repayments of more than five years). It may also be according to source, such as domestic or international loans; national government or inter-local government; and GFls or private banking loans. z Total Gooaripans Coe P[NTRC Tax Research Journal Vol. XXV.4 July-August 2013 Bank loans offered to LGUs can be classified into four (4) categories: 1 Term Loans ~ usually used by LGUs for their capital projects; these are loans with maturity of more than one (1) year; Transaction Loans ~ loans granted for specific purpose; Line of Credit — a special arrangement in which a bank allows an LGU to borrow a maximum amount of money at any one time; and Revolving Credit ~ the bank’s commitment to lend a maximum amount for a duration that an LGU can withdraw upon request. The LGUs may avail of loans from any of the following: 1. GFis, such as the LBP, DBP, GSIS and the SSS The GFls, particularly the banks, have actually funded a wide array of LGU projects, such as infrastructure, heavy equipment, diagnostic centers, public markets, resettlements, water supply systems, commercial buildings, sports complexes, bus terminals and other minor projects. Private Domestic Banks and Other Credit Institutions (e.g. PNB) The scope of LGU projects funded by private domestic banks include income-generating and cost-saving projects like commercial centers, public markets, transport terminals, slaughterhouses, power and water supply systems, heavy equipment, telecommunications facilities, grains procurement and post-harvest facilities. In 2011, the Commission on Audit (COA) issued audit directives focusing on the accounts of credit financing to determine and verify the existing and outstanding, loan balances of LGUs and the projects supported by these loans. As of 2011, the LGU debt monitoring system and creditworthiness rating system show that among the GFls, the Land Bank of the Philippines (LBP) provided the highest amount of loans/bond of PhP 39.90 billion. Development Bank of the Philippines (DBP) was second with PhP 8.21 billion followed by the Philippine Veteran’s Bank (PVB) with PhP 4.44 billion. Region IV LGUs have the highest loans/bonds payable amounting to PhP 11.91 billion, while ARMM LGUs have the lowest amounting to PhP 416 million. (Table 3) Local Government Credit Financing 7NIRC Tax Research Journal Vol. XXV4 July-August 2013 ‘Table 3. SUMMARY OF LOANS/BONDS GRANTED BY GFIS, BY REGION cy 2011 (in Million Pesos) Creditors Region une | pep | pese | PVE Total NCR 7.156 484 80 7.720 CAR 699 59 758 1 2,861 634 31 47 3.573 u 301 376 1 ors im 4867/1219 19 476 6.581 Vv ssi | 1.545, 38 1.896 | 11.910 v 1917] 1.720 183,655 [ow 912 191 395 1.498 vi 3.561 410 3| 3.974 vill 352 4 | 466, Ix 1,003, 251 866 | 2,120 x __2,009 527 16. 342| 2,954 xt 3,672 112 1 315 4.100 Xl 1,102 146 1.248 Xt 646. 421 1,067 ARMM. 416 416 TOTAL 3990s] 3209, 166| 4438 | _52,718 Source: COA 2071 Annual Financial Report Among the private domestic banks, the Philippine National Bank (PNB) has the highest total loan/bonds granted amounting to PhP 4.93 billion, followed by the Bank of Philippine Islands (BPI) and United Coconut Planter Bank (UCPB), respectively. Region 1 LGUs have the highest loans/bonds payable (PhP1.12 billion) followed by Region IV LGUs (PAP 1.04 billion) and Region VIII LGUs (PhP 739 million), respectively. Regions VII, XI and XIT LGUs have no record of loans/bonds payable to any of the private domestic banks mentioned below. (Table 4) 8 Local Government Credit Financini‘NTRC Tax Research Journal Vol. XXVA Tuly-August 2013 ‘Table 4. SUMMARY OF LOANS/BONDS GRANTED BY PRIVATE DOMESTIC BANKS, BY REGION cy 2011 (Ia Million Pesos) recion| px | A!!! sain | per | ucPB| QUEDANCOR | TOTAL | Bank | NCR 476.14 476.14 CAR 15.30 15.30 1 398.15 | 37.97 182.29 1118.41 nm 53.94 53.94 im 538.67 7.03 345.70 v 954,59 13.06 | 66.66 4.95 | 1039.26 Vv 159.00 139.00 vi 245.56 245.56 Vil vit 26.02 26.02 1x 507.81 19.82 3.04 530.67 x 191.86 0.65 192.51 xi XI Xi 739.22 739.22 ARMM [123.21 123.21 TOTAL | 4,929.47 | 37.97| 19.82 | 198.38] 67.31 15.02 | 5,264.04 Source: COA 201 Annual Financial Report. 3. National Government Facilities ~ the Municipal Development Fund (MDF) ‘The MDF, created under PD 1914'5, was reorganized and renamed Municipal Development Fund Office'® (MDFO). Pursuant to its mandate, the MDFO provides relevant financing assistance to LGUs in their distribution of basic services and other local government projects through the implementation of the Local Government Finance and Development (LOGOFIND) and Community-Based Resource Management (CBRM) Projects. It has also embarked into a number of credit and financing programs such as, Program Lending (PROLEND), Millennium Development Goal Fund (MDGF) and Philippine Water Revolving © Entitled, “Creating a Special Revolving Fund for Purposes of Foreign Assisted Projects Applicable to Local Government”, (approved 29 March 1984), Executive Order (EO) No. 41, entitled, “Reorganizing the Administrative Structure of the Municipat Development Fund, Consolidating its Functions in the Department of Finance and for Other Purposes", (approved 20 November 1998), Local Government Credit Financing —— 3TRC Tax Revearch Journal Val RRA Tulj- Agus 7015 | Fund (PWRF).'’ The MDFO makes it possible for lower income LGUs to avail of financial assistance from domestic and international financing institutions to accomplish various social and economic development projects. The foreign loans for local projects under the jurisdiction of the MDEFO are directed through an inter-agency policy governing board composed of senior representatives from the DOF, the Department of Budget and Management (DBM), the Department of Interior of Local Government (DILG), NEDA and the Department of Public Works and Highways (DPWH). The MDFO is managed by an Administrator based at the DOF. The loan is made available to eligible LGUs through an agreement between the DOF and the LGU concerned. Features of MDFO Loans 1. Eligibility All LGUs are eligible to borrow from the MDFO except where a specific component had been pre-agreed to focus within a confined geographic area or sector. 2. Purpose Projects shall be directed to poverty alleviation through the reduction of physical infrastructure shortage. Among the common projects which have been approved for funding are the installation, construction, and rehabilitation of facilities, including water supply, sanitation, drainage, streets, markets, slaughterhouses and motor pool. The MDFO financial assistance has also been used for the procurement of maintenance equipment and technical assistance. Endeavors in the promotion and development of health, education and agrarian reform are also accepted by the MDFO. 3. Loan Ceiling Open loan ceiling depends on the project requirements, and debt service should be in accordance with the MDFO computational guide for loanable amount > For Non-Revenue Project ~ shall not exceed 10% of the annual regular income (local sources and IRA) multiplied by annuity factor of 12 years at 14% per annum or the prevailing interest rate; and Funetions, Funds, Personnel and Records of the Mus "BO 742, $. 2008, entitled “Amending EO 252, dated December 1, 2003, Transferring the Assets, ipal Development Fund Office to an Affiliate Corporation of the Land Bank of the Philippines, and for Other Purposes” (approved 2 July 2008), 10 Tocal Government Cred Financing |[NTRC Tax Research Journal Vol. XXV.4 July-August 2013 > For Revenue Generating Project -shall not exceed 18% of the annual regular income (local sources and IRA) multiplied by annuity factor of 12 years at 14% per annum or the prevailing interest rate. 4. Equity 10% of the total sub-project cost. 5. Loan Term ‘The loan term shall depend on the project financed but not to exceed 15 years inclusive of a maximum repayment period of three years on the principal. 6. Interest Interest shall be applied uniformly to all agreements signed within the relevant year, regardless of the fund source. 7. Loan Repayment Billing shall be done every semester from the time of withdrawal. In case of non-payment on due date, there shall be a penalty of two percent (2%) per month on the amount due. 8. Security Requirements Withholding from the LGU’s IRA on the amount equivalent to its amortization, in case of default. 9. Other Requirements Insurance on infrastructure and annual appropriation for infrastructure maintenance. ‘The MDFO provides assistance to vast range of vital and necessary requisites recognized by LGUs in their Local Development Plans and Annual Investment Programs such as physical and social infrastructures, policy reforms, climate change adaptation and technological improvements. In 2010, the MDFO approved 80 subprojects, 42 of which were revenue generating projects such as improvement of water systems, construction of public markets, slaughterhouses, bus terminals, and infrastructure projects, among others'*. Figure 1 shows that 52% of the MDFO-funded subprojects were geared towards revenue-generating schemes ventured by LGUs, 20% to disaster damage management and 9% to social programs and 8% for purchase of heavy equipment. " DOF 2010 Annual Report. Local Government Credit Financing iWTRC Tax Research Journal Vol. XXV4 July-August 2013 wsultaney Service Contingency Financing = isaster & Damage Management Disaster & lief Response = Cowonmenta Heavy Equipment sINFRA-Non Revenue s Revenue Generating Mecica!Equipmont = Social Source: DOF 2010 Annual Report For CYs 2010-2011, the MDFO acted as a fund conduit to several local projects. It served as intermediary to Foreign Assisted Projects (FAPs) by managing funds for LGUs that are being implemented by different national government agencies and other funding institutions. A total of 86 financial supports were provided, 34 of which were made available to the Disaster Assistance Management Fund. In CY 2011 majority of the financial assistance from the MDFO was granted to the Municipal Development Fund Project (18), Disaster Assistance Management Fund (16) and Millennium Development Goal Fund (11). (Table 5) ‘Table 5. NUMBER OF FINANCIAL ASSISTANCE PROVIDED BY THE MDFO AS A FUND CONDUIT TO FOREIGN ASSISTED PROJECTS Ys 2010- 2011 No. of LGUs FINANCING WINDOWS mie | aun | ee Disaster Management Assistance Fund 18 16 34 ‘Municipal Development Fund Project (MDFP) 2 is_| 20 Health Sector Reform Project (HSRP) 1 Mindanao Basie Urban Service Sector Project (MBUSSP) 4 4 8 Millennium Development Goal Fund (MDGF) 2 u 13 Health Sector Reform Assistance Support Programme HSRASP) 2 2 Project Technical Assistance and Contingency Fund (PTACF) |__1 3 4 Department of Health (DOH) i 1 Integrated Coastal Resources Management Project ICRMP) i 1 Second Generation Fund (SGF) 2 2 TOTAL 31 55 86 Source: BLOF. Tocal Government Cred Financing |NTRC Tax Research Journal Vol. XXVd July-August 2013 ] For CY 2011, the MDFO provided a total financial assistance of PhPS79.16 million. Italso entered into a bilateral agreement with other national government facilities incurring a total of PhP630.43 million financial funding (Table 6). These credit facilities are Millennium Development Goal Fund (MDGF), Disaster Management Assistance Fund (DMAF), Laguna de Bay Institutional Strengthening and Community Participation (LISCOP) and Community-Based Resource Management Project (CBRMP) Table 6, SUMMARY OF MDFO SCHEDULED LOANS/BONDS, BY REGION cy 2011 (In Million Pesos) ecion | mpro | MBGE | MART MDFO. | conu | rorat | Nox) : : : : CAR. 1.63 = = = fz 1.63. I 14.56 1,92 5.34 = £ 21.82 i 719 = = = = TAD TL 21.90 | - - s & 21,90 yea) es) ai) = 203.79 x 38.93 - - Zz 9.65 48.58 VL 18.40 - - - = 18.40 vil 2m] : : : 2 Vu = 7.45 = - 2.59 10.04 IX. 59.14 = = £ : 59.14 x 30.88 = = = z 30.88 za : : : : : : XI 93.79 - - : z 93.79 xu asa5 | ; ; : ss. ARMM 24.88 | = - : = 24.88 TOTAL 579.46 29.20 5.34 419 12.24 630.43 Source: COA 2017 Annual Financial Report. Table 7 identifies the corresponding LGUs that benefitted from the financial assistance provided by the MDFO together with its national government facilities counterparts. For CY 2011, the LGUs accrued a total of Php 51.02 million of financial funding from the MDFO and its financial partners. The municipality of Sampaloc, Quezon in Region IV incurred the highest loan of PhP 19.83 million, under the MDGF. (Zeca Government Credit Financing 3([ NTRCTTax Researeh Journal Vol. XXV July-August 2013 Table 7. LGUS WHICH AVAILED OF MDFO LOANS CY 2011 (In Million Pesos) LGU Financing Windows Amount Region I [ | Santa Catalina,llocos Sur MDGF 1.96 DMAF 5.34 [Region IV Sampaloc, Quezon. MDGF Morong, Rizal LISCOP Region V. Casiguran, Sorsogon CBRMP | 0.89 Bula, Camarines Sur CBRMP | 5.33 Garchitorena, Camarines Sur CBRMP 3.44 | Region VI Pilar, Bohol CBRMP 2.59 Region VIII | Cabuegayan, Biliran MDGF 7.45 TOTAL 51.02 ‘Source: COA 2017 Annual Financial Report 4, Inter-LGU Loans LGUs may also obtain loans, grants and subsidies from other LGUs up to the extent of surplus funds of the latter, provided the loan is approved by a majority of all the members of the lending LGU Sanggunian.!” LGUs may jointly or severally contract loans, credits and other forms of indebtedness for reason that it can be mutually advantageous to them upon approval of their respective Sanggunian. Inter-local_ government Ioan agreements are contractual commitments entered into by LGUs in the exercise of their corporate powers. This scheme is beneficial to LGUs since there are no standard terms and conditions for the loans. The creditor and the borrower may negotiate and come to an agreement that both parties may deem proper. ‘The process for initiating an inter-LGU loans are as follows: Step 1. The borrower LGU shall ratify a resolution/ordinance applying for a loan, defining the name of the creditor LGU and the purpose for which the loan shall be utilized. It shall also include the " Section 300 of the LGC. Local Government Credit Financing |[NTRC Tax Research Journal Step 2. Vol. XX July-August 2013 LCE’s authority to negotiate and enter into contract for the LGU. The LCE shall concur through an explicit approval of the resolution. The creditor LGU shall establish the amount to be loaned and its terms and conditions: > The Provincial/City/ Municipal Treasurer of the lending LGU shall issue a certification on the accumulated surpluses which are eligible for lending, grants or subsidies. The certificate issued shall be attested to by the Provincial/City/Municipal Auditor. v The Sanggunian shall convene to decide on the amount to be loaned within the certified amount by the treasurer. ‘The Sanggunian shall further draw the terms and conditions to be prescribed by defining and delineating the amount, purpose, equity of borrower, interest rates, grace periods and repayment schemes and security. > Upon reaching a consensus on the loan amount and terms and conditions, the borrower and the creditor LGUs may draw the requisite contracts. v The loan contract shall be ratified by the Sanggunians of both parties to become valid and be put into effect. > Upon ratification of the loan contract, the Auditors, the Budget Officers and the Treasurers of both parties shall be furnished copies of contracts for purposes of ensuring the appropriation and payment of amortization. > LGUs may resort to automatic allocation of repayment wherein an LGU may automatically set aside the amounts for repayment in a fund account which cannot be reverted back to the regular funds of such LGU. Inter-LGU loans can open inter-local cooperation to have a more effective service delivery to the public and establish cross-over responsibilities between LGUs. Table 8 shows the LGUs that have obtained loans and/or bonds from their provincial governments. Partnership among LGUs forms alliances to develop a more progressive LGU. ‘This scheme can also create a stronger union between the LGUs that would initiate a more responsive local government, Local Government Credit Financing isNIRC Tax Research Journal Vol. XXV.4 July-August 2013 ‘Table 8. LOANS EXTENDED BY PROVINCIAL GOVERNMENTS TO ‘THEIR MUNICIPALITIES cy 2010 (In Million Pesos) LGU Creditors Purpose of Loan ‘Amount Region 1 Bacarra, Hocos Norte Provincial Government of locos | Pstablishing muti-pass rice 138 rill project Region IT Gonzaga, Cagayan Salt-Making Project 0.95 Region 111 San Isidro, Nueva Ecija__| Provincial Government of Nueva_| Tabon-Manga Farm- to- 1.00 Beija Market Road Phase Il ‘Talugtog, Nueva Eetja Provincial Government of Nueva. | Purchase of 10,000 bags of 10s Ecija cement . Region IV | Amadeo, Cavite | Provincial Government of Cavite | Not Indicated 0.25 ‘Temate, Cavite | Provincial Government of Cavite | Construction/Maintenance’ 2.00 Rehabilitation Project Liliv, Laguna Provineial Government of Laguna | ‘Tax Mapping 057 Sta Cruz, Laguna Provincial Government of Laguna | Construction/Maintenance! 10.00 Rehabilitation Project Baras, Provincial Government of Rizal | To augment operating Lis expenses of municipality Provincial Government of Rizal Morong, Rizal Construction/Maintenance! 097 Rehabilitation Project Region V Nabua Provineial Government of Construction/Maintenance! 021 Camarines Sur Rehabilitation Project Region XIII Jabongan, Agusan del Government of Agusan | Seed capital for the 250 Norte implementation of Palay Price Equalization Provincial Government of Agusan | Counterpart fund for the 057 del Norte computerization project Talacogon, Agusan del Sur | Provincial Government of Agusan | Finance the equity required for 0.46 del Sur the MinSSAD” project Source: COA 2017 Annual Financial Report. ® Mindanao Sustainable Settlement Area Development. 16 Local Government Creu Financig |NTRC Tax Research Joumal Vol. XXV.4 July-August 2013 Deferred Payments Section 298 of the LGC authorizes LGUs to acquire property, plant, machinery, equipment and other such necessary accessories under a supplier's credit, deferred payment plan, or other financial scheme. In the case of imported equipment or machinery with tax exemption privilege”, LGUs are not allowed to dispose of the aforementioned either by public auction or negotiated sale within five (5) years from the importation thereof. If sold within the five-year period, the purchasers or recipients shall be considered importers and will be liable for duties and taxes computed based on the book value of such importation. ‘The LGU must secure a Certificate of Borrowing and Debt Service Capacity from the BLGF that officially allows the LGU to avail of a deferred payment plan. Bonds A local bond is an interest-bearing obligation issued by LGUs. It is in effect a promissory note of LGUs direct to the creditor that upon maturity, LGUs will pay both the principal investment and the interest. Per Section 299 of the LGC, bonds and other certificates of indebtedness may be used to finance self-liquidating, income producing development or livelihood projects identified in the local development plan and the annual investment program. The scheme allows LGUs to balance sources of funds and avoid dependence on taxes to support development projects. It also enhances transparency of the LGUs" development plan. The step by step process of bond issuance is shown below.”* Step 1: Project Identification & Evaluation ‘Type and Size of Project/Business Activity Step 2: Sanggunian Approval of the Project and Authority to Issue Bonds to Partially Finance the Project Step 3: Hiring of Financial Advisor Step 4: Design of a Financial Plan Step 5: Selection of the Underwriting Team Step 6: Negotiation on Bond Terms and Conditions Step 7: Preparation of Documents and Agreements 2" Article 445, Rule XXXV of the IRR of the LGC and DOF Circular No. 21-92. ® Celestino, Alicia B., ctal., Op.cit. p. 250. Local Government Credit Financing 7]NTRC Tax Research Journal Vol. XXVA4 July-August 2013, Step 8: Sanggunian Approval on Final Bond Terms and Inclusion in the Budget Step 9: Ifa Housing Project, Arrange Guarantee by Home Guaranty Corporation” Step 10: DAR Approval for Conversion of Land from Agriculture to Housing/ Commercial Property if Real Estate will be Involved Step 11: Preparation of Underwriting Documents & Offering Prospectus Step 12: Obtain BSP’s Favorable Opinion on the Bond Issue Step 13: Sanggunian Panlalawigan Approval on the Issue if a City or Municipality Step 14: Bond Offering Sale and Issue Step 15: Debt Ser ing by the Issuer LGU bond flotation acts as a viable local development financing option which instills values of good governance and improves the borrower's enterprise management and creditworthiness with their investors and stakeholders. Based on available data from the BLGF, from 1999 to 2004 there were 13 LGUs that issued bonds to initiate local infrastructures in their respective vicinity (Appendix A). The City of Caloocan issued the highest bonds amounting to PhP 620 million, in CY 2000 for three (3) infrastructures namely: Poblacion public market, City Hall Park with a commercial area, and toll parking, and a hospital. Urdaneta City had the least with an issuance of only PhP 25 million to build the citys abattoir/slaughterhouse in CY 1999. Cities of Urdaneta, Puerto Princesa, Tagaytay, Iloilo and San Juan, the municipalities of Daraga and Bayambang and the province of Leyte have fully paid their obligations before reaching maturity. Other LGUs namely, Aklan Province, Caloocan City, Carmona Cavite, Imus, Cavite and Pasay City have paid their obligations on the date of its maturity. Accordingly, projects are completed on time or in a much earlier period. ‘The Build-Operate-Transfer (BOT) Agreement Section 302 of the LGC sanctions LGUs to enter into contracts with private sector for the financing, construction, operation, and maintenance of any financially viable infrastructure facilities under the BOT agreement. ® Enacted by RA 8763, entitled, "An Act Consolidating and Amending RAs $80, 1557, $488 and 7835 and EOs 535 and 90, As Which Shall be Renamed as Home Guaranty Corporation, and for Other Purposes”, (approved 29 February 2000), 18 Local Government Credit Financing |NTRC Tax Research Journal _ Vol. XXV4 July-August 2013, The BOT process consists of three (3) phases”; Phase I. Project Formulation ‘The first phase has five (5) steps: Step I. Project Identification and Justification. This requires: description of the project (name, type, purpose, population size and area served and approximate location) and justification or rationale of the project. Step 2. Priority Project Designation. > Site and right-of-way acquisition and relocation issues, including the availability of duly located LGU-owned land > Market area served and demand for the project > Effect on, or relevance to LGU master plans > Evidence of community support for the project and resolution of legal, technical and social hindrances > Existence of competing infrastructure in the project's area coverage v Environmental issues and potential cost implications (identifying environmental issues addressing the need to classify the project) > Estimated capital cost to recognize and indicate budget impacts > Potential for private sector investment in the project > Possible social impact Step 3. Pre-feasibility Analysis > Establish the technical viability of the project > Determine its financial viability * Celestino, Alicia B., etal, Op.cit. pp. 254-255. Local Government Credit Financing 9NTRC Tax Research Journal Vol. XXV.4 July-August 2013, Assess its economic expediency, including its initial impact to the environment Make recommendations concerning the implementation approach to employ Step 4. Project Packaging “Packaging” refers to what LGUs can offer candidate project proponents that is usually outlined in the tender offers. ‘The aim of project packaging is to create a set of conditions which will be usefull to guarantee the private sector participation in a local infrastructure project that is acceptable to both parties, Step 5. Project Authorization ‘The Sanggunian formally confers authority to the LCE to go on with the negotiation for the project. Phase Il. Project Proponent Selection This involves the selection of project proponent. It can be done through: > A public bidding procedure or solicited proposal for projects which have completed the process described in the project formulation; and An unsolicited proposal, which cannot be submitted for “priority projects” designation, and as a result, has not been subjected to the reviews and decisions made during the project formulation phase. Phase III. Project Implementation At this stage, formal documents have been completed and the actual physical asset has met the public sector's needs. This phase formally begins when the Notice to Proceed is issued to the successful bidder within 15 days of contract approval. Although the public facility will be constructed, financed and operated by a private enterprise, the LGU is not relieved of the responsibility to guarantee: > > 20 that the project is built according to specifications; that it operates by supplying the intended volume or level of services: and that corresponding payments are made by the target beneficiaries. Teal Government Credit Financing |NTRC Tax Research Journal Vol. XXV.4 July-August 2013 The passage of the BOT law established the private sector participation in infrastructure and development projects. Table 9 below shows the various LGU projects under BOT Agreement, It provided a more efficient and simplified backdrop on government procedures for approval of projects and contracts, and selection of proponents with straightforward agreements. As clearly noted on the expected benefits, the BOT provides a financially doable investment both to the private sector and the LGUs. It likewise covers infrastructure sectors (transportation, power, water facilities, etc.) and non-traditional infrastructure projects (health, education, information technology, etc.). Also, provision of reasonable rate of return and institutionalized ‘government support are incorporated. Table 9. LGU PROJECTS UNDER BOT AGREEMENT Implementing Agency Project Description Benefits Municipal Government of EI Nido, Palawan City Government of | Calamba_ City Government of Cagayan de Oro, ~ Establishment of a water supply system and sanitation project covering four (4) barangays of the Poblacion area” ~ Ongoing procurement of advisors as of 14 January 2013 ~ Construction of @ PRP 2.5B one- stop shop facility for at least $4 government agencies ** (Awarded 29 November 2012). = Redevelopment of Cogon, Carmen, and Agora Markets “(July 2004 — December 2030; 17 months construction and 25 years ‘cooperation period). | ‘The EI Nido local government is | cognizant of the need to ensure clean water supply and maintain clean environment in light of the growing tourism industry. ‘The project will allow fast and efficient processing of any document’ paper! ermivclearance from any government agency with all the government depariments found in one location. The regional centers will also improve the discharge of public service by the different national government agencies at the regional level. ‘The modernization of the three (3) public markets will increase revenues, expand economic activity in the area and increase employment hutpi/ppp.gov.ph%p=10511 (Accessed 25 April 2013), x iMalaysian Bags First 8 Infra Giant i Pop Project in “EL Nido Water Supply and Sanitation System Project”, Public-Private Partner Center, LGU", The Daily Tribune. nfia-gi (Accessed 25 April 2013), ” “Public-Private partnershi ‘The Cagayan De Oro Experience, Aig py phi contenupload/2012/04/CDO Public-Matket pf (Accessed 25 April 2019) (Laat Government Credit Financing a = 2NTRC Tax Research Journal Vol. XXVa4 TulyAugust 2013 Implementing Ageney Project Description Benefits City Government of ~ The Talisay City Plaza Complex | To strengthen the foundations of @ Talisay Heritage Restoration and Village City-like infrastructure, systems Redevelopment Project” and processes; and to provide efficient and effective local government services Toeal City of T Gonstruction of wastewater “The project is seen as necessary and Puerto Galera management system” fundamental in order to preserve the town’s natural environment and sustain the growth of the local tourism industry Official Development Assistance (ODA) ‘The ODA is a foreign loan or loan and grant derived from government agencies and administered with the objective of promoting sustainable social and economic development and welfare of the Philippines. The proceeds of the ODA are used to accomplish equitable growth and development in LGUs through priority development projects. The recipient LGU acquires these resources through diplomatic channels and official representations. The ODA is provided through either multilateral institutions or bilateral programs. Multilateral institutions include the United Nations (UN), The European Community (EC), and the regional development banks, such as the WB and ADB. Major bilateral or government sources of ODA include Japan, the United States, Germany, Italy, France and Australia. ODA loans can be used to finance either: > Specific activities or projects involving physical capital formation with a particular sector or subsector coverage; or > Non-project assistance in the form of standard program assistance for various minor projects consisting of an extensive development program for the procurement of commodities, either in kind or monetized for the local corresponding needs of specific projects or general budgetary support. Conversely, ODA grants have no compensation obligations and are mainly presented in the form of cash donations, consultancy services, fellowships and training, and with limited quantities equipment/commodities. Possible duplication with other proposed/current projects; and > Possible national security implications; Concemed NGA reviews the project proposal within 30 days and notifies the DILG and the LGU concerned of the result of the review; ‘The proposal is revised if inconsistencies are found in the assessment; Upon satisfactory completion of the project proposal, the Local Sanggunian endorses it to the identified ODA grant donor; LGU submits the project proposal to ODA grant donor and provides copies of the proposal and its endorsement to the local, regional and national offices of the DILG and NED; LGU coordinates with ODA grant donor in monitoring the course of the proposal and regularly informs the DILG and NEDA of the status of the proposal; NEDA coordinates regularly with ODA grant donor in facilitating the assessment and approval of the project proposal; and An NGA evaluates the project proposal only upon the request of ODA grant donor and the consent of the LGUs concerned. Table 10 shows a list of names of foreign institutions and their strategic corresponding assistance schemes/programs in the Philippines.’ * Celestino, Al ia B., etal., Op.cit. pp. 258-259. Local Government Credit Financing “3NTRC Tax Research Journal Vol XXVA_Tuly-August 2013 Table 10, FOREIGN INSTITUTIONS AND COUNTRIES AND THEIR STRATEGIC PROGRAMS DEVELOPMENT PARTNERS ‘STRATEGIC PROGRAMS Bilateral ‘Australian Agency Tor International Development (AusAid) 2007-2011 Philippine-Australia Development “Assistance Strategy ‘Canadian Tnternational Development Agency (CIDA) ‘Country Strategy for the Philippines uropean Union (EU) EU Country Strategy Paper (CSP) for the Philippines 2007-2013, ‘Tapan International Cooperation Agency (ICA) ‘Country Assistance Strategy(CAS) ‘Korea International Cooperation Agency (KOICA) Country Assistance Strategyi0 Spain Intervention Action Program for 2010 (leading to the Strategic Partnership Framework Agreement 2011- 2016) U.S. Ageney for International Development (USAID) ‘2009-2013 USATD/Philippines Country Assistance Strategy Multilateral ‘Asian Development Bank (ADB) ‘ADB Country Operations Business Plan for the Philippines 2010-2012 and ADB Country Strategy and Program World Bank (WB) ‘Country Strategy for the Philippines 2010-2012 Food and Agriculture Organization (FAO) FAO National Medium Term Priority Framework ¢NMTPF) for 2010-2011 International Fund for Agricultural Development (IFAD) IFAD's Philippines Country Strategic Opportunities Programme 2010-2014 United Nat is Development Programme (UNDP) UNDP Country Programme Document for the Philippines 2005-2009 (extended up to 2011) and GOP-UNDP Country Programme Action Plan (CPAP) 2005-2009 (extended up t0 2011) United Nations Population Fund (UNFPA) The UNFPA 6th Country Programme and GOP- UNFPA CPAP 2005-2009 (extended up to 2011) United Nations Children’s Fund (UNICEF) ‘Shah Country Programme for Children (CPC 6) 2005- 2009 (extended up to 2011) end GOP-UNICEF CPAP 2005-2008 (extended up to 2011) United Nations Educational, Scientific and Cultural Organization (UNESCO) "| Philippines- UNESCO Country Programming Document (PH-UCPD) 2009-2011 ‘Source: ODA Portfolio Review 2010, ** ODA Portfolio Review 2010, published by the National Economic and Development Authority hups/ivww.neda.gov, 9th 2629.pdl (Accessed on 14 December 2012). DAVODAP42ORI 20VERSION 20%428P4 SEW220F INA 24 Local Government Credit FinancingNIRC Tax Research Journal Vol. XV Tuly-August 2013 Japan International Cooperation Agency (JICA), one of the international institutions that provides grant assistance, has offered funding on several LGU development projects in the form of experts, equipments and studies, Table 11 cites LGU development projects that JICA has endorsed. Based on the consultation with JICA, equivalent monetary value can be an alternative means of assistance offered for each grant offered to LGUs as stated below. *? Table 11. JICA GRANTS OFFERED TO LGUS CYS 2006-2011 | Implementing Grant in Project Title Nester Monetary Unit sy | Period Maternal and Child Health Project DOH, Ifugao and 424M 2006-2010 Biliran Province Project on Strengthening of Local Health | DOH-CHD CAR, 398M 2006-2011 System in the Province of Benguet Benguet Province Capacity Enhancement Program of Toilo Provincial 331M 2007-2010 Metropolitan Hloilo-Guimaras Government, Development Council (MIGDC) and | MIDGDC and Banata Bay Resource Management BBRMCI Couneil Inc. (BBRMCI) ‘The Project for Enhancement for Local | Misamis Oriental 256M 2008-2011 Governance and Community Empowerment in Micro-Watersheds in Misamis Oriental US Dollars, VI. CONCLUSION The intent to pursue local development projects and improve basic services requires considerable amount of funding. To augment locally-sourced revenues, LGUs are encouraged to avail of non-traditional funding sources through credit financing. The LGC broadens financing options for LGUs to enable them to finance local infrastructure and socio-economic development projects in their jurisdiction. This will eventually lead to their attainment of their fullest development as self-reliant communities and partners in the attainment of national goals. * ODA Portfolio Review 2010. 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