Local Credit Financing Options.docx

Credit Financing Options of Government Units

Local Credit Financing is the power of Local Government Units (LGUs) to undertake indebtedness and enter into credit and other financial transactions, with the ultimate goal of accomplishing local development projects and gaining benefits for their constituents. Such power is provided for in the Local Government Code (LGC) of 1991, specifically Book II Title IV, which states that LGUs have the power to “create indebtedness” and avail of “credit facilities” in order to finance local infrastructure and other socio-economic development projects in accordance with the approved local development plan and public investment program. In addition, LGUs may also avail of government and private bank/loan institution credit lines in order to stabilize local finances. Before the LGC of 1991, the demands for financing of LGUs were answered by Presidential Decree (PD) No. 752 entitled “Decree on Credit Financing for Local Governments” issued in the year 1975. PD 752 authorized LGUs to avail of credit facilities and undertake loans if local funds were insufficient to finance completion, expansion, operation, and maintenance of local infrastructures and development projects. However, such law limited the LGUs into incurring loans only with governmental financing institutions (GFIs) at a strictly limited amount. Such limitations proved problematic as these GFIs were not able to keep up with the increasing demand for financing by LGUs and that the limited amount an LGU may borrow from these GFIs effectively served as a deterrent to borrowing. On the other hand, the LGC of 1991 broadened such borrowing power of LGUs. Under this Code, LGUs are specifically authorized to: (1) 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, (2) avail of credit lines from GFIs or private banks and lending institutions. Such loans are subject to such terms and conditions as may be agreed upon by the local government unit and the lender.1 The LGC also authorizes LGUs to acquire property, plants, machinery, equipment, and such necessary accessories under a supplier’s credit, deferred payment plan, or other financial scheme.2 Additionally, the Code also states that subject to the rules and regulations of the Central Bank and the Securities and Exchange Commission (SEC), provinces, cities, and municipalities are hereby authorized to issue bonds, debentures, securities, collaterals, notes and other obligations to finance self-liquidating, income-producing development or 1 2

Section 297, LGC. Section 298, Ibid.

livelihood projects pursuant to the priorities established in the approved local development plan or the public investment program.3 With these said, there are various credit financing options currently available to LGUs, such as: (1) loans, (2) deferred payments, (3) bonds, (4) the Build-OperateTransfer (BOT) Agreement, and (5) the Official Development Assistance (ODA). First, a Loan is a debt for a specific period that is expected to be paid back with interest, usually by regular periodic payments. Bank loans offered to LGUs can be classified into four (4) categories, namely: (1) term loans, (2) transaction loans, (3) line of credit, and (4) revolving credit. Term loans are usually utilized by LGUs for capital projects, and these loans have a maturity period of more than one (1) year. Transaction loans are loans granted for a specific purpose. Lines of credit are special arrangements wherein a bank allows an LGU to borrow an amount of money with a maximum cap at any one time. Revolving credit is a bank’s commitment to lend a maximum amount for a period that an LGU can withdraw upon request. As earlier stated, LGUs may avail of loans from various GFIs such as the Land Bank of the Philippines, Development Bank of the Philippines, the GSIS, and the SSS. LGUs may also borrow from private domestic banks and credit institutions such as the Philippine National Bank. In addition to these, the Municipal Development Fund (MDF) was created through the Presidential Decree No. 1914. It is a special revolving fund for re-lending to LGUs which enabled LGUs to avail of financial assistance from local and international sources for the implementation of various social and economic development projects.4 The MDF is administered by the DOF-BLGF and the DPWH-CPO. It has been mandated to assume the administration of both the project evaluation and credit delivery processes previously handled by BLGF and CPO. It promotes LGU self-reliance in undertaking socio-economic development programs through effective system of making ODA available to LGUs, provides assistance to low income LGUs in financing development projects, and establishes LGU creditworthiness to help access private funds. Second, a Deferred Payment Plan is a loan arrangement wherein the borrower is allowed to start making payments at some specified time in the future. This scheme is often used in retail settings where a person buys and receives an item with a commitment to begin making payments at a future date. Such is expressly provided for under Section 298 of the LGC.5 Third, Local Bonds are interest-bearing obligations issued by LGUs to creditors stating that upon maturity, the LGUs will pay both the principal investment and the interest. As stated in Section 299 of the LGC, bonds and other certificates of indebtedness

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Section 299, Ibid. Presidential Decree No. 1914 Entitled, “CREATING A SPECIAL REVOLVING FUND FOR PURPOSES OF FOREIGN ASSISTED PROJECTS APPLICABLE TO LOCAL GOVERNMENTS” (Issued 29 March 1984). 5 Section 298. Deferred-Payment and other Financial Schemes. - Provincial, city and municipal governments may likewise acquire property, plant, machinery, equipment, and such necessary accessories under a supplier's credit, deferred payment plan, or either financial scheme. 4

may be utilized to finance self-liquidating, income-producing development or livelihood projects pursuant to the priorities established in the approved local development plan or the public investment program. This scheme allows LGUs to balance sources of funds, avoid tax dependence in supporting local projects, and improve transparency. Fourth, the Build-Operate-Transfer (BOT) Agreement, is an agreement that allows the private sector to participate in infrastructure developments. Such scheme is sanctioned in Section 302 of the LGC. The provision states that LGUs may enter into contracts with the private sector for the financing, construction, operation, and maintenance of any financially viable infrastructure facilities under the BOT Agreement. It has three (3) phases, namely: (1) project formulation, (2) project proponent selection, and (3) project implementation. Project formulation (Phase I) involves five (5) steps: (a) project identification and justification, (b) priority project designation, (c) pre-feasibility analysis, (d) project packaging, and (e) project authorization. Next, project proponent selection (Phase II) ensues, wherein a project proponent will be selected through either public bidding procedure or solicited proposals as described in the project formulation stage, or through unsolicited proposals which have not been reviewed under the project formulation stage. Lastly, project implementation (Phase III) takes place, wherein a Notice to Proceed will be given the successful bidder within fifteen (15) days of contract approval, after which the public facility will be constructed, financed, and operated by a private entity. However, the LGU is still required to ensure that: (1) the project is built according to specifications, (2) it supplies the intended volume of services, and (3) the corresponding payments are made by the target beneficiaries. Lastly, the Official Development Assistance (ODA) is a foreign loan or grant received from government agencies which have the objective of promoting sustainable socio-economic welfare and development in the Philippines. The ODA is provided either through bilateral programs with Japan, the United States, Germany, Italy, France, and Australia; or through multilateral institutions such as the United Nations, the European Council, or regional development banks such as the World Bank and the Asian Development Bank. Such grants are mainly given in the form of cash donations, consultations, fellowships and training, with limited quantities equipment/commodities. There are various ways LGUs may acquire funding for local development projects and benefits for their constituents. They are more than encouraged by the LGC, through its provisions, to avail of these different schemes so as to not limit their funding options to just local taxation and loan agreements with GFIs. These credit financing options not only broaden the horizon for LGUs in attaining funds for their benefit, but also give them a level of certainty in garnering funds.