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

2

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

3

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.

4

Government’s Policy on LGU DebtsP H ID O FBLGF

Legal Framework of PHI Subnational Debts

5

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