Stretching the Peso

Access to funds key to municipal infrastructure development in the Philippines-

Local government units (LGUs) in the Philippines undertake a large number of development works, and as such their financial soundness is critical in ensuring inclusive and sustainable development throughout the country. LGUs have been accorded an increasing developmental role since the decentralisation of governance in 1991. However, their access to funding has remained weak, partly as a result of underdeveloped technical capabilities, and partly due to an insufficient ability to generate local revenue. Typically, these weak LGUs have also been unable to attract private investors.

However, the scenario is changing, with LGUs now beginning to access larger shares of government budgets, official development assistance (ODA), as well as private capital. The changing trend comes on the back of several factors. The Philippines is emerging as one of the fastest growing economies in Southeast Asia, and the government is taking initiatives to maintain – and increase – the pace of economic growth. Greater roles are being accorded to LGUs in order to achieve both national and international developmental and economic goals. For instance, in 2000, the Philippines was one of the 189 signatories to the United Nations Millennium Declaration aimed at achieving the Millennium Development Goals (MDGs). To realise the MDGs, LGUs were given significant responsibilities and hence the budget allocations of LGUs have been increasing. In addition, financial assistance extended by multilateral agencies, such as the World Bank and the Asian Development Bank (ADB), has also helped in attracting investor interest towards the LGU space. Another factor that drew investor interest towards the municipal sector was the beginning of provisioning of financial guarantees for LGU debts by the LGU Guarantee Corporation (LGUGC) in 1998. This proved to be a corrective for the lack of investor confidence regarding the LGU space.

Sources of funding

There are various sources of financing for LGUs in the Philippines. The largest provider of funding to LGUs is the government-established Municipal Development Fund Office (MDFO). It runs various financing programmes through which it provides financial as well as technical assistance to Filipino LGUs. Budgetary allocation has been the typical source of funding for LGUs for years now. In addition, government financial institutions (GFIs) are also gaining importance with respect to municipal financing. The various funding sources for Filipino LGUs are discussed below.

MDFO

The MDFO, established exclusively for re-lending to LGUs, is a major source of municipal finance in the Philippines. It is the major channel of ODA funds to LGUs. It is recognised as an effective mechanism that has enabled Filipino LGUs to avail of financial assistance from local as well as international sources. The Municipal Development Fund (MDF) is administered by the Department of Finance–Bureau of Local Government Finance and the Department of Public Works and Highways– Central Project Office.

The MDFO runs various financing programmes under which it caters to the financing needs of LGUs. One such programme is the Municipal Development Fund Project (MDFP). It provides financial aid to LGUs and helps them enhance local revenue generation through investment in local public enterprises and infrastructure projects. It offers loans with a fixed interest rate of 9 per cent per annum. For infrastructure projects, the repayment period is 15 years (inclusive of a three-year grace period for principal payment).

Another key financing programme of the MDFO is the Philippine Water Revolving Fund. It meets the investment requirements of LGUs for water supply and sanitation facilities. The programme also engages private financing institutions as co-lenders. It also utilises funds extended by the Development Bank of the Philippines and the Japan Bank for International Cooperation (JBIC). It specifically meets long-term investment requirements as it taps credit guarantees from the LGUGC and the USAID Development Credit Authority.

The Mindanao Basic Urban Services Sector Project (MBUSSP) is another financing programme of the MDFO that is designed to provide technical assistance to LGUs in Mindanao and to help them gain access to credit facilities. The MDFO provides loan assistance to LGUs that implement MBUSSP subprojects. The programme specifically targets the strengthening of urban infrastructure in the second largest island of the country.

Meanwhile, the Filipino administration is increasingly focusing on the promotion of public–private partnerships (PPPs) at the LGU level, which will lead to the much-needed participation from the private sector. The PPP Fund, sourced from the MDF-Second Generation Fund (MDF-SGF), is a financing window that may be tapped by LGUs looking to support pre-investment studies, which help in ensuring the viability of infrastructure development projects that are planned to be undertaken.

National budgetary support

An important source of funds for Filipino LGUs is in the form of budgetary support. The LGU share in the national budget of the Philippines rose by 9.7 per cent to PhP 318.1 billion due to improved revenue collection in 2010, the base year for computing the internal revenue allotment of LGUs for 2013. In addition, the government also has a matching grant programme, but only projects supported by MDF loans are eligible for it.

GFIs

Filipino LGUs normally request GFIs and some commercial banks to provide a “consolidated loan package” that carries lower interest rates than those offered otherwise. The facility also includes salary loans to LGU employees.

The space occupied by LGU financing in the Philippines has been witnessing increasing participation from GFIs, primarily the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines. In 2006, the LBP underwrote the first municipal bond issue since 1991, worth PhP 40 million. However, activity in this space has been on a lower key than desirable. The municipal bond market has yet to witness more development and additional deepening. The presence of the LGUGC (discussed in the subsequent section) is now leading to the gradual development of the bond market.

LGUGC

To attract investor interest towards LGU financing, the role of the LGUGC is of prime importance. The LGUGC is the first private corporation to enter the financial guarantee business space in the country. It is the recognised private sector link for PPPs looking for local government financing.

The primary mandate of the LGUGC, which was incorporated in March 1998, includes granting LGUs access to private capital by providing credit enhancement to LGU debts. This credit enhancement has facilitated the entry of LGUs engaged in development projects into the capital market. The LGUGC extends its guarantee services to water districts (WDs), electric cooperatives, and renewable energy technology providers, among others. Its stockholders include the Bankers Association of the Philippines, the Development Bank of the Philippines, and ADB.

As of end-2012, the LGUGC had provided guarantees for 14 WDs aggregating PhP 1.67 billion in loan amount. In addition, the LGUGC also provides programme management services. A large number of financial institutions partner the LGUGC. These include Bank of the Philippine Islands, Banco de Oro Universal Bank, Metropolitan Bank and Trust Company, and Philippine National Bank & Allied Banking Corporation. GFIs such as the Development Bank of the Philippines and the LBP are also important partners of the LGUGC in implementing its programme management services.

The way forward

Government role crucial in arranging funding

In the future, the role of the government will prove instrumental in increasing the funding available to LGUs. For instance, policy correctives aimed at enhancing the role of lending by private banks to the LGU sector will prove beneficial. The gradual entry of private banks in this space will establish a level playing field with GFIs in providing financing to LGUs.

Revisiting the extant policies will also prove beneficial. The matching grant programme, for instance, should allow an LGU to obtain a loan for a project that is eligible for a matching grant from any source (including a private bank) and still receive a grant. At the LGU level, improved project management and monitoring; financial reforms, including budgeting, planning, accounting, collections, and resource mobilisation; and better dissemination of public information will bring about more transparency and will pave the way for increased access to private capital. In addition, the development of a credit market for LGU bonds and for other securities is also required. The pooling of LGU bonds is another option that may be exercised.