Santiago F. Dumlao Jr. l July 24, 2024 l Business Mirror
SOME of us capital market stakeholders, wishing to see more capital market products available—specifically, to see LGU bonds offered as additional investment options—are feeling stymied to discover that some provisions in the Local Government (LG) Code of 1991 (Republic Act 7160) are becoming obstructive.
It is in fact the “basic policy that any local government unit may 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.” (Section 296, General Policy Title Four-Credit Financing, LG Code.)
But the issuance of “Bonds and Other Long-Term Securities” are limited in their nature and purpose, i.e. “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 livelihood projects.” (Section 299, LG Code)
This limitation to self-liquidating income-producing projects is unfortunate because many local projects direly needing financing are neither self-liquidating nor income-producing. Yet these are the projects ideally appropriate for local government unit (LGU) bonds to finance.
For example, disaster risk reduction and adaptation projects are urgent for many local communities. These include disaster coordination and communication centers, heavy equipment and related rescue facilities, evacuation centers, emergency medical clinics, ambulances, fire trucks, and transportation facilities. These are direly needed but they are not income-producing nor self-liquidating. Even, let’s say, the necessary retrofitting or reinforcing of local office or school buildings cannot be financed by the convenience of a bond issuance (why not indeed?).
With the full devolution of many basic services to LGUs heretofore performed by national agencies, and with the consequent responsibility for financing of these services likewise devolved to LGUs, the requirement for LGUs to seek new or other sources of financing has become more pressing. LGU bond financing indeed presents itself as a promising suitable financing alternative. This full devolution was effected by Executive Order (EO) 138 (dated June 1, 2022).
But these basic services extensively enumerated in Section 17 of the LGU Code, are not self-liquidating and income-producing, and so cannot be financed by LGU bonds which could be ideally so financed.. We are talking here of such basic services classified as: Health Services, Agricultural Services, Natural Resources Management Services, Local Infrastructure Services, Social Welfare Services, and Tourism Services (this particularly could however be made income-producing). It could be quite frustrating to an LGU wishing to issue bonds.
Moreover, there is the provision in Section 324 of the LGU Code on “Budgetary Requirements,” “that the amount of appropriations for debt servicing shall not exceed twenty percent of the regular income of the local government unit concerned.”
This quantitative restriction limits the flexibility of the LGU to structure an appropriate financing scheme that is custom-fitted to the nature of the cash flows of the LGU’s total debt composition.
For it is conceivable to have the LGU’s debt servicing exceed the annual 20-percent ceiling and still keep the whole finances of the LGU manageable. It’s all about financial flexibility.
In any case, we have used this story to release our pent up disappointments with the law. Sure, we are stymied, but are not discouraged.
We’ll find ways.
Santiago F. Dumlao Jr. is the past president (1989) of the Financial Executives Institute of the Philippines, Secretary General of the Association of Credit Rating Agencies in Asia and chairman of the market governance board and market policy committee of the Philippine Dealing & Exchange Corp. His views do not necessarily reflect those of the Finex and the BusinessMirror. Photo from Pinterest.