Financing Modalities for LGU Enterprises

Financing Modalities for LGU Capital Investments(With Focus on Public Enterprise)By Norman R. RamosLGU Finance Consultant : 

Financing Modalities for LGU Capital Investments(With Focus on Public Enterprise)By Norman R. RamosLGU Finance Consultant

Lecture Coverage : 

Lecture Coverage LGU Investment Environment Essence of Public Enterprises LGU-Private Sector Interface in Local Investments Characteristics of LGU Capital Investments Approaches to LGU Capital Investment Financing Financing Sources for LGU Capital Investments Basic Sources Local Revenue Toolkit ODA Facilities LGU Investment Financing Ability Factors Assessing LGU Investment Financing Potential LGU Investment Financing Plan Formulation Selecting Between Alternative Modes of Credit Financing LGU Project Cost Recovery Guidelines Combined Utilization of Assets in LGU Capital Investments CAGAYAN TOWN CENTER: ECONOMIC ENTERPRISE AS A LEVER FOR MOVING THE PROVINCE

Environment Characterizing LGU Capital Investments : 

Environment Characterizing LGU Capital Investments Restrictive fiscal environment Budgetary deficits of the national government which affects the volume and timing of infrastructure grants and even the IRA for LGUs. Locally-sourced revenues not increasing enough to compensate for this erosion. Available resources mostly used to finance current operating budgets so that local capital investments as a proportion of LGU budgets have remained largely static.

Environment Characterizing LGU Capital Investments : 

Environment Characterizing LGU Capital Investments Increasing involvement of the private sector in financing capital investments LGUs have to operate in a market environment. Local administration as well as LGU activities influence local economic development. Private sector has become more involved in financing and even operations and management of LGU infrastructure capital investments.

Essence of Public Enterprises : 

Essence of Public Enterprises Dependence on service fees and charges to support operations. Assumes that there is effective demand for product or service being offered by the enterprise activity. There are users. Users are able and willing to pay to consume or enjoy the product or service. Extent to which fees are charged to defray the costs of providing the service depends on: Nature of the service. Size and characteristics of the user base. Policy objectives of the LGU.

Essence of Public Enterprises : 

Essence of Public Enterprises The setting of user charges should consider the following criteria: Equity. To what extent does the user charge system recognize differences in service demand by individual users? Revenue stability. Does the user charge schedule produce stable and predictable revenues over time? Flexibility. Does the user charge system have the flexibility to accommodate users with widely varying demand and usage characteristics. Ease of administration. How difficult is it for the concerned LGU staff to prepare, levy and collect bills, and can charges be easily updated. Public acceptance. Does the design of the user charge system encourage public acceptance.

Essence of Public Enterprises : 

Essence of Public Enterprises User charge systems that are very simple may be inequitable and result in poor public acceptance. To treat all users fairly may require and extremely complicated rate structure that would be extremely cumbersome to administer and to explain to the users. The optimum user charge is likely to fall between the two extremes of the simplest and the fairest.

Essence of Public Enterprises : 

Essence of Public Enterprises User charges have increased significantly in their importance to LGUs. User charges are now commonly charged for a wide variety of public activities and services including recreational an public safety services. Generate revenue. Regulate service demand by curbing abuse associated with free public services. These attributes of benefit-based charges combined with diminishing external grants from the national government portends further growth for public enterprises.

Areas of Interface Between the LGU and the Private Sector in Local Investments : 

Areas of Interface Between the LGU and the Private Sector in Local Investments LGU Private Sector

Areas of Interface Between the LGU and the Private Sector in Local Investments : 

Areas of Interface Between the LGU and the Private Sector in Local Investments LGUs influence the local economy through taxation and other administrative function. In service delivery and investment programming, LGUs have to communicate with the private sector. Major financial contacts exist through taxation and property development One major area of mutual interest is the provision of public services. LGUs rely on private sector providers when services are contracted out. PPPs are usually based on co-financing schemes. The business climate is also affected by local values in service provision.

LGU-Private Sector Cooperation in Local Investment Planning and Implementation : 

LGU-Private Sector Cooperation in Local Investment Planning and Implementation Cooperation in local investments is the least developed, especially in terms of joint financing of local capital investments. Information on critical components of the partners ship is not readily available to both LGUs and private sector actors. Insufficient knowledge and managerial capacity at the LGU level to work on complex private sector deals – models and solutions are not widely known. Banks and financing situations because of lack of transparency in LGU investment decisions are not able to become effective partners in establishing joint financing arrangements.

LGU-Private Sector Cooperation in Local Investment Planning and Implementation : 

LGU-Private Sector Cooperation in Local Investment Planning and Implementation Local governments need comparative information on the private sector, public contracts, service charges, price-setting methods and performance indicators, which are all crucial conditions for partnerships. The local administration should make all stages—preparation (identification, prioritization and scheduling), bidding, contracting and implementation—understandable and public.

Key Interface Points in Public-Private Relationship in Local Investment Planning and Implementation : 

Key Interface Points in Public-Private Relationship in Local Investment Planning and Implementation Local infrastructure development Infrastructure is an important asset of local government not only as equity but also as stable revenue-producing property. LGUs as service providers Urban productivity can be increased through the concentration of production factors by achieving economies of scale and agglomeration economies Capital investment financing tools Local capital investments in infrastructure require diverse sources of funding: national grants, own-source revenues, contributions paid by future users and private capital in the forms of loans and other financing arrangements.

Basic Characteristics of LGU Infrastructure Investments : 

Basic Characteristics of LGU Infrastructure Investments The LGU infrastructure is comprised of mostly core, non-negotiable assets. The market value of these assets usually is above their registered (book) value. Infrastructure is important for local budgets, as it enables LGUs to define future revenues stemming from the utilization of these assets. Directly visible real estate and related revenue sources (e.g., rents, lease); Investments promoting the general attractiveness of the city including all external factors of urban development, such as human services, environmental protection, landscape, cityscape, etc.

Basic Characteristics of LGU Infrastructure Investments : 

Basic Characteristics of LGU Infrastructure Investments Infrastructure services have extended distribution networks and large operating equipment; therefore, capital investment costs are high, requiring accumulation of capital before the project is initiated. Competitiveness is reduced due to the high transaction costs required. Local capital investments in infrastructure require diverse sources of funding: national grants, locally sourced revenues, contributions paid by future users and private capital in the forms of loans and other financing arrangements.

LGU-Private Sector Linkages in Local Service Provision : 

LGU-Private Sector Linkages in Local Service Provision Local governments and businesses are connected in two ways: Operation and management of services as clients and contractors. In service delivery the client-contractor split is the basis for utilization of local government assets. Financing capital investments as partners. Local governments are able to pay for services produced by the private sector. Alternatively the LGU as a regulatory authority is able to create revenue flow from customers to the private service unit.

Basic Approaches to LGU Capital Investment Financing : 

Basic Approaches to LGU Capital Investment Financing Public services connected to private expenditures Local government services are financed partly by private sources through connection and user charges - the local government is the active party and collects revenues from users of the infrastructure. Mechanisms to link private benefits to public revenues Private sector improvement or development projects benefit from available public services, so higher public revenues balance these private gains – property-related LGU revenues including RPT, special assessment, and development impact fees.

Relaxing the LGU Investment Financing Constraint : 

The new development investment financing constraint is not completely fixed for LGUs. Confronted with pressing constituent demands, LGUs have the option of relaxing the development investment budget constraint by: Raising additional local revenues -- taxes, fees and charges. Borrowing capital funds -- Increased access to long-term capital funds through loans from development financing and commercial banks and/or bonds or through joint venture and BOT-type arrangements. Re-allocating funds from the operating budget to the investment budget. Proposed projects may also be scaled down, phased or even deferred. Relaxing the LGU Investment Financing Constraint

Basic Sources of LGU Infrastructure Financing : 

Basic Sources of LGU Infrastructure Financing Self-generated local government revenues such as user charges and taxes (including special assessments and development charges) are critical elements for financing infrastructural development. In principle, these revenues provide the balance between benefits received from improved infrastructure and the costs of capital investment. In practice, user charges reflect largely “political demands” and rarely cover the required MOOE, depreciation and capital recovery. Available matching grants and transfers from extra-budgetary funds have an impact on local government development behavior. They usually operate in a grant-giving local fiscal environment, so a grant-seeking attitude dominates their capital investments.

Basic Sources of LGU Infrastructure Financing : 

Basic Sources of LGU Infrastructure Financing Private Capital Crucial component is the LGU revenue stream. Negotiating and administrative capacity of LGUs to design, manage and control combined financing arrangements. Otherwise, joint capital development schemes will not serve the public through higher levels of infrastructure and lower costs. Issue of users’ ability and willingness to pay as well as willingness to charge on the part of the LGU officials are also important.

Alternative LGU Investment Financing Sources : 

Alternative LGU Investment Financing Sources Alternative LGU investment funding sources that should be assessed include: Current LGU revenues (local taxes and fees, reserves, surpluses, IRA); Borrowings – direct loans, lease financing and bond proceeds; Foreign and local grants including congressional funds allocated to members of the House of Representatives and the Senate for the funding of constituency “hard” and “soft” development projects; Capital income from sales or use of LGU assets; Special levies and taxation of future benefits; and Public-private partnerships; or Combinations of the above.

Local Revenue Tool Kit : 

Local Revenue Tool Kit The 1992 LGC provides LGUs with powerful resource mobilization tools that can be grouped into five distinct classes of potential revenue sources. I. Land-based Tools that rely on the real property resources of LGUs; II.Community Activity-based Tools that rely on the flow of economic activity within the territorial jurisdiction of the LGU; III.Infrastructure-based Tools that are based on the “user” or “beneficiary”-pay principle that is people or entities like corporations should pay for the use of or benefits derivable from public infrastructure. ; IV.Debt-based Tools that allow LGUs to secure debt finance for so-called “income-generating projects” and to make investments in financial debt instruments like securities – Treasury bills, commercial papers, and shares of stocks. ; and V.Revenue sharing Tools based on national government revenues shared with LGUs as provided for in the 1992 LGC.

Land-based Tools : 

Land-based Tools A. Basic Real Property Tax (Sec. 232). This is a yearly ad valorem tax on real property such as land, building, machinery, and other improvements. The maximum tax is 2% of the assessed value which is a percentage of the fair market value of real property. The LGC prescribes the graduated schedule of assessment for agricultural, residential, and other real property classification. LGUs are required to prepare and update every three years a schedule of fair market values for all classes of real property. B. Special Education Fund – SEF Real Property Tax (Sec. 235). This is an additional yearly ad valorem tax on real property. The amount of tax is 1% of the assessed value of real property and is collected together with the basic real property tax.

Land-based Tools : 

Land-based Tools Land Transfer Tax (Sec. 135). This tax is imposed on any mode of transferring title of ownership of real property from one person to another, such as through sale, barter or donation. The amount of tax is 75% of 1% of the total consideration or fair market value, whichever is higher, and is payable within 60 days from the execution of the deed. Sale or transfer under the Comprehensive Agrarian Reform Program is exempt from this tax. (Applicable only to cities and provinces). Idle Land Tax (Sec. 236). This is a yearly ad valorem tax on idle land and is in addition to the basic real property tax and SEF. The maximum amount of tax is 5% of the assessed value of property. Idle lands include agricultural lands more than one hectare in area, one half of which remains uncultivated or unimproved; non-agricultural lands more than 1,000 square meters in area, one-half of which remain unutilized or unimproved; and residential lots in subdivision, regardless of area. (Applicable only to cities, provinces, and Metro Manila municipalities) .

Land-based Tools : 

Land-based Tools E. Public Land Use Tax (Sec. 235a). An LGU may collect real property tax on government lands which are used for the private benefit of individuals or corporations. For example, concessionaires or business establishments within government properties such as the lands of the Air Transportation Office may be levied real property taxes on government lands they occupy. F. Land Sale of Foreclosed Real Properties (Sec. 257, 258 and 260). Local taxes, fees and charges constitute a lien on real properties owned by a taxpayer. An LGU may foreclose on the properties of delinquent taxpayers and sell these properties through public auction. In the absence of bidders, or if the bids are not enough to pay the tax obligation, including interests and penalties, the LGU treasurer will purchase the property for the LGU.

Land-based Tools : 

Land-based Tools G. Land Investment. An LGU may acquire and develop land using its ordinary corporate powers (Sec. 18), though purchase of foreclosed real properties (Sec. 263) or through joint ventures (Sec. 302) with the private sector, or through build-operate and transfer scheme (BOT). Such investment in land development provides direct revenues to the LGU in terms of profits upon disposition and also in terms of enhanced property value and higher property tax base. H. Land Reclassification (Sec. 20). An LGU may reclassify at most 15% (for highly urbanized and independent component cities), 10% for component cities and first to third class municipalities, 5% for fourth to sixth class municipalities of existing agricultural lands for other uses which are deemed to have greater economic value.

Land-based Tools : 

Land-based Tools I. Land Development Permit Fee (557 and 558). The regulation of land development and subdivisions is one of the devolved functions to LGUs. In the exercise of the functions, LGUs may impose development permit fees, to cover the cost service in the process of issuance of a permit. Alternatively, LGUs may base the development permit fee on the financial impact or economic benefits to be derived from such a permit. J. Tax on Sand, Gravel and other Quarry Resources (Sec. 138). This is an ad valorem tax on ordinary stones, sand, gravel, earth and other quarry resources extracted from public lands or from beds of seas, lakes, rivers, streams, creeks, and other public waters within an LGU’s territorial jurisdiction. The tax should be no more than 10% of the fair market value in the locality per cubic meter. (Applicable only to cities and provinces)

Community Activity-based Tools : 

Community Activity-based Tools A. Business Tax (Sec. 143). Description: This is a tax imposed on various categories of business operations (manufacturer, retailer, exporter, service, etc.). The tax follows a graduated schedule based on sales or receipts of the preceding year. The LGC prescribes the graduated schedule of tax rates for the categories of business. (Applicable only to cities and municipalities) B. Community Tax (Sec. 156). This is a yearly tax on individuals and juridical persons. An individual who is at least 18 years old and is gainfully employed or is engaged in business or occupation or owns real property with assessed value of at least Php 1,000, pays the community tax to the LGU where he resides. The amount of tax is Php 5 plus Php 1 for every Php 1,000 of income from all sources, but not exceeding Php 5,000. In the case of husband and wife, the additional tax is based on their total combined properties and gross income. (Applicable only to cities and municipalities)

Community Activity-based Tools : 

Community Activity-based Tools C. Franchise Tax (Sec. 137). This is a yearly tax imposed on a business enjoying a franchise within the territorial jurisdiction of the LGU. The amount of tax is 75% of 1% of gross receipts realized within the territorial jurisdiction of the LGU during the preceding calendar year, payable within the first 20 days of January and quarterly thereafter. For a newly started business, the amount of tax is 1/20 of 1% of capital investment. (Applicable only to cities and provinces) D. Tax on Business of Printing and Publication (Sec. 136). This is a yearly tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature. The amount of tax is 50% of 1% of the gross annual receipts of the preceding calendar year. For a newly started business, the amount of tax is 1/20 of 1% of capital investment. (Applicable only to cities and provinces)

Community Activity-based Tools : 

Community Activity-based Tools E. Professional Tax (Sec. 139). This tax is imposed on the practice of a profession requiring government examination. The tax is for every profession practiced, i.e., a CPA-lawyer who practices both professions must pay for two professions. Professionals working exclusively for the government are exempt. The amount of tax is Php 300 per year and may be paid to the LGU where the professional resides. (Applicable only to cities and provinces) F. Amusement Tax (Sec. 140). This is a percentage tax on gross receipts from admissions of amusement places such as movie houses, clubs and other places of entertainment. The amount of tax should not exceed 30% of gross receipts. The time, manner, terms and conditions for payment are to be prescribed by ordinance. (Applicable only to cities and provinces)

Community Activity-based Tools : 

Community Activity-based Tools G. Annual Fixed Tax on Delivery Trucks or Vans (Sec. 141). This is an annual fixed tax for every truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of products as may be determined by the local legislative council to sales outlets or consumers whether directly or indirectly within the LGU’s jurisdiction in an amount not exceeding Php 500. (Applicable only to cities and provinces) H. Fees and Charges (Sec. 147). Municipalities and cities may impose such reasonable fees and charges on business and occupation except those reserved to the province under Sec. 139 commensurate with the cost of regulation, inspection and licensing.

Community Activity-based Tools : 

Community Activity-based Tools I. Fees for Sealing and Licensing of Weights and Measures (Sec. 148). The local legislative council may impose may levy reasonable fees for the sealing and licensing of weights and measures. (Applicable only to cities and municipalities) J. Fishery Rentals, Fees and Charges (Sec. 149). The local legislative council may grant fishery privileges within its territorial waters and impose rentals, fees or charges. (Applicable only to cities and municipalities) K Service Fees and Charges (Sec. 153). LGUs may impose and collect such reasonable fees and charges for services rendered.

Infrastructure-based Tools : 

Infrastructure-based Tools A. Special Levy (Sec 250). This is a tax imposed on lands specially benefited by public works projects which are funded by the local government. Public works projects which provide benefits to adjacent lands are roads, drainage, power transmission lines, water distribution lines, telecommunication lines. Benefits include appreciation in value, increased economic/commercial activities, reduced maintenance costs of property improvements, etc. The maximum amount of tax to be generated from a special levy is 60% of the actual project costs, which include cost of land and other real properties acquired in connection with the project. The tax liability is allocated among the real properties affected by the project in proportion to the benefits to be derived. The tax may be paid in yearly installment over at least 5 years but not more than 10 years.

Infrastructure-based Tools : 

Infrastructure-based Tools B. Toll Fees or Charges (Sec. 155). The local legislative body may prescribe the terms and conditions and fix the rate of toll fees or charges for the use of any public road, pier, waterway, bridge, ferry, including telecommunication systems funded and constructed by the local government unit. Toll fees should be commensurate with the economic benefits derived by users of the facilities. C. Public Utility Charges (Sec. 155). LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction.

Debt-based Tools : 

Debt-based Tools A. Debt Financing (Sec. 297-302). LGUs may borrow money directly from the financial/banking system- commercial or government - or other sources or through the flotation of bonds in the financial markets to fund development projects. A LGU may use its real property as collateral for such loans. In addition to loans, credits, deferred payment schemes, bond and security issues, and other forms of indebtedness, cities are now allowed to enter into BOT agreements with the private sector. B. Financial Investment (Sec 18). LGUs may invest in public or private financial instruments. Excess or idle funds may generate additional revenues through bank time deposits.

Revenue Sharing Tools : 

Revenue Sharing Tools Share in Mining, Fishery, and Forestry Taxes (Sec. 290). In addition to its IRA, LGUs shall have a 50% share in the gross collection derived by the national government from the preceding fiscal year from mining taxes, royalties, forestry and fishery charges, and such other taxes, fees, or charges plus any share that may accrue to it in any co-production, joint venture or production sharing agreement in the utilization and development of the national wealth within their territorial jurisdiction. Share in the Gross Sales or Taxes of Government-Owned and Controlled Corporations (Sec. 291). LGUs may share in the gross sales or taxes of a government-owned and controlled corporation (GOCC), if it is engaged in the development and exploitation of natural resources located in a LGU. Eighty percent, however, of the proceeds derived from the development and utilization of hydropower, geothermal, and other sources of energy shall be applied solely to lower the cost of electricity in the LGU where such energy sources are located.

Revenue Sharing Tools : 

Revenue Sharing Tools The share of the LGU is 1% of the gross sales of the preceding year or 50% of the mining taxes, royalties, forestry and fishery charges, and such other taxes, fees and charges, including related surcharges, interests, or fines the government agency or GOCC would have paid if it were not exempt. The share of the LGU is 1% of the gross sales of the preceding year or 50% of the mining taxes, royalties, forestry and fishery charges, and such other taxes, fees and charges, including related surcharges, interests, or fines the government agency or GOCC would have paid if it were not exempt. Congressional funds. Members of the House of Representatives as well as members of the Senate are allocated funds that they may allocate for development projects within their respective districts or in the case of the Senators, in any location within the country that they may so choose. Congressional funds have both “hard” and “soft” components. The infrastructure funds are for identified hard capital projects such as roads, bridges, schools, hospitals, etc. while the Priority Development Assistance Funds (PDAF) are for soft type projects such as medical expenses of indigent patients or for scholarship funds.

Probable Capital Financing Options for Philippine LGUs : 

Probable Capital Financing Options for Philippine LGUs

Factors Affecting LGU Project Financing Ability : 

Factors Affecting LGU Project Financing Ability In financial planning, the LGU must investigate the financing options and the fiscal feasibility of funding the various project requests. The number of projects that an LGU can finance generally depends on: The level of recurring future operating expenditures including that of the proposed projects. The cost recovery elements for individual projects and the potential for the public investment to be revenue generating. The availability of cost sharing by different levels of government or public-private partnerships. Debt structures and instruments (debt-carrying capacity).

Projection of LGU Development Financing Potential : 

Projection of LGU Development Financing Potential New Development Investment Financing Potential covers the 20% Development Fund and the aid to barangay projects (in case of cities and municipalities) to highlight the importance of a comprehensive planning and programming of LGU projects. The estimated investment financing potential may be directly applied on LGU projects or it may be leveraged, that is, loans contracted and the estimated financing potential used to service the loans.

LGU Revenue Forecasting Tips : 

LGU Revenue Forecasting Tips Extrapolate the various components of regular LGU income except the IRA. Apply the average annual growth rate for each revenue items for the past 5 years on the base year. For example, to project a particular revenue item from 2007 to 2010, apply the average annual growth rate from 2001 to 2006 on the 2006 value to arrive at the forecast 2007. The same growth rate can be applied on the forecast 2007 value to arrive at the 2008 forecast value, and so on. In case of the RPT, if there is a general revision of property values during any of the 5 year period for which the average is being computed, take out the growth rate for that year and just simply compute the annual average growth rate for the off-years. Extrapolate the IRA The IRA for a particular year is based on the BIR collections 3 years back. Data on actual BIR collections in previous years are available from the website of the Bureau of Treasury (www.treasury.gov.ph)

LGU Revenue Forecasting Tips : 

LGU Revenue Forecasting Tips If we want to forecast the IRA for 2007, we may apply the growth rate of BIR collections between 2003 and 2004 on the 2006 IRA to get the forecast value for 2007. The IRA for 2008 may be estimated by applying the estimated growth rate of BIR revenues between 2004 and 2005. For non-recurring LGU revenue sources Capital revenues: use LGU plans regarding the sale of property and other assets. Interest income: use Treasure’s estimate of trust funds and average balances to be maintained in deposit accounts and apply the average bank deposit rate. LGU’s share in national wealth: get information from DBM regarding what has been programmed for release for shares from economic zones, tobacco excise tax, etc. In case that there are no such information available, err on the conservative side even assuming zero values. Sum up the forecast values of the various LGU income components to arrive at forecasts of total LGU revenues.

LGU Revenue Mobilization Priorities : 

LGU Revenue Mobilization Priorities The first priority is to collect revenues that are due from the existing tax and service fee structure through: Improved local revenue collection and tax administration. This implies improving both the effectiveness and the efficiency of operations of the existing LGU revenue administration. Increasing the local tax base by improved mapping and assessment procedures. Enactment of enabling laws to tap new sources of local revenue and provide greater flexibility to establish cost-effective tax and fee rates.

Slide 44: 

LGU Investment Financing Plan Formulation Process

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan The financing plan can be formulated via a four (4) step procedure. First, project services are categorized into the following to identify cost recovery potential. a. General urban services that cover all LGU general administration/service requirements including police and firefighting services. b. Public utilities and local services, i.e., public markets, slaughterhouses, water supply systems, telecommunication systems, cemeteries, and related LGU-run utilities and services. c. Social services, i.e., health centers, nutrition programs and anti-poverty programs including livelihood training.

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan Second, the potential cost recovery sources are identified. Revenue efficiency criteria developed by the World Bank [i] suggests that: a. General urban services should be financed by local taxes. b. Public utilities and local services should be subject to various forms of user fees and charges sufficient to cover major (if not full) cost recovery options. c. Social services should be supported by national government grants. Economic enterprises (e.g., public markets, slaughterhouses, commercial centers, fish ports, transport terminals) can be financed from user fees. Most LGU capital projects cannot be completely financed from user fees, and therefore have to be financed either by local taxes, or central government grants. [i] See the World Development Report 1988, p. 159.

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan Third, the appropriate financing strategy is identified depending on whether the PDIP project is “hard” or “soft”. Two basic financing strategies are open to LGUs: i. The “pay-as-you-use” strategy, which finances improvements from future earnings. Provinces may finance these improvements from loans with a maturity that equals the life span of the facilities. If the maturity of the loan is shorter, the province can roll over the loan costs, and the investment project is paid back by user fees and taxes. . An example is an LGU borrowing money through a 7-year municipal bond float, and using the excess of future (with project) stall rental revenues over MOOE to retire the bond (pay for the loan) over a 7-year period.

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan ii. The “pay-as-you-go” strategy. In this case an LGU finances improvement expenditures from current and previous operating surpluses. This is the traditional and best known way of financing LGU infrastructure projects in the Philippines with the excess of LGU revenues over LGU expenses in the current year used to finance infrastructure outlays for the next (and even subsequent) year(s).

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan Fourth, depending on the financing strategy selected, the appropriate financing instrument is selected based on the following considerations. a. Legality – for example, LGUs cannot issue general obligation bonds to finance LGU operations as well as non-income generating projects.[i] They may however, issue revenue bonds to finance income-producing projects. LGUs may contract “loans, credits and other forms of indebtedness with any government or domestic private bank and lending institutions to finance the construction, installation, improvement, expansion, operation or maintenance of public facilities, infrastructure facilities, housing project, the acquisition of real property and the implementation of other capital investment projects subject to such terms and conditions as may be agreed upon by the local government unit and the lender.” [ii]

Formulating the Capital Investment Financing Plan : 

Formulating the Capital Investment Financing Plan Characteristics of the sources – internal or external to the provincial government, i.e., local revenues vs. borrowings and grants; currency denomination (local vs. foreign); finance cost such as borrowing rate or opportunity cost of internal funds of the provincial government; repayment period including provision of loan rollovers, other loan availment conditions including collateral, “tied-up purchases” and documentation requirements. c. Adequacy of the funds with respect to project capital and MOOE requirements. d. Impact on the LGU including economic impact such as necessary “belt tightening” measures including the deferment or even cancellation of other projects. e. Political and administrative feasibility, e.g., raising of fee and tax rates to service debt requirements; and ability to prepare elaborate project documentation requirements such as pre-feasibility and feasibility studies. [i] Sec. 299 of the 1991 LGC states that “…provinces, cities, and provincialities are hereby authorized to issue bonds, debentures, securities, collateral, notes and obligations to finance self‑liquidating, income producing development or livelihood projects…” [ii] Sec. 297 of the 1991 LGC.

Selecting Between Alternative Modes of Credit Financing : 

Selecting Between Alternative Modes of Credit Financing A BOT-type of project financing may be considered for PDIP projects where the LGU: Has no sufficient funds available for the counterpart or equity requirements (usually, 20 to 30% of total project costs). Want to maximize private sector participation. Want to “escape” from political pressures in the setting of rates as well as in the use of the facility to be financed.

Slide 52: 

Key Financial Considerations In LGU Borrowing What are the key financial issues to consider in deciding whether or not to borrow? Borrowed money is costly and has a long-term impact on the LGU’s budget. Before deciding to go ahead with a loan, an LGU should: Explore the use of less financially expensive means of financing investments such as LGU savings, beneficiary contributions like land sharing labor contributions, congressional grants and other local and foreign grants. Establish whether the LGU is eligible to tap the credit market. An LGU can tap the credit market if it is not operating on a deficit. Determine which of the proposed projects can generate future revenues to repay all or part of the loan. Economic enterprises such as markets, commercial centers, and slaughterhouses generate future revenues.

Slide 53: 

Key Financial Considerations In LGU Borrowing Analyze the LGU’s ability to repay borrowed money in future years from its own budget. Determination of the ability to pay must consider statutory debt ceilings imposed by the 1991 LGC. A. Debt service ceiling is computed in accordance with Sec. 325b of the 1991 LGC, which is 20% of Annual Regular Income for the current year. B. Annual Regular Income for the current year = Average of Locally Sourced Income for the past 3-4 years + Current Year IRA as estimated by the Department of Budget and Management (DBM) C. Debt Service Ceiling for the current year = 0.20 x Annual Regular Income for the current year. D.Net Debt Service Ceiling for the current year = Debt Service Ceiling for the current year – Debt Service for Existing Loan(s). E. To be acceptable for borrowing purposes, the debt service ceiling of an LGU has to be certified by the Department of Finance’s Bureau of Local Government Finance (DOF-BLGF). Know and understand all the terms of the loan like loan disbursement schedule, interest rate, repayment period and schedule including a so-called grace period on principal and interest, and their potential impact on the LGU’s budget.

Modes of Accessing the Credit Market : 

LGUs may responsibly access the credit market to finance vital development investment projects, especially so-called income generating and revenue-anticipating projects. Credit market options include variants of the Build-Operate-Transfer (BOT) scheme, municipal bond flotation, and direct borrowings from private and government financing institutions (GFIs) like commercial banks, specialized GFIs like the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP) and from government-managed specialized lending lines like the Municipal Development Fund (MDF). LGUs must compare the features of each mode of credit financing vis-à-vis the nature of the project to be financed and their financial circumstances. Modes of Accessing the Credit Market

Selecting Between alternative Modes of Credit Financing : 

Selecting Between alternative Modes of Credit Financing A direct loan from private or government financing institutions may be considered for the financing of projects where the LGU: Intend to use the use loan proceeds to finance vital infrastructure or development projects that are not “self-liquidating” or “directly income-generating.” Want full borrowing predictability arising from fixed loan terms in terms of interest rate and regular annual repayment periods. Do not have the capability nor the means to engage financial advisors to prepare the required feasibility studies and related project packaging requirements. Is willing to pay higher interest rates and be subjected to less flexible loan terms. Is willing to suffer opportunity losses as well as project escalation arising from delayed loan approval periods in the case of special national government-managed lending lines like those of the Municipal Development Fund (MDF).

Selecting Between alternative Modes of Credit Financing : 

Selecting Between alternative Modes of Credit Financing A municipal bond float may be considered for the financing of projects where the LGU: Intend to use the bond proceeds to finance self-liquidating and directly income generating projects. Want to have the option of taking advantage of anticipated downward tends in interest rates. Want to maximize their discretion in the design of the project as well as the financing terms, especially the repayment period — they may opt for regular equal payments or for a balloon payment at the end. Have the capability or the means to engage financial advisors to prepare the required feasibility studies and related project packaging requirements. Want to encourage citizen participation as well as increased citizen savings through bond retail sales to its constituency.

Comparative Features of Potential LGU Credit Sources : 

Comparative Features of Potential LGU Credit Sources

Comparative Features of Potential LGU Credit Sources : 

Comparative Features of Potential LGU Credit Sources

LGU Project Cost Recovery Guidelines : 

LGU Project Cost Recovery Guidelines Key policy issue: Whether to price a local government service so that it recovers all or only a portion of the cost of the service. In most developing countries, it is common practice to recover only part of the cost through service charges or user fees, with the remainder subsidized by general (tax) revenues. Under most circumstances, LGU enterprise services should be priced at full cost, which includes both direct (production and distribution) and indirect costs associated with service provision. In certain cases like LGU owned utilities, a reasonable return on investment is legally and administratively justifiable. For social goods and services, a partial subsidy is usually warranted.

LGU Project Cost Recovery Guidelines : 

LGU Project Cost Recovery Guidelines

LGU Project Cost Recovery Guidelines : 

LGU Project Cost Recovery Guidelines When should a subsidy be provided? For social services, partial cost pricing is justified when any of the following conditions exists: Some of the benefits from the service accrue to the whole community. For example, public library services, parks, recreational facilities, inoculations, sanitary landfills The LGU wants to stimulate demand for the service. For example, if the LGU wants to encourage the use of a park ground or recreational area, it can do so by fully subsidizing its operations from general taxes or possibly by charging a token fee for users.

LGU Project Cost Recovery Guidelines : 

LGU Project Cost Recovery Guidelines Enforcement of the charge at full cost would result in widespread evasion. For example, full cost charging for the required HIV tests among commercial sex workers may provide additional incentive for these workers to evade such tests. Partial cost pricing may be justified under such circumstances. The service is used primarily by low-income households. For example, the construction of public faucets or public artesian wells in low-income communities should be subsidized by LGUs. The payment for actual water consumption from such public taps or the operations and maintenance costs of such public wells should, however, be borne by the communities. For such services to low-income communities, access should be subsidized, but the cost of use should be fully recovered.

LGU Project Cost Recovery Guidelines : 

LGU Project Cost Recovery Guidelines How much of a subsidy should be provided? Scoring method for setting the proportion of the full cost of a public service that is appropriately recovered from project beneficiaries or users:

Slide 64: 

Instructions for Scoring: Evaluate each service according to the seven questions. Each “Yes“ answer is assigned the full weight (Weight multiplied by 1) from the Weight Column. Each “No” answer counts as zero. Thus, the score per question is either the full weight or zero (0). Get the sum of all the scores. The total score indicates the percentage of the full cost of the service that should be borne by service charges to be paid by beneficiaries or users. A total score of 100 indicate that there should be full-cost recovery from beneficiaries or users. A total score that is less than 100 indicate that a certain amount of LGU subsidy is appropriate for the project. The proportion of the appropriate subsidy is equal to 100 less the total score. Each LGU may change the weights or even some of the questions based on the preferences and values of its constituents. The total of the weights must, however, always be 100. LGU Project Cost Recovery Guidelines

Slide 65: 

Project B has 40% cost recovery and 60% subsidy mix. 80% of Project E would have to be recovered through user fees and charges, and the remaining 20% subsidized by the LGU. LGU Project Cost Recovery Guidelines

Target: Combined Utilization of Assets in LGU Capital Investments : 

Target: Combined Utilization of Assets in LGU Capital Investments Local authority and administration Involves planning, regulation and construction permit administration. Physical Infrastructure including LGU property Physical infrastructure is a crucial condition for urban development. Fiscal measures and financial management techniques Provide direct linkages between the local budget and property owners and service users through revenue policy. Local governments control capital investment programs and financing schemes, which are important assets if used efficiently for the purposes of urban development.

Property Tax Increase and Improved Businesses : 

Property Tax Increase and Improved Businesses

New Development and Local Revenues : 

New Development and Local Revenues

Spiral LGU Development and Property Values : 

Spiral LGU Development and Property Values

CAGAYAN TOWN CENTER: ECONOMIC ENTERPRISE AS A LEVER FOR MOVING THE PROVINCE : 

CAGAYAN TOWN CENTER: ECONOMIC ENTERPRISE AS A LEVER FOR MOVING THE PROVINCE This case illustrates how a province can take advantage of a strategically-located idle property within a component city, and commercially redevelop it, making it a lever to help move the province.

Investment Programming Process:Choosing “What” and “When” : 

Investment Programming Process:Choosing “What” and “When” The Cagayan Town Center had already been explored as a project as early as the late 1980s when discussions arose on the possible uses of the said provincial property. The provincial government observed that there is a high demand for a commercial complex in Tuguegarao. It saw an opportunity to capture the expenditure leakages of the residents, who travel to as far south as Ilagan and Santiago (both in Isabela) for goods and services, through the establishment of its own commercial complex. The dream town center project started to materialize when it was formally included as a priority project in the 1999-2005 Capital Investment Program since it was proposed in the province’s Provincial Development Plan (PDP). The project was eventually proposed in the Annual Investment Plan for 2000. The project has undergone a process of project screening conducted by the Local Finance Committee (LFC).

Investment Programming Process: Choosing “What” and “When” : 

Investment Programming Process: Choosing “What” and “When” The Finance Committee, composed of the Provincial Planning and Development Coordinator (PPDC), the Provincial Treasurer, the Provincial Budget Officer, and the Provincial Accountant, meets quarterly to draw up the CIP. All projects to be funded have to be recommended by the LFC for it to be forwarded to the Sangguniang Panlalawigan for funding consideration. This policy was imposed by Governor Edgar Lara to ensure that each project was being carefully studied by the Finance Committee. The LFC was also assigned to defend the projects before the Council.

Investment Programming Process: Choosing “What” and “When” : 

Investment Programming Process: Choosing “What” and “When” Governor Lara’s administration gave priority to infrastructure projects for the province, such as construction of provincial roads and other infrastructure utilities which would improve access of rural areas to urban services as well as commercial center which would provide a venue for the promotion and marketing of Cagayan’s major industry sector. Other projects included in the provincial development plan were social service-related programs which included those that supported the major development agenda of the national government such as poverty alleviation programs.

The Proposed New Cagayan Town Center: A Candle Waiting to be Set Alight : 

The Proposed New Cagayan Town Center: A Candle Waiting to be Set Alight The New Cagayan Town Center aimed to capitalize on Tuguegarao’s strategic advantages. A government owned property which housed the old and unused provincial hospital building located in the heart of Tuguegarao City’s Central Business District (CBD) became the site of the proposed new civic center and commercial complex. The site is centrally located within the CBD just fronting St. Peter’s Cathedral, and within walking distance from most of the schools and offices.

The Proposed New Cagayan Town Center : 

The Proposed New Cagayan Town Center The New Cagayan Town Center Project was envisioned to have a trade hall which would serve as the venue for the promotion and marketing of the Province’s agro-industrial sectors. The agro-industrial sector has developed various industries, i.e., wood furniture, gifts, toys and housewares, ceramics and dried flowers, food processing, metal works, and bamboo crafts. The project would also complement the Kabuhayan 2000 Program of the Province which focused on production of rattan products, fossilized flower products and processed food products (dried mango and mango juice). Finally, the town center would also cater to the space needs of the growing number of business establishments in the province and at the same time generate additional revenue for the Province.

Leveraging the IRA through an LGU Bond Float: Using a Long Lever to Move the Project Along : 

Leveraging the IRA through an LGU Bond Float: Using a Long Lever to Move the Project Along As of 2002, Cagayan Province had total annual revenues amounting to Php 825.8 million. However, only 7.24% came from locally sourced funds, 88.05% was contributed by the IRA and only a total of 4.71% came from other income sources of the province. For locally sourced of funds, 37.7% came from economic enterprises and 37.03 % from real property taxes. The Bureau of Local Government Finance (BLGF) certified that Cagayan had a Php 500 million debt capacity.

Leveraging the IRA through an LGU Bond Float: Using a Long Lever to Move the Project Along : 

Leveraging the IRA through an LGU Bond Float: Using a Long Lever to Move the Project Along Given the strategic and revenue value of the proposed project, the provincial government decided to leverage its IRA-dependent income by floating a 7-year Php 205 million bond to finance the New Cagayan Town Center Project. The final project finance mix is as follows: Total project cost : Php 213.8 Million Bond float proceeds : Php 205.0 Million Provincial government equity: Php 8.8 Million On October 30, 2003, the Php 205 Million Cagayan Provincial Bonds were issued by the Provincial Government of Cagayan to finance the planning, design, construction and site development of the Cagayan Town Center Project

Preparations for Project Operations: Keeping the Candle Alight : 

Preparations for Project Operations: Keeping the Candle Alight To operate and manage the new Cagayan Town Center along with the other provincial economic enterprises, an Economic Enterprise Office was created by the provincial government. The newly created Economic Enterprise Office manages the operation of the following provincial income-generating projects: a) fingerlings production, b) heavy equipment rental; and c) New Cagayan Town Center. The office hired a private marketing arm responsible for the promotion of the town center. This marketing arm also handles the screening of interested lessees of the town center’s commercial spaces which include banks (ATM machines), groceries, and boutique owners. The provincial government will contract out the maintenance of the building including janitorial and security services.

Future Directions: Moving from Candle to Incandescent Bulb : 

Future Directions: Moving from Candle to Incandescent Bulb Given the potential income from the project, the provincial government is considering the option of retiring the bonds earlier than 2010. This is to finance a convention center project through bond flotation again. A 60-ha. land had been donated to the provincial government and 1.5 has. of this was allocated for the proposed project. Another option now being considered by the provincial government is the construction of a government complex with a convention center. Being the institutional center of the region, Cagayan is home to all regional offices of various national agencies. However, these agencies are renting office spaces for as much as Php 150,000 per month.

Future Directions: Moving from Candle to Incandescent Bulb : 

Future Directions: Moving from Candle to Incandescent Bulb The DPWH Regional Director suggested that the provincial government develop a government center since the province has the capacity to finance such development compared to all other national agencies. The DPWH offered to prepare a development plan for the 60-ha. property which would include a regional government complex with a convention center component. Other regional offices proposed that the provincial government consider contracting out the complex’s buildings to them in rent-to-own terms. The regional offices would then use their monthly rental allocation to pay for their amortization payments to the Cagayan provincial government.

Lessons Learned : 

Lessons Learned Commercially-oriented projects are best identified via a strategic assessment of the market. Project planning should always be market- or demand-oriented to ensure that what is financed and built will be of a scale and quality that potential users will be able and willing to pay for. LGUs should not waste their “IRA boon”, but instead leverage their IRA to finance strategic income-generating and revenue-anticipating capital investment projects. Through such a leveraging process, they could eventually wean themselves away from their current IRA dependence, and move towards a higher degree of self-reliance and more efficient modes of revenue mobilization.

Lessons Learned : 

Lessons Learned Separate economic enterprise offices with separate books of accounts are necessary for LGUs to properly manage their growing portfolio of so-called economic enterprises. This will allow for greater accountability and transparency in the way economic enterprises are being run. Even with well functioning economic enterprise offices, LGUs should consider the use of the private sector to supply certain services like marketing, security, janitorial, and maintenance services where the private sector has comparative advantages in terms of efficiency and cost. Investment programming should be a rolling and future-oriented process. Well-planned LGU development project packages do not need government guarantees. In the case of the Cagayan Town Center, the guarantee was provided by a private insurance company, the Malayan Insurance Company.

Slide 84: 

The New Cagayan Town Center

Financing Modalities for LGU Capital Investments(With Focus on Public Enterprises) : 

Financing Modalities for LGU Capital Investments(With Focus on Public Enterprises)