VB Enhanced Devt Fin Challenges Presentation-1

MAKATI: ECONOMIC AND DEVELOPMENT FINANCE CHALLENGES: 

MAKATI: ECONOMIC AND DEVELOPMENT FINANCE CHALLENGES PROS Planning Team for the Economic Development, Finance Management and Administrative Services Sectors

Outline of Presentation: 

Outline of Presentation Makati’s Economy: Growth Performance, Issues and Challenges Growth Performance Economic Growth Challenges Supporting Future Economic Growth Economic Sector Goals, Objectives, Targets, Strategies, Projects Public Finance Performance and Recommendations Financing Makati’s Development Investment Requirements Workshop Tasks

Makati’s Economy: Growth Performance and Challenges: 

Summary presentation of trends in the city’s economic base, key growth drivers, and strategies for consideration by the city government Makati’s Economy: Growth Performance and Challenges

Makati’s Economic Growth Performance: 

Makati’s Economic Growth Performance Makati’s economic base, primarily focused on trade, services, real estate and finance related businesses located within the city’s CBD, steadily grew from an annual growth rate of nearly 3% between 1997 and 2007 to an average of 4% between 1998 and 2010. The steady growth rate reflects the competitive advantages of Makati as a business center: Geographic location of Makati at the center of Metro Manila. Good connection by land transport corridors to the country’s major air and sea gateways, and other urban activity centers in the fast growing Central Luzon and CALABARZON regions. Agglomeration economies arising from its well-planned and maintained CBD --- the country’s financial center well complimented by “world-class” shopping centers, centers of higher education, and residential areas. Decades of good local governance that is friendly to business.

Makati’s Economic Growth Challenges: 

Makati’s Economic Growth Challenges The lagging behind of the growth of business establishments in the city to the overall national economic growth (growth elasticity of business establishments to GNI = 0.55) mainly due to the competitive pressures of emerging CBDs in Metro Manila and in regional centers in the Visayas and Mindanao. Between 2011 and 2013, new office space in the Makati CBD is expected to increase by 134.0 thousand sq.m. On the other hand, office spaces within Bonifacio Global City, Ortigas, Eastwood, Alabang, and other Metro Manila locations will increase by nearly 5 times at 625.7 thousand sq.m. Business process outsourcing operations (BPO) are rapidly rising up in Metro Cebu, Bacolod, Iloilo, Cagayan de Oro, and Davao City with their cheaper labor, rental rates and more pleasant living environments.

Makati’s Economic Growth Challenges: 

Makati’s Economic Growth Challenges Unlike most cities and municipalities in the Philippines, whose primary concerns revolve mostly around local development issues, the major economic challenges facing Makati City are how: (a) to enhance its role as the premier central business district, not only of the country but of the entire Southeast Asian region, amidst competition from other business districts, and (b) to ensure that its residents (such as urban poor, middle class, large taxpayers) share in the benefits as well as the responsibilities of this role. In order to address these challenges, there is a need to anticipate and provide for future growth requirements , and to continuously upgrade local service capacities and improve the overall physical environment .

Supporting Future Economic Growth: 

Supporting Future Economic Growth The investment climate should be further enhanced to ensure that the city remains to be desirable as a business location. The city could look into its set of investment incentives. There is a need to anticipate and provide for future growth requirements, continuously upgrade local service capacities, and improve the overall physical environment in order to attract and retain cutting edge service functions and the highest value added activities and land uses. Examples include: The so-called Makati Loop Project City’s drainage and sewerage system, the inadequacy of which was identified as a major concern in the city’ disaster risk reduction management (DRRM) program

Supporting Future Economic Growth: 

Supporting Future Economic Growth The continued growth of Makati City will also depend on improving the physical and social environment, so that it conforms to international standards, and the availability of cultural, leisure, and recreational amenities. Governance, resident behavior, and physical amenities must be properly matched to the desired level of city development. innovative forms of public-private–partnerships (PPP) to address the financial requirements of massive infrastructure retrofitting requirements of the city should be explored.

Supporting Future Economic Growth: 

Supporting Future Economic Growth To ensure that the various classes of Makati residents share in the benefits and responsibilities: Activities and properties from which fees/charges and /or taxes can be imposed should be properly identified, assessed and fees/taxes due properly collected. At the same time, bulk of the revenue collections should be recycled back to retrofit and continually operate/maintain city infrastructures, utilities and services. Properly focused skills upgrading and training programs should be implemented especially among the city’s low income population to make the city economic growth more inclusive by giving them a fair chance of landing jobs in the business enterprises located in the city or operating their own small businesses catering to the city’s huge day time population.

Economic sector goals, objectives, strategies, projects: 

Summary presentation of economic goals, objectives, strategies, and projects. Economic sector goals, objectives, strategies, projects

Overall Economy: 

Overall Economy Goal Attain high, sustained and inclusive economic growth and development. Objectives Maintain Makati City’s primacy as the financial, commercial, and services center of the country. Increase local participation in the city’s economic activities. To ensure that the various classes of Makati residents share in the benefits and responsibilities.

Overall Economy: 

Overall Economy Strategies Makati City is facing competition from alternative business districts -- Taguig, Mandaluyong, Pasig, Quezon City. The growth of these alternative CBDs are products of the growth of the metropolitan and national economies, which have reached levels that cannot be served by a single CBD. What is critical for Makati is that it remains as the primary CBD, linked to and serving other business districts of the country, and retaining the highest value added activities and land uses. Key to this strategic objective is managing the growth of Makati such that it provides the necessary physical and social environment to host cutting edge service functions.

Overall Economy: 

Overall Economy Strategies Promote and implement hard and soft infrastructure projects needed to support existing business activities and future growth. Encourage and provide cost-effective incentives to industries involved in information technology and business process outsourcing to locate in Makati City. Orient local educational, skills, and employment training programs towards the requirements of business and commercial activities including information technology industries.

Overall Economy: 

Overall Economy Strategies Improve and enhance the quality of the physical environment (e.g. air quality, greenery, waste management, etc.) in order to make Makati City competitive locally and with other financial capitals of Asia. Enhance the cultural, educational, leisure, and recreational needs of the resident and visitor population. Enhance fee-based cost recovery for city services and utilities where beneficiaries can be properly identified and cost effectively charged for availed services to ensure longer term sustainability in terms of quantity and quality of services rendered.

Overall Economy: 

Overall Economy Strategies Leverage the city’s financial and human resources and its locational advantages to encourage the development of growth industries. For example, enhanced city and improved educational program focused on the industry-desired skills would be an incentive to potential locators. With its huge LGU financial resource base, the city can afford to extend financial incentives to desired business locators and financial support to small and medium scale enterprise (SMEs) and cooperatives to ensure inclusive growth. Appropriate rezoning of well-located property areas would attract potential locators who wish to take advantage of the agglomerative benefits of the Makati CBD.

Trade and Industry Subsector: 

Trade and Industry Subsector Objectives Strengthen Makati City’s role as the business, financial, and services center of the country. Promote the development of small and medium scale enterprises. Targets Reduce by half the processing time and related transaction costs of registration, licensing, and permits by end of planning period. Double the number of small and medium scale enterprises by end of planning period. Attain an overall business density ratio of 116 establishments per 1,000 population by end of planning period from the 2010 level of 103 establishments per 1,000 population.

Trade and Industry Subsector: 

Trade and Industry Subsector Strategies Intensify tax mapping of establishments and updating of tax records and assessment. Formulate and effectively implement a development-oriented land use and zoning plan. Enhance and refocus the city’s HRD programs to make it supportive of the skill requirements of existing and potential locators. Strengthen linkages with trade and industry associations for job placements. Provide an investment atmosphere suitable for the development of small and medium scale enterprises. Implement online business permits and licensing system.

Trade and Industry Subsector: 

Trade and Industry Subsector Projects Prepare Investments Incentives Code Intensified Manpower Training Program Enhanced Cooperative-Related Livelihood Program Inventory of Skills Requirements of Existing and Potential Locators Intensified Job Placement Program Information, Education, and Communication Program

Tourism Subsector: 

Tourism Subsector Objectives Increase the number of visitor arrivals. Upgrade existing tourist attractions and facilities. Target Increase the number of visitor arrivals by 3% annually.

Tourism Subsector: 

Tourism Subsector Strategies Tap the private sector for cost-sharing schemes. Strengthen the City Tourism Council. Projects Inventory of Existing Tourist Sites Development of New Tourist Sites Establishment of Tourist Assistance Centers Development of Collaterals

Makati’s public finance performance and recommendations: 

Summary presentation of Makati’s public finance trends and available development investment financing toolkit. Makati’s public finance performance and recommendations

Public Finance Performance: 

Public Finance Performance

Public Finance Performance: 

Public Finance Performance

Public Finance Performance: 

Public Finance Performance This trend could be exacerbated by the city’s expenditure policy of continuous social service subsidies, which do not benefit its big taxpayers. In 2010, the city spent for its socially-oriented programs more than a third of its budget (34.1%) while spending only 17.5% for vital urban functions as economic development, infrastructure development, environmental management, finance management and protective services which most of the city’s taxpayers view as “remunerative” for the taxes and charges that they pay. Under-spending in these sectors could also further worsen the city’s urban growth-related problems which could discourage growth in property values as well as business growth. In the long-term, even existing taxpayers may find the city’s taxes “oppressive” vis-à-vis the services that they get if the city continues to underspend on sectors that are vital to proper urban growth management.

Recommendations: 

Recommendations Short-term: In the short-term, the city should religiously implement the updating of the city’s Schedule of Market Values (SMV). The SMV should be treated as a technical exercise properly reflecting actual market values. If adjustments need to be made to address potential taxpayer resistance, the adjustment can be done on the assessment levels and tax rates. Valuation should be considered as a technical exercise and taxation via the assessment level and the tax rate a political exercise.

Recommendations: 

Recommendations Short term: In the short-term, the city should conduct vigorous business tax mapping including: (a) analysis of Manila Water and MERALCO data to identify commercial and industrial establishments and gauge the scale of operations of existing and new business establishments; (b) utilize the cost-effective exercise of visitorial powers by the city treasurer; (c) access the BIR tax declaration data of existing business taxpayers; and (d) consider the use of presumptive business taxation for the assessment of business taxes using proxy business scale data.

Recommendations: 

Recommendations Long term: Revisit expenditure priorities to: effect a more balanced budgeting between proper urban growth needs and social orientation to address the property and business taxpayer willingness-to-pay; attract new businesses; and increase the market values of real properties in the city. The key is for existing and future taxpayers to view city taxes as remunerative rather than oppressive.

Recommendations: 

Recommendations

Financing Makati’s Development Investment Requirements: 

Summary presentation of Makati’s public finance trends and available development investment financing toolkit. Financing Makati’s Development Investment Requirements

Role of Service Delivery: 

Service delivery is the cornerstone of city governance The reliability, quality and cost efficiency of equitable services to all areas of the city — wealthy and poor — is the primary responsibility of local government, and is the most tangible result for which the community will hold their elected officials accountable. Pricing especially as it affects the poor The 1991 LGC enabled LGUs to better manage service delivery by having the autonomy to set tariffs and user fees and access other finance mechanisms; to determine the mix and level of services; and to design efficient delivery methods including the private sector. Service delivery quantity /quality Role of Service Delivery

LGU Revenue Source-Expenditure Matching: 

LGU Revenue Source-Expenditure Matching For an LGU to be able to efficiently raise revenues, it must be able to properly match its expenditure programs with the corresponding revenue source such that the matching is perceived by taxpayers to be equitable . The efficiency of LGUs in raising revenues can be judged based on the following 4 criteria: The cost of providing local services should be recovered to the extent possible from fees and charges on the beneficiaries; Services whose costs cannot be recovered from fees and charges can be financed from general taxes ; Social services , whose benefits generally spill over to produce national benefits, should be financed by grants from the national government ; Borrowing is an effective and equitable way of raising capital investment finance.

LGU Revenue Source-Expenditure Matching: 

LGU Revenue Source-Expenditure Matching

City Revenue Source-Expenditure Matching: 

The tax revenue ratios for all Metro Manila cities including Makati are all much higher that the corresponding expenditure ratio for general public services. At the same time, the ratio of fees, charges and borrowings to total expenditure are much lower than that of the combined expenditure for economic services and borrowings. This indicate that there is under-recovery in terms of fees and charges from direct beneficiaries, and that such under-recovery is covered by local tax revenues. Issue of equity with all taxpayers sharing in the cost of economic services that some or many of them may not have benefitted from. Issue of efficiency in the use of the service. Efficiency is promoted when the price of the service is set at a level related to the cost of providing the service . City Revenue Source-Expenditure Matching

Important Considerations in Financing Investment Requirements: 

Important Considerations in Financing Investment Requirements

Financing Policies: 

Financing Policies Key policy issue that must be addressed: the methods of financing. The policies must be developed within the overall planning, financial, institutional and legal framework governing the operations of LGUs, especially the 1991 LGC. For example, LGUs must continuously operate within the framework of a balanced budget, and that borrowings are not allowed for LGUs with deficits. The 1991 LGC also limits bond flotation to revenue bonds or bonds the repayment for which are tied up to project revenues. Thus, the city cannot put as a policy that bond flotation will be resorted to finance a non-revenue generating social project.

Financing Policies: 

Financing Policies Examples of financing policies: Approximately 6% of the annual regular revenues of the province will be allocated for CIP project financing. The amount from the annual regular revenues available for CIP projects will be leveraged via direct loans or bond float. Land-readjustment and special assessment will be major cost recovery tools for urban road and drainage projects. There will be full cost recovery for economic enterprise projects under the CIP.

Financing Strategy: Pay-as-you-go v.s. Pay-as-you-use: 

Financing Strategy: Pay-as-you-go v.s. Pay-as-you-use Pay-as-you-go Strategy In this case a city 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). Pay-as-you-use Strategy A city finances improvements from future earnings . Cities may finance these improvements from loans with a maturity that equals the life span of the facilities. An example is a city borrowing money through a 7-year city bond float or a direct bank loan, and using the excess of future (with project) city convention center rental revenues over MOOE to retire the bond (pay for the loan) over a 7-year period.

Financing Instruments: 

Financing Instruments Alternative investment funding sources: a. Current regular local revenues (local taxes, fees and charges, reserves, surpluses, IRA); b. Borrowings – direct loans, lease financing and bond proceeds; c. 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; d. Capital income from sales or use of LGU assets;

Financing Instruments: 

Financing Instruments e. Cost recovery elements for individual projects and the potential for the public investment to be revenue generating including user fees and charges, special levies and taxation of future benefits ; f. Cost sharing with other LGUs or with the national government; g. Public-private partnerships ; or h. Combinations of the above.

Consideration in the Selection of the Financing Instrument: 

Consideration in the Selection of the Financing Instrument 1. Legality – for example, LGUs cannot issue general obligation bonds to finance LGU operations as well as non-income generating projects. 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.”

Consideration in the Selection of the Financing Instrument: 

Consideration in the Selection of the Financing Instrument 2. Characteristics of the sources – internal or external to the LGU, 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 LGU; repayment period including provision of loan rollovers, other loan availment conditions including collateral, “tied-up purchases” and documentation requirements. 3. Adequacy of the funds with respect to project capital and MOOE requirements.

Consideration in the Selection of the Financing Instrument: 

Consideration in the Selection of the Financing Instrument 4. 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. 5. Impact on the city including economic impact such as necessary “belt tightening” measures including the deferment or even cancellation of other projects.

City Investment Plan Formulation Process: 

City Investment Plan Formulation Process

WORKSHOP TASKS: 

Things to be discussed and resolved during the Workshop WORKSHOP TASKS

Workshop Tasks: 

Workshop Tasks Formulate Policies Formulate Financing Strategies by Project Type Identify Financing Instrument by Project