The Sub-National Debt in The Philippines

The views expressed in this presentation are the views of the author and do not necessarily reflect the
views or policies of the Asian Development Bank Institute

(ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included
in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
Credit Financing for Local Development

The Subnational Debt in the Philippines
NIÑO B. ALVINA, Bureau of Local Government Finance, Department of Finance
ADBI 20th Annual Conference | Managing Private and Local Government Debt in Asia | 30 N ovember 2017 | ADB Institute, Tokyo, Japan
Outline of Presentation
1 Introduction
2 Policy and Legal Framework
3 BLGF Debt Capacity Certification
4 Subnational Debt Profile and Trends
5 Proposed Creditworthiness Rating Index
6 Conclusions and Recommendations
ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 2

Introduction
Decentralized fiscal governance

• Long history of fiscal
decentralization Provinces (81)
• Evolving policy frameworks over Municipalities Component

(1,489) Cities (107)
time that has broadened the local
autonomy and political landscapes Barangays Barangays
Local Autonomy Act of 1959: RA N o. 2264

Decentralization Act of 1967: RA N o. 5185
Independent Cities (38)
Local Government Code of 1983: BP N o. 337
Highly Urbanized Cities (33)
Local Government Code of 1991: RA N o. 7160 Independent Component Cities (5)
• Demands for efficient public service Barangays

delivery: 7,107+ islands; 81 Provinces;
145 Cities; 1,489 Municipalities; 42,036
Villages
Introduction
Revenue assignments
• Local governments have broader taxing and revenue generation powers
Tax Base Prov City Muni Brgy

• May impos e regulatory
Business x ✓ ✓ x fees and us er charges
Real Property; Sand, gravel and • Largely fixed (with
✓ ✓ Shared Shared
other quarry resources maximum rates /ceilings )
and not indexed to
Idle Land; Real Property
inflation
transfers; Printing and
✓ ✓ x x • Tax rates can only be
publication; Delivery vans and
trucks; Professionals; Franchise adjusted up to 10% and
once every 5 years
Amusement Places ✓ ✓ Shared
• R ates /levies mus t be
Community Tax x ✓ ✓ Shared legis lated through local
council

Introduction
Expenditure responsibilities
Devolved Basic Services, Facilities, and Functions Prov City Muni Bgy
Agricultural research extensions and on-site research services ✓ ✓ ✓
Social welfare services ✓ ✓ ✓
Tourism facilities and promotions ✓ ✓ ✓
Enforcement of forestry laws ✓ ✓
Hospitals and tertiary health services ✓ ✓
Infrastructure funded from provincial funds ✓ ✓
Investment support services, industrial research and development services ✓ ✓
Low-cost housing ✓ ✓
Telecommunication services for provinces and cities ✓ ✓
Adequate communication and transportation facilities ✓
Support services and facilities for education, police and fire protection ✓
Community-based forestry projects and management of communal forests ✓ ✓
Primary health care services and access to secondary and tertiary health services ✓ ✓
Public works and infrastructure projects funded out of local funds ✓ ✓
School building projects ✓ ✓
Solid waste disposal system and environmental management system ✓ ✓
Information services and reading center ✓ ✓ ✓
Agricultural support services including collection of produce and buying stations ✓
Health center and day care center ✓
Roads and infrastructure funded by the barangay ✓
Solid waste collection ✓
Village justice system ✓
Introduction
Funding development: a major challenge

•Financing cater to high-income LGUs
• Declaration of Martial Law • Widespread LGU loan 1990s
1970s 1980s •Rapid GFI lending
• Oil Price Shock payment defaults
•Asian Financial Crisis
Pres idential Decree No. 752 1987 Constitution
Article X - Local Government 1991 Local Government Code
1993 New Central Bank Act
1996 LGU Financing
Historical Bank Average Lending Rate (%) Framework
•Global financial crisis
30.000 2000s •Expanding need for local capital
28.23
25.000
investments
24.32
20.000
DOF LFC No. 1-2000
19.33 19.43
17.12
18.39 BSP Circular Letter s. 2002
15.000
14.00
Executive Order No. 809
13.30 14.56 12.40
10.000 12.00 10.07 •Low IRA, drop in borrowings in 2012
8.90 8.76
6.63
5.64 2010s •Typhoon Yolanda
5.000
DOF LFC No. 1-2012
0.000
BSP Circular No. 769 s. 2012
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
DOF DO No. 054.2016
BSP Circular No. 926 s. 2016
DOF DC No. 1.2017
Introduction
From low level of capacity to
increased revenue performance and service delivery
a challenge to most local governments…

Introduction
Fiscal and financial performance of LGUs

LGU Income & Expenditure: FY1972 - FY2016 Local Income to GDP Ratio: FY1972 - FY2016
600 1.5%
T otal Income T otal Expenditures
500
400 1.0%
300 Local Election Year
200 0.5%
100
- 0.0%
'72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14

Introduction
Varying degrees of dependency on national transfers

Other External
Sources; 3.4%
Other Loans, 2.3%, Other Non-
External Income
Sources; 4%; Loans, 3.7%
Receipts;
1.5%; Other
Provinces Non-
Income
Receipts;
3.6% Other Non-
Loans, 2.1% Income
Cities Local
Receipts,
Sources; Local
IRA; 72% 2.3%
17% Other Sources;
External 17%;
Sources;
Local 5.8%;
Sources,
IRA, 41% 51%,
Munici-
• LGUs receive 40% share from internal revenue taxes palities
• Better tax effort means more IRA, adds pressure on local collection capacity
• LGUs’ own-source revenue capacity depends on assigned taxing mandates IRA; 73%;

Introduction
Comparative Performance of LGU Fiscal Sustainability Ratings
Provinces Cities Municipalities
LGUs with very high IRA dependence generally are below the local income growth benchmarks
Big cities, capital towns, and rich provinces cluster above the benchmarks on local collection growth, IRA dependence

Policy Thrust and Legal Framework
Subnational Debt Policy

to Support Local Financing
• 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
• N ational Government has to manage LGU debts to:

• Prevent a systemic LGU debt crisis that could force the N ational
Government to bail out heavily indebted LGUs;
• Strengthen the implementation of the statutory limit on LGU debts; and
• Promote responsible and credible debt management among LGUs.

Legal Framework of Subnational Debts in the Philippines
• Sec. 296 of LGC; Art. 395d of 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 LGC: Appropriations of 20% of the LGU’s regular income for debt servicing
• Art. 403 of LGC-IRR: DOF 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. 127: BLGF 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

LIMITED PURPOSES
Forms of Local Indebtedness  Construction, installation, improvement, expansion,
o Loans, Credits and Other Forms of operation, or maintenance of public facilities,
Indebtedness infrastructure facilities, housing projects, acquisition of
real property, and the implementation of other capital
o Deferred Payment and Other Financial
investment projects
Schemes
 Establishment, development, or expansion of agricultural,
o Bonds and Other Long-Term
industrial, commercial, house financing projects,
Securities
livelihood projects, and other economic enterprises
o Inter-Local Government Loans,
 Acquire property, plant, machinery, equipment, and such
Grants, and Other Subsidies
necessary accessories
o Loans from funds secured by National
 Finance self-liquidating, income-producing development
Government from foreign sources
or livelihood projects

13
DOF LGU Financing Framework

Creditworthy LGUs: 1st - 3rd Income Clas s
3 1
GFI Loans BOT Projects Bonds
MDF Loans Commercial Bank/GFI Loans
Limited MDF Grants
Social/ Revenue
Environmental Generating
Projects Projects
4 2
MDF Loans BOT Projects
Grants and TA GFI Loans and TA
Limited MDF Loans and TA
Marginal or Non-Creditworthy LGUs: 4th - 6th Income

Clas s

DOF LGU Financing Framework
Strengths and Weaknesses
• Recognition of disparities • No ex-post administrative or

among LGUs judicial rules
• Clarity of designated plans • Lack of strong monitoring
• Underscores grants and and regulatory framework
technical assistance to • Lack of creditworthiness
marginal LGUs index

LGU Loan Application Process Flow
Existing ex-ante control and regulations

DOF/BLGF Regulations
• LGU debt service ceiling and net
 Local Finance Circular (LFC) No. 1-2000: issued to enhance the
borrowing capacity determined access of all LGUs to credits and other forms of
and certified by BLGF indebtedness
• Favorable Monetary Board opinion  LFC No. 01-2012: Amended the previous LFC to ensure a
on the monetary and balance of more accurate and appropriate evaluation of the maximum
payments implications borrowing and debt servicing capacities of all LGUs
• Local legislative authorization and  LFC No. 01-2014: Reduced requirements for 171 LGUs
inclusion in the annual investment affected by Typhoon Yolanda, from 12 to 4 requirements,
and extending the validity by 1 year
plans and priorities are required
 DOF Department Order No. 54.2016: Streamlined requirements
and process: 4 documents; Well-defined computational
parameters; Improved certification process; Verification/
validation delegated to BLGF Regional Offices


BSP Monetary Board Regulations
 Circular No. 402: Revised Guidelines on the Flotation of
borrowing capacity determined and Bonds by LGUs Without NG Guarantee in 2003
certified by BLGF
 Circular Letter No. CL-2008-050: Reminder to all banks on prior
• Favorable Monetary Board opinion MB Opinion under Sec. 123 of R.A. No. 7653;
on the monetary and balance of
payments implications  Circular No. 769: 2012 Guidelines on Requests for MB
Opinion of Proposed Domestic Borrowings by LGUs
• Local legislative authorization and
inclusion in the annual investment  Circular No. 797: Enforcement Actions on Banks in Relation to
Sec.123 of R.A. No. 7653 (2013)
plans and priorities are required
 Circular No. 819: 2013 Amendments to Circular No. 769
 Circular No. 926: 2016 Guidelines in Processing Requests for
MB Opinion


Requirements for LGUs
Bonds and loans require approval of the local legislative council
borrowing capacity determined and
certified by BLGF  Local chief executive must be authorized by the local legislative
council through a Resolution to negotiate, enter into, and sign
• Favorable Monetary Board opinion
contracts for and in behalf of the local government
on the monetary and balance of
payments implications  Proposed project to be financed by the loan is included in the
Approved Annual Investment Plan (AIP) for the current year
• Local legislative authorization and
inclusion in the annual investment  BSP requires the submission of a duly executed ordinance approving
plans and priorities are required the proposed borrowing, its purpose, terms and conditions for the
release of Loan Proceeds

BLGF Debt Capacity Certification
Determining the LGU Borrowing Capacity
Debt Service Ceiling (DSC)

1 • 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
Net DSC (NDSC)

2 • DSC less All amortizations payable
during the year
Local Fiscal
Policy Service
Borrowing Capacity (BC)
Local Debt Monitoring
• NDSC x Annuity Factor
3 and Evaluation Division

Documentary Requirements of BLGF
1 2 3 4
Letter Request from Certification
the Local Chief Certification of existing of Commission on Audit issued by the LI
Executive indicating loan/s duly certified by the (COA) Annual Audit stating that it
the specific Local Treasurer indicating Certificate for the past shall not
 Lending institution (LI);  Types and purpose of loans & 3 fiscal years showing require LGU
other obligations contracted;
 Terms and condition of no adverse finding deposits as
Name of the LI; compensating
proposed loan; and 
against the LGU, and
 The purpose/s of the  Date of approval & maturity; supported by the year- balance for the
loan.  Terms & conditions end financial reports loan (for non-
Remaining balances of loans authorized
Pre-closing trial balance;

and other obligations; and


Detailed Statement of government

Annual amortization


Financial Performance depository banks)
schedules from the LI

Features of BLGF
Certification
• 3 Parts: Letter to the Local Chief
Executive, Certificate, and
Directives to the Local Treas urer
• Controlled; original issued each for
LGU, Lending Institution, and BSP
• Compliant with BSP Circular N o. 926
• Free of charge

Subnational Debt Profile and Trends
Observations
Annual Debt Servicing < 20% Statutory Limit LGU Outstanding Loans
18,000 4.67% 5.00% 100.00
4.54% 4.45% 4.54%
4.43% 86.02
16,000 4.14% 4.50% 90.00
3.98%
3.71% 4.00%
14,000 80.00
68.24 69.98 68.11
3.50% 70.00
12,000 75.82
3.00% 69.90 70.89
60.00
10,000
2.50%
50.00 57.52
8,000
2.00% 51.37
40.00
6,000
1.50% 41.14 42.84
30.00
4,000 35.68
1.00% 33.08
20.00
2,000 0.50%
10.00
- 0.00%
2009 2010 2011 2012 2013 2014 2015 2016 -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Debt Service [3] Ratio of Debt Service to Total Expenditures

Observations
LGU Loans and Borrowings LGUs Outstanding Loans to GDP
to GDP and Total Revenues
16,000 3.77% 4.00% 0.76%
105,000 0.80%
0.72% 0.72%
3.43% 0.59%
14,000 3.50% 0.66% 0.70%
90,000 0.61% 0.57%
12,000 2.80% 3.00%
2.66% 2.57% 0.54% 0.60%
2.42% 75,000
10,000 2.50% 0.50%
2.07% 60,000
1.91%
8,000 2.00% 0.40%
45,000
6,000 1.50% 0.30%
30,000
4,000 1.00% 0.20%
15,000 0.10%
2,000 0.50%
0.14% 0.15% 0.11% 0.07% 0.09% 0.07% 0.10% 0.10%
- 0.00% - 0.00%
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
LGUs Outstanding Loans [4]

LGUs Receipts from Loans and Borrowings[1]
Ratio of LGU Loans and Borrowings to GDP Ratio of LGUs Outstanding Loans to GDP
Ratio of Loans and Borrowings to Total Revenue

Outstanding
Financial Institution
Balances (Php B)
Government Financial Institutions: Profile of Lending Institutions, as of 2017
Land Bank of the Philippines 44.83
Development Bank of the Philippines 21.59
Municipal Development Fund Office* 7.36 13.53%
Philippine Postal Savings Bank 0.42
Sub-total 74.19
LOANS
Private Financial Institutions:

Philippine National Bank 7.16
Philippine Veterans Bank 3.16
Allied Bank** 0.03
Bank of the Philippine Islands** 0.10
EastWest Bank** 0.54
Robinsons Bank** 0.02
Philippine Savings Bank 0.05
Sub-total 11.06
Grand Total 85.26 86.48%
Outstanding
BONDS
Financial Institution
Balances (Php B)
Philippine Veterans Bank 0.42 Public Financial Institutions
Local Government Unit Guarantee Corporation 0.11 Government Financial Institutions
Grand Total 0.53

Profile of Loan Purpose, as of 2017 Requests for MB Opinion by Loan Purpose (BSP 2016 Report)
3% 100%
4%
11.7 10.2 9.1 11.5
4% 15
90%
3.6 6.1 5.9 2.2
32.0 3.9
8% 80%
70% 26.1 24.5 29.3

33.9
3.9 33.1
60%
49% 20.4
15% 50%
40%
30% 58.6 59.2 57.0

48.0 51.1
20% 43.7
17%
10%
Economic Services
General Public Services 0%
Capital/ Investment Expenditure S1 2013 S2 2013 S1 2014 S2 2014 S1 2015 S2 2015
Education, Culture, and Sports
Housing and Community Development
Health, Nutrition, and Population Control Infrastructure projects Puchase of heavy equipment/vehicle
Others Loan refinancing/ take out Others*

Number of Issued BLGF Certifications Number of Issued BLGF Certifications

by LGU Type by Financial Institution
450 450
400 15 400 36
8 31
350 350
300 300
7
250 250 50
293 317
200 200
377
212 10 353 8
150 5 150 30
100 128 229
114 100
169
50 51 55 127
29 50
31 27 32 25
11 26 14
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Province City Municipality Barangay GFI PFI

Proposed Creditworthiness Rating Index (CRI)
Moving ahead… Revenue Financial

Generation Management
CRI as a Performance Measure

the level of confidence that financial institutions have Expendi- Repayment Investment
tures Experience Capacity
that a local government unit will pay its debts
Intended for Indicators being Considered

 NG: Identify the status of LGUs in terms of credit
 Banks: Comparison with their own creditworthiness
10%
system 30%
25%
 LGUs: Know debt standing and complement other
performance metrics and standards; 35%
 BLGF: Improve revenue supervision and debt
management oversight for LGUs Revenue Generation
Financial Management and Investment Capacity
Repayment Experience
Expenditures
Proposed CRI Rating

Rating
Points Description
Category
Possible Capping on
90 - 100 AAA Best Quality
Borrowing Capacity
80 - 89 AA Better Quality
70 - 79 A Good Quality AAA to A • 100%
60 - 69 BBB Average Quality BBB • 90%
Medium Grade BB • 80%

50 - 59 BB
Quality B • 70%
Below Average
40 - 49 B C • 60%
Quality
< 40 C Poor Quality

Preliminary Simulation Results

Expected Benefits
LGU Type AAA AA A BBB BB B C
 Promote responsible debt mindset,
fiscal discipline among LGUs. Poor
Cities (144) - 11 77 44 9 3 -
LGUs will need to start small in debts.
 CRI will give confidence to banks in
Municipalities (1,490) 2 100 498 565 215 74 36
offering better loan terms
advantageous to the LGUs.
Provinces (80) - 2 45 23 9 1 -
 This will impact on local planning and
improve prioritization of projects to
Grand Total 2 113 620 632 233 78 36
be financed by credit financing.

Conclusions and Recommendations
Recommendations, Way Forward

1. Improve debt monitoring and information sourcing and sharing
2. Improve regulatory policies to address overspread of borrowing capacity,
and minimize haphazard borrowing behavior
3. Incentivize good debtors and replicate best practices.
4. Invigorate the subnational bond market
5. Strengthen institutional oversight and stakeholders coordination
6. Adopt ex-post remedies, subnational insolvency system
7. Consider debt service cap based not solely on regular income
8. Continuously improve the revenue generation capacity of local governments
Conclusions and Recommendations
Credit financing has a vital role in local development.
Credit financing has risks,

so it should always be
used responsibly, and
strategically, to achieve
the vision for progress
and better public
service delivery.
THANK YOU!
Salamat po!

The Sub-National Debt in The Philippines

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The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development Bank Institute

Credit Financing for Local Development

2 Policy and Legal Framework

3 BLGF Debt Capacity Certification

4 Subnational Debt Profile and Trends

5 Proposed Creditworthiness Rating Index

6 Conclusions and Recommendations

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 2

Decentralized fiscal governance

• Evolving policy frameworks over Municipalities Component

Local Autonomy Act of 1959: RA N o. 2264

• Demands for efficient public service Barangays

Tax Base Prov City Muni Brgy

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 4

Funding development: a major challenge

a challenge to most local governments…

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 7

Fiscal and financial performance of LGUs

300 Local Election Year

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 8

Varying degrees of dependency on national transfers

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 9

Comparative Performance of LGU Fiscal Sustainability Ratings

Provinces Cities Municipalities

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 10

Subnational Debt Policy

• Prioritize financing capital infrastructure expenditure and tax

• N ational Government has to manage LGU debts to:

• Strengthen the implementation of the statutory limit on LGU debts; and

• Promote responsible and credible debt management among LGUs.

Legal Framework of Subnational Debts in the Philippines

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 12

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 13

DOF LGU Financing Framework

Marginal or Non-Creditworthy LGUs: 4th - 6th Income

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 14

DOF LGU Financing Framework

Strengths and Weaknesses

• Recognition of disparities • No ex-post administrative or

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 15

Existing ex-ante control and regulations

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 17

Existing ex-ante control and regulations

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 18

Existing ex-ante control and regulations

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 19

Determining the LGU Borrowing Capacity

Debt Service Ceiling (DSC)

Net DSC (NDSC)

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 20

Documentary Requirements of BLGF

and other obligations; and

Detailed Statement of government

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 21

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 22

Debt Service [3] Ratio of Debt Service to Total Expenditures

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 23

LGUs Outstanding Loans [4]

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 24

Private Financial Institutions:

ADB 20th Annual Conference 2017 PHILIPPINES - DOF - BLGF 25

70% 26.1 24.5 29.3