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Local Government Credit Financing

The study provides alternative sources that LGUs with limited funds can tap to finance local infrastructure and other socio-economic development projects. It describes local credit financing as a non-traditional source of funding these projects. Local credit financing refers to the power of LGUs to create indebtedness and to enter into credit and other financial transactions. It allows LGUs to accomplish development projects and gain benefits, at current prices, with the cost of the projects being paid later. The legal basis authorizing LGUs to create indebtedness and avail of credit facilities to finance local infrastructure and other socio-economic development projects in accordance with the approved local development plan and public investment program is provided in Book II Title IV of the LGC of 1991. LGUs may also avail of credit lines from government or private banks and lending institutions for the purpose of stabilizing local finances. Prior to the LGC of 1991, Presidential Decree (PD) No. 752 (Decree on Credit Financial for Local Governments) was issued to answer the increasing demands for additional sources of LGUs’ financing. However, said law provides that, LGUs may incur loans only with government financial institutions (GFIs). Since the GFIs could not provide them enough program loans, LGUs continued to deal with insufficient funds. Moreover, PD 752 required unwarranted control on the credit transactions of LGUs and strictly limit the amount LGUs may borrow. The restrictions enforced evidently served as deterrents for LGUs to borrow. The passage of the LGC of 1991 broadens the power of the LGUs to create indebtedness and to enter into credit and other financial transactions. Under the LGC, LGUs are authorized to create indebtedness and avail of credit facilities not only with GFIs but also from domestic private banks. LGUs are also authorized to acquire property, plants, machinery, equipment, and such necessary accessories under a supplier’s credit, deferred payment plan, or other financial scheme. Under the LGC, the issuance of bonds, debentures, securities and other long term securities is also allowed subject to the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC). Bonds issuances are used to finance self-liquidating, income-producing development and livelihood projects pursuant to the local development plan or the public investment program. The LGC also incorporates relevant provisions of RA 6957 (Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector) on the build-operate-and-transfer (BOT) and build-and-transfer schemes. The BOT scheme is primarily a financing scheme where through contractual agreement, a contractor undertakes the financing of an infrastructure facility and turns this over to the LGU based on an arranged schedule. Credit financing offers a number of benefits to LGU financial operations, among others: (1) LGUs can have a ready source of funds during low revenue collection periods; (2) they can attain flexible financial capabilities without having to wait for sufficient funds to accumulate from their savings; (3) with the participation of the private sectors, LGUs can augment quality investments with consistent and viable yields to investors and LGUs; (4) LGUs can promote early cost-recovery types of projects, thus crafting a faster and quicker way in processing local development and service delivery; (5) having access to private loan sources and investor markets benefits the LGUs as creditworthiness standards applied permit only the most viable commissions to be financed; and (6) private loan and investor market potential sources are relatively large compared to what might be available through central government-operated firms and institutions of subsidized credit.


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