Local Government Bonds: Will They Work?

Bureau of Treasury Philippines Building

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(First of 3 Parts)

When we earn less than what we need to spend, what we do is borrow money. The “we” can apply to individuals, to corporations, or to sovereign countries or governments. Often—for governments especially—borrowing money is not a problem. They borrow money to pay for borrowed money, and lenders are easy to find. For example, latest available data show that the total (gross) amount of US government debt (USD21T) is bigger than that country’s gross domestic product, or GDP (USD20T). Stated differently, the current debt-to-GDP ratio of the federal government of the USA is 105 percent.

Some countries even have higher debt-to-GDP ratios: Japan (236 percent), Italy (131 percent), and Singapore (110 percent), among others.

Philippines? The trend over the past decade shows a decreasing rate: from 55 percent in 2008 to 42 in 2017. Amount of total national government debt in 2017 stood at Php6.6T, 67 percent of which was domestic debt while 33 percent was foreign debt.

The debt-to-GDP ratio is one of the indicators of a country’s capacity to pay. Economics experts tell us that a low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient enough to pay back debts without incurring further debt.

Because government borrowing does not seem to worry policy makers even for debt guzzlers like the US and Japan, perhaps what may interest taxpayers more is determination of the “need to spend.”

There are cases where countries (or areas within them) can promote people’s welfare better by buying public goods and services now, using borrowed money (at cost, meaning with interest) than waiting for a later date when cash flow positions can be expected to improve. A quick example is expenditure on key infrastructures, like road networks or hydro-electric plants that stimulate job-generating private investments, and further promote downstream livelihood opportunities. Investments like these often pay for themselves over a long period of time.

The development goal becomes more attractive when economic opportunities are seen spilling over the countryside, with added expected benefits—from the whole nation’s perspective—of easing urban poverty and congestion, greater equity in wealth distribution, creating a variety of conditions for social leveling, etc.—all of which can go a long way in checking rural insurgency.

This idea is cropped from the backdrop of the Philippines’ possibly becoming a federal nation where, as an assumption, the federal states will have more autonomy at finding sources from which to fund their development projects. A possible set up can emerge where, like what the national government does, LGUs can float debt papers or instruments (such as notes or bonds) to raise money.

While other countries like the US, Japan, China and Brazil have enabled their local governments to issue debt instruments or securities, consideration of this funding option has yet to gain traction among most LGUs in the Philippines, except for some mega cities like Victorias, Urdaneta, Cebu City and the Province of Albay. Rather the more common practice has been for LGUs to vie for direct/bilateral loans, involving in many cases Government Financial Institutions (GFIs), MDFO, or private partnerships like Build-Operate-and-Transfer schemes, whenever they see the need to source external funding.

Over the past several years, the Bureau of the Treasury, in collaboration with the Department of Finance and Bangko Sentral ng Pilipinas, among other related government agencies, has developed a robust environment for debt management operations that include improved investor relations, enhanced organizational capacity and optimized analytical tools for policy action, streamlined processes for origination (eg auction of Treasury Bills and Bonds), as well as big data management required from recording, monitoring and servicing of national government debt.

The external environment contributes to the vigor of the entire debt management apparatus, such as the overall health of the economy—buttressed by a predictable political climate—that can justify positive credit ratings on a consistent basis. It is this kind of ratings that makes it easy for governments to find lenders, and incur debt at the least possible cost to the taxpayer.

Investment opportunities for LGUs are legion, and I wish to broadly discuss a few of them here.

  • Real Estate Development

That Metro Manila needs to be decongested is obvious for LGUs to easily see the opportunities from that big problem. Hint: Build a hub for a national government agency, one that offers free housing for 1,000 to 2,000 employees, on top of state-of-the-art digital connectivity infrastructures. Then invite a government agency that rents property for its offices in Metro Manila or nearby areas to relocate. In five years, the host LGU should see a rapid increase in the number of economic establishments within the area, providing livelihood opportunities for its residents.

Urban planners would also do well to shape ideas for similar ventures. For example, the Tacloban North Township Project of Tacloban City can be a model for uprooting entire communities from danger zones to more a more ideal settlement area.

  • Land Banking

LGUs that think through issues of squatting (which can be considered as tax on idle property) and disaster response should also do well to buy land now (while still available and relatively cheaper) for future needs of their constituency.

  • Aged Care Homes and Services

LGUs can add value to what the Philippine Retirement Authority offers by building specialty facilities for the elderly, including those that require medical care for dementia, Alzheimer’s and other physical ailments caused by wear and tear. Filipinos excel (competitive advantage) in caregiving largely because of their culture: respect for elders and moorings from extended families. The market is simply too big (and growing by the day) to be ignored. Estimates show that in 25 years almost one-third of the population of the USA, Japan and most European countries would be nearing retirement age. Unlike the Philippines, the ties that bind families in these countries are not as “strong,” where elders are often left to fend for themselves. These elders, one may further note, are not “freeloaders,” boosting financial viability of these investments.

  • Organic Agriculture

The objective is to help local farmers compete with the established producers and traders by organizing and continuously training them, and providing them with the needed start up and working capital requirements. The “organic” niche can help them stand out from the competition.

  • Franchisee for Disaster Relief

LGUs can “sub-contract” from DSWD its disaster relief operations on a bill-me-later basis. Government personnel, except probably those who have military or police training, are hardly known for their skills in logistics management. But all other things being equal, LGUs are in a better position to respond more effectively to disaster relief needs due to their proximity to affected areas.

  • Natural Resource Management (NRM) projects

The government has invested in big-ticket projects like hydro-electric power plants, water systems, irrigation systems, etc. Yet they are only as good as the carrying capacity of their watershed areas, among other technical considerations. NRM projects like agro-forestry and watershed development do not only pay for themselves in the long run; like jewelry, they do not depreciate. Moreover, they ca be developed later on for local tourism, just like what  the fishing community in Apo Island (Negro Oriental) did to their marine sanctuary.

In conclusion, I tried to show that LGUs do have many opportunities to innovate on their service delivery systems by investing in projects that are outside of their usual development portfolio. A robust structure for managing public debt, led by the Bureau of the Treasury, exists. It can be tapped to help them generate the funds they need from the domestic capital market.

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Author: ingming aberia

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