DRAFT FOR DISCUSSION 17 October 2005
LOCAL GOVERNMENT FINANCING AND FISCAL
MANAGEMENT
A Position Paper of Local Governments on the Rationalization Program of the National
Government in Support of Local Government Financing and Fiscal Management
1.1.1. Internal Revenue Allotment (IRA)
To carry out their new responsibilities, the LGUs were given an increased share of NG
revenues. Through the Internal Revenue Allotment (IRA), the LGUs were to receive 40
percent of the internal revenue taxes collected by the NG. The IRA is to be released
automatically and directly to the LGUs. The LGUs are mandated by the LGC to spend no
less than 20 percent of the IRA for development projects. LGUs are enjoined to submit
their local development plans to the DILG. [Per Book II, Title Three, Chapter 1, Sections
284 to 288 of the LGC]
Local Government Financing and Fiscal Management
(Draft for Discussion)
SECTION 284. Allotment of Internal Revenue Taxes. – Local government units shall have a
share in the national internal revenue taxes based on the collection of the third fiscal year
preceding the current fiscal year as follows:
(a) On the first year of the effectivity of this Code, thirty percent (30%); (b) On the second year,
thirty-five percent (35%); and
(c) On the third year and thereafter, forty percent (40%).
Provided, that in the event that the national government incurs an unmanageable public sector
deficit, the President of the Philippines is herby authorized, upon the recommendation of
Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and
Management, and subject to consultation with the presiding officers of both Houses of Congress
and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment
of local government units but in no case shall the allotment be less than thirty percent (30%) of
the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal
year: Provided, further, that in the first year of the effectivity of this Code, the local government
units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include
the cost of devolved functions for essential public services, be entitled to receive the amount
equivalent to the cost of devolved personal services.
SECTION 285. Allocation to Local Government Units. – The share of local government units in
the internal revenue allotment shall be allocated in the following manner:
(a) Provinces – Twenty-three percent (23%);
(b) Cities – Twenty-three percent (23%);
(c) Municipalities – Thirty-four percent (34%); and (d) Barangays – Twenty percent (20%).
Provided, however, that the share of each province, city and municipality shall be determined on
the basis of the following formula:
(a) Population – Fifty percent (50%);
(b) Land Area – Twenty-five percent (25%); and (c) Equal Sharing – Twenty-five percent (25%).
SECTION 286. Automatic Release of Shares. – (a) The share of each local government unit shall
be released, without need of any further action, directly to the provincial, city, municipal or
barangay treasurer, as the case may be, on a quarterly basis within five (5) days after the end of
each quarter, and which shall not be subject to any lien or holdback that may be imposed by the
national government for whatever purpose.
(b) Nothing in this Chapter be understood to diminish the share of local government units under
existing laws.
SECTION 287. Local Development Projects. – Each local government unit shall appropriate in
its annual budget no less than twenty percent (20%) of its annual internal revenue allotment for
development projects. Copies of the development plans of local government units shall be
furnished the Department of Interior and Local Government.
Local Government Financing and Fiscal Management
(Draft for Discussion)
SECTION 288. Rules and Regulations. – The Secretary of Finance, in consultation with the
Secretary of Budget and Management, shall promulgate the necessary rules and regulations for a
simplified disbursement scheme designed for the speedy and effective enforcement of the
provisions of this Chapter.
1.1.2. LGU Shares in National Wealth and Other Taxes
In addition to the IRA, LGUs were to have an equitable share in the proceeds derived by
the NG and any of its agencies and corporations from the utilization and development of
the national wealth within their locality including those from mining taxes, royalties,
forestry and fishery charges. [Per Book II, Title Three, Chapter 2, Sections 289 to 294 of
the LGC]
SECTION 289. Share in the Proceeds from the Development and Utilization of the National
Wealth. – Local government units shall have an equitable share in the proceeds derived from the
utilization and development of the national wealth within their respective areas, including sharing
the same with the inhabitants by way of direct benefits.
SECTION 290. Amount of Share of Local Government Units. – Local government units shall, in
addition to the internal revenue allotment, have a share of forty percent (40%) of 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, including related
surcharges, interests, or fines, and from its share in any co- production, joint venture or
production sharing agreement in the utilization and development of the national wealth within
their territorial jurisdiction.
SECTION 291. Share of the Local Governments from any Government Agency or- Owned and-
Controlled Corporation. – Local government units shall have a share based on the preceding
fiscal year from the proceeds derived by any government agency or government-owned or-
controlled corporation engaged in the utilization and development of the national wealth based on
the following formula whichever will produced a higher share for the local government unit:
1. (a) One percent (1%) of the gross sales or receipts of the preceding calendar year; or
2. (b) Forty percent (40%) of the mining taxes, royalties, forestry and fishery charges and
such other taxes, fees or charges, including related surcharges, interests, or fines the
government agency or government-owned or controlled corporation
would have paid if it were not otherwise exempt.
SECTION 293. Remittance of the Share of Local Government Units. – The share of local
government units from the utilization and development of national wealth shall be remitted in
accordance with Section 286 of this Code: Provided, however, that in the case of any government
agency or government-owned or controlled corporation engaged in the utilization and
development of the national wealth, such share shall be directly remitted to the provincial, city,
municipal or barangay treasurer concerned within five (5) days after the end of each quarter.
SECTION 294. Development and Livelihood Projects. – the proceeds from the share be
appropriated by their respective to this chapter shall be appropriated by their respective
sanggunian to finance local development and livelihood projects: Provided, however, that
Local Government Financing and Fiscal Management
(Draft for Discussion)
at least eight percent (80%) of the proceeds derived from the development and utilization of
hydrothermal, geothermal, and other sources of energy shall be applied solely to lower the cost of
electricity in the local government unit where such a source of energy is located.
1.1.3. Local Tax and Non-Tax Revenues
LGUs were also given enhanced authority to collect local taxes. Provinces and cities are
allowed to impose taxes on transfer of real property ownership; the business of printing
and publication; sand, gravel and other quarry resources; delivery trucks of manufacturers
and dealers; and the franchise tax, professional tax, and amusement tax. Municipalities
and cities may impose taxes on businesses; fees for sealing and licensing of weights and
measures; and fishery rentals, fees or charges. Barangays may impose taxes on small
businesses; application fees for barangay clearance; user fees for barangay-owned
properties or service facilities; and fees and charges on cockfighting-related activities,
recreation facilities which charge admission fees, and billboards, signboards and other
outdoor advertisements. [Per Book II, Title One, Chapters 1 and 2, Sections 128 to 152 of
the LGC]
Real property taxes have traditionally been the biggest source of LGU tax revenues.
While the province has the power to levy the annual ad valorem tax on real property such
as land, buildings, machineries and other improvements, collection of the tax is the
responsibility of the municipal treasurers. A province or city may also levy and collect an
annual tax of one percent on the assessed value of real property, which shall be in
addition to the basic real property tax, for the Special Education Fund. A province or city
may also impose an additional five percent tax on idle lands. A province, city or
municipality may also impose a special levy on lands inside its area of jurisdiction that
are benefited by public works projects or improvements funded by it. [Per Book II, Title
Two, Chapters 1 to 8, Sections 197 to 283 of the LGC.]
LGUs were also given the power to raise non-tax revenues. They may collect reasonable
fees and charges for services that they render. They may fix tariff rates for the public
utilities that they own and operate within their jurisdiction. They may charge toll fees for
the use of public roads, bridges, waterways, piers or telecommunication systems funded
and constructed by them. Cities and municipalities may also levy a community tax. [Per
Sections 153 to 164 of the LGC]
1.1.4. Loans and Grants
LGUs were also allowed to accept donations directly from donors, without prior approval
of the National Government. They are required only to report this to both houses of
Congress and the President. [Per Section 23 of the LGC]
The LGC also gave LGUs the power to create indebtedness and to 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.
LGUs may contract loans from any government or domestic private bank and other
lending institutions to finance the construction, expansion, operation or maintenance of
public facilities, infrastructure facilities, housing projects, acquisition of real property and
implementation of other capital investment
Local Government Financing and Fiscal Management
(Draft for Discussion)
projects as well as agricultural, industrial, commercial, livelihood projects, and other
economic enterprises. Subject to the rules and regulations of the central bank and
Securities and Exchange Commission, provinces, cities and municipalities are authorized
to issue bonds, debentures, notes and other obligations to finance self-liquidating,
income-producing development or livelihood projects. The proceeds of loans contracted
or grants secured by the National Government with foreign financial institutions or other
international funding agencies may be relent to any LGU for the construction, expansion,
operation or maintenance of public utilities and facilities, infrastructure facilities, housing
projects, acquisition of real property, and implementation of other capital investment
projects. LGUs may also enter into contracts with private individual contractors for the
financing, construction, operation, and maintenance of any financially viable
infrastructure facilities under the build-operate-transfer (BOT) scheme subject to the
provisions of R.A. 6957. [Per Book II, Title Four, Sections 295 to 303 of the LGC]
Provinces, cities and municipalities may extend loans, grants or subsidies to other LGUs
in amounts not exceeding their surplus funds. LGUs may also jointly or severally contract
loans, credits, and other forms of indebtedness for purposes mutually beneficial to them.
LGUs may, through appropriate ordinances, group themselves, consolidate, or coordinate
their efforts, services and resources for purposes commonly beneficial to them. In support
of such undertakings, the LGUs involved may contribute funds, real estate, equipment
and other kinds of property and appoint or assign personnel as may be agreed upon by the
concerned LGUs through Memoranda of Agreement. [Per Sections 300 and 33 of the
LGC]
1.2. 1996 LGU Financing Framework
The LGU Financing Framework was formulated by the Department of Finance (DOF), in
consultation with various stakeholders, in response to the 1991 Local Government Code
which mandated the devolution to LGUs of many functions previously carried out by
national government agencies. Although the LGUs were given an increased share of
national government revenues and were receiving increasing amounts of official
development assistance, all these would eventually not be enough for the LGUs to deliver
all the services that would be expected by their constituents. LGUs would have to
improve their ability to generate their own revenues and to gain access to private capital.
The basic objective of the Framework is to wean away the LGUs from dependence on the
national government and promote effective partnership with the private sector. This
vision is anchored on two premises:
First, LGUs have varying level and records of creditworthiness and bankability. Second, their
financing needs are huge.
Therefore, the private sector (BOT investors, bondholders, commercial banks), the GFIs and
MDF all have a role to play in meeting LGU financing needs.
The ultimate objective is to graduate the more creditworthy LGUs to private sources of
capital which are vast and promising, but remain largely untapped.
Local Government Financing and Fiscal Management
(Draft for Discussion)
The LGU Financing Framework provided a conceptual framework by which LGU
projects requiring financing could be clustered into four groups based on the
creditworthiness of the LGU and the type of project to be undertaken. Each group would
have access to a different set of credit and grant facilities. The Credit Policy Framework
for LGUs is presented as Annex 1.
A seven-point program of action was recommended to implement the Framework,
namely:
1. 1) Increase LGU use of BOT arrangements;
2. 2) Develop the LGU bond market;
3. 3) Promote LGU access to private banks;
4. 4) Optimize the involvement of GFIs in LGU financing;
5. 5) Restructure and reorient the Municipal Development Fund;
6. 6) Improve the capacity of LGUs to raise own revenues; and
7. 7) Tap ODA technical assistance and financing.
The GFIs and MDF were envisioned to act as catalysts to bring LGUs into the
mainstream of the private capital markets. The GFIs and MDF were given guidelines on
how to provide their financial and technical assistance to LGUs. GFIs were asked to do
the following:
1. 1) Lend to creditworthy LGUs that cannot yet tap private capital;
2. 2) Develop co-financing arrangements or project referral schemes with
commercial banks;
and
3. 3) Provide limited technical assistance to enhance LGU creditworthiness,
particularly in the
areas of financial and project management.
The MDF was tasked to do the following:
1. 1) Target its financing to less creditworthy LGUs and to social/environmental
projects;
2. 2) Refrain from providing grants and credits to LGUs that are qualified to obtain
GFI loans or have viable BOT projects;
3. 3) Link its funding to technical assistance to improve LGU capacity and
creditworthiness for graduation to other sources of credit; and
4. 4) Promote more direct access of LGUs to ODA sources.
To help realize the objectives of the LGU Financing Framework, new directions for ODA
support were outlined, namely:
1. Participate in building up the LGUs’ infrastructure pipeline by providing technical
assistance to finance project feasibility studies;
2. Support an LGU capacity building fund to promote LGU institutional
development in the areas of revenue mobilization, budget administration,
development planning, capital budgeting and investment programming, project
preparation, contract management and construction supervision;
3. Participate in establishing market-based credit enhancement mechanisms for LGU
BOT infrastructure projects; and
Local Government Financing and Fiscal Management
(Draft for Discussion)
d. Provide grants and long-term credits for poorer LGUs and for social/environmental
projects through the MDF, GFIs and other facilities and promote innovative LGU-
implemented projects and/or greater LGU participation in NGA-sponsored projects
In line with the framework, various ODA-supported projects were developed and are still
being implemented in which the LGUs play a central role. The so-called demand-driven
approach was adopted in many cases, wherein financing facilities are put in place, and
LGUs are free to make their proposal or application, depending on their own needs and
priorities.
2. STATE OF LGU FINANCING 2.1. BOT Projects of LGUs
BOT projects of LGUs that have been completed include the Mandaluyong City
Marketplace (US$23 M), Dapitan Public Market (US$1.3 M) in Quezon City, and the
Talisay City Hall (US$4 M). Joint ventures between the Bohol Provincial Government
and Salcon Consortium operate the Bohol Provincial Electric System (US$5 M) and
Bohol Water Supply System (US$14.4 M). Five BOT projects were under construction as
of 30 June 2004, per report of the BOT Center under the Department of Trade and
Industry (DTI): Binirayan Administrative and Commercial Center (US$3.8 M) of the
Antique Provincial Government; Bocaue Public Market and Commercial Center (US$5.0
M) in Bulacan; Tarlac City Public Market (US$3.88 M); Roxas Commercial Center
(US$1.0 M)in Isabela; and Matnog Integrated Bus Terminal (US$4.4 M) in Sorsogon.
Six LGU projects are in the pipeline, namely: the Information and Communication
Technology Projects of Koronadal City, Kidapawan City and Cavite City (US$0.5 M
each); General Santos City Integrated Transport Terminal and Commercial Complex
(US$2.7 M); Davao del Norte Integrated Water Resource Development Project
(US$76.36 M); and Upgrading and Rehabilitation of Olongapo City’s Electric Power
Distribution System (US$6.4 M).
