LGUs mismanaging loans – COA

MANILA, Philippines – Local government units (LGUs) across the country have been mismanaging their loans and borrowings resulting in financial problems, the wastage of government resources, and failure to accomplish development goals.

The Commission on Audit (COA), in a 2009 report sent to Interior and Local Government Secretary Jesse Robredo, bared how some cities and municipalities are even contracting loans which they cannot pay.

Others, the audit bared, are entering into extended payment schemes that go beyond the useful life of the project to be funded and the terms of office of incumbent officials, which means that their successors will be the ones to carry the burden of paying for the debts.

Based on a consolidated financial report for the country’s LGUs, consolidated loans and bonds payable increased from P35.097 billion as of Dec. 31, 2006 to P44.565 billion as of Dec. 31, 2008.

COA’s report noted that while borrowings, to some extent, are being monitored by the Bureau of Local Government Finance (BLGF) and the Department of Finance (DOF), some legislators expressed alarm over possible abuse by some officials in securing loans in amounts exceeding their paying capacity.

Lawmakers said such practices may result in the need to give them a lion’s share of internal revenue allotment (IRA) so that they can pay for debts thus “leaving little or no funds for the delivery of essential public services.”

COA Director IV Susan Garcia, in a letter to Robredo dated Aug. 4, 2010, said the Special Audit Office report on the management of loans and borrowings of LGUs covered 16 cities, municipalities, and provinces including Caloocan, Malabon, Mandaluyog, Marikina, Parañaque and Pasay for the National Capital Region and Dagupan City, Angeles City, Bataan province, Cabanatuan City, Antipolo City, Rizal province, Lucena City, Palawan province, Puerto Princesa city, and Davao City for Regions I, III, IV, and XI.

State auditors said they did a review of existing policies, a review of loans and reports, a review of disbursements to determine if loans were used for intended purposes, conducted interviews, and conducted inspection of funded projects.

“Overall, the audit concluded that LGU’s loans and borrowings may not be considered effectively managed due to deficient criteria for evaluating LGU’s debt service capacity, unrecorded loans and borrowings, and deficiencies in the implementation procedures,” the report said.

“These deficiencies resulted in financial difficulty for a number of LGUs to meet loan obligations, wastage of government resources, and non-attainment of LGU’s development objectives.”

The COA report said seven cities with net available funds ranging only from zero to P0.19 million were able to contract loans with required yearly amortizations of P0.75 million to P23.13 million.

In effect, state auditors said the LGUs were allowed to contract loans in excess of their borrowing capacities which eventually resulted in the payment of additional interest and penalty, the forfeiture of projects funded thereof, and the continuous cycle of loan restructuring.

This happened allegedly because their borrowing capacity was assessed based only on the debt service ceiling set under the Local Government Code (LGC) of 20 percent of the regular income without considering net available funds prior to the loan.

The COA report said economic and useful life of the projects and the terms of office of officials were not considered in determining maximum payment period since some payment terms covered as long as 17 years.

“Thus, out of the loan balance of P3.80 billion as of Dec. 31, 2008 of nine LGUs, 21 projects financed… in the amount of P1.34 billion were no longer functional, not being used, or abandoned. A number of loans contracted as early as 1979 to 1987 have also remaining substantial unpaid balances of P40.10 million as of Dec. 31, 2008,” it said.

The COA report also discovered how borrowings are being made for projects with no specific period of implementation, no development plans and programs, and no adequate study and evaluation which resulted in the delay and even the termination of some projects.

State auditors said they found P3.79 billion in loans for projects that were not specifically identified in the loan agreements nor were listed as priority projects, thus making the necessity of such projects “questionable.”

The COA report said six LGUs borrowed P1.03 billion but did not use the funds for the intended projects which “remained unimplemented, partially completed, or unpaid” as of Dec. 31, 2008.

Loans for lending to micro, small and medium enterprises are also ineffectively monitored for collection, thus payment is eventually shouldered by the city government concerned.

School buildings are supposedly being built without coordination with the Department of Education (DepEd) resulting in construction in areas where there is no need for such projects as against other areas where schools have a 65:1 or as high as a 447:1 pupil to classroom ratio.

In the case of Bataan, the COA report said the provincial government purchased 4,834 more school chairs than was actually needed.

Out of the 113 loan-funded projects inspected by the team, state auditors said 54 were neither in accordance with plans and specifications nor of acceptable workmanship.

“Eleven projects implemented by two LGUs were found deficient by P6.28 million while deficiencies of 43 other projects implemented by three LGUs could not be quantified due to the absence of detailed computations. These projects are of poor workmanship, with missing and/or uninstalled items, or with changes in design.”

On the legal aspect, the COA report said six LGUs – Parañaque, Marikina, Dagupan, Cabanatuan, Lucena, and Pasay – utilized loan proceeds and interest income from bond floatation in the amount of P2.33 billion without covering appropriation or in excess of the approved appropriation in violation of existing regulations.

“Payments out of loans by the city government of Dagupan for the construction of Malimgas Market costing P283.47 million and by the city government of Puerto Princesa for the supply and/or installation of synthetic track oval costing P17.50 million were not fully documented in violation of Section 4(4) of PD 1445. As such, the validity, propriety, and legality of the said claims cannot be assessed,” the audit report said, referring to the Auditing Code of the Philippines.

The report added that four localities did not record in their books of accounts
their loan releases, repayment and disbursements worth P460.78 million.

In its recommendations, the COA report said the DILG, DOF, the National Economic and Development Authority (NEDA), and the Department of Budget and Management (DBM) should consider establishing appropriate guidelines for managing LGU loans and borrowings to avoid contracting of loans beyond their paying capacity and ensure that these are used for the purpose/purposes intended.

On the other hand, the audit said LGUs should conduct self-assessment of their capacity to repay loans by taking into consideration net available funds, ensuring that appropriate ordinances are enacted, determining most effective borrowing schemes, contracting loans only after proper evaluation of priority projects, and allocating sufficient funds for such loans. –Michael Punongbayan (The Philippine Star)