AUDIT OBSERVATION MEMORANDUM NO. 8. Bond flotation semi-annual interest from December 5, 2006 to December 5, 2007 in the amount of P3.436 million could have been saved had the municipal government of Bulan, Sorsogon set-aside bond flotation as the mode of financing the project, although as a consequence a loan agreement made, executed and notarized on September 3, 2007 by and between LGU Bulan, Sorsogon and LBP Legaspi Branch, to refinance the same project.
DISCUSSION:
The Sangguniang Bayan of LGU Bulan, Sorsogon confirmed and ratified, ordinance No. 004 series of 2003, authorizing the Bond Flotation of the Municipality of Bulan, Sorsogon in the amount not exceeding Fifty Million (P50,000,000.00) to fund the construction and development of Bulan Bus Terminal and Municipal Slaughterhouse, represented by Mayor Guillermo O. De Castro and DPEM Inc. represented by its President Junio M. Ragrario.
1. The Municipality is hereby authorized to issue and float “Bulan Bonds” under the terms and conditions set forth and agreed upon with any person, corporation or entity for the purpose of constructing the projects abovementioned and the power and authority in negotiating the terms and conditions for the said “Bulan Bonds” and signing and executing and delivering such agreements, contracts, deeds, papers and documents necessary for the full and total implementation of the authority granted.
2. The features and terms and conditions of the bond flotation is provided in Section 2 of said ordinance abovementioned to wit:
| BULAN BONDS | |
| Bond Name | Bulan Bonds |
| Issuer | Municipality of Bulan |
| Amount | P50 million, in staged tranches as allowed by the financial capacity of the Municipality |
| Issue | Registered local government bonds of the Municipality of Bulan (“Bulan Bonds) |
| Purpose | Construction of the twin projects, etc. |
| Offering Price | 100% of face value |
| Term | Mixed term up to ten (10) years from issue date |
| Denomination | P1,000; P10,000; P100,000; and P1,000,000 |
| Medium of sale | 1) Public offering; 2) Private placement; and 3) Direct payment to suppliers, contractors, or project developers/proponents |
| Manner of Payment | |
| Interest | Semi-annual fixed or floating rate |
| Principal | Balloon principal repayment at the end of the seventh or tenth year from issue date and/or principal payments amortized equally starting the third year or later following issues of different terms |
| Interest rate | Interest shall be floating based on the weighted average of the 182-day Treasury Bill (T-Bill) rate |
| Collateral/Guarantee/Security | Proceeds from revenue of project improvements and facilities funded by proceeds of the bond, and assignment of Internal Revenue Allotment |
| Trustee/Fiscal Agent | Any government bank to be designated by the Municipal Mayor, to act as a fiscal agent, handle the sinking fund, act as fund manager, transfer agent and paying agent |
| Trustee fee | Up to ½ of 1% per annum |
| Underwriting | Any government or private financial institution licensed to undertake underwriting of securities as allowed under Philippine laws |
| Guarantor | LGU Guarantee Corporation (LGUGC) or any other appropriate institution |
| Guarantee fee | One-time fee chargeable to developers, proponents, contractors, or investors of the project |
Moreover, Section 3 to 9 of the subject ordinance provides among others several conditions for the LGU, to wit.
3. To appropriate the entire proceeds of the bonds, upon its successful issue exclusively to finance the construction of the twin projects and to pay for the financial advisory fee and trustee fee and other financial obligation relative thereto;
4. To appropriate in the municipal annual budget such amount necessary to fund the sinking fund that will be created through the appointed trustee bank;
5. To designate a government depository bank to act as trustee or fiscal agent for the Bulan Bonds, to sign and execute any trust indenture agreement and deed of assignment, relative to the designation of said bank and flotation of the bond;
6. The Municipal Mayor shall appoint, any government or private institution duly licensed as underwriter to be the underwriter of the Bulan Municipal Bonds “Bulan Bonds” and to negotiate, sign and execute an underwriting with the said underwriter in such form and substance to be ratified by the Municipal Council;
7. The Municipal Mayor may designate the LGU Guarantee Corporation, a Corporation organized by the Bankers Association of the Philippines, to specifically extend guarantee on the Bulan Municipal Bonds and for this purpose the Municipal Mayor is likewise authorized to negotiate, sign and execute any contract or agreement with the LGU Guarantee Corporation pertinent to bond flotation in such form and substance to be ratified by the Municipal Council. The Municipal Mayor, however, may undertake alternative agreements should such be necessary due to cost considerations.
8. The Municipal Mayor is authorized to conduct public bidding on the awarding of the projects to be funded through bond flotation either on a design and construct basis or on a construct basis with the developer/contractors to be paid either in the form of Bulan Bonds and/or cash proceeds from bond’s sale. The procedure of such bidding shall be done in accordance with applicable provisions of PD 1594, usual auditing and accounting rules and regulations, relevant Municipal Ordinances and such procedures which the Municipal Mayor may deem necessary in the implementation of the municipal’s bond flotation project or projects. The Municipal Treasurer shall issue the corresponding Certificate of Funds Availability out of the proceeds of the Bond Flotation.
9. The Memorandum of Agreement entered into by and between the Municipal Government of Bulan, represented by its Mayor, the Honorable Guillermo O. De Castro, as authorized by the Sangguniang Bayan and DPEM Inc. represented by its President, Junio M. Ragrario, for purposes of the bond flotation is hereby confirmed and ratified.
Our audit disclosed that LGU Bulan, Sorsogon have incurred unnecessary expenses of P3.436 million for two semi-annual interest from December 5, 2006 to December 5, 2007, excluding financial advisory fee, trustee fee and other financial obligations relative thereto. Although as a consequence, a loan agreement was made and executed on September 3, 2007 by and between the LGU Bulan and LBP Legaspi Branch just to refinance the project with the corresponding promissory with assignment of Internal Revenue Allotment (IRA) and revenues from the project as collateral.
COA’S RECOMMENDATION:
Require the Sangguniang Bayan of LGU Bulan, Sorsogon to justify in writing why they resorted the bond flotation instead of direct loan with the same bank which could have avoided such incurrence of unnecessary expenses amounted to P3.436 million and proper identification of other expenses incurred in addition thereto in detail.
LGU’S COMMENT:
The administration of Mayor Guillermo O. De Castro can be credited for transforming Bulan from a backwater municipality, dark and littered with dirt and refuse. After illuminating and cleaning the town, the then-LCE opened roads and access to even the remotest village. Prior to 2003, it became evident that the price of development is caching up with the municipality. By then, the premier commercial and educational center in the part of the province, congestion, overcrowding and related problems were weighing heavily on the populace. Concerned government agencies suggested decongestion. Transportation terminals, slaughterhouses, cemeteries and the like were all situated in and around the center of the poblacion. Tackling the problems heads-on, the administration tried to secure financing from bank and government agencies. With prospective fund sources unable to accommodate the LGU, the municipality opted to raise the money thru the only available option: bond flotation. Ironically, offers of straight loan came in droves after the flotation, entice, no doubt, by the LGU’s increased IRA-share.
The then-LCE and the then-Sangguniang Bayan were not remiss in the performance of their duties. Doing their best, they were hampered by the circumstances such as the dearth of loan-providers. Given the situation obtaining today, those community leaders would have opted for a straight loan.
The 8.9% Bulan Bonds cost the LGU some P3.436 million in interest payment for the period covering December 5, 2006 to December 5, 2007. If the municipality were granted a simple straight loan in the same period at the prevailing rate of 8.53% the interest payment for the first year would have been P3.412 million or a difference of P24,000. Indeed, the entity could have saved P24,000 on interest and on the transaction cost; but only if the situation in 2006 were similar to that in 2007. And they were not.
In 2003, the LGU was facing a looming problem of congestion brought about by haphazard town-planning. The municipality had 2 alternatives: address the problem now or wait for “better” times. With spiralling prices, “better” times would mean bigger implementing cost. The LGU, like a good father to its constituents, addressed the problem by utilizing the best option available to it at the time to deliver the service demanded of it by its people.
The experience, though, provided the LGU with a better insight of the financing community. In times of similar needs, the LGU can tap on its experience and be guided by other government entities such as the Commission on Audit.
