An important aspect of good governance which most local chief executives have overlooked or failed to exploit as a key to infrastructure boom is the issuance of bonds.
When Cebu Province floated equity bonds nearly a decade ago to finance the expansion of its airport and the construction of an alternate bridge linking the city to Mactan, the impact it created was simply amazing. Not only did local investments expand dramatically, growth per capita soared to high levels with the entry of capital from outside the city.
The same strategy was adopted when Puerto Princesa City also floated municipal bonds, or the green bonds, to keep on track its ecological projects, low-cost housing, and tourism-oriented targets. Like Cebu, the dynamism introduced by the bond flotation doubled the speed of infrastructure spending and the volume of new investments dramatically appreciated. As a result, there was economic boom. Muntinlupa City later followed Cebu’s bond flotation.
Thirty-nine years ago, just one and a half years after Davao was inaugurated as a city, the national government, in order “to construct the necessary sewer facilities and other permanent improvements” of the city, issued bonds after the National Assembly passed Commonwealth Act No. 389, which was approved by President Manuel L. Quezon on September 5, 1938.
The edict authorized the city to borrow money amounting to PhP350,000 (roughly US$2.936 million in today’s equivalent or PhP146.8 million) using the bonds as guarantee.
The issuance of bond was made at the request of the City Council which passed an ordinance recommending to the Secretary of Finance the issuance of 30-year bonds as loan collateral in the name of the Commonwealth president, the only person authorized to issue them. Section 1 of the law stipulates:
“The bonds… shall be issued in convenient denominations, in registered form, and shall be registered and transferable and payable [to the national treasurer]. They shall have the same date, bear interest at the same rate, and be payable at the same time as the bonds of the Commonwealth… The interest rate… shall not be in excess of five per centum per annum.”
As the authorized person, the President was imbued with the authority ”to convey and transfer the bonds [to the government] for a consideration,” which was charged to the net proceeds of the sale of the bonds and deposited with the national treasurer under the account titled “Public Works Bond Fund, City of Davao.”
The law placed the discretion to choose the kind of bonds, whether coupon or registered, on the President, stipulating these are to be registered with the National Treasury. It also gave the finance secretary the authority to determine if the principal and interest of the bonds would be paid in Philippine peso or American dollar.
The national treasurer played an important role in the disposition of the bonds, which were exempt from tax. First, he must see to it that the selling of the bonds must be done only at public auction; second, he set the terms and conditions most favorable to the government; and third, he deposited the proceeds of the sale in the name of the National Treasury.
An important provision of the statute was the creation of a sinking fund for the payment of the loan principal and interest, which was placed under the custody of the national treasurer, subject to future investments to be determined by the finance secretary.
Under the same Act, it is also ordered that the city reimburse the national government “the sums so disbursed by it for the sinking fund, interest and expenses of the issue and sale of the bonds, within thirty days after payment of said expenses by the National Government out of the general fund of the city.”
In case the City Council failed to reimburse the guaranteed amount, the internal revenue collector and the city treasurer were authorized and directed “to withhold from the revenues of the said city that may come into their possession an amount sufficient to make the reimbursement or any other reimbursement” for deposit with the national treasury.
To ensure the funds were not used for purposes other than those intended, the director of public works was imbued with the task to supervise the projects, which could only be commenced after the national treasurer had certified the availability of the funds.
More notably, unless the bonds had been fully paid, “the administration, control, operation, maintenance, and improvement of the sewerage system and other permanent improvements established with the proceeds of the sale of the bonds… shall be vested in a board composed of the City Mayor, who shall be the chairman, the Director of Public Works or his representative, and the Director of Health or his representative, as members.”
Moreover, the edict added: “All income derived from the sewerage system shall be credited to a special fund [to] be used only for the following purposes… First, for the payment of the reimbursement… second, for the operation and maintenance of the sewerage system; third, for the improvement and extension of the system, provided that the plans therefor have been duly approved by the Director of Public Works; and fourth, in case there is a surplus…, [it] may be used for the general purposes of the City of Davao.”
But the issue of the projects complying with the strict construction norms is an entirely different matter. The law dealt only about the loan’s processes and nothing more.
