Philippines Impact Brief


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Philippines Impact Brief

  2. 2. On the Cover: Makati Skyline,San Fernando Water Districtpumping stationCredit SEGURA IP3 Partners LLC BACKGROUND entered into a DCA Guarantee Agreement with Access to basic services dramatically affects the living LGUGC to re-guarantee 30 percent of the principal conditions, health, and economic wellbeing of the and interest LGUGC is obligated to pay in the event Philippine people. However, of default of a loan qualifying for coverage under the ABOUT DCA infrastructure in the agreement up to an identified ceiling. The DCA USAIDs Development Credit Authority Philippines to support basic guarantee was initially focused on the municipal bond (DCA) was created in 1999 to mobilize local private capital through the services is lacking, leaving market and infrastructure projects of LGUs, but over establishment of real risk sharing many of the country’s poor time evolved to focus on water infrastructure relationships with private financial without access. Funds projects and included independent water districts, in institutions in USAID countries. The tool is available to all USAID overseas required for infrastructure addition to local governments, as eligible borrowers. missions and can be used as a vehicle improvements and for providing much needed credit to an EVALUATION OBJECTIVES expansion far outstrip array of enterprises and underserved USAID’s Economic Growth, Agriculture and Trade sectors. The evaluation in the current financing sources Philippines is part of a set of Bureau’s Office of Development Credit (EGAT/DC) including external donor evaluations EGAT/DC is undertaking commissioned SEGURA/IP3 Partners LLC to conduct in different countries, to test a series of resources. Promotion of this evaluation of the DCA agreement with LGUGC developmental hypotheses related to private financing of local the DCA guarantees. in the Philippines. The evaluation was guided by an public infrastructure is one Evaluation Framework – developed by SEGURA/IP3 in approach USAID/Philippines conjunction with USAID and adapted to the has taken to span the breach between those that have Philippines context – designed to assess results at access to essential services and those that do not. three levels: output, outcome, and impact. It also In the Philippines much of the responsibility for local examined the effect of exogenous influences. The infrastructure rests with local government units evaluation assesses the performance of the DCA (LGUs). Although local governments have the guarantee with respect to the mobilization of private authority to borrow private capital, they have almost commercial lending to (initially) LGUs and (later) exclusively borrowed from government financial water districts. institutions (GFIs). Private financial institutions have been reluctant to lend to LGUs due to a lack of EVALUATION METHODOLOGY information, skepticism about the creditworthiness of A two-person team conducted the evaluation using a local governments, and a tradition of conservative combination of quantitative and qualitative methods. lending practices. Field work took place in Manila and outlying areas during July 8-17, 2009. Primary sources of The Local Government Unit Guarantee Corporation information were interviews with key informants (LGUGC) was formed in 1998 to provide credit representing a variety of DCA stakeholders; enhancement to attract private financing for local documents pertaining to the DCA guarantee; and public infrastructure projects. LGUGC was initially secondary information from the USAID Credit owned by the Bankers Association of the Philippines Management System, LGUGC, government and (a trade organization of commercial banks), and private financial institutions, target sector borrowers, Development Bank of the Philippines (a GFI), with and additional research. Asian Development Bank added as an equity owner in 2005. Soon after its formation, in 1999, USAID PHILIPPINES DCA LOAN GUARANTEE Ending Number of Aggregate Amount of Starting Date Utilization Rate Average Loan Size Date Loans Loans 1999 2014 11 US$28,521,273 86.3% US$2,592,843
  3. 3. KEY FINDINGS AND CONCLUSIONS OUTCOME Conclusions A number of factors contributed toOUTPUTConclusions The purpose of the DCA guarantee as LGUGC’s achievement of desired DCA outcomes (i.e., encouragement of private capital flows to thefinally amended – to strengthen LGUGC’s ability to target sectors, increased local credit marketmobilize private capital for creditworthy water confidence in LGUGC, and expansion of the scope ofinfrastructure projects of local governments and its operations). Most important among the factorswater districts – complemented LGUGC’s strategy to were the revised strategy of USAID and LGUGC tofacilitate private financing through loan guarantees for include water districts under the DCA guarantee, aslocal infrastructure projects. The formal well as USAID direct technical assistance and DCAcommitment of USAID in the form of the DCA monitoring support, which served to strengthen theguarantee assured rigorous oversight and was critical LGUGC. LGUGC wasin establishing the credibility of LGUGC among EVALUATION QUESTIONS incorporated intoprivate financial institutions and other stakeholders. Output—Did LGUGC’s use of the collaboration between USAIDThe DCA guarantee was used by LGUGC to improve DCA guarantee conform to guarantee and the Government of Japan objectives as described in theaccess to private sources of credit for local Guarantee Agreement (i.e., “to to facilitate private investmentgovernments and water districts where little or none strengthen the LGUGC’s ability in water and sanitation. The mobilize private capital lending forhad previously existed, although the volume of local government infrastructure DCA guarantee led LGUGClending was less than anticipated due to adverse services and facilities and for water to guarantee loans to the districts in the Philippines”)?external influences. There is evidence the DCA target sectors without the Outcome— Did the DCA guaranteeguarantee may have played a part in increasing tenors influence behavioral changes at the DCA re-guarantee. Sinceof LGUGC guaranteed loans to water districts (both LGUGC-level, and did LGUGC’s private financing effectively experience with the DCA guaranteewith and without DCA coverage). played no role in the target improve access to credit for entities inFindings in support of these conclusions include: sectors before the LGUGC, the target sectors outside of the DCA guarantee coverage?• LGUGC made 11 DCA guaranteed loans to its loan guarantees made Impact— Did the guarantee have a LGUs and water districts totaling approximately outside the DCA guarantee demonstration effect that improved access to credit for entities in the US$28.5 million, including six LGU bond issues increased access to credit for target sectors by increased lending and five water district loans. target sector borrowers. from the private banking sector without use of the guarantee?• Interviews confirm that the DCA guarantee LGUGC has also begun to significantly enhanced the confidence of private cautiously expand its guarantee activities outside of financial institutions in LGUGC, thereby the target sectors, and has broadened its services by encouraging lending to the target sectors. becoming program manager of three other guarantee• There were no significant differences in interest funds for other organizations. rates or the collateral required between DCA Findings in support of these conclusions include guaranteed loans and other LGUGC guaranteed • Interviews with private financial institutions loans. However, the pattern and trend of tenors repeatedly affirmed the importance of LGUGC of all LGUGC guaranteed loans to water districts and its perceived backing by USAID as critical to suggest experience of private financial institutions their decision to enter the new areas of LGU with lending under the DCA and LGUGC and water district financing. guarantees played a part in the improvement of • Interviews with LGUGC management and staff the tenors of such loans to the 10 year DCA indicated that experience with the DCA permitted maximum. guarantee of bonds/loans to LGUs prepared it for implementation of the decision to expand
  4. 4. LGUGC GUARANTEED TARGET SECTOR LOANS the DCA guarantee to the water district market. BY VALUE• LGUGC has guaranteed 11 loans to the target sector (eight bond issues/loans to LGUs and three loans to water districts) without the protection of the DCA guarantee, totaling over US$42.1 million and representing 60 percent of its entire target sector loan guarantee portfolio.• LGUGC has extended its guarantees beyond the target sectors by guaranteeing one loan to a renewable energy company for a mini-hydroelectric plant, and two loans to bulk water suppliers of water districts. LGUGC currently serves as program manager for three energy sector guarantee programs of other donors/international financial institutions.IMPACTConclusions Being a partial re-guarantee of a guarantee In the long term, the impact of the DCA guarantee as amakes assessment of the impact of the Philippines DCA demonstration model could be significant.guarantee difficult to quantify, and primarily subjective.The impact of the DCA guarantee has been modest to Findings in support of these conclusions include:date. However, the DCA guarantee was a key factor, in • Prior to the LGUGC, there was virtually no access tocombination with a number of elements, in initiating private sector financing in the target sectors.private lending to the target sectors. The true impact • One private financial institution has made a loan to amay be what was begun—the process of introducing water district without a guarantee, which it would notprivate investment in the target sectors. The process have made without its experience with LGUGC, andcontinues with the creation of the new Philippines Water is considering lending to LGUs without a guarantee.Revolving Fund (PWRF), a joint U.S./Japan initiative to • Target sector borrowers have accessed aboutcoordinate and combine concessionary donor funds with US$70.6 million in private financing guaranteed bycommercial private financing for water infrastructure LGUGC (both DCA and non-DCA guaranteed loans).projects. The PWRF, launched in October 2008, utilizes • LGUGC participated in a pilot project, whichLGUGC, a new DCA guarantee and concessionary loans presaged the PWRF.from Japan International Cooperation Agency (JICA) to • Based on experience with the subject DCA guarantee,attract longer-term private investment and build on the a new guarantee with LGUGC was approved byprogress made under the first DCA guarantee. USAID to serve as an integral part of the PWRF.Experience gained with this DCA guarantee and the • Several donor/international financial institutionexistence of LGUGC, as strengthened by the monitoring projects under development are directed towardand technical assistance that accompanied the DCA either urban infrastructure generally or the waterguarantee, were important factors in the formation of the sector specifically, including a World Bank projectPWRF and the commitment to participate of private aimed at assisting less-than-creditworthy waterfinancial institutions. Furthermore, the World Bank is districts to complement the PWRF.planning a program to complement the PWRF. This publication was produced for review by the United States Agency for International Development. It was prepared by SEGURA/IP3 Partners LLC under SEGIR Global Business, Trade and Investment II – IQC Indefinite Quantity Contract, Number EEM-I-00-07-00001-00 Task Order # 04, Development Credit Authority Evaluation CONTACT INFORMATION U.S. Agency for International Development Office of Development Credit 1300 Pennsylvania Avenue, NW Washington, D.C. 20523 Keyword: DCA