Part 1

Executive Summary

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EXECUTIVE SUMMARY

INTRODUCTION

As defined by the Department of Budget and Management (DBM) in its budget

document “Budget of Expenditures and Sources of Financing” prepared public
debt refers to the total indebtedness incurred by the National Government, local
government and government corporations or financial institutions from
industries, corporations or financial institutions, whether private or government,
foreign or domestic, which are fully supported and guaranteed by the national
government.

The government normally resorted to borrowings in case collection from taxes,

customs duties and fees collected by authorized government agencies are not
enough to finance development projects and sustain economic growth.
Government borrowings are negotiated either by the DOF or by the concerned
Government Owned and Controlled Corporations (GOCC).

The management of public debt is one of the functions of the Department of

Finance (DOF). The DOF aimed to build a strong fiscal position, among
others, through a sound management of public sector debt envisioned to realize
the following:

 a stable fiscal situation with adequate resources for government projects and
budgetary which could be adequately financed;
 a borrowing program that is able to avoid the crowding-out effect on the
private sector, and minimizes costs;
 a public sector debt profile with long maturities and an optimum mix of
currencies that minimizes the impact of currency movements; and
 a strong economy with stable prices and strong growth.

It is then adopting prudent financing strategies to ensure steady flow of

financing without financing costs undermining the developmental aspects of the
national budget and prudent management of contingent liabilities to ensure that
there will be no guarantee calls that would impact in the budget.

As reported by the DOF, the total public debt as of years ending December
2002 and 2003, are P5.158 Trillion and P5.920 Trillion, respectively. This is
equivalent to 122% to 138% of the total Gross National Product (GNP) and
Gross Domestic Product (GDP).

These figures do not include the debt of other GOCCs not directly guaranteed
by the national government and the reserve liabilities of the Local Government
Units (LGUs), the One Stop-Shop Tax Credit, and the Retirement and
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Separation Benefits System (RSBS) pension funds. These debts, though not
directly guaranteed by the national government, would likewise be assumed by
the national government in case of default.

The national government repays the public debt either out of the national
government’s collections from duties and taxes or from other additional foreign
or domestic loans. For the past five years, total repayments increased from 43%
in CY 1999 to 75% in CY 2003 of the total national government revenues
consisting of collections from customs duties, taxes and fees.

The increasing public sector deficit affecting the government’s fiscal condition
raised the concerns of the public and the country’s creditors. Thus, this audit on
the management of public debt was undertaken.

AUDIT OBJECTIVE

The audit was conducted to assess the consistency and adequacy of existing
laws, rules and regulations in ensuring proper management and monitoring of
public debt taking into consideration the following:

 debt limitations;
 debt components;
 public debt records; and
 monitoring.

AUDIT SCOPE AND METHODOLOGY

The audit focused on the evaluation of existing systems, policies and

procedures on proper management and monitoring of public debt and accurate
and reliable maintenance of records. The existing systems were evaluated using
the recorded foreign and domestic loans from January 2002 to December 2003.
The agencies covered in the audit are the BTr, DOF, National Economic and
Development Authority (NEDA) and Municipal Development Fund Office
(MDFO).

The team assessed the consistency and adequacy of laws, rules/regulations,

policies and procedures and its implementation on the basis of the following
audit criteria as shown on the next page:
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 Well Established Public Debt Indicators;

 Well Defined Public Debt Components;
 Adequate Evaluation Criteria for Foreign Assisted Projects;
 Sound Monitoring and Control Mechanisms; and
 Accurate and Reliable Reporting.

To attain the audit objective, the team performed the following procedures,
among others:

 Evaluated existing laws, rules/regulations, systems and processes in the

management and monitoring of loans;
 Identified government offices responsible in the management and
monitoring of public debt and assessed their performance;
 Interviewed concerned personnel;
 Gathered data/information from other government agencies to confirm the
accuracy of public debt stock monitored and reported by the BTr and
DOF; and
 Evaluated utilization and validated existence of selected projects funded
from foreign borrowings through ocular inspections.

The audit was conducted from July 12, 2004 to March 25, 2005 pursuant to
MS/TS Office Order No 2004-024 and 024A dated June 24, 2004 and
September 1, 2004, respectively.

AUDIT CONCLUSION

A. The audit concluded that existing laws, rules and regulations were
inadequate to ensure proper management and monitoring of public debt as
evident in the following:

1. There is no mandated ceiling on public debt. This resulted in unlimited

contracting of loans and issuance of guarantees, and continuous
programming of expenditures over and above the estimated income. As
the estimated income were most often not realized, actual borrowings
even exceeded the amount programmed to be borrowed. The loan
proceeds did not, however, significantly contribute to our economic
development as these were expended for loan repayments and not to
projects.

Because of the absence of limitations, the total loan repayments

included, among others, servicing of GOCC debts assumed by the
national government amounting to P63.959B from CYs 1999 to 2003
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and advances by the national government for GOCC loans which

amounted to P36.229B as of December 2003.

2. As of December 2003, the DOF’s data on outstanding public debt of

P5.920 Trillion is equivalent to 137% of the GDP. Of this amount,
foreign borrowings amounted to P3.467 Trillion which is equivalent to
80.7% of the GDP. The IMF’s Debt and Reserve-Related Indicators of
External Vulnerability (2000) considers 50% as the critical point for
external debt to GDP ratio. Included in foreign debt are loans of
GOCCs assumed by the national government pursuant to Proclamation
No. 50 and guarantees extended by the national government to the
GOCCs.

3. There is inconsistent treatment of liabilities of the different sectors for

lack of definition of the components to be considered as public debt.
For national government and LGUs, the DOF considers only loans
contracted and bonds issued. However, for the 14 monitored GOCCs,
the DOF includes all liabilities reflected in their respective financial
statements which may include payables to contractors, employees and
other miscellaneous liabilities.

4. The DOF’s data on outstanding public debt does not also include
indebtedness of other government corporations amounting to P22.585B
and contingent liabilities on account of guarantees issued by the
national government on BOT/PSP projects estimated to be P308.850B.
Payments for some of these loans have already been advanced by the
national government. In addition, the amount of indebtedness of LGUs
differs from the amount reflected in the LGUs financial statements.

Under these conditions, the government could not make an accurate

assessment of its financial condition.

B. A number of projects funded from borrowings were approved without

proper evaluation thus, risks in project implementation were not addressed
before the projects were started. The project implementation were either
delayed or the loans were totally cancelled due to unpreparedness of the
implementing agencies, unresolved right of way problems, lack of funds or
inadequate facilities, among others, after incurring substantial amounts of
project expenditures including commitment fees, thus, wasting limited
government resources at the expense of the taxpayers and depriving the
public of the benefits to be derived from the projects.

The project evaluation likewise did not cover adequacy of planning and
project design to ensure that projects would be completed, operational and

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could be properly maintained. There are projects with substantial loan

balances but already undergoing rehabilitation works funded under other
foreign loans.

C. The government’s interest is not adequately protected under EO 252.

While the assets of the MDFO to be transferred to the MFC created under
EO 252 amounted to P8.5B, the MFC’s capital stock reflecting the national
government’s equity was only P4B. This amount is not sufficient to cover
the MDFO’s assets alone. Under this arrangement, the national government
remained responsible for amortizing the loans transferred to the MFC for
relending to the LGUs with all repayments made by the borrowing LGUs
retained by the MFC.

As management of public debt is critical to ensuring economic development as

well as sustainability of government projects and operations, the team
recommended measures (Part IV) to address these concerns.

MANAGEMENT’S REACTION TO AUDIT OBSERVATIONS

The results of the audit were transmitted to the DOF, BTr and NEDA on May
26, 2005 for comments. They acknowledged that there are aspects in public
debt management which have to be improved and that they are in the process of
initiating needed improvements. Their comments were incorporated in the
report together with the team’s rejoinder.