Local government units especially municipal governments in the region have to better monitor the P90-million bond flotation project in Nabunturan, Compostela Valley. As of now, the bond flotation is already in the works after the feasibility study for the project pushed by Mayor Macario Humol was approved by the majority in the local sanggunian three weeks ago. The resolution approving the FS is now awaiting deliberation in the provincial board, and should the latter fails to act on it in a month’s time it is good as confirmed based on the local government code. Then the bond flotation in Nabunturan legally takes off.
The FS is prepared by the mayor’s chosen financial adviser-consultant, one firm that goes by the name Preferred Ventures Corp. (PVC), which has at least two failed and busted municipal bond floats tailing its track record in this yet baby financing industry.
Humol, a third-termer, has pushed for the bond flotation to tap private funds for the construction of a new public market building, which would replace for the stalls that were gutted by a fire three years ago. The mayor is known to be a frugal steward of funds since his first term as he was observed to be not keen in having his municipal coffer tied up with loans from banks. It’s his feat that he acquired heavy equipment using internal resources.
Why a sudden change of heart in his last term by his aggressive campaign to float bonds whose repayment obligations would last for 7 to 10 years is quite a tall query as the bond flotation is just the same dog, nay nastier dog with a different collar (read: it is still loan made inversely, not secured from banks but from private persons and firms through the underwriter or ahente).
We will explain this now to know what is this thing called bond flotation. It is like a transaction where you as businessman assign the future income of your business as payment with added interest for the money you get from others who join with you in making an income-generating project. To legalize the transaction with your co-investors or so as to assure them that you would be returning their money with added interests, you need a legal document and this is what the bond is- a scrap of legal paper that you issued to your co-investors.
But there is another actor in bond flotation- the underwriter or ahente, who would get the bonds in bulk in case there would be no investors or buyers of your bonds. This ahente would either buy the bonds in bulk by using his own money or resorting to bank borrowing or by selling the bonds to his own buyers, or a combination of these. In return, the ahente for helping the businessman who is facing an absence or lack of investors, gets underwriter fees, other fees and charges including hidden fees (read: tong-pats) on top of the interest he would be earning from buying and selling the bonds in bulk. Of course, the ahente makes sure that his total tong-pats should be over the interest charges he would be paying for his own bank borrowing which he uses to buy the bond in bulk.
In short, bond flotation is still a borrowing not secured directly from banks but made inversely either or both from investing persons and firms and through the ahente (underwriter) who profits much from his tong-pats in buying through his own capital or by borrowing from banks, and selling the bonds to his own buyers.
Given these, why can’t just Mayor Humol of Nabunturan and his majority cabal of councilors borrow directly from the banks as a shortcut and do away from paying the exorbitant P1.35 million underwriter fees, P900,000 guarantee fees, P450,000 trustee fees, additional fees, charges and interests and hidden charges (tongpats) for the ahentes, besides doing away from paying the same exorbitant P2,7 million consultancy fees, P6.1 million for architectural and engineering design and other pre-construction expenditures?
Now put the Internal Revenue Allotment (IRA), that share of tax from the national government which comprises the bulk of the town income (usually 80-90 percent), in your future income from business. Note that the IRA is an assured income as the government will never go bankrupt being a tax collector. It’s also the source of the expenditure for the most of the personnel services, maintenance and operating expenses, infrastructure development and basic social services of the LGU.
Unfortunately, it is this precious IRA that is made as the collateral and assured source for the repayments of the bond obligations as it put in the sinking fund in installments automatically debited by chosen trustee bank to assure that the brokers and ahentes of the bond flotation would be laughing in their way to the bank. (For my online edition, visit my blog at: http://cha4t.wordpress.com)
