31 January 2010

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MY FORMER City Hall colleague, Jessie Natividad, must have been following my ongoing conversation with Atty. Che Carpio.

When I woke up this morning, I got an email from him containing the link to Carpio's latest column, which Vox Bikol published in its website a day after our face-to-face at the Ateneo when he talked about Kaantabay sa Kauswagan, Naga's urban poor housing project.

I of course obliged him with the following reply:

Dear Attorney Carpio:

This pertains to your latest column entitled “Tinimbang Ka Ngunit Kulang,” which continues to amuse me.

First off, this is an ongoing conversation between us. Since I first emailed you last Jan 17, you will take note that the message came from my email address; and it was my name that appeared as its author. It is only in your mind that it was Mayor Jesse Robredo responding, not I.

Having said that, anyone interested in finding out what I emailed you the second time around can check my weblog. I stand by what I wrote; if your or anybody else’s sensibilities are offended, then I’m sorry for that and the attending hurt or discomfort. But I will never apologize for correcting distortions and data selectivity that would amount to intellectual dishonesty.

Let me now address your clarifications point by point:

1. The only reason why the S&P report is not available in the website is because S&P marked it confidential. That much is clear from my email to Julma when I forwarded it to her per your request.

2. To the contrary, your claim that “intermediate is a dismal 50% rating” and a “failing mark”” is what I will call a spin. Because nowhere in that report did S&P conclude that way. They were your simplistic conclusions that do not do justice at all to the report in its entirety.

Consider, for example, the following snippets from the Financial Management Assessment (FMA) Report’s “Overview of Naga City’s key strengths and weakness” (underscoring mine):

Not withstanding the systemic constraints and institutional weaknesses afflicting Naga City, the strongest areas of financial management which drive the overall score for the city government include annual budgeting at Intermediate, financial reporting and disclosure at Intermediate Plus and debt management at Intermediate Minus.

Despite the lack of budgeting or accounting software, the city has been accurate in its budgeting performance on both revenue and expenditure. And as mentioned, its audited financial statements are free of material qualifications, a rarity among Philippines LGUs. This is a significant driving factor behind the city’s overall score as well. Naga city has also proven to have the capacity to managed debt and demonstrated a relatively high level of quality in its debt monitoring.



The city’s financial statements had received clean audit opinions from COA in the last few years. No notable discrepancies appeared on Naga’s audited statements except for the usual inconsistency in the valuation of physical assets, and COA reported that the city is expected to resolve them by end 2008. Naga’s transparency in its reporting of financial performance is also noteworthy, with the comprehensive publishing of its annual budget, interim annual and quarterly financial statements released on a timely basis on the city website. However its financial reporting score is constrained by the lack of accounting software that would potentially reduce paperwork and offer easier access to financial information within the city administration. Nonetheless, Naga has still managed to consistently produce reliable financial statements despite the lack of electronic solutions.

Likewise, despite the absence of any budgeting software, Naga’s annual budgeting performances have been strong and demonstrated relative accuracy on both revenue and expenditure planning. It is conservative on revenue budgeting, with final outcome more often than not exceeding initial budgeted amount. Correspondingly, expenditure outturn has been lower by an average of 1.6% from budgeted amounts in the period 2005-2007 (albeit with some volatility from year to year). Though Naga’s annual budgeting process is still largely characterized by incremental-based, it is one of the few LGUs to have at least adopt some form of programmatic expenditure planning. Currently, around 15%-20% of the city’s budget is estimated to be program-based.

The Naga city government demonstrate adequate capacity in debt management. Unlike most LGUs who have monthly debt repayment automatically deducted from their monthly IRA transfers, the Naga administration keeps good track of its amortization schedule and issue checks on timely basis to directly repay lending banks. Furthermore, all of the city’s loans are negotiated with clauses that allow prepayment without penalties. The city government actively monitors borrowing rates and would seek cheaper refinancing whenever the opportunity arises. However, like most LGUs, Naga’s debt management score is weakened by the lack of a coherent and explicit debt policy. Alleviating this is that the city’s medium-term investment plan (LDIP) has acted as a pseudo-debt policy of the current administration.
Together with the FMA is the Credit Rating Report on Naga, whose section entitled “Comparative Analysis” contains the following:
International peers
The Russian entities of Nizhny Novgorod (BB-/Stable/--) and Tver Oblast (B+/Negative/--), as well as the Ukrainian capital city of Kyiv (CCC+/Watch Neg/--) and the Turkish city of Istanbul (BB-/Negative/--) are suitable international peers for the City of Naga (which is was given a credit rating of BB-/Stable)



Like some of its peers, the City of Naga has been able to partially fund aggressive capital expenditure programs in recent years with operating surpluses, which has helped to limit its borrowing requirements. However, the overall average level of capital expenditure relative to total expenditure reported by Naga (18.5%) is still below that for its international peers (30%) from 2005-2007. Although its physical infrastructure is relatively well-maintained by national standards, it is largely inadequate in the international context.

Naga’s direct debt level has been steadily declining, unlike Istanbul’s. Coupled with a healthy and fast-rising cash position, the city’s overall debt profile is favourable and compares well to that of Nizhny Novgorod. Likewise, Naga’s strong budgetary performance stands out among its peer group. However, this is in part a function of the city’s weaker capacity to administer capital projects (stemming from lack of benefits of scale), and also a function of the systemic borrowing constraints faced by Philippine local governments.

Local peers
Unlike its domestic peers who are located in Metro Manila like Quezon City, Taguig and Mandaluyong, who have relatively more diversified service-base economies, Naga is predominately engaged in the agrarian sector. The lack of a distinct geographic or industrial advantage has resulted in lower property value and smaller-scale businesses operating in Naga, which in turn limits the city’s real property and business tax collection. In mitigation, its local economy has been relatively more insulated than Metro Manila peers in this current global downturn. In addition, outside the capital region, Naga’s tax base and per capita income would compare more favorably than those of Iligan and Tacloban.



The city’s budgetary performance is nevertheless stronger than all rated Philippines cities, despite the fact that other cities have far more revenue streams at their disposal. This reflects to some extent the more advanced financial management practices of the Naga city government than its peers. Likewise, despite its more limited resources, Naga has been able to maintain robust liquidity coverage and a direct debt burden better than the average for its peer group.

This is hardly the picture of a “failing” city and its local government.

This is precisely why I challenged Vox Bikol to publish it wholly and let its readers decide. To me, it is an unadulterated take on the strengths and weaknesses of the city’s economy and the city government’s stewardship of its financial resources.

I will have to check if our point person in this credit rating project has already secured the needed clearance from S&P to publish the report in the city website. If yes, rest assured that we will make it available. Nonetheless, I am uploading the report in my blog, albeit unofficially, because I believe that its potential to educate us clearly outweighs its confidential nature.

3. I am happy that you have now acknowledged Naga’s score relative to its peers, the glaring omission that actually prompted that “intellectual dishonesty” remark in my previous email. Consequently, I will now gladly reconsider that assertion.

4. I will concede your point on the scope of that World Bank-funded pilot project, which is only limited to eight cities thus far. But I am confident that this inference is in order for the following reasons:
  • To have been considered, and more importantly, included in a pilot project on the credit rating of Philippine cities (out of the 120, because the League of Cities of the Philippines is still contesting the controversial SC decision affirming the cityhood of the other 16) already says enough about Naga. The mayor’s SOCR already covered this. But clearly, there is something about Naga that merited the Bank’s attention.
  • Quezon City, the richest LGU in the Philippines today, is among the pilot cities. So are Marikina, incidentally the most innovative and most awarded city in Metro Manila; Mandaluyong, Malabon and Taguig. But as you yourself acknowledged, albeit grudgingly, Naga more than held its own compared to these richer localities and their much more diversified economies. Unlike you, I therefore like our chances.
  • Your asides about transparency notwithstanding, the report clearly recognized, and it bears repeating here, that “Naga City is the only city assessed so far to have consistently received a clean opinion from COA on its financial statements, which placed the quality of its financial reporting considerably above domestic peers.” I have every reason to believe we will continue to be so, even if credit rating covers the entire universe of Philippine LGUs.
  • My experience with Philippine local governments -- and my work on public education has brought me to a number -- is that for the most part, they have continuing difficulty with disclosure and openness in regard to their finances. (For instance, I will be very interested to see whether the CWC is making money or not. By the way, I have written COA twice, requesting that it put online its 2008 Audit Reports for the Bicol cities and provinces; thus far, they have only obliged us with Masbate province and city.) To my knowledge, and of course I will be happy to be corrected on this matter, only Naga publishes its proposed and approved annual budget, as well as its quarterly financial statements.
5. Finally, that “consuelo de bobo” thing again highlights the fundamental difference in our respective positions: you may have become a little more honest in laying down the facts, but the “half-empty” perspective continues to color your opinion.

In your static world view, that condescending put-down (that Naga merely topped the class of Philippine failures) is consistent with your negative perspective; if one reads closely, it smugly implies that Philippine cities do not have what it takes to be world-class -- simply because their best started out with a measly “Intermediate” rating when S&P first came to local shores, courtesy of the World Bank.

In that world view, its credit rating of BB-/Stable for foreign currencies -- mind you, better than the capital cities of Ukraine and Turkey; BB+/Stable for local currencies; and AA+ in the national rating system -- only a shade lower than AAA, S&P’s top investment grade given to “the best quality borrowers, reliable and stable” -- it proposes for Philippine local governments do not matter at all.

Unfortunately for you, the Naga city government not only looks at the glass half-full, but believes it is our responsibility to fill it up the brim. Instead of sulking and fault-finding, we celebrate affirmations that come our way, like that S&P report, because they tell us we must have doing some things well and right all along. Thankfully, its FMA points out precisely where and what we need to do make the system better. I am confident that our current and next leaders are as bullish about the future and have the same positive, can-do attitude.

Again, I will not take it against you: you are entitled to your beliefs, in the same manner that I am entitled to a vigorous defense of the city’s position against continuing distortions that mask reality.

And I don’t have be a Mayor Robredo to be able to do it.:)

Those interested in the S&P report can go check the following:

Credit Analysis of Naga City

Financial Management Assessment (FMA) Report on Naga City

Appendix - Overview of the Philippine Inter-Government System

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