WASHINGTON - Officials from the Republic of the Philippines are here on a whirlwind tour of the U.S. to learn how to issue municipal bonds, and sponsors of the coast-to-coast trip say there may be something in it for everyone.
"The U.S. municipal bond market has a lot of skills that look like an exportable item," said John Petersen, president of Government Finance Group Inc., a Legg Mason company that is sponsoring the two-week visit by officials of several Philippine provinces.
The experience of U.S. underwriters, financial advisers, trustees, and others will eventually be sought by countries like the Philippines that are decentralizing their governments and shifting more power to provinces and other government "subunits," Petersen said. He spoke in an interview last Thursday after the visiting officials were briefed by U.S. agencies and international financial institutions.
As part of that shift of power, countries like the Philippines, which are struggling for funds for desperately needed power projects and other infrastructure, are enacting broad new laws that give their provinces direct authority for the first time to issue municipal bonds, officials at the briefing said.
But emerging countries face formidable problems, the gravest of which is the difficulty of finding international lenders to provide some form of backing for the bonds, they said.
Officials from the international finance agencies expressed concern over the poor track record of developing nations, which are struggling with unstable governments and roller-coaster inflation rates in paying back development loans. But they said they continue to hold out hope that seed money will have some effect in these nations.
The tour by the officials from the Philippines, which started Nov. 9 and extends through Nov. 24. will include visiting roughly 50 different federal, state, and local government agencies, as well as dealers, bond law firms, rating agencies, and industry groups.
Represented at the day-long meeting here last Thursday were: the World Bank, the InterAmerican Development Corp., the U.S.-Asia Environmental Partnership, the Treasury Department, the Securities and Exchange Commission, the Department of Transportation, and the Environmental Protection Agency. The meeting was hosted by the Public Securities Association.
Bond issuers scheduled for visits include: the Metropolitan Washington Airports Authority; the Virginia Resources Authority; the Village of Chevy Chase, Md.; the Baltimore Development Corp.; the Maryland Department of Economic Development; the Port Authority of New York and New Jersey; the Office of the Comptroller of the City of New York; the City of Arlington, Tex.; the City of Fort Worth, Tex.; the City of Oklahoma City; Gov. Barbara Roberts of Oregon; the Oregon Economic Development Department; and the City of Portland.
Officials at the meeting pointed out that one Philippine locality, Cebu, already has sold a tax-exempt bond issue to finance airport development and industrial real estate. The bond was issued last year by a joint corporation formed by the locality and Allaya Real Estate.
The province and real estate firm formed a public/private Corporation, the majority of which is owned by the province, which sold the bonds and will repay the bondholders in stock after the project is converted to a private entity. Under the convertible deal, bondholders convert to stockholders.
Officials pointed to another innovative public-private partnership in the Philippines where a nonprofit organization hooked up with an energy development agency in New Jersey to issue tax-exempt New Jersey bonds that will bring in revenues that can be lent to U.S. companies for working capital in Asian venture projects. New Jersey officials were not available to comment on the partnership.
"Over the years, the municipal bond market has been very insular." Petersen said. "What's happening is the realization that the municipal securities market provides the prototype for sub-national financing that can involve airports" and other projects in the Philippines.
Asked how realistic it is to expect countries to tap U.S. expertise in the near future, Petersen said it depends on the country. "Columbia, Chile, Mexico are reasonably near at hand. Eastern Europe is many years away," he said.
As for the Philippines, Petersen said provincial governments there have a lot in their favor. They have laws modeled after the U.S. securities laws, the natives speak English, and the country is part of the Asian economic boom, he said.
Kenneth Langer, manager of environmental and energy infrastructure for the United States-Asia Environmental Partnership, said he is managing a new $100 million program that will advise U.S. companies on opportunities for partnerships in Asian countries, such as the Philippines, to develop large infrastructure projects such as those for water, power, and hazardous waste.
But when asked by one key Philippine banker whether the partnership would provide a guarantee fund to back up or provide a mechanism for supporting municipal issues of local governments for financing infrastructure, Langer said, "I was afraid you'd ask that." He said while the project is very large by U.S. standards, it has four separate divisions and dollars are stretched thin.
"To be looking for U.S. Asian Environmental Partnership monies that will actually guarantee those projects, no. But what we can do is put in money to help actually search for backers. We would like to help you find those ways, and we think there are ways." he said. He added that the partnership is planning a major credit enhancement study to assess the risks and benefits of implementing new credit enhancements in three or four places, including Asia.
William Dillinger, senior urban finance specialist for the World Bank, said the bank has a long-standing interest in helping municipal governments get access to long-term credit for infrastructure projects. But he said the bank has had "very mixed experience" in providing financial backing.
"We can almost universally say that our municipal credit projects meet the minimum criteria for success." he said. "They disperse our money based on the agreed-upon criteria, but that's often about it. The money never comes back."
But Dillinger said the World Bank should continue to help countries set up some kind of financial engineering that bears some kind of government backing. "
He pointed to a project in Columbia where the risk of lending to the municipal government is not taken by the taxpayer, but by private banks that have to originate loans. Once a private-sector bank has made an infrastructure loan to a government, then FINDETER, a development bank in the country, rediscounts infrastructure loans.
Meanwhile, Securities and Exchange Commissioner Richard Roberts on Thursday told the Philippines officials, "Your visit to the U.S. takes place at an interesting time.
"Among other things, the recent presidential election, the riot in Los Angeles, the flood in Chicago, and the hurricane in Florida have brought attention to the finance needs of U.S. state and local government and thus to the need for an efficient public finance ... system."
Roberts urged local officials in the Philippines to develop an enforcement program to "ensure the integrity" of their market as their public finance system develops.
"Hopefully, you will establish an enforcement presence in your marketplace much more quickly than the SEC did in our municipal securities market," he said, noting that he is not necessarily speaking on behalf of the commission.