BOND FLOTATION FOR TOURISM DEVELOPMENT

THE BORACAY-AKLAN PROVINCIAL BONDS (BAPB)

AKLAN PROVINCE: A PROFILE

Aklan is the youngest of four provinces in Panay Island, but, historians believe it is one of
the country’s oldest. Legislated as a province only in 1956 upon separation from Capiz, it was
actually established in 1213 as Minuro it Akean by Bornean settlers led by Datu Puti when he
purchased the whole Panay Island from the Ati King Marikudo for a golden salakot (native head
gear) and necklace, bolts of cloth and some trinkets. The occasion was celebrated with great
revelry, which the Aklanons have continued to observe through the years as the Ati-Atihan
Festival.

The Province has adequate infrastructures: a relatively good network of roads and bridges
spanning its 17 municipalities; wharves and two airports linking it with Manila and the neighboring
provinces; and adequate communications and electric power facilities. Kalibo, the capital town
and center of commerce, is also the seat of the Provincial Government and the National
Government offices in the area.

Tourism: The Main Industry

Boracay, situated off the northernmost tip of the main island of Panay, started to be a tourist
attraction in the seventies, supposedly, after having been “discovered” by a foreign film crew while
shooting a movie on the Island. Its fabled pristine white beaches, clear blue waters and virgin coral
reefs, have since made the Island a popular tourist destination. In 1990, the BMW Tropical Beach
Handbook cited it as one of the best beaches in the world; and in 1996, it was named by a British
publication as the best tropical beach in the world.

In the eighties, tourists started coming to the Island in large numbers. In 1988, the
Department of Tourism recorded 30,836 tourists as having visited Boracay. This number grew by
more than 500 percent in 10 years (1988-1997), reaching 164,429. A sudden decline was briefly
experienced in 1995 and 1998 in the aftermath of the Asian financial crisis, but tourism recovered
quickly, and, in 1999, tourist arrivals were 181,813. This number continued to grow steadily in the
next five years (1999- 2004), at an annual average rate of 20 percent. The number of tourists during
these years consistently exceeded projections. In 2004, tourist arrivals registered a record 428,751
(Figure 5.1). This is a 135.8 percent increase in five years. During the first eight months of 2005,
the number reached 362,448, a 13 percent increase over the same period of the previous year.
Tourism has concededly emerged as the main industry of the Province.

Financial Profile (1995-2004): An Overview

The Province had experienced tremendous growth in both income and expenditures during
the past 10 years. From Php 127,325,331 in 1995, total income increased to Php 329,073,880 in
2004, representing more than 150 percent increase. Annual average increase in income during the
period was 11.9 percent. Increases were noted in both national subsidy and locally generated
income. Aklan’s total income is derived primarily from national government subsidy, specifically,
the Internal Revenue Allotment (IRA), and locally generated sources from tax and non-tax
revenues.
 From Php 15,041,840 in 1995, it increased nearly three times over a ten-year period, to
Php 40,413,300 in 2004. This meant an average annual growth rate of 10.69 percent. Taxation had
been, traditionally, the main source of local income for the Province. From l995 to l999, tax
revenues accounted for 62 to 72 percent of local income, while non-tax income constituted only
from 27 to 32 percent of total income. Tax revenues were derived primarily from Real Property
and Business Taxes, while fees, charges, and economic enterprises were the source of non tax
revenues.

Tourism Infrastructure for Resource Generation

Officials of Aklan have long realized that while tourism was its dominant industry, the
Province had derived only peripheral financial benefits from it. The Municipality of Malay, which,
by accident of geography, has Boracay Island in its territory, enjoyed much of the tourists’ money
which elevated it from a barangay into an independent municipality.

In 1995, the newly-elected young Governor of Aklan, Florencio T. Miraflores, thought it

was time for the Province to actively promote the tourism industry for the LGU’s benefit. He was
convinced that tourism was the proverbial goose that will lay the golden eggs for the Province, and
that it was time for tourism in Boracay which had not realized its full potential, to help propel
Aklan’s economy. The development of Boracay was, therefore, adopted as one of the priority
programs under the Provincial Development Plan, and a major item in the Provincial Priority
Investment Plan approved by the local legislative body. Focus of the Development Program was
the transportation infrastructure, specifically the development of alternative world-class facilities
to replace the existing antiquated system.
 By addressing intractable transportation infrastructure problem, the Provincial Governor
was certain that more tourists will visit the Island throughout the year. The infrastructure Project
envisioned the Caticlan jetty port to have 10 docking stations capable of accommodating larger
vessels coming directly from whatever port in the country and later, even from overseas. The
terminal building, on the other hand, will offer a wide range of amenities and services to visitors,
including waiting lounges, ticketing booths, tourist information and assistance desks, airline, resort
and bank offices, and cargo and luggage areas, much like those found in airport and seaport
passenger terminals in developed countries.

The Process
Marketing the Project
In May 1996, the Department of Tourism reported that tourist arrivals for the first five
months of the year had already exceeded the projection for the whole year. It considered this as an
indicator of higher growth rate of tourism in the coming years. It decided it was time to fast track
the development of the Island in anticipation of large numbers that usually come in the latter half
of the year. It created, for the purpose, the Aklan Provincial Tourism Special Task Force or simply
Task Force Boracay.

The Task Force identified as priority projects potable water supply and solid waste
management which, in recent years, have been concerns raised by environmentalists. The
Governor brought up to the Task Force his proposal for a jetty port and terminal building, adding
that the total development of the Island can be realized, only if the persistent problems of air,
seaport, and passenger transportation facilities were addressed.

With the Task Force Boracay having pledged support to the prioritization of the Project,
the Governor and members of the Sangguniang Panlalawigan began campaigning for the support
of the local business and community leaders, as well as the national government agencies, for the
Project. They cited the direct impact of these infrastructures in further promoting tourism and its
multiplier effect on the local economy. Provincial officials explained that the proposed Caticlan
Jetty Port and Passenger Terminal Project will encourage more tourist arrivals which will
eventually trigger more demand for goods and services, thus, leading to more business and
employment opportunities. This will translate to more income for the LGU in the form of taxes
and fees. Real property values will rise and real property tax collections will increase. These added
revenues will enable the Provincial government to pursue aggressively other development projects.
For the people of Aklan, the Project will provide more opportunities for employment and income.

Financing the Project: Options

 With the community giving full support to the Project, the Provincial officials now had to
face the inevitable issue of sourcing of funds for its implementation. It was clear from the
beginning that the resources of the Province cannot support the Project. The Project package was
estimated to cost Php 100 million, with Php 40 million for the Caticlan jetty port and passenger
terminal project, and Php 60 million for the smaller passenger terminal and seaports in Sitios
Tambisaan and Cagban in Boracay Island.

From the time the Project was being conceptualized, the Governor was fully convinced that
bond flotation was the ideal financing option. The Governor was personally convinced that bond
flotation will be successful and that the Project will be viable, being essentially income-generating.
He also believed that the largely untapped tourist industry will, itself, ensure the sustainability of
the Project. However, he was concerned that the implementation cost of the infrastructure project
and the debt service burden might take a heavy toll on the financial resources of the Province. The
Provincial officials, therefore, met to explore other alternative options and/or complementary
funding schemes. Among these were:

1. Bond float with financial assistance from the Department of Tourism (DOT). The
proposal was for the proceeds of bond flotation to apply to the Caticlan Jetty Port and
Passenger Terminal in Boracay, and for DOT funds to develop the Tambisaan and Cagban
seaports. For lack of funds, however, the DOT rejected the request for financial assistance
and suggested that the Province apply for a loan facility from the Development Bank of
the Philippines;

2. Loan facility window from the Development Bank of the Philippines (DBP). This was
not pursued for the following reasons: (a) the Project did not fall within the category of
small and medium scale enterprises for which the loan facility window was open; (b) the
amount proposed exceeded the Php 45 million limit for loans under the window; (c) the
bank required a 25 percent equity which the Province could not put up; and (d) interest rate
for such loan was found to be not substantially different from existing commercial lending
rates;

3. Straight loan with commercial banks. The group rejected this option because the
average lending rate at that time of l6.2 to l8 percent was deemed too prohibitive.
Furthermore, the Governor and the Sangguniang Panlalawigan did not want to bind the
Province to a fixed high interest rate for a specific period of time, since this could adversely
affect expenditures for social services. They were also discouraged from taking this option
after being advised that interest rates would likely decline in the following years, and,
therefore, it did not seem wise to take out a loan at the time.; and
4. Build Operate and Transfer (BOT) and its variants. This option was immediately found
attractive because it entailed no upfront cost to the government. Under this arrangement, a
private investor group will construct the facilities, operate, and maintain it for a given
number of years, after which, it will turn over the facilities to the Province. Exploratory
 talks with prospective investors, however, yielded no takers from the groups that would
have the capability to do the undertaking. Their reluctance had been due to their
unfamiliarity with the operations of the local governments and the fact that BOT, being a
new a concept in the country, procedures for its undertaking still remain to be clearly
provided. They also entertained doubt about the viability of the Project, in the light of the
prevailing financial crisis.

Given these developments, the Governor and the Sangguniang Panlalawigan realized that
bond flotation was the best option to take. It was decided, however, to limit the amount of the
bonds to Php 40 million, primarily because the obligations under this smaller float will be within
the capacity of the Provincial government to absorb, without affecting the delivery of basic
services. The Governor’s strategy was to float a smaller amount of bonds which will make it easier
to sell. Once the bonds passed the market test, it will be relatively easy to sell bigger amounts of
bonds for other development projects of the Province in the future.
Due to the reduction in the amount of the bonds to be floated, it was also decided that the
proposed transportation infrastructure Project be refocused on the passenger terminal and the
reclamation works in the port in Caticlan. The terminal and sea ports in Cagban and Tambisaan
and the other complementary projects on the Boracay side were to be funded from other sources.
The Department of Transportation and Communications (DOTC) responded and provided a Php
50 million assistance to complete the remaining components of the transportation infrastructure
Project.

Securing the Services of a Financial Adviser

To help in the preparation for the bond float, the Province secured the services of a
Financial Adviser. The Adviser was tasked to conduct a feasibility study of the proposal,
specifically, to evaluate the historical, political, managerial and financial status of the Province
and the validity of financial, technical and operational viability of the Project, and determine the
financial capacity of the LGU to meet and secure the requirements.
The Financial Adviser, after completing the appropriate studies, came out with the following
conclusions:

1. The Province was in a sound financial position and has the financial capability to pursue
the Project.
2. The transportation infrastructure Project was highly and unquestionably viable.

3. The projected income and cash flow was very favorable and the Project will be able to
support the debt service obligations and still end up with a positive cash balance by Year
7, the proposed term of the bond. The bulk of revenues will come from passenger terminal
fees, cargo, and stall rentals, and lease of docking rights. Passenger fee is projected to
 account for 86 percent of the income. A net income of Php 69.2 million was projected from
operations in the seven year period.

The income projections of the Financial Adviser were based largely on its seven year
projection of tourist arrivals.

The Financial Adviser also assisted the Province in designing the features and
implementing strategies for the bond float, and in negotiating with trustee banks, concerned
government agencies and instrumentalities, relative to the float.

Subsequently, there is a Provincial Ordinance that authorized the appropriation of a certain

percentage or a portion of the Internal Revenue Allotment and the share of the Province from the
gross revenue collection of the National Government for the guarantee of redemption or payment
of the forty million pesos (Php 40 million) Boracay-Aklan Provincial Bonds (BAPB). The amount
shall be treated as “Sinking Fund” to be used for the redemption of the bonds when they mature.
It also authorized the Governor to make arrangements for the assignment of a portion of the
collections from the share of Province in the IRA from the Department of Budget and Management
(DBM) to the Trustee Bank, the Land Bank of the Philippines. A subsequent ordinance authorized
the appropriation of an amount from the Provincial budget as the contribution of the Province to
the Sinking Fund for that year and the succeeding years, to secure payment of obligations for the
bond float “until such time that all obligations under the Trust Indenture with the Land Bank of
the Philippines was fully paid and satisfied.” Figure 5.4 provides the institutional framework for
bond issuance.
Trust Agreement
Armed with the authority given by the Sanggunian, the Governor started negotiations with
the Land Bank. A Trust Indenture was executed between the Province and LBP on May 23, l997.
As Trustee, Land Bank-Trust Banking Group assumed the following responsibilities:

1. To handle custody of the Trust Fund, which was composed of the proceeds from the sale
of bonds, revenues from the Project, the Sinking Fund, guarantee payments, and fund
remittance by the Province, which may be used for project development and servicing of
the bonds;

2. To keep custody of all documents relating to the BAPB, including its certificates of
ownership of titles of properties;

3. To maintain a registry of bond holders and act as paying agent to handle the scheduled
payments of the interests and principals to the bond holders;
 4. To have accountability for ensuring that all revenues from the Project shall be part of
the Trust and deposited in a trust sub-account separate from the account, wherein the
proceeds from the sale of the bonds were deposited, and that the Trust Fund representing
the revenues generated shall be transferred to the Sinking Fund;

5. To make appropriate releases of the Trust Fund as payment to contractors, subcontractors

and suppliers for the jetty port and passenger terminal; and

6. To deliver and remit for deposit in the Sinking Fund the amount of Php 5,657,500 semi-
annually, or Php 11,315,000 annually, for seven years. This amount represented the
Provincial contribution to the Sinking Fund.

The following process flow describes the financial structure to support the bond issuance (Figure
5.5).

Clearances from Regulatory Agencies

Bond flotation requires clearances from regulatory agencies, like the Securities and
Exchange Commission (SEC) and the Monetary Board of Bangko Sentral ng Pilipinas (BSP).
Although local governments are exempted from this regulation, an express exemption from the
SEC is required. Likewise, favorable opinion was to be secured from the Monetary Board of the
Bangko Sentral ng Pilipinas, to ascertain that the issuance of the Province’s proposed bonds will
not affect the country’s monetary aggregates, the price levels and the balance of payments. The
Provincial Governor also requested the Insurance Commission to endorse the bonds as eligible for
the reserve investment of insurance companies.

Financial Performance vs. Projections

The first six months of operation yielded, in 2003, an income of Php 2,495,459. This
increased by more than 500 percent, to Php 11,320,099, for the whole year of 2004. In the first
eight months of 2005, collections already reached Php 12,932,700. This puts its monthly average
income at Php 1,616,587. Projected by yearend, the income will compare with the projections for
the Year 4 full operations of these facilities. Moreover, this data on collection level for the past
three years are, at best, an understatement, for the following reasons;

1. Of the intended Php 40 per head passenger terminal fee, only half (Php 20) per head was
collected during the period, the reason being that the Cagban and Tambisaan terminal and
seaports on the Boracay side were not yet completed. Upon their completion in October
2005, the full rate for terminal fees will be collected. The foregone income from this
discounted Passenger Terminal Fee, however, is more than made up for by the increased
number of tourists that swelled beyond the projections for the past three years.

2. Only income so far been derived from stall rentals and stall rights are partial, as some
units were still unoccupied, and the others that have already been bidded, remains to be
completed.

3. Other projected income sources, like advertising, lease of docking stations, etc. are yet
to be realized.

Impact on Provincial Income

Collections from the Project started to impact positively on the finances of the Province
from the start of partial operations of the facilities. From an income of Php 23,553,600 in l999,
total provincial income increased to Php 35,359,910 in 2003. In 2004, it rose further to Php
40,413,300. This represents an increase of 62 percent from the l995 level; 41 percent from that of
1999, and 12 percent over the 2003 income from locally generated sources. In 1999, local income
accounted for only 10 percent of total income of the Province. This share increased to 12 percent
in 2004. This increase in income has improved the share of local income vis-à-vis the subsidy from
the National Government.

This robust financial picture from the partial operation of the jetty port as passenger
terminal is expected to continue and improve further in the coming years, as tourist arrivals have
decidedly gone on an upward trend. The operation of the new world-class facilities is expected to
give an added attraction for tourists to visit Boracay. The fees and charges from RORO operations
are, likewise, expected to increase, on account of the growing popularity of the RORO as a means
of transport for both passengers and cargo.