Master of Business Administration

College of Business and Economics - De La Salle University, August 2010

Local Government Development and

Implementation of Capital Establishment for
Sustainable Abaca Plantation in the Philippines
Engr. Alejandro S. Gonzalez1
1
Master in Business Administration, Graduate School of Business - College of Business and
Economics - De La Salle University, Manila, Philippines

The Philippine Abaca, Manila hemp, has remained a reliable source of export earnings since the 1980’s. It
has contributed more than USD80 Million from the 1980’s to the late 1990’s. It dominates the world
market supply by 85% ever since. This product has been a consistent dollar earner of the Philippines and
contributed to the upliftment of the socio-economic condition of the people of the archipelago. This
commodity is one of the flagship products of the Eastern Visayas Region.

INTRODUCTION currency, made into handcraft bags, carpets, clothing

Abaca1
Abaca was introduced to the archipelago at the
Spanish era as clothing material. It is specie of banana
indigenous to the Philippine which has great economic
importance, being harvested for its fiber, is also called
Manila Hemp. On average the plant grows at about 6
meters tall. The fiber was originally used in making
twines and ropes but now the abaca is pulped and used
in a variety of paper-like products. Abaca is classified as
a hard fiber within the category of coir, henequen and
sisal. The leaves grow from the trunk of the plant and
the sheath contains the valuable fiber. The fiber is
composed primarily of plant elements such as cellulose,
lignin and pectin.
The plant grows in well-drained loamy soil. Pieces of
mature root are planted at the start of the rainy season
and the harvest from the initial 18-25 month growth
period is every three to eight months. The plant's total
lifespan is 10 years. The harvest includes having
operations concerning the leaf sheaths to be tuxied,
separating the primary and secondary sheath, stripped,
acquiring the fiber and dried, traditionally sun-drying.
The fibers can be spun into twines and cordages. The
fiber yields ranges from 1.0 to 1.5 tons/hectare
and furniture. The abaca rope is durable and can resist
salt water damage. It is superior over all other fibers of
its class thus is the choice for ropes used in oil dredging,
an vies and merchant shipping. Lupis is the finest quality
of abaca and Sinamay is woven from abaca.
Recommended varieties include Linawagan Puti,
Linawagan Pula, Sogmod and Lausigon for Region 5;
Laylay, Inosa, Linawaan, Linlay, Putian, Laguis, Linlib
and Linino for Region 8 and Inosa, Tangongon and
Maguindanao for Mindanao Regions.
Abaca Grade
Grades of abaca variety are from Excellent to
Residual. These grades are used in different kinds of
products such as ropes and cordages products, fiber
craft products such as bags, hats, place mats and other
cottage industry. And in recent undertakings of this
commodity, it has seen to be a valuable material for
paper making, with its water resisting feature, it has
been used for teabags, clothing and currency
production. Blends of this fiber with silk, pina or
polyester, produces high-end fabrics and handmade
paper such as media and decorative.
Production2

Most of the abaca fiber is pulped and processed into
specialty paper used for tea bags, vacuum bags, and
1
“Hope Springs Eternal for the Abaca Industry” – Agriculture
Business Week
In the early years of the 1990’s, abaca production is
at its highest and amounted to 70,400 metric ton valued
at PHP1.27 Billion. The area of land cultivated for abaca
2
Fiber 2 Fashion – World Garment Textile Fashion – News Desk
India
Page 2 Master of Business Administration – COB/DLSU
fluctuated from 116,850 ha to 104,700 ha in those early
years. During that time there has been a 10-year
national average yield of 0.93 ton/ha.
In the recent economic turn, the production has dropped
by 17.8% during the first quarter of 2010. This is due to
the fall of the prices of the product at farm level.
Manufacturing during January to March 2010 stood at
102,417 bales of 125 kilograms. Most areas in the
Philippines where abaca is primarily produced
experienced this fall including Eastern Visayas and the
Bicol Region. Only the Zamboanga Peninsula registered
a positive trend in abaca fiber manufacturing.
Demand
Demand for raw abaca fiber in the world market is
steadily increasing at 6.6% since 1994. This increase in
trend required a net output of 18.4 metric ton to 19.32
metric ton increase in a single year from 1994 to 1995.
This has declined dramatically in the early months of
2007 because of fluctuating prices in the world market
but has grew in leaps and bounds by a staggering 308%
to 23,085 bales. According to the Fiber Industry
Development Authority (FIDA), this shipment
improvement is due to the revival in demand for this
fiber in developed countries such as the United Kingdom
and Japan.
Foreign Trade
Export earnings from abaca fibers and
manufacturers reached USD94.5 Million in 1995. North
America absorbed 72% of the abaca cordages, Europe
(44%) and Asia (53%) accounted for the total export of
pulp. Europe also accounts for 48% of the annual abaca
fiber exports.
The United Kingdom shipments soared up by 500% in
the recent months (Jan-Mar 2010) and Japan’s demand
for this fiber also soared by 316.9%.
REVIEW
For the purpose of this study we will discuss the
related literature regarding the supply capacity of the
Philippines as an answer to the demand of the world for
the abaca commodity. The following series will
enumerate the industries where abaca is used, the
factors that reflect the current prices for the product and
the procedures on the production of this raw material.
The following includes the capital (machinery, land and
research) and labor needed for optimum production.
Industries
Food Packaging is differentiated to three types,
Primary, such as bags-in-boxes, envelope, blister pack,
cushioning, wrapper and skin pack, Secondary, such as
carton and shrink wrap and Tertiary, such as crates,
stretch wraps, bales and slip sheets. The use of abaca in
food packaging is primarily used in heat seal teabag
filters and heat seal coffee filter paper. Abaca pulp is the
raw material needed for these packages and is mainly
exported to manufacturers in China and Japan.
The furniture industry is also a big consumer of the
abaca product, usually used in home decorations and
typical furniture such as chairs, tables and cabinets. In
combination with silk, polyester and cotton, abaca
creates a new line of clothing fabric that is durable and
water proof. Hats, handbags, tapestries and table cloths
are just a few examples of the many uses of the abaca
fiber. Finally, paper products used for hand crafting,
paper art, decorative and media. High-quality paper use
abaca fiber to extended use.
Industry Structure
Farming, stripping, trading, fiber exporting and
processing are the five major sectors of the abaca
industry. The main role of the abaca farmer is the
cultivation of these abaca trees and stripping them down
to the ungraded raw material. From the
producer/farmer/stripper, the abaca fiber is sold at an
"all-in" basis to the Barangay dealer. At this stage, fibers
are sold ungraded due to farmers’ general lack of
knowledge of the grading/classification system. The fiber
goes further to the town/city dealers. To some extent
the farmers sell directly to exporters/grading and baling
establishments (GBEs). In some cases, farmers'
cooperatives/associations have a direct link to domestic
processors.

Figure 1: Industry Structure Flow Chart
World Prices3
Prices of abaca were soaring even on the onset of
the global downturn in 2008. Farmers and strippers of
the commodity placed bigger priority towards the
plantation to grab the opportunity of more profit. But
after a year a sharp drop of prices has created a
disastrous effect on the farmers. The price of a kilogram
of Excellent Grade Fiber plunged from PHP64 in July
2008 to PHP37 in April 2009 and the Course Grade Fiber
from PHP40 to PHP11. Only 2/3rd of the profit was given
back to the farmers and 1/3rd to the landowners.
But at the turn of 2010, a buying frenzy for raw abaca
pushed the price of the Excellent Grade Fiber to PHP70
per kilogram. These high prices made abaca production
in the Eastern Visayas to 62.5 Million kilograms. This has
covered the world demand of 77,066 metric ton of fiber
by 86%.
Figure 2: World Prices of Abaca (PHP/KGS)
Production4
Varieties in Mindanao vary with respect to the water
source and climate in the area. Although abaca virtually
3 “Strippers’ lives hanging by a thread” by Juan V. Sarmiento Jr –
Philippine Daily Inquirer July 2009
4 Production Guide on Abaca by Leo Pinghoi – EntrePinoys Atbp.
Engr. A.S. Gonzalez Page 3
grows in all types of soil and climate in the Philippines, it
has been found that it is more productive in areas where
soil is volcanic in origin, rich in organic matter, loose,
friable and well-drained clay loam type.
It requires a water table of 80 cm with 60-80%
saturation and a soil pH of 6.0 to 7.0. Undulating or
rolling to hilly or mountainous areas less than 500 m
above sea level with deep surface soil with slopes from
200 to 600 are ideal for abaca production. For normal
growth of abaca plants, the soil must contain adequate
amounts of organic matter, potassium, calcium, and
magnesium.
Abaca requires warm and humid climate for optimum
growth and productivity. Though the optimum
temperature requirement for abaca has not been fully
determined, it grows in areas with temperatures of 20°C
during cool months and 25°C during warm months. A
relative humidity of 78 to 85% and a fairly-distributed
rainfall through out the year are conducive to good
growth. The area must be free from cyclonic winds and
typhoons, if not the plants must be provided with cover
trees or windbreaks to dissipate the force.
Methods of propagation include seedpieces (corms),
suckers, seed and tissue culture. Planting season starts
in the rainy season. The distance of each propagated
seeds for ordinary variety is 2m x 2m, for big size variety
is 2.5m x 3m and for nursery purposes is 1m x 1m.
Rate of fertilization requires 2 bags ammonium sulfate at
the time of planting, 4 bags 8 months after planting and
2 bags of complete fertilizer 13 months thereafter. Major
pests like brown aphid directly feeds on abaca plant,
root weevil feeds on corms and sugar caterpillars on the
leaves. These are controlled by appropriate contact
spray of insecticide. The major diseases vary on the
common plant viruses like the potyvirus, a disease
causing leaf mottling. Another is the virus that causes
bunchy-top, which causes chlorotic areas on young
leaves and the damage is characterized by stunted and
bunchy growth of the plant forming a rosette with
bladeless leaves. The leaves become stiff and brittle,
tear along the margin, curls upward and dry up.
Abaca matures from 18 to 24 months after planting.
Subsequent harvests are done 3 to 4 months intervals.
Extraction during harvesting is done by hand-stripping,
spindle-stripping and decortications. These are
characterized from manual labor, which output ranges
from 15 to 25 kilograms of fiber per day, to mechanized
Page 4 Master of Business Administration – COB/DLSU
fiber extraction, which output ranges from 80 to 120
kilograms of fiber per day.
Figure 3: Abaca Grades
Labor and Land
1.5 Million Filipinos directly of indirectly depend on
abaca production for a living. There are more than
100,000 farmers involved in this production. The
estimated area that is currently for abaca is around
153,000 hectares, which produce 77,400 metric tons
each year.
FRAMEWORK
The discussions above are the basic foundation of
the knowledge of our commodity. It has molded the
basis of our study, that abaca, as a basic produce of the
Figure 4: Agribusiness LGU Framework
country, can mold the way of life through proper
management and financing. The schematic below is the
interchange of resources and support from a mesh of
key personalities and the underlying relationship
between them.
Farmers and the Cooperative
This is where the farmers pool their resources in
certain areas of activity. In the light of abaca production,
these activities are farming, stripping, trading, fiber
exporting and processing.
In the framework below, we can distinguish two area of
cooperative work as services cooperative, which
provides training and development for the advancement
of producing their commodity, and production
cooperative, which focuses on output through the
intensive use of land and machinery.
This form of business organization is usually distinct
from investor-owned firms (IOFs), in which the
cooperative strive to maximize the benefits for their
members at zero-profit operation. Essential services
from IOFs cannot be obtained because of the zero-profit
nature of cooperatives.

Research and Development
These are facilities over the region commissioned by
the government to cultivate scientific and tactical
discipline of the community, focusing primarily on
agricultural research and training. The main goal of this
center is to maintain a facility that will study processes
and operations of abaca cultivation. The facility will be
wholly autonomous from the rest of the communities
operations whereas this unit will only serve as support
towards high yield of production.
Involvement of the Fiber Industry Development
Authority (FIDA) will be the core of this unit. Experts
from around the country will be consulted or employed
for fast paced abaca research.
Stakeholders
They are the basic financial foundation of the whole
system. As defined by the 1963 internal memorandum at
the Stanford Research institute, they are the party that
can affect and be affected by the outcome of the
operation of the business entity.
In the case of our schematic there are three types of
stakeholders in the system. First are the Shareholders,
which expect profit, performance and direction of the
business. Second is the Local Government, which drives
its interests from proper legislation, low community
unemployment and taxation. And last is the farming
community, which focuses on employment, involvement,
profit sharing, health and environmental issues.
Internal and External Stakeholders manifests its role in
the Market that will be created by the abaca industry.
The primary stakeholders will be engaged in the
economic transactions with regards to the business (eg.
customers, suppliers, creditors and farmers) while the
secondary stakeholders, although does not engage
directly on the economic exchange, are affected by the
actions of the entire business unit (eg. families,
community, research center and the media).
Local Government5
The Local Government Unit (LGU) is composed of
LGU officials and staff that shall take the lead in
initiating and facilitating the LED process. The LGU LED
team is expected to provide the leadership of and
5 Strategic Local Economic Development: A Guide for Local
Governments
Engr. A.S. Gonzalez Page 5
establish the structures and systems in the whole LED
process. It is not only concerned with managing the
technical side of the process but also in getting ‘buy-in’
from political leaders, the relevant and related
government agencies, business and non-government
sector.
UNDERLYING PROBLEM
As the leading producer and exporter of abaca fiber
in the world, there exists a very unstable world market
for abaca in which prices becomes very volatile. This
causes the abaca farmers to shift to other crops because
if this unstable market.
1. How can the Local Government create an
orderly and stable market for this commodity to
maintain the growth of the abaca industry?
2. What kind of assistance to the agricultural sector
can the Local Government impart in line with the
national objective to increase agricultural
production and boost exports?
3. How can the Local Government sum up capital
from outside investors to finance abaca
production, processing, distribution, sale,
transport and storage?
These are the primary tasks that need to be answered
by the Local Government unit. Under the Local
Government Code of the Philippines, the governing body
of the locality can exercise their powers to create their
own sources of revenue6. This provision should be
inculcated within the whole study of the industry in
which the central figure in boosting the market of abaca
in all aspects will be geared and supported by the local
government.
ASSUMPTIONS
Farmer’s Perspective
From a column in the Philippine Daily Inquirer by
Juan V. Sarmiento, a farmer in Virac, Catanduanes was
found dead hanging from a tree in Barangay Buenavista
after a sharp drop of prices in the abaca industry
plunged the livelihood of their community. The farmer’s
wife verified that her husband was deeply troubled by
the low abaca prices, a few hours before he took his
6 Sec. 129 “Power to Create Sources of Revenue” – Local
Government Code of the Philippines
Page 6 Master of Business Administration – COB/DLSU
own life. From the income from stripping, the basic
farming family buys their food, including rice, sugar,
coffee and other basic necessities.
At an academic perspective, 80% of the Catanduanes’
inhabitants depend on abaca, and strippers, who are
landless, are amongst the poorest. The collapse of abaca
prices have led to a drop in the enrollment rate among
children of strippers.
The scenarios above are the general assumptions of this
study, that the agricultural perspective of the common
farmer is not focused mainly on supply for a demand for
a commodity, but rather a more individualistic view.
That the primary consideration for higher yield is that
the farmers expect that they will have higher income to
support their basic needs.
The individualistic view of people as independent units
leads to emphasis on a range of self-oriented values and
skills that support independent living. These values
include self-sufficiency, self-determination, self-
advocacy, self-competence, self-direction, self-efficacy,
self-regulation, self-reliance, and self-responsibility. Our
assumption pertains to the reaction of a common abaca
farmer with regards to the low priced commodity that
they are producing. If this will entail that they will not be
meeting their personal and basic needs, then the
farmers will look for other commodities that will give
them the income that they expect.
Stakeholder’s Perspective
Identifying who will be the stakeholders in this
program is one of the key parts of our assumptions.
Below are the primary beneficiaries and contact people
in this area.
Municipality
They will guide the development plans of the local
municipality.
Councilors
They are the decision makers of the program based on
the needs and aspirations of their constituencies.
Communities and other stakeholders
The abaca program is based on community needs and
priorities. Communities have the chance to participate in
identifying their most important needs.
It is encouraged that all stakeholders who reside and
conduct business within a municipal area to participate
in the preparation and implementation of the
development plan.
National and provincial sector departments
Many government services are delivered by provincial
and national government departments at local level -for
example: police stations, clinics and schools.
Municipalities must take into account the programs and
policies of these departments. The departments should
participate in the process so that they can be guided
how to use their resources to address local needs.
It is assumed that any growth in the economy will likely
be an effect on the amount of contribution towards
research, science and technology. This is where the role
of the stakeholder’s come in. They serve as the primary
investor towards this growth and from any investor’s
point of view; an expected return must be realized at
the end of any business cycle.
Expectations are set by these stakeholders as their
primary motivation towards lending and sharing the
equity on the business pursuit with the local
government. Some of these expectations are
transparent performance, orderly business practices and
a firm local government agenda.
SIGNIFICANCE
Agribusiness is one of the largest industries in the
Philippines. It makes up a significant portion of the
economic development portfolio of the Local
Communities of the country. As the world population
grows, the need for agriculture and agricultural solutions
to basic human problems increases as well. Agriculture is
a vital part of our national and our local economy.
Agribusiness provides jobs for the people and has an
annual economic impact. Opportunities increase locally
as we continue to grow into value-added processing,
developing more and more-efficient production to attract
new opportunities and expand our current
agribusiness.
The Department of Agriculture (DA) pledged to increase
abaca production to allow the Philippines to stay the
number one producer in the world. Agriculture secretary
Arthur C. Yap said good production volume should be
about 85,000 metric tons (MT). Exports of raw and
processed abaca reached $90.68 million in 2006. About

85% of the world abaca fiber supply comes from the
Philippines.
The key to improved production is increased planting
areas. The total abaca area in the country, according to
the Fiber Industry Development Authority (FIDA), is
141,747 hectares.
Abaca is indigenous to the Philippines, but Ecuador and
Indonesia have caught on to the abaca trade too.
Ecuador is the minority commercial producer, cornering
15% of the market.
FIDA will encourage more farmers to plant abaca
because of the strong market demand, but a problem
with abaca culture and post-harvest technology. Most
farmers do no practice proper cultural management.
Most farms do not have that much land area and they
plant below that so the farms will not produce the
optimal yield per unit area.
Abaca is one fiber that has made the Philippines known
all over the world. Before the advent of synthetics in the
1960s, abaca was the principal raw material for the
manufacture of the world-renowned Manila rope. In fact,
since the turn of the century, abaca was the top export
earner of the country.
The abaca industry continues to be one of the Country's
major pillars in terms of employment generation and
foreign exchange earnings. The industry sustains more
than 1.5 million Filipinos who; directly or indirectly,
depend on it for a living. Direct dependents include
abaca farmers, classifiers/sorters, manufacturers,
traders, exporters and hundreds of fiber craft processors
who provide employment to thousands of Filipinos.
At present, the abaca industry generates some US$81
million per year from the exports of raw fiber and
manufacturing.7
SCOPE and LIMITATION
The study will go around the role of the local
government in boosting the production of abaca in their
very own locality. It will tackle the basic business roles
of a corporation in order to gain a profit margin where
all stakeholders are satisfied. The LGU will tap on its
management capabilities towards Human Resourcing
7 “Abaca Program Aims to Keep RP Number One” by Maria
Kristine Conti
Engr. A.S. Gonzalez Page 7
(training, research and development), Marketing
(distribution, sales and stakeholder engagement),
Operations (production and cost reduction) and Finance
(acquiring capital and boosting stock prices).
The main focus of this discussion will be capital
acquisitions and capital management, using the other
three functions (Human Resource, Marketing and
Operations) as supporters towards higher equity in the
business perspective, which equates to higher retained
earnings that will boost the stock price of the business
and will create a higher equity value to all the
stakeholders.
METHODOLOGY
Locale
Eastern Visayas is one of the two regions of the
Philippines having no land border with another region
and is designated as Region VIII. It consists of six
provinces, namely, Biliran, Eastern Samar, Leyte,
Northern Samar, Samar and Southern Leyte. These
provinces occupy the easternmost islands of Visayas:
Leyte, Samar and Biliran. The regional center is
Tacloban City.
The region receives heavy rainfalls and typhoons
throughout the year with no pronounced dry season.
Eastern Visayas is primarily an agricultural region with
rice, corn, coconut, sugarcane and banana as major
crops. Its total land area is 21,431.7 km². 52% of its
total land area is classified as forestland and 48% as
alienable and disposable land.8
The study will be centered in the Northern Samar
region. Northern Samar is located in the northernmost
portion of Samar, the third largest island of the country.
It is 732.72 kilometers southeast of Manila. The Pacific
Ocean bound Northern Samar on the east, the San
Bernardino Strait on the north, the Samar Sea on the
west and Samar on the south.
The province has a total land area of 3,498 sq. km.
About 201,730 hectares are classified as forestland. The
forestland is further classified as follows: a) Timberland-
189,200 hectares; b) Forest reserves-11,900 hectares;
c) Fishpond-499 hectares d) military and naval
reservations-128 hectares.
8 http://en.wikipedia.org/wiki/Eastern_Visayas
Page 8 Master of Business Administration – COB/DLSU
Northern Samar is composed of 24 municipalities and
572 barangays. It is divided into two legislative districts-
the First and Second Districts. Catarman serves as the
provincial capital.
There are four ports located in San Jose, Laoang, Allen
and San Isidro. The San Isidro and Allen ferry terminals
serve as the gateway to Luzon and Southern Philippines.
Design
The basic management principles of Human
Resourcing, Operations and Marketing will be the
cornerstones to guide the Financing of this business
endeavor.
Human Resourcing
This will deal with the approach of the local
government towards creating a facility for training and
research for the abaca commodity. This will include
experienced farmers, the youth, international aid and
the academe to create a center where training will be
facilitated.
This should be accomplished by coordinating all research
training programs at a central source, creating expanded
opportunities for research, advocating the importance of
research, enhancing the career development of the
farmers, their families and the quality of mentoring and
strengthening the funding base for research.
Marketing9
Meaningfully engaging the public requires planners
and government officials to develop a public
participation arena that can be used in a wide variety of
situations. Local governments may use several effective
approaches, depending on whether the project is an
ongoing planning initiative or a public input process, in
which case the planting and processing of abaca as the
input process to push the funding initiative.
The community open house format, a public meeting
room is set up with several separate stations around the
perimeter. Each station is staffed by a small group with
a specific viewpoint or a specialized area of expertise.
General information is also available or displayed on
9“Effective Approaches to Engaging Stakeholders at the Local
Level” - Institute for Local Government
various aspects of the project or initiative. One station
may be staffed by a design team, another by city
officials and a third by the plan’s proponent or
developer. Members of the public can visit each station
at their leisure, look at drawings and ask questions of
the individuals at the station.
In this intuitive arrangement, people need little
prompting to engage in meaningful conversation on a
particular topic, and because the discussion is on a more
personal level, it’s more likely to be polite, if not cordial.
The confrontational aspect of the more traditional
presentation and question-and-answer format is
removed, and people feel freer to express support for or
opposition to a plan or project without the judgment or
intimidation of a large crowd.
When planning for the next years of the community’s
life, it’s critical to maintain a sustained collaborative
public process over a number of years. There should
also be significant emphasis on involving the city’s
youth. Working with the local schools and teachers to
explain the General Plan process and the importance of
the update will drum up a good deal of youth interest.
Different methods should be used to get the word out
and maintain public interest over long periods. The Local
Government should work with the local community and
volunteer groups, such as the chamber of commerce,
environmental groups, Rotary Club, board of realtors
and homeowners associations. To advertise meetings
and communicate with people we can use the city’s
website, cable channel, direct mailings, e-mail
notifications, frequently asked questions (FAQ) sheets,
and lawn and A-frame signs, as well as local newspaper
ads and articles, radio announcements, newsletters and
flyers. All of this can result to a higher number of
attendees.
Also, the each representative should report back to the
community what they hear at public meetings and to
communicate how public input has influenced or
changed the abaca industry. This builds community trust
by making it clear that the public agency has heard what
people are saying. It’s essential that information gained
from community input is delivered to elected or
appointed officials so they are well informed and in
touch with the needs of the community. This may take
the form of a memo, oral report or newsletter. Reporting
the outcome of discussions with public officials on the
city website, cable access channel or the chamber of
commerce newsletter are good ways to close the
communication loop.

A well-run process builds community trust and credibility
for the public agency. More importantly, a well-crafted
collaborative public involvement program will help guide
the community through any project or community
initiative, no matter how complex or controversial.
Effective marketing at the level of an agribusiness
scenario are related to those affected by the
business/industry. They should be informed about
activities, be involved in transparent processes and have
an opportunity to participate in those activities that
affect them. In designing acquisitions processes, we
must involve both provincial and local government,
customers, industry, environmental groups, non-
government organizations and other stakeholders.
Generally, engagement consists of the figure below
(Fig.5)
Figure 5: Factors of Engagement
On a more specified level, engagement on acquisition
processes consist of communication to stakeholders at
an early stage, keeping stakeholders involved and
informed about next steps, holding information sessions
and workshops to provide details and seek feedback,
soliciting stakeholder input through online forms and/or
written submissions.10
Operations11
A method of planning should be used as the basic
operational process for the development of the abaca
industry in the local government level. This method can
be used in multiple scenarios, but is totally realized in
the agribusiness sector. Integrated Development
10Stakeholder Engagement – BC Hydro for Generations
11“Integrated Development Planning for Local Government” –
Local Government in South Africa
Engr. A.S. Gonzalez Page 9
Planning is an approach to planning that involves the
entire municipality and its citizens in finding the best
solutions to achieve good long-term development.
An Integrated Development Plan (IDP) is a super plan
for an area that gives an overall framework for
development. It aims to co-ordinate the work of local
and other spheres of government in a coherent plan to
improve the quality of life for all the people living in an
area. It should take into account the existing conditions
and problems and resources available for development.
The plan should look at economic and social
development for the area as a whole. It must set a
framework for how land should be used, what
infrastructure and services are needed and how the
environment should be protected.
There are six main reasons why a municipality
should have an IDP as the core planning technique in
their local abaca production:
Effective use of scarce resources
The IDP will help the local municipality focus on the
most important needs of local communities taking into
account the resources available at local level.
The local municipality must find the most cost-effective
ways of providing services and money will be spent on
the causes of problems in local areas.
For example, a municipality may decide to allocate
resources to building a water system that will be the
main line for the abaca plantation.
It helps to speed up delivery
The IDP identifies the least serviced and most
impoverished areas and points to where municipal funds
should be spent. Implementation is made easier because
the relevant stakeholders have been part of the process.
The IDP provides deadlock-breaking mechanisms to
ensure that projects and programs are efficiently
implemented. The IDP helps to develop realistic project
proposals based on the availability of resources.
It helps to attract additional funds
Government departments and private investors are
willing to invest where municipalities have clear
development plans.
Page 10 Master of Business Administration – COB/DLSU

Strengthens democracy The identified problems are assessed and prioritized in

Through the active participation of all the important
stakeholders, decisions are made in a democratic and
transparent manner.
Helps to overcome the legacy of apartheid
Municipal resources are used to integrate rural and
urban areas and to extend services to the poor.
Promotes co-ordination between local,
provincial and national government
terms of what is urgent and what needs to be done first.
Information on availability of resources is also collected
during this phase. At the end of this phase, the
municipality will be able to provide:
• An assessment of the existing level of
development
• Details on priority issues and problems and their
causes
• Information on available resources

The different spheres of government are encouraged to

work in a coordinated manner to tackle the development
needs in a local area.

Before starting the planning process, an IDP Process

Plan must be drawn up. This plan is meant to ensure the
proper management of the planning process.

This plan should outline:

• The structures that will manage the planning

process
• How the public can participate and structures
that will be created to ensure this participation
• Time schedule for the planning process
• Who is responsible for what?
• How will the process be monitored?
Figure 6: Analysis Phase
At District Council level, a framework will be developed
in consultation with all local municipalities within the
district. This framework will ensure co-ordination, PHASE 2 STRATEGIES
consultation and alignment between the district council
and local municipalities. The framework will guide the During this phase, the municipality works on finding
development of the Operational Plan for each local solutions to the problems assessed in Phase 1.
municipality.
This entails:
The process undertaken to produce the development
plan consists of 5 phases: • Developing a vision - The vision is a statement
of the ideal situation the municipality would like
PHASE 1 ANALYSIS
to achieve in the long term once it has
addressed the problems outlined in phase one.
During this phase information is collected on the existing
The following is an example of a vision
conditions within the municipality. It focuses on the
statement:
types of problems faced by people in the area and the
causes of these problems. These are the evident
“The world leader in abaca production with citizens living
problems in trading and fluctuating prices for the abaca in a secure, healthy and comfortable environment”
product.
 Engr. A.S. Gonzalez Page 11

• Defining development objectives - Development

objectives are clear statements of what the
municipality would like to achieve in the medium
term to deal with the problems outlined in phase
one.
“Provider of high grade abaca fiber”

• Development strategies - Once the municipality

has worked out where it wants to go and what it
needs to do to get there, it needs to work out
how to get there. A development strategy is
about finding the best way for the municipality
to meet a development objective.
“Coordinate with local abaca traders and have a reliable
end of the day production output and price agreement
between the farmers and the traders.”
• Project Identification - Once the municipality has
identified the best methods to achieving its
development objectives it leads to the
identification of specific projects.
Figure 8: Project Phase
PHASE 4 INTEGRATION
Once all projects have been identified, the municipality
has to check again that they contribute to meeting the
objectives outlined in Phase 2. These projects will
provide an overall picture of the development plans. All
the development plans must now be integrated. The
municipality should also have overall strategies for
issues like dealing with price fluctuations, poverty
alleviation and disaster management.

PHASE 5 APPROVALS

These phases are presented to the council for

consideration and adoption. The Council may adopt a
draft for public comment before approving a finalized
plan.

Figure 7: Strategy Phase

PHASE 3 PROJECTS

During this phase the municipality works on the design

and content of projects identified during Phase 2.

A clear detail for each project has to be worked out in

terms of:
• Who is going to benefit from the project?
• How much is it going to cost?
• How is this project going to be funded?
• How long would it take to complete?
• Who is going to manage the project?

Clear targets must be set and indicators worked out to

measure performance as well as the impact of individual
projects. Figure 9: Integration, Approval & Implementation
Phase
Page 12 Master of Business Administration – COB/DLSU
Finance12
An outline of shareholder expectations is a useful
guide for the whole system towards a single goal. It
supplements the operating principles outlined in the
previous section and the broader expectations with
regard to governance, reporting requirements, and the
role and responsibilities of all stakeholders in general.
1. Performance
11% Rate of Return
Whilst recognizing that the strategic value of the abaca
industry is in their underpinning of the broader economic
environment, the fact remains that sustained financial
viability is an underlying pre-requisite for abaca
production.
The expectation is a rate of return of 11%. This is
intended to ensure that the farmers and the local
government are financially viable and are able to
withstand financial shocks without recourse to
shareholders. The rate of return may not necessarily be
extracted by way of dividend but in this new system the
local government handling the financial side should
make no such assumption in the future. Where abaca
production have sound investment opportunities or
where important capabilities might need to be retained
shareholders will make informed decisions about
whether these are worth a reduced rate of return.
Where the abaca production has no sound investment
opportunities, they are expected to return surplus cash
to the shareholder in the form of a dividend.
Many farmers have engaged in high levels of
reinvestment, especially pointing towards which crops to
plant on which land. With some exceptions, this
reinvestment has produced few tangible returns to date.
Although reinvestment may be a medium- to long-term
nature, farmers will be expected to demonstrate their
return expectation on such reinvestment.
Target Capital Structure
Consistent with this Government’s focus on driving
better value for money, shareholders wish to see all
parts of the public sector playing their part to ensure
more rigorous use of capital. Thus, financial arm of this
12 “2009 Outline of Shareholders Expectations for Crown
Research Institute” – Bill English, Minister of Finance and Wayne
Mapp, Minister of Research (S&T) – New Zealand Government
system are expected to manage their balance sheets
effectively.
Each financial officer is also expected to manage to an
agreed capital structure target based on its risk/return
characteristics. Each farmer should update its target
regularly as the locality's profile materially changes.
Where a single abaca producer has not carried out its
own capital structure review, a benchmark target of
30% net gearing and three times interest cover should
prevail.
Investment in Capital Assets
Boards are expected to manage their business in a way
that they can meet their short-, medium-, and long-term
needs. This involves making sufficient financial
provision to replace assets. Financial officers and the
Local Government should develop plans that address
future infrastructure requirements in the most cost-
effective manner over the planned life of the industry.
Capability Retention
The local government needs to think strategically about
retaining capabilities that are not fully funded against
the expectation that future income may be attainable.
Unfunded or underfunded capabilities that do not
achieve clear science goals and that jeopardize the
abaca industry's on-going financial viability should not
be countenanced. However, cases where income is
insufficient to maintain what may be considered
‘nationally important’ capabilities must be brought to
shareholders’ attention.
2. Business Expectations
Communication
The farmers and abaca producers are encouraged to
maintain the key role they play in communicating the
value of science. As part of this, farmer's public
accountability documents (in particular annual reports)
should communicate more clearly to the local
government each range of activities and contribution to
industry's well being.
Technology Transfer
Technology transfer is a key expectation within the
abaca production system. However, there are cases
where farmers have invested often significant amounts
in bringing products and services to a market-ready

state. This has often involved the farmer alone incurring
considerable risk and significant investment.
As research organizations first and foremost, farmers are
expected to remain focused on their core research
activities, including the transfer of knowledge and
technologies to other key points in the industry. Boards
should not spend excessive time on commercial ventures
to the detriment of a farmer’s core focus. Commercial
ventures must be underpinned by a realistic business
and investment plan with measurable interim and
ultimate objectives. Farmers are not expected to be
long-term holders of commercial ventures except under
exceptional circumstances. Conversely, farmers are not
expected to transfer their products to the private sector
at devalued rates. They are expected to derive an
adequate return on their investment.
It is acceptable for farmers to enter into technology
transfer arrangements with other localities. In doing so,
however, farmers will be expected to consider benefit to
the local government, and provide evidence.
Linkages and Collaboration
Linkages between farmers, local government, and
tertiary education institutes are extremely important and
the farmers are encouraged to maintain and grow such
linkages.
The local government is encouraged to continue to seek
opportunities for national and international collaboration.
Teams across the abaca production system are already
generally collaborating well. There may be potential,
however, for enhanced collaboration through forms of
closer collaboration. We can point out the collaboration
of merger companies to this kind of system.
Good Employer Obligations
Finally, land owners have obligations toward their
farmers to act as good employers and to engage openly
and constructively with their farmers and the community
representatives. Where land owners face the prospect of
having to review their manpower numbers, land owners
are encouraged to take into account future requirements
and explore all viable options. The personal impact on
affected farmers should be borne in mind.
3. Local Government Agenda
The local government recognizes that there are a
number of initiatives that are needed to provide a more
Engr. A.S. Gonzalez Page 13
transparent and efficient environment for the science
sector. A list of priorities includes:
• Less bureaucracy and reduced compliance costs
• Clearer expectations for what farmers and
shareholders deliver from negotiated funding
• Development of a formal Statement of Science
Priorities
• Appointment of the Science and Financial
Officers.
Respondent Sampling13
Understanding the agribusiness of abaca and its
brand success, which will retain the famous name Manila
Hemp, is critical to managing your key stakeholders as
well as ensuring that the business sees return on its
investment. There are various ways to analyze the abaca
business' success from a digital perspective. From web
traffic, to e-commerce transactions, to customer
surveys, there are various ways to slice the data. The
following is a list of effective ways in collecting data to
analyze business performance:
• Using multiple data sources is the best way to
gauge business success: using customer, the
farmers, the community and the shareholders',
feedback surveys or another qualitative survey,
understanding page views per visit on local
government web site, seeing how many users
enrolled for email communications are all
important performance indicators that can give
your business success more context. Because
business success is dependent on the sum of all
marketing efforts, it is best to represent your
business success as an aggregate of all your
performance indicators.
• Use surveys to validate or gauge the level of
acceptance of the target demographic: while
every farmer's interest is different, surveys are
still one of the most effective ways to ensure
that the target demographic is who you think it
is and that they are satisfied with whatever
service, financial and marketing, or product,
research and development and machinery, that
the local government can assist with. We can
apply scales, such as the Likert scale, to various
dimensions of the industry in order to measure
customer satisfaction in the context of the
business' success.
13 “Analyzing Business Success” – Cynthia Spitalny, 2010
Page 14 Master of Business Administration – COB/DLSU
While there is no manual that shows the best use of
data to represent business success, understanding each
of the needs and wants of all the stakeholders can help
the local government choose what data to use and how
to collect that data.
FINANCIAL PLAN14
The range of options for organizing and financing a
business has expanded considerably in recent years as
innovations in financial markets created new alternatives
to meet the varied needs of business managers. We will
be assessing these choices to be able to provide a
comprehensive listing of organizational and financing
options for farm and agribusiness abaca firms, and to
explain the circumstances under which these various
options are likely to be most useful.
The approach to the financial/organizational structure of
most farm and agribusiness firms is very tradition
bound. Historically, financing focused primarily on
internally generated equity, with debt used if internal
sources of equity were not adequate to finance the
growth of the business. The dominant organizational
structure has been the sole proprietorship with limited
forward or backward "linkages" (i.e., contracts or
ownership of successive stages of Production). The
options and alternatives available to finance and
organize farms and agribusiness firms are now much
broader in terms of (1) business/legal arrangements, (2)
asset control strategies, and (3) financing
instruments/options.
The options below are an effective strategic plan that
captures the best financial and organizational structure
for the abaca business. This need is dictated by the
increased number of options available, the opportunities
to lower cost and reduces risk through the proper plan,
and the conflicting goals and objectives that should be
satisfied in making this strategic choice.
There are a number of criteria that should be considered
when choosing a financial and organizational structure.
One of the most effective criteria is the focus of returns,
which is the primary motivation of all parties in the
abaca industry system. This objective focuses on which
options will allow access to resources and funds at the
lowest cost, and emphasizes the set of economic
activities and enterprises that maximizes profits. Costs to
14“Alternative Financial Structure of Farm and Agribusiness Firms”
– M. Boehlje and D. Lins, Purdue University
be considered include administrative and legal costs
(including taxes, licensing fees, etc.) as well as the more
traditional costs of acquiring inputs and doing business.
The tax treatment and resulting tax burden of various
alternatives are critically important, as are the direct
costs (interest, fees, etc.) of the various ways of
sourcing funds. This objective focuses on organizing and
financing the business in such a way as to meet the
strategic objective of generating the highest net returns
possible.
The second criteria are the risk of financial loss. Because
of legal structure, contract agreement, or financial
arrangement, various parties have
Different claims on the income or revenues of the
business. For example, debt holders have a different
form of claim on income of the business
Than do equity holders. Characteristics of these claims,
including amount, certainty (as contrasted with
uncertain or contingent), and priority, will
Determine their impact on income risk.
Other legal and financial arrangements carry specific
claims on assets of the business. These claims are
frequently conditional in nature and contingent on
specific financial or economic performance. For example,
a debt holder may have secured a loan with a pledge of
collateral assets that can be claimed if the debt is not
repaid. The amount, general vs. specific and conditional
nature of these claims will determine their impact on
asset risk.
Lastly is the risk of financial loss from bankruptcy and
legal liability depends heavily on the financial and
organizational structure. If all the assets one owns are
included in one legal entity, they may all be vulnerable
to bankruptcy claims. The use of multiple legal entities
may help protect the assets of one entity from liability or
bankruptcy claims of a separate entity. Personal liability
exposure can also be significantly impacted by the
financial and organizational structure. Vulnerability
under liability and bankruptcy rules is the fundamental
dimension of bankruptcy/liability risk. The success or
failure of the business is influenced in part by the
financial and organizational structure. Failure may result
in losses in value or other consequences for related
business ventures as well as loss of self-esteem,
prestige, and respectability of the farmers.
Legal Organization
A cooperative is a legally incorporated business
entity capitalized by its member patrons that carries out

business activities for its member patron/owners and
remits margins to its patron/owners in proportion to
their patronage business. Cooperatives have been a very
popular business arrangement to acquire inputs and sell
products in agriculture. A cooperative is taxed on income
at corporate rates, but patronage refunds are tax
deductible to the cooperative if specified rules are met.
This cooperative structure can be permeated by the
intervention of the local government and the probable
stakeholders to jointly acquire and provide machinery
and equipment services, marketing and selling services,
advisory and consulting services, and other assets and
services.
Business Arrangement
In addition to the legal form of business, farms and
agribusiness firms have a wide choice of business
arrangements, and they can use them in various
combinations in the same firm. Alternative business
arrangements like independent production and contract
production is an efficient way of distributing a constant
number of outputs at constant rate of return to the
farmers, the community and shareholders.
The independent producer arrangement is the most
common method of conducting business. Under this
arrangement, the local abaca industry is free to buy
inputs from wherever and from whomever it pleases.
Likewise, output from the firm is marketed in whatever
channels the local industry chooses. The independence
of operator decisions is a key advantage of this business
arrangement. This is where the primary role of the local
government takes place. The LGU will be the leader in
the supply chain that will happen in the business cycle.
In contract production it is involving a contract
agreement between various levels in the
production/marketing/distribution chain, e.g., between
the producer and an input supplier or a processor. Such
arrangements have become very commonplace in the
production of various vegetable and specialty crops.
Contracting arrangements are highly variable in scope,
but likely will take one or a combination of the following
forms.
Product Specification: This type of contract includes
detailed product specifications to guarantee the quality
characteristics of the product. Abaca has various
commodity quality and almost all surpluses of each
variety can be sold at competitive prices. The LGU can
impose sizable discounts and premiums if quality
standards are not met.
Engr. A.S. Gonzalez Page 15
Resource Providing: This arrangement specifies that
the local government will supply specific inputs or
resources to be used in the production process of a
specific quality product at a specified price and/or under
agreed upon conditions.
Price- or Risk-Sharing: This type of contract specifies
or guarantees price for a product with specific quality
attributes; specifies a minimum profit margin above a
calculated cost of production and guarantees that
margin; or specifies a sharing of the margin above
calculated costs, or some combination thereof.
Market access: This contractual arrangement is
structured to guarantee access by the farmers to the
processing facility. It is used primarily as a flow
scheduling device to more efficiently use production and
processing facilities by scheduling them at full capacity.
Market access arrangements reduce the risks of not
having capacity available when products are mature or
having excess processing capacity when products are
unavailable.
Leasing Options
In general terms, leasing is a method of obtaining
use and control of assets without the requirement to
own them. Leases can be single season, annual
operating leases, or longer term in nature. Some
analysts view leasing as simply an alternative form of
financing. Debt allows one to acquire the ownership and
use rights to assets with part of the earnings used to
service that debt; leasing allows one to acquire control
and use of the assets for an annual lease payment.
Leasing is a very common method of "financing" asset
use in agriculture more frequently used for real estate
and buildings than for machinery and equipment.
There are four fundamental types of farmland leases,
with variations and combinations thereof. Most of these
leases are of one-year duration, but they may be
negotiated for a longer period. These negotiations with
land owners will be based on the national policy
regarding agrarian reform.
A cash lease typically involves a cash payment for the
annual right to farm or graze a parcel of real estate.
Payments are a function of productivity and local
supply/demand conditions, but are typically fixed prior to
the production season with full or at least partial
payment in advance.
Page 16 Master of Business Administration – COB/DLSU
A share lease usually requires both tenant and landlord
to share some part of the crop production expenses as
well as the output. Common share lease terms have
been a 50-50 share, with the landlord and tenant
sharing equally the expenses of purchasing operating
inputs (seed, fertilizer, chemicals, fuel, etc.) and the
resulting output. Each party in such an arrangement is
responsible for financing his or her share of the inputs
and selling his or her share of the output. A share lease
may involve livestock production facilities as well as
farmland; such arrangements are typically more complex
than crop share leases.
A facility/equipment operating lease involves a specified
payment in cash (sometimes in kind) for the use of a
particular building, structure, or item of equipment for a
specified period of time. A common example is to lease
a tractor or combine for the tillage or harvesting session,
respectively, or to lease a warehouse or trucks for
storage and distribution of feed and supplies. Operating
leases are typically seasonal or annual (with renewals) in
length, with no ownership rights or responsibilities
occurring to the lessor. The LGU can acquire additional
income from this as they can lease ballers and farming
machinery to the farmers at a lease price or can be
added to the total cost to gain tax effects that may be
beneficial to the over all growth of the local abaca
industry.
Capital lease arrangement is different than a single
season or annual operating lease in that it is longer term
(the term is usually a function of the life of the asset); it
typically allows the lessee to recover most, if not all, of
the purchase price of the asset over the lease term; and
the lessor typically has an option to buy at the end of
the lease period. Capital leases are treated much like
debt- financed asset purchases from an accounting and
analysis perspective-they are included in the balance
sheet as an asset at the capitalized value of the lease
with the scheduled lease payments as an offsetting
liability, and they are analyzed with net present value
and/or interest rate equivalent procedures. Qualified
capital leases receive unique tax treatment (lease
payments are fully tax deductible), which may be a
major advantage for some firms.
They are commonly used in the agribusiness sector to
acquire machinery and equipment (trucks, application
and delivery equipment, etc.), and less so for buildings
and facilities. In production agriculture, capital leases
are less popular than in the agribusiness sector, but are
most commonly used for major equipment items such as
power and harvesting units. Increasingly, cars and other
motor vehicles are being leased by consumers as well as
farm and agribusiness firms. In many cases the option
to-buy feature of such leases is structured to encourage
purchase at the end of the lease period, or to encourage
replacement with another leased asset.
The leveraged lease arrangement involves three parties:
a lessee, a lessor, and a lender. In essence, the lender
makes a loan to the lessor that enables him or her to
purchase the equipment. The lessor then leases that
equipment to a lessee. The lease arrangement has been
prearranged in such cases, thus providing the cash flow
needed by the lessor to satisfy the lender's concern with
repayment. Such arrangements are common in the
transportation industry, with the leveraged leasing of
airplanes, locomotives, trucks, and rail cars. Such an
arrangement allows advantageous use of the relative tax
and financial position of the lessee and lessor. There is
no reason why leveraged leasing could not be used in
abaca agriculture.
Equity
If the abaca industry is to be carried out with owned
assets rather than leased assets or through a contract,
license, or other business arrangement, the assets can
be acquired with two fundamentally different sources of
funds - debt and equity. Although the choice of funding
strategy at first blush seems rather straight forward, the
number of options and alternative forms of debt and
equity makes the decision much more complex.
Equity is the owner or investor's contribution to the
funding pool, which can come from various sources
using various instruments. The first source of equity
funding for any business is the initial capital
contributions from the owner/investors. These funds
may come from many sources: accumulated savings,
borrowing against personal assets, liquidation of
investments, inheritances, etc. In some small and start-
up ventures this contribution may be "in kind" (i.e.,
specific assets rather than cash). It may be inherited or
gifted business interests or assets from family members
that were previous owners. Or it may occur in the form
of "in kind" labor and management contributions during
the start-up phase where managers are compensated in
the form of equity interests (for example, stock or
partnership shares) rather than cash wage or salary
payments.
At this point the LGU will be the marketer of the industry
to look for stockholders to share with the initial equity of
the local industry. This usually can start within the

community as the production will initially start but can
be sourced from outside the locality to create a strong
capital structure for the local abaca industry.
This context of external equity refers to the concept of
soliciting investors (maybe family members, but more
likely individuals outside the family and possibly outside
the local community) to provide funds to finance the
business. These investors may become participants in a
general or limited partnership. Such arrangements
involve proportionate interests in the business venture,
with the manager/investor and the "external" investor
sharing in the risks and the rewards of the enterprise.
Some of these arrangements are structured with the
"external" investor purchasing specific assets such as
real estate or buildings and the operator leasing these
assets and using them in the business. This latter
arrangement reduces the potential conflicts if
disagreements result in a decision to close down the
business venture; if assets are not jointly owned, the
difficult tasks of determining value and ownership
interests are avoided. Finding and soliciting "external"
investors can be a very time-consuming task, and those
who do so may encounter criticism because of the
stigma of "external" equity in rural communities.
One form of external equity capital that has grown in
recent years is institutional investment in farmland. With
funds acquired primarily from retirement or pension
funds, investment firms have managed the process of
buying and managing farmland for pension fund
investments. In some cases, these purchases of
farmland have involved sale-leaseback practices.
Debt
Debt capital is obtained in two primary ways loans
and the issuance of debt instruments such as bonds.
Loans for farmers and agribusiness firms are available
from a variety of lenders and with a variety of features.
One of the first choices that must be made in any loan is
debt maturity or the length of time over which the
principal must be repaid. With the incremental approach
to debt-financing, the cash flow available for debt-
servicing becomes a dominant consideration in the
decision about the length of time to repay. This can be
handled by the LGU as it can use local treasury to agree
on a maturity date and assist the simple abaca farmer to
be able to capitalize their production the soonest
possible time, without fear of bankruptcy. Cash flow is,
in fact, one test of how much debt a firm can safely
handle, but capital debt repayment capacity is also
Engr. A.S. Gonzalez Page 17
important and can, in fact, give a better indicator of the
total debt that can safely be utilized by the firm.
In essence, the concept is asset liability matching; i.e.,
the maturity of liabilities should be matched to the
maturity of the assets in the business. Short-term assets
should be funded with short-term liabilities, and,
likewise, long-term assets should be funded with long-
term liabilities. Mismatching in the form of financing
longer term assets with shorter term liabilities has been
a common problem in the past in agricultural lending (as
well as in financial institutions such as Savings & Loans
and some commercial banks). Maturity matching allows
use of the full financial life and cash flow generating
capacity of the assets to be used to support the
liabilities. In some cases, particularly with installment
contract sales of real estate, the lender/seller demands a
shorter maturity than is financially desirable based on
the asset's life and cash flow generating capacity. In this
case, a partial amortization or pay down with a balloon
at the end of the contract life can be used to better
match assets and liabilities.
A new concept that may assist in matching cash flow to
debt maturity is the adjustable term loan. With this
arrangement, if interest rates rise, the annual payment
remains constant but the life of the loan or maturity
increases to reflect the higher rate. With the adjustable
term arrangement, higher interest rates don't result in
increased annual debt-servicing requirements and
potential repayment problems, in contrast to the typical
situation with the adjustable rate arrangement.
The second decision that must be made or negotiated in
the choice of a debt-financing strategy is that of interest
rate. The interest rate decision is typically not
independent of loan maturity; long-term rates are
usually higher than short-term rates because the normal
shape of the yield curve is upward sloping. However, in
agricultural lending longer term loans are typically lower
risk because of the security used and have lower
servicing requirements and costs, so carry lower rates.
Interest rates depend on negotiation and marketing
skills of the LGU as well as the financial strength of the
business and the maturity of the debt. Skill in
negotiating with the lender can be important, not only in
obtaining debt funds but in the cost of those funds.
Page 18 Master of Business Administration – COB/DLSU

CONCLUSION

The process of capital establishment planning is one

of the most significant tools in local government. It grew
out of the realization that if we are to address the
serious challenges facing our communities local
government industries it would have to be more
thoughtful and creative and less bureaucratic in its
approach to management and governance, to plan more
purposefully and realistically, to work more closely with
communities, utilize their talents and resources and
encourage all stakeholders to take greater responsibility
and to ensure that the collective effort of all spheres of
government in our municipal area, are coordinated more
effectively.

It is fair to say that this thinking is already starting but

never fully developed and the opportunities for
cooperation and collaborative work never fully grasped.
In this, the first few phases of this capital establishment
should consciously adopt a more bold and dynamic
approach and providing us with an excellent foundation
for a creative transformation agenda.

The local government management team is challenged

by making it clear that mediocrity and “business as
usual” is not acceptable. We have been challenged to
lead the process of transforming Northern Samar from a
good to a great municipality.