The government of the Philippines is using letters of credit (L/Cs) or bank guarantees in new arrangements with local firms that supply goods to the public sector.

The new arrangements allow local firms to compete on the same terms as foreign suppliers.

Advance payments

A directive issued earlier this month permits government offices for the first time to make advance payments to local suppliers of up to 15 per cent of the contract amount.

Before the directive, advance payments to local suppliers were not permitted while foreign suppliers could receive advance payments of up to just 10 per cent.

Payment fears

The government has also raised the percentage of allowable advance payments for foreign suppliers to 15 per cent.

The Philippines' public sector has hitherto avoided making advance payments for fear of spending taxpayers' money on goods that may not be delivered.

L/Cs and guarantees

To allay this fear, the government is stipulating that advance payments under the directive can only be made if the local or foreign supplier submits an irrevocable L/C or a bank guarantee issued by an eligible bank.

If goods on which an advance payment has been made are not delivered, then the government may seek reimbursement under the L/C or guarantee terms.

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