DILG-Resources-2011216-85e96b8954 (1)

March 23, 2018 | Author: jennifertong82 | Category: Government Budget Balance, Local Government, Decentralization, Asian Development Bank, Devolution
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.Fiscal Decentralization in the Philippines: ISSUES, FINDINGS AND NEW DIRECTIONS Department of the Interior and Local Government with the support of Asian Development Bank May 2010 2010 Department of Interior and Local Government and Asian Development Bank All rights reserved. Published 2010. Printed in the Philippines. ISBN # 978-971-93652-2-8 Publication Stock No. Cataloging-In-Publication Data Niazi, Tariq H., Llanto, Gilbert M., and Fabre, Raymund C. (editors) fiscal decentralization in the Philippines: issues, findings and new directions Quezon City, Philippines: Department of the Interior and Local Government and Asian Development Bank, 2010. 1. fiscal decentralization Government. 2. Local governance I. Department of the Interior and Local This publication was produced with funding from the Asian Development Bank through ADB Technical Assistance Project 7019-PHI: Local Government Financing and Budget Reform. The views expressed in this book are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. TABLE OF CONTENTS List of Tables and Figures Acronyms Message Foreword Preface FISCAL DECENTRALIZATION IN THE PHILIPPINES: ISSUES, FINDINGS AND NEW DIRECTIONS Tariq H. Niazi, Gilbert M. Llanto, and Raymund C. Fabre A. Historical Context B. Expenditure Management Expenditure Allocations and Service Delivery at the Local Level Expenditure on Education C. Key Issues and New Directions in Expenditure Management Personal Services Special Education Fund Fiscal Surplus-Deficit Local Economic Enterprises D. Local Own-Source Revenue Generation E. Key Issues and New Directions in Local Own-Source Revenue Generation – Exercise of LGU’s Corporate Powers Guiding Principles Building the Promotional Structure Establishing the Policy Support System Capacity Building Advocacy and Technical Assistance Monitoring and Evaluation F. Local Credit Financing G Key Issues and New Directions in Local Credit Financing – Improving LGU . Access to Official Development Assistance Allow LGUs to use private commercial banks as depository institutions LGUs to access ODA directly from donors: Fast-track the implementation of Executive Order 809 Page |i vii xix xx xxi xxiii 1 1 4 4 9 11 11 13 14 16 20 26 27 27 28 28 30 30 30 35 35 36 TABLE OF CONTENTS Establish a monitoring system between NEDA, DILG, DBM and DOF for ODA-funded individual LG projects On Processes and Procedures Acquaint LGUs with sources of public investment funds other than direct ODA grants Develop LGU capacities in local planning and project development Establish a project Feasibility Studies Fund for LGUs Streamline the development and approval processes for small subprojects Involve LGU representative in the programming exercises with donors Other Recommendations STUDY ON LOCAL PERSONAL SERVICES EXPENDITURE POLICY Rosario G. Manasan and Cynthia G. Castel 1. 2. 3. Introduction Legal Framework and Institutional Arrangements Outstanding Issues and Recommendations 3.1 Staffing Concerns 3.2 Pay and Compensation Concerns 4. Conclusion References Annex – Attachment No. 1 THE SPECIAL EDUCATION FUND: PROSPECTS FOR POLICY IMPROVEMENT Rosario G. Manasan and Cynthia G. Castel 1. 2. 3. Introduction Legal Frame Work Current Practice On Allocation of SEF 3.1 Allocation for Locally Funded Teachers 3.2 Allocation for Capital Outlays 3.3 Allocation for Sports Competitions 3.4 Allocation for Citizen Development Programs and Co-curricular Activities P a g e | ii 36 37 38 38 39 39 40 40 41 41 47 54 57 63 77 79 81 83 83 89 96 96 100 100 101 TABLE OF CONTENTS 3.5 Use of SEF to Pay for the Cost of Tax Collection 3.6 Other Items Charged Against the SEF 4. Current Institutional Arrangements 4.1 DepEd-driven or LCE-driven LSB Budget Allocation Process 4.2 Pattern of Allocation Across Schools 4.3 Lessons from Synergeia 5. Lessons from International Experience 6. Recommendations 6.1 Improving Guidelines on the Utilization of the SEF 6.2 Improving the Institutional Arrangements 6.3 Clarifying Definitions and Usage of Terms in LGC and RA 9155 6.4 Clarifying Expenditure Assignment in Basic Education Sector 6.5 Increasing Equity in Education Spending 7. Conclusion References Annex 1: International Experience on Expenditure Assignments in the Education Sector Annex 2: Joint Circular No. ___ March 31, 2009 Department of Education, Department of Budget and Management and Department of Interior and Local Government STUDY ON LOCAL FISCAL SURPLUS/DEFICIT Rosario G. Manasan and Cynthia G. Castel 1. 2. 3. Introduction Legal Framework Current Practice and Outstanding Issues 3.1 Measuring and Monitoring Fiscal Balances of LGUs 3.2 Measuring Resources Available for Appropriation 3.3 Managing the Fiscal Position 4. Conclusion References 102 102 103 103 104 104 105 106 107 109 110 110 110 111 112 113 128 131 131 132 135 135 145 147 150 153 P a g e | iii TABLE OF CONTENTS IMPROVING THE FINANCIAL MANAGEMENT OF LOCAL ECONOMIC ENTERPRISES Rosario G. Manasan and Cynthia G. Castel 1. 2. Introduction Local Economic Enterprises Situationer 2.1 Increasing Number of LEEs 2.2 What Drives the Trend Towards Greater Number of LEEs 2.3 Many LEEs Incur Losses Year after Year 2.4 Increasing Financial Risks Assumed by LGUs and LEEs 3. Outstanding Issues 3.1 Need for a Clear Policy Framework for the Creation and Continued Operation of LEEs 3.2 Need to Clarify Treatment of LEE in the LGU Budget 3.3 Need to Strengthen LGU Capability Relative LEE Creation and Operation 4. Summary and Conclusion References Annex 1: A Review of Alternative Service Delivery Option Annex 2: Systems of Budget and Financial Management of Local Government Enterprises STUDY ON THE CORPORATE POWERS OF LOCAL GOVERNMENT UNITS I. II. Introduction The Political and Corporate Nature of Local Government Dual Nature of Local Governments Creation of Local Government Units Powers and Functions Economic Activities The Corporate Powers of LGUs Current Trends in the Exercise of LGU Corporate Powers Extent of LGU Borrowing Financial Performance of Local Economic Enterprises 154 154 155 155 157 158 162 167 167 180 188 189 192 193 208 237 237 238 238 238 239 240 241 244 244 245 III. IV. P a g e | iv TABLE OF CONTENTS V. Emerging Models of LGUs’ Exercise of Corporate Powers Public-Private Partnership Inter-LGU Cooperation Schemes Corporatizing Service Facility Case Studies of Models 1. The La Union Medical Center 2. LGU Experience in the Operation of Economic Enterprises: An Evolving Institutional Arrangement – The Tagum City Model 3. A Non-Traditional Approach to Local Economic Enterprises Management 4. Corporatization of Economic Enterprise: LGU initiative – Misamis Oriental Telephone Systems, Inc. 5. Good Service Delivery and Taking the Lead in Inter-LGU Cooperation: Naga City 6. Bond flotation for Tourism Development: The Boracay-Aklan Provincial Bonds 7. Privatization of Power and Water Utilities: The Joint Venture Project of the Province of Bohol 8. Capitalizing Private-Public Sector Investment Venture: The Bulacan Packaging Service Center Challenges Confronting LGUs’ Exercise of Corporate Powers The Issue of Cost Recovery Cost Recovery Schemes for Existing LEEs Cost Recovery for New LEEs Administratively Feasible Interventions The Organization of Local Economic Enterprises The Beginnings The Evolving Structure A Contemporary Model Professionalization of LEE Management Financial Viability Legal Issues in the Operation of LEEs Exploring a New Mindset in Local Economic Enterprise Management Legal Impediments in the Exercise of LGU Corporate Powers 246 246 246 247 247 247 250 255 256 259 263 266 269 271 273 273 274 275 275 275 276 278 279 279 280 280 281 VI. Page |v TABLE OF CONTENTS Exercise of LGU Corporate Powers through Public-Private Partnership Management contract Lease Contract Concession Agreement BOT Contract Pre-Contract Analysis Typical Responsibility Distribution for Each Model VII. Setting the Stage to Enhance LGUs’ Exercise of Corporate Powers The Local Government as an Economic Unit VIII. Program Strategy Guiding Principles Building the Promotional Structure Establishing the Policy System Capacity Building Sustaining Actions Financing Options General Criteria Description of the LGU Corporate Powers Reform Areas and Corresponding Grant Component Institutional Framework References Appendix A: Issues on LGU Exercise Corporate Powers Appendix B: Investment of understanding Assets LGU ACCESS TO OFFICIAL DEVELOPMENT ASSISTANCE (ODA): STATUS, ISSUES AND CONCERNS Alex B. Brillantes, Jr., Gilberto M. Llanto and Ruperto P. Alonzo I. Introduction A. Rationale of the Study B. Approach and Methodology C. ODA Policy Framework of the Philippines D. Local Government Unit Access to Official Development Assistance 281 282 283 283 283 283 284 285 286 288 288 288 289 289 291 293 294 296 297 299 300 305 307 307 307 308 308 311 P a g e | vi LGU Access to ODA B. Seeking. Other Recommendations 316 316 317 317 318 319 320 320 324 324 329 333 334 339 340 340 340 341 343 344 345 348 352 352 352 355 358 P a g e | vii . The Policy Framework for Selective National Government Intervention 1. Background A. Certain Issues and Concerns A. Summary III. and Monitoring ODA at the Local Level 1. Processes and Procedure 1. Other ODA Resources Available to LGU D. The LGU Grant Financing Framework and Cost-Sharing Principles II. National Government Involvement in Developed Functions B. Principles for Designing NG Assistance C. On the Foreign Borrowing Act of 1966 and on Programming Foreign Assistance C. Managing. On Policies 2. Challenges in the Implementation of the LGU Financing Framework D. Monitoring ODA Flows to LGUs B.TABLE OF CONTENTS II. Equity in the Distribution of ODA Resources E. Current Situation A. Positive Stories and Good Practices to Share 2. Scaling Up and Avoiding Duplication 3. Recommendations on Policies. LGU Access to ODA Grant Funds C. Conclusions and Recommendations A. The Foreign Borrowing Act of 1966 D. The Nature Of National Government Assistance 3. On Processes and Procedures 3. The Rationale for NG Involvement 2. On Access to LGU Financing and the MDFO facility IV. and for Cities.TABLE OF CONTENTS References Annex 1-A: NG-LGU Cost Sharing Scheme (Financing Mixes). 1990s Annex 1-B: Revised Loan-Grant-Equity Mix for Province/Municipalities. 2009 Annex 2: Ranking of Provinces Based on ODA funded projects Annex 3: Ranking of Regions Based on ODA funded projects Annex 4: Distribution of ODA funded projects by Sector. By Province Annex 5: Ranking of Provinces with ODA funded projects in Agriculture/Agrarian Reform Annex 6: Guidelines for Grant Design Annex 7: Experiences of LGUs Surveyed on their ODA Experience 360 362 363 364 366 368 371 373 375 P a g e | viii . 6 7 9 11 21 22 23 24 25 32 11 STUDY ON LOCAL PERSONAL SERVICES EXPENDITURE POLICY Table 1. Table 6. 1985-2005 Spending on Education by Level of Government. 1. Table 11. 2007 Average number of personnel. Table 9. Table 3. Local Government Expenditure Relative to GNP and to General Government Expenditure (%) Ratio to GNP of Local Government Expenditures (in percent) Sub-Sectoral Distribution of Local Government Social Expenditure 2001-2005 Selected Education Indicators. 1991-1998. Table 9. Table 5. Table 5. 1989-2000 Share of National and Local Governments to General Government Revenue (in percent) Local Government Borrowings. 2007 Population to LGU personnel ratio. by object of expenditure. 2007 Average number of non-regular personnel. Figure 1. 2007 P a g e | ix 44 45 50 52 56 57 59 60 61 62 65 .1994 a/ Size of LGU wage bill. Table 6. 2000-2007 LGU pay as percentage 0f national schedule as per RA 6758 Proportion of LGUs Implementing Third Tranche of Revised SS under Joint Resolution No. 2007 Percent of Unfilled Regular Positions to Total Number of Regular Positions. 2000/01 and 2005/06 Tax Assignment in Cities. Table 2. Table 4. Table 3. 1988-2007 Composition of LGU expenditures. Table 4. and Municipalities Distribution of Local Government Own-source Revenue Across Levels of Sub-national Government by Type of Revenue (%) Distribution of Cost of Devolved Functions Across Levels of Local Governments by Functions. Table 8. LGU expenditures as Percentage of GDP. Table 7. Provinces. 2007 Average number of hirees under job order per LGU.LIST OF TABLES AND FIGURES FISCAL DECENTRALIZATION IN THE PHILIPPINES: ISSUES. Table 2. Table 10. Table 10. Table 7. 2007 Percentage of LGUs complying with PS Cap. FINDINGS AND NEW DIRECTIONS Table 1. 1992 Collection Rate of Current Year for Basic RPT. Table 8. Table 9. SY 2007-2008 a/ 83 84 85 85 86 86 88 88 89 96 97 97 98 99 Page |x . Table 15. 2007 66 67 68 71 72 74 THE SPECIAL EDUCATION FUND: PROSPECTS FOR POLICY IMPROVEMENT Table 1. 2007 Proportion of LGUs Exceeding PS Cap Before Waivers. Size of LGU wage bill. Table 2. Table 17. 2007 Percent of LGUs not complying with restrictions on giving of allowances. 2003-2007 Average number of teaching positions charged to SEF per LGU. Table 16. 2006 Budget share of PS. by compliance with PS cap. 2006 SEF Income and Expenditures. Basic education outcomes. 2003-2007 Educational attainment of HH head and poverty status. Table 4. 2004-2007 Remaining Numbers of Excess/ Deficit Teachers Given Actual Number of LGU/ SEF-funded Teachers. Table 7. by Salary Schedule Adopted. 2004National achievement test for 2nd Year. Table 14. SY 2007-2008 (in pesos) Median SEF spending per pupil in municipalities and cities classified according to LGU income class. 2006-2008 Total number locally funded teachers. Table 5. Table 14. Table 13. 1990-2007 TIMSS scale scores. Table 6. 2007 Some counterfactuals on number of LGUs exceeding PS cap. Table 11. Table 8. Table 13. Dep-Ed School-Level MOOE per student. 2005-2008 Addressing Input Gaps in Basic Education. Table 12. 2007 Percent of LGUs not complying with restrictions on giving of Magna Carta benefits to PHWs. 2007 Number of LGUs Adopting Salary Schedule of Higher Class LGUs. 2001-2007 (in million pesos) SEF expenditure per student vs.LIST OF TABLES AND FIGURES Table 12. Table 10. SY 2006-2007 a/ National achievement test for Grade 6. 1990-2003 Net enrollment rate and completion rate at the elementary and secondary level by region. MOOE and CO in SEF expenditures. Table 3. 2002-2007 Variation in fiscal surplus (deficit) based on BLGF SIE a/ as % of LGU income. Table 2. Table 4. Table 3. Table 4. 2002-2006 Percent of LGUs with overall fiscal deficit based on BLGF SIE. 2005-2007 Results of operation of LEEs. 20022007 Gross borrowings and outstanding long-term liabilities of all LGUs. 2007 a/ LGU Income from Local Economic Enterprises. 2002 & 2006 Cash reserves and amount available for appropriation. Table 2. by type of LEE. Proportion of LGUs (as % of total number who responded to survey) operating LEE. Figure 2. 2002-2007 (in billion pesos) Relation between Amount Available for Appropriation and Overall Fiscal Balance. Table 6. Table 5. Table 3. Table 8. Fiscal surplus (deficit) from COA Statement of Cash Flow.LIST OF TABLES AND FIGURES STUDY ON LOCAL FISCAL SURPLUS/DEFICIT Table 1. 2007 Gross borrowings and outstanding long-term liabilities of all LGUs. 2007 137 138 139 140 141 142 144 146 IMPROVING THE FINANCIAL MANAGEMENT OF LOCAL ECONOMIC ENTERPRISES Table 1. Table 7. LEEs in the General Fund and Regular LGU Unit Delivering “LEE-like” Services 156 157 159 160 163 Figure 1. 2006-2007 Overall fiscal surplus (deficit) on cash basis based on BLGF SIE. 2006-2008 Percentage of LEEs posting net losses. by type LEE. 2002-2007 Percent of LGUs with fiscal deficit based on COA Statement of Cash Flows. Table 5. 2002-2007 (in billion pesos) Graphical Presentation of LGU Decision Making Process Relative to Creation of LEEs Chartered LEEs. 174 191 P a g e | xi . 1998-2008 Provinces with the Most Number of Infrastructure Projects. (2007 ODA Portfolio) ODA Grants. Program Loans. Table 4. by Type. Table 13. 19982008 Number of ODA funded projects by Sector. 1998-2008 Bottom Five Regions Based on ODA funded projects. Table 2. Table 3. Table 15. by Implementing Agency. 1998-2008 Provinces with the Least Number of ODA funded projects. by Funding Source (2007 ODA Portfolio) ODA Facilities for Local Government Units. 2002. Table 7. Table 5. LGU Financing Framework The Ten Provinces with the Most Number of ODA funded projects. 2007-2008 (In thousand pesos) ODA Grants. Table 11. and GDP by Region (Based on 2003 ODA Portfolio) P a g e | xii 315 325 326 326 326 327 328 328 329 330 330 331 331 332 333 334 335 . Table 8. 1998-2008 Top Five Regions Based on ODA funded projects. and 2007 Appropriations and Allocations for Foreign-Assisted Projects (In thousand pesos) Obligations for Projects. 1998-2008 Value and Number of ODA Loans and Grants. 239 254 LGU ACCESS TO OFFICIAL DEVELOPMENT ASSISTANCE (ODA): STATUS. Table 10. ISSUES AND CONCERNS Table 1. Table 17.LIST OF TABLES AND FIGURES STUDY ON THE CORPORATE POWERS OF LOCAL GOVERNMENT UNITS Table 1. 1997. Criteria for Creating Local Government Units Organizational Structure. 2000-2008 Shares in ODA funded projects Costs*. 1998-2008 Provinces with the Most Number of ODA-Funded Agriculture/Agrarian Reform Projects. Table 12. Population. Figure 1. 2000-2008 Project vs. Table 9. (as of 31 March 2009) ODA Loans with LGU participation. Table 14. Table 16. Table 6. LIST OF TABLES AND FIGURES Table 18. Table 19. Table 20. Table 21. Table 22. Table 23. Per Capita Cost* of ODA funded projects by Region vs. Poverty Incidence (Based on 2003 ODA Portfolio) Average Number of ODA Subprojects per Province, by Area by 2001 Income Class ODA Subprojects per Million Residents per Province, by Area by 2001 Income Class Subprojects per Province and per Million Residents per Province by Quintile in Poverty Incidence Significance Levels of Regression Coefficients MDFO Loan-Grant-Equity Mixes, by Project Category, By Type and Fiscal Class of LGU, 2002, (In percent) ODA Grant Programming Flowchart Local Investment Programming Process ODA funded projects by Sector, 1998-2008 LGU Planning Framework Bohol ODA Coordination Framework 336 337 337 338 339 346 Figure 1. Figure 2. Figure 3. Figure 3. Figure 4. 310 312 327 313 343 P a g e | xiii ACRONYMS ADB ARMM AO ADCOM ALS AusAID ARD BEIS BCDA BCCI BESRA BLCI BLGF BLGD BLGF- DOF BLGS BPSTC BWUI BTr BOT BSP CBRM CESO CI CCLCP CGCP CIDA CO CoAG COA CPCS CPR CSOs CSC DA Asian Development Bank Autonomous Region of Muslim Mindanao Administrative Order Additional Compensation Allowance Alternative Learning System Australian Agency for International Development Associates in Rural Development Basic Education Information System Bases Conversion and Development Authority Bulacan Chamber of Commerce and Industry Basic Education Sector Reform Agenda Bohol Light Company, Inc. Bureau of Local Government Finance Bureau of Local Government Development Bureau of Local Government Finance of the Department of Finance Bureau of Local Government Supervision Bulacan Packaging Services and Toll Center Bohol Water Utilities Inc. Bureau of Treasury build-operate-transfer Bangko Sentral ng Pilipinas Community-Based Resource Management Career Executive Service Officers Congressional Initiatives Coordinating Council for LGU Corporate powers Naga City Computerization Program Canadian International Development Agency Capital Outlays Council of Australian Governments Commission on Audit Compensation and Position Classification System Country Program Review Civil Society Organizations Civil Service Commission Department of Agriculture P a g e | xiv ACRONYMS DBCC DBM DBP DECS DENR DepEd DFA DILG DLGCD DOF DOH DOTC DOST EC EIB EIRR EO FINEX GAA GASB GBEs GF GFI GRDP GO-FAR GOLD GOCC GOP GDP GNP GRDP GOJ ICC IMF IASs IFAD Development Budget Coordinating Committee Department of Budget and Management Development Bank of the Philippines Department of Education, Culture and Sports Department of Environment and Natural Resources Department of Education Department of Foreign Affairs Department of the Interior and Local Government Department of Local Government and Community Development Department of Finance Department of Health Department of Transportation and Communication Department of Science and Technology European Commission European Investment Bank Economic Internal Rate of Return Executive Order Financial Executive Institute of the Philippines General Appropriations Act Government Standards Accounting Board Government Business Enterprises General Fund Government Financial Institution Gross Regional Domestic Product Governance-Facility for Adoption and Replication Governance in Local Democracy Government-owned and-controlled corporation Government of the Philippines Gross domestic product Gross National Product Gross regional domestic product Government of Japan Investment Coordinating Council International Monetary Fund International Accounting Standards International Fund for Agriculture P a g e | xv ACRONYMS IAEA IPSAS IRA JBIC JICA JFPR JC JMEEDO JICA JV KRA LBP LFF LET LCPCF LGSP LBC LBM LCE LEEU LDIP LEEs LGA LCP LGC LGPMS LGU LGUs LGUGC LOGTRI LOGOFIND LLDA LGUGOCC LSB LWUA International Atomic Energy Association International Public Sector Accounting Standards Internal Revenue Allotment Japan Bank for International Cooperation Japan International Cooperation Agency Japan Fund for Poverty Reduction Joint Circular Jimenez Municipal Economic Enterprise Development office Joint Commission on Local Government Personnel Joint Venture Key Result Areas Land Bank of the Philippines LGU Financing Framework Licensure Examination for Teachers LGU Corporate Powers Challenge Fund Local Government Support Program Local Budget Circular Local Budget Memorandum Local Chief Executive Local Economic Enterprise unit Local Development Investment Plan Local Economic Enterprises Local Government Academy League of Cities of the Philippines Local Government Code of 1991 Local Governance Performance Management System Local Government Unit Local Government Units LGU Guarantee Corporation Local Government Training and Research Institute Local Government Unit Finance and Development Laguna Lake Development Authority Local Government-owned and Controlled Corporation Local School Board Local Water Utilities Administration P a g e | xvi ACRONYMS LUMC MC MBUSS MDF MDG MDGD MDFO MNDC MSMEs MSBs MISORTEL MOOE MPS MTPDP MTPIP NAT NACIGEA NCR NC NCP NCC NCPC NEDA NEDA-PMS NEED NG NGA NGAS NGO NSW NGOs NNC NZAID O&M OCPC La Union Medical Center Memorandum Circular Mindanao Basic Urban Support Service Municipal Development Fund Millennium Development Goal Management Development and Governance Division Municipal Development Fund Office Metro Naga Development Council Micro Small-Medium Enterprises Municipal School Boards Misamis Oriental Telephone System Maintenance and Other Operating Expenses Mean Percentage Score Medium-Term Philippine Development Plan Medium-Term Public Investment Plan National Achievement Test Naga City Government Employees Association National Capital Region Needing Clearance National Competition Policy National Competition Council Naga City People’s Council National Economic Development Authority National Economic Development Authority Project Monitoring Staff Naga Early Education Development National Government National Government Agency New Government Accounting System Non-Government Organization New South Wales NEDA Regional Offices Not Needing Clearance New Zealand's International Aid & Development Agency Operations and Maintenance Office of Compensation and Position Classification P a g e | xvii ACRONYMS ODA OPAS OPCCB OPDS OPIF PCPPs PACAP PAPs PD PDAF PDF PFI PEGR PEP PES PIB PIP/PSEP PHWs PLC PNB PPEM PPDO PS PSC PSOs PWS RA RATA RDIP RDC ROOM ROI RORO Official Development Assistance Office of the Provincial Agricultural Services Organization, Position Classification and Compensation Bureau Office of Project Development Services Organizational Performance Indicators Framework Position Classification and Pay Plans Philippines-Australian Community Assistance Program Programs, Activities and Projects Presidential Decree Priority Development Assistance Fund Philippines Development Forum Private Financial Institutions Philippine-Australian Governance Reform People Empowerment Program Provincial Electric System Productivity Incentive Benefits Productivity Improvement Program/Public Service Excellence Program Public Health Worker Port and Livelihood Center Philippine National Bank Provincial Planning and Expenditure Management Provincial Planning and Development Office personnel services Philippine Sports Commission Private Sector Organizations Provincial Waterworks System Republic Act Commutable Representation and Transportation Allowances Regional Development Investment Program regional development council Rehabilitate-Own-Operate-and-Maintain Return of Investment Roll-On Roll-Off P a g e | xviii ACRONYMS ROCS RPT RPS SEC SEF SEDIP SEED SIDA SG SPVs SPS SMED SIP SOE SREs SONA SUCs QC-HURA SSL SSL3 TA TWG UBOM UN UNDP UNDESA USAID YEB WB Regional Operation Coordination Service Real Property Tax Rationalized Local Planning System Securities Exchange Commission Special Education Fund Secondary Education Development and Improvement Project School for Early Education and Development Swedish International Development Cooperation Agency Salary grade Special Purpose Vehicles Small project Scheme Small and Medium Enterprise Development School Improvement Plans State-owned Enterprise Statement of Receipts and Expenses State of the Nation Address State Universities and Colleges QC-Housing and Urban Renewal Authority Salary standardization Law Salary Standardization Law 3 Technical Assistance Technical Working Group Updated Budget Operations Manual United Nations United Nations Development Programme United Nations Department of Economic and Social Affairs United States Agency for International Development Year-End Benefits World Bank P a g e | xix Republic of the Philippines DEPARTMENT OF THE INTERIOR AND LOCAL GOVERNMENT A. Francisco Gold Condominium II, EDSA cor. Mapagmahal St. Diliman, Quezon City MESSAGE This collection of studies titled “Fiscal Decentralization in the Philippines: Issues, Findings and New Directions“ is the Department of the Interior and Local Government’s contribution to the body of knowledge on local revenue generation, local expenditure and budget management, and intergovernmental fiscal relations. Although much has already been studied and written in the abovementioned areas, this book delves into current and critical but barely investigated issues. Since the passage of the Local Government Code of 1991, much has already been written about the Internal Revenue Allotment (IRA) as a key intergovernmental transfer but little, if any, in-depth studies have been written about the LGU’s access to Official Development Assistance or ODA. Similarly, as much as there have been studies looking into local taxes such as the real property taxes and business taxes, in-depth studies on the exercise of the LGU’s corporate powers have been virtually non-existent. Finally, as much focus have placed on the issues of revenue generation, little has been studied on local expenditure management especially as this relates to the appropriate treatment of personal services and surplus-deficit situations, economic enterprise and the Special Education Fund (SEF). It is the intent of the DILG through this study to provide value-added to the policy reform debate by opening up these little studied issues and recommend possible solutions to the problems identified in these areas. It is also the intent of the DILG to raise these important issues to national and local policy-makers and stakeholders in the hope that the LGU reform agenda can move forward in the coming years. Let me take this opportunity to thank our partners: the DBM, the DOF, and the Asian Development Bank who worked with us in producing this set of studies and this publication as well as shared our vision of furthering fiscal decentralization reforms in the country. May this partnership continue to strengthen inter-agency and donor cooperation as we continue to address the challenges of reaching excellence in local fiscal governance. RONALDO V. PUNO Secretary P a g e | xx (c) local government personal services expenditure policy. posing challenges and opportunities to further local development. The Local Government Code of 1991 provided the legal framework to devolve taxing.Republic of the Philippines DEPARTMENT OF THE INTERIOR AND LOCAL GOVERNMENT A. Mapagmahal St. In the past seventeen years. (d) financial management of local economic enterprises. several issues have arisen. The current studies analyze some of these outstanding issues by providing a comprehensive review of: (a) utilization of the special education fund. It has supported the government’s efforts in strengthening decentralization policy framework and building capacity at the national agencies and the local government units (LGUs). The ADBsupported Local Government Financing and Budget Reform Program (LGFBR) has been running actively since 2006. project investment and technical assistance. borrowing and spending powers to local government units. The SEF is the share from real property tax collection and has become an important source of income for local government units. Francisco Gold Condominium II. Quezon City FOREWORD Asian Development Bank (ADB) has been closely involved in support of decentralization reforms in the country gathered significant pace from the early 2000s. the country has experienced a positive stimulus to local growth and development brought about by a paradigm shift of entrusting responsibilities and authorities to local government units for local development. (b) surplus and deficit in local government units. The study proposes a set of new guidelines that may provide a better link between SEF allocations and actual needs of local schools. and (f) procedures on sharing national wealth. Diliman. (e) corporate powers of local government units. including program financing. The study suggests specific recommendations to assist the government in framing an appropriate response to such issues. In the course of implementation of the new policy framework. There are varying views regarding the impact of decentralization on the provision of local services but scant actual research. The study on utilization of the Special Education Fund (SEF) gives important leads on how local government units can effectively utilize this fund. EDSA cor. and provides a range of support to the Government. P a g e | xxi . AUSTERE A. The study results will be considered carefully by the Government and will be used to help develop better systems and policies. It appears that while financing is a general constraint to local service delivery. LGUs have paradoxically registered fiscal surpluses. The study makes important recommendations to strengthen financial management of local enterprises. A basic policy issue at the local level involves the need to balance the employment and compensation policy with service delivery objectives. PANADERO Undersecretary P a g e | xxii . LGUs need to attract and retain good technical and managerial staff while at the same time they have to control the wage bill in view of budget constraints. many of them actually incur financial losses. The study on local economic enterprises finds that though these local entities are intended to be revenue-generating or at least self-sustaining. We see the book as an important input to evidence-based policy making. The study analyzes the question in light of fiscal conservatism and inefficiency or under-spending by LGUs that may impact service delivery and suggests measures to improve budgeting policies and procedures to promote more effective and efficient use of government resources. Another study reviews LGUs’ exercise of corporate powers through the operation of public utilities.The study on local fiscal surplus/ deficit reviews the current practices. We look forward to ongoing support from ADB through the LGFBR Program and for further analytical policy studies to be jointly developed with the Government. controlling the wage bill may negatively affect the local service delivery. guidelines. Less than business-like approach to local enterprise management is cited as a reason for large arrears and low collection efficiency. The study proposes a design for a program strategy in harnessing LGU corporate capacities. the studies compiled in this volume will be of great interest to policy makers especially in their review of the Local Government Code that aims to improve the policy framework for decentralization. economic enterprises and other service facilities. Paradoxically. The study on local personal services expenditure policy recommends giving LGUs flexibility to set their own compensation policy subject to a budget constraint and eliminating most of the waivers in applying the cap on personal services. and procedures on budgeting at the local level as it relates to the treatment of fiscal surplus/ deficit. . . Additionally. as provided for under Article VII. These include the organization of municipal and provincial councils based on general suffrage. of the 1945 Constitution. In 1959 another landmark legislation was passed on local autonomy. the Decentralization Act of 1967 (RA 5185) was implemented. Historical Context The American occupation of the Philippines (1902-1935) saw the promulgation of policies providing limited local autonomy. purportedly supportive of local autonomy. the establishment of the Moro Province (Act 787 in 1903). Less than a decade later. then the smallest political unit of the local government system.” Philippine political independence was granted by the Americans in 1946. Niazi. The Commonwealth period (1935-1946) saw local governments in the Philippines placed under the general supervision of the president. and the extension of popular control. Despite the enactment of these policies. Other pronouncements indicative of the thrust toward local autonomy included the following: the instructions of President McKinley to the Taft Commission. It further increased the financial resources of local governments and broadened their decision-making powers over administrative (mostly fiscal Page |1 . and Raymund C. Gilbert M. could alter the jurisdictions of local governments and in effect create or abolish them (Laurel Act of 1926). including the elimination of appointed members from provincial boards. the Americans maintained a highly centralized politico-administrative structure for security reasons. into quasi-municipal corporations by vesting them some taxing powers. This act vested in city and municipal governments greater fiscal. and regulatory powers. The Barrio Charter Act (RA2370) sought to transform the barrios. the incorporation of the City of Manila (Act 183 of the Philippine Commission in 1902). by statute. Llanto.FISCAL DECENTRALIZATION IN THE PHILIPPINES: ISSUES. President Quezon preferred to appoint the chief local officials of cities and would brook no “democratic nonsense. FINDINGS AND NEW DIRECTIONS Tariq H. It broadened the taxing powers of the cities and municipalities within the framework of national taxing laws. Section II. planning. Fabre A. the president. Barrios were to be governed by elective barrio councils. The first local autonomy act (RA 2264) entitled “An Act Amending the Laws Governing Local Governments by Increasing their Autonomy and Reorganizing Provincial Governments” was implemented in 1959. the organization of provincial governments (Act 1396 in 1905). ” The document likewise made constitutional the taxing powers of LGUs when it stated that “Each local government unit shall have the power to create its own sources of revenue and to levy taxes subject to limitations as may be provided by law. the appointment of officers-in-charge may be seen as a setback to the cause of local autonomy. the 1973 Constitution of the Republic of the Philippines rhetorically committed itself to a policy of local autonomy. to remove local officials throughout the country whose loyalties to the government were questionable and to replace them with officers-in-charge. to ensure their fullest development as self-reliant communities. could not be realistically implemented under the authoritarian regime. Notwithstanding the highly centralized dictatorial setup. especially the barrio. It provided that “the President shall have control and exercise general supervision over all local governments. More specifically. Findings and New Directions and personnel) matters. Seen as an isolated act. The authoritarian government promulgated the Local Government Code of 1983 (also known as Batas Pambansa Bilang 337). A year later.” Genuine autonomy. which abolished local elections and vested in the dictator Marcos the powers to appoint local officials who were beholden to him. the 1987 Constitution of the Republic of the Philippines was promulgated. was a great setback for the local autonomy movement in the Philippines. Article X.” It was this provision that enabled President Aquino. the President continued to exercise supervision and control over local governments. the imposition of Martial Law in 1972. but viewed in its proper historical and political context. Among the major state policies articulated was the policy that “The State shall ensure the autonomy of local governments.” However. stating that “The State shall guarantee and promote autonomy of local government units (LGUs). local governments were to be entrusted with as much autonomous powers and financial resources as are required in the more effective discharge of their responsibilities.Fiscal Decentralization in the Philippines: Issues. The overthrow of Marcos in 1986 and the installation of President Corazon Aquino saw the creation of the Freedom Constitution. It included specific provisions guaranteeing autonomy to local governments. it may be appreciated as a necessary measure in stabilizing the immediate post-dictatorship transition government. the Decentralization Act granted local governments greater freedom and ampler means to respond to the needs of the people and promote prosperity with a more equitable and systematic distribution of governmental power and resources. To this end. Section 3 of the 1987 Constitution of the Republic of the Philippines provided that Congress will enact a local government code to provide for a more responsive and accountable local government structure instituted through a system of Page |2 .” Additionally. however. which reiterated the policy of the State to “guarantee and promote the autonomy of local government units to ensure their fullest development as self-reliant communities and make them effective partners in the pursuit of national development. By any measure. through the minister of local government. It finally transferred the responsibility for the delivery of basic services to LGUs. It was by far the most radical and far-reaching policy that addressed the decades-old problem of an over centralized politicoadministrative system. and local school boards. education projects (school building program). tourism activities (facilities. telecommunications services and housing projects (for provinces and cities). enforcing environmental laws. and other such services. programs. Republic Act 7160 or the Local Government Code of 1991 was enacted in the Philippines. local health boards. More specifically. and establishing cockpits and holding cockfights. Most sectors of society welcomed the enactment of the code. processing and approving subdivision plans. environment (communitybased forestry projects) and agriculture (agricultural extension and on-site research) projects and public works undertakings (locally funded). equipment. It increases the financial resources available to LGUs by (i) broadening their taxing powers. assets. In 1991. Findings and New Directions decentralization giving local government units powers. such as investment support It devolves to LGUs the responsibility of enforcing certain regulatory powers. specifically through the recall and people’s initiative provision. including appropriate personnel. Because of their ability to organize and mobilize people.Fiscal Decentralization in the Philippines: Issues. it allocates to NGOs (Non-Government Organizations) and POs (People’s Organizations) specific seats in local special bodies. The following are the major features of the code: (i) It devolves to LGUs responsibility for the delivery of various aspects of basic services that earlier were the responsibility of the National Government. which ensured that most significant political and administrative decisions were made in Manila. and projects. (ii) providing them with a specific (ii) (iii) (iv) Page |3 . inspecting food products and imposing quarantines. such as reclassifying agricultural lands. These special bodies include local development councils. enforcing a national building code. responsibilities and resources. granting franchises and regulating the operation of tricycles. and development). promotion. These basic services include the following: health (field health and hospital services and other tertiary services) and social services (social welfare services). the door is wide open for NGOs and POs participation in governance in promoting local accountability and answerability. It also provides the legal and institutional infrastructure for expanded participation of civil society in local governance. primary health care. Under the LGC. water supply. obtain loans from local private institutions. all within the context of encouraging them to be more business-like and competitive in their operations. primary health care. pollution control. The last two are independent of the province and their residents cannot vote for provincial officials. agricultural extension and research. public parks. solid waste disposal system. a contiguous territory of at least one hundred square kilometers. social welfare services. and intermunicipal telecommunications). construction and maintenance of public elementary schools. and local infrastructure facilities (like municipal/city and provincial roads and bridges. In addition. Findings and New Directions share in the national wealth exploited in their area (e. hospital care. housing. flood control.. e. Philippine cities can be generally classified into three categories: Component. the code provides the foundation for LGUs to enter into build-operate-transfer (BOT) arrangements with the private sector. (v) It laid the foundation for the development and evolution of more entrepreneurial LGUs. and Highly-Urbanized. internal revenue allotments [IRAs] from a previous low of 11% to as much as 40%). The Code states that a city can be created or abolished through an act of Congress but must be a municipality or a barangay that has at least an average annual income of 20 million pesos for the last 2 years based on 1991 constant prices. which is a change from traditional government norms and operations. health facilities. Independent Component. float bonds. Municipalities are made responsible for the delivery of frontline basic services. community-based forestry. provinces are assigned functions that involve the inter-municipal provision of services whose catchment area covers more than one municipality like operation and maintenance of district and provincial hospitals. fishing. For instance.e. it also devolved the construction of public school buildings to local governments.g. provincial/ municipal/city buildings and structures. and (iii) increasing their share in the national taxes (i. mining.. drainage.. etc. municipal services and enterprises (like public markets and slaughterhouses). B.g. Expenditure Management Expenditure Allocations and Service Delivery at the Local Level Section 17 of the 1991 Local Government Code (LGC) transferred from National Government agencies to local governments the principal responsibility for the delivery of basic services and the operation of facilities in the following areas: land use planning.Fiscal Decentralization in the Philippines: Issues. and forestry charges). communal irrigation. environmental management. Highly-urbanized Page |4 . and a population of no less than one hundred fifty thousand. sewerage. The 1992 code also enhances the ability of LGUs to generate revenue from local fees and charges. Section 17c (which allows national government agencies to continue to implement devolved public works and infrastructure projects and other facilities. On the surface.Fiscal Decentralization in the Philippines: Issues. The primary responsibility for the provision of basic education rests with the national government although the construction and maintenance of school buildings is devolved to local governments under the LGC. The only advantage of independent component cities and highly-urbanized cities is their political independence from the provincial government. land area and the equal sharing provision under the Code. The Code gives municipalities responsibility for the implementation of community-based forestry and watershed projects but allows the Department of Environment and Natural Resources (DENR) to retain supervision and control over such projects. One important exception to the application of the decentralization theorem in the Philippines is education.000. are inadequate to meet the requirements of its inhabitants”) obfuscate what initially appears to be a clear cut 1 One important exception to the application of the decentralization theorem in the Philippines is education. All cities do not need to share their basic real property tax collections with the province but they have to give 30% of these to their respective barangays. The devolution of expenditure responsibilities to local governments is largely consistent with the decentralization theorem 1. the LGC permits local sub-national governments to group themselves and consolidate/coordinate their efforts. Their share is determined by population. For the most part. water supply development and distribution) when there are economies of scale in doing so. pertinent executive orders. services and resources for purposes that are commonly beneficial to them. They receive their respective shares in the internal revenue allotment (IRA) from the allocation given to all cities. There are many documented cases of smaller local governments joining together to carry out specific responsibilities (like coastal resource management. other special laws. Moreover. devolved functions are those that can be provided at lower levels of governments. which is 23% of the total IRA. programs and services provided these are “funded by the National Government under the annual General Appropriations Act (GAA). Section 17b of the Local Government Code provides an explicit and clear delineation of functions across levels of governments except perhaps in the area of environment and natural resource management. and those wholly or partially funded from foreign sources”) and Section 17f (which allows the national government or the next higher level of local government to “provide or augment the basic services and facilities assigned to a lower level of local government when such services or facilities are not made available or. Generally. the three different categories share the same revenue advantages. if made available. Findings and New Directions cities must have an annual income of at least 50 million pesos and a minimum population of at least 200.2 However. 2 Page |5 . solid waste disposal. Few of them have benefits that spillover outside the territorial jurisdiction of local governments with the exception perhaps of those related to public health and environmental management. The primary responsibility for the provision of basic education rests with the central government although the construction and maintenance of school buildings is devolved to LGUs under the Local Government Code. 53 3.17 10.61 3.6% of GNP in 1985-1991 to 3.38 22. Total local government spending doubled from an average of 1. Table 1.75 3. Findings and New Directions assignment of expenditure responsibilities.67 11.4% of GNP in 1992-2005.20 22.55 2.40 24. Similarly. Bureau of Local Government Finance. Page |6 .15 Source: Commission on Audit.55 26. the share of local governments in total general government expenditure net of debt service rose from an average of 11.2% in the post-Code period (Table 1). In a sense.Fiscal Decentralization in the Philippines: Issues.74 20.88 Expenditure to General Government Debt Expenditure Net of Debt Service (%) 12.53 1.54 1.76 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Average 1985-1991 1992 – 2005 1.44 1. total local government expenditure expanded relative to gross national product (GNP) and relative to total general government expenditure.0% in the pre-Code period to an average of 24. the prevailing arrangements effectively permit the existence of a two-track delivery system where both National Government agencies and local governments can initiate devolved activities.67 3. Local Government Expenditure Relative to GNP and to General Government Expenditure (%) Year Ratio of local government Expenditure to GNP (%) 1.89 2.75 3.04 23. In line with the transfer of functions to local governments mandated under the Code and of more resources at their disposal.72 3.36 11.20 12.33 26.87 25. education. aggregate local government expenditure on health rose almost five-fold from 0. in order of relative importance.1 0.1 1999 3.0 1995 3.9 0. local government spending on the social services sector almost tripled (from 0.1 2001 3.38 0. However.4 0. total local government expenditure on housing/community development and social welfare services in 2003 were less than twice as large their 1991 levels when expressed relative to GNP.9 0.3 0.2 0.3 0.8% in 2003 (Table 2).5 0.3 0. Findings and New Directions Table 2.1 0.1 0. largely reflect the higher priority that local officials assign to these sectors in the more decentralized regime.07% of GNP to 0.0 0.01 1991 1.5 0.2 0.4 1.0 0.1 0.39% of GNP in 2003 while local government spending on education increased by more than three-fold from 0.5 1.8 0.1 1997 3. The share of the social services sector to total local government expenditure expanded while the shares of the economic services sector and the general public services sector contracted (albeit marginally in the case of the latter).1 0.1 0.3 0.2 0.5 0.9 0.1 2005 2.35 0.1 2003 3.Fiscal Decentralization in the Philippines: Issues.22% of GNP (Table 2).9 0. on the other hand.8 0. While local government spending on all sectors also posted increases when expressed relative to GNP.3 0.8 1.3% of GNP in 1991 to 0. local government spending on the economic services sector expanded only minimally.2 0.3 1. from 0.11 0.0 0.3 0.7 0.53 0.1 0.3 1.5 1.2 0. In contrast. Higher local government expenditures on education and housing/community in the post-Code period.1 0.7 0.7 0.07 0.8 0. The increase in local government spending on social services between 1991 and 2003 went to health.3 0. Thus.9% of GNP in 2003).2 0.9 0.4 1.7% of GNP in 1991 to 0.2 0.9 0.08% of GNP in 1991 to 0.1 0.85 0. In contrast.7 0. Ratio to GNP of Local Government Expenditures (in percent) NG-LG Benchmark 2.0 0. local governments were not locked into pre-devolution national government expenditure levels in these sectors because local governments were Page |7 .2 0.5 1.0 0.7 0.1 0.1 0.6 0.5 0.0 1993 2.5 1.5 1.4 1.77 0. housing/community development and social welfare.1 GRAND TOTAL Total Economic Services of which: Agriculture Transportation and Communication Total Social Services of which: Education Health General Public Service Others Debt Service Source: Bureau of Local Government Finance.3 0.5 0.1 0.65 0. The mandated transfer to local governments of functions previously discharged by National Government agencies caused a major shift in the composition of local government budgets.4 0.6 0.4 1.4 0.8 0.07 0. The increases in local government spending on health and social welfare were largely due to the fact that the local governments had very little choice but to absorb the cost of devolved health and social welfare personnel which accounted for more than half of the total cost of all devolved personnel.5 0.0 0. despite the devolution of the responsibility for local infrastructure. These developments are true for provinces and municipalities in particular.8% in 2003. These developments are a cause of concern considering the robust and strong association between economic growth and infrastructure spending. Local government spending on the economic services sector expanded only minimally. With the devolution of agricultural extension and environment/natural resource management. Housing and social welfare commanded slightly higher than one-fifth of the local expenditure pie with labor and employment less than one half of a percent. Given the trends above. from 0. This is unexpected as investment in infrastructure (classified as building roads. In contrast. Findings and New Directions not obligated to absorb devolved personnel. On the other hand. social expenditures for housing and social welfare have been declining or stagnant over the same period. but not for cities and appear to be related to the fiscal difficulties faced by local governments during this period.7% of GNP in 1991 to 0. including the construction and maintenance of local roads to local governments. In fact. In contrast. This trend is worrisome considering that municipalities are primarily responsible for the delivery of basic health services. the expenditure share of these sub-sectors rose somewhat between 1991 and 2003. the increase in local government spending on the education sector may be attributed to the fact that the local governments’ Special Education Fund (SEF) grew by substantial amounts in the post-Code period. there are indications that aggregate local government spending on health and social welfare in 2004-2005 is even lower than combined National Government/Local Government spending in 1991. Although aggregate local government spending on the social services sector registered a general upward trend in 1991-1997 (when measured relative to GNP and in real per capita terms). it manifested some stagnation in 19972005. bridges and canals) ranks high in citizens’ preferences. Spending of provinces and municipalities on the transportation and communication sub-sector was lower than the 1991 level for most of the post-Code period. Page |8 . local government spending on the transportation and communication sub-sector in the post-Code period did not increase relative to the 1991 level when expressed as a proportion of GNP. Health and education’s share of local expenditures rose steadily since 2000.Fiscal Decentralization in the Philippines: Issues. by 2005 the education and health sectors combined comprised more than 78% of local government social expenditure (Table 3). insufficient generation of local own-source revenues.5 9. notwithstanding the devolution of many basic services to LGUs.6 0. and poor access of local governments to development credit from public sources for social projects and private capital markets for income-generating projects. between provinces and cities). absence of equalizing transfers. However.1 25.3 10.9 31. The current lack of an effective performance measurement system in local governments may be attributed to the insufficiency of local resources to create or improve existing measurement systems and the lack of incentives to utilize performance measurement systems.0 Period 2001 2002 2003 2004 2005 Education 27.0 100. and (c) unclear expenditure assignments.e.3 0.8 17.0 45.0 100. Weak fiscal and expenditure management can be broadly attributed to a lack of clear guidance and support from national government (NG) oversight agencies and inadequate local capacity in fiscal and expenditure management.0 100..8 11. delivered through the Department of Education (DepEd).3 10. NG and local governments) and intra-governmental levels (i.5 30.7 47.0 11.. Nutrition and Population Control 44.5 0. mandated increases in salaries and benefits of local government employees without the corresponding revenue measure). Findings and New Directions Table 3: Sub-Sectoral Distribution of Local Government Social Expenditure 2001-2005 (at current prices) Health.6 49. uncertainty in national transfers such as the IRA and special shares such as shares in the income from the taxation of natural wealth.0 Social Welfare 11.g.0 Total Social Expenditure 100.2 10.e.6 11.1 29.3 Housing and Community Development 16. (b) poor fiscal and expenditure management.7 46. This can be broadly attributed to: (a) lack of resources.9 Source: Department of Finance: Bureau of Local Government Finance-Statement of Receipts and Expenditures The problem of low growth and welfare in local communities can be traced to poor delivery of local public goods and services. Expenditure on Education Basic public education is still largely the responsibility of the national government. The lack of resources is mainly due to unfunded mandates (e.6 0.0 100. In this regard.8 Labor and Employment 0. Unclear expenditure assignments result from the continued provision of devolved services by the national government agencies and from a poor matching of expenditure assignments or functions and resources both at the inter-governmental level (i.Fiscal Decentralization in the Philippines: Issues. it will be important to install an effective performance measurement motivate local governments to adequately address the needs of their communities. LGUs Page |9 . Students completing a primary education declined from 67% in 2001 to 62% in 2002 while students completing a secondary education declined from 73% in 2001 to 55% in 2005. Aggregate local government spending on basic education registered a general upward trend in 1992-1997 (when measured relative to GDP) but manifested a well. the Special Education Fund (SEF).2% of GDP in the post-Code period.defined downward trend in 1998-2007. Primary education enrollment has declined from almost 97% in 2001 to 73% in 2005 while secondary education enrollment has declined from 66% in 2001 to 44. Completing education in both primary and secondary schools have suffered as well. This movement is common across all levels of local government and is similar to the movement in national government spending on basic education during this period (Figure 1). local spending can be better targeted to address local education issues while national government spending can address homogenous or generic educational needs. spending at the local level is needed to supplement this expenditure. It appears that the trend in spending on basic education is correlated with the fiscal position of the government during a given period of time. the largely poor performance of education indicators between 2001 and 2006 can be partially attributed to the fiscal difficulties faced by government. Although national government spending has been increasing. The importance of local spending for education is strongly supported by the available data. Aggregate local government spending on basic education went up from an average of 0.5% in 2005 (Table 4). in the previous years. it is substantial when reckoned relative to DepEd non-personal services spending (40%-85%) and DepEd maintenance and operating expense or MOOE (70%-140%) in 2001-2007 and has the potential to have some impact on basic education outputs and outcomes.Fiscal Decentralization in the Philippines: Issues. which has been earmarked by law for the basic education subsector.1% of GDP in the pre-Code period to 0. Findings and New Directions are able to provide supplementary funding support to public basic education because they have access to a sustainable source of funding. P a g e | 10 . In addition. While local government spending on basic education does not seem large when compared to either general government education spending (5% in 1992-2007) or total DepEd spending (7% in 1992-2007. To some extent. The monies in the SEF comes from an additional 1% tax on real property that LGUs are mandated by the Local Government Code to impose and collect. 2007.80 66.10 67. which will enable them to deliver efficient services to their constituency. improve remuneration to attract and/ or retain good technical.51 44. P a g e | 11 .05 92. 4. The guidance from the international literature suggests that the first step in a pay reform strategy is to determine the medium-term resource envelope.99 93.0% 0.40* C. 1991-1998. Table 4_: Selected Education Indicators.50 62. Findings and New Directions Figure _1 .30 2005/06 73. Philippine Statistical Yearbook 2007.Spending on Education by Level of Government.5% 2.0% 1.58 54. 2000/01 and 2005/06 2000/01 Net enrollment ratio – primary (%) Net enrollment ratio – secondary (%) Cohort survival rate – elementary (%) Cohort survival rate – secondary (%) Adult Literacy Rate (%) *2003 Source: Department of Education 96. Key Issues and New Directions in Expenditure Management Personal Services The basic policy problem with respect to public sector employment and compensation policy at the local level revolves around the question of how to effectively control the LGU wage bill while simultaneously trying to ensure that LGUs have an adequate number of personnel with the appropriate qualification. fiscal sustainability should be primordial in the LGUs’ hierarchy of objectives.Fiscal Decentralization in the Philippines: Issues. Thus.5% 0. the twin challenge is how to control wage costs but at the same time. In other words.5% 4.0% 1991 1992 1993 1994 1995 1996 1997 1998 CG/GDP LG/GDP Source: National Statistics Coordinating Board.0% 3.5% 1.5% 3. professional and managerial staff.0% 2.18 73. Furthermore. There is also a need to revisit the criteria for assigning different salary grades for higher level positions in LGUs of different income class and different levels. Relative to this. criteria and/ or benchmarks that LGUs can refer to in deciding on the staffing pattern that is appropriate for their particular situation should be established. position classification and compensation concerns cannot be completely divorced from staffing concerns. Meanwhile. The revised model organizational structure and staffing pattern could possibly lead to a more compact list of plantilla positions that include only positions that are needed for the delivery of the core mandates of LGUs. This is important so as to reinforce the imperative for LGUs to live within hard budget constraints. the practice of granting additional/ extra year-end benefits subject to the availability of funds at the level of the operating unit as the budget year is about to come to a close should be discontinued in order to improve public expenditure management at the local level. There is also a need to review and define model organizational structures for LGUs with corresponding staffing pattern (by level and by income class). It is recommended that the cap on LGU spending on personal services be retained. Findings and New Directions Since the wage bill is simply the product of the number of employees and the wage rate. In addition.Fiscal Decentralization in the Philippines: Issues. Related to this. personal services (PS) expenditure policy has to contend with issues related to both staffing and pay policy. (ii) position classification and compensation policies. which are not part of the core mandates of the LGU. it is recommended that LGUs be given the flexibility to set their own compensation and pay policy (choosing one from the eight alternative salary schedules described in RA 6758) as long as they work within the fiscal constraint embodied in the PS cap. is the need for a body similar to the Joint Commission on Local Government Personnel Administration to be constituted to act as oversight body on local personnel matters and to ensure better coordination of (i) staffing and employment policies. The amended model organization structures should be indicative rather than prescriptive. It is further recommended that most if not all of the waivers to the application of the PS cap be eliminated as the presence of these waivers seriously undermines fiscal discipline. and (iii) sectoral policies. Corollary to this. Moreover. it is necessary to coordinate implementation of benefits under various Magna Carta legislations with P a g e | 12 . the pertinent provision of the LGC allowing the grant of additional allowances and benefits to national government officials should be amended as this puts undue pressure on LGUs to provide such allowances at the expense of local service delivery. Fixedterm employment contracts may then be considered for personnel who are focused on the delivery of the priorities of the current administration. Findings and New Directions implementation of the overall compensation structure of government. P a g e | 13 . While the implementation of SSL3 will present difficulties as it further exerts greater pressure to increase the LGU wage bill. which remain as major concerns towards improving the access to and the quality of basic education in the country. A strong alliance among these three sectors is needed for sustained funding of the education programs. Among such issues are adequate number of teachers. At the local level. Finally. The 2005 census has placed the population of the country at 88 million. With the devolution policy under the Local Government Code of 1991 and the decentralized governance of the sector under Republic Act 9155. SEF stood at PhP 14. which LGUs can use in making hard choices between number of employees and the corresponding wage bill would be helpful if developed. Special Education Fund Education reform initiatives in the county seek to address issues primarily on access to basic education and the quality of education programs. the commitment of the LGUs is anchored primarily on its support of the education programs through the Special Education Fund or SEF. classrooms and other facilities. Such a toolkit will be particularly useful for LGUs when they consider the sustainability of the proposed round of salary increases and their alternative responses. there is no official monitoring report on how the SEF is used and how it actively supports or complements the national program on basic education. the basic education sector continues to be hounded by lack of financial resources.Fiscal Decentralization in the Philippines: Issues. from the 75 million of the 2000 census. Yet. The SEF represents the share of the LGUs from the annual collection from real property taxes. particularly elementary and secondary education. a toolkit. In 2007. especially under Salary Standardization Law 3 (SSL3). The concomitant funding requirement to implement the elementary and secondary education program to respond to the increased demands arising from population growth prompts a strategic review of the present financing framework for the basic education program.2 Billion. likewise it also presents an opportunity for staffing and pay reforms to be made. The country’s population increases at an alarming rate. SEF income has been growing through the years. While the annual budget of the national government has always given highest priority to the education sector. and instructional materials. the burden of providing basic education is now shared with Local Government Units (LGUs) and the private sector. with increasing real property tax assessments and a more aggressive tax collection by LGU. if not a political. It is approved by the Board through a LSB Resolution. been a parochial. decision in the absence of clearer identification as what can and what cannot be supported by SEF. and municipalities. LGUs in the aggregate have paradoxically registered fiscal surpluses year after year. the LSB allocates the local government’s SEF to the various education programs that they consider as priority. While it is generally agreed that financing is a constraint to local service delivery in the Philippines. Findings and New Directions Circulars or issuances jointly issued by the Department of Education. On the other hand. The management of the SEF is done through the Local School Boards (LSBs) in each of the provinces. Nevertheless. and the Department of Budget and Management provide the general guidelines for SEF utilization. There should be clear statements as to the expenditures chargeable to the SEF. cities. the Department of Local Government. The SEF budget is not processed like a regular local budget as no local appropriation is required. Information on the allocation from the national budget for the local schools would need to be communicated to the LSBs concerned to help ensure that the SEF is used in the most effective and efficient manner to advance the programs for the basic education subsector. A Joint Circular of the DepEd. and involves the participation of local budget and accounting staff who are not necessarily members of the Board. such surpluses are to a large extent illusory because once LGUs actually realize a fiscal surplus at the end of the fiscal year. including the use of allotments as disbursement authority. While the membership is provided for in the LGC. Local School Board (LSB) budgets provide evidence that the prioritization in the allocation has in a number of instances. There is a need for greater alignment of the SEF budget with the programs and priorities at the national level. the implementation is in accordance with budgeting and accounting rules and processes. P a g e | 14 . there are some indications that additional membership or representation by other stakeholders in the different Boards has been adopted by some LGUs. they immediately appropriate the full amount by enacting a supplemental budget. Co-chaired by the LGU and the DepEd. just like local governments in other parts of the world.Fiscal Decentralization in the Philippines: Issues. there is a need for clear guidelines for a better link between SEF allocations and what the schools actually need. Although previous versions of the guidelines have done this. DILG and DBM should contain in unequivocal terms the type and purpose of the utilization. However. Fiscal Surplus-Deficit Local governments in the Philippines are subject to some form of balanced budget constraint. Significant differences in the BLGF and COA data on LGU fiscal aggregates measured on a cash basis have been observed in 2002-2007. Still another measure of fiscal performance. The handbook should aim (i) to communicate a policy framework for LGU budgeting that is anchored on the basic principles of public expenditure management. processes and procedures governing the preparation. In addition. The articulation of the policy framework is important because there is a need to provide the proper motivation for the various processes that are part and parcel of the local budgeting. The policy problem thus boils down to the extent one can further stretch the fiscal space given existing resources without compromising fiscal discipline. the fiscal performance indicators in the Local Government Performance Monitoring System should include the current fiscal balance as a measure of LGU savings and its contribution to the pool of resources that is available for investment. e. It outlines the specific steps LGUs have to take and the specific forms LGUs have to use as they go through the budget cycle in a manner that will ensure that they comply with the process and documentation requirements of law on local budgeting. The overall fiscal balance allows government to focus on the financing constraint. The guidelines. There is a need to better understand the sources of the disparity and for the oversight agencies to adopt common measures and definitions. and (ii) to provide LGUs with tools and techniques that will help them incorporate these tenets in their budget processes. a measure that assesses the size of debt service relative to LGU income and one that compares the amount of cash outflows to amortize/ redeem past debt relative to amount of cash inflows from the incurrence of new debt. which has traditionally been viewed as government’s most binding constraint. At the same time. which may be included in the list of indicators of fiscal performance that should be tracked. In the light of the balanced budget provision in the LGC.Fiscal Decentralization in the Philippines: Issues.. there is anecdotal evidence that some LGUs have resorted to frequent restructuring of their outstanding debt. is the overall fiscal balance as a summary measure of LGU’s borrowing requirement. review and execution of the budget are well laid out in the Updated Budget Operations Manual (DBM 2005). At the same time. There is a need for a handbook to complement the UBOM. the amount available for appropriation is another important indicator of fiscal performance that should be monitored on a regular basis. It is also important for LGUs to be able to arrive at good estimates of this measure in order for them to be able to delimit how much they can legitimately subject to further appropriation. some debt management indicators may also be considered. On the other P a g e | 15 .g. Findings and New Directions It is noted that the stock of outstanding LGU long-term debt has almost doubled in the five-year period between 2002 and 2007. indicative perhaps of some kind of fiscal stress. many of them actually incur losses on a continuing basis. Overall. Many of the elements of the existing framework will still be part of the new framework but a number of new P a g e | 16 . The Local Governance and Fiscal Management Project of ADB (TA 4778) has developed a training module for this purpose. Current practice in many LGUs does not engender a clear appreciation of the true cost of the local economic enterprise. there is a need to upgrade the technical capacity of LGUs in formulating honest and realistic estimates of income and sources of budget finance including the amount available for appropriation at the end of each fiscal year. Findings and New Directions hand. the DBM may also wish to establish benchmarks against which LGUs can compare the results of their cash flow forecasts and cash flow analysis to aid in decision making for the timing of the release of reserves. and revising the methodology for revenue forecasting. These are essential inputs to a better functioning allotment system that will assist LGUs strike the right balance between fiscal conservatism and the need to provide the services that local communities are in dire need of. the need to establish a clearer and more comprehensive policy framework to govern the creation of new LEEs and continued operation of existing ones is critical. In particular. the less than business-like approach to local enterprise management has resulted in large arrearages and low collection efficiency. part of the cost of LEE operation and management is sometimes charged under other offices in the LGU.Fiscal Decentralization in the Philippines: Issues. Local Economic Enterprises Although local economic enterprises (LEEs) are meant to be self-sustaining. Given this perspective. There is also a need to build the technical capacity of LGUs to do cash flow forecasting and analysis. On the other hand. economic enterprises are oftentimes used as vehicle for charging casual employees who are utilized elsewhere in the LGU system so as to circumvent the prescribed 45%-55% limitations on personal services (PS) expenditures of LGUs. there is also a need to equip LGUs with the tools that will assist them on the more technical aspects of budgeting. COA has documented many cases wherein the operation of LGU economic enterprises was not treated as special accounts in the General Fund contrary to the provisions of the Local Government Code (LGC) of 1991. Since simple spreadsheet models for cash flow forecasting and analysis have been developed under the AusAID’s Philippine-Australian Governance Reform (PEGR) project. revisiting revenue generation strategies. On the one hand. if not revenue-generating units. The less than transparent reporting of the actual financial condition and profitability of these enterprises may have some adverse effect on decisions taken by LGU officials. and licenses or (ii) directly by the LGU either through an LEE or through a regular unit or office in the LGU. In this respect. public service delivery through external organizations is commonly used for public utilities and social services like education. Second.Fiscal Decentralization in the Philippines: Issues. Once the LGU deems it appropriate to provide a given service. external service providers tend to operate in a more competitive environment and are 3 These guidelines may simply provide criteria that will assist LGUs decide whether it should be engaged in the direct provision of marketable goods/ service and may include either a positive list of what marketable goods/ services are appropriate or not appropriate for LGU provision. concessions. First. Thus. managerial problems and political realities that come into play against the inherent strengths and weaknesses of each of the various alternative service delivery modes. management contracts. the fixing of tariffs or prices in the LEE is normally done by fiat or through an administrative process and is thus more subject to political interference. when an LGU is confronted with the need to decide whether to provide a given good/ service. It may be the case that the private sector is the efficient provider of certain goods and services. the new policy framework should also provide LGUs guidance on the criteria that they may use in analyzing the advantages/ disadvantages of using external organizations to deliver public services as opposed to direct service delivery by the LGU itself. P a g e | 17 . The new policy framework should also recognize that some goods/ services are better delivered by the national government4 while at the same time recognizing that the LEE modality is but one of a number of alternative service delivery modes. Such an evaluation should take into account the financial risks.3 These guidelines should take into account the possibility of market failures and government failures as well. 4 The assignment of expenditure responsibilities across levels of government is largely defined by the Local Government Code. it should then assess the suitability of the alternative service delivery modalities in the context of its own particular situation. In contrast. leases. The framework should thus establish guidelines when government provision of outputs that could be provided by the market is justified. It should also be premised on the superiority of private-sector led development unless a strong case can be made for government intervention. On the one hand. Service delivery can be done either (i) through organizations external to the LGU like private sector enterprises and non-governmental organizations (NGOs) via various types of public-private partnerships arrangements like service contracts. the new policy framework should be anchored on the basic principle that LGUs need to focus on their core functions. the LGU should be advised to first check the alignment of said good/ service with its goals and core functions. and (ii) alignment with the public interest. Findings and New Directions features will have to be put in place. In other countries. two factors have to be taken into account: (i) market orientation. Political pressure also tends to be strong on the LGU service provider in the area of staffing and personnel administration. However.g. lifeline pricing and subsidization of poorer segment of the population). and innovations in service delivery (e. (ii) tariff setting. servicing of areas with low traffic volume). with some degree of cost recovery in mind because by their very definition LEEs raise the bulk of their revenues from the sale of their outputs. (ii) tariff rates or user charges that will be charged for goods/ services provided by LEE. This means that subsidy given to LEEs is an ex-ante conscious decision on the part of the LGU rather than an ex-post item that finances whatever the resulting gap between revenue and expenditure is.. it then has to choose whether to do so via an LEE or through a regular unit or office in the LGU. in principle. 2008. LEEs are less subject to restrictions on staffing and have some flexibility in terms personnel remuneration allowing them to better attract professional and technical personnel.g..” Report submitted to the Asian Development Bank (ADB) under the Technical Assistance 4778 Project. On the other hand. quality of service (e. 5 6 7 Wright. and (iii) who will be subsidized and by how much. LGU service providers directly accountable to clients but compliance to service standards is typically part of contractual agreements between LGU and external service provider). it is usually assumed that direct delivery of service by the LGU can be more easily aligned with the public interest in terms of access and coverage (e. (iii) investments in capital assets and maintenance of the same and (iv) overall performance orientation in the delivery of services. this approach opens up the possibility for abuses in hiring of staff and paying of the staff. tariffs/ service charges (e.g. Ibid. The La Union Medical Center provides a good example of how a well articulated policy on providing subsidy to the poor contributes to the efficient operation of the LEE. Also. The new policy framework should provide explicit guidance on the creation of LEEs. LEE tariffs are set by Sanggunian legislation and are determined. external provider might be more willing and capable of introducing service improvements especially if contractual arrangements provide the incentives to do so6. LEEs tend to have greater inclination and wherewithal to make the necessary investments to maintain the equipment and facilities needed to deliver the service. These two approaches differ in terms of (i) staffing. Glendal. Given these considerations.g. Consequently.Fiscal Decentralization in the Philippines: Issues. “A Review of Alternative Service Delivery Options. If the LGU deems it best to provide the service directly by itself. On other hand.. The guidance should specify that LEEs should be established by enacting an ordinance that specifies in unequivocal terms: (i) LGU policy on degree of cost-recovery of LEE up front in terms of what percent of cost will be recovered from user charges. P a g e | 18 . Findings and New Directions thus subject to the discipline of the market place when they determine the appropriate number of their personnel complement as well as the level of tariffs that they should charge. the LGU service provider and external providers tend to be substantially different in terms not only of the incentives for efficiency and economy but also in terms of their cost structures5.7 including schedule of rates by income bracket of clients where applicable. LEEs may have greater drive for results and performance especially when the performance measures are clearly defined and monitoring/ evaluation systems are established and enforced. On the other hand. we argue that the budget format sends signals on how budget execution should proceed and thus affects LGU spending behavior. the same budget format is carried over in the appropriation ordinance. revenues earned from an LEE’s operation are credited to an intra-agency receivable account known as “due from operating units account” while the operating expenditures of the LEE are debited from the same account by the LGUs. proposed expenditures of LEEs do not form part of the spending proposals in the proposed budget of the local chief executive. However. particularly as it relates to LEE operations. A number of LGC provisions related to budgeting create some confusion. Tagum City) that treat their LEEs just like any other unit/ office when they prepare their budget such that the income of the LEEs are shown as part of the income estimate for the General Fund and all expenditure proposals related to LEE operation are shown as part of the expense items in the proposed budget. However. this is in direct violation of the basic principle of local fiscal administration that no money shall be paid out of the local treasury except in pursuance of an appropriations ordinance. The maintenance of special accounts for LEEs is essential in tracking the results of LEE operations and how closely LGUs follow their intent for creating LEEs. income derived from the operation of LEEs is utilized in the payment of operating expenses without passing the usual budget procedures. If the review shows that the continued operation of some LEEs is no longer justifiable. there are LGUs (e. key informant interviews and discussions during consultation workshops reveal that some LGUs essentially treat their LEEs offbudget. On the one hand. the new policy framework should then provide guidance on what the alternative options available to the LGUs in LEE divestment. the framework should also institutionalize the periodic review of the operation of existing LEEs to help LGUs decide whether these LEEs deserve to continue their operation especially in the light of changing market environment. Findings and New Directions Third. In addition.g.. During budget execution. different LGUs exhibit different ways of treating their LEEs not only when they prepare their budgets but also when they execute their budgets. LEE income does not form part of the total income estimate that is used as basis for budget preparation. proposed subsidies to LEEs (if any) are shown as an expenditure item in the proposed budget. some LEEs may have been created at a time when no private sector providers were present in the LGU jurisdiction but in the interim the private sector has entered the marketplace.Fiscal Decentralization in the Philippines: Issues. As a corollary. In like manner. P a g e | 19 . In this way. For instance. In practice. At the same time. the new policy framework should reiterate and re-emphasize the importance of the maintenance of special accounts for LEEs as prescribed by the COA under the NGAS. P a g e | 20 .Fiscal Decentralization in the Philippines: Issues. it is not only more transparent than current practice. Thus. under the LGC the share of provinces in the proceeds of the Real Property Tax (35%) is smaller than that of cities (70%) and municipalities (40%). For instance. However. Also. then it is likely that only expenditure items in GF proper will be affected. this presentation tends to build a firewall between the General Fund Proper and the LEE. Part 2 shows the income estimate and spending proposal for the LEE. if actual collections of local economic enterprise were to fall short of the estimate in the course of the budget year. Local Own-Source Revenue Generation The LGC authorizes local governments to levy local taxes on a good number of tax bases. if actual collections of the LGU’s General Fund were to fall short of the estimate in the course of the budget year. it is recommended that the LGU budget be divided into three parts. then it is likely that only expenditures items for the LEE will be affected. if actual collections of were to exceed the estimate. This implies that Sanggunian authorization for LEE spending is required. D. Part 3 shows the consolidation of Parts 1 and 2. it also provides incentives for LEE managers to improve their collections since they are better able to isolate their earnings from the rest of the General Fund Proper. it also gives them a greater discretion in setting the tax rates. including some which were not allowed during the pre-LGC period like banks and other financial institutions. It is worth noting that the assignment of revenues under the LGC has effectively shifted the distribution of own-source revenue from municipalities and provinces to cities. In like manner. it also provides incentives for LEE managers to improve their collections since they are better able to isolate their earnings from the rest of the General Fund Proper. Findings and New Directions In this regard. the LEE can automatically increase their spending beyond what has already been appropriated without first enacting a supplemental budget. This presentation also defines an unambiguous demarcation line that separate the LEE from the GF proper. Part 1 shows the income estimates and spending proposals (including subsidy to LEE) for the General Fund Proper. This budget format is not only more transparent than current practice. and printing/publication. During budget execution. The Code not only allows cities to impose all the taxes that provinces and municipalities are authorized to levy. the LGC set ceilings for the real property tax assessment levels for different classes of property whereas the assessment levels themselves were fixed in the pre-LGC period. Section 143 – Tax on Business has a very detailed schedule of fees which can be simplified. there are many low yielding taxes which impose substantial collection and administrative costs on local governments and contribute to a lack of transparency on the side of the taxpayer. and Municipalities Subject Cities Prov. P a g e | 21 . the Code fixes the tax rate of some of the taxes that are assigned to local governments (like the SEF real property tax and the community tax). and radio fees. There is a need to focus on taxes. The LGC also provided for the exemption of residential buildings with market value below P175. Moreover. tax revenue accounted for 25% of total regular income8. In Bacolod City there are over 200 different rates for the mayor’s business permit fee.02% of the local governments total own-source revenue. no more than 0. For instance. the Code sets ceilings (or floors) on the tax rates that local governments may impose which in some cases appears to be low (or high) given current realities. and charges that have high yield potentials. Muni’s On Real Property Transfers On Business of Printing and Publication On Franchise On Sand. thereby resulting in the reduction in the effective assessment levels of residential 8 9 10 Bureau of Local Government Finance. Source: Philippines – Local Government Code of 1991. fees and charges. Studies have shown that local governments have created revenue codes with a huge array of taxes. The LGC seriously limits the power of local governments to set local tax rates. In addition. This can be partly attributed to the Code itself. and to improve their administration and collection. First.Fiscal Decentralization in the Philippines: Issues. on average. Tax Assignment in Cities.9 Many of these are under-collected and some not collected at all.000 from real property taxation. Findings and New Directions Table 5. fees. all of which depend on the type of establishment. Provinces. the maximum assessment levels set under the LGC are no higher and often significantly lower than the fixed assessment rates in the pre-LGC period10. Second. Gravel and other Quarry Resources On Amusement Places On Professionals On Delivery Vans and Trucks On Real Property On Idle Lands On Business On Community Tax a/ Shares in proceeds of levy of province. each bring in. For example taxes on peddlers. while local governments do have some discretion in setting tax rates in the case of other local taxes. a/ a/ a/ a/ a/ a/ In 2006. fishing vessels. Brgy. Thus.3 12.6 46. all types of buildings and all types of machinery. Cities 1999 2001 2003 2005 Average 1985-91 1992-05 1985-05 19.3 35.1 10. the resulting adjustments will not allow local governments to maintain the real value of their revenues.0 23.1 28. Cities 11. Clearly.8 63. highlights the inconsistency between tax 11 This is true in both the pre-Code and post-Code period.Fiscal Decentralization in the Philippines: Issues.2 11.6 72. This provision is particularly restrictive in the case of taxes (like the professional tax and the tax on delivery vans and trucks) whose rates are specified in nominal peso terms.8 33.8 19. The broader powers given cities relative to provinces and municipalities is justified by the fact that cities are expected to carry out all the functions that are assigned to both provinces and municipalities.8 46. A comparison of Table 5 with Table 6. thus.4 22.9 12.1 8. This situation tends to increase administrative and compliance costs which is further exacerbated by a weak local tax administration. the tax structure prescribed by the Code for the local business tax is too complicated such that different categories of firms are subject to different rate schedules.1 17.7 22.3 44.6 46. Cities 61.3 69. future Code reviews should look at giving local governments greater discretion in setting tax rates by raising the maximum allowable tax rates. the Code mandates that tax rates can only be adjusted once in 5 years and by no more than 10%.4 9. There is a need to move away from tax rates that are not indexed to inflation as such practice necessitate frequent revisions of local tax ordinances if local governments want to keep their own-source revenues buoyant.7 66.8 58. the current assignment of taxing powers across levels of government scores low in terms of the fiscal autonomy criterion.6 72.9 10.7 67.7 49. Distribution of Local Government Own-Source Revenue Across Levels of Sub-national Government by Type of Revenue (%) Total Own-Source Revenues* Province Municipal.2 10. In addition.6 23.8 11.3 35.8 35.3 19. Table 6. That local tax administration is severely inadequate in many local governments is highlighted by the declining trend in Real Property Transfer collection efficiency of both provinces and cities in the post-Code period. Third.1 26.1 29.0 25.1 33.5 48.1 18.0 *Sums equal 100%.2 38.2 49. In addition.1 16.4 61. the cost of devolved functions (specifically those that are accompanied with actual transfer of personnel) is heavily skewed in favor of provinces and municipalities (Table 7). Source: Bureau of Local Government Finance.7 37.9 36. Findings and New Directions land.1 13.0 35.0 21.9 25.2 66.1 17.3 Total Non-Tax Revenues* Province Municipal.6 64.9 20.7 10.5 16.3 37. P a g e | 22 .11 However.8 66.0 61.7 Total Tax Revenues* Province Municipal. potentially leading to an erosion of RPT revenues.4 43.7 15. 2 4.8 47.0 70.0 2. the share of provinces and municipalities in total local government ownsource revenue declined in the post-Code period despite their larger share in the cost of devolved functions. Findings and New Directions assignment and expenditure assignment across levels of local governments.5 1.7 0. The share of provinces and municipalities in total local government own-source revenue contracted from an average of 19.1 11.6 23.0 1.0 100. 1992 Percent distribution across levels of local governments General Public Services Economic Services Agriculture Environment and Natural Resources Social Services Health Social Welfare and Employment TOTAL Percent distribution across functions General Public Services Economic Services Agriculture Environment and Natural Resources Social Services Health Social Welfare and Employment TOTAL Source: Commission on Audit.5 1.5 87.4 61. Distribution of Cost of Devolved Functions Across Levels of Local Governments by Function. respectively.2 4.9 33.0 65.5 15.9 4.8% in the post-LGC period.8 23.5 0.0 100.9 100.1%.1% and 26.0 100.0 100. This kind of movement is evident for tax as well as non-tax sources of own-source revenues.2 82.8 5.4 97. in 19851991 to 12.9% and 37.3 100.0 100.7 60.4 3.1 5.0 100.1%.0 100.0 100.0 21.6 51. respectively.6 0.8 44.2 2.0% in the pre-LGC period to 61.4 20.5 74.1 19.9 13.1 37. Table 7.7 22.3 3.9 83. in 1992-2005 (Table 5).9 18.3 38. 0. the share of cities in total local government own-source revenue expanded from 43.0 The size of the local tax base outside of the real property tax and the local business tax is not significant and the bulk of the productive tax bases still rest P a g e | 23 .6 4.2 37.Fiscal Decentralization in the Philippines: Issues.0 5. In short.0 Provinces Munis Cities All LGs 7. In contrast.2 100.3 48.4 77.6 50.7 82.0 100.7 57.6 12.9 35. to face a lower basis for imposition of their business tax.4 50. See footnote 13. these efforts have been stalled by the nonissuance of the implementing guidelines for this provision because of concerns regarding the provision of the National Internal Revenue Code on non-disclosure of tax information.1 1994 60. Findings and New Directions with the national government.1 52.0 59.7 54.0 66. Key among this is the guideline for taxation of bank branches in favor of the head office. Collection Rate of Current Year for Basic RPT.7 Source: Bureau of Local Government Finance 12 13 Department of Finance Local Finance Circular 1-93. Also. Table 8.4 49. there are no implementing guidelines for imposition of business taxes on mining sites.1 65.Fiscal Decentralization in the Philippines: Issues.0 62. and hence the local government hosting the head office12. P a g e | 24 .1 1992-2000 55. Some implementing regulations on local taxation are not favorable to all local governments. In this regard.0 1991 58. However. usually in less wealthy local governments.6 61.6 44.2 54.4 63.0 55.3 1997 57.9 54.13 That local tax administration is severely inadequate in many local governments is highlighted by the declining trend in Real Property Tax (RPT) collection efficiency of both provinces and cities in the post-Code period (Table 8). The current interpretation of the relevant LGC provision has caused the bulk of the bank’s revenues to be posted to the head office causing the bank branches.0 1999 54.4 54. 1989-2000 All LGs Provinces Cities 1989 58. Weaknesses in the supporting mechanisms for local government tax administration at the national government level likewise hamper local tax performance.7 57. The local government Leagues have actively pursued the implementation of Section 171 of the LGC which requires the BIR revenue district offices to share their tax information with the local treasurer.1 Average 1989-1991 58. The enforcement of local business taxes is held back by the lack of coordination between the BIR and local treasurers. Limiting the number of local taxes to those which are buoyant may be an effective way to increase transparency and reduce transaction costs. the President recently has passed an executive order to provide guidelines on sharing of tax information between the BIR and the local governments.9 2000 54. 2 8.2 3. however.9 6. Findings and New Directions Given this perspective.0 100.0 96.9 7. the decision whether to impose and collect local taxes is a choice that local elected officials make. it comes as no surprise that the contribution of local governments to total revenues of the general government (national government and local governments combined) remains low – an average of 7.9 87.2 5.9 12. As a result.0 95.0 100.0 100. resulting in declining collections in real terms.0 100.Fiscal Decentralization in the Philippines: Issues.9 93. Under this proposal. to increase the tax rates in general for fear of a backlash from their constituents during election. many provinces and cities have done a general revision of the schedule of market values only once since 1991.7 100.0 100.6 11.8 100.0 100.6 88.1% in 1992-2005 compared to an average of 4.9% in 1985-1991 (Table 9) Table 9.0 LG 6.1 9.6 100.14 Also.1 92.1 87.6 93.0 100.4 6.4 4. it is important to understand the incentive structure that drives this choice.1 6.or both.1 12.9 92.8 91. few governments have revised their local tax codes since 1992 despite the fact that rate of some of the taxes are not indexed to inflation.3 7. This development is reportedly due to the resistance on the part of either the local chief executive or the local Sanggunian (Council).1 7.0 100. real property assessments have not kept up with changes in market values. poor local revenue performance may also be attributed to the fact that many local government officials tend not to fully utilize the tax powers assigned to them. Some analysts have proposed the transfer of the assessment function to the National Government as a means of de-politicizing the updating of real property assessments.0 100.3 Year 2001 2003 2005 Average 1985-1991 1992-2005 1985-2003 GG 100. One important outstanding concern in efforts to increase RPT tax collections relates to the failure of many local governments to conduct regular general revision of the schedule of market values of real property as mandated under the LGC and their tendency to have adopt property values that do not adequately reflect the true market value of real properties in their jurisdiction when they do implement a general revision of assessments. For instance.4 88.9 Source: Commission on Audit.0 100. Share of National and Local Governments to General Government Revenue (in percent) Total Revenues GG NG LG 100.8 GG 100. local governments will retain the power over the determination of the tax rate and the collection of the RPT.0 100.6 92.0 100. Ultimately.2 Non tax NG 87. Undeniably.8 94. However.4 7.0 90.1 93.0 LG 12. P a g e | 25 .0 92. In this 14 The Code mandates that LGUs to conduct a general revision of market values once every three years with the first one taking effect in 1994.7 Tax NG 93.4 11. in more recent years. assessment and collection of the real property tax and local business tax. as regional and global competition for markets and resources accelerate. Very few of these units have certified public accountants in their rolls. and limited availability of taxpayer services which increases taxpayer compliance costs. Thus. tax audits and enforcement are inadequate which erode the credibility of the system and results in low compliance. These problems affect all aspects of tax administration: poor taxpayer registration systems and low-quality record keeping results in widespread tax delinquencies. some local governments have no incentive to utilize their revenue raising authorities fully precisely because more resources have been transferred to them relative to their needs. local governments have not fully explored the adoption of a common IT platform for local tax administration. while a number of local governments are investing in information technology to improve their tax registers. Findings and New Directions regard.Fiscal Decentralization in the Philippines: Issues. On the other hand. the traditional role of local governments as service provider has been expanded to include economic promotion as a necessary function of local governance. local governments have to assume a significant role in the national economic strategy. such responsibility has been shifted to local governments as they are now cognizant of their bigger and proactive role in securing the economic wellbeing of their constituents. For instance. Key Issues and New Directions in Local Own-Source Revenue Generation – Exercise of LGU’s Corporate Powers By tradition. However. these LGUs can always point to the national government as the culprit for not allowing finance to follow function. Thus. local economies are the building blocks of the national economy. thereby impairing their audit capability. Local government tax administration capacity is constrained due to (i) low professional qualification of the staff. Also. At the same time. and (ii) inadequate automation of core tasks. the poor incentives resulting from the mismatch between the assignment of taxes and the assignment of expenditure responsibilities to the different levels of local government and the inadequate tax autonomy given to local governments cannot be ignored. many local governments (especially those which have a limited tax base) tend not to maximize the use of their taxing powers because they would have to levy taxes at fairly high rates before they are able to raise sufficient revenues to fund services at levels that are palpable enough to make any difference in the overall welfare of their constituents. E. many of the personnel assigned to the tax division are not well-equipped technically for their tasks. On the one hand. While national economic development is principally the task of the National Government. the National Government has been tasked with the responsibility of promoting economic development in a community. The emerging reality is for local governments to steer their local P a g e | 26 . local communities tend not to complain about the inadequacy of local services because they do not pay much in terms of local taxes anyway. On a broader perspective. as DILG’s conduit with multilateral and bilateral institutions. The Office of Project Development Services (OPDS).Fiscal Decentralization in the Philippines: Issues. can take the lead in LGU P a g e | 27 . The Local Government Academy (LGA). As a catalyst for economic growth by utilizing the enterprise as a strategic and deliberate tool for local economic development. with respect to LGUs’ corporate powers. and to structure this environment through appropriate policies. regulations and enforcement to ensure the dynamic and efficient interplay of market forces and private initiatives. in collaboration with other institutions. can take the lead in the promotional and advocacy initiatives in LGUs exercise of corporate powers. broker and promoter of inward investments and play the role of an investor in basic enterprises where private sector is absent. policy consultation and policy formulation. The different bureaus and offices of the Department can provide the policy and promotional support for the program. The Bureau of Local Government Development (BLGD) can be the focal office in terms of policy review. The envisioned role for LGUs in economic development is that of an enabler and creator of an environment conducive to sustainable development. Findings and New Directions economies to be able to confront the twin challenges of globalization and local autonomy. inspired by some guiding principles to serve as guideposts. LGUs’ operation of local economic enterprises could be viewed as two-pronged: o As stand-alone investment by improving returns realized directly from the use/operation of such enterprises. Harnessing and enhancing LGUs’ corporate capacities must be anchored on a strategy. and an institutional framework to galvanize stakeholders’ support. The basic goal of an enabler is to create a social. It requires the dynamic interplay of policy support. on the other hand. Guiding Principles LGUs must act primarily as planner. physical and economic environment favorable to the development and growth of the locality. Further. capacity building sustaining actions through advocacy. technical assistance and funding support. the OPDS can assist LGUs in packaging programs and projects and in channeling funding support along these initiatives. the DILG can advocate improvement in technical and financial capacities of LGUs for preparing and managing local development investments in a corporate manner. monitoring and evaluation. o Building the Promotional Structure As the lead oversight government agency for the local government sector. Establishing the Policy Support System There are numerous factors that impact on LGUs’ ability to exercise corporate powers.Fiscal Decentralization in the Philippines: Issues. Indeed. Some of them are vague as to LGUs’ mandate to establish LEEs. while others are external. proper consultation with stakeholders (e.. Likewise.some are internal. the LGUs by the DILG Regional Offices) by oversight agencies as they issue policy directives and guidelines would ensure healthy national-local dynamics and goal congruence. The internal factors include organizational and managerial culture. Visionary and committed Local Chief Executives (LCEs) with entrepreneurial mindset are needed to trigger a paradigm shift in LGUs operation and culture. Capacity Building Equally important is the need for a capacity building framework. The policy environment needs to be reviewed against the backdrop of the above-mentioned guiding principles and of the rapid changes in the public and private domain. a crucial ingredient in harnessing and enhancing LGUs’ corporate powers. but often in their interpretation and implementation at the operational/local level.g. there are external factors that impact on LGUs’ exercise of corporate powers. This prevailing organizational culture (absence of entrepreneurial culture. training in individual competencies is generally viewed as non-threatening and is thus often supported.. attempts at rationalizing or strengthening institutional interrelations and organizational capacities are often viewed as threatening and thus resisted.g. In contrast. and c) individual competencies. It is envisioned that the BLGD will take the lead in this aspect of policy support. Findings and New Directions institutional capacity building initiatives to enhance LGUs’ exercise of corporate powers. b) organizational capacities. personal training) without the others will not be completely effective. the policies on LGUs’ exercise of corporate powers must be responsive and more enabling to LGUs’ initiatives. There are a number of laws and policies that govern LGUs’ exercise of corporate powers. Further. However. rigid policy framework based on tradition and past precedence and top-down approach to management. Addressing one (e. Capacity building should be viewed in three inter-related dimensions: a) institutional interrelations. financial and other organizational systems and the overall notion of LGU capacity. organizational and competency implications of policy implementation. The Bureau of Local Government Supervision (BLGS) can provide the framework for effective monitoring and evaluation of LGUs’ initiatives in the exercise of corporate powers. among others. and policies on organizational and financial systems for LEEs are not in tune with private enterprise standards. On the other hand. major gaps are encountered not necessarily in the policies themselves. Developing a framework for policy reform therefore has to take into consideration the institutional. and these pertain to policy and oversight support and to market forces as well. among P a g e | 28 . financial management and risk management. offers opportunities for expanding service delivery. can be used as an “entry point” for pursuing the other dimensions of capacity building. Identification of economic potentials. provision of broad-based information on LGUs’ exercise of corporate powers through documented good practices and improved approaches is also an integral part of capacity building. and (c) individual competences are appropriately the concern of the LGA. among others: Identification and valuation of assets Risk allocation and risk mitigation Contract design Analysis and identification of appropriate regulatory regime Timing and form of private sector involvement The experience of some LGUs in finding use for their under-utilized assets is worth replicating. training in identifying investment and economic potentials and potential economic niches. Findings and New Directions others) needs to be reformed if capacity building is to become truly effective. e. needs and demands b. joint venture and bond flotation. The use of LGU assets in public-private partnerships.g. especially in joint ventures. This is the area of intervention where the LGA can provide the necessary support with the active participation of the DILG Regional Offices.Fiscal Decentralization in the Philippines: Issues. In any case. business planning. Further. among others. Linking with academic institutions can be considered in the following highly technical areas: Identifying investment potentials for LGUs a. The capacity building interventions in the inter-related dimensions of: (a) institutional interrelations. coaching and mentoring by or engaging the services of practitioners and experts will probably be necessary to help LGU in the following areas. P a g e | 29 . (b) organizational capacities. public-private partnerships. Identifying potential economic niches c. management skills. in entrepreneurship and enterprise management. Determination of modes of investments Managing local economic enterprises Various modes of LGUs’ exercise of corporate powers Institutionalization of Local Economic Enterprise Offices In the non-traditional exercise of LGU corporate powers. employment generation and economic promotion.. needs and demands. lack of local government familiarity with 15 Includes micro-enterprises P a g e | 30 . and Small and Medium Enterprise Development (SMED)15 Council in promoting LGUs’ exercise of corporate powers and in providing them the necessary technical assistance in identifying its economic potentials. rather than national agencies. and shall be used to implement the performance-based grant on LGUs’ exercise of corporate powers. availability of a collateral and other loan security. the BLGS shall have overall responsibility for collecting data and monitoring results. provide assistance in managing LEEs as well as act as broker for LGUs in sourcing financing for its projects and initiatives in line with LGUs’ exercise of corporate powers. this could be part of DILG’s LGPMS. Sources include domestic banks.Fiscal Decentralization in the Philippines: Issues. Monitoring and Evaluation In collaboration with the DILG Regional Directors and Local Government Officers. credible local sub-national government loan repayment capacity. and partly to cover operating expenses. Local Credit Financing Credit financing is used by local governments to support development of infrastructure. The baseline data shall be established by BLGS in collaboration with the concerned DILG and local officials. However. to play a dominant role in financing local governments. and loans through the NG from foreign sources. LGUs would need some assistance in identifying investment potentials of their respective communities. F. potential economic niches. several key issues need to be addressed to facilitate local government access to private capital markets. The results of monitoring system will be incorporated as part of DILG’s overall management information system. There is a need for transparent local government financial information. capital investment. The long term vision of the NG is for the capital market. Community monitoring tools could also be developed by DILG to be actively used by accredited civil society organizations and private sector organizations to promote better governance and transparency in project activities. DTI. The OPDS can take the lead in collaboration with the DILG’s Regional Offices. GFIs. and a framework for local governments to make deposits and set up special accounts for bond repayments. Findings and New Directions Sustaining Actions Advocacy and Technical Assistance The successful exercise of LGU corporate powers would require not only the necessary policy support but sustained advocacy and adequate technical and funding assistance as well. It is believed that addressing these issues will mitigate the more general fears of creditors over the short political tenure (3 years but with reelection) of local chief executives. It calls for the segmentation of the local government financing with lower-income local governments accessing the Municipal Development Fund (MDF). many local governments (especially provinces and municipalities) remain dependent on their 20% Development Fund16. It also recommended the strengthening of local capacity to generate own-source revenue.8 billion in 2001-2005. their weak project identification and preparation capacities. So far. restructuring of the MDFO.4% of the total receipts net of borrowings of cities compared to 3. also known as the Local Development Fund to finance major development expenditures. Findings and New Directions financing instruments. Local government borrowings rose steadily from P448 million in 1991 to a peak of P6. Borrowings contributed to 5. The LGU Financing Framework (developed by the Department of Finance in 1996) envisions the greater participation of the private capital market in local government financing. the improvement of local government access to private banks. the promotion of PSP mechanisms (including BOT schemes).9 billion in 2004 and an average of P5. Prior to 1991. Local government access to credit at commercial rates will not only increase the amount of resources available for infrastructure spending. local governments were restricted from contracting loans to finance their capital requirements. to recover cost from local services.5% of total local government receipts net of borrowing in 2005 from less than 2% in 1991 (Table 20). middle-income local governments accessing the GFIs and upper-income local governments accessing PFIs. The passage of the Local Government Code allowed local governments greater flexibility in tapping various sources of credit financing – bank credit.1% in the case of municipalities in the post-Code period. and to improve their financial management systems. This is one of the budgeting provisions under the Code in which non-compliance can be grounds for rendering the local budget inoperative. local government borrowing became a more important source of local financing.7% in the case of provinces and 2. P a g e | 31 . To bring this into effect. Thus. Cities had greater access to local credit markets than provinces and municipalities. and development of the local government bond market.Fiscal Decentralization in the Philippines: Issues. bonds and build-operate-transfer arrangements. 16 The Local Government Code of 1991 requires LGUs to set aside 20% of their regular income for development projects. accounting for 3. the re-orientation of the role of GFIs in local financing. but also instill the discipline of the market on local governments and increase their propensity to increase their tax collection efficiency. and the danger of loan default. the framework promotes the establishment of a “graduation program” that will induce creditworthy local governments to shift from GFIs to the private capital market. low credit worthiness. accounting for 76% and 7%. GFIs and the MDFO continues to be the dominant source of local government financing.81 3.58 2.8%.33 4.482 915 1.879 1. not many local governments are able to borrow from banks because not all are creditworthy.59 1999 5.041 2005 6. However.78 5.32 10.680 1991 1. As a result.822 2003 5.21 5. the inability of private banks to become depository banks for local governments appears to be an important structural impediment to the PFIs’ entry into the local 17 GFIs do not have an IRA intercept mechanism to protect them. little progress has been made to end local government reliance on the GFIs.13 1995 3.48 2001 4. LGUs are required to sign along with the loan document another agreement which authorizes the GFI lender in the event of a default in the payment of interest and amortization of principal to debit the LGUs IRA depository account in the GFI.65 3.91 5.988 2004 6.59 2.60 2005 3.8% and municipalities 25. The intention of the framework was to lead to a reduction in the role of GFIs and MDFO in lending to local governments.20 2.87 1.76 3.48 2. Overall.30 5. 1985-2005 (In Million Pesos) ALL LGs Provinces Municipalities Cities Ratio to LG Income (%) ALL LGs Provinces Municipalities Cities Average 19851991 110 57 12 41 Average 19851991 0. Part of the problem is the non-availability of reliable information on local government creditworthiness in which cities can likely provide better information than provinces and municipalities.95 2.853 1.043 2002 4. GFIs possess an advantage in the local government credit market due to their role as local government depository banks17 while the MDFO has access to an IRA intercept mechanism in the event of a loan default.310 19922005 3.111 961 840 2.65 Source: Bureau of Local Government Finance.321 1999 5. However.794 1.70 2002 2.09 2.83 2004 3. cities are better positioned to access credit financing.610 3.87 5.37 1991 448 325 37 87 1995 2. and an increased participation of private financial institutions (PFIs) by graduating more creditworthy local governments to private capital markets.360 1.219 1.Fiscal Decentralization in the Philippines: Issues.103 4.50 0.08 5.37 1.95 4.635 1. However private lending is still not substantial.949 771 561 4. Local Government Borrowings.618 2001 5. Findings and New Directions Table 10.79 1.26 4. To date. despite the adoption of the LGU Financing Framework (LFF) in 1996. Commission on Audit. of total local government borrowing in 2006.21 1.46 3. However.88 19922005 4. Local governments have been unable to access private bank lending to date. P a g e | 32 .639 892 3.78 1.88 2003 3. they protect themselves through what is commonly referred to as a “back-to-back” agreement.36 1.735 1.23 0.69 2.493 593 579 1. respectively.651 1. Thus. cities account for the bulk (54%) of total outstanding local government loans as of 30 June 2004 while the provinces account for 18.574 1.51 0. 2003. a total of 9 local governments BuiltOperate-Transfer projects have been documented20. As of March 2002. P a g e | 33 . Local government bonds are now 50% riskweighted if backed by the LGUGC guarantee. lack of reliable information about local governments. there is no clear demarcation of the markets to be served by the MDFO. Because of this. Findings and New Directions government credit market. Together with GFIs’ access to ODA funds. and no longer subject to the documentary stamp tax for secondary transactions. Thus. the evolution of the MDFO into a second-tier funding entity for local governments and a bond-pooling agency is in order to make the MDFO a more effective institution for local financing. Manila. development of policy-based loans/ grants. Manila. Decentralization in the Philippines. Second was the presence of enhancements on the purchase of local government bonds. 2005. Public Expenditure. the lower effective rate of interest charged by the MDFO (because of the bundling of the grant with the loan component of on-lent funds from ODA sources) acts as a disincentive for even the more creditworthy local governments to access funds from the private capital market. uncertainty about management capacity at the local level. Moreover. The LBP and the DBP appear reluctant to relinquish their monopoly over the more creditworthy local governments as this segment of the market has emerged to be a profitable part of their portfolios.8 billion.Fiscal Decentralization in the Philippines: Issues. However. One of the more serious concerns affecting the growth of the local government bond industry is the uncertainty in the approval ADB/World Bank. GFIs. At the same time. the depository bank privilege has also allowed them to maintain a competitive advantage over PFIs18. First was the creation of the LGU Guarantee Corporation (LGUGC). important constraints continue to hamper the development of the local government bond market.19 Part of the problem is that there has been no official issuance on the part of the NG on the Local Financing Framework as a national policy. a revisit of policies on matching grants. the graduation policy enunciated under the LGU financing framework described above has not been realized. 20 ADB/World Bank. the LGUGC and the Financial Executive Institute of the Philippines (FINEX) are actively advocating to have local government bonds tax exempt in the same manner as treasury bills. namely: higher costs associated with bond flotation compared with direct bank borrowing. and lack of access to IRA as a security for local government obligations21. eligible for compliance of banks to the law requiring them to set aside a fixed portion of their loan portfolios as loans to the agriculture and agrarian sector.7 billion . lack of a market for secondary trading. Also. In 2003. Procurement and Financial Management Review. and PFIs or for that matter which entity should be providing developmental credit vis-à-vis commercial loans. 19 18 21 Ibid. To further develop the local bond market. A number of factors provided the impetus for the modest growth of the local government bond market. there have been 21 LGU bond issuances to date worth about P3. LBP’s outstanding loans to LGUs amount to some P12 billion while that of the DBP is P1. Local government access to non-traditional capital markets is rising but still sluggish. requires local governments to first obtain a Certificate of Debt Service Capacity from the BLGF. The BSP has expressed concern over the impact of an increasing local government debt base on monetary aggregates. The program-policy lending facility or PROLEND of the MDFO was launched in 2007. The 2 billion pesos PROLEND facility provides provinces with a program loan for the pursuit of policy reforms not only at the provincial level but also in more than 50% of their component cities and municipalities. Findings and New Directions process at the national level. The lack of a consistent policy stance from the BSP has delayed a number of bond floatations. Although this is not difficult to obtain. This launching came as a result of the completion of the PROLEND policy and operations guidelines which were completed in December 2006. the MDFO also provides grants as a part of its financing package. Also in 2007. health and environmental projects that were aimed at improving local service delivery in these areas. The Bangko Sentral ng Pilipinas (BSP). the MDFO has incorporated a performance based grant system into the second phase of Mindanao Rural Development Project Phase 2. by project end in 2009. which has regulatory power over the issuance of local government debt to the private sector22. the MDFO will be launching its 500 million peso Millennium Development Goal (MDG) fund for 4th to 6th income class local governments to pursue development project aimed at achieving MDG objectives. the LOGOFIND has provided credit to 217 3rd to 6th income class local governments with total loans amounting to 2. for improved service delivery in environment and health. 22 Section 299 of the Local Government Code P a g e | 34 . As of 2007. All these facilities will be financed through the second-generation fund or reflows of the MDFO.Fiscal Decentralization in the Philippines: Issues. Notably. . Under the Local Government Unit Finance and Development (LOGOFIND) project and the Community-Based Resource Management (CBRM) project of the Municipal Development Fund Office. In addition to credit financing for local government development projects. has extended credit to 131 local governments. many 3rd to 6th income class local governments were able to access financing for urban infrastructure. the BSP has occasionally vacillated on its policies and have held off issuing a no-objection opinion until the prospective local government issuer has provided more information. The MDFO is currently reviewing its loan-grant mix to take into consideration not only the income class of the local government but also the difficulties inherent in different types of social projects. Similarly. an $84 million project that will provide grant amounting to 20% of the total project cost of the local government. The MDFO. regardless of income class. and created more uncertainty in the market. the MDFO will provide credit financing to the Mindanao Basic Urban Support Services (MBUSS) project also through its second generation fund.7 billion pesos. The MDFO is also looking into performance-based grants and is commissioning a study to develop a framework for policy-based grants which can be implemented next year. increased transactions costs. DILG and DOF for ODA funded local government projects. For many areas in the countryside. While it has been observed that the amount of ODA grants and the number of ODA grant projects have been declining over the years. 23 NEDA. the LGU is the single biggest potential banking client. a number of other factors could explain the poor performance of LGUs in availing themselves of ODA funds. etc. which will compete for LGU business by way of offering higher interest on deposits. A promising policy area which has not been well studied is access by local governments to Official Development Assistance (ODA) resources. Allow LGUs to use private commercial banks as depository institutions. Various modalities have been identified – ranging from the exercise of their corporate powers through public-private partnerships. local autonomy and the imperative of raising substantial resources is how to complement local resources. which have been dependent on traditional LGU sources such as the Internal Revenue Allotment (IRA) with other financing sources. and better banking services in general.22%. government-owned and controlled corporations . Findings and New Directions The grant will be subject to the achievement of performance objectives in local tax revenue collections. to availing of loans and grants from both local and international sources. At the policy level.Fiscal Decentralization in the Philippines: Issues. national government agencies held the biggest share of the ODA pie at 65%. privatization. iii) establishing a monitoring system between NEDA.. One major factor is the fact that LGUs (with very few exceptions) have inadequate capacity to access and manage ODA funds. there is also a perception among LGUs that the process of accessing ODA is complex and cumbersome. With access to LGU accounts. On the other hand. ii) fast-tracking the implementation of Executive Order 809. build-operate-transfer. 2006. Manila th P a g e | 35 . government financing institutions -13% while the LGUs held less than one percent (1%)23. lower interest on loans. the government needs to look into: i) allowing LGUs to use private commercial banks as depository institutions. Key Issues and New Directions in Local Credit Financing – Improving LGU Access to Official Development Assistance A general concern of LGUs given devolution. G. Statistics on the distribution of ODA loans show that the local government sector is the smallest recipient of this funding source. 15 Annual ODA Portfolio Review. more private banks will also be enticed to establish branches outside traditional areas in the regions. and. Allowing LGUs to use private commercial banks as depository institutions will enable them develop a closer working relationship with those banks. As of 2006. DILG. ADB is open to relaxing this condition.” well-prepared one that would serve as a showcase for emulation by other LGUs. The concerned government agencies need to agree that there is a need to establish such a system and develop an institutional arrangement that would monitor not only the disbursement of ODA funds. the LGUs are nevertheless expected to enjoy a lower cost of funds if they are able to borrow directly from ODA sources. however.5 percentage points to the cost of funds to the LGU (this is the current charge of the LGU Guarantee Corporation). Executive Order 809 issued by President Arroyo on June 9. 7160”) directs the DILG and the DOF to implement the LGU Financing Framework. For ODA projects still in the pipeline. however. and municipalities whose average regular and locally-source funds for the past three years comprise 60% of their total income) may borrow directly from multilateral agencies to ensure that they have sufficient funding sources for their vital projects. when practically all donor partners. but also confirm their utilization and evaluate development results. This used to be a moot issue before. Lately. Studies of other country experiences would help towards a better appreciation of the merits and demerits of the proposal. and the list of participating LGUs included in the project proposal may change upon implementation.Fiscal Decentralization in the Philippines: Issues. Among the Philippines’ ODA partners. To jumpstart this initiative. without any direct or indirect National Government guarantee. 2009 (“Implementing the Financing Policy Framework for Local Government Units by Identifying New Sources of Funding for First Tier LGUs under Republic Act No. coordination among the oversight P a g e | 36 . whereby first-tier LGUs (provinces. a default by the LGU may affect the country’s sovereign risk rating negatively. For ongoing foreign-assisted projects. The fear of most national governments in allowing direct local foreign borrowing is that. DBM and DOF for ODA-funded individual LG projects. Establish a monitoring system between NEDA. from donors: Fast-track the A proposal from the League of Provinces of the Philippines to allow LGUs direct access to ODA without any sovereign guarantee by the national government is worth considering.” Although this may add on some 1. Findings and New Directions LGUs to access ODA directly implementation of Executive Order 809. information on which LGUs are covered by a particular project is at best indicative. the ADB is probably the one most ready (and willing) to lend directly to LGUs. refused to lend without sovereign guarantee. The EO stresses that “any such loan obtained shall be on a stand-alone basis. cities. the first ODA-funded project should be an “easy. multilateral and bilateral. as such projects are often demand-driven. even without sovereign guarantee. NEDA is the agency mandated to monitor foreign-assisted projects (through its Projects Monitoring Staff. or NEDA/PMS). particularly grants. and v) improve the monitoring system on ODA flows. P a g e | 37 . The ODA monitoring system. local officials hearing that the neighboring town is getting a grant from a donor agency for a similar project may decide to cancel the subloan application. to finance its domestic water supply project. Probably the best venue for installing a tracking and monitoring mechanism for ODA funds going to LGUs is DILG. Under the ODA Act of 1996. say MDFO or LBP. however. DILG has offices that go all the way down to the local level. DBM. grant aid recipients in many instances are not informed by donors on the magnitude of technical assistance involved. a common reporting system should be devised and installed that would allow the Philippine government (and the donor governments themselves) to say with a reasonable degree of confidence how much aid flowed in and where it went. Especially on financial matters. as chair of the PDF Working Group on Decentralization and Local Government. It sometimes happens that an LGU may already have expressed interest in getting a subloan from. is at the agency and project levels. NEDA’s monitoring. efforts should be exerted to address the following: i) acquaint LGUs of sources of local public investment funds other than direct ODA grants. would have the financial flows. A byproduct of such an ODA monitoring system that goes down to the LGU level is transparency in the award of subprojects. In the interest of transparency and accountability. may be tapped to apprise the LGU if the expectation of getting a grant is realistic or not. On Processes and Procedures At the organizational level. hoping that they would get a grant as well. aside from simply providing a database. NEDA/PMS does not have the personnel and other resources to monitor subprojects. It is at the LGU subproject level that DILG can help in the monitoring process. iii) streamline the development and approval processes for small subprojects. ii) develop LGU capacities in local planning and project development.Fiscal Decentralization in the Philippines: Issues. The tracking and monitoring system should gather information not just from the LGUs but from the donor agencies as well. iv) involve LGU representatives in the programming exercises with donors. Findings and New Directions agencies will help towards greater transparency and accountability for both the government and the donor community. However. meanwhile. The subprojects that trickle down to the LGUs (especially at the municipal level and below) are so many and so widely dispersed across the country. while DOF (through BLGF and MDFO) would have the broader fiscal picture for the LGU (such as borrowing capacity and projected amortization of LGU loans). for strategic reasons. the PDAF or CIs reached their highest levels in 2003 (P19. But not all LGUs are members of the RDC.7 billion) P a g e | 38 . Lobbying by the local chief executive (usually the mayor. both national and local. particularly DBM. The national government.Fiscal Decentralization in the Philippines: Issues. The compensation package for local government personnel should have a performance-based component. For the bigger projects. The donor agencies themselves contribute to the problem as they compete for the services of local planning and project development officers who perform well. where the regional directors of the national line agencies sit as members. By far the bigger resources are in the programs. If the regional directors are not close to their national office superiors. LGU representation or lobbying may have to be with the national office superiors themselves. Develop LGU capacities in local planning and project development. that are undertaken by the line agencies of the national government in their respective localities and jurisdictions. as the governor is often a rival of the congressman) helps assure that the small local project is consistent with the local development plan. Findings and New Directions Acquaint LGUs with sources of public investment funds other than direct ODA grants. The national government. The smaller LGUs (the municipalities) have to course their requests through the governors or lobby with the regional directors. but this is more easily said than done. These are political realities with which LGUs have to contend.5 billion) and 2004 (P19. the limited technical capacity of LGUs is a perennial problem that cannot just be solved simply through more training and capability building. activities. As mentioned earlier. has been trying to “rationalize” the uses of the PDAF by defining the set of local infrastructure projects that may be funded by the facility. LGUs should be reminded that they have access to external resources other than the ones in the management of which they formally participate. The third phase of the Salary Standardization Law (SSL III) substantially raises the salaries of government employees. locally funded or foreign-assisted. if funded from the President’s budget. and projects (PAPs). but fears have been expressed that the poorer LGUs may not be able to afford the higher pay scales. whether foreign-assisted or locally funded.24 The PDAF is a significant extra-budgetary source for many small and poor LGUs. may stir much debate and have a rough sailing in Congress. often reserves ODA for those large projects that. 24 Historically. Another source is the Priority Development Assistance Fund (PDAF) or congressional initiatives (CIs) which are allocated by congressional district and run into billions of pesos. the immediate venue for the LGUs’ influence on design and implementation is the regional development council (RDC). At present. P3 million and below). Streamline the development and approval processes for small subprojects. trained LGU technical personnel is a temporary. periodic cross-posting or special secondment scheme with the major donor agencies.g.” Unfortunately.. Said funds shall be administered by the NEDA for project identification. P a g e | 39 .Fiscal Decentralization in the Philippines: Issues. For the on-lending facilities of the GFIs and MDFO. LGA has been working with local training institutes. master planning at local and regional levels. lodged within NEDA or DILG. this may be observed at the more senior level among NGAs (oversight and line). the NEDA Regional Offices (NROs) have a facility to assist LGUs in project preparation. the DILG’s Local Government Academy (LGA) may enter into partnership with other training institutions especially in the regions so that the supply of training services could be sustained and made more easily accessible. is the need to set aside a Project Feasibility Studies Fund. For example. this has not been implemented. e. A similar arrangement may be developed for LGU technical personnel. These aspects deserve a closer look by the PDF Working Group on Decentralization and Local Government. would go a long way towards helping LGUs gain better access to ODA funds. especially in the short run. The establishment of a Project Feasibility Studies Fund. and economic aspects may be easily developed. the Philnet which is based on the Local Government Training and Research Institutes (LOGTRI) network in the Asia region. financial. six months or one year. The ODA Act actually says that “NEDA shall endeavor to obtain ODA funds from donor countries. school-building projects are fairly standard and a checklist-type template on the market. such that full-blown feasibility studies may be dispensed with. Side-by-side with the capacity building initiatives. templates can probably be developed for small subloans. technical. especially for the smaller LGUs. The network of the Association of Schools of Public Administration in the Philippines (ASPAP) may also be tapped. This would substantially reduce the project development costs and make the ODA onlending facilities more accessible for the lower-tier LGUs. as the typical municipal development office may have only one or two technical persons. 25 In fact. feasibility studies. say. and monitoring and evaluation. Findings and New Directions A possible way of stemming the outflow of good. where a bureau director or division chief goes on leave to join a foreign-assisted project for. It may be unrealistic for these small LGUs to build up their own internal capability to conduct full-blown project studies. Nevertheless.25 Establish a Project Feasibility Studies Fund for LGUs. but these resources are limited. which shall approximately be five percent (5%) of the total ODA loan from the immediately preceding year. Meanwhile. follow steps and procedures. While DILG participates in most (if not all) of the bilateral and multilateral consultations on country programming. it may be good to invite representatives of local government leagues to attend. Findings and New Directions Involve LGU representatives in the programming exercises with donors. 2) make available a ready pool of consultants to assist LGUs in preparing for the necessary financing application requirements through MDFO.Fiscal Decentralization in the Philippines: Issues. 3) use ODA for better access to performance-based LGU financing. P a g e | 40 . Other Recommendations 1) Set-up an MDFO website for greater transparency and wider reach of the facility with an appropriate easy-to. even as observers. A common question asked by a local chief executive is why a neighboring town received a grant from a particular donor while his own town was apparently bypassed. and 4) build-up SREs database within BLGF and harmonize them with other concerned agencies. LGC also provides that the rates of pay in LGUs should be set at fixed percentages1 of the prescribed national salary schedule as provided under RA 6758 (The Salary Standardization Law of 1989). It gave LGUs responsibility for a wide range of functions including some that were previously assigned to national government agencies. The LGC also broadened the taxing powers of LGUs and provided for increased intergovernmental transfers from the central government to local governments. Manasan and Cynthia G. P a g e | 41 . 1 The fixed percentages are based on the LGU income class and are increasing as the LGU income class increases. the LGC mandates that LGUs’ organizational structure and staffing patterns should not only take into account their service requirements and financial capability but should also comply with the guidelines prescribed by the Civil Service Commission (Section 76). significant number of personnel from these agencies were transferred to the rolls of the LGUs. Castel 1. The expansion of existing functions and absorption of new ones by LGUs pursuant to the expenditure assignments mandated under the LGC have thus resulted in the growth of their organization and the increase in the number of LGU staff. Furthermore. Three. While the LGC provides LGUs some degree of autonomy in designing their own organization structure and in determining the compensation of local officials and employees. INTRODUCTION The Local Government Code (LGC or Code) of 1991 is a landmark piece of legislation that gives local government units (LGUs) greater local autonomy overall. salaries and wages. the Code also limits the spending of LGUs on personal services (PS) to less than 45% of their total annual income from regular sources in the next preceding fiscal year in the case of LGUs belonging to LGU income classes 1-3 and 55% in the case of LGUs belonging to LGU income classes 4-6 (Section 81).Two. allowances and other benefits of local officials and employees.Study on Local Personal Services Expenditure Policy STUDY ON LOCAL PERSONAL SERVICES EXPENDITURE POLICY Rosario G. it also imposes certain restrictions on LGU staffing and compensation. LGUs created new offices and hired additional staff for newly assigned functions even in cases where no personnel were devolved from national government agencies. while the LGC gives Local Sanggunians the discretion to determine the positions. One. Concomitant with the devolution of functions from national government agencies. 2 Note that devolved personnel retained their pay scales and th devolved personnel retained their pay scales and thus were getting first class rates. On the other hand. These items include: implementation of SSL. the budget share of personal services in all LGUs as a group went up from 46% to 47% during the same period. regardless of the income class of the LGU that absorbed them.2 Second.. creation of mandatory positions. i. and 65% for all cities. This figures mask the huge increases in the budget share of personal services in municipalities (from 46% to 55%) and in provinces (from 43% to 49%) which were somewhat dampened by the decline in the budget share of personal services in cities (from 48% to 38%) during the same period (Table 2). because many LGUs were not able to implement the salary increases envisioned under SSL2 without breaching the budgetary limitations on their PS spending. P a g e | 42 . At the same time. SSL2. in its desire to minimize the disparity in pay between the organic personnel of LGUs and the devolved personnel of national government agencies that have been absorbed by local government units. Moreover. with the enactment of the second Salary Standardization Law (SSL2) in 1994. the three basic provisions of the LGC with respect to LGU staffing and compensation were modified in response to changing policies and conditions.us were getting first class rates. The introduction of waivers in computing compliance with the PS cap and the discretion given to LGUs to adopt the salary schedule of higher income class LGUs have rendered the budgetary limitation on personal services expenditures inutile to a large extent. This is exacerbated by the lack of uniformity in the review of LGUs budgets.e. 80% for all provinces and all municipalities. Subsequently. another round of government salary increases was mandated for all levels of government.8% of GDP in 1989-1991 to 1.7% of GDP in 1994-1998 (Table 1). Thus. This situation created some discord at the local level.Study on Local Personal Services Expenditure Policy Soon after the implementation of the devolution program in 1993/ 1994. PS spending of all LGUs combined more than doubled from an average of 0. the Department of Budget and Management (DBM) introduced socalled “waivers” to the PS cap. these developments have necessarily resulted in increased spending on personal services relative to the pre-Code period. payment of benefits provided under the Magna Carta for Public Health Workers and absorption of the cost of devolved hospital services transferred from provinces to cities. items that are not included as part of PS spending in determining LGU compliance with the PS spending limitation. allowed LGUs to adopt the salary schedule of higher class LGUs provided that said are financially capable of doing so. regardless of the income class of the LGU that absorbed them. at 75% for all LGUs combined. absorption of devolved personnel. First. the PS spending of LGUs as a proportion of their regular income two years back was well over the PS cap on the average in 1994-998. including local governments. Consequently.4% of GDP in 2007 for all LGUs combined.0% of GDP in 1998 to 1.Study on Local Personal Services Expenditure Policy From November 1. LGUs’ PS spending as a proportion P a g e | 43 . 1997 (the last tranche of SSL2) to June 30. the budget share of personal services in provinces and cities remained high in municipalities (54%) and in provinces (47%) during the period (Table 2). government salaries have not been adjusted. 2007. total LGU spending on personal services went down from 2. not just the LGU sector during this period (Table 1). While the share of PS in total LGU expenditures contracted for all LGUs as a group and for all levels of local governments in 1998-2007. Moreover. reflecting the erosion of real wages in the entire public sector. 39 0.57 0.15 0.66 0. LGU expenditures as Percentage of GDP.39 0.73 1.37 0.56 1.50 0.32 0.64 1.34 2005 3.65 1996 0.49 0.43 0. ALL LGU's GRAND TOTAL PS MOOE CO B.54 0.22 0. ALL PROVINCES GRAND TOTAL PS MOOE CO C.43 0.36 0.14 1999 1.14 1994-1998 1999-2007 1.43 0.47 0.15 1996 1.28 0.09 1993 1.30 0.43 1991 0.15 1.33 0.19 2001 1.48 0.30 1994-1998 1999-2007 0.87 0.72 1994 0.64 1989 1.58 0.65 0.72 0.18 0.16 1991 0.26 0.27 0.13 1989 0.13 2007 1.39 1996 3.82 0.38 0.37 1.05 1991 1.19 0.13 0.33 1.88 0.30 0.77 1.21 0.55 0.76 0.85 0.26 0.13 2003 1.16 2003 1.82 1.30 0.41 0.43 0.19 0.14 1998 1.37 0.25 0.23 0.59 0.11 2005 1.35 0.66 0.77 0.95 1.54 0.47 0.42 0.15 0. various years P a g e | 44 .31 0.33 0.50 0.39 0.25 0.84 0.62 0.63 2003 0.61 0.17 0.90 0.47 1.33 1999 3.45 0.16 1994-1998 1999-2007 1.26 1989 0.33 0.58 0.54 0.40 0.26 0.50 0.27 0.38 2003 3.66 0.42 0.67 0.71 3.95 0.31 0. 1988-2007 A.25 0.42 0.68 1999 0.69 0.61 0.12 1992 0.47 1.61 1.24 1994 3.44 0.62 0.16 1993 2.59 0.30 0.97 0.74 0.11 1989=1991 0.50 0.88 0.16 1.59 2007 0.18 0.17 0.25 0.36 1.33 Source of basic data: COA Annual Financial Report for LGUs.86 1.40 0.30 0.43 0.45 0.52 1993 0.36 0.10 1994-1998 1999-2007 3.16 0.19 1.21 1994 1.29 0.62 1998 0.59 0.31 0.92 0.33 0.07 1992 0.58 0.47 1.46 0.50 0.15 1998 1.14 2005 1.94 0.60 0.69 0.35 0.70 0.23 0.26 0.67 0.21 0.89 0.24 2007 3.14 1992 1.58 0.65 0.28 0.56 0.34 0.23 0.62 0.55 0.44 0.82 0.80 0.72 1.25 0.18 1996 1.08 1989 0.54 0.49 2005 0.38 2001 4.38 0.59 0.14 0.The Special Education Fund: Prospects for Policy Improvement Table 1.82 0.21 0.01 1.82 0.25 0.13 1991 0.17 2007 1.97 0.32 1989=1991 0.15 1999 1.76 2001 0.19 0.35 0.19 1993 0.16 0.32 1998 3.41 0.28 0.19 2001 1.16 0.41 0.86 1.13 1994 1.67 0.11 1989=1991 0.53 0.45 0.66 0.54 0.32 0.35 1992 0. ALL CITIES GRAND TOTAL PS MOOE CO 1989=1991 1.76 0.84 1.57 1.21 0.34 0.19 0.39 0.52 0.67 1.71 0. ALL MUNICIPALITIES GRAND TOTAL PS MOOE CO D.28 0.39 0.52 0.72 0. 6 1998 100.5 32.0 11.66 12.0 2005 100.5 43.41 1999-2007 100.7 10.8 15.7 32.00 38.0 47.29 34.1 34.0 74.2 2005 100.0 46.2 73.72 44.9 92.39 1994-1998 100.0 16.0 61.9 1999 100.10 17.2 1989 100.9 1992 100.3 61.78 36.0 45.8 2001 100.8 30.7 40.9 37.6 83.87 40.0 1999 100.7 23.0 41.00 53.4 51.9 96.7 46.1 2007 100.00 43.0 50.3 2007 100.1 21.08 37.6 31.1 13.4 1994 100.1 81.0 52. 2 years back C.1 42.5 1998 100.97 71.0 51.71 101.2 34.0 15.7 12.3 17.9 17.2 1994 100.5 11.0 42.7 1992 100.0 51. inc.1 Source of basic data: COA Annual Financial Report for LGUs.00 36.1 17.2 2007 100.53 74.3 16.11 80.86 52.0 49.1 72.2 38.4 16.00 84.23 16.0 44.5 2003 100.6 35.0 28.00 47.6 35.0 36. Composition of LGU expenditures.13 30.0 1993 100.56 1999-2007 100.1 33.6 57.5 32.2 1996 100.7 95.82 86.4 34.0 18. ALL MUNICIPALITIES GRAND TOTAL PS MOOE CO % of PS to reg.3 52.5 39.2 23.1 1993 100.81 35.5 99.5 1991 100.47 79.9 32.8 1993 100.6 65.00 46. inc.9 34.5 14.9 65.1 2001 100.0 38.2 2007 100.5 2005 100.2 62.0 1996 100.0 45.3 20.00 47.13 35.3 12.0 50.0 45.2 43. 2 years back D.0 49.5 18.1 37.3 81.3 112.1 58.78 1994-1998 100.0 51.0 44.4 1994 100.5 94.4 58.0 51.5 35.00 46.03 1989=1991 100.0 39.0 44.76 14.7 33.52 33. ALL PROVINCES GRAND TOTAL PS MOOE CO % of PS to reg.11 33.5 1998 100.1 50.0 1996 100.3 42.15 36.0 43.0 46.19 19.6 49.0 46.99 17.7 39.82 61.8 33.8 33.8 36.7 64. 2 years back B.6 34.2 74.1 42.0 34. by object of expenditure.05 17.30 34.2 23.1 1994 100.9 31.7 1996 100.37 19.0 50.8 68.0 34.0 1998 100.0 45.1 21. inc.6 2001 100.0 40.1 110.7 2003 100.2 71.0 55.2 75.9 15.0 2003 100.1 35.0 49.26 1999-2007 100.1 31.6 24.6 1989 100.1 1991 100.8 17.9 63.6 14.5 62.3 63.4 69.2 1993 100.9 31.83 1999-2007 100.5 36.8 22.1 38.4 1999 100.0 39.5 19.3 15.67 65.3 53.21 26.0 47.0 30.00 22.0 18.5 26.56 1989=1991 100.00 55.2 31.0 49.00 45.04 1994-1998 100.Study on Local Personal Services Expenditure Policy Table 2.0 57.2 1999 100.0 41.7 37.4 79.9 41. ALL LGU's GRAND TOTAL PS MOOE CO % of PS to reg.2 41.90 1994-1998 100. various years P a g e | 45 .9 33.68 1989=1991 100.4 18.0 53. 2000-2007 A.3 1991 100.9 33.0 55.00 49.2 70.0 24.0 37.6 1992 100.0 50.5 37.0 50.7 37.0 36.1 34.6 38. 2 years back 1989=1991 100.8 47.8 14.7 2005 100.2 18.3 31.2 32.98 34.0 48.7 22.6 1989 100.9 12.4 35.3 15.1 27.0 1992 100.0 43.0 41.6 15.0 1991 100.3 16.40 22.0 37.11 16.8 113.0 45.0 50.7 49.04 1989 100.8 17.4 2003 100. ALL CITIES GRAND TOTAL PS MOOE CO % of PS to reg.8 54.0 22.4 19.6 90.7 2001 100.3 13.3 98.12 54.4 87.2 23. inc.00 45. 2% of GDP in 2007 while total LGU spending on CO dipped from 0. if government sector pay is not adjusted as is now being proposed in order to address the overall erosion of public sector wages and to decompress public sector compensation. Given this perspective. On the other hand. to encourage productivity and to avoid corruption. First. some of the positions devolved resulted in some redundancy in the LGU staffing pattern. 3 This is largely because of the relative decline of the IRA which in turn was due to the persistent deterioration in BIR tax effort in 1998-2005. a host of other staffing and compensation issues have emerged after devolution and created certain dysfunctions in the local bureaucracy.e. it is likely that local economic development will be severely compromised if LGU spending on personal services eats up an even larger part of their budgets as LGUs become less and less able to improve local infrastructure. To wit. Given pending proposals to implement another round of salary adjustments as part of the third wave of the salary standardization initiative. devolved personnel retained their pay scales and thus were getting first class rates.. P a g e | 46 .3% of GDP in 1999 to 1. Moreover. there is some anecdotal evidence that the large number of casual employees in the rolls of some LGUs have a significant impact on their wage bill. as similar positions were already existing in the LGU plantilla even prior to devolution.Study on Local Personal Services Expenditure Policy of their regular income two years back continued to exceed the budgetary limitation on PS spending on the average in 1999-2007 for all municipalities combined (62%) and for all provinces as a group (54%). devolved health personnel also receive Magna Carta benefits. Yet. total LGU spending on MOOE went down from 1. the contraction in total LGU income relative to GDP in recent years3 resulted in the concomitant decline in total LGU spending on MOOE and CO as a proportion of GDP. Otherwise. The higher rates given to devolved personnel and the benefits from the Magna Carta for Health Workers created some conflict in the LGUs. Second.7% of GDP to 0. MOOE and CO) which are just as essential as wages and salaries in local service delivery. position structure and compensation levels of LGUs as these have significant impact on local budget allocation and prioritization as well as the effectiveness of local service delivery. there is thus need to review existing policies on the organization. On the other hand. government will find it difficult to recruit and retain quality staff. LGUs risk further diminution of the quantity and quality of local services precisely because an increase in the wage bill will likely put the squeeze on non-wage items (i. the need to secure an effective control over the public sector wage bill becomes even more imperative. In like manner. regardless of the income class of the LGU that absorbed them.6% of GDP. Third. although there has been some increase in the budget share of maintenance and other operating expenditures (MOOE) and capital outlays (CO) in 1999-2007 relative to their levels in 1994-1997. Tomas in Davao del Norte. a survey questionnaire was sent out to all LGUs by the study team in collaboration with the Organization. The response rate was 38% for provinces (31 out of 81). Many other LGUs also attended the consultation workshop held in Manila in December 2008 and in Cebu in January 2009. municipalities and barangays) were vested with specific powers (as defined in the Revised Administrative Code and individual LGU charters) including the power to P a g e | 47 . In addition. Butuan. Davao del Norte. San Jose del Monte. The consultation workshops and key informant interviews provided important insights and contributed to the formulation of some of the recommendations in this study. LEGAL FRAMEWORK AND INSTITUTIONAL ARRANGEMENTS Prior to the issuance of Presidential Decree (PD) 1136 in 1977. Bayugan. among others.e. The study hopes to assist LGUs in formulating budgets with a more rational distribution of their financial resources across the different spending categories. cities.Study on Local Personal Services Expenditure Policy Objective of the study. Tagum and San Fernando (La Union). Iloilo.. Guimaras. Methodology. Iloilo. the details of LGU spending on personal services and the salary schedule adopted by the LGU. the cities of Quezon. and the municipalities of Bauang and Caba in La Union. Regional Operations Coordination Service (ROCS) and all the Regional Offices of the Department of Budget and Management (DBM) in the second quarter of 2008 to gather information on the number of LGU personnel (distinguishing between permanent and non-regular employees). Basey in Samar. In the conduct of this study. by class of expenditure. the local legislative bodies of local governments units (i. The analysis provides useful information on As part of this study. Barbara in Iloilo. Asuncion and Sto. These LGUs include the following: the provinces of La Union. Leyte. Marikina. Palo in Leyte. Surigao. field visits to 26 LGUs were also undertaken during which LGU officials were interviewed. and Agusan del Sur. 33% for cities (45 out 120) and 34% for municipalities (510 out of 1495). provinces. Tacloban. Position Classification and Compensation Bureau (OPCCB). manuals and regulations governing personal service expenditures and civil service concerns and COA Annual Audit Reports for various cities and provinces for the years 2005-2007 was also undertaken. Tubay in Agusan del Norte and Trento in Agusan del Sur. The analysis of the data gathered from this survey informs the discussions and recommendations of the outstanding issues in Section 3. Sta. 2. This study aims to review current practice in budgeting for personal services expenditures at the local level and to develop improved and updated personal services expenditure policies for LGUs in order to promote more effective and transparent LGU budget processes and public expenditure management. a desk review of relevant legislation. Tagaytay. that in exercising such power. however. a wide gap was created between the salaries of rank-and-file employees and local elective officials because certain laws (e. The P a g e | 48 . The Joint Commission was chaired by the then Secretary of the Department of Local Government and Community Development (now the Department of Interior and Local Government or DILG) and included the Secretary of the Budget Commission (now the Department of Budget and Management or DBM). and provided secretariat services to the commission. The DOF determined the fiscal capacity of local governments to carry out the proposed PCPPs and reviewed local government budgets to ensure that the expenditures for personal services are in conformity with approved PCPPs. 4477) fixed the salaries of municipal. Republic Act (RA) No. and (iv) to provide general supervision of personnel administration in local governments (DBM 2007). Presidential Decree No. The Budget Commission. Entitled “The Local Government Personnel Administration and Compensation Plans Decree of 1977. some position titles were not descriptive or reflective of the duties and responsibilities of the positions and salaries were fixed in an arbitrary manner.” PD 1136 called on LGUs “to adopt rational personnel policy and position classification and compensation plans. 268 as amended and RA No. The DLGCD was responsible for prescribing model organization and staffing patterns for LGUs. personnel administration.g. administration and maintenance of the position classification and pay plans (PCPPs) and (ii) reviewed and recommended PCPPs for LGUs to ensure that all positions are allocated to proper position titles and salary grades. and on the need to recognize differences in pay arising from substantive differences in duties. position classification and salary administration. Position Classification and Compensation Bureau (OPCCB). the Secretary of the Department of Finance (DOF). (ii) to formulate policies affecting personnel administration. position classification and salary and compensation plans for local governments.” It also created the Joint Commission on Local Government Personnel Administration (JCLGPA) (i) to serve as the principal coordinating body for agencies with direct responsibilities for local government supervision. (iii) to evaluate and approve LGU position classification and compensation plans.. installation. Also. now the Organization. budgeting. based on the principle of equal pay for substantially equal work. responsibilities and qualification requirements” with the end in view of promoting “the efficiency. provincial and city elective officials. DBM (2007) noted. the Chairman of the Civil Service Commission (CSC) and a Provincial Governor (represent local governments) as members. (i) prepared guidelines for the preparation.Study on Local Personal Services Expenditure Policy determine the number of employees that each office should have and to fix their salary rates. there were no specific guidelines nor definite standards used in the creation of positions and the fixing of salaries. effectiveness and integrity of the local government personnel service. PD 1136 also set the maximum salary rates for provincial. city and municipal officials by equating them to Career Executive Service Officers (CESO) ranks. Moreover. 1136. through the then Office of Compensation and Position Classification (OCPC). It also provides that every local government unit shall be responsible for human resources and development in the LGU and shall take all personnel actions in accordance with the Constitutional provisions on civil service. The LGC authorizes LGUs to design and implement their own organizational structure and staffing pattern taking into consideration its service requirements and financial capability subject to the minimum standards and guidelines prescribed by the Civil Service Commission (Section 76). On the other hand. second income class cities and provinces pay their employees at rates equivalent to 95% of those set in the national government pay schedule. performance evaluation. first income municipalities pay their employees at rates equal to 90% of the national government salary schedule. appointments. Furthermore. Thus. Meanwhile. while first income class cities and provinces and special cities pay their employees salaries equal to the rates set in the national government salary schedule. as mandated in the 1987 Constitution. 7160 or Local Government Code (LGC) of 1991. 6758 or “Compensation and Position Classification Act of 1989. rules and regulations. disciplinary action and such other personnel activities as defined in pertinent laws. Republic Act No. it provides for the Local Sanggunians to determine the positions. including LGUs. salaries and wages. P a g e | 49 . guidelines and standards as the Civil Service Commission may establish (Section 77).Study on Local Personal Services Expenditure Policy CSC was responsible for matters dealing with certification of eligibility. Section 10 of RA 6758 provides that the rates of pay in LGUs are to be determined on the basis of their income class and financial capability and are to be set at fixed percentages of the prescribed national salary schedule as indicated in Table 3. pertinent laws. allowances and other emoluments and benefits of local officials and employees provided such compensation shall not exceed the limitations on the budgetary allocations for personal services and are based on the pertinent provisions of RA 6758 (Section 81). examination. That is. and rules and regulations thereon. The Joint Commission was also tasked under RA 6758 to oversee the proper implementation of salary standardization in accordance with the policies and guidelines issued by the DBM. including such policies.” While PD 1136 allowed LGUs to formulate their own position classification and salary and compensation plans. promotions. the discount factor applied to the national government pay scale rises as the income class of the LGU goes down. RA 6758. more popularly known as the Salary Standardization Law. Republic Act No. directed the DBM to establish and administer a unified Compensation and Position Classification System for the entire government. As part of its mandate to administer RA 6758. However.Study on Local Personal Services Expenditure Policy Table 3. and (iv) provide technical expertise in the training of LGU personnel to enable them to administer and maintain the compensation and position classification system (DBM 2007). The LGC also abolished the Joint Commission on Local Government Personnel Administration and transferred its personnel. the LGC subjects total annual appropriations for personal services to a cap equal to 45% of their total annual income from regular sources realized in the next preceding fiscal year in the case of 1st to 3rd income class LGUs and 55% in the case of 4th to 6th class LGUs (Section 325). 42 in 1993 reiterated DBM’s continuing responsibility regarding position classification and compensation and the applicability of rules and regulation under RA 6758 with respect to LGUs. prosecutors. This Joint Resolution revised the compensation and position classification system originally prescribed under RA 6758. (iii) advise and assist LGUs on matters of position classification and compensation of LGU personnel. Section 468 a (1) (ix)]. the Code was silent as to which agencies the functions of the member agencies of the Joint Commission are to be transferred. Administrative Order (AO) No. AO 42 specified that the DBM shall (i) provide guidelines on the classification of local government positions and on the specific rates of pay therefore. (ii) provide criteria and guidelines for the grant of all allowances and additional forms of compensation to LGU employees. In order to minimize the disparity in pay between devolved personnel of national government P a g e | 50 . records and assets to the CSC (Section 78). LGU pay as percentage of national schedule as per RA 6758 LGU Income For Class Province/Cities Special Cities 1st Class 2nd Class 3rd Class 4th Class 5th Class 6th Class 100% 100% 95% 90% 85% 80% 75% For Municipalities 90% 85% 80% 75% 70% 65% At the same time. Section 458 a (1) (ix). The issuance of AO No. 42. public school teachers and other national government officials stationed in or assigned in localities when LGU finances allow [Section 447 a (1) (ix). Under the LGC. 1 of 1994 (otherwise known as SSL 2). local sanggunians may provide additional allowances and benefits to judges. Senate and House of Representatives Joint Resolution No. The lack of a clearly identified authority over position classification and compensation gave rise to the issue as to the real powers of the Local Sanggunian on staffing and compensation. 1997. As provided under the Local Government Code. A study conducted by DBM in 19964 shows that 36% of provinces. approve and implement their organizational structures and staffing patterns and modify the same. LGUs also submit their approved plantilla of personnel to the CSC for the latter’s information and guidance in processing appointments and other personnel action. AO 282 was issued in 1996 reiterating DBM’s role in administering RA 6758 and calling on LGUs to strictly adhere to the provisions of RA No. Subsequently. 7160. There is. Institutional arrangements. s. The salary schedule prescribed under the Senate and House of Representatives Joint Resolution No. In particular. s. LGUs have the power to design. LGUs pay salaries and step increments pursuant to the provisions of RA 6758 and its implementing rules and regulations as issued by the DBM. despite the issuance of AO 42 and AO 282. was implemented in 4 tranches starting January 1. However. (iii) the salary schedule adopted shall be uniformly applied to all positions in the said LGUs. 88% of the municipalities which were unable to fully implement the third tranche belong to the 4th-6th income classes (Table 4). a need to revisit the pertinent provisions of RA No. 4 This is based on the presentation of Director Myrna Chua of OPCCB in ADB TA 4778 workshop on PS expenditure policy in December 2008. provided their actions conform to the guidelines provided by the Civil Service Commission and the Department of Budget and Management. 6758. They also grant allowances and benefits based on existing laws and guidelines. In addition. as amended by Senate and House Resolution No. 1994. Director Myrna Chua concluded that this situation paved the way for the waiver of the 45%/55% personal services cap on budgets of LGUs adopting the salary schedules for their income classes. thus. provided that (i) the LGU must first implement fully the prescribed salary schedule for its income class and assure sustainability before it can exercise the option to adopt a higher salary schedule.Study on Local Personal Services Expenditure Policy agencies and organic personnel of LGUs. Moreover. (ii) the LGU is financially capable. 01. 1994. P a g e | 51 . rules and regulations issued by the DBM. issues on the perceived authority of the local sanggunian over position classification and compensation persist to this day. At the same time. (iv) the difference arising from the adoption of the higher salary schedule shall be subject to the budgetary and general limitations on personal expenditures mandated under Section 324 and Section 325 of the LGC (DBM 2007). Sangguniang Panlalawigan reviews ordinances of lower level LGUs authorizing their annual or supplemental appropriations (including personal services appropriations). the position titles in their plantilla have to conform to the position titles established under RA 6758 as administered by the DBM. 1994 through November 1. 01. 24% of cities and 66% of municipalities were not able to fully implement the third tranche of the new salary schedule under said Joint Resolution. the Joint Resolution also allowed LGUs other than special and 1st class cities and provinces to adopt the salary schedule of higher class LGUs. It also conducts periodic inspection and audits of the implementation of LGU organization structures. 1994 a/ % of LGU which % of LGUs which did not LGU Category implemented implement third Trance fully third tranche fully Province Cities Municipalities 64. In addition.e. Office of Local Chief Executive. rules and regulations set by the Department of Budget and Management. staffing patterns and personnel actions. LGU actions on position classification and compensation (i. Related to this.. rules and regulations set by the Civil Service Commission. While the LGC provides that Local Sanggunians shall determine the positions. salaries and wages. provides for the creation of other offices not in the list provided mandatory positions are already created and PS cap is met. 19. MC 19 also lists offices each level of LGU may create (e. Position Classification and Compensation Bureau (OPCCB) of the DBM continues to establish and maintain the guidelines.. echoes mandatory and optional positions per LGU category as provided in the LGC. the CSC provides technical assistance in the design and implementation of organizational structure and staffing pattern and provides guidance that these should be in accordance with the basic services and facilities assigned to LGUs as per Section 17 of the LGC.e. rules and regulations pertaining to LGU position classification and compensation. In other words.5 66. the Organization.0 a/ 1996 unpublished DBM study as cited in presentation of Director Myrna Chua in December 2008 workshop for PS expenditure policy study. Office of Secretary of Sanggunian.g.0 35. LGU actions related to staffing (i.9 23. s. it processes appointments to LGU positions and other personnel actions. determining the number and kinds of positions) are guided by the standards. division and department as the structural units of an office. rules and regulation to guide its implementation as issued by the DBM. In this regard. including (i) the creation of new classes of positions with corresponding salary grades as the need arises. In particular. 1992 provides the guidelines and standards for the establishment of organizational structures and staffing patterns of LGUs. 1. it also provides that these shall be based on the provisions of RA 6758 and standards. On the other hand. the financial capability of LGUs and the qualification requirement for specific positions as provided in the LGC.5 34. allowances and other emoluments and benefits of local officials and employees. and (ii) P a g e | 52 .. Proportion of LGUs Implementing Third Tranche of Revised SS under Joint Resolution No. Office of Local Treasurer). and cites section.Study on Local Personal Services Expenditure Policy Table 4.1 76. providing the correct position titles and salary grades) are guided by standards. CSC Memorandum Circular (MC) No. The OPCCB also sets standards for classes of positions and provide advice on correct classification of LGU positions (Chua 2008). it aims to correct the erosion of public sector wages and salaries that came about because of the very infrequent and minimal adjustments in the last 10 years because of the fiscal constraints. (ii) adjustments in rates of allowances such as representation and transportation allowances and clothing allowance. and other concerns. the OPCCB continues to establish and maintain the guidelines. or rules and regulations on (i) salary adjustments. salary schedules to be followed. need to be harnessed and coordinated to rationalize staffing needs of the LGUs and control the growth P a g e | 53 . as the Civil Service Commission. it is recognized that position classification and compensation concerns cannot be completely divorced from staffing concerns. allowances and other benefits. technical and professional positions. there appears to be a need for a body similar to the Joint Commission on Local Government Personnel Administration to act as oversight body on local personnel matters and to ensure better coordination of (i) staffing and employment policies. Although the original objective of this study is more focused on PS expenditure policy (i. 2008. the Department of Finance and the Department of Interior and Local Government. For instance. The objective of this proposal is twofold. At present. Occupational Groups. as need arises. there are proposals pending in Congress to revise government salary schedule upwards as part of the third wave of salary standardization. Through various Local Budget Circulars. It also provides advice and clarification on compensation issues and conducts studies on compensation concerns to recommend policies and refine existing guidelines. the OPCCB issues Local Budget Circular (LBCs) providing guidelines. In more specific terms. rules and regulations pertaining to LGU position classification and compensation. and (iii) sectoral policies. on the 10% across-theboard salary increase effective July 1. Classes and Salary Grades concerning positions in national government agencies in the Index for LGUs. position classification also considers the number and kind of positions supervised and level of organizational units supervised Chua (2008)..e. 88. DBM. First. the latest of which is LBC No.Study on Local Personal Services Expenditure Policy inclusion of certain existing classes of positions in the Index of Occupational Services. it aims to rectify the relatively compressed wage structure in the public sector (as evidenced by the ratio of the salary of the highest position to that of the lowest position) which make it difficult for government to recruit and retain staff particularly those at occupying managerial. rules and regulations (Chua 2008). The combined efforts of the agencies responsible for related policies on staffing. and (iii) grant of new allowances and benefits. (ii) position classification and compensation policies. Second. In this regard. position classification and compensation concerns). Recommendation. This new entity. The proposed creation of a Joint Committee on Local Government Personnel Administration. Collegial action would facilitate the speedy responses to policy needs as well as provide the forum for concerted action or decision on problems and issues especially those prevailing. retention or not of the PS cap and under what circumstances.Study on Local Personal Services Expenditure Policy of the wage bill which has been observed to be growing primarily after the devolution. grant of allowances to selected national government personnel assigned in the LGU. medicine). travel and other resources that are needed to complement personnel resources.. Logistical support for the initial year of implementation would need to be clarified in the enabling Administrative Order to avoid its becoming an issue among agencies concerned or to become an impediment to smooth operations. Another writer set the benchmark at 40% (UNDP/ MDGD 2001). books. as the indicative staffing model and position mix by level of LGU. professional and managerial staff. If spending is too skewed in favor of personal services. the LGC provision mandating LGUs to keep their PS spending below 45% or 55% of P a g e | 54 . Its creation appears to be supported by both DBM and CSC. if instituted immediately. 3. While recognizing that policy recommendations cannot be "read off" the employment and wage statistics. creation of new operating units. and no objection is expected from the DILG. could already be tasked to formulate the policies and guidelines on the issues and problems presented in the study. OUTSTANDING ISSUES AND RECOMMENDATIONS The basic policy problem with respect to public sector employment and compensation policy at the local level revolves around the question of how to effectively control the LGU wage bill while simultaneously trying to ensure that LGUs have an adequate number of personnel with the appropriate qualifications that will enable them to deliver the services needed by their constituency and to improve remuneration to attract and/ or retain technical. much like the previous such entity. and capital expenditure. There is no definitive way of determining whether the wage bill is excessive or not but the most common measure is the degree to which nonwage expenditure is being crowded out in relation to the PS spending (Nunberg 1988). service delivery suffers because there is little room in the budget to pay for supplies (e. service delivery requires a mix of both wage and nonwage spending. maintenance. governments risk reducing their effectiveness by squeezing non-wage expenditure such as goods and services. In a sense. when the public sector wage bill as a percentage of total public sector spending rises over 25%.g. the World Bank (World Bank website on administrative and civil service reform) notes that as a rule of thumb. As indicated earlier. if PS spending is too high LGUs are not able to improve local public infrastructure which is the main driver of local economic development. will provide the coordinated policy formulation and implementation guidance on local personal services. At the same time. but which are not the concern of only one particular agency. These figures are higher than both the World Bank benchmark of 25% and the UNDP benchmark of 40%. The budget share of personal services appears to be directly related with the income class of municipalities such that lower income class municipalities tend to have higher relative PS spending. On average. followed by provinces (47%) and cities (37%). the budget share of PS was 40% in first income class municipalities compared with 63% in fifth income class municipalities in 2007.e. this study argues for the retention of the cap on LGU spending on personal services. For instance. MOOE and CO) which are just as critical as wages and salaries in local service delivery. there is a risk that there will a further reduction in the quantity and quality of local services precisely because an increase in the wage bill will necessarily reduce the non-wage items (i. Otherwise. the need to secure an effective control over the public sector wage bill becomes even more imperative. The national averages mask wide disparities in the composition of the LGU budget across different income classes (Table 5). P a g e | 55 . the budget share of personal services was highest for municipalities (54%). However. the relationship between the PS spending and LGU income class is not as clear cut in the case of provinces and cities. Thus.Study on Local Personal Services Expenditure Policy their regular income two years back (depending on LGU income class) is consistent with this thinking. Given this situation and the current proposals to implement another round of salary adjustments as part of the third wave of the salary standardization initiative. Table 2 shows that personal services accounted for 45% of aggregate LGU spending on the average in 1999-2007 while 37% was accounted for by MOOE and 18% was accounted for by capital outlays.. 7 13.4 40.4 44.2 57 50 95 166 120 22 510 35.4 49.1 NA NA 28.2 54.6 50.1 8.0 43.1 38.9 58.8 47.3 48.0 NA NA 30.8 NA 38.6 NA NA 17.8 10.1 39.1 48.2 28.5 40.1 41.2 NA 41.3 34.6 47.4 48. cities and municipalities in 2007 is not insignificant.0 55.8 42.5 NA 42.5 46. 2008 It should also be pointed out that the budget shares for MOOE that are reported in Table 5 may be higher than what the real situation in the field would indicate.2 63.7 63.2 47.9 42.5 37.4 16.0 27.9 42.1 35.3 47.9 37.8 48.8 NA 40.4 39.1 52.8 40.6 7.2 43.4 42.3 50.5 22.3 NA 15.7 45.3 NA NA 27.5 37.8 38.7 18.9 15.4 45.2 36.6 46.4 20 6 10 9 0 0 45 24.8 14.7 3. P a g e | 56 .3 35. Table 6 shows that the number of job order hirees of provinces.7 10.9 56.6 45.9 43.8 48.Study on Local Personal Services Expenditure Policy Table 5. 2007 % of PS Expd % of Capital to Current % of PS Expd % of MOOE Outlay to Regular to Total Expd to Total Expd Total Expd Income Provinces Total No. of LGUs % of PS Expd to Total Income Provinces First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total Cities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total Municipalities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total 15 4 8 3 1 0 31 35.9 48.2 7.7 9.1 50.9 Source of basic data: PS expenditure policy survey.2 25.3 36. Size of LGU wage bill.8 34.7 44.4 NA NA 52.3 52.9 49.7 14.4 14.8 29.1 46. Interviews with LGU officials reveal that some LGUs use job order hirees (who are charged against MOOE) to work on tasks that would normally be assigned to regular employees in order to avoid exceeding the PS cap.0 6.2 36.1 40. On the one hand. LGUs have been adding to their staffing pattern. Clearly. (ii) too many casuals and contractuals.1. and (iii) how these policies and standards impact on the ability of LGUs to keep within the PS cap. On the other hand. the discussion that follows is divided into three parts: policies and standards relating to employment/ staffing. Staffing concerns Issues on LGU staffing include (i) overall size of the LGU personnel complement. The number of personnel in LGUs have increased considerably from 189.227 in 2004 (Brillantes and Fernandez 2008). P a g e | 57 . 3. There is thus a need to revisit the level and nature of positions in the existing model to respond to the changing needs of the LGUs in the delivery of public services at the local level. LGUs need to ensure that they have staff in sufficient numbers and with the appropriate qualifications to enable them to deliver services needed by their constituency at a level that they can afford.Study on Local Personal Services Expenditure Policy Table 6.” hiring large numbers of employees/ casuals in the lowest salary grades as response to lack of employment opportunities in their jurisdictions.878 in 1984 to 316. (ii) policies and standards relating to pay/ compensation. 2008 Because the arithmetic is such that wage bill is very simply the product of the number of employees and the wage rate. The rise in personal services expenditures of LGUs may partly be attributed to the expansion of the LGU organizational structure and increases in the total number of positions in LGU plantilla following the passage of the LGC. in terms of both the organization structure and the allowable level and number of positions. 2007 First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All LGUs Provinces 290 591 276 0 0 NA 288 Cities 767 1795 229 370 NA NA 705 Munis 85 47 54 30 23 8 40 Source of basic data: PS expenditure policy survey. This implies that the population-to-personnel ratio went down from 286 in 1984 to 211 in 1994 and 220 in 2004. but there is no information as to whether these conform with the model under MC 19. Average number of hirees under job order per LGU. Additional operating units have also been created for the now popular operations of local economic enterprises. or state-owned enterprises. A number of considerations impinge on the size of the LGU personnel complement. interviews with local chief executives during the field visits conducted for this study confirm that local officials are sometimes tempted to act as an "employer of last resort. and (iii) too many unfilled regular positions.023 in 1994 and 377. This is consistent with the fact that these levels of local governments have very similar service responsibilities as per their mandates under the LGC. However. parliamentary versus presidential governments). differences in political structure (federal states versus unitary states. On the other hand. largely because of the way health facilities were actually assigned to different levels of LGUs under the devolution program. However.1. P a g e | 58 . ranging from differences in the role of the state in the economy.org/WBSITE/EXTERNAL/TOPICS/ EXTPUBLICSECTORANDGOVERNANCE/administrative&civilservicereform). the variation in the population-to-LGUpersonnel ratio across different LGU income class does not support the affordability hypothesis that higher income class LGUs would tend to exhibit lower ratios (Table 8). The data also show that the number of filled regular positions in the average city (705) and that in the average province (749) are quite similar. When the size of the personnel complement is standardized by population size. The variation in the size of the LGU staff complement becomes even larger when one corrects for population size.Study on Local Personal Services Expenditure Policy 3. the size of the LGU population clearly has some impact on decisions regarding the appropriate size of the LGU staff complement. differences in the functional assignments across different levels of governments. Overall Size of LGU Personnel Complement Overstaffing is a relative concept. it is very tempting to benchmark the country vis-à-vis other countries. This finding is quite surprising considering that provinces operate hospitals which have fairly large personnel requirements while only a few cities do. it becomes evident that cities and municipalities have fairly close population-topersonnel ratios. It appears that the larger populations of higher income class LGUs are not quite compensated by their higher income levels to allow them to maintain ratios that are at par with their “poorer” counterparts. a comparison of different LGUs classified according to the level of government and according to LGU income class is perhaps more informative.1. the issue is motivation and affordability rather than staff numbers (World Bank website on administrative and civil service reform http://web. The variation in the average number of personnel across the different LGU income classes for the different levels of LGUs suggests that indeed affordability is a major factor that influences LGUs’ staffing decisions.worldbank. differences in the design of intergovernmental transfers and differences in the level of overall development. such an exercise is often futile because of the vast differences in country specific characteristics. Clearly. Higher income class LGUs are generally shown to have larger staff complement than their “poorer” counterparts regardless of the level of local government (Table 7). The same can be said of the average number of filled regular and non-regular positions in provinces and cities. In this regard. In this regard. perhaps.7 108 21 3306 65 88 119 1. Table 7. However. Nonetheless.Study on Local Personal Services Expenditure Policy In either case.filled regular and nonand nonregular positions positions regular regular regular positions positions positions positions 843 1030 1059 1489 146 256 842 874 515 690 102 133 667 833 447 740 92 108 507 828 334 458 72 90 337 337 NA NA 51 62 NA NA NA NA 45 55 749 295 1653 533 721 907 1. some of the LGU officials interviewed for this study report their interest in re-organizing and. staffing pattern and appropriate size of personnel complement – not so much on the process but more on the design of structure and determination of size of personnel complement that responds to their needs.754 300 452 624 2. Average number of personnel. At the same time.5 705 1010 124 8260 397 605 1040 2. 2007 Provinces Cities Municipalities Average Average Average Average Average Average number of number of number of number of number of filled regular number of filled regular filled regular filled filled regular and non. This problem should be studied further. Some of them have engaged the services of private organizations which have demonstrated their expertise in this area. skills shortage in specific sectors. even rationalizing their personnel complement.6 81 21 306 56 74 97 1. they suggest that it would be helpful if the CSC technical advisory services in this area were to be more accessible.7 917 337 2567 664 885 1024 1.8 Income Class First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Minimum Maximum Quartile 1 Quartile 2 or Median Quartile 3 Interquartile ratio (Q3/Q1) 96 4.1 Source of basic data: PS expenditure policy survey. in many LGUs cannot be denied. They are seeking guidance on organizational structure. 2008 P a g e | 59 . particularly the health sector. the wide disparity in both the average number of personnel per LGU as well as the population-to-personnel ratio (as measured by the interquartile ratio) is indicative of the scope for rationalizing the size of the LGU personnel complement. it is also important to recognize that while there are indeed indications of overstaffing overall in some LGUs. Too Many Casuals The conventional wisdom is that there are too many casual personnel in the employment rolls of LGUs. The average number of casuals per LGU rose from 157 in 2006 to 182 to 2008 for provinces. On the other hand.Study on Local Personal Services Expenditure Policy Table 8. it is telling that non-regular employees (consisting mostly of casual employees) do account for a significant percentage of the total number of LGU personnel regardless of employment status. of Filled Regular and Regular Regular Regular Non-regular Non-regular Non-regular Positions Positions Positions Positions Positions Positions 1082 632 520 499 47 NA 834 47 2410 433 713 1116 2. provinces had 168 nonregular employees on the average. However. of Filled Population to No. representing 30% of total number of LGU personnel in 2007 (Table 9).2.4 647 514 443 356 258 380 439 36 2718 265 370 498 1. cities and municipalities remains very close to the minimum wage rate on the average. representing 18% of total number of LGU personnel while cities had 304 non-regular employees on the average.9 Income Class First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Minimum Maximum Quartile 1 Quartile 2 or Median Quartile 3 Interquartile ratio (Q3/Q1) Source of basic data: PS expenditure policy survey. accounting for 25% of total number of LGU personnel. P a g e | 60 .9 371 395 377 284 211 308 328 23 1586 216 307 419 1. 2007 Provinces Cities Municipalities Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Population to Population to Population to Population to No. from 207 to 215 for cities and from 18 to 23 for municipalities. of Filled No. To wit. The data shows that nonregular employees of cities and provinces are generally paid more that their counterparts in municipalities. of Filled Population to No. Population to LGU personnel ratio. of Filled Regular and No.5 416 318 235 303 NA NA 370 121 1569 223 315 560 2. of Filled Regular and No.6 886 609 416 789 47 NA 681 47 1646 346 679 855 2. The growth in the number of casuals in terms of absolute numbers appears be minimal and may even be just about consistent with the growth in population. However. the compensation of non-regular employees in provinces. 2008 3.1. municipalities had 27 non-regular employees on the average.5 296 237 142 221 NA NA 259 49 767 151 247 364 2. 3 18. of number of Total No.6 27.9 25. ranging from 2 years to 15 years. some of the regular positions in these LGUs are not filled intentionally to accommodate the hiring of non-regular P a g e | 61 .3 430 176 293 124 NA NA 304 28. They also report that there are many “permanent” casuals. However. 2008 A good number of local appointive officials interviewed during the field visits readily admitted that some casuals in the employment rolls of some LGUs are hired to pay political debts.4 39.8 23.1 NA NA 30. Average number of non-regular personnel.035 4 127 303 75. For instance.1 117 32 16 19 12 11 27 0 3004 0 7 27 42.3 First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Minimum Maximum Quartile 1 Quartile 2 or Median Quartile 3 Interquartile ratio (Q3/Q1) 0 4.9 20.5 19.9 38.7 0. many of them become “regular” casuals. In cases like this. Key informant interviews also reveal that in many LGUs casual employees substitute for permanent employees. 2007 Provinces Cities Municipalities Income Class % of Non% of Non% of Nonregular regular regular Positions to Positions to Positions to Average Average Average Total No.5 18. it is reported that the employment status of casual employees are not made permanent for a variety of reasons. In many instances.1 3.Study on Local Personal Services Expenditure Policy Table 9. some casuals are assigned to do regular technical work sometimes with sub-optimal competency.Total No. although casual employees are officially hired on a short-term basis. LGU officials find themselves having to “make work” for some of those thus hired. of number of non-regular Filled Regular regular Filled Regular non-regular Filled Regular personnel personnel personnel and Nonand Nonand Nonregular regular regular Positions Positions Positions 187 32 166 321 0 NA 168 0 914 6 108 213 35.8 Source of basic data: PS expenditure policy survey. Consequently.1 25. with their contracts being renewed continuously and actually staying on the employment roll for extended periods. That is. of number of non.0 NA 18. many of the casuals do not meet the qualification standards of plantilla positions.1 14. That is.7 19. some LGU officials averred that they choose to retain the casual status of some of their employees even if these employees are able to meet the qualification standards because casual employees tend to be more productive and efficient than their counterparts who are hired on a permanent basis because of the casual’s fear of being fired anytime. 7 12.1 10. and it is these civil servants who tend to be committed to a career in an internal labor market with few career alternatives.0 Municipalities 13. there is a need to balance these concerns with the reality that the civil service has to also be sensitive to the priorities of the current administration.0 8. and the need for flexibility to respond to changing needs and to work for greater efficiency in government operation. private-sector labor-contract arrangements (or at least fixed contracts under public-employment statutes) seem more appropriate.1 7. 2008 The discussion above highlights the tension between the imperative to professionalize the local bureaucracy and to provide security of tenure.0 25.3 8. (ii) the need to secure the neutrality of bureaucracy and protect it from inappropriate personnel changes due to political pressures. on the one hand.3 9.9 13. Shepherd (2003) emphasizes two factors that are important in thinking about the issue of tenure in the civil service: (i) the kind of labor market that is applicable to civil servants occupying certain positions and (ii) the functional role that certain positions are meant to perform. On the other hand.4 6. The corresponding figure is 24% in cities and 8% in municipalities (Table 10). and policy execution functions. and can thus shift with more ease into private-sector jobs.2 19. Percent of Unfilled Regular Positions to Total Number of Regular Positions. and (iii) the perceived efficacy of long-term career paths in encouraging discipline in the workplace because the risk of losing tenured employment is viewed by many as a serious threat (World Bank website on administrative and civil service reform).2 5.0 Source of basic data: PS expenditure policy survey. notably service delivery.4 NA 13. differentiating between core and non-core functions and between high-level policy making functions. on the other hand.2 21. 14% of regular/ plantilla positions in provinces are unfilled in 2007. Other senior civil servants working in non-core functions. Thus. on the one hand. Table 10. He says: “The tenure argument applies most clearly to senior civil servants at the core of government: it is the more important decisions and actions made by these people that can be subject to political manipulation.Study on Local Personal Services Expenditure Policy employees. 2007 Income Class First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Provinces Cities 27.7 20. In these cases. arguably function within external labor markets. The tendency in P a g e | 62 . The greater protection from dismissal that is generally granted to civil servants in many countries is anchored on: (i) the need to promote continuity in the delivery of public services and to serve the longer-term concerns of government.8 NA NA 24.1 7. 3. Pay and Compensation Concerns The international literature suggests that the framework in thinking about public sector pay and compensation policy is arriving at “a level of pay that is consistent with the operation of a motivated and professional public service at a scale the government can afford on a sustained financing basis” (World Bank website on administrative and civil service reform). Some countries.3. and the need to promote continuity in public administration at the local level. Revisions to the model organizational structure and staffing pattern could possibly lead to a more compact list of plantilla positions that include only positions that are needed for the delivery of the core mandates of LGUs.2. on the one hand.Study on Local Personal Services Expenditure Policy advanced countries to separate policy-making from policy-executing agencies (and to create executive agencies for the latter) goes in this direction. affordability is a constraint P a g e | 63 . exclude these jobs from the civil service. the amended model organization structures should be indicative rather than prescriptive. 3. rather. fixed term employment contracts are common for senior positions as this type of employment arrangement were originally introduced to endow the senior civil service with more flexibility. sensibly. weighing the trade-off between the need for personnel who have the full trust and confidence of the LCE. The tenure of department heads and heads of the various offices may also have to be revisited. pay arrangements and to specify performance requirements in developed and even some developing countries. cleaners. on the other hand. the World Bank further notes that the first step in a pay reform strategy is to determine the medium-term resource envelope.1. Arguments against tenure in the lowest levels – drivers. In these countries. As a corollary. Needless to say. there is a need to establish criteria and/ or benchmarks that LGUs can refer to in deciding on the staffing pattern that is appropriate for their particular situation. guardians. the model staffing patterns may indicate minimum and maximum number and level of positions for each LGU level and income class. Fixedterm employment contracts may then be considered for personnel who are focused on the delivery of the priorities of the current administration but which are not part of the core mandates of the LGU.” The World Bank (World Bank website on administrative and civil service reform) notes that fixed term employment contracts are increasingly being used to define terms of employment. Recommendations There is a need to review and define model organizational structures for LGUs with corresponding staffing pattern (by level and by income class). In this regard. Related to this. UNDESA (2005) echoes the same guidance saying that “a pay policy does not determine affordability. for instance – are these jobs are part of external labor markets. Many LGUs fail to comply with the PS cap prior to the application of the waivers. 3. 35% and 10% that non-compliant municipalities provide.2.g. and (vi) grant of allowances/ honoraria to NG personnel. and Striking a balance between pay. respectively. the percentage of LGUs that are not able to meet the PS cap requirement tends to be higher for LGUs belonging to the lower income categories than for those belonging to the higher income categories. MOOE and CO. respectively. That is.” In other words. regardless of level of local government. 41% and 10% that their non-compliant counterparts provide in 2007. The impact of the non-compliance with the PS cap on the distribution of the total LGU spending on different objects of expenditures is shown in Table 12. In like manner. Compliance with the PS Cap Prior to Waivers Section 325 of the Local Government Code provides that the total annual appropriations for personal services of LGUs should not exceed 45% of their total annual income from regular sources realized in the next preceding fiscal year in the case of 1st to 3rd income class LGUs and 55% in the case of 4th to 6th class LGUs. 40% of cities and 75% of municipalities exceed the PS cap prior to the application of the waivers in 2007 (Table 11).1. Given this framework. UNDESA (2005) further argues that pay policy involves the following: Bringing pay in line with government’s overall policy objectives. 46% and 12% to PS. compared to the 50%. provinces which successfully adhered with the PS cap allocated 34%. cost of living. Moreover. (v) grant of unanticipated extra yearend benefits. Determining the basis for pay which consists of the appropriate mix of primary factors (e. Establishing an appropriate “compression ratio” between the pay of the highest and lowest positions. other benefits (including pensions) and allowances. job content) and secondary factors (e. fiscal sustainability should be primordial in the LGUs’ hierarchy of objectives.g. municipalities which comply with the PS cap (abstracting from the waivers) allocated 42%. For instance. MOOE and CO.. this subsection reviews the following outstanding issues related to LGU pay and compensation policy: (i) PS cap issue. P a g e | 64 .. Fifty-eight percent of provinces. 45% and 21% to PS. affordability. compliance with the PS cap appears to be correlated with the fiscal capacity of the LGU as proxied by its income class. qualifications and individual performance). (iv) Magna Carta benefits for public health workers and public social workers.Study on Local Personal Services Expenditure Policy imposed by the budget. (ii) differentiated salary schedule (iii) too many allowances. market-based pay. It underscores the perverse impact of non-compliance with the PS cap on both MOOE spending and capital outlays of LGUs at all levels of local government. compared to the 54%. 75 dated July 12.0 50. Table 11.1 20 6 10 9 0 0 5 3 5 5 0 0 25.7 50. P a g e | 65 .7 100.Study on Local Personal Services Expenditure Policy These figures provide a strong argument for sustaining the budgetary limitations on PS spending that are now found in the LGC. That the salary schedule to be adopted shall be uniformly applied to all positions in the LGU concerned.0 50. 7160 as implemented by Local Budget Circular (LBC) No.5 75. of LGUs Number of No. of LGUs Number of No. 2002.0 55. That the difference arising from the adoption of the higher salary schedule shall be subject to the budgetary and general limitations on personal services expenditures mandated under Sections 324 and 325 of RA No. Adoption of Salary Schedule of Higher Class LGUs As indicated earlier.6 NA NA 57 50 95 166 120 22 32 33 77 124 108 10 56.3 45 18 40.2. That the LGU is financially capable.2.0 510 384 Source of basic data: PS expenditure policy survey.0 NA 58. the Senate and House of Representatives Joint Resolution No.1 66.0 75.0 45.0 66. 1 of 1994 allowed LGUs other than special cities and first income class provinces and cities to adopt the salary schedules of higher class LGUs subject to the following conditions and limitations: That the LGU must first implement fully the prescribed salary schedule for its income class and assure sustainability before it can exercise the option to adopt a higher salary schedule.0 81.1 74. of LGUs the PS cap the PS cap the PS cap LGUs in exceeding PS LGUs in exceeding PS LGUs in exceeding PS before before before Sample cap before Sample cap before Sample cap before waivers waivers waivers waivers waivers waivers Income Class First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes 15 4 8 3 1 0 31 7 2 6 2 1 0 18 46.7 90. Percentage of LGUs complying with PS Cap. and That in the case of component cities and municipalities. 2007 Provinces Cities Municipalities % exceeding % exceeding % exceeding Number of No. the salary schedule to be adopted shall not be higher than that of the province where they belong. 2008 3. 7 49.2 10.9 35.5 40. regardless of the class of the LGU to which they were devolved. to maintain the integrity and consistency of the Pay Plan the following rules shall apply in reverting to the prescribed/ lower salary schedule: No personnel whose salaries have been adjusted based on the higher salary schedule shall suffer diminution in pay as a result thereof. 2008 The DBM (2007) notes that the intent of this provision of the Joint Resolution No. 2007 % of PS % of % of PS % of PS % of Expd to Capital Total No. LGUs actually have little flexibility in terms of actually setting pay and compensation at the local level prior to the passage of the Joint Resolution No. For new hirees/ appointees. salaries and wages.4 34.0 35.9 45.4 41.9 Source of basic data: PS expenditure policy survey.7 42. 1 of 1994 was to minimize the disparity in pay between personnel of national government agencies who were devolved to LGUs and the organic personnel of the LGUs.2 126 384 510 36.7 16.7 12. may revert to the prescribed or lower salary.5 40.6 45.1 42.9 15.4 10.0 13 Not complying with PS cap 43.8 21.0 17. their salaries shall be at the hiring rates of their positions based on the prescribed/ lower salary schedule.3 48.2 53. 1 of 1994 because whatever pay and compensation scheme they adopt has P a g e | 66 .4 38.4 46.9 49. This problem arose because devolved personnel retained their salaries which were set on the basis of the national government pay scale and thus were getting first class rates.3 50.5 38. and allowances of local officials and employees.0 37. Size of LGU wage bill. However. by compliance with PS cap.7 40.4 27 27 54 25. It should be noted that despite the LGC provision authorizing Local Sanggunians to determine the positions.9 9.0 28.6 54.8 30.2 55.2 44.2 52.5 18 Total Cities Complying with PS cap Not complying with PS cap Total Municipalities First Income Class Second Income Class Total 31 38.7 27.2 25. Table 12.8 41.1 38.4 28.7 19.Study on Local Personal Services Expenditure Policy The Manual on Position Classification and Compensation System (DBM 2007) provides that when an LGU which has adopted a higher salary schedule as authorized finds that it can no longer afford to sustain such schedule. Expd to Expd to MOOE to Provinces Outlay to Current of LGUs Total Total Total Total Regular Income Expd Expd Income Expd Provinces Complying with PS cap 32. the provision regarding “no diminution of salaries” of incumbents in cases of reversion effectively ensures that such reversion would have little impact on PS spending in the near to medium term. more than half of these LGUs adopted salary schedules that are more than one notch higher than that of their own income class.2 19.4 11. of LGUs 31 22 4 5 45 29 5 11 510 307 101 102 % 100. 36% of cities and 40% of municipalities adopted salary schedules of higher class LGUs (Table 13). In 2007.0 60.0 64. 78% of provinces which adopted salary schedules higher than their own exceeded the PS cap (abstracting from the waivers to the application of the cap) while only 50% of those which implemented the schedule of their own income class did in 2007 (Table 14).9 16.1 100. Thus. the Joint resolution and the waivers tended to nullify the fiscal discipline imposed by the PS cap. With this provision. 2008 No. In P a g e | 67 . In a sense.Study on Local Personal Services Expenditure Policy to be consistent with the provisions of RA 6758 which are fairly specific. the provisions of the Joint Resolution with respect to the adoption of higher salary schedules together with the many waivers that were later allowed in computing compliance to the PS cap weakens the imperative for LGUs to work within hard budget constraints. 2007 Salary schedule adopted All Provinces for own income class for immediately succeeding income class for next succeeding income class or higher All Cities for own income class for immediately succeeding income class for next succeeding income class or higher All Municipalities for own income class for immediately succeeding income class for next succeeding income class or higher Source of basic data: PS expenditure policy survey. adherence with the PS cap requirement is compromised by the adoption of the higher salary schedules. the provision on Joint Resolution with respect to the adoption of salary schedules of higher class LGUs changed this. Also. Although the guidelines governing the implementation of the Joint Resolution allows for reversion to the prescribed or lower salary schedule should LGUs find the current PS spending fiscally unsustainable.0 Predictably. Moreover.1 24.0 71.8 20.0 12.4 100. However. LGUs are now basically able to choose from any one of the eight salary schedules that are available to them subject only to the budget constraint. Table 13. 29% of provinces. Number of LGUs Adopting Salary Schedule of Higher Higher Class LGUs. of LGUs Exceeding % in Sample PS Cap Salary schedule adopted All Provinces 31 18 58.2 78.1 for own income class 22 11 50. city or municipality.0 All Cities for own income class for immediately succeeding income class for next succeeding income class or higher All Municipalities for own income class for immediately succeeding income class for next succeeding income class or higher Source of basic data: PS expenditure policy survey. by Salary by Salary Schedule Adopted. 79% of municipalities which implemented higher salary schedules had PS expenditures in excess of the PS cap compared to 73% of those which adopted the prescribed schedule that were not able to meet the PS cap requirement. For instance. highly urbanized cities/ independent component cities vis-a-vis component cities).Study on Local Personal Services Expenditure Policy like manner. Table 14.9 40.4 3. on the income class of the municipality and on whether the said position is in the province.0 for next succeeding income class or higher 5 5 100. Similarly.6 80. 2008 45 29 5 11 510 307 101 102 18 11 2 5 384 223 81 80 40.3 72. the applicable salary grade for department heads is from salary grade (SG) 27 in special cities.0 45.3. The second level of differentiation arises from the fact that in the implementation of RA 6758 different salary grades are assigned to higher level positions in the LGU depending on the kind of city (i. SG 25 in component cities and municipalities in NCR and SG 24 in other municipalities. Proportion of LGUs Exceeding PS Cap Before Waivers.e.2. the percentage of cities which fail to observe the PS cap is higher for cities which implemented salary schedules other than that of their own income class (44%) compared to those which adopted the salary schedule of their own income class (38%). 2007 No.. No.0 for immediately succeeding income class 4 2 50. P a g e | 68 . Similar differentiation is also applied to assistant department head positions in different LGUs. SG 26 in provinces and HUCs.0 37.5 75. The first level of differentiation is due to the provision under Section 10 of RA 6758 (as shown in Table 3) which is presumably based on the financial capacity of LGUs as indicated by their income class. Differentiated Salary Schedule for LGUs There are two levels of differentiation in rates of pay that are applicable to same positions in LGUs of different levels and different income classes. uniform/ clothing allowance. then one can argue that this concern is already being addressed by the first level differentiation.Study on Local Personal Services Expenditure Policy One could argue that the first level of differentiation is based on the principle that the LGU staffing and compensation should be set at levels that are fiscally sustainable for the LGU.5. commutable representation and transportation allowances (RATA). Thus. Allowances and Other Benefits Too many allowances. Given this perspective. The premise of the second level of salary differentiation is not as obvious. the failure of a significant proportion of LGUs to implement SSL2 while observing the PS cap paved the way for certain PS expense items to be waived in computing compliance with the budgetary limitation on PS spending. the higher salary grades prescribed for provinces and highly urbanized cities may be related to the relatively wider span of control that department heads and LGU officials occupying relatively higher positions exercise relative to their counterparts in component cities and municipalities. and their counterparts in municipalities. and absorption of devolved hospital services cost transferred to cities from provinces are considered waived in evaluating compliance with the PS cap. year-end benefits (YEB). Magna Carta Benefits for P a g e | 69 . 75 (2002) included the following: Additional Compensation Allowance (ADCOM). some of the observers interviewed for this study opined that compliance with LBC 75 is a farce. it is not clear why there should be a difference in the salary grades assigned to higher level positions in component cities. Also. Personnel Economic Relief Allowance (PERA). the lack of consistency in the review of local budgets given the fact that different entities are tasked with this budget review function resulted in the uneven application/ enforcement of Local Budget Circular (LBC) 75 of 2002 which governs the application of the waivers. many LGUs find it difficult to formulate their budget without violating some of the budgeting rules or the limitations on Ps spending. payment of MC benefits of public health workers (PHWs). step increments for length of service. Conceivably. Productivity Incentive Benefits (PIB). 3. Waivers to Application of the PS Cap As discussed in Section 2 above. allowances and other compensation associated with the creation of mandatory positions. on the other hand. there is a need to revisit the parameters of the second level of salary differentiation at the local level. the salaries. on the one hand.4. absorption of devolved personnel.2. If the reason for the differentiation between these two groups is anchored on the fact that the fiscal capacity of cities are generally higher than that of municipalities. However. 3. continued implementation of SSL. given that the component cities and municipalities have very similar expenditure assignments. In line with these. The list of authorized allowances and benefits for LGU personnel under LBC No.2. Without the waivers on the PS cap. there has been a tendency for the national government to announce the grant of additional/ extra year-end benefits subject to the availability of funds at the level of the operating unit as the budget year is about to come to a close. P a g e | 70 . or attached to "hardship" locations such as mountainous or inaccessible areas. LGUs deliberately generate “savings” from its regular activities sometimes at the expense of service delivery. Very specific guidelines are provided by DBM as to the application of each of these allowances: (i) who benefits and (ii) how each is computed. PERA and ADCOM). per diem of the local officials/ employees.500 per month. Table 15 shows that many LGUs do not comply with the said rules and guidelines. The subsistence allowance is equal to PhP 1. said workers are granted subsistence allowance.. The longevity pay is equal to 5% of basic pay for every 5 years of continuous service. laundry allowance. the hazard pay is equivalent to at least 25% of basic pay for PHWs receiving salary grade 19 and below and 5% of basic pay for PHWs receiving salary grade 20 and above. On the other hand. hazard pay. differentiating position-based allowances and task-based allowances with the end in view of integrating or consolidating those that are similar to each other. It would streamline not only the financial reports but more importantly the work of the payroll unit if some of the allowances can be embedded in the base pay if so warranted (e.Study on Local Personal Services Expenditure Policy Public Health Workers. In recent years.5 Grant of “unanticipated” extra benefits at year-end. Under the Magna Carta of Public Health Workers (Republic Act 7305). and which are often a percentage of the base salary. there is a need to evaluate the other allowances.g. This practice has created perverse incentives on the part of the LGUs. and longevity pay. night-shift differential. Also. On the other hand. while the laundry allowance is equal to PhP 150 per month. So as to be able to give such extra benefits. tasked-based allowances are those which are paid on the assumption that a civil servants is doing more than what one person can reasonably be expected to do and which are given to persuade an employee to take on the additional responsibility as a temporary measure. PHW Magna Carta benefits. specialists’ fees and allowances (in case employer-employee relationship exists). Thus. Surprisingly. 5 Position-based allowances are those which are usually attached to jobs with more than usual risk or skills requirement such as dealing with law and order. this practice should be discontinued in order to improve public expenditure management at the local level. 5 87.0 100.0 52.3 30.0 66.7 100. w/ total subsistence ave.12 salary> 1/12 100.3 98.05 * of PHWs < PHWs < PHP > PHP 1500*12 annual PHP 150*12 4000 salary 1500*12 50.5 62.5 74. PERA > adj.0 60.0 66. laundry ave.2 85.1 61. % of LGUs w/ % of LGUs w/ w/ ave.0 50. % of LGUs w/ w/ ave.8 22. % of LGUs w/ w/ total subsistence ave.0 88.1 58.0 63.7 83.9 88.0 0.7 90.7 20.2 35.0 NA NA NA 100.7 98.9 10.0 100.0 77.3 66.0 NA NA NA NA NA 71.0 22.8 % of LGUs w/ ave.4 95.0 68.0 100.5 0.7 13. PHP 500*12 65.8 88.02 >PhP3000 94.8 1.0 68.2 29.0 100.0 80.5 First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total 57 50 95 166 120 22 510 Source of basic data: PS expenditure policy survey.2 55.0 0.0 84. Percent of LGUs not complying with restrictions on giving of allowances.0 0.0 100.3 0.0 62.0 16.0 75.0 62.1 9.3 0.3 73. of LGUs % of LGUs % of LGUs w/ Ave.12 1/12 85.0 100.6 11.9 70.2 70.0 33.1 77.0 0.0 100.4 66.3 33.8 48.7 100.0 75.3 73. PHP 500*12 82.3 33.9 % of LGUs % of LGUs % of LGUs w/ ave.0 86.0 100.8 90. addl clothing overtime allowance allowance of comp> PHP allowance pay >.5 62.0 83.0 70.1 28.02 >PhP3000 75.5 55.6 9. of LGUs % of LGUs % of LGUs w/ Ave.0 93.3 % of % of % of LGUs w/ Year-end LGUs w/ LGUs w/ RLIP/ Bonus/ Cash Gift >PhP salary annual 5000 <.05 * of PHWs < PHWs < PHP 1500*12 > PHP annual PHP 150*12 4000 salary 1500*12 63. PHP 500*12 100.3 54.8 NA NA NA NA NA NA NA NA NA NA 62.2 50.3 80. addl overtime allowance allowance of comp> PHP allowance pay >.12 1/12 100.0 60. w/ PAGAnniversary IBIG/salary Bonus <.8 4.0 22. addl clothing overtime allowance allowance of comp> PHP allowance pay >.0 100.0 NA 6.4 95.2 36.0 0.0 100.2 35. 2007 % of LGUs w/ ave. % of LGUs w/ w/ ave.3 86.0 NA 96.0 50.4 29.0 100.3 4.0 0.2 100.0 66.6 First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total 20 6 10 9 0 0 45 Municipalities Total No.0 8.5 100.7 46.0 43.0 88.0 83.0 0.0 87.7 0.7 86.4 % of LGUs w/ ave.5 96.5 44.8 62.0 100.5 47.7 99.0 75. PERA > adj.0 100.1 67.4 92.8 12.0 70.8 68.0 4.3 % of % of LGUs w/ % of Year-end LGUs w/ LGUs w/ Bonus/ Cash Gift RLIP/ annual >PhP salary salary> 5000 <. w/ total subsistence ave.6 % of LGUs % of LGUs w/ Ave. PERA > adj. laundry ave.0 100.0 50.0 86.9 74.8 70.5 37.3 100.6 83.0 45.8 81.0 30.0 NA 96.0 0.0 65.0 48. laundry clothing ave. w/ PAGAnniversary IBIG/salary Bonus <.2 NA NA 15.5 Provinces Total No.9 % of LGUs w/ % of % of Year-end LGUs w/ LGUs w/ Bonus/ Cash Gift RLIP/ annual >PhP salary salary> 5000 <.1 68.3 83.7 100.0 0.0 100.0 NA NA 88.0 100.0 50.Study on Local Personal Services Expenditure Policy Table 15.02 >PhP3000 93.0 84.6 83.8 59.05 * of PHWs < PHWs < PHP 1500*12 > PHP annual 150*12 PHP 4000 salary 1500*12 73.9 NA NA NA NA NA NA 93.0 5.0 0.2 77.5 59.7 100.0 24. 2008 P a g e | 71 .0 60.0 100.2 % of LGUs % of LGUs % of LGUs % of LGUs w/ w/ ave.0 16.5 37. w/ PAGAnniversary IBIG/salary Bonus <.3 31.0 60.6 90.0 80.8 13.0 45.0 75.2 77.8 37.0 80.5 29.7 33. of LGUs First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total 15 4 8 3 1 0 31 Cities Total No.3 100.0 77.0 100.6 52.2 % of LGUs % of LGUs % of LGUs w/ ave.4 47.0 6.2 11.0 NA NA 84. 2 NA NA 35. 2008 The PS survey was not able to get firm numbers on the proportion of LGUs which are providing the hazard pay at prescribed rates. of LGUs 20 6 10 9 0 0 45 Total No.1 No.0 0.0 29.0 NA 35.1 Municipalities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total No.0 22.6 47. Table 16. 6 P a g e | 72 .0 37.5 9. of LGUs w/ ave. of LGUs w/ ave.6 No.3 24.2 No.0 Source of basic data: PS expenditure policy survey.0 0. of LGUs w/ ave.5 Cities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total No.0 11. Key informant interviews suggest that the percentage of LGUs which are providing the hazard pay at the prescribed rates is even smaller.6 Data from the PS expenditure survey indicates that the subsistence allowance and the laundry allowance actually granted by LGUs account for about 3% of total PS expenditures of provinces and less than 2% of total PS expenditures of both cities and municipalities.3 0.5 33. of LGUs 15 4 8 3 1 0 31 Total No. laundry allowance of PHWs < PHP 150*12 33. cities and municipalities are providing the subsistence and the laundry allowance at the prescribed rates in 2007 (Table 16).7 75. 2007 Total No.2 55.8 48.Study on Local Personal Services Expenditure Policy To date.1 NA NA 11.5 29.0 NA 45. subsistence allowance of PHWs < PHP 1500*12 45. of LGUs 57 50 95 166 120 22 510 Provinces First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class Total No.5 33.0 30.0 37. of LGUs w/ ave.8 13. Percent of LGUs not complying with restrictions on giving of Magna Carta benefits to PHWs. subsistence allowance of PHWs < PHP 1500*12 36.5 37. Less than 50% of provinces.4 48.1 28. many LGUs are not giving all the allowances due PHWs under RA 7305 in full. subsistence allowance of PHWs < PHP 1500*12 46. laundry allowance of PHWs < PHP 150*12 5.0 47.0 50. of LGUs w/ ave.3 0. laundry allowance of PHWs < PHP 150*12 12. of LGUs w/ ave.3 50. The desire to provide higher pay to public health workers. (ii) the adoption of higher salary schedule and (iii) the payment of Magna Carta benefits of public health workers were examined. Comelec. Although the grant of these allowances is not a must. In particular. It also raises the possibility that said national government personnel may actually be getting allowances from multiple sources (from different LGUs as well as from their own mother unit). the experience with the implementation Magna Carta of PHWs shows that legislation of this type can be counterproductive. the Magna Carta of PHW is a especially sensitive matter at the local level. 3. Decomposing Non-Compliance with the PS Cap Counterfactual simulations were made as part of this study to better understand the reasons for non-compliance with the PS cap. This study recommends that Congress should revisit the desirability of grant of Magna Carta-type MC benefits to all government employees instead of special groups only. the impact of (i) the hiring of non-regular employees. Moreover. the BIR among others. personnel from the PNP.2. Grant of allowances to national government personnel. public school teachers and other national government officials stationed in or assigned in localities when LGU finances allow. the proportion of provinces which are not able to observe the PS cap will go down from 58% to 42%. The grant of these allowances imposes a heavy drain on LGU resources. on the other. in addition to those already mentioned. where the Magna Carta allowances are not granted in full or where said allowances are not granted at all. who are deemed to be underpaid relative to the demand for their services in the local as well as foreign labor markets is understandable. The LGC allows LGUs to grant additional allowances and benefits to judges. particularly doctors and nurses. It is recommended that the pertinent section of the LGC be amended to disallow the grant of additional allowances and benefits to national government officials. especially that of poorer LGUs. prosecutors. The analysis reveals that if all three of these elements were excluded from the computation of compliance with the PS cap. Moreover. It creates conflict between the LCE and other officials. and the PHWs.6. There are many reports of cases filed in the courts or Ombudsman against LCEs and sometimes other local officials like the local Budget Officer by PHWs due to non-implementation of the Magna Carta benefits. The corresponding proportion for cities is estimated to decrease from 40% to 20% while that for municipalities is estimated to be decline from 75% to 56% (Table 17). perhaps this concern might be addressed better by adjusting the salary grades that currently assigned to these positions instead of providing blanket salary top-ups to all PHWs. on the one hand. the list of national government personnel being given additional allowances is long and includes. the Bureau of Fire Protection. LGUs are put under extreme pressure to actually grant them. But.Study on Local Personal Services Expenditure Policy However. P a g e | 73 . 5 Source of basic data: PS expenditure policy survey. of LGUs with PS net Non-Regular Positions in Excess of PS Cap % of LGUs with PS net Non-Regular Positions in Excess of PS Cap No. 2008 P a g e | 74 .6 84.0 80. 2007 No.0 81.7 50.Study on Local Personal Services Expenditure Policy Table 17.0 50.4 60.0 75.4 5 2 5 1 0 NA 13 % of LGUs with PS net of nonreg personnel.5 46.0 NA 41.1 31 30 76 116 106 10 369 54.0 76.0 62.5 66.5 68.6 33. of LGUs % of LGUs with PS Expd with PS Expd No.0 66.0 0.0 16.0 NA NA 20.5 33. of LGUS % of LGUS w/ w/ PS Expd PS Expd Net No.9 20 6 10 9 0 0 45 5 3 5 5 NA NA 18 25.9 88.6 5 2 6 1 1 NA 15 % of LGUs No.0 0.0 NA 54.7 100. of LGUs in Excess of in Excess of in Sample PS Cap PS Cap Before Before Waivers Waivers Provinces First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Cities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes Municipalities First Income Class Second Income Class Third Income Class Fourth Income Class Fifth Income Class Sixth Income Class All income classes No.0 57 50 95 166 120 22 510 32 33 77 124 108 10 384 56.0 NA NA 22.0 55.4 32 32 73 99 101 10 347 56.0 75.0 45.5 55. of LGUs with PS net with PS net of Non-Regular non-reg Positions in personnel.0 NA NA 31.6 52.4 75.0 0.3 45.7 100.8 63.7 50. Some counterfactuals on number of LGUs exceeding PS cap.0 45.0 66.6 NA NA 40.1 74.0 16.3 50.3 85.0 33.0 0.0 1 1 5 0 NA NA 7 5.3 50.5 72.3 0.7 50.0 NA 51. MC benefits & cost of higher SS 15 4 8 3 1 0 31 7 2 6 2 1 NA 18 46. For PHWs in Excess of PS Cap 40.1 44.5 75.0 69.0 50.0 16.0 NA NA 33.1 40.0 83.5 62.0 75.0 NA 51. of LGUs Net of Cost of of Cost of with PS net of Adoption of Adoption of non-reg Higher SS in Higher SS in personnel and excess of PS excess of PS MC benefits Cap Cap 7 2 6 1 0 NA 16 46.0 45.7 100.0 0.2 4 1 4 0 NA NA 9 20.0 66.8 59.0 75.7 60.1 66. of LGUs with PS Expd Net of Magna Carta Ben.2 45. For PHWs in Excess of PS Cap 6 2 6 2 1 NA 17 % of LGUs with PS Expd Net of Magna Carta Ben. MC Excess of PS benefits & cost Cap and MC of higher SS Benefits 33.0 NA 58.0 74.7 90.3 50.0 20 22 71 98 100 10 321 35.3 100.6 8 1 6 0 NA NA 15 40.3 0.0 50.3 45.0 75.0 16.1 4 1 5 0 NA NA 10 20.0 69.9 20 20 66 77 90 10 283 35.7 50.7 59.8 No.3 8 1 5 0 NA NA 14 40.0 16.1 64.0 75.3 22 26 72 105 102 10 337 38.0 NA NA 15.0 33.7 50.1 5 2 6 2 1 NA 16 33.7 40.0 NA 48. Given this findings. This study simulated what will happen to the LGU wage bill using the staffing pattern of 3 municipalities. that of cities by 78%-94% and that of provinces by some 69%. the proportion of cities which are not able to comply with the PS cap is estimated to go down from 40% to 16% if the PS cost of non-regular employees were excluded from LGUs’ actual PS expenditures. by 4-8 percentage points in the case of cities and 1 percentage point in the case of provinces. SSL3 will increasingly make it difficult for LGUs to keep their PS spending below the PS cap. In line with this. 7 The projected 10% growth rate for LGU income in 2010-2013 is based on historical performance in the last 5 years. especially in the case of cities and municipalities. It is estimated that the ratio of PS spending to the PS cap will go up by some 5-11 percentage points in the case of municipalities. the number of non-regular employees in the employment rolls of LGUs appears to have the biggest impact on compliance with the PS cap. These estimates are based on the assumption that LGU income will increase by 19% in 2009 and 10% every year thereafter until 2013. To wit. 2 cities and 1 province if SSL3 were to be implemented starting 2010 over a 4 year period. this study recommends that LGUs be given the flexibility to set their own compensation and pay policy provided they comply strictly with the PS cap.Study on Local Personal Services Expenditure Policy The analysis also shows that the payment of Magna Carta benefits of PHWs appears to have the smallest impact on the ability of LGUs regardless of level to conform with the PS cap requirements. As expected.2. This proposal (which has come to be known as SSL3) aims to correct the erosion of real public sector wages and salaries in recent years and to decompress the wage structure in the public sector. the proportion of cities which are not able to comply with the PS cap is estimated to go down from 40% to 31% if all LGUs had adopted the salary schedules that are prescribed for their own income class. The corresponding proportion for municipalities is estimated to be reduced from 75% to 66%.7.7 Admittedly. Simulation of Impact of SSL3 A proposal to revise the government salary schedule upwards as part of the third wave of salary standardization is pending in Congress at present. The corresponding proportion for municipalities is estimated to be reduced from 75% to 68% while that for provinces was reduced from 58% to 52%. For instance. the study also recommends that most if not all of the waivers to the application of the PS cap be eliminated in as much as the presence of these waivers seriously undermines fiscal discipline. The results of the simulation indicate that the full implementation of SSL3 will jack up the wage bill of municipalities by 82%-102%. The impact of the adoption of higher salary schedules is found to be significant as well. In contrast. P a g e | 75 . 3. it is recommended that the PS cap be retained. It would also be helpful if a toolkit which LGUs can use in making hard choices between number of employees and the corresponding wage bill is developed. Prospectively. there is a strong argument for retaining the cap on LGU spending on personal services. Thus. it is recommended that LGUs be given the discretion to choose any which one of the eight alternative salary schedules (which is provided in Section 10 of RA 6758 and which is shown as Table 3 in this paper) that they think is best suited to their particular situation guided by their fiscal capacity and subject to their complying strictly with the PS cap. In line with this. P a g e | 76 . This recommendation is anchored on the premise that service delivery requires a mix of both wage and non-wage spending. we recommend that LGUs be given the flexibility to set their own compensation and pay policy as long as they work within the constraints imposed by the fiscal headroom that is actually available to them.Study on Local Personal Services Expenditure Policy these results are based on a fairly small sample. In other words. the practice of granting additional/ extra year-end benefits subject to the availability of funds at the level of the operating unit as the budget year is about to come to a close should be discontinued in order to improve public expenditure management at the local level. If spending is too skewed in favor of personal services. Fourth. there is a need to revisit the parameters that form the basis for assigning different salary grades for higher level positions in LGUs of different income class and different levels. Doing so reinforces the imperative for LGUs to live within hard budget constraints. Fifth.2. travel and other resources that are needed to complement personnel resources as well as local public infrastructure needed for local economic development. we also recommend that most if not all of the waivers to the application of the PS cap be eliminated. Third. it is recommended that the pertinent section of the LGC be amended to disallow the grant of additional allowances and benefits to national government officials. Recommendations First. service delivery suffers because of the squeeze on supplies. this issue needs to be studied further. Second. Such a toolkit will help LGUs evaluate different “what if” scenarios. This will be particularly useful for LGUs when they consider the sustainability of the proposed round of salary increases and alternative responses. This provision puts undue pressure on LGUs to provide such allowances at the expense of local service delivery. 3.8. The presence of these waivers seriously undermines fiscal discipline. Congress should revisit the desirability of grant of Magna Carta-type MC benefits to all government employees instead of special groups only. the desire to provide higher pay to public health workers. Because the arithmetic is such that wage bill is very simply the product of the number of employees and the wage rate. Fixed-term employment contracts may then be considered for personnel who are focused on P a g e | 77 . (ii) position classification and compensation policies. position classification and compensation concerns cannot be completely divorced from staffing concerns. PS expenditure policy has to consider issues related to both staffing and pay policy.Study on Local Personal Services Expenditure Policy Sixth. On the other hand. there is a need to establish criteria and/ or benchmarks that LGUs can refer to in deciding on the staffing pattern that is appropriate for their particular situation. Moreover. particularly doctors and nurses. There is also a need to review and define model organizational structures for LGUs with corresponding staffing pattern (by level and by income class). professional and managerial staff. there is need for a body similar to the Joint Commission on Local Government Personnel Administration to be constituted to act as oversight body on local personnel matters and to ensure better coordination of (i) staffing and employment policies. The experience with the implementation Magna Carta of PHWs shows that legislation of this type can be counterproductive. 4. The guidance from the international literature suggests that the first step in a pay reform strategy is to determine the medium-term resource envelope. The revised model organizational structure and staffing pattern could possibly lead to a more compact list of plantilla positions that include only positions that are needed for the delivery of the core mandates of LGUs. fiscal sustainability should be primordial in the LGUs’ hierarchy of objectives. The amended model organization structures should be indicative rather than prescriptive. Moreover. there is a need to coordinate implementation of benefits under various Magna Carta legislations with implementation of the overall compensation structure of government. CONCLUSION The basic policy problem with respect to public sector employment and compensation policy at the local level revolves around the question of how to effectively control the LGU wage bill while simultaneously trying to ensure that LGUs have an adequate number of personnel with the appropriate qualifications that will enable them to deliver the services needed by their constituency and to improve remuneration to attract and/ or retain technical. and (iii) sectoral policies. might be addressed better by adjusting the salary grades that currently assigned to these positions instead of providing blanket salary top-ups to all PHWs. Related to this. As a corollary. In other words. especially under SSL3. and Sangguniang Bayan for municipal barangays). highly urbanized and independent cities and LGUs in the NCR) and the appropriate Sanggunian or legislative body (Sangguniang Panlalawigan for component cities and municipalities. P a g e | 78 . Monitoring of LGU compliance is primarily done by way of the budget review process. It is recommended that the cap on LGU spending on personal services be retained. Related to this. we recommend that LGUs be given the flexibility to set their own compensation and pay policy (choosing one from the eight alternative salary schedules described RA 6758) as long as they work within the fiscal constraint embodied in the PS cap. it would be helpful if a toolkit which LGUs can use in making hard choices between number of employees and the corresponding wage bill is developed. Admittedly. We further recommend that most if not all of the waivers to the application of the PS cap be eliminated. In addition. In this regard. While the implementation of SSL3 will surely present difficulties as it further exerts greater pressure to increase the LGU wage bill. there is a need to coordinate implementation of benefits under various Magna Carta legislations with implementation of the overall compensation structure of government. the success of the new PS expenditure guidelines recommended above depends on the effective enforcement of said guidelines. there is a need to strengthen the capacity of provincial/ city/ municipal governments. Furthermore. the pertinent provision of the LGC allowing the grant of additional allowances and benefits to national government officials should be amended as this puts undue pressure on LGUs to provide such allowances at the expense of local service delivery. especially under SSL3. The presence of these waivers seriously undermines fiscal discipline. but it also presents an opportunity for staffing and pay reforms to be made. This is important so as to reinforce the imperative for LGUs to live within hard budget constraints. Meanwhile. Such a toolkit will be particularly useful for LGUs when they consider the sustainability of the proposed round of salary increases and their alternative responses. where budgets of LGUs are reviewed by the DBM (for provinces. the practice of granting additional/ extra yearend benefits subject to the availability of funds at the level of the operating unit as the budget year is about to come to a close should be discontinued in order to improve public expenditure management at the local level.Study on Local Personal Services Expenditure Policy the delivery of the priorities of the current administration but which are not part of the core mandates of the LGU. Finally. There is also a need to revisit the parameters that form the basis for assigning different salary grades for higher level positions in LGUs of different income class and different levels. specifically those of the provincial/ city/ municipal budget officers who support the Sanggunians in discharge of their budget review function (including compliance with the budgetary limitations on personal services expenditures). Sangguniang Panlungsod for city barangays. C. Adoption of Higher Salary Schedule by Local Government Units Department of Budget and Management (DBM) Local Budget Circular No. 1996. 719 Department of Budget and Management (DBM). Manila Nunberg. “Civil Servlce Reform and the World Bank. Clarifying the Role of the Department of Budget and Management in the Compensation and Classification of Local Government Positions Under R. 1993. and Maricel Fernandez. 2008. s. 19. No.: The World Bank. 75. P a g e | 79 . Supplemental Rules and Regulations on the Appropriation for Personnel Benefits Chargeable Against the Annual or Supplemental Budget of the Local Government Units DBM Local Budget Circular No. and Research Working Paper No. 2003. 2002. D. Rules and Regulations on the Grant of Compensation Adjustments to Local Government Personnel Pursuant to Executive Order No. 88. Planning. Nunberg. 1995. 2007.” Policy. “Is There a Philippine Public Administration?” A paper presented in the public colloquium on: “Is there a Philippine Public Administration: A Timeless Issue. Washington. 71.A. 2.C. 1988. “Public Sector Pay and Employment Reform. 2000.” held at the UP National College of Public Administration and Governance (UP NCPAG) on June 2627.: The World Bank. 2008. Barbara and John Nellis. 282 (1996) Brillantes. 7160 Administrative Order No. Guidelines on Personal Services Limitation Department of Budget and Management (DBM) Local Budget Circular No. Washington. Manual on Position Classification and Compensation System. 63. 161. D. Position Classification and Compensation of Barangay Officials and Personnel Department of Budget and Management (DBM) Local Budget Circular No. 42. 2008.Study on Local Personal Services Expenditure Policy REFERENCES Administrative Order No.” World Bank Discussion Papers No. s. Alex Jr. 113. Civil Service Commission (CSC) Memorandum Circular No. 1992 Guidelines and Standards in the Establishment of Organizational Structures and Staffing Pattern for Local Government Units CSC-DBM Joint Circular No. Barbara. 2003. Schiavo-Campo. 1999. s. United Nations Department of Economic and Social Affairs (UNDESA).C. 7160. Republic Act (RA) No. Washington.00. http://web.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECT ORANDGOVERNANCE/0..html P a g e | 80 .Study on Local Personal Services Expenditure Policy Presidential Decree (PD) No. “Reforming the Civil Service. The Local Government Personnel Administration and Compensation Plans Decree of 1977. “Civil Service Reform in Developing Countries: Why Is It Going Badly?” Paper presented in the 11th International Anti-Corruption Conference held in Seoul. 01. 1989. Urging the President to Revise the Existing Compensation and Position Classification System in Government and to Implement the Same Initially Effective January 1994. Salvatore. Republic of Korea on 25-28 May 2003. 6758.” Finance and Development. 1991.C. 1977. Compensation and Position Classification Plan of 1989. Senate and House of Representatives Joint Resolution No.: International Monetary Fund. 1994. 31. 2005.: The World Bank.worldbank.un. pdf) World Bank. Civil Service Reform Paper. D. Geoffrey. 1996.” PREM Notes No. D. New York: United Nations United Nations Development Programme/ Management Development and Governance Division (UNDP/ MDGD).org/intradoc/groups/public/documents/UN/UNPAN001183. 1136. Washington. Shepherd. Unlocking the Human Potential for Public Sector Performance: World Public Sector Report 2005. “Rethinking Civil Service Reform. World Bank website on administrative and civil service reform. Local Government Code of 1991 Republic Act (RA) No.contentMDK:20133435~menuPK:286310~page PK:148956~piPK:216618~theSitePK:286305~isCURL:Y. 2001. (http://unpan1. Now. the Joint Commission on Local Government Personnel Administration was abolished by RA 7160. President of the Philippines. the formulation of more responsive local government personnel policies and the development of more appropriate organizational structure and staffing of the local government units.Study on Local Personal Services Expenditure Policy Annex Attachment No. and hereafter to be know as the Joint Committee. WHEREAS. 1 MALACANANG Manila BY THE PRESIDENT OF THE PHILIPPINES ADMINISTRATIVE ORDER NO. I. and the Chairman of the Civil Service Commission as Members. Gloria Macapagal-Arroyo. the Secretary of the Department of Finance (DOF). Section 2. do hereby order the following: Section 1. there is a need for coordinated efforts among the oversight agencies to facilitate and integrate their efforts to promote and develop the efficiency and effectiveness of local government units and to encourage them to adopt and implement rational personnel policies and position classification and compensation system as prescribed under existing legislation’. therefore. There is hereby created a Joint Committee on Local Government Personnel Administration (JCLGPA). by virtue of the powers vested in me by law and the Constitution. the Local Government Code of 1991. the Secretary of the Department of Budget and Management (DBM). The JCLGPA shall be composed of the Secretary of the Department of Interior and Local Government as Chairman. The President may P a g e | 81 . taking into account the existence of the unified position classification and compensation system. WHEREAS. CREATIING A JOINT COMMITTEE ON LOCAL GOVERNMENT PERSONNEL ADMINISTRATION WHEREAS. Ermita P a g e | 82 . rules and regulations to further develop the capacity of LGUs in the development. including the levels of pay and the allowances authorized at present. Section 7. Secretariat services shall be provided by the Organization. Section 6. The Joint Committee will issue the policy paper on this matter within 45 days after the issuance of the AO. This Order shall take effect immediately.Study on Local Personal Services Expenditure Policy appoint as member of this Joint Committee the sitting Head of the League of Governors. Section 5. implementation and monitoring of more meaningful personnel programs. Section 8. Expenses in the conduct of this program shall initially be shared by the Department of Budget and Management and the Department of Interior and Local Government. By the President Eduardo R. Section 3. It shall rationalize the compensation and pay plans of local government units. Position Classification and Compensation Bureau of the Department of Budget and Management. The Joint Committee will have the responsibilities of formulating policies. 8 66.1 71.4 67.8% in 2007 at the elementary level and from 62.1 72.4 58. INTRODUCTION Background.6 b/ 2000 92.7 53.9 59. although some improvement in the completion rate is evident at both the elementary and secondary level in 1990-2007.9% to 2007 at the secondary level (Table 1).9 75. student achievement scores remain at a fairly low level.1 75.9 73.0 44.6 2007 84.9 46.4 2002 90. 64% and 49% at the elementary level and secondary level National Achievement Test (NAT) in 2007 Moreover.7 70.7 62.3% in to 2000 to 61.4 2004 87.3 79.8 49.0 71. Basic education outcomes. In fact.3 59.1 b/ 35.6 54.4 72. the outcomes of basic education achievement tests have been erratic during the period. Castel 1.4 76.6 73. many analysts agree that the basic education subsector is in crisis today. etc.6 71. the average mean percentage score (MPS) was.3 71.7 44. 1990-2007 1990 Elementary level participation rate Secondary level participation rate Elementary level cohort survival rate Secondary level cohort survival rate Elementary level completion rate Secondary level completion rate Elementary level achievement score a/ Secondary level achievement score a/ 84.0 54.2 58.7 46.7 76. Also.2 71.0 61.5 70.7 72.0 72.3 72.1 70.4 64.4 58. For instance. In 1999.8 61. only 20% of grade 6 pupils attain 75% or better mastery level in the NAT for the elementary level while less than 1% of 4th year students achieve 75% or better master level in the NAT for the secondary level in 2005 (Abad FEF presentation).9 2003 88.7 60.1 60.0 68.3 2006 83.1 59.8 2005 84. Thus. EDCOM.8 71.THE SPECIAL EDUCATION FUND: PROSPECTS FOR POLICY IMPROVEMENT Rosario G. The lackluster performance overall of the Philippine basic education subsector in the last 20 years has been underscored in a number of studies (PESS.5 40. Manasan and Cynthia G. respectively. the net enrollment rate from declined from 92. Moreover. the Philippines ranked 36th in both the Math P a g e | 83 .1 61.2 71.3 a/ based on NEAT and NSAT for 1994-2000 and o NAT for 2003-2006 b/ refers to 1994 The sad state of the quality of basic education in the country is further underscored by the results of the Trends in International Mathematics and Science Study (TIMMS).7 54.4 69. Table 1.).7 69.0 66. the basic education completion rate continues to be low. To wit. At the same time. only 73 out of every 100 grade 1 entrants finish grade 6 and only 75 out of every 100 first year entrants finish high school.3 69.7% in 2000 to 84.6 51. the country’s competitive edge in the global economy that has been attributed to its well educated labor force is continuously being eroded. Moreover. Moreover. national averages mask wide disparities across regions. net enrollment rates vary from a low of 19% (ARMM) to a high of 56% (NCR) while completion rates ranged from a low of 39% (ARMM) to a high of 65% (Ilocos region). 1999-2003 Country Grade 8 Math 1999 2003 604 605 Singapore 587 589 South Korea 582 586 HongKong 585 585 Taiwan 519 508 Malaysia 467 441 a/ Thailand 403 411 Indonesia 345 378 Philippines a/ refers to result of 2007 test Grade 8 Science 1999 2003 568 578 569 571 549 558 530 556 492 510 482 471 a/ 435 420 345 377 Moreover. 1 2003 Report on Functional Literacy. the Philippines continues to under perform all the countries in the region (Table 2). the Philippines’ ranking remains low: 34th of 38 countries taking the Grade 8 Mathematics test and 43rd of 46 countries taking the Grade 8 Science test. Also. indicating pockets of under-served areas. Table 2. Although the Philippines posted some gains in the 2003 TIMMS (relative to the 1999 TIMSS). For instance. net enrollment rates vary from a low of 71% (Davao region) to a high of 81% (Bicol region) while completion rates ranged from a low of 31% (ARMM) to a high of 76% (NCR) at the elementary level (Table 3). Education and Mass Media Survey (FLEMMS) P a g e | 84 . Meanwhile. the Philippines has the highest spread in test scores of grade 4 pupils among all 25 participating countries in the 2003 TIMMS. In like manner. TIMSS scale scores. the functional literacy rate ranged from a low of 63% in ARMM to a high of 95% in NCR compared to a national average of 84% in 20031. As a result.The Special Education Fund: Prospects for Policy Improvement and Science tests given to eighth graders in 38 countries. disparities in the results of the national achievement tests at both the elementary and secondary level persist and appear to be rising (Table 4 and Table 5). 7 68.Central Luzon Region IV-A (CALABARZON) Region IV-B (MIMAROPA) Region V .3 60.2 39.0 75.Bicol Region Region VI .4 57.3 60.4 76.9 61.4 64.3 55.5 52.8 CENTRAL VISAYAS 60.2 49.1 1.9 37.0 78.9 45.5 1.6 40.7 45.3 63.2 58.3 Region I .3 60. SY 2006-2007 a/ Elementary level Region Net Enrollment Ratio (NER) 76.3 72.3 39.0 75.57.1 74.0 55.61 47.6 74.2 57.8 57.4 Completion Rate 76.9 47.8 47.1 61.9 45.8 58.7 73.5 74.9 CAR 54.5 55.0 55.0 63.8 47. 200420042005ILOCOS REGION 63.7 58.1 52.9 56.6 53.7 Minimum Maximum Max/ Min 200661.7 53.9 62.4 45.0 57.0 70.6 DAVAO REGION 52.Cagayan Valley Region III .8 81.8 58. Net enrollment rate and completion rate at the elementary and secondary level by region.7 72.SOCCSKSARGEN CARAGA Region ARMM CAR NCR PHILIPPINES Male (M) Female (F) Table 4.7 67.7 69.3 47.4 61.5 48.4 63.6 19.4 62.8 58.9 51.1 71.8 1.4 WESTERN VISAYAS 49.Ilocos Region Region II .The Special Education Fund: Prospects for Policy Improvement Table 3.4 65.4 76.7 58.8 66.2 62.5 EASTERN VISAYAS 67.Western Visayas Region VII . National achievement test for Grade 6.5 56.1 ZAMBOANGA PENINSULA 57.1 55.8 46.4 58.0 41.9 61.7 73.4 70.64 200768.3 44.3 38.2 49.6 62.2 75.3 39.1 NORTHERN MINDANAO 54.0 50.5 64.0 49.7 74.0 CARAGA 70.1 BICOL REGION 55.6 60.8 62.3 57.8 68.7 58.7 74.5 48.7 CAGAYAN VALLEY 53.5 59.8 67.Davao Region Region XII .Eastern Visayas Region IX .47 45.4 75.4 Secondary level Net Enrollment Ratio (NER) 52.2 60.1 74.2 CENTRAL LUZON 53.Northern Mindanao Region XI .2 71.4 NATIONAL CAPITAL REGION 49.5 70.Zamboanga Peninsula Region X .0 54.9 45.9 62.1 80.7 55.2 57.7 62.9 57.7 67.8 56.6 CALABARZON 63.1 1.8 76.8 79.7 42.5 38.1 67.9 TOTAL 54.8 74.3 67.5 31.1 54.1 Completion Rate 64.8 51.8 59.1 58.3 70.3 SOCCSKSARGEN 49.1 ARMM 45.1 61.6 40.0 69.5 53.7 47.2 75.0 MIMAROPA 62.9 59.2 52.7 55.9 74.56 P a g e | 85 .6 55.0 51.Central Visayas Region VIII . Table 6.3 29.3 13.0 43.8 46.3 64.5 1.3 46. Educational attainment of HH head and poverty status.9 48.3 25.2 49.4 3.3 40.6 65.0 46.6 Minimum Maximum Max/ Min 2007-2008 56.5 65.3 35.The Special Education Fund: Prospects for Policy Improvement Table 5.7 0.3 41.2 45.2 47.8 ARMM 32.2 50.1 CAR 40.2 NATIONAL CAPITAL REGION 38.0 P a g e | 86 .9 EASTERN VISAYAS 43.9 45.4 40.6 CARAGA 45.5 44.7 47.8 1.9 43.7 36.1 1.1 42.6 CENTRAL LUZON 36.5 43.7 42.8 61.2 BICOL REGION 35.9 TOTAL 37.2 64.5 44. poverty incidence among households which are headed by individuals who have had no education at all is 54%.2 40.1 46.9 49.3 1.1 MIMAROPA 36.3 51. only 2% of households headed by college graduates are poor (Table 6).2 52.5 SOCCSKSARGEN 35.1 44.6 26.8 44.3 ZAMBOANGA PENINSULA 40.8 65.2 CALABARZON 37.8 CENTRAL VISAYAS 37.56 The disappointing performance of the basic education subsector and the large disparities across regions is a cause of concern given the close link between educational attainment of household heads and poverty status of households.5 43. 2006 Educational attainment of HH head Poverty incidence % distn of poor HHs No education Some elementary education Elementary graduate Some high school High school graduate Some college College graduate All HHs 53. National achievement test for 2nd Year.5 CAGAYAN VALLEY 37.9 5. In contrast.7 43.2 41.9 14.7 50.4 DAVAO REGION 37.5 17.41 40.5 WESTERN VISAYAS 36.2 65.5 47.8 44.6 45.8 43.5 45.0 62.5 49.2 46.61 41.6 47.3 1.8 47.6 47.63 32.6 100.8 42.7 44.5 55.2 NORTHERN MINDANAO 37.5 62.4 52. Poverty incidence is found to be higher among households which are headed by individuals with lower educational attainment.2 8.0 47.0 41. In 2006. 2003-2007 2003-2004 2005-2006 2006-2007 ILOCOS REGION 38.9 49.3 52.9 45. delivered through the Department of Education (DepEd). This paper focuses on the need to ensure that all sources of financing for the basic education subsector are used in the most effective and efficient manner. if need be. the Special Education Fund (SEF).2% of GDP yearly in 2001-2007. Also. the analysis also suggests that the budget for capital outlays in the SEF of all LGUs as a group has declined between 2006-2008 despite the large shortage in classroom that persists during the period in many areas around the country. It is against this backdrop that the present study is undertaken. particularly at the secondary level. While SEF spending does not seem large when compared to either general government education spending (7%-9%) or total DepEd spending (7%-10%). Basic public education is still largely the responsibility of the central government. On the other hand. some LGU officials as well as some DepEd officials point out that some Local School Boards allocate significant portions of their SEF on sports activities and competitions at the expense of instructional/ academic activities of schools.2 billion in 2007. SEF expenditures increased from PhP 7. it is substantial when reckoned relative to DepEd non-personal services spending (41%-86%) or DepEd maintenance and operating expense or MOOE (71%142%) (Table 7). notwithstanding the devolution of many basic services to LGUs. LGUs do provide supplementary funding support to public basic education because of they have access to a sustainable source of financial resources that are earmarked for the basic education subsector.The Special Education Fund: Prospects for Policy Improvement Objective of the study. In particular. this study aims to review and assess LGUs’ current practice in the allocation and utilization of the Special Education Fund (SEF) and to recommend improvements in the utilization of the SEF. The monies in the SEF comes from an additional 1% tax on real property that LGUs are mandated by the Local Government Code to impose and collect. data from the Basic Education Information System (BEIS) on the actual deployment of locally funded teachers across schools show that many of these teachers are assigned in a sub-optimal manner such that in SY 2007-2008 many LGU/ SEF-funded teachers were assigned in public elementary and secondary schools with excess teachers even while the actual number of LGU/ SEF-funded teachers who were assigned in teacherdeficit public elementary and secondary schools fell short of the required number (net of the number of teachers actually deployed by the DepEd).5 billion in 2001 to PhP 14. At the same time. The SEF income of all LGUs in the aggregate grew from PhP 8. P a g e | 87 . Aggregate SEF spending is fairly stable when reckoned relative to GDP. The analysis below suggests that the current allocation of the SEF is going to less efficient uses. However.1 billion in 2007.8 billion in 2001 to PhP 12. at 0. For instance. 022 1. SEF Income and Expenditures.395 1.580 11.956 6.718 145.265 2.5 7.440 5.100 11.136 12.5 80.287 9.0 85.495 7. if one assumes that all of the SEF expenditures of all LGUs are spent on school level MOOE and if the SEF were distributed across LGUs in direct proportion to enrollment.5 8.005 7.887 2.0 142.702 6.2 8.311 1. 2001-2007 (in million pesos) 2001 2002 2003 2004 2005 SEF Income Province Cities Municipalities SEF Expenditures Province Cities Municipalities Total LGU Educ Expd Province Cities Municipalities DepEd Expd incl.824 2.067 2.816 2. SBP SEF expd as % of Gen Gov Educ Expd SEF expd as % of total DepEd spending SEF expend as % of DepEd non-PS spending SEF expend as % of DepED MOOE Source of basic data: BLGF SIE 8.074 107.707 7.537 1.920 10.875 2.226 2.4 times the DepEd allocation for school level MOOE of secondary schools following the regular curriculum (Table 8).175 9.198 10.9 85.In particular.397 1.4 10.511 1.7 135.411 1.456 4.153 2.6 7.038 7.607 7.838 1.510 5.923 108.722 2.016 9.340 2006 13.167 8.2 9.063 1.554 5.016 2.3 120.376 12.3 61.002 1.0 6.1 121.516 1.459 100.4 times the DepEd allocation for school level MOOE of elementary schools and 1.182 122.180 8.7 In the aggregate.0 8.916 10.167 2.679 2. SY 2007-2008 (in pesos) DepEd School Level MOOE per student elementary level secondary level regular curriculum tech-voc curriculum Aggregate SEF expenditure per student 207 500 700 692 P a g e | 88 .646 8.669 8.047 6.384 1.155 2.883 13.104 2.182 2.860 7.4 83.0 8. SEF expenditure per student vs.774 1.7 70.068 2.249 1.5 7.658 5.0 86. Table 8.7 139. then per student SEF spending would equal to PhP 692.393 105.377 4.807 2.100 8.324 2007 14.620 2.9 73.179 13. SEF expenditures per student in 2007 is significantly higher than the DepEd allocation for school level MOOE.5 9.953 1. DepEd SchoolLevel MOOE per student.062 5.744 1.990 7.854 1.515 4.451 1.941 109.6 41. This figure is estimated to be about 3.191 8.693 1.246 12.7 7.365 11.826 1.010 6.424 2.0 7.The Special Education Fund: Prospects for Policy Improvement Table 7.352 2.219 2.427 10.691 2. Culture and Sports or DECS) is not one of the national government agencies affected by the devolution program pursued following the enactment of the LGC which involved the transfer of personnel and facilities from national government agencies to LGUs and which subsequently reduced the budgetary allocations of said agencies. other things being equal. 2006 LGU income class Municipalities LGU income class Cities First Second Third Fourth Fifth 143 87 68 59 45 NCR cities First class non-NCR Second/ Third Fourth Fifth 1. However. LEGAL FRAMEWORK The Local Government Code does not explicitly devolve the provision of basic education. teachers and the community itself in the governance of the schools. On the other hand. In other words. the LGC gives LGUs access to a financing source. per student SEF spending of 1st income class municipalities is more than three times as large as fifth income class municipalities (Table 9). Median SEF spending per pupil in muncipalities and cities classified according to LGU income class. It calls for the empowerment of schools in making decisions that improve quality of learning and for the establishment of school and community networks. the Basic Education Governance Act of 2001 (Republic Act 9155) envisions a different kind of decentralization in the basic education subsector. To wit.938 669 453 371 249 2. emphasizing the need for the greater participation of parents. This occurs primarily because the more urbanized LGUs tend to have larger real property tax base as a result of the higher property values in these LGUs compared to less urbanized LGUs. P a g e | 89 . per student SEF spending of NCR cities is almost 3 times as large as that of first income class non-NCR cities and almost 8 times as large as 5th income class cities. The Department of Education (then called the Department of Education. Table 9. Moreover.The Special Education Fund: Prospects for Policy Improvement Just as there are wide disparities in basic education outcomes. On the other hand. the provision of basic education arguably became the shared responsibility of the central government and local government units. per student SEF spending of cities is greater than that of municipalities regardless of the income class of LGUs. given the important role LGUs play in the financing of the school. the Special Education Fund (SEF). RA 9155 envisages decentralization in the tradition of what has come to be known in the education literature as school-based management. Because of this. which is earmarked for the operation and maintenance of public schools. Nonetheless. the LGU is naturally one of the major stakeholders in school-level governance. there are also substantial disparities in per pupil SEF spending across LGUs of different income classes. such as athletic meets. Under RA 5447. while the provisions of the LGC are not entirely inconsistent with that of RA 9155. In the case of provinces. there are certain mismatches that cause confusion. 20% to the SEF of the province and 30% to the Bureau of Treasury (BTr). tasks and responsibilities of the different units in the education bureaucracy and the empowerment of schools. including that of the Board of National Education. city and municipal levels which were composed of the provincial/ city division P a g e | 90 . To wit. The amounts remitted to the BTr were meant to be expended exclusively for stabilizing the SEF in municipalities. if not discord. (v) the purchase and/or improvement. entitled “An Act Creating a Special Education Fund to be Constituted from the Proceeds of an Additional Real Property Tax and a Certain Portion of the Taxes on Virginia-Type Cigarettes and Duties on Imported Leaf Tobacco Defining the Activities to be Financed. (ix) the granting of government scholarships to poor but deserving high school graduates who intend to enroll in priority courses in higher education institutions. (vii) the implementation of the existing program for citizenship development in barrio high schools. and (x) the promotion of physical education. cities and provinces. (ii) the construction and repair of elementary school buildings. The Special Education Fund was originally created under Republic Act (RA) No. and simple laboratory devices for elementary and secondary classes.The Special Education Fund: Prospects for Policy Improvement As will be evident below. including spare parts needed by the Bureau of Vocational Education and secondary schools offering vocational courses. repair and refurbishing of machinery. (vi) the purchase of teaching materials such as workbooks. printing and/or purchase of textbooks. (iii) the payment and adjustment of salaries of public school teachers. and Appropriating Funds There from. approved in accordance with existing laws to be used in all public schools. Perhaps key to improving the utilization of the SEF is finding a better alignment of the provisions for the LGC on the membership in the Local School Board and the allocation of the SEF with the provisions of RA 9155 on the roles. technical and similar equipment and apparatus. teachers' guides. 5447. (viii) the undertaking of education research. and the acquisition of sites. 50% of the collections from the additional 1% real property tax imposed under RA 5447 went to the SEF of municipality where the property subject to tax is situated. laboratory.” which took effect in 1969. flip charts. (iv) the preparation. forms and pamphlets. 60% of the collections from the additional 1% tax on real property went to the SEF of the city while 40% went to the BTr. RA 5447 called for the creation of Local School Boards (LSBs) at the provincial. the SEF was meant to be expended exclusively for the following activities of the Department of Education: (a) the organization and operation of extension classes that may be needed to accommodate all children of school age desiring to enter Grade I. atlases. the allocation and utilization of the SEF was largely under the control of the then Department of Education. science and mathematics teaching aids. Republic Act 5447. folk schools and adult education classes. In the case of cities. Creating School Boards for the Purpose. In the case of provinces. the LGC provides that the proceeds from the additional one percent (1%) tax on real property shall be automatically released to the local school boards (Section 272). the local treasurer. At the same time. purchase of books and periodicals. cities and municipalities. educational research.” (iv) duly elected president of the federation of parents-teachers associations. as the case may be. and (iii) sports activities at the division. First. municipal. may levy and collect an annual tax of one percent (1%) on the assessed value of real property which shall be in addition to the basic real property tax and that the proceeds thereof shall exclusively accrue to the Special Education Fund (Section 235).The Special Education Fund: Prospects for Policy Improvement superintendent/ district supervisors as chairman and the representative of the governor/ city mayor/ municipal mayor. (ii) local treasurer. and maintenance of school buildings and other facilities of public elementary and secondary schools. and sports development as determined and approved by the Local School Board. the proceeds are divided equally between the provincial and municipal school boards. (v) duly elected representative of the teachers’ organizations. the LSB is mandated (i) to determine the allocation of the school board budget. Section 100 provides that the annual school board budget shall give priority to the following: (i) construction. (ii) to authorize the local treasurer to disburse funds from the SEF and (iii) to act as an advisory committee to the Sanggunian on educational matters (Section 99). facilities and equipment. and (vi) duly elected representative of the non-academic personnel of public schools in the LGU (Section 98). (ii) establishment and maintenance of extension classes where necessary. The Local Government Code (LGC) of 1991 amended RA 5447 and provides that a province or city. repair. or a municipality within the Metropolitan Manila Area. Second. (iii) representative of “pederasyon ng mga sanggunian kabataan. The Local Government Code contains two provisions that pertain to how the SEF is to be allocated. Section 272 provides that “the proceeds [of the SEF] shall be allocated for the operation and maintenance of public schools. Under RA 5447. The LSB is composed of the local chief executive and the division superintendent/ district supervisor of schools as cochairmen and with the following as members: (i) chairman of the education committee of the Sanggunian. city or municipality in accordance with the criteria set by the Bureau of Public Schools or by the Bureau of Vocational Education. and approved by the Secretary of Education. the LSBs were mandated to determine the allocation of the SEF for the operation and maintenance of public schools within the province. the representative of the local council and the representative of the League of Parents-Teachers Associations as members. district. In turn. the LGC calls for the creation of the Local School Board (LSB) in provinces.” P a g e | 91 . Furthermore. construction and repair of school buildings. and barangay levels. Local Government Code (LGC) of 1991 (Republic Act 7160). titling and improvement of school sites. and facilities. regional. On the other hand. the fact that “in case of provinces. municipal and barangay levels. Section 17 (b) (4) calls on cities to provide “all the services and facilities of the municipality and province.” It is curious. municipal roads and bridges. (g) expenses for school sports activities at the national. that the Section 17 does not specifically list education or school buildings as one of the basic services and facilities that provinces should provide. the Department of Budget and Management (DBM) and Department of Interior and Local Government (DILG) provided the implementing guidelines on the utilization of the fund. with the justification that this expense is apparently part of the cost of operating and maintaining schools. Section 17 (b) (2) (viii) lists “infrastructure facilities intended primarily to service the needs of the residents of the municipality and which are funded out of municipal funds including but not limited to. Section 17 of the LGC enumerates the basic services and facilities that LGUs are mandated to provide. non-formal. The payment of salaries and authorized allowances of the non-teaching personnel was a late addition to the list. P a g e | 92 . the following: …. Apparently taking off from Section 100 of the LGC. instructional materials. In particular. Section 2 also asserts that the state will encourage local initiatives towards the improvement of the quality of basic education.…” as one of the basic services and facilities that municipalities are tasked to provide. including cocurricular activities. Culture and Sports or DECS). It was also clarified that the payment of salaries and authorized allowances of teachers hired to handle new extension classes of public elementary and secondary schools is included under operation and maintenance of public schools.(ii) support for education. and periodicals. (b) construction. That is. the proceeds [of the additional 1% SEF tax] shall be divided equally between the provincial and municipal school boards” (Section 272). however. Basic Education Governance Act of 2001 (RA 9155). district. RA 9155 calls for greater decentralization in delivery of basic education services in the tradition of schoolbased management. notwithstanding. and (h) other DECS/DepEd related activities. (e) acquisition/ procurement of books. (f) acquisition of equipment. repair and maintenance of school buildings. and in addition thereto. including information technology resources. division. police and fire services and facilities. remedial and summer classes and payment of salaries and other authorized allowances of public school teachers. the expanded list of priorities included the following: (a) operation and maintenance of public schools. (d) educational research. including organization of extension. it calls for the empowerment of schools and learning centers “to make decisions on what is best for the learners they serve” (Section 2 – Declaration of policy). school buildings and other facilities for public elementary and secondary schools. Joint Circulars issued by the Department of Education or DepEd (formerly the Department of Education. (c) other needed capital outlays such as the purchase.The Special Education Fund: Prospects for Policy Improvement On the other hand. the regional offices shall have the authority. creating in the school an environment that is conducive to teaching and learning. the DepEd formulated the Basic Education Reform Agenda (BESRA). On the other hand. The regional office is also tasked to approve the proposed staffing pattern of schools divisions and schools districts. To better implement RA 9155. administering and managing all personnel. universal school participation and elimination of drop-outs and repetition in first 3 grades. the schools (headed by the school head) are given the authority. accountability and responsibility for setting the vision. and P a g e | 93 . plans and standards and for the monitoring and assessment of national learning outcomes. recommending the staffing complement of the school based on its needs. and encouraging the active participation of teachers organizations. accountability and responsibility for the development of regional basic education policy framework. deployment and evaluation of division supervisors and district supervisors.The Special Education Fund: Prospects for Policy Improvement RA 9155 establishes the application of the principle of shared governance in the delivery of basic education. monitoring the utilization of funds provided by the national government and LGUs to schools and learning centers. nonacademic personnel of public schools. goals and objectives of the school. the office of the Secretary of education shall have the authority. implementing the curriculum and being accountable for learning outcomes. accountability and responsibility for the formulation of national basic education policies. RA 9155 gives schools division offices the authority. the schools district supervisor is responsible for curricula supervision and providing professional and instructional advice and support to the school heads and teachers/ facilitators of schools and learning centers in the district. task and responsibility inherent in the office and for which it is principally accountable for outcomes. evaluate the performance of division superintendents and assistant division superintendents and to approve the establishment of public and private elementary and secondary schools and learning centers. developing and implementing the school education and school improvement plan. On the other hand. Meanwhile. and parents-teachers-community associations in school level decision making. The BESRA aims to achieve: universal completion of full cycle of basic education schooling with satisfactory achievement levels by all at every grade/ year. supervising the operations of all public and private elementary and secondary schools and learning centers and ensuring compliance of the quality standards of basic education programs. establishing school and community networks. plans and standards and for the monitoring and assessment of regional learning outcomes. This principle “recognizes that every unit in the education bureaucracy has a particular role.” In line with this principle. physical and fiscal resources of the school. Finally. accountability and responsibility for the formulation and implementation of division basic education plans. recruitment. mission. (iii) school-level reporting of learning outcomes to parents and the community. the LGC provides that schools district supervisor shall seat as co-chair of the Municipal School Board. and (iv) school-driven representation in the Local School Board. perhaps because there is almost a one-to-one correspondence between the municipality and the schools district. these mismatches cause confusion. and (ii) the institutionalization of a process for the school and community to continuously improve the school and learning outcomes thereof. the BESRA emphasized the need for (i) presence/ assignment of a head for every school. P a g e | 94 . One. Under RA 9155.2 In this context. the mandate of schools district supervisors under RA 9155 is largely limited to curriculum and instructional supervision. are not congruent with one another either. it is the school heads who prepare and implement the school improvement plans while the schools division superintendents are tasked to prepare and implement the division education development plan. A closer reading of both the LGC and RA 9155 reveals some gaps within each one as well as mis-alignments between the provisions of the LGC and RA 9155. physical and fiscal requirements of the schools vis-à-vis the total amount of resources that are available to the school from various sources. if not discord. there are some municipalities which are divided into two schools districts. At the same time. However. it is the school heads who are responsible and accountable for administering and managing the fiscal resources of the school while the division superintendents are tasked with the utilization of funds provided to schools including those provided by the LGUs.The Special Education Fund: Prospects for Policy Improvement Universal coverage of out-of-school youths and adults in provision of basic learning needs. alternative learning systems and private sector participation KRT 5: Change institutional culture of DepEd to better support KRTs As part of attaining KRT 1. The BESRA has five key result areas (KRTs). 2 However. The provisions of the LGC and RA 9155. namely: KRT 1: Get all schools to continuously improve KRT 2: Enable teachers to further enhance learning outcomes KRT 3: Increase social support to attainment of desired outcomes KRT 4: Improve impact on outcomes from complementary early childhood education. including the formulation of school improvement plan and the establishment of school governing councils. central to the achievement of KRT 1 is the adoption of the school-based management framework. schools district supervisors are expected to collate and evaluate the personnel. Consequently. and in a general lack of clarity in the implementation of both laws especially with respect to the utilization of the SEF. while not entirely inconsistent. Assessment of legal framework. In other words. the use of the term “operation and maintenance of public schools” in Section 272 of the LGC is the subject of varying interpretations. and barangay levels. As such. These findings notwithstanding. On the other hand. sports activities at the division. Three. the DepEd has put in place a number of instruments and protocols (mostly based on the Basic Education Information System) like the teacher deployment analysis and the classroom shortage analysis that will provide good support for evidenced-based resource allocation at the school level. district supervisors may still be able to adequately represent the schools in the Local School Boards if they have access to good quality information on school level learning outcomes and the flow of resources (personnel. this situation raises some issues on the quality of representation that district supervisors provide in the LSBs in terms of providing a school-based perspective. the key informant interviews and the survey instrument sent out to LGUs for the purpose of this study suggest that the connection between these instruments/ protocols are largely not being made even at the schools division level where LSB representation is not an issue. Key informant interviews done during the course of this study suggest that some schools district supervisors are not fully informed about how much resources schools actually receive from the DepEd budget and how these resources are actually used. However. municipal. Four. district.The Special Education Fund: Prospects for Policy Improvement The existing arrangement regarding representation of the DepEd in the Local School Boards is also not quite consistent with the BESRA advocacy for a school-driven representation in the LSBs. programs and activities of the DepEd related to sports competition to the Philippine Sports Commission (PSC) even while school sports and physical fitness remains part and parcel of the basic education curriculum. the LGC provides that the annual school board budget shall give priority to. one of the guiding principles of good expenditure assignment in fiscal decentralization is the need for greater clarity in the P a g e | 95 . among other activities. many division superintendents and district supervisors interpret the provisions of the LGC to mean that participation in the barangay. budgetary and physical) to schools. regional and national level of the Palarong Pambansa should be one of the priorities of the SEF. As a result. At the moment. division. However. district. On the one hand. To further complicate matters. Two. RA 9155 transferred all functions. the ambiguity in the use of the term “operation and maintenance” gives LSBs greater flexibility to respond to actual needs at the level of the schools in the LGU. there appears to be some confusion on where one exactly draws the line between school sports and physical fitness and sports development/ sports competition. an Executive Order that was issued more recently has reinstituted the administrative attachment of the PSC to the DepEd. Note that schools district supervisors in some sense do not play a central role in the flow of budgetary information as well as actual budgetary resources into schools with the greater decentralization of resources to the schools within the DepEd system in more recent years. Despite this development.5 19. MOOE and CO in SEF expenditures.5 27.9 26.9 24. 2005-2008 Provinces Munis Cities All LGUs PS 2006 2007 2008 MOOE 2006 2007 2008 CO 2006 2007 2008 18.6 54. respectively) than municipalities (15%-21%).0 21.8 48.5 47. the bulk of the SEF (44%-49% in 2006-2008) is spent on maintenance and other operating expenditures (MOOE).6 55. On the other hand. This stems from the fact that if all levels are made responsible for the same functions. Allocation for Locally Funded Teachers Recognizing the urgent need to address the huge shortfall in the required number of teachers in public elementary and secondary schools.7 43. Table 10.4 48.1.6 47.8 34.2 34.5 Source of basic data:SEF survey conducted under ADB TA 4778 All levels of local governments allot about half of their SEF on MOOE. it becomes extremely difficult to exact accountability from any one level of government.6 24.7 34. an analysis of the current allocation of the SEF reveals that the share of personal services in total SEF expenditures of LGUs went up from 27% in 2006 to 29% in 2008 for all P a g e | 96 .2 41.9 30.3 14.676 new teacher items were created in the DepEd budget in 2005-2007 thereby reducing the teacher deficit from 37. CURRENT PRACTICE ON ALLOCATION OF SEF In the aggregate. However.7 18.5 46.8 31. municipalities and cities tended to spend a bigger portion of their SEF on personal services (31%-35% and 27%-30%. Budget share of PS.5 22. 37.8 20.9 46.333 as of the end of SY 2007-2008 (Table 11).4 29.6 50. provinces and cities tended to allocate a larger proportion of their SEF on capital outlays (25%-35% and 23%-30%.8 22. On the other hand.7 23.1 28. in the aggregate.8 29.5 29.6 22. however. 3.6 29.8 47. 3. 27%-29% of the SEF of all LGUs combined was allocated to personal services while 23%-30% went to capital outlays in 2006-2007 (Table 10). respectively) than provinces (19%-21%) in 2006-2008.986 in SY 2003-2004 to 9.The Special Education Fund: Prospects for Policy Improvement assignment of functions across levels of government. The Special Education Fund: Prospects for Policy Improvement LGUs in the aggregate (Table 10).676 9. Addressing Input Gaps in Basic Education.250 20.488 Number of teacher positions created in 2004-2007 Gap as of end of SY 2007-2008 37. In like manner. Average number of teaching positions charged to SEF per LGU.333 19.952 9. The response rate was 67% provinces (54 out of 81).087 in 2007 while the number of locally funded teachers charged against the General Fund (GF) of LGUs increased by 33% from 3.009 7. 20062008 2006 2007 2008 Provinces 68 69 61 Munis 12 12 13 Cities 65 64 65 Source: SEF Survey under TA 4778 Data from the Basic Education Information System (BEIS) of the DepEd corroborates these findings. 65% for cities (88 out 136) and 59% for municipalities (888 out of 1495). 2003-2007 Teacher Requirements Teacher deficit as of SY 2003-2004 Additional teachers required for 2004-2007 due to enrollment growth Total teachers required 37.536 39.275 in 2004 to The figures cited in Table 11 are obtained from a survey conducted by the Department of Budget and Management (DBM) under ADB TA 4778 in the second quarter of 2008 on the utilization of the SEF in 2006-2008. The BEIS shows that the number of SEF funded teachers who are assigned at public elementary schools rose 24% from 7. However. Table 11.023 47.238 a/ without double shifting b/ A total of 41. 3 P a g e | 97 .986 Classroom Requirements Classroom deficit as of SY 2003-2004 a/ Additional classrooms required for 2004-2007 due to enrollment growth Total classrooms required Net increase in number of classrooms between SY 2003-2004 and SY 2007-2008 b/ Gap as of end of SY 2007-2008 31.3 The same trend is evident for cities and municipalities. Table 12.353 in 2004 to 9.546 new classrooms were built from various funding sources in 2004-2007 but many of these were actually used to replace dilapidated or substandard classrooms. the average number of SEF funded teachers based on the DBM survey hardly changed in 2006-2008 with the exception of those charged to the SEF of provinces (Table 12). SEF expenditures of provinces showed some contraction in the budget share of personal services between 2007 and 2008. 265 8.682 6.354 in 2007 (Table 13). Meanwhile.911 1. Thus.369 in SY 2007-2008 (Table 14). At the same time.576 18. Table 13.The Special Education Fund: Prospects for Policy Improvement 4.407 2.948 11.756 of which: SEF 7.006.609 Sec Level of which: SEF LGU PTCA Both Levels of which: SEF LGU PTCA 18.939 19. the actual number of LGU/ SEF-funded teachers in all teacher-rich public secondary schools exceeded the required number by 8.017 LGU/ SEF-funded teachers were assigned in public elementary schools with excess teachers in SY 2007-2008.648 more than the actual teacher deficit nationwide even if the excess LGU/ SEF-funded teachers were re-deployed to fill in the gap in teacher-deficit schools.139 29.891 42. the actual number of LGU-funded teachers hired in SY 2007-2008 was 5. 2004-2007 2004 2007 Elem Level 10. Total number of locally funded teachers.854 20. the number of locally funded teachers charged against the SEF and the GF continued to rise between 2004 and 2007. For instance.275 4. These results are quite surprising given the fact that the teacher deployment analysis using the color coding scheme has been in place P a g e | 98 .500 S ource of basic data: D epE d B E IS On the other hand.087 LGU 3. In contrast. the some 12.915 less than the required number in all teacher-deficit public secondary schools in SY 2007-2008. the actual number of LGU/ SEF-funded teachers who were assigned in teacher-deficit public elementary schools fell short of the required number (net of the number of teachers actually deployed by the DepEd) by 6. While the numbers are not as dramatic in the case of public secondary schools.800 6.469 6. BEIS data on the actual deployment of locally funded teachers across schools show that many of these teachers are assigned in a sub-optimal manner at the level of the school and the LGU.353 9.302 3.098 11. the actual number of teachers funded out of LGUs’ GFs and SEFs was 8.628 23.354 PTCA 4.389 8.116 3. The Special Education Fund: Prospects for Policy Improvement for quite some time now and appears to be widely known within the DepEd community. Nonetheless.992) (6. On another note. there are also many LGUs which pay locally funded teachers the DepEd rate. Furthermore. if such disparities in the compensation of teachers have any impact on learning outcomes at the school level. SY 2007-2008 a/ Elementary Level Secondary Level Regions Remaining Excess teacher deficit teachers after inclusive of assignment of LGU/ SEF LGU/ SEF funded funded teachers teachers (12) (29) (297) (1.915) 437 543 733 638 421 611 887 826 250 327 94 301 220 271 1.066 2. it is commendable that all the LSBs visited in the conduct of this study report that all locally funded teachers passed the licensure examination for teachers (LET). Table 14. these LSBs also report that all locally funded teachers are ranked in accordance to DepEd guidelines.627) (176) (353) (253) (1.479) (256) (345) (493) (329) (429) (338) (739) (166) (934) (8. locally funded teachers are paid an honorarium of PhP 2. however. Remaing Numbers of Excess/ Deficit Teachers Given Actual Number of LGU/ SEF-funded Teachers. It is not clear.000 759 619 307 83 473 752 286 712 413 152 12.500 per month.405) (136) (162) (72) (351) (107) (305) (108) (88) (498) (15) (769) (24) (1.146 204 98 8. In some areas.369) 852 1.017 Remaining Excess teacher deficit teachers inclusive of after LGU/ SEF assignment funded of LGU/ SEF teachers funded (69) (176) (753) (1.006 Region I Region II Region III Region IV-A Region IV-B Region V Region VI Region VII Region VIII Region IX Region X Region XI Region XII CARAGA NCR CAR ARMM Total Philippines a/ Required number of teachers computed assuming that a teacher-pupil ratio of 1:45 for both elementary and secondary level Key informant interviews during the field visits also reveal that locally funded teachers are paid salaries/ honoraria that are much lower than the compensation of nationally funded teachers. however. P a g e | 99 .842 597 550 555 1. This result is quite unexpected in the case of municipalities and cities in the light of Section 17 of the LGC which explicitly included school buildings as one of the facilities that municipalities and cities are mandated to provide. there are two contrasting views from the DepEd. Basey in Samar. uniforms and travel allowances for representation in district. Tomas in Davao del Norte. A similar movement is registered by the budget share of capital outlays of provinces and cities. On the other hand. the lackluster support for school building construction by provincial governments in the aggregate may be linked to the fact that education and school building construction is not specifically mentioned in the list of mandated services and facilities for provinces under Section 17 of the LGC. On the other hand. however. In addition. Barbara in Iloilo. San Jose del Monte. Davao del Norte. division.2. Allocation for Sports Competitions The allocation for sports competitions in the LSB budget vary widely across LGUs. the budget share of capital outlays in municipalities was stagnant. and Agusan del Sur. many of the schools division and schools district officials interviewed for this study assert that the Palaro 4 As part of this study. especially if double shifting is considered to be a stop-gap measure rather than as a long-term policy. Despite this. the limited sample from the field visits undertaken as part of this study4 suggests that the amount is not inconsequential. Guimaras. Tacloban. Leyte. Pasig City). The emphasis on sports competition in the LSB budget is surprising considering that RA 9155 transfers all functions. and travel allowances and registration fees for training of coaches. some DepEd central office officials appear to view the current LSB allocation as one which overly emphasizes sports competitions at the expense of instructional/ academic activities of schools. Butuan. Surigao. These LGUs include the following: the provinces of La Union. However. the cities of Quezon. Sta. the overall disappointing trend in LGU spending on school building construction may have also been influenced by the disincentive effect of the Roxas Law which is biased towards giving a uniform share per legislative district. Tubay in Agusan del Norte and Trento in Agusan del Sur. However. Bayugan. 2008 at the Linden Suites. field visits to 25 LGUs were undertaken during which LGU officials and DepEd schools division and schools district officials were interviewed. However. Tagaytay. The allocation for this item includes support for barangay sports. ranging from 10%30% of the LSB budget. Tagum and San Fernando (La Union). Iloilo. Iloilo. P a g e | 100 . Furthermore. and the municipalities of Bauang and Caba in La Union. Asuncion and Sto. many other LGUs officials who attended the consultation workshop last December 4. awards and incentives for outstanding performance in sports competitions. Palo in Leyte. programs and activities of the DepEd related to sports competition to the Philippine Sports Commission. 3. Allocation for Capital Outlays Table 11 above indicates that the lack of classroom continues to be a serious problem.3. On the one hand.The Special Education Fund: Prospects for Policy Improvement 3. regional and national sports competition (Palarong Pambansa). the budget share of capital outlays in the SEF of all LGUs as a group declined from 30% in 2006 to 23% in 2008 (Table 10). music festivals. science fairs. These officials were quick to add. 3. one DepEd regional director suggested that the DepEd central office should clarify and rationalize the current policy on school’s participation in the Palaro. and press conferences. on the one hand. One DepEd regional director pointed out that there is a need to rationalize the holding of these activities because they are not only costly to support but also because they take the time of teachers and students away from the classroom. municipal. Moreover. there is considerable variation across LGUs with respect to the allocation for citizen development programs and co-curricular activities in their LSB budgets. cultural contests. Furthermore. While the budget share for citizens development/ co-curricular activities is not as large as that allocated for sports competitions. on the other. district. and barangay levels (among other things). as with the allocation for sports competitions. budgetary support coming from the central/ regional office. that they do recognize the importance of physical development and sports in the well-rounded development of the child but stressed that there is a difference between physical education and school athletics. if any. they note that the Philippine Sports Commission has been “re-attached” to the DepEd more recently. Allocation for Citizen Development Programs and Co-curricular Activities Again. P a g e | 101 . One of the specific recommendations is to limit the number of national level competitions and to have some of the competitions go up to the level of the division or region only. and the development of athletes (which is the objective of the Palaro). the limited sample from the field visits showed numbers that range from 5%-25% of the LSB budget. On the other hand. however. The field visits also found an emerging third perspective on LSB spending on sports competitions from both LGU officials and DepEd field officials. they argue that the LGC provision on the use of the SEF is quite specific in saying that the LSB budget shall give priority to sports activities at the division. The activities supported under citizen development and co-curricular programs include academic competitions at various levels including quiz bee.The Special Education Fund: Prospects for Policy Improvement Pambansa is an activity that DepEd expects the field offices to participate in but for which there is little. they report that field offices are left with very little choice but to get the requisite financing for the holding of the various levels of the Palarong Pambansa from the SEF. One of the city mayors interviewed for this study said that he has cut the allocation for sports competitions in the LSB budget thinking that monies previously allotted to it will be put to better use if allocated to support the instructional needs of the schools in order to improve learning outcomes. math contests. Because of this.4. P a g e | 102 .e. and travel allowance/ registration fees of teachers attending training. the manner by which the LSB arrives at its spending priorities. While LSB members knew that this is not in consonance with the provision of the LGC on the earmarking of the proceeds of the additional 1% tax on real property for education. repair and maintenance of school buildings. receipts) and personnel doing work related to either RPT assessment and/ or collection against the SEF. i. interest expense for loans incurred to construct schoolbuildings.g. Key informant interviews suggest that this rule may have to be revisited because of the recognition that the availability of a motor vehicle aids school supervision. acquisition of motor vehicles for schools and district offices. Other Items Charged Against the SEF In addition to the items specifically mentioned above. The allocation for the acquisition of textbooks is particularly problematic because of the current policy on centralized procurement of textbooks. Use of SEF to Pay for the Cost of Tax Collection Key informant interviews during the field visits indicate that a number of LGUs (e.5. workbooks and worktexts. It is notable that this list is quite comprehensive and includes almost all of the inputs that are necessary for the operation of the schools. additional allowances for DepEd teachers. Some LSBs also provide allocations for reproduction machine and materials for student testing. Such response though well meaning will not be of much help in addressing gaps in the availability of textbooks. textbooks procured by the central office are not available in the market. LSBs trying to supplement the supply of textbooks from the center will most likely be procuring textbooks with titles that are different from those distributed by the DepEd central office. In some of these LGUs. these charges against the SEF amounted to 10%-20% of SEF income.. in Region 1 and CARAGA) charge expenses related to the cost of SEF collections like cost of accountable forms (e.The Special Education Fund: Prospects for Policy Improvement 3. Under this arrangement. Thus.g.. 3. textbooks. Many LSBs also provide allocations for activities related to alternative learning system (ALS) including honorarium of ALS teachers and materials.6. electricity and water utility expense of schools and district offices. But what is perhaps more important than the list of items that are actually charged against the SEF is the manner of how the SEF is allocated and spent. On the other hand. instructional materials. concerned LSB members opined that it is difficult to go against the local treasurer who has the authority to disburse funds from the SEF. school bags and supplies for distribution to students and stipend for scholars. the acquisition of motor vehicle using the SEF is not allowed under existing DBM guidelines. the list of expenses that are charged against the SEF varies across LGUs and schools but typical includes the following: honorarium of education supervisors and district supervisors.. despite high SEF spending per pupil in NCR. only 20% of elementary pupils in public schools in NCR achieved at least 60% mastery of subject matter compared to a national average of 37%. in 2005. or in some instances. the division superintendent/ district supervisor initiates the allocation process by preparing a budget proposal which reportedly consolidates the requests submitted by the schools heads/ principals to the division superintendent/ district supervisor. This is surprising considering that the formulation of the SIP is one of the milestones in the roll-out of the school-based management (SBM) under the BESRA. Such a process.1. however. one or two district supervisors say they refer to school improvement plans (SIP) formulated by the schools but this is not a common occurrence. to the provincial school boards. In the same year. In many LGUs. P a g e | 103 . to make their needs known and appeal for additional resources. On the whole. CURRENT INSTITUTIONAL ARRANGEMENTS DepEd-driven or LCE-driven LSB Budget Allocation Process Key informant interviews during the field visits suggest that SEF allocation is largely driven by the DepEd division superintendents/ district supervisors in sharp contrast to the widely held perception that local chief executives (LCEs) tended to dominate the allocation process in the LSB. The amount of inputs from the schools themselves in the preparation of the proposed LSB budget varies across LGUs. Moreover. The process appears to be consultative and participatory in some areas but less so in others. this does not tally with the BESRA call for school-level reporting of learning outcomes to parents and community. For instance. Many LCEs and Sanggunian representatives to the LSBs interviewed during the field visits report that they are essentially dependent on the recommendations of the DepEd division superintendent/ district supervisors because the latter knows the “needs” of the schools best. Again. less than 1% of elementary pupils in public schools in NCR achieved at least 75% mastery of subject matter compared to national average of 8%. LCE control of the LSB budget process is evident in only one of the 25 LGUs visited in the course of the study. 4. does not preclude some school heads/ principals from going directly to the local chief executive. In preparing the budget proposal for LSB deliberation. The observed lack of awareness of LSB members’ of basic education outcomes and the amount of resources available at public schools in the LGU from other sources may help explain why there seems to be a poor link between SEF spending and improvement in basic education outcome in some areas. LSB members’ familiarity on the amount of resources that schools receive from the DepEd appears to be even less.The Special Education Fund: Prospects for Policy Improvement 4. LSB members’ awareness of the indicators of education performance in their LGU is generally low although a few exceptions do exist. Lessons from Synergeia The experience of Synergeia project sites indicates a number of elements that are key to “re-inventing” the Local School Boards. On the other hand. For instance. school heads point out that the district offices tend to compete rather unfairly vis-à-vis the schools themselves. In some LGUs. In some areas. 4. parents and the community come together to discuss the current status of basic education. district offices get as much as 25% of the total LSB budget with district supervisors asserting that district offices do not get any allocation from the DepEd budget. First. It should be emphasized though that many of these elements are also found in the SBM and the BESRA. These events are seen not only as a good venue for informing the parents and the community at large of the performance of the school in improving learning outcomes but also for generating the support and commitment of various stakeholders. This arises because the link of the district supervisors with the secondary schools is non-existent. the SEF is distributed equally across all schools. teachers. performance assessment at the school level and the reporting of the results of the assessment to the parents and the community tends to improve accountability of the school heads by exerting pressure on them to manage school resources more effectively and efficiently. all public elementary and secondary schools in Quezon City receive a share of the city’s SEF. Second. the constraints and problems faced by the school and the alternative solutions thereof has been found to be beneficial to the school community itself. In some of these areas. such a situation tends to improve subsequent learning outcomes at the school. albeit limited. secondary schools do not receive any allocation from the SEF.2. In contrast. On the other hand.3. the holding of participative events like education summits and workshops where school officials. Some secondary school principals argue that the district supervisors do not present the needs of the secondary schools well.The Special Education Fund: Prospects for Policy Improvement 4. more remote elementary schools which then are left to rely on the meager resources of barangays and PTCAs. In turn. the LSBs of some of the municipalities of CARAGA tended to give greater priority to the bigger elementary schools over the smaller. reveal no clear pattern on how the LSB budget is allocated across schools. P a g e | 104 . Pattern of Allocation Across Schools Key informant interviews during the field visits. In Quezon City. secondary schools in other LGUs do have access to the resources of the SEF just like their counterparts at the elementary level. the SEF defrays 100% of the cost of electricity and water consumed by all elementary schools and 50% of that of all secondary schools. the expansion of the LSB membership to include NGOs. In a number of countries. the central government is generally considered to be better equipped than state and local governments to formulate a common minimum educational standard including curriculum design. production and distribution. mostly federal systems such as Brazil and India. The true extent of local control over teachers depends on whether or not the teachers are members of a unified national civil service with pay scales set by the relevant service commission. Thus. some teachers. curriculum design. in most developing countries teachers are central government civil servants. textbook distribution is also centralized because of the belief that it will result in greater cost efficiency due to scale economies in centralized procurement. countered that while scale economies do exist in centralized procurement of textbooks. however. distribution of teachers and technical assistance to underperforming areas are also commonly considered to be functions of the central government. Textbook procurement. one of the international consultants under ADB TA 4778. Some federal governments (for example. Central governments are also seen to be best placed to address equity issues. In many countries. Teacher salaries. the United States) have successfully delegated the monitoring of compliance to standards to the state level of government but in other countries. monitoring and evaluation of the status of the education sector is also assigned to the central government. even in highly centralized systems. Textbook production and distribution is usually centralized in order to harmonize textbooks with curriculum design and development process. and private schools as non-voting members is also found to be advantageous. 5. where responsibility for provision of education is fully devolved. titled “International Experience on Expenditure Assignment in Education Sector” which is presented in full in Annex 1 of this report. Teacher salaries. with conditions of service determined by the public service commission or an independent teacher service commission. in tapping expertise available outside of the traditional LSB membership. business chambers. are civil servants of intermediate governments. Worldwide. P a g e | 105 . In a few countries. LESSONS FROM INTERNATIONAL EXPERIENCE 5 Standard setting. It helps in expanding the pool of allies and advocates. the same cannot be said of centralized distribution of textbooks. Thus. Some experts have. are usually paid from the recurrent budget of the administrative level to which teachers report. and in securing additional resources. community involvement in financing teachers’ salaries were found to help make schools more responsive to community needs.The Special Education Fund: Prospects for Policy Improvement Third. but the 5 This section draws from the paper of Glendal Wright. mainly in primary and secondary education. In many cases. Meanwhile. programs and activities of the DepEd related to sports competition to the Philippine Sports Commission (PSC) under RA 9155. This is evident. such as Tanzania. in a few cases. because teacher resistance to reforms of conditions of service designed to make them formally accountable to intermediate and local government remains a common impediment to system reform. For instance. for instance. 6. in what appears to be an excessive emphasis on the hiring of locally funded teachers and too little priority given to school building construction in the LSB budgets. and central governments for tertiary education. RECOMMENDATIONS The evidence from the analysis of BEIS school-level data and the information obtained from the key informant interviews during the field visits as well as the LGU survey conducted under this study indicate some dysfunctions in the utilization of the SEF. Construction and Maintenance. the priority currently given to sports competition in the current SEF spending of LGUs appears to be inconsistent with the transfer of all functions. including federal states such as Pakistan.The Special Education Fund: Prospects for Policy Improvement practice is controversial with teachers’ unions because it can create inequities in salaries and student-teacher ratios among poorer and richer communities. For example. Responsibilities also tend to be divided according to the level of schooling. the central government finances both construction and maintenance of classrooms. Specifically. and the actual pattern of SEF spending by LGUs. lower level local governments are responsible for primary schools. Communities and their representatives may also share costs. mid-level governments for secondary schools. School building construction and maintenance are traditionally among the most decentralized education sub-functions in many countries. Constructive dialogue with the relevant teacher unions and groups is an important priority in education reform. Given this. P a g e | 106 . However. there appears to be a mismatch between what appears to be the actual needs of the school based on school level data. on the one hand. and prestige. on the grounds that they lose inter-jurisdictional mobility. the use of the terms “sports activities” and “sports development” in the LGC when it talks about the utilization of the SEF needs to be further clarified. Responsibilities for construction and maintenance are often divided between government levels in some countries. teachers have resisted reforms that would have placed them under the jurisdiction of local or intermediate governments. comparable conditions of service. in some countries. the province provides resources for construction and major rehabilitation while lower level local government units conduct routine maintenance. On the one hand. For example. the “all-or-nothing” track may not be as appropriate with respect to other expenditure items. there are two non-mutually exclusive ways of implementing a “rulesbased” revision of the SEF utilization guidelines. Corrective action/s in this regard may follow two alternative approaches. It involves the joint issuance by the DBM. The first approach may best be described as a “rules-based” approach. teacher salaries. textbooks) or by mandating them to confine their SEF spending to a well-defined list of expenditure items without room for any deviation. In turn. 6.g. there is a need to clarify expenditure assignment in the education sub-sector across different levels of government overall. motor vehicle acquisition) on the condition that specific provisions are met.” Related to this. The benefits from such a restriction are justified on the basis of the inefficiencies that are associated with LSBs continued use of the SEF to finance textbooks given the existing policy on the centralized procurement of textbooks. For instance. the new guidelines may contain both a positive list and a negative list of expenditure items. On the other. This is so because it provides a one-size-fits-all solution..1. Alternatively.g.The Special Education Fund: Prospects for Policy Improvement Also. the oversight agencies may decide to take a “all-or-nothing” track by either strictly prohibiting LSBs from charging specified items of expenditures (e.. The “all-or-nothing” track appears to be appropriate for some expenditure items like textbooks. while there appears to be a need to minimize the current priority given to teacher salaries/ honoraria in the LSBs’ budgets. It may also discourage local initiative in sharp contrast to the “conditional” track. prohibiting the use of the SEF for such a purpose completely as was the case in the 1990s will reduce the capability of LSBs to respond to specific needs of the schools under its coverage. international experience clearly suggests that the guidelines on the utilization of the SEF may be improved by prohibiting the use of the SEF for the acquisition of textbooks.. As such. the oversight agencies may take a “conditional” track in improving the SEF utilization guidelines by advising LSBs to restrict their SEF spending on certain items (e.g. it reduces the flexibility to respond to local needs. DepEd and DILG of new guidelines containing either a positive list of type of expenditure items that may be charged against the SEF or a negative list of expenditure items that are not allowed to be charged against the SEF. Improving Guidelines on the Utilization of the SEF The efficiency and effectiveness of the utilization of the SEF may be enhanced by improving the existing guidelines that govern SEF allocation. P a g e | 107 . compliance with results of teacher deployment analysis. there appears to be a lack of clarity as to what exactly the LGC refers to when it talks of “operation and maintenance of schools. However. e. In the same manner. (iv) the resources available to the schools from the DepEd’s GAA. the use of the SEF to fund classroom construction may be tied to the classroom availability analysis of the DepEd. and (v) the school report card including key performance indicators like drop-out rates and pupil achievement scores. P a g e | 108 . Annex 2 illustrates the draft guidelines on the utilization of the SEF that follows the conditional approach. LSBs may be given full discretion in the allocation of the SEF while support mechanisms that enhance planning and budgeting of the SEF are strengthened. Thus. the establishment of school governing councils and institution of school level reporting of performance. Instead. between the provincial and municipal LSBs. specifically the formulation of school improvement plans. (ii) the results of classroom and school furniture availability by school and the programmed allocation of new classroom construction from the Basic Education Facilities Fund or School Building Program of the General Appropriations Act (or GAA). it is critical to provide the LSBs (especially the LGU officials in the board) with good quality information about the specific needs of the schools as well as their performance even if one takes the “conditional” under the “rules based” approach. at the other end of the spectrum and directly opposite the “rules-based” approach. This approach may be referred to for want of a better term as the “market-based” approach. its success is dependent on the successful installation and implementation of the various elements of the school-based management. (iii) the school improvement plans. the “conditional” track of the “rules-based” approach may allow teacher salaries/ honoraria to be charged against the SEF provided the teacher deployment analysis of the DepEd shows that there is a teacher deficit in the school. The support mechanisms will also include improvements in the coordination links between the DepEd and the LSBs. the oversight agencies have the option of recalling all existing guidelines on the utilization of the SEF.6 These support mechanisms will generally involved the improved flow of information (including both the “what” and “when” questions) with respect to (i) the results of teacher deployment analysis by school and the assignment of new teacher items. While the “market-based” approach promotes greater flexibility of the LSBs to address the varying needs of the schools at any point in time. and between the district supervisors/ division superintendents and the school heads. On the other hand.The Special Education Fund: Prospects for Policy Improvement In situations like this. the application of “market-based” approach may have to be put on hold in the meantime given that the SBM and BESRA are not yet fully in place. 6 It should be pointed that the allocations that come out of such an unconstrained allocation process are highly unlikely to conform with those that individuals or indeed schools would have made on their own in a true 'market' or a 'quasi market' where families/schools are simply given vouchers to spend the SEF money. Nonetheless. The need to have school level representation in the MSBs would have to be weighed against the practicality of increasing the number of MSB members. expanding the membership of the LSB to include the head of the cluster of secondary schools in the district as is now done in some LSBs is worth further consideration. At the same time. the LGC provides that the schools district supervisor co-chairs the Municipal School Board together with the mayor. Too big a number tends to be counterproductive as the experience of the Local Development Councils suggest. At present. it is the school heads who are responsible and accountable for administering and managing the fiscal resources of the school under RA 9155. The school heads are also tasked to prepare and implement the school improvement plans. The expansion of the LSB membership to include NGOs. on the one hand. Improving the Institutional Arrangements DepEd representation in the Local School Boards.2. This change is indicated because of the observed weak connection between the district supervisors and the secondary schools. business chambers. In the medium term. Expansion of LSB membership. the mandate of schools district supervisors under RA 9155 is largely limited to curriculum and instructional supervision. on the other hand. and in securing additional resources for the schools. While the quality of representation provided by district supervisors in the LSBs may not be optimal in terms of providing a school-based perspective. The experience of the Synergeia suggests the need to expand the membership of the LSB in yet another direction. On the other hand. Specifically. The discussion in Section 2 above suggests that one of the weaknesses of the existing institutional arrangements governing the use of the SEF arises from the inconsistencies in the provisions for the LGC on the membership in the Local School Board with the provisions of RA 9155 on the roles. and LSB allocation process. P a g e | 109 . in tapping expertise available outside of the traditional LSB membership. the situation may be improved in the near term by improving the flow of information between the schools (both at the elementary and secondary level) and the district supervisors.The Special Education Fund: Prospects for Policy Improvement 6. and private schools as non-voting members has been found to beneficial in terms of expanding the pool of allies and advocates. there is a need to re-think DepEd representation in the municipal school boards (MSBs). tasks and responsibilities of the different units in the education bureaucracy and the empowerment of schools. However. there is a need to establish a clearer connection between the various instruments and protocols in the BEIS and the BESRA like the teacher deployment analysis and the school improvement plan. the local treasurer is tasked to disburse funds from the SEF in accordance with LSB budget at present. First.1. Given the existing policy on centralized textbook procurement. Increasing Equity in Education Spending While recommendations in Sub-sections 6. 6. say per student SEF income. If not addressed. and barangay level even while RA 9155 transferred all functions.3. part of the SEF income of LGUs with a P a g e | 110 . There are two options in addressing the equity concerns. In other words. municipal. among other activities. 6. Clarifying Definitions and Usage of Terms in LGC and RA 9155 As indicated in Section 2. a more symmetrical treatment of the SEF relative to the General Fund with respect to budget execution will help promote better financial management in the utilization of the SEF. one could take the tack taken under RA 5447 and mandate that LGUs contribute part of their SEF collection (say. programs and activities of the DepEd related to sports competition to the Philippine Sports Commission. sports activities at the division.4 above will tend to increase the efficiency in the way the SEF is allocated and utilized. there is a need to delineate the line that separate school sports and physical fitness from sports development/ sports competition. this inequity in the distribution of the SEF may result in a widening of the disparity in education outcomes across LGUs. Given this. they do not address the inequity in the distribution of the SEF across LGUs as a result of the wide disparity in the distribution of real property tax base. 6. This clarification is needed because many division superintendents and district supervisors interpret the provisions of the LGC to mean that participation in the barangay. 10%-20%) to a pool that will then be allocated so as to equalize the real property tax base of all LGUs relative to some standard.The Special Education Fund: Prospects for Policy Improvement On the other hand. the need to de-list textbooks from the list of expenditure items chargeable against the SEF is clear. regional and national level of the Palarong Pambansa should be one of the priorities of the SEF especially in the light of schools’ continued mandate from the DepEd to participate in the Palaro Pambansa but with little or no budgetary support from the central government.5. actual utilization of the SEF at present indicates a fairly comprehensive overlap with DepEd expenditure items. district. district.4. The inclusion of the local budget officer in the LSB is a step in this direction. Thus. division. Clarifying Expenditure Assignment in Basic Education Sector The use of the term “operation and maintenance of public schools” in Section 272 of the LGC has been the subject of varying interpretations. the LGC provides that the annual school board budget shall give priority to.6. In this regard. the first option is more likely to be met with greater resistance than the second. it is important that greater accountability be exacted from them. Second. among others. The first option is a technically neater solution than the second option. However.The Special Education Fund: Prospects for Policy Improvement higher real property tax base will effectively be transferred to LGUs which have a smaller real property tax base. particularly LGUs given that the SEF is a local imposition. In this regard. P a g e | 111 . the need to revisit the Roxas law which gives LGUs an incentive to shirk the LGC mandate for them to construct and maintain school buildings. CONCLUSION Beyond the need to further clarify expenditure assignment between the national and the local government and across different levels of local government. there is a need for a policy change at the national level to remove the disincentives to the efficient and effective use of the SEF. the expenditure assignment in other countries as summarized in Section 5 above and as presented in greater detail in Annex 1 provides some guidance and would have to be studied further in the light of the overall thrust towards greater decentralization. Meanwhile. one could take the distribution of SEF resources across LGUs as given but instead attempt to adjust the school-level MOOE from the DepEd budget so as to equalize the flow of total resources from the DepEd budget and the LGUs (Atkins and Manasan 2001). 7. This includes. Defining the Activities to be Financed. Republic Act No. Administrative Order No. DECS-DBM-DILG Joint Circular No.The Special Education Fund: Prospects for Policy Improvement REFERENCES 1. RA 7160 (The Local Government Code of 1991) 3. 01. Creating School Boards for the Purposes. 01 – B (25 June 2001) 7. and the Municipalities Within the Metropolitan Manila Area to Enact a Local Tax Ordinance Levying an Annual ”Ad Valorem” Tax on Real Property and an Additional Tax Accruing to the Special Education Fund): 4.1998 (14 April 1998) 5. (Directing the Sanggunian of all Provinces. and Appropriating Funds Therefrom) 2. 04 (29 September 2001) P a g e | 112 . s. DECS-DBM-DILG Joint Circular No. 01 – A (14 March 2000) 6. DepEd-DBM-DILG Joint Circular No. Cities. 261 (1992). 5447 (An Act Creating a Special Education Fund to be Constituted from the Proceeds of an Additional Real Property Tax and a Certain Portion of the Taxes on Virginia-type Cigarettes and Duties on Imported Leaf Tobacco. DECS-DBM-DILG Joint Circular No. This is due to many complex factors. but primarily the belief that there should be some equity in the quality of education as well as the financial burden should be spread across all segments of the society. P a g e | 113 . The exact line were this division is drawn is quite naturally subject to the social and political attitudes prevalent in a country. and secondary school levels. particularly at the preprimary. which is common in this area. etc. and the great differences in the quality of education facilities. Introduction This report will examine the expenditure assignment of education services based on a decentralized model of service delivery which has become prevalent during the past twenty years or more in which decentralization has become one of the main governance themes around the world. the bureaucratic and financial management inefficiencies of a centralized system. examples of the expenditure assignment will be provided to illustrate the different and varied approaches. To the extent possible. Aspects of Education Decentralization The process of decentralization education systems has accompanied the world wide effort of choosing the path of decentralization by governments. as a critical societal value. Equality of school learning facilities and the consequent financing requires that there be some transfers from the central to the local levels. Education. 2. as well as other sectors.The Special Education Fund: Prospects for Policy Improvement Annex 1 International Experience on Expenditure Assignments in the Education Sector Glendal Wright 1. there has been a need to insure that the financing of education. will not suffer from the inequalities in the financial capabilities that goes along with the decentralization of education service delivery. the decentralization of financial resources from the central to the local levels is not so clear cut. It should be apparent that while decentralization of the authority and decision making on education practices is recognized. such as health. is one of the primary areas where decentralized delivery of services is considered to be a more efficient and participatory method of delivery. While decentralization has been focused on the decision making of education delivery to the local levels of government. The generally accepted view is that centralized control of education service delivery has failed due to closed decision making by the few central level authorities. primary. It will examine the general accepted views about what areas of education should be given to the sub-national units and the allocation of expenditure responsibility for these costs. have pursued decentralization of education. governments. Some of the emerging areas of consensus are summarized in the following paragraphs.The Special Education Fund: Prospects for Policy Improvement including teachers and staff. Cost recovery schemes such as community financing have been used as a means for central governments to offload some of the fiscal burden of education services. transparency. and eventually improve coverage and quality. generally with encouragement from international donor organizations. student evaluations. accountability. and the inaccessibility of the education services to many of the population. which vary from country to country. It is a critical aspect of the expenditure assignment requirements as the location of the control or responsibility for various aspects of the education functions should also follow with the financial support for that function. Proponents of decentralization believe that the process of decentralization will substantially improve efficiency. and parent-teacher linkages. some aspects of the control or responsibility for education functions are addressed with general application to international practices. teaching methods. and often for preschools and adult literacy. either due to physical geography and in some cases societal values toward females. school construction and rehabilitation. Governments see decentralization as an opportunity to address some severe fiscal constraints and see decentralization as a method to increase efficiency and lower costs. In the following paragraphs. P a g e | 114 . There are often competing objectives and the net fiscal result depends to a great extent on the level of accountability that is placed on the national to sub-national leaders. The choices of who does what are further complicated because each of these functions has to be evaluated for primary. and responsiveness of service provision. more responsive services and will not be used as a cost-cutting scheme with little improvements in education quality. Due to these circumstances. textbook production and distribution. and tertiary education. Assignment of Responsibilities in Education Sector There is always much debate within the decentralization process concerning the appropriate level of government that has responsibility for functions in the education sector. better reflect local priorities and encourage participation. the more likely that decentralization will lead to better. The process of assigning responsibilities requires that policy makers rationalize and harmonize a complex set of complementary functions that includes curriculum design. The rule is generally that the more accountable the national and local leaders are to their populations. along with other public services as the solution to these problems. 3. education financing. teacher recruitment and pay. secondary. Distribution of teachers and technical assistance to underperforming areas are commonly central functions. Teacher Recruitment and Promotion Teachers are central government civil servants in most developing countries. the United States) have successfully delegated the monitoring and standards to the state level of government. P a g e | 115 . mostly federal systems such as Brazil and India. on the grounds that they lose inter-jurisdictional mobility. mainly in primary and secondary education. In devolved education systems where sub national governments have statutory or constitutional responsibility for some education subsectors. and prestige. central governments either assign taxes or transfer resources to cover these and other devolved responsibilities. with conditions of service determined by the public service commission or an independent teacher service commission. field offices receive their budgets from the central ministry through the next highest level. particularly primary and secondary schooling. production. In deconcentrated systems. Education Financing A large share of education services. including federal states such as Pakistan. are civil servants of intermediate governments. comparable conditions of service. are publicly provided and financed in most countries though some degree of private financing and provision is increasingly common. because teacher resistance to reforms of conditions of service designed to make them formally accountable to intermediate and local government remains a common impediment to system reform. some teachers.The Special Education Fund: Prospects for Policy Improvement Setting Education Standards The central government is generally considered to be better equipped to address equity issues and ensure a common minimum educational standard. teachers have resisted reforms that would have placed them under the jurisdiction of local or intermediate governments. where responsibility for provision of education is fully devolved. In many cases. Some federal governments (for example. In a few countries. Constructive dialogue with the relevant teacher unions and groups is an important priority in education reform. and distribution. Some central and intermediate governments also provide additional matching grants to local governments to increase local expenditures on priority areas. Textbook Production and Distribution Textbook production and distribution is usually centralized in order to harmonize textbooks with curriculum design and development process as well as increase cost efficiency due to scale economies in centralized procurement. The true extent of local control over teachers depends on whether or not the teachers are members of a unified national civil service with pay scales set by the relevant service commission. community income levels. PTA contributions. for example. the communities are increasingly given substantial control over the day-to-day operation of schools. for example. mid-level governments for secondary schools. Teachers’ Salaries Salaries. Bhutan and Zambia also provide good examples of this trend. this is traditionally among the most decentralized education sub functions. the elected members of a community education association are vested with legal responsibility for enrolling a specified number of students. even in highly centralized systems. local school committees and district education boards and committees composed mainly of community representatives have been set up for this purpose. the province provides resources for construction and major rehabilitation. P a g e | 116 . such as Tanzania. Construction and Maintenance Although in a few cases. and ad hoc community contributions in cash or kind are becoming quite common.The Special Education Fund: Prospects for Policy Improvement Many governments have also implemented community management and costrecovery schemes in response to shrinking central fiscal resources and growing demand for basic education. establishing classrooms or new schools. In many countries. and the local government conducts routine maintenance. In China. Community involvement in financing teachers’ salaries can help make schools more responsive to community needs. the United Kingdom. are usually paid from the recurrent budget of the administrative level to which teachers report. In rural El Salvador. reduced (subsidized) school fees. and hiring and supervising their teaching staff. Partial community financing in the form of contingency fees. and countries. communities and their representatives share costs. On the management side. and the United States also have highly developed school-level management systems. Responsibilities also tend to be divided according to the level of schooling: local governments are responsible for primary schools. PTA roles are highly variable across schools. there are government schools and community run schools. but the practice is controversial with teachers’ unions because it can create inequities in salaries and student-teacher ratios among poorer and richer communities. and central governments for tertiary education. usually for a subset of schools. the central government finances both construction and maintenance. Ireland. In rare cases communities are entirely responsible for school financing. Responsibilities for construction and maintenance are often divided between government levels. and quality in poorer communities continues to lag. This is dramatically different to the situation in the new EU member states that originated from the collapse of the soviet bloc in the transition states of the Central and Eastern European region. By increasing the participation of parents. These results are derived from ongoing impact evaluations. that secondary and primary education should be devolved as far as possible. Chile’s experience also suggests that decentralization does not by itself remove inequalities between localities of varying income. and quality. 5. controlling for similar household background and school inputs. and that local participation in school management improves accountability and responsiveness and fosters resource mobilization. These results are supported by experiences in New Zealand. it may be just a matter of time before better student attendance translates in to higher student achievement. the design of these decentralized systems has been criticized. further empirical analysis is needed. community-managed schools in El Salvador show significantly lower rates of student and teacher absenteeism. central governments have delegated responsibilities to local governments and communities without providing adequate targeted support to poorer areas. P a g e | 117 . per capita expenditures. These have been relatively stable over the years. Because the impact of management reforms such as these may take time to unfold.The Special Education Fund: Prospects for Policy Improvement 4. The initial evidence suggests that decentralization to sub national governments (that is. In Nicaragua. The information only indicates the assignment of the various functions on the basis of a voluntary or mandatory requirement on the local government units. In Brazil the central government has increased overall access (enrollments) but has done little to reverse persistent regional inequities in access to schooling. While this type of management does not appear to have improved student performance in tests according to recent evaluation. However. students in schools that make more of their decisions about school functions perform better in tests. Education Expenditure Assignment in 14 EU State The following details the expenditure assignment for certain areas of educational services that are either voluntary or mandatory on the local governments in the original 14 EU states. which has had to make new policies and functional assignments in a democratic transition. Impact of Decentralization The limited available evidence about the impact of decentralization on education services is mixed depending largely on why and how decentralization was undertaken. The current consensus is that tertiary education and specific functions such as curriculum design and standards setting are best retained by the center. provinces and states) may not be sufficient and that increased autonomy for communities and school actors may be necessary to improve schools and learning. In some cases. In some cases. Placing them as mandatory indicates that the local government or school authority must finance these to the extent of their capabilities. The central level provides a general transfer either through the local government or through the school district authority for these purposes. The mandatory responsibilities are based on the general concept that local schools should be based on the lowest government level that is closest to the community that is served. This follows a normal pattern in education expenditures. The following education expenditure assignments were as follows: Voluntary In 13 EU States: Pre-Primary Schools—Construction And Upkeep In 9 EU States: Pre-Primary School Administrative. the local governments are mandated to provide the preprimary and primary school costs while there is more voluntary responsibility at the secondary school level. In most cases. specific grants may be made to the schools to support the extraordinary costs associated with these students. As indicated below. Some subsidies are also provided for the capital costs of new construction through specific grants to supplement the local financial resources or the debt that is incurred at the local level for this construction. for example special education for disabled or disadvantaged children. It does not mean that they are fully financed by the local units. The main emphasis of the transfer is to provide an equalization basis for education financing and to maintain some minimum standards of quality of the education facilities available across the various rich and poor jurisdictions.The Special Education Fund: Prospects for Policy Improvement This only provides some indication of where the primary financial responsibility lies within the governmental structures. the recurrent operating costs of the school must be borne by the local school itself and some portion of the general transfer may be needed to cover any costs that are not covered by the local financial sources. that is provided to the local government or school authority without restrictions on its use. the general method is the use of a transfer based system from the central to the local level on the basis of an formula. While the basis for education financing varies considerable throughout the European Community. generally per pupil based with some other factors considered. Teaching or Technical Staff Mandatory 1 12 1 8 0 8 P a g e | 118 . Teaching and Technical Staff In 8 EU States: Primary School Administrative. Slovakia where the State has retained entire responsibility for education. All do in practice spend more than the normative amount on education. whereas Poland took a slower and more deliberate approach in which responsibilities were progressively devolved over a nine year period to 1999.The Special Education Fund: Prospects for Policy Improvement In 7 EU States: Secondary School Construction And Upkeep In 4 EU States: Secondary School Administrative. the specific features of each country’s approach is more fully described with regard to the expenditure assignment and financing of the education sector with a focus on the pre-primary and primary education responsibilities. calculated by the Ministry of Finance by a formula which includes fixed sums per pupil in each type of school. contributing the balance from general revenues. In the following sections below. All regular costs fall on county or municipal budgets including teaching salaries. Local governments are not obliged to spend this grant according to its service composition. and. In the case of P a g e | 119 . Hungary took a more rapid approach by transferring responsibility for managing and financing pre-primary. Both counties and municipalities receive general grants. These differences are summarized. 4 3 0 4 1 0 Education Expenditure Assignments in Transition Countries of Central and Eastern Europe There is an interesting comparison to make with the approaches that the transition countries of Central and Eastern Europe took after the fall of the soviet bloc and communist state control of the education system. Teaching and Technical Staff In 1 EU State: Higher Education Premises Construction And Upkeep 6. finally. primary and secondary education rather abruptly to the devolved local governments in 1990 at the very early stages of transition. The Czech Republic took a middle of the road approach with the State and local government having shared responsibility a longer stage of devolution into the early part of the new century. but yet to be fully implemented. although some degree of devolution has been planned. Hungary. The four countries discussed below took different approaches and speed in which they have placed the delivery of education services in a decentralized and democratic system. These grant elements cover roughly two thirds of actual average costs. but usually only where they offer no equivalent education. County governments do not levy taxes or receive income tax shares and their discretionary resources are largely confined to the general per capita portion of their normative grant. The receiving municipality does. Local and county governments receive the central transfers from the Ministry of Interior. of course. Where pupils commute to school across municipal boundaries. but others. the central government is constrained by an element of guarantee: the total sum transferred to local and county governments P a g e | 120 . In the decentralized system of public education in Hungary the lower tier of government plays a dominant role. The Ministry of the Interior has provided grants towards school construction and there are ad hoc grants from the Ministry of Education for innovations. One of the most important characteristics of public education finance is the marked distinction between financial flows from the central to the local or county government level and from the latter to the school level Local governments have two kinds of revenue sources: local revenues and central governmental transfers. However. one of the key characteristics of the Hungarian local governmental system is the imbalance between the exceptionally wide expenditure assignment and the restricted revenue assignment. receive the normative grant element which is based on pupil numbers. and local taxes of which a tax on business turnover is by far the most important in urban centers. fees. rent revenues. Since the central governmental budget is put forward by the Ministry of Finance. However. setting the actual amount of formula grants for education. Some do so. Own revenues include local taxes (the most significant being the local business tax). the share of transfers in local governmental revenues has decreased in the last decade. probably these two ministries play the most important role in deciding on the amount of grants. not school age population. a declining share of personal income tax. lump-sum formula grants and earmarked discretionary grants for investment projects. Schools are financed by the local governments that at the same time receive subsidies from the central budget. the procurement of professional advice and so on. like the Ministry of Education are also involved (especially in setting the relative shares of different grants within the category of formula grants for education). their home municipality is not obliged to contribute to the receiving authority’s costs. user charges. In general. The most important types of transfers are shared taxes42 (the dominant in this category is the personal income tax).The Special Education Fund: Prospects for Policy Improvement municipalities these include the non-service related elements of the formula grant. surplus of financial investment activities and revenues from selling property. based on budget shares of the previous year. Thus local and county governments allocate some of other transfers and/or own revenues to school finance. or for students commuting from other settlements).g. These grants are not earmarked. different amounts were assigned to years in primary and secondary school education and several additional elements were introduced (e. earmarked development grants are for local and county governments to finance investment projects in the physical educational infrastructure. later this shift has been reversed. However. The implementation of a local formula financing scheme is a rare exception. From the middle of the 1990s the system of formula grants became more and more differentiated. While the formula grants subsidize the operation of schools. i.e. responsibilities for additional services delegated to local governments and changes in local tax rules). Local P a g e | 121 . together with changes in expenditure and revenue assignment (e. Formula grants for school maintenance are computed on a per student basis.e. The scope of the potentially subsidized projects and the maximum rate of cost coverage are defined by the central government (e.The Special Education Fund: Prospects for Policy Improvement can not be less than the 90% of the expenditures on education of lower tiers of government two years anterior (excluding capital expenditures). i. local or county governments may use this amount as they wish. The only requirement is the continuous compliance with the standards of general legal and educational regulation. Formula grants are only one component of central transfers and whether local governments are in a loose or stressed fiscal position can be judged only with respect to transfers as a whole.g. and not exclusively on education services. school finance at the local level usually follows a different logic: the method of allocating funds for particular schools in the annual local budget is at the discretion of the local and county governments. However. teaching minority languages. and has been implemented so. Thus there is no direct relationship between changes in formula grants for education and government spending on education. as the amount of these grants is regularly below the minimum costs of providing education. The allocation is most frequently the result of a bargaining process between schools and maintainers. disadvantaged Roma children taking part in an ethnic program. The central government aimed at representing the diversity of average costs in the school system in details. By the second half of the decade the necessity to reduce the complexity of the grant system became evident.43 in fact all local and county governments spend more on schools than the grant they receive for this purpose. It is important to note. Note that while maintainers of schools are subsidized on a per student formula basis (excluding development grants). building classrooms or student dormitories).g. formula grants for education have to be supplemented by school owners. that changes in per student formula grants are very poor measures of the fiscal burden that the maintenance of educational institutions imposes on local governments. Local governments make their own decisions on the criteria for distributing their education budgets to individual schools. that financial provision for education would not suffer from devolution. The responsibility for schools has been handed over progressively to the various levels of local government between 1990 and 1999. After the investment projects have been carried out. due partly to municipal reluctance and partly to the legal impediments to firing teachers. it exceeds the education element by an average of 25%. This higher level of expenditure by local governments has arisen from investment costs. Most use incremental methods centered around negotiations on the annual pedagogical plans. but there is a legal provision that the education elements must constitute at least 12% of the State Budget revenue. These incorporate historic disparities between territories in the provision and cost of schools. The basic feature of these algorithms was a system of per pupil weights or multipliers designed to shift resources to those jurisdictions that had low pupil/teacher ratios. The education elements in the grants to individual local governments have generally been based on the cost to the State Budget at the time of transfer.86 was used for all pupils in rural gminas whose class sizes were less than 15. These transfers form part of the general grants to the local governments. and tax sharing alone in the case of the two higher tiers. The balance is drawn from general revenues—a combination of tax sharing and local taxes in the case of gmina (local government unit). and teachers in particular.33 for rural class sizes greater than 18 and 1. so the State budget’s operating expenditure has been transferred to them by annual grant. and by the reluctance of rural gminas to reduce employment despite low and falling pupil teacher ratios. This provision was inserted to reassure the public at large. In practice. increased annually by standard percentages. but the redistribution was somewhat ‘dampened’ by a provision that no local government should receive less than 100% or more than 110% of the previous year’s amount. payment by larger cities of teachers’ salaries above mandated levels. these multipliers were tied to the average class sizes of primary schools. 1. Poland. fall below the education element.44 for rural classes of between 15 and 18 pupils. Hopes that local governments might offset part of wage rises by retrenchment have not been fulfilled. per pupil basis. local governments have to account for the usage of the grant. Initially. A multiplier of 1.2 for urban pupils in classes less than 24.The Special Education Fund: Prospects for Policy Improvement governmental applications for the grant are evaluated by the Ministry of Interior on a discretionary basis. In 2000 allocation was converted to a normative. Local governments are not obliged to spend their general grants in any particular way and their education spending could. P a g e | 122 . 1. in law. their home municipality is obliged to contribute to the receiving municipality’s costs. Where pupils commute to school across municipal boundaries. If a school’s teachers are younger than average or class sizes above average. but there is an assumption that these will be replaced by shares of state taxes. in 1996 there was a single multiplier of 1. plus responsibility allowances and annual bonus at the director’s discretion. which is also responsible for the payment category classification of all other school employees. Municipalities meet these expenses from their general revenues which include shares of income tax and a property tax. As a result. The rural multiplier reflected the fact that on average the class sizes of rural gminas were one third smaller than those of urban ones (18 to 24).000 inhabitants. Czech Republic. At schools that are not legal entities the responsible school office (regional authorities with transferred capacities) plays the role of employer. These multipliers were progressively lowered.33 for all pupils attending schools in rural areas and another 1. Increases in pupil numbers will be similarly rewarded. The payment category classification is done by directors at schools that are legal entities. there is extra margin for employing more teachers (and shortening hours) or paying them more allowances or bonus. as class sizes in small towns were the same as in cities. such as pupils with disabilities. At present they receive targeted grants. Teaching salaries are funded by the Ministry of Education by grants to schools channeled through school offices. the per pupil multipliers were really designed to reflect existing staffing patterns. and not the relative workloads associated with different categories of pupils.18 for pupils attending schools in towns with less than 5. Teachers receive a basic salary on a national scale according to their age. The small town multiplier however had no such justification. The financial base for the educational responsibilities of the new regional governments has not been finally resolved. P a g e | 123 . in the case of primary and preprimary schools these only cover roughly one sixth of the cost and the balance has to be provided from municipal budgets along with all investment costs. The Ministry also provides a grant per pupil for the operating expenses of schools other than teaching salaries. and by 1996 decoupled from average class sizes. Schools are treated as “contributory organizations” so that they may retain unspent balances at the year’s end. However.The Special Education Fund: Prospects for Policy Improvement In other words. The funds for the remuneration of directors and other school employees are earmarked by the Ministry. This provides directors with considerable room for maneuver over the numbers and remuneration of staff. These are allocated according to a formula basically comprising the number of pupils divided by a standard pupil/teacher ratio and multiplied by the average national wage for teachers of the respective level. Extra pay for management and personal extra pay is usually recognized for a year. opportunities to remunerate very good directors with high-quality performance are too limited. The wage of school directors consists of a basic tariff component. Personal extra pay for directors of schools and school facilities is provided on the basis of very good results of the evaluation of quality of educational activities. Binding rules only exist for the determination of extra pay for directors of schools and school facilities established by the Ministry. However. The school offices have been making proposals regarding extra pay so far. a director who is not very active receives the same remuneration as a colleague of his who is more active. The methods and the system of remuneration are well-thought out and the remuneration is transparent. The director is entitled to extraordinary extra pay twice a year. On the other hand. normally from 1 November of the current year to 31 October of the next year. Thus. the quality of teaching staff. This is a disadvantage for directors of large school complexes. and the excellent fulfillment of a large amount of tasks. The proposed personal extra pay amount can be up to 50% of the basic tariff wage of the director. Sometimes a paradox situation occurs—directors of kindergartens receive higher remuneration than directors of secondary schools. The situation might be corrected as a result of the establishment of regional authorities. which will be able to distribute the funds P a g e | 124 . this mechanism has an advantage. Ministry in case of schools established by the Ministry. the maximum amount of which (per year) is determined. Extra pay for management is determined based on the number of pupils in a school. extra pay for management and personal extra pay. school parts and other criteria. which fulfill the function of state administration and are managers of their schools. which is the limitation of the state employees’ influence on the calculation of extra pay. if they work at facilities of a comparable size. However. which cannot be exceeded even if the total amount calculated is higher at large schools. in basic schools and kindergartens. Therefore. The remuneration amount depends on the school office’s management of the available finances. on which the person making the proposal has no influence. and the establishing entity in case of other schools. the remuneration is recognized by the school office.The Special Education Fund: Prospects for Policy Improvement The salary of directors of state schools is determined by the responsible school office (regional body with transferred capacities) in case of schools established by the school office or the municipality. The remaining funds for wages are used for the remuneration of directors. There is a maximum limit determined for extra pay for management. the type of school. remuneration recognized by the school office is sometimes higher than remuneration recognized by the Ministry. The Ministry does not approve remuneration for a director that would be higher than the maximum limit. The exact amount paid for the individual activities is determined by the Ministry. It has been frustrated. but draft legislation envisages replacing these over time with a combination of local taxes (a surcharge on personal income tax in the case of regional governments. an extraordinary extra pay (extra pay for class teachers and work under difficult conditions) are part of the regular component of the wage. the employer can determine the classification of the employees within the entire range of payment levels by issuing his own rules. The Ministry contends that the debts are largest in the regions with sparse populations and small schools. based on pupil numbers. Once ownership of schools has been transferred to regional and municipal governments. parents contribute to the upbringing. Remuneration of teaching staff and other school employees depends on the establishing entity. A bill has been submitted to Parliament to subject school funding to normative criteria. As a result. The table only determines the basic salaries. In state—(i. In the case of kindergartens. the school fees in primary schools specializing in art. and shares of national taxes.e. These are allocated to individual schools by the regional and district offices. The Ministry of Education has been trying to convert funding from a discretionary and historic cost basis to a normative formula based on school type and pupil numbers. The State Budget currently meets all operating and investment costs of schools. Local governments have no financial obligations to education. Schools have accumulated substantial debts and a major backlog in repair and maintenance. At the level of primary schools parents pay for meals. however. but have intervened on numerous occasions to carry out emergency repairs neglected by the State Budget. Slovakia. common) schools. property. Employees are divided into payment categories according to the character of their work and payment grades according to the prescribed education and recognized years of practical work.The Special Education Fund: Prospects for Policy Improvement within the financial package for wages in the educational sector based on the needs and remunerate the work of the best directors. Extra pay for management and replacement. food and educational aid. through the regional State Administration budgets. major disparities in per pupil funding exist between regions. tables determined by law are used for the calculation or the remuneration. These will be financed initially by targeted grants. by the tightness of state budget allocations and by the reluctance of regional state administrations to follow Ministry guidance. consumption and unincorporated business taxes in the case of municipalities). the board of children in outdoor pursuit P a g e | 125 . This holds true for the remuneration of manual workers. Only in the lowest qualification classes (1–3). The parents also contribute to the financing of education expenditures. they will become responsible for all non-teaching costs. This is achieved by using the statistics of an average class size. The scope of the new school building construction is limited. The textbooks for a school year are loaned to pupils (with the exception of pupils in the first grade). in that the indexes are set to a higher level. The areas with national minorities are treated in a special way. The number of students visiting the individual school or educational facility is the basis for the budgeting of wage costs. namely on particular building constructions within a limit set in the state budget for every category. number of employees per performance unit index. This basic performance unit is modified by uniform indicators in order to establish equal qualitative level of staffing and its remuneration according to an overall Slovak average. The use of calculation according to average temperature in a year in individual regions remains only in theory. The finances for maintenance are generally provided only in the case of emergency situations. The part of financial means determined for fixed expenditures (mainly energy costs and rental) is budgeted according to the needs of the previous year. accommodation in boarding houses. The bonuses and allowances to directors are approved by the Department of Education at the District or Regional Office. The finances for operation are supposed to be allocated also on the basis of a normative approach. P a g e | 126 . Often it is not possible to consider an increase in prices of primary energy.The Special Education Fund: Prospects for Policy Improvement schools. The sources for investment construction are allocated individually. A similar approach is used in areas with a higher occurrence of small class schools. and indicator of the average salary. A part of further means (current expenditures) is allocated in a form of variable expenditures usually by calculation per pupil. the award of which is decided by the school director. The parents also pay the school fees in private schools and educational facilities at all levels. The small schools which do not posses the legal entity are in the area of remuneration as well as financing of school operation under the responsibility of the Department of Education of District Office. they also contribute towards the extra-curricular children’s clubs and personal teaching aid. The real situation in the financing of education at this time does not allow this. The District Office Department of Education decides on the number of employees on the basis of the number of pupils and the amount of financial means allocated for given calendar year by the Regional Office in the budget break-down. The school also receives within the break-down of wage means a certain volume for bonuses and allowances. The level of financial means from the state budget necessary for education is partly determined in normative way. The office usually discusses the budget break-down with every school and assists also in filling the planned staffing posts. The capital investment requirements have a bigger financial input from the central level. The broader participation of the community stakeholders. it is appropriate that there is a sharing of the financial responsibility for support of the education system. and other charges that barely cover the main expenditures areas. particularly the salaries and operation and maintenance expenses. the central level has retained the main revenue sources and the local authorities are given a few taxes.The Special Education Fund: Prospects for Policy Improvement 7. has done much to insure the quality of the education available. For developing countries. The general trend is that the local authorities have to cover the general operating and recurrent costs of the local schools. P a g e | 127 . What has been a serious constraint on furthering of this authority is the lack of sufficient financial resources in most of these developing countries to meet many of the expenditure assignments given to the local authorities. Since education is a critical sector for a nation’s development. there is always a mix of central and local financial responsibility and where the exact division of financial support is drawn is a policy decision in the political process. provincial and central authorities. The worldwide trend toward decentralization of authority and responsibility for education services at the pre-primary and primary level has had some measurable success in most countries. but in many cases in the developed world the local authorities have to use their own borrowing and debt capacity to finance these investments. Conclusion There is an endless variation in the assignment of expenditure responsibilities among countries around the world. fees. In most cases. To this extent. The central level will provide a general transfer that allows for the local authorities to use at their discretion and this often covers some of the additional operating expenses that the local authority could not cover or to enhance some educational facilities. beyond just the local. the central level ministry generally provides grants for specific purposes and is largely constrained by the overall national level development budget funds. 2.. DIVISION SUPERINTENDENTS AND DISTRICT SUPERVISORS OF SCHOOLS. Department of Budget and Management (DBM). together with the private sector. Local Government Units are thus called upon to support the funding requirements of basic education delivery services with monies coming from the SEF. 2009 TO: GOVERNORS. March 31. AND OTHER NATIONAL AND LOCAL GOVERNMENT OFFICIALS CONCERNED REVISED/UPDATED JOINT CIRCULAR ON THE BUDGET ALLOCATION OF THE SPECIAL EDUCATION FUND SUBJECT: 1. MEMBERS OF THE LOCAL SCHOOL BOARDS. Towards this end. MAYORS.0 REITERATION OF THE BASIC EDUCATION REFORM AGENDA AND POLICY Basic education is a shared responsibility of the national government and the local government units. it is reiterated that the empowerment of the schools and learning centers calls for greater clarity in their fiscal responsibilities towards more efficient and effective use of resources. particularly that coming from the SEF.The Special Education Fund: Prospects for Policy Improvement Annex 2 DEPARTMENT OF EDUCATION DEPARTMENT OF BUDGET AND MANAGEMENT and DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT Joint Circular No. the Local Government Code of 1991 and related basic education policies. P a g e | 128 . and in consonance with the objective of greater decentralization of the academic and financial management of schools.0 PURPOSE This Joint Circular is being issued to revise and update the rules and guidelines contained in previous Joint Circulars of the Department of Education (DepEd). and Department of Interior and Local Government (DILG) on the use and purpose of the Special Education Fund (SEF) as provided for under RA 7160. chargeable to the SEF monies of each of the provinces. Acquisition of equipment.7 5.3 5.The Special Education Fund: Prospects for Policy Improvement 3. repair and maintenance of school buildings and other facilities of public elementary and secondary schools in schools which are deemed to have a classroom shortage as per the classroom deployment analysis and which have not been identified as recipients of similar funding allocation either in the national budget allocation of DepEd. 5. Educational research. or municipality. and 5.1 Construction.4 5. titling. where necessary. Payment of the salaries and other authorized allowances of teachers and non-teachers hired in connection with the conduct of extension classes in schools that are shown to have a teacher deficiency as per the teacher deployment analysis . through its regional offices.0 PRIORITIZATION OF FUNDING ALLOCATION FROM THE SEF In accordance with the pertinent provisions of the LGC of 1991. cities. from the Priority Development Assistance Fund of legislators or from the School Buildings Program/ Basic Education Facilities Fund of the Department of Public Works and Highways. and improvement of school sites. the following expenses shall be given priority in the allocation of the SEF budget: 5. shall be responsible for determining the annual supplementary budgetary requirements of the public schools in their locality in implementation of the public elementary and secondary education programs. including information technology resources Purchase.2 5. Acquisition/procurement of library books and periodicals.0 RESPONSIBILITY OF THE LOCAL SCHOOL BOARDS (LSBs) The LSBs in each province. shall see to it that the LSBs are furnished with copies of the individual school’s allocation for the year from the national budget. city. Training of teachers. and municipalities.5 5. including programmed school buildings and other capital outlays. Establishment and maintenance of extension classes. 4.8 P a g e | 129 .0 RESPONSIBILITY OF THE DEPARTMENT OF EDUCATION The DepEd.6 5. DepEd approved multi-year school improvement plans shall also be furnished the LSB concerned which will serve as a basis for the LSB budget formulation. signed by the Chair and Co-Chair and all the members present during the deliberation. district. Jr. ANDAYA. accounting. subject to the joint approval of the Chairman and Co Chairman of the Board. It is understood that the DepEd representative to the LSB shall be responsible for coordinating municipal/city school plans with that of the province 6.9 Sports activities at the division.0 EFFECTIVITY This circular shall take effect immediately. 5.0 LIMITATION Expenses not listed in the foregoing shall only be included in the LSB budget estimates/ budget preparation where funds are still available after providing for the priorities. and barangay levels which are supportive of school’s physical education programs. and auditing rules and regulations. 8.The Special Education Fund: Prospects for Policy Improvement 5. PUNO Secretary Department of the Interior and Local Government P a g e | 130 . 9. LAPUS Secretary Department of Education ROLANDO G. JESLI A. The implementation of the SEF budget shall follow the same process as the regular budget of the LGU and shall be subject to budgeting. 7.0 APPLICABILITY This Joint Circular supersedes all other circulars on the prioritization of the expenses chargeable to the SEF.0 BUDGET APPROVAL AND IMPLEMENTATION The SEF Budget shall be subject to the evaluation and approval of the LSB in the form of an LSB Resolution. municipal. The school improvement plan shall be a major input in this process.0 SEF ALLOCATION PROCESS The LSBs shall formulate strategic prioritization policies in the allocation of the SEF to the schools. Secretary Department of Budget and Management RONALDO V. there is some anecdotal evidence that some LGUs have incurred debt which they cannot service without exceeding their debt cap. roll-over) their debt. Given this observation. these LGUs (with concurrence of the creditor banks) restructure (i. Tomas in Davao del Norte. Marikina. and the municipalities of Bauang and Caba in La Union.e. Objective of study. Guimaras. Tagaytay.. At the same time. While these two questions are not necessarily contradictory. Surigao. Leyte. Tacloban. guidelines. they suggest the need for a better appreciation and understanding of how the LGU fiscal balance is measured as this would have serious implications on public expenditure management and debt management at the local level. and Agusan del Sur. processes and procedures with the end in view of helping promote not only fiscal discipline but also the more effective and efficient use of government resources. Manasan and Cynthia G. This study also comes up with recommendations that will help improve budgeting policies. Field visits to 26 LGUs were also undertaken during which LGU officials were interviewed. To cope with this problem. fiscal data from two sources were analyzed: (i) the Statements of Income and Expenditure of individual LGUs which are compiled and published by the Bureau of Local Government Finance (BLGF) and (ii) the financial statements submitted by individual LGUs to the Commission on Audit (COA). the cities of Quezon. This study is an exploratory one that aims to shed more light on various measures of the LGU fiscal balance.STUDY ON LOCAL FISCAL SURPLUS/DEFICIT Rosario G. LGUs in the aggregate have paradoxically registered fiscal surpluses year after year (Table 1). P a g e | 131 . Tagum and San Fernando (La Union). some analysts have argued that the fiscal conservatism exhibited by some LGUs may have been misplaced considering the numerous unmet needs for basic services at the local level. INTRODUCTION In the Philippines. Asuncion and Sto. Davao del Norte. The study then proceeds to assess how LGUs measure up with regards to alternative measures of the fiscal balance. It will do so by first reviewing the existing legal and policy framework related to LGU fiscal balance. San Jose del Monte. Iloilo. Bayugan. In the conduct of this study. Butuan. while it is generally agreed that financing is a constraint to local service delivery. Iloilo. Castel 1. These LGUs include the following: the provinces of La Union. In turn. Put positively. Fiscal discipline help improve the allocation of resources by allowing LGUs to prioritize their activities with a realistic appreciation of their budget constraints. Barbara in Iloilo. The World Bank (1998) underscores the interdependence of the three principles of public expenditure management as one of the most robust findings of both practice and theory. With overly optimistic forecasts of LGU revenue. Tubay in Agusan del Norte and Trento in Agusan del Sur. projects and activities (PPAs) that are of lower priority to those of higher priority. 2.e. LGU officials may not also have the incentive to make hard choices early on during budget preparation. provides an insight as to the hierarchy of objectives. LEGAL FRAMEWORK Public expenditure management is anchored on three basic principles: (i) fiscal discipline. relevant legislation. allocative efficiency calls on spending units (i. fiscal discipline creates an environment that encourages allocative efficiency and operational efficiency. In addition. (ii) allocative efficiency..Study on Local Fiscal Surplus/Deficit Basey in Samar. It requires that LGUs allocate their resources in a strategic manner so that the budget system reallocates resources (i) from programs. Palo in Leyte. It requires that LGUs come up with honest and good forecasts of revenues and practice good expenditure control. and (ii) economical by acquiring quality inputs at the lowest cost.. and (ii) from less effective to more effective PPAs. expenditure cuts) during the budget year. Operational efficiency calls on spending units to deliver goods and services in a manner that is (i) efficient by finding the right combination of inputs so that any given output is produced in the least costly manner (i.e. departments and offices) to deliver goods and services in a manner that is effective by selecting the right combination of PPAs (or outputs) that contribute the most to the achievement of the desired outcome. manuals and regulations governing local budgeting and the COA Annual Audit Reports for various cities and provinces for the years 2005-2007 were reviewed. Sta. which could lead to the sequestration of appropriations (i. minimizing cost per unit of output). LGU officials also may not have the incentive to look for more effective and efficient ways of achieving their objectives. Fiscal discipline calls for matching of the demand for government spending with the available resources in the aggregate in order to ensure that LGUs’ fiscal position is sustainable in the medium term. That is. Schiavo-Campo and Tommasi (1999). greater allocative efficiency and operational efficiency feeds back positively into fiscal stability by allowing LGUs to do more with less. however. and (iii) operational efficiency. increased unpredictability in the funding of activities and the possible disruption of local government services. Allocative efficiency refers to the alignment of LGU spending with their policies and priorities..e. They say: P a g e | 132 . However. installation. these provisions have also meant that LGU borrowing can only be undertaken to finance investment expenditure and that LGUs are forbidden to incur debt of any kind for the purpose of covering current operating deficits. comes first. it measures the contribution of government to investable resources and economic growth. resource allocation and operational efficiency come next. On the other hand. Taken together.. securities and other obligations for the purpose of financing the construction. in the European Union (EU). you can’t allocate it. albeit somewhat weaker relative to those in other countries. current revenues less current expenditures) is not allowed to be in deficit. Balanced budget rule.Study on Local Fiscal Surplus/Deficit “If you can’t count the money.m). In other words. the current fiscal balance or the operating balance represents government saving. improvement.1 For many. The LGC also provides that the aggregate amount appropriated in the budgets of LGUs for any given fiscal year shall not exceed the estimates of income (Section 324). balanced budgets constraints prevail in many US states and many provinces of Argentina and Canada (von Hagen 2007). debentures. and if you can’t allocate it you can’t manage it. For instance. credits and other forms of indebtedness as well as through the issuance of bonds. and thus the subtraction of resources from resources available for investment (Schiavo-Campo 2007). it is not surprising that legally stipulated fiscal rules require many governments around the world to balance their budgets or to subject certain fiscal aggregates to very specific targets. these three provisions of the Code have generally been interpreted to mean that proposed and approved budget appropriations for current operating expenditures during any given fiscal year shall not exceed current revenues in that year. income-producing development or livelihood projects (Section 297 and Section 299). in many ways. operation or maintenance of public facilities.e.” Given this perspective. Conversely. the LGC also allows LGUs to borrow from the credit and the capital markets through loans. infrastructure facilities and selfliquidating. expansion. Fiscal discipline. P a g e | 133 . a current balance deficit represents government dis-saving. This view is further reinforced by the Updated Budget Operation Manual or UBOM which includes borrowings as one of the income sources which has to be 1 By definition. the operating fiscal balance or current fiscal balance (i. As such. member states are required to keep their annual government budget deficits below 3% of GDP and their government debt below 60% of GDP. Local governments in the Philippines are likewise subject to some form of balanced budget constraint. One of the fundamental principles of local fiscal administration set forth in Section 305 of the Local Government Code (Republic Act 7160) of 1991 says: “The local government unit shall endeavor to have a balanced budget in each fiscal year of operation” (Section 205 . provided borrowings are incurred for the sole purpose of financing capital outlays only. Section 328 (Duration of Appropriation) provides that “appropriations for ordinary administrative purposes not duly obligated shall terminate with the fiscal year and all unexpended balances thereof shall be automatically reverted on the thirty-first (31st) day of December of each year to the general fund of the local government unit. Three provisions of the LGC complicate the measurement and interpretation of the balanced budget rule. First. MOOE and CO in the current period) measured on a cash basis does not exceed the sum of current revenues. Section 322 (Reversion of Unexpended Balances of Appropriations.” These provisions authorize the carryover of unobligated appropriations for capital outlays into the next year while directing that unexpended balances of appropriations for personal services and P a g e | 134 .e. Thus. appropriations for capital outlays shall continue and remain valid until fully spent. This provision suggests that LGU budget outturns or the actual results of budget execution (not just the proposed and approved budgets) must be balanced in the sense that the total expenditures (i. However.. continuing appropriations and supplementary budgets. there is a need to clarify exactly how this provision should be read in relation to the more popular interpretation of the so-called “balanced budget” provisions of the LGC.Study on Local Fiscal Surplus/Deficit estimated as part of budget preparation and which specifies that the proceeds from borrowings are to be used to finance the development of capital projects (DBM 2005 p. 53). reverted or the project is completed. however. two of the 26 LGUs visited during the field work did borrow to finance current operating deficits in 2006 and 2007. It should be pointed out.. RA 7160 mandates “that no cash overdraft in any local fund shall be incurred at the end of the fiscal year” (Section 337). that Section 296 (b) of the Local Government Code (General Policy on Credit Financing) says: “A local government unit may avail of credit lines from government or private banks and lending institutions for the purpose of stabilizing local finances. In particular. “cash at the end of the previous period” and borrowings. At the same time. the sum of PS. Unexpended appropriations. Continuing Appropriations) provides that “unexpended balances of appropriations authorized in the annual appropriations ordinance shall revert to the unappropriated surplus of the general fund at the end of the fiscal year and shall not thereafter be available for expenditure except by subsequent enactment.” Second.” A liberal interpretation of Section 296 (b) implies that borrowing may also be undertaken by LGUs to bridge short-term cash flow shortfalls that may result in negative actual current operating fiscal balances. Closer scrutiny of the financial statements of selected LGUs does indicate that the balanced budget provisions are not strictly complied with. except when supported by funds actually available as certified by the local treasurer or by new revenue sources. and (iii) Statement of Cash Flows.e. Third. 3. This implies that a deficit position in the overall fiscal balance measured on a cash basis may be financed by simply drawing down on the LGU’s cash reserves and without the need to go to the credit or capital market. two data sets are available which may be used to track fiscal aggregates at the local level: the Statement of Cash Flows from LGU submissions to the COA and the LGU Statement of Income and Expenditures collated by the BLGF. The Manual on the New Government Accounting System (NGAS) for LGUs (COA 2002) provides that local accountants shall prepare three financial statements for each fund: (i) Balance Sheet. no ordinance providing for a supplemental budget shall be enacted. CURRENT PRACTICE AND OUTSTANDING ISSUES Measuring and Monitoring Fiscal Balances of LGUs As indicated in Section 2 above. there appears to be no systematic monitoring of the fiscal balance of LGUs. P a g e | 135 . This implies a more nuanced interpretation of the overall fiscal balance than what has been discussed so far. all expenses are recognized when incurred.” The enactment of supplemental budget/s implies that expenditures for the fiscal year may exceed current revenues for that year if the supplemental budget is backed by unappropriated fiscal surpluses that the LGU has accumulated over the years. the Local Government Code calls on LGUs to maintain their current fiscal balances measured on a cash basis in positive territory. current revenues less current expenditures) and overall fiscal balance (i.. Market Fees) or when other methods may be required by law. The NGAS follows a modified accrual basis of accounting..e. current revenues less total expenditures3) while the latter provides data that is only able to measure the overall fiscal balance. income shall be on accrual basis (e. However.1. Section 321 (Changes in the Annual Budget) provides that “after the local chief executive concerned shall have submitted the executive budget to the sanggunian. Share from Internal Revenue Collections) except for transactions where accrual basis is impractical (e. Total expenditures = personal services expenditures (PS) + maintenance and other operating expenditures (MOOE) + capital outlays (CO). At present. (ii) Statement of Income and Expenses.Study on Local Fiscal Surplus/Deficit MOOE2 are to be reverted to the unappropriated surplus of the general fund. This implies that the overall fiscal surplus measured on a cash basis may actually include cash balances that are not available for appropriation because they are meant to finance continuing appropriations for capital outlays and MOOE that have not yet been expended but which are still valid. Under this method. Thus. 3.g.g. The former allows the measurement of both the current fiscal balance (i. 2 3 More recent provisions allow appropriations for MOOE to remain valid for a period of two years. On the other hand. fiscal data recorded on a cash basis in the Statement of Income and Expenditure of individual LGUs which are compiled and published by the Bureau of Local Government Finance (BLGF 2008) includes the overall fiscal balance but not the current fiscal balance. This confirms the larger fiscal capacity of cities relative to provinces and municipalities to finance capital investments .e. user charges. current revenues less current expenditures and capital outlays) is equal to the net cash inflow from operating activities minus the net cash outflow from investments. The current fiscal balance is simply equal to the net cash flow from operating activities from the Statement of Cash Flows. fees. in a format that reconciles the beginning and ending cash balances (COA 2002). implying that about 16% of total LGU income is available to finance capital outlays in these years. On the other hand. On the other hand. the overall fiscal balance (i. measured on a cash basis. To make it comparable to the estimates of the overall fiscal balance that were earlier derived from the COA Statement of Cash Flows. P a g e | 136 . This means that transactions are captured when cash is received or when cash payments are made.. The information on the sources and uses of cash is useful for assessing the liquidity of the government sector that is not possible from the record of flows on an accrual basis (IMF 2001). cities posted larger current fiscal surpluses (20% of total LGU income) than provinces (14% of total LGU income) and municipalities in 2002-2007. may be read off the Statement of Cash Flows of LGUs (IMF 2001). the overall fiscal balance in the BLGF’s Statement of Income and Expenditures is computed as the difference between the sum of current revenue (consisting of taxes. the current fiscal balance (i. Also.Study on Local Fiscal Surplus/Deficit The Balance Sheet shows the financial condition of the LGU at a specific date. Unlike the accrual-based Statement of Income and Expenses. on the one hand. With the shift to accrual accounting. and total expenditures (consisting of both current and capital expenditures). IRA) and borrowings. liability and the government equity of the LGU.1.. It reports cash receipts and cash payments and net change in cash resulting from the operating. on the other hand. 3. current revenues less current expenditures). borrowings were netted out of the BLGF measure of the overall fiscal balance.e. On the average during this period.1. The Statement of Income and Expenses presents the detailed information of the income and expenses recognized during the period covered. However. all LGUs in the aggregate posted current fiscal surpluses in 2002-2007. the Statement of Cash Flows reflects a cash basis of recording. Current Fiscal Balance Based on COA data. the Statement of Cash Flows shows the LGU’s cash activities. the current fiscal surplus of all LGUs combined was equal to 16% of total LGU income. investing and financing activities of the LGU during a period. It presents information on the assets. 0 2.14 0.2 5.37 0.7 0.00 0.39 0.8 6.09 14.0 -2.3 2.5 9.30 0.6 3.6 0.10 0.8 1.4 1.63% of GDP (or 16% of total LGU income) in 2005 and 0.9 13.Study on Local Fiscal Surplus/Deficit Table 1.01 0.67 0.5 14.8 15.3 6.2 17.2 5.7 14.7 14.1 57.24 16.19 6.15 0.7 18. Fiscal surplus (deficit) from COA Statement of Cash Flow.5 18.9 18.20 0.7 4.2 3.7 14.81% of GDP (or 19% of total LGU income) in 2002 to 0.12 0.06 0.1 -0.20 -0.13 12.9 12.5 14.76 0.80 a/ Overall fiscal balance is computed as net cash inflow from operating activities less net cash outflows from investing activities.1 -2.56 0.1 2002-2007 27. That the troughs in the observed cycle coincide with election years is certainly something that requires further attention from political economists.01 0.4 9.8 103.24 0.1 5.7 7.2 8. The current fiscal surplus of all LGUs as a group declined from 0. it rose to 0.11 20.5 9.15 0.8 36.01 0.3 2007 -5.09 0.3 -0.4 3.3 4.8 Provinces 1.0 34.7 41.5 40.18 0.08 0.7 10.05 0.3 -3.2 7.04 0.5 16.01 -0.2 2.5 27.3 -1. the aggregate current fiscal surplus of all LGUs combined exhibited what appears to be a regular fluctuation over the period.5 19.09 0. This trend is evident as well for all levels of local government (Table 1).8 3.21 2.02 -0.3 -0. P a g e | 137 .3 6.2 8.0 16.35 0.8 15.12 0.66 0.6 7.30 0.01 0.2 -0.6 10.3 3.7 16.55% of GDP (or 14% of total LGU income) in 2007.3 14.8 6.67% of GDP (or 17% of total LGU income in 2006 before slipping to 0.1 Municipalities 3.3 10.5 17.4 14.2 -0.9 4.6 19.8 -0.04 0.56% of GDP (or 15% of total LGU income) in 2004.00 -0.0 -2. Source: COA Annual Financial Report for LGUs.6 21.4 4.8 13.3 32.13 0.05 0.5 202.03 0.13 0.33 0.03 0.7 2.5 0.3 4.19 0.42 3.6 12.4 3.08 0.10 0. Then.22 -0.8 0.0 Cities 5.0 20. 2002-2007 2002 2003 2004 2005 2006 Levels in billion pesos a/ Overall fiscal balance 10.08 -0.5 5.4 10.0 21.5 -0.42 1.5 21.05 -0.5 7.27 0.12 0.8 14.81 0.7 Current fiscal balance Provinces Cities Municipalities % of GDP Overall fiscal balance Provinces Cities Municipalities Current fiscal balance Provinces Cities Municipalities % of LGU income Overall fiscal balance Provinces Cities Municipalities Current fiscal balance Provinces Cities Municipalities 31.5 -0.6 14. various years However.14 0.2 0.4 4.30 0.9 2.7 9.63 0.14 0.5 -0.55 0.01 0. 2. it went up to PhP 23.6 17.3 % of LGUs with overall fiscal deficit Provinces 34.1 18.7 Cities 4.9 Municipalities 9.7 Source of basic data: LGU Statement of Cash Flows. the proportion of LGUs which fail to comply with the balanced budget requirement in the LGC increased from 8% in 2006 to 18% in 2007 in the case of provinces.9 59.Study on Local Fiscal Surplus/Deficit In line with trend in the current fiscal balance of LGUs.9% of total LGU income) in 2004 (Table 3). The overall fiscal balance of all LGUs as a group (measured on a cash basis based on BLGF data) also appears to fluctuate in relation to the electoral cycle.8 billion (or 3. Percent of LGUs with fiscal deficit based on COA Statement of Cash Flows.4% of GDP (or 10. the ratio of the fiscal surplus to total LGU income was estimated to be 15% on the average (or equivalent to a little less than two months’ worth of LGU income) in the case of cities and 8% on the average (or equivalent to more than one month’s worth of LGU income) in the case of provinces and municipalities in 2002-2007.6% of total LGU income in 2002-2003 to PhP 6. Then. Table 2.8 44.9 billion (or 12% of total LGU income) in 2005 and PhP 32. To wit. On the average. Overall Fiscal Balance Overall fiscal balance based on BLGF data. Cities registered larger overall fiscal surpluses on the average than provinces and municipalities during this period.6 billion (or 10.9% of total LGU income) in 2002-2007 (Table 3). P a g e | 138 . The overall fiscal surplus of all LGUs in the aggregate based on the BLGF SIE declined from an average of PhP 17.2 Cities 28. the overall fiscal surplus based on BLGF data is equal to 0.2 Municipalities 24. 4% to 18% in the case of cities and 9% to 18% in the case municipalities (Table 2).9 billion (or 15% of total LGU income) in 2006 before dipping slightly to PhP 29. 2006-2007 2006 2007 % of LGUs with current fiscal deficit Provinces 7.4 51. COA 3.1.3 17.5 billion (or 12% of total LGU income in 2007. 5 0.9 8.0 -0.1 -0. They say that once LGUs actually realize a fiscal surplus at the end of any given fiscal year. It measures the amount of variation that is less influenced by extreme values than the range. The interquartile ratio4 of the fiscal-surplus-to-LGU-income ratio in 2006 is 9 for cities and 8 for provinces and municipalities (Table 4).1 0.9 a/ current revenues net of borrowing less total expenditures Source of basic data: BLGF Statement of Income and Expenditure (BLGF SIE) These averages mask large surpluses in many LGUs.6 9.149 -0. (ii) the unused portion of their calamity fund which they are required to keep intact until the end of the fiscal year unless a calamity/ disaster does occur.1 4.6 8.1 0.4 12.2 0.5 7.9 Provinces 2.9 9.1 0.4 9.6 7. Also.3 0.1 0.7 9.3 12. some analysts have argued that the fiscal conservatism exhibited by some LGUs may have led them to “underspend” despite numerous unmet needs for basic services at the local level.8 3.4 0.3 6. Overall fiscal surplus (deficit) on cash basis based on BLGF SIE.5 5.1 0.1 11. and (iii) delays in the implementation of projects.1 0.4 0.006 0. said LGUs immediately appropriate the full amount that is available for appropriation by enacting a supplemental budget in the year immediately after the year the surplus is 4 The interquartile ratio is the value for the 75th percentile divided by the value for the 25th percentile.5 22. 32% of cities and 19% of municipalities had fiscal-surplus-to-LGU-income ratios that are equivalent to more than two months’ worth of their annual income in 2006.7 -0.4 13.2 Overall fiscal surplus (deficit) as % of GDP Provinces Cities Municipalities Overall fiscal surplus (deficit) as % of LGU income Provinces Cities Municipalities 2007 29.4 10.4 0.003 0.4 3. LGU treasurers and budget officers interviewed as part of this study note that the surpluses many LGUs report are in large part attributable to the following factors: (i) the cautious fiscal stance of many LGUs because they are not allowed to incur an overdraft thereby leading them to have overly conservative revenue/ income estimates and/ or excessive expenditure controls.0 11. 29% of provinces.2 Municipalities 6.2 0.6 10.4 0.8 19.1 0.2 0.6 15. Thus.4 7.Study on Local Fiscal Surplus/Deficit Table 3.8 7.5 0.8 6.0 13.8 23.7 10.5 Cities 8.5 17.1 0. In view of these findings. P a g e | 139 .0 0.2 0.5 73.1 5.2 14.6 12.0 33.2 0.6 16.9 2002-2007 128.6 -0.1 16.5 14.7 10.9 32. However.1 20.1 0.1 7.2 11. they argue that such surpluses are to a large extent illusory.9 -0. 2002-2007 2002 2003 2004 2005 2006 a/ Overall fiscal surplus (deficit) (in billion pesos) 17.2 9.7 10.1 0.6 5.2 0. it is not as large when measured relative to total income as BLGF data indicates (2% of total LGU income vis 11% of total LGU ). 2005 and 2006). This finding. 2003. and that based on COA data on the other. therefore.9 21. Table 4.4 17.4 Cities First quartile Median Third quartile Municipalities First quartile Median Third quartile 1. BLGF Overall fiscal balance based on COA data. the overall fiscal balance for all LGUs in the aggregate using BLGF data is always positive in 2002-2007 and does not show the deficit spending during election years that was evident when the COA data is used. on the one hand.Study on Local Fiscal Surplus/Deficit realized.0 a/ net of borrowings Source of basic data: 2002 and 2006 SIE. In earlier years. However. Difference between overall LGU fiscal surplus estimates from COA data and BLGF data. while the accumulated overall fiscal balance based on COA data is positive (PhP 28 billion) for the entire period 2002-2007. In 2007 and 2008.2 14.5 2. they differ on two points.3 9. This can be gleaned from a comparison of Table 1 with Table 3). The trend in the overall fiscal balance of all LGUs as a group measured based on COA data is generally consistent with that based on BLGF data.9 2.8 1.5 10.2 22. Variation in fiscal surplus (deficit) based on a/ BLGF SIE as % of LGU income.2 Median 6. is consistent.8 8.5 16.0 Third quartile 13. Table 1 shows that overall fiscal deficits were registered during election years (2004 and 2007) while fiscal surpluses were posted during nonelection years (2002.7 7. fiscal surpluses were used to fund LGU projects that were not accommodated in the regular annual budget that were typically funded out of current year’s income.2 3. LGU budget officers report that the fiscal surplus realized in the previous year was appropriated as supplemental budgets and used to fund the 10% across-the-board salary increase that were mandated in those years. Second. First. Although the trend in the overall fiscal balance based on estimates based on BLGF data.5 9. does not appear to support the hypothesis that LGUs are “under-spending” and which appears to be evident from BLGF data. the aggregate LGU overall fiscal balance based P a g e | 140 . 2002-2006 2002 2006 Fiscal surplus (deficit) as % of total LGU income Provinces First quartile 2. 0 billion in 2004.5 billion in 2004. Debt Finance of Capital Outlays. 14% of municipalities had negative overall fiscal balances in 2006 based on BLGF data compared to the 24% estimate based on COA data.2 16. Percent of LGUs with overall fiscal deficit based on BLGF SIE.4 Source of basic data: BLGF SIE Given this perspective. Other Fiscal Aggregates: Accumulation of Cash Reserves. However. there is a need to better understand the sources of the disparity and for the oversight agencies to adopt a common measure. 17% of provinces had overall fiscal balance in negative territory in 2006 based on BLGF data compared with 34% when COA data is used. To wit.9 Municipalities 11.5 billion in 2002 to PhP 57. Cash Inflows from New Debt and Cash Outflows to Redeem Existing Debt The growth in “cash at the end of the period” of all LGUs in the aggregate (which is found in the COA balance sheet) is largely consistent with the movement in the overall balance. The growth in “cash at the end of the period” of all LGUs in the aggregate is still another way of verifying the hypothesis that LGUs are underspending. due to time constraint. Given an overall fiscal surplus of PhP 5. In like manner. the proportion of LGUs that posted overall fiscal deficits in 2006 based on the BLGF data was significantly lower than the corresponding estimate when COA data is used (compare Table 5 with Table 2).7 billion in 2005 P a g e | 141 .3 billion in 2003 (Table 6). For instance. 2002 & 2006 2002 2006 % of LGUs with overall fiscal deficit Provinces 15. the overall fiscal balance for all LGUs combined based on the BLGF data was 70%-325% higher than the corresponding estimates based on the COA data during the years under study.1. This is therefore definitely an area for future research. Then.5 Cities 14.2 14. the present study is not able to look into the reasons that will explain the observed differences. their “cash at the end of the period” dipped to PhP 57.3 billion in 2006 after LGUs registered an overall fiscal surplus of PhP 9.0 17. “cash at the end of the period” for all LGUs as a group rose to PhP 79. relative to GDP or relative to LGU income. As a corollary. as all LGUs in the aggregate posted an overall fiscal deficit of PhP 0.3 billion for all LGUs combined in 2003 (Table 1).Study on Local Fiscal Surplus/Deficit on the BLGF data is significantly larger than the corresponding estimates based on COA data in 2002-2003 and 2005-2006 regardless of whether it is expressed in nominal levels. Subsequently. “cash at the end of the period” went up in nominal terms from PhP 50. Table 5.3. 3. various years 2006 79.6 18.3 1. however. 2002-2007 2002 2003 2004 2005 Levels (in billion pesos) Cash reservesa/ at end of period 50. In contrast. with the drawdown of accumulated surpluses accounting for 10% and net borrowings accounting for 3% of the total LGU financing requirement in 2007.3 1.3 57. they are consistently building up their cash reserves over time.1 37. Continuing appropriaitons (consisting of unobligated balances for capitla outlays) estimated based on previous years' ratio to total income for 2004-2007.5 9.7 27.6 0.[1] (iv) sinking funds.2 32.6 16.4 17. This finding appears to be consistent with anecdotal stories obtained from the field visits that LGU elective officials tend not only to spend the surpluses they have accumulated in earlier years but also to incur more debt during election P a g e | 142 .3 37.7 0.3% of GDP and 33%-37% of total LGU income during the period.9 33.2 0. capital outlays were financed by the net result of operating activities (87%). capital outlays of all LGUs combined were fully financed by the net result of operating activities in 2002-2003 and in 2005-2006 as gleaned from a closer scrutiny of the details of the LGUs’ Consolidated Statement of Cash Flow.6 0.2%-1.6 0.6 8. (ii) equity set aside to finance capital projects backed up by continuing appropriations.8 28.9 15.0 9.9 1. aggregate cash reserves of all LGUs remained fairly stable at 1.3 0. on the one hand. capital outlays were financed by the net result of operating activities (98%) and net borrowings (2%).8 4.2 1.8 billion in 2006.3 0. property and equipment including public infrastructure in process net of total long-term liabilities.1 35.9 9.0 70. (v) prepayments.3 0.3 0. (vi) contingent capital or receivables.3 Amount available for appropriation b/ 14.4 1. this finding does not appear to support the hypothesis that LGUs are under-spending and.1 36.5 16.2 17. This trend is consistent with the observed accumulation of fiscal surpluses by all LGUs in the aggregate during these years as shown in Table 1.5 0.6 0.6 2007 77. and the sum of (i) total plant.5 17.5 57. when expressed relative to GDP or relative to total LGU income. Source of basic data: Consolidated Balance Sheets and SAAOB in COA Annual Financial Reports for LGUs. (iii) obligated allotments for which no liability had been recognized as yet.3 15.5 15. In 2004.Study on Local Fiscal Surplus/Deficit and PhP 7. Again.0 33.1 On the other hand.3 1. as a result.7 13.3 33. and (vii) unused inventories.7 35. Table 6.1 8.1 Current assets net of payables but not continuing appropriation 24.2 0. Cash reserves and amount available for appropriation.4 % of GDP Cash reservesa/ at end of period Current assets net of payables but not continuing appropriation Amount available for appro % of LGU income Cash reservesa/ at end of period Current assets net of payables but not continuing appropriation Amount available for appro a/ Includes investment in securities b/ Amount available for appropriation is equal to the difference of government equity.6 6. However. However.14% of total LGU income in 2002 to 0. Thus. this measure can be read off easily from the COA Statement of Cash Flows. 5 Admittedly. the trend in outstanding long-term liabilities of all LGUs does not appear to strongly support these apprehensions. roll-over) their debt. An indicator of this occurrence is where outflows to redeem past debt are relatively large compared to the inflows of new debt. outstanding long-term debt of all LGUs combined went up from 0. there are anecdotal stories that a number of LGUs have incurred debt which they cannot service without exceeding their debt cap. the 50% cut-off is arbitrary. This finding provides some evidence that indeed the number of LGUs which may be having problems servicing their debt are not as insignificant as one would initially expect given the balanced budget rules in the Local Government Code. P a g e | 143 . 21% of cities and 5% of municipalities in 2007. Table 7 shows that while outstanding long-term debt of all LGUs in the aggregate did increase between 2002 and 2007 it did so only marginally when reckoned relative to total LGU income. the list of fiscal performance indicators in the Local Government Performance Monitoring System should include the current fiscal balance as a measure of LGU savings and its contribution to the pool of resources that is available for investment. Recommendation.e. Some observers raise the concern that local chief executives tend to borrow more as their terms are about to end at the expense of incoming officials who are left to pay off such indebtedness.17% of total LGU income in 2007 despite the fact that nominal level of outstanding long-term liabilities of LGUs almost doubled during the period. To validate these stories. Fortunately. To cope with the problem. For instance. In the light of the balanced budget provision in the LGC. It was found that cash outflow for the amortization/ retirement of old debt accounted for at least 50%5 of the cash inflow from loan proceeds in 10% of provinces.Study on Local Fiscal Surplus/Deficit years. In contrast.. these LGUs (with concurrence of the creditor banks) re-structure (i. a reading of the Annual Audit Reports for individual LGUs for 20062007 and key informant interviews during the field visit indicate that the frequent restructuring of LGU debt is another possible manifestation of fiscal distress. the cash inflows from new borrowings are compared with the cash outflows for the redemption of old debt for all LGUs in the Philippines in 2007. 14 0.87 3.16 3.17 0.7 4.65 0.0 1.2 6.14 0.08 0.55 4.64 3.1 0.04 0. P a g e | 144 .7 1.3 2.6 37.4 36.15 0. some debt management indicators may also be considered.54 2003 5.13 0. a measure that assesses the size of debt service relative to LGU income and one that compares the amount of cash outflows to amortize/ redeem past debt relative to amount of cash inflows from the incurrence of new debt.23 0. 2002-2007 (in billion pesos) % increase 20022007 145.8 0.9 136..13 0.11 0.16 0.21 0.12 2.05 0. Gross borrowings and outstanding long-term liabilities of all LGUs.23 Gross borrowings Provinces Cities Municipalities Outstanding long-term liabilities Provinces Cities Municipalities Gross borrowing as % of GDP Provinces Cities Municipalities Outstanding LT liabilities as % of GDP Provinces Cities Municipalities Gross borrowing as % of LGU income Provinces Cities Municipalities Outstanding LT liabilities as % of LGU income Provinces Cities Municipalities Source: COA AFR.1 5.5 2.14 0.40 0.05 0.15 0.8 6.Study on Local Fiscal Surplus/Deficit Table 7.8 7.5 21.8 10.16 0. e.9 24.04 0.0 1.2 110.36 0.73 0.3 90. various years 2002 4.16 0.14 0.2 0.16 2.1 31.12 0.41 5.9 28.25 0.81 4.04 0.4 3.24 1.62 0.17 3.04 0.7 1.11 Still another measure of fiscal performance which may be included in the list of indicators of fiscal performance that should be tracked is the overall fiscal balance as a summary measure of LGU’s borrowing requirement.73 2004 6. “the extent to which government is either putting financial resources at the disposal of other sectors in the economy or utilizing the financial resources generated by other sectors” (IMF 2001).73 2007 10.2 2.15 0.11 0.08 0.8 9.1 67.5 7. i. The overall fiscal balance allows government to focus on the financing constraint which has traditionally been viewed as government’s most binding constraint.5 24.83 2.8 0.9 200.03 0.04 0.05 0.21 0.0 10.15 0.05 0.07 0.03 0.4 0.36 0.69 0.12 0.9 2.3 0.8 2.17 0.13 0.24 3.15 0.22 2.12 0.6 0.02 2.16 0.65 0.17 3.12 0.e.61 0.37 0.96 3.02 2006 8.03 2.6 1.04 0.06 3.15 0.04 0.70 0.35 0.0 14.2 177.17 0.7 14.84 5.2 17.2 1.34 0.11 0.02 0.g.5 45.9 2.22 0.16 0.9 1.14 0.8 8.3 4.65 2005 6.04 0.53 3. In addition..65 0.16 0.1 11.17 0.28 0.02 0.7 0.5 1.18 0.19 0.4 17.77 2.3 57.3 5.8 7.97 2.81 3.61 2.15 0.58 2.08 0.10 0.06 0.74 1.15 3.15 3.02 0. Meanwhile. the amount available for appropriation at the beginning of the period is equal to the difference of government equity. they do not include an estimate of the amount of resources available for appropriation at the end of the previous year when they prepare the budget proposal for the incoming year. the majority of LGU budget officers interviewed as part of this study report that. Instead. P a g e | 145 . the provisions of the LGC authorizing (i) the carryover of appropriations for capital outlays into future years. and (vii) unused inventories. underscores the need for arriving at a good measure of the amount of “resources available for appropriation or operation at the end of previous year” (sometimes also referred to as the amount of free resources) at the end of any given fiscal year. In principle. This measure is perhaps even more critical than the current or overall fiscal balance not only in enforcing fiscal discipline but also in improving resource allocation and operational efficiency as it promotes total resource budgeting. Arriving at good estimates of this measure will contribute significantly to the improvement of public expenditure management system by better defining the LGU resource envelope. (ii) equity set aside to finance capital projects backed up by continuing appropriations. and the sum of (i) total plant. Table 6 shows that amount available for appropriation varies from 4% . In fact. when they prepare the budget proposal for the incoming fiscal year. more than a few of the LGU technical staff interviewed during the field visits had difficulty providing estimates of this measure. As a result.Study on Local Fiscal Surplus/Deficit 3. (v) prepayments. Unfortunately.9% of total LGU income in 2002-2007. (ii) the reversion of unexpended balances of appropriations for personal services and MOOE to the unappropriated surplus of the general fund and (iii) the enactment of supplemental budgets provided that they are supported by funds that are actually available for appropriation or new sources of revenues. the amount of resources available for appropriation at the end of the previous year cannot be read off easily from any of the existing financial reports. maintenance and other operating expenditures and capital outlays. (vi) contingent capital or receivables. a comparison of Table 1 with Table 6 6 7 This amount should be disclosed in the Notes to the Financial Statements. despite guidance in the Updated Budget Operations Manual (DBM 2005) to the contrary. property and equipment including public infrastructure in process net of total long-term liabilities. the amount available for appropriation at the end of the year may also be computed as being equal to the amount available for appropriation at beginning of the year plus revenues / income in current year less current and capital expenditures in current year less accounts payable less value of continuing appropriation. on the one hand. The authors wish to thank Carmen Antasuda of the COA for sharing this formula.2. they only look at estimates of current revenue/ income vis-à-vis proposed spending for personal services.7 Alternatively.6 (iv) sinking funds. (iii) obligated allotments for which no liability had been recognized as yet. Measuring Resources Available for Appropriation As discussed in Section 2 above. The amount available for appropriation was estimated for the 26 LGUs visited for this study. then it is more likely that said LGU will post an overall fiscal deficit. Relation between Amount Available for Appropriation and Overall Fiscal Balance.Study on Local Fiscal Surplus/Deficit indicates that the amount available for appropriation is consistently larger than the overall fiscal surplus during the period. This is perhaps indicative of the extent of creative accounting that is happening on the ground. On another level. However. A comparative analysis of the 26 LGUs visited for this study reveals that the incidence of fiscal deficit is higher (62%) than the incidence of negative amounts available for appropriation (Table 8). 2007 Negative Positive overall fiscal overall fiscal balance balance Amnt available for appro is negative Amnt available for appro is positive Total 8 3 Total 11 (42%) 8 16 (62%) 7 10 (38%) 15 (58%) 26 (100%) Recommendation. then it is more likely that the amount available for appropriation in the LGU is also positive. It appears that if the amount of available for appropriation in the LGU is negative. It is notable that LGUs which have negative “amount available for appropriation” share a common characteristic. The analysis reveals that the amount available for appropriation is negative in 11 (or 42%) out of these 26 LGUs in 2007. if the LGU has an overall fiscal surplus. Table 8. It is important for LGUs to be able to arrive at good estimates of this measure in order for them to be able to delimit how much they can legitimately subject to further appropriation. these 3 LGUs would have also posted fiscal deficits had they reduced their accounts payables. Eight out of the 11 LGUs which had negative “amount for available for appropriation” also registered fiscal deficits while 3 posted fiscal surpluses. The amount available for appropriation is another important indicator of fiscal performance that should be monitored on a regular basis. it would also improve public expenditure management at the local level if simple techniques to forecast the amount available for appropriation P a g e | 146 . Their accounts payable are significantly larger than their cash reserves. However. It outlines the specific steps LGUs have to take and the specific forms LGUs have to use as they go through the budget cycle in a manner that will ensure that they comply with the process and documentation requirements of law on local budgeting. On the other hand.. income estimates that are too easy tend to result in an overly conservative fiscal stance. On the one hand. many LGUs do not include any estimate of the amount available for appropriation for the year (t-1) in preparing the budget for year t.e.3. On the other hand. budget execution and budget accountability. review and execution of the budget are well laid out in the Updated Budget Operations Manual (DBM 2005). budget authorization. Managing the Fiscal Position The guidelines. processes and procedures governing the preparation. not including this amount in the preparation of the annual budget for year t detracts from the implementation of total resource budgeting and tends to fragment budget preparation.1.3. and non-implementation of much needed programs. On the other hand. the resource envelope). The handbook should aim (i) to communicate a policy framework for LGU budgeting that is anchored on the basic principles of public expenditure management. 3. These forecasting techniques would require the close monitoring of cash flows and utilization/ obligation of appropriations and allotments which are prescribed in the UBOM and the NGAS even now. large budget surpluses.Study on Local Fiscal Surplus/Deficit in the current year are developed so as to be able to include this estimate in the preparation of the budget for the incoming year. and (ii) to provide LGUs with tools and techniques that will help them incorporate these tenets in their budget processes. current practice may be justified on the grounds of fiscal prudence because of the difficulties involved in arriving at a firm determination of the amount available for appropriation. 3. On the one hand. budget review. Realistic Income Estimates Good public expenditure management suggests that budget preparation starts with a firm determination of the amount of resources that are likely to be available (i. there is also a need to equip LGUs with the tools that will assist them on the more technical aspects of budgeting. Instead they simply enact a supplemental budget in year t once the actual amount available for appropriation that is realized upon closing of the accounting books for year (t1) becomes evident. At present. The articulation of the policy framework is important because there is a need to provide the proper motivation for the various processes that are part and parcel of the local budgeting. The UBOM provides a comprehensive step-by-step guidance on budget preparation. overly optimistic income estimates lead to the sequestration of allotments P a g e | 147 . What is perhaps needed at this point is a handbook to complement the UBOM. Good budget execution calls for: (i) ensuring that the budget will be implemented in conformity with the budget legislation. In turn. and (iii) managing the use of resources efficiently and effectively. (ii) an adequate and transparent reporting system showing all movements on appropriation/ allotment/ obligation/ cash expenditure is installed to track transactions at each stage. (ii) adapting the budget to changes in the economic environment. pressures from local elected officials appear to have pushed income estimates upward such that in some LGUs the expenditure program has become bloated relative to what can realistically be supported by actual collections. P a g e | 148 . 3. the budget enters the budget execution phase. the UBOM provides Local Budget Forms which LGUs shall use in showing their income and revenue estimates. that the problem of arriving at realistic income estimates stems not only from purely technical factors but also from bureaucratic inertia as well as the desire of politicians to keep an excessive number of programs during budget preparation. There is a need to upgrade the technical capacity of LGUs in formulating honest and realistic estimates of income and sources of budget finance including the amount available for appropriation at the end of each fiscal year. the appropriation does not necessarily reflect actual fund utilization and the budget becomes non-transparent. and (iii) budget funds are released in a timely manner to support implementation of government programs. delays in project implementation. What is missing. subsequently. Pardo and Zipagan (2008) have developed a training module to do just this under ADB TA 4778. however. is guidance on how to develop good income estimates. It used to be that income/ revenue estimates tended to be generally biased downwards. Furthermore. It should be emphasized. however. reflective perhaps of local treasurers’ tendency to use collection targets that are easily within their reach. Recommendations.2. allocative efficiency and operational efficiency require that (i) effective controls at each phase of budget execution are in place to ensure that obligations and disbursements do not exceed appropriations.3. In practice. income/ revenue estimates on which the annual budget is based tend to be poor.Study on Local Fiscal Surplus/Deficit (especially in the early part of the year). Related to this. Many local treasurers do not appear to follow a systematic approach in coming up with their income estimates. fiscal discipline. More recently. Expenditure controls Once the budget is passed into an appropriation ordinance. This underscores the need for communicating the public expenditure management framework at the local level. delays in the obligation of expenditure authorization and. But perhaps more importantly. the allotment system is one way of ensuring that obligations incurred do not exceed spending authorization as embodied in the appropriation ordinance. The LBM also allows the imposition of reserves. The Local Budget Matrix (LBM) reflects the overall plan of the LGU for the release of allotments8 pertaining to approved appropriations disaggregated by department/ office/ program/ project and by object of expenditure. the allotment system forms the first line of defense in expenditure control. On the other hand. there is little guidance available on the technical aspects of cash flow forecasting and cash follow analysis. it may set aside a certain portion of the authorized appropriation of every department/ program to cover for any possible shortfall in revenue. By focusing on the control of allotment releases. The release of the “for later release” portion of the allotments for said items depends on the results of the periodic evaluation of the physical and financial performance of the department/ office/ project concerned. That is. These tools are essential to ensure that allotments are safely covered by cash or by future collections and that cash is available when it is needed to pay obligations. the allotment system requires a system of cash monitoring and programming through the use of periodic Cash Flow Forecast and Cash Flow Analysis. The “needing clearance” items generally include new programs/ projects. 8 P a g e | 149 . the Cash Program and Physical Performance Targets as the control devices in the allotment system. While the UBOM outlines the specific steps LGUs have to take and the specific forms LGUs have to use in the preparation of the Cash Flow Forecast and Cash Flow Analysis. The allotment advice is the authorization issued by the local chief executive allowing a department/ office of the LGU to incur obligations for specified amounts within its appropriation. The UBOM (DBM 2005) specifies the use of the Local Budget Matrix (LBM). the purchase of motor vehicles/ equipment and the payment of retirement gratuity and terminal leave benefits. the Physical Performance Targets contains the targeted performance indicators of each department/ office of the LGU which serves as standards/ guides against which physical and financial performance of a department/ office are measured and evaluated. Thus.Study on Local Fiscal Surplus/Deficit In practice. As discussed in the UBOM. the classification determines the relative ease in securing the allotment advice for the different expenditure items. It also paces the release of allotment advice by categorizing the different expenditure items in the appropriation ordinance into those not needing clearance (NNC) and those needing clearance (NC) prior to the release of the allotment advice. the system aligns the release of spending authority with the projected inflow of tax collections and other revenues. just like local governments in other parts of the world. These are essential inputs to a better functioning allotment system that will assist LGUs strike the right balance between fiscal conservatism and the need to provide the services that local communities are in dire need of. These practitioners also note that the stock of outstanding LGU long-term debt has almost doubled in the five-year period between 2002 and 2007. Simple spreadsheet models for cash flow forecasting and cash flow analysis have been developed by Manasan (2006). The discussion above highlights the need to build the technical capacity of LGUs to do cash flow forecasting and cash flow analysis. revisiting the revenue generation strategies of the LGU. There is a need to better understand the sources of the disparity and for the oversight agencies to adopt a common measures and definitions. In the light of the balanced budget P a g e | 150 . the DBM may also wish to establish benchmarks against which LGUs can compare the results of their cash flow forecasts and cash flow analysis to aid their decision making process as to the timing of the release of reserves. On the other hand. While it is generally agreed that financing is a constraint to local service delivery in the Philippines. and revising the methodology for revenue forecasting. At the same time. they also point to anecdotal evidence that some LGUs have resorted to the frequent restructuring of their outstanding debt. Significant differences in the BLGF and COA data on LGU fiscal aggregates measured on a cash basis have been observed in 2002-2007. LGUs in the aggregate have paradoxically registered fiscal surpluses year after year. is there need for Sanggunian action or resolution authorizing the local chief executive to reduce allotments without need for further consultation with the Sanggunian once it is established that actual revenues for the fiscal year will be lower than the estimates of income that were used in preparing the budget? Are the existing guidelines pertaining to the allotment system not enough to address this problem? 4. They say that once LGUs actually realize a fiscal surplus at the end of the fiscal year said LGUs immediately appropriate the full amount by enacting a supplemental budget. indicative perhaps of some kind of fiscal stress.Study on Local Fiscal Surplus/Deficit Recommendation. CONCLUSION Local governments in the Philippines are subject to some form of balanced budget constraint. practitioners argue that such surpluses are to a large extent illusory. To further assist LGUs. The policy problem thus boils down to the extent one can further stretch the fiscal space given existing resources without compromising fiscal discipline. The DBM may also wish to consider providing guidance on what steps LGUs need to take in the event of an impending fiscal deficit. For instance. and (ii) to provide LGUs with tools and techniques that will help them incorporate these tenets in their budget processes. On the other hand. some debt management indicators may also be considered.g. Still another measure of fiscal performance which may be included in the list of indicators of fiscal performance that should be tracked is the overall fiscal balance as a summary measure of LGU’s borrowing requirement.. The guidelines. At the same time. It is also important for LGUs to be able to arrive at good estimates of this measure in order for them to be able to delimit how much they can legitimately subject to further appropriation. There is also a need to build the technical capacity of LGUs to do cash flow forecasting and cash flow analysis. the amount available for appropriation is another important indicator of fiscal performance that should be monitored on a regular basis. The articulation of the policy framework is important because there is a need to provide the proper motivation for the various processes that are part and parcel of the local budgeting. e. There is a need for a handbook to complement the UBOM. The handbook should aim (i) to communicate a policy framework for LGU budgeting that is anchored on the basic principles of public expenditure management. These are essential inputs to a better functioning allotment system that will assist LGUs strike the right balance P a g e | 151 . there is a need to upgrade the technical capacity of LGUs in formulating honest and realistic estimates of income and sources of budget finance including the amount available for appropriation at the end of each fiscal year. a measure that assesses the size of debt service relative to LGU income and one that compares the amount of cash outflows to amortize/ redeem past debt relative to amount of cash inflows from the incurrence of new debt. review and execution of the budget are well laid out in the Updated Budget Operations Manual (DBM 2005). there is also a need to equip LGUs with the tools that will assist them on the more technical aspects of budgeting.Study on Local Fiscal Surplus/Deficit provision in the LGC. processes and procedures governing the preparation. Pardo and Zipagan (2008) have developed a training module to do just this under ADB TA 4778. the fiscal performance indicators in the Local Government Performance Monitoring System should include the current fiscal balance as a measure of LGU savings and its contribution to the pool of resources that is available for investment. In particular. It outlines the specific steps LGUs have to take and the specific forms LGUs have to use as they go through the budget cycle in a manner that will ensure that they comply with the process and documentation requirements of law on local budgeting. In addition. The overall fiscal balance allows government to focus on the financing constraint which has traditionally been viewed as government’s most binding constraint. the DBM may also wish to establish benchmarks against which LGUs can compare the results of their cash flow forecasts and cash flow analysis to aid their decision making process as to the timing of the release of reserves. revisiting the revenue generation strategies of the LGU. Simple spreadsheet models for cash flow forecasting and cash flow analysis have been developed by Manasan (2006). P a g e | 152 . To further assist LGUs.Study on Local Fiscal Surplus/Deficit between fiscal conservatism and the need to provide the services that local communities are in dire need of. and revising the methodology for revenue forecasting. Budgetary Decisions: London: Cambridge University Press. Manasan. James J. Anwar (ed. Managing Government Expenditures. Anwar (ed.: International Monetary Fund. Manila: BLGF Commission on Audit (COA). Local Government Code of 1991 Von Hagen. 1999.C. Folscher. A Public Choice Approach. 2008. 2002.: World Bank Schiavo-Campo.Study on Local Fiscal Surplus/Deficit REFERENCES Bureau of Local Government Finance (BLGF). 2007. 1996.: World Bank P a g e | 153 .” Report submitted to the Asian Development Bank as part of Technical Assistance Strengthening Provincial Planning and Budgeting. Anwar (ed. Manual on the New Government Accounting System (NGAS) for Local Government Units. D. 7160. “Budgeting Institutions for Better Fiscal Performance” in Shah. 1991.C. 2007. D. Budgeting and Budgetary Institutions. Manila: Asian Development Bank Republic Act (RA) No. Quezon City: Commission on Audit Department of Budget and Management (DBM). Rosario.C. Washington. Budgetary Politics in American Governments. 2005. D. Washington. Salvatore. New York: Routledge International Monetary Fund (IMF). Kraan. “Budgeting and Public Expenditure Management Guidebook. Manual on Government Finance Statistics. 2002. Statement of Income and Expenditures. 2005-2007. Jurgen. Transparency and Accountability. Salvatore and Daniel Tommasi. 2001. Budgeting and Budgetary Institutions. D.: World Bank Gosling. 2006.C. Alta.” in Shah. “Budget Preparation and Approval” in Shah. Local Budgeting.). Updated Budget Operations Manual for Local Government Units. 2007.). “Local Fiscal Discipline: Fiscal Prudence. Washington. Washington. Manila: Department of Budget and Management. Dirk-Jan.). Shiavo-Campo. many of them actually incur losses on a continuing basis. 58% for cities (79 out 136) and 40% for municipalities (593 out of 1495). parking areas.. a survey questionnaire was sent out by the study team in collaboration with Regional Operations Coordination Service (ROCS) and all the Regional Offices of the Department of Budget and Management (DBM) in the second quarter of 2008 on the types of LEEs operated by LGUs and the results of operation of these LEEs. Objective of the study. INTRODUCTION Local economic enterprises (LEEs) may include public markets. On the other hand. the less than business-like approach to local enterprise management has resulted in large arrearages and low collection efficiency. garbage collection and disposal. COA has documented many cases where the operation of LGU economic enterprises was not treated as special accounts in the General Fund contrary to the provisions of the Local Government Code (LGC) of 1991.IMPROVING THE FINANCIAL MANAGEMENT OF LOCAL ECONOMIC ENTERPRISES Rosario G. public cemeteries. and public transport and terminal services. P a g e | 154 . On the one hand. In the conduct of this study. part of the cost of LEE operation and management is sometimes charged under other offices in the LGU. recreational and cultural facilities. The less than transparent reporting of the actual financial condition and profitability of these enterprises may have some adverse effect on decisions taken by LGU officials. Manasan 2003) have pointed out that although LEEs are meant to be self-sustaining.g. Pardo and Zipagan 2008. Overall. Castel 1. among others. public utilities such as water and power supply and distribution and telecommunications. hospitals. slaughter houses. Earlier studies (e. The response rate was 28% provinces (23 out of 81). Current practice in many LGUs does not engender a clear appreciation of the true cost of the local economic enterprise. if not revenue-generating units. sports. economic enterprises are oftentimes used as the vehicle for charging casual employees who are utilized elsewhere in the LGU system so as to circumvent the 45%-55% limitations on personal services (PS) expenditures of LGUs. The objective of the study is to review and assess existing financial management and budgeting systems of LEEs with the end in view of providing inputs towards the improvement of existing guidelines and guidance on the financial management of LEEs. Manasan and Cynthia G. Palo in Leyte. Guimaras.1 Many of the newer LEEs (like state-of-the-art hotels. a desk review of relevant legislation. Barbara in Iloilo. In more practical terms. 54% of cities and 1 More formally. First. a good is to be non-excludable if the provision of the good to one individual will automatically make it available to other individuals. Sta. Tagum and San Fernando (La Union). LOCAL ECONOMIC ENTERPRISE SITUATIONER Increasing Number of LEEs Because there is no baseline information on the total number of LEEs as of any given reference year it is difficult to categorically say that there is a big increase in the total number of LEEs today compared to say. For instance. These LGUs include the following: the provinces of La Union. On the other hand. From traditional LEEs providing municipal services like markets. Surigao. there are indications that this is in fact the case. Davao del Norte. However. many other LGUs attended the consultation workshop in November 2008. today’s LEEs include enterprises that produce goods and services that are more in the realm of private goods (i. Basey in Samar. cemeteries and water services. Iloilo. Asuncion and Sto. and Agusan del Sur.1. Tacloban. 100% of cities and 93% of the municipalities who responded to the LEE survey operate markets while 95% of cities and 71% of municipalities operate slaughterhouses in 2007 (Table 1).e. Tubay in Agusan del Norte and Trento in Agusan del Sur. Bayugan. 2. field visits to 25 LGUs were also undertaken during which LGU officials were interviewed.” A good is said to be characterized by rivalness in consumption if an individual’s consumption of the good necessarily results in a reduction in the supply of that good that is available for the consumption of other individuals. In addition. San Jose del Monte. hotels and recreational facilities. good and services which are normally provided by the private sector) like shopping malls. 2. manuals and regulations governing LEE operation and COA Annual Audit Reports for various cities and provinces for the years 2005-2007 was also undertaken. excludability means that it is possible/ feasible for producers to charge a price for the good so as to prevent those individuals who are not willing to pay the price from consuming/ enjoying the benefits of the said good. Tomas in Davao del Norte. Markets and slaughterhouses are still the most popular forms of LEEs at present. Tagaytay. Iloilo. asphalt batching plants and tomato processing plants) involve more complex operations than the more traditional ones. in economics. the character of LEEs appears to have evolved over the years. the cities of Quezon. private goods (as opposed to public goods) are defined as goods which exhibit two properties: “rivalness” in consumption and “excludability. Leyte. On the other hand.Improving the Financial Management of Local Economic Enterprises As part of this study. Butuan. the pre-Code period. In addition. slaughterhouses. P a g e | 155 . and the municipalities of Bauang and Caba in La Union.. buildings for lease. a sizable number of LGUs operate the more non-traditional types of LEEs. not elsewhere classified 4 18 9 Markets 0 100 93 Slaughterhouses 0 95 71 Cemeteries 0 54 44 Commercial center 0 1 0 Cultural/ sports/ recreational centers 13 14 4 Parking lots 4 18 12 Hotels 0 9 1 Hospitals 48 16 3 Tertiary schools 4 9 3 Other LEEs. For instance. To wit. 48% of provinces run their hospitals as LEEs while 13% of provinces operate cultural/ sports/ recreational facilities. not elsewhere classified” category despite the care taken during the formulation of the questionnaire to include. 14% operate cultural/ sports/ recreational centers. 35% of cities. many of the newer LEEs. by type of LEE. 39% of municipalities and 104% of provinces operate LEEs in the said category. 23% operate garbage collection and disposal facilities. On the other hand. not elsewhere classified 104 35 39 a/ multiple answers allowed Source of basic data: LEE survey Some cities and municipalities have also ventured into managing their hospitals and special/ tertiary schools as LEEs. a big number of LGUs operate LEEs that belong to the “others. and 9% operate hotels. 2007 a/ Type of LEE Provinces Cities Munis Water utilities 0 11 36 Garbage collection/ disposal 0 23 17 Telephone 0 3 2 Electric/ power utility 0 3 2 Public transport terminal 4 34 10 Other utilities.Improving the Financial Management of Local Economic Enterprises 44% of municipalities operate cemeteries while 11% of cities and 36% of municipalities operate water utilities. Table 1. P a g e | 156 . 10% operate public transport terminals and 4% operate cultural/ sports/ recreational centers. 12% operate parking lots. For example. On the other hand. 18% operate parking lots. Proportion of LGUs (as % of total number who responded to survey) operating LEE. 16% of cities and 3% of municipalities operate hospitals while 9% of cities and 3% of municipalities operate special/ tertiary schools. in the list from which respondents are asked to tick off the type of LEE they operate. More significantly. 34% of cities operate public transport terminals. 17% of municipalities operate garbage collection and disposal facilities. However. 854 100. cities operate more than four LEEs each while municipalities operate more than three LEEs each in 2007.4 3.8 a/ b/ 3. LGUs are looking for more diversified sources of local revenue. LEE income account for 11%-12% of total own-source revenue of all LGUs in the aggregate and around 4% of their total income in 2005-2007 (Table 2).8 a/ b/ 9.721 235.408 225. 2.833 11.669 78. First.733 67.414 20.197 16.1 Cities Income from LEEs Total own-source income Total income Municipalities Income from LEEs Total own-source income Total income All LGUs Income from LEEs Total own-source income Total income b/ LEE income as % of total income Source: LGU Statement of Income and Expenditures.Improving the Financial Management of Local Economic Enterprises Second.747 8. In particular.376 12. provinces operate around 2 LEEs each on the average in the same year.9 a/ b/ 8.2 a/ b/ 4. Income from LEEs accounts for 3%-4% of total LGU income of all provinces combined.2.515 3.2 4.5 3.1 a/ b/ a/ LEE income as % of total own-source revenue Unfortunately.6 4.066 8. many LGUs continue to extol their LEEs for their contribution to LGU coffers in terms of gross receipts even as they turn a blind eye on the net losses that the very same LEEs generate year after year.202 197.638 19. LGU Income from Local Economic Enterprises. 2005-2007 2005 2006 million pesos % million pesos % Provinces Income from LEEs 1.660 7.018 19. Income from LEEs contributes a significantly larger portion of the total own-source income of provinces (20%-24%) and municipalities (19%20%) relative to that of cities (8%) in 2005-2007 perhaps because the ownsource revenue base of provinces and municipalities are more limited than that of cities. a point we will go back to later in this report.9 Total income 45.4 a/ b/ 2. On the other hand.663 20.633 83. P a g e | 157 . the contribution of LEE income to total income from all sources is less invariant with the level of government.349 7. Table 2.155 69.3 4.7 4.3 b/ 51. LEEs promise to be one such source.9 a/ b/ 7.570 75.765 14.5 4.0 a/ b/ 2.367 95.4 3.611 % a/ b/ 24. many LGUs are operating multiple number of LEEs at present.9 a/ b/ 3.957 15.2 3. On the average.602 Total own-source income 7.2 a/ b/ 4.064 19. 4% of total LGU income of all cities as a group and 4% of total LGU income of all municipalities in the aggregate in 2005-2007.5 3. In contrast. What Drives the Trend Towards Greater Number of LEEs? Key informant interviews undertaken as part of this study suggest that there are primarily three reasons why LGUs create and operate LEEs.535 3.456 52.406 53.927 11. BLGF 2007 million pesos 2.472 45.411 82.495 1.012 52.2 a/ 7.378 78. Improving the Financial Management of Local Economic Enterprises Second. P a g e | 158 . some LGUs officials apparently establish certain activities as LEEs because of the perception that doing so allows them increased flexibility in the grant of allowances to employees of the LEEs. 58% of cities and 56% of municipalities posted net losses on their aggregate LEE operations in 2006 (Table 3). they argue that local governments should invest and operate economic enterprises because private sector investment is not forthcoming and because said investments will give the necessarily push to generate more private sector investments in allied areas. In line with this. Although there was some improvement in net results of operations of LEEs operated by provinces in 2007.3. some LGU officials interviewed during the field visits said that LEEs are desirable because of the need for the LGU to have “catalytic” investments in order to generate greater local economic development. Note that Section 325 (a) of the LGC provides that the total appropriations for personal services of an LGU for one fiscal year shall not exceed 45% in the case of first to third class provinces. there was a movement in the opposite direction in the case of LEEs operated by cities. of the total annual income from regular sources realized in the next preceding fiscal year but the allowances of officials and employees of public utilities and economic enterprises owned. Put differently. the direction where LGUs lean on this issue depends on the orientation of LGU officials on the appropriate role of government in local economic development. Many LEEs Incur Losses Year after Year Eighty-nine percent of provinces. the second group raises the question. On the other hand. some LGUs appear to operate certain activities as LEEs for a number of dysfunctional reasons. the projections for 2008 show that LGUs are not expecting the financial positions of their LEEs to be very much different from that in the previous year. Needless to say. and 55% in the case of fourth class or lower. cities. On the one hand. the data suggests that LGUs expect their LEEs will continue to operate in negative territory in the future. and municipalities. While the first group argues in favor of a more aggressive stance in the creation of LEEs on the grounds of “crowding in” or stimulating the increased flow of private sector investments. it depends on whether LGU officials believe (i) in having an activist/ interventionist government. At the same time. operated and maintained by the LGU shall not be included in computing the maximum allowable expenditure for personal services. Thus. or (ii) in having a market-oriented government. many LGUs officials very candidly say that they put up LEEs because they have difficulty complying with the personal services (PS) expenditure cap in the Local Government Code. “does government have any business being in business?” Third. 2. 63% of cities and 56% of municipalities in 2007. In other words. the net result of aggregate LEE operations was negative in 77% of provinces. P a g e | 159 . hospitals and heavy equipment motor pools operated by LGUs as LEEs were unprofitable with no exception.380) 32 139 Based on the detailed information provided in the LEE survey. On the other hand.384) 33 248 89 (931) 30 272 58 (9.5 billion for municipalities in 2006-2007 (Table 3). Table 3. gross receipts from LEEs accounted for 14%15% of the total LEE expenditures of the cities that posted net losses in their aggregate LEE operation in 2006-2008 (Table 3). In contrast.068) 14 156 56 (1.265) 36 136 56 (1. gross receipts from LEEs cover less than a third of the total cost of their operations.1 billion for provinces. water systems tended to have 60% probability of being profitable. For instance. Results of operation of LEEs. the likelihood that public markets. 2006-2008 2006 actual Provinces % of LEEs posting net loss Net profit (loss) of LEEs in the aggregate (in mill pesos) Gross receipts as % of total expd of lossing LEEs Gross receipts as % of total expd of profitable LEEs Cities % of LEEs posting net loss Net profit (loss) of LEEs in the aggregate (in mill pesos) Gross receipts as % of total expd of lossing LEEs Gross receipts as % of total expd of profitable LEEs Municipalities % of LEEs posting net loss Net profit (loss) of LEEs in the aggregate (in mill pesos) Gross receipts as % of total expd of lossing LEEs Gross receipts as % of total expd of profitable LEEs Source of basic data: LEE survey 2007 actual 77 (1. the net result of operations of LEEs of all LGUs combined was negative in 2006-2007. The aggregate net loss from LEE operations was PhP 0.9 billion – PhP 1.PhP 10. The corresponding figures for provinces and municipalities were 30%-33% and 32%-36%.582) 14 138 63 (10.3 billion .6 billion .Improving the Financial Management of Local Economic Enterprises In the aggregate. respectively.8 billion for cities and PhP 1. slaughterhouses and cemeteries will be profitable is less than 50%. On the average. PhP 9. Tertiary schools also had a high likelihood (86%) of posting net losses (Table 4).PhP 1.881) 15 144 64 (13.071) 33 113 2008 projected 75 (1.482) 34 137 47 (1. (iii) poor collection efficiency. This implies that the 25% of the stalls are either not occupied or not reserved. (ii) low tariffs. For example. Percentage of LEEs posting net losses. by type LEE. indicative of unrealistic projection of demand in the feasibility study or poor marketing. four concerts/ shows used the Tacloban City City Convention Center free of charge even if the said shows collected entrance fees in 2006 because of the failure of the Sangguniang Panglunsod to enact an ordinance prescribing rental rates in time for the completion of the said venue. At times. Weak institutional support and technical capability. For example. 2007 All LGUs combined Markets Slaughterhouses Cemeteries Water system Heavy Equipment/ Motorpool Hospitals Tertiary schools 53 56 55 40 100 100 86 Source of basic data: LEE survey and COA Annual Audit Reports. the public transport terminal failed because of the ordinance mandating the re-routing of public transport vehicles was not passed. many Sanggunians have shown a reluctance to pass an ordinance that will set LEE rentals/ tariffs at appropriate levels. in one of the LGUs visited for this study (San Jose del Monte City). Also. At the same time. rehabilitation/ construction of access road) to a commercial facility was not put in place thereby resulting in low business traffic for the LEE (e. P a g e | 160 . namely: (i) weak institutional support and technical capability.g. there were a number of cases where the infrastructure support (e. LGU officials reported that the demand for slaughterhouse services projected in the feasibility study was as large as the total demand for the entire province despite the fact that there were already existing slaughterhouses in other LGUs in the province.g. LGUs have generally shown weak institutional support towards the operations of their LEEs. the reasons for LEE losses are attributable to a number of factors. in one LGU. Moreover.. On the other hand. the needed policy support for the successful operation of an LEE appears to have been overlooked. the technical capability in assessing feasibility studies of LEEs and overall LEE management appears to be weak in many LGUs. For instance.Improving the Financial Management of Local Economic Enterprises Table 4. Butuan City). the COA Annual Audit Report for Danao City (2007) indicates that only 61% of the stalls in its Integrated City Terminal and Public Market are occupied while an additional 14% have been reserved but are not yet occupied). 2007 Based on the key informant interviews conducted for this study. P a g e | 161 . and (iv) cage wheels of the hand tractors that were actually procured were “narrow/short” and easily submerged in the rice fields when used. a number of them backed out for various reasons: (i) unaffordable price and payment scheme. proposal or recommendation on the feasibility of this undertaking (COA Annual Audit Report for Eastern Samar 2007). the City Slaughterhouse has to compete with the many illegal 2 The total cost of the hand tractors was PhP 31. the province was able to sell 30 units to farmers. and (iii) some LEEs are established and operated primarily to address social objectives. due to the high elevation of the area.Improving the Financial Management of Local Economic Enterprises Baybay City provides another example of poor project identification. The OPAS revealed that a lot of farmers had initially shown interest in obtaining these machines thru loans.1 million. resulting in a loss of PhP 28. certification fee. Still another illustration of the lack of a feasibility study is provided by the provincial government of Easter Samar. In 2006. the slaughterhouse was not utilized because there is no water in the vicinity and.3 million for the province. Low tariffs and fees.2 However. This arise because the fees collected by the San Pablo City Slaughterhouse are still based on the 1992 City Ordinance. the Water District is unable to serve the location. Post Mortem fee. The COA Annual Audit Report for San Pablo City (2007) noted that income from the City Slaughterhouse could not be increased to support its operations largely because the present rate of fees charged and imposed by the City to the customers is significantly low compared to that of neighboring cities and municipalities. the Office of the Provincial Agricultural Services (OPAS) of the provincial government neither submitted nor was required to submit a study. However. Further. Thus. there were no takers for the remaining 310 units as of the end of 2007. Partly because of the weak policy support and the inadequacies in the technical know-how on LEE operations. there are fees collected in other cities/municipalities which are not collected by the City of San Pablo such as: permit fee. (ii) farmers’ preference for brands with spare parts that are available in the local market. the provincial government of Eastern Samar borrowed money from the Development Bank of the Philippines for the acquisition of 340 units of hand tractors for subsequent distribution to farmers on credit. Babay City constructed a slaughterhouse in 2005 with loan financing. At the same time. Seven months after the hand tractors were procured and delivered. (ii) lack of appreciation of the concept of cost recovery on the part of LGU officials. the tariffs or user charges charged by LGUs for the good and services provided by their LEEs appear to be low relative to the cost of providing said goods and services for a number of reasons including: (i) the Sanggunian Ordinance authorizing the fees and charges is outdated. (iii) the hand tractors procured by the province did not include the plow. However. 094. At the same time.4 million) from the operations of the city’s public market (COA Annual Audit Report 2007). Because of similar losses in earlier years. the gross revenue from slaughterhouse operation was P990. etc. not all the stallholders in the public market are issued contracts thus their obligations are not well defined and established and the liabilities of the stallholders cannot be legally imposed.. in Batangas City.356. schools.4.466 per unit. Increasing Financial Risks Assumed by LGUs and LEEs Gross borrowings of all LGUs as group grew at a rate of 20% yearly on the average from PhP 4. the operations of the slaughterhouse suffered continuous losses totaling P10 million.900 while its combined expenses for personal services. LGU officials decided not to utilize some machineries and equipment starting in 1999 to reduce expenses for electricity and maintenance. Note that the hand tractors were sold to farmers on credit and were payable over a period of 3 years.194 (COA Annual Audit Report for San Pablo 2007). resulting in a total loss of PhP 3. On the other hand. As a result.3 billion in 2007 (Table 5). 2. it is not surprising that 100% of hospitals and 86% of tertiary schools that are organized by LGUs as local economic enterprise are operating at a loss (Table 4). Thus.e. and maintenance and operating expenses were PhP 3. the slaughterhouse was downgraded by the National Meat Inspection Commission in 2002 from Class “AA” to Class “A”. 41% of the projected income from stall rentals in the public market of San Carlos City in Pangasinan is not collected (COA Annual Audit Report for San Carlos City 2007). P a g e | 162 .2 billion in 2002 to PhP 10.326 per unit. For instance. the COA Audit Report for Danao City in 2007 suggests that only 50% of the rentals due from occupied stalls was collected. many LEEs also tend to have poor collection efficiency. In 2007. the provincial government of Eastern Samar sold the hand tractors that it acquired for subsequent sale to farmers at a credit sale price of PhP 80. Meanwhile.) are deemed to address some social objective. This amount is lower than the acquisition cost of PhP 91. subsidy from General Fund Proper of PhP 13. Third. implying a loss of P2. some LGUs set their fees at rates that are lower than that which will allow full cost recovery right at the start ostensibly because some LEEs (like hospitals.7 million3 if the province were able to sell all the units it bought. Moreover. uncollected stall rentals account for about 20% of the implied losses (i. In 2003-2007.Improving the Financial Management of Local Economic Enterprises slaughterhouses that are operating in the City as the Sanggunian has not passed an ordinance regulating said entities.365. In like manner. This 3 This amount does not include the cost of money. 8 0.8 8.2 6.9 2.6 1.62 2003 5.9 2.3 0.1 5.2 1.65 2005 6.13 0.7 4.9 1.1 billion in 2002 to PhP 45. The case studies provided below are by no means representative but they are presented here to highlight the financial risks that LGUs take on when they decide to establish LEEs.8 2.3 5.70 2006 8. 2002-2007 (in billion pesos) % increase 20022007 145.4 36.2 0.65 2004 6. Thus.0 10.8 9. It is composed of commercial stalls and a department store.1 67.5 7.8 10.61 2007 10. outstanding debt of all LGUs combined nearly doubled from PhP 24.4 0.1 Gross borrowings Provinces Cities Municipalities Outstanding long-term liabilities Provinces Cities Municipalities Gross borrowing as % of GDP Outstanding LT liabilities as % of GDP Source: COA LGU Annual Financial Report.16 0.6 0.Improving the Financial Management of Local Economic Enterprises rapid growth in gross borrowings necessarily resulted in increasing LGU indebtedness.4 3.3 90. various years 2002 4.14 0. Table 5.7 1.7 1.3 4. P a g e | 163 .9 24.8 0.11 0.5 1.5 21. a perusal of COA Annual Audit Reports in recent years suggests that a significant chunk of LGU debt are indeed used for LEEs. A province in the northern part of the country (Cagayan) initially issued bonds worth PhP 205 million for the construction of a commercial complex (known as the “Mall” for short) in 2003.8 7. Case study number 1.2 177.8 7.7 0.9 200.8 billion in 2007.1 31.69 Although there is no systematic information on what part of LGUs’ borrowings were used to finance LEE-related investments. with the debt stock of provincial governments coming in a close second. They also illustrate that the there are many instances when the demand projections made in the feasibility studies that are conducted in support of securing a bank loan or issuing bonds are not realized.14 0.7 14. The debt stock of municipalities grew fastest. Gross borrowings and outstanding long-term liabilities of all LGUs.9 136.12 0. The Mall is a 3-story building located at the provincial capital’s central business district.0 14. It was envisioned to be a major component of the provincial government’s economic enterprise to generate additional revenues for the province while at the same time serving as venue for the promotion and marketing of the province’s major products and industries (COA Annual Audit Report for the Province 2007).2 17.8 6.5 45.0 1.1 11.2 2.3 57.5 2.0 1.2 110.5 24.4 17. They show that many LGUs have incurred loans to finance the setting up of their LEEs and that a number of them have encountered in difficulties in servicing these loans.9 28.6 37.3 2. 2006.25% interest and payable in 13 quarters or until the year 2010. In the first half year of its operations. However. weddings.0 with 4. the bonds were redeemed and the outstanding principal and interest of PhP 166. the COA notes that there are still unoccupied spaces which could add to the income of the Mall. In April 30. Case study number 2. If the yearly income of the Mall is pegged at its 2007 level. A province in the southern part of Luzon (Batangas) borrowed PhP 238 million from the Land Bank of the Philippines (LBP) for the P a g e | 164 . The buy-out scheme has a 5. hold out deposits equal to the total amount of the loan is held by the creditor bank.Improving the Financial Management of Local Economic Enterprises The proceeds of the bond floatation was subsequently augmented by PhP 69.1 million from the General Fund and PhP 17.04% instead of the 24% that was shown in the feasibility study. However.4 million. When a new governor assumed office in 2007. the hold out deposits cannot be used for the implementation of projects which deprives the province’s constituents of the benefits from said projects.3 million.0 million per year. Moreover. Furthermore.3 million from the interest income earned on deposits (Project Fund/Sinking Fund) in order to defray the total construction cost of the Mall which reached PhP 291. it registered a net income of PhP 6. the Mall posted a net loss of PhP 2. the COA then estimates that it will take the province 48 years. Although hold out deposits earn interest at the regular rate for savings deposit. 2006. The COA estimates that from 2008 onwards the total amount to be recouped amounts to PhP 310. The buy-out scheme also required a hold out deposit equivalent to the amount of the loan until it is fully paid. meetings and the like. Thus. still much higher than what is assumed in the feasibility study. in August of that year. The Mall formally started its operation on June 1.4 million for the full year of 2007.25% interest payable in 7 years. the loan was transferred to the Land Bank of the Philippines. and required a hold out deposit equivalent to the amount of the loan until it is fully paid.4 million. including the interest payments due in 2008-2010. the internal rate of return is estimated to be 0. including a function hall that could be rented out for seminars.5 million was paid through the proceeds of a loan of the same amount from the Philippine Postal Savings Bank (PPSB). with an outstanding balance of PhP 141. The COA estimates that the vacant spaces could earn additional rental income equal to PhP 4. the payback period is estimated to be reduced to 30 years. earning an interest based on the regular rate of savings deposit (COA Annual Audit Report for the Province 2007). which is 32 years beyond the payback period of 12 years in the feasibility study and 18 years beyond the estimated useful life of the building of 30 years. if it is assumed that all the stalls and the function room will be fully occupied from 2008 onwards. the COA noted that while the loan is not yet fully paid. landing and parking fee collections amounted to PhP 5. resulting in a net loss of PhP 15. In addition to this. It was also initiated to address the socio-economic problems brought about by the redevelopment of the port area wherein many illegal settlers were displaced.2 million.3 million and other operating expenses totaling PhP 1. The COA. especially the displaced settlers benefiting from this project. The PLC building lacked the necessary amenities to be taken seriously by investors. The PLC was built on a borrowed fund with LBP and the projected income is not realizable. Retailing activity is envisioned to be the main function of this facility. The PLC is located in the port area right in front of the fast craft terminal building. the amortization of the loan amounting to PhP 14.8 million was paid to the Land Bank in 2007. packaging and promotion is weak. The new administration is proposing to reinvent/ reengineer the PLC from being a “white elephant” to being self-liquidating by: Negotiating for the restructuring of the province debt-obligation with LBP Considering the possibility of the PLC building as site of the following: Shipping Lines Call Center Maritime School Hotel “Tiangge: Divisoria Style Regional Offices Combination of the above P a g e | 165 . Interest expenses of PhP 19. Marketing wise. The building and other equipment continue to depreciate.3 million. The feasibility study was haphazardly done. Investors turned-off by the very onerous conditions.1 million were incurred. In 2007. The PLC is a two-storey commercial building with the central passenger terminal as the main feature of the complex. thus. The rentals/fees for this economic enterprise are to be approved by the Provincial Economic Enterprises Board. The COA reports that none of the projections were realized except for nominal parking fees that were collected. puts forward the following opinion: “The objective of the provincial government in establishing the PLC is not attained for evident reasons: Poor planning. Although the construction of the building was completed in the June 2004. with the small and medium entrepreneurs.Improving the Financial Management of Local Economic Enterprises construction of a Port and Livelihood Center (called the PLC for short) in 2003. the project did not materialize as planned. Lack of political will in containing the problem brought about by the stallholders comprised of the illegal settlers. just to comply with LBP requirements. The establishment of the PLC was envisioned to enhance economic activity in the province and serve as a springboard for promotion and investment. In fact. however.Improving the Financial Management of Local Economic Enterprises Inviting LBP to put up a branch office at the PLC building Repairing the PLC building. a reduction in the rental rates was being considered at the time of the audit (COA Annual Audit Report for the City 2007). contrary to sound management practice (COA Annual Audit Report for the City 2007). it was found that only 6 floors are being used by the city college in 2007. the 7th to 13th floors. The COA reports that the city government did not conduct a feasibility study prior to the acquisition of the building. A Metro Manila city (Manila) borrowed PhP 450 million in 1995 from the Development Bank of the Philippines (DBP) for the purchase of a lot and building in what used to be its premier financial district for the use of its city college. P a g e | 166 . The COA concludes that the vacant floors and spaces could have been developed for lease or rent in order to generate self-sustaining income to help defray the interest expense on the loan. the city also took out a loan worth PhP 239 million in 2003 and another one worth PhP 176 million in 2006 for the renovation of its public markets. Case study number 3. Case study number 4. However. it is estimated that the commercial complex has to almost double its current rental income for it to be able to break even in its operations in the next 15 years assuming a 5% rate of interest. the city prepaid the balance of the DBP loan by taking out another loan from the Philippine National Bank (PNB) worth PhP 330 million in 2001. This does not appear to be likely. were left vacant. Moreover. The remaining floors. given that 30 of the 51 stalls in the complex are not occupied in 2007. Subsequently. The operations of the commercial complex generated a total income of PhP 32. Another Metro Manila city (Caloocan) issued bonds worth PhP 225 M in 2001 for the construction of a parking and commercial building complex.5 million in 2003-2007. However. It further notes that this resulted in lack of adequate guidance in ascertaining the viability and economic sustainability of the project. Given this. In addition to the loan for the acquisition of the building for the city college. Some city officials attributed the vacancies to the allegedly “excessive” rental rates that were set for the commercial complex. the rental earnings did not sufficiently meet the city’s bond flotation obligations which amounted to PhP 236 million for the same period. the COA reports that all of city’s local economic enterprises generated net losses in 2007. g. goods and services for which prices/ fees may be charged). however.. SOEs may have to be categorized in terms of “their potential to earn a positive return as well as the way such enterprises commonly operate elsewhere. namely: the public dimension and the enterprise dimension.” Shirley (1989). government business enterprises. Jones 1982. public sector enterprises. clarifies that since many entities that have the potential to be financially viable may also have non-commercial objectives.” In other words. parastatals. In the following sub-section. In a more restricted sense. sometimes with the latter dominating the commercial objectives. The term “economic enterprise” is not well defined in the Philippines as we shall see below. World Bank 1995). we also review the theoretical and empirical underpinnings for the existence of state-owned enterprises. if not profit-orientation. it is notable that the closest concept to “economic enterprise” in the international literature is that of “state-owned enterprise” or SOE.. Thus. The enterprise dimension relates to government ownership. Review of literature: What are SOEs? Why/ Why not SOEs? In the international literature. In this regard. the term “state-owned enterprise” (also known as public enterprises. (ii) the need for greater clarity in the treatment of LEEs in budgeting. These issues include: (i) the need for a clear policy framework for the creation and continued operation of LEEs. and (iv) the need to strengthen LGU capacity in operating LEEs more efficiently. the enterprise dimension is sometimes used to refer to production entities that “operate according to commercial principles. control and/ or management. the outstanding issues that impinge on the financial management of LEEs are examined more closely in this section. or government owned and/ or controlled corporations) is used to refer to government owned or government controlled economic entities that generate the bulk of their revenues from selling goods and services (e. The enterprise dimension implicitly relates to the achievement of some level of cost-recovery.e. the enterprise or “marketedness” dimension limits the application of the term to entities that produce marketable outputs (i. OUTSTANDING ISSUES Given this perspective. On the other hand.1. the term public P a g e | 167 . and the potential for the enterprise to earn a return on investment.” An appreciation of the rationale or “reason for being” of economic enterprises and the advantages of LEEs over other modalities of service delivery are also important inputs to this process.Improving the Financial Management of Local Economic Enterprises 3. it is useful to start by reviewing how the term is defined in the international literature. This definition emphasizes two distinct characteristics of SOEs. Need for a Clear Policy Framework for the Creation and Continued Operation of LEEs Central to arriving at a clear policy framework for the creation and continued operation of local economic enterprises is an unambiguous definition of term “economic enterprise. 3. employment maximization. and externalities. private sector investors may not have the incentive to invest in industries which benefit other industries without being paid for the service thus provided (Chang 2007). the argument for government ownership rests primarily on the potential of government of public enterprise ownership to correct the inefficiencies that arise from various types of market failures. large-scale projects with long gestation periods. Third.g.. P a g e | 168 . For example. On the other hand. employees. Other analysts (e... hence no one has the responsibility and motivation to set clear performance goals and assure they are attained. natural monopoly. private sector investors may be unwilling to invest in projects that have high returns in the long run but carry high risks in the short term because capital markets have an inherent bias towards short-term gains and do not like risky. it is argued that government ownership allows government to prevent a natural monopoly from setting prices so high that their products are no longer affordable to a wider segment of the community while at the same time avoiding the difficulties associated with the regulation of natural monopolies. and other interest groups thrust upon SOEs multiple and often conflicting goals (e. price increases.g. politicians. e.. all contingencies and certain aspects of performance are difficult to define in advance.g. underdeveloped capital market. distort the incentives facing SOE managers and reduce managerial effort” (World Bank 1995). Multiple objectives and multiple constraints increase transaction costs. Instead. First. profit maximization.Improving the Financial Management of Local Economic Enterprises enterprise or SOE may refer to entities which have both social and commercial objectives. government regulation involves contractual arrangements that are difficult to manage. and a host of other social objectives) while simultaneously imposing a bewildering and sometimes contradictory collection of constraints (e. and the choice of suppliers or markets). The economic justification for SOEs essentially says that public enterprises are a better alternative to their private sector counterpart (i) if they overcome market failures and (ii) if they are superior to regulatory alternatives (Shapiro and Globerman 2004). the case against government ownership (through SOEs) recognizes market failure but argues that the risk of government failure may even be greater. However.” This definition thus adds a third dimension to the basic SOE definition by putting emphasis on SOEs having “separate legal personality” and implying that SOEs take the corporate form. Public ownership of the SOE implies that “no one has a clear stake in SOE returns. bureaucrats. The contract negotiations and the 4 Government ownership of many public utilities is often justified on this ground.g.4 Second. Shirley 1989) use the term “state-owned enterprise” in a more limited sense by defining an “SOE as a publicly owned entity with a separate legal personality and separate accounts that earns the bulk of its revenue from the sale of its goods and services. On the one hand. restricting layoffs. This definition of an economic enterprise/ public utility in the UBOM is vague and may be interpreted to mean that any activity that delivers goods/ services and 5 In turn. FAQS-A). Shleifer.1. if still ambiguous.” The UBOM says economic enterprises are “income-generating establishments created for the purpose of improving production & delivery of basic goods and services for a specified market or client group” while public utilities are “revenueraising undertakings created for the purpose of providing a basic need or service to the general public which otherwise cannot be provided adequately by the private sector” (p. Moreover. Thus. elections are not good mechanisms for producing information on voter's preferences because they are held infrequently and are not constrained to deal with any specific issue (Shirley and Walsh 2000). 188. Thus. since politicians who manipulate SOE operations for political reasons receive all of the benefits of such interventions. definition of the term “economic enterprise. P a g e | 169 .1. Need for a greater clarity in the use of term “economic enterprise” Both the Local Government Code and Manual on the New Government Accounting System (NGAS) for Local Government Units (COA 2002) do not provide an explicit definition of the term “economic enterprise”. Many of the arguments in favor of SOEs are premised on the assumption that political markets are efficient. The Updated Budget Operations Manual or UBOM (DBM 2005) provides an explicit.Improving the Financial Management of Local Economic Enterprises legal disputes that sometimes occur as part of contract enforcement may involve substantial transactions costs (Chang 2007). some analysts (e.5 However. on the other. the potential beneficiaries tend to free ride on any effort to support the “good” policy but the potential losers have the incentive to work harder to defeat said policy. but bear little of the direct (subsidies) or indirect (inefficiencies) costs. and Vishny 1996) assert that “political intervention in public enterprises is likely. and government failure. On the one hand. voters are not well informed about the actions taken by politicians and the consequences of said actions because of information asymmetry. However. the arguments against efficient political markets are coach in terms of the principal-agent problem between voters and politicians. On the other hand.g. The World Bank (1995) notes that the empirical evidence show that private regulated firms tend to perform the same as or better than SOEs in most studies (Shirley and Walsh 2000) 3. the choice between private and government ownership depends on the tradeoff between market failure.. the NGAS Manual implicitly defines the term by way of enumerating the various types of public utilities and economic enterprises that LGUs operate and assigning each one a sub-code number (Section 108). Boycko. the incidence of the benefits of “good” policy tends to be widely dispersed while the incidence of losses tends to be more concentrated in a few. on one hand.” It is also argued “that it is more transparent and difficult for politicians to overtly subsidize private firms than to slant SOE operations so as to serve their political goals” (Shirley and Walsh 2000). ” Recommendation. It also provides that “a business development plan shall be prepared (long-term. NEDA) should adopt a common definition of the term “local economic enterprise” emphasizing enterprise dimension.3. the use of the qualifiers “income-generating” and “revenue-raising” falls short of saying that public utilities and economic enterprises receive the bulk of their revenues from selling their outputs. organization structure. 3. the “enterprise” dimension of public enterprise that we find in the international literature is not quite as evident in UBOM definition.2.Improving the Financial Management of Local Economic Enterprises generates some income/ revenue should be classified as such. The UBOM says further: “After two years of operation. p. For example. First.2. The “enterprise” dimension of LEEs is also not obvious from the Local Economic Enterprise Codes and the ordinances creating LEEs that have been enacted by many LGUs.” Second. Also. The NGAS manual makes an oblique reference to enterprise nature of LEEs. clients or beneficiaries. In this regard. FAQS-A. 188). medium-term and annual plan) stating its mission or purpose.2.1. Elements of New and Improved Policy Framework for LEEs There is considerable ambiguity with regards to the intent for the creation of or “reason for being” of LEEs. FAQS-A. the funding P a g e | 170 . improve fiscal management and enhance good governance. It states that “economic enterprises and public utilities shall be established after the conduct of a feasibility study showing proof of its economic and social viability in the long run” (UBOM. the use of the phrase “the production and delivery of basic goods and services” may be interpreted to be a reference to the production and delivery of public goods instead of “marketable goods and services. DILG. strategies. or as reflected in its business development plan. p.2. financial plan or budget and expected returns” (UBOM. The oversight agencies (DBM. the definition of Jones (1982) and the World Bank (1995) may be adopted: LEEs are local government owned economic entities that generate the bulk of their revenues from selling goods and services. 189). the LEE code of a small city in Mindanao states: “Policy statement – It is the policy of the city government to be self-reliant and self-sustaining by engaging in viable and stable economic enterprises that provide a wide range of opportunities that will uplift the socio-economic well being of its constituents. activities and projects. DOF/ BLGF. The UBOM does provide a clearer articulation of the enterprise nature of LEEs. It states that objective of maintaining special accounts in the General Fund for public utilities and economic enterprises is “to determine whether the income these entities generate is sufficient to meet their respective operating costs” (Section 106 of NGAS Manual). As a result. even income from traffic management is considered as LEE income by some LGUs. the corporate form is arguably effective in promoting more business-like behavior of public enterprises by providing their managers greater operational autonomy and flexibility to “manage for results. It fills in service gaps not adequately provided by the private sector.2.189). It shall operate like a corporate body with a separate strategic plan and budget. there are only three chartered LEEs – the Pamantasan ng Lungsod ng Maynila.2. the NGAS and the UBOM is generally consistent with conceptual framework found in the international literature. in fact.2.4 of the UBOM indicates (refer to Section 2 above). existing policy framework as best articulated in the UBOM appears to lean more towards the public ownership model. FAQS-A. and the La Union Medical Center. And. p. the corporate form may help in shielding the enterprise from political interference. On the other hand. In this regard.8 seems to imply that LEEs should be self-sustaining with full recovery of at least their operating costs. Admittedly. The UBOM further elaborates on the rationale and criteria for the establishment and operation of local economic enterprises and public utilities as follows: LEE satisfies both the economic and social objectives of the concerned LGU. the use of the term LEE is not actually limited in practice to activities that produce goods/ services that are not being provided by the private sector as FAQS – A.2. Also. (FAQS-A. many LEEs compete directly with private sector enterprises. many LEEs post net losses year after year as shown in Section 2 above. The guidance on LEEs found in the LGC.” The corporate form is also said to help public enterprises mimic the corporate discipline available in private sector through the application of commercial principles in their operation. P a g e | 171 . Many LGUs report that their LEEs are established to address social objectives as well. while FAQS – A. two items appears to be missing: (i) guidance on what the different alternatives to the creation of LEEs are. Furthermore.8.Improving the Financial Management of Local Economic Enterprises requirements of economic enterprises and public utilities shall be sourced from its operating income or user fees” (UBOM. in practice many LEEs are not deemed or have not been officially declared by concerned LGUs to attain some degree of cost recovery. These LEEs were created as corporations by Congressional legislation. the Quezon City General Hospital. 189). However. As a result of the weaknesses in the LEE policy framework. It shall operate with a lean and mean staffing complement to satisfy the income objective of the economic enterprise/ public utility. there is a need for the UBOM to clarify what it means when it says that LEEs should operate like a corporate body. To date.4 p. and (ii) cautionary statement on potential government failures that may arise with the establishment and continued operation of LEEs. In fact. XII of the Philippine Constitution).Improving the Financial Management of Local Economic Enterprises At present. In its rebuttal. all of legal age x x x may form a private corporation for any lawful purpose or purposes x x x.. 147402. Furthermore. Can LGUs create corporations? A number of LGUs (e. Because of this. being a juridical person by virtue of it being a corporation itself. This opinion is based on the fact that Section 10 of the Corporation Code provides that: “Any number of natural persons not less than five but more than fifteen. the COA states: “While it is concurred that only competent courts can declare whether or not a law or ordinance is constitutional. COA. Tagum City is one such example. It is also worth emphasizing that good results are possible even if the LEE operates as an organic part of the LGU. There are many examples in this regard. there are outstanding legal issues pertaining to the use of the corporate form for LEEs when Congress is not inclined to pass a law creating one (Box 1). the establishment of a dedicated to oversee LEE operations appears to promote good outcomes.e. consequently therefore. the COA is not precluded in the exercise of its constitutional duty to review the propriety of the investment in question since it involves the disbursement of public funds. 16 Art. dated January 14. most of the discussion that follows would concern itself with how to improve the policy framework for LEEs given the existing legal framework. the Department of Interior and Local Government (DILG) in an opinion dated July 22. Misamis Oriental and Quezon City) have attempted to operate their LEEs by registering their LEEs as corporation with the Securities and Exchange Commission (SEC) under the Corporation Code. the Quezon City government maintains that the jurisprudence cited is not on all fours applicable to the case of the QC-Housing and Urban Renewal Authority (QC-HURA). one where the use of the corporate modality for LEEs is limited. GR No. Ranulfo Feliciano. 2004). In many of these good practice examples. It further asserts that only a competent court can declare a law/ ordinance unconstitutional. …. the COA insists that the principle laid down by the Supreme Court (SC) Feliciano versus COA is applicable to QC-HURA where the SC clarified the Local Government Code did not delegate in the Sangguniang Bayan the authority to create corporations. any investment made for the purpose has no leg to stand on. However. In response to the aforementioned opinion of the COA. It also says that the LGC does not vest in the Sangguniang Bayan the power to create corporations (Supreme Court in Engr.. BOX 1. i.” P a g e | 172 . 1997 (as cited in Pardo and Zipagan 2008) asserts that an LGU.” On the other hand. cannot be an incorporator of a private corporation. Leyte Metropolitan Water District vs. Considering that creation of QC-HURA is infirmed. the COA points out government corporations can only be created by Congress (Sec.g. The LGU decision making process with respect to the creation/ continued operation of LEEs under the new policy framework is illustrated graphically in Figure 1. It should also be premised on the superiority of private-sector led development unless a strong case can be made for government intervention. P a g e | 173 . Basic principles First. Given this perspective. 7 The assignment of expenditure responsibilities across levels of government is largely defined by the Local Government Code. Many of the elements of the existing framework will still be part of the new framework but a number of new features will have to be put in place. the need to establish a clearer and more comprehensive policy framework to govern the creation of new LEEs and continued operation of existing ones is critical. The framework should thus establish guidelines when government provision of marketable output is justified. the new policy framework should be anchored on the basic principle that LGUs need to focus on their core functions.Improving the Financial Management of Local Economic Enterprises Recommendations. The new policy framework should also recognize that some marketable goods/ services are better delivered by the government central7 and that the LEE modality is but one of a number of alternative service delivery modes. 6 These guidelines may simply provide criteria that will assist LGUs decide whether it should be engaged in the direct provision of marketable goods/ service and may include either a positive list of what marketable goods/ services are appropriate or not appropriate for LGU provision.6 These guidelines should take into account the tradeoffs between market failures and government failures as elaborated in the review of literature above. BLT. concessions. Shared Services Contracting Out Service. Thus. Canadian International Development Agency (CIDA). Management. BOO Public/Private Partnerships & Joint Ventures Including with private-not-for-profit entities (NGOs/CSOs) Partner Abandon Is corporatization feasible and desirable? Congress creates GOCC Government Owned and Controlled Corporations i. it should then assess the suitability of the alternative service delivery modalities in the context of its own particular situation. managerial problems and political realities that come into play against the inherent strengths and weaknesses of each of the various alternative service delivery modes. or should. and licenses or (ii) directly by the P a g e | 174 . Such an evaluation should take into account the financial risks. Draft report submitted to the Local Government Support Program (LGSP). leases. BT. LGU Inc. Graphical Presentation of LGU Decision Making Process Relative to Creation of LEEs Does the service contribute to achievement of LGU goals? Yes Is there a legitimate and necessary role for government in this service? Yes Should the LGU have primary responsibility for this service? Yes Could. Once the LGU deems it appropriate to provide a given service.e. when an LGU is confronted with the need to decide whether to provide a given good/ service. 2003. BOT. this service be provided in whole or in part by the private or voluntary sector? No Is the service affordable within fiscal realities? Yes Yes No Yes No No Alternative Service Delivery Options Privatization Service Shedding Divestiture Abandon Pass to NG Public Partnership – i.e. Service delivery can be done either (i) through organizations external to the LGU like private sector enterprises and non-governmental organizations (NGOs) via various types of public-private partnerships arrangements like service contracts.. Lease & Concession Contracts Built Operate Transfer i.Improving the Financial Management of Local Economic Enterprises Figure 1. “Developing the Public Economic Enterprise in the Philippines – The LGSP Way”.e. management contracts. the LGU should be advised to first check the alignment of said good/ service with its goals and core functions. Local Economic Enterprise Organic Unit in LGU No LGU creates LEE Adapted from: SEQUUS. Service contracts. The revenue collected from the water meters belongs to the LGU while the service contractor is paid based on the amount agreed in the service contract. (iii) responsibility for operation and maintenance. The LGU also sets the tariffs for the service. and (viii) extent of monopoly rights. The different publicprivate partnership modalities are discussed in some detail in Box 2. As an example. a service contract might be issued for the reading of water meters. (v) receipt of operating revenue. (iii) relationship to the consumer/ citizens. The operation and maintenance are met from the income received for the service and any operating surplus or deficit is the responsibility of the local government unit. Box 2. The service contractor. The operating income is controlled by the LGU and goes to its accounts. the LGU maintains ownership of the assets and is responsible for investments in construction and other capital requirements.Improving the Financial Management of Local Economic Enterprises LGU either through an LEE or through a regular unit or office in the LGU. on the other hand. P a g e | 175 . In other countries. is directly responsible to the citizen for the service and assumes all financial risks. (ii) responsibility for capital investment. The LGU may contract an external organization to delivery the service. the LGU continues to own the assets but the service contractor is responsible for the repair and maintenance of the assets and usually for the replacement of some equipment necessary for the delivery of the service. Under the service contract approach. (vii) degree of LGU subsidy. the LGU bears all responsibilities and financial risk. Management Contracts. under this option. (iv) regulation of user charges or tariffs. If there is no sharing of income. The use of management contracts can take two forms: (i) without sharing of the service income or (ii) with sharing of the income received from the delivery of the service. The contractor is simply paid for the service based on the agreed price. public service delivery through external organizations is commonly used for public utilities and social services like education. is simply paid a fixed fee for the service. Therefore. (vi) sharing of financial risks. The scope of this service contract can vary from a fairly limited one involving just part of the service to a more extensive one involving the entire service itself. Alternative Service Delivery Modalities Using Private Enterprises/ NGOs The alternative service delivery options using the private enterprise sector or non-government organizations differ in terms of how the contractual arrangements between the LGU and the private sector/ NGO are defined with respect to the following areas: (i) ownership of the assets. The service provider must return the assets to the LGU in good condition at the end of the lease period. repair and maintenance. The income sharing option is usually considered for those activities that are not expected to need an operating subsidy from the LGU although it is also used in some cases for services that may collect fees or charges while also receiving a subsidy. While the LGU has the same responsibilities and risks as in the “no-income-sharing” approach. and for replacement of shortlife equipment. P a g e | 176 . but has to invest capital in the constructing and providing the necessary infrastructure. Leasing. In some cases. the service contractor receives a fixed percentage share of the operating surplus on top of the fixed contract fee. including capital. and communication networks. All the financial risks are borne by the service contractor. The contractor might still receive some share of the operating surplus after the subsidy is received into the funds. the service contractor usually has discretion to charge less (but not more) than the regulated tariffs. a service contractor is given an exclusive right to provide a service for a fixed period of time. The service contractor collects the operating income and meets the operating costs.Improving the Financial Management of Local Economic Enterprises Box 2. The service provider is responsible for operation. In this approach. A concession may be useful for large scale infrastructure projects. toll roads. Con’t (2) In contrast. The service provider is directly responsible to those consuming the service and not to the LGU. a fixed fee for the asset use and a share of the income generated from the use of the asset. Two. Concessions. and is responsible to the consumers of the service. operation and maintenance. One. two additional features are generally present under the income sharing option. or (ii) a percentage share of the revenue. The service contractor is responsible for all costs. the LGU still owns the assets and is responsible for the investment and debt service associated with the assets. In a concession. less normal wear and tear on equipment. The service company thus bears all the financial risks associated with the operation of the service. or (iii) both. the revenue received from the delivery of the service is shared between the LGU and service contractor under the income sharing option. such as public utilities. The LGU may lease some of the assets it owns to a service provider in exchange for a rental price that the service provider will pay. repair. the LGU may regulate the tariffs for the service. The payment options for the service provider may take the following forms: (i) a straight rental price for the use of the asset. full amortization of the initial capital investment. etc or even refuse collection. sports. or cultural activities. This is often used for public transport service delivered by a service contractor under a concession arrangement. Con’t (3) The competitive approach to awarding the concession is generally used and the concession award may require service levels and charges/tariff limits. Thus. The LGU may provide initial subsidy or funding for the undertaking of the investment. At the end of the concession. This approach is often used where there is potential for competition and the service requires lower investment costs.Improving the Financial Management of Local Economic Enterprises Box 2. Licensing. This type of contract normally covers a particular program or activity. the LGU may have some claim to the operating income. “A Review of Alternative Service Delivery Options. owns the assets used and bears the financial risks. A service provider may be licensed to invest in and operate a service on the same conditions as a concession. In these cases. P a g e | 177 . but the licensed service contractor does not have the exclusive rights that a concession agreement has for the service contractor. the service contractor retains the assets used for the delivery of the service at the expiration of the license period.” Report submitted to the Asian Development Bank (ADB) under the Technical Assistance 4778 Project. and a reasonable rate of return on the investment. The financial arrangements may take several forms. recreation. Payment of the grant would be dependent on adherence to these standards and to periodic review of the activities being undertaken. LGUs may enter into a contract with a non-profit organization to provide to the service organization a grant to provide certain services. Funding Agreement. -----------------Source: Wright. Tariffs may be reviewed periodically and indexed to inflation or return on investment calculations. such as social. buses. The agreement would cover the broad content of the program and set standards of quality to be maintained. Glendal. The service organization is responsible for all investment and operating costs. tariffs and the period of the concession is calculated based on the recovery of operating costs. A Build-Operate-Transfer (BOT) is a form of concession. The LGU may also pay a subsidy to the service contractor as a means of lowering the charges/tariffs to the public for the delivery of the service. from 15 to 30 years. Essentially. the assets become the property of the local government unit. In this case. and not the whole operations of the service contractor. 2008. the period of the concession is generally for a long period of time. Licenses are often used for transport services. such as taxis. LGU service providers directly accountable to clients but compliance to service standards is typically part of contractual agreements between LGU and external service provider). the feasibility of public-private partnership type arrangements may be limited by two factors: (i) the availability and capacity of the private sector/ nongovernment organizations to undertake the delivery of these services.Improving the Financial Management of Local Economic Enterprises Criteria for evaluating pros and cons of using external providers versus direct service delivery by LGU Second. However. tariffs/ service charges (e.. and (ii) the capacity of the LGU to manage the necessary contractual and regulatory arrangements which can be both complex and costly at times. external provider might be more willing and capable of introducing service improvements especially if contractual arrangements provide the incentives to do so (Wright 2008). expertise and experience that is more often available to the external provider.g. two factors have to be taken into account: (i) market orientation. these advantages are only available if the following conditions exist: (i) there is some level of competition in the market with several providers capable of P a g e | 178 . and (iv) the LGU has access to the technology.. and (ii) alignment with the public interest. lifeline pricing and subsidization of poorer segment of the population).g. the fixing of tariffs or prices in the LEE is normally done by fiat or through an administrative process and is thus more subject to political interference.g. and innovations in service delivery (e. In contrast. On other hand. it is usually assumed that direct delivery of service by the LGU can be more easily aligned with the public interest in terms of access and coverage (e. In this respect.. Consequently. quality of service (e.g. (ii) the LGU is able to come up with a precise definition of the required service delivery levels. Wright (2008) notes that the international experience tends to show that the use of contracting/ concession methods and joint ventures yields favorable results when (i) the LGU does not assume all of the financial risks that come with the operation of the external service providers while being able to maintain control over the delivery of the services. On the one hand. the new policy framework should also provide LGUs guidance on the criteria that they may use in analyzing the advantages/ disadvantages of using external organizations to deliver public services as opposed to direct service delivery by the LGU itself. servicing of areas with low traffic volume). external service providers tend to operate in a more competitive environment and are thus subject to the discipline of the market place when they determine the appropriate number of their personnel complement as well as the level of tariffs that they should charge. However. (iii) there is transparency in the regulation of the external providers’ performance. Political pressure also tends to be strong on the LGU service provider in the area of staffing and personnel administration. the LGU service provider and external providers tend to be substantially different in terms not only of the incentives for efficiency and economy but also in terms of their cost structures (Wright 2008). 8 including schedule of rates by income bracket of clients where applicable. On the other hand. the government has the option to provide guidance on minimum rate of cost recovery for different classes of LEEs.Improving the Financial Management of Local Economic Enterprises providing the service at comparable cost and performance. (ii) tariff rates or user charges that will be charged for goods/ services provided by LEE.8 (p. (ii) tariff setting. The guidance should specify that LEEs should be established by enacting an ordinance that specifies in unequivocal terms: (i) LGU policy on degree of cost-recovery of LEE up front in terms of what percent of cost will be recovered from user charges. commercial buildings but allowing less than full cost recovery for certain types of public utilities and enterprises with social service orientation. with some degree of cost recovery in mind because by their very definition LEEs raise the bulk of their revenues from the sale of their outputs. Note that the need for ordinance is provided in the UBOM (FAQS-A.189) but the UBOM does not call for the specification of the cost recovery rate up front.2. For example. this approach opens up the possibility for abuses in hiring of staff and paying of the staff.189) 8 This means that subsidy given to LEEs is an ex-ante conscious decision on the part of the LGU rather than an ex-post item that finances whatever the resulting gap between revenue and expenditure is. In this regard.5. P a g e | 179 . Also. Given these considerations. it then has to choose whether to do so via an LEE or through a regular unit or office in the LGU. and (iii) corruption and other ethical infringements do not come into play. The La Union Medical Center provides a good example of how a well articulated policy on providing subsidy to the poor contributes to the efficient operation of the LEE.2. If this is followed then there is a need to revise FAQS-A. resorts. and (iii) who will be subsidized and by how much. LEEs are less subject to restrictions on staffing and have some flexibility in terms personnel remuneration allowing them to better attract professional and technical personnel. malls. (iii) investments in capital assets and maintenance of the same and (iv) overall performance orientation in the delivery of services. LEE tariffs are set by Sanggunian legislation and are determined. Guidance on creation of LEEs If the LGU deems it best to provide the service directly by itself. The new policy framework should provide explicit guidance on the creation of LEEs. in principle. These two approaches differ in terms of (i) staffing. LEEs tend to have greater inclination and wherewithal to make the necessary investments to maintain the equipment and facilities needed to deliver the service. LEEs may have greater drive for results and performance especially when the performance measures are clearly defined and monitoring/ evaluation systems are established and enforced. However. (ii) there is a fairly high level of expertise in LGU to formulate the metrics for outputs/ service performance assessment. guidelines may be issued suggesting that full cost recovery is a must for markets/ slaughterhouses and enterprises engaged in purely commercial operations like hotels. p. the framework should also institutionalize the periodic review of the operation of existing LEEs to help LGUs decide whether these LEEs deserve to continue their operation especially in the light of changing market environment. LGC provisions not quite clear on use of LGU income First. At the same time. For instance. activities that are commercial in nature but from which LGU has little or no intent to recover cost). Subsequently.2..Improving the Financial Management of Local Economic Enterprises of the UBOM to allow for less than full cost recovery as may be provided in the LEE ordinance. the Local Government Code also provides that: “Profits or income derived from the operation of public utilities and other economic enterprises. after deduction for the cost of improvement. one of the fundamental principles of local fiscal administration in the Local Government Code of 1991 states: “No money shall be paid out of the local treasury except in pursuance of an appropriations ordinance or law” [Section 305 (a)] Second. The new policy framework should then distinguish between LEEs created by ordinance with well articulated policy on cost recovery as described above and “LEE-like” activities (i. particularly as it relates to LEE operations. 3. In addition. Need to Clarify Treatment of LEE in the LGU Budget A number of LGC provisions related to budgeting create some confusion. The maintenance of special accounts for LEEs is essential in tracking the results of LEE operations and how closely LGUs follow their intent for creating LEEs.e. If the review shows that the continued operation of some LEEs is no longer justifiable. we argue that the budget format sends signals on how budget execution should proceed and thus affects LGU spending behavior. the new policy framework should then provide guidance on what the alternative options available to the LGUs in LEE divestment. some LEEs may have been created at a time when no private sector providers were present in the LGU jurisdiction but in the interim the private sector has entered the marketplace. 3. the policy framework should provide for the differential treatment of these two groups of activities in terms of budgeting and need for the maintenance of special accounts.2. the new policy framework should reiterate and re-emphasize the importance of the maintenance of special accounts for LEEs as prescribed by the COA under the NGAS. Institutionalization periodic review of existing LEEs Third.1. repair and other related expenses of the public utility or economic enterprise P a g e | 180 . g. On the other hand. LEE income does not form part of the total income estimate that is use as basis for budget preparation. However. revenues earned from an LEE’s operation are credited to an intra-agency receivable account known as “due from operating units account” while the operating expenditures of the LEE are debited from the same account by the LGUs that prepare their budgets in the manner of Option 2 above.2. income derived from the operation of LEEs is utilized in the payment of operating expenses without passing the usual budget procedures in direct P a g e | 181 . In practice. In this way. It will be seen below that this confusion appears to have caused a number of LGUs much grief. Any excess shall form part of the General Fund of the LGU concerned” (Section 313 – second part). shall first be applied for the return of the advances or loans made therefore. it should be stressed that such an interpretation of the Section 313 directly contradicts the basic principle of local fiscal administration set out in Section 305 (a) of the LGC. This way of preparing the LGU budget proposal is shown as Option 2 in Box 3. the same budget format is carried over in the appropriation ordinance. However.7. FAQS-A. proposed subsidies to LEEs (if any) are shown as an expenditure item in the proposed budget. there are LGUs (e.Improving the Financial Management of Local Economic Enterprises concerned. Third. On the one hand. This way of preparing the LGU budget proposal is shown as Option 1 in Box 3. of the UBOM provides: “The budget for and economic enterprise and a public utility shall be presented separately under the General Fund Annual Budget of the local government subject to the usual budgetary process. appears to be a source of confusion among LGUs as it seems to suggest that some degree of “use of income” or even some degree of “income retention” for the purpose of funding “cost of improvement repair and other related expenses” (which may be interpreted to include other types of operating expenses) of LEEs. In like manner. particularly the part quoted above. proposed expenditures of LEEs do not form part of the spending proposals in the proposed budget of the Executive.” Section 313. different LGUs exhibit different ways of treating their LEEs not only when they prepare their budgets but also when they execute their budgets.. As a corollary. This same budget format is carried over subsequently in the appropriation ordinance. During budget execution. Tagum City) that treat their LEEs just like any other unit/ office when they prepare their budget such that the income of the LEEs are shown as part of the income estimate for the General Fund and all expenditure proposals related to LEE operation are shown as part of the expense items in the proposed budget. key informant interviews and discussions on the floor during the consultation workshops conducted as part of this study reveal that some LGUs essentially treat their LEEs off-budget. the expenditures for each of the different offices in the General Fund (broken down as to PS. including income from LEEs. MOOE and CO) are shown in the expenditures portion of the proposed budget. are explicitly shown in the income estimate portion of the proposed budget. more importantly. MOOE and CO) are shown explicitly in the expenditure portion of the proposed budget. this short note makes use of a numerical example. The budget presentation for Option 1 using the illustrative data given above is shown below. spending proposals for LEE (also broken down as to PS. Moreover. Under Option 1. service income but excluding receipts from LEE – PhP 500 M Receipts from LEE (IL) – PhP 75 M Suppose also that the proposed expenditures for 2009 are as follows: Total personal services (PS) expenditure for all offices in GF Proper (PSP) excluding PS expenditure for LEE – PhP 200 M Total MOOE for all offices in GF Proper (MOOEP) excluding MOOE of LEE and subsidy to LEE from GF Proper – PhP 155 M Total capital outlay in GF Proper (COP) excluding capital outlay for LEE – PhP 100 M Total PS expenditure of LEE (PSL) – PhP 50 M Total MOOE for LEE (MOOEL) – PhP 70 M Subsidy from GF Proper to LEE (SPL) – PhP 45 M Three alternative ways of treating LEEs in the budget are presented below. in terms of the implications on budget execution and overall financial management of the LEE and the LGU itself. local tax revenues. Further suppose that the income estimates for 2009 are as follows: Total income of the General Fund Proper (IP) including IRA. Box 3. On the other hand. the implications of alternative budget formats especially as they relate to LEEs are assessed not only in terms of their form and appropriation language but. estimates of income from various sources. The following sections outline different ways of presenting the LGU budget for 2009 corresponding to these different options. Suppose the budget of LGU A for the year 2009 is being prepared. Alternative Options for the Treatment of LEEs in Budgeting Using Numerical Illustration In this short note. To foster a better appreciation of the alternative ways of treating LEEs in the budget.Improving the Financial Management of Local Economic Enterprises violation of the basic principle of local fiscal administration that no money shall be paid out of the local treasury except in pursuance of an appropriations ordinance. OPTION 1 Description. P a g e | 182 . However. Because subsidy to LEE is part of General Fund Proper). MOOE and CO are not appropriated. This presentation is consistent with one-fund principle. the subsidy to LEE operations is not obvious/ transparent from the presentation although it can be derived. this annex is presented just for information purposes and does not form part of the appropriation ordinance per se. if actual collections of IP were to fall short of the estimate in the course of the budget year. only expenditures under the General Fund Proper are appropriated. The budget presentation for Option 2 using the illustrative data given above is shown below. In this presentation. The same holds true for shortfalls in actual collections of IL. OPTION 2 Description. it is also appropriated.Improving the Financial Management of Local Economic Enterprises Box 3. P a g e | 183 . LEEs are allowed to use their receipts/ income without need for the Sanggunian authorization. Although PS expenditure for the LEE is shown explicitly in the budget. However. During budget execution. Con’t (2) GENERAL FUND BUDGET FOR 2009 (in million pesos) Income estimates: IP IL Total income Expenditures: PSP MOOEP COP Total expd for GF Proper PSL MOOEL Total expd for LEE Total expd in GF 500 75 575 200 155 100 455 50 70 120 575 Assessment. Although an annex is included showing LEE operations. Under this option. LEE expenditures for PS. it is not difficult to exclude it from the computation to check compliance from the PS cap. then it is likely that actual expenditures both for the GF proper and the LEE will be affected. P a g e | 184 . a problem common to revenue earmarking. if actual collections of IL were to fall short of the estimate in the course of the budget year. then it is likely that the impact on LEE spending will be limited to the extent that subsidy from the General Fund Proper might be affected. This budget presentation runs counter to the one-fund principle. However. Con’t (3) GENERAL FUND BUDGET FOR 2009 (in million pesos) Main Body Income estimates: IP 500 Expenditures: PSP MOOEP COP SPL Total expd 200 155 100 45 500 Annex: Information on LEE Operations Income estimates: IL 75 SPL 45 Total income 120 Expenditures: PSL 50 MOOEL 70 Total expd for LEE 120 Assessment. Conversely. if actual collections of IP were to fall short of the estimate in the course of the budget year. if actual collections of IL were to be exceeded. then it is likely that only actual expenditures for the LEE will be affected. LEE spending may increase correspondingly even if they are not necessary. Thus. the incentives for efficiency under Option 2 are weaker relative to Option 1 above and Option 3 below. During budget execution.Improving the Financial Management of Local Economic Enterprises Box 3. Improving the Financial Management of Local Economic Enterprises Box 3. Con’t (4) Because LEE operations are essentially treated off-budget, the actual results of operations of the LEE will not be apparent. Also, since the expenditures of the LEE are not appropriated, PS spending of LEE is clearly excluded from computation of compliance with PS cap. OPTION 3 In this presentation, the budget is divided into three parts. Part 1 shows the income estimates and spending proposals (including subsidy to LEE) for the General Fund Proper. Part 2 shows the income estimate and spending proposal for the LEE. Part 3 shows the consolidation of Parts 1 and 2. This implies that Sanggunian authorization for LEE spending is required. Moreover, LEE spending is broken down by object of expenditure. The budget presentation for Option 3 using the illustrative data given above is shown below. LGU BUDGET FOR 2009 (in million pesos) Part I: General Fund Proper Income estimates: IP 500 Expenditures: PSP MOOEP COP SPL Total expd for GFP Part II: LEE Income estimates: IL 75 SPL 45 Total income 120 Expenditures: PSL 50 MOOEL 70 Total expd for LEE 120 200 155 100 45 500 P a g e | 185 Improving the Financial Management of Local Economic Enterprises Box 3. Con’t (5) Part III: General Fund (Consolidated) Income estimates: Total income Expenditures: Total expenditures 575 575 Assessment. This presentation is consistent with one fund-principle. It is also the most transparent of the three options considered. Although PS expenditure for the LEE is shown explicitly in the budget, it is not difficult to exclude it from the computation to check compliance from the PS cap. During budget execution, this presentation is able to build a firewall of sorts between the General Fund Proper and the LEE. For instance, if actual collections of IP were to fall short of the estimate in the course of the budget year, then it is likely that only expenditure items in GF proper will be affected. In like manner, if actual collections of IL were to fall short of the estimate in the course of the budget year, then it is likely that only expenditures items for the LEE will be affected. However, if actual collections of IL were to exceed the estimate, the LEE can automatically increase their spending beyond what has already been appropriated without first enacting a supplemental budget. This presentation defines an unambiguous demarcation line that separate the LEE from the GF proper. It also fosters greater transparency and provides clearer signals/ incentives for efficient use of resources. The COA annual audit reports for 2007 for the two provinces, that were earlier referred to as case study numbers 1 and 2 in Section 2, uncover that these provinces follow Option 2 as well. The COA also reports that the province in the southern part of Luzon (case study number 2) passed a provincial ordinance that provides that separate accounts for each individual economic enterprise shall be maintained in the General Fund. The same ordinance also provides that only the net receipts from the LEE (i.e., revenue less expenditures, improvement, repair, personal services, MOOE, capital outlay and other related expenses) shall form part of general fund. The COA audit also disclosed that the collection from each LEE is deposited in a separate bank account. In the accounting books, the collections were credited to an “other payables” account and the account was simply debited for the payment of operating expenses and acquisition of assets pertaining to the LEE. P a g e | 186 Improving the Financial Management of Local Economic Enterprises In both cases, the COA audit reports rendered an unfavorable opinion and argued that as a result of the way the LEE income and expenditures are treated in budget preparation and budget execution, the financial position of the LGUs’ LEEs, the results of the LEEs’ operations and cash flows for the reference year cannot not be ascertained. As such, the lack of financial information rendered difficult the measurement and evaluation of the financial performance and viability of the LEEs. It should also be pointed out that the way LEEs are treated in the budget when Option 2 is used is not consistent with the “one fund” principle. Under this principle, the government’s budget should in principle cover all transactions financed with public financial resources. Schiavo-Campo (2007) asserts that “it is impossible for the government budget to reflect the preferences and choices of society and to incorporate the principles of good governance if it includes only a small proportion of revenues and expenditures. If the budget excludes major expenditures, there can be no assurance that scarce resources are appropriately allocated to priority programs and that legal control and public accountability are properly enforced. Only if all proposed expenditures are on the table at the same time does it become possible to review them in relation to one another and to choose those that have higher relative benefits for the community.” It should be stressed that one-fund principle applies to LEE expenditures because LEEs do not have a separate legal persona since they do not partake of the corporate form under the existing legal framework. Instead under the Local Government Code, LEEs are still part of the General Fund but special accounts within the General Fund should be maintained for each LEE. Of course, it would have been an altogether different story if LEEs are established as a corporation with separate legal personality and full operational autonomy. Note that expenditures and revenues of government corporations are not submitted to the same scrutiny and approval mechanisms as the government budget. Rather, the government’s budget should only include the net transfers between the government and the government corporation (i.e., subsidies, equity contributions). Recommendation. Some LGU officials and some analysts argue in favor of Option 2. They assert that government entities which provide quasi-private goods and services and which charge for said goods/ services should be allowed to retain at least a significant portion of it. Otherwise, these government entities would have no incentive to improve their efficiency if they could not use freely some of the revenues they earn from selling their services. For instance, these officials refer to the increase in income of DOH retained hospital after the income retention policy was put in place to illustrate their point. In order to take this concern into account, at least partially, while at the same time putting emphasis on transparency and accountability, it is recommended P a g e | 187 Improving the Financial Management of Local Economic Enterprises that LEE income and spending be treated following Option 3 in Box 3. In this presentation, the budget is divided into three parts. Part 1 shows the income estimates and spending proposals (including subsidy to LEE) for the General Fund Proper. Part 2 shows the income estimate and spending proposal for the LEE. This implies that Sanggunian authorization for LEE spending is required. Part 3 shows the consolidation of Parts 1 and 2. This budget format is not only more transparent than current practice, it also provides incentives for LEE managers to improve their collections since they are better able to isolate their earnings from the rest of the General Fund Proper. 3.2.2. LGC provision on personal services spending of LEEs creates perverse incentives The LGC also provides that: “The total appropriations, whether annual or supplemental, for personal services of a local government unit for one fiscal year shall not exceed 45% in the case of first to third class provinces, cities, and municipalities, and 55% in the case of fourth class or lower, of the total annual income from regular sources realized in the next preceding fiscal year. The allowances of officials and employees of public utilities and economic enterprises owned, operated and maintained by the local government unit shall not be included in the annual budget or in the computation of the maximum amount for personal services. The appropriations for the personal services of such economic enterprises shall be charged to their respective budgets” (Section 325 - a). The preferential treatment given to personal services expenditures of LEEs by exempting the same in the computation of compliance with the PS cap has given rise to perverse incentives. Said preferential treatment of LEEs may be justified on the grounds that LEEs being self-sustaining deserves some flexibility in their staffing. However, interviews with LGU officials during the field visits affirm that many LGUs abuse this provision and use it as a means to feign compliance with the PS cap. Recommendation. It is recommended that the favorable treatment given to the personal services spending of LEEs as provided under under Section 325 (a) be retained but that its application be limited to LEEs which are created by ordinance and which have well articulated policy on cost recovery. 3.3. Need to Strengthen LGU Capability Relative LEE Creation and Operation The discussion so far highlights the need to capacitate LGUs in the following areas: evaluating alternative modes of public-private partnerships P a g e | 188 Improving the Financial Management of Local Economic Enterprises evaluating when to create new LEEs or when to continue operations of existing ones drafting of ordinances for the creation of new LEEs including formulation of subvention policy improving LEE operations development/ evaluation of feasibility studies, especially forecasting of demand tariff setting collection procedures and systems evaluating alternative organizational structures for the management and monitoring of LEEs conduct of periodic review of existing LEEs evaluating alternative divestment modes. At the same time, there is a need to information dissemination/ advocacy campaign targeting LGU and oversight agencies officials to generate better appreciation and understanding of the new policy framework for LEEs. 4. SUMMARY AND CONCLUSION An unambiguous definition of term “economic enterprise” is key the formulation of a clear policy framework for the creation and continued operation of local economic enterprises. In this regard, we that the oversight agencies (DBM, DOF/ BLGF, DILG, NEDA) adopt a common definition of the term “local economic enterprise” emphasizing enterprise dimension: LEEs are local government owned economic entities that generate the bulk of their revenues from selling goods and services. The guidance on LEEs found in the LGC, the NGAS and the UBOM is generally consistent with conceptual framework found in the international literature. Perhaps by being silent on what the alternative options are, the existing policy framework appears to lean more heavily towards the public ownership model. Also, the existing policy framework does not provide cautionary statement on potential government failures that may arise with the establishment and continued operation of LEEs. Given this perspective, the need to establish a clearer and more comprehensive policy framework to govern the creation of new LEEs and continued operation of existing ones is critical. Many of the elements of the existing framework will still be part of the new framework but a number of new features will have to be put in place. The new policy framework should be anchored on the basic principle that LGUs need to focus on their core functions. It should also be premised on the superiority of private-sector led development unless a strong case can be made for government intervention. The framework should thus establish guidelines P a g e | 189 Improving the Financial Management of Local Economic Enterprises when government provision of marketable output is justified, taking into account the tradeoffs between market failures and government failures. The new policy framework should also recognize that some marketable goods/ services are better delivered by the government central and that the LEE modality is but one of a number of alternative service delivery modes. After considering the different alternatives, if an LGU deems it best to create an LEE, the new policy framework should provide explicit guidance in doing so. This guidance should specify that LEEs should be established by enacting an ordinance that specifies in unequivocal terms: (i) LGU policy on degree of costrecovery of LEE up front in terms of what percent of cost will be recovered from user charges, (ii) tariff rates or user charges that will be charged for goods/ services provided by LEE, and (iii) who will be subsidized and by how much;9 including schedule of rates by income bracket of clients where applicable. The new policy framework should then distinguish between LEEs created by ordinance with well articulated policy on cost recovery as described above and “LEE-like” activities (i.e., activities that are commercial in nature but from which LGU has little or no intent to recover cost). Subsequently, the policy framework should provide for the differential treatment of these two groups of activities in terms of budgeting and need for the maintenance of special accounts. The proposed treatment of the chartered LEEs, LEEs in the General Fund, and regular LGU units delivering “LEE-like” services with respect to budgeting, use of income and PS spending is summarized in Figure 2. 9 This means that subsidy given to LEEs is an ex-ante conscious decision on the part of the LGU rather than an ex-post item that finances whatever the resulting gap between revenue and expenditure is. The La Union Medical Center provides a good example of how a well articulated policy on providing subsidy to the poor contributes to the efficient operation of the LEE. P a g e | 190 Improving the Financial Management of Local Economic Enterprises Figure 2. Chartered LEEs, LEEs in the General Fund and Regular LGU Unit Delivering “LEE -like” Services Form/ Modality Chartered LEEs (GOCClike) e.g., LUMC, PLM & QCGH Nature of Service Extent of Cost Recovery as per Statement of Policy Legal Basis Treatment in the for Creation Budget Treatment of PS Spending Relative to PS Cap Need for Special Account in General Fund Use of Income Commercial with intent to recover cost fully or partially Variable but significant; extent depends on social service orientation Act of Congress LGU appropriations for GOCC shown as subsidy/ equity/ transfers/ net lending Option 1: Three part presentation of GF budget – GF proper and LEEs – more transparent but some kind of firewall between the two Option 2: : LEE Not applicable Not applicable Yes Option 1: No PS spending of LEE not included in computation of compliance to PS cap. LEE Commercial with intent to recover cost fully or partially Variable but significant; extent depends on social service orientation Act of Sanggunian Yes Regular office/ unit delivering LEE-like service Commercial with little or no intent to recover cost Nil None essentially treated off-budget. Only subsidy to LEEs is part of spending proposal/ appropriations. Treated just like any other LGU PS of LEE-like department/ office activities included in the budget; in computation of appropriation for compliance with unit shown as PS, PS cap MOOE, CO in LGU annual budget Option2: Yes Yes No P a g e | 191 Improving the Financial Management of Local Economic Enterprises REFERENCES Chang, Ha-Joon. 2007. State-Owned Enterprise Reform. New York: United Nations Department for Economic and Social Affairs (UNDESA) Commission on Audit (COA). 2002. Manual on the New Government Accounting System (NGAS) for Local Government Units. Quezon City: Commission on Audit Department of Budget and Management (DBM). 2005. Updated Budget Operations Manual. Manila: Department of Budget and Management Jones, Leroy. 1982. Public Enterprise in Less-Developed Countries. London: Cambridge University Press. Pardo, Erlito and Romulo Zipagan. 2008. “Study on the Corporate Powers of Local Government Units.” Report submitted to the Department of Interior and Local Government and the Asian Development Bank under ADB Technical Assistance 4778. Republic Act 7160. Local Government Code of 1991 Schiavo-Campo, Salvatore. 2007. “The Budget and its Coverage.” In Shah, Anwar, ed. Budgeting and Budgetary Institutions. Washington D.C.: World Bank Shapiro, Daniel and Steven Globerman. 2004. “The International Activities and Effects of State-Owned Enterprises.” (http://business.sfu.ca/files/Office_Documents/cibc-centre/soes.ppt) SEQUUS. 2003. “Developing the Public Economic Enterprise in the Philippines – The LGSP Way”, Draft report submitted to the Local Government Support Program (LGSP), Canadian International Development Agency (CIDA). Shirley, Mary M., 1989. The Reform of State-Owned Enterprises: Lessons from World Bank Lending. Washington D.C.: World Bank. Shirley, Mary M. and Patrick Walsh. 2000. Public Versus Private Ownership: The Current State of the Debate. Washington D.C.: World Bank. World Bank. 1995. Bureaucrats in Business: the Economics and Politics of Government Ownership. Washington D.C.: World Bank. Wright, Glendal. 2008. “A Review of Alternative Service Delivery Options.” Report submitted to the Asian Development Bank (ADB) under the Technical Assistance 4778 Project. P a g e | 192 Because local governments are charged with providing a wide range of services. In many of the developing and transition countries where decentralization is being undertaken to give more authority and power to local governments to deliver services. and promote the interests of their citizens. from police. fire. deliver these services. 2008. Therefore. The financing might be direct to the enterprise or as a subsidy to the operation of the enterprise to maintain its financial viability. but are connected to the local government by the creation and financing of these quasi-government organizations. 10 Report submitted to Department of Budget and Management and Asian Development Bank under ADB Technical Assistance 4778. they will be unable to provide these services in the efficient and cost effective manner. The scope of options available to local government units ranges from the direct delivery of the services through their own internal organizational structures and staffing. This does always lead to the most efficient and effectively delivery of these services. These are primarily the departments and budget units of the local government unit. If local governments are constrained in the service delivery options. P a g e | 193 . That is they are the producer/provider of the service within the organizational structure of the local government unit. INTRODUCTION The requirements placed on local governments to deliver the services that are needed by their citizens require that these governmental organizations have a full complement of authorities and powers to meet these needs. August 6. At the next level. cultural. but has some distinct legal separation from the local government. they are often given a wide range of mandated services to deliver but are not given either the financial resources or the service delivery options to meet these needs. infrastructure. the local governments cannot meet the needs of their citizens in performing their financial management responsibilities. Very often the local government is confined to performing these functions by having to provide these services directly to the citizens. the local governments often use some quasigovernmental entities formed by the legal authorities of the local government. there is a need for the local government to have a wide range of options in performing these service delivery functions. These options represent a situation where the local government unit bears full legal responsibility and financial risk in this situation.Improving the Financial Management of Local Economic Enterprises Annex 1 A REVIEW OF ALTERNATIVE SERVICE DELIVERY OPTION10 Glendal Wright 1. These might be comparable to private sector organizations. and economic development. health. this P a g e | 194 . These include the use of service and management contracts. The main focus is to determine if a full range of options are available and being utilized by the local government units. the leasing of local government assets to the service provider. beyond the existing traditional service delivery methods and the corporate methods that are being used. particularly through the use of the private sector and the non governmental organizations to deliver services has meant that new legal. The possibilities of local governments delivering services.Improving the Financial Management of Local Economic Enterprises Other options are also available to the local government units that minimize the legal and contractual relationship as well as the financial risk. other than directly to the citizen. This is typically viewed negatively in the developed countries for local governments to assume their responsibilities. has expanded significantly as new needs for services beyond the traditional public safety. joint ventures. The worldwide trend toward decentralization to service delivery and financial resources to local governments has meant that local governments have had to increase their service delivery capacities. Therefore. In this short paper. and financial systems have had to be adapted to these situations. so in many cases new approaches. Overcoming these limitations requires a substantial amount of effort and capacity building from the national to the local government level. It also keeps the local government from competing with the private sector or non-governmental sector to deliver these services. as well as the licensing and concessions approaches that provide the local government some options without assuming direct financial risks. to deliver services is addressed. organizational. the risk exposure of the local governments in both legal and financial terms is quite high. the absence of qualified private sector or non government providers for these services. The intent is to expand the possible range of these service delivery methods to local governments in the Republic of the Philippines. This has often been difficult to achieve through the resources available. In should be added that these service delivery options are often limited due to the lack of legal authority being given to the local governments to engage the private sector or the non government sector to provide these services. buildoperate-transfer options. The purpose of this paper is to identify other potential service delivery options that might be utilized to enhance service delivery at the level of the local government units. ALTERNATIVE METHODS OF DELIVERING PUBLIC SERVICES The method of delivering public services at the local government level has under gone revolutionary transformations over the past decades. the use of some new innovations. rather than being the direct provider of the services. education and health has greatly increased. public-private partnership. commonly used in the developed and transitional countries. In many cases. and the technical capacity of the local government staff to assume a role of regulator and monitor of services. 2. the central and local governments have had to decide what types of activity should be retained in the public sector and what should be decentralized to the lower units. does it need to remain under local government control and what is the best organizational structure for the control and monitoring of these services? How will the financial arrangement be structured between the local government and the service delivery organization? How will the charges for services be determined and by whom? Who will be responsible for the capital expenditures and how should these be funded? If a local government subsidy is needed how should it be calculated? What should happen to the ownership and maintenance of the assets? What controls should be exercised over the service delivery organization? What contractual form should be implemented? How can performance be measured to ensure compliance with contractual requirements? As can be seen these involve a complex set of problems and issues that need to be addressed by the national and local governments levels.1. In many of the transition countries. Service Delivery Issues There are a number of issues that need to be addressed in determining the possible arrangements for the delivery of services. This possibility is generally based P a g e | 195 . 2. financial risks. The legal frameworks need to be implemented that will allow for the greatest flexibility but also insure that the potential for liability. These include the following: Does a task or service need to remain within the public sector? If so. 2. and other difficulties can be minimized to the local citizens who ultimately bear the burden of supporting these service delivery methods.2. This is one of the key determinants of what the legal and organizational structure should be in order that these services can be delivered.Improving the Financial Management of Local Economic Enterprises paper will address some methods that may be used to reduce this risk to the local government and the citizen-taxpayer. What Services Should be Delivered There is a continuing debate about what services should be delivered by the local governments. and this seems the case in the Philippines. In the developing and transition countries. The key distinguishing factor is to determine those services which involve and element of public service and those that are more oriented toward private sector commercial delivery. The generally accepted approach is to limit the government sector to those that have some well defined and significant public interest in providing to the citizens. there is a temptation to hold on to old state owned enterprises as profit making entities and to even undertake new commercial enterprises that will bring additional revenues to the local government. While these guiding principles seem straightforward and clear in their application. fire. health. to have access to if there were charges for the services and delivered at market rates. but too expensive for some income groups. Identify services which benefit all citizens without exclusion of anyone and therefore makes charging for these services impossible. the provision of this service serves to improve the attraction of the facility to those visiting. the poor. A second problem is that the so-called profits may be illusory in the sense that not all costs or efficiency of the service delivery is being factored and calculated into the “profit. there are always exceptions to applying these general principles. Consequently. water and sewerage. A local government owned and operated enterprise most likely will compete unfairly with the potential private sector providers through subsidization of the enterprise. values and cultures that are inherent in the society. the actual decision making is greatly influenced by national and local political situation. These services fall under the categories of schooling and provision of public transport or recreational facilities that might be too expensive for many of the citizens to access. Examples include piped water supply. 4. Identify services that are considered essential to the quality of life of the citizens and require a large funding investment so that only one provider. and environmental protection. These are the classical services. with the possible exception of an activity that supports a genuine public service. streets. as opposed to communal well or other water source. These include education. An example might be the situation in which a museum. a monopoly position. such as police. The provision of public services can also be addressed by examining the following classification approach: 1. This approach can produce unnecessary consequences on the local government and the private sector development that should be promoted. park or recreation facility might also provide food services as part of ensuring that the facility meets the needs of those using the public service. While the food service is generally accepted commercial enterprise. would be feasible.Improving the Financial Management of Local Economic Enterprises on the belief that these enterprises will produce a profit to the local treasury and overcome the lack of local tax base and difficulties of the intergovernmental transfer systems that may not be based on objective formula and subject to political manipulation. 3. among other services.” The general principle that has been applied in the more developed countries with local governments engaging in the full delivery of public services is that the local governments should not engage in commercial activities. 2. P a g e | 196 . Identify services which are essential to the quality of life. Identify services which should be provided as they have benefit to all citizens who receive the services. These service delivery arrangements provide an advantage to the local governments in overcoming a significant conflict in the delivery of these services. The non-governmental organizations are often able to deliver services in the fields of education. This conflict often results in contradictory policies. First. Therefore. This has been a significant trend in that new legal and regulatory frameworks are being devised to provide these services outside the direct delivery by the local government through its ownership and control of the service delivery. there should be some possibility that several providers would be available to provide this P a g e | 197 . this activity. This conflict arises from the divided interest of the local government to be responsible for the delivery of the service at a cost efficient level. That is the local government may be overly influenced to maintain the assets and staff at an unnecessary level over the requirement to provide the citizens with these services at the lowest and most efficient cost level. cultural. monitoring and.Improving the Financial Management of Local Economic Enterprises 2. Traditionally.3. There are two limitations on the local governments in employing this policy option of using the private sector. while not exploiting its economic position. local governments have a broader and more flexible options for providing services that their citizens may require. the international trend has been to transfer this function to the private sector or non governmental organizations for delivery. Hopefully. and social services. if necessary. public-private partnerships. is the availability and capacity of private sector organizations to undertake the delivery of these services. These are often used for the delivery of utility and other services. How Public Services Are Provided If a service is determined that it should be provided the question arises as to what are the best methods to provide this service. this conflict can be avoided if the local government unit allows for the service to be delivered by an outside organization. However. Private enterprises are becoming involved in delivering public services. it has been considered that the local government should provide this service through it financial and human resources and the organizational structure is within the local government structure. subsidizing. However. and confines it role to regulating. but it is not essential that they are the direct provider of the service and instead use the private sector to deliver the service. These often are structured through joint ventures. Under the newly emerging trend the local governments still are responsible for the service to be delivered. This situation provides for a competitive environment and the discipline of the private sector to provide the service at the lowest cost. or contractor agreements. and the responsibility to maintain its interest as the owner of the assets and the employer of the human resources that are used to provide this service. If this is not possible. P a g e | 198 . The cost and complexity of the service to be delivered largely dictates the capacity needs of the local government administration. Direct Service Delivery by the Local Government If services are provided directly by the local government through its own organizational structures the local government is consequently responsible for all areas of ownership. and service delivery efficiency to the citizens. Possible Service Delivery Relationships The organizational form of service delivery can be divided between the direct delivery by the local government structure or the use of organizational forms. the legal and contractual relationship involves much more complex issues. depending on which option is chosen. However.1. A second limitation is the capacity of the local government itself to manage the contractual and regulation requirements and oversee the private enterprise delivery of these services. There are a number of issues that need to be examined in determining how this contractual relationship will be defined in the agreement.Improving the Financial Management of Local Economic Enterprises service at the local government level. the advantages of using the private sector are more limited. 2. primarily private enterprises and non governmental organizations.4. There has to be established an agreement formulated into a legally recognizable contract that will ensure both parties understand the requirements. investment. The policy option here is rather straightforward between the two alternatives. Should conflicts arise the legal system can address these conflicts through the legal process. financial operations. 2.4. These include the following: Ownership of the assets Responsibility for capital investment Responsibility for operation and maintenance Relationship to the consumer/citizens Regulation of the charges or tariffs Receipt of operating revenue Responsibility for financial risks Degree of municipal subsidy The extent of monopoly rights Each of these issues has to be addressed in determining what option is the most feasible and practical for the local government to minimize its risk and maximize the potential for service delivery at the lowest possible cost. the service contractor is given a fixed fee for the service. such as water supply or refuse collection. It is used in some cases for services such as swimming pools that may collect fees or charges while also receiving a P a g e | 199 .Improving the Financial Management of Local Economic Enterprises 2. In addition.4. If the contract takes on the form of not sharing the income the local government units maintains ownership of the assets and has responsibility for investing in construction. The operating income is controlled by the local government and goes to its fund accounts. while the service contractor is paid based on the amount agreed in the service contract. The local government may contract the delivery of the service to an external organization. The service contractor usually has discretion to charge less (but not more) than the regulated tariffs The service contractor receives a fixed percentage share of the operating surplus on top of the fixed contract fee.4. Management Contracts The use of management contracts can take two forms. The income sharing option is usually considered for those activities that are expected to not need an operating subsidy from the local government unit. Therefore. Service Contracts with External Organizations An option that allows for service provision other than directly by the local government organization is the use of service contracts. and usually for the replacement of some equipment necessary for the delivery of the service. 2. The contractor is simply paid for the service based on the agreed price. in the option without income sharing the local government bears all responsibility and financial risk. The scope of this service contract can be quite extensive from operating public housing to parking services to vehicle maintenance. a service contract might be issued for the reading of parking or water meters. The key feature of the service contract approach is that the local government continues to own the assets. The conditions of the without income/revenue sharing apply.2. The operation and maintenance are met from the income received for the service and any operating surplus or deficit is the responsibility of the local government unit. The revenue collected from the parking meters belongs to the local government. As an example. but generally. but the service contractor is responsible for the repair and maintenance. The local government unit sets the tariffs or charges for the service and is directly responsible to the citizen for the service and has to assume all financial risks. the following conditions are also featured. The first is without sharing income of the service and the second is the sharing of the income received from the delivery of the service. The alternative option of income sharing arranges a division of the revenue received from the delivery of the service.3. and other capital requirements. the period of the concession is P a g e | 200 .4. Leasing The most common leasing approach is when the lease agreement allows for the local government unit to lease to a service provider the assets owned by the local government in exchange for a rental price that the service provider will pay. All the financial risks are borne by the service contractor. The service contractor is responsible for operation. The service contract provider is directly responsible to those consuming the service. 2. or A percentage share of the revenue. These charge/tariffs may be reviewed periodically and indexed to inflation or return on investment calculations. less normal wear and tear on equipment. and for replacement of short life equipment. communication networks. The service contractor collects the operating income and meets the operating costs. the local government units still owns the assets and is responsible for the investment and debt service associated with the assets. The service company thus bears all the financial risks associated with the operation of the service. the local government may regulate the pricing or tariffs for the service. Concessions A concession is when a service contractor is given an exclusive right to provide a service for a fixed period of time. and not to the local government unit. full amortization of the initial capital investment.4. The service contractor must return the assets to the local government unit in good condition at the end of the lease period. tolls roads. In this approach. The service contractor will pay to the local government unit one of the following options: A straight rental price for the use of the asset. and is responsible to the consumers of the service. Essentially. operation and maintenance. The competitive approach to awarding the concession is used and the concession award may require service levels and charges/tariff limits. The service contractor is responsible for all costs. and public utilities. Due to these consideration. including capital. repair and maintenance. The contractor might still receive some share of the operating surplus after the subsidy is received into the funds. In some cases. A concession maybe useful for large scale infrastructure projects. repair. a fixed fee for the asset use and a share of the income generated from the use of the asset. such as operation of convention centers or sport stadiums.5. the charges/tariffs and the period of the concession should be calculated based on the recovery of operating costs. or Both.Improving the Financial Management of Local Economic Enterprises subsidy. but has to invest capital in the constructing and providing the necessary infrastructure. 2. and a reasonable rate of return on the investment.4. 2.4. such as taxis. Funding Agreement Another option is the situation where local government units enter into a contract with a non-profit organization to provide to the service organization a grant to provide certain services. A Build-Operate-Transfer is a form of the concession. or cultural activities. owns the assets used and bears the financial risks. 2. 2. This type of contract normally covers a particular programme or activity. sports. such as social.Improving the Financial Management of Local Economic Enterprises generally for a long period of time. from 15 to 30 years. Licensing Under licensing a service provider may be licensed to invest in and operate a service on the same conditions as a concession. but the licensed service contractor does not have the exclusive rights that a concession agreement has for the service contractor. This may occur in the example of charitable organizations that may offer food or accommodations to those in need or other welfare services. The agreement would cover the broad content of the programme and set standards of quality to be maintained.4. Unregulated Provision At the extreme end of this spectrum of public service delivery options would be the instance when a private organization provides a public service with no formal or contractual relationship with the local government unit. etc or even refuse collection. The BOT scheme comes under this type of agreement. The local government may also pay a subsidy to the service contractor as a means of lowering the charges/tariffs to the public for the delivery of the service. At the end of the concession. the service contractor retains the assets used for the delivery of the service at the expiration of the license period. This approach is often used where there is potential for competition and the service requires lower investment costs. The organization has to comply with all relevant legal requirements for delivering this service. the local government may have some claim to the operating income.4.7.6. recreation. This is often used for public transport service delivered by a service contractor under a concession arrangement. The financial arrangements may take several forms. Payment of the grant would be dependent on adherence to these standards and to periodic review of the activities being undertaken. The local government may provide initial subsidy or funding for the undertaking of the investment. buses. The service organization is responsible for all investment and operating costs. the assets become the property of the local government unit. In these cases. and not the whole operations of the service contractor. In this case. Licenses are often used for transport services. such as for construction of P a g e | 201 .8. 3. The local government P a g e | 202 . environmental regulations. There may also be abuses in terms of paying the staff through the company method at a higher salary rate than in the market and thus increasing the costs of the service. Local Government Organizations Versus Local Government Companies Delivering Services If the initial assessment is that the local government should maintain control and provision of the services the choice that must be made is to whether to deliver the service through the internal organizational departments and budgetary units. In the following sections these different approaches are examined with the advantages and disadvantages identified and discussed.1. and health and safety requirements. The second method is to use external organizations. The choices can be divided into two different methods. DETERMINING THE ORGANIZATIONAL METHODS FOR SERVICE DELIVERY Along with the choices of determining the appropriate contractual approach to delivering services. The issues related to the assets employed are more clearly established when the local government company is responsible for these. there are also choices that need to be made with regard to the most appropriate organizational form for delivering the services. The main differences in choosing either of these two approaches is in the areas of employment status. employment conditions of staff.Improving the Financial Management of Local Economic Enterprises facilities. 3. which will be contracted to deliver the service through the various contractual approaches discussed above. property ownership and the investment in the capital assets required for delivery of the services. The first is to provide the service through the direct local government delivery and control by the local government departments and budgetary organizations or through the creation of a municipally owned company or companies that will be responsible for delivery of the services. There may also be excessive staffing of the company that is more than necessary to provide the services in a cost effective approach. such as private commercial firms or non governmental organizations. The organization is subject to all inspections as any other commercial provider would be for the same services. The use of local government companies provides that they will not be subject to any special restrictions on the employment of the staff and will be competing for employees in the employment market for the needed professional and technical staff. This approach opens up the possibility for abuses in hiring that may not be acceptable if there is not a merit based system that is used for hiring the staff. water and other services where the capital costs are high but the services are delivered for a substantial period of time. there are also some significant disadvantages as well. Some incentive toward performance based bonuses based on profitability or return on investment can promote this advantage of using local government companies. P a g e | 203 . would be more interested in professional management and the use of cost effective service delivery methods. such as waste management. This is often the case with large service delivery areas. Among these are the following: Companies may not feel the sense of public duty or service ethic that goes with being an internal part of the local government unit The profit motive might force the company to not deliver services to those areas where the economic cost and return is minimal and. either a sole ownership or joint venture operation. It is expected that a local government company. A local government company would potentially be more inclined to make the necessary capital investments to maintain the equipment and facilities needed to deliver the service. but the wider service delivery area across several jurisdictions may make economies of scale possible.Improving the Financial Management of Local Economic Enterprises assets that are used by a company can be transferred or leased to the company. Even more critical in this approach would be to use joint ventures approaches so that a portion of the local government company will be owned by the private operators. some citizens may not receive the service The monopoly position of the company may mean that it ignores market forces that would otherwise control its economic behavior There is also the potential for corruption and nepotism if the company ownership is directly tied to the political leadership and under its influence The transparency and accountability of the local government company may not be sufficient to ensure the public and the media can fully examine its operation and financial management. The method chosen must specify the ultimate disposition of the assets and whether they are to be retained by the local government as an asset in its inventory. The company should be in a position to raise the capital to acquire these assets. In some cases the use of a company owned by several local government units may make economic sense as the service area is too small for just one jurisdiction. therefore. The potential for the local government company formed in a joint venture operation is another risk that can create a very complicated situation with regard to the future risks of using a local government company. While there are some substantial advantages in using a company to deliver these services with the local government structure. The external provider may be more concerned to deliver the services to those most able to pay or in such numbers that they are insured that a profit will be made. The Use of External Providers for Service Delivery The use of external providers allows for private sector commercial enterprises and non governmental organizations to deliver the services. 3.1. The cost structures are substantially different and the motivations for efficiency and economy in the delivery of the service are also different between these two choices. It is assumed that the local government direct delivery of services would more easily insure that the public’s interest in the service would be maintained.2. the alternative services P a g e | 204 . Influence of the Market The basis for establishing the pricing for the delivery of services is different between the two choices. The dynamics of the decision making is varied and significant depending on the choice of a local government company or external providers.Improving the Financial Management of Local Economic Enterprises 3. management contracts. licenses and unregulated operation that were described in the preceding section. There are quite a number of issues that must be addressed in analyzing the use of external providers as opposed to a local government owned and operated companies. An external provider must balance the pricing with the level of competition.2. These will be addressed in the following sections. Pricing or Service Charges: the delivery of the service by the municipal organization may be based on low charges for the service and subsidization of the loss making operations.2. The issue of access to and coverage for a given population to be served must be factored into the calculation of which service provider is more capable of delivering that service to those most needing the service. The contractual relationships for use of external providers includes the service contracts. These include the following areas: Access and Coverage: the public interest is presumably served by providing the service to all eligible citizens regardless of the cost of this service. There are a number of considerations that need to be addressed in determining if the public interest is being served. 3.2. leases. This may not produce the most efficient and effective service delivery options and may mean that the whole population of taxpayers may ultimately pay more for the service. Defining the Public Interest Determining or defining the public’s interest in choosing the alternative methods should also be considered in making the choice. The local government owned company will normally be subjected to the fixing of service pricing by the administrative procedures and possibly the political decisions within the local government system. The external provider is more concerned with utilizing economic and market analysis for determining the appropriate level of pricing and service charges. concessions. There is a difficult balance to be made in deciding which organizational approach that will provide for constant service delivery improvement. If the local government is also responsible for monitoring and regulating its environmental impact. the external provider may be able to deliver the same quality of service if these are clearly established and made part of the contractual agreement and penalties applied if the service is not delivered to the established levels. the external provider may be more sensitive to cost and pricing than the local government company. Also. since an external provider knows that the contract can be terminated if performance standards are not met. Environmental Impacts: The general quality of life in a local government may be impacted in terms of the environmental impacts that may result from the choice of either a local government company or an external provider. Service Delivery Improvement: There is a need for constant innovation and renewal of the services being provided. The lack of the profit motive would also mean that services are not sacrificed to achieve the profit on the service. However. Quality of the Services Delivered: The issue of which provider may be best able to provide the service at a level of quality desired has some interesting comparisons. Therefore. they are less sensitive to the environmental impacts or the need to avoid these problems. This may be overcome by specifying in the contractual agreement the provisions for maintaining environmental quality as well as provision for the costs of incorporating these into the cost of the service. The external provider might be more willing and capable of introducing these service improvements.Improving the Financial Management of Local Economic Enterprises available and the extent to which it must set pricing to achieve some profit or return on investment. It is generally felt that since the local government is more directly accountability to the citizens through the elected officials that the quality of service would be insured. These are costly impacts that need to be factored into the decision. it may well be that the internal organizational dynamics of the local government structure may hinder this enforcement. Having said this. Therefore. The local government environmental protection department may be more willing to enforce the environmental standards against the external provider than against another department of the same local government. P a g e | 205 . The knowledge that the service will be competed again with the possibility that poor performance will be taken into account in this competition serves as another incentive for the external provider to maintain the quality of the service. The need for construction. there are additional incentives for them to maintain the level of service required. There is often a claim that the external provider would be little interested in assuming the environmental costs as this would reduce the profitability of the operation. The use of competitive methods of bidding and contracting for services also puts some discipline into the process. New technologies that improve productivity and efficiency need to be constantly introduced. it is not always the case that the local government company will be even more disciplined in maintaining environmental quality. maintenance and operation of many local public services can have impacts on the air and water quality in the community. However. and social service delivery. 3. There must be some level of competition in the market with several providers capable of providing the service at comparable cost and performance. and flexibility in the contractual agreements will not hinder the introduction of these improvements. these advantages are only available if the following conditions apply to the local government situation. There is a need to introduce into the contracting environment the flexibility to provide incentives to have the external provider incorporate new service delivery improvements. and other services. the more precise definition of the required service delivery levels.Improving the Financial Management of Local Economic Enterprises The use of the contracting. The non governmental organizations are also good at introducing innovations into service delivery and have substantial expertise in several areas. such as health. The use of the external provision of service delivery puts into the decision equation the affects of competition. and the access to the technology. such as the water. sanitation. expertise and experience that is more often available to the external provider. 3. The international experience has been that on balance the use of contract or concession methods to achieve the external provision of local government services is more favorable. They have more limited experience or capabilities in the delivery of more infrastructure related services. education. concession and licensing agreements may provide this opportunity. a situation where there is more transparency and regulation of the providers performance. The development of the outputs or service performance requires a high level of expertise that may be lacking in the local government P a g e | 206 . costs mitigated in introducing these new methods. Non Governmental Organizations The choice of an external provider between a private sector commercial firm and a non profit/governmental organization deserves some consideration.4. The use of a mixed approach in which the local government and external providers may jointly operate and deliver the services also has significant advantages. Making the Choice The above has provided a discussion of the advantages and disadvantages of the choice between using a local government company or the use of an external provider of these services. This means provisions for improvements in service delivery will be rewarded. There are many factors to consider in making this choice. The important point to be made here is that the local government is able to maintain control over the delivery of the services and not assume the financial risks that come with that operation.3. The financial advantages of the non profit and the use of volunteer human resources provide advantages to the non governmental organization. If this is missing in the potential providers. Even if the choice is to use a local government company. If the above conditions are absent. the local government may not have any alternative other than the direct provision of the service to the community. there is still a need to ensure that the contractual arrangements are clearly specified and performance monitored by the municipal political and professional management. The use of contracts and service agreements can still be utilized even with a local government company. the access to expertise and experience typically required by the external provider to deliver the service needs to be assessed. There is a great need to insure that corruption or other ethical infringements may not come into the situation. P a g e | 207 . then other alternatives need to be considered. Finally.Improving the Financial Management of Local Economic Enterprises personnel. The enforcement of public integrity standards is needed to a high degree. restaurants. along with other purposes. These are usually created by the authority of the general purpose governments that often confer on these limited purpose governments special taxing. hazardous materials. borrowing or other powers. such as hospitals. income or business related taxes. etc. These limited purpose governments can be created by one or more general purpose governments to cover a larger geographic area for providing a certain function. such as building construction. In some cases. is controlled by an elected legislative body representing a particular political (geographic) jurisdiction.Improving the Financial Management of Local Economic Enterprises Annex 2 SYSTEMS OF BUDGET AND FINANCIAL MANAGEMENT OF LOCAL GOVERNMENT ENTERPRISES11 Glendal Wright 1. ORGANIZATIONS OF LOCAL GOVERNMENTS It is useful before beginning the analysis of local budgets and financial management of local government enterprises to provide some definition of the types of organizations that come under the purview of local government functions and services that are delivered. The first of these are the “general purpose governments” which provide the traditional services. This is often the case with sanitation services. In addition to these types of government organizations that provide the traditional services and are largely financed by broad based taxes. and ambulance services. and medical services. As a starting point a local government organization can be defined as one that has a public purpose (or several public purposes). such as police and fire protection. 27 January 2009 P a g e | 208 . use of eminent domain. garbage collection. tax-exempt borrowing. public buildings. the general purpose governments may also provide education services through the public schools. and so forth. There can be two types of local governments that could fit under this definition. or transportation services that cover several geographic areas and political jurisdictions. and usually has special powers like taxing. such as provision of streets and public lighting. Governmental enterprises are usually limited purpose public 11 Report submitted to Department of Budget and Management and Asian Development Bank under ADB Technical Assistance 4778. Limited purpose governments often operate as what are called government enterprises. such as landfill serving several political jurisdictions. such as property. including eminent domain. along with some inspection services. there are also what are termed “limitedpurpose” (or single purpose) government organizations. Improving the Financial Management of Local Economic Enterprises organizations or parts of governments that produce public goods or services that are sold to the public. “Fairness” obviously means different things to different people.” They are often intended to run without subsidy or even to generate a profit. etc. no matter the purpose. Although these enterprises sometimes have specific taxing and borrowing rights. This requires that a particular government strive to minimize the levels of resources used. highest benefit fashion. governments. and state or regional transportation authorities. in both the short run and the long run. governments have public accountability as an objective—responding to the needs of the government’s clientele and the requirements of its environment in an open. etc) and how it is spending its money (personnel. and governments reflect this sense of fairness of their constituencies. (taxes. highways. public safety. This objective prompts the governments to evaluate continually how it is raising its money. 2. equipment. governments try to raise and spend resources equitably—distributing costs and benefits of government activities “fairly” among the individuals and groups they serve. water and sewer systems with local general-purpose governments.-.and they have several general objectives they hope to satisfy in providing these goods and services. OBJECTIVES OF GOVERNMENT ORGANIZATIONS Governmental organizations provide a wide range of public goods and services— housing. they are distinguished by their reliance on fees or user charges to make them “self-sustaining. for example. Governments are not established to make profits or amass fortunes. Second. But in the analysis of government actions. education. and involving fashion and being held responsible for its actions. Government enterprises include. This objective requires that the government develop the information needed to evaluate its operations. in the lowest-cost. but they are expected to take those steps needed to ensure that they have the financial strengths to carry out their public responsibilities. etc) to keep it use of resources and their costs down. health services. “fairness” usually means distributing costs in a manner that recognizes that different individuals and groups have different abilities to pay them. or the costs of these resources. informative. in providing a given set of goods and services. Third. with such fees or user charges providing most or all of the revenues of the organization. materials. public hospitals or utilities run as special districts. Finally. utilities. put this information into an understandable P a g e | 209 . try to raise and spend resources efficiently. fees. while raising resources and providing public goods and services. First. governments try to maintain a healthy financial condition-being able to meet their financial obligations as they come due. which may include entities with both social policy and commercial objectives. a government housing department may be an economic entity which includes entities that provide housing for a nominal charge. This is intended to represent some of the variations in this complicated subject area and does not represent any advocacy of how the local government units in the Philippines should address this issue. to other entities at a profit or full cost recovery.1. INTERNATIONAL PRACTICES ON LOCAL GOVERNMENT ENTERPRISES In the following sections some presentation of international practices as they relate to the treatment of local government enterprises within the financial systems of local government accounting systems. and provide mechanism for the appropriate public review of its activities. of the present methods in the Philippines can be assessed with proper recommendations. 3. and (e) Is controlled by a public sector entity. Government Business Enterprises (GBEs) are required to comply with International Accounting Standards (IASs) issued by the International Accounting P a g e | 210 . For example. The IPSAS standard defines an economic entity. International Accounting Standards for Government Business Enterprises International Public Sector Accounting Standards (IPSAS) 6 addresses Consolidated Financial Statements and Accounting for Controlled Entities. Consequently. 3. as well as entities that provide accommodation on a commercial basis. (d) Is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length). The trend in the past years has been toward the governmental accounting systems coming more closely to commercial oriented accounting through the application of accrual accounting and fixed asset cost accounting methods. and potential consequences. (c) Sells goods and services. in the normal course of its business. Under this Accounting Standard Government Business Enterprises have the following characteristics: Government Business Enterprise means an entity that has all the following characteristics: (a) Is an entity with the power to contract in its own name. many of the activities of local governments can be included under both a public and private (commercial) accounting context. Further analysis of the situation in the Philippines is required in order that further clarification of the extent. (b) Has been assigned the financial and operational authority to carry on a business. as an economic entity. inclusive of what are termed government business enterprise.Improving the Financial Management of Local Economic Enterprises and accessible form. Although GBEs are not required to comply with this Standard in their own financial statements. and for accounting for controlled entities in the separate financial statements of the controlling entity. Guideline No. In these circumstances. The following paragraphs provide guidance to help determine whether or not control exists for financial reporting purposes. “Financial Reporting by Government Business Enterprises” notes that IASs are relevant to all business enterprises. to IASs. (b) The entity has the power to extract distributions of assets from the other entity. unless there is clear evidence of control being held by another entity. For example the benefit condition may be met if an entity had responsibility for the residual liabilities of another entity. a majority of the votes that are likely to be cast at a general meeting of the other entity. Power Conditions (a) The entity has. and/or may be liable for certain obligations of the other entity. regardless of whether they are in the private or public sector.Improving the Financial Management of Local Economic Enterprises Standards Committee. The Public Sector Committee’s Guideline No. to appoint or remove a majority of the members of the governing body of the other entity. and hence should be consolidated. directly or indirectly through controlled entities. ownership of a majority voting interest in the other entity. 1 recommends that GBEs should present financial statements that conform. and in accounting for investments in GBEs in the controlling entity’s separate financial statements. or regulate the casting of. in all material respects. In examining the relationship between two entities. control is presumed to exist when at least one of the following power conditions and one of the following benefit conditions exists. either granted by or exercised within existing legislation. This Standard establishes requirements for the preparation and presentation of consolidated financial statements. Benefit Conditions (a) The entity has the power to dissolve the other entity and obtain a significant level of the residual economic benefits or bear significant obligations. (c) The entity has the power to cast. this Standard should be applied in consolidating GBEs into the financial statements of the economic entity. P a g e | 211 . In other cases it may not be clear. (d) The entity has the power to cast the majority of votes at meetings of the board of directors or equivalent governing body. In some cases it may be clear that an entity is controlled. the provisions of this Standard will apply where a public sector entity that is not a GBE has one or more controlled entities that are GBEs. (b) The entity has the power. Public sector entities may create other entities to achieve some of their objectives. 1. Accordingly. The entity holds a “golden share” (or equivalent) in the other entity that confers rights to govern the financial and operating policies of that other entity. the following factors are likely. such as local economic enterprises and would define the requirements for financial reporting and budgeting. UBLIC SECTO Benefit Indicators (a) The entity holds direct or indirect title to the net assets/equity of the other entity with an ongoing right to access these. either individually or collectively. The same dynamics that is driving the Philippines local governments to engage in these activities is approximately the same as the situation in New South Wales a few years ago. Local governments were increasingly not receiving sufficient funds from the central level to finance their activities and at the same time were being asked to provide more services. (d) The entity is exposed to the residual liabilities of the other entity. (b) The entity has the ability to veto. (d) The mandate of the other entity is established and limited by. (b) The entity has a right to a significant level of the net assets/equity of the other entity in the event of a liquidation or in a distribution other than a liquidation. Power Indicators (a) The entity has the ability to veto operating and capital budgets of the other entity. 3. has paid some attention to the issues of how to deal with the increasing levels of effort by local governments to engage in more commercially oriented functions by their local governments. The above provides the recognized standards and basis for defining the relationship between a municipal government and any created and/or controlled entities.Improving the Financial Management of Local Economic Enterprises When one or more of the circumstances listed above does not exist. (c) The entity has the ability to approve the hiring. or modify governing body decisions of the other entity. The issues surrounding the approach by local governments toward providing these P a g e | 212 . Commercial and Corporatization of Local Governments in Australia It is always instructive to examine the experience from other countries of the Asia region to identify how they have handled similar problems and dealt with these issues. “Golden share” refers to a class of share that entitles the holder to specified powers or rights generally exceeding those normally associated with the holder’s ownership interest or representation on the governing body. reassignment and removal of key personnel of the other entity. (c) The entity is able to direct the other entity to co-operate with it in achieving its objectives. legislation. and particularly the state of New South Wales (NSW).2. to be indicative of the existence of control. Australia. overrule. This agreement only required the principles to be applied to a council’s significant business activities. including local government businesses. as P a g e | 213 . corporatization principles to government trading enterprises.Improving the Financial Management of Local Economic Enterprises services through commercial or enterprise type organizations is identified and described in the following paragraphs Issues • What local government activities are commercial in nature? • To what extent do their prices recover their costs? • Should more services be commercialized? • What are the pros and cons of extending the corporatization model to local government businesses? What does it mean for a government business unit to be corporatized? A 1988 report by a senior committee of NSW public officials advocated that a government business should meet conditions such as: (1) Have clear and nonconflicting commercial objectives. In the early 1990s many Australian state governments had been investigating reform of public enterprises. and applied. and (7) Be exposed to competition in both input and output markets The first six attributes made such an enterprise “commercial”. among other things. This particular plank of the policy was called competitive neutrality. (3) Be compensated for having to do community service obligations. (5) Be subject to arm’s length performance monitoring by the owner-government. (2) Be stripped of regulatory powers. After consultation with local government the NSW State government settled on a threshold approach. Those businesses that earned revenue in excess of $2m\ per year. Part of the challenge in implementing the reforms was to define significance. however it took a Council of Australian Governments (CoAG) meeting in1995 for a nationally consistent framework for ‘competition’ reform to emerge. known as Category 1 Businesses. The NCP agreement called on governments to implement a raft of reforms designed to increase the competiveness of the Australian economy. (6) Have effective rewards and sanctions related to performance. ranging from governance of government businesses to forcing third party access to monopolized infrastructure. (4) Have an independent board and management. whereas the addition of the last condition made it fully “corporatized”. were to be subject to the same reforms. The result of this meeting was the National Competition Policy (NCP). One of those reforms aimed to prevent government businesses from having an unfair advantage over the private sector due to issues such as tax treatment and preferential borrowing arrangements. If childcare services are primarily driven by social policy. the supply of childcare services may meet both social and commercial objectives. For example. The extent to which these businesses were to adopt a corporate model was at the discretion of council. may object to increased fees or reduced service levels due to their position. and _ Include in costs the same taxes faced by private businesses. P a g e | 214 . Pros and Cons of further applying corporatization principles to local government business Applying corporatization principles to a greater range of local government businesses brings a number of benefits to council. despite best intentions. _ Quantify and make explicit Community Service Obligations. Allow managerial responsibility. Have effective performance monitoring by the owner-government Effective performance monitoring can assist local government business units to assess their performance against agreed and measurable benchmarks. fee increases can be similarly justified. At the same time as the NCP came into being. _ Include debt guarantee fees. Have clear and non-conflicting objectives Identifying clear and non-conflicting objectives can assist councils to determine the extent to which they view a service as a commercial. Businesses with a sales turnover of less than $2M are known as Category 2 businesses.Improving the Financial Management of Local Economic Enterprises State Government owed businesses. and to recommend so-called ‘competition payments’ to the States upon positive assessment by the NCC5. the National Competition Council (NCC) was formed to assess compliance with the reform agenda. essentially due to the limited impact such businesses were thought to have on resource allocation decisions. Councils were to apply full cost attribution to as many Category 2 activities as was practicable. Corporatization can assist local government to determine the trade-off between these two objectives. Those requirements were: _ Adopt a corporate model. who. then any cross-subsidy can be justified on these grounds. authority and autonomy Managerial autonomy allows major decisions regarding the performance of various business units to be made at arms length from councillors. If in the future the service is viewed as essentially commercial. _ Operate in the same regulatory framework as other businesses. _ Factor into prices an appropriate return on capital invested. This may be a particular problem in rural and regional areas where councilors are relatively closer to their communities than in metropolitan areas. social or regulatory venture. Since local government businesses are not scrutinized by the equity and debt markets. many councils do not charge fees for the use of those fields. the consequences of corporatization may impact upon more the council’s balance sheet. The financial benefits of this shift. Have effective rewards and sanctions related to performance Effective monitoring combined with appropriate reward and sanction mechanisms can help ensure local government businesses are governed to meet the objectives of council. The following were identified in the New South Wales study that indicated possibilities for applying a corporate model to local government supplied activities. rather than those of management or other self-interested groups. While some may argue that such fees do recover costs. particularly in rural and regional areas. These facilities should be reexamined for revenue opportunity. There are a number of costs associated with imposing a corporatization model. These services appear to be able to earn council an economic return. Opportunities to increase fee income While mindful of the pros and cons of further implementing the corporatization model. may be outweighed by impact on the local economy due to a loss of employment. a council service may be able to be provided more efficiently by an external agency. Public halls Public halls are often rented to community groups for minimal rates. councils may wish to cross-subsidize this service on equity grounds. implementing the four principles to a business that is insignificant in terms of both revenue and expenditure is likely to incur transactions costs that far outweigh the efficiency gains. Second. For instance. Of course. council may wish to investigate charging rents comparable to those charged in the private sector for equivalent facilities. it would seem that a number of services provided by NSW councils are worthy of investigation. however. particularly now that many employers pay childcare fees through benefits such as salary sacrifice. Sports grounds Although they maintain sporting facilities. First.Improving the Financial Management of Local Economic Enterprises the owner-government must replicate this function to ensure its business units meet the set objectives. P a g e | 215 . For example: Childcare Many councils either provide childcare services directly or subsidize rental by private operators. There are many small local governments that lack the necessary capabilities to support some public services directly and this has created the possibility and potential to utilize commercial type enterprises. Only a part of municipal enterprises follow the municipal enterprise model. 3. a funds statement and a balance sheet. A municipal enterprise is part of the municipal administration and finances. it is not a separate legal person and it does not have an independent legal obligation to keep books. enterprises treated as so called other balance sheet units and business with separate accounts) are treated in the same way as other municipal activities. Municipal enterprise Municipal enterprises following the so-called municipal enterprise model are independent units in terms of accounting to which the council of the municipality or joint municipal board has granted a more independent budgetary status than that of other municipal functional units. The above discussion represents some general guidance and policies that can be established with regard to the treatment of those services delivered by local government enterprises that may reflect their commercial orientation. This reflect the traditional and classical approach to the delivery of public services that may be outside of the general government functions. Income and expenditure from jointstock or other such business operations are not included in the statistics on the finances of municipalities even if the municipality owns the entire capital stock of the enterprise. The following provides some narrative on the definition and structure of municipal enterprises and how they are treated in the budgets and financial reports at the local and central level. Treatment of Local Government Enterprises in Finland Finland has one of the most well developed structures of local government provision for delivery of public services to their citizens.Improving the Financial Management of Local Economic Enterprises Hire of earthmoving equipment Road service is one function that may be difficult to corporatize due to the limited income streams. authorized and sanctioned by the local governments to delivery these services on a cost reimbursable basis. According to the instructions of the Municipal Section of the Accounting Board.3. P a g e | 216 . This may provide a basis for a clearer definition and development of a policy on this issue in The Philippines. municipal enterprises draft separate financial statements containing a profit and loss account. Councils might explore hiring idle earth moving equipment to private enterprise. The example of Finland provides a model based on the more traditional market economy orientation practiced by developed economies. In statistics on the finances of municipalities and joint municipal boards other municipal business operations (incl. and financing. the budget is divided into the operational economy. This enables the combining of the municipalities' and their municipal enterprises' budgets and financial statement estimates into a comprehensive budget/financial statement estimate for the entire municipality. Combined budgets. whose figures are comparable with those of the financial statement. According to the Local Government Act the budget includes the appropriations required by the operational targets and revenue estimates and indicates how the financing needs will be met. Statistics Finland collects separate data from the municipal enterprises' financial statement estimates and budgets. the municipality must also compile for its budget a profit and loss statement that includes the profit and loss estimates of the municipal enterprise line by line and from which the interest paid on internal loans and the return on fixed capital have been eliminated. Budget A budget is the plan for the financial administration of the municipality or joint municipal board. Since a municipal enterprise is treated differently in the budget than in the financial statement. are also published on the Statistics Finland website. In Statistics Finland's budget publications the budgets of municipalities and joint municipal boards are published without the budgets of enterprises following the municipal enterprise model. The structures of the profit and loss account and financing parts correspond to the formats for the profit and loss account and the funds statement of the municipality and joint municipal board. According to the budget recommendation of the Association of Finnish Local and Regional Authorities. The municipality can use this profit and loss estimate in communicating about its budget to the public. In order to compile statistics on financial statement estimates and budgets. P a g e | 217 . The budget for the budgetary year is approved before the end of the previous year by the council of the municipality or joint municipal board. investments. According to the budget recommendation of the Association of Finnish Local and Regional Authorities. the profit and loss account. Hence a municipal enterprise is not linked to the municipal budget "line by line".Improving the Financial Management of Local Economic Enterprises The profit and loss account in the municipal budget includes settlements between the municipality and a municipal enterprise (internal interest paid and return on the municipal enterprise's fixed capital) but not the municipal enterprise's "own" profit and loss estimates. the figures in the budget and the financial statement may not be comparable. The separate financial statement of a municipal enterprise is integrated "line by line" into the municipality's or joint municipal board's financial statement to form an overall financial statement. or budget data comparable with financial statements. If a municipality has municipal enterprises. and capital is not obtained by selling shares of stock that promise future financial returns. as municipal enterprises are entered into the latter line by line. What distinguishes fund accounting from conventional for-profit accounting is that the government is divided for accounting purposes into separate accounting entities. reflecting the control orientation of fund accounting.4. Fund accounting is the basic framework that has been developed and used by accountants to record financial transactions in governments. A government may have one or more funds. Each fund is usually set up to record and account for the uses of specific group of assets or sources of revenue. Only a part of municipal enterprises follow the municipal enterprise model. government revenues are usually not generated by the sale of goods and services. Unlike for-profit organizations. whereas for-profit accounting makes no similar divisions. Fund accounting was developed primarily for control purposes and is designed to record where resources come from and what they are used for.Improving the Financial Management of Local Economic Enterprises The Local Government Act stipulates that the budget must be observed in municipal activities and financial administration. it must. use these resources (inputs) produce goods and services (outputs) and then distribute these goods and service to their constituencies. or funds. but not maximizing financial profit. Thus governments are concerned with “bringing in as much money as goes out” (balancing the budget) and being accountable for the use of resources. and to help ensure that governments conform to the legal constraints placed upon them. publish also a profit and loss statement part in its budget which contains the municipal enterprise's profit and loss statement estimates and from which interest paid on internal loans and returns on basic capital have been eliminated. The profit and loss statement part of the budget is therefore not comparable with the profit and loss statement of the financial statement. If the municipality or joint municipal board has enterprises following the municipal enterprise model. The accounting of the municipality or joint municipal board monitors the realization of the budget and the financial statement includes a comparative report on the realization of the budget. according to the budget recommendation of the Association of Finnish Local and Regional Authorities. eliminating internal items. The council decides on revisions to the budget. P a g e | 218 . the profit and loss statement part of the budget includes the settlements between the municipality or joint municipal board and their municipal enterprises (internal interests paid and return on the municipal enterprise's basic capital) but not the municipal enterprise's "own" profit and loss estimates. Fund Accounting in the USA Governments obtain resources. 3. P a g e | 219 . Fiduciary funds are set up either as governmental or proprietary funds.” There are three broad categories of funds—governmental funds. governmental funds usually employ either an accrual expenditure or a modified accrual basis of accounting. or commercial-type. many activities that are run on a break-even basis or with operating subsidies are still set up as a proprietary fund. transactions between funds are permitted and occur frequently. and fiduciary funds—and there are specific types of funds in each broad category.Improving the Financial Management of Local Economic Enterprises Funds in government often correspond to activities and objectives of the organization. These activities or objectives are often specified by external organizations. Governmental funds are sometimes referred to as expenditure funds. or limitations. but they do not necessarily correspond to operating divisions such as departments or programs within the government. proprietary funds. and changes therein. together with all related liabilities and residual equities or balances. This does not mean that a profit should be realized but only that the measurement of profit is possible and desirable. the same one used by for-profit organizations. In fact. restrictions. Activities set up as proprietary funds often involve an exchange of resources for a product or service similar to a commercial venture. Proprietary funds are also referred to as self-sustaining. As a result. A complete definition of fund is as follows: “A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources. They are primarily designed to keep track of the revenues and expenditures related to these activities—what comes in and what is spent by the government in the conduct of these activities. The accrual expense basis of accounting. such as higher levels of governments providing revenues with restrictions on their use. funds. or by a government’s legislative branch requiring that funds raised in a certain way be put to a specific use. Governmental funds typically include most of the ordinary or routine activities of a government. Fiduciary funds are established when the government must hold assets for individuals (such as employees in a pension fund) or for other organizations (as when a county collects sales tax for a city). depending on their specific purpose. is accepted practice in proprietary funds. Proprietary funds are designed to account for those specific governmental activities for which a profit orientation is appropriate. Although funds are independent accounting entities. nonexpendable. which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations. and/or funds. 2. or other purposes. including depreciation) of providing goods and services to the general public on a continuing basis be financed or recovered primarily through user charges. Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises—where the intent of the governing body is that the costs (expenses. Special Assessment Funds are used to account for the financing of public improvements or services deemed to benefit the properties against which special assessments are levied. this fund is central in governments. public policy. general long-term debt principal and interest 5. Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the government unit. P a g e | 220 . For the most part. and (c) Pension Trust Funds. private organizations. on a costreimbursement basis. Proprietary Funds: 1. The number of funds in any single governmental unit may vary considerably. expenses incurred and/or net income is appropriate for capital maintenance. whereas states and larger cities may break the funds down further into an even larger set. accountability. Debt Service Funds are used to account for the accumulation of resources for . (b) Nonexpendable Trust Funds. Special Revenue Fund is used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes 3. Fiduciary Funds: Trust and Agency Funds are used to account for assets by a government unit in trustee capacity or as an agent for individuals. Capital Projects Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities 4. 2.Improving the Financial Management of Local Economic Enterprises The following are specific types of funds within these categories: Governmental Funds: 1. The General Fund to account for all financial resources except those required to be accounted for in another fund. or to other government units. the general fund contains the resources that are used for the operational activities of the government. Small towns may use only a few of the above mentioned funds. These include (a) Expendable Trust Funds. management control. or (b) where the governing body has decided that periodic determination of revenues earned. and the payment of. and (d) Agency Funds. Although the general fund is defined in a residual manner to handle resources not restricted to other uses and funds. other government units. expenditures and changes in fund balances. Although not part of a fund subject to the accounting equation. (b) the manner in which prices. a statement of revenues. and permanent funds will be prepared using the current financial resources measurement focus and modified accrual basis of accounting. or otherwise. verification and control of costs. comparison. capital projects. it is still recommended that governments keep a record of their long-term assets and liabilities. The only exceptions are those long-term assets and liabilities associated with enterprise. (c) adequacy and appropriateness. contributions to permanent and term endowments. These statements should also report capital contributions. GOVERNMENTAL FUND FINANCIAL STATEMENTS Governmental Fund Financial Statements including general fund. and special revenue. PROPRIETARY FUND FINANCIAL STATEMENTS Proprietary fund financial statements that include enterprise funds and internal service funds will be prepared using the economic resources measurement focus and the accrual basis of accounting. (d) measurement of efficiency and effectiveness of public services. The required proprietary fund statements are a statement of net assets. and changes in fund net assets and a cash flow statement that is prepared using the direct method. debt service. taxes or inter-governmental transfers are determined. The differences in the accounting systems of the governmental funds and proprietary (enterprise) fund are presented in the box below. The required governmental fund financial statements are a balance sheet. An excerpt from governmental funds and enterprise funds for a local government in the USA is provided in Appendix A for further illustration of how fund accounting presented in the financial statements.Improving the Financial Management of Local Economic Enterprises Note that most long-term assets and liabilities are not counted for within the fund structure. and certain trust funds. In principle. expenses. local government accounting systems must address through the types of accounts that they utilize and their budgeting systems the following: (a) identification. and transfers separately at the bottom of the statement to arrive at the all-inclusive change in fund net assets. It is important to recognize the differences in the basis of accounting between the two types of funds and the financial statement requirements of the two funds. special and extraordinary items. a statement of revenues. internal service. (e) comparison and contrast of P a g e | 221 . of prices or taxes. 3. to determine and then to achieve the leasteconomic-cost technically feasible solutions to the concerns they address. and fund balance—for the organization as a whole.Improving the Financial Management of Local Economic Enterprises costs and prices: among entities.($000) General Water & Municipal Parking Fund Sewer Fund Fund Assets: Cash on Hand 50 100 120 Property Tax Rec 100 Accounts Rec 25 30 40 State Aid Rec 50 Due from Other Funds 10 12 15 Other Assets Inventories: Materials/Supplies 2 20 25 P a g e | 222 . The primary document in this area is the balance sheet. liabilities. over time. and fund balances at any single point in time for an individual fund or group of funds. balance sheets are usually presented in the financial reports for all funds (governmental. liability. (g) costs and benefits of projects. as well as what are termed account groups for fixed assets and debt accounts. and fiduciary) for the beginning and end of the fiscal year.1. and. The following illustrates a combined balance sheet that reflects the use of the general fund and several enterprise fund accounts based on the fund accounting method used in the US. Combined Balance Sheet for Local Government. A combined balance sheet contains the balance sheets of every individual fund and account group and sometimes displays a total of each account—asset. January 1. (h) the manner of funding capital expenditure and its impact on current accounting and financial management. especially by comparison between in-house provision and contracting-out. This is a very simplified version of a balance sheet for the purposes of illustration. while actual combined balance sheets might well have several enterprise fund. and often the balance sheets for all funds are presented in a single combined statement. The balance sheet lists the assets. 2--. proprietary. to facilitate efficient and credible financial and economic analysis of activities. (i) providing necessary – albeit not always sufficient – cost data. Illustration of Balance Sheet Under Fund Accounting Method One basic purpose of accounting is to report on the stock of resources of a government. (f) costs and benefits of providing services in different ways. and against budgets and other expectations. For governments.4. each fund will have a different set of assets and liabilities. The reserve for encumbrances represents the portion of the fund balance that is set aside to meet certain types of financial obligations not yet fulfilled.Improving the Financial Management of Local Economic Enterprises Equipment (net Depreciation) Land 10 Buildings (net of depreciation For enterprise fund) 50 Total Assets: Liabilities: Vouchers Payable Salaries Payable Due to Other Funds Bond Anticipation Notes Revenue Bonds Payable Total Liabilities: 297 10 100 5 200 50 322 40 445 10 15 20 15 20 15 100 25 175 5 10 5 100 15 135 45 Reserves: Reserve for Encumbrances Total Reserves Fund Balances Retained Earnings Total Liabilities. First. If the government has encumbered funds for certain items that have been ordered but not yet delivered. there can be interfund transfers and obligations among the funds. P a g e | 223 . then the reserve shows that these orders are outstanding. Cash is common to all the funds. Second. but the cash accounts are not commingled into one bank account in most cases. In addition there is a reserve account that is placed between the liabilities and the fund balances. Reserves and Fund Balances or Retained Earnings 100 100 152 147 310 297 322 445 There are several aspects of the combined balance sheet that should be highlighted. Fixed assets and long term debt are now included in the general fund based on the changes to the accounting standard issued the Government Standards Accounting Board (GASB) Statement 34. Reserves consist of those portions of the fund balances that are segregated for a specific future use and not available for further expenditure. the general fund. cities or municipalities. This comparison is presented to illustrate the differences in the transparency and accountability that can be provided by the presentation of local government financial activities. the distinction is helpful because the governmental funds use expenditure accounting while the enterprise funds use expense accounting. use a fund balance. 3. Representation of Balance Sheet of Local Government in the Philippines The following balance sheet is utilized as a comparison of how a balance sheet is presented under a one fund approach too accounting for local government finances and the multi-fund approach that is utilized by the local governments in the USA. including those of a general government nature and those of a more commercial and profit oriented focus. The breakdown of the fund accounting approach in the USA provides much more detail and possibility of analysis than the balance sheet for the local government in the Philippines. while the governmental funds. or through the operation of the local government enterprise.4. The use of the two accounts is similar when viewed from the accounting equation perspective. There is a retained earning/surplus account. As is evident from the balance sheet. but this does not indicate if this surplus was a result of any increases in revenues. however. the comparison is made from one year to another and there is no breakdown by any governmental and/or enterprise activities of the local government unit. P a g e | 224 . It is strictly used to illustrate the differences in how the financial condition is presented between the two methods. there is a need for more detailed identification of the financial activity of the various components of the local government functions.2. any savings in general government operations. and very important. The balance sheet presented for the town of Ati-Atihan does not purport to be representative of all local governments. in the Philippines. Given the increasing level of commercial related activity that seems to be the trend in the Philippines. the enterprise funds use retained earnings to describe the difference between assets and liabilities. The assets of the local government are presented although it is not clear as to whether these assets are used for general government purposes or for enterprise purposes.Improving the Financial Management of Local Economic Enterprises Finally. 116.718.143.Plant and Equipment Other Assets TOTAL ASSETS P 1.90 48.81 P 160.911.92 2.03 28.98 4.05 19.81 0.00 0.225.00 14.703.852.664.026.571.32 141.00 0.33 2.83 18.068.25 0.054.163.840.455. Plant and Equipment Public Infrastructures Reforestation Project Construction in Progress Total Property.62 0.00 91. AKLAN CONSOLIDATED BALANCE SHEET As of December 31.00 1.59 2.956.520.551.510.164.415.50 10.523. 2007 (With Comparative Figures for CY 2006) 2007 ASSETS Current Assets Cash Receivables Inventories Prepayments Other Current Assets Total Current Assets Investments Investment in Securities Sinking Fund Total Investments Property.06 15.71 0.73 5.533.00 P 0.00 0.58 P 60.123.67 4.413.28 P 97.420.885.00 51.414.061.176.939.095.547.49 555.90 138.00 9.085.00 0.901.549.21 P a g e | 225 .892.68 0.151.120.398.502.598.950.Plant and Equipment (net of Depreciation) Land Land Improvements Buildings Leasehold Improvements Office Equipment.96 5.883.438.00 0.00 10.862.25 29.211.492.591.875. Furnitures and Fixtures Machineries and Equipment Transportation Equipment Other Property.413.605.00 2006 P 29.110.202.673.176.33 2.320.286.411.982.Improving the Financial Management of Local Economic Enterprises Republic of the Philippines Province of Aklan ATI-ATIHAN TOWN OF KALIBO MUNICIPAL GOVERNMENT OF KALIBO.83 45.833.96 2.502.00 7.674.86 0.896.50 767.42 1. 767.28 P 24.542.713.724.64 P 37.842.080.99 2.092.576.32 141.458.797.998.779.552.21 32.998.560.132.022.510.71) 108.22 2.616. End TOTAL LIABILITIES AND EQUITY 1.100.499.283.972.48 4.21 6. Beginning Add/Deduct: Retained Operating Surplus Prior Year's Adjustments Transfers to Registry Transfer of PPE/Completed Projects from Trust Fund/ General Fund/Other Fund Government Equity.11 108.176.41 (10.379.11 284.37 P 160.189.981.685.29 10.987.960.37 99.591.84 P a g e | 226 .629.552.21 16.389.725.950.74 21.88) (4.Improving the Financial Management of Local Economic Enterprises LIABILITIES AND EQUITY LIABILITIES Current Liabilities Long-term Liabilities Deferred Credits Total Liabilities EQUITY Government Equity.080.91 122.840.58 4.319.275.817.939.89 10.962. transportation systems. it may weaken the financial condition of the government by requiring subsidies from other funds in the form of money or services. What it does mean is that the enterprise has an effect on the financial condition of the government. FINANCIAL ANALYSIS OF GOVERNMENT ENTERPRISES There is a fundamental difference in the manner in which government enterprises are analyzed on a financial basis that a general government operational activity. (3) capital structure. and recreational facilities are examples of activities organized on an enterprise basis. and (4) liquidity. Utilities. But just because the enterprise puts a financial burden on the government does not mean that the goods or services from the enterprise are not “worth” the cost. the enterprise should have no adverse affect on the financial condition of the government. a government enterprise may produce a surplus or profit which may be available for use elsewhere in the government. If an enterprise operates on a break-even basis without subsidies from other parts of the government. P a g e | 227 . It is assumed that the purpose of a governmental enterprise is to provide a public good or service in exchange for payments from the users of that good or service. Subsidies for certain public enterprises may be socially desirable. a short description of the elements of financial analysis of government enterprises is provided in the following sections. Given the reflection of the financial condition of local economic enterprises presented in the main body of this report. (2) operational performance. The analysis of the finances of the government enterprises is more closely related to the analysis of the commercial profit oriented corporations and businesses. they might be self-sustaining as is indicated by the laws concerning the establishment and operation of these enterprises. Moreover. the significance of the losses and the debt of these enterprises indicates that there has not been sufficient attention to the financial analysis of these enterprises to determine if. the operation of the enterprise should result in an improvement in the financial condition of the government. or even when.Improving the Financial Management of Local Economic Enterprises 4. convention centers. If an enterprise fails to operate at least on a break-even basis. The major question to be addressed is how do government enterprises affect the financial condition of a government. For these reasons. by providing a valued good or service to the community and thereby meeting a need that might not be met without the enterprise. Finally. The analysis of the financial conditions of a government enterprise can be examined in the following four areas: (1) assessments of demand and supply. and that this financial effect should be recognized. airports. This relationship can be represented by the specification of a demand curve and/or estimation of the elasticity of demand with respect to price. Examples include the environmental regulations that affect sewer systems. a municipally owned cable television system may face competition from satellite systems and home video recorders. such as airports and water systems. Finally. Again.Improving the Financial Management of Local Economic Enterprises Demand and Supply A distinguishing feature of enterprises. This elasticity is specified as the percentage change in the quantity of the product demanded that associated with a percentage change in price. but the railway may fact competition from automobiles and private express buses. Similarly. others face direct competition. compared with the other activities of governments. the demand is called inelastic (elastic) with respect to the price. The market should also be examined to understand the nature of indirect competition. competing products and prices may lower the revenues to a public enterprise. For example. Regulations may improve or worsen the finances of an enterprise. if as is often the case the enterprise is in a monopoly position. they must be assessed on a case-by-case basis. is that they operate in markets where resources are exchanged for goods and services. a city may operate the only commuter rail line. the market analysis should include an estimate of the relationship of the quantity of the product demanded to the price charged for the product. such as recreational facilities. Thus an examination of the enterprise should include an investigation of the nature of the direct competition. In addition to a general market analysis. Thus it is important to examine the enterprise’s role in the supply of and demand for the services in question. nuclear regulatory effects on electric utilities. An important aspect of the market is the degree of competition. In some respects the financial riskiness of the enterprise increases with the competition in the market. For example. P a g e | 228 . If the percentage change in the product demanded is less (more) than the associated percentage change in price. many enterprises operate in industries that are faced with special regulations. While many public enterprises approximate monopoly suppliers. then there will be no actions by direct competitors. The public enterprise’s market share should be examined over time to determine whether its position in the market is growing or declining. such as price cutting or product enhancement. and the move away from cost reimbursement toward prospective reimbursement in the health industry. Enterprises that face an inelastic demand are in a better position from a financial perspective because they will receive more revenues for a given price increase than they would if their demand were more elastic. that could affect the financial condition of the enterprise in a negative way. and as a result. and these affect the supply of and demand for products. Although break-even performance may be the financial goal. In growing enterprises there may be a need for additional working capital. Another measure of the enterprise’s operational performance is the return on investment. since it involves the assessment of revenues and expenses. This ratio assesses the earnings of the enterprise compared with the asset base generating the earnings. This ratio is called the operating margin in some industries. the less likely it is that the government will become involved in subsidizing the enterprise. either for capital expansion or for replacement. For this reason.Improving the Financial Management of Local Economic Enterprises Operational Performance The analysis of the operational performance of an enterprise is most analogous to internal resource analysis. Most of the reasons stem from the notion that break-even performance is the long run goal rather than the objective for any particular year. Usually interest expense is added to the income figure in the numerator because interest is part of the total return on assets. The numerator of this ratio may be based on operating income or total income. Or the enterprise may wish to operate with a positive net income in some years as a contingency for those years in which unexpected events have a negative effect on its earnings. at the least. The excess of revenues over expenses may be needed for capital purposes. In general. The second part is net income or total net income. There are a number of measures available to assess an enterprise’s operational performance. this can be used as a benchmark in the analysis of operational performance. or to pay back contributed capital that is sometimes used to start up a public enterprise. This is the difference between operating revenues and operating expenses where operating refers to those flows which are directly related to the enterprise’s primary service activities. Most enterprises report their income in at least two parts. Thus the return on investment from operations equals (net income from operations plus interest expense) divided by total assets. there are several reasons why a positive net income may be appropriate. The ability of an enterprise to raise its rates or prices to improve its operational performance should also be examined. The first part is typically labeled operating income. and includes nonoperating revenues and expenses as well as operating income. the total return on investment equals (total net income plus interest expense) divided by total assets. Sometimes. the better the operational performance of the enterprise. in order to compare the income data for enterprises of various sizes. The denominator is the total assets of the enterprise. it is better to examine the enterprise’s revenues and expenses over several years rather than for a single year. Since assets are typically measured by historical cost less P a g e | 229 . the part paid to the debtholders. Since the financial goal of enterprises is assumed to be break-even operations. operating income and net income or divided by revenues. which can be generated by operating with a positive net income. or net income from operations. it is not a cash flow). For these reasons. in part. so that the risks of not being able to pay debt service are less. asset valuations are affected by inflation. the greater the difficulty of raising additional debt. we need to examine the stock of debt outstanding and debt service flows to assess an enterprise’s capital structure. The use of debt. Financial ratios that use assets measured in this way are less reliable than those that use more current data. is not a signal of poor financial condition. For example.g.Improving the Financial Management of Local Economic Enterprises depreciation. the greater the possibility that unexpected changes in enterprise revenues and expenses may require general fund contributions to the payment of the enterprise’s debt service. on its current capital structure. Capital Structure The ability of the enterprise to raise capital depends. the debt service coverage ratio can be defined as [Total net income plus depreciation plus interest payments] divided by [Principal payments plus interest payments]. per se. The likelihood that an enterprise will be able to repay its debt depends on the annual payments required by existing debt levels. the greater the debt carried by the enterprise. so they have to be interpreted more cautiously. the greater the level of enterprise debt. Enterprises that are heavier users of debt are generally considered to be financially riskier than those that borrow less (recognizing that average levels of debt vary across industries). common stock). an analysis of the enterprise’s capital structure usually means measuring the degree to which it relies on debt. the total asset turnover ratio is computed by dividing total annual operating revenues by total assets. Activity ratios usually compare a measure of the enterprise’s input with its output. even though it often uses a measure of enterprise assets measured in historical terms. A final type of ratio that is useful in the evaluation of operational performance is the activity ratio. Higher values of the debt service coverage ratio indicate that the enterprise has more funds available in any given year (more coverage) to pay back the debt. all else being equal. which is used to compare the funds available in a given period (normally a year) for the repayment of debt with the amount of debt and interest on the debt that must be repaid over that period. in terms of capital expansion. For an enterprise. P a g e | 230 . For government enterprises that cannot issue equity (e. implying efficient use of assets. The numerator represents the annual cash flow available to pay debt service (depreciation is included in the numerator because although it is an expense. If this ratio is high it suggests that every dollar of assets is generating a high value of assets. and the denominator is the annual debt service. but all else being equal. A ratio that is commonly used in this assessment is the debt service coverage ratio. Moreover. using cash budgets and information on past surpluses and deficits and sources and uses of cash from existing financial statements. 5. In the last case. and the current and quick ratios can also be used. Thus enterprise fund surpluses and deficits are analyzed as a primary source of the increases and decreases in the enterprise’s fund balances or net worth. and the probability of cash flow problems. we start by estimating the expected levels and timing of cash flows to and from the enterprise. To analyze the liquidity of the enterprise’s internal resources. Too high a debt to asset ratio implies that the enterprise needs more internal resources in the form of net worth or retained earnings.Improving the Financial Management of Local Economic Enterprises For an enterprise. a measure of the amount of debt outstanding is the debt to assets ratio. with some exceptions that will be noted. Internal resources can increase by transfers from other funds and/or surpluses (profits) earned by the enterprise. Finally. Following this we can try to assess the extent to which the enterprise can change the magnitude of its cash flows. The local government code does not specify whether a P a g e | 231 . such as net working capital. the stock of long-term debt outstanding to the total fixed assets of the enterprise. Levels of Liquidity of Internal Resources The analysis of the levels and liquidity of internal resources for enterprises follows the same approach as for other government funds. standard methods of comparing changes in current assets and liabilities over time and/or between organizations can be used for evaluating the liquidity of government enterprises. but it is also necessary to use debt to asset ratios (rather than a fund balance to revenue ratios) to determine the adequacy of this “equity” (nonborrowed) capital cushion. This ratio measures the proportion of the fixed assets of the enterprise that is financed by long-term debt but again suffers from the use of assets measured by historical costs. and/or slowing down cash outflows (like payment of bills). and the timing of its cash flows by speeding up cash inflows (like collection of water bills). it is necessary to turn to collection rates and payment rates. through additional borrowing or increasing revenues and/or decreasing its expenditures. Liquidity measures. To analyze levels of internal resources it is necessary to examine the levels and trends of fund balances (sometimes termed the net worth or retained earnings in government enterprises). BUDGETING METHODS There is a need to clarify the basis on which budgets are prepared within the local government units. relative to its debt. it must be stressed that the process of budgeting is the planning of financing for future activities and acquisitions. one that determines the tax rate that local councils will be asked to approve for the year.Improving the Financial Management of Local Economic Enterprises cash based or accrual basis of accounting will be employed by the local governments. expenditures are recorded on an accrual basis meaning the period in which the obligation is incurred rather than paid. cash-based budgeting was more useful for determining fiscal flexibility. while revenues are recorded on the basis of actual cash receipts of the taxes in the budget period. For example. The budget is not an accounting exercise. New Zealand. to spend. The standard international practice is that local governments will use a modified accrual basis for accounting of local government expenditures and revenues. to full accrual budgeting at all levels and agencies of the government. To facilitate meaningful comparisons. The budget and financial statements are both important financial documents that have obvious linkages. The US Government Accounting Office has conducted at least two surveys of the use of accrual budgeting around the world. Financial statements provide assurance to users that financing and operations were carried out in accordance with the authorities and powers granted. Iceland. but ultimately decided against using it altogether. Canada. To put it bluntly. this is an important pricing exercise. to raise revenue. even though the verdict has long been in with regard to accrual accounting. the United Kingdom and the United States. Norway and Sweden considered it. On the other hand. A government's budget is a critical element in the accountability cycle and the standard against which subsequent performance is judged. such as at the government-wide level. to invest and to borrow. the financial statements provide a measure of a government's performance in the achievement of its objectives as set out in budget documents. P a g e | 232 . the international jury on accrual budgeting is still deliberating. On this basis. Implementations range from the most limited. The budget and budget bylaw include direct authority to staff to provide services at specified costs. It is utilized to varying degrees in Australia. First. Financial statements also assist users in assessing the municipality’s performance in the management of financial affairs by identifying variances that need explanation. In particular. and where it is believed that a cash basis does not provide adequate information for tax levies or user rates. The Netherlands. It was found that cash-based and accrual-based budgeting are useful for different purposes. Denmark and Switzerland recently expanded the use of accrual budgeting. whereas accrual-based budgeting proved useful in costing of programs. planned results need to be reported on a basis and for a scope consistent with that used to report the actual results of the current period. For municipalities. whereas the actuals would include only repayment of debenture interest.g. Inconsistent with the new Provides decent view of depending upon budgetgovernment sustainability financial reporting system design requirements – may be in the short-term difficult to monitor. Variance reports would be comparing apples and oranges as the budget numbers would include repayment of debenture principal. whereas accrual-based budgeting provides a more comprehensive view of the costs involved in providing a service or a product. postclosure costs) Short-term view of Any under-funding Complexity of Budget authority accrual budgeting of or provision for for current full price Council leads to may lead to future budgets based of asset misunderstanding replacements upon affordability by Councils becomes obvious rather than need May be difficult to monitor. as the US GAO survey discovered. new financial especially for nonreporting accountants requirements P a g e | 233 . and perhaps more important. it may be quite inadequate in providing for the true cost of providing a service. is that a cash-based budget is excellent as a financing plan. especially if the daily accounting is on an accrual basis First are the serious disconnects between cash-based budgeting and accrual accounting. the focus will shift more to the need to provide for on-going maintenance and future sustainability of services than is perhaps the case at present. Thus the pricing derived or used from cash-based budgeting is perhaps only part of the story.and by long-term staff Large projects look Ensures cash is expensive and may available in the be delayed due to period an unfavourable view of large upfront costs Accrual-based Budgeting Advantages Disadvantages Consistent with the Difficult to understand. However. resulting in a more sustainable price or tax rate being determined. lead to underwhich will lead to funding full capital budgeting (e.Improving the Financial Management of Local Economic Enterprises Long-term focus on Without cash-flow budgets. Cash-based Budgeting Advantages Disadvantages Budgets for tax Easily understood purposes only – by current fails to focus on the Councilors and Taxpayers . tangible capital assets. it may asset renewal. by highlighting the consumption and de facto using up of assets through the recording of amortization expense. Further. Second. because expenditures should match the revenues or financing that is available. as there is no consideration of the consumption of tangible capital assets over time or other non-cash expenses. Improving the Financial Management of Local Economic Enterprises Appendix A: Illustrations of Financial Statements of Local Government in the USA NOTE: This is illustration of fund accounting practices prior to the issuance of the GASB Statement 34 which redefined the method in which fixed assets or infrastructure were reported on the balance sheets of local governments. P a g e | 234 . This is shown for illustration purposes. Improving the Financial Management of Local Economic Enterprises P a g e | 235 . Improving the Financial Management of Local Economic Enterprises P a g e | 236 . Thus. business incubators) . Pardo and Romulo R. Zipagan I. These recommendations can be used by the DILG in harnessing the LGUs’ corporate capacities.. local governments also have to assume a significant role in national economic development to complement the efforts at the National level. Such support was provided by ADB under Local Governance and Fiscal Management Project (TA 4778-PHI).g. Thus. It is in this light that the Department of the Interior and Local Government (DILG) has requested technical assistance from the Asian Development Bank (ADB) to enable it to study the local government units’ (LGUs’) exercise of corporate powers in tandem with their governmental and regulatory powers. such responsibility has been shifted to local governments as they are now cognizant of their bigger and proactive role in securing the economic wellbeing of their constituents. INTRODUCTION By tradition. in more recent years. while national economic development is principally the task of the Central Government. This study sought to document the exercise of the LGUs’ corporate powers and review aselected group of LGUs that have exercised their corporate powers through the operation of public utilities. governmental and regulatory powers has affected their ability to confront the challenges of poverty alleviation and ensuring local economic development. the emerging reality is that local governments will have a part to play in steering their local economies to be ready to confront the challenge of globalization. Based on the results of thereview. Local economies are the building blocks of the national economy. the Central Government has been tasked with the responsibility of promoting economic development in a community.STUDY ON THE CORPORATE POWERS OF LOCAL GOVERNMENT UNITS Erlito R. However. the traditional role of local governments as service provider has been expanded to include economic promotion as a necessary function of local governance. and how this exercise of corporate. Thus. P a g e | 237 . a set of guidelines and a program strategy design will be formulated. economic enterprises and other service facilities (e. Provinces. 1993). cities.” The phrase “political subdivision” appropriately covers the exercise of governmental functions. As agents of the state. and abolished through a legislation enacted by Congress. or an ordinance passed by the local legislative body. It states: “Every local government unit created or recognized under this Code is a body politic and corporate endowed with powers to be exercised as a political subdivision of the National Government and as a corporate entity representing the inhabitants of its territory. structure. and municipalities are LGUs created through the acts of Congress while barangays are created through ordinances passed by the concerned city or municipality that has jurisdiction over them. subject to approval by majority of the votes cast in a plebiscite in the LGU/s directly affected. municipalities and barangays. merged. taxation.” In 1991. functions. services and facilities. local governments exercise two kinds of power: governmental powers to protect and promote public interest and welfare. the criteria for the creation of LGUs are population. The Code embodies all existing laws and statutes concerning local governments and their powers. Section 15 of the LGC underscores the dual nature of LGUs. cities. personnel. Congress enacted a new Local Government Code (LGC). while the phrase “corporate entity” properly refers to the exercise of proprietary functions (Nolledo. There shall be autonomous regions in Muslim Mindanao and the Cordilleras as hereinafter provided.Study on the Corporate Powers of Local Government Units II. and corporate or proprietary powers to provide local necessities and conveniences for its community. Dual Nature of Local Governments Local governments in the Philippines are political subdivisions of the state vested with substantial powers to manage local affairs and whose officials are directly elected by their respective constituencies. It also provides for the transfer of certain authorities and functions from the national government to local governments. Under the LGC. Creation of Local Government Units Local governments may be created. land P a g e | 238 . Section 1 of Article X of the Constitution states: “The territorial and political subdivisions of the Republic of the Philippines are the provinces. THE POLITICAL AND GOVERNMENT UNITS CORPORATE NATURE OF LOCAL The 1987 Philippine Constitution upholds the autonomy of local governments by laying down the general framework for the existence and operations of local government units (LGUs). budget. in Local Government Center-College of Public Administration.5M Province * 250. are to serve as “a general-purpose government for the coordination and delivery of basic. projects and activities in the community. crystallized and considered.000 ** Highly Urbanized Cities 200. Source: Local Government Code of 1991. The section assigns to the provinces the role of being “a dynamic mechanism for developmental processes and effective governance of local government units within its territorial jurisdiction. meanwhile. City * 150. Barangay 2. they should have at least P100 million local-source income. *** Starting Calendar Year 2001. and direct services and effective governance of the inhabitants within its jurisdiction. and as a forum wherein the collective views of the people may be expressed.000 2. Criteria for Creating Local Government Units LGU Population Land Area Annual Income P20M P20M *** P2.000 100 sq. municipalities and barangays.000 P50M * Province and city must comply with income criterion and with either the population or land area requisite. Manila: Philippines.000 sq. land use planning. Minimum requirements are established to ensure the viability and capacity of new units in providing essential services to the people (Table 1). regulation.” The barangays. the powers and functions of local governments range from the provision of basic services and facilities to revenue generation. m. and provision of certain services. Wilhelmina L. and Public Administration Promotion Center-German Foundation for International Development.Study on the Corporate Powers of Local Government Units area and income. and other governmental and corporate powers. m. and where disputes may be amicably settled.” 1 In general. regulation of real estate trade. reclassification of agricultural lands. Municipality 25. “Overview of Local Governments in the Philippines”. taking cognizance of the viability of the unit to perform the assigned powers and functions.” Cities and municipalities. for their part. facilities and infrastructure within their jurisdictions like roads Cabo.000 50 sq. ** For barangays within Metro Manila and highly urbanized cities. taxes and other impositions. for municipalities to be converted to cities.P. enacting and implementing ordinances. development planning. programs. Powers and Functions The functions and responsibilities of local governments are specifically delineated in Section 17 of the Code for the provinces. Table 1. cities. They include levying and collecting fees. budgeting. plans. enforcement of building code. are viewed as the “primary planning and implementing unit of government policies. 1996 1 P a g e | 239 . m. the requirement is at least 5.000 people. Local Economic Promotion in the Philippines. U. regular. The scope of functions performed by local governments has been expanded under the Code. garments manufacturing. markets. agriculture. subject of course to certain national guidelines. through the Internal Revenue Allotment. and regulate tricycle operations. The provision of certain services and facilities and the exercise of some regulatory powers previously performed by the National Government have been transferred to the purview of local governments. slaughter houses. The devolution also required the transfer of assets and properties. Economic Activities Agriculture is the economic base of most LGUs. jewelry making. These cover certain services and facilities in health. as well as promoting sustainable living. of the affected agencies. and parks. garbage collection and disposal. regulate the operations of cockpit and cockfights. The widening of the scope of local governments’ functions is accompanied by increased fund allocation from the Central Government. Local governments are now responsible for the maintenance of day-care centers. waterworks. This potentially diminishes the agricultural base of many LGUs whose economy and livelihood draw heavily from tilling the land. rapidly encroaching on agricultural lands. however. sewerage and drainage.Study on the Corporate Powers of Local Government Units and bridges. are thriving in many LGUs. to help them finance the devolved services. implementation of primary health care. and leather craft. and natural resources and environment. to name a few. These economic enterprises are usually owned and operated by independent family entrepreneurs. social welfare. It also involved the transfer of Central Government personnel performing the devolved functions from their mother agencies to the local units they are assigned. enforcement of forestry and pollution control laws. as the Philippines is basically an agricultural country. The limited practice of agriculture is even noticeable in the peripheries of urban areas in the countryside. and prevention and control of plant and animal pests and facilities. Small and medium-sized enterprises that cater to domestic and foreign markets like handicraft. They are also authorized to approve subdivision plans. P a g e | 240 . public works. LGUs have to face the challenge of keeping a good balance between attaining the economic objectives and ensuring food security. The development of real and industrial estates across the country is. Police and fire protection are national functions but local chief executives are empowered with operational supervision and direction over those who are stationed in their areas. With the authority to reclassify agricultural lands now transferred to local governments. Public housing may now be undertaken by local governments under the LGC. health centers. This also increases the threat to the environment. as far as the devolved services are concerned. furniture making. among other authorities. Slaughterhouses are also common enterprises. There are many areas where tourism remains a major component of their local economy. Higher levels of trade are expected in the more developed parts of the municipality such as the center or “poblacion”. the extent of these activities substantially vary among them. III. The most visible impact is the improvement in infrastructure and utilities in these areas. with public markets. and be able to leverage them in the pursuit of their governmental and corporate functions. telecommunications. increases the opportunities for local units to promote economic development in their areas. stating that "When P a g e | 241 . scope and origins of the corporate powers of LGUs. are also not uncommon in most local units. the provincial capital. they do not generate substantial revenues. and seaports. airports. such as roads and bridges. for their part. are popular tourist attractions. especially those involving capital-intensive resort developments. compared. power supply. While commerce and trade are common features of the economic base of any local unit. The strategy of the National Government of establishing autonomous special economic zones and growth areas in selected regions outside Metro Manila to attract investments and disperse industries to the countryside. all to safeguard public health. The public good that may be derived from slaughterhouses include the inspection of meat products and the regulation of the processes in the slaughter of animals. in one form or another. Local governments. as well as agricultural fairs and similar community activities.Study on the Corporate Powers of Local Government Units Tourism activities. The celebration of local religious rites and feasts. particularly those that are endowed with natural attractions. The establishment of Regional and Provincial Industrial Centers is in line with this economic strategy. cities. however. THE CORPORATE POWERS OF LGUs The Local Government Code of 1991 contains the provisions for the nature. Thriving tourism in most places is usually operated by private entities. are also involved in economic activities as they operate public enterprises and utilities. LGUs will need to position themselves to take full advantage of the economic potentials of these regional developments. for example. and in locations functioning as centers of services and facilities as well as transshipment points for the movement of goods across boundaries. Its Section 14 defines the onset of an LGU's existence as a corporate entity. The designation of certain regions in the country as growth areas and special economic zones has significant implications on the economic development of affected LGUs. Most cities and municipalities operate and maintain public markets which are a regular source of revenues for the local units. Some LGUs also operate commercial centers and bus terminals as part of their corporate and proprietary powers. 6. Furthermore. the following corporate powers are vested on LGUs: 1. The LGUs’ corporate character springs from its nature as an “entity representing the inhabitants of its territory” as opposed to being a political subdivision of the National Government. to have and use a corporate seal.Study on the Corporate Powers of Local Government Units a new local government unit is created. to enter into contracts. in advance of revenues (Section 297). P a g e | 242 . unless some other time is fixed therefor by the law or ordinance creating it. 4. lease. Section 22 outlines the scope of LGUs’ corporate powers as follows: 1. developmental or welfare purposes in the exercise of their governmental or proprietary powers and functions(Section 18): to negotiate and secure grants to support basic services and community facilities (Section 23). through loans. 3. grants. or other financial scheme (Section 298). 5. subject to the limitations provided in the Code and other laws. its corporate existence shall commence upon the election and qualification of its chief executive and a majority of the members of its Sanggunian. deferred payment plan. to have continuous succession in its corporate name. to create their own sources of revenues. acquire. plant. 4. 3. credits and other forms of indebtedness. to acquire property. More specifically. to borrow from financial markets. and to apply their resources and assets for productive. income-producing development or livelihood projects pursuant to the priorities established in the approved local development plan (Section 299). 2. to acquire and convey real or personal property. to extend loans. encumber. debentures. alienate or otherwise dispose of real or personal property held by them in their proprietary capacity." The succeeding section. to sue and be sued. Section 15. develop. prescribes the nature of the LGU as both body politic and body corporate. machinery equipment and such necessary accessories through a supplier’s credit. to issue bonds. and to exercise such other powers as are granted to corporations. securities. 5. or subsidies to other local government units (Section 300). 2. collateral notes and other obligations to finance self-liquidating. 6. provide for the establishment. 457(2)(v). 458(5(x). barangay markets. maintenance. The Code stipulates that “Local government units may. or coordinate their efforts. slaughterhouses of animal corrals and authorize the operation thereof (Sections 447(5)(ii) and 458(5)(ii) for municipalities and cities. through the local Sanggunians: authorize the lease to private parties of buildings held in a proprietary capacity (Sections 447(2)(v). operation. cities. and 468(4)(ii). through appropriate ordinances. to enter into joint ventures and other cooperative arrangements with non-governmental organization (NGOs) and People’s Organization (POs) for social and economic purposes (Section 35). services. maintain. and other structures and marine or offshore activities intended to accelerate productivity (Sections 447(5)(iii) and 458(3)(vii) for municipalities and cities. 9. and repair of an efficient waterworks system (Sections 447(5)(vii). parking areas. respectively). Section 33). establish and provide for the operation of vocational and technical schools and similar post-secondary institutions (Sections 447(5)(x). or other similar facilities (Section 391(7)). establish. Section 33 provides the legal mantle for inter-LGU cooperation. consolidate. group themselves. and provinces. respectively). 8. construction. operation and maintenance of financially viable infrastructure facilities under the Build-OperateTransfer (BOT) agreement. cities and provinces . This provision allows the LGUs to consolidate and integrate their resources and efforts in constructing infrastructure facilities for economic development P a g e | 243 .Study on the Corporate Powers of Local Government Units 7. to enter into contracts with any duly pre-qualified individual or contractor for the financing. and 468(2)(v) for municipalities. to. for municipalities. respectively). subject to the applicable provisions of Republic Act 6957 as amended by Republic Act 7718 (Section 302). and resources for purposes commonly beneficial to them” (cf. 458(5)(vii). and 468(4)(iii) for municipalities. multi-purpose pavements. establish markets. and operate ferries. cities and provinces. wharves. respectively). and Regulate the use of Barangaymulti-purpose halls. respectively). This would compensate for the inadequate resources of individual LGUs which constrain their efforts in generating more economic activities in the local area. Their power to mobilize resources is anchored on their dual nature – corporate/proprietary powers. Data from the Bureau of Local Government Finance of the Department of Finance (BLGF-DOF) revealed that total LGU borrowing from government financing institutions (GFIs) and bond floats grew from P2. the development of enterprises (e. loans. public-private partnerships and inter-LGUl cooperation to finance the delivery of services.Study on the Corporate Powers of Local Government Units purposes. BOT schemes) are normally modes equated with LGUs’ exercise of corporate powers.8 billion in 1992 to P92. waterworks systems.) LGUs’ exercise of their corporate powers is manifest in their initiatives at resource mobilization through the operation and maintenance of local economic enterprises (LEEs) and the mobilization of non-traditional forms of financing. with the exception of the barangay.g. The novelty of such mechanisms stems from their ability to address and overcome the paralysis of bureaucratic processes. bond flotations. IV. The information on LGU borrowings and issuance of debt P a g e | 244 .g.. The other examples the exercise of LGU corporate powers are the different modes of establishing and managing schemes and mechanisms to undertake LGU entrepreneurial activities such as joint venture arrangements and build-operate-transfer schemes. relevant and client-driven responses. and the establishment and operation of LEEs. The collection of fees and charges from the operation of public markets. wharfs. CURRENT TRENDS IN THE EXERCISE OF LGU CORPORATE POWERS Extent of LGU Borrowing The LGU corporate powers are exercised at all levels of local government. Organization and management of mechanisms and arrangements that are not the exclusive responsibilities of LGUs but are shared with the private sector or civil society organizations (e.. bus terminals. business incubators). generally fall within the corporate or proprietary powers of LGUs. The involvement of the private and voluntary sectors is deemed strategic and desirable as these sectors could facilitate quick.3 billion in 2007. and other utilities. and taxing and police (governmental) powers. LGUs have been exploring the use of grants. For the past 16 years. (Editor's Note: The cohesion among the succeeding 4 paragraphs is weak. while LGU borrowings paved the way for the establishment and operation of LEEs. A total of 972 LGUs have outstanding loans from GFIs. 2 It is not known. Of these LGUs. public market and city hall. It is also an expression of LGUs corporate powers. the establishment and operation of LEEs remain high on the governance agenda of LGUs because these enterprises provide LGUs the opportunity to pursue the two-fold mandate of revenue generation and service delivery. This preference for credit financing could be attributed to the simplicity of the bank borrowing and the LGUs’ long familiarity with it. In spite of this. which appear to be the common justification for borrowing. leading most cities to subsidize their operations.8 billion. for a deficit of P1. while expenditures totaled P4 billion. and 767. and Iloilo City for its government employees’ housing project. However. municipalities. Boracay (Aklan) for the construction of its jettyport and terminal building. it taking from 9 to 12 complicated steps to accomplish. Caloocan City for the construction of its general hospital. how many of the LGUs cited are repeat borrowers. Some of these LGUs are those of: Urdaneta City (Pangasinan) for the upgrading of its abattoir. Loans represent about 97% of monitored LGU borrowings. 124. while bond flotations represent only 3%. a number of LGUs have resorted to it to raise funding for various projects. cities. however.2 LGUs prefer loans more than any other form of financing. as shown by the experience of cities is not encouraging.2 billion. 81 are those of provinces. Tagaytay City for the construction of its convention center. total receipts from these enterprises in 2004 amounted to P2. Victorias (Negros Occidental) for a mass housing project. Financial Performance of Local Economic Enterprises The financial performance of LEEs. slaughterhouses and transport terminals. Despite the perception among local executives that bond flotation a lengthy and complex process. P a g e | 245 . it also posed a challenge to make these economic enterprises “revenue positive” since these borrowings had to be repayed. Based on data from the Bureau of Local Government Finane.Study on the Corporate Powers of Local Government Units come from government financing institutions (GFIs) and bond floats as evidenced by formal memorandum of agreements on LGU credits furnished to the BLGFDOF. The significant borrowings of the LGUs resulted in local economic infrastructures like public markets. Puerto Princesa City (Palawan) for its socialized housing project. Considering the dearth of technical and financial capabilities at the local level. Nonetheless.Study on the Corporate Powers of Local Government Units V. EMERGING POWERS MODELS OF LGUs’ EXERCISE OF CORPORATE Public-Private Partnership Public-private partnerships are collaborative efforts of government and the private sector to deliver services and/or engage in enterprises. and partnerships with community organizations. Among the public-private partnership arrangements that are slowly becoming popular among LGUs in the country are the "Build-Operate-Transfer" (BOT) and "Build and Transfer (BT) schemes. At the initiative of the City Government of Naga. Provided for by Section 302 of the LGC. there have been a few examples that could be cited. and the management contract of the Misamis Oriental Telephone Systems. CSOs and PSOs can supplement the LGU resources in order to undertake more economic activities in more diverse sectors. the BOT and BT mechanisms enable the LGU to avail of the resources of either CSOs or PSOs in the construction of extensive infrastructure facilities or in establishing public enterprises which it normally cannot undertake single-handed. and in service delivery. the construction of the Bulacan Toll and Packaging Center. the LGU allocates grants or loan funds to these organizations to support the livelihood projects they wish to undertake. the council was formed with the city and its outlying municipalities as members. However. Public-private partnerships have not yet to gain wide acceptance among LGUs. such as: the construction of the Mandaluyong City public market through the BOT scheme. (MISORTEL) with Bayantel. member-municipalities coordinated in the implementation of a number of Council-identified projects/activities in their respective localities. which was undertaken to promote micro small-medium enterprises (MSMEs). Inter-LGU Cooperation Schemes Inter-LGU cooperation schemes involve two or more LGUs in collaborative efforts in planning and implementing projects and programs. The private sector has participated in some of the council's activities. P a g e | 246 . The LGC also encourages CSOs to participate in the implementation of livelihood projects in order to provide job opportunities for rural folks. the upgrading of Bohol's water and power utilities through a joint venture. A classic example of this collaborative effort is the Metro Naga Development Council. Through the Council. most community organizations do not have sufficient resources to embark on viable projects. the participation of civil society organizations (CSOs) and private sector organizations (PSOs) in promoting and developing economic enterprises is a much welcome move. therefore. In most cases. Inc. P a g e | 247 . the case of Partido Development Administration in Camarines Sur is an example of a Congressional initiative providing the legal framework for inter-LGU cooperation. a Php 650 million. The Medical Center was a Galing Pook awardee in CY 2004 and an E-NGAS awardee in CY 2007. by special charter. 1. a “gift of love” from the European Union according to Governor Victor Ortega. 9259. Case Studies of Models The above are some of the emerging trends and models in LGUs’ exercise of their corporate powers. Significance of the Special Charter The authority of Congress to create or establish. B. On the other hand. 1991. was inaugurated. The La Union Medical Center A. Hereunder are some selected brief case studies on the emerging models. it was devolved to the Province of La Union as mandated by the LGC. Formerly named Doña Gregoria Provincial Hospital. Section 16). Corporatizing Service Facility The case of La Union Medical Center is an example of corporatizing a service facility (the La Union Provincial Hospital) through the act of Congress which meant that they legal personality was created through a Republic Act. it only had a capacity of 50 beds as a result of the devastating earthquake on July 16. the Provincial Government of Misamis Oriental corporatized the operation of MISORTEL by registering themselves with the Securities and Exchange Commission (SEC). On the other hand. It involved the contiguous LGUs surrounding the Gingoog Bay and is focused mainly on protecting the sustainability of the bay.In 2004. Introduction The La Union Medical Center (LUMC) is a local government-owned and controlled corporation (LGUGOCC) created by Republic Act No. The LUMC is located in the town of Agoo. At the time it was turned over to the provincial government.Study on the Corporate Powers of Local Government Units The case of Gingoog Bay Development Council is also an example of inter-LGU cooperation based on common interest rather than a legalized partnership. government-owned and -controlled corporations is vested by the Constitution (Article XII. 100-bed modern hospital. l Under the Charter. 5. Mandates 11. In fact. Employees of corporations incorporated under the Corporation Code are governed by the Labor Code. Section 2[1 of the 1987 Philippine Constitution. 9. 6. C. 3. and is assured of continuity of operations and stability unaffected by changes in local government administration. Among the significant and important responsibilities of the LUMC are: P a g e | 248 . The Board is composed of: 1. 7. Section 9 of the LUMC Charter guarantees the security of tenure of civil service officers and employees in the implementation of Government reorganization under Republic Act 6656. subject to Civil Service Law. LUMC has the right to acquire. 8. one coming from the first district and the second from the second district of La Union to be appointed by the Provincial Governor with the concurrence of the Board of Trustees two representatives form social. civic or religious sector organizations in the Province to be appointed by the Governor with the concurrence of the Board of Trustees the President of the Liga ng mga Barangay of La Union. 4. 2.Study on the Corporate Powers of Local Government Units Under Article IX B. 13. Hospital Administration The LUMC is administered by a Board of Trustees composed of fifteen members who serve ex officio. the power to enter into transactions and contracts. 10. own or dispose property or assets. and the Chief of Hospital of the LUMC D. 12. the Governor of the Province of La Union the Vice Governor of the Province the Chairman of the Committee on Budget and Appropriations of the Sangguniang Panlalawigan of La Union the Chairman of the Committee on Ways and Means of the Sangguniang Panlalawigan of La Union the Chairman of the Committee on Health and Sanitation of the Sangguniang Panlalawigan of La Union the Chairman of the Committee on Trade and Industry of the Sangguniang Panlalawigan of La Union the Provincial Health Officer of the Province of La Union The Municipal Mayor of the host town of Agoo the Regional Director of the Department of Health Region I two representatives from the private sector engaged in the medical profession. officers and employees of government owned and controlled corporations with original charters are placed under the Civil Service. Poor patients are allowed to pay in kind. The LUMC has made available quality hospital services to the people of the Province of La Union. The number of beds allocated for indigent patients shall not be less than 20% of the total number of hospital beds. E. By prudent management of its finances. F. develop and undertake a comprehensive family medicine program with emphasis on the preventive and curative aspects of health care to develop a multi-specialty center with focus on the diagnostic and therapeutic components of difficult cases to promote and develop a research center for locally-based health concerns to extend medical services to the general public. The Board of Trustees is mandated to institute a program for indigents. relieve or alleviate afflictions and maladies of the people. Success Factors The success of the La Union Medical Center can be attributed to the following factors: the unqualified support of the political leadership of the Ortega family the support of the Sangguniang Panlalawigan the “gift of love” from the European Community P a g e | 249 . Financial Management The average provincial subsidy for the former 50-bed hospital was Php 30 million. 52% of the patients were charity patients. 40% were Philhealth members. The Province continues to subsidize the LUMC by about the same amount. creed or political belief The preferential option for the poor is emphasized in the Program for Indigents. especially the poor and less fortunate. to help prevent. but with a difference. The Galing Pook award attests to this achievement.Study on the Corporate Powers of Local Government Units to promote and develop a center for the delivery of quality and affordable medical and surgical care to the people of La Union and Region I to promote. the LUMC has built a dormitory for families of patients who stay to look after the needs of their patients. without regard to race. It has also added a new wing for 32 additional beds. and 8% were patients who paid in full under a policy of “fee for service” from those who can afford. out of earnings. In CY 2006. 6 hectares that was constructed in two phases. improve fiscal management and enhance good governance. as Chief of Hospital. the City relied on the creative and innovative exercise of its corporate/proprietary powers. rice cultivation and cash crops. Code of Economic Enterprises) A. It is a component city of Davao del Norte. and a land area of 19.Study on the Corporate Powers of Local Government Units the appointment of US-trained physician. Dr. Tagum City Overland Transport Integrated Terminal Section. It has made travel by commuters to different destinations more convenient. B.Tagum has a population of approximately 200. improve fiscal management and enhance good governance”. LGU Experience in the Operation of Economic Enterprises: An Evolving Institutional Arrangement . commodities and services. This enterprise is a Php 54 million investment covering 4.000. Introduction Tagum City is located at the southern part of Mindanao.580 hectares predominantly devoted to agricultural production that includes banana plantation. consistingof twenty-three barangays. Next Steps The LUMC model can be offered to LGUs experiencing financial difficulties and deteriorating level of services in the operation of their hospitals. root crops. over the objection from certain sectors G. Fernando Astom. 2. The Enterprises Tagum City Public Market. The modern market serves as the trading area for marine and agricultural products. This enterprise is a Php 25 million central public transport terminal that contributes significantly in the flow of goods.The Tagum City Model It is the policy of the City Government of Tagum to be self-reliant and selfsustaining through engaging in viable and stable economic enterprises that provide a wide variety of opportunities that will uplift the socio-economic wellbeing of its constituents. fruits and vegetables coming from Tagum and neighboring municipalities. meat and poultry products. agro-based raw materials. To pursue the objectives of “engaging in viable economic enterprises that provide a wide variety of opportunities that will uplift the socio-economic wellbeing of its constituents. P a g e | 250 . ( Tagum Policy Statement. The Bottomline It has been held that a municipal corporation has a public character as regards the state at large insofar as it is the agent in government.46 million.05 1. A modern “AA” slaughterhouse. Tagum City Cultural Trade Center. or an excess of receipts over expenditures of Php 23. Tagum City Livestock Auction Center. Fontanilla 85 SCRA 599 (1978) Source: BLGF Data Bank P a g e | 251 . total expenditures for the same period amounted to Php 28. It has a litsonan area as an integral feature of the Center.4 3 4 Torio V. worth Php 8 million and is located in 5.06 million. it is a joint project with the National Meat Inspection Commission. It is presently being rehabilitated and improved.3 In the case of Tagum City.000 square meters of land.Study on the Corporate Powers of Local Government Units Tagum City Slaughterhouse. it has a total land area of 3. The next hurdle is what is known as the bottomline. profitable were the economic enterprises? The CY 2007 Receipts from Economic Enterprises appear as follows: In Million Pesos Markets Slaughterhouse Bus Terminal Cemetery Other economic enterprises Total 25.52 Against these receipts. How viable. A facility for trading livestock raised in the barangays and neighboring municipalities. The Center is a Php 22 million project established to support the small and medium scale enterprises through the provision of display areas primarily for items produced in the City.41 51.7 hectare area developed as a burial ground.55 5.500 square meters. the economic enterprises have undoubtedly promoted local necessities and conveniences in a highly satisfactory manner. Tagum City Public Cemetery. A 2.33 6. a hefty amount.18 13. and private (so called) insofar as it is to promote local necessities and conveniences for its community. Enabling mechanisms. In a PowerPoint presentation during the Roundtable Conference on LGU Corporate Powers held on October 29.1 Balance 32. Tagum City has benefited from technical assistance extended by National Government agencies and foreignfunded institutions. and the feedback mechanism to improve results Energize – building understanding and desire for action Supportive Sanggunian. e. and initiating capacity enhancement trainings to improve their skills Empower – providing the freedom to get the task completed. Access to technical assistance. Community support. The City has created an Economic Enterprises Department focused on managing and operating the economic enterprises.0 13. the Livestock and Poultry Raisers Association and the Local Traders Association. A Code of Economic Enterprises has been enacted through an ordinance. namely: Envision – establishing a vision then developing a plan to achieve it Enable – putting the right people with the right skill to get the job done. The Sangguniang Panlunsod has demonstrated a high degree of support and cooperation through the enactment of the necessary enabling legislation. Mayor Uy has articulated his leadership creed as embodied in the 4 Es. Tagum City has developed a strong partnership and collaboration with civil society organizations and local groups actively involved in economic enterprise activities. P a g e | 252 . the space to innovate. 2008.. Modern infrastructures.Study on the Corporate Powers of Local Government Units Another measure is debt service.5 Enlightened and principled leadership. ADB. the political leadership of Tagum City has advocated strategic management principles in the exercise of the City’s corporate powers. the following were shown: In Million Pesos Principal Public Market Bus Terminal 54. NMIC.6 Payments 22. MBUSSP. Among the latter groups are: the Market Vendors Association. The economic enterprise infrastructures are modern. efficient management system. DILG.g. adequate and well maintained.5 12.5 25. Led by Mayor Uy. the Bus and Jeepney Transport Operators. An Economic Enterprises Regulatory Board was constituted to formulate and adopt specific and related rules and regulations. City Officials and representatives from the NGO. conduct raffles and award vacant stalls and spaces. and Revenue Collection. Operations and Services Divisions oversee the operation of the City’s six economic enterprises. The Economic Department is headed by an Economic Enterprise Manager. The Organizational Structure of the Economic Enterprises Department The City Mayor exercises executive direction and control over the management and operation of the economic enterprises. serve as advisory body to the Chief Executive. P a g e | 253 .Study on the Corporate Powers of Local Government Units D. The Board is composed of Sangguniang Panlunsod Committee Chairmen. Each of the enterprise is headed by a Section Chief. The organizational structure is schematically illustrated in Figure 1. He is assisted by an Assistant Economic Enterprise Manager and is supported by an Administrative Division. develop plans. conduct pre-qualification of applicants for vacant stalls. propose adjustment and/or increase of fees and rentals. programs and strategies. Maintenance and Security and Enforcement Sections. and to perform such other functions as the Sangguniang Panlunsod may authorize. Study on the Corporate Powers of Local Government Units Figure 1: Organizational Structure. OFFICE OF THE CITY ECONOMIC ENTERPRISE 1 – CO DEPARTMENT HEAD 1 1 – CO ASST DEPARTMENT HEAD 1 SG – 25 SG – 23 PERSONAL STAFF 2 – Clerk 2 1 – Driver 1 SG – 4 SG – 3 ADMINISTRATIVE AND SUPPORT DIVISION 1 – Administrative Officer IV 1 – Clerk II SG – 22 SG – 4 OPERATTIONS AND SERVICES DIVISION 1 – Operations and services Officer IV SG – 22 1 – Clerk II SG – 4 ADMINISTRATIVE SECTION 1 – Administrative Officer III 1 – Cashier II 1 – Administrative Assistant 1 – Bookkeeper 1 – Storekeeper 1 – Utility Worker SG – 18 SG – 10 SG – 8 SG – 8 SG – 6 SG – 3 PUBLIC MARKET SECTION 1 – Market Supervisor III 1 – Market Supervisor II 1 – Market Inspector II 9 – Market Inspector I 1 – Clerk II SG – 18 SG – 14 SG – 8 SG – 6 SG – 4 REVENUE COLLECTION SECTION 1 – Revenue Collection Officer III SG – 18 1 – Local Revenue Collection Officer 1 SG – 11 25 – Revenue Collection Clerk III SG – 9 TOTIT SECTION 1 – SPURO 1 – Parking Aide III 1 – Parking Aide II 1 – Clerk II 4 – Ticket Checkers 1 – Traffic Aide I 2 – Utility Workers SG – 18 SG – 6 SG – 4 SG – 4 SG – 3 SG – 3 SG – 3 MAINTENANCE SECTION 1 – Public Services Officer III 1 – Labor General Foreman 2 – Electrician 2 – Carpenter 2 – Plumber 20 – Laborer SG – 18 SG – 8 SG – 6 SG – 5 SG – 5 SG – 3 PUBLIC SLAUGHTERHOUSE SECTION 1 – Slaughterhouse Master III 1 – Slaughterhouse Master II 4 – Meat Inspectors II 2 – Livestock Inspector 1 – Clerk II 4 – Laborer II SG – 18 SG – 14 SG – 8 SG – 8 SG – 4 SG – 3 SECURITY ENFORCEMENT SECTION 1 – Security Officer III 1 – Security Agent II 36 – CSU/Market Guard SG – 18 SG – 10 TAGUM CITY LIVESTOCK AUCTION CENTER SECTION 1 – Animal Keeper III 1 – Livestock Inspector I 1 – Clerk II 2 – Laborer II SG – 8 SG – 6 SG – 4 SG – 3 CULTURAL AND TRADE CENTER SECTION 1 – Market Supervisor III 1 – Market Inspector II 1 – Clerk II SG – 18 SG – 8 SG – 4 PUBLIC CEMETERY SECTION P a g e | 254 1 – Public Services Officer III 1 – Public Services Foreman SG – 18 SG – 6 Study on the Corporate Powers of Local Government Units E. Observations and Issues 1. A Revenue Collection Section has been established in the Economic Enterprises Department. The Code of Economic Enterprises of Tagum City provides that the Economic Enterprises Manager shall “act as a collection deputy of the City Treasurer for the collection of charges, tolls and fees in the operation of the enterprises.” As a “collection deputy”, the Economic Enterprise Manager is assisted by a Local Revenue Collection Officer II, and a Revenue Collection Clerk III. The New Government Accounting Manual (NGAS) prescribes detailed procedures in the receipt and collection process. How does the “Alternative Collection Mechanism” mentioned by Mayor Uy in the Davao Forum on Harnessing LGU Corporate Capacities for Mindanao Development, held in Davao City on 27 October 2006, fit into NGAS requirements? 2. The Code of Economic Enterprises imposes fees and charges, e.g. market rental fees, market entrance fees, fees for livestock and poultry products, corral pen rentals, toll fees, bus terminal fees, slaughterhouse fees, public cemetery fees. Issue: The proper place for these impositions is the City Revenue Code. The Local Government Code Implementing Rules and Regulations prescribe procedural guidelines in the imposition of local taxes, fees and charges, among others; posting and/or publication before public hearing; public hearing; review by a higher sanggunian; posting and/or publication after approval. The Supreme Court has consistently ruled in a series of rulings that “notice and actual conduct of public hearings with respect to a tax measure/ordinance as well as its publication are indispensable requirements for its validity.” F. Next Steps The Tagum City Model is a good work for replication by way of technical assistance extended to LGUs. 3. A Non-Traditional Approach to Local Economic Enterprise Management The Municipality of Malabon in the Metropolitan Manila Area (now Malabon City) chose a non-traditional approach in the operation of the Malabon Central Market. The LGU entered into a lease agreement with the Malabon Central Market Development Cooperative for the management and operation of the Market. P a g e | 255 Study on the Corporate Powers of Local Government Units Under the terms of the lease contract, for and in consideration of an annual rental of One Million Five Hundred Thousand Pesos (Php 1,500,000.00), the Malabon Central Market Development Cooperative managed and operated the Malabon Central Market for twelve (12) years or from January 1, 1955, up to December 31, 2006. (According to the City Treasurer, the Cooperative continues to manage and operate the Market, while new arrangements are being worked out to modernize the buildings and facilities, and for the management and operation of the economic enterprise.) Among the salient provisions of the lease contract are: The property leased included the market building, stalls, other facilities, and premises, except the premises occupied by municipal and national offices. The property leased shall be used for “market” purposes only. The Cooperative agreed to shoulder all expenses for repairs necessary to maintain the facility in good condition, provided that all repairs and/or improvements shall have the prior consent of the lessor. Water, electricity, telephone, and repair charges shall be borne by the Cooperative. In case the stall rental fees are increased, the Cooperative agreed to pay an additional rental equivalent to twenty percent (20%) of the increase. During the 12-year period, the LGU received a total rental of Php 18,000,000.00 without incurring any overhead. 4. Corporatization of Economic Enterprise: LGU Initiative – Misamis Oriental Telephone Systems, Inc. A. Background The Misamis Oriental Telephone System began its operations before the outbreak of the Second World War by virtue of a Certificate of Public Convenience and Necessity authorizing the operation and maintenance of a telephone system in the province of Misamis Oriental. It was damaged during the War but was restored in 1947 with the use of an army-type switchboard left behind by the US Army. The System was manually operated and all calls were made through a switchboard operator. P a g e | 256 Study on the Corporate Powers of Local Government Units In 1958, the telephone switchboard was changed to a common battery-run system, which was still operator-assisted but still an improvement over the old army-type switchboard. New equipment and improvements have been introduced since then; services were extended to Gingoog City, and a provincewide system linked to the rest of the country and the world is expected soon with the installation of a “point to multi-point radio communication system. Up to August 2002, the system was operated and financed as an economic enterprise by the provincial government of Misamis Oriental which, in 1991, secured a Php 144 million loan from the Eximbank of Korea for the system’s expansion project. The provincial government continues to service this loan, as well as a loan from the Development Bank of the Philippines which it also secured for the system’s upgrade. C. The Corporation On July 4, 2002, the Misamis Oriental Telephone Systems, Inc. or MISORTEL was created to take over the operation and management of the old telephone system. On that day, Misamis Oriental officials led by Governor Antonio P. Calingin, along with Vice Governor J. Miguel C. de Jesus and thirteen members of the Provincial Board approved MISORTEL’s Articles of Incorporation and By-Laws. The creation of MISORTEL was a reaction to the increased competition that resulted with the entry of competitors. The telephone system’s present competitors include Philcom, Cruz Telco, Bayantel wireless, Globe landline, Sotelco and the DOTC’s Telecom. A management contract with Bayantel to operate the system in 2002 did not help in making MISORTEL competitive. The corporation’s Articles of Incorporation and By-Laws were duly approved by the Securities and Exchange Commission with the issuance of the Certificate of Incorporation on August 26, 2002, giving the company Registry No. CS200253967. The Corporation is capitalized at Php 200 million, divided into 2 million shares with a par value of Php 100. It has a total of 500,000 subscribed shares, 499,985 of which are owned by the Proincial Government of Misamis Oriental, and the rest is owned by the fifteen incorporators who own one share each. The incorporators are the governor, vice governor, and 13 members of the Sangguniang Panlalawigan of Misamis Oriental. The Articles of Incorporation provide that “The shares of stocks being assigned to and held in trust by the Provincial Government of the Province of Misamis Oriental, the Provincial Governor, Vice Governor and all the members of the Sangguniang Panlalawigan … shall in no case be sold, assigned or transferred to any person.” The Board of Directors consists of the same officials P a g e | 257 Study on the Corporate Powers of Local Government Units who are the fifteen incorporators, as well as the Provincial Treasurer as elected Treasurer, and the Provincial Attorney as Secretary of the Corporation. In effect, therefore, what the corporatization accomplished was to transfer management from Provincial Officials to the Corporate Officers who are the same persons. D. Financial Operations From an interview with MISORTEL’s General Manager, Relio B. Acero, the following information were gleaned: There has been a marked improvement in services. Telephone rates are fixed by the Board of Directors. The rates are lower than existing commercial rates. Employees are considered “government personnel” covered by Civil Service Rules. The Board has, however, taken steps to exempt employees from the jurisdiction of the Civil Service Commission. Collections are turned over daily to the Treasurer. Current operating income exceeds current operating expenses, but there are liquidity problems arising from indebtedness incurred prior to incorporation. Disbursements are made by the Treasurer. Financial transactions comply with government accounting and auditing regulations. The Provincial Government assumes loan repayments to the Eximbank of Korea and the DBP through IRA intercepts. E. Observations and Issues MISORTEL had as its incorporators the Provincial Governor, the Provincial Vice Governor, and thirteen Provincial Board Members. Issue: It is beyond the scope of this Study to resolve the legal issues surrounding the creation of private corporations owned and/or controlled by LGUs; this is the domain of the Courts of Law. They are raised here as topics for discussion and possible resolution by proper authorities. Two opinions were gathered from DILG: o . . . the law governing stock corporations is the Corporation Code of the Philippines. Section 10 thereof provides that: “Any number of natural persons not less than five but more than fifteen, all of legal age x x x may form a private corporation for any lawful purpose or purposes x x x.” (Underlining ours.) a corporation like that of a province cannot, for reasons thereof, be an incorporator of another P a g e | 258 Study on the Corporate Powers of Local Government Units corporation, it being a juridical person or more appropriately a public corporation. (Opinion No. 80, July 22, 1997) o . . . private corporations owned or controlled by the Government can only be created by a special law, that is through Congress. (Opinion No. 97, September 6, 1995) MISORTEL was incorporated by natural persons, that is, the Provincial Officials. The Provincial Government of Misamis Oriental became a majority and controlling stockholder by subscribing stocks of a private corporation, MISORTEL in this case. COA has not rendered financial audit to MISORTEL since it was corporatized and registered with the SEC. F. 1. Lessons Learned The financial viability of an economic enterprise is not assured by the creation of a private corporation under the Corporation Code of the Philippines. Services have improved by the appointment of a professional manager. The experience of MISORTEL may serve as a learning example to other LGUs. Although spinning off economic enterprises as private corporations has some appeal, care should be taken in selecting the enterprise to corporatize. G. 1. Next Steps Steps should be taken to clear the issue of LGU owned and controlled corporations. Technical assistance should be provided to LGUs wishing to corporatize economic enterprise operations. 2. 3. 2. 5. Good Service Delivery andTaking the Lead in Inter-LGU Cooperation: Naga City A. Background Naga City, Camarines Sur, is known as the heart of Bicol – the center of commerce and trade in the region. Recently, it was dubbed by the Lonely Planet traveler’s guide as Luzon’s best-kept secret for its interesting tourist attractions P a g e | 259 Study on the Corporate Powers of Local Government Units like the Peñafrancia Festival in September and Mt. Isarog which is popular as a mountain trekking desitnation and for its hot springs. It is, however, for innovative approaches in good governance that Naga City is better known for and is a class of its own. These approaches, focused on participatory governance and people empowerment, has elevated the city as a model LGU as earned its Mayor, Jesse Robredo, the 2000 Ramon Magsasay award for Government Service. Among the more notable innovations is the Metro Naga Development Council (MNDC). B. Challenges Financial Problems. Before 1988, the City had a huge budgetary deficit due to poor tax collection, graft and corruption, etc. City government employees were underpaid and had very low morale. Poor Service Delivery. Aside from the City experiencing the typical problems of urban areas, namely urban blight, rampant crimes, etc., the dismal financial state has caused service delivery a downhill turn. In addition, bureaucratic red tape delays the service delivery even more. At that time, Naga City was very far from being a model local government. C. Factors that Contributed to the Success of the Innovation Transparency, Accountability and Empowerment Two core programs undertaken by Mayor Jesse Robredo have propelled development in the City: (1) the Productivity Improvement Program/Public Service Excellence Program (PIP/PSEP) and (2) the People Empowerment Programs (PEP). The PIP/PSEP, which aims to professionalize the City Government’s workforce by improving its responsiveness, effectiveness and efficiency in delivering basic services, was able to streamline bureaucracy, institutionalize quick response systems, and remove incidence of red tape – resulting in the increase of targeted beneficiaries. In fact, the productivity improvement program was able to resuscitate the city government’s finances wherein income increased from Php 19 million in 1988 to Php 330 million in 2002. Local income generated by the city’s fiscal agencies contributed 40% or Php 132 million of the total income in 2002, which is a whopping 10-fold increase from their contribution in 1988. At that time, the city’s economic growth was 6.5% – a rate higher than the national level. Related to this, investors have found confidence on the city government with the improved fiscal discipline and more efficient system of service delivery. During P a g e | 260 Study on the Corporate Powers of Local Government Units the period of 2001 to 2003, at least Php 612 million of investments were approved by the Naga City Investment Board. These new investments translated to new jobs for the citizens of Naga. The PIP was also responsible for empowering the Naga City Government Employees Association (NACIGEA). The PIP was able to raise the morale of the city’s employees, leading to inspired and highly productive LGU personnel through negotiating additional fiscal and non-fiscal benefits, as well as incentives to employees. On the other hand, the PEP, initiated by the city government in 1989, had institutionalized partnerships and participatory mechanisms in Naga City. It aims to empower marginalized sectors by enabling their participation in the policysetting and decision-making processes of the city government. The City Mayor believed that involving the stakeholders will ensure sustainability, acceptability and success of the projects initiated by the city government. A People Empowerment Ordinance was enacted which created the Naga City People’s Council (NCPC) composed of around 100 representatives from different nongovernment organizations (NGOs) and people’s organizations (POs) who participate in direction-setting, policy-making, program and projects implementation, and monitoring and evaluation. Representatives of the NCPC sit in all local special bodies, propose legislations and vote at the committee level of the city council. In addition to the (PIP/PSEP) and the PEP, enhancement and use of the information and communication technology allowed for a more transparent, responsive and competitive city government operations. The Naga City Government Computerization Program (CGCP), implemented in 1996, streamlined internal processes and provided information to support decisionmaking. It also helped increase local government income by 112% and reduced operating costs. Also, the I-Governance project of the city encourages participatory governance among the residents of Naga. Relevant public information is readily available and easily accessible. Also, citizen feedback is made possible through the city website and through text messaging. It is important to note that internet facilities are made available in barangay halls and public schools. Resolving Urban Poor Issues. Urban poor groups were made to participate in addressing urban poor issues through the Naga Kaantabay sa Kauswagan (Partners in Development) Program. The program was able to improve the plight of the city’s urban poor since intervention is more targeted. Presently, at least 5,000 former informal settlers have been given security of tenure and are now proud owners of home lots in good neighborhoods. In addition, land tenure problems since 1950s have been resolved. A livelihood component was also institutionalized to ensure the success and sustainability of the program. Moreover, the urban poor are now represented in the City P a g e | 261 where various professional organizations. was also developed by the city. Pasacao. private sector. Gainza. day-care workers were trained to handle mentally and physically disabled students in a day-care center called the Naga School for Early Education and Development (SEED). the city government set up the Parent Education Program to promote a conducive learning environment for the pre-schoolers starting at their own homes where parents also take part in the education process of their children. With all these initiatives. a performance-based system for educators/teachers. Milaor. San Fernando. religious organizations. The composition of the Local School Board members was expanded to include multi-sectoral stakeholders. Naga’s urban poor program has become a model for replication in other areas in Bicol. Pamplona and Minalabac). The program’s overwhelming success was recognized by the United Nations Center for Human Resettlements and was declared a model for the Habitat II Conference in 1996. Canaman. NGOs.Study on the Corporate Powers of Local Government Units Development Council. Calabanga. Moreover. Also. the city launched the Adopt-A-School program. Pooling resources through inter-LGU cooperation and partnership with NGOs/private sector. With cooperation among local stakeholders and other concerned organizations strengthened. Naga City pursued various approaches to ensure that education is made available for all. Pili and Pamplona share their fire-fighting facilities to the other P a g e | 262 . The city established the Naga Early Education Development (NEED) Program to accommodate children from different socio-economic background and mental/physical health. Similarly. and in the Naga City Urban and Housing Development Board. Bombon. The diverse membership of the Local School Board allows to have a Local Education Plans to aid in the planning and budgeting process transparently and systematically. Camaligan. In addition. The NEED program also touched issues on malnutrition by conducting feeding programs at the preschool level. NGOs and other professional organizations. Magarao. Providing Access to Quality Education. the Local School Board has been reinvented and strengthened to ensure effective targeting of interventions. and business organizations financially supported the depressed elementary schools. The Metro Naga Development Council (MNDC) is one good example where Naga City shares its ambulance to the other 12 member-LGUs (municipalities of Pili. Naga City. The City’s Local School Board now includes representatives from the academe. The feedback mechanism is being used by the city government to promote a service-oriented culture among the education officials in Naga City. the NEED Program received Child-Friendly City Awards at the regional level and has been replicated in at least four municipal daycare centers in the province of Camarines Sur. Furthermore. Similarly. transparency and accountability. (2) active stakeholders’ participation. Also. Metro Naga Equipment Pool. Trade and Exhibition Center. improvement of the transportation infrastructure was deemed necessary to make travel to the island more efficient. Enterprise Development. Results and Lessons Learned The experience of Naga City in participatory governance and people empowerment which was made possible through: (1) visionary and strong political leadership.000 tourist arrivals annually. barangay councils. mass media groups. ERN and Isang Irog Environmental Movement. and more passengers. However.Study on the Corporate Powers of Local Government Units member-LGUs. The pump boat and outrigger owners are the most affected among the stakeholders in the Province. safe and comfortable. increase in government savings. Bond Flotation for Tourism Development: The Boracay-Aklan Provincial Bonds A. etc. and pooling resources through inter-LGU cooperation is one effective way to provide services for a lesser cost. and even a long-term benefitinter-LGU cooperation which is reflected through pooling of resources of neighboring towns in pursuit of common governance agenda.). is proposed to be the solution to the transportation problem in the Province. D. the Naga Emergency Rescue Network (ERN) also brings together resources of various city departments. and even government and private medical practitioners. 6. enterprising pump boat and outrigger owners had abused passengers by charging excessive fees for the short rides from Caticlan to Boracay and back. B. the transportation infrastructure could not keep up with the influx of people and goods brought about by the tourism industry in Boracay. specifically in Boracay. Background Tourism is the major industry in the Province of Aklan since Boracay. The MNDC has become a model for collaborative initiatives influencing the establishment of the Metro Naga Livelihood Fund. A new all-weather jetty port and passenger terminal building which can accommodate bigger and modern vessels. registers close to 500. They have openly P a g e | 263 . fire trucks. and (4) competent staff translated to improve service delivery. Challenges Disturbance of Status Quo. Low-income LGUs may not have all the necessary equipment and facilities to promote urban safety (ambulance. Hence. Terminals and docking facilities had become chaotic and unsafe for passengers. The Provincial Government would like to maximize the economic potential of the tourism industry in Aklan. its world-class beach resort island. (3) fiscal prudence. and terms and conditions were established to safeguard the Province’s resources and ensure that the objectives of the project are achieved. (2) lending rates of commercial banks of 16. Source of Funds. Unfortunately. C. that there is no way Boracay will reach its full economic potential if the local government will rely merely on “bancas” for transportation of people and goods. during the height of the Asian financial crisis. Necessary ordinances were passed. Stakeholders’ Participation. Aklan needed to explore other sources of funds for the proposed project as the coffers of the Provincial Government could not afford the project. given the magnitude of the proposed project. Selection of the appropriate innovative financing options and undergoing through the procedures required a level of technical capability that the Provincial Government has not quite reached yet. the stakeholders who are most anxious about the project. The Provincial Government knew that they needed to carefully explore alternative financing options to fund the proposed project because the Province’s resources are not sufficient for the construction of the proposed jetty port and passenger terminal. Clearly. The Provincial Government reassured the pump boat and outrigger owners that they could operate exclusively in certain areas.2-18% were too prohibitive. Dialogues between the government and the concerned sectors were conducted to ensure the public’s full support on the implementation of the proposed project. Political harmony between the executive and legislative branches is key to the success of any local government endeavor. Factors that Contributed to the Success of the Innovation Political Will. The nation was experiencing the Asian financial crisis and thus the Provincial Government would need an innovative financing option to fund the project. long-term investments were not attractive to investors. Among the financing/service delivery options. The Provincial Governor and the Sangguniang Panlalawigan worked together in finding the best strategy to implement the proposed jetty port and passenger terminal.Study on the Corporate Powers of Local Government Units protested to the idea of the jetty port and passenger terminal because having these improved structures will take away their control over the transportation system in the island. Also. it seemed that the investment should be long-term in order to fund both the jetty port and the passenger terminal. P a g e | 264 . Lack of Technical Capability of the Provincial Government. Selection of Best Financing/Service Delivery Option. The Provincial Government had to convince the pump boat and outrigger owners. bond flotation was chosen as the most ideal scheme for the Province given the following reasons: (1) Government Financing Institutions (GFIs) require 25% equity which the Province could not afford. Consequently. and lease of docking rights is sufficient. and (3) the return of investment (ROI) of the project through passenger terminal fees. Fiscal Prudence and Discipline. conduct of feasibility study. Proceeds from the project’s revenues (i.e. and lease of docking rights) are sources of repayment. etc. through the technical assistance provided by the financial adviser..2 million during the seven-year operation of the project. The passenger terminal fees. (2) the project is viable. Results and Lessons Learned Use of Local Government Unit Corporate and Proprietary Powers. The feasibility study conducted by the financial adviser showed that: (1) the Province has the financial capability to pursue the project.e.Study on the Corporate Powers of Local Government Units and (3) guidelines for Build-Operate-Transfer (BOT) Scheme and its variants were not clearly provided during that time and thus did not attract investors. This underscores the increasing significance of the Provincial Government’s use of its corporate and proprietary powers. design of features and implementing strategies. cargo and stall rentals. particularly the mechanics and dynamics of bond flotation. not only to support the debt service obligations which the Province will incur if they pursue the project. rolling cargo fees. and rolling cargo fees contributed significantly to the increase in the Province’s income. since the operation of the new jetty port and passenger terminal. Based on the financial resources of the Province. passenger terminal fees. Also. Technical Assistance.) emerges as the main source of local income of the Province. negotiation with trustee banks and concerned national government agencies. D. In the past. The Province engaged the services of a financial adviser to help in the preparation of the bond flotation. another ordinance was passed by the Sangguniang Panlalawigan authorizing the appropriation of a certain percentage of the Province’s internal revenue allotment (IRA) as the sinking fund to be used for the redemption of the bonds when they mature. P a g e | 265 . cargo and stall rentals. approving bond flotation amounting to P40 million with a sevenyear maturity as the financing option to fund the proposed jetty port and passenger terminal. cargo terminal fees. It was estimated that there was a 62% increase from the Province’s income after one year of the project’s operation compared to its total income in 1995. the Provincial Government employees had a deeper appreciation of various innovative financing options.e. tax revenue has been the biggest source of local income in Aklan. but also the Province’s prospect of earning a net income of P69. However. the Provincial Governor and the Sangguniang Panlalawigan realized that they had to limit the amount of the bonds to P40 million. i. passenger terminal fees. nontax revenue (i. cargo terminal fees. The Sangguniang Panlalawigan passed an ordinance on 8 April 1997. There was no way the Provincial Government could fund almost P1. As a result of the improvement in the transportation infrastructure in the island. The construction of the jetty port and the passenger terminal was coincidental to the roll-on roll-off (RORO) operations in Western Visayas. huge money is spent on their maintenance and operations. Water and power supply had become unreliable and inadequate for the growing demand. Thus. problems with watershed management. The Province experienced limited hours of water supply. The estimated costs of the improvement works were P968 million for water and P212 million for power. The Provincial Government’s decision to embark on this project was perfect timing. 7. home to the famous Panglao beach and Chocolate Hills. Starting the mid-1920s. The Provincial Government learned that it would be very costly for the Province to shoulder the costs of rehabilitating. has become one of the fastest growing eco-tourism industry in the country. Privatization of Power and Water Utilities: The Joint Venture Project of the Province of Bohol A. Both the PWS and PES served Tagbilaran City and the neighboring towns. the Province has been operating and maintaining the Provincial Waterworks System (PWS) and the Provincial Electric System (PES). Maintenance and operations costs of the PWS and PES were steadily increasing and had become the biggest expense of the Provincial Government. high systems losses. While the PWS and PES were the largest sources of local income of the Province. Caticlan has become the center of RORO operations in the region which evidently contributed to the further success of the project. Bohol was dealing with saltwater intrusion.Study on the Corporate Powers of Local Government Units Adherence to National Objectives. B. Annual population growth rate of Bohol has become higher than the national average and tourism development in the area has prompted a steady increase of tourist arrivals.2 billion the necessary improvement works. comprising approximately one-third of the total expenditure of the Province. as well as regularly maintaining them. power surges and blackouts. The Provincial Government would like to improve the water and power services in Bohol to keep up with the demand brought about by increasing population and tourist arrivals. and antiquated and insufficient facilities. upgrading and expanding the coverage area of the water and power supply facilities. P a g e | 266 . the Province needed to explore alternative financing options to fund the proposed improvements. Background The Bohol Province. Challenges Source of Funds. Study on the Corporate Powers of Local Government Units Disturbance of Status Quo. Lack of Technical Capability of the Provincial Government. The residents have benefited from the PWS and PES as they could afford to be delinquent with their payments because they easily bargained their way with the Provincial Government. was created by the Provincial Government to further evaluate the viability of the operations and the conditions of the facilities of both utility departments. P a g e | 267 . particularly Tagbilaran City and the nearby towns which the PWS and PES had been servicing. more so go through the required procedures. operating and maintaining the utility departments properly required skilled personnel and highly modernized technologies which would be difficult for the Provincial Government to provide. C. during the selection of financing or service delivery options. The Provincial Government was serious in its intention to improve the water and power services in Bohol. composed of the staff of the Office of the Governor and the Provincial Planning and Development Office. litigation between the Provincial Government and a certain opposition group transpired. the Provincial Government employees did not have the necessary technical skills to properly choose the most suitable innovative financing or service delivery option. In fact. A technical working group (TWG). The PWS and PES had become an extension of the Provincial Government’s bureaucracy. the Provincial Government aimed to be able to distribute the Province’s support for basic service delivery across the Bohol Province and not for its resources to be pinned down by the exorbitant costs of maintaining and operating the utility departments. Similarly. A Class Action for Prohibition with a Prayer for Preliminary Injunction was filed and an Issuance of a Temporary Restraining Order was requested by the opposition group. Moreover. Given the perks the residents get and the history of PWS and PES in Bohol. In addition. the Provincial Government has a stake in the PWS and PES. where a portion of the personnel services expenses had been charged to both utility departments. Managing. The Provincial Government benefited from the income generated from the two utility departments. the executive and legislative branches of the Provincial Government continued to support each other. the idea of an outright sale or any possibility which will lessen the control of the Province over the two utility departments would not be taken lightly by the Boholanos. Also. Factors that Contributed to the Success of the Innovation Political Will. despite the fact that a certain group of residents blatantly opposed the possibility that the stake of the Province in the PWS and PES will be reduced or totally removed in light of the proposed improvement works on the utilities. (3) selection of and negotiation with the best bidder. Since joint venture was the option chosen by the Province. (2) tendering of documents (or offering the project for bidding). At the same time. the Provincial Government had quite a difficulty convincing them of the possible strategies to which the Province would have to evoke to realize the very costly improvement works given its limited financial resources. Joint Venture (JV) through Rehabilitate-OwnOperate-and-Maintain (ROOM) arrangement was deemed most ideal to achieve the Province’s plan to expand. Among the options considered by the TWG. Through the JV option. (ARD) consultants. operations and maintenance of the utility departments are provided. However. and (4) the procedures and negotiations that the Provincial Government will undergo is protected by law. Resource Mobilization. namely (1) validation of the initial assessment made by the TWG on the PWS and PES operations and facilities. the consultants provided technical support in undergoing the procedures on privatization. thus allowing it to use its resources to benefit the whole Province and improve provision of other basic services. (2) the Province is able to retain ownership (as part owner) and its share in the profits of the utility departments. The ARD consultants assisted the TWG in the selection of the most suitable options that will allow the Province to achieve its twin goals: improve services and facilities of the utility departments and at the same time improve basic service delivery in the whole Province. The fund for the technical assistance was provided by the Governance in Local Democracy (GOLD) project of the United States Agency for International Development (USAID). Inc. The Provincial Government had the best of both worlds when it opted for a public-private partnership to improve the Provincial water and power utility departments. and (4) actual transfer of the operations and maintenance of the utility departments. It was liberated from the very high cost implications of improvement works on the utilities and income loss from delinquent payments. (1) funds required for the improvement works on the utility departments are provided. highly skilled and modernized technologies for management. modernize and more efficient the water and power supply services and facilities. Selection of Best Financing/Service Delivery Option. the Provincial Government still consulted its stakeholders. Technical Assistance. the Provincial Government was able to keep its ownership and its share in the P a g e | 268 .Study on the Corporate Powers of Local Government Units Stakeholders’ Participation. The residents certainly agreed that there is a need to improve the services of the PWS and PES. (3) efficient. The Province engaged the services of the Associates in Rural Development. Despite the difficulty in soliciting support from the residents. Study on the Corporate Powers of Local Government Units profits. More Efficient System. operating and maintaining utilities. Inc. Small and Medium Enterprises (MSMEs) in agri-aqua industries. and other service industries significantly contribute to the province’s economic growth. The Provincial Government would like to further sustain strong local entrepreneurship by providing assistance in packaging of local products to make them more marketable. The Province has a 30% equity share in what is now called the Bohol Water Utilities. The Province did not only gain financial freedom from shouldering the maintenance and improvement works on the utility departments as well as the burden of income losses brought about by delinquent payments. penalties or disconnections. Paradigm Shift on Conservation of Resources. garments. D. service delivery was spared with the usual bureaucracy that hindered efficient and effective systems in managing. pyrotechnics. On top of the Provincial Government’s direct financial gains. Capitalizing Private-Pubic Sector Investment Venture: The Bulacan Packaging Service Center A. The services of the BPSTC include label design. While water and power supply greatly improved and allowed the residents the little luxuries of life and businesses more room for expansion and growth. supply of packaging materials and technical services on packing technology. which are part of the private consortium Salcon. but it also experienced expansion of tax revenue base as soon as the BWUI and BLCI were set up. jewelry. tourism services. every single drop of water and every surge of power are charged and failure to settle accounts promptly will result to immediate sanction. Results and Lessons Learned Financial Freedom. Micro. (BLCI). where the offices and facilities are located. i. information technology. Both BWUI and BLCI.e. Gone are the days that replacements of even the smallest spare parts would take so long. Background Bulacan. P a g e | 269 . is a progressive province. thus the establishment of the Bulacan Packaging Services and Toll Center (BPSTC) project. 8. packaging. pay real property tax and other assessments to Tagbilaran City. dubbed as the Gateway to the North. tannery. since the water and power utilities are now privatized. (BWUI) and Bohol Light Company. Inc. 000 jobs. The Provincial Government acquired loans from government financing institutions (GFIs) to fund the project on top of the share from the Provincial Development Fund. the center has also provided approximately 149. and (2) the political harmony between the legislative and executive branch. C. The BCCI has been in-charge of the daily operations and maintenance of the center. Results and Lessons Learned Employment Opportunities and Sustained Economic Growth. P a g e | 270 . The fact that the Province was able to allocate a budget for this project shows: (1) the willingness of the Provincial Government to venture on non-traditional sources of funds to promote further local economic development. The development goal of the province is aimed at empowering the middle class of Bulacan. The effects of investment growth and increase in employment opportunities will definitely spillover to the whole Province. the Bulacan Chamber of Commerce and Industry (BCCI) has been the one managing the BPSTC project. With a mere PhP12 million worth of a project. The total cost of the BPSTC project amounted to PhP12 million. the BPSTC was able to generate close to PhP14 billion of investments.Study on the Corporate Powers of Local Government Units B. The Provincial Government was very focused with its intervention and conceptualized a project that would directly impact the local entrepreneurs which are the province’s middle class.896 local entrepreneurs seeking for technical assistance to further increase their sales whose needs were packaging technology. thus ensuring their viability and competitiveness in a highly competitive market environment. in particular. Technical Assistance and Partnership with Concerned National Government Agency. D. While the project was funded by the Provincial Government. Challenges The growing number of small and medium entrepreneurs in Bulacan needs institutional assistance to make their products marketable. The Provincial Government was assisted by the Department of Science and Technology (DOST) by providing technical support and providing 15% share in the counterpart financial contribution. The Provincial Government decided to establish the BPSTC project because of the clamor of the 43. Subsequently. Public-Private Partnership. Stakeholders’ Participation. Factors that Contributed to the Success of the Innovation Political Will. Under the provisions of the Code. They may borrow funds and securitize their assets. with powers to set aside funds for development projects as well as to maintain a special account under the General Fund for the operation of local economic enterprises. certain authorities and responsibilities have been transferred from the Central Government to the local governments. The Code has set the policy environment necessary for LGUs to exercise their corporate powers and develop local economic enterprises. . The Code put into effect the policy of the State that “the territorial and political subdivisions of the state shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them more effective partners in attainment of national goals. may still require the strategic inputs of public policy officials. “Developing the Public Economic Enterprise in the Philippines – The LGSP Way”. and also to discharge the functions and responsibilities of national agencies devolved to them pursuant to this Code. . CHALLENGES CONFRONTING LGUs’ EXERCISE OF CORPORATE POWERS The LGC calls for accountable and responsive local government units. the public policy environment. With the advent of the BOT Law. They may also provide grants or credit to other LGUs. While all these are possible. they may enter into contractual agreement with the private sector. The following are some constraints identified in the LGUs’ exercise of corporate powers: 5 Institutional Arrangements o LGUs’ lack of financial and other resources o Unpreparedness in terms of understanding the dynamics of organization. as it relates to particular modalities and/or methods of operations. 5 P a g e | 271 .” The Code entrusted to the LGUs the financing and management of a wide range of services and facilities and for providing leadership and innovation in community and economic development. LGUs need technical assistance in institutional capacity building to be able to enhance the exercise of corporate powers. 2003. resources and people Taken from The Local Government Support Program Public Economic Enterprise Development Model of Sequus. Further. LGUs may likewise forge strategic alliances with other LGUs and private sector organizations.Study on the Corporate Powers of Local Government Units VI.” Section 17 of the Code further states that “local government units (LGUs) shall endeavor to be self-reliant and shall continue to discharge the duties and functions currently vested upon them . It also vested individual LGUs had been vested by the Code. structures. bus terminals. The challenge is to make these LEEs revenue positive or viable. waterworks system. has exhibited a set of common problems namely: o Poor financial performance o Inadequate management o Rigid adherence to traditional policies and practices in operating such enterprises o Ineffective accounting and financial reporting o Poor service delivery o Absence of committed and dynamic champions The operation of most local economic enterprises (LEEs) is usually subsidized by the LGUs. P a g e | 272 . cemeteries. Here are some steps that LGUs can embark on to make LEEs viable. slaughter houses. etc.Study on the Corporate Powers of Local Government Units Enabling Environment o Vague mandate of LGUs to establish and disengage in the operation of public economic enterprises o Unclear policies on financial systems for economic enterprises o Poor culture for managing economic enterprises within the LGU Political Will o Political succession risk o Change of management approaches o Absence of committed and dynamic champions LGU Capacity o Inadequate management skills o Lack of enterprise identification and business planning o Poor quality of service Systems and Structure o Absence of formal organization structure o Absence of effective financial system Information Generation o Lack of knowledge on financing modalities o Poor information and data banking The plethora of LGU-operated public markets. amortization of capital and interest expense d. Fontanilla. the establishment and operation of local economic enterprises if properly managed can be a source of additional income for the LGU. P a g e | 273 . and the cost of running government. pricing based on identified cost to be recovered.g.6 Under this. however. 599 (1978) The ruling then in the adjudication of stalls or booths views public bidding as “transferring” the authority to fix . and goods and services they provide are generally not competitively priced. Subsidizing local economic enterprises should not be an accepted policy and cost recovery should be the preferred option. pricing should also factor the inherent advantage of LGUs in operating economic enterprises (e. Therefore. Cost Recovery Schemes for Existing LEEs There are a number of strategies that LGUs can adopt to recover costs in the operation of their LEEs. LGUs should adopt corporate business practices. e.. MOOE. .g. rates to private persons”.Study on the Corporate Powers of Local Government Units The Issue of Cost Recovery The exercise of LGU proprietary powers includes the promotion of local necessities and convenience for the community. . exemption from taxation and some regulatory requirements. best sites/locations and security arrangements) 6 7 Torio v. On the other hand.realities. Use competitive/market-oriented pricing a. LGUs are not subject to the payment of regulatory fees.. depreciation. pricing based on market surveys c. but in reality the playing field is not level. This ruling should. LGUs enjoy certain privileges and advantages not extended to the private sector. 85 SCRA.. LGUs face the ever-present dilemma of shortage of funds to finance the provision of other basic needs. purely legal point of view local economic enterprises should not be operated for profit. are exempt from taxes. The private sector is supposed to be the “engine of growth” of our economy. A subsidy should be seen as what it is – a diversion of funds to support the operations of a losing LEE at the expense of other priorities. The government should not compete with the private sector. the prosecution of development projects and activities. use of public bidding in awarding abandoned or delinquent market stalls7 b. be revisited in the light of present. preparation by the Accountant of quarterly statements of income and expenses and year-end financial statements consisting of the following for each local economic enterprise Balance Sheet Statement of Income and an Expense Statement of Cash Flows Under-pricing and poor collection performance are the main causes of losses in the financial operations of LEEs. Proper asset inventory and management a. The above financial reports provide adequate financial information for management and decision makers. leverage for more productive use of assets and facilities that are not effectively utilized Cost Recovery for New LEEs In planning for new LEEs. LGUs should adopt corporate business practices. financial viability tested against P a g e | 274 .. e. renting out of under-utilized assets b. closer supervision of collectors thru regular reshuffling and daily liquidation of collections b. improve collection performance regular and prompt collection of monthly charges enforce collection of arrearages strict enforcement of internal control measures. The accounting for the income and expense of LEEs under the Special Accounts within the General Fund as provided by Section 313 of the Local Government Code and Chapter 6 of the New Government Accounting System is not considered an impediment in the operation of LEEs. Project identification and justification as articulated in the approved Local Development Plan Conduct pre-feasibility analysis embodying the following: a.Study on the Corporate Powers of Local Government Units Establish sound financial management a. It is timeliness and easy access to the reports that is needed.g. technical viability and preliminary design b. discounted cash flow. social and other impacts and of course risks other quantitative indicators of profitability or non-profitability. Identification of economic potentials. Further it should explore all reasonable alternatives for the use of the very same resources as part of responsible asset management. labor. The Beginnings Markets and slaughterhouses were the common and traditional forms of local economic enterprises and the city or provincial treasurer was responsible for overseeing their operations prior to the advent of the Local Government P a g e | 275 . To be sure many LGUs through experimentation and innovation have in introduced models that have proven appropriate and effective for their particular needs. The impact is formally measured by the Economic Internal Rate of Return (EIRR). Administratively Feasible Interventions Capability building on the following: Identifying investment potentials for LGUs a. needs and demands b. internal rate of return. Determination of modes of investments Managing local economic enterprises Various modes of LGUs’ exercise of corporate powers Institutionalization of Local Economic Enterprise Office The Organization of Local Economic Enterprises The increase in the scale and varieties of economic enterprises established by local governments point to the need for organizational structures and management systems that would contribute to ensuring the financial viability of the enterprises. The LGU should identify the best possible use of resource (land. This Chapter looks into how structures and systems had been modified and improved. e. as well as promote the efficient delivery of services. EIRR is measured based on the project’s effect on local employment and the public and health sectors.g. payback period.. economic viability measured against local and national economics. cost-benefit analysis c.Study on the Corporate Powers of Local Government Units project revenue project cost to include cost of mitigating environmental. Identifying potential economic niches c. funding). The operation of public utilities under the jurisdiction of the Public Service Commission was generally under the city/district engineer. 337 (The first Local Government Code) and Republic Act No. The provincial treasurer exercised this responsibility through a market superintendent and the municipal treasurers. and transportation were likewise under the charge of the provincial treasurer. Collector Mkt.8 However.9 The recommended administrative structure is illustrated in Organizational Chart I. Chart I MAYOR MDC Municipal Treasurer Municipal Health Sanguniang Bayan Asst.Study on the Corporate Powers of Local Government Units Code. Treasurer Meat Inspector Junior Clerk Butcher Market Cleaner Market Collector Market Cleaner Asst. The operation of toll roads. 1979. the Local Government Code of 1991. Mun. P a g e | 276 . 7160. Mkt. Guard Market Cleaner 8 9 Asst. Mkt. Guard Revised Manual of Instructions to Treasurers. Public Market Manual for Local Units. these arrangements were changed upon the enactment of Batas Pambansa Blg. Collector Mkt... 1954 edition. bridges and ferries. The Evolving Structures The first attempt to standardize structures and personnel complement was undertaken by the Bureau of Local Government of the Ministry of Local Government and Community Development. Officer Accountant Budget Officer Personnel Officer Local Eco.10 Model 1 LOCAL ENTERPR5ISE UNIT MAYOR Administrator Local Eco Ent. Ent.Study on the Corporate Powers of Local Government Units In A Guidebook on Cost Recovery Scheme for Local Enterprises and Utilities. Unit Treasurer Planning & Devt. Department of the Interior and Local Government. Unit 10 Annex II of the Guidebook issued in 1994. by the Bureau of Local Government and Development. Officer Accountant Budget Officer Personnel Officer Model 2 MAYOR Administrator Treasurer Planning & Dev. P a g e | 277 . three “Models” were suggested. Under the executive direction and control of the City Mayor. Public Market. Slaughterhouse. This arrangement would be acceptable in small LGUs where the office of the local mayor is not adequately staffed. A Contemporary Model An example of a full-blown separate department to manage and operate local economic enterprises is illustrated in Figure 1. Unit Planning & Devt. Ent.Study on the Corporate Powers of Local Government Units Model 3 MAYOR Administrator Local Eco. The enterprises are: 1. This arrangement is appropriate for some LGUs with markets and slaughterhouses only as their economic enterprises. costing Php 25 million 3. Under Model 3 LEE operations are under a separate department in the LGU. Model 2 reverts to the local treasurer the supervision of the LEEU. a Php 54 million investment 2. costing Php 8 million P a g e | 278 . an Office of the City Economic Enterprise was created headed by an Economic Enterprise Manager with the rank of department head. Batas Pambansa Blg 337 and later Republic Act No. 7160 changed this set-up by making the local economic enterprises under the executive supervision of local executives and the policy directions promulgated by the local sanggunians. Officer Treasurer Accountant Personnel Officer Chart I typically represents the then prevailing view that economic enterprises was properly the domain of the local treasurers. Overland Transport Integrated Terminal. In Model 1 the local economic enterprise unit (LEEU) is placed in the office of the local mayor under the immediate supervision of the local administrator.. This is the preferred structure where a number of enterprises have been established by the LGU. Cultural Trade Center.Study on the Corporate Powers of Local Government Units 4. All in all. losses in the operation of local economic enterprises should be avoided. Livestock Auction Center 5. Financial Viability The financial viability of local enterprises should not escape the attention of local decision-makers and those who craft local policies. Cultural and Trade Center Section. While subsidies are sometimes the result of responding to local necessities and promoting the convenience of the community. For sustainability. a.. and 6. progressive practices in human resource development should be an overriding concern of top management. Public Cemetery The Economic Enterprise Manager is assisted by a Personal Staff and he supervises two major Divisions. To maintain service competence and efficiency. the Administrative Division and the Operations and Services Division. The Operations and Services Division is composed of six Sections: Public Market Section. Public Slaughterhouse Section. e.g. Provide adequate staffing with regularly appointed personnel P a g e | 279 . Livestock Auction Center Section. Professionalization of LEE management. the Department has a personnel complement of 155. Maintenance Section and Security Enforcement Section. Internal Control Section. Under the Administrative Division are four Sections: Administrative Section. LGU operating at least 2 LEEs and has plans to expand. a continuing program of staff development has to be in place. Professionalization of LEE Management Recruitment of qualified and competent personnel is an important aspect of local economic enterprise management. and Public Cemetery Section. Overland Transport Integrated Terminal Section. in which Php 22 million was invested. Local Economic Enterprise Office can be created in cases where economic enterprise management has become significant. Selection of qualified and competent personnel b. is an ideal not attained by many LGUs. (Section 15. irrigation. Many local executives and sanggunian members. Under the Local Government Code one of the responsibilities of municipalities is to provide “Public markets. and 88% of provinces incurred losses in operating their economic enterprises. This is disclosed in writeshops for the updating of revenue codes and drafting of market codes. proprietary or private function of LGUs. do not see it this way. because they are “incomegenerating establishments created for the purpose of improving production and delivery of basic services”. conditions and sanctions stipulated in the contracts Exploring a New Mindset in Local Economic Enterprise Management The need for a clear policy framework in the establishment. (Updated Budget Operations Manual) The Revised Government Chart of Accounts further describes Income from Economic Enterprises as “Share of General Fund from income generated by LGUs from its economic enterprises such as hospitals. however. But income is realized only when costs are recovered. The establishment of economic enterprises has been generally viewed as an exercise of the corporate. 53% of municipalities. Providing services and not profit is in their minds. 63% of cities.Study on the Corporate Powers of Local Government Units Legal Issues in the Operation of LEEs Regular review and renewal of contracts Enforcement of terms. however. transportation. The determination as to whether or not an activity aims to provide basic services and facilities or for profit should be appropriately left to local authorities. The payment of fees for government services seems to be the characteristic that defines a government activity as an economic enterprise. the principal objective of economic enterprises. livelihood projects.” (Section 17) A deliberate act to identify an activity as an economic enterprise should be promulgated through an ordinance.” Income generation is. Cost-recovery. etc. slaughterhouses. In a separate study it has been established that in CY 2007. therefore. markets. operation and management of economic enterprises is very evident from the experience of local governments. Local Government Code) Economic enterprises are so denominated. slaughterhouses and other municipal enterprises. where receipts exceed operating expenses. thus explicitly providing the appropriate policy P a g e | 280 . Local officials are acting only as agents of the corporate entity which is the LGU. There are significant advantages of the private sector participation arrangements for the LGUs. 80. 97. (d) an effective organization and human resource led by an empowering local leaders. duties and functions. series of 1995) Exercise of LGU Corporate Powers through Public-Private Partnership Part of the declared policy of government is to recognize the indispensable role of the private sector as the main engine for growth and development and provide the most appropriate incentives to mobilize private resources for the purpose of financing the construction. particularly Sec. The Code also authorizes LGUs to mobilize private sector participation in the operation of public economic enterprises through sale. mandates LGUs to be self-reliant in exercising their powers. The Local Government Code (RA 7160). Legal Impediments in the Exercise of LGU Corporate Powers Lack of a clear statutory provision authorizing LGUs to form LEE corporations Only natural persons may form a private corporation. operation and maintenance of infrastructure and development projects normally financed and undertaken by government. A good financial management system of the economic enterprise must also be set in place.Study on the Corporate Powers of Local Government Units and financing framework for the operation and management of such economic enterprise. It enables the LGUs to implement priority projects without having to raise the funds for its construction P a g e | 281 . series of 1997) Private Corporations owned or controlled by the government can only be created by special law (DILG Opinion No. (DILG Opinion No. (c) identification of particular products and services. and (e) the use of untapped and under-utilized LGU assets. 17. management contract and other arrangements. lease. A survey conducted by the Office of Project Development Services of DILG on models of LGU corporate projects indicates that the development of local business or enterprises will involve: (a) businesses of enterprises needing to mature in an environment of risks. (b) operation of sound financial systems to educate LGUs analyze and manage the flow of finances and redistribution of risks in the use of internal and external financing. with appropriate penalties for failure to meet them. P a g e | 282 . Management contract/ service contract Lease contract Concession contract. financing and operation.Study on the Corporate Powers of Local Government Units It frees LGU funds for other priority development projects which may not be eligible for credit financing.g.. social and environmental projects It allows flexible financing and private sector partnership in local development It provides access to superior technology transfer and training It enables LGU to own the infrastructure facility after the fixed term It hastens project implementation and assures operating efficiency It provides potential source of funds if revenue sharing scheme is built into BOT contract There are four possible arrangements of public-private partnerships that could be used by LGUs. and BOT and its variants The four models differ in terms of ownership. Management contract • • • LGU engages the services of another company (the contractor) to operate and maintain the system The contractor assumes operational responsibility but does not assume commercial risks The contractor acts at all times on behalf of the LGU One particular benefit of contracting out is that measurable performance requirements can be specified. e. • Pre-Contract Analysis First Stage: Several questions should be raised prior to venturing into partnership with the private sector: • • Clarify objectives for the project Determine whether private sector participation is appropriate and affordable. it is allowed to charge facility users appropriate tolls. as needed. major repairs and additional capital financing. fees. including offices. it needs to move on to the second. focusing on the following questions: What is the state of the existing utility? P a g e | 283 . collections and financial working capital. design. vehicles. more in-depth stage of analysis. • Concession Agreement • • The contractor is responsible for operations. The contractor leases the existing facilities and is responsible for all normal operations and maintenance.Study on the Corporate Powers of Local Government Units Lease Contract • The LGU is responsible for replacement of major works. BOT Contract • A private entity receives a franchise from the public sector to finance. and operate a facility for a specified period after which ownership is transferred back to the public sector. maintenance. construct. During the time the project proponent operates the facility. billings. for debt service and for tariffs. Existing fixed assets remain the property of the LGU. spare parts. and charges stated in the contract to enable the project proponent to recover its investments and operating and maintenance expenses in the project. Once a government has determined that private sector participation appears financially and politically feasible. rentals. and cost recovery projects. o Conduct a rough financial feasibility analysis o Conduct a preliminary analysis of the political support for and opposition to private sector participation. replacements. Typical Responsibility Distribution for Each Model Institutional Arrangements – Private Sector Functions and Management Responsibilities Contract Policy Government Formulation Policy Government Enforcement Asset Ownership Debt Service Obligation Technical Tasks Social Preparation Marketing O&M Billing/ Collections and Receivables Commercial Risk Government Government Contractor Government Contractor Contractor Contractor Government Lease Government Government Government Government Contractor Government Contractor Contractor Contractor Contractor Concession Government Government Government Contractor Contractor Government Contractor Contractor Contractor Contractor BOT Government Government Government Contractor Contractor Government Contractor Contractor Contractor Contractor P a g e | 284 . • • not only in deciding on the form and timing of private sector involvement. but also in designing the contract and the accompanying regulatory regime.Study on the Corporate Powers of Local Government Units How compatible is the regulatory regime with private sector participation? How committed – or opposed – to private sector participation are key stakeholders? What are the main risks that need to be allocated or mitigated to ensure that private sector participation can succeed? Pre-Contract analysis is vital. Consistent with the findings of the study that there are legal impediments for LGUs to establish private corporations. A Joint Venture is a contractual arrangement whereby a private sector entity or a group of private sector entities and government contribute money/capital. A contractual JV is a legal and binding agreement under which the JV partners shall perform the primary functions and obligations under the JV Agreement without forming a JV Company. more access to efficient and better services that lead to better quality of life. On the part of the LGU. It involves a community or pooling of interests in the performance of the service. or a combination of any or all of the foregoing. it is recommended that Joint Venture Agreements with the private sector be in the form of contractual Joint Venture. and more organized interventions for a stronger and more diverse local economy that is capable of generating sustainable growth and opening a range of permanent job opportunities across the locality. A JV may be a contractual JV. more efficient and better goods and services. limited or special goal or purpose with the end view of facilitating private sector initiative in a particular industry or sector. function. A JV company is an entity registered with the Securities and Exchange Commission (SEC) by the JV partners that shall perform the primary functions and obligations of the JV as stipulated under the JV Agreement. with each party having a right to direct and govern the policy in connection therewith. business or activity. P a g e | 285 . Higher income implies greater purchasing power. land or intellectual property). the higher the income. or a corporate JV. SETTING THE STAGE CORPORATE POWERS TO ENHANCE LGUs’ EXERCISE OF Poverty alleviation remains the main goal of local development. and eventually transferring ownership of the investment activity to the private sector under competitive market conditions. adopting applicable provisions of Executive Order (E0) No.Study on the Corporate Powers of Local Government Units Another mode of public-private partnership is the Joint Venture Arrangement. services. subject to agreement by the parties. assets (including equipment. Parties to a JV share risks to jointly undertake an investment activity in order to accomplish a specific. and with a view of sharing both profits and losses. 423 dated 30 April 2005 (See Annex C) VII. the greater the chance for the LGU to be able to provide more and improved infrastructure facilities. More organized economic activities in the community are believed to generate more jobs and thus. provide more income for the people and the LGU. (c) building more and better infrastructure facilities. Recently. the local government takes it upon itself to provide jobs to the unemployed in the locality. it becomes imperative for the LGU to provide them jobs. The local government spearheads in performing this catalytic function.and medium-sized enterprises at the local level seems to be foremost in the agenda. The role of the LGU as an employer has constrained its capacity to operate efficiently and effectively. to increase the competitiveness of the community in establishing more economic activities. It also needs to continuously maintain support for the local economy through policies consistent with local industrial growth and investment. Under this new role. the local government is viewed as an employer and provider of basic goods and services. More often than not. which is. accommodating just anybody. establishing Investment Promotion Centers. It assists in providing the sites and premises necessary for local industrial growth and the required investment. the promotion of small. Every time a new local administration is sworn in. Local governments can provide these support mechanisms to increase its competitiveness. (d) extending better and more accessible social services. a host of new employees are also recruited. the concept of re-engineering or re-inventing the government has somewhat changed the role of the local government as an employer and provider of goods and services. such as policies encouraging establishment of economic enterprises. Since the private sector cannot create enough job opportunities for them. the local government now performs functions such as planner. the LGU becomes a “welfare” institution. It is tasked with the responsibility of: (a) providing employment opportunities to the citizenry. especially to the disadvantaged sector of the society. The promotion of these enterprises can be supported by setting up incubation centers or common services facilities. While this is considered as “political patronage”.Study on the Corporate Powers of Local Government Units The above measures point to yet another significant objective of governance. Taking into account the level of economic development in the country. The Local Government as an Economic Unit Traditionally. This conventional role has been de-emphasized in favor of a role treating the local government more as a catalytic entrepreneurial enterprise engaged in economic activities that are aimed at developing and facilitating the diversification of local economic structure. broker and promoter of inward investments as well as playing the role of an investor in P a g e | 286 . and (e) providing such services that cannot be provided by other sectors of the community. whether there is legitimate work for them or not. A local area needs to compete with other localities in promoting inward investments. training the labor force as well as providing advisory and information services to business establishments and to individuals. (b) providing efficient and better quality of goods and services. Study on the Corporate Powers of Local Government Units enterprises where the private sector is absent. The Code has provided more avenues for flexibility in making decisions and in undertaking projects leading toward local economic development. finance. to a certain extent. The local government needs to take an active role in attracting more investments into the local area. as a catalyst for economic growth by utilizing the enterprise as a strategic and deliberate tool for local economic development. administrative inefficiencies and peace and order. In certain situations. This happens when there are insufficient private or voluntary/social sector providers of a service or when the capacities of these providers are inadequate. e. Undoubtedly.e. the LGUs may have to take the lead role in jump-starting local economic development. The above emphasizes the necessary shift in the role the LGU plays. as stand-alone investment by improving the returns realized directly from the use/operation of such enterprises. bureaucratic systems and processes. it has been observed that LGUs are more effective if they play the catalytic and regulatory roles and do not compete with the private sector. i.. Another occasion for LGU intervention is in the case of the so-called “market failures” like cartels when private sector players conspire to bid up the prices of critical commodities to the detriment of the public good. the local government has to do some “house cleaning” by addressing the perceived weaknesses in various aspects of the local economy and governance. The Code has also granted LGUs with additional powers making them more equipped and their participation in economic development more meaningful. has laid down the legal framework for the LGUs’ active involvement and participation in development. labor supply. LGUs currently involved in public economic enterprises must have a well-defined exit strategy.from merely an employer and provider of public goods and services into an economic entity that promotes and facilitates wider latitude of economic activities and advocates good governance to further improve the local economic base and the delivery of basic services. However. But before investments could come in. skills and training. etc.g. telecommunications.. LGUs’ operation of local economic enterprises could be viewed as twopronged: first. Some advocates of LGUs’ corporate powers are aiming for a larger objective of corporate governance among LGUs. transport. land supply. This means the adoption of P a g e | 287 . the Local Government Code of 1991. It has to promote the advantages and benefits of investing in the community and make the location attractive to the investors by providing infrastructure facilities needed for the latter’s economic enterprises to operate successfully in the area. and second. A case in point is the provision of electricity and water. roads. systems and operational standards and adherence to transparency and accountability in local governance in pursuit of development objectives. technical assistance and funding support. The basic goal of an enabler is to create a social. and to structure this environment through appropriate policies. VIII. The challenge at hand is to develop and apply a framework that recognizes the imperative need of key corporate behaviors and roles on the part of the LGU and support agencies that will ensure and promote a healthy exercise of corporate powers among the LGUs. the DILG can advocate improvement in technical and financial capacities of LGUs for preparing and managing local development investments in a corporate manner. monitoring and evaluation. The different bureaus and offices of the Department can provide the policy and promotional support for the program. broker and promoter of inward investments and play the role of an investor in basic enterprises where private sector is absent. inspired by some guiding principles to serve as guideposts. Harnessing and enhancing LGUs’ corporate capacities must be anchored on a strategy. LGUs’ operation of local economic enterprises could be viewed as two-pronged: o As stand-alone investment by improving returns realized directly from the use/operation of such enterprises. PROGRAM STRATEGY The envisioned role for LGUs in economic development is that of an enabler and creator of an environment conducive to sustainable development. It requires the dynamic interplay of policy support. as DILG’s conduit with multilateral and bilateral P a g e | 288 . and an institutional framework to galvanize stakeholders’ support. As a catalyst for economic growth by utilizing the enterprise as a strategic and deliberate tool for local economic development. physical and economic environment favorable to the development and growth of the locality. o Building the Promotional Structure As the lead oversight government agency for the local government sector. regulations and enforcement to ensure the dynamic and efficient interplay of market forces and private initiatives. capacity building sustaining actions through advocacy. The Office of Project Development Services (OPDS).Study on the Corporate Powers of Local Government Units policies. Guiding Principles LGUs must act primarily as planner. in collaboration with other institutions. Indeed.g. The Local Government Academy (LGA). while others are external. but often in their interpretation and implementation at the operational/local level. Capacity building should be viewed in three inter-related dimensions: a) institutional interrelations. b) organizational capacities. The Bureau of Local Government Development (BLGD) can be the focal office in terms of policy review. can take the lead in the promotional and advocacy initiatives in LGUs exercise of corporate powers. The internal factors include organizational and managerial culture. Further. a crucial ingredient in harnessing and enhancing LGUs’ corporate powers. can take the lead in LGU institutional capacity building initiatives to enhance LGUs’ exercise of corporate powers. among others. and c) individual competencies. Establishing the Policy Support System There are numerous factors that impact on LGUs’ ability to exercise corporate powers. the LGUs by the DILG Regional Offices) by oversight agencies as they issue policy directives and guidelines would ensure healthy central-local dynamics and goal congruence.. Developing a framework for policy reform therefore has to take into consideration the institutional. Likewise. policy consultation and policy formulation. P a g e | 289 . Visionary and committed Local Chief Executives (LCEs) with entrepreneurial mindset are needed to trigger a paradigm shift in LGUs operation and culture. On the other hand. there are external factors that impact on LGUs’ exercise of corporate powers. and policies on organizational and financial systems for LEEs are not in tune with industry standards. The Bureau of Local Government Supervision (BLGS) can provide the framework for effective monitoring and evaluation of LGUs’ initiatives in the exercise of corporate powers. the policies on LGUs’ exercise of corporate powers must be responsive and more enabling to LGUs’ initiatives.Study on the Corporate Powers of Local Government Units institutions. organizational and competency implications of policy implementation. with respect to LGUs’ corporate powers. proper consultation with stakeholders (e. Further. There are a number of laws and policies govern LGUs’ exercise of corporate powers. financial and other organizational systems and the overall notion of LGU capacity. the OPDS can assist LGUs in packaging programs and projects and in conduiting funding support along these initiatives. and these pertain to policy and oversight support and to market forces as well. It is envisioned that the BLGD will take the lead in this aspect of policy support. Some of them are vague as to LGUs’ mandate to establish LEEs. major gaps are encountered not necessarily in the policies themselves. The policy environment needs to be reviewed against the backdrop of the above-mentioned guiding principles and of the rapid changes in the public and private domain. Capacity Building Equally important is the need for a capacity building framework. on the other hand.some are internal. training in individual competencies is generally viewed as non-threatening and is thus often supported. among others. management skills. This prevailing organizational culture (absence of entrepreneurial culture. personal training) without the others will not be completely effective. e. Identification of economic potentials.g. provision of broad-based information on LGUs’ exercise of corporate powers through documented good practices and improved approaches is also an integral part of capacity building. coaching and mentoring by or engaging the services of practitioners and experts will probably be necessary to help LGU in the following areas. among others: Identification and valuation of assets Risk allocation and risk mitigation Contract design Analysis and identification of appropriate regulatory regime Timing and form of private sector involvement P a g e | 290 .Study on the Corporate Powers of Local Government Units Addressing one (e. financial management and risk management. (b) organizational capacities. can be used as an “entry point” for pursuing the other dimensions of capacity building. joint venture and bond flotation. The capacity building interventions in the inter-related dimensions of: (a) institutional interrelations.g. Determination of modes of investments Managing local economic enterprises Various modes of LGUs’ exercise of corporate powers Institutionalization of Local Economic Enterprise Offices In the non-traditional exercise of LGU corporate powers. Identifying potential economic niches c. and (c) individual competences are appropriately the concern of the LGA. rigid policy framework based on tradition and past precedence and top-down approach to management. in entrepreneurship and enterprise management. publicprivate partnerships. attempts at rationalizing or strengthening institutional interrelations and organizational capacities are often viewed as threatening and thus resisted. needs and demands b. Further.. This is the area of intervention where the LGA can provide the necessary support with the active participation of the DILG Regional Offices. In any case.. However. training in identifying investment and economic potentials and potential economic niches. Linking with academic institutions can be considered in the following highly technical areas: identifying investment potentials for LGUs a. among others) needs to be reformed if capacity building is to become truly effective. business planning. In contrast. Monitoring and Evaluation In collaboration with the DILG Regional Directors and Local Government Officers. this could be part of DILG’s LGPMS. Advocacy and Technical Assistance The successful exercise of LGU corporate powers would require not only the necessary policy support but sustained advocacy and adequate technical and funding assistance as well. and act as broker for LGUs in sourcing financing for its projects and initiatives in line with LGUs’ exercise of corporate powers. The baseline data shall be established by BLGS in collaboration with the concerned DILG and local officials. the BLGS shall have overall responsibility for collecting data and monitoring results. b. provide assistance in managing LEEs. offers opportunities for expanding service delivery. Sustaining Actions a. The results of monitoring system will be incorporated as part of DILG’s overall management information system. LGUs would need some assistance in identifying investment potentials of their respective communities. The OPDS can take the lead in collaboration with the DILG’s Regional Offices.Study on the Corporate Powers of Local Government Units The experience of some LGUs in finding use for their under-utilized assets is worth replicating. especially in joint ventures. DTI. A. potential economic niches. and Small and Medium Enterprise Development (SMED)11 Council in promoting LGUs’ exercise of corporate powers and in providing them the necessary technical assistance in identifying its economic potentials. Appendix B is a sample listing of how LGUs generated income from the use of idle assets. The use of LGU assets in public-private partnerships. needs and demands. and shall be used to implement the performance-based grant on LGUs’ exercise of corporate powers. Community monitoring tools could also be developed by DILG to be actively used by accredited civil society organizations and private sector organizations to promote better governance and transparency in project activities. Indicative Activities by Component The following are the envisioned indicative activities of following offices: 11 Includes micro-enterprises P a g e | 291 . employment generation and economic promotion. DA. DBM.000 per model] o o o o o o o o o 12 Composed of DILG. DOF.Study on the Corporate Powers of Local Government Units Bureau of Local Government Development: Indicative Activities Review of existing policies on LGUs’ exercise of corporate powers Identifying areas of reform Organizing consultative workshops Formulating appropriate policies Review and approval of proposed policies by the Coordinating Council for LGU Corporate Powers (CCLCP) 12 Issuing appropriate guidelines by BLGD-DILG (for policies that can be promulgated through Administrative Issuances) Drafting the proposed legislation for policies that would need Congressional Action o o o o o o o Local Government Academy: Indicative Activities Conduct survey to determine/identify training needs on local enterprise management and . NEDA. TESDA. DTI. DOJ. ULAP and PCCI P a g e | 292 .public-private partnerships Development of the training design and appropriate capacity building interventions Development and printing of training materials Central Office (CO) and Regional Office (RO) staff training workshop on LGUs’ corporate powers RO roll-out to provinces and cities Development of orientation and promotional materials on LGUs’ corporate powers for municipalities Roll-out to municipalities (c/o LGU) Documentation and compilation of best practices/models in LGUs’ exercise of corporate powers (“Kaban Galing” and “Galing Pook”) Replication of best practices/models in LGUs’ exercise of corporate powers–Good Governance-Facility for Adoption and Replication (GO-FAR)–through mentoring and coaching in collaboration with OPDS [P500. It is to be established as a window in the Municipal Development Fund Office (MDFO): P a g e | 293 .000 per model as per GO-FAR] Hire a corporate lawyer/consultant to draw a legal roadmap on how to engage in public-private partnership on certain LGU service deliveries o o o o o o o Financing Options A. systems and operational standards with strict adherence to transparency and accountability in local governance. adopting policies. The LCPCF is proposed to be capitalized with P300M from budgetary appropriation to be sourced by DILG. pre-feasibility study.Study on the Corporate Powers of Local Government Units Bureau of Local Government Supervision: Indicative Activities Develop performance indicators on LGUs’ exercise of corporate powers Establish performance standards for LEEs (benchmarking) Monitor LGU performance against the indicators Monitor LGU compliance with DILG guidelines on LGUs’ exercise of corporate powers Summarize findings for management purposes o o o o o Office of Project Development Services: Indicative Activities Assist in packaging proposed LEEs for possible funding Provide technical assistance in project identification. Establishing the LGU Corporate Powers Challenge Fund (LCPCF) The LCPCF shall be set up to provide financial support for LGUs’ innovative exercise of corporate powers to promote economic development and key corporate behaviors. and assessment of both financial and technical viability Assist LGUs in identifying various options for the operation of LEEs Assist LGUs in identifying appropriate options for financing and service delivery under the principle of public-private partnership Document good practices on LGUs’ exercise of corporate powers in collaboration with LGA Replicate models on LGUs’ exercise of corporate powers in collaboration with LGA [P500. or P30M. enterprise development. as well as transparency and accountability. P a g e | 294 . for capacity building.Study on the Corporate Powers of Local Government Units - 10% of LCPCF. one-stop shops and IT related projects. projects related to environment (eco-tourism. wharves and fish ports. as grant to LGUs to promote LGUs’ exercise of corporate powers General Criteria The LCPCF will support a wide range of initiatives in LGUs’ exercise of corporate powers such as waterworks system. programs that institutionalize service cost and standards in service delivery. among others. 90% of LCPCF. projects that promote inter-LGU cooperation and those that enhance public-private partnership. postharvest facilities. bus terminals and slaughterhouses. as well as investment promotion. The following is a matrix of LGU Corporate Powers Reform Areas and the corresponding grant amount. sanitary landfill. skills and manpower development and employment and improvement in the operation and maintenance of the traditional LEEs such as public markets. watershed management). or P270M. food production. building and other regulatory requirements through one-stop-shop centers Difficult P a g e | 295 .Study on the Corporate Powers of Local Government Units POLITICAL Easy Quadrant I Public markets Bus terminals new Slaughterhouses Post-harvest facilities Investment Promotion Program Food Production Program Crafting an LGU vision and molding a corporate identity as an LGU marketing strategy Difficult Quadrant III Public markets old Bus terminals existing Slaughterhouses Post-harvest facilities Providing adequate land supply through efficient zoning. land banking and proper area management Formulate LGU employment policies in collaboration with local firms in order to initiate job creating processes Investment Code Promotion of audit committees to enhance transparency and accountability Quadrant IV Establishment and institutionalization of service cost and standards in service delivery with customer feedback mechanism Establishment of Citizens’ Charter or Service Delivery Contract Inter-LGU cooperation o Establishing center for facilitating partnership and interLGU alliances o Communal farming and forestry o Irrigation and water impounding system Public-private partnerships Wharves Fish ports Waterworks Corporate farming using interLGU cooperation and public- ADMINISTRATIVE Easy Quadrant II Incubation centers/common services facilities Environment projects Eco-tourism Brokering o Business matching and joint venture search o Skills & manpower development and employment o Product development. planning. packaging and marketing One-stop shops o Streamlining of business registrations o Facilitating speedy issuance of construction. The grant would be an amount equivalent to 5% of the project cost but not to exceed P1M. c. EIRR is measured based on the project’s effect on local employment and the public and health sectors. to include cost of mitigating environmental. b. social and other impacts and of course risks. and 2) financial viability tested against the following: a. economic viability-measured against local and national economics. The impact is formally measured by the economic internal rate of return (EIRR). project revenue project cost. The above proposed LEEs should meet the following tests: 1) technical viability and appropriate design.Study on the Corporate Powers of Local Government Units IT-based projects Establishing Investment Promotion Centers Establishing center for agro-fisheries and marine industry development Establishing packaging development center Strategic business planning Entrepreneurship Training Camps and Enterprise Development Program Institutionalization of Local Economic Enterprise Office private partnership to ensure food security Description of the LGU Corporate Corresponding Grant Component Quadrant I Powers Reform Areas and These are typical local economic enterprises that LGUs would normally operate and maintain which are politically acceptable and within their administrative capability. Fund Release First tranche Second tranche Third tranche 30% upon signing of the agreement 30% upon 50% completion 40% upon completion and final acceptance of the project P a g e | 296 . Quadrant IV These are projects which would entail visionary. The grant would be in the amount equivalent to 20% of the project cost but not to exceed P4M. and are challenging to the administrative capabilities of the LGUs. in collaboration with the other oversight agencies and concerned 30% upon signing of the agreement 30% upon 50% completion 40% upon completion and final acceptance of the Project. The grant would be in the amount equivalent to 15% of the increase in receipts of these LEEs over the average receipts of the previous 5 years. Institutional Framework To set the stage and create a platform for LGUs’ effective exercise of corporate powers. an institutional framework is hereby envisioned where the DILG. but not to exceed P3M. collaborative and strong political leadership to undertake and which would challenge LGUs’ administrative. But in no case shall the previous 5-year average operating expenses exceed 30% of the previous 5-year average operating receipts. Fund Release The grant would be released upon certification by the Local Treasurer as to the actual receipts.Study on the Corporate Powers of Local Government Units Quadrant II These are projects that are politically acceptable. P a g e | 297 . political and networking capabilities. The grant would be in the amount equivalent to 10% of the project cost but not to exceed P2M. Fund Release First tranche Second tranche Third tranche Quadrant III These are typical LEEs that LGUs are normally operating and maintaining which are mostly financially weak and where political leadership is challenged to adopt measures to improve their financial viability. 6.Study on the Corporate Powers of Local Government Units institutions such as NEDA. approve or disapprove applications of LGUs to LCPCF. It shall review and amend LCPCF policy guidelines after a prescribed period of operation. DA. shall establish a Coordinating Council for LGU Corporate Powers (CCLCP). The CCLCP shall be created through an Executive Order. The forthcoming Philippine Basic Urban Services Sector Project funded by the Asian Development Bank 4. The Spanish Grant intended for Regions 5 and 13 to support capacity building on resource mobilization. a program lending window designed to promote and support policy reforms in local governance. The Municipal Development Fund particularly the PROLEND Program. 1. DTI. 3. DOF. DOJ. It shall serve as the clearinghouse of policies and implementing rules and regulations as regards LGUs’ exercise of corporate powers. The CCLCP shall formulate promotion policies and provide guidance on LGUs’ exercise of corporate powers. BLGS and LGA which shall serve as CCLCP’s secretariat. 4. 3. 5. DBM. P a g e | 298 . financial management and economic enterprise management. It shall act as a collegial body to review. B. 2. The Local Economic Development Project funded by the Canadian International Development Agency (CIDA) to support LGU capacity building for the next eight years. Other Financing Support 1. 2. BLGD. ULAP and PCCI. The CCLCP shall be assisted by a core support group composed of representatives from OPDS. Manual on the New Government Accounting System for Local Government Units. Department of the Interior and Local Government. Commission on Audit. Joaquin. German Foundation for International Development and Local Government Center-U. 1996. USAID and The Asia Foundation. 2002. eds. Cabo and Ma. Wilhelmina L. U. Ernita T. Mindanao Economic Development Council and Asian Development Bank. l979. 2003. Alberto C. and Public Administration Promotion CenterGerman Foundation for International Development. Supreme Court Reports Annotated. Public Market Manual for Local Units. Local Government Center-College of Public Administration. Ministry of Local Government and Community Development. 2006.P. College of Public Administration. 1987. Local Government Code of 1991. Local Economic Promotion in the Philippines. Joint Venture Guidelines and Procedures. Rules and Regulations Implementing the Local Government Code of 1991. 2007. Developing the Public Economic Enterprise in the Philippines. and Vincent Edward R. Festin.. Emerging Trends: Harnessing LGU Corporate Capacities for Mindanao Development. P a g e | 299 . Economic Promotion by Local Authorities in the Philippines and in Germany: A Reader. The Philippine Constitution. 1994. Perla E. 1995.. Legaspi.P. and Wolfgang Meyer. Perla E. Legaspi. Build-Operate-Transfer Manual. LGSPA.Study on the Corporate Powers of Local Government Units References Agra. Revised Manual of Instructions to Treasurers. Manila: Philippines. Compilation of Recent Legislation on Local Governments 1991 to 2005. NEDA. l954 Edition. private and corporate. (MISORTEL) Quezon City Housing and Urban Renewal Authority. that is through Congress. purpose x x x” (Underscoring ours). Current Jurisprudence Proprietary powers. arising from its existence as legal persons and not as public agencies. stables. Section 10 thereof provides that. 97. 22 July 1997) x x x private corporations owned or controlled by the Government can only be created by a special law. Inc. “Any number of natural persons not less than five but not more than fifteen. (Opinion No.Study on the Corporate Powers of Local Government Units APPENDIX A ISSUES ON LGU EXERCISE OF CORPORATE POWERS 1. fisheries. Emerging Models of LGUs’ Exercise of Corporate Powers LGU Corporation granted a Charter by Law (R. it being a juridical person or more appropriately a public corporation. as amended by RA 8989) 2. 80. (HURA) 1. are those exercised for the special benefit and advantage of the community and include those which are ministerial. 9259) The La Union Medical Center (LMUC) LGU capitalized corporations organized under the Corporation Code of the Philippines Misamis Oriental Telephone Systems. September 6. A corporation like that of a province cannot for reasons thereof. all of legal age. slaughter houses. Inc. bathing establishments. (Opinion No. x x x The following are corporate in character: municipal waterworks. be an incorporator of another corporation. wharves. x x x may form a private corporation for any lawful. 1995) 3. DILG Opinions The law governing stock corporations is the Corporation Code of the Philippines.3 Inter-LGU Corporate Body Partido Development Administration (RA 7820. P a g e | 300 .A. ferries. markets. 192 SCRA 257. Collector of Internal Revenue. Quezon City: AFA Publications. 1990) Source: Aguedo F. (18 Am. it has no greater rights. City of Manila v. As a private corporation. de Leon. III. or regulation of private corporations. (SC Decision 2nd Division. Corporators are either stockholders in stock corporations or members in non-stock corporations. 2002 ed. Commentaries and Jurisprudence on the Commercial Laws of the Philippines. golf courses. 52179. (See National Development Co.R.Study on the Corporate Powers of Local Government Units maintenance of parks. Vol. (Article XII. provide for the formation. 583 (1924) Source: Hector S. 2002 ed. 1st Division. Veterans Bank. the government never exercises its sovereignty. organization. or privileges than any other corporation organized for the same purpose under the Corporation Code. vs. powers.R. it acts merely as a corporator. Phil. de Leon.. Agbayani. November 15. cemeteries. 1991) Source: Hector S. Firme G. The Corporation Code of the Philippines Annotated. Bar Review Materials in Commercial Law (Tenth ed 1993) As members of a corporation. Philippine Constitution) A special law creating a private corporation which is neither owned nor controlled by the government is void for being violative of the constitutional provision. The Congress shall not. April 8. The Corporation Code of the Philippines Annotated. 46 Phil. vs. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. No 71159. Municipality of San Fernando v. (National Coal Co. except by general law. and airports. Source: Lorenzo F. Incorporators are natural persons with contractual capacity who are signatories to the articles of incorporation. 1964 ed. Intermediate Appellate Court G. P a g e | 301 . Jorge. l989. Section 16. Jur 2d 584) And the mere fact that the government happens to be a majority stockholder does not make it a public corporation. 2003 Board “act(s)” on Appointed budget General submitted by Manager GM by Independent Auditor Partido Development Authority InterLocal Corporate Body Integrated and Coordinated Development of 10 Municipalities of Camarines Sur Board of Directors composed of 22 members . 1236. and redevelopment Seven Member Board of Directors headed by City Mayor Not covered by Not clear CS Rules Quezon City Housing and Urban Renewal Authority.Board of media services Directors composed of the PG. including the Mayors of the member LGUs Budget approved by the Board Appointed by Audited Administrator in COA accordance with CS Rules and Regulations by P a g e | 302 . receives & disburses funds Status of Personnel Officers and employees covered by CS rules and regulations Auditing LGU Owned & Modern General Controlled Hospital Corporation Services (RA 9259) Audited by Provincial Auditor of La Union Misamis Oriental Telephone Systems. Ord. CS200253967 Telecommunica15 Member tions and multi. headed by the Prov. Inc. (HURA) Private Corporation. VG & SP Members Low-cost housing. SEC Reg. Governor Financial Management Budget enacted by Board of Trustees. No. Corporatization of Economic Enterprises Name of Enterprise La Union Medical Center (LUMC) Nature Services Offered Governing Body 15 Member Board of Trustees. (MISORTEL) Private Corporation. urban renewal s.Study on the Corporate Powers of Local Government Units 4. Inc. reviewed by PBO Provincial Treasurer is Corporate Treasurer. Compensation GOCCs – Salary Standardization Law Private Corporations – Fixed by Governing Body P a g e | 303 . instrumentalities. those for which the government has put up a counterpart fund or those partly funded by the government. (Corporate Audit or LGU Audit?) HURA – Independent Auditor Partido Development Administration . 7. including government-owned or controlled corporations with original charters. Section 2. Philippine Constitution) .COA COA’s Mandate Examine. subdivisions. of any of its subdivisions. (Article IX-B. 1993) 6. audit. and agencies of the Government. and expenditures or uses of funds and property. Section 2(1). and settle all accounts pertaining to the revenues and receipts of. where applicable as in the case of stock corporations. .Study on the Corporate Powers of Local Government Units 5. the Corporation Code. Government Auditing Code of the Philippines) . agencies. . to the extent of at least fifty-one percent (51%) of its capital stock. . or instrumentalities. including government-owned or controlled corporations with original charters (Section 2. (Section 26. Article IX-D. November 09. owned or held in trust by. Philippine Constitution) Department of Labor and Employment Those incorporated under the general incorporation law. or pertaining. (RA 7656. Oversight Agencies on Employment and Personnel Civil Service Commission The civil service embraces all branches. Issues on Audit Jurisdiction a. are governed by the Labor Code. . Current Practice LUMC – Audited by the Provincial Auditor of La Union MISORTEL – Not clear. to the Government. Applicability of the Government Procurement Reform Act . SB 279. .Philippines. . office. Retaining fifty percent (50%) of the income even if the enterprise is losing money would only increase the LGU’s subsidy. Pimentel. Establishment of Economic Enterprises Within the LGU Structure as LGU Exercise of Corporate Powers Policy Issues On the creation of separate corporations Special Charters must pass the test of economic viability (Article XII. (Implementing Rules and Regulations (IRR) Part A of the Government Procurement Reform Act. b) goods. by any branch. “After deducting statutory or contractual obligations. or instrumentality of the Government. after deduction of the cost of improvements. public utilities and economic enterprises. Comment: “of the remainder of the income” should be “profits or net income”. Jr. Senator Aquilino Q. including government-owned and/or –controlled corporations (GOCC).Study on the Corporate Powers of Local Government Units 8. Philippine Constitution)bbbb What are the conditions that justify the establishment of a separate corporation to manage and operate an economic enterprise? On the retention by the economic enterprise of part of the earnings Section 313 of the Local Government Code provides that profits or income from the operation of. agency. bureau. shall govern and apply to the procurement of a) infrastructure projects. government financial institutions (GFIs) state universities and colleges (SUCs). and c) consulting services. a minimum of fifty percent (50%) of the remainder of the income of the public market owned by the government shall be reserved and set aside as a capital and management development fund for the maintenance and improvement of the market and for staff development. Section 16. repair and other related expenses shall be applied for the return of the advances or loans and any excess shall form part of the general fund of the LGU In the proposed Market Code of the . and local government units (LGUs). P a g e | 304 . Republic Act 9184) 9.. department. An undetermined site for 362 housing units was declared an area for socialized housing by the LGU and approved by DAR for conversion into residential land. Program III LGU Magdalena. Naga City. Region V Socialized Housing Project The City Government donated a 2. Bacolod Celine Bacolod City. Iloilo. Waterworks System DPWH into 4"CD pipe.50 province-owned lot valued at P7M. The Bicol Science Daraga. P a g e | 305 . Region V and Technology Centrum Legaspi City. A provincial government feeding plant project turned-over to the municipal government and now operating commercially through a Board of Trustees (SEC-registered).45 hectares owned by the LGU was converted into a housing site by a private developer through a Joint Venture Agreement. Region Management income. Region IV-B The Magdalena Water Supply and Sanitation Project Expansion and rehabilitation of a 1950 American constructed system. A cleanliness drive since 1964 and Solid Waste Olongapo City. Systematized in 1989 to generate Zambales. Capitol Plaza Hotel The enterprise is construction on a Region II and Restaurant 1.000 square meters of lot located at the City Hall Compound. Region VI The Barotac Viejo Nutri-Food Plant. Region IV-A El Nido. Laguna. Ibalong Village Albay.A UNDP grant project with the LGUs Based Village Power providing counterpart funds and land (Barangay for Plant site) and a System Cooperative managing the enterprise An improvement of a 2"m pipe built by The Puerta Galera.Study on the Corporate Powers of Local Government Units APPENDIX B INVESTMENTS OF UNDERUTILIZED ASSETS NAME OF LGU ASSETS UTILIZED ENTERPRISE Buguias. Palawan. Benguet. Renewable Energy. Inc. A 14. La Union Medical A P650M European Union funded Region I Center hospital turned-over to the Provincial Government Quirino Province.097. Homes Region VI Barotac Viejo. The Public Market A vacant municipal lot used to display CAR Improvement Project goods and services by traders and vendors La Union Province. The Puerto Galera Mindoro Oriental. Negros Occidental. a reservoir and 2 Region IV-B Distribution tanks through an LBP loan. Management Jimenez Municipal Consolidating six existing public Economic Enterprise economic enterprises into one Development Office economic enterprise office. Region VII Tubigon Community An earning municipal hospital built Hospital through grants and donations. local resources and loan. Oriental Negros Basey. Region VIII Lawaan. Coastal Resource Management Program Application of a systematized and regulated method of collecting user's fees in the use of nine Marine Sanctuaries. JMEEDO) Source: OPDS/DILG P a g e | 306 . The Gen. Misamis Occidental Balantac Resort and The development of natural resources Rawis Cave for ecotourism and other economic activities. Bohol. lands for the establishment of seed Resource Region VIII nurseries and Management Project 230 hectares for tree plantation. Dauin. Samar. Use of protected marine sanctuaries as Lawaan Coastal areas for mudcrab ranching and Resource seaweed farming. MacArthur The use of 294 hectares of government Community-Based Eastern Samar. Eastern Samar Jimenez. General MacArthur.Study on the Corporate Powers of Local Government Units Tubigon. build-operate-transfer.. A. One major factor is the fact that LGUs. and these range from the exercise of the LGUs’ corporate powers through public-private partnerships. with very few exceptions. Statistics on the distribution of ODA loans show that the local government sector is the smallest direct recipient of this funding source. national government agencies held the biggest share of the ODA pie at 65%. with government-owned and controlled corporations and government financing institutions getting 22% and 13%. and LGUs receiving less than one percent (1%) (NEDA 15th Annual ODA Portfolio Review). Jr. This study addresses one particular modality: that of local governments accessing Official Development Assistance (ODA) resources. Brillantes. As of 2006. have inadequate capacity to P a g e | 307 . ISSUES AND CONCERNS Alex B. and other such schemes. and given further that financial autonomy and the imperative to augment local resources continues to be a primordial concern among local governments.LGU ACCESS TO OFFICIAL DEVELOPMENT ASSISTANCE (ODA): STATUS. Alonzo I. privatization. respectively. Rationale of the Study INTRODUCTION This study addresses a general concern of local governance in the Philippines: given the regime of devolution and local autonomy. to availing of loans and grants from both local and international sources. While it has been observed that the amount of ODA grants and the number of ODA grant projects have been declining over the years. Llanto and Ruperto P. the question has always been asked: how can local government units (LGUs) complement their financial resources from sources other than the traditional Internal Revenue Allotment (IRA)? Various modalities for doing so have been identified. several factors could explain why LGUs have not been able to have a substantial share in ODA funds. Gilberto M. and the technical staff of LBP and DBP. Maloy Malvar. See also Appendix 1 for the participants of the workshop. 4778 on Local Governance & Fiscal Management Project that would recommend measures to improve the LGUs’ access to ODA. Additional concerns including managing and monitoring of ODA at the local level and difficulties in the implementation of the LGU financing framework are also addressed. Issues and Concerns prepare feasibility studies. the study looks into ODA funds. In assessing the current status of LGU access to ODA. Helen Habulan of the MDFO. and formal and informal interviews with key persons of responsible national government line agencies1 and the various leagues of local government authorities. It also provides a historical background and legal basis of LGU access to ODA. including equity considerations in the distribution of ODA resources for LGUs. which are composed of (a) ODA grants. Specifically. B. The conduct of the study involved a desk review of available documents on ODA. ODA Policy Framework of the Philippines ODA is defined as a loan or loan and grant administered with the objective of promoting social and economic development and welfare in the 1 Key officials interviewed included Rolando Tungpalan and Rhoderick Planta of NEDA. There is also a perception among LGUs that the process of accessing ODA is complex and cumbersome. access and manage ODA funds. the conduct of workshops among stakeholders.LGU Access to Official Development Assistance (ODA): Status. Approach and Methodology This ODA Study focuses on the current status of LGU access to ODA and attendant issues and concerns. with support from the Asian Development Bank Technical Assistance No. the Department of the Interior and Local Government (DILG) commissioned a study. C. formerly of BLGF. P a g e | 308 . They may also lack information on the procedures to be followed in availing themselves of ODA funds. it analyzes the LGUs’ access to both the grant and loan components of the ODA. and (b) ODA loans . Recognizing these ODA accessibility concerns. a simple survey among LGUs. basic descriptive and statistical analysis. LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns Philippines. More specifically, ODA funds are meant to achieve equitable growth and development in all provinces through priority development projects for the improvement of economic and social service facilities taking into account such factors as land area, population, scarcity of resources, low literacy rate, infant mortality and poverty incidence in the area. (Section 4, RA 8182- ODA Act) The underlying law for of the use of ODA in economic development is Republic Act (RA) No. 8182, or the Official Development Act of 1996, as amended by RA 8555. Foreign loans may be contracted with governments of foreign countries with whom the Philippines has diplomatic and/or trade relations or bilateral agreements, or which are members of the United Nations (UN), their agencies and international and multilateral lending institutions. Sources of ODA. ODA comes either from multilateral institutions or bilateral programs. The former include the UN system, the European Community, the International Atomic Energy Association (IAEA), the International Fund for Agriculture (IFAD), and regional development banks, e.g., the World Bank (WB) and the Asian Development Bank (ADB). The latter include the programs of the following countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, The Netherlands, New Zealand, Norway, Spain, Sweden, United Kingdom, and the United States of America. The major bilateral sources are Japan, USA, Germany, Italy, France, Canada and Australia. Forms or Types of ODA. The National Economic and Development Authority (NEDA) classifies ODA under two categories: 1) soft loans, and 2) grants. “Soft loans" have interest rates ranging from 0%-7%; maturity periods of from 10 years to 50 years; and grace periods of from 5 years to 10 years. ODA “grants,” on the other hand, have no repayment obligations unlike soft loans. They are given in the form of technical assistance services, equipment, commodities and training. NEDA has established the guidelines for the use of soft loans and grants. Soft loans are to be used for projects which are revenue generating and lead to capital formation. On the other hand, grants and highly concessional financing P a g e | 309 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns are preferred for development projects in the social sectors as well as for technical assistance types of projects. Process of Accessing ODA Funds. The ODA Grant Programming Process, which particularly refers to local governments, seeks to maximize the benefits of ODA on sectoral and local/regional development by matching these with the needs of priority programs. It envisages beneficiaries obtaining the required goods and services available through ODA in the appropriate form, quality and cost. This process involves two main activities: the Country Program Review and project submission, negotiation and ODA availment. Figure 1 illustrates the flow of ODA Grant Programming. Figure 1. ODA Grant Programming Flowchart Source: National Economic and Development Authority. The Country Program Review (CPR) involves the assessment of projects by the Government of the Philippines (GOP) and the ODA funding agency, wherein they identify the common areas of concern and agree on the directions for future grant aid. Later, the ODA donors would pledge indicative ODA resources to the Philippine government as a whole. The project negotiation is the result of prior country programming exercises wherein the available ODA pledge P a g e | 310 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns is designated to a particular programmed project. Based on the CPR, project proposals are submitted or resubmitted; after which renegotiations on the nature, features and/or implementation modalities of the project. After the processing of the proposal which usually runs from three months to one year, ODA may then be availed of by the local government concerned. D. Local Government Unit Access to Official Development Assistance The Local Government Code of 1991 (LGC) provides the rationale behind availment of the ODA grant by LGUs. It empowers LGUs to directly propose projects and negotiate for grants with donor agencies. More specifically, Section 23 of the LGC states that local chief executives (LCEs) are accorded with the “authority to negotiate and secure financial grants or donations in kind -from local and foreign assistance agencies without necessity of securing clearance or approval therefore from any department, agency or office of the national government or from any other higher local government units xxx.” Project Identification and Project Preparation. Project identification and preparation are two prior major steps that need to be undertaken by LGUs before submitting, negotiating and securing ODA grants. These steps form the core planning activity referred to as "local investment programming" (See Figure 2) The process makes operational the strategies of local medium-term development plans into area-specific, viable and implementable packages of medium-term programs and projects. 2 2 Parts of the section are drawn from the NEDA Guide on Availment of ODA Grants by LGUs. P a g e | 311 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns Figure 2. Local Investment Programming Process Source: Based on the Guide on Availment of ODA Grants by LGUs. In March 2007, Joint Memorandum Circular (JMC) No 1. Series of 2007 was jointly issued by the DILG, NEDA, DBM and DOF. It specifically aims to: (1) provide guidelines on the harmonization and synchronization of planning, investment programming, budgeting and expenditure management, and revenue administration at the local level; (2) strengthen the interface between LGUs and national line agencies (NLAs) and the complementation between and among all levels of the LGU in planning, investment programming, budgeting, revenue administration, and expenditure management; (3) clarify responsibilities and supportive roles of the oversight agencies following the principles of Rationalized Local Planning System (RPS) of the DILG, the Provincial Planning and Expenditure Management (PPEM) of the NEDA, the Updated Budget Operations Manual (UBOM) of the DBM and the upcoming local revenue guide of the DOF (DILG-NEDA-DBM-DOF JMC No. 1; NEDA). As such, JMC No. 1 provides for the medium and long-term planning and implementation framework and instruments for LGUs. The matrix below indicates the key planning and investment programming instruments. Figure 3 shows the planning framework for LGUs. P a g e | 312 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns Matrix 1. LGU Planning Instruments Planning Content Instrument CLUP Policy guide for the regulation of land uses embracing the LGU’s entire territorial jurisdiction. It covers policies on settlements, protected areas, production areas, and infrastructure CDP A multi-sectoral plan to promote the general welfare of the LGU. Sectoral goals, objectives, strategies, programs, projects and legislative measures ELA A term-based component of the CDP. Sectoral goals, objectives, 3-year strategies, prioritized programs and projects, prioritized legislative measures LDIP Principal instrument for implementing the CDP and ELA and to some extent, certain aspects of the CLUP prioritized PPAs and program planned financing AIP Yearly investment program of the LDIP. Prioritized PPAs proposed for inclusion in the annual local budget. Timeframe 10 to 15 years 6 years 3 years 3 years 1 year Source: Drawn from the Roll-out Plan for JMC No. 1, Series 2007, DILG-NEDA-DBM-DOF. Legend: CLUP=Comprehensive Land Use Plan; CDP=Comprehensive Development Plan; ELA= Executive Development Plan; LDIP= Local Development Investment Plan; AIP= Annual Investment Program Figure 3. LGU Planning Framework Source: Drawn from the Roll-out Plan for JMC No. 1, Series 2007, DILG-NEDA-DBM-DOF. P a g e | 313 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns LGU-NGA Linkage. After the local investment programming process has been undertaken, the medium-term Local Development Investment Plans (LDIPs) of concerned LGUs are integrated into a Regional Development Investment Program (RDIP). This is done through a formal forum on regional planning and development participated in by local government executives, legislative representatives, national government officials and private sector representatives. It must be remembered that after the LGUs have identified and planned the development and implementation of their projects in their respective LDIPs, they must then ensure that these projects are prepared for financing, whether through local or foreign ODA sources. These are covered by the Preparation of Programmed Local Development Projects. The LDIP will be translated into the Annual Investment Program and the Local Finance Committee (LFC) will identify funding sources, that is, whether it will be externally or internally sourced. LGUs may acquire financial assistance through NEDA Regional Offices (NRO). Financial assistance may sourced from the different NGAs depending on its availability and NEDA regional offices may just provide information on the ODAs and other available windows. This is another process which facilitates the preparation of programmed local development project for eventual financing and implementation. The LGUs may request for assistance through the preparation of the following activities: a) Assisting in enhancing the capability of LGUs in project identification, preparation, evaluating and appraisal, implementation, monitoring and ex-post evaluation; b) Reviewing the concerned LGUs programmed local development projects to develop project concepts into detailed project proposals and implementation plans; c) Coordinating the provision of technical expertise of specific national government agencies either to develop project development capabilities of LGUs or to match necessary technical or financial resources of these national agencies in support of local development projects; and d) Monitoring the implementation and evaluating the impact of ongoing and completed local projects respectively to flag potential P a g e | 314 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns or existing problems in project development, and to derive lessons for improving the LGUs project development capability. As to fund sources, the LFC determines the amount of total allocation for the budget including the fund sources for the priorities included in the LDIP and AIP. They normally coordinate with NGAs on available fund sources as to whether it is a loan or a grant. No single agency coordinates available financing for LGUs. Table 1 describes the broader policy framework of LGU financing support from the national government (NG). The financing framework provides directional focus on the type of assistance to LGUs. It broadly segmented the market to two types of LGU clusters and rationalized MDFO to concentrate on less creditworthy LGUs. This framework, which was formulated under a technical assistance managed by DOF, provides that social and environmental projects are eligible for grants. Such projects are expected to have positive spillovers to other LGUs, On the other hand, revenue generating projects, even if these may have positive externalities, are classified as ineligible for national government grants other than technical assistance. Table 1. LGU Financing Framework Social/Environmental Projects Revenue-Generating Projects Creditworthy LGUs MDFO, GFI Loans BOT Projects Commercial bank loans Bonds Limited MDFO grants GFI, Commercial bank loans Marginally Creditworthy or Non-Creditworthy LGUs BOT Projects MDFO grants and technical assistance (TA) GFI, limited MDF Loans and TA Source: Department of Finance. There have been several minor revisions in the LGU financing policy framework since its formulation, but the basic principles underlying it have remained the same. The issues associated with this framework will be discussed later in this report. P a g e | 315 LGU Access to Official Development Assistance (ODA): Status, Issues and Concerns II.BACKGROUND3 A. National Government Involvement in Devolved Functions The early years of decentralization and devolution in the Philippines saw a strong hesitation by the NG oversight agencies (e.g., DOF, DBM and NEDA) to continue NG support to devolved activities. The flow of ODA to local development activities was thus significantly affected. Meanwhile, the line agencies (national government departments) continued to provide local public goods and services like school buildings, rural roads, communal irrigation, and health services with their locally funded projects, although at a smaller scale than before. However, the NG realized the need to have clear and definite policy guidelines on: (1) defining the conditions that warrant NG support for devolved functions; (2) determining the appropriate form and level of this support; and (3) identifying mechanisms for channeling funds to LGUs for such assistance. Two studies were commissioned by the NEDA and the DOF with the support of the World Bank. The NEDA study identified policy options on the respective roles of national and local governments in the development and financing of local development projects that have high spillover effects and are not “bankable,” especially those addressing social and environmental concerns, and recommended an action program that specifies the regulatory and institutional measures needed to facilitate the flow of foreign assistance to such projects. The DOF study looked into modes of LGU access to capital markets and prepared an action plan for the development of a municipal credit system. Some parts of this section draw from Alonzo R. Channeling Resources to Local Development Concerns: Issues and Options. Philippine Review of Economics and Business, vol. XXXIV, No. 2, December 1997; reprinted as Chapter 4 in Studies in Governance and Regulation: the Philippines, edited by D.B. Canlas and S. Fujisaki, Tokyo: IDE, 1999 (48-76). 3 P a g e | 316 Intervention by NG is justified by spatial externalities. Externalities or spillover effects. ODA is often considered the best source of external financing made available to LGUs given the concessional terms under which it is given (high grant element or soft terms).LGU Access to Official Development Assistance (ODA): Status. issued. Loan programs are made available to LGUs from different sources. Even if the IRA has risen and grant funds are made available to LGUs. The LGC 1991 does not prohibit LGUs from applying for loans from foreign financing sources (commercial or ODA) to finance local infrastructure and other socioeconomic development projects in accordance with the approved local development plan and public investment program.. the inter-agency Investment Coordination Committee (ICC) of the NEDA Board. ODA. foremost of which is the lack of financial resources. The Foreign Borrowings Act (R. depending on the financial capacity of the LGUs to repay the loans. Based on the results of the first study. some local public investment activities are so lumpy that LGUs have to source out funds through loans or credit financing. or when benefits or costs of public services provided by an P a g e | 317 . What constrains LGUs from contracting ODA funds is the NG “guarantee” required of LGUs by the international lending institutions. NGadministered programs. the Policy Framework for National Government Assistance for the Financing of Local Government Projects with Environmental and Social Objectives. Framework for Selective National Government The Rationale for NG Involvement The first study proposed that continued NG intervention in LGU responsibilities is necessary as the devolution process poses problems for LGUs in fully undertaking devolved activities on their own. commercial. The Policy Intervention 1. and programs of government financial institutions or GFIs. 4860) states “that the guarantee of the Philippine Government could be issued only for loans granted to government-owned and -controlled corporations (GOCCs) and GFIs.A. (b) economies of scale. the body that approves all foreign-assisted projects. and (c) equity.g. Issues and Concerns B. The policy framework identifies the following grounds for NG intervention: (a) externalities or spillover effects. in 1998. e. They shall be for specific and authorized expenditures in line with the intentions of the national program. The eligibility of LGUs will be based on their respective income and economic classifications. The grants shall be conditional on the participating LGUs putting up their share of the cost and preparation work. NG intervention is necessary and LGU borrowings shall be governed by the standing ICC policy on LGU access to ODA funds. the costs of providing the service may spill over to other jurisdictions. If LGUs that are faced with tight budgetary constraints are unable to provide the minimum level of services to their constituents. Issues and Concerns LGU are realized by non-residents. specific and closed-ended grants. they are meant to be temporary and limited where costs are well known to both LGUs and the national agency at the outset. and cannot be used to finance deficits of LGUs arising from spending decisions that are outside of the scope of the program. 2. Programs of assistance should give priority to the needs of relatively disadvantaged LGUs in the allocation of resources. NG intervention may be warranted. ODA P a g e | 318 . thus necessitating higher-level intervention. the latter to be measured by poverty incidence. Economies of scale. The Nature of National Government Assistance Providing assistance to LGUs under the Policy Framework for National Government Assistance for the Financing of Local Government Projects with Environmental and Social Objectives shall be in the form of matching. The provision of some services may be made more cost-effective if designed for a service area larger than the jurisdiction of a single LGU. In cases such as these.LGU Access to Official Development Assistance (ODA): Status. the jurisdiction that would be providing the service may not consider the benefits accruing to nonresidents and thus may give low priority to such service. Finally. Under this policy. the NG share in the cost shall have to be very limited. In cases where LGUs need to tap external financing for devolved projects. However. Similarly. Equity considerations. A national agency can help LGUs with small jurisdictions undertake investments jointly with adjacent LGUs to realize such economies of scale. if this criterion is the only basis for NG intervention. in principle. The role of community involvement cannot be taken for granted. Imposing local counterpart induces a degree of local involvement and accountability for the spending. and to make sure that ODA facilities guaranteed by NG cater to the needs of the LGUs. e. the Municipal Development Fund (MDF) or through a GFI under relending terms to be determined by their respective policy making bodies. Issues and Concerns loans for devolved activities are to be channeled as loans to LGUs through either two conduits. even as it is supported by the NG. Community equity contributions and LGU counterpart are essential to the quality of project outcomes. and participation of. Consultation with. recurrent operation and maintenance expenditures shall be given low priority for NG grants. b. Implementing arrangements shall promote inter-agency coordination. Principles for Designing NG Assistance A set of considerations and parameters were formulated in order to ensure the effectiveness of LGU programs being partly supported by NG. National programs should allow LGUs to make decisions in targeting interventions based on their awareness of the different conditions and preferences of communities within their respective jurisdictions. P a g e | 319 . namely. National programs should develop mechanisms to enable LGUs to collect user charges to raise revenues for the operation and maintenance of local public facilities.4 These are: a. Channeling Resources to Local Development Concerns: Issues and Options 1999. Inter-agency coordination is needed for programs that may overlap in target areas and beneficiaries. LGUs are. better implementers of local projects than national line agencies because they have a closer feel of the people’s needs.LGU Access to Official Development Assistance (ODA): Status. 3. Cost recovery through user charges shall be encouraged. NG agencies shall seek to harmonize 4 Based on Alonzo R. communities ensures that programs are need-based and appropriate for the local resources and capabilities. d. c. The Foreign Borrowings Act of 1966 Republic Act No. It also allows the President to guarantee. The grantors’ objectives shall be safeguarded. Issues and Concerns their prioritization criteria in order to convey consistency in NG policies for supporting LGU investment activities. competitive bidding. in consultation with the LGUs. build-operatetransfer schemes. however.LGU Access to Official Development Assistance (ODA): Status. These activities shall be financed through NG-LGU costsharing arrangements. The LGU Grant Financing Framework and Cost-Sharing Principles Within the policy framework adopted by the ICC. Since this law was enacted in 1966 (prior to the passage of Decentralization Act of 1967 and the 1991 Local Government Code). P a g e | 320 . g. with NG providing technical assistance. The implementation of the program activities. on behalf of the Philippine government. shall be responsible for the preparation of sectoral projects and programs that shall contain priority LGU activities eligible for NG grant assistance. D. on behalf of the Philippine government. for such loans. the national line agencies. this deficiency is understandable. The Act however has no provision either for foreign borrowings of local governments or for the issuance of a guarantee from the President. among other modalities. f. The NG shall monitor the implementation of programs against stated national objectives for the sector. The national line agencies shall take the lead role in the sponsorship of such programs and the sectoral justification that shall usher the program through the investment appraisal process to the mobilization and release of funds for them. foreign loans or bonds issued by government-owned and controlled corporations for economic development purposes. 4860 or better known as the Foreign Borrowings Act of 1966 authorizes the President of the Philippines to obtain foreign loans and credits to finance approved economic development projects or purposes. franchising and volunteerism. Private sector participation shall be elicited whenever feasible. C. Private sector participation shall be harnessed at all levels of government through. shall always be the responsibility of the LGUs. b) rural infrastructure. Meanwhile. Issues and Concerns A set of sectoral guidelines for the financing of devolved activities with social or environmental objectives was formulated by DOF to provide more specific guidance to NG agencies as well as LGUs in the preparation of programs and projects. and the grant shall apply only to level 1 (source development) systems. and coastal resource management) require less capital costs and the environmental concerns they address usually cut across several LGUs. For these sub-sectors. NG grants shall be based on total project cost. Rural Infrastructure – Given the large investments involved in communal irrigation projects. First class LGUs shall receive a maximum of 20%. Water supply – Only 5th and 6th class LGUs shall be eligible for a 50% grant from the NG.g. These NG grants shall also be applied as a percentage of capital costs. depending on the LGU’s income class. Environment – Projects under the green and blue sub-sectors (e. which range from 50% to 90%. forest management. The four sectors covered by the initial guidelines are: a) water supply. watershed protection. and d) the environment. depending on the LGU income class. public markets.e. etc. These grants range from 20% to 70%. protected area management. shall be eligible for NG grants for such projects. The maximum NG grant shall be 50% for 5th and 6th class LGUs. all LGUs are eligible for NG grants. LGUs shall be required to shoulder operating costs to ensure that the project can be sustained. b. “Brown” projects (solid and industrial waste management and pollution control projects) are expected to be located P a g e | 321 .g. i.. Health – For health projects. as well as provincial and municipal roads shall not be eligible for any NG grant. irrespective of income class. These NG grants shall be applied as a percentage of capital costs. d. therefore. soil conservation. Personnel services as well as maintenance and operating expenses are eligible cost items under the NG grant. all LGUs. exclusive of O&M expenditures. communal irrigation. abattoirs.. roads. c. The said guidelines are: a.. revenue-generating projects such as public markets and bus terminals. e. c) health.LGU Access to Official Development Assistance (ODA): Status. . lying in clinics.g. FS. and the post-implementation costs for operation and maintenance.. The new policy categorizes civil works into three (3) clusters and classifications with an indicative list of subprojects. municipal wharves and fish ports. As the LGUs’ financial resources improve. Environment-related projects. Annex 1-A contains the different NG-LGU cost-sharing schemes. e. water supply level III. will also be eligible for NG grants. or as factors affecting LGUs’ capacity to provide for devolved activities change. bus and jeepney terminals. detailed engineering design.g. post harvest facilities. Cluster 1 covers “public economic enterprises” subprojects such as public markets. site development and right of way. It maintains the ICC policy that the maximum allowable grant should not be more than 50% of the total subproject cost. Issues and Concerns in urbanized areas and may be designed as revenue generating. “Social” subprojects include health centers. Third to sixth class LGUs that require sanitary support facilities may avail of 50%-70% grant for the total cost of these support facilities. this ICC policy would be adjusted accordingly. which covers the cost of civil works only for devolved activities. slaughterhouse. DOF issued DO 40-09 adopting the revised guiding principles and NG-LGU Cost-Sharing Policy. e. among others. The cost-sharing scheme between NG and LGUs for devolved activities is meant to be temporary. the financing policy included the newly-approved NG-LGU Cost Sharing Policy for Solid Waste Management project. 10% of the total subproject cost should be a cash component. In 2009. sanitary support facilities for public markets. It also provides that of the total equity requirement of the LGU. Cluster 2 is further classified into social subprojects and green/blue subprojects. It excludes pre-implementation activities. schools P a g e | 322 . and public memorial parks. Moreover. ice plants.LGU Access to Official Development Assistance (ODA): Status. cold storage facilities. excluding Metro Manila LGU since they have special SWM requirements and management arrangements. mangrove and watershed protection. soil conservation. bridges. and SWM facilities and projects such as materials recovery facilities. e. Cluster 3 consists of brown environment-related subprojects.g. sanitary landfill and transport systems. communal irrigation. Green/blue subprojects may include reforestations. review and seashore protection. P a g e | 323 . etc. forest related activities. drainage. Issues and Concerns buildings. farm to market roads. water supply level I and II. among others. which are sub-categorized as water waste facilities and projects. Annex 1-B the revised Loan-Grant-Equity for the three clusters. rural roads or local roads.LGU Access to Official Development Assistance (ODA): Status. sewerage and sanitation support. Among the agencies surveyed were the following: National Irrigation Administration Department of Social Welfare and Development Department of Agriculture Department of Agrarian Reform Department of Health National Economic and Development Authority Aside from the survey conducted in the aforementioned NGAs. from 1998 to 2008. Results of the survey reveal that. and Laguna Lake Development Authority or LLDA). Local Water Utilities Administration or LWUA.625 ODA funded projects in the 80 provinces across the country. LGU Access to ODA This part of the study report presents the general picture of LGU access to ODA as it covers both the loan and grant components of the facility. The survey did not include the Department of Education (DepED) and the attached agencies of the Department of Agriculture (DA). Issues and Concerns II. while Annex 2 shows the complete ranking of provinces based on the number of ODA funded projects per LGU.. another source of data for ODA funded projects is the Asian Development Bank. These government agencies and financial institutions were not present in the workshop-meeting convened by NEDA-PMS and the authors.LGU Access to Official Development Assistance (ODA): Status. P a g e | 324 . Subic Bay Metropolitan Authority or SBMA. CURRENT SITUATION A. Table 2 presents the 10 provinces with the most number of ODA funded projects.g. there were 1. It also did not cover the GFIs (Development Bank of the Philippines or DBP and Land Bank of the Philippines or LBP) and the GOCCs (e. Bases Conversion and Development Authority or BCDA. It is based on a rapid survey conducted by the authors among NG agencies with ODA funded projects accessed by LGUs for the period 1998 to 2008. Negros Occidental 3. of ODA funded projects 43 39 37 37 37 34 33 33 33 32 31 30 30 28 26 26 26 26 26 26 Of the top ten provinces. only Albay and Pampanga are in Luzon. Bohol North Cotabato Zamboanga del Sur 6. Antique Iloilo Surigao del Sur 4. Issues and Concerns Table 2. in the Visayas (7). Albay Misamis Occidental 9. The provinces of Antique. Agusan del Sur 2. followed by the province of Negros Occidental with 39 ODA-funded projects. The province with most ODA funded projects is Agusan del Sur with a total of 43 ODA-funded projects. 1998-2008 Province 1. P a g e | 325 . Zamboanga del Norte 7. The Ten Provinces with the Most Number of ODA funded projects. The majority is in Mindanao (11) and the rest. of the seven (7) provinces with the least number of ODA funded projects. Cebu 5. Meanwhile. the majority is located in Luzon (Table 3). Iloilo and Surigao del Sur tied for the third slot with 37 projects each.LGU Access to Official Development Assistance (ODA): Status. The fact that Dinagat Island had the least number of ODA funded projects could be explained by the fact that the province is a newly created one. Maguindanao 8. Agusan del Norte Bukidnon Capiz Lanao del Sur Pampanga Sultan Kudarat Regional Location Region XIII Region VI Region VI Region VI Region XIII Region VI Region VII Region XII Region IX Region IX ARMM Region V Region Region VIII Region XIII Region X Region VI ARMM Region III ARMM No. Leyte 10. Dinagat Island Region XIII CARAGA 2 2. of ODA funded projects 1 Region VI (Central Visayas) 167 2 Region XIII ( CARAGA) 133 3 Region V (Bicol) 122 4 ARMM 120 5 Region III (Central Luzon) 117 Except for one. 1998-2008 Rank Region No. Issues and Concerns Table 3. Bottom Five Regions Based on ODA funded projects. Batanes Region II 5 4. 1998-2008 Name of Province Regional Location Number of ODA funded projects 1. Catanduanes Region V BICOL 8 Siquijor Region VII 8 Zambales Region III 8 Mindanao and the Luzon had two each of regions with the most number of ODA funded projects (Table 4). La Union Region I 7 5. Zamboanga Peninsula had the fifth least number of ODA funded projects. but this could be explained by the fact that there are only three (3) component provinces in this region. (Table 5) In reality. Marinduque Region IV-B 3 3.LGU Access to Official Development Assistance (ODA): Status.Zamboanga Peninsula No. the five regions with the least number of ODA funded projects are all in Luzon. two provinces of Zamboanga Peninsula are among the 10 provinces with the most number of ODA funded projects. Ilocos region had the least number of ODA funded projects with 60. (Also see Annex 3) Table 4. 1998-2008 Rank 1 2 3 4 5 Region Region I – Ilocos Region Region II – Cagayan Valley Region IV-A – Calabarzon Region IV-B – Mimaropa Region IX. Region VI or Central Visayas had the highest number of projects assisted by ODA at 167. followed closely by Cagayan Valley with 62. Top Five Regions Based on ODA funded projects. of ODA funded projects 60 62 75 77 84 P a g e | 326 . Provinces with the Least Number of ODA funded projects. (Table 2) Table 5. Next in rank was Region XIII (CARAGA) with 133 ODA funded projects. 4% 9.LGU Access to Official Development Assistance (ODA): Status. and good governance).1% 7. agriculture and others (energy.4% 13. Figure 3.4%) and then by health (218 or 13. P a g e | 327 . environment.1% 11.1%) had the least number of projects (Table 6.0% 100. and Annex 4. Table 6.00% Figure 3. infrastructure. ODA funded projects by Sector.0% 25. Education (115 or 7. It was followed closely by infrastructure (413 or 25.1%) and social services (132 or 8. Issues and Concerns The ODA accessed by LGUs funded projects in the following sectors: health. 1998-2008 Sector Agriculture/Agrarian Reform Infrastructure Health Environment Social Services Education Others Total Number of ODA funded projects 421 413 218 153 132 115 173 1625 Percentage to Total 26. rural development. with the latter containing the sectoral distribution of ODA funded projects by province). agriculture/agrarian reform accounted for the most number of ODA funded projects (421 or 26%). Of these sectors.0% 8. Number of ODA funded projects by Sector.4%). social services. 1998-2008 450 400 350 300 250 200 150 100 50 0 Agri Educ Env Health Infra Soc Others Source: Survey. Ilocos Norte 8. Agusan del Sur Davao del Norte Zamboanga del Norte 2. Sulu. the eight (8) provinces with no infrastructure projects funded by ODA are mostly in Mindanao (Basilan. 5. of ODA funded projects in Agriculture/Agrarian Reform 13 13 13 12 12 12 11 11 10 10 Most of the provinces with 10 or more infrastructure projects funded by ODA are in Luzon (5) and in the Visayas (4) while only Surigao del Sur and Zamboanga del Norte are in Mindanao (Table 8). 19982008 Provinces 1. Table 7. Provinces with the Most Number of Infrastructure Projects. Albay Pangasinan Zamboanga del Norte No. Davao del Sur Misamis Occidental Misamis Oriental 3. Dinagat Island. Provinces with the Most Number of ODA-Funded Agriculture/ Agrarian Reform Projects. Table 8. Tawi-tawi and Zamboanga Sibugay) (See Annex 6). of ODA funded projects in Infrastructure 23 20 19 16 14 12 12 11 10 10 10 P a g e | 328 . 2. 1998-2008 Provinces 1. Albay Zamboanga del Su 4. 6. Negros Occidental Antique Iloilo Surigao del Sur Pampanga Cebu Rizal 7. 4. On the other hand. 3. Issues and Concerns All the provinces with the most number of ODA funded projects in agriculture/agrarian reform are in Mindanao except for Leyte (Visayas) and Albay (Luzon) (Table 7). The rest of the provinces in the country had less than 10 projects except for Dinagat and Rizal which had no agriculture/agrarian reform projects that were ODA funded (Annex 5). Leyte Surigao del Norte No.LGU Access to Official Development Assistance (ODA): Status. Siquijor. 2002.3 75. The relative amounts of ODA grant funds are even smaller in terms of budgetary obligations and appropriations. and irrigation facilities).400 11.1 Grants/Total ODA 10.230 940 723 Number 237 211 89 per project value 5. Value and Number of ODA Loans and Grants.747 Number 187 204 130 per project value 61. comprise less than 2% of allocations for 5 Based on NEDA ODA Portfolio Reviews.0 58. as reflected in the national government’s budget. however. one will invariably find a municipality or barangay that has not received any direct support from ODA funds. Table 9.8% 7. ports and airports. ODA Portfolio Reviews. the survey results nevertheless indicate that practically all provinces have received ODA assistance.LGU Access to Official Development Assistance (ODA): Status. P a g e | 329 .500) and barangays (more than 40.6% 10.0 Grants ($ mln) 1. Grant proceeds from ODA. various years. Issues and Concerns While the 2008 survey was certainly not exhaustive due to resource and time constraints.8% Source: NEDA. At lower units of jurisdiction. the reality is that there is not much ODA grant funds to move around. This arises from the sheer number of municipalities (more than 1.4% Grant/loan size 8.000) around the country.2 4.5 The average value of a grant project is also much less than the average value of a loan project. railroads.1997. LGU Access to ODA Grant Funds While Section 23 of the LGC grants authority to LGUs to negotiate and secure grants from foreign agencies without needing to get a clearance from any NG entity. B. ODA grants have historically comprised at most 10% of total ODA flows (Table 9). and did not cover all government agencies availing of ODA and offering LGUs access to the ODA funds. and 2007 1997 2002 2007 Loans ($ mln) 11.9% 7.5% 7.900 9. These LGUs nevertheless are likely to have benefitted indirectly from ODA through government projects that are national or regional in scope but with strong local benefit incidence (such as arterial roads.5 8. 406 93.785 100.8% Total Projects 343.815 1.0% Source: DBM.150 29.0% 523.4% 33.683 67..” In the 2007 ODA Portfolio.689 11.0% 598. Thus.897.401. Table 10.235.807. the number of LGUs (provinces. Obligations for Projects.933.6% 490.334 100.2% Loan Proceeds 22. equipment and studies.6% 423.379 100.4% 40. with the notable exception being the grant assistance to the Supreme Court. 2009. Table 11. 26 out of the 89 grant projects) “have no indicated amounts as assistance from multilateral and bilateral partners and come in the form of experts.g.333.414. practically all reported grants were coursed through the line agencies of the NG (Table 12).010 88. by Type.LGU Access to Official Development Assistance (ODA): Status.2% Foreign-Assisted 39.0% 40.699 100. Issues and Concerns foreign-assisted projects (Table 10).486. Budget of Expenditures and Sources of Financing. some grants (e. however.379 6. Appropriations and Allocations for Foreign-Assisted Projects (In thousand pesos) GAA 2008 Share BESF 2009 Share Peso Counterpart 10.2% 11. At the same time. cities. the Department of Transportation and Communications (DOTC).6% 557.807.0% Source: DBM. which accounted for less than 10% of all projects for 2008 and 2009 (Table 11). and municipalities) has been growing. but the absolute number of grant projects has also been falling (from 237 projects in the 1997 ODA portfolio to only 89 projects in the 2007 ODA portfolio). both line and oversight for the limited amount of grants. As the 16th ODA Portfolio Review notes.578 6.8% Grant Proceeds 538. is one P a g e | 330 . the NGA with the biggest share of grant aid.080 31. 2009 National Expenditure Program.122. Making the situation worse for LGUs is that they have to compete with the large number of agencies of the NG. What this implies is that much of what ODA grant funds the LGUs may expect would ordinarily pass through the national government agencies (NGAs). 2007-2008 (In thousand pesos) 2007 2008 2009 Project Type Amount % Amount % Amount % Locally-Funded 304. the likelihood of an LGU securing an ODA grant is low relative to getting a locally-funded project.2% 28.456.221. Incidentally.578 100.756 1.756 93. Not only have the absolute amount and relative share of grant funds in total ODA commitments been declining.698.473 69. for the 2007 ODA Portfolio.0% Total 33.333.393. 516.540.000 9.480.000.050. ODA Grants.845. (2007 ODA Portfolio) Grant Amount (In US$) DOTC 196.437.940.461 DENR 109.000 DOE 33.1% 2.7% 1.0% 1.495 th Source: NEDA.866 TOTAL 723.6% 3.143 DOH 178.589 EC 67.239 31.000 DA 7.7% 15. for example.885 19.5% 13.5% 14.472.000 DAR 35.7% 25. ODA Grants. received the second and third largest grant amount.631 DepEd 89.8% 4.6% 100.000 PNP 1.000 DOF-BIR 19.761 DSWD 22.3% 22.119.557.224 DTI-SBGFC 7. Implementing Agency Share (in %) 27.000 MWSS 2.1% 0. by Funding Source (2007 ODA Portfolio) Donor Grant Amount Share in Amount per Agency (in US$) Total Project (US$) JICA 228. In peso terms.2% 0.310.409 Supreme Court 18.760.550. Table 12.580.869. the average JICA grant project amounts to more than P1 billion.286.2% 24.000. city. by Implementing Agency. of the typical LGU – whether it be a province.1% 12. Table 13.4% 4. P a g e | 331 .LGU Access to Official Development Assistance (ODA): Status.0% 0.1% 2.3% 0.562 UN 141.065.667 Source: NEDA. 16th ODA Portfolio Review. 16 ODA Portfolio Review. or municipality.000 DILG 511.000 PRRC 1.180 20.804 USAID 148.318.195.436.000. The Department of Health (DOH) and the Department of Environment and Natural Resources (DENR). Issues and Concerns that is not likely to have subprojects at the local level.0% The average grant amount per project among the top four donor institutions (Table 13) is huge compared to the size of the economy of the typical LGU. are actually departments with many devolved functions under the 1991 LGC. and the contact details. Only five of the 19 projects are managed directly by the donors and the rest involve an NGA or a GFI. Not all projects in the list are grant projects as nine are credit facilities for relending to LGUs. the donor. Table 14.ph/progs_prj. Program/project Development Agency Perez-Guerrero Trust Fund for Economic and Technical 1 DFA/UNDP Cooperation 2 LGU Investment Program LBP/KfW Philippines-Australia Community Assistance Program 3 AUSAID (PACAP) 4 Small Projects Scheme (SPS) NZAID Secondary Education Development and Improvement 5 DEPED/JBIC/ADB Project (SEDIP) GOJ/EMBASSY 6 Grant Assistance for Grassroots Human Security Project DILG/LBP/ADB/NDF 7 Mindanao Basic Urban Services Sector Project Infrastructure for Rural Productivity Enhancement Sector 8 DA/ADB Project DBP/KfW 9 Credit Line for Waste Management Program for LGUs 10 Health Sector Reform Agenda Support Program DOH//MDFO/KfW 11 Japan Fund for Poverty Reduction (JFPR) ADB 12 Local Governance Support Program in ARMM DILG/CIDA 13 EIB-DBP Global Loan Facility DBP/EIB 14 DBP/SIDA Credit Facility for Environmental Management Project MDFO/WB 15 LGU Finance and Development (LOGOFIND) Project Support for Strategic Local Development and Investment 16 LBP/WB Project 17 Mindanao Rural Development Project. Issues and Concerns Perhaps mainly because of the initiatives of the Philippine Development Forum’s Working Group on Decentralization and Local Government.asp P a g e | 332 . the target regions and LGUs. These nine relending facilities involve the GFIs Land Bank and the Development Bank of the Philippines and the Municipal Development Fund Office (MDFO) as conduits (Table 14). (as of 31 March 2009) No. the project duration and status. ODA Facilities for Local Government Units. the eligibility criteria for assistance. The 11-page downloadable document gives the name of the project. the implementing agency. the NEDA website now carries a listing of ODA facilities for LGUs (dated 31 March 2009).gov.neda.LGU Access to Official Development Assistance (ODA): Status. the project objectives and main areas of assistance. Phase 2 DA/WB DBP/KfW 18 Credit Line for Energy Efficiency and Climate Protection EC 19 Dialogue on Governance: Strategic Project Facility 2 Source: www. And. Issues and Concerns The above list.6 1.844.129.3 1. the LGU is also expected to assume a sub-loan to help finance the subproject.7% in 2000 to 21.5 10.LGU Access to Official Development Assistance (ODA): Status.167.0% 18. Other ODA Resources Available to LGUs Other than grants.3 11. C. may be indicative of the directions that LGUs should pursue in view of their known capacity constraints and the limited amount of ODA that is channeled to local governments. or a combination of two or three institutions) as co-implementer of a subproject. or a GFI.7% 15.3% 21. ODA Portfolio Reviews.0 7.846.1 8.6% 20.575.846.0% 18. various years.4% 18.155.4% 17.977.3 10.2 1.9 1. P a g e | 333 .790. Projects % LGU Participation 2000 2001 2002 2003 2004 2005 2006 2007 2008 1. Loanfinanced projects with LGU participation that are undertaken by the GFIs invariably involve relending to the LGUs.531.8 1.1% Source: NEDA.7% 18. 2000-2008 Year With LGU Total.9 16. DILG and DOF) and donor agencies to improve the access of LGUs to ODA facilities. Table 15.1% in 2008 (Table 15).722. a project with LGU participation is one where the LGU enters into an agreement with the executing agency (an NGA. from 16. LGUs may wish to consider loans as fund sources for their development projects.866.898. There will be a need for greater collaboration with oversight agencies (NEDA. Especially (but not exclusively) for projects that are revenue generating.633. with the LGU committing to put up equity as its contribution to the subproject cost. the share of ODA loan-financed projects with LGU participation to total ODA loan projects have been increasing.9 11. a GOCC.4 1.910.7 1.387.826. Most projects of the MDFO also involve relending. ODA Loans with LGU participation. Loans constitute a much bigger share of ODA resources (Table 9) and there are many loan projects that are meant for collaboration with LGUs. though partial.963.9 1.9 10. In the context of the NEDA’s ODA Portfolio Reviews.2 9.5 8. ODA Portfolio Reviews.3% 2007 7. D.4% 0. One reason for this phenomenon is that in recent years.3 billion in 2000 to only US$9. 2000 11. from US$13.6% 2005 9. $ mln No. This is partly the outcome of the improving fiscal situation in the country.906 119 2. There is often the presumption that the National Capital Region has been getting the lion’s share of public investments.5% 2002 10.131 11 21. Equity in the Distribution of ODA Resources Much concern has been expressed about the distribution of ODA across the different regions of the country.LGU Access to Official Development Assistance (ODA): Status. The surge in program loans since 2006 may also be attributed to the “easing up” on the policy reform conditionalities that go with them.2% 2.5% 2008 7. Issues and Concerns However.2% 3.4% 2001 11.3% 8.8% 4.531 176 150 1 1. as the Philippine fiscal situation has begun to show substantial improvements. 2000-2008 Year Projects Programs % Programs $ mln No. particularly the multilateral agencies.0% 2. The total amount of ODA commitments has also been declining.0% 3.065 6 9.211 7 9.7 billion in 2007.310 6 13.2% 2006 8. Table 16.4% 1. bouncing back only slightly to US$10.791 198 1. with domestic interest rates and the spread on commercial borrowings from the international financial markets declining.171 11 22. have been moving away from project loans towards program loans (Table 16).167 135 1.6% 2004 10. the absolute amount of loans with LGU participation has been declining. including those from ODA.9% 2003 10.844 160 350 2 3.0 billion in 2008.963 195 1.129 184 788 5 7. Luzon’s share in foreign assisted projects is almost equal to its share in the total population of the country. the Philippine Government and its major donor partners. even without adjusting for inflation.5% Source: NEDA. the latter having a smaller share of the ODA funded projects while P a g e | 334 .846 196 1. The imbalance is between the Visayas and Mindanao.467 7 11. Project vs. $ mln No.576 119 2.2% 8. various years. Program Loans. 8 2. Table 18 compares resources per capita from ODA-funded projects with poverty incidence (percent of poor families) across regions.1 2. while at initial glance Tables 17 and 18 may initially suggest that poorer regions get more ODA-funded public P a g e | 335 .4 7. Issues and Concerns having a bigger share in the total population. The ratio of share in ODA funded projects to share in GDP favors the Visayas and Mindanao.0 8. Mindanao meanwhile has a 19.7 24. However.0 3.4 16. In fact. Thus. and GDP by Region (Based on 2003 ODA Portfolio) Area LUZON I II III IV V NCR CAR VISAYAS VI VII VIII MINDANAO IX X XI XII ARMM CARAGA Share in ODA Projects 56. relative to their regional GDP.7 10. Population.0 1.6 4. Thus.7 23. Table 17.2 8. the poorer regions do get more ODA-funded projects than the richer ones.2 Share in 2003 Popularion 55.7 4.8 20.2 3.3 3.8 3.0 2.6 0.5 10.1 19.8% in GDP (Table 17).2 3.1 7.4% share in the GDP.6 3.5 15.1 3. Luzon’s share in ODA funded projects is not matched by its share in the GDP. No clear pattern is discernible concerning the relationship between poverty incidence and project presence.LGU Access to Official Development Assistance (ODA): Status.1 7. 12th ODA Portfolio Review.7 2.1% share in ODA funded projects and a 17.4 Source: NEDA.8 4.9 1.8 4.9 2. Shares in ODA funded project Costs*.1 13.1 9.7 Share in 2003 GDP 65.6 4.5 3.4 5.5 3. * Includes loan proceeds and GOP counterpart.5 6.4 6.3 17.5 4.0 2.9 30.3 8.0 14.7 3.2 6. with the Visayas having a 24.5 2.0 15.5% share in ODA funded projects while having a 16. The distribution seems to reflect the conscious effort of the national government and the donor agencies to channel most of the ODA resources to the poorer regions of the country.0 1.5 19.3 2. a regression analysis using data from Tables 17 and 18 indicate that neither poverty incidence nor per capita gross regional domestic product (GRDP) has any statistically significant influence on per capita ODAfinanced public investment across regions.9 5. 6 NCR CAR VISAYAS 72. Provincial. subproject-level data on ODA utilization are available from a survey of line agencies that have projects involving LGU participation.112 10.675 5. 12th ODA Portfolio Review.941 X 12. The new variables added are: (a) the 2001 fiscal income class of the province.590 7. Neither is there a bias in favor of the richer regions.4 II 7.055 3.450 2. * Includes loan proceeds and GOP counterpart. by fiscal income class of province.350 2.3 III 53.805 19.485 ARMM 5.439 XI 12.647 2. Poverty Incidence (Based on 2003 ODA Portfolio) Area P million* P/capita % Poor LUZON 12. Issues and Concerns investment.4 23. An earlier section of this paper describes the results of the survey and analyzes the survey data in detail.596 VIII 22.1 45.707 9.674 13.937 CARAGA 19.405 Source: NEDA.5 V 13. statistical analysis does not show any significant affirmative action bias in favor of poorer regions.8 29.8 25.0 37. Table 18 reports the average number of subprojects per province.5 32.075 VII 31.921 6.6 35.380 XII 11. Per Capita Cost* of ODA funded projects by Region vs.849 40.595 6.260 7.356 5.648 19.636 24.963 4.971 IX 11.4 IV 32.7 28.159 3.3 38.1 VI 37. Based on this table.934 5.044 92. (b) population.429 1. Here the analysis is extended by way of appending additional variables onto the provincial database and running multivariate analysis on the revised set of data.1 44. and (c) 2003 poverty incidence among families.006 3.735 6. Table 18.4 31.LGU Access to Official Development Assistance (ODA): Status.425 3. the poorer (lower-class) provinces P a g e | 336 .874 4.4 47.230 3.349 MINDANAO 72.9 I 23.989 17. 2 38.2 provinces 19 6 10 35 2 16.8 22.0 20.3 provinces 38 16 26 80 Source: survey data.2 46.7 24.8 92.7 provinces 9 1 2 12 4th 163.7 provinces 38 16 26 80 Source: Survey data. For example. the opposite pattern emerges. 4th class provinces have.6 27. by Area by 2001 Income Class Class Luzon Visayas Mindanao Total 1 17.6 21.8 6.0 20.7 25. on average. by Area by 2001 Income Class CLASS Luzon Visayas Mindanao Total 1st 14.6 provinces 8 6 11 25 3rd 82.3 13. Another way of ascertaining if access to ODA funded projects has been P a g e | 337 .4 20. Table 19.0 75.8 44. however.0 42.7 24.8 34. Table 20 gives the number of projects per million residents per province.0 15.5 17.6 provinces 2 3 3 8 Total 41.0 39.0 provinces 9 1 2 12 4 4. The same pattern is observed across the three major island groupings.5 62. Table 20. Issues and Concerns tend to have fewer subprojects than the richer ones. ODA Subprojects per Million Residents per Province.4 43.3 provinces 19 6 10 35 2nd 31.6 20.LGU Access to Official Development Assistance (ODA): Status.0 provinces 2 3 3 8 Total 16.5 69.6 provinces 8 6 11 25 3 28. It shows that the poorer LGUs in fact have access to more ODA-funded subprojects.5 27. As one corrects for provincial population. while 1st class provinces have 22 subprojects each. 13 subprojects each.7 11.1 23.0 39. Average Number of ODA Subprojects per Province.26 37. across fiscal income class. 1 20. poverty incidence is the one most consistent in its influence on the number of projects. a 4th class province.LGU Access to Official Development Assistance (ODA): Status.7 Regressions were run on the survey data aggregated by province.5% 43. therefore. at least at the subproject level.3 46. the richest provinces.9% 21.6% .1% . Table 21. In Table 21. Batanes.4% . with the dependent variables composed of the overall number of projects and the sectoral breakdowns.8 20. It must be noted that a 1st class province does not necessarily have a low poverty incidence.30. It would seem. The bigger the population. is a 1st class province in terms of LGU income. the more ODA-funded projects there are.4%. On the other hand. Of the explanatory variables. the poorer the LGU. Zamboanga del Norte. the highest poverty incidence among provinces.64. The first row of Table 22 below shows that population. P a g e | 338 . income class.5% 34. 2003 Projects Per million Richest Second Third Fourth Poorest Total 3. that indeed. within the province.6% .6% 15.3 22.1 23. provinces are grouped by quintile in terms of poverty incidence.3 20. Across sectors.5 35.3% 31. health has the poorest fit.20.4% .64.6 52. Subprojects per Province and per Million Residents per Province by Quintile in Poverty Incidence Quintile % Poor. for example.8 42.7 32. there is a pro-poor bias in ODA-funded projects. grouped in the first quartile have poverty incidences above or below the national mean of 24. overall and by sector. but 65% of its resident families were poor in 2003. and the higher the poverty incidence in the province.41.34. had a poverty incidence of only 6% in 2003. No discernible pattern emerges. All the three explanatory variables are significant at the 2% level or better. and poverty incidence together explain more than one-fourth of the variation in the number of subprojects across provinces.6% 3.8 45. Issues and Concerns equitable is by comparing the number of subprojects per province (absolute and per capita) with poverty incidence.1% . 740 0.018 0.001 0. To do this there is a need not only to address the capacity constraints of LGUs but also to argue this point among policy makers and the oversight agencies.659 0. Issues and Concerns Table 22.LGU Access to Official Development Assistance (ODA): Status.198 0. DepEd. as well as the matching grant projects of some NGAs like DOH.654 Environment & Nat Res. and (c) there does not seem to be any bias in access in favor of either the rich or the poor LGUs. Summary The empirical evidence gathered by the study shows that: (a) LGUs should not pin much hope on access to ODA grants as the total amount of ODA grants has historically been small relative to the number of LGUs and their corresponding development needs.144 0. Significance Levels of Regression Coefficients Independent Variables Dependent Variables POPN CLASS POV03 F All Projects 0. However.000 0.048 0.001 Agric/Agrarian Reform 0.020 0.000 0.829 0.000 adj R2 0.264 0. P a g e | 339 .472 0. A good forum to discuss the goal of expanding the access of LGUs to ODA grants and of generating support from donors and oversight agencies is the Working Group on Decentralization of the Philippine Development Forum.041 0.230 -0.071 0.172 0. (b) the much bigger ODA pool open to LGUs is the portfolio of loans for relending to LGUs coming from the GFIs and MDFO. DAR.280 0.002 Education 0.830 0. there may be a case for enlarging the share of LGUs in the limited pool of ODA grants.000 0.000 0.703 0. 0.815 0.000 0.016 Infrastructure 0.035 Social Services 0.002 0.000 Health 0.070 0. and DENR.366 E.249 0. As mentioned earlier. poverty reduction. Positive Stories and Good Practices to Share Section II of this report has shown that ODA grant funds are scarce and getting scarcer. the GOP. may be graduated or scaled up to the national level. especially with those involving the bilateral aid agencies. most of the bilateral grant projects are small relative to loan projects. The geographical spread and coverage of ODA grants is the outcome of the regular country assistance programming meetings between the GOP and the donor partner. which is represented by NEDA (as lead agency). and other major policy pronouncements that the President and the Cabinet may have made. In the country assistance programming meetings. Issues and Concerns III. national harmony and other development objectives. The MTPDP contains the President’s agenda for the nation. with their project design often involving some innovative aspects of local development. Managing. Medium-Term Public Investment Program (MTPIP). as enunciated in the current Medium-Term Philippine Development Plan (MTPDP). and the project itself. the President’s State of the Nation Address (SONA). better access to education. other oversight agencies and some line P a g e | 340 . and Monitoring ODA at the Local Level 1. The idea is to identify and develop new modes of intervention that. CERTAIN ISSUES AND CONCERNS A. Yet stories of successful LGU-ODA donor partnerships abound. A project that is deemed worth replicating may get picked up by a multilateral agency (ADB or the World Bank) or by the same bilateral donor agency that developed it. fiscal strength. Their coverage is therefore limited initially to a few LGUs so that they could be more focused.LGU Access to Official Development Assistance (ODA): Status. take off from the GOP’s own official statements of development goals and strategies. multilateral or bilateral. the LGU concerned. The high visibility of successful projects is attributable to the advocacy conducted for them by the donor. All donor partners. if proven to be successful. which may cover such areas as the following: better health outcomes. Seeking. Scaling Up and Avoiding Duplication Precisely because donor agencies want to have nice and positive stories to tell to illustrate the success of their assistance. may suggest particular areas of assistance or projects. held in Tagbilaran City on November 23. however. donor agencies are given much leeway in choosing their LGU partners. 2006. particularly some parts of the Visayas and Mindanao. sometimes with the collaboration of certain 6 The Workshop was sponsored by the PDF Working Group on Decentralization and Local Government. especially those with which the donor agency has an ongoing project or program. P a g e | 341 . Drawing from a presentation made by the program director of the Local Governance Development Program of AusAID during the workshop on “Enhancing Coordination and Management of ODA by LGUs. The bilateral donor agencies often propose projects to be implemented at the local level. training and development Good information to support decision making and funding applications Proactive effort to attracting ODA -. so as to “build on” earlier assistance. demand driven Counterpart support that anticipates needs to make the partnership work. Generally.LGU Access to Official Development Assistance (ODA): Status.”6 the following are the “success factors” for effective LGU access to ODA funds and facilities: Dynamic leadership of the local chief executive United vision and ability to gain consensus Clear development goals Competence of the PPDO – effective human resource selection. including a specific allocation of counterpart funds Active effort to coordinate projects at all levels Active seeking of ways to develop public-private sector partnerships Policy environment that encourages building on initiatives of previous administrations 2. or areas where they may have had some previous exposure. The enumeration above is slightly edited. Issues and Concerns agencies. careful planning and selection of pilot sites or LGUs for project implementation are conducted by both donor agencies and the recipient LGUs.marketing of needs. LGU Access to Official Development Assistance (ODA): Status. because LGUs with those desirable traits are not that easy to find. there were several competing ODA grant facilities on poverty monitoring and local development planning. to program. loans or grants. are provided by the pilot LGUs. it may happen that when the pilot project is replicated or expanded to include more LGUs project performance may fall short of the level of success achieved in the pilot LGUs. and monitor ODA flows to the province. Issues and Concerns national government agencies. However. which is depicted in Figure 4 below. Equipment and technical experts are supplied by the donors while counterpart personnel and sometimes. Here is where weak local capacity arises as a constraint to successful project implementation. helps avoid this duplication. some LGUs just keep quiet and accept the assistance despite the duplication (and confusion when the various advisors offer conflicting advice). 7 This information was shared by the Planning and Project Development Officer (PPDO) of the province with NEDA at a workshop on poverty monitoring for local officials back in 1999. for example. equity in cash or in kind) to complement the grants or given by the donor partner to the pilot LGUs. A decade ago. There is also the problem of finding a sufficient number of LGUs to participate in the scaling up as the LGUs are now expected to put up most of the resources (that is. which results in wasteful duplication of assistance. one of the most successful provincial governments insofar as accessing ODAs is concerned.7 Because donor assistance often comes with resources such as computers. The system installed by the Bohol Provincial Government. counterpart funds too. donor agencies sometimes converge on the (already) financially and technically capable LGUs with offer of more technical assistance. all on how to prepare a medium-term provincial development plan and install a community-based poverty monitoring system. office equipment and sometimes even vehicles. such that one province in Mindanao had four such facilities going on at the same time. The LGUs in the expansion or scaling up phase may not have the same technical and managerial resources present in the pilot LGUs. Moreover. P a g e | 342 . with the “clearinghouse” and with the LGU having a clearly defined and well-articulated local development plan. implement. Project Convergence Project Monitoring & Evaluation Endpoint evaluation by ODA agency & Provincial Gov’t Source: PDF Working Group on Decentralization and Local Government. by avoiding duplication and facilitating alignment of programs & projects with Prov’l Dev’t Framework. P a g e | 343 . or whether or not there would be monitoring jointly done by DILG and NEDA the tracking and monitoring system should gather information not just from the LGUs but from the donor agencies as well. 23 Nov 2006.LGU Access to Official Development Assistance (ODA): Status. DILG. 3. While NEDAPMS is the agency with the official mandate to monitor ODA funded projects. on the other hand. probably the best venue for installing a tracking and monitoring mechanism for ODA funds going to LGUs is the DILG. Whether or not the DILG would be given the responsibility of monitoring ODA flows. Bohol ODA Coordination Framework Project Funding Project Proposal Stage BoholDev as clearing house for all ODA (to avoid duplication) Project evaluation & approval by PDC (for strategic alignment w/ dev’t framework) Project Implementation Shaded area shows the stages where BoholDev will assist the PDC. It is noted that grant aid recipients in many instances are not informed by the donors on the magnitude of assistance. Tagbilaran City. has offices down at the local level. especially on financial matters. Issues and Concerns Figure 4. the subprojects that trickle down to the LGUs (especially at the municipal level and below) are so many and so widely dispersed across the country that monitoring could tax this agency beyond its capacities. Monitoring ODA Flows to LGUs At the national level. or the NEDA-PMS gets to retain its mandate. as chair of the PDF Working Group on Decentralization and Local Government. the provision of local social and environmental infrastructure) while sub-grants are for those activities that are the responsibility of the national government. This is a possibility but the LGC and foreign borrowings act must be amended. Sub-loans are often for those activities that have been devolved (e. Under the existing decentralized set-up.LGU Access to Official Development Assistance (ODA): Status. Since the time of its enactment into law. recognizes the increasing role of local governments in promoting economic development and 8 For the poorer LGUs. Issues and Concerns It is not just grant assistance that should be monitored. the development agenda has included decentralization and devolution as key strategies for development. ODA) with national government guarantee. donors overlook the inclusion of local governments in the exercise. Thus. the national government should now consider giving guarantee to local government foreign loans.g. in particular local development. On programming development assistance. P a g e | 344 .8 B. such as basic education. the local governments now serve as an important partner of the national government in achieving the country’s socio-economic development goals. As discussed earlier. donors should also consider the involvement of LGUs in the programming process.. Considering the enhanced role of local governments in countryside development. On the Foreign Borrowings Act of 1966 and on Programming Foreign Assistance The Foreign Borrowings Act has to be amended since it only recognizes national government agencies as the major players in the pursuit of economic development. One foreign aid agency. It does not contain a provision allowing local governments to borrow from foreign sources (e. We suggest selective guarantee for LGUs based on certain parameters in order to avoid abuse of the borrowing route to finance local development activities. the bulk of ODA funded projects with LGU participation is in the form of sub-loans and sub-grants.g. It is noted that recent developments show that a few LGUs have borrowed without sovereign guarantee. the sub-loans often are accompanied by grants. the Asian Development Bank (ADB). and not limit it to national government agencies. GFI. A number of local government units (LGUs) withdrew participation in projects due to the inability to shoulder the NG-LGU cost sharing scheme for LGUdevolved programs. but there is no mechanism acceptable to both MDFO and DBM.g. e. Other LGU financing facilities exist.LGU Access to Official Development Assistance (ODA): Status. that there is too much national government support to LGUs in the devolved activities.and NGA-led facilities as funding options for LGUs. i. and preparation of detailed engineering designs. P a g e | 345 . The list from the 13th ODA Portfolio Review (2005) is typical: (a) Funds for the transfer of NG grants to LGUs with ongoing projects are available. Challenges in the Implementation of the LGU Financing Framework Practically all of the NEDA’s annual ODA Portfolio Reviews in recent years point to the same implementation issues plaguing ODA loans with LGU participation. the Department of Finance (DOF). The limited technical capacity of LGUs likewise delayed implementation. stemming mainly from the perception held by national oversight agencies.e. Department of Budget and Management (DBM). (b) (c) (d) These issues are interrelated. This statement has to be explained by NEDA in view of possible disagreement coming from the MDFO and DBM. The lack of LGU equity is a major problem. There should be an empirical study and policy analysis of this perception in order to guide national government policies toward LGUs. and NEDA. C. A number of LGUs had difficulties in complying with pre-qualification requirements. The LGU Financing Framework is supposed to guide the focus of GFIs and NG but is lightly regarded by all parties because DOF has not strongly monitored and supported the implementation of the financing framework. Issues and Concerns it has now expressed its willingness to lend directly to LGUs. documentary requirements for clearances. This is indeed a welcome development since it could serve as a wake-up call for other donor agencies to do the same. Table 23 shows the November 2002 NG-LGU cost sharing scheme under MDFO for environmental projects. Table 23. where only 5th and 6th class cities could get a grant (and only for “brown” projects at that). the NG grant component is probably too low or the LGU equity component too high.LGU Access to Official Development Assistance (ODA): Status. How would a market-based or market-inspired mechanism ration a given supply? When there are hardly any takers. There is an updated version of the cost-sharing scheme but essentially the sharing is the same. A performance-based grant system is currently under analysis by a technical committee chaired by the DILG. MDFO Loan-Grant-Equity Mixes. Current maximum grant for devolved responsibilities is 50%. The scheme represents a substantial “tightening” from the 1996 ICC policy resolution on the NG grant component. By Type and Fiscal Class of LGU. such as raising the minimum share of LGU equity or lowering the maximum share of NG grant in subproject financing. if the national P a g e | 346 . however. while the basic principles underlying the LGU Financing Framework remain the same. This was tightened further by a joint ICC-DBCC memorandum issued in August 2004 that declared a zero grant policy on devolved activities. The zero grant policy was reversed back to the 2002 cost-sharing scheme mainly because of LGUs protests. (In percent) Municipality/Province City Green/Blue Loan Grant Equity Loan Grant Equity 1st & 2nd 50 30 20 80 0 20 3rd & 4th 45 40 15 80 0 20 5th & 6th 40 50 10 80 0 20 Municipality/Province City Brown Loan Grant Equity Loan Grant Equity 1st & 2nd 60 20 20 80 0 20 3rd & 4th 45 40 15 80 0 20 5th & 6th 40 50 10 60 20 20 Source: ICC Secretariat. there is an emerging view to allow additional grants but these should be based on performance. Issues and Concerns Thus. at various times the Investment Coordination Committee (ICC) would revise the parameters defining NG support to LGUs. 2002. But the fact that target LGUs withdraw participation because of lack of counterpart equity should be taken as indication that perhaps the rules should be revisited. by Project Category. On the other hand. . the LGUs are always taking advantage of single window for all LGUs. The on-lending rates may differ across lending facilities e.LGU Access to Official Development Assistance (ODA): Status. Issues and Concerns grant component is too high. The “competition” among the different LGU on-lending and other forms of co-financing facilities is perhaps partly due to eligibility criteria that favor the “exemplary” LGUs. the ones with the “ideal” traits described earlier. i. The different ODA facilities therefore run out of “eligible” LGUs willing and able to participate. and Land Bank of the Philippines (LBP). P a g e | 347 . The common approach is to rank project proposals within a given sub-window according to some simple. access to the loan officers. because of differences in the interest rates being charged by the ODA funding sources. There are also differences in the “hidden” costs to the LGUs. The World Bank. Richer LGUs and communities with the financial capacity to put up the higher counterpart would be the ones getting access to the NG grant funds.g. actual community needs may be generated through rapid appraisal techniques. but only partially. for the conduct of which guidelines may be disseminated to the proponents. How then shall the limited grant funds be rationed? It is tempting to suggest that the NG share be lowered iteratively until the excess demand vanishes. the LGUs should be able to generate capacity to put up the counterpart requirement and not depend on continuing subsidy.e. after two or three subprojects of the on-lending or co-financing type. the Municipal Development Finance Office (MDFO). Another form of competition is in the financing charges being assessed by the different LGU lending facilities. But the ones who would drop out with this procedure may be those most in need of assistance. soon run out of local resources for counterpart equity. and Japan International Cooperation Agency (JICA) (formerly JBIC) impose different rates. Development Bank of the Philippines (DBP). However. in terms of processing time. A strategy is to create a window for LGUs eligible for full grant. ADB. These LGUs. together with benefit and cost effectiveness indicators. queuing is likely to result. After a few projects on highly concessional terms. documentary requirements. For "small" projects.. and the like. The creation of separate sub-windows for different income classes addresses this problem. transparent criteria that take levels of community needs and resources into consideration. which will create a motivation for good personnel to stay with the LGU. and the length of the ODA availment process. P a g e | 348 . both at the national and local levels. D.LGU Access to Official Development Assistance (ODA): Status. Issues and Concerns There have been suggestions that this “competition” should be removed and that there should be only one LGU financing window for ODA (and that would be MDFO). but fears have been expressed that the poorer LGUs may not be able to afford the higher pay scales. limited staff and financial capacity. On Access to LGU Financing and the MDFO facility Consultations with stakeholders revealed that the major i concerns pertaining to LGUs’ availment of ODA financing are the following: the lack of technical support. it is but natural for the LGUs to seek the best terms from the variety of sources. 2006. in government as well as in the private sector. Centralizing ODA to MDFO may bring along operational issues such as budgetary allocation and inability to handle so many LGUs because of organizational constraints. This and other local issues deserve a closer look by the PDF Working Group on Decentralization and Local Government. We note that the third phase of the Salary Standardization Law (SSL III) shall substantially raise the salaries of government employees. However. Bohol on November 23. The limited technical capacity of LGUs is a perennial problem that cannot be solved simply through more training and capability building. the LGUs should not be deterred from exploring various options to increase local revenues thereby creating opportunities for an appropriate incentive system for local personnel. Monopoly. While the NG oversight agencies would call it forum shopping by LGUs.9 9 Also see Annex 9 for other issues raised by members of the League of Cities of the Philippines based on the Philippines-Australia Local Governance Development Program PDF Consultations held in Tagbilaran City. from the LGU standpoint. almost always works against the interest of the consumer. The compensation package for local government personnel should thus have a performance-based component. The local planning and project development officers who perform well sometimes get pirated by the donor agencies themselves. While this is more easily said than done. competition even among different agencies of government is healthy in that it encourages the subloan or co-financing providers to be more efficient. On the demand side. Here partisan politics may get in the way of getting support for a good project. It is noted that the risk of not being able to secure approval for the project is high in LGUs where the LCE and the sanggunian are not political allies. On the other hand. feasibility study/studies. This also reflects weak planning capability of the LGUs. d) perceived high interest rates. Some LGUs feel that the requirements. Some bargaining and compromise inevitably happen and project specifications. preparation of detailed architectural and engineering design (DAED). partisan politics at the local level come into play. Partisan politics getting in the way of technical decisions. financial statements. sanggunian approval of a proposed loan by the LCE may be withheld pending satisfaction of parochial political objectives. The rather uninspiring perception is of some local officials who seek personal gain out of the loan proceeds. In some cases. opposition by the sanggunian (local councils) may also be a good deterrent for bad projects submitted by the LCE. which also offer loan P a g e | 349 . it appears that many LGUs lack the technical capacity to prepare the documentary requirements for loan availment. including those supported by ODA. b) partisan politics getting in the way of technical decisions. c) cash flow problem of the national government (NG). include: a) lack of technical capacity of LGUs to prepare for loan requirements. Once some LGUs are ready with their pre-loan activities and documents. the LCE needs to secure the support of the sanggunian to enact an ordinance or resolution. projects do not secure approval. These requirements include completed application forms. e) failure by LGUs to meet the Bureau of Local Government Finance (BLGF) certification requirement. may be altered and compromised. LGUs normally hire consultants to help them prepare all the requirements. with special reference to the MDFO loans facility.LGU Access to Official Development Assistance (ODA): Status. To be able to implement local projects. Issues and Concerns The study also identified major bottlenecks that limit the access of LGUs to ODA. and proof of borrowing capacity. processes and procedures set by the MDFO to enable LGUs to gain access to ODA loan funds are tedious and lengthy as compared to those of GFIs and private banks. Lack of technical capacity of LGUs to prepare for loan requirements. which have been determined mainly on technical considerations. in other cases. The national government (NG) sometimes faces cash flow problems. A forty-five day ban on infrastructure projects is imposed before the election period with exceptions for foreign assisted projects. The MDFO points out that there are instances when once all the requisites for loan approval have been completed. the MDFO can use the socalled second-generation funds at its disposal to cover the financing gap. or both. the MDFO supports the applicant LGUs by providing technical assistance in the preparation of FS and DAED. The provision of LGC allows the LGU to allocate P a g e | 350 . Either because a project is vital for the development of the municipality or city concerned. However. The perception among LGUs is that there is a relatively slow issuance of the Certificate of Debt Service Capacity and the disclosure of the loan that LGU is going to avail. On the other hand. other creditors take over with a promise to immediately release project funds. The preparation of these required documents take time and may have been seen by the applicant LGUs as a lengthy processing from time of loan application to approval. the MDFO has taken note of this and is taking steps to provide more competitive interest rates. being cancelled by the LGU loan applicants. which takes at least 9 months. NG cash flow problem. There are cases of project loans. with technical plans for funding through the MDFO. There is also the perception that MDFO’s lengthy processing of loans. Some of these financial institutions even provide technical assistance to LGUs to facilitate the latter’s access to expedient financing assistance. there has been some improvement in bridging the cash flow gap by the NG through various fiscal measures. or because the LCE and all other politicians involved with the project need “visible” projects to increase their chances of getting elected. High interest rates. there arises the inevitable greater pressure for the MDFO to process projects more expeditiously. Additionally. Issues and Concerns facilities to LGUs. However. This somehow delays access to funds by qualified LGUs. primarily due to some built-in technical assistance and capability building activities for recipient LGUs. Failure to meet the BLGF certification requirement.LGU Access to Official Development Assistance (ODA): Status. gets lengthier as an election period approaches. The interest rates of MDFO are seen to be higher compared to those of other financial institutions. This is not a welcome situation because it has implications on determining the creditworthiness of the LGUs and one aspect of this is the debt service capacity. Because of this exhortation from the BSP. It is noteworthy that this database for SREs of LGUs has a three-year lag. Firstly. e. health. The BLGF has to attend to these concerns in order to expedite the loan application process for LGUs. P a g e | 351 . which are funded by dole outs. Other policy issues There are also other overarching policy issues which may be considered in setting the appropriate LGUs financing framework. the BLGF. Issues and Concerns 20% of regular income for debt service. Some LGUs have the tendency to manufacture their own certifications of borrowing capacity in order to be granted access to the MDFO facility. without appropriate screening or identification of the most needy and financially incapable LGUs. individual projects of LGUs needs further attention not only by NEDA but also by other oversight agencies such as DBM (on the budgetary aspects of the LGU project) and DILG (on the impact of such sub-projects to the community being served by the LGU). etc. Inasmuch as the NEDA monitors total ODA and program portfolio.LGU Access to Official Development Assistance (ODA): Status. Second. E. These certifications have not been honored because the mandate to issue such certification of borrowing capacity lies with a third party institution. NG has provided funding – mostly dole out for LGUs – for various sectoral programs. that is. A Bangko Sentral ng Pilipinas (BSP) letter circular required the attachment of a BLGF certification of a debt service capacity to inform the MDFO Policy Governing Board if the scheduled loan amortization is below the mandatory ceiling. the BLGF has been collecting the Statement of Receipts and Expenses (SREs) of LGUs and has created and maintained a database of such submissions. they would rather continue to be dependent on NG fiscal transfers. The BSP urges all financial institutions to ensure that entities to be granted loans have good debt service capacity. Finally. LGUs fail to maximize their revenue raising potential. This serves to stunt the initiative in most LGUs as they simply await fiscal transfers from the NG agencies and do not raise nor allocate resources for the delivery of local services. there seems to be no monitoring nor evaluation of the development impact of individual subprojects of LGUs financed by either grants or the MDFO loan facility.g. Gilberto M and others (1998). Recommendations on Policies. the prohibition against LGUs using commercial banks as depositories should be lifted. Allow LGUs to use private commercial banks as depository institutions. Makati City: The Philippine Institute for Development Studies.LGU Access to Official Development Assistance (ODA): Status. DBM. lower interest on loans. thereby providing financial services not only to the LGU but also to a wider client base as well. and better banking services in general. Processes and Procedures 1. the government needs to seriously consider the following: i) allow LGUs to use private commercial banks as depository institutions. It is noted that as early as 1998. ii) fast-track the implementation of Executive Order 809. Local Government Units’ Access to the Private Capital Markets. and DOF for ODA funded local government projects. more private banks could be motivated to establish branches in areas with limited banking facilities. iii) establish a monitoring system to be established and based among NEDA. and. Issues and Concerns IV. This recommendation and a few others in their landmark study10 have been picked up by other analysts who echoed very similar recommendations. There seems to be some scope for this recommendation to prosper because many sectors including those from the different PDF Working Groups and even some high-level DOF officials themselves have supported this recommendation. This will allow LGUs to develop a working relationship with private commercial banks. DILG. For many areas in the countryside. With proper safeguards to be developed by the DOF and BSP. the LGU has been the single biggest potential banking client. The Llanto. which are expected to compete for LGU business by way of offering higher interest on deposits. CONCLUSIONS AND RECOMMENDATIONS A. 10 P a g e | 352 . On Policies At the policy level. Llanto and his colleagues at the Philippine Institute for Development Studies have made this recommendation. With access to LGU accounts. 5 percent. without any direct or indirect National Government guarantee. however. and municipalities whose average regular and locally-sourced funds for the past three years comprise 60% of their total income. or those provinces. the national government has failed to act on it. Issues and Concerns curious fact is that despite the good reason behind this practical recommendation and the widespread support for it. e. a default by the LGU may negatively affect the country’s sovereign risk rating. whereby first-tier LGUs. 7160”) directs the DILG and the DOF to implement the LGU Financing Framework. An idea worth exploring is the proposal from the League of Provinces of the Philippines to allow LGUs direct access to ODA without any sovereign guarantee by the national government. multilateral and bilateral.” The LGUs are expected to enjoy a lower cost of funds if they are able to borrow directly from ODA sources.. The fear of most central governments in allowing direct subnational foreign borrowing is that. Fast-track the implementation of Executive Order 809. However. even without sovereign guarantee.LGU Access to Official Development Assistance (ODA): Status. This used to be a moot issue before. Executive Order 809 issued on June 9. 2009 (“Implementing the Financing Policy Framework for Local Government Units by Identifying New Sources of Funding for First Tier LGUs under Republic Act No. Studies of experiences in other countries would help policy makers have a better appreciation of the merits and demerits of the proposal and enable them to make an informed decision. may borrow directly from multilateral agencies to ensure that they have sufficient funding sources for their vital projects. when practically all donor partners. ADB has been open to relaxing this condition. The LGU Guarantee Corporation charges a guarantee fee of 1. a loan guarantee such as that provided by the LGU Guarantee Corporation (a private corporation that was established by the government and private commercial banks to guarantee LGU indebtedness. refused to lend without sovereign guarantee. P a g e | 353 . cities. Lately. bonds) that those lending agencies may require may increase the cost of funds for LGUs. The EO stresses that “any such loan obtained shall be on a stand-alone basis.g. For ODA funded projects still in the pipeline. DBM and DOF for ODA-funded individual LG projects. NEDA’s monitoring. but also their utilization and development results. but local priorities also sometimes get distorted by national concerns. however. The heads of concerned government agencies need to agree that there is a need to establish such a system and develop an institutional arrangement that would monitor not only the disbursement of ODA funds. Establish a monitoring system among NEDA. Under existing arrangements where the borrower is a national government agency or a GFI that then relends to the LGU. To jumpstart this initiative. is at the agency and project levels. however. DBM. not only do the borrowing costs of the LGU get inflated. It does not have the personnel and other resources to monitor subprojects. Among the Philippines’ ODA partners. or NEDA/PMS). The ADB also has the advantage of having its headquarters in Manila. meanwhile. A database can be created to determine distribution. the first project should be an “easy. information on which LGU access is covered by a particular project is at best indicative. coordination among the oversight agencies will help towards greater transparency and accountability for both the government and the donor community. while DOF (through BLGF and MDFO) would have the broader fiscal picture for the LGU (such as borrowing capacity and projected amortization of LGU loans). would have data on the financial flows. For ongoing foreign-assisted projects. P a g e | 354 . It is at the LGU subproject level that DILG can help in the monitoring process. NEDA is the agency mandated to monitor foreign-assisted projects (through its Projects Monitoring Staff. Under the ODA Act of 1996. the ADB is probably the one most ready (and willing) to lend directly to LGUs. and the list of participating LGUs included in the project proposal may change upon implementation. availment and implementation performance of specific LGUs. Issues and Concerns But perhaps the greater benefit to the LGU comes from being able to define its own public investment needs and priorities and have direct access to multilateral lending institutions. DILG. as such projects are often demand-driven.” wellprepared one that would serve as a showcase for emulation by other LGUs.LGU Access to Official Development Assistance (ODA): Status. and projects (PAPs). often reserves ODA for those large projects that. ii) develop both LGU capabilities and LGU capacities in local planning and project development. iv) involve LGU representatives in the programming exercises with donors. may be tapped to apprise the LGU if the expectation of getting a grant is realistic or not. The NG. Acquaint LGUs with sources of public investment funds other than direct ODA grants. particularly grants. By far the bigger resources are in the programs. aside from simply providing a database. activities. the local officials hear that the neighboring town is getting a grant from a donor agency for a similar project. that are undertaken by the line agencies of the NG in their respective localities and jurisdictions. The ODA monitoring system. It sometimes happens that an LGU may already have expressed interest in getting a subloan from. Issues and Concerns A byproduct of such an ODA monitoring system that goes down to the LGU level is transparency in the award of subprojects. to finance its domestic water supply project. for strategic reasons. They cancel the subloan application. particularly DBM.LGU Access to Official Development Assistance (ODA): Status. Another source is the Priority Development Assistance Fund (PDAF) or congressional initiatives (CIs) which are allocated by congressional district and run into billions of pesos. LGUs should be reminded that they have access to external resources other than the ODA grants.11 The PDAF is a significant extra-budgetary source for many small and poor LGUs. and v) improve the monitoring system on ODA flows. 2.7 billion) P a g e | 355 . The national government. Then. whether foreign-assisted or locally funded. say MDFO or LBP. if funded from the President’s budget. hoping that they would get a grant as well. efforts should be exerted to: i) acquaint LGUs of sources of local public investment funds other than direct ODA grants. iii) streamline the development and approval processes for small subprojects. On Processes and Procedures At the organizational level.5 billion) and 2004 (P19. may stir much debate and have a rough sailing in Congress. has been trying to “rationalize” the uses of the PDAF by defining the set of local 11 The PDAF or CIs reached their highest levels in 2003 (P19. LGUs should explore various options for raising their revenue intake. as the governor is often a rival of the congressman) helps assure that the small local project is consistent with the local development plan. trained LGU technical personnel is a temporary. If the regional directors have less influence in their respective central offices. LGU representation or lobbying may have to be with the central officials themselves. e. but fears have been expressed that the poorer LGUs may not be able to afford the higher pay scales. The donor agencies themselves complicate the situation as they compete for the services of local planning and project development officers who perform well. These are political realities with which LGUs have to contend. A possible way of stemming the outflow of good. But not all LGUs are members of the RDC. both national and local. Issues and Concerns infrastructure projects that may be funded by the facility. the immediate venue for the LGUs’ influence on design and implementation is the regional development council (RDC). but while this is more easily said than done.g.LGU Access to Official Development Assistance (ODA): Status. where the regional directors of the national line agencies sit as members. the limited technical capacity of LGUs is a perennial problem that cannot just be solved simply through more training and capability building. periodic cross-posting or special secondment scheme P a g e | 356 . locally funded or foreign-assisted.. The smaller LGUs (the municipalities) have to course their requests through the governors or lobby with the regional directors. Lobbying by the local chief executive (usually the mayor. improve the administration of local business taxes even as they deliver better local public services. The compensation package for local government personnel should have a performance-based component. Develop LGU capabilities and capacities in local planning and project development. It is within this context that the Local Government Academy (LGA) of the DILG can also play a key role in providing a framework for sustainable LGU capacity building. The third phase of the Salary Standardization Law (SSL III) substantially raises the salaries of government employees. improve the collection of real property taxes through better valuation of properties. As mentioned earlier. For the bigger projects. but these resources are limited. the NEDA Regional Offices (NROs) have a facility to assist LGUs in project preparation. master planning at local and regional levels. such that full-blown feasibility studies may be dispensed with. At present. so that the supply of training services could be sustained and made more easily accessible. P3 million and below). The ODA Act actually says that “NEDA shall endeavor to obtain ODA funds from donor countries. P a g e | 357 .g. especially in the short run. Said funds shall be administered by the NEDA for project identification. 12 In fact. The network of the Association of Schools of Public Administration in the Philippines (ASPAP) may also be tapped. Nevertheless. templates can probably be developed for small sub-loans. say. Again.. six months or one year. would go a long way towards helping LGUs gain better access to ODA funds.” Unfortunately. For the on-lending facilities of the GFIs and MDFO. Issues and Concerns with the major donor agencies. this may be observed at the more senior level among NGAs (oversight and line). the DILG’s LGA may enter into partnership with other training institutions. and monitoring and evaluation.LGU Access to Official Development Assistance (ODA): Status. lodged within NEDA or DILG. It may be unrealistic for these small LGUs to build up their own internal capability to conduct full-blown project studies. especially for the smaller LGUs. as the typical municipal development office may have only one or two technical persons. A similar arrangement may be developed for capable LGU technical personnel. Side-by-side with the capacity and capability building initiatives. This suggestion deserves a closer look by the PDF Working Group on Decentralization and Local Government. is the need to set aside a Project Feasibility Studies Fund. For example.12 Establish a Project Feasibility Studies Fund for LGUs. LGA has been working with local training institutes and the Philnet which is based on the Local Government Training and Research Institutes (LOGTRI) network in the Asia region. The establishment of a Project Feasibility Studies Fund. this has not been implemented. Streamline the development and approval processes for small subprojects. where a bureau director or division chief goes on leave to join a foreign-assisted project for. school-building projects are fairly standard and a checklist-type template on the market.(e. especially in the regions. feasibility studies. which shall approximately be five percent (5%) of the total ODA loan from the immediately preceding year. even as observers. While DILG participates in most (if not all) of the bilateral and multilateral consultations on country programming. It must be emphasized that DILG as a national government agency is uniquely positioned since it has presence all the way down to the local level. This would substantially reduce the project development costs and make the ODA on=lending facilities more accessible for the lower-tier LGUs. grant aid recipients in many instances are not informed by donors on the magnitude of the technical assistance involved. The subprojects that trickle down to the LGUs. with a reasonable degree of confidence. Especially on financial matters. As discussed earlier. Issues and Concerns technical. and economic aspects may be easily developed. Other Recommendations The study team likewise recommends the following: i) establishment of an MDFO website for greater transparency and wider reach of the facility. as chair of the PDF Working Group on Decentralization and Local Government. financial. probably the best venue for installing a tracking and monitoring mechanism for ODA funds going to LGUs is the DILG. Improve the monitoring system on ODA flows. ii) making available a ready pool of consultants to assist LGUs in P a g e | 358 . it may be good to invite representatives of local government leagues to attend. in accordance to the basic spirit of transparency and participation. Involve LGU representatives in the programming exercises with donors. particularly grants. A common question asked by LCEs is why a neighboring town received a grant from a particular donor while his own town was apparently bypassed. are many and widely dispersed across the country. especially at the municipal level and below.LGU Access to Official Development Assistance (ODA): Status. 3. a common reporting system should be devised and installed that would allow the Philippine government (and the donor governments themselves) to say. The tracking and monitoring system should gather information not just from the LGUs but from the donor agencies as well. In the interest of transparency and accountability. with the site having an appropriate easy-to-follow steps and procedures on LGU ODA availment. how much aid flowed in and where it went. LGU Access to Official Development Assistance (ODA): Status. P a g e | 359 . Issues and Concerns preparing for the necessary financing application requirements through MDFO. iii) use ODA for better access to performance-based LGU financing. and iv) build-up of the SRE database within the BLGF and harmonizing this with those of other concerned agencies. gov. The World Bank. December 1997. October 2008 <http://www. October 2008 __. 3 December 2009. 2. 1998. Tokyo: IDE.gov.B. "15th (2006) Annual ODA Portfolio Review.ph/progs_prj/15thODA/15th_odamain. "12th Annual ODA Portfolio Review.gov. and others Local Government Units’ Access to Private Capital Markets. reprinted as Chapter 4 in Studies in Governance and Regulation: the Philippines. NEDA. October 2008 <http://www. Department Order No. National Economic Development Authority. NEDA. Gilberto M.gov.gov. edited by D.ph/progs_prj/oda/odaAct.gov. October 2008 <http://www. Channeling Resources to Local Development Concerns: Issues and Options. 8555 An Act Amending RA NO.” 2007. A.ph/progs_prj/16thODA/16th_odamain." 8 September 1966.htm>.neda. —. "Official Development Assistance Act of 1996 . 40-09.LGU Access to Official Development Assistance (ODA): Status. October 2008 <http://www.gov. February 2009 <http://www.htm>." 20008. XXXIV. "Foreign Borrowings Act of 1966.ph/progs_prj/13thODA/13th_odamain.htm>. NEDA. and for other Purposes. National Economic Development Authority Website.neda.neda. Philippine Review of Economics and Business. Issues and Concerns References Alonzo. “Revised National GovernmentLocal Government Unit (NG-LGU) Cost Sharing Policy.htm>.neda. —.ph/progs_prj/oda/odaAct. National Economic Development Authority Website.ph/progs_prj/oda/odaAct. "LGU Financing Framework in the Philippines. Canlas and S." 2004. —. 8182.ph/progs_prj/12thODA/12th_odamain. Congress of the Republic of the Philippines. 1999 (48-76)." 11 June 1996. Fujisaki. 2008. Department of Finance. —. February 2009 <http://www.neda.neda. Khan. Ruperto. October 2009 <http://www. NEDA.htm>. "Republic Act No." 2006. P a g e | 360 ." Powerpoint presentation." 26 February 1998. NEDA. “16th (2007) Annual ODA Portfolio Review.htm>.gov. Makati: Philippine Institute for Development Studies. —. No. "17th (2008) Annual ODA Portfolio Review.htm>. <http://www.neda.neda.ph/progs_prj/17thODA/17th_odamain.htm>. "13th Annual ODA Portfolio Review. Llanto." 2003. NEDA. Kamran M. vol. —. Celia Soriano. "14th (2005) Annual ODA Portfolio Review. October 2008 <http://www.htm>. "Institutional Arrangements for Intergovernmental Fiscal Transfers and a Framework for Evaluation.neda. Office of the President of the Republic of the. Powerpoint presentation. A study commissioned by the Department of Finance.) 8182. "Implementing Rules and Regulations (IRR) for Republic Act (R." In The Dynamics of Regional Development: The Philippines in East Asia. January 2009 <http://www. <http://www. Pellegrini. Roberto. NEDA. Manila: unpublished. A Study to Revisit the LGU Financing Framework and Its Implementation. Tan.neda. Manila: Malacanang." 2005.: The World Bank. 2007. "Decentralization and the Financing of Regional Development.ph/progs_prj/14thODA/14th_odamain." 4 March 2005.ph/progs_prj/ICC/ICC_March2005/Revised%20IC C%20Guidelines%20and%20Procedures%20(as%20of%204%20March %202005). Philippines. Implementing the Financing Policy Framework for Local Governmnent Units by Identifying New Source of Funding for First Tier Local Government Units under Republic Act No. Rosario. 7160. 275-315. Executive Order 809. Issues and Concerns —. "ICC Guidelines and Procedures .C. by Arsenio Balisacan and Hal Hill. Executive Order. Washington. undated.gov.neda.. Cheltenham: Edward Elgar Publishing Ltd. Shah.LGU Access to Official Development Assistance (ODA): Status. 293318.A. Manila: Department of Finance . Anwar. D." In Intergovernmental Fiscal Transfers: Principles and Practice. Anthony and Ma. Manasan. 2002. 2007.gov.gov.pdf>. National Economic Developmetn Authority.htm>.ph/progs_prj/oda/odaAct. NEDA. Otherwise Known as "The Official Development Assistance (ODA). P a g e | 361 ." 23 July 1996. Global Trends in Financing:The Philippine Experience . by Robin Boadway and Anwar (eds) Shah. 1990s Sector/Activity LGU Income Class NG Share Remarks (%) Water Supply (only for 1st 0 No National Government Level 1) 2nd 0 grants for Levels 2 3rd and 4th 0 (communal faucet) and 3 5th and 6th 50 (house connection) water systems. Provincial Roads 1st – 6th 0 Municipal Roads 1st – 6th 0 NG support only possible for access roads. traffic engineering Sanitary support facilities for public markets and slaughterhouses 1st 2nd and 3rd 4th – 6th 20 50 70 Cost-sharing based on total project cost (PS & MOOE included in the National Government grant). investment. Issues and Concerns Annexes Annex 1-A. Health Environment Blue (watershed protection. municipal fishery mgt. soil conservation. farm-tomarket roads covered by approved national programs (e. Cost-sharing based on total project cost (PS & MOOE included in the National Government grant).g. O&M) 3rd and 4th 5th and 6th 50 70 P a g e | 362 .LGU Access to Official Development Assistance (ODA): Status. Vehicular emission control. mangrove protection and rehabilitation Green (reforestation and Forest-related activities. NG-LGU Cost Sharing Schemes (Financing Mixes). water pollution control. Rural Infrastructure Public Market 1st – 6th 0 Revenue-generating Bus Terminal 1st – 6th 0 Projects will not be provided National Government grants. The cost-sharing arrangement applies only to capital costs. 1st and 2nd 3rd and 4th 5th and 6th 0 0 0 NG shoulders costs of rehabilitation of ecosystems. protected area mgt. Communal Irrigation 1st 2nd and 3rd 4th 5th and 6th 1st and 2nd 3rd and 4th 5th and 6th 1st 2nd and 3rd 4th – 6th 20 30 40 50 50 70 90 20 50 70 The cost-sharing arrangement applies only to capital costs. wildlife conservation) Brown (solid waste mgt. coastal resource mgt. environment or agrarian reform). LGU shoulders all other costs (enforcement. and for Cities. 2009 Municipalities and provinces Cities LGU Income Cluster Loan Class Loan % Grant % Equity % Grant % Equity % % 0 0 0 0 0 1st & 2nd 0 3rd & 4th 70 20 10 0 0 0 Cluster 1 5th & 6th 40 50 10 0 0 0 1st & 2nd 50 30 20 80 0 20 Cluster 2 3rd & 4th 45 40 15 80 0 20 5th & 6th 40 50 10 50 30 20 20 20 80 0 20 1st & 2nd 60 Cluster 3 3rd & 4th 45 40 15 80 0 20 Water waste 5th & 6th 40 50 10 60 20 30 LGU Income Grant LGU share Grant LGU share Class (Loan/equity) (Loan/equity) Cluster 3SWM 1st & 2nd 3rd & 4th 5th & 6th 20 40 50 60/20 45/15 40/10 40 25 20 60 75 80 P a g e | 363 . Issues and Concerns Annex 1-B.LGU Access to Official Development Assistance (ODA): Status. Revised Loan-Grant-Equity Mix for Provinces/Municipalities. Negros Occidental Region VI 39 3. Agusan del Sur Region XIII 43 2. Benguet CAR 20 Romblon Region IV-B 20 Sulu ARMM 20 16. Compostela Region 23 Southern Leyte Region 23 13. Cebu Region VI 34 5. Albay Region V 30 Misamis Occidental Region 30 9. Zamboanga del Norte Region IX 32 7. of ODA funded projects 1. Davao del Norte Region 22 Davao Oriental Region 22 Ilocos Norte Region 22 Lanao del Norte Region 22 Negros Oriental Region 22 Oriental Mindoro Region IV-B 22 Palawan Region IV-B 22 Sorsogon Region V 22 South Cotabato Region 22 Tawi-tawi ARMM 22 14. Agusan del Norte Region XIII 26 Bukidnon Region X 26 Capiz Region VI 26 Lanao del Sur ARMM 26 Pampanga Region III 26 Sultan Kudarat ARMM 26 11.Camarines Sur Region V 25 Davao del Sur Region 25 Surigao del Norte Region XIII 25 12. Bohol Region VII 33 North Cotabato Region XII 33 Zamboanga del Sur Region IX 33 6. Maguindanao ARMM 31 8. Issues and Concerns Annex 2. Aurora Region III 19 Batangas Region IV-A 19 Isabela Region II 19 P a g e | 364 . Antique Region VI 37 Iloilo Region VI 37 Surigao del Sur Region XIII 37 4. Ranking of Provinces Based on ODA funded projects Province Regional Location No. Basilan Region 21 Eastern Samar Region 21 Masbate Region V 21 Nueva Ecija Region III 21 Pangasinan Region I 21 15. Leyte Region VIII 28 10.LGU Access to Official Development Assistance (ODA): Status. Camiguin Cavite Ilocos Sur Occidental Mindoro Quirino Western Samar 26. Bataan 23. Bulacan Camarines Norte Guimaras Northern Samar Rizal 20. Kalinga 21. Misamis Oriental Mt.LGU Access to Official Development Assistance (ODA): Status. Apayao Laguna 25.625 P a g e | 365 . La Union 28. Province 18. Catanduanes Siquijor Zambales 27. of ODA funded projects 19 19 19 18 18 17 17 17 16 16 16 16 16 15 14 14 14 13 12 11 11 10 10 10 10 10 10 08 08 08 07 05 03 02 1. Abra Biliran Ifugao 19. Dinagat Island TOTAL Regional Location Region IV-B Region XII Region IX Region CAR Region I Region CAR Region III Region V Region Region Region IV-A CAR Region II Region II Region III Region III Region CAR Region Region Region IV-A Region I Region IV-B Region II Region Region V Region Region III Region I Region II Region IV-B Region XIII No. Batanes 29. Marinduque 30. Aklan 24. Issues and Concerns Province Quezon Saranggani Zamboanga Sibugay 17. Cagayan Nueva Vizcaya Tarlac 22. Issues and Concerns Rank Annex 3.LGU Access to Official Development Assistance (ODA): Status. Ranking of Regions Based on ODA funded projects Regions LGUs (Provinces) Total Number of Total # of ODA ODA Projects funded Projects Per Province Per Region Region 6 Aklan Antique Capiz Guimaras Iloilo Negros Occidental Agusan del Norte Agusan del Sur Dinagat Island Surigao del Norte Surigao del Sur Albay Camarines Norte Camarines Sur Catanduanes Masbate Sorsogon Basilan Lanao del Sur Maguindanao Sulu Tawi-tawi Aurora Bataan Bulacan Nueva Ecija Pampanga Tarlac Zambales Biliran Eastern Samar Leyte Northern Samar Western Samar Southern Leyte Bukidnon Camiguin Lanao del Norte Misamis Occidental Misamis Oriental 12 37 26 16 37 39 26 43 2 25 37 30 16 25 8 21 22 21 26 31 20 22 19 13 16 21 26 14 8 17 21 28 16 10 23 26 10 22 30 18 167 1 2 Region 13 Caraga 133 3 Region 5 122 4 ARRM 120 5 Region 3 117 6 Region 8 115 7 Region 10 Northern Mindanao 106 P a g e | 366 . LGU Access to Official Development Assistance (ODA): Status. Province Bohol Cebu Negros Oriental Siquijor Campostela Valley Davao del Norte Davao del Sur Davao Oriental Zamboanga Del Norte Zamboanga Del Sur Zamboanga Sibugay Marinduque Occidental Mindoro Oriental Mindoro Palawan Romblon Batangas Cavite Laguna Quezon Rizal Batanes Cagayan Isabela Nueva Viscaya Quirino Ilocos Norte Ilocos Sur La Union Pangasinan 98 97 11 Region 11 Davao Region 92 12 Region 9 Zamboanga Peninsula Region 4-B MIMAROPA 84 13 77 14 Region 4-A Calabarzon 75 15 Region 2 62 16 Region 1 60 Total ODA Projects 1625 P a g e | 367 . Issues and Concerns Rank Regions LGUs (Provinces) Total Number of ODA Projects Per Province 33 19 22 26 17 11 20 17 15 18 33 34 22 8 23 22 25 22 32 33 19 3 10 22 22 20 19 10 11 19 16 5 14 19 14 10 22 10 7 21 1625 Total # of ODA funded Projects Per Region 100 8 Region 12 Soccsksargen 9 CAR 10 Region 7 North Cotabato Sarangani South Cotabato Sultan Kudarat Abra Apayao Benguet Ifugao Kalinga Mt. g. Distribution of ODA funded projects by Sector. Province Ilocos Norte Ilocos Sur La Union Pangasinan Batanes Cagayan Isabela Nueva Vizcaya Quirino Aurora Bataan Bulacan Nueva Ecija Pampanga Tarlac Zambales Batangas Cavite Laguna Quezon Rizal Marinduque Occidental Mindoro Oriental Mindoro Palawan Romblon Albay Camarines Norte Camarines Sur Catanduanes Masbate Sorsogon 7 4 3 2 6 4 11 6 3 10 6 5 2 4 8 2 4 5 14 3 1 8 2 3 4 12 1 1 8 7 4 10 6 8 3 7 6 3 2 3 2 2 3 3 3 3 3 2 2 2 2 2 2 2 2 4 4 4 4 2 3 6 3 3 2 5 2 4 2 4 5 3 2 3 6 1 6 6 6 3 11 4 9 2 4 7 1 2 10 7 1 6 5 1 1 2 1 1 1 1 4 1 1 3 6 1 2 1 2 2 2 1 1 1 3 1 2 1 3 4 2 3 2 2 5 8 9 7 6 1 3 2 2 2 3 1 4 1 1 1 1 3 1 2 3 4 1 2 1 1 5 1 7 1 1 3 2 1 4 2 1 3 4 2 5 1 1 2 1 1 2 1 2 1 2 2 2 2 1 4 3 1 1 P a g e | 368 .LGU Access to Official Development Assistance (ODA): Status. Govern ance etc. By Province LGU (Provinces) Infra Educ Social Services Agriculture/ Agrarian Reform Health Environment Others (e. Energy.) Total Number of ODA funded projects 17 11 20 17 15 18 22 10 7 21 5 14 19 14 10 19 13 16 21 26 14 8 19 10 11 19 16 3 10 22 22 20 30 16 25 8 21 22 Abra Apayao Benguet Ifugao Kalinga Mt. Issues and Concerns Annex 4. Issues and Concerns LGU (Provinces) Infra Educ Social Services Agriculture/ Agrarian Reform Health Environment Others (e. Govern ance etc.LGU Access to Official Development Assistance (ODA): Status. Energy.g.) 4 3 3 2 2 4 7 3 1 1 5 2 1 6 1 1 1 1 1 1 1 2 3 4 3 4 1 5 5 2 2 2 2 2 1 7 1 3 2 3 4 5 3 2 Total Number of ODA funded projects 12 37 26 16 37 39 33 34 22 8 17 21 28 16 10 23 32 33 19 26 10 22 30 18 23 22 25 22 33 19 Aklan Antique Capiz Guimaras Iloilo Negros Occidental Bohol Cebu Negros Oriental Siquijor Biliran Eastern Samar Leyte Northern Samar Western Samar Southern Leyte Zamboanga Del Norte Zamboanga Del Sur Zamboanga Sibugay Bukidnon Camiguin Lanao del Norte Misamis Occidental Misamis Oriental Compostela Valley Davao del Norte Davao del Sur Davao Oriental North Cotabato Saranggani 4 20 5 2 19 23 3 12 2 1 5 7 2 2 5 10 6 2 2 2 3 4 4 3 5 1 4 5 8 5 6 2 2 4 10 6 3 7 2 7 7 7 3 2 4 4 7 2 8 7 2 1 1 1 5 4 6 5 3 2 1 2 2 6 1 1 3 2 3 1 2 2 2 3 3 4 2 2 5 3 1 3 5 3 1 2 4 4 1 2 1 1 2 6 2 2 3 3 3 3 13 11 9 8 5 7 12 12 9 13 12 9 8 5 9 1 4 5 3 5 3 7 4 1 3 2 1 1 4 P a g e | 369 . ) 3 5 1 3 1 10 9 3 5 2 3 4 421 1 3 4 3 6 4 5 218 1 2 1 2 2 4 Total Number of ODA funded projects South Cotabato Sultan Kudarat Agusan del Norte Agusan del Sur Dinagat Island Surigao del Norte Surigao del Sur Basilan Lanao del Sur Maguindanao Sulu Tawi-tawi Total ODA funded projects 1 4 5 6 2 2 1 3 3 3 5 6 1 7 6 9 13 3 4 1 9 3 2 4 3 22 26 26 43 2 25 37 21 26 31 20 22 1625 5 16 1 2 2 3 5 6 5 4 4 115 2 4 8 9 14 9 9 173 413 132 153 Sources of Data: DA (Infres) .Development Bank of the Philippines DENR (FAPSO) .Department of Public Works and Highways (Bureau of 7 Construction) 8 DSWD (Kalahi-CIDDS) .LGU Access to Official Development Assistance (ODA): Status.g.National Irrigation Administration P a g e | 370 . Issues and Concerns LGU (Provinces) Infra Educ Social Services Agriculture/ Agrarian Reform Health Environment Others (e. Govern ance etc.National Economic and Development Authority 11 NIA .Department of Agriculture (infrastructure for Rural Productivity 1 Enhancement Sector) 2 DAR .Department of Health DPWH (BOC) .Department of Social Welfare and Development 9 LBP . Energy.Department of Agrarian Reform 3 DBP .Department of Education 6 DOH .Department of Environment and Natural Resources 4 (Foreign-Assisted and Special Projects) 5 DepEd .LandBank of the Philippines 10 NEDA . Ranking of Provinces with ODA funded projects in Agriculture/ Agrarian Reform Rank LGU (Provinces) No.LGU Access to Official Development Assistance (ODA): Status. Issues and Concerns Annex 5. of Agriculture/Agrarian Reform Projects 1 1 1 2 2 2 3 3 4 4 5 5 5 5 5 5 6 6 6 7 7 7 7 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 10 10 10 10 Agusan del Sur Davao del Norte Zamboanga Del Norte Davao del Sur Misamis Occidental Misamis Oriental Albay Zamboanga Del Sur Leyte Surigao del Norte Agusan del Norte Camarines Sur Compostela Valley Davao Oriental Surigao del Sur Zamboanga Sibugay Bohol Bukidnon North Cotabato Lanao del Norte Sorsogon South Cotabato Southern Leyte Isabela Negros Oriental Northern Samar Occidental Mindoro Oriental Mindoro Palawan Quezon Sultan Kudarat Bataan Camiguin Capiz Cebu Lanao del Sur Negros Occidental Saranggani Zambales Aklan Camarines Norte Eastern Samar Ilocos Norte 13 13 13 12 12 12 11 11 10 10 9 9 9 9 9 9 8 8 8 7 7 7 7 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 5 4 4 4 4 P a g e | 371 . Province Pampanga Siquijor Guimaras Marinduque Dinagat Island Rizal Total ODA funded projects 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 421 P a g e | 372 .LGU Access to Official Development Assistance (ODA): Status. of Agriculture/Agrarian Reform Projects 10 10 10 10 10 10 10 10 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 13 13 Ilocos Sur Iloilo La Union Masbate Nueva Ecija Pangasinan Tarlac Tawi-tawi Antique Basilan Batangas Cagayan Laguna Nueva Vizcaya Quirino Romblon Sulu Western Samar Abra Apayao Aurora Batanes Benguet Biliran Bulacan Catanduanes Cavite Ifugao Kalinga Maguindanao Mt. Issues and Concerns Rank LGU (Provinces) No. Tax-base sharing—allowing subnational governments to introduce their own tax rates on central bases. Equity (fairness). Revenue adequacy. The grant formula should specify ceilings and floors for yearly fluctuations. . Specific transfers to finance subnational government deficits should not be made. All grant-financed programs create winners and losers. 10. 9. 6. Subnational governments should have adequate revenues to discharge designated responsibilities. Autonomy. Grant objectives should be clearly and precisely specified to guide grant design. 5. The formula should be easy to understand. 8. Responsiveness. The grant program should be flexible enough to accommodate unforeseen changes in the fiscal situation of the recipients. P a g e | 373 3. Both the formula and the allocations should be disseminated widely. Reach. Subnational governments should have complete independence and flexibility in setting priorities. 2. Grant allocation should be based on objective factors over which individual units have little control. They should not be constrained by the categorical structure of programs and uncertainty associated with decision making at the center. in order not to reward grantsmanship. 7. Simplicity. Transparency. Any major changes in the formula should be accompanied by hold harmless or grandfathering provisions. Predictability. The design should provide incentives for sound fiscal management and discourage inefficient practices. Guidelines for Grant Design By Anwar Shah 1. Clarity in grant objectives. The grant design should be neutral with respect to subnational governments’ choices of resource allocation to different sectors or types of activity. Efficiency. Issues and Concerns Annex 6. or bloc grants—is consistent with this objective. The grant mechanism should ensure predictability of subnational governments’ shares by publishing five-year projections of funding availability. 4.LGU Access to Official Development Assistance (ODA): Status. in order to achieve as broad a consensus as possible on the objectives and operation of the program. Incentive. 11. formulabased revenue sharing. Allocated funds should vary directly with fiscal need factors and inversely with the tax capacity of each jurisdiction. The recipient must be accountable to the grantor and its citizens for financial integrity and results—that is. Consideration must be given to identifying beneficiaries and those who will be adversely affected to determine the overall usefulness and sustainability of the program.] P a g e | 374 . Issues and Concerns 12. The grantor must be accountable for the design and operation of the program. Each grant program should focus on a single objective. This suggests that matching programs should be closed ended. Singular focus. Accountability for results. Safeguarding of grantor’s objectives. Grantors may therefore have to assign priorities to various factors in comparing design alternatives (Shah 1994b). Affordability. Grantor’s objectives are best safeguarded by having grant conditions specify the results to be achieved (output-based grants) and by giving the recipient flexibility in the use of funds.LGU Access to Official Development Assistance (ODA): Status. Canada 2006). The grant program must recognize donors’ budget constraints. 14. Citizens’ voice and exit options in grant design can help advance bottom-up accountability objectives. [Some of these criteria may be in conflict with others. 13. improvements in service delivery performance. 15. LGU Access to Official Development Assistance (ODA): Status. information gathering and M & E activities LGUs generally have inadequate knowledge of effective ODA management and coordination information to make investment decisions and P a g e | 375 . A survey respondent stated that one impediment to pursuing local priorities is that ODA priorities can skew local priorities placing projects of lesser importance to an LGU on its priority list simply because of the availability of ODA funds. including: underinvestment in infrastructure is threatening economic and environmental development in Region VII infrastructure and investment still appear to be piecemeal and ad-hoc unreliable statistics as a basis for policy development and decision-making unclear guidelines on LGU partnership formation and operation majority of ODAs implemented through NGAs which involve individual LGUs ODA information is monitored by NGAs and obtained on request ODA coordination is semi-formal or informal. Issues and Concerns Annex 7. The province of Bohol has also identified the following issues based on its experience: differing requirements of development partners start-up processes involving NGAs can take some time need to properly decentralize the approach and allow more ODA to go directly to LGUs need to emphasize a demand driven approach rather than an ODA driven approach success breeds success—hard for the less fortunate and less capable LGUs to attract ODA need for accurate demonstrate results While the case of Iloilo province has raised several issues and observations. Experiences of LGUs surveyed on their ODA Experience Some of the issues and concerns on accessing ODA funds as raised by two survey respondents from the League of Cities of the Philippines (LCP) are the following: lack of technical support. LGUs participate through consultation meetings. limited staff and financial capacity length of the ODA availment process Other issues not related to the ODA process were also identified. gov..ph .. Mapagmahal St. Quezon City http://www.dilg. EDSA cor. Published by: Department of the Interior and Local Government Francisco Gold Condominium II.
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