Public Disclosure Authorized

Public Disclosure Authorized

OVERVIEW REPORT

AN ASSESSMENT OF NON-IRA AND OTHER

NATIONAL FUNDING FOR DEVOLVED SERVICES IN
THE PHILIPPINES

Public Disclosure Authorized

Public Disclosure Authorized

36277
Vol. 1

October 2005

1.

Introduction

1.1
Expenditures on functions which have been devolved to Local Government Units
(LGUs) under the 1991 Local Government Code and subsequent legislation are funded
from three chief sources:
a.
b.
c.

The Internal Revenue Allotment (IRA), the main fiscal transfer to LGUs;
Own source revenues (OSRs, including borrowing) and smaller shared revenues;
Expenditures by national government departments and agencies (NGAs) on
devolved functions and activities.

1.2
The IRA and OSRs have been the focus of much analytic attention recently and
are reasonably well-understood. To date, however, non-IRA national expenditures on
devolved activities have not been subject to much scrutiny. This study aims to address
this gap. In other words it deals with category c., focusing on both non-IRA transfers to
LGUs as well as the direct spending by national government agencies and corporations
on devolved functions and activities.
1.3
The study divides this aggregate (i.e. fiscal transfers + direct NGA spending) into
four chief types, by source:

Government Funded Programs & Projects (GFPP) i.e. devolved-function

expenditures sourced from the National Governments own revenues (excluding
congressional allocations);
ODA Loans and Grant Funded (LGF) expenditures by NGAs on devolved
functions; 1
Congressional Allocations (CA) expenditures on devolved functions; and
Off-Budget Funding (OBF) i.e. direct donor support to LGUs for devolved
functions which flows outside of the normal budget process.

1.4
This document provides a brief overview of the main findings, observations
and conclusions from the study. The detailed Technical Report on which it is based is
also available.

Only the grant component of the transfers to LGUs is included. The Study does not deal with the
loans to LGUs.
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2.

Key findings

2.1
Overall picture. Total funding available for devolved functions in the
Philippines in 2003 amounted to approximately P229.3bn ($4.2bn). While the IRA
funds by far the largest proportion of these (P141bn, or 62%), non-IRA national
funding is also reasonably significant and stands at about P25.4bn ($468.0m) or 11 %
of the total.
Non-IRA
Funding
11%

Other LGU
Revenues
27%
P62.9bn
($1,159.5m)

P25.4bn
($468.0m)

P141.0bn
($2,601.5m)

IRA 62%

2.2
Overview of non-IRA national expenditures. A breakdown of the nonIRAnational expenditures (i.e. of the P25.4bn amount) between the four chief sources
outlined in par 1.3 gives the following picture:
LGF
21%
P5.4bn
($100.0m)

P15.6bn
($288.6m)

P4.1bn
($75.7m)

OBF
1%

GFPP
16%

CA
62%

Congressional Allocations account for about two thirds of the total (P15.6bn),
followed by ODA-sourced expenditures (P5.4bn or 21%), then Government Funded
Programmes & Projects (P4.1bn 0r 16%). Offbudget funding is relatively
insignificant. Note that although these are FY2003 figures (the most recent year for
which final account data is available), with the exception of the CA component
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(which has been reduced by 40 % in 2005), the situation today does not appear to
differ significantly from the one presented here.
2.3
Transfers to LGUs vs direct expenditures by NGAs on devolved activities.
Most of the non-IRA expenditures (87% or P22bn), took the form of direct spending
by NGAs on devolved functions and activities. Only 13% (P3.4bn) was actually
transferred to the LGUs in the form of categorical grants for locally implemented
activities.
Transfers to
LGUs 13%
P3.4bn
($62.5m)

P22.0bn
($405.5m)

Direct Spending
87%

2.4
Expenditure by economic classification. Most of the non-IRA expenditure
goes on capital outlays (CO) whereas personnel costs (PS) and maintenance and
operations (MOOE) accounts for a much smaller share (11%).

P2.8bn
($51.5m)

PS/MOOE/
Unallocated
11%

P22.6bn
($416.5m)

CO
89%

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2.5
Local expenditure by LGU type. Over two thirds of the expenditures
examined (68%) were accounted for by municipal functions (as defined in the Local
Government Code), followed by city functions (21%) with provincial
expenditures accounting for only 4% of the total. This bias towards municipal
functions is evident across all the chief sources of non-IRA national funding (71% for
CA funds; 71% for LGF funds; and 58% for GFPP funds).
Unallocated 6%
Provinces 4%

P1.6 bn
P1.1bn ($29 M)
($20M)

Cities
21%
P5.4bn
($100M)
P17.2bn
($318M)

Municipalities 69%

2.6
Departmental breakdown. About 84% of the GFPP and LGF expenditures
(i.e. the non-IRA expenditures excluding Congressional Allocations and off-budget
funding) was accounted for by five NGAs: Department of Public Works and
Highways (DPWH), Department of Education (DepEd), Department of Agriculture
(DA), Department of Environment and National Resources (DENR) and Department
of Land Reform (DPL). Table 1 shows the respective contributions of the major
departments as well as the 20 largest projects and programmes through which the
non-IRA national expenditures are steered. In addition, the Congressional Allocation
funding used for devolved functions was concentrated on DPWH (92%) and was
expended mainly on infrastructure projects such as local roads, bridges and water
supply systems.

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Table 1: Distribution of non-IRA expenditures across NGAs (excluding CAs)

TOTAL
EXPENDITURE

DIRECT
SPENDING

TRANSFER
TO LGUS

DepED

3,126m (33 %)

2,692m

434m

DPWH

2,166m (23%)

2,166m

0m

DA

1,332m (14%)

877m

455m

DLR

655m (7%)

0m

652m (7 %)

633m

19m

3.

Tulay Ng Pangulo Project (1,330m)

(LGF)
DA Farm to market roads (546m)
(GFPP)
Local infrastructure programmes
(291m) (GFPP)
GMA incentive allowances to
extension workers (347m) (GFPP)
Balikatan Sagip Patubig Project
(378m) (GFPP)
Integrated food security project
(39m) (GFPP)
Fishery resource (28m) (LGF)
Irrigation project (14m) (LGF)

655m

DENR

CHIEF DIRECT SPENDING

PROGRAM
School Building Programme
(1,710m) (GFPP)
Third Elementary Education Comp.
(837m) (LGF)
Secondary Education Development
Improvement Comp. (143m) (LGF)

Forestry- infrastructure:
(344m)(LGF)
Community Based Forestry
(178m)(LGF)
Ecogovernance technical assistance
(83m) (LGF)
Malalag Waterwork system (13m)
(LGF)

MAIN TRANSFER
PROGRAM
Third Elementary
Education Comp. (433m)
(LGF)

GMA programs (12m)

(GFPP)
Mindano Rur. Dev.
Programme (410m)
(LGF)
Upland Dev. Programme
(32m) (LGF)
Agriculture Reform
Community Project
(230m) (LGF)
Mindanao sust. settlement
area devt. (200m) (LGF)
Agriculture Reform Com.
Devt. Project (94m)
(LGF)
German Community
Forestry Project (18m)
(LGF)

Observations

3.1
These findings provide the basis for four chief observations concerning the
intergovernmental fiscal transfer system in the Philippines.
3.2
First, non-IRA national expenditure on devolved functions and activities is
significant. Although it only accounts for about 11% of the total funding on devolved
services, this is nevertheless a large sum in real figures (P25.4bn). Moreover, it is
especially significant when compared to the resources available for LGU capital
expenditures. Initial calculations indicate that total annual capital expenditure on
devolved activities in the Philippines amounts to about P50bn. At P22.6bn, non-IRA
funded national expenditures on local capital programmes accounts for almost 45% of
this total.
3.3
Second, although each of the programmes and projects through which the nonIRA funding is expended has its own rationale and objectives, from a systemic point
of view non-IRA national expenditures on devolved activities present a complex and
fragmented picture (these funds are channelled through more than 80 programmes
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and projects). Taken as a whole, this expenditure does not reflect the sort of crosscutting policy imperative which international experience suggests should guide fiscal
allocations to sub-national governments. From an LGU perspective these resource
allocations tend to be non-transparent and difficult to plan and budget for; from a
central government perspective it is hard to judge the overall efficiency with which
these resources are utilized or whether they are distributed in an equitable manner. In
particular, the non-IRA system is characterized by lack of strong incentives for LGUs
to improve their performance and thus compounds a performance incentive problem
which is more widely characteristic of the intergovernmental fiscal system within the
Philippines as a whole (see below).
3.4
Third, the study demonstrates the incompleteness of the decentralisation
process. Fourteen years after adoption of the Local Government Code (LGC), many
devolved functions are still performed by the NGAs which are still in the business of
directly spending about P22bn on devolved activities and functions annually. In
general, phasing in the implementation of the LGC is reasonable and there is good
reason for NGAs to remain involved in the provision of devolved services in an
appropriate manner. But it is not clear that all of the P22bn should continue to be
directly expended by NGAs in perpetuity. Over time, as the decentralization process
deepens, it is reasonable to expect an increasing fraction of these resources to be
transferred to LGUs in a fair and efficient manner so they can get on with delivery in
the manner the Code envisions. If the full benefits of decentralization are to be
realized, ongoing reform of this system will be necessary.
3.6
Finally, because the non-IRA national expenditures are significant
(particularly relative to the capital budgets), the potential benefits to restructuring and
rationalizing these resource flows are substantial. However, it is also clear that
because these funds are embedded in a plethora of projects and programmes run by
the NGAs, none of which is likely to want to give them up, such a restructuring is
unlikely to be easy. To some extent, this is a technical task, but the more significant
constraints that any restructuring process are likely to encounter will be bureaucratic
and political. A long, slow process can be anticipated.
4.

Conclusions: the way forward

4.1
Prospects for reforming the intergovernmental fiscal transfer (IGFT) system in
the Philippines are bounded by two realities:

The core problem that the current system confronts is that, in the context of
muted systems of accountability (both top-down and bottom-up), incentives to
enhance the capacities and performance of LGUs are weak;
Reform of the IRA transfer, which accounts for almost two thirds of all
resource flows to LGUs and would appear to offer most bang-for-buck
potential, is not likely in that, aside from minor adjustments to the formula, reorganizing or restructuring all or part of it is not legally or politically feasible
for the foreseeable future.

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4.2
Marrying these two propositions with the observations made in section 3
implies a two-track approach on the part of those who are interested in reforming the
IGTF with a view to improving the performance of LGUs.
4.3
First, recent efforts to develop a multi-sector Performance Grant System
(PGS) which incentivises enhanced performance on the part of LGUs through linking
access to development funding to strengthening institutional capacity and deepening
accountability should be supported. Such a system will take some time to develop
and will need to draw from a variety of funding sources, including a rationalization of
the non-IRA national expenditures dealt with in this study. An ongoing
rationalization of this kind could yield two additional benefits: it could make the
overall IGFT system more efficient and equitable; and it could force a further
clarification in the roles and mandates of NGAs vis a vis LGUs. It should be noted,
however that designing and implementing a PGS will take some time and, as
indicated earlier, reforming non-IRA national expenditures on devolved functions is
unlikely to be a simple or easy process. The potential benefits that a PGS can bring to
the intergovernmental system in the Philippines are substantial, but this is best
understood as a medium-term reform. Nonetheless, work in this area should progress
now.
4.4
Second, the existing non-IRA programmes particularly the largest of these
should also receive immediate attention. The focus in this area should be to improve
their overall efficiency and effectiveness by making them more performance-oriented
where possible. The scope for big wins in this area is more limited than with the
PGS; equally, however, prospects for reform are more immediate.
4.5
Finally, it should be noted that this study was undertaken and largely
completed prior to the recent announcement of the Kilos Asenso initiative. Thus far,
the structure and modalities of this programme have not yet been defined. Potentially,
however, it will involve a sizeable additional transfer to LGUs (P5bn). There is
obviously a major potential opportunity here for using resources at scale to address
the performance-incentive deficiencies of the current IGFT system. Whether time
will allow for this is not currently clear. At the least, however, significant effort
should be devoted to ensuring a transition to a PGS as the KA programme evolves.

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