Review and Assessment of Decentralization in the Philippines Focusing on Local Resource Mobilization (1991-2001)

REVIEW AND ASSESSMENT OF DECENTRALIZATION IN THE PHILIPPINES FOCUSING ON LOCAL RESOURCE MOBILIZATION (1991-2001)

Inaugural-Dissertation zur Erlangung der Doktorwuerde der Philosophischen Fakultaet am Seminar für Wissenschaftliche Politik der Albert-Ludwigs-Universitaet Freiburg i. Br.

Charisma Malixi aus Bataan, den Philippinen

WS 2007/2008

Erstgutachter: Herr Professor Dr. Juergen Rueland Zweitgutachterin: Frau Professor Dr. Gisela Riescher

Vorsitzender des Promotionsausschusses Der Gemeinsamen Kommission der Philologischen, Philosophischen und Wirtschafts- und Verhaltenswissenschaftlichen Fakultaet: Herr Professor Dr. Hans-Joachim Gehrke

Datum der Fachprüfung im Promotionsfach: 22. Februar 2008 FOREWORD

I am dedicating this Dissertation to my late father, Rodolfo, my mother, Leonida, my siblings, Elizabeth and Richard. I am extending my appreciation to my friends and colleagues from the University of the Philippines, the National Economic and Development Authority (NEDA) and the University of Freiburg, especially to Ms. Coralie Pison-Hindawi and friends in Alban-Stolz-Haus, Freiburg.

For their statistical support, I am indebted to Dr. Manfred Heisterkamf from Rechenzentrum, University of Freiburg, Mr. Percival Pastrana from Proctor and Gamble, Beijing and Ms. Joanne Tolentino from NEDA-Public Investment Staff.

For his editorial assistance, I am thanking Mr. Edwin Daiwey from NEDA- Development Information Staff.

Thank you to my past Professors and mentors – Prof. Dr. Gisela Riescher, Wissenschaftliche Politik, University of Freiburg ; PD Dr. Baldo Blinkert, Institut für Soziologie, University of Freiburg; Prof. Dr. Marianne Rodenstein, University of Frankfurt; and Prof. Olivia Caoili and Prof. Ledivina Cariño, University of the Philippines.

I am equally grateful to Deutscher Akademischer Austauschdienst (DAAD) for giving me the opportunity to study in Germany, specifically in a prime University and to learn the German language in Goethe-Institut Bremen.

Lastly, I am sharing this Dissertation with my Doktorvater - Prof. Dr. Jürgen Rüland. Without his support, this Dissertation will not come into fruitition.

i Zusammenfassung

Mit dem Local Government Code (LGC) verabschiedete der Philippinische Kongress 1991 eine Dezentralisierungsreform, die nicht nur im Lande selbst, sondern in ganz Südostasien und weit darüber hinaus für neue Standards sorgte. Die Reform übertrug den Gemeinden zahlreiche neue Aufgabenbereiche, setzte Maßstäbe bei der Erweiterung der kommunalpolitischen Partizipationsmöglichkeiten für zivilgesellschaftliche Akteure und stattete die Kommunen mit deutlich mehr Mitteln als in der Vergangenheit aus. Gerade dieser fiskalische Aspekt weckte große Hoffnungen, dass die Kommunen von nun an autonomer handeln können und die Dezentralisierung damit auch einen Beitrag zur Re-demokratisierung des Landes nach dem Sturz des Marcos-Regimes 1986 leistet. Bislang allerdings liegen gerade mit Blick auf die kommunalen Finanzen nur sehr wenige aussagekräftige Studien vor, aus denen sich rund 15 Jahre nach Beginn der Reform erschließen ließe, inwieweit sie die Handlungsmöglichkeiten lokaler Politik erweitert haben. Die hier vorgelegte Studie unternimmt auf der Grundlage eines 10-Jahres Datensatzes einen solchen Versuch.

Hauptfragestellung der Studie war herauszufinden, inwieweit die Übertragung neuer Aufgabenbereiche philippinischer Kommunen mit einer adäquaten Finanzausstattung einhergeht. Dabei sollte vor allem die Effektivität der Kommunen bei der Mobilisierung von Finanzmitteln untersucht werden. Weiter ging es darum, die Motivationen der lokalen politischen Entscheidungsträger den vorhandenen Finanzrahmen voll auszuschöpfen zu ergründen und die politischen Rahmenbedingungen für den Erfolg oder Misserfolg der Reform zu bestimmen.

Dazu wurde in Kapitel 1 zunächst der Versuch unternommen, die philippinische Dezentralisierungsreform demokratietheoretisch und fiskaltheoretisch zu verorten. Grundlage dafür war die neuere theoretische Literatur zu Dezentralisierungsfragen. Aus dieser theoretischen Einordnung wurden die oben benannten Fragestellungen abgeleitet und Hypothesen formuliert.

Kapitel 2 skizziert die politischen Rahmenbedingungen, innerhalb derer die Dezentralisierungsreformen durchgeführt wurden. Sie gehen deutlich über frühere Reformanästze hinaus und stellen somit erstmals einen ernsthaften Versuch dar, die Kommunen des Landes aus ihrer großen Abhängigkeit von der Zentralregierung

ii herauszulösen. Das in den Philippinen seit der Malolos Verfassung von 1899 bestehende präsidentielle Regierungssystem hat zumindest in der Vergangenheit diese Abhängigkeiten zusätzlich verstärkt.

Kapitel 3 gründet auf einem kompletten und umfassenden, den Zeitraum von 10 Jahren abdeckenden Datensatz (1991-2001), der eine eingehende einnahme- wie ausgabenseitige Analyse der Finanzentwicklung philippinischer Kommunen erlaubte. In diesem Kapitel wird mithin die Reform der Gemeindefinanzen aus einer Makroperspektive beleuchtet. Hierbei zeigte sich, dass das Finanzaufkommen der philippinischen Gebietskörperschaften seit Beginn der Dezentralisierungsreformen in der Tat sprunghaft gewachsen ist. Allerdings verlassen sich philippinische Lokalpolitiker primär darauf, die nationalen Zuweisungen (d.h. vor allem den Internal Revenue Allotments, IRA) abzuschöpfen. Neue, von der Reform erschlossene Finanzquellen, wie Kredite, ausländische Entwicklungshilfezuwendungen und andere moderne Finanzierungsinstrumente werden dahingegen nur sehr zögerlich in Anspruch genommen. Zwei Gründe spielen dabei eine Rolle: Erstens, die mit der Erschließung dieser Ressourcen verbundenen hohen Transaktionskosten und, zweitens, die oft nur kurze (dreijährige) Amtsperiode, die länger angelegte und nachhaltige Finanzierungsplanung erheblich erschwert. Zudem lassen sich in verschiedenen Dienstleistungsbereichen – so vor allem im Gesundheitssektor – deutliche Rezentralisierungstendenzen feststellen, die sich aus administrativen Kompetenz- und Managementproblemen ergeben. Schließlich zeigte sich im weiteren Verlauf der Studie, dass nach einer Inflationsbereinigung der den Kommunen zur Verfügung stehenden Finanzmittel die meisten Gebietskörperschaften 10 Jahre nach Beginn der Finanzreformen schlechter dastanden als noch 1991.

Kapitel vier gründet auf umfangreichen Felderhebungen, Experteninterviews und der Auswertung lokaler Dokumente in zwei ausgewählten Provinzen (Pampanga, Bataan) und insgesamt acht Kommunen von unterschiedlichem Status, unterschiedlicher Größenordnung und unterschiedlichem Entwicklungsstand (San Fernando City, Gagua, Magalang, Sta. Rita in der Provinz Pampanga und Balanga City, Dinalupihan und Pilar in der Provinz Bataan). Das Kapitel überprüft bzw. ergänzt damit die in Kapitel drei gewonnenen Einsichten in die Dezentralisierungsreformen aus einer Mikroperspektive. Dabei zeigte sich auch hier, dass mit einer Ausnahme (Balanga) alle Gebietskörperschaften zum Teil erhebliche Zuwächse bei den lokalen Finanzen aufzuweisen haben, aber auch, dass die Reform im Wesentlichen die größeren, ohnehin bereits besser situierten Kommunen bevorzugt. Sie sind aufgrund ihrer

iii besseren Personalausstattung und ihrer besseren administrativen Infrastruktur eher in der Lage die neuen Finanzierungsinstrumente zu nutzen. Die akkumulierten, zum Teil erheblichen Guthaben indes verweisen auf nicht unerhebliche Probleme bei der langfristigen Planung und Budgetierung von Entwicklungsvorhaben der Gebietskörperschaften. Gerade auch am Beispiel einzelner Gemeinden ließen sich die schon in Kapitel drei identifizierten Rezentralisierungstrends ausmachen.

Damit fallen letztendlich – wie das zusammenfassende fünfte Kapitel zeigt - die Leistungen der philippinischen Dezentralisierungsreform recht ambivalent aus. Die Finanzdezentralisierung vermochte zwar die Autonomie der Gebietskörperschaften die ihnen zur Verfügung stehenden Mittel autonom zu nutzen erheblich zu erweitern, was aber trotz zum Teil erheblich gestiegener Ausgaben nicht zu einem durchgängigen lokalen Entwicklungsschub geführt hat. Noch immer spielen politische, im Wesentlichen um ihre Wiederwahl kreisende Erwägungen der kommunalen Eliten eine zentrale Rolle bei der Bereitschaft die lokalen Ressourcen auch vollumfänglich zu mobilisieren. Dies gilt vor allem für die Erhebung lokaler Steuern, mit der zudem eine oft niedrige Erhebungseffizienz einhergeht. Zudem erscheinen lokalen Politikern die mit der Erschließung neuer Finanzressourcen verbundenen Transaktionskosten zu hoch, um sich um derartige Mittel zu bemühen. Somit entfällt noch immer ein hoher Anteil der lokalen Ausgaben auf den Titel „allgemeine Verwaltung“, während der Anteil der Investitionen nach wie vor gering bleibt. Dies gilt insbesondere für kleine und strukturschwache Gemeinden, während größere Gemeinden eher bereit und in der Lage sind, größere Investitionen zu tätigen. Dies gilt vor allem dann, wenn die lokale politische Führung vergleichsweise sicher sein kann, nach Ablauf der kurzen, nur dreijährigen Amtszeit wiedergewählt zu werden.

REVIEW AND ASSESSMENT OF DECENTRALIZATION IN THE PHILIPPINES FOCUSING ON LOCAL RESOURCE MOBILIZATION (1991-2001)

Table of Contents

Page Number Foreword i Summary in German ii-iv List of Abbreviations vii-x List of Tables xi-xii List of Figures xii-xiv Chapter 1 1-19 Introduction 1-3 Decentralization and Political Theory 3-9 Decentralization and Economic Theory 10-13 Statement of the Problem and Research Question 13-15 Methodology and Research Techniques 15-19 Organization of the Study 19

Chapter 2: The Philippine Political System: Decentralization and 20-57 Government Legacies of Centralization in the Philippines Pre-Colonial Era 21-22 Spanish Colonial Period 22-24 American Rule 24-26 Japanese Occupation 26-27 The Third Republic 27-28 Marcos Dictatorship 28-31

The 1987 Constitution – Toward Decentralization? Constitutional Basis of Government 32-34 Challenges to the Constitution 34-36 Executive Centralization 36-38 The Philippine Legislature 38-40 The Judiciary 40-41 Inter-Branch Relationship 41-42

The Local Government Units (LGUs) Definition 42-44 LGUs and Decentralization 44-45

v National Government-LGU Relationships 45-48 The Question of Dependency 48-50 Decentralization and Development 50-52 Decentralization and the Anti-Poverty Effect 52-56

Chapter 3: The Local Government Code and the Local Financing 58-211 Structure Decentralization and Local Autonomy Through the Local Government Code of 1991 Personnel Decentralization 59-64 Functional Devolution 64-86 Fiscal Decentralization 86-88 The Local Financing Structure Trends in Local Financing 89-100 Trends in Local Expenditure 102-118 Sources of Revenues Internally-Generated Revenues 119-125 Externally-Generated Revenues 125-187 Evaluation of LGC and LGU Performance 188-198 Summary and Preliminary Analysis 199-203

Chapter 4: Case Studies on Decentralization – Provinces of Pampanga 204-341 and Bataan The Central Luzon Region 205-213 Financial Decentralization in Pampanga Pampanga Province: An LGU Profile 214-216 Trends in Local Financing in Pampanga 216-225 Expenditure Trend in Pampanga 225-233 City of San Fernando 233-249 Municipality of Guagua 250-261 Municipality of Magalang 262-276 Municipality of Santa Rita 276-284 Financial Decentralization in Bataan Bataan Province: A Profile 284-286 Bataan’s Political Dynamics 286-292 Trends in Financial Management 292-303 City of Balanga 303-312 Municipality of Mariveles 312-324 Municipality of Dinalupihan 324-334 Municipality of Pilar 334-341 Summary 342-345

Chapter 5: Conclusion 346-359

List of People Interviewed 360-363 Bibliography 364-375

List of Abbreviations

ADB Asian Development Bank ALGU Allotment for Local Government Units AFMA Agricultural Farm Modernization Act AO Administrative Order ARMM Autonomous Region of Muslim Mindanao ATI Agricultural Training Institute ATM Automated Teller Machine AusAID Australian Agency for International Development BAP Banker’s Association of the Philippines BDC Bataan Development Corporation BEZ Bataan Economic Zone BIADP Bukidnon Integrated Area Development Project BIR Bureau of Internal Revenue BLGF Bureau of Local Government Finance BLT Build-Lease-Transfer BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung or Federal Ministry for Economic Cooperation and Development BNPP Bataan Nuclear Power Plant BOT Build-Operate-Transfer BP Batas Pambansa BT Build-Transfer CAMDP Clark Area Municipal Development Project CARL Comprehensive Agrarian Reform Law CBRM Community Based Resource Management CC Cabinet Committee CDF Countrywide Development Fund CIDSS Countrywide Integrated Delivery of Social Services CLUP Comprehensive Land Use Plan CO Capital Outlay COA Commission on Audit COMELEC Commission on Elections CSC Civil Service Commission CSEZ Clark Special Economic Zone DA Department of Agriculture DAR Department of Agrarian Reform DBM Department of Budget and Management DBCC Development Budget Coordinating Council DBP Development Bank of the Philippines DECS or DepEd Department of Education, Culture and Sports or Department of

vii Education DENR Department of Environment and Natural Resources DILG Department of Interior and Local Government DOF Department of Finance DOLE Department of Labor and Employment DOT Department of Tourism DOT Develop-Operate-Transfer DOH Department of Health DPWH Department of Public Works and Highways DSWD Department of Social Welfare and Development DTI Department of Trade and Industry ECC Environmental Compliance Certificate EDSA Epifanio delos Santos Avenue EIS Environmental Impact Study EO Executive Order FAPs Foreign-Assisted Projects GAD Gender and Development GFIs Government Financing Institutions GOCCs Government-Owned and Controlled Corporations GOLD Governance and Local Democracy Project GONGOs Government-organized NGOs GTZ Deutsche Gesellschaft für Technische Zusammenarbeit or German Technical Cooperation IAD Integrated Area Development ICC Investment Coordination Committee IFIs International Financial Institutions IRA Internal Revenue Allotment IRR Implementing Rules and Regulations IULA International Union of Local Authorities JBIC Japan Bank for International Cooperation JICA Japan International Cooperation Agency KBL Kilusang Bagong Lipunan KfW Kreditanstalt für Wiederaufbau or German Development Bank LBP Land Bank of the Philippines LCEs Local Chief Executives LDP Liberal Democratic Party LEDAC Legislative-Executive Advisory Committee LGAMS Local Government Assistant and Monitoring Service LGC Local Government Code LGEF Local Government Empowerment Fund LGSEF Local Government Service Equalization Fund LGUGC Local Government Unit Guaranty Corporation LGUs Local Government Units LP Liberal Party LPPM S Local Productivity and Performance Measurement LPP Local Government Performance Program

viii LSB Local Special Bodies LWUA Local Water Utilities Administration MBN Minimum Basic Needs MDF Municipal Development Fund MDGs Millennium Development Goals MFC Municipal Finance Corporation MMC Metro Manila Commission MOA Memorandum of Agreement MOOE Maintenance and Other Operating Expenditure MTPDP Medium-Term Philippine Development Plan NCA Notice of Cash Allocation NCR National Capital Region NEDA National Economic and Development Authority NIA National Irrigation Authority NIRC National Internal Revenue Code NGAs National Government Agencies NGOs Non-Government Organizations NIA National Irrigation Administration NPA New People’s Authority NPC National People’s Coalition NRC National Revenue Code NRDC National Resources Development Corporation NTRC National Tax Research Center NUCD National Union of Christian Democrats NSCB National Statistics Coordination Board OCWs Overseas Contract Workers ODA Official Development Assistance O&M Operations and Maintenance PACAP Philippines-Australia Community Assistance Program PAF Poverty Alleviation Fund PARuDEP Progressive Action for Rural Development Special Project PBAC Pre-qualification, Bids and Awards Committee PCCD Presidential Council on Community Development PD Presidential Decree PDAC Project Development Assistance Council PDP Partido Demokratiko ng Pilipinas PESO Philippine Employment Services Office PEZA Philippine Export Zone Authority PNB Philippine National Bank PNOC Philippine National Oil Corporation PNP Philippine National Police POs People’s Organizations PPA Philippine Ports Authority PPDO Provincial Planning Development Office PPIP Private-Public Investment Partnerships PREMIUMED Project for Essential Municipal Infrastructure Utilities,

ix Maintenance and Engineering Development. PRMDP Philippine Regional Municipal Development Project PSF Presidential Social Fund PSGC Philippine Standard Geographic Code PSWDO Provincial Social Welfare and Development Office (PSWDO) RA Republic Act RPT Real Property Tax RTC Regional Trial Court SARO Special Allotment and Release Order SBAMDP Subic Bay Area Municipal Development Project SBCDA Subic Bay Conversion Development Authority SBMA Subic Bay Metropolita Authority SEC Securities and Exchange Commission SOC Special Oversight Committee SRC Social Reform Council SUCs State Universities and Colleges SZOPAD Special Zone of Peace and Development TB Technical Board TESDA Technical Education and Skills Development Authority ULAP Union of Local Authorities of the Philippines UNCHS United Nations Commission on Human Settlements UNDP United Nations Development Programme USAID United States Agency for International Development WB World Bank

x List of Tables

Table Title Page Number Number 1-1 Respondents Interviewed for the Study: Agency and Province 17-18 2-1 Poverty Incidence in the Philippines 52 2-2 Distribution of LGUs by Income Class 54 3-1 LGUs and Mandatory/Appointive Local Officers 60 3-2 Number of Government Personnel by Major Subdivision and 61 Status of Appointment 3-3 Devolution of Personnel 66 3-4 1991-2001 Local Government Expenditures 68 3-5 List of Re-Nationalized Hospitals 76 3-6 Fund Support to CIDSS 81 3-7 Budgetary Appropriation for AFMA 85 3-8 Change in IRA Distribution 87 3-9 Consolidated Income 1985-1990 – Provinces, Cities, 92 Municipalities 3-10 Consolidated Income 1991-2001 – Provinces, Cities, 94 Municipalities 3:10.1 Consolidated Income 1991-2001 - Provinces,Cities, Municipalities 187 (in Pesos) and Real Growth 3-11 Projected Income 2002-2010 - Provinces, Cities, Municipalities 98 3-12 1985-1990 Local Government Expenditures 102 3-13 1991-2001 Local Government Expenditures 104 3-14 Projected 2002-2010 Local Government Expenditures 107 3-15 Consolidated Budget Operations Statement of LGUs 1985-1990 110 3-16 Consolidated Budget Operations Statement of LGUs 1991-2001 110 3-17 Consolidated Budget Operations Statement of LGUs 2002-2010 111 3-18 National Government Cash Budget 113 3-18.1 National Government Cash Budget and Real Growth 187 3-19 Growth Rate of the National Government Expenditures, by 114-117 Sectoral Classification 1975-2003 3-20 Percent Distribution of National Government Expenditures, by 118-119 Sectoral Classification 1975-2003 3-21 Collection Efficiency Rate: Fiscal Year 1992 and 1997 123 3-22 Cancellations for the WB-CBRM Project 138 3-23 Official Development Assistance (ODA)Facilities For Local 145-150 Government Units 3-24 Local Government Finance – IRA Levels 162 3-25 LGU Submission 189 4-1 Consolidated Income 1991-2001-Region III 211 4-2 Region III Local Government Expenditures 213 4-3 Consolidated Income 1991-2001 – Province of Pampanga 219 4-4 Local Government Expenditures Province of Pampanga 227

xi Table Title Page Number Number (1991-2001) 4-5 Pampanga Consolidated Income and Expenditure 230 4-6 Mayors of San Fernando 234 4-7 Consolidated Income 1991-2000 – City of San Fernando 239 4-8 Local Government Expenditures - City of San Fernando 241 4-9 Consolidated Income and Expenditure-City of San Fernando 245 4-10 Consolidated Income 1991-1998 – Municipality of Guagua 251 4-11 Surplus/Deficit - Municipality of Guagua (1991-1998) 252 4-12 Income for 1999-2000-Municipality of Guagua 254 4-13 Expenditure for 1999-2000- Municipality of Guagua 255 4-14 Surplus/Deficit - Municipality of Guagua (1999-2000) 255 4-15 Surplus/Deficit 1991-1998 –Municipality of Magalang (1991- 265 1998) 4-16 Consolidated Income - Municipality of Magalang (1991-1998) 267 4-17 Local Government Expenditure - Municipality of Magalang 273 (1991-1998) 4-18 Consolidated Income-Municipality of Santa Rita (1991-1998) 279 4-19 Local Government Expenditure - Municipality of Santa Rita 282 (1991-1998) 4-20 Provincial Governors, Province of Bataan 288-289 4-21 Consolidated Income – Province of Bataan (1991-2001) 293 4-22 Local Government Expenditure - Province of Bataan (1991-2001) 295 4-23 Real Property Tax Collection Efficiency 297-298 4-24 Income and Expenditure of Bataan 302 4-25 Consolidated Income of Balanga (1991-1998) 307 4-26 Local Government Expenditure of Balanga (1991-1998) 309 4-27 Income and Expenditures of Balanga 311 4-28 Consolidated Income of Mariveles (1991-1998) 315 4-29 Local Government Expenditure of Mariveles (1991-1998) 321 4-30 Income and Expenditures of Mariveles 322 4-31 Consolidated Income of Dinalupihan (1991-1998) 330 4-32 Local Government Expenditure of Dinalupihan (1991-1998) 333 4-33 Income and Expenditure of Dinalupihan 334 4-34 Consolidated Income of Pilar (1991-1998) 338 4-35 Inventory of Existing Municipal Employees 339 4-36 Local Government Expenditures of Pilar 340 4-37 Income and Expenditure of Pilar 341 4-38 Summary 342-345

xii List of Figures

Figure Title Page Number Number 2-1 Structure and Function 34 3-1 1991-2001 Local Government Expenditures 69 3-2 Budget of Selected Devolved Agencies 71 3-3 Consolidated Income of LGUs (1985-1990) 90 3-4 Consolidated LGU Income (Average, 1985-1990) 91 3-5 Sources of LGU Income (Average, 1991-2001) 95 3-6 Consolidated LGU Income (1991-2001) 96 3-7 Sources of LGU Income (Average, 2002-2010 Projection) 99 3-8 Projected LGU Income (2002-2010) 100 3-9 1985-1990 Local Government Expenditures 103 3-10 Local Government Expenditures (Average, 1991-2001) 105 3-11 Projected LGU Expenditures (2002-2010) 108 3-12 Projected 2002-2010 Local Government Expenditures 190 3-13 Compliance to Prescribed Offices, Positions, Local Special 191 Bodies (LSBs) 3-14 100% Compliance with Prescribed membership of the 6 Local Special Bodies (LSBs) 191 3-15 Inventory of Local Fiscal Administration Process Indicators 192 3-16 Partial Inventory of Economic Services Indicatory 193 3-17 Inventory of Programs and Projects Implemented by LGUs 194 3-18 Projects by Source of Funding 195 4-1 Sources of Region III Revenues (Average, 1991-2001) 209 4-2 Consolidated Income of Region III (1991-2001) 210 4-4 Region III Local Government Expenditures 213 4-5 Sources of Income of Pampanga (Average, 1991-2001) 217 4-6 Consolidated Income of Pampanga (1991-2001) 218 4-7 Pampanga Provincial Expenditures (Average, 1991-2001) 225 4-8 Pampanga Provincial Expenditures (1991-2001) 226 4-9 Consolidated Income of City of San Fernando 238 4-10 Sources of Income of San Fernando 238 4-11 Expenditures of San Fernando (1991-2001) 242 4-12 San Fernando Expenditures (Average, 1991-2001) 242 4-13 Sources of Revenues: Guagua 253 4-15 Expenditures: Guagua (Average, 1991-1998) 260 4-16 Local Government Exenditures: Guagua 261 4-17 Consolidated Income: Magalang (1991-1998) 268 4-18 Sources of Income: Magalang (Average, 1991-1998) 269 4-19 Expenditures: Magalang (Average 1991-1998) 272 4-20 Local Government Exenditures: Magalang 273 4-21 Sources of Income: Santa Rita (Average, 1991-1998) 280 4-22 Consolidated Income: Sta. Rita (1991-1998) 280

xiii Figure Title Page Number Number 4-23 Expenditures: Santa Rita (Average, 1991-1998) 281 4-24 Local Government Exenditures: Santa Rita 282 4-25 Consolidated Income: Province of Bataan 294 4-27 Expenditures: Bataan Province 295 4-28 Bataan Provincial Expenditures (Average, 1991-2001) 296 4-29 Sources of Revenues: Balanga (Average, 1991-2001) 308 4-30 Consolidated Income of Balanga (1991-1998) 308 4-31 Expenditures of Balanga (Average, 1991-1998) 310 4-32 Local Government Exenditures: Balanga 310 4-33 Sources of Revenues: Mariveles (Average, 1991-1998) 314 4-34 Consolidated Income of Mariveles (1991-1998) 316 4-35 Expenditures of Mariveles (Average, 1991-1998) 321 4-37 Sources of Revenues: Dinalupihan (Average, 1991-1998) 329 4-38 Consolidated Income of Dinalupihan (1991-1998) 329 4-39 Expenditures of Dinalupihan (Average, 1991-1998) 333 4-40 Local Government Exenditures: Dinalupihan 334 4-41 Sources of Revenues: Pilar (Average, 1991-1998) 336 4-42 Consolidated Income of Pilar (1991-1998) 337 4-43 Expenditures of Pilar (Average, 1991-1998) 339 4-44 Local Government Exenditures: Pilar 340

xiv

REVIEW AND ASSESSMENT OF DECENTRALIZATION IN THE PHILIPPINES FOCUSING ON LOCAL RESOURCE MOBILIZATION (1991-2001)

Chapter 1

Introduction

The social scientists, public administrators and technocrats have for decades controversially discussed the best combination of centralized and decentralized structures of government systems. This debate continues unabatedly.

In the field of development studies, the discourse on centralization and decentralization can be traced back to the 1950s. In the years thereafter, the pendulum swung back and forth several times. Periods in which a decentralized government system were considered superior to master the challenges of catch up development changed with periods in which a centralist mood prevailed (Smoke 1994: Local Government Finance in Developing Countries: The Case of Kenya). Since the 1980s, however, as a concomitant of the basic needs approach, poverty alleviation, the rise of nongovernmental organizations (NGOs), the environmental movement, an increasing concern for participation, democracy, good governance practices and rule of the law, decentralization has become a conditio sine qua non in the development discourse.1 The Millennium Development Goals (MDGs) with their target to reduce poverty to one-half by 2015 have, though not explicitly naming decentralization, further reinforced the trend towards the strengthening of local government capacities. Not surprisingly, thus, international organizations have passed conventions calling for a more forceful and sustained decentralization. In 1985 and 1993, the International Union of Local Authorities (IULA), for instance, passed a World Wide Declaration of Local Government, the UN Commission on Human Settlements (UNCHS) passed the World Charter of Local Self-Government2 and the

1 Diana Conyers, Decentralization: the Latest Fashion in Development Administration, in: Public Administration and Development, Vol. 3, No. 1, 1983, pp. 97-109; Jürgen Rüland, Politisch-institutionelle Reformen und De- zentralisierung: Thesen zum Forschungsstand, in: K. Simon, A. Stockmeyer und H. Fuhr (Hrsg.), Subsidiarität in der Entwicklungszusammenarbeit. Dezentralisierung und Verwaltungsreformen zwischen Strukturanpassung und Selbsthilfe, Baden Baden: Nomos Verlagsgesellschaft, 1993, pp. 181-196; Paul J. Smoke, Local Government Finance in Developing Countries. The Case of Kenya, Nairobi: Oxford University Press, 1994. 2 The United Nations Centre for Human Settlements (Habitat) and the World Associations of Cities and Local Authorities Coordination (WACLAC) drafted this consultation document entitled “Towards a World Charter of Local Self-Government” on 25 May 1998. Its objectives include the drawing-up of an internationally agreed, adaptable framework for the practice of local democracy, as a vital contribution to the improvement of people’s living conditions in all continents and regions. 1

Rio Summit of 1992 passed Agenda 21.3 Moreover, most bilateral and multilateral donors have made decentralization a cross-cutting concern of their aid programs and initiated ambitious decentralization projects. As early as 1983, the Ministry of Economic Cooperation and Development (BMZ) of the Federal Republic of Germany named decentralization prominently in its Sector Paper on “Public Administration Aid” and since then decentralization appears as a developmental priority in many country strategy papers of the ministry. Also the ministry’s Asia Strategy of 2001 and various decentralization policy papers of the German Agency for Technical Cooperation (GTZ) view decentralization as a major component of a participatory and responsive system of government, poverty alleviation and better public service delivery.

However, Asian countries have only reluctantly embarked on decentralization. Here, traditional concepts of power at variance with decentralization have been a major obstacle to the development of more dynamic local authorities. The Javanese concept of power, for instance, regards power as indivisible and, hence, decentralization as heralding a decay of governmental authority. 4 In other countries, such as the Philippines, a traditionally decentralized system of government was profoundly transformed through the centralizing 5 effects of colonial rule; the legacies of which are still widely felt in central-local relations.

Against this background, the Local Government Code (LGC) enacted by Congress, the Philippine legislature, in 1991, constitutes one of the boldest, most progressive and most far-reaching decentralization schemes in Asia. The Code was the final brush in a process of re-democratization that commenced with the disposal of long-time dictator Ferdinand E. Marcos in a People’s Power uprising in February 1986 and was continued with the writing of a new constitution and elections at all levels of the political systems in 1987 and 1988. 6 The Local Government Code implemented provisions of the 1987 Constitution for a broad concept of local autonomy and thus paved the way for a sweeping devolution of functions

3 The Rio Declaration on Environment and Development highlights the role of local communities in environmental management and development because of their knowledge and traditional practices. 4 Benedict, R.O'G. Anderson "The Idea of Power in Javanese Culture." Pages 1-69 in Claire Holt (ed.), Culture and Politics in Indonesia. Ithaca: Cornell University Press, 1972. 5 Romeo B. Ocampo/Elena M. Panganiban, The Philippine Local Government System. History, Politics and Finance, Manila: Local Government Center, College of Public Administration, University of the Philippines, 1985, pp. 2-4; Alex Brillantes, “Decentralization in the Philippines: An Overview”, in: Philippine Journal of Public Administration, Vol. 31, No. 2,April 1987 p. 134. 6 On the disposal of President Marcos and the collapse of his authoritarian regime, see David Wurfel, Filipino Politics. Development and Decay, Ithaca and London: Cornell University Press, 1988; David G. Timberman, A Changeless Land. Continuity and Change in Philippine Politics, New York and Singapore: M.E. Sharpe and

from the central government to local authorities, that is, the provinces, cities, municipalities and barangay7of the country. With it went a strengthening of local democracy through novel participatory mechanisms, the recognition of civil society as a major actor in local politics and decision-making and, at least on paper, a marked strengthening of local fiscal capacities.

It is a truism that without adequate financial resources and their effective use even the most well-meaning decentralization reforms are destined to failure. This thesis thus departs from the premise that any devolution of governmental functions to local authorities must be matched by sufficient financial resources. Without adequate revenues and resources, local governments will neither be able to justify the expectations of the drafters of the reform nor of the wider public for an improvement of services, better living conditions, poverty alleviation, good governance and a more dynamic process of development. The subsequent chapters of the dissertation will address this pivotal question. They will analyze how the decentralization reforms in the Philippines affected the fiscal capacities of local governments and how they impacted on service delivery. The trends of local finances will be examined on two levels: On the basis of aggregated national data and by in-depth studies of a selected cross-section of Philippine local governments in the two Central Luzon provinces of Bataan and Pampanga.

Decentralization and Political Theory

The question on whether to centralize or decentralize has been discussed by political thinkers since the late eighteenth century. It was first raised in The Federalist Papers (1787- 1788) by Hamilton, Jay and Madison in searching for the appropriate institutional arrangements between the federal government and state governments of the United States of America. The newly ratified constitution addressed this question by delegating powers to the federal government, which are deemed to be few and defined. And the state governments implement the remaining powers which are considered to be numerous and indefinite. The implication is: “the states were the greater beneficiaries.” Specifically, the federal powers are limited to war, peace, negotiation and foreign commerce where the power of taxation is

Institute of Southeast Asian Studies, 1991; Mark Thompson, The Anti-Marcos Struggle: Personalistic Rule and Democratic Transition in the Philippines, Quezon City: New Day Publishers, 1995. 7Barangays are grassroots administrative units in the urban as well as in the rural areas of the Philippines. For more details, see Chapter 2. 3

connected.8 There is thus a clear delineation of powers - as determined by the functions involved - between the states and the federal government.

The main motivation of the three authors of “The Federalist” for devising a federal system of government was the search for a balanced institutional design, one preventing a tyranny of the majority, a despotic rule by an individual or an oligarchy, but at the same time enabling the establishment of a forceful and stable government. The famous Letter No. 10, presumably authored by Madison, thus adds a vertical dimension to Locke’s and Montesquieu’s horizontal division of powers. The key concern of this additional check in the American government system is thus to curtail and hedge concentration of power. Moreover, in consonance with the principle of representation, the vertical division of power permits the transfer of a democratic system to a large territory. Up to then, the concept of “democracy” was equated with small city republics in which all citizens participate in decision-making.9

Alexander de Tocqueville, in comparing the American and French political systems in 1830, corroborated the importance of a vertical division of power. For him, decentralization and local self-government are – aside from an elective civil service, freedom of the press and an independent judiciary – major institutional safeguards for individual freedoms and protection against democratic despotism. 10

De Tocqueville cautions against extreme centralization because it is in his view not a sustainable form of government. An individual can not achieve its utmost creativity and innovation in an over-centralized polity. Centralization may groom an individual to be a leader. It, however, fails to move the nation towards prosperity. With centralization, the integration of individual deeds may not necessarily contribute to national development. De Tocqueville, in fact, foresees the weakening of the government due to overcentralization.

Relatedly, the iron law of oligarchy of Robert Michels elaborates on the necessity of a high degree of centralized power to achieve effective bargaining and operations. This

8 Alexander Hamilton, John Jay and James Madison, The Federalist Papers: 1787-1788, 1964, NY: Washington Square Press, Inc. pp. 99-102. 9 Dieter Oberndörfer/Wolfgang Jäger, Klassiker der Staatsphilosophie, Band 2, Stuttgart: Köhler, 1971, pp. 51- 52 and pp. 56-65. 10 Ibid., p. 122; pp.130-131. 4

centralized power, however, is – as Michels admits - also a source of weakness since it constrains popular participation and (mass) mobilization.11

In development theory, initially a more centralist sentiment prevailed. Especially in mainstream modernization theory of the 1960s and 1970s the belief was widely shared that catch up development needs a strong state. A strong state was essentially one in which all powers were concentrated at the center in order to overcome vested traditional interests opposing modernization. Key agents for modernization were either a tightly organized political party,12 the bureaucracy13 or even the military.14 Viewed from hindsight, somewhat surprisingly, for some theorists the model to emulate was the Soviet Union which was admired by them as a great “developmental machine.” 15 Loewenthal, by referring to the enormous developmental performance of the Soviet Union between the 1920s and 1960s, thus called for the establishment of a “development dictatorship” (Entwicklungsdiktatur), 16 a concept that even went beyond Shil’s “tutelary democracy.”17 While these positions marked extremes in the debate, the view was widely shared that in the initial phase of the transition to modernity, centralist authoritarian rule was acceptable, although it was believed that – as development proceeds – it would over time give way to a liberal democracy following the Anglo-Saxon model.

One of the few modernization theorists deviating from this argumentative pattern was the Swiss Sociologist Richard F. Behrendt. While Behrendt shares the main point of modernization theorists, that is, that underdevelopment is caused primarily by endogenous

11 Robert Michels, Political Parties : A Sociological Study Of The Oligarchical Tendencies Of Modern Democracy, Glencoe, Illinois : Free Press, 1958; see Jeffrey C. Isaac Power and Marxist Theories: A Realist View, 1987, pp. 136-137. 12 Samuel P. Huntington: Social and Institutional Dynamics in One-Party Systems, in: Samuel P. Huntington/Clement Moore (eds.), Authoritarian Politics in Modern Society. The Dynamics of Established One- Party Systems, New York and London: Basic Books, 1970. 13 Shmuel N. Eisenstadt, “Bureaucracy and Political Development” In Joseph G. Palombara, Bureaucracy and Political Development / Contributors: Carl Beck…[et al/] Princeton, New Jersey: Princeton University Press,1963, 1967 (2nd ed.). 14 Lucian W. Pye (1962) Politics, Personality, and Nation-Building: Burma's Search for Identity / [A study from the Center for International Studies, Massachusetts Institute of Technology] . New Haven : Yale University Press. 15 See Richard Loewenthal, „Staatsfunktion und Staatsform in den Entwicklungsländern“, in: Richard Löwenthal (ed.), Die Demokratie im Wandel der Gesellschaft, Berlin: Colloquiumverlag 1964, pp. 164-192. For an overview of the debate in these days, see Jürgen Rüland/Nikolaus Werz, Von der “Entwicklungsdiktatur” zu den Diktaturen ohne Entwicklung – Staat und Herrschaft in der politikwissenschaftlichen Dritte-Welt-Forschung, in Franz Nuscheler (ed.), Dritte Welt-Forschung Entwicklungstheorie und Entwicklungspolitik, in: Politische Vierteljahresschrift, Sonderheft 16, 1985, pp. 210-232. 16 Ibid. 17 Edward Shils, Political Development in New States, The Hague : Mouton, 1962. 5

factors, 18 he draws radically different conclusions. A sharp critic of the concept of “development dictatorship,” Behrendt regards authoritarian rule in developing countries as breeding political instability, violence, abuse of power and rampant corruption.19 For him the key to successful late development is “fundamental democratization” which entails the dynamization of development on all levels of society through subsidiarity, pluralism, decentralization and a vibrant local self-government. Development, in other words, must be conceived as a bottom-up process in which the greatest possible number of people participates. 20

Behrendt claims that the administrative aspect of democratization is decentralization.21 Unlike many of his predecessors, he is able to provide for a concrete definition of decentralization. According to Behrendt, decentralization means administration by local authorities of all basic services within the reach of each individual or family, instead of channelling it through the central government. Education, health services, agriculture and social welfare are among the services he has foremost in mind. This arrangement intends to be responsive to the specific needs of the local constituents.

Behrendt further argues that decentralization is neither deconcentration nor regionalization. Considering only the aspect of deconcentration or regionalization is deemed to be false decentralization.22 In addition, authoritarian leadership at the local level is likewise false decentralization.23

This normative school of decentralization, of which Behrendt was an early, albeit leading representative, emphasized the vertical division of power. Through multilayered government, power is dispersed between many players and the dispersal and control of power strengthens the rule of law. Policymaking on more than one level, the playing on several

18 On development theory, see the overviews by Klaus-Georg Riegel, (1976) Politische Soziologie unterindustrrialisierter Gesellschaften: Entwicklungsländer, Wiesbaden: Akademische Verlag Gesellschaft. Ulrich Menzel (1991), Geschichte der Entwicklungstheorie, Einführung und systematische Bibliographie, Hamburg : Dt. Übersee-Inst., Andreas Boeckh, „Entwicklungstheorien. Eine Rückschau“. In Dieter Nohlen and Franz Nuscheler (eds.), Handbuch der Dritten Welt. Grundprobleme, Theorien, Strategien, Bonn: Verlag C.H.F. Dietz Nachf., 110-130. 19Behrendt 1965, p. 445. 20 Ibid., p. 520. 21 Richard F. Behrendt, Soziale Strategie für Entwicklungsländer: Entwürf einer Entwicklungssoziologie, 2. Ergänzte Auflage, Frankfurt/Freiburg: S. Fischer Verlag, 1965 and. 1968 pp. 525-531. 22 Ibid, p. 530. The idea is similar to Harold F. Alderfer, Local Government in Developing Countries, New York-Toronto-London 1964, p. 176 and Philip Mawhood, “Negotiating from Weakness: The Search for a Model of Local Government in Countries of the Third World”, in Planning and Administration, 1974, 1:17-32. 23 Ibid. 6

chess boards, creates veto points,24 makes decisions more transparent and forces political actors to communicate, compromise and cooperate. Decentralization enhances participatory opportunities for citizens, thereby increasing ownership of local development initiatives, and reduces the distance between rulers and ruled – a point already highlighted by Madison. As explained by Dahl, “the easier accessibility of local governments makes it easier for citizens to get in touch with officials.” 25 The capability of the community to communicate their needs with the LGUs leads to people-government interaction, an essential ingredient of people empowerment. Decentralized government systems are also believed to better protect minority rights – an ability particularly significant to maintain peace in ethnically deeply divided societies. Finally, decentralization creates space for political experiments and innovation, stimulates political learning, provides opportunities for political apprenticeship (local government as school of democracy), widens the social base of political leadership and intensifies elite circulation. 26 Summing up, local self-government, often equated with local autonomy, rests on what has become known as the subsidiarity principle which means that government functions are implemented at the lowest possible government level. Only if lower order government units, that is, local governments, do not possess the managerial or technical capacities to effectively carry out these responsibilities will they be relegated to higher levels of government, albeit only as long as the lower levels are able to assume them. More recently, this notion of subsidiarity has been termed “vertical subsidiarity” and is distinguished from “horizontal subsidiarity,” that is, the provision of services and/or the implementation of functions by private actors (such as non-governmental organizations, NGOs, or other civil society organizations). 27

A second school of thought emerged in the early 1980s. It rehearsed classical democracy theory much less than the normative school and rather stressed functional arguments.28 Viewed from this angle, decentralization figured as an institutional device to increase the

24 George Tsebelis, Veto Players : How Political Institutions Work? . - New York : Sage; Princeton, NJ : Princeton University Press, 2002; Arendt Lijphart, Democracies. Patterns of Majoritarian ansd Consensus Government in Twenty-One Countries, New Haven and London: Yale University Press, 1984; Gisela Riescher/Sabine Russ/Christoph M. Haas, Zweite Kammern, München and Wien: R. Oldenbourg, 2000. 25 Robert A. Dahl, Democracy in the United States: Promise and Performance, Chicago: Rand McNally, College Publishing Company, 1967, pp. 243-272. 26 Rüland 1993, pp. 181-185. 27 Reinecke 1998; see also Kampffmeyer et al. 1998. 28 Hans F. Illy (ed.) 1986 Entwicklung durch Dezentralisierung? : Studien zur Kommunal- und Regionalverwaltung in der Dritten Welt, München : Minerva-Publications. pp. 9-23; Rüland 1993, pp. 187-190. 7

efficiency of government action and development policies. The proximity of local governments to the grassroots facilitates more adequate policies than if decisions are made in a remote capital. Uphoff ascribes to them a comparative advantage in channeling resources and shaping project outcomes and thus suggests that investment decisions for local development should be made by local institutions. This includes funds coming from foreign donors which usually deal with national-level organization because these are the first and most easily found. The acceleration of progress toward local institutional development may thus also begin at the international level. 29 Decentralization also helps to avoid log-jamming in the central bureaucracy, division of labour speeds up administrative action and thus reduces transaction costs. In other words, local governments may reduce time, effort and finances spent in delivering basic services. Moreover, in countries where nation-building is still underway or which are highly diverse in terms of resource endowment, environment, cultural and socioeconomic development, decentralization is regarded by this school of thought as a politically stabilizing factor. Finally, a decentralized system of government contributes to a better administrative penetration of peripheries where state authority has usually been notoriously weak.30 The functionalist view shared with the normative school of thought the firm belief that decentralization reforms would spur socioeconomic development.

The most influential contribution from the functional school comes from Dennis Rondinelli and Chabbir M. Cheema 31 Rondinelli and Cheema distinguish four major sub-types of decentralization:32

29Norman Uphoff, Local Institutional Development: An Analytical Sourcebook with Cases, USA: Kumarian Press, 1986, pp. 257-263 30 Rüland 1993, p. 188. 31 Dennis A. Rondinelli and G. Shabbir Cheema, eds., Decentralization and Development: Policy Implementation in Developing ,1983. 32 Ibid, p. 530. The idea is similar to Harold F. Alderfer, Local Government in Developing Countries, New York-Toronto-London: McGrawhill, Beverly Hills, London, New Delhi,1964. You may also refer to (a) ibid, 1980, Urban Services in Developing Countries: Public and Private Roles in Urban Development, Hongkong: The Macmillan Press, Ltd. (b) Kenneth Ruddle and Dennis A. Rondinelli, 1983, Transforming Natural Resources for Human Development: A Resource Systems Framework for Development Policy, Tokyo, Japan: United Nations University. (c) D. Rondinelli, 1983, Development Projects as Policy Experiments: An Adaptive Approach to Development Administration, London-New York: Methren and Company, Ltd. (d) D. Rondinelli, 1980, Spatial Analysis for Regional Development: A Case Study in the Bicol River Basin of the Philippines, Research and Methodological Series #2, Japan: The UN University. 33 Dennis A. Rondinelli/G. Shabbir Cheema, “Implementing Decentralization Policies. An Introduction”, in: G. Shabbir Cheema/Dennis A. Rondinelli (eds.), Decentralization and Development. Policy Implementation in Developing Countries, 1983, Beverly Hills, London, New Delhi: Sage, pp. 18-25. 8

(a) Devolution or the transfer of authority, functions and resources (budget) from the central units to local administration. The local constituents send representatives in the legislative branch. The state’s control is quite limited;

(b) Deconcentration or the transfer of routine task from the central administration to its subordinate branches; decision-making powers and control, however, remain at the central level. Popular representation is limitred or does not exist at all;

(c) Delegation of authority to parastate organizations like Area Development Authorities in Malaysia, the Improvement Thrusts and Metropolitan Development Authorities in India or the Regional Development Council in the Philippines; and

(d) Privatization or debureaucratization including the implementation of activities by non-government organizations.

More recent work took issue with Rondinelli and Cheema’s excessively broad concept of decentralization. Rüland, for instance, criticized that such a broad and flexible conceptualization which, in effect, backs authoritarian regimes in their effort to shore up legitimacy. Under pressure from abroad by conditionalities of donors and an increasingly organized trans-national civil society, they hesitantly subscribe to the decentralization mantra. Yet, with Rondinelli and Cheema’s conceptualization, they may conveniently sell deconcentration measures as proof for their commitment to democratization and decentralization.33 Numerous studies, however, show that “deconcentration” is little more than a strategy of authoritarian regimes to create a more efficient central bureaucracy.34 Deconcentration only shifts certain functions from central to lower levels of the state bureaucracy, without in any noteworthy way empowering local governments and the local population. A more efficient bureaucracy may thus produce just the opposite effect of what advocates of decentralization policies expect from it: It prolongs and further entrenches authoritarian rule.

34 See Rüland 1993. Markus Steinich, Dezentralisierung und Entwicklung: Licht in die entwicklungspolitische Dunkelheit, in: Nord-Süd aktuell, 1. Quartal 1997, S. 69-80; Thomas Kampffmeyer et al., Financing Local Development in the Decentralization Process of the Philippines. The Case of Cebu, Berlin: German Development Institute, 1998 followed his arguments. 35 See Donald C. Rowat, “The Centralization Effects of Recent Local Government Reorganizations”, in: Planning and Administration, Vol. 10, No. 2, pp. 64-67; Harvey Demaine/Romana E. Malong (eds.), Decentralization: Area Development in Practice in Asia, Bangkok: Asian Institute of Technology, 1987; and Nikolaus Werz, Dezentralisierung und regionale Entwicklung in Lateinamerika. Zweites internationales Symposium zur politischen Reform in Lateinamerika, in: Verfassung und Recht in Übersee, Vol. 23, No. 2, pp. 190-192. 9

Similar objections can be raised against “delegation of functions” to para-statal bodies. Even NGOs can be manipulated and the literature knows numerous examples of government-organized NGOs (GONGOs),35 pretending a strengthening of civil society, while in reality being little more than a prolonged arm of the government. Other critics, such as Pretecelle or Slater, 36 went even further and contextualized decentralization in structural adjustment policies of international financial institutions (IFIs). For Pretecelle, decentralization is "a possible way to consolidate hegemony by organizing a wider consensus on austerity and restructuring through further integration and mobilization of local authority and beyond them.”37

In the last decade, a growing body of empirical research has underscored the ambiguities of decentralization. 38 Though vocally continuing to support decentralization as a key strategy for creating a more democratic polity and accelerated socioeconomic development, these studies nevertheless point to the often unintended negative effects that accompany decentralization reforms. There is thus no automatism that decentralization expands democratic space, and no automatism that decentralization improves service delivery, reduces poverty and stimulates economic growth. 39 Implemented without due regard to good governance principles and in consideration of deficient managerial capacities at the local level, decentralization may also facilitate a “decentralization of corruption,” create local instead of national empires, increase administrative coordination problems, exacerbate problems of national macroeconomic instability and widen the gap between functions devolved upon local authorities and their fiscal capacities. In other words, decentralization is neither a panacea for public sector ills nor an inevitable obstacle to effective government.” 40

Decentralization and Economic Theory

36For the Philippines, see Gerard Clarke, Non-Governmental Organizations and Political Institutionalization in the Philippines, in: Philippine Journal of Public Administration, Vol. 38, No. 3, July 1994, pp. 197-217. 37David Slater, Debating Decentralization – A Reply to Rondinelli, in: Development and Change, Vol. 21, 1990, pp. 501-512; Edmond Pretecelle, "From Centralization to Decentralization: Social Restoration and French Local Government," in Chris Pickvance and Edmond Pretecille,eds. State Restructuring and Local Power: A Comparative Perspective, London: Pinter Publishing Limited, 1991, pp. 123-147 38Edmond Pretecelle, 1991, pp. 123-147. 39 See Smoke, Paul/Gomez, Eduardo J./Peterson, George E.: “Understanding Decentralization: The Need for a Broader Approach”, in: Paul Smoke/Eduardo J. Gomez/George E. Peterson (eds.), Decentralization in Asia and Latin America. Towards a Comparative Interdisciplinary Perspective, Cheltenham: Edward Elgar, 2006, p. 4. 40 Remy Prud’homme, “The Dangers of Decentralization”, The World Bank Observer, v. 10 #2, August 1995. 41 Smoke/Gomez/Peterson 2006, p. 4. 10

While the bulk of the decentralization literature is inspired by public administration and political science, there is also a substantial economic literature, mainly focusing on the fiscal implications of decentralization. Although economists themselves deplore that the fiscal role and performance of local governments in developing countries has been neglected by research on public finance,41 there has been an upsurge of studies in recent years. Yet, much of this literature operates with theoretically deduced assumptions that lack empirical tests based on extensive field work. In general, albeit not devoid of a normative dimension, this literature tallies well with the functional school of decentralization studies.

Most economic contributions to the study of decentralization rest on the theory of fiscal federalism even though its subscribers have maintained that circumstances in developing countries necessitate modifications of the theory.42 Fiscal federalism, which draws much of its assumptions from neoclassical economic theory, is a sub-field of public finance and addresses the vertical structure of the public sector. It seeks to provide answers on the pivotal question of which functions and policy instruments “are best centralized and which are best placed in the spheres of decentralized levels of government” or, in other words, what is the “optimal service provision area.” 43

Fiscal federalism likens decentralization to a market system which allows highly mobile individuals to make their locational choices. In other words, individuals move to localities which offer them the best and most cost-effective package of services. Yet, state intervention is justified, if the market fails. Market failure may jeopardize macroeconomic stability or may distort distribution and allocation patterns.

Fiscal federalism is then about the sharing of major government functions such as macroeconomic stabilization, distribution, and allocation among different levels of government.44 It posits that macroeconomic stability is best secured by central government interventions as due to the open nature of local economies, local fiscal policies would not have much impact. Distribution, too, is better placed in the hands of the central government. If, for instance, redistribution policies are decentralized, wealthy areas will be able to effect more significant redistribution than poorer regions because they can afford to transfer more

42 Johannes F. Linn, “Urban Finances in Developing Countries”, in: Roy Bahl (ed.), Urban Government and Finance. Emerging Trends, Beverly Hills and London 1981, pp. 245-283; Smoke 1994, p. 13. 43 Smoke 1994. Wallace C. Oates, “An Essay on Fiscal Federalism”, in: Mark Baimbridge/Philip Whyman (eds.), Fiscal Federalism and European Economic Integration, London: Routledge, 2004, p. 13. 44 See Jennie Litvack/Junaid Ahmad/Richard Bird, Rethinking Decentralization in Developing Countries, Washington DC: The Worldbank Sector Studies Series, 1998, p.5. 11

resources internally. Moreover, especially in developing countries, the resource base of local authorities is too small to effect sizeable redistribution.

Contrary to macroeconomic stability and distribution, there is a strong argument for a substantial role of local government in the allocative function. The argument is here that demand is not likely to be uniform across space for many public goods and services. Yet, it cannot be expected from a central government that it has complete information about local needs and preferences in a great variety of localities. This problem is exacerbated in developing countries due to inferior information technologies and greater socioeconomic, ethnic and ecological disparities. If services were provided uniformly by the central government, this would thus result in a misallocation of resources. As argued by Oates:

“If the costs of provision are the same across jurisdictions, but demands differ, then the extent of the welfare loss from a centrally imposed, uniform level of output increases, other things equal, with the price inelasticity of demand. There is a large body of econometric evidence that finds that the demand for local public goods is typically highly price inelastic. This suggests that the potential welfare gains from decentralized finance may well be quite large.” 45

The assumption underlying fiscal federalism then is that if resources are allocated more efficiently through decentralization, this would accelerate and strengthen socioeconomic development. It would thus not only stimulate economic growth at the local level but increase welfare on a nation-wide basis.

Fiscal instruments to perform these governmental functions are taxes, borrowings and intergovernmental transfers. Fiscal federalism argues that highly mobile economic units should be taxed by the center, whereas local governments should tax essentially immobile economic units such as land and buildings. Apart from this, it could impose betterment levies, if local services increase the productivity of investments. Intergovernmental grants may be provided in order to internalize spill-over benefits to other jurisdictions and to equalize highly varying resource endowments across jurisdictions.46 Smoke, however, cautions that these

45 Oates 2004, p. 16 46Ibid, p.19. 12

assumptions must be tailored to the conditions of developing countries, where both the public as well as the private sector are weak, where mobility may be less pronounced than in industrialized societies and where cognitive and political factors may work against public choice rationality.47

Statement of the Problem and Research Question

This study proceeds from the obvious assumption that without revenue powers and expenditure autonomy any devolution of functions on local governments remains hollow. Without resources local self-government is an exercise without much scope for decision- making. But even if local governments do have adequate revenue powers, their fiscal autonomy may be curtailed by utterly restrictive and, often Byzantine, administrative regulations of the central state, erratic interventions by the central government and – for fear of being not returned to office in future elections - a lack of will among local leaders to utilize the revenue powers vested in local authorities.

Although there is a plethora of literature on decentralization in the Philippines, the literature reflects what Linn,48 Smoke,49 and Smoke, Martinez-Vasquez and Peterson50 have deplored elsewhere in relation to fiscal decentralization in more general terms: there is not much systematic research on how the Local Government Code of 1991 affected the fiscal capabilities of local governments. Most of the decentralization literature stands in the tradition of the old institutionalism51 and thus strongly centers on legal-institutional aspects and the historical evolution of decentralization in the Philippines. The few serious studies are by now dated52 or are difficult to access because they are studies commissioned by bilateral and multilateral donor organizations.53

The main objective of this study is thus to explore as to what extent in the Philippines the devolution of functions has been accompanied by an adequate allocation of

47 Smoke 1994, p 24f. 48 Linn 1981 49Smoke 1994 50 Smoke/Martinez-Vasquez/Peterson 2006. 51 Peter A. Hall, Rosemary C.R. Taylor: “Political Science and the Three New Institutionalisms”, in: Political Studies, Vol. XLIV, No. 5, December 1996, pp. 936-957. 52See, in particular, the seminal volume edited by Roy Bahl and Barbara Miller (eds.), Local Government Finance in the Third World: A Case Study of the Philippines, Ohio, USA: John T. Zubal, Inc. 1983. 53 Kampffmeyer 1998; Capuno 2002. 13

resources to local governments. Local fiscal capacities are thus considered as the litmus test for the success of decentralization reforms in the Philippines.

More specifically, the study seeks to address the following research questions:

• How effective are the local government units (LGUs) in the Philippines in mobilizing resources for local government?

• Which financial resources are being mobilized by local government units?

• How are these financial resources being mobilized?

• What conditions favor or impede local financial resource mobilization?

• How do prevailing political conditions affect local mobilization of financial resources?

• What constraints are created by the national government for local resource mobilization?

• How have local governments made use of the new borrowing powers and access to credit? And,

• How do the resources vested in local governments contribute to the macroeconomic stability, distribution and allocation, in other words Philippine development?

The study thereby departs from the following main assumptions: 1.) Financial dependency of the LGUs is determined by the power structures and relations embedded in the institutional arrangements of the financing sources. • The provision of a conduit or a third tier in the structure of local fund sourcing (e.g., access to ODA sources) discourages LGUs from tapping own-revenue sources (e.g. real property tax, business tax, fees and charges, etc.). • The more streamlined the organizational structure of the fund source is, the greater the likelihood of LGUs tapping that source (e.g., Internal Revenue Allotment or IRA). 2.) Given the variety of possible funding sources, the local chief executives (LCEs) will choose a funding scheme that in their view entails the lowest transaction costs. Thus, this financial decision is based on economics aside from politics. 3.) The search for alternative funding sources by LGUs is dependent on the awareness of LCEs of the need to tap such sources and the LCEs appreciation of their powers under

the Code of 1991 given the supervisory role and substantial control over them by the DILG.

While issues like these have been addressed in the literature in a piecemeal and fragmented fashion, this study attempts a more comprehensive approach. Much of the writing on fiscal decentralization in the Philippines are media analyses, conference papers or articles in scholarly journals. While many of them approach the theme mainly from an aggregate data basis, others are limited to isolated case studies and a third variety are accounts from practitioners. The present study combines the first two approaches. It departs from a careful analysis of aggregate data on local finance in the Philippines and it complements the national perspective with field studies from the provinces of Bataan and Pampanga, both located in Central Luzon or Region III. It is hoped that this combination of aggregate data analysis with an in-depth study of no less than ten local governments, that is, provinces, cities and municipalities, will provide differentiated insights transcending the usual sweeping affirmative or critical assessments on local government reform and decentralization in the Philippines.

Methodology and Research Techniques

By examining fiscal decentralization and local resource mobilization in the Philippines, this study follows primarily the case study approach. Although case studies emphasize the specific at the expense of more general insights, they nevertheless allow a testing of existing hypotheses and development of new hypotheses. Moreover, as argued by Lijphart, case studies may be fruitfully combined with the comparative method by embedding comparisons in a case study.54 This is precisely what is done in this study which integrates a comparison of two provinces in a case study of a country.

Bataan and Pampanga, the two provinces selected for in-depth comparative analysis, are two better-off provinces in the proximity of Metro Manila, or National Capital Region (NCR). They have been selected on the assumption that wealthier local governments respond better to the opportunities created by decentralization.55 More prosperous local government units tend to have not only greater managerial capacities, but also due to a more

54 Lijphart, Arend: Comparative Politics and the Comparative Method, in: American Political Science Review, Vol. 65, No. 6, 1971, pp. 682-693. 55 For this assumption see also the local awards given to high-income class provinces and municipalities. 15

dynamic private sector a greater tax base. Yet, both provinces despite their wealth are typical for the Philippines, and, for that matter, many other developing countries, due to their enormous spatial, ecological and socioeconomic disparities. While the economy of both provinces is driven by dynamic urban centers, there are also poor municipalities in remote areas which have hardly benefited from this growth. Studying the two provinces thus also allows testing of how low-income local governments are able to respond to the opportunities created by the Local Government Code and to what extent they are able to mobilize local resources. In order to cover the whole range of local government conditions, aside from the two provincial governments, a sample of local governments including component cities5656, high-income class municipalities, middle income class municipalities and low-income class municipalities has been examined.

The study relies on the method of triangulation,57 that is, a mix of complementary research techniques. Foremost is the analysis of local government fiscal data, which have been provided by the Bureau of Local Government Finance (BGLF) of the Department of Finance (DOF). Time series analysis for the national as well as the provincial data was used covering the period between 1991, when the Local Government Code was enacted, and 2001, the year when most of the field work was conducted. Other primary sources include Memo Circulars, Executive Orders, internet sources, government homepages and newspaper content analysis.

Apart from these primary sources, the relevant published and unpublished literature was reviewed. These secondary sources were used to contextualize, double-check and validate the findings of the study. Information gathered from written sources was complemented by expert interviews in both Manila and the two provinces of Bataan and Pampanga. A total of seventy- five respondents were interviewed. In particular, at the national level, fourteen senior government officials from oversight agencies (Department of Finance, Department of Budget & Management, National Economic and Development Authority and Civil Service Commission) and the line agencies (Department of Interior and Local Government,

56 A Component City has an income of not less than P 20 million for the immediately preceding two consecutive years based on 1991 constant prices as certified by the Department of Finance. 57On Triangulation, see Uwe Flick, Triangulation. Eine Einführung, Wiesbaden: VS Verlag für Sozialwissenschaften 2004 and Allan Bryman,http://www.referenceworld.com/sage/socialscience/triangulation.pdf (as of 21 July 2007).

Department of Agriculture, Department of Agrarian Reform, and Department of Social Welfare and Development) were interviewed to ascertain their views on decentralization both at the policy level and during implementation. An additional fifteen national government officials, nine from oversight agencies and six from line agencies, were technical personnel who provided historical accounts and assessments of the current implementation of the decentralization law with a focus on the effectiveness of the LGUs in mobilizing financial resources. Three national legislators, one Senator and two Congressmen, provided information on the legislative processes related to the decentralization, pork barrel funds and local elections and recall. Eight representatives from the foreign donor community were interviewed to examine the ability of local authorities to make use of the Code’s liberal provisions on local government access to foreign grants. Finally, one representative from the private sector was interviewed to discuss the procedures in accessing the capital market as well as the factors inhibiting LGUs to access such funds. Field staff of national agencies interviewed included a technical chief from NEDA Region III and an official from the Department of Interior and Local Government (DILG) at the provincial level (Bataan). The remainder of the interviewees – thirteen - were local officials at the provincial, city and municipal level. They included the governors, mayors and councilors of the ten local government units visited. Apart from these local chief executives and local legislators, the Provincial Administrator as well as technical staff such as officials from the Office of the Treasury, the Budget, Planning and Development Office was interviewed. The following table summarizes the respondents that have been interviewed. Table 1.1: Respondents Interviewed for the Study Agency Technical Senior Personnel Officials Oversight Agency National Economic and Development Authority 3 2 Department of Finance 1 2 Department of Budget and Management 3 2 Civil Service Commission 1 1 Central Bank of the Philippines 1

Agency Technical Senior Personnel Officials Line Agency Department of Interior and Local Government 1 Department of Agriculture 1 Department of Agrarian Reform 1 1 Department of Health 3 Department of Social Welfare and Development 1 4 Department of Trade and Industry 1 Total 16 14

Technical Staff Local Chief Province Executives (LCEs) Pampanga 8 4 Bataan 12 9 Total 20 13 Field work was conducted between 25 June and 24 September 2001 and again August 2002 in Manila and the provinces of Pampanga and Bataan. A semi-structured questionnaire was prepared which required open-ended responses related to local resource mobilization. In particular, five sets of semi-structured questionnaires were prepared depending on the affilia tion of those interviewed. At the macro-level, the oversight agencies58 were interviewed to provide a background on their involvement on fiscal decentralization. A separate questionnaire was also prepared for the Civil Service Commission as an independent entity to ascertain their view on the impact of devolution of personnel. At the sectoral or micro-level, the implementing agencies were interviewed to establish the impact of decentralization to service delivery. The questionnaire for the local chief executives, their administrators and staff was administered to determine the LGU relationship with the national government, the LGU experience before and during fiscal decentralization and the inter-LGU relationship in resource mobilization. Lastly, the questionnaire for the legislators aims to determine their participation not only in the legislative process of decentralization but also in the project selection using pork barrel funds as a resource. Respondents were generally very

58National Economic and Development Authority, Department of Finance, Department of Budget and Management and the Bangko Sentral ng Pilipinas (Central Bank of the Philippines). 18

accommodative and willing to discuss their experiences with the decentralization reform. Interviews lasted between thirty minutes and one and half hours, with an average duration of 45 minutes.

Organization of the Study This dissertation is organized into five parts. Chapter 1 discusses the theoretical foundation of decentralization as well as the study’s significance, scope and limitations, and methodology. In particular, the theoretical foundation lays down the debate between centralization and decentralization as well as the differing contexts – political and economic - of decentralization. The research question and the study’s possible contribution were also explained in this chapter. Chapter 2 describes the Philippines’ political-legal structure and its local government system. It also briefly outlines the major changes brought about by the Local Government Code of 1991, the most extensive reform legislation on local governments in the country’s history. Chapter 3 presents the overall or macro-view of decentralization in the Philippines. First, decentralization and local autonomy were explained using the Local Government Code of 1991 wherein the new Code became a catalyst to personnel, functional and fiscal decentralization. Second, the local financing structure was described by presenting the trends and dynamics between the central and local governments in obtaining the consolidated LGU income and expenditures from 1985 (pre-LGC of 1991) until 2001 (after the passage of the LGC of 1991). Third, the Local Government Code and the LGU Performance were evaluated using the results of the Local Productivity and Performance Measurement System (LPPMS) as a self-assessment tool. Chapter 4 presents the case studies in Bataan and Pampanga on fund sourcing as well as the performance of the Central Luzon Region in local fiscal administration. The case studies will show the experiences of the provinces, cities and municipalities in resource mobilization under the regime of decentralization. This Chapter will also show the impact of inflation or increase in prices in the increase in income on whether the inflation to increase in income leads to real growth in a particular locality. Chapter 5 provides an analysis of the results and observations of the study.

CHAPTER 2

The Philippine Political System: Decentralization and Government

The approval of the Local Government Code of 1991 marks a high point in the Philippines’ efforts to strengthen democracy and put into motion the ideal of sustainable development. It is significant as a step to complete the process of empowering the people, through their direct participation in the affairs of government, by allowing them the widest possible political space to decide, initiate and innovate. Moreover, it is a product of efforts to free the political system from the grasps of centralized authoritarian rule which had been the overwhelming governance structure for over four centuries.

Legacies of Centralization in the Philippines

The Philippines has a tradition of authoritarianism longer than a democratic one during the modern period. Colonization under Spain (1521-1896), the United States of America (1899-1935), Japan (1940-1945), as well as the Marcos Martial Law regime (1972-1986) comprise the periods wherein government was concentrated in a the highly centralized administrative structure. A brief interregnum, from 1945 to 1973, was characterized by attempts to implement democratic practices and institutions. These attempts notwithstanding, vestiges from the colonial past – such as feudal economic structures and widespread poverty, remain unchanged.

After the Peoples’ Power Revolution of 1986 which toppled the Marcos dictatorship, reforms in governance resumed in earnest. These reforms set into motion what has been observed as a transition from a highly centralized authoritarian regime to a democratic one. It has not been smooth sailing, though. But with the enactment and continuing implementation of the Local Government Code of 1991, the legal foundation for reforms that enable decentralization and promote greater local government autonomy has been laid. The subsequent sections briefly reconstruct the long way towards this

landmark reform. They are followed by an overview of the main characteristics of the Philippine government system at the national as well as the local level.

Pre-Colonial Era

The government during pre-Colonial Philippines or the period before colonization, had features that combined features of centralized and decentralized governance practice. The state, albeit in its primitive form, existed with the basic elements: people, government, sovereignty, and definite territory 1. These elements were provided for by the barangay, the main unit of government which consisted of anywhere from 30 to 100 families. 2

Each barangay was independent and ruled by a chieftain. There was no king in those days, although some chieftains were more powerful than others and consequently respected by other chiefs. The multiplicity of barangays implies that there was no national or central government. It was the duty of the chieftain to rule and govern his subjects and to promote their welfare and interests. He had wide powers, for he exercised all the functions of government. He was the executive, the legislator, and the judge.3

In the making of laws, however, the barangay chieftain calls in the elders of the community who will deliberate on rules and regulations to be applied to the people. The chieftain usually tells the elders, who also serve as a collective counsel, what he has in mind. The elders discuss and refine the proposals of the chieftain and if a consensus is formed, the agreements are immediately broadcasted to the whole community – through a town crier called umalokohan for implementation. 4

1 Emerencia Y. Arcellana, A Critical Study of Indigeneous Philippine Governments, Political Customs, and Institutions , (Master’s Thesis presented to the Graduate School, University of the Philippines) 1954; also in Jose Abueva and Raul de Guzman, Foundations of the Filipino People. 2 Teodoro A. Agoncillo, History of the Filipino People , Quezon City, Garotech Publishing, 1990, p. 40. 3 Ibid. p. 41. 4 Ibid. p. 42. 21

Economic life during the precolonial days was not much different from that found today in many remote barrios. One significant change is in the tempo of life: mainly placid and characterized by less economic and social pressure than it is today. 5 Agriculture was the predominant economic activity, followed by fishing, weaving, shipbuilding, and, on a limited scale, gold mining. Domestic commerce among barangays and islands was also conducted. There is also evidence of foreign trade, mainly with China, Japan, Siam, Sumatra, Java and the other islands of the old Malaysia. And because currency was not in use that time, the barter system was the main instrument in business transactions.

Spanish Colonial Period

The first thing the Spaniards did when they settled in the Philippines in 1565 was to group the scattered barangays into resettlements ( reduccion ). By 1580, through the Catholic Franciscan Order, the colonizers proceeded to establish pueblos and ordered all natives to build their homes around the church. 6 Through the reduccion , the precolonial barangays metamorphosed externally and internally. External changes included the construction of colonial churches and convents made of stone. Internal changes came with the integration of Spanish customs and values, as well as Christianity. 7

The Spanish regime transformed the barangay into barrios, and established the municipalities, cities and provinces. The chiefs (datus) of the indigenous barangay were relegated to the role of tax collectors. The Spanish Governor-General appointed the governors of the provinces, which became an instrument of extending the authority of Spain on subordinate units, i.e. city, municipality and barrios. 8 The Maura Law of 1893 empowered the local constituents to select some of local officials through the established

5 Ibid. p. 48 6 Ibid. p. 80 7John Leddy Phelan, The Hispanization of the Philippines : Spanish aims and Filipino responses ; 1565 – 1700, Madison : Univ. of Wisconsin Press, 1959. 8 Raul P. de Guzman, Mila A. Reforma, and Elena M. Panganiban, “The Evolution of Local Government in the Philippines”, in Proserpina Tapales, Jocelyn Cuaresma, and Wilhelmina Cabo, ed. Local Government in the Philippines: A Book of Readings, vol. I Local Government Administration , QC, Philippines: Kadena Press, Inc., 1998, pp. 103-120. 22

municipal tribunal and provincial “juntas.” This, according to Laurel, was Spain’s belated and half-hearted tribute to Filipino ability in self-government.” 9 The highly centralized administration was nonetheless maintained through:

(a) the retention of rights and prerogatives by the colonial elite, from the Spanish governor-general to the privileged principalia class; 10 (b) the straight-laced centralization of powers, including that of taxation and decision-making even on local affairs; (c) the continued interventions of the Catholic Church, through the friars, in state affairs; (d) the limitations in economic franchises granted, and mainly by central authority; (e) the inadequate election method devised and enforced in the latter years of the colonial regime; and (f) the defective financial system instituted. 11

The economic development of the Philippines in the nineteenth century led to the rise of the Filipino middle class. Non-existent in the previous centuries under Spanish colonial rule, this class consisted mainly of Spanish and Chinese mestizos (citizens of mix blood) who rose in the Filipino community and eventually became leaders in finance and education. This class led the campaign for reforms in governance under Spanish colonial rule and, later, in the revolution against Spain. 12

9 Jose P. Laurel, Local Government in the Philippine Islands , Manila: La Pilarica Press, 1926, p. 290, also in Alex B. Brillantes, Jr. “Historical Development of Philippine Local Governments: Five-Year Assessment of the Implementation of the Local Government Code,” 1997. 10 According to Remigio Agpalo, the principalia class developed gradually. This consisted of the traditional principalia, i.e. the local officials and also landed elite, the emerging commercial elite (both natives and mestizos), and the emerging new agricultural elite which had been recruited from the emerging commercial elite. In Remigio Agpalo,”The Organic-Hierarchical Paradigm and Politics in the Philippines,” Adventures in Political Science, QC, Philippines: University of the Philippine Press, 1996, pp.163-194. 11 Laurel, ibid. 12 On the socioeconomic changes in the nineteenth century see Jonathan Fast, Jim Richardson, Roots of dependency : political and economic revolution in 19th century Philippines, Quezon City : Foundation for Nationalist Studies, 1979. 23

As the revolution raged, the Filipino revolutionary government established the Malolos Constitution of 1899. This constitution, steeped in democratic ideological concepts, called for the active participation of the people in the governance of local affairs through “popular and direct election as well as determination of taxing powers. 13

This constitutional arrangement, however, was short-lived. During the Spanish- American war, the Treaty of Paris transferred political administration from Spain to the American government in 1900, effectively scuttling Filipino self-governance and leading to protracted Filipino-American hostilities which lasted until the next two decades. But overall, American colonial rule was effectively put into place after the capture of the leaders of the Filipino forces.

American Rule

The Filipino elite cooperated with the American colonizers up to the national level of administration. Being a highly centralized government, the American administrators and the few Filipinos who occupied the top executive, legislative and judicial positions exercised vast powers and influence in national affairs. It was in the Filipino judiciary where the native elite were given substantial role, in the person of Cayetano Arellano who was appointed Chief Justice of the Supreme Court. 14

The institution of decentralized structures, within the context of democratization (also called “Filipinization” by other historians), reflected the political climate in the United States where the political orientation was focused on promoting self-rule in its overseas colonies. 15 The Filipinization of governance began with the holding of elections for local officials, mainly provincial governors to municipal mayors, in 1901. American influence was in the position of provincial treasurer held by Americans. The national elections were held in 1907, giving rise to the Philippine Commission which became the Philippine Legislature. The Filipinos were able – to an extent, to control the legislature

13 de Guzman, et al, ibid. 14 Agoncillo, 1990, p. 300. 15 Ibid. p. 309 24

starting in 1916, 16 although the Americans exercised actual power through the Governor- General’s veto power.

Filipinos could directly elect their local officials and even dominated the civil service as the American government maintained its stranglehold through the highly centralized administration. By enacting a special law, 17 Manila retained its status as center not only of administration but also of commerce and finance, a bias started by the Spanish colonial government. 18

The Filipinization of the American colonial government also gave rise to the campaign for genuine Philippine independence. The campaign bore fruit that on May 1, 1935 Philippine Legislature accepted the Tydings-McDuffie Act which provided for a Commonwealth status to the Philippines for ten years, after which full independence would be granted to Filipinos.

The 1935 Philippine Constitution under the Commonwealth period mandated the President to exercise general supervision over all local governments. While this mandate strengthened Filipino supervision of government, it also enabled then President Manuel L. Quezon to unwittingly reinforce centralization. During his term, President Quezon appointed the mayors in all cities created from 1936 to 1940. Moreover, the police service was nationalized in 1937, giving the central government the power to appoint officials assigned to maintain peace and order even in the local communities. 19

There were instances during this period when resources were shared between national government and the local government units (LGUs). The amendment of the Internal Revenue Laws of the Philippines on June 15, 1939 under Commonwealth Act No. 466 illustrates this resource-sharing arrangement. The law specifically effected the allotment of 20 percent to total internal revenues for “Special Purposes” which benefited

16 Alesdair Bouice and Danny Unger, The Politics of Open Economies: Indonesia, Malaysia, the Philippines and Thailand, UK-USA-Australia: Cambridge University Press, 1997, pp. 98-128. 17 De Guzman, ibid. 18 For example, to oppose this action, the Carino family with the indigenous peoples filed a case in court contesting the acquisition of these lands by the Americans. 19 de Guzman, et al, ibid. 25

local governments. This allotment is further broken down as follows: (a) 5 percent as provincial allotment; (b) another 5 percent as a road and bridge allotment in the local regions to be administered by the national government; and (c) 10 percent municipal allotment. 20

The 10-year Commonwealth regime was rudely interrupted when World War II broke out and the Japanese occupied the country for 3 years. Political life was limited during the Japanese-sponsored republic, with centralized governance as its main feature. The occupation did not last long, but it was during this period that overall economic life was at its harshest thereby hastening the eventual defeat of the colonizers from a united guerrilla front, supported by American allied forces.

The Japanese Occupation

When the Japanese Imperial Forces occupied Manila in early 1942, the Japanese issued a proclamation that its real purpose for occupying the Philippines was “to emancipate you (the Filipinos) from the oppressive domination of the United States of America, letting you establish the ‘Philippines for Filipinos’ as a member of the Co- prosperity Sphere in Greater East Asia and making you enjoy your own prosperity and culture.” 21 No Filipino believed this, of course.

During the first few months of occupation, the status of provinces and chartered cities remained practically the same as during the Commonwealth years. A government was organized, headed by an Executive Commission and run by six departments: Interior, Finance, Justice, Agriculture and Commerce, Education, Health and Public Welfare; and Public Works and Communications. But all these bodies were inutile as Japanese “advisers” who were actually spies, controlled all flow of decision-making processes and

20 de Guzman, et. al. ibid 21 Agoncillo, 1990, p. 395 26

communications. At the provincial and municipal levels, the arrangement was the same, with the Japanese military commanders performed “advisory” roles in governance. 22

With the defeat of the Japanese and its allies in mid-1945 and the devastation of the City of Manila from the bombings notwithstanding, the Commonwealth government ceased to exist and democratic practices were restored. Again, the idea of strengthening greater participation of the people through decentralization became another quest.

The Third Republic, 1946-1973

The Third Republic (1946-1973), despite its shortcomings, recognized the importance of decentralization as a means of giving local governments greater part in decision-making. This recognition came in the form of legislative enactments, such as the following:

a) Republic Act 2264 or An Act Amending the Laws Governing Local Governments by Increasing their Autonomy and Reorganizing Provincial Governments. This law, also known as the Local Autonomy Act, was concurred with by the Executive branch in 1959. Under this Act, municipal governments were empowered to: (a) impose license taxes or professional tax and business taxes; and (b) to appropriate funds for purposes not stated by law for social welfare. The Act also reorganized the provincial government structure for provincial budgeting and planning as well as implementation of projects;

b) Republic Act 2370 or the Barrio Charter Act of 1959. This provided authority to barrios to impose taxes, and to approve and enforce ordinances for the identification and implementation of local development projects; and

22 Ibid. 27

c) Republic Act 5185 or the Decentralization Act of 1967. This enabled the local government units to have a bigger share in the internal revenue allotment using the criteria of population and land area. Decision-making powers of the LGUs were also broadened by devolving to the provincial governor the appointment of the provincial assessor and agriculturist, a task erstwhile exercised by the national government. 23

These laws notwithstanding, no significant progress was observed in the local communities. At their best, therefore, these laws appeared simply as lip service to decentralization. The national government continued to influence directions of national and local development as illustrated by the continuing dependence of local authorities on national offices for resources. Governors and mayors continue to seek development funds not only from the President and the Cabinet but also from the “pork barrel” of the legislators to finance their priority projects. This fiscal dependency did nothing to improve the capacity of the LGUs at greater self-reliant development.

Marcos Dictatorship, 1973-1986

When President Ferdinand E. Marcos declared martial law in September 1972, he changed the unitary presidential structure into a semi-parliamentarian type of government similar to the French system. A new Constitution was ratified in 1973, reversing the trend of directly electing local officials. Marcos appointed the local officials in 1975 after the term of previously elected officials ended. The direct election of governors and mayors was adopted only in January 1980. These elections were described as farce because of the widespread manipulation of results by the administration’s leading political party, the Kilusang Bagong Lipunan (KBL). Barrio (now barangay) officials, for their part, were directly elected only after the lifting of Martial Law in March 1982. 24

In what appears an effort to institute decentralization, the Batasang Pambansa – the martial law era’s legislative arm, enacted Batas Pambansa (BP) 337 or the Local

23 de Guzman, et al, ibid. 24 de Guzman, ibid. 28

Government Code in 1983. This law was passed, unfortunately, when the Marcos government was into its lowest ebb in terms of credibility, both domestically and internationally. It was also seen as a half-hearted concession to pressure from the grassroots for greater local autonomy, particularly in the sharing and use of financial and other resources. Moreover, the assassination of main critic Benigno Aquino had aroused widespread public dissatisfaction with the regime, and it was a matter of time that the Marcos government would collapse.

Aside from defining the local government structure, BP 337 intended to transfer to the LGUs, as a general policy and where appropriate, the responsibility and authority over service delivery functions. But the drawback was that national agencies and offices holding the responsibility and authority were not required to transfer them all at the same time and to all LGUs. Moreover, this enactment “ignored the need of LGUs to enhance or upgrade their capabilities to absorb the transfer” of the responsibilities for delivery of basic social services. 25

Other efforts of the Marcos Regime to decentralize government functions include the creation of the Kabataang Barangay for youth mobilization and Katarungang Barangay for the administration of justice at the community level. With the amendment of Presidential Decree 144 to 599 in September 1974, the barangays became co-recipient of the Internal Revenue Allotment (IRA) as community development project grants. The administration of the distribution of these grants, however, continued to be lodged under the Office of the President. 26

The 1973 Constitution, with its Article on Local Government Units (XI), authorized LGUs to create their own sources of revenue and to levy taxes. This provision became the legal basis for the enactment of BP 337. 27 These measures, however, were

25 Manuel S. Tabunda and Mario M. Galang, Primer on the Local Government Code of 1991 , MJ Educational Supply, Manila, 1991. p. 11 26 Jocelyn C. Cuaresma and Simeon A. Ilago, 1996, Local Fiscal Administration in the Philippines , Philippines: Local Government Center College of Public Administration University of the Philippines, and Public Administration Promotion Centre German Foundation for International Development. 27 Brillantes, ibid, p.134. 29

rendered ineffective when Marcos enacted laws contradictory to local autonomy principles in order to consolidate his dictatorial powers. For example, the Marcos administration’s idea of budgetary and fiscal reforms included the abolition of the so- called “pork barrel” funds and integrating the annual public works appropriations in the regular budget based on national public works infrastructure plan and program. 28 This resulted in the further weakening of check-and-balance principles, with the Legislative branch practically put at the mercy of the Executive. Both the Executive and Legislative branches had been competing for control over local governments. The administration of pork barrel funds and the process of accessing said funds had been a prerogative of the Legislative until its abolition. As a result, Congress had to request funds from the Office of the President to finance the priority development programs of the lawmakers for their respective bailiwicks. This held true with the planning and allocation of the annual public works appropriations in the regular budget. This condition perpetuated the patron-client relationship at both the national and local levels.

The Marcos regime also experimented with metropolitan urban governance by establishing the Metro Manila Commission (MMC) in 1975. This Commission practically centralized the governance of the 17 cities and municipalities of what constituted the National Capital Region. The centralized planning and operations called for by the MMC were supposedly aimed at addressing the problems of urbanization in Manila and its neighbors. Appointed as MMC governor was the dictator’s wife, Imelda Romualdez-Marcos who ruled over the metropolis like some kind of fiefdom and to further stabilize the rule of Marcos regime through control of the country’s political, economic and socio-cultural center. 29

As administrator of finances, the Marcos government practically controlled the directions of national and local development, including the operations of programs and projects financed through foreign loans. During the oil crises in 1973 and early 1980s,

28 Olivia C. Caoili, “The Batasang Pambansa: Continuity in the Philippine Legislative System,” Philippine Journal of Public Administration , 30 (January 1986) 36-59. 29 See Jürgen Rüland, “Metropolitan Government under Martial Law: The Metro Manila Commission”, in: Philippine Journal of Public Administration , Vol. XXIX, January 1985, no. 1, pp. 27-41. 30

the regime undertook ambitious projects on energy, some of which were of dubious investment soundness. These include the Chico River Basin Dam and the Bataan Nuclear Power Plant (BNPP), which were discontinued (for BNPP alone, the present government is paying US$300 thousand a day). 30

Marcos’ cabinet members, most of them technocrats, directly negotiated and administered project loans from foreign sources (now called official development assistance, or ODA) with minimal or no consultation at all with the communities to be affected by the projects. Moreover, the government ordered consolidation of foreign loans and grants under the administration of the Ministry of Finance. This is an example of a central government decision making which excluded participation of LGUs, despite the fact that the LGUs are supposedly the main beneficiaries. Through Presidential Decree No. 1914 entitled “ Creating a Special Revolving Fund for Purposes of Foreign Assisted Projects Applicable to Local Governments” issued in March 1984, the Municipal Development Fund (MDF) was established and put under the Ministry of Finance with a Central Project Office. This MDF was created to provide LGUs with financing from external sources after Government Financing Institutions (GFIs) stopped lending to LGUs due to massive defaults of the latter in the 1980s. 31 But then, use of the MDF by the intended LGU-beneficiaries has been very minimal due to massive red tape.

The subsequent sociopolitical unrest, climaxing with the assassination of Marcos’ arch-critic Benigno Aquino in 1983, led to the Church-backed People’s Power Revolt in August 1986 which overthrew the Marcos 13-year dictatorship and ushered in another era of democratic rule. 32

The 1987 Constitution – Toward Decentralization?

30 Mario Lamberte et al., Philippine External Finance, Domestic Resource Mobilization and Development in the 1970s and 1980s, (Philippines: Philippine Institute for Development Studies, 1992), pp. 292-310. 31 ADB Final Report, Strengthening Public Finance and Planning of Local Government Units (TA 3145- Phi), April 2000, prepared by Public Administration Service, in Association with Pacific Rim Innovations and Management Exponents, Inc., p. 61. 32 For an analysis of the downfall of the Marcos regime, see Mark Thompson, The Anti-Marcos Struggle: Personalistic Rule and Democratic Transition in the Philippines, New Haven and London: Yale University Press, 1995. 31

Linz and Stepan suggest that in achieving a consolidated democracy, the necessary degree of autonomy and independence of civil and political society be further embedded in and supported by the rule of law. This rule of law must be “embodied in a spirit of constitutionalism as an indispensable condition.” 33 Briefly, the Constitution is an instrument of order during democratization.

Constitutional Basis of Government

The Constitution of the Philippines serves as the highest law of the land. When the Philippines first became a republican state, albeit a Commonwealth, Congress enacted the 1935 Constitution aimed “to establish a government with the blessings of independence under a regime of justice, liberty and democracy.” 34

Marcos then promulgated the 1973 Constitution, changing the functions of the established institutions. Like the 1935 Constitution, its 1973 counterpart emphasized that the Philippines is a republican state. In practice, however, the government was similar to the French semi-parliamentary system, wherein the President was elected nationally, after which the President appoints his Prime Minister with the blessings of the parliament, or the Batasang Pambansa. It declares that “civilian authority is at all times supreme over the military” 35 which is contradicted by the practice of “constitutional authoritarianism” where the supreme authority – President Marcos, actually ruled through Presidential Decrees. 36 As an illustration, the creation of five provinces and thirty-four municipalities from 1973 until 1980 was effected through Presidential Decrees. This policy has brought about gerrymandering and fragmentation in the localities. 37

33 Juan J. Linz and Alfred Stepan, Problems of Democratic Transition and Consolidation: Southern Europe, South America and Post-Communist Europe, Baltimore and London: The John Hopkins University Press, 1996. 34 The 1935 Philippine Constitution, Preamble. 35 Ibid, Article II, Sec. 8. 36 This is similar to the bureaucratic authoritarianism as explained by O’Donnell, Schmitter, Lawrence Transitions from Authoritarian Rule: Prospects for Democracy, USA: The John Hopkins University Press, 1986. 37 Fragmentation or the division of the Philippines into smaller local government units is the result of gerrymandering among Congressmen. Fragmentation is usually associated with a loss of efficiency 32

The 1987 Constitution was a product of continuing change in the Philippine historical landscape. Jose Nolledo, a member of the 1987 Constitutional Commission, affirms that the current Constitution is the first truly Filipino Constitution considering the circumstances that led to its promulgation. 38

Both the 1973 and 1987 Constitution maintain the inviolability of the separation of the church and the state. As the only Christian country in Asia, the Catholic Church has been participating actively practically in all aspects of life, including social and political affairs. In fact, the Church was instrumental in helping topple the Marcos dictatorship by mobilizing its constituents during the EDSA People Power Revolution.

The 1987 Constitution “establishes a government with the blessings of independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality and peace.” 39 It affirms that the Philippines is both a democratic and republican state. 40 Scholars consider that 1987 Constitution is guided by the 1935 Constitution. In particular, a significant number of provisions in the 1987 Constitution are patterned after similar provisions in the 1935 Constitution.

The 1987 Constitution restored the unitary presidential structure of the Philippines similar to the 1935 Constitution. As illustrated in the Figure 1 the Executive, the Legislative, and the Judicial branches comprise the three separate branches and relatively autonomous bodies of the current Philippine Government:

considering that new bureaucratic structures need to be created to manage the newly-created LGU. Fragmentation is also against the trend of amalgamation in economically more advanced countries like Germany, UK and Scandinavian countries in order to lower the cost of operations among LGUs. Presidential Decrees and Executive Orders that emasculate local autonomy also drive the metropolitanization that is occurring in the Philippines. See Elena M. Panganiban, Toward a Democratic- Efficient Framework of Local Government in the Philippines: Some Policy Criteria , Quezon City: Doctoral Dissertation, University of the Philippines, 1990. 38 Jose N. Nolledo, The Constitution of the Republic of the Philippines Explained, Mandaluyong City: National Book Store, 1992; See also Eva-Lotta E. Hedman, and John T. Sidel, Philippine Politics and Society in the 20 th Century: Colonial Legacies, Post-Colonial Trajectories , London and New York, 2000. 39 The 1987 Constitution, Preamble. 40 Jose N. Nolledo, Ibid, Article II, Section 1, 1992. 33

Figure 2-1 STRUCTURE AND FUNCTION

Constitution

Legislative/ Executive Judiciary/ Law-Making State Court

House of Supreme Court (15) Representatives (250) Chief of Government/ Senate (24) President Lower Court

Central Administration Local Administration/Government

Ministry Province (78)

Bureau

City Municipality (82) (1,525) Division

Section Barangay/Village (41, 939)

Source: “Fiscal Decentralization and the Mobilization and Use of Natural Resources for Development: Issues Experience and Policies in ESCAP Region,” Development Papers No.11 on Economic and Social Commission for Asia and the Pacific Bangkok 1991, United Nations, Public Ledger: A Public Finance and Fiscal Administration Magazine, December 1993, pp. 33-48.

Challenges to the Constitution

Nonetheless, the Constitution – despite its goal of establishing stability in government, continues to be tested. During the administrations of Corazon C. Aquino (1986-1991) and Fidel V. Ramos (1992-1998), Congress filed similar motions to amend the Constitution by proposing a shift to parliamentary system for certain reasons, like maintaining the continuity of the current leaderships. Said action, however, did not prosper due to the mobilization of mass protests by the leadership of the Catholic Church. Local and national elections were carried out as scheduled. 41

Proposing amendments to the Constitution the end of the term of the President draws near is not new in Philippine history. President Manuel L. Quezon, for instance, amended the 1935 Constitution in 1939 changing the term of the President from one term of six consecutive years to two consecutive terms of four years each. President Marcos, after being re-elected in 1969, declared martial law in 1973 and in the process amended the Constitution. He lifted the constitutional prohibition on the term of presidency to maintain his leadership. Earlier, Marcos set aside the 1935 Constitution and called a Constitutional Convention in 1971 in order to draft a new Constitution by invoking the emergency powers of the President similar to that exercised by previous President Elpidio Quirino who suspended the privilege of the writ of habeas corpus in 1950 in an effort to control the communist insurgency. 42

Since the voters directly elect the President under the present political system, the incumbent President has a built-in popularity and could easily wield firm constitutional powers as the single head of the executive arm of the government.43 Under exceptional

41 On the proposed constitutional changes, see Jülrgen Rüland, “Constitutional Debates in the Philippines: From Presidentialism to Parliamentarianism”, in: Asian Survey, Vol. LXIII, No. 3, May/June 2003, pp. 461-484. 42 Alex B. Brillantes, “The Executive”, in Raul P. de Guzman and Mila A. Reforma (eds.), Government and Politics of the Philippines, Oxford/NY: University Press, 1988, pp.113-131. 43 Renato S. Velasco. “The Philippines,” in Ian Marsh , Jean Blondel , Takashi Inoguchi (eds.) , Democracy, Governance, and Economic Performance : East and Southeast Asia, Tokyo, Japan; New York, NY, USA: United Nations University Press, 1999, p.170.

circumstances, however, the Office of the President in its attempts to consolidate power was met with challenges. Since the transfer of power from Marcos to Aquino through popular uprising, the military – in what has been described as “military adventurism” has staged several coup d’états challenging Aquino’s leadership. Another challenge to the leadership include the attempts to replicate People Power-type movements, as that used to topple the administration of President Joseph E. Estrada in 2001 (EDSA 2). Opponents of President Gloria Macapagal-Arroyo have also tried using such approach, through the EDSA 3 in May 2001, with disastrous results.

With the re-election of Gloria Macapagal-Arroyo to the Presidency in 2004, constitutional reform continues to be part of her agenda. As with her predecessor and political party-mate President Fidel V. Ramos, Arroyo also sought to change certain features in both the political structure and economic system of ownership which she felt were barriers to more equitable and sustained development.

Executive Centralization

The Executive branch, primarily the President and his cabinet, is considered the focal point of political exercise. 44 It is the most dominant branch among the 3 branches of government. The President is the chief executive as well as chief diplomat. The President is involved in all cycle of government operations, i.e. planning, legislation and execution. The term of the President is limited to six years, similar to that provided in the 1935 Constitution. Under this arrangement, political succession is expected to continue, and the propagation of a single power as experienced during the Marcos administration could be discouraged.

The Executive branch has a multi-tiered structure along functions and areas. With regard to functions, the Executive branch is divided into four, namely: (a) general government services – these cover the Departments of Finance, Foreign Affairs, Justice,

44 See Dr. Olivia C. Caoili, “Legislative-Executive Relations in the Philippines and the Parliamentary Alternative,1994.” Also David Wurfel, Filipino Politics: Development and Decay, Philippines: Ateneo de Manila University Press, 1988. 36

Interior and Local Government, and National Defense; (b) social services – Departments of Education, Health, Labor and Employment, and Social Welfare and Development; (c) economic services – Departments of Agrarian Reform, Agriculture, Environment and Natural Resources, Tourism, Trade and Industry, and Transportation and Communications; and (c) support services – Departments of Budget and Management, Science and Technology, and National Economic and Development Authority. With regard to areas, the Executive branch can work at the national level, regional offices and field offices.

The President appoints the heads of the Cabinet based not only on their qualifications but also on his or her trust and confidence. The recruitment of the Technical and Administrative Staffs, however, is governed by rules of the independent Civil Service Commission. The civil servants are necessary in providing stability whenever there are changes in leadership. There are, however, times when the integrity of the bureaucracy was challenged by the Presidential prerogative over appointments, especially at the end of the executive’s term. These instances, called “midnight appointments” are characterized by massive approval of appointments for existing vacancies in civil service by the outgoing President.

The Executive branch recognizes that reorganizations of structures and hierarchies may be necessary to become more effective in the exercise of its functions. Thus, reorganizations of the Executive were undertaken in 1946, 1954 and 1972. Such reorganizations came in various guises, including deconcentration. For example, regional centers and councils were established through the Integrated Reorganization Plan under Presidential Decree 1 of President Marcos in 1973. While deconcentration of functions of the various cabinet offices was adopted, such as their “transfer” from the national center to the regional and field offices, it was observed that the trend tended towards centralization as indicated by the following: (a) the extent and scope of presidential power over local officials; (b) the integration of police, jail and fire services; (c) the centralization of regulatory powers over buildings and tourist-oriented establishments; (d) the central direction in the planning and implementation of development programmes

and projects; and (e) proliferation of ministries/agencies having supervision over different aspects of local affairs. 45

After the Marcos regime, the Aquino Government enacted Executive Order No. 17 in an attempt to reorganize the bureaucracy by weeding out supposedly incompetent, corrupt and inefficient personnel. The implementation of this Order was done in haste and disregarded due process, thereby leading to the notion that the reorganization was nothing more than a witch-hunt that sought to remove people who collaborated with the Marcos regime. Thus, the principle of security of tenure of many bureaucrats was violated. It was argued, however, by supporters of the reorganization that security of tenure was a less important criterion compared with performance and the current needs of the bureaucracy.

The Constitution also provides for Constitutional Commissions considered independent of all the three branches of governments. There is the Civil Service Commission (CSC), which is the central personnel agency of the Government. The CSC ensures that the recruitment of people by government agencies including the government- owned and controlled corporations is based on the qualifications it has established. Another is the Commission on Audit (COA), which has the power, authority and duty to examine, audit and settle all accounts owned or held in trust by the government. And there is the Commission on Elections (COMELEC), which oversees and administers the conduct of an election, plebiscite, initiative, referendum and recall.

Philippine Legislature

The 1987 Constitution under Article VI, Section 1 stipulates that the legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate

45 Raul P. de Guzman, Alex B. Brillantes, Jr., and Arturo G. Pacho, “The Bureaucracy”, ibid, pp. 180-206, 1988. 38

and a House of Representatives, except to the extent reserved to the people by the provisions on initiative and referendum. 46

The upper house of Congress is the Senate which is composed of 24 members who shall be elected at large by the qualified voters of the Philippines as may be provided by law. 47 A senator may serve for six years and may not be allowed to serve for more than two consecutive terms. 48

The lower house of Congress is the House of Representatives composed of not more than two hundred and fifty members who are also called Congressmen. The number of members may be increased, to include the following: (a) those who shall be elected from legislative districts apportioned among the provinces, cities, and the Metropolitan Manila area in accordance with the number of their respective inhabitants, and on the basis of a uniform and progressive ratio, and (b) those who shall be elected through a party-list system of registered national, regional, and sectoral parties or organizations. 49

A Congressman may serve for a term of three years. Similar to the Senate, he may not be allowed to serve for more than two consecutive terms. 50 Changing the terms of office of both houses of Congress is being considered through amendments of the Constitution.

The formulation of laws of national or local importance is a prerogative of Legislature. This power to make laws was emasculated severely during the Marcos regime. The President himself made laws as he saw fit through the issuance of Presidential Decrees. This effectively rendered as inutile the legislative powers of the Batasang Pambansa (the legislative branch) which was reduced to a rubber stamp of the Executive. In addition, the Cabinet – through its technocrat-members, exercised

46 The 1987 Philippine Constitution, Article VI, Section 1. 47 Ibid, Article VI, Section2. 48 Ibid, Section 4. 49 Ibid, Section 5. 50 Ibid, Section 7. 39

substantial influence in the legislative process, particularly on major development policy decisions.

The Judiciary

The judiciary is the third branch of government. Judicial power is vested in one Supreme Court and the lower courts. Judicial power, vis-à-vis the other branches of government, lies in the duty of these courts to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. 51

To ensure the independence of the Judiciary, it enjoys fiscal autonomy, as provided for by the Constitution: “Appropriations for the Judiciary may not be reduced by the legislature below the amount appropriated for the previous year and, after approval, shall be automatically and regularly released.” 52

The independence of the judiciary had often been questioned, especially that the President is the one who appoints the members of the Supreme Court. Moreover, where the lower courts are concerned, it is Congress that prescribes the qualifications of the judges.

During the Marcos regime, the judiciary understandably failed to play its role as dispenser of justice. It was the other way around, with the judiciary being instrumental in consolidating the power of Marcos through its decisions affirming the following: (a) the validity of the suspension of the privilege of writ of habeas corpus; (b) the power of the President to call a plebiscite for the ratification of the Constitution; (c) the validity and effectivity of the new Constitution; (d) constitutionality of Martial Law; (e) constitutionality of the referendum; (f) validity of the creation and jurisdiction of military

51 Ibid, Section 1. 52 Ibid, Section 3. 40

tribunals; and (g) power of the President to exercise legislative power even after Martial Law. 53

The Philippine judiciary, however, also had its redeeming moments. In fact, the judiciary reached its peak of popularity and respect when the Supreme Court decided resolutely in affirming the legality in the transfer of the presidency from Joseph E. Estrada to Gloria Macapagal-Arroyo as an aftermath of EDSA People Power 2. The Supreme Court, in particular, upheld the Constitutional provision on the supremacy of the people as its basis for affirming the swearing in of Macapagal-Arroyo as the next president after Estrada.

Inter-Branch Relationship

The 1987 Constitution affirms that the three branches of government are independent and relate with one another through the principle of check-and-balances. This interrelationship can also be collaborative, especially if it concerns the common good. For example, the Supreme Court could examine and affirm all cases involving the constitutionality of executive or legislative actions, ranging from the enactment of treaties with other countries, other international or executive agreements, presidential decrees, proclamations, orders, instructions, ordinances and other regulations. 54

The Supreme Court may not necessarily relate with other branches favourably. For instance, during the exercise of emergency powers of President Quirino, the High Court rejected the constitutional propriety of such powers. It likewise questioned, in another instance, the validity of midnight appointments to the Civil Service made by President Garcia in 1961.

Inter-branch cooperation, or disagreement, between the Executive and Legislative branches is another political reality. There are times when the Executive finds it

53 Raul P. de Guzman, “Towards Redemocratization of the Political System”, in Raul P. de Guzman and Mila A. Reforma (eds.), Government and Politics of the Philippines, Oxford/NY: University Press, 1988, pp. 267-282. 54 Ibid, Section 4 (2). 41

necessary to influence legislative decisions along party lines. The formulation of laws that tend to push the Executive’s agenda can be faster when majority of the members of Legislature belong the same political party as the former. In cases where there is no decisive majority party in Legislature, collaboration is still possible. During the term of President Ramos, the Legislative-Executive Development Advisory Committee (LEDAC) was established to ensure decision-making on vital development matters that disregard party lines. All political groups were represented in the LEDAC which was able to serve its purpose by hastening the passage of laws necessary for economic development.

The Local Government Units (LGUs)

Definition

Alderfer defines local government as consisting “of all units of government under the national level in unitary states and under national and state levels in federal system.” 55 Local governments in the Philippines, as defined by the 1987 Constitution, cover the following territorial and political subdivisions: the provinces, cities, municipalities, and barangays. 56

All these local governments are under the general supervision of the President of the Republic. Moreover, “provinces with respect to component cities and municipalities, and cities and municipalities with respect to component barangays shall ensure that the acts of their component units are within the scope of their prescribed powers and functions.” 57

The Philippine Standard Geographic Code (PSGC), a systematic classification and coding of geographical-political subdivisions, identified four local government units,

55 Harold F. Alderfer, Local Government in Developing Countries, New York, Toronto, London: Mc Graw Hill, Book Company, 1964, pp.1-16. 56 Article X, Section 1. 1987 Philippine Constitution. 57 Ibid. Section 4 42

or LGUs, namely: the region, the province, the municipality/city and the barangay. 58 These LGUs are herein defined:

a) Region - A subnational administrative unit comprising of several provinces having more or less homogenous characteristics, such as ethnic origin of inhabitants, dialect spoken, agricultural produce, etc.; b) Province - The largest unit in the political structure of the Philippines. It consists, in varying numbers, of municipalities and, in some cases, of component cities. Its functions and duties in relation to its component cities and municipalities are generally coordinative and supervisory; c) City - There are three classes of cities in the Philippines: the highly urbanized, the independent component cities which are independent of the province, and the component cities which are part of the provinces where they are located and subject to their administrative supervision; d) Municipality - Is a political corporate body which is endowed with the facilities of a municipal corporation, exercised by and through the municipal government in conformity with law. It is a subsidiary of the province which consists of a number of barangays within its territorial boundaries, one of which is the seat of government found at the town proper (poblacion); and e) Barangay - The smallest political unit into which cities and municipalities in the Philippines are divided. It is the basic unit of the Philippine political system. It consists of less than 1,000 inhabitants residing within the territorial limit of a city or municipality and administered by a set of elective officials, headed by a barangay chairman ( punong barangay ). 59

The Local Government Code of 1991 offers similar definitions, although it pegs the population of a barangay at 2,000. 60 The municipality, on the other hand, is

58 National Statistics and Coordination Board, Philippine Standard Geographic Code , 1992. 59 Ibid. 60 For Metro Manila and other metropolitan political subdivisions or in highly urbanized cities, the required population is 5,000. The barangay is led by punong barangay (chief), 7 sangguniang barangay members (council), sangguniang kabataan chairman (youth), barangay secretary, and barangay treasurer. The Local Government Code of 1991, Book III. 43

considered to be a general-purpose government for the coordination and delivery of basic, regular and direct services and effective governance. 61

Similar to the municipality, the city serves as a general-purpose government, although it is much larger in terms of area and population. It consists of more urbanized and developed barangays. 62 The Mayor heads the municipality and city. The Vice Mayor presides at the Sangguniang Bayan or the legislative arm at the municipal and city levels.

The province, as a political and corporate unit of government, serves as a dynamic mechanism for developmental processes and effective governance of LGUs within its territorial jurisdiction. It consists of a cluster of municipalities, or municipalities and component cities. 63 The Governor heads the Province with the Vice Governor presiding at the Sangguniang Panlalawigan or legislative council at the Provincial level.

The local chief executives may serve only for three consecutive terms. Similar to the executive branch, there are also departments, bureaus, divisions and sections at the local level. The recruitment of the local technocrats is also governed by the merit system of the civil service.

LGUs and Decentralization

The 1987 Constitution , specifically Section 2 of Article 10, provides that “The territorial and political subdivisions shall enjoy local autonomy.” Furthermore, it directs Congress to “enact a local government code which shall provide a more responsive and

61 The municipality consists of a group of barangays, and may be created with the following criteria: (i) an average annual income of P2,500,000.00 for the last 2 consecutive years based on the 1991 constant prices, (ii) a population of at least 25,000 inhabitants, and (iii) a contiguous territory of at least 50 square kilometres. Ibid, Sections 400 and 442. 62 It consists of more urbanized and developed barangays. A component city may be created if the municipality meets the following criteria: (i) a contiguous territory of at least 100 square kilometres, (ii) a population of not less than 150,000 inhabitants, and (iii) an average annual income of at least P20,000,000 including the income accruing to the general fund but exclusive of special funds, transfers and non- recurring income. 62 The Mayor heads the municipality and city. The Vice Mayor presides at the Sangguniang Bayan or the legislative arm at the municipal and city levels. Ibid, Sections 448 and 450. 63 The creation of the province involves the following criteria: (i) an average annual income of not less than P20,000,000.00 based on 1991 constant prices, either (ii) a contiguous territory of at least 2,000 square kilometres, or (iii) a population of not less than 250,000 inhabitants.Ibid, Sections 459, and 461. 44

accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units.” 64

The Local Government Code also introduces innovations in local governance to ensure that LGUs are able to perform definite functions. Such innovations include the creation of five LGU bodies, namely the local development council; the local prequalification, bids and awards committee, the local school board, the local health board, and the local peace and order council. These local bodies, while working closely with the local government, also consist of representatives from the local community, the private sector as well as relevant nongovernmental organizations. These bodies encourage the participation of the various stakeholders in the local communities on decision-making.

National Government-LGU Relationships

Under the unitary government framework, the local governments are under the supervision of the national government. This exactly has been provided for by the 1987 Constitution, to wit: “the President shall exercise general supervision over local governments. Provinces with respect to component cities and municipalities, and cities and municipalities with respect to component barangays shall ensure that the acts of their component units are within the scope of their prescribed powers and functions.” 65

Presidential supervision over the LGUs is exercised through the Department of Interior and Local Government (DILG). DILG is headed by a Secretary, and maintains offices in all administrative regions. Direct supervision of the LGUs is done by the

64 Article X. 65 Article X, Section 4. 45

Undersecretary for the Local Government and a Board of Trustees which maintain the Local Government Academy which trains the local governments in all aspects of government management. Where the maintenance of peace and order is concerned, supervision is undertaken by the Undersecretary for Peace and Order and its respective Board of Trustees which oversees the Philippine Public Safety College for training purposes.

After implementation of the Local Government Code, the budget of DILG 66 has continued to increase. The DILG allocation for personnel services has increased from P361.9 million in 1991 to P1,276 million in 2002. This increase reflects the greater role of the DILG despite devolution efforts. It was explained, however, that the hikes in the budget were aimed at developing and upgrading the levels of institutional capacity as well as individual capabilities of LGUs.

Up to now, the supervisory role of DILG after devolution continues to evolve. There are at least five reasons for this. The first relates to its advocacy function. The DILG is the main advocate of LGUs for reforms, especially among the national government, the LGUs themselves, and other stakeholders (such as the foreign donor community) in priority areas supportive of local autonomy.

Second, the DILG is veering away from the tight control framework observed during the Marcos regime into one that is more open. Essentially, the supervisory mode is more collaborative and seeks to improve LGUs’ performances with their mandated tasks. The most difficult area for the DILG after devolution, in fact, is on changing the mindset of the field offices who have been used to controlling LGUs. Thus, one of the DILG’s continuing concerns is the re-orientation of its field officers.

The third reason is the emerging brokering role of the DILG where it acts as integrator and coordinator of the various concerns of the LGUs. For example, the DILG

66 This pertains to only the Office of the Secretary. It excludes the budget of the National Police Commission, Philippine National Police, Bureau of Fire Protection, Bureau of Jail Management and Penology and Philippine Public Safety College. 46

helps the LGUs in gaining access to certain resources such as foreign assisted projects. Due to economies of scale, it has become advisable for the DILG to directly negotiate loans from foreign lending organizations for local projects that cut across several LGUs. Thus, for the Bridges Program of the President, the DILG has gathered together all the needs for bridges of the various LGUs and negotiated for the necessary resources. In this case, all LGUs with similar needs are able to get a share of the overall funding that is generated based on their actual needs. Moreover, even the less endowed and capable LGUs, such as the 5 th and 6 th class municipalities, are given the equal chance to avail of funding assistance compared with their more affluent counterparts.

It has been argued that unless the Leagues of Provinces and Municipalities (the association of LGUs) will perform the task of resource mobilization for all its members, the DILG has committed itself to shepherd projects intended for LGUs.

This current arrangement, however, limits actual involvement of LGUs in project development by confining their role to mere project beneficiaries thereby compromising project ownership by LGUs and their sustainability. This particular observation is further expounded in Chapter 3 on the financing of projects through national government agencies (NGAs).

The fourth reason concerns the continuing role of the DILG in helping create an environment conducive to policy and systems supportive of national programs that need coordination of LGU efforts. Examples are the various activities under the Social Reform Agenda and the Agriculture and Fisheries Modernization Program for food security. The DILG acts as the conduit between the national government and the LGUs in the implementation of nationwide programs at the local level.

And fifth, in its coordination role, the DILG is able to recognize the best practices in local governance for replication among the various LGUs. Examples of best practices include the Galing Pook Award for sustainable environment programs held in

collaboration with the Asian Institute of Management and the Gawad ng Pamana ng Lahi for best community-based development programs.

The DILG is moving ahead with a clearer set of priorities and focus on its role as facilitative and partner of LGUs. Aside from ensuring LGU participation in projects and programs of the President, the department also monitors performances. In this regard, the DILG has prepared a self-diagnostic performance measurement system to help LGUs identify their own strengths and weaknesses and institute corrective measures by themselves.

The LGUs may also participate in the planning and implementation of national projects through proper coordination with national agencies and offices. The national agencies, through Presidential directive, may also provide financial, technical or other forms of assistance to the LGUs. These agencies, including the government-owned and controlled corporations (GOCCs), provide monthly reports to the local chief executives (LCEs) to update them on national developments of activities affecting the LGUs.

Insofar as appointments to bureaucratic positions in LGUs are concerned, recruitment rules of the Commission on Civil Service are strictly observed, except for some positions peculiar to requirements of the LGUs. In the same manner, the Commission on Audit does the external auditing of all LGUs save for internal audit matters.

The Question of Dependency

A dependency 67 relationship exists when the LGUs source most of their income externally, i.e. through national government transfers, in order to meet their expenditure requirements. Dependency is also reinforced by the national government which – as the approving authority – imposes requirements to be met by the LGUs who seek support.

67 For further readings on the ‘culture of dependence’, please see the article of Rosario G. Manasan and Shiladitya Chatterjee, “Regional Development” in Arsenio Balisacan and Hal Hill, The Philippine Economy: Development Policies and Challenges: 2003, Philippines and USA: Ateneo de Manila University Press, and Oxford University Press, Incorporated, 2002. 48

Said requirements could be submission of necessary documents, a change in party affiliation of the local political leadership or political trade-offs, in terms of support or opposition to certain views or programs.

The mere fact that a great number of LGUs are greatly dependent on their shares of internal revenue allotment (IRA), which is the biggest portion of transfers from the national government, is already a proof of dependency. However, the IRA depends on the total tax collection of the government at the national level. As such, the level of IRA shares can be unpredictable.

The unpredictability of IRA can thus place LGU expectations of financing its programs on unstable grounds. This is one reason why the local governments themselves should exert efforts to increase their internally-generated income in order to gain leeway in the financing of their operations and activities. This becomes more important in the light of increasing expenditures, which is a political reality especially before and after election periods.

While the Local Government Code of 1991 does not prohibit LGUs from being financially dependent on the national government, neither does it encourage this. The Code does not provide sanctions to LGUs if they are financially dependent on the national government and does not also provide a timeframe as to when LGUs should be financially autonomous or independent. At present, the dependency relationship between the two levels of government gives rise to at least three implications: (a) politico- administrative implication, where institutions are supposedly in place to meet the needs of local finance but cannot be fully utilized; (b) socio-political implication, where the Philippine commitment to democracy is compromised due to the still unresolved patron- client 68 relationship encouraged during the Marcos dictatorship; and (c) economic

68 Tom R. Burns, “Models of social and market exchange: toward a sociological theory of games and social behavior ” in Craig Calhoun, Marshall W. Meyer, and W. Richard Scott, ed. Structures of Power and Constraint: Papers in honor of Peter M. Blau , Cambridge/New York/Port Chester/Melbourne/Sydney: Cambridge University Press, 1990, pp. 129-165 differentiates between market exchange and social exchange. To quote: “Market exchange, in the purest sense, entails single transactions or once-only relationships... Economic exchange in a modern market depends not on personal 49

implication, where the national government continues to be burdened with the growing scarcity of funds due to growing demands for assistance from LGUs. This also implies that the country’s debt burden continues to remain unresolved as the government continues to rely on foreign assistance to meet national development needs.

Ideally, genuine decentralization is best pursued when this dependency relationship is at its minimum. It is not, however, politically realistic to insist that LGUs should be fully financially independent in order to be effective in fulfilling its obligations to its constituents. As discussed in the section on LGU-national government relationships, there are advantages when the oversight department for LGUs (DILG) also acts as the conduit between the President and the LGUs in resolving development issues and problems.

Decentralization and Development

Is decentralization, by giving LGUs a wide latitude of self-government, expected to help attain sustained national development?

Decentralization has emerged as a major strategy to attain national development. A look into the conditions that gave rise to the concept, particularly over the past 50 years in Philippine history, may explain why.

Before the 1970s, most economic planners in less developed countries looked at development as a function of sustained economic growth. The economy grows when it consistently produces more goods and services than what it costs to produce them. But trust between the individuals involved but on trust in the international system of law, formalized contracts, courts, and enforcement agencies... In social exchange there is, generally speaking, a taboo on explicit bargaining, for example, in the exchange of favors, gifts, and assistance. This norm serves to underline the intrinsic character of the relationship; the focus is on the relationship as opposed to specific goods and services and gains and sacrifices associated with them.” The latter kind of exchange may be related to the experience of the Philippines, specifically the patron-client relationship. Max Weber provides the condition on rational exchange: “Der rationale Tausch ist nur möglich, wenn entweder beide Teile dabei Vorteil zu finden hoffen, oder eine durch ökonomische Macht oder Not bedingte Zwangslage für einen Teil vorliegt. ” Max Weber, Wirtschaft und Gesellschaft: Grundriss der verstehenden Soziologie Hrg. Von Johannes Winckelmann, I und II Halband, Tübingen: J.C.B. Mohr (Paul Siebeck) 1956, p.37. 50

then, more input is needed to yield an increasing output. This situation gave rise to the problem of where to get the necessary capital and how to use it to spur or sustain economic growth and, in the process rely less on wealth redistribution. The assumption here is that as the economy grows as a result, the benefits derived from it will “trickle down” to the poor in terms of employment and rising income, thus redistributing wealth in the process. The structure thus calls for a central body that could control the distribution of scarce resources in such key areas as finance, investment and administration. 69 Political centralization fitted this bill.

This strategy, however, drew heavy criticism when most developing countries – including the Philippines, failed to grow according to plans. Thus, the focus of development policy and administration shifted from just hitting macro growth targets to meeting the basic needs of the poor. This new approach believes that development can trickle up from below by promoting community self-reliance and encouraging the people to participate in the affairs of development and administration. Thus, less stress was put on central planning and centralized administrative structures were recast to encourage local initiatives in planning and enhance the responsibility of accountability of those who plan , decide and implement local development projects and programs.

The 1987 Constitution could have maintained this view when it provided that local governments should have autonomy. Thus, in Section 5 of Article X, it instructed that “each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.” 70

Article X is entirely used to spell out how the decentralization process should be carried out within the context of local autonomy. As for the Local Government Code of 1991 itself, it lists down a long list of powers and functions devolved from the central

69 Ibid. This development thinking reflects the is main development views of the Third Philippine Republic as well as the Marcos Regime, from 1946 to 1986. 70 Article X. 51

government to the LGUs. These could be grouped under the following categories: basic services and facilities, regulatory functions, revenue-raising powers, and other governmental and corporate powers. All these powers and functions impact directly on local development, particularly on the improvement of the quality of life of the people at the lowest level of government. These, in other words, also aim to give flesh to the unending effort to win the war against poverty.

Decentralization and the Anti-Poverty Effort

Will decentralization provide the solutions to the problem of poverty?

Over the years, the various government administrations of the Philippines had continuously been undertaking programs to combat poverty. Compared with other countries in the Asian region, progress in poverty reduction in the Philippines has been modest. 71 During the 1970s and 1980s, the incidence of poverty declined by only around 0.7 percentage points. In comparison, the poverty declined in Indonesia is around 2 points annually and nearly 1.5 points annually in Thailand and Malaysia during roughly the same period. 72 During the 1985-1997 period, the proportion of Filipino families living below the poverty line decreased from 44.2 percent in 1985 to 31.8 percent in 1997. However, in the aftermath of the Asian financial crisis of 1997 and droughts induced by the El Nino weather phenomenon before 2000, the poverty incidence in the country rose to 33.7 percent in 2000.

Poverty in the Philippines is even more pronounced in the rural areas than in the urban areas, as indicated in the table below:

Table 2-1: Poverty Incidence in the Philippines 1991 (in %) 1994 (in %) 1997 (in%) 2000 (in%) Philippines 39.9 35.5 31.8 33.7 Urban 31.1 24.0 17.9 19.9 Rural 48.6 47.0 44.4 46.9 Source: National Statistics Office

71 Japan Fund for Poverty Reduction, Asian Development Bank, 2002. 72 World Bank, 1998. 52

Where regions are concerned, poverty is spread throughout the country, although it is most pronounced in Mindanao island. In particular, the Autonomous Region of Muslim Mindanao (ARMM) has the highest poverty incidence, followed by Region 5 (Bicol Region). The Bicol region, situated on Luzon island, rank 2 is often affected by natural disaster, such as eruptions of Mayon Volcano and the annual typhoons. Region 12 (Zamboanga, also on Mindanao island) ranks third. The development of Mindanao has been historically the site of protracted armed conflict between Muslim separatists and the military.

Regions in Luzon posted lower poverty incidences. The National Capital Region has the lowest poverty incidence followed by Regions 3 (Central Luzon) and 4 (Southern Tagalog). The affluence of these regions is influenced by the past policy of providing priority to the NCR in terms of investments. Central Luzon and Southern Tagalog enjoyed the spill-over effect of the development of NCR.

LGUs are also classified according to income classes, thereby providing the necessary information to development planners and managers on which development priorities could be base. At the provincial level, 1 st and 2 nd income class provinces comprise 65 percent of the total, signifying that a good number are well off. Cities are better off, with 81 percent of them financially strong. This is not surprising, considering most cities – aside from serving as regional capitals for commerce and other activities, are also strong magnets for productive investments from the surrounding areas. On the other extreme, municipalities are considered the poorest LGUs, with 73 percent of them ranking from the 3 rd to the 6 th income class level.

Clearly, in terms of development demands, municipalities comprise the LGUs that are the most needy and where pressure to uplift the quality of life is the greatest.

Table 2-2. Distribution of LGUs, by Income Class

Province City Munipality Income 1999 1999 1999 Class Population No. % Population No. % Population No. % 1st 51,695,347 30 38 15,722,971 53 64 11,617,115 109 7 2nd 15,239,644 21 27 1,490,095 14 17 6,820,304 109 7 3rd 5,078,043 13 17 584,532 9 11 9,030,413 187 12 4th 2,434,240 13 17 283,367 4 5 13,172,449 406 27 5th 14,891 1 1 87,258 1 1 10,449,990 569 37 6th - - - - 1,538,192 130 9 Special - - 3,693,646 2 2 0 0 class not specified - - - - 255,542 15 1 TOTAL 74,462,165 78 100 21,861,869 83 100 52,884,005 1525 100

Sources: DOF Department Order No. 24-97, NSCB Statistics Series, December 1998, No. 1998-005.

The World Bank’s poverty assessment of 2000 concluded that the underlying causes of poverty are still heavy dependence on agriculture, lack of adequate safety nets, and lack of educational achievement. It thus suggested that achieving higher growth and enhancing the ability of the poor to participate in that growth by building up their assets through investments in their human capital and their physical environment would be the main engine for poverty reduction. 73 Local governments in the rural areas would thus be the key in this process, especially if strengthened and equipped to provide adequate and timely agricultural, environmental, and natural resources management extension resources. In this case, giving greater autonomy among LGUs in areas or concerns that directly affect communities could be a significant step forward.

The high population growth is another factor that constrains increases in per capita incomes and concluded that curbing population growth will make the poverty reduction task much easier. The Philippines has a high fertility rate by Asian standards (3.5%) despite its decline in recent years. If the current trend in fertility continues, population is set to increase to about 95 million in 2010 from 81 million in 2005, which puts a burden on economic growth to reduce poverty. 74 This has implications for the

73 World Bank Group, Improving the Lives of the Poor Through Growth and Empowerment , Country Assistance Strategy for the Philippines Program. Manila. April 30, 2002, p. 18 74 Ibid. 54

delivery of basic services, such as food, health and education especially in the poor regions.

The World Bank, in its Country Assistance Strategy Process in 1999, highlighted the important role of LGUs in the anti-poverty effort. It has earlier found out, in a series of consultations, that the factors hindering development included poor governance, weak implementation capacity, and related issues in project implementation. Thus some of the key issues that LGUs must address include: (a) capability building; (b) participation of civil society and local communities in the development process; (c) synchronization of services from the different levels of government; and (d) closer attention to cross-cutting issues of population management, governance and empowerment of the poor .75

In the light of limited resources needed for investments, particularly on infrastructure, efforts have been focused on reducing dependence on national government financial resources. One strategy is the strengthening of public-private infrastructure partnerships that call for greater participation of private sector groups in undertaking public infrastructure. Another is to make infrastructure management at the local government level more effective. Very few local governments have either the financial or management capacity to design, construct, operate or contract out infrastructure.

The World Bank suggests four areas which LGUs could explore insofar as undertaking public infrastructure are concerned:

a) Modify the LGU financing framework. This calls for a revision of existing formulas of block transfers involving financing assistance from all sources, including internal revenue allotment (IRA) by increasing allocation to smaller and poorer towns. This would force larger cities to rely more on their own internal sources of revenue from business and property taxes;

75 Ibid. 55

b) Privatize or concession out local government-owned commercial enterprises and activities . LGUs tend to invest their scarce capital in business enterprises where there is strong investment interest from the private sector;

c) Develop the financial market financing option for the larger LGUs with a more diversified revenue base . The current LGU finance market is extremely limited. Presently, only the Development Bank of the Philippines, the Land Bank, and the Municipal; Development Fund provide financing to local governments. The LGUs should be encourage to tap the private financing market; and,

d) Increase performance pressures on LGUs . Benchmarking performance indicators for each LGU could tighten governance and accountability. Making comparative results available to the public, community groups, and local businesses could significantly increase performance measures. 76

76 Ibid. p. 136. These recommendations were also raised by the Medium-Term Philippine Development Plan, 1998-2004 and reiterated, in general terms, in the current Philippine development plan. Private-public investment partnerships (PPIP) have emerged as an accepted strategy to foster development in less- endowed areas. 56

CHAPTER 3

The Local Government Code and the Local Financing Structure

While the Local Government Code (LGC) of 1991 has devolved regulatory functions; revenue-raising powers; and an array of other governmental and corporate powers from the national government to the local governments, its key concern is enabling LGUs to deliver basic services and facilities within their respective jurisdictions.

Prior to 1991, only few LGUs were effective service providers. Thus the Code seeks to correct this by explicitly requiring the affected national government agencies and offices to transfer to LGUs the services enumerated by the Code within 6 months from January 1, 1992. 1 It goes without saying that for this decentralization process to be effective, the LGUs need to be capable of implementing the devolved basic services and have the financial capability to carry them out as well. It has been rightly observed that “the relatively short time frame for the transfer really highlights the issue on the absorptive capacities of LGUs. Some local governments may be adequately prepared to take the devolved functions and responsibilities, while others may not be.” 2

While the Code requires the LGUs to absorb the transferred personnel, it is only up to the extent that it is administratively viable as determined by the Special Oversight Committee (SOC), which the Code creates to oversee it initial implementation. The SOC is chaired by the Department of Interior and Local Government with the Department of Budget and Management as the co-chair. The SOC is tasked to plan and oversee the expeditious implementation of the transfer, merger and or absorption into the Department of the personnel, property, appropriations and installations of involved agencies.

1 Manuel S. Tabunda and Mario S. Galang, 1991, p. 11. 2 Ibid. p. 13 58

The LGUs are also given the power to create and broaden their own sources of revenue. Their share in the national taxes (IRA) shall also be increased. Unfortunately, the Code is silent on the issu eCommission entitle them to separation or retirement be the present? This chapter intends to find this out.

Decentralization and Local Autonomy Through the Local Government Code of 1991

The enactment of the Local Government Code (LGC) by the Philippine Congress in 1991 has resulted in the transition from merely administrative deconcentration 3 to political devolution. In sum, the LGC of 1991 became a catalyst to personnel, functional and fiscal decentralization. 4

Personnel Decentralization

With regard to personnel decentralization, the local government chief executives (LCEs), through the Code, were empowered to appoint their administrative personnel. Two types of appointive local officers have been identified: mandatory and optional. Mandatory appointments should be based on the LGU’s organizational structure and staffing pattern within the context of its service requirements and financial capability. Moreover, all appointments made by the local executives are subject to minimum qualifying standards and guidelines prescribed by the Civil Service Commission. 5

3 Administrative deconcentration started during Marcos’ administration wherein the national planning and administrative functions were delegated at the regional level. 4 See discussion of Fei Yue, 1999, Decentralization and Its Implications for Bank’s Operations, Asian Development Bank. 5 Local Government Code of 1991.

Table 3-1: LGUs and Mandatory/Appointive Local Officers

LGUs Mandatory Optional Province/City/ Secretary to Sanggunian Information Officer Municipality Treasurer* Assistant Treasurer Assessor Assistant Assessor Accountant Environment and Natural Budget Officer Resources Officer Planning & Development Architect Coordinator Population Officer Engineer Health Officer Civil Registrar Province/City Administrator Optional for Municipality Legal Officer Optional for Municipality Social Welfare & Development Optional for Municipality Officer Cooperatives Officer Veterinarian General Services Officer Province Agriculturist Optional for City and Municipality Source: Local Government Code of 1991 Asian Development Bank

The Local Government Code lists the local officers that the LCEs, who are elected to their posts, could appoint. However, due to the extraordinary responsibility accruing to the position, the treasurer is exempted from this regulation. LCEs were only permitted to recommend a qualified person which needs to be approved by the Secreatry of Finance. Yet, this regulation marks a major deviation from the principle of devolution and indicates sizeable distrust on the part of the national government towards the administrative capacity of the LGUs. Moreover, such a regulation creates a source of serious central-local friction, as a treasurer beholden in his position to the national government may become a major obstacle for LCEs to implement their programs and policies.

The Treasurer also needs to be a resident of the locality with the assumption that he is knowledgeable of the local conditions. This provision also constrains the LCE to tap the services of a highly-qualified treasurer outside of his locality and is especially in small and geographically remote LGUs impeding administrative efficiency.

Insofar as the sources of appointments are concerned, the number of personnel in both the national and local governments has been increasing (Table 3-2). A look into the trends in the employment of government personnel affirms the role of government as a provider of jobs. As a matter of fact, the government is the biggest single institutional employer in the Philippines. Relative to personnel tenure, the number of contractual or casual employees in the local governments is nearly double than that in the national government. Only about 22 percent of those employed in the LGUs are permanent, which means these enjoy the protection of Civil Service laws and regulations regardless of shifting political leaderships.

Table 3-2: Number of Government Personnel By Major Subdivision and Status of Appointment

Major Subdivision Regular Positions Casuals/Contractuals 1996 1997 1998a 1999 1996 1997 1998a 1999 Total 1,192,614 1,204,217 1,260,723 1,287,651 167,046 174,427 144,805 157,847 National Government 849,337 865,254 914,202 44,719 48,697 45,764 Government Owned 90,087 77,343 77,569 21,620 19,799 17,402 and Controlled Corporations Local Government 253,190 261,620 295,880 100,707 105,931 94,681 a Projected Source: Civil Service Commission

The role of LGUs as providers of local employment, however, is significant only over the short-term considering that the duration of employment of non-permanent employees is usually co-terminus with the locally-elected officials. This is reflective of the spoils system 6 prevalent in most developing countries where newly-elected government executives maximize their power of appointment by putting people they could trust or to whom they owe a debt of gratitude in certain positions. Thus, aside from qualifications, the LCEs may prefer to appoint people to positions based on personal reasons.

6 Spoils system refers to the practice of regarding public offices and their emoluments as plunder to be distributed to members of the victorious party (Merriam-Webster Dictionary definition). 61

Other justifications used by LCEs in hiring personnel, particularly for casual or contractual positions, include the pressure from an increasing population. Some provinces, municipalities and cities, particularly those belonging to the high-income levels, use the employee-to-population ratio to justify new appointments. This is true, for instance, in the delivery of education services. While the administration of teachers is not a devolved function, some LGUs, however, fill in the gaps by providing the salaries for the additional teachers to meet the increase in the number of students. Thus far, there have been few complaints against this practice. The Civil Service Commission (CSC), which oversees all appointments to the Civil Service at all levels, reveals that the number of administrative cases filed against LCEs for questionable appointments is low. Should there be cases filed in CSC against local executives, said cases are usually procedural in nature, such as the timing of appointment, or the need for certain documents.

The data also show that despite decentralization, the number of personnel employed by the national government – including those supposedly devolved to the local governments, contracted minimally from 1990 until 1996. Ironically, by 1997, the number of national government had reached the level prior to decentralization and this number continues to increase. Clearly, there has been no dramatic change in employment trends after the adoption of decentralization policy, despite expectations that this re-engineering effort of the national government would result in smaller and more effective working agencies. One of the reasons of this trend is the spoils system. Another is the mindset of the administrators in the bureaucracy. In particular, the number of personnel is translated to the relative strength of a certain department. In view of this, Executive Order 366 or the rationalization program is geared to focus government resources on vital functions, minimize overlaps and duplications, and improve delivery and support systems. 7

Overall, thus, this trend seems to have adverse consequences in two respects: First, the enormous increase of contractual and casual employees hardly improves the administrative performance of LGUs. The level of expertise and training of most of these employees is low

7 “NEDA Chief: Gear-Up Public Sector Reforms”, NEDA Digest, July 8, 2005. 62 and inadequate to meet the requirements of the increasingly complex and technically complicated managerial tasks efficient local governments are expected to carry out. The rise of casuals and contractual employees also raises the question in how far national civil servants evaded the transfer to local governments and thus also weakened service delivery capacities of LGUs. This leads to the second negative consequence of the devolution of personnel. If not only the personnel of LGUs increases, but also of the national government, decentralization can hardly be considered cost-efficient and it must be suspected that public funds will flow into routine expenditures and even less is available for public investment and development.

Aside from the control of appointments, the LGUs also have the power to recall officials due to loss of confidence. The first recall process was initiated by the Province of Bataan on the island of Luzon. Similar recall efforts were followed by Barangay Sta. Ana in the City of Manila and Caloocan City, both in the National Capital Region (NCR). The recall processes are tedious and complicated. The process is usually initiated by a preparatory recall assembly by registered voters of the LGU concerned wherein the proposal to change the elected local government executive is raised. This proposal is written and submitted to the Commission on Elections (COMELEC) which, in turn, verifies and investigates the merit of the proposal. The COMELEC then publishes the petition to ensure the widest audience possible for a discussion on the matter. After this, the electoral body announces the acceptance of candidates and conducts the recall election. The tediousness of the process is a device to protect local officials from abuse of the recall mechanism. An elected Governor, for example, who does not belong to the same political party as that of his subordinates, could be subject to recall as a result of personal idiosyncrasies or the inability to agree on individual or party agenda. Such conflicts inevitably paralyze local government and absorb much time that could be spent more productively for the improvement of public services.

In order to address the concern that the recall process would be improperly used, Congressman Enrique Garcia,8 who was earlier recalled as Governor in Bataan province, filed a bill in Congress increasing the percentage of the total number of registered voters who

8 Congressman Garcia was elected anew as Governor of Bataan in 2004. 63 would initiate the petition from 25 percent to 50 percent in the LGU concerned. 9 Yet, it is still recognized, however, that recall process, aside from helping resolve a leadership vacuum, remains an avenue for the people in their exercise of democratic procedure.

Yet, the proposal from now Governor Garcia did not prosper. The recall process, instead, was streamlined with the elimination of the preparatory recall based on Republic Act 9244. 10 The percentage requirement is also reduced depending on the population. For example, if the population is greater than 20,000, the requirement is 25 percent. If the population is greater than 75,000, the requirement is 20 percent. If the population is greater than 300,000, the requirement is 10 percent. Before the percentage requirement is fixed at 25 percent regardless of the population. 11 .

Functional Devolution

The Local Government Code of 1991 provides for the devolution of the following specific functions from the national government to the LGUs: social welfare services, local health care and hospital services, agriculture extension and on-site research, community-based forestry projects, public works and infrastructure projects financed by local funds (public markets, bus terminals, slaughterhouses, roads, water supply and sanitation, solid waste management) school building programs, tourism facilities and tourism promotion and development, housing projects for provinces and cities and other services.

Aside from delivery of services and provision of infrastructure facilities, the LGUs have also been entrusted with regulatory functions. One major regulatory function is that on the reclassification of agricultural lands. This involves the authority to determine whether a piece of agricultural land may have greater economic value for residential, commercial or industrial purposes. The LGUs are also authorized to: (a) inspect food products for public consumption; (b) adopt quarantine regulations; (c) enforce the National Building Code; (d)

9 Interview with Congressman Garcia, Balanga, Bataan, 8 September 2001. 10 “An Act Eliminating the Preparatory Recall Assembly as a Mode of Instituting Recall of Elective Local Government Officials Amending for the Purpose Sections 70 and 71, Chapter 5 Title I, Book I of RA 7160 Otherwise known as the LGC of 1991 and for other Purposes”, 19 February 2004. 11 Ibid. 64 regulate the operations of tricycles; (e) regulate the real estate trade and business; and (f) license the establishment of cockpits and regulate cockfighting. 12 The LGUs also have the power to ensure protection and conservation of the environment and thus could impose penalties for illegal logging, dynamite fishing, and similar acts, and the adoption of measures against pollution.

The national government agencies that are affected by the decentralization process are mainly those whose services and responsibilities – such as those cited above, will be devolved to the LGUs. These are the Departments of Agriculture (DA) for food inspection, Health (DOH) for quarantine regulations; Social Work and Development (DSWD); Environment and Natural Resources (DENR); Public Works and Highways (DPWH) for enforcement of building codes; Transportation and Communication (DOTC) for regulation of tricycle operations; Tourism (DOT); and Education, Culture and Sports (DECS). 13

While the teachers and employees of DECS remain on the payroll of the national government, the agency is affected because the buildings and other facilities for public elementary and secondary schools are devolved to the cities and municipalities. 14 For public health matters, the DOH used to be primarily responsible for the implementation of the Code on Sanitation and thus oversee the operations of local health agencies. Under the Code, the local health units have been placed under the LGUs and the DOH can only intervene on public health matters in case of emergencies.

As of 1995, a total of 70,842 personnel were devolved to the LGUs. Below is a summarization of the number of personnel devolved to the LGUs from the various national government agencies:

12 Manuel S. Tabanda and Mario S. Galang, 1991, p. 17-19. 13 Ibid. p. 18 14 Ibid. p. 12 65

Table 3-3: Devolution of Personnel Agency Number of Number of Devolved Personnel Personnel retained (as of 1995)

Department of Health 46,107 25,261 Department of Social Welfare and Development 4,144 2,676 Department of Agriculture 17,667 12,804 National Meat Inspection Commission 9 395 Department of Environment and Natural Resources 899 21,780 Department of Public Works and Highways 309 19,382 Department of Tourism 32 1,846 Department of Budget and Management 1,650 1,298 Philippine Gamefowl Commission 25 166

Total 70,839 65,608 Sources: Department of Interior and Local Government, Civil Service Commission Asian Development Bank, and 1993 National Expenditure Program, Regional Coordination Staff

The figures above indicate that most of the various Departments devolved more than half of their personnel in 1992. This devolution of personnel resulted in the corresponding transfer of their salaries totalling P2,226,585,000 which has been included in the 1992 Internal Revenue Allotment (IRA) of LGUs. This indicates that the cost of the devolution of personnel has been given utmost importance.

Still, however, raising funds to pay salaries of personnel continues to remain a problem. Even the relatively well-off local governments have encountered limitations on the use of funds for compensation purposes. In particular, the total appropriations for personnel services should not exceed 45 percent for high to middle (1 st to 3 rd ) class provinces, cities and

66 municipalities, and 55 percent for low middle to poor (4 th to 6 th ) class LGUs. 15 Such limitations, notwithstanding, the LGUs are actually exceeding this requirement. Table 4 and Figure 1 illustrate the expenditure patterns of the LGUs from 1991-2001.

The financial bottlenecks were even greater with respect to the cost of Operations and Maintenance (O&M) as well as Capital Outlay (CO). In 1994, an estimated P519.8 million worth of assets were reportedly devolved to LGUs, such as land, buildings and improvement, furniture and fixtures, equipment, vehicles and supplies. 16 But most of the assets were retained by the national government. As a result, LGUs that did not have the sufficient infrastructure in place encountered difficulty of implementing the devolved functions during decentralization. This is true especially for the less affluent LGUs particularly the 3 rd to 6 th class municipalities which are already hampered with insufficient revenue collections.

15 Local Government Code of 1991, Section 325. 16 Republic of the Philippines, 1994 Socio-Economic Report . 67

Table 3:4 :1991-2001 Local Government Expenditures (in Philippine Peso) Year Current Expenditures Capital Outlay * Grand Total General Government Public Welfare & Economic Operation of Other Total Internal Safety * Development Economic Charges * Enterprise * 1991 8,403,919,555 2,832,046,876 3,006,595,570 951,325,550 5,266,155,854 20,460,043,405 2,242,757,678 22,702,801,083 1992 10,159,602,815 3,901,907,853 3,642,422,484 1,168,683,478 3,689,281,026 22,561,897,656 2,743,245,941 25,305,143,597 1993 12,270,021,653 8,803,781,062 5,298,942,180 1,448,046,980 6,233,342,685 34,054,134,560 4,409,531,764 38,463,666,324 1994 15,224,000,000 12,247,000,000 6,859,000,000 2,232,000,000 9,528,000,000 46,090,000,000 6,508,000,000 52,598,000,000 1995 19,817,839,324 15,143,980,290 8,501,180,611 2,543,451,278 11,376,603,537 57,383,055,040 7,004,905,580 64,387,960,620 1996 22,849,822,361 17,735,499,880 9,873,498,287 3,361,530,142 12,225,248,465 66,045,599,135 6,320,370,137 72,365,969,272 1997 29,079,719,358 22,369,610,629 12,318,411,569 4,300,894,508 16,231,305,329 84,299,941,393 7,227,119,651 91,527,061,044 1998 31,939,647,090 25,173,391,644 13,366,990,502 3,772,577,607 18,052,428,391 92,305,035,234 7,291,905,635 99,596,940,869 1999 35,759,650,073 26,742,609,266 14,460,418,675 3,976,258,377 24,980,180,830 105,919,117,221 8,165,180,082 114,084,297,303 2000 40,925,707,008 31,273,396,109 16,840,180,901 4,790,189,351 24,533,004,988 118,362,478,357 13,027,205,611 131,389,683,967 2001 55,644,955,379 35,935,209,040 25,474,435,298 0 20,367,074,498 137,421,674,215 0 137,421,674,215 Average 25,643,171,329 18,378,039,332 10,876,552,371 2,594,996,116 13,862,056,873 71,354,816,020 5,903,656,553 77,258,472,572 Source: Bureau of Local Government Finance, Statement of Income and Expenditure Reports * Starting 2001, a new Statement of Income and Expenditure (SIE) format is used. Capital expenditure is incorporated in every sector. Operation of Economic Enterprise is included in Economic Development *For 2001, Public Welfare and Internal Safety was broken down as follows: 9,715,125,185 Education, Culture and Sports Manpower Development: 15,837,610,210 Health, Nutrition and Population Control 217,968,070 Labor & Employment 6,004,051,879 Housing and Community Development 4,160,453,697 Social Security and Social Services and Welfare Total: 35,935,209,040

Chart 3:1 - 1991-2001 Local Government Expenditures

160,000,000,000

140,000,000,000

120,000,000,000

Operation of Capital Outlay* 100,000,000,000 Economic Enterprise*

In PHP Economic Development 80,000,000,000 Other Charges*

Public Welfare & Internal Safety* 60,000,000,000 General Government

40,000,000,000 Source : Department of Finance, Bureau of Local Government Finance ,Statement of Income and Expenditure Reports 20,000,000,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average

Year

Related to this, the Local Government Code, particularly the Augmentation Scheme under its Implementing Rules and Regulations (IRR), assigned national government agencies (NGAs) to augment basic services and facilities earmarked to identified LGUs. The National Government Agencies will provide from their budget, if not cash outlay, basic services and facilities to the identified LGUs. The standards and guidelines for basic services and facilities prescribed by the NGAs form the bases for determining non-availability or inadequacy of such services and facilities in an LGU. Through the President’s instruction, the appropriate NGA can also provide financial, technical or other form of assistance to the LGU at no extra cost in case the latter could not support the salaries of devolved personnel, maintain the operation of transferred

69 assets or finance the adequate delivery of basic services and facilities. In this case, rather than provide direct cash outlay to the LGUs for the delivery of basic services, the NGAs relegate the implementation of the projects and programs of the national government, including the use of the allocated budgets, to the LGUs. The NGAs also defend the budget allocated to these projects and programs during the budget planning process, even though these are for LGU needs.

This arrangement is a challenge to the NGAs who have to provide detailed prescription requirements on highly heterogeneous LGUs in the context of the LGUs’ economic, social, political and cultural environment. The actual implementation of this provision is already being tested in the packaging of some foreign-assisted projects by the NGAs for the benefit of local communities. This point is further explained in the section on the sourcing of funds for LGUs from Official Development Assistance (ODA).

An issue that is putting a strain to the continued devolution of services is the perceived increases in the budget for devolved personnel from selected NGAs. A principle observed during the devolution of functions is that there would be no decrease whatsoever in the salaries of personnel affected. This has led to the peculiar situation where the salary of a devolved staff, like the rural physician, is actually higher than that of a mayor.

Another issue that is related to the budget is the Philippine practice of using a one-fund concept where the national government through the Bureau of Internal Revenue (BIR) collects income taxes nationwide. The budget that should be transferred directly to the LGUs is channelled through the national government implementing agencies. 17 Charts 2 and 3 show the trends in the budget of selected devolved personnel from 1991 to 1997, and from 1997 until 2002, respectively.

17 ADB TA 3145-PHI Strengthening Public Finance and Planning of Local Government Units. “Policy Paper 2: Toward Establishing Stability, Equity and Sustainability in Local Government Unit Development Programs,” Prepared by Public Administration Service in association with Pacific Rim Innovation and Management Exponents, Inc. March 2000. 70

Figure 3-2 Budget of Selected Devolved Agencies

20,000 15,000 DOH DA 10,000 DSWD 5,000 DENR -

3 91 9 97 99 01 9 9 1 19 1995 1 19 20

Source: Brillantes, 1997 and General Appropriations Act

The trends in the budget allocations for selected agencies which devolved most of their employees show varying results. The budget of DOH, for example, in 1992, decreased in 1993 and picked up in 1994. From 1997 until 2001, the DOH maintained the level of its budget. In 2002, however, DOH budget decreased.

For its part, the budget of DA substantially increased in 1996. A minimal decrease in the DA budget was experienced in 1999 but this was temporary as it recovered in 2001 and increased anew in 2002. Since 1992, agricultural infrastructure was a priority concern of the government, and the rehabilitation of marine and aquatic resources through the Coastal Resource Management Program was in full swing. The behaviour of the budget of the DA is similar to that of the DENR which had been increasing from 1992 until 1997 and maintained the level of its budget until 2001 and increased slightly in 2002. The protection and conservation of the country’s natural resources, including its sustainable management, was a concern that paralleled that for the agricultural sector.

For the DSWD, which carries out the bulk of anti-poverty efforts of the government through the delivery of basic social services, its budget has remained steady

71 except for 1998 when it experienced a hefty decrease in 1998 and in 2002 with a marginal increase.

The problems that emerged from the devolution exercise could be grouped into the following: (a) tenure and compensation of the devolved personnel vis-à-vis the organic LGU employees; (b) lack of technical capacity among the LGU staffs to carry out the devolved services; and (c) lack of sustained funding sources with which to finance the maintenance, operations and capital outlay of the devolved facilities.

A closer scrutiny of these selected agencies is necessary to further explain how the decentralization process has impacted on delivery of basic services at the local levels.

Department of Health (DOH)

To address concerns on devolution, the DOH established the Local Government Assistance and Monitoring Service (LGAMS). The involvement of DOH in the devolution process was delayed due to opposition from concerned personnel who would be devolved to the local governments. While the agency continued to implement the supposedly devolved activities and functions from 1991 to 1996 due to the standoff between the affected personnel and the implementing bodies, efforts were undertaken to determine how the devolution could be undertaken to the satisfaction of all contending parties. Thus, in 1997, the President issued Executive Order 102 entitled “Rationalization and Streamlining Plan” for the health sector. Based on this Order, reforms were implemented, including those having to do with the management of the various public hospitals nationwide. Hospitals were freed from the previous subsidies granted by national government, and a scheme to rationalize the payment of services rendered in these hospitals was put in place.

Tenure and Compensation As earlier mentioned, health personnel devolved to LGUs comprise more than half of the total devolved personnel from all national government agencies. An important issue arising from the devolution concerned compensation. In particular, the salary scale of the devolved personnel was retained, consistent with the Civil Service rules on tenure and compensation. Thus, a physician’s salary is actually higher than the salary of the LCE, particularly the governor or mayor. Among others, this situation resulted in the demoralization of organic members of the LGUs.

Aside from the retention of the salary scale, Republic Act No. 7305 or the Magna Carta for Health Workers 18 on March 26, 1992 contributed to a wider gap in compensation between the organic members of the LGUs and the devolved personnel. While this law is instrumental in resolving issues of the devolved health personnel particularly on the protection of their tenures and levels of compensation, it antagonized the organic LGU personnel. For instance, the promotion of the LGU personnel is not as fast as that of the devolved personnel. The professional mobility of personnel in Manila is faster than that of the province. Aside from this is the seniority issue. The devolved personnel might be holding a higher position although officials were younger than that of the organic personnel. 19

There was also the issue of cooperation between the devolved health personnel and the LGUs. For instance, devolved health staff of the Bataan Provincial Hospital waged a strike in 1997 demanding additional compensation as provided by RA 7305 from the Bataan Provincial Government or to revert the operations of the hospital to the national government. The Bataan Provincial Government, in response, opted to grant the request of the striking health workers to give back to the national government

18 Republic Act No. 7305, The Magna Carta of Public Health Workers, (26 March 1992) spearheaded by Senator Juan Flavier was enacted to (a)promote and improve the social and economic well-being of the health workers, their living and working conditions and terms of employment, (b) develop their skills and capabilities in order that they will be more responsive and better equipped to deliver health projects and programs, and (c) encourage those with proper qualifications and excellent abilities to join and remain in government service. 19 Interview with Ms. Risa Yapchingco, Bureau Chief Local Health Development, Department of Health, Manila, 18 July 2001. 73

(re-nationalization) because providing additional compensation to devolved health workers would also mean having to do the same to other devolved personnel from other departments.

Technical Capacity Aside from the issue on tenure and personnel compensation, another problem that arose during the devolution process was the gap on technical capability between the devolved personnel and the organic LGU employees. The organic LGU employees were woefully equipped insofar as professional and technical competence in delivering health services was concerned compared with the nationally-trained health workers. This issue alone has raised concerns on the ability of the LGUs to provide quality health services to the people.

Maintenance The LGUs also encountered problems in sustaining the provision of hospital services. LGUs found out that maintaining and operating hospitals can be very costly. It has been estimated that at least PhP6 million would be needed to run a small hospital for a year. Most provinces, however, could provide a budget of only PhP3 million on the average. 20

As earlier mentioned, the costs for the maintenance, operations and other expenses (MOOE) as well as the capital outlay of devolved services are not provided to the LGUs. Before devolution, health care services for indigents used to be free regardless of the number of people served. This held true especially for public hospitals where anybody – regardless of socioeconomic status - may use the services of such institutions. Because the LGUs have budget constraints, LGUs are now hard pressed in providing free services to the poor. As the economics would dictate, they have to charge fees for consultations. On the other hand, their constituents might demand that health services be free similar to the previous practice of DOH where everything is given free of charge.

20 Interview Mr. Jose Basas, Bureau Chief Local Health Development, Department of Health, Manila, 18 July 2001. 74

The LGUs are aware of the fact that they need to recover part of the cost of operating hospitals. But making hospital services more expensive than during the time these were under the national government, however, is politically not acceptable. Thus, the services and facilities of most devolved hospitals have deteriorated because the LGUs could not cope with the cost of operating the hospitals. There are instances where thedistrict hospitals were downgraded from tertiary to infirmary. 21

Some LGUs, in the face of difficulties in maintaining devolved public hospitals, have tried to re-nationalize the hospitals through their representatives in Congress who drafted the appropriate bills. The DOH, however, opposed the move saying that it did not want to become a party to the reversion of the process of devolution. The DOH Secretary that time (1998-2002), Dr. Eduardo Romualdez, clearly stated he would not accept further attempts to re-nationalize devolved hospitals.

From 1993 until 1998, eighteen hospitals were re-nationalized. Even high-income class provinces, such as Bataan, and highly-urbanized cities including those in the NCR, were able to revert their hospitals to the national government. After stronger opposition from the DOH, the process of re-nationalizing hospitals was stopped in 1999 when the national government approved to shoulder the budgets of all hospitals through the line appropriations of the DOH.

21 According to Mr. Michael Provido of NEDA Social Development Staff, the DOH will not disclose specific hospitals, which experienced downgrading because the LGUs are politically sensitive on this aspect. The researcher tried to request information on specific examples from DOH. The DOH, however, declined this request for information. 75

Table 3-5: List of Re-nationalized Hospitals Year Region Renationalized Hospital Republic Year Given Act Passed Line Budget under DOH I 1. Region I Medical Center 7983 1995 1999 II 2. Veterans Regional Hospital 7645 1993 1999 3. Southern Isabela General Hospital 833 1997 1999 III 4. Bataan Provincial Hospital 8561 1998 2000 5. Mariveles Mental Hospital (R-9507) 7160 1996 1999 IV 6. Ospital ng Palawan 8549 1998 2000 V 7. Bicol Regional Training & Teaching 8051 1995 1999 Hospital VI 8. Don Jose Monfort Medical Center 8372 1997 2000 Extension Hospital IX 9. Dr. Jose Memorial Hospital 8200 1998 2000 10. Margosatubig Regional Hospital 8412 1997 2000 11. Basilan General Hospital 8543 1998 2000 X 12. Camiguin General Hospital 8482 1998 2000 13. Mayor Hilarion A. Ramiro Sr. 7937 1995 1999 Regional Training & Teaching XII Hospital 7943 1995 1999 NCR 14. Amai Pakpak Medical Center 8454 1998 2000 CAR 15. Batanes General Hospital 8314 1997 1999 16. Luis Hora Memorial Regional CARAGA Hospital 8255 1997 1999 17. CARAGA Regional Hospital 8343 1997 2000 18. Adela Serra Ty Memorial Medical Center Source: Department of Health

It appears that the LGUs who had their hospitals reverted to the national government were not properly advised on the political consequences of their actions. The actual problem, as earlier pointed out, has been the lack of technical and financial capacity to ensure the delivery of quality health services. It has thus been argued that the LGUs should have requested for more funds from Congress as a solution to their woes rather than give up the delivery of hospital services altogether. The overall effect was that re-nationalization actually set back the process of decentralization, particularly on the delivery of health services, with the unwitting cooperation of Congress.

This re-nationalization episode notwithstanding, efforts have been undertaken to augment the financial needs of the LGUs. The Department of Budget and Management (DBM), for one, established the Allotment for LGUs (ALGU) to enable local governments to meet the requirements of providing health services to the people. The DOH likewise sourced P120 billion from its budget and various donor agencies to assist various activities of the health sector 22 . This amount includes requests from the national government and several foreign-assisted projects. These projects include, among others, the health sector initiatives from the Japan International Cooperation Agency (JICA), the LPP-Integrated Family Planning and Maternal Child Health of the USAID, and the Philippine Health Development Project of the World Bank 23 .

Since these programs and projects are implemented at the local level, despite being nationwide in scope, the LGUs should have been the implementing agency of these projects. The DOH, however, argued that the donors rely on national line agencies for reporting and monitoring purposes. In effect, the DOH acts like a middleman in this arrangement by brokering the needs of the LGUs and raising the required budget to meet these needs. The DOH was thus involved more with the procedures on the delivery of health services to the community and less on transferring skills to the LGUs. 24 .

Related to the high costs of maintaining hospitals are the high costs of medicine. Before devolution, procurement was centralized, considering there was economy of scale in purchasing medicine by bulk. After devolution, locally-made purchases of medicines, mostly in limited quantity, thus led to high cost of drugs. High costs for medicine are also the result of an oligopoly in the drug market – an issue beyond the control of the LGUs. It is a known fact that the manufacture and distribution of medicine in the country is

22 Interview with Assistant Director Alma Cruz, Regional Office Coordinating Staff, Department of Budget and Management, Manila, 7 August, 2001. 23 Interview with Ms. Cecilia Pangilinan, Project Coordinator, Integrated Family Planning, Local Government Performance Program, USAID, Manila,18 July 2001. 24 Interview with Ms. Risa Yapchingco Bureau Chief Local Health Development, Department of Health, Manila, 18 July 2001.

77 controlled by large multi-national drug firms which dictate on the prices of medicine sold nationwide. While the costs of drugs in urban areas are already high, those in the rural areas are even higher due to the costs for transport. Efforts to bring down the costs of medicine, like the enactment of the Generic Drugs Act of 1998, where all medicines should indicate their generic names to ensure wider choices among similar drug, have not helped. 25 Quite to the contrary, persistently low budgetary outlay for medicines by the LGUs has even exacerbated the problem.

To resolve this issue of high costs of drugs, the DOH advised the LGUs to follow DOH prices during the local bidding to minimize cost. For its part, the national government has implemented the parallel importation of drugs to procure cheaper drugs from other countries, such as India. It was also suggested that the private sector play a bigger role in providing access to cheap medicine. In this respect, LGUs were advised to develop their business relationships with the private sector. Thus, it was proposed that for LGUs to have access to timely and sustained supply of cheap medicine, they could arrange for a three-year supply contract with the private sector rather than depending on national procurement. 26 It has been emphasized that time, as an opportunity cost, has often been lost because of the long procurement procedure.

With regard to the effectiveness of devolution to health service delivery, in its annual assessment report 27 , the DOH claims that for the past 10 years, there has been a decrease in maternal mortality and certain diseases have been eliminated. Despite this, it also said the LGUs were quite slow in delivering health services which is understandable considering that the LGUs are still struggling to resolve crucial issues in the delivery of health and other basic services. From this may be concluded that improvements in the

25 This is counter to the economies of scale, where DOH orders drugs based on bulk or in large quantities. The study of Elizabeth Malixi on Effects of the Generics Acts of 1998 on the Price Differentials Among Various Brands of Drugs, 1989-1993 (Thesis in Economics, UPLB, 1993) claims that the concentration ratios in the pharmaceutical industry shows that the market structure is oligopolistic. The Generic Acts of 1998 did not attain its objective of achieving a uniform spread of prices of drugs among brands. 26 National Government Procurement may be considered arbitrary because of the need to convene the principals (higher officials) before conducting the bidding procedure. 27 Annual DOH Accomplishment Report: 2001, Department of Health. See also DOH Inputs for the Socio- Economic Report. 78 people’s health can not be attributed to decentralization. The World Bank Study also confirms that the average LGU spending and the LGU share in overall health outlays have grown following the increase in the Internal Revenue Allotment (IRA). On the other hand, increase in health spending during devolution did not address health insurance issues, particularly meeting the health insurance needs of the poor who are more prone to diseases and illness. The problem cited is the LGU’s reluctance to co- finance required premium subsidies. Considering that the LGUs provide an ample amount of funds for the capital outlay, some LGUs find that co-financing insurance premium is a double burden. 28

Department of Social Welfare and Development (DSWD) With regard to the devolution of social services to LGUs, DSWD has reported less problems by asserting its responsiveness in the provision of its services to the constituents of the LGUs.

Technical Capacity Operating within the limited funds of the LGUs, the DSWD was able to provide technical assistance and training to the LGUs so they could be able to effectively deliver basic social services. The department even provided funding for certain programs including gender and development (GAD) as well as disaster mitigation and management. As DSWD personnel are operating on the ground even prior to decentralization, the LGUs are already familiar with the nature of the job of DSWD. Unlike with DOH, there is less friction between the devolved personnel and organic staff 29 .

The increase in the budget of DSWD, as earlier mentioned, was caused not only by the devolution of functions but also by special programs, particularly those anti-poverty activities that are assisted by foreign-funded grants and donations. One such program is

28 Samuel S. Lieberman, Decentralization and Health in the Philippines and Indonesia: An Interim Report, World Bank, East Asia and Pacific Region, April 2002.pp.4-5. 29 Interview with Director Ma. Suzette Agcaoili, Social Welfare and Development Institute, Department of Social Welfare and Development, Manila, 10 July 2001. 79 the Countrywide Integrated Delivery of Social Services (CIDSS), which is funded mainly by the national government and which draws support from foreign donors. In 1998, the allocation for CIDSS amounted to P439.295 million, which is one-third of the total budget allocated for DSWD.30 The funds are released through the regional offices of DSWD and channelled to Offices of Social Work of concerned municipalities. A national secretariat, named the National Anti-Poverty Commission was created by RA 8425 to oversee the implementation of CIDSS. The program also considered the active participation of the LGUs particularly in resource mobilization in order to ensure its sustained operations. 31

The CIDSS aims to meet the minimum basic needs (MBN) using the convergence approach which refers to “pooling together of the resources of government, non- government and people’s organizations in addressing MBNs of the marginalized Filipino families and communities.”32 While the LGUs were encouraged to participate in the program by way of providing counterpart funds as well as the manpower resources, they – ironically, were not involved in its conceptualization. From the very start, there was little effort made to have the LGUs “own” the CIDSS which was meant for them. 33 .

As mentioned earlier, DSWD conducts pilot-tests on possible projects for LGUs. Pilot-testing means demonstrating project feasibility and assessing its impact on the beneficiaries. In this case, especially when there is no project ownership on the part of the LGUs by not providing counterpart funds, the DSWD pilot program may either be continued through additional funding from the national government, or stopped altogether. The CIDSS, however, has become a continuing program of DSWD through

30 Interview with Director Marina Tabamo, Policy Planning and Information Management System, DSWD, Ms. Tricia Mazo, Programs and Projects; and OIC-Director Ma. Alicia S. Bonoan, Comprehensive and Integrated Delivery of Social Services, (CIDSS) Presidential Flagship Program, DSWD, Quezon City, 10 July 2001. 31 Republic Act No. 8425, entitled “An Act Institutionalizing the Social Reform and Poverty Alleviation Program, Creating for the Purpose the National Anti-Poverty Commission, Defining its Powers and Functions, and for Other Purposes” was concurred on 11 December 1997. 32 Victoria A. Bautista, 1999, Combating Poverty Through the Comprehensive and Integrated Delivery of Social Services (CIDSS), Quezon City: University of the Philippines-National College of Public Administration and Governance. 33 Interview with OIC-Director Ma. Alicia S. Bonoan, CIDSS-DSWD, Quezon City, 10 July 2001. 80 the Poverty Alleviation Fund established by the national government. Fund Support to CIDSS (Table 3-6) indicates that its appropriations increased from 1994 to 1998. Actual fund releases however averaged at 70 percent and with a drastic drop to only 4 percent of the total in 1997.

Table 3-6: Fund Support to CIDDS

Year Appropriations Released % of Total Average Funds (in Million Pesos) (in Million Released Released per Family Pesos) (in P) 1994 54.6 35.9 65.8 2,239.0 1995 246.0 182.8 74.3 2,332.0 1996 200.9 129.5 64.5 783.0 1997 411.0 16.9 4.1 642.0 1998 439.295 (No data) Source: CIDSS Transparencies, 1998; and Bautista, 1999,page 40.

Aside from CIDSS, DSWD is also the lead implementing agency of several foreign assisted projects. The DSWD provides the counterpart budgets for these projects, one of the conditions imposed by foreign donors before approving official development assistance (ODA) funds. This counterpart usually ranges from 10 percent to 50 percent of the total project cost. Among the foreign-assisted projects implemented by DSWD include the Early Childhood Development Program by the World Bank and Asian Development Bank, the Street Children Program, and the Vulnerable Groups Facility of the Australian Agency for International Development (AusAID). The project activities are implemented in local communities, with the participation of LGUs 34 .

Maintenance While the DSWD packages the projects on a nationwide basis as demonstrated in the CIDSS project, the sustainability of such initiatives at the local government level hinges on the support of the LGUs themselves in terms of providing counterpart funding at the local level. Sustainability refers to the ability and willingness of the LGUs to continue the project even after assistance from the national government ceases. It also

34 Interview with Ms. Tricia Mazo and OIC-Director Ma. Alicia Bonoan, Comprehensive and Integrated Delivery of Social Services, (CIDSS) Presidential Flagship Program, DSWD, Quezon City, 10 July 2001. 81 means providing a budget for Operations and Maintenance (O&M) once the National Government support ceases.

Department of Agriculture (DA) A study of the Asian Development Bank (ADB) observes that “the total DA annual budget for the years 1992 to 1999 showed an increasing trend when taken at their nominal peso values. It more than doubled over the period from P7,146 million in 1992 to P14,465 million in 1999.” 35 The increase in the DA budget is attributed to mandatory increases in salaries of government personnel in compliance to the Salary Standardization Law and also due to the savings during the Ramos administration. Aside from this, DA has been implementing new foreign-assisted projects. The DA likewise requested a budget for the institutionalization of completed foreign-assisted projects requiring additional MOOE (Maintenance and Other Operating Expenditures) and incremental personnel services as well as construction, repairs, rehabilitation or maintenance of farm to market roads and national irrigation systems 36 .

Maintenance Within the framework and spirit of decentralization, the costs of MOOE and personnel services of completed facilities should have been provided by the concerned LGUs. But similar to the case of DSWD, the lack of project ownership has deterred the LGUs from putting up counterpart funds for the operations of the completed facilities.

The 2003 Agricultural Sector Study conducted by the Japan Bank for International Cooperation (JBIC) also affirms that financial constraints hinder the municipalities to construct, operate and maintain farm-to-market roads as a devolved function. In addition, the Study also asserts that politics plays a big role in the construction of farm-to-market

35 Strengthening Public Finance and Planning of Local Government Units TA3145-PHI, Policy Paper 2: Toward Establishing Stability, Equity and Sustainability in Local Government Unit Development Programs, March 2000. 36 Interview with Director Agnes Catherine Miranda, Planning Staff, Department of Agriculture, Quezon City, 19 July 2001. 82 roads using the national budget. 37 Prior to the 2001 national elections, an additional P1.5 billion was provided for these infrastructure projects. After the elections, however, the budget for farm-to-market roads was decreased to P700 million. For 2002, the budget was raised to P11 billion 38 . Despite the existence of engineering and other technical studies, the procedures on the disbursement of funds have remained ambiguous. As a result, the implementation of farm-to-market roads has often been left to the discretionary political judgment of Congressmen or the local chief executive. 39 This only shows that technical requirements are being subverted by short-sighted patron-client relations in favour of political considerations, particularly during election period.

Technical Capacity Aside from financial constraints, the lack of technical capability hinders LGUs from implementing devolved functions such as operations of communal irrigation systems. As a result, the National Irrigation Administration (NIA) continues to construct the irrigation systems. But before this happens, NIA and the concerned LGU sign a Memorandum of Agreement indicating that the LGU is deferring to the NIA the construction of communal irrigation systems.

As with the hospital operations issue with the DOH, the NIA-LGU arrangement is another case where the LGUs gives up the implementation of a devolved function altogether, rather than seek assistance to upgrade its capability and ably assume the function. Instead of encouraging LGUs to enter to a joint undertaking that would allow the transfer of technology, the NIA has perpetuated in the mind-set of some LGUs, that it is more expedient to source funds from the national government than to train the local personnel 40 .

37 The 2003 Philippine Agricultural Sector Study commissioned by the Japan Bank for International Cooperation mounted a Workshop at the Ateneo Graduate School, Rockwell, Makati City on 8 August 2003 to solicit comments on the initial findings. The Researcher is one of the participants. 38 Interview with Director Miranda, Department of Agriculture, Quezon City, 19 July 2001. 39 Feedback Workshop on Philippine Agriculture Sector Study, 8 August 2003. 40 Based on discussions during the JBIC workshop on Philippine Agriculture Sector Study, 8 August 2003. 83

Decisions on whether to construct new agricultural facilities or merely rehabilitate existing ones are often highly influenced by politics. While it might be more cost- effective to just rehabilitate and properly operate and maintain existing systems, the political whims of local leaders can change everything. For instance, just because an existing facility is identified with the past Congressman or local government executive, the new set of officials would opt to build a new agricultural system in place of the old one which could be cited as part of their accomplishments. This is a case where the national government could intervene to save on resources and put order into governance procedures. 41 The increase in the budget of the DA could also be attributed to the construction of national agricultural research facilities and implementation of emergency programs. The research facilities, particularly the Agricultural Training Institute (ATI), are used by the department to train farmers and fishermen in building capacities. It has been observed by DA Director Miranda 42 , however, that the devolution process has resulted in weaker linkages between the field workers with the DA and lesser focus on research. With the Agriculturist appointed by the provincial governor, it gives the LGUs ample leeway in the formulation and implementation of agriculture-related plans and programs. In addition, with the creation of the ATI, the LGUs have been able to integrate research activities in their agricultural extension programs.

Another reason for the increase in the budget of the DA was the adoption of GATT- related safety nets programs and projects. 43 In 1999, P55.236 million was allotted mainly for GATT-related safety nets programs and projects. The amount was increased to P59.024 million in 2000 and in 2001 as a re-enacted budget.44

Another source of budgetary support for the DA is the Agricultural Farm Modernization Act (AFMA) of 1997 whose implementation has also been assigned to the department. The AFMA provides for the “necessary policy environment and deliberate

41 Based on discussions during the JBIC workshop on Philippine Agriculture Sector Study, 8 August 2003. 42 Interview with Director Miranda, Department of Agriculture, Quezon City, 19 July 2001. 43 Interview with Director Miranda, Department of Agriculture, Quezon City, 19 July 2001. 44 2001 General Appropriations Act, Department of Budget and Management. 84 public investment stream that will transform the rural economy into one that is modern, science and technology-based, more integrated into the national and international markets, and thus highly productive and competitive.” 45 In terms of budgetary appropriations, an annual budget of P20 billion for the period 2001-2004 has been allocated to AFMA and broken down as follows:

Table 3-7: Budgetary Appropriation for AFMA

Activities Amount

- Irrigation P6B - Post-harvest facilities P2B - Other Infrastructure P2B - Research & Development P2B - Marketing Assistance P1.6B - Salary supplement of extension workers P1.2B - Capability Building P1B - National Agriculture and Fisheries Education System (NAFES) P1B - National Information Network (NIN) - Rural non-farm employment training P800M - Identification of Strategic Agriculture and Fisheries Development P350M Zone (SAFDZ) P50M

Source: The Philippine Agriculture and Fisheries Modernization Plan, 2001-2004

Some of the identified activities for AFMA have already been devolved to LGUs, such as agricultural extension and on-site research. In the light of sizeable funds allotted to agricultural activities, the ADB study observes that the use of such funds could be maximized best under a decentralized structure. 46 It concludes that “it is highly possible that there are so much funds within the DA that should have been rightfully ‘transferred or channelled’ to LGUs to maximize the use of NG resources.” 47

Insofar as the selection of the LGU beneficiaries for its DA’s various projects is concerned, two factors are usually considered: (a) presence of a co-financing scheme or

45 The Philippine Agriculture and Fisheries Modernization Plan, 2001-2004, Department of Agriculture. 46 ADB, Final Report on the Philippine Municipal Finance Study prepared by Emmanuel A. Leyco, 28 February 2001. 47 Ibid. 85 structure with the LGU; and (b) the urgency of need of the LGU. Co-financing pertains to the ability of LGUs to provide counterpart equity to match the provision of appropriate assistance from the national government. It is, however, up to the DA to entice or persuade the LGUs to invest in agriculture as a major thrust in poverty alleviation.

The implementation of AFMA and other programs is executed by the regional offices of DA and other cooperating agencies. This means that the department has not been able to fully devolve resources to the LGUs. The DA, despite the devolution of certain functions, has continued to maintain its regional offices in the same manner as most national government agencies, notwithstanding the explicit provisions of the LGC of 1991 stating that regional offices of national agencies or offices whose functions have been devolved to LGUs should be phased out within one year after the approval of the Code. 48 However, rather than abolish the regional offices of the national government agencies altogether, there is a plan to streamline instead these offices by re-orienting their functions in the regions into monitoring and providing technical assistance to the LGUs. For the DA, the thrust as suggested by the 1999 Agricultural Bureaucracy Plan is for the field offices to assume mainly regulatory functions. 49

Fiscal Decentralization

Fiscal decentralization serves as a means by which LGUs are able to perform their devolved functions. According to the Local Government Code, among the powers to be devolved to the LGUs is to create and broaden their own sources of revenues. This will be accompanied by an increase in their share of national taxes (IRA).

Thus, for one year starting January 1, 1992, the Code entitles the LGUs to receive from the national government the amount equivalent to the cost of devolved personnel services. This shall be on top of the 30 percent share of the LGUs in national taxes for the

48 The Local Government Code of 1991, Section 17. 49 Interview with Director Agnes Catherine Miranda, Planning Staff, Department of Agriculture, Quezon City, 19 July 2001. The 1999 Agricultural Bureaucracy Plan can not be shared publicly as it is still on the drawing board. 86 same period. However, the Code limits the amounts LGUs may appropriate for personnel services. Thus, the first to third class LGUs will be allowed to use the maximum of 45 percent of their regular income for personnel services; and fourth to sixth class, 55 percent. The regular income includes income from taxes, fees and charges, share from national taxes, etc. but excluding borrowings, grants and the like. 50

Aside from the Code, other related laws to strengthen the share of the LGUs from the national wealth were amended and consolidated into the Code. Such laws include the Local Government Code of 1983, the Local Tax Code (Presidential Decree 231) and the Real Property Tax Code (PD 464) which were amended accordingly and further consolidated in the LGC of 1991. 51

In particular, the Internal Revenue Allotment (IRA) allocated to LGUs has increased by 100 percent. Table 3-8 compares IRA distribution formula between the Marcos-era PD 114 as amended and the LGC of 1991. Barangays are the greatest beneficiaries with the highest increase of 300 percent.

Table 3-8: Change in IRA Distribution

Total Internal Revenue (in %) Presidential Local Increase Decree 114 as Government (in %) amended Code of 1991 All LGUs 20 40 100 Provinces 5.40 9.20 70.37 Cities 4.50 9.20 104.44 Municipalities 8.10 13.60 67.90 Barangays 2.00 8.00 300.00 Source : Fei Yue, Decentralization in the Philippines and Its Implications for Bank Operations , Asian Development Bank, 1996.

The share of LGUs in the national wealth as provided for by the Code averages 40 percent of the gross collection derived by the national government from the preceding

50 Manuel S. Tabanda and Mario M. Galang, 1991, p. 14 51 The Local Government Code. 87 fiscal year from all forms of taxes and other revenue sources, except foreign borrowings. The LGUs also have a 1 percent share of the gross sales or receipts of the preceding calendar year from any government agency or government-owned or controlled corporation (GOCC).

While LGUs could not share from the loans and grants secured by the national government from foreign sources or from ODA, they could borrow from these sources to finance their development objectives. In this case, the Department of Finance (DOF) serves as an intermediary by providing the sovereign guarantee for the loan secured from Overseas Development Assistance (ODA) and re-lent to LGUs.

The Code considers the LGUs as a political entity as well as a corporate entity which can enter into contracts. The LGUs thus have administrative autonomy to directly negotiate with other entities, including the private sector in concluding contracts to finance the construction, maintenance, operations and management of infrastructure and other projects. Before concluding a contract, the LGU is obliged to conduct a transparent parliamentarian scrutiny by presenting proposed contracts to the local legislative council (Sanggunian) for concurrence. The Sanggunian, if it does not object to the contract, then prepares a resolution indicating the acceptability of the arrangement that sets the rules of engagement of both the LGU and the contracting party.

To reinforce inter-LGU cooperation, individual provinces, cities and municipalities through their respective Sanggunian may extend loans, grants and subsidies to other LGUs. Inter-LGU cooperation is an innovation under the Code that is meant to strengthen the sharing of resources among local governments in pursuit of common objectives. (The case studies in Chapter 4 further elaborate this arrangement.) Although LGU associations are highly institutionalized through the Leagues of Provinces, Cities and Municipalities, there is still no instance where the Leagues were able to develop a capital-intensive project through shared individual LGU contribution.

With the LGC opening new financing avenues for LGUs, how far have LGUs gone in realizing the concept of local autonomy especially where fiscal decentralization is concerned? The subsequent section tries to present the trends and issues on local fiscal administration. This section also aims to show the aggregate financial situation of the LGUs vis-à-vis the LGC of 1991 as well as related laws and policies.

The Local Financing Structure 52

Trends in Local Financing

Based on the consolidated LGU income from 1985-1990 (Figures 3-3 and 3-4, and Table 3-9) prior to the enactment of the LGC of 1991, the internal source of income is higher than the external source of income such as aid and allotments from the national government. In particular, the national government only provided 37 percent of the total LGU income, 33 percent of which came from Bureau of Internal Revenue (BIR) in the form of IRA. The rest came from national aid.

52 All tables and succeeding figures are processed by the researcher. The data are sourced from DOF- BLGF with the permission of Acting Director Norberto Malvar. 89

Figure 3-3. Consolida ted Income of LGUs (1985 -1990)

18,000

16,000

14,000

12,000 In Million PHP National Aids

10,000 BIR Allotments

Fees/Charges and 8,000 Other Receipts Receipts from Econom ic Enterprises 6,000 Business Taxes*

Real Property Tax 4,000

Source: D eparment of 2,000 Finance and Bureau of Local Government Finance (DOF-BLGF), Statement of Income and

0 Expenditure (SIE) 1985 1986 1987 1988 1989 1990 Average Reports Year

Figure 3-4 Consolidated LGU Income (Average, 1985-1990)

National Aids 4% National Wealth 0% Real Property Tax 23%

BIR Allotments 33%

Business Taxes* 13%

SOURCE: DOF -BLGF, Statement of Income Loans & Borrowings and Expenditur e Reports 0% Receipts from Economic Enterprises

Fees/Charges and Other 10% Receipts 17%

With regard to internal sources of income, LGUs received the highest income from real property tax, which is 23 percent of the total LGU revenues. This is followed by fees and charges and other receipts at 17 percent. Business taxes and receipts from economic enterprises contributed 13 percent and 10 percent, respectively. Although LGUs could avail of loans and borrowings, the amount incurred by LGUs from these sources is negligible. Thus, loans and borrowings were not fully reflected in the DOF-BLGF data.

Table 3-9: Consolidated Income 1985-1990 - Provinces, Cities, Municipalities (in Million Pesos) Grand

Internal External:Aids and Allotments Total SUB- BIR National National SUB- TOTAL Allotments Aids Wealth TOTAL Revenue from Taxation Non-Tax Revenues Real Business Taxes* Total Receipts Fees/Charges Loans & Total Property from and Other Borrowings Year Tax Economic Receipts Enterprises

1985 1,951 1,204 3,155 691 1,527 0 2,218.00 5,373 3,205 530 0 3,735.00 9,108 1986 2,258 1,266 3,524 788 1,394 0 2,182.00 5,706 3,299 441 0 3,740.00 9,446 1987 2,375 1,290 3,665 822 1,580 0 2,402.00 6,067 3,142 452 0 3,594.00 9,661 1988 2,670 1,474 4,144 911 1,662 0 2,573.00 6,717 3,974 514 0 4,488.00 11,205 1989 3,678 1,800 5,478 1,276 2,738 0 4,014.00 9,492 4,343 626 0 4,969.00 14,461 1990 2,964 2,200 5,164 2,268 2,755 0 5,023.00 10,187 6,106 450 0 6,556.00 16,743 Average 2,649 1,539 4,188 1,126 1,943 0 3,069 7,257 4,012 502 0 4,514 11,771 SOURCE: Department of Finance-Bureau of Local Government Finance, Statement of Income and Expenditure Reports

Taking into account, the yearly progress of LGUs in mobilizing resources, Figure 3-5 indicates that overall LGUs increased their income from 1985-1990. A decline in real property tax collection was experienced in 1989. The provision of national aid in that same year likewise declined. Moreover, a marginal decrease in BIR allotments was encountered in 1987.

After the ratification of the LGC, externally-sourced income of cities and municipalities from 1991-2001 (Table 3-10 and Figure 3-5), almost doubled, with BIR allotments comprising 60 percent and national aid, 1 percent. The share of LGUs in national wealth, however, was realized only in 1994 despite the new LGC of 1991. The delay was attributed in part to the accounting of the income of the GOCC (Government Owned and Controlled Corporation) and its corresponding distribution to concerned LGU in a given locality. The amount of the share of LGU was also negligible at 0.27 percent of its total income. There is no indication on whether the LGU share from 1991-1993 would be given retroactively.

Table 3:10 Consolidated Income 1991-2001 - Provinces,Cities, Municipalities (in Pesos)

Internal External:Aids and Allotments Grand Total

Revenue from Taxation Non-Tax Revenues SUB-TOTAL BIR National Aids National SUB-TOTAL Allotments Wealth

Year Real Property Business Total Receipts from Fees/Charges * Loans & Other Total Tax Taxes* Economic Borrowings * Receipts Enterprises

1991 3,672,200,197 2,785,042,412 6,457,242,609 1,553,251,954 729,976,057 390,803,813 4,314,511,246 6,988,543,070.00 13,445,785,679 9,751,619,367 784,732,587 0 10,536,351,954.00 23,982,137,633

1992 3,922,935,934 3,493,843,398 7,416,779,332 1,485,818,570 855,285,324 392,930,339 1,695,853,330 4,429,887,563.00 11,846,666,895 15,473,181,946 383,723,255 0 15,856,905,201.00 27,703,572,096

1993 4,940,643,655 5,336,743,666 10,277,387,321 1,812,330,667 1,406,737,345 1,315,411,527 1,572,355,462 6,106,835,001.00 16,384,222,322 27,456,281,766 506,247,502 0 27,962,529,268.00 44,346,751,590

1994 6,157,000,000 6,750,000,000 12,907,000,000 2,446,000,000 1,686,000,000 2,110,000,000 2,497,000,000 8,739,000,000.00 21,646,000,000 35,219,000,000 488,000,000 281,000 35,707,281,000.00 57,353,281,000

1995 8,308,935,538 7,341,871,098 15,650,806,636 2,546,691,241 1,991,218,125 1,561,339,401 2,641,047,060 8,740,295,827.00 24,391,102,463 40,873,771,473 642,303,531 581,944,975 42,098,019,979.00 66,489,122,442

1996 8,846,783,402 10,282,440,523 19,129,223,925 2,860,127,113 2,415,217,048 3,455,023,673 3,779,171,809 12,509,539,643.00 31,638,763,568 44,897,143,855 670,076,533 137,640,412 45,704,860,800.00 77,343,624,368

1997 11,485,133,501 11,935,519,590 23,420,653,091 3,549,790,126 2,858,950,029 3,674,219,369 4,508,724,362 14,591,683,886.00 38,012,336,977 56,059,373,056 451,411,406 151,043,996 56,661,828,458.00 94,674,165,435

1998 12,431,030,395 12,586,820,710 25,017,851,105 3,722,901,667 2,841,306,852 3,118,077,139 5,328,955,484 15,011,241,142.00 40,029,092,247 61,433,029,970 1,175,146,191 159,711,434 62,767,887,595.00 102,796,979,842

1999 13,261,524,259 14,013,506,709 27,275,030,968 3,973,541,004 3,265,114,270 5,821,636,568 3,884,606,488 16,944,898,330.00 44,219,929,298 75,796,887,607 1,406,657,785 126,767,231 77,330,312,623.00 121,550,241,921

2000 14,946,782,751 15,160,770,673 30,107,553,424 4,617,167,996 3,392,553,199 6,041,454,813 5,677,746,200 19,728,922,208.00 49,836,475,632 87,317,946,820 788,683,615 88,145,511 88,194,775,946.00 138,031,251,578

2001 16,867,771,862 15,967,720,645 32,835,492,507 3,510,306,124 4,223,486,410 5,425,240,384 2,797,996,316 15,957,029,234.00 48,792,521,741 87,593,463,073 1,084,284,260 1,138,935,038 89,816,682,371.00 138,609,204,112

Average 9,530,976,499 9,604,934,493 19,135,910,993 2,916,175,133 2,333,258,605 3,027,830,639 3,517,997,069 11,379,084,667 29,145,037,508 49,261,063,539 761,933,333 216,769,963 50,239,766,836 81,170,939,274

SOURCE: Department of Finance-Bureau of Local Government Finance, Statement of Income and Expenditure Reports * For 2001, this includes other taxes amounting to P2,163,325,890.69 * For 2001, this includes regulatory fees and service/user charges. * For 2001, this includes transfers amounting to P496,048,433.86 * For 2001, this includes grants from domestic and foreign sources. * For 2001, this includes share in tobacco excise tax amounting to P742,541,375.88

Figure 3-5 Sources of LGU Income (Average, ) 1991-2001 BIR Allotments 60%

Other Receipts 4%

Loans & Borrowings* 4% National Aids Fees/Charges* 1% 3% National Wealth Receipts from Economic 0% Enterprises Real Property Tax 4% 12% Business Taxes* SOURCE: Department 12% of Finance-Bureau of Local Government Finance

Figure 3-6 Consolidated LGU Income (1991-2001)

140,000,000,000

120,000,000,000

National Wealth

100,000,000,000 National Aids

BIR Allotments

80,000,000,000 Other Receipts

Loans & Borrowings* In P H P Fees/Charges* 60,000,000,000

Receipts from Economic Enterprises

Business Taxes* 40,000,000,000

Real Property Tax

20,000,000,000

0 SOURCE: Department of Finance-Bureau of Local 2 3 4 9 0 1 91 9 9 9 98 9 0 0 e Government Finance 9 9 9 9 9 0 g 1 1 1 19 1995 1996 1997 1 1 2 20 ra ve A

Year 96

Both the business and real property taxes contributed the highest share in the internally generated income with 12 percent each of the total LGU income. Loans and borrowings, receipts from economic enterprises and other receipts posted 4 percent of the total LGU income, with fees and charges chipping in 3 percent.

Considering the yearly progress of LGU performance in mobilizing resources (Figure 3-6), the entire LGU portfolio steadily increased, particularly the real property tax, business taxes, receipts from economic enterprises and BIR allotments. A marginal decrease for fees and charges was realized in 1998 – an election year. The trends for loans and borrowings consist of an increase in 1991 until 1994, a decrease in 1995, an increase in 1996 until 1997, a marginal decrease in 1998, and a continued increase in 1999 until 2000. Loans and borrowings dwindled in 2002. For other receipts, the LGUs were able to collect P4.3 billion in 1991. The amount, however, shrunk in the following years and recovered in 1997 with P4.5 billion. After this recovery, LGU collection for other receipts substantially decreased in 2002 with only P2.8 billion.

As to aids provided by the national government, the amount received by the LGUs vary from as high as P1.4 billion to as low as P384 million. This is also true with LGU share in the national wealth which ranged from a low of P281 thousand in 1994 to a high of P1.14 billion in 2001.

With reference to the projected income of the LGUs from 2002 until 2010, the Bureau of Local Government Finance under the DOF foresees that LGUs will continue to rely on national government transfers with BIR allotments pegged at 63 percent, national aid at 1 percent and share to national wealth at 0.24 percent (Figure 3-7). The projected average share, however, will be doubled from P217 million in 1991-2001 to P522 million in 2002-2010. The share of RPT in the internally generated income will increase from 12 percent to 15 percent. A marginal decrease will be realized in collecting business taxes at 11 percent. Similarly, loans and borrowing and fees and charges will have a share of 3 percent of the total LGU income. Moreover, receipts from economic enterprises and other receipts will obtain 2 percent of the total LGU income. Yearly projections indicate that both internally and externally-sourced income will continue to increase from 2002 to 97

2010 (Figure 3-8). Thus, even the national government itself is expecting that the LGU reliance to NG transfers will continue.

Table 3-11: Projected Income 2002-2010 - Provinces,Cities, Municipalities (in Million Pesos) Grand

Internal External:Aids and Allotments Total Revenue from Taxation Non-Tax Revenues SUB- BIR National National SUB- TOTAL Allotments Aids Wealth TOTAL Real Business Taxes Total Receipts Fees/Charges Loans & Other Total Property from Borrowings Receipts Year Tax Economic Enterprises 2002 19,239 17,362 36,601 3,707 4,697 5,319 3,386 17,109.00 53,710 108,835 2,043 408 111,286.00 164,996 2003 21,338 18,717 40,055 4,056 5,110 5,464 3,558 18,188.00 58,243 114,558 2,300 434 117,292.00 175,535 2004 23,779 20,248 44,027 4,170 5,552 5,830 3,806 19,358.00 63,385 120,285 2,643 462 123,390.00 186,775 2005 26,726 21,796 48,522 4,254 5,962 5,851 3,951 20,018.00 68,540 126,300 2,643 495 129,438.00 197,978 2006 30,022 23,438 53,460 4,431 6,445 5,960 4,162 20,998.00 74,458 132,615 2,849 517 135,981.00 210,439 2007 33,693 25,309 59,002 4,644 6,821 6,074 4,362 21,901.00 80,903 139,245 3,057 546 142,848.00 223,751 2008 37,689 27,290 64,979 4,860 7,213 6,117 4,589 22,779.00 87,758 146,280 3,314 578 150,172.00 237,930 2009 42,230 29,427 71,657 5,039 7,584 6,135 4,829 23,587.00 95,244 153,609 3,566 613 157,788.00 253,032 2010 47,371 31,712 79,083 5,234 7,921 6,199 5,064 24,418.00 103,501 161,308 3,843 648 165,799.00 269,300 Average 31,343 23,922 55,265 4,488 6,367 5,883 4,190 20,928 76,194 133,671 2,918 522 137,110 213,304 SOURCE: Department of Finance-Bureau of Local Government Finance, Statement of Income and Expenditure Reports

Figure 3-7: Sources of LGU Income (Average, 2002-2010 Projection) BIR Allotments 63%

Other 2%

Borrowings Loans & 3% sFees/Charge Economic 3% Receipts from Sou rce: Department of Finance- Bureau of sEnterprise Local Government 2% finance, statement of Income and Aids ExpenditureReports Taxes National Business 1% 11% National

Wealth0% Real Property 15% Tax

100

Figure 3-8: Projected LGU Income (2002-2010)

300,000

250,000

National Wealth 200,000 AidsNational In Million PHP AllotmentsBIR Bir

ReceiptsOther Other 150,000 BorrowingsLoans & Fees/Charges ReceiptsFees/Charge ReceiptsFrom 100,000 EnterprisesEconomic TaxesBusiness

TaxReal Property

Source: 50,000 Department of Finance- Bureau of Local fGovernment finance, statement of Income and ExpenditureReports 0 F 2002 2003 2004 2005 2006 2007 2008 2009 2010 Averag e Year

101

Trends in Local Expenditure Insofar as the trend of LGU expenditure is concerned, expenses are the highest with general government, even before the enactment of the Code (Table 3-12). General government pertains to the operations of the offices of the concerned LGUs, the bulk going to salaries of personnel (Figure 3-11). Expenses for other charges ranked as the second largest, followed by public welfare and internal safety, then economic development. The yearly expenditures of LGUs from 1985 to 1990 have continuously been following an upward trend, except for other charges which went down marginally in 1990 (Figure 3-9) .

From 1991 to 2001, based on consolidated LGU expenditures from 1991 to 2001 (Table 3-13), the expenditure trend in the previous years was maintained, although in bigger amounts. Expenses for general government averaged 32 percent, followed by public welfare and internal safety at 24 percent. LGUs spent 18 percent of their allocations for other charges (Figure 3-10). The expenditure for economic development decreased from 18 percent in 1985-1990 to 14 percent in 1991-2001 while capital outlay expenses, was maintained at 8 percent. Expenditure for the operations of economic enterprises was 3 percent of total LGU expenses, the lowest in that period (Figure 3-11).

102

Table 3-12:1985-1990 Local Government Expenditures (in Million Philippine Peso) Year Current Expenditures Capital Grand Total Outlay Gener Public Economic Operation Other Total al Welfare Development of Charges Gover & Economic nment Internal Enterprise Safety 1985 2,041 1,753 1,673 0 2,013 7,480 868 8,348 1986 2,327 1,930 1,676 0 2,085 8,018 608 8,626 1987 2,659 2,080 1,695 0 2,101 8,535 587 9,122 1988 2,902 2,296 2,016 0 2,303 9,517 733 10,250 1989 3,839 2,430 2,027 0 3,453 11,74 775 12,524 9 1990 6,639 1,886 2,129 0 3,012 13,66 1,430 15,096 6 Average 3,401 2,063 1,869 0 2,495 9,828 834 10,661 Source: Department of Finance- Bureau of Local Government finance, Statement of Income and Expenditure Reports

103

Figure 3-9: 1985-1990 Local Government Expenditures

16,000

14,000

12,000

Capital Outlay 10,000 Other ChargesOther In PHP 8,000 Operation Economic EconomicEconomi DevelopmentDevelopme 6,000 Public Welfare & Internal Safety General GovernmentGeneral

4,000

Source: Department of Finance- Bureau of 2,000 Local Government finance, statement of Income and ExpenditureReports

0 1985 1986 1987 1988 1989 1990 Averag Year

104

Table 3-13:1991-2001 Local Government Expenditures (in Philippine Peso) Year Current Expenditures Capital Outlay * Grand Total General Government Public Welfare Economic Development Operation of Other Charges * Total & Internal Economic Safety * Enterprise *

1991 8,403,919,555 2,832,046,876 3,006,595,570 951,325,550 5,266,155,854 20,460,043,405 2,242,757,678 22,702,801,083 1992 10,159,602,815 3,901,907,853 3,642,422,484 1,168,683,478 3,689,281,026 22,561,897,656 2,743,245,941 25,305,143,597 1993 12,270,021,653 8,803,781,062 5,298,942,180 1,448,046,980 6,233,342,685 34,054,134,560 4,409,531,764 38,463,666,324 1994 15,224,000,000 12,247,000,000 6,859,000,000 2,232,000,000 9,528,000,000 46,090,000,000 6,508,000,000 52,598,000,000 1995 19,817,839,324 15,143,980,290 8,501,180,611 2,543,451,278 11,376,603,537 57,383,055,040 7,004,905,580 64,387,960,620 1996 22,849,822,361 17,735,499,880 9,873,498,287 3,361,530,142 12,225,248,465 66,045,599,135 6,320,370,137 72,365,969,272 1997 29,079,719,358 22,369,610,629 12,318,411,569 4,300,894,508 16,231,305,329 84,299,941,393 7,227,119,651 91,527,061,044 1998 31,939,647,090 25,173,391,644 13,366,990,502 3,772,577,607 18,052,428,391 92,305,035,234 7,291,905,635 99,596,940,869 1999 35,759,650,073 26,742,609,266 14,460,418,675 3,976,258,377 24,980,180,830 105,919,117,221 8,165,180,082 114,084,297,303 2000 40,925,707,008 31,273,396,109 16,840,180,901 4,790,189,351 24,533,004,988 118,362,478,357 13,027,205,611 131,389,683,967 2001 55,644,955,379 35,935,209,040 25,474,435,298 0 20,367,074,498 137,421,674,215 0 137,421,674,215 Average 25,643,171,329 18,378,039,332 10,876,552,371 2,594,996,116 13,862,056,873 71,354,816,020 5,903,656,553 77,258,472,572 Source: Department of Finance- Bureau of Local Government Finance,Statement of Income and Expenditure Reports

* Starting 2001, a new Statement of Income and Expenditure (SIE) format is used. Capital expenditure is incorporated in every sector. Operation of Economic Enterprise is included in Economic Development *For 2001, Public Welfare and Internal Safety was broken down as follows: 9,715,125,185 Education, Culture and Sports Manpower Development: 15,837,610,210 Health, Nutrition and Population Control 217,968,070 Labor & Employment 6,004,051,879 Housing and Community Development 4,160,453,697 Social Security and Social Services and Welfare Total: 35,935,209,040

*For 2001 other charges includes expenditure for debt servicing amounting to P3,303,187,497.56

105

Figure 3-10: LGU Expenditures (Average 1991-2001) Capital Outlay* 8%

Other Charges* General Government 18% 33%

Operation of Economic Enterprise* 3%

Economic Development 14% Public Welfare & Internal Source: Bureau of Local Safety* Government Finance 24%

106

Table 3-14 : Projected 2002-2010 Local Government Expenditures (in Million Peso) Year Current Expenditures General Government Public Welfare & Economic Development Other Charges Total Internal Safety * & Operation of Economic Enterprises 2002 66,715 41,451 30,528 22,947 161,641 2003 72,333 44,018 33,535 24,486 174,372 2004 77,351 45,745 36,593 25,663 185,352 2005 81,323 48,699 40,310 26,575 196,907 2006 87,236 51,312 43,755 27,147 209,450 2007 92,934 54,113 46,819 28,769 222,635 2008 99,309 57,078 50,066 30,104 236,557 2009 105,810 61,266 53,246 31,377 251,699 2010 112,655 64,954 57,931 32,666 268,206 Average 88,407 52,071 43,643 27,748 211,869 Source: Department of Finance- Bureau of Local Government finance,Statement of Income and Expenditure Reports

••• Starting 2001, a new Statement of Income and Expenditure (SIE) format is used. Capital expenditure is incorporated in every sector.

Operation of Economic Enterprise is included in Economic Development.

107

Figure 3-11: Projected LGU Expenditures (Average, 2002-2010)

Other Charges 13%

Economic Development & General Government Operation of Economic 41% Enterprises 21%

Public Welfare & Internal Safety* Source: Bureau of Local 25% Government Finance

As to projected LGU expenditures from 2002-2010 (Table 3-13), a substantial increase in the expenditure for general government is expected. However, LGUs will spend almost the same as the previous decade at around 25 percent for public welfare and internal safety. Spending for economic development and operations of economic enterprises is expected to increase at 21 percent, up from the previous decade’s 14 percent (Figure 3-11). The share of other charges, for its part, will likely decline at 13 percent. Overall, the expenditure projection from 2002-2010 shows an upward trend in all its components (Figure 3-12).

108 Figure 3-12: Projected 2002-2010 Local Government Expenditures

300,000

250,000 Other Charges

200,000 Economic Development & Operation of Economic 150,000 Enterprises In Million Public Welfare & Internal Safety* 100,000

General Government 50,000

Source: Bureau of Local 0 Government Finance 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average Year

From 1985 to 2001, the LGUs have been experiencing budgetary surpluses every year. The consolidated budget operations statements of LGUs in 1985-1990 and 1991-2001 (Table 3-15) point this out, with the highest surplus recorded in 1998. Moreover, the DOF-BLGF projects that LGUs will continue to attain or even exceed their income over their expenditure from 2002 until 2010 (Table 3-16). From these developments, the surpluses realized by the LGUs before and after the enactment of the Code raise doubts on the claim that the cost of devolution exceeded LGU income even with national

109 government transfers. There is likelihood that most LGUs were actually not able to make full use of their budgetary allocations vis-à-vis their planned activities.

Table 3-15 Consolidated Budget Operations Statement of LGUs 1985-1990 (In Million Pesos) Year Income Expenditures Excess (Deficit) of Income over Expenditures 1985 9,108 8,348 760 1986 9,446 8,626 820 1987 9,661 9,122 539 1988 11,205 10,250 955 1989 14,461 12,524 1,937 1990 16,473 15,096 1,377 Average 11,771 10,661 1,110 Source: Department of Finance- Bureau of Local Government Finance,Statement of Income and Expenditure Reports

Table3-16 Consolidated Budget Operations Statement of LGUs 1991-2001 (In Philippine Pesos) Year Income Expenditures 1991 23,982,137,633 22,702,801,083 1992 27,703,572,096 25,305,143,597 1993 44,346,751,590 38,463,666,324 1994 57,353,281,000 52,598,000,000 1995 66,489,122,442 64,387,960,620 1996 77,343,624,368 72,365,969,272 1997 94,674,165,435 91,527,061,044 1998 102,796,979,842 99,596,940,869 1999 121,550,241,921 114,084,297,303 2000 138,031,251,577 131,389,683,967 2001 138,609,204,112 137,421,674,215 Average 79,039,939,235 75,300,234,263 Source: Department of Finance- Bureau of Local Government finance,Statement of Income and Expenditure Reports

110

Table 3-17 Consolidated Budget Operations Statement (In Million Pesos) Year Income Expenditures 2002 164,996 161,641 2003 175,535 174,372 2004 186,775 185,352 2005 197,978 196,907 2006 210,439 209,450 2007 223,751 222,636 2008 237,930 236,557 2009 253,032 251,699 2010 269,300 268,206 Average 213,534 211,869 Source : Department of Finance- Bureau of Local Government Finance,Statement of Income and Expenditure Reports

Within the context of overall government budget management, a comparison of the LGUs’ budget vis-à-vis the national government’s budget indicates points of disagreements. From 1988 until 1993, the national government had a continuous annual deficit (Table 3-18) and one justification for such situation was that the Aquino administration was in transition during that time. The building up of credibility among foreign donors and investors was a primary concern at that time. The Aquino government, therefore, did not renege on the country’s past obligations, which eventually accumulated into current deficit. It was only during the more politically stable administration of President Fidel V. Ramos from 1994 until 1997 that budgetary surpluses were realized. This was, however, not sustained beginning 1998 especially when the country began to feel the aftershocks of the Asian financial crisis of 1997. 53 Although the magnitude of the capital outflow that time was not as large as that of Thailand, there was a decline in reserves, a collapse in stock

53 Rosario G. Manasan, Analysis of the President’s Budget for 2003 . (Monograph)

111 market and depreciations in large currency. 54 The deficit was also attributed to the dwindling tax collection which was due to lack of political will to impose sanctions on tax evaders and the uncorrected weaknesses in tax policy. 55 Ironically, then Finance Secretary Jose Isidro Camacho blamed the big budget deficit on the Local Government Code. He cited that “one of the bad effects of the LGC is that we doubled their (local governments’) resources without having introduced or nurtured fiscal responsibility on (their) part. 56 He added that “we see continued reliance of the local government on the national government in the areas of infrastructure, tourism and many others that should have been devolved.” 57

Secretary Camacho’s assertion, however, is contrary to facts. From 1975 until 1992, the IRA share of LGUs grew from 18.61 percent to 29.19 percent and decreased to 24.86 percent from 1993 to 1998. The provision of IRA further shrunk in 1999-2002 to only 8.98 percent (Table 3-19). These decreases are further confirmed by the National Government Expenditures as Proportion of GDP by Sectoral Classification: 1975-2003, which shows that the share of the IRA grew from merely 0.61 percent in 1975 to 3.31 percent in 1999-2002. Based on both documents, resources given to LGUs were not “doubled” as mentioned by the DOF head. 58

Overall, the share of the IRA is still lower than the rest of the items in the general government budget. While economic services 59 may have dwindled from 6.28 percent in 1975 to 3.39 percent in 1999-2002, the amount involved is almost the same as the IRA granted to the LGUs, especially when seen as a proportion to GDP. This observation jibes the percent distribution of National Government Expenditures by Sectoral Classification: 1975-2003. The IRA share has increased from 4.09 percent in 1975 to 16.78 percent in 1999-2002 (Table 3-21). The proportion of these increases to the total national

54 http://www.imf.org/external/np/exr/ib/2000/062300.htm#box4. 55 For further reading see Rosario G. Manasan, Analysis of The President’s Budget For 2003. (Monograph) 56 “Camacho blames big budget deficit on local government code,” Business World , 10 August 2003, p.10. 57 Ibid. 58 Manasan, ibid, pp. 4. 59 In budgetary terms, economic services consist of agriculture, agrarian reform, natural resources, industry, trade, tourism, power &energy, water resources development, and transportation & communications.

112 government expenditures continues to be relatively low. In addition, although the national government increased its allocation for the MOOE (Maintenance and Other Operating Expenditure) of the LGUs from merely 4.46 percent in 1975 to 17.36 percent in 1999-2002, their share of the capital outlay and loans was virtually nil in 1975 and was only 0.07 percent in 1999-2002.

Table 3-18: National Government Cash Budget (in Million Pesos) Year Revenues Expenditures Surplus Financing Change in Cash (Deficit) 1988 112,861 136,067 -23,206 39,330 18,059 1989 152,410 171,978 -19,568 28,660 13,182 1990 180,902 218,096 -37,194 19,270 -13,065 1991 220,787 247,136 -26,349 41,248 18,142 1992 242,714 258,680 -15,966 152,638 90,659 1993 260,405 282,296 -21,891 -15,656 -24,240 1994 336,160 319,874 16,286 -21,939 -39,772 1995 361,220 350,146 11,074 10,969 -17,232 1996 410,449 404,193 6,526 43,319 30,676 1997 471,843 470,279 1,564 -27,113 -32,564 1998 462,515 512,496 -49,981 88,896 -17,089 1999 478,502 590,160 -111,658 181,698 38,984 2000 514,762 648,974 -134,212 203,815 3,810 2001 563,732 710,755 -147,203 175,235 -22,229 Source: 2001 Philippine Statistical Yearbook

113

Table 3-19 'GROWTH RATE OF THE NATIONAL GOVERNMENT EXPENDITURES, BY SECTORAL CLASSIFICATION, 1975-2003 (In Percent)

Average 1999- 75-85 86-92 93-98 86-98 99-2002 1996-97 1997-98 1998-99 2000

GRAND TOTAL 15.66 18.07 13.09 15.74 7.32 18.18 9.28 7.99 17.59

Total Economic Services 13.84 7.15 11.70 9.23 0.96 29.49 -7.54 7.06 19.59

Agriculture 10.81 11.71 10.34 11.07 0.48 57.37 -29.56 28.98 -7.24 Agrarian Reform 1.05 29.16 25.99 27.69 13.61 -1.36 -3.80 -7.67 49.85 Natural Resources 10.45 19.41 11.54 15.71 8.02 67.77 -32.60 -2.37 2.79 Industry 14.51 9.08 10.96 9.95 5.78 6.35 -34.96 -0.97 63.88 Trade 24.13 -21.82 9.80 -8.55 43.02 7.04 -42.25 -78.25 38.32 Tourism 7.61 19.41 24.18 21.59 6.37 31.80 23.74 -28.30 74.40 Power & Energy -3.02 24.70 -3.46 10.80 -31.50 111.95 -17.65 186.46 -40.80 Water Resources Devt. 35.48 5.18 -7.87 -1.06 -46.07 15.06 -50.61 17.65 -24.37 Transp. & Comm. 8.94 15.89 12.34 14.24 0.71 21.95 10.22 -2.58 32.35 Other Econ. Services 32.70 -30.93 3.51 -16.75 -5.27 7.01 -41.53 80.01 -1.05

Total Social Services 15.58 21.06 18.21 19.74 3.34 23.58 10.36 5.65 7.85

Education 16.01 21.48 18.83 20.25 4.26 26.84 11.75 4.50 4.56 Health 15.03 20.26 5.03 12.98 -0.40 25.87 -5.64 10.91 -1.39 Soc. Serv., Labor & Emp. & Other Social 7.37 37.04 27.28 32.45 3.66 34.23 12.07 3.56 12.42 Housing & Com. Devt. 22.36 -16.43 46.65 8.33 -15.93 -59.84 38.22 40.34 104.45

National Defense 7.54 11.35 12.51 11.88 5.94 10.79 7.87 4.59 9.86

Total Public Services 16.67 23.80 14.04 19.20 5.93 13.25 10.53 -1.97 15.85

114 Table 3-19 'GROWTH RATE OF THE NATIONAL GOVERNMENT EXPENDITURES, BY SECTORAL CLASSIFICATION, 1975-2003 (In Percent)

Average 1999- 75-85 86-92 93-98 86-98 99-2002 1996-97 1997-98 1998-99 2000

Public Administration 15.29 18.99 11.79 15.61 3.40 9.04 9.37 -11.66 16.04 Peace and Order 24.23 35.56 16.99 26.65 8.09 18.49 11.87 8.88 15.68

Others 18.76 25.52 25.67 25.59 10.42 21.95 11.93 26.51 18.38

Debt Service (Interests) 36.21 27.34 3.85 15.90 15.92 1.89 27.99 6.51 32.56

MEMO ITEM:

IRA 18.61 29.19 24.86 27.18 8.98 25.54 8.29 23.85 19.92 Grand Total - Debt Service 13.76 15.25 16.24 15.71 5.07 21.85 5.76 8.33 14.23 Grand Total - Debt Service - IRA 13.55 14.13 14.86 14.47 4.02 21.11 5.23 5.02 12.80 Infrastructure 8.35 15.97 11.07 13.68 -1.44 24.14 7.79 4.00 24.96 Defense & Peace & Order 9.25 18.74 14.79 16.90 7.14 14.77 10.01 6.92 13.08 Source: Department of Budget and Management and Manasan, 2003

115 Table 3-19 'GROWTH RATE OF THE NATIONAL GOVERNMENT EXPENDITURES, BY SECTORAL CLASSIFICATION, 1975-2003 (In Percent)

Average 1999- 75-85 86-92 93-98 86-98 99-2002 1996-97 1997-98 1998-99 2000

GRAND TOTAL 3.61 8.87 4.47

Total Economic Services -7.44 -6.13 -1.92

Agriculture 6.79 2.89 -6.92 Agrarian Reform -5.90 18.14 0.81 Natural Resources 23.68 7.10 -3.76 Industry -45.47 40.13 -18.88 Trade 303.03 -24.94 -8.27 Tourism -41.94 26.41 15.96 Power & Energy 28.03 -70.95 63.32 Water Resources Devt. -17.36 -86.47 -5.09 Transp. & Comm. -12.30 -11.38 -0.34 Other Econ. Services -31.31 18.50 -31.39

Total Social Services -3.59 9.66 0.80

Education 2.80 9.93 1.07 Health -10.51 11.50 -3.37 Soc. Serv., Labor & Emp. & Other Social -4.11 7.11 2.88 Housing & Com. Devt. -78.95 16.09 -15.12

National Defense -0.99 15.81 -1.19

Total Public Services 6.44 2.12 -0.47

Public Administration 5.78 -6.88 -3.26

116 Table 3-19 'GROWTH RATE OF THE NATIONAL GOVERNMENT EXPENDITURES, BY SECTORAL CLASSIFICATION, 1975-2003 (In Percent)

Average 1999- 75-85 86-92 93-98 86-98 99-2002 1996-97 1997-98 1998-99 2000 Peace and Order 7.03 10.23 1.66

Others 0.69 24.71 3.19

Debt Service (Interests) 24.09 9.78 16.31

MEMO ITEM:

IRA 1.36 16.05 5.32 Grand Total - Debt Service -1.72 8.57 0.54 Grand Total - Debt Service - IRA -2.54 6.49 -0.92 Infrastructure -10.55 -15.57 1.04 Defense & Peace & Order 3.55 12.54 0.44 Source : Department of Budget and Management, and Manasan, 2003

117

Table 3-20 PERCENT DISTRIBUTION OF NATIONAL GOVERNMENT EXPENDITURES, BY SECTORAL CLASSIFICATION, 1975-2003

Average 75-85 86-92 93-98 86-98 99-2002 1997 1998 1999 2000 2001 2002 2003

GRAND TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total Economic Services 42.27 24.16 20.85 21.98 17.15 22.23 18.81 18.65 18.97 16.95 14.61 13.72

Agriculture 5.98 4.24 3.68 3.87 3.20 4.98 3.21 3.84 3.03 3.12 2.95 2.63 Agrarian Reform 0.83 1.86 1.60 1.69 1.40 1.58 1.39 1.19 1.51 1.37 1.49 1.44 Natural Resources 1.62 1.51 1.39 1.43 1.04 1.89 1.17 1.06 0.92 1.10 1.08 1.00 Industry 1.66 0.84 0.88 0.86 0.49 0.89 0.53 0.48 0.67 0.35 0.46 0.35 Trade 0.79 0.22 0.15 0.17 0.03 0.12 0.06 0.01 0.01 0.06 0.04 0.03 Tourism 0.28 0.13 0.18 0.16 0.16 0.20 0.23 0.15 0.22 0.12 0.14 0.16 Power & Energy 5.11 1.79 0.99 1.26 0.59 0.54 0.41 1.08 0.54 0.67 0.18 0.28 Water Resources Devt. 0.92 0.43 0.24 0.30 0.06 0.24 0.11 0.12 0.08 0.06 0.01 0.01 Transp. & Comm. 17.98 11.03 11.33 11.22 9.92 11.41 11.51 10.38 11.68 9.89 8.05 7.68 Other Econ. Services 7.12 2.12 0.42 1.00 0.26 0.39 0.21 0.35 0.30 0.20 0.21 0.14

Total Social Services 19.97 20.71 24.12 22.96 23.92 26.83 27.10 26.51 24.31 22.63 22.79 21.99

Education 12.51 14.72 17.41 16.49 17.41 19.31 19.74 19.11 16.99 16.86 17.02 16.46 Health 4.02 3.73 2.56 2.96 2.08 2.87 2.48 2.55 2.14 1.85 1.89 1.75 Soc. Serv., Labor & Emp. & Other Social 1.06 1.55 3.49 2.82 3.84 4.23 4.33 4.16 3.97 3.68 3.62 3.56 Housing & Com. Devt. 2.39 0.71 0.67 0.68 0.59 0.43 0.54 0.70 1.22 0.25 0.26 0.21

National Defense 12.46 7.13 6.16 6.49 5.35 5.94 5.86 5.68 5.31 5.07 5.39 5.10

Total Public Services 10.72 12.17 14.45 13.67 13.22 14.61 14.78 13.41 13.22 13.58 12.73 12.13

118 Public Administration 8.01 6.84 8.01 7.61 6.13 7.80 7.81 6.39 6.30 6.43 5.50 5.10 Peace and Order 2.71 5.33 6.44 6.06 7.09 6.81 6.97 7.03 6.91 7.14 7.23 7.04

Others 5.21 6.34 14.46 11.69 17.96 14.53 14.88 17.43 17.55 17.06 19.54 19.30

Debt Service (Interests) 9.38 29.49 19.97 23.21 22.41 15.85 18.57 18.31 20.65 24.73 24.93 27.76

MEMO ITEM:

IRA 4.09 4.34 14.04 10.73 16.78 14.45 14.32 16.42 16.75 16.38 17.46 17.60 Grand Total - Debt Service 90.62 70.51 80.03 76.79 77.59 84.15 81.43 81.69 79.35 75.27 75.07 72.24 Grand Total - Debt Service - IRA 86.54 66.17 65.99 66.05 60.81 69.70 67.12 65.27 62.61 58.89 57.61 54.64 Infrastructure 24.01 13.24 12.55 12.79 10.57 12.19 12.02 11.58 12.30 10.62 8.24 7.97 Defense & Peace & Order 15.17 12.46 12.60 12.55 12.43 12.75 12.83 12.71 12.22 12.21 12.62 12.14 Source: Department of Budget and Management

119 Sources of Revenues This section discusses the sources of revenues of LGUs, as well as the trends, procedures and issues involved in mobilizing a given source of revenue. The sources of revenues of the LGUs are organized according to the reporting of the accounts of LGUs as submitted to the DOF-BLGF and Commission and Audit, namely: internal and external sources of revenues of the LGUs.

Internally-Generated Revenues The internal sources of revenues are revenues that are those generated by the concerned LGUs themselves. The major internal sources of revenues among local governments are tax and non-tax revenues. The LGC of 1991, moreover, provides that those taxes, fees and charges collected by the LGUs shall accrue exclusively to the LGUs.

Revenue from Taxation To identify the definite sources of revenues from taxation, the LGC consolidated the local tax laws, consisting of the Local Tax Code (Presidential Decree No. 231 as amended dated June 28, 1973) and the Real Property Tax Code (Presidential Decree No. 464 dated May 29, 1974). 60 These local taxes are the main sources of funds for the LGUs, after the Internal Revenue Allotment (IRA) and other national government domestic transfers.

1. Real Property Tax (RPT) From 1985-1990, the share of the RPT of the consolidated LGU income was 23 percent after BIR allotments of 33 percent. The collection of RPT increased from 1985 until 1989, only to decline in 1990. Collection recovered from 1991 to 2001, but the share of real property taxes to the consolidated LGU income declined with an average of

60 Book II: Local Taxation and Fiscal Matters of the Local Government Code of 1991.

120 12 percent. 61 The DOF-BLGF, however, projected that the share of RPT from the total LGU consolidated income will increase to 15 percent.

RPT collection is dependent on two variables: the tax base, and the tax rate. The tax base refers to the classification of the land whether it is residential, commercial or agricultural. The tax rate, on the other hand refers to the rate that will be imposed on a given property and should not be greater than 1 percent of the total assessed value of a particular property. In this case, provinces that are highly agricultural may find it difficult to mobilize revenues from RPT.

Under the new Code, however, a city or municipality may reclassify an agricultural land through an ordinance passed by the Sanggunian (Council). The Sanggunian must first demonstrate that the land is no longer economically feasible and appropriate for agricultural purposes as determined by the DA and that greater economic value could be derived out of the land when reclassified to residential, commercial or industrial purposes. But the LGUs should observe the provisions of the Comprehensive Agrarian Reform Law (CARL) (RA 6657) wherein those areas that are covered by CARL cannot be included for land reclassification. 62

Although the new Code provides an opportunity to LGUs to reclassify land for development purposes, it has been observed that those LGUs that are either urbanized and urbanizing or are near urban centers are in the best position to take advantage of this opportunity for land classification. The development spill-over from Metro Manila, for example, has enabled the neighbouring settlements, particularly in Central Luzon (Region 3) and Southern Tagalog (Region 4) to reclassify agricultural lands to either industrial or

61 The study of Llanto et al (1998) has indicated that there is a deterioration in the RPT revenue collection. “The RPT is the single major source of locally generated LGU revenue, contributing 41.9 percent in 1981- 1991. However its importance weakened during the period under study, with its share in total LGU source income dropping to 35.4 percent in 1992-1993. This trend is shown in the declining share of RPT revenue in total source income of cities (from 42.3 to 36.9 percent) and municipalities (from 39.9 to 30.5 percent). In contrast the contribution of RPT revenue to total locally sourced income of provinces increased slightly from 45.4% to 46.7%.” 62 LGC of 1991, section 20.

121 residential lands. A result of such reclassification was the increase in real property collections by the LGUs concerned as a result of changing the tax base and rate.

The regulatory role of national government agencies like DAR and DA has likewise influenced the changing character of land properties in the countryside. For instance, DA might resist land reclassification efforts in the light of AFMA which, among other things, pushes for the conservation and protection of land for productive agricultural activities to ensure food security. In addition, the new Code excludes the opinion of the Department of Trade and Industry (DTI) in the determination of land reclassification, which may serve to balance the opinion of the LGUs and that of the DA especially in cases when the reclassification efforts are meant to encourage private sector investments.

The power to reclassify land goes beyond merely increasing RPT. Land reclassification can become a tool of LGUs in determining the directions of development they want for their communities, whether it be for increased agricultural productivity, creation of industrial estates, or for human settlement.

The collection efficiency of LGUs nationwide from 1992 to 1997 has been improving, according to the final ADB report on the Philippine Municipal Finance Study concluded in 2001. Despite this, it is felt that the collection targets are rather conservative that there is still the need to perform better through more efficient and effective collection efforts, especially for RPT (Table 3-21). 63

63 Asian Development Bank, Philippine Municipal Finance Study (Final Report), Prepared by Emmanuel A. Leyco, 28 February 2001.

122 Table 3-21: Collection Efficiency Rate Fiscal Year 1992 and 1997

Region Collection Rate (%)

1992 1997 NCR (National Capital Region) 55.68 61.01 I (Ilocos Region) 57.96 69.75 CAR (Cordillera Administrative Region) 53.23 54.24 II (Cagayan Valley) 30.91 36.79 III (Central Luzon) 37.26 58.22 IV (Southern Tagalog: A and B) 47.2 52.32 V (Bicol Region) 28.79 45.78 VI (Western Visayas) 47.18 42.6 VII (Central Visayas) 41.27 53.91 VIII (Eastern Visayas) 49.53 54.56 IX (Zamboanga Peninsula) 39.99 37.02 X (Northern Mindanao) 50.38 71.25 XI (Davao Region) 37.2 51.57 XII (SOCCSKARGEN) 42.48 66.69 ARMM (Autonomous Region in Muslim 8.77 32.24 Mindanao) XIII (CARAGA) 48.2 Source: Philippine Municipal Finance Study , Final Report (28 February 2001) Asian Development Bank, Prepared by Emmanuel A. Leyco.

It should be noted that the computation of collection efficiency rate is based on the target or planned collection for a given year vis-à-vis the actual collection. Thus, if an LGU sets a conservative target for RPT collection, it is likely that a higher collection efficiency rate may result because its target is below or within expectation. Given this assumption, the LGUs need to set a more realistic and above-par target tax collection in order to improve their tax collection efficiency.

2. Business Tax Aside from RPT, the LGUs can collect taxes from businesses. In particular, provinces may impose taxes on: (a) transfer of ownership of real property; (b) printing and publication; (c) franchises; (d) sand and gravel; (e) professions; (f) amusement; and (g) annual fixed tax for every delivery truck/van of manufacturers, producers, wholesalers, dealers, and retailers of certain products.

123

Municipalities, on the other hand, are authorized to levy the following business tax on (a) manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, compounders of liquors and others, or manufacturers of any article of commerce; (b) wholesalers or distributors, or dealers; (c) retailers; (d) exporters and on manufacturers, wholesalers and retailers of essential commodities; (e) contractors; (f) banks and other financial institutions; (g) peddlers; and (h) all other businesses. As provided by law, the tax on any business entity or activity shall not exceed 2 percent of gross sales or receipts in the preceding year including businesses subject to excise, percentage or value-added tax under the National Revenue Code (NRC). 64

The cities are also provided the same taxing powers and can impose maximum rates. These rates, however, should not exceed 50 percent as imposed by municipalities and provinces with the exception of professional and amusement taxes. Metro Manila is, however, exempted from this ruling and could therefore impose beyond the 50 percent tax rate. 65

Barangays, the smallest LGU unit, can levy taxes on stores or retailers and levy service fees and charges on: (a) barangay clearances; (b) commercial breeding of fighting cocks, cockfights and cockpits; (c) places of recreation charging admission fees; and (d) billboards, signboards, neon signs and outdoor advertisement. 66

The share of business taxes to the consolidated LGU income from 1985 to 1990 averaged 13 percent. After devolution, from 1991 to 2001, this share slightly decreased to 12 percent. The DOF-BLGF has projected that from 2002-2010 the share of business taxes will continue to decrease by another percentage point, equivalent to 11 percent.

While the aggregate share of business taxes is expected to decline relative to other sources of revenues, the yearly overall performance of LGUs in this area has actually

64 Local Government Code of 1991. 65 Ibid. 66 Ibid.

124 been improving. But there are poor performers, especially those provinces 67 where the incidence of poverty continues to remain high and where economic activity is not as vigorous as in the more affluent LGUs.

Non-Tax Revenues Sources of internally-generated non-tax revenues for LGUs include their economic enterprises, and the collection of fees and charges.

1. Economic Enterprises Examples of economic enterprises that provide LGUs with income other than taxes include the operations and maintenance of public markets, slaughterhouses, bus terminals, and similar activities. Excluded from this list are the so-called special economic zones run by the national government even though these zones are physically located within LGU territory. While the national government, through the Philippine Export Zone Authority (PEZA), regulates and operates the special economic zones in the country, the establishment of such zones – or industrial enclaves, requires the concurrence of the LGUs as provided for by the LGC of 1991. The LGUs’ participation in the establishment of economic zones is a recognition of their role in regulating the operations of these industrial enclaves which may adversely affect the environment, as well as the local population in terms of their health and economic well being. The LGUs are also mandated to regulate the establishment of autonomous special economic zones.

Moreover, the LGUs can also receive revenues on the gross sales of these economic zones through their “share on national wealth.” In this regard, there is a need for the LGUs to be financially competent in computing their share. The LGU share will not be given in a silver platter, considering that claims can only be granted upon presentation of requests that are backed up by proper documentation and computation. In addition, while the LGUs can ask that the local population be granted priority in employment in these zones, this does not preclude the establishments within the zones to

67 NEDA listed the following priority 10 provinces considering poverty incidence: (1) Zamboanga del Norte, (2) Masbate, (3) Maguindanao, (4) Agusan del Sur, (5) Surigao del Norte, (6) Mountain Province, (7) Lanao del Norte, (8) Camarines Norte, (9) Saranggani, (10) Zamboanga Sibugay.

125 source their manpower needs from elsewhere, considering that most employment procedures are centralized. While this situation could result in the in-migration of workers that could also help spur the local economy, it could present constraints on limited physical resources and cause environmental and health problems. Some LGUs may not be financially prepared to confront the problems of rapid urbanization brought about by the increased economic activities in the zones.

The share of receipts from economic enterprises of LGUs for 1985-1990 to the total income levelled at 10 percent, based on the consolidated LGU income report for the period (1985-1990). This share contracted to 4 percent during 1991-2001 and is projected by financial authorities to further decline to 2 percent in 2002-2010.

2. Fees/Charges and Other Receipts A similar trend has been observed for fees/charges and other receipts. From its 17 percent share on the total sources of revenues in 1985-1990, fees/charges and other receipts contributed only 7 percent in 1991-2001. The DOF-BLGF projects that this will further decline to an average of 5 percent in 2002-2010. These developments reinforce the perception that LGU efforts to increase resources through private sector sources are quite minimal. On the other hand, it is also possible that the low collection of fees and charges from private activities reflects LGU efforts to encourage private sector investments by lowering the cost of business by not increasing fees and charges. This observation, however, is not conclusive due to the lack of data on the trends of private sector growth in the LGUs.

Externally-Generated Revenues The external sources of finances for the LGUs come from the following sources: (a) loans and borrowings, mainly through credit from government financing institutions (GFIs), the Municipal Development Fund, official development assistance (ODA) and the private sector; (b) the national budget; (c) internal revenue allotment (IRA) which includes the proceeds from national taxes from mining, royalties, forestry and fishery

126 charges and similar taxes, fees and charges levied on the use and development of the national wealth; and (d) pork-barrel funds through the legislators.

Loans and Borrowings

From a zero share of loans and borrowings to total LGU income in 1985-1990, the picture changed after the LGC was enacted. For 1991-2001, the contributions of this source rose to 4 percent of total LGU income. The financial authorities, however, project that such sources of LGU funds will likely decrease to 3 percent in 2002-2010. According to DOF-BLGF 68 , the LGUs have also been borrowing from government financing institutions (GFIs) such as government-owned banks and quasi-financial institutions before the enactment of the LGC of 1991. The borrowed amounts from these institutions, however, were deemed insignificant to be adequately reflected in the books of the LGUs.

Through the LGC, however, LGUs have been encouraged to tap credit financing as a possible source of revenues. In fact, the Code devotes an entire section on the subject. In particular, the LGUs have been authorized to tap the following modes of credit financing: (a) loans, credits and other forms of indebtedness with government and private banks and other lending institutions; (b) issuance of bonds and other long-term securities; (c) enter into inter-local government agreements for loans, grants and subsidies; (d) loans from funds secured by the national government from foreign sources; and (e) enter into agreements with the private sector on the financing, construction, maintenance, operations and management of infrastructure projects. 69

1. Credit from Government Financial Institutions (GFIs) The LGUs have subsequently been tapping the services of government-financing institutions (GFIs). The GFIs, being government-owned, temper their profit motives with social responsibility as they cater to the needs of the more vulnerable sectors of society,

68 Interview with Acting Director Norberto Malvar, Department of Finance-Bureau of Local Government Finance, Manila, 4 July 2001. 69 Local Government Code, Chapter 2, Title IV

127 including farmers, small businesses and LGUs. The lead GFI players include the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The PNB has already been privatized, leaving the LBP and the DBP as the main providers of credit to LGUs. The LBP has emerged as the dominant source of credit for the LGUs, having lent out P4.7 billion in 1995 and P4.4 billion in 2000. 70

GFIs actually began serving the credit needs of LGUs before 1985 until they were faced with a loan default of P2.1 billion. Thus, GFIs refrained from providing additional credit to the LGUs despite benefiting from the national government’s debt relief program. 71 The enactment of the Code renewed the interest of the GFIs to lend to LGUs, particularly when the national government increased its IRA allotments to the LGUs. As a result, the local governments were able to gain access to more than P10 billion worth of credit from the GFIs. 72

Credits provided by the GFIs to the LGUs are used to finance a variety of development activities. Initially, loans were made to finance the operations of income- generating activities of LGUs such as public markets, slaughterhouses, bus terminals and the procurement of equipment. Lately, the LGUs have gone into borrowing to finance social projects, such as water supply systems, construction of school buildings and operations of hospitals.

The GFIs likewise on-lend to LGUs those funds coming from Official Development Assistance (ODA). For example, the LBP is the lead executing agency for the Water Districts Development Project financed by the World Bank (WB), as well as the Japanese-assisted LGU Support Credit Program. It is, moreover, also the conduit for the Mindanao Basic Urban Services Project financed by Asian Development Bank. The

70 ADB Technical Assistance on Strengthening Public Finance and Planning of Local Government Units (TA 3145-PHI), March 2000, “Policy Paper 2: Toward Establishing Stability, Equity, and Sustainability in Local Government Unit in Development Programs”, prepared by Public Administration Service. 71 Gilberto M. Llanto, et al, Local Government Units’ Access to the Private Capital Markets, Philippines: Philippine Institute for Development Studies, 1998. 72 Ibid, also mentioned in the 2000 ADB-TA.

128 DBP, on the other hand, is the conduit for LGU Urban Water Supply and Sanitation Project also financed by the WB. It has also opened-up the Credit Line for Small and Medium-Enterprises, which is financed by the German Government through KfW and is the conduit for the KfW-assisted Integrated Solid Waste Management Program for LGUs. 73

Even if the source of financing is from ODA, which usually carries concessional terms of payment, the GFIs are able to lend to LGUs within the existing market rates to avoid distortion as well as to secure financial viability. On the side of the borrowing LGUs, on the other hand, they are able to partake of the concessional benefits of the loans aside from the possibilities that they could obtain grants from the ODA donors for the conduct of pre-feasibility and feasibility studies for their various development undertakings.

GFIs assess LGU loan requests based on the financial capacity of the concerned LGU to repay the loan and implement or comply with the technical merits of the project they seek assistance for. Other considerations for the granting of loans include non- technical and non-financial factors, such as the peace and order situation of the LGUs and their professional and management capability, among others. The usual terms of GFIs on granted loans include 2 to 5 percent interest spread over the prevailing 90-day Treasury bill rate with 3-12 years payment period. Collateral is also a requirement, and this may either be one of a combination of the following: (a) assignment of the IRA; (b) hold-out deposits; and (c) real estate or chattel mortgage. 74

With regard to the reach of GFI loan windows, these financing institutions do not discriminate among LGUs, including those belonging to lower income bracket. The 1998 study by Gilbert Llanto on LGU access to private capital markets confirm that the “GFI loans are more evenly distributed across LGUs of different income classes relative to MDF loans. In 1995, 31 percent of GFI loans went to LGUs belonging to the 1 st and 2 nd

73 NEDA-Project Monitoring Factsheet, 2003. 74 Gilberto M. Llanto, Ibid, pp.92, 113-126.

129 income classes, 27% to those in the 3 rd and 4 th income classes, and 41 percent to those in the 5 th and 6 th classes.” 75 The study likewise affirm that there is no direct correlation between the creditworthiness of the LGUs or the ability of LGUs to re-pay the loans and their income class, although the creditworthiness of lower income class LGUs might be lower than the higher income class. 76

2. Municipal Development Fund This source of credit was established by President Marcos through Presidential Decree No. 1914 in 1984 as a revolving fund for ODA-assisted projects. It was intended to accelerate self-reliance among LGUs through the provision of financial assistance in undertaking socio-economic development activities. 77 The MDF structure was reorganized through Executive Order (EO) No. 41 in 1998, resulting in the creation of the Municipal Development Fund Office (MDFO) in Department of Finance. Subsequently, EO 252 issued on December 1, 2003 restructured the MDF anew by making it an “affiliate corporation” under the Land Bank of the Philippines. 78 The MDFO thus became a subsidiary of the LBP known as the Municipal Finance Corporation (MFC). 79 The effectivity of its implementation (i.e. MFC as a subsidiary of the LBP), however, is still under discussion.

Before it was transformed into a corporation, the MDFO was dependent on the national government budget for its counterpart funds, which are necessary to ensure disbursements of accessing foreign borrowings, especially ODA. The percentage of said counterpart is dependent on the agreement between the Philippines, the donor or lender. Thus, for a donor or lending entity to actually disburse 65 percent of loans to the Philippines, the latter is obliged to provide a counterpart of 35 percent. Aside from this, taxes and duties on imported goods that will be used by the foreign-assisted projects also

75 Ibid. 76 Ibid. 77 Gilberto M. Llanto, 2003, “On the Corporatization of the Municipal Development Fund Office: Second Stage Reorganization” (Monograph), p.1-12. 78 E.O. 252, “Transferring the Assets, Functions, Funds Personnel and Records of the Municipal Development Fund Office to an Affiliate Corporation of the Land Bank of the Philippines and for other Purposes,” of 1 December 2003. 79 Ibid.

130 need to be included in the budget of the national government agencies acting as the conduit for the LGUs.

With the transformation of the MDFO into the MFC, no government subsidy is needed to raise the counterpart requirement of the LGUs or national agencies involved in carrying out the foreign-assisted programs or projects. 80

3. Official Development Assistance (ODA) This refers to foreign aid coming from official sources, whether bilateral or multilateral, that is intended to promote the economic and social development of recipient countries. It covers the flow of long-term financial resources from developed to developing countries that are provided in concessional terms (the aid contains a grant element of at least 25 percent). The recipient government obtains these resources through diplomatic and official representations. The recipient country is generally accountable for its utilization. 81

ODA granted through bilateral assistance covers the resources that flow directly from the government of one country to that of another. Major bilateral or government sources of ODA include Japan, the United States, Germany, Spain, France, Canada, United Kingdom, Australia and New Zealand. ODA through multilateral assistance covers the flow of resources from multilateral agencies to recipient countries. These agencies include the United Nations, European Union, World Bank, Asian Development Bank and International Monetary Fund. 82

The forms of assistance are of four types: (a) grants, which involve all non- repayable transfers received from other levels of government, or from private individuals or institutions. It includes reparations and gifts given for a particular project or program, and for general budget support; (b) foreign/project loans obtained to finance specific

80 For more discussions on MDFO, please refer to pages 78-81. 81 National Economic and Development Authority, Handbook on Official Development Assistance; also in Guide on the Availment of ODA Grants by LGUs. 82 Ibid.

131 projects; (c) direct project, which involves special agency undertakings that are to be carried out within a definite time frame and intended to result in some pre-determined measure of goods and services; and (d) program loan which is usually a multipurpose foreign loan that is not used to finance a specific project but is conditioned, in general, on expected changes in government (economic, monetary or fiscal) policies. 83

The programming of a program or a project is agreed upon between the Philippine Government and the donor agencies through the bilateral or multilateral consultations. After both negotiating parties confirm sectoral and geographic priorities and issues, the implementing or proponent agency submits the proposal to be assisted by the National Economic and Development Authority (NEDA) Secretariat. The NEDA Secretariat then reviews and evaluates the merits of the project, particularly its consistency with the medium-term and long-term development plans as well as its economic and financial viability. When the proponent submits all the requirements as recommended by the NEDA Secretariat, the project is presented to the Investment Coordination Committee (ICC) for final review.

The ICC is an inter-agency committee under the NEDA which oversees efforts in rationalizing national public investments and expenditures. The ICC has two levels: a technical board (TB) and the cabinet committee (CC). The ICC-TB scrutinizes the technical merits of the projects after which it may elevate this to the ICC-CC that is co- chaired by the DOF Secretary and the NEDA Director-General. 84 This cabinet level body decides on the management aspect of the project as well as its impact on the overall budget ceiling. Should it approve the project, it is elevated to the NEDA Board headed by the President, for final approval.

Although the ICC has supported decentralization, the profile of its members and its way of conducting its affairs have remained basically unchanged even after the passage of the LGC of 1991. Efforts have been undertaken to promote wider

83 Ibid. 84 The ICC-CC membership includes the Secretaries of the ICC-TB members.

132 representation in the ICC to include the LGUs. For instance, Batangas Governor Hermilando I. Mandanas, on July 4, 2002, recommended to President Arroyo that the head of the Federation of Regional Development Councils be appointed as member of the ICC in order to promote local autonomy. In response, the President on August 29, 2003 issued Memorandum Order No. 114 authorizing the President of the Federation of the RDCs to attend NEDA Board and ICC meetings as a participant-observer, without voting power. He could only discuss the Federation’s views on programs or projects that involve development in the regions.

There has also been no change in the ICC requirements under the decentralized setting. In particular, the ICC requires an Environmental Compliance Certificate (ECC) from the DENR-Environmental Management Bureau for infrastructure projects. Securing of an ECC costs P600,000.00 because of the need to conduct an environmental impact study (EIS) that will substantiate that the proposed project will not cause environmental problems. This is definitely disadvantageous to LGUs, especially those financially less endowed. For example, the LGUs as implementors 85 of a Level 1 (point source) water system will be constrained to undertake this project considering that the unit cost is only P100,000.00 per water system. Moreover, conducting the EIS alone usually takes 6 months to complete. LGUs can thus be discouraged to engage in foreign- assisted projects because of the time lag of between securing the loans and actually implementing the projects.

ODA may amount anywhere from 6 to 11 percent of the total national government sources of revenues but it nonetheless requires extensive attention by bureaucracy because it involves relationships between the Philippine government and that of other states. Agreements or contracts invoke a partner relationship between the donors and the Philippine government since the ODA donors provide assistance through grants or concessional loans 86 they also stand to benefit from the arrangement. It has been

85 The national government agency will serve as the Executing Agency and borrower of the loan. 86 The tied nature of ODA may be mentioned in advancing the commercial interest of some ODA donors. It is of the view, however, that the transfer of technology and knowledge is also important in the implementation of reforms in developing countries particularly in the globalized world.

133 recognized that the economic health of developing countries can impact on security of the donor countries. On the part of the Philippines, it is obligated to pay what it borrows. Thus, Congress automatically appropriates funds in the annual budget to service its debts as well as interest payments on such debts. Being a good “payer” is necessary for the national government debts not only to meet its obligations and to maintain credibility among foreign creditors. Almost 26 percent of national budget 87 is allocated annually for foreign debt servicing.

Given that the Philippines practices a one-fund concept, funds that could be allocated for social services or growth-enhancing infrastructure projects can be re- allocated for debt-servicing. Setting aside a substantial amount for debt-servicing naturally constrains the independent pursuit of development objectives.

To make debt-servicing manageable, the national government has been pursuing ways to develop cost-sharing arrangements involving the LGUs in undertaking foreign- assisted projects/programs (FAPs). In particular, the ICC-CC on August 29, 2002 asked the MDFO-Policy Governing Board to determine the appropriate Loan-Grant-Equity (LGE) mix by considering the income class of LGUs and the type of projects that could be undertaken under this mix. 88 On November 29, 2002, the MDFO Board formulated and adopted a specific LGE mix for LGU implementation of projects, such as public economic enterprises, social and environmental projects to take effect January 2003.

This LGE mix proposes, for example, that the national government will provide no subsidy to 1 st and 2 nd income class municipalities and all cities regardless of income class in the implementation of public economic enterprises. The middle-income class municipalities, for their part, may secure up to 70 percent of the loan, with the national government providing 20 percent and 10 percent in equity. The lower income

87 General Appropriations Act and National Expenditure Program. 88 MDFO-Policy Governing Board Resolution No. 03-11-29-2002, “Resolution Adopting a Set of Guiding Principles and Cost-Sharing Formula in the Evaluation and Processing of Projects Involving Devolved Activities.”

134 municipalities (5 th and 6 th class) can only secure up to 40 percent of the loan, with the national government providing 50 percent in grants and 10 percent in equity.

The middle and poor income LGUs have opposed the LGE mix because of the possible negative impacts on the beneficiaries of the projects. For instance, a particular LGU implementing a water supply project may find it necessary to increase its pass-on rate (water tariff) to its constituents in order to re-pay the loans incurred.

Where the MDF is concerned, its funding comes from the donor governments or multilateral institutions. Loan agreements for the MDF including the provision of sovereign guarantee are the responsibilities of the Department of Finance. The DOF then transfers the funds to MDF for on-lending to LGUs at terms: a maturity period of 15 years including a three-year grace period at an annual interest rate of 14 percent. 89 On the other hand, the terms of the foreign loans contracted by DOF ranges from 0.75 percent to 7 percent interest rate, with a maturity period of 6 to 40 years and grace period of 6 months to 12 years. This means that the concessionality of the foreign loan is not enjoyed by the LGUs considering the pass-on rate of the MDF.

On the part of the MDFO, however, the terms and conditions of the MDF need to be within the threshold of that of GFIs and private banks in order to avert market distortion as well as unfairly competing with the latter. In addition, the administrative costs incurred by the MDFO have also been indirectly imputed on the overall terms and conditions of accessing foreign loans by the LGUs.

While it is desirable that the LGUs access ODA directly from the foreign donors to affirm “genuine local autonomy” and to directly benefit from the concessionality of foreign loans, this action is constrained by the Constitution. The Code, in fact, is consistent with the Constitutional provision that only the Executive has the power to contract foreign loans. This explains why the MDF funds flow structure identifies the

89 Fei Yue, Dezentralization in the Philippines and Implications for Bank Operations,(Draft Report) Asian Development Bank.

135 LGUs mainly as the beneficiaries with the national government as the conduit of the ODA funds. 90

Many donors themselves have reservations on the LGC before its promulgation, despite the constitutional constraint. Foremost of these concerns is the possible increase in the administrative operational cost on their part in catering with individual LGUs. The ADB, for instance, explained that there is no economy of scale to consider if the donor directly negotiates with individual LGUs. There is also this reservation on the technical capacity of the LGUs to prepare project documents, which has been mastered by the national departments.

There is also this less important concern on the positioning of individual powers or protocol. While the foreign ambassadors or other foreign representatives usually sign the loan or contract agreements on behalf of their governments, they find themselves in an awkward position based on the inter-state relations where the counterpart signatory should be of equal or higher rank.

The MDFO has claimed a 100 percent collection rate of loans granted to the LGUs since the LGU debt repayment instrument is through IRA interceptions. Before the Office releases the loans, it requires the concerned LGUs to provide certifications from the DOF assigning their IRA to the MDFO for repayments. Moreover, the GFIs as depository banks of the LGUs have an advantage of withholding the LGUs’ deposit for repayment of loans. This means that providing loans to LGUs becomes a lessee because of the guaranty ascribed to the IRA intercept.

The practice of intercepting the IRA by the DOF-MDFO has resulted in diverse opinions among LGUs and other stakeholders. One view is that such arrangement is not consistent with the provision of automatic release of IRA shares under Section 286 of the LGC which stipulates that “the share of each LGU shall be released, without need of any

90 Specific provision on accessing loans from foreign sources or ODA is provided in Section 301 of the 1991 LGC.

136 further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly basis within 5 days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the National Government for whatever purpose.” 91

A source of contrary opinion is the provision of the Implementing Rules and Regulations of the Code on the IRA. Specifically, Article 383 of the IRR says that the national government may holdback the IRA due to loan contracts or project agreements arising from foreign loans and international commitments, such as premium contributions of LGUs to the Government Service Insurance System and loans contracted by LGUs under foreign-assisted projects. This provision is supported in practice through a contract or Memorandum of Agreement between DOF-MDFO and LGUs, wherein all loans contracted shall be subject to terms and conditions as agreed upon. 92 Once the LGU enters into a contract, this means it waives some of his rights to the other party. In this case, the compliance of LGUs has, therefore, legitimized the Implementing Rules and regulations and the contract between the borrowing LGU and DOF-MDFO.

The 100 percent collection rate from LGUs for MDF loans 93 has also been affirmed in the study of Pasimio on the creditworthiness of the LGUs. She suggests that while the LGUs have a rather dismal record as borrowers from public and private institutions, lessons could be learned from their commendable record as loan borrowers from the MDF. 94 It has been noted, however, that those who have been availing of MDF loans belong to high-income class municipality since the first generation fund from MDF caters to the management of fast-developing cities and municipalities.

91 Section 286, The Local Government Code of 1991. 92 Op . cit., The Local Government Code of 1991, Section 297 93 The following figures was provided by the ADB Study on Decentralization in the Philippines and Its Implications for Bank Operations: As of 31 March 1999, MDF has provided P2.669 billion in form of sub- loans for 136 projects. The repayment from LGUs to MDF was amounting to P1.3 billion at the beginning of 1998. 94 Winona Pasimio, A Discriminant Model for Assessing the Creditworthiness of LGUs , DBA Dissertation, College of Business Administration, Diliman, Quezon City: University of the Philippines, May 1994.

137 The LGUs’ access to foreign loans through the MDF continues to be smaller than their access to grant funds. As of March 31, 1999 the MDFO has provided P2.669 billion in the form of sub-loans for 136 projects. In the case of grants, the MDFO extended P7.948 billion in grant assistance for 1,066 LGUs. The reasons for the low loan availment will be discussed in the section on LGU Performance based on LGUs’ perspective as well as the Chapter on the case studies on the provinces of Bataan and Pampanga.

It has been observed that foreign donors have followed the fervor of decentralization. In particular, the multilateral banks extended loans for both capital and capacity-building components on projects supporting decentralization. Despite this, the likelihood of LGUs backing out from dependence on foreign-assisted projects is also high. The absorptive capacity or the ability of the LGUs to utilize the funds is one of the problems encountered by the MDFO in managing the funds provided by foreign donors. An example is the Community Based Resource Management (CBRM) Project funded by the World Bank which required re-structuring. The World Bank has already cancelled US$10 million from the original allocation of US$50 million to this MDFO- administered fund due to LGUs that backed out. The table below lists revisions in the contract.

Table 3-22: Cancellations for the WB-CBRM Project

Allocation Revised Difference (US$Million) (US$Million) (US$Million) Sub-Projects (sub-loan and grants) 37.20 32.00 5.20 Planning and Implementation, 3.10 2.36 0.75 Support to LGUs ETT and Policy Support Initiating 4.80 3.50 1.30 MDF Rural Window and Project 4.90 2.15 2.75 Management 50.00 40.00 10.00 Source: Department of Finance, NEDA Project Monitoring Staff Fact Sheet 2001

In allotting almost 10 percent of the loan for the strengthening of the DOF- MDFO, the national government not only hired consultants but increased the number of

138 plantilla positions in this office, despite the stand of the DBM against hiring new personnel as part of overall efforts to streamline the bureaucracy. Moreover, it has been observed that the capacity-building initiatives for LGUs used loan proceeds, rather than grants that could readily be accessed. Almost 16 percent of the total loan is on the soft- side, meaning it has been identified for human resource development. The loan may be considered expensive, as there is no proper mix of loans and grants that could result in less cost for the loan.

During the process of decentralization, the Asian Development Bank (ADB) has also supported a number of LGU projects. The following four projects reveal why LGUs backed out from ODA-supported projects.

Philippine Regional Municipal Development Project (PRMDP) . This project has the Department of Interior and Local Government (DILG) as its main implementing agency. The objective of PRMDP is to develop regional growth centers, particularly Regions 4, 7, 11 and 12. The project sought to provide basic infrastructure facilities to spur economic development in these selected regions through a loan from ADB with interest rate of around 2.8 percent, approximately 20 years maturity with 4 to 5 years grace period, a 0.75 percent annual commitment fee charged on progressive amounts of undisbursed balances, and a 1 percent front end fee. The soft component comprising the development of planning, technical, financial and management capabilities of the LGUs would be sourced from grants extended by the Australian Agency for International Development (AusAID). The loan amount contracted by the Philippine government on November 27, 1995 was US$30million.

However, the withdrawal of four cities from the original seven priority cities led to loan cancellation amounting to almost half (US$14.99 million) of the earlier contracted amount. Subsequently, only three cities pushed through with the project, namely: Puerto Princesa, Tagbilaran and Iligan. Thus, only three regions (4, 7, 11) were covered by the PRMDP.

139 The four city governments which eventually backed out from the project had earlier signed a Memorandum of Agreement (MOA) with DILG and MDFO confirming their commitment to allot a portion of their IRA as a form of repayment and even passed a Council Resolution for the purpose. The main reason for the change in stand is the change in political leadership from the time the project was conceptualized in 1995. In the process of implementing PRMDP, two elections were conducted, in 1998 and in 2001. The newly elected city mayors, who had their own political agenda, did not honor the MOA and the Council Resolution of their predecessors.

It is not, however, on mere political whim of the newly-elected local government executives that the cities backed out of the project. In fact, there are cost considerations that came into play. While the grant funds for capability-building from AusAID are free, these actually serve as a condition for the contracting of loans. In other words, providing grant funds is also a mechanism to attract LGUs to secure loans for the PRMDP. Moreover, the worth of the Philippine peso relative to the US dollar had risen over time, thereby increasing actual repayment terms. When the Investment Coordination Committee (ICC) approved the PRMDP loan at P1.48 million, the conversion rate was P26 to a dollar. By 2003, the rate rose to P50 to a dollar, resulting revised costs of P1.55 billion. The project also experienced delays in implementation thereby pushing the original completion date of June 30, 2001 to revised September 30, 2003 which caused additional commitment charges of 0.75 percent per year for the undisbursed or unused amount. 95

Subic Bay Area Municipal Development Project (SBAMDP). This project was approved on January 21, 1998 with funding from a loan amounting to US$22 million from the ADB with a five-year implementation period from 1998 until June 30, 2003. The project involves improvement of urban infrastructure such as roads and bridges, drainage, public markets and solid waste management covering the city of Olongapo, the municipalities of Subic, Castillejos and San Marcelino of Zambales and Dinalupihan, Hermosa and Morong of Bataan.

95 Information on the project is derived from Project Fact Sheet, NEDA-Project Monitoring Staff.

140

A corollary program is also provided to strengthen the capability of LGUs to sustain these subprojects through a training program, advisory studies and office equipment upgrading. The Spanish Government provided grants for the capacity-building activities of the LGUs in order to prepare them for the maintenance and operations of the capital projects. The implementing agencies consist of DILG, Subic Bay Metropolitan Authority (SBMA), Local Water Utilities Administration (LWUA), and the concerned LGUs.

Of the US$22 million contracted loan, US$18.99 million was cancelled, bringing down the actual loan to only US$3.01 million. The cancellation of the loans was caused by at least three reasons. First, there was poor coordination among the various implementing agencies. In December 2002, both ADB and the concerned implementing agencies agreed to appoint DILG to take the lead in overseeing the implementation of the remaining subprojects. Second, there was a change in SBMA and LGU leaderships after the 2001 local and national elections that caused some shifts in political agenda of the concerned local executives. And third, the failure of some LGUs to put up equity for subprojects, such as the Dinalupihan Access Road and the Olongapo City Elicaño Bridge led the DILG not to request further extension of the project. Dinalupihan, however, actually requested the cancellation of the access road subproject and has indicated willingness to complete it through a joint venture arrangement with private investors. As a result, ICC conducted another round of evaluation in the second and third quarters of 2002 to determine the viability of the project towards achieving its overall objectives. During the ICC deliberation, it was established that the project is still viable. 96

Clark Area Municipal Development Project (CAMDP). This project was signed on December 15, 1998 and has been targeted for completion by June 2005. Its funding was to come from a loan of US$24.231 million from the ADB. The project involves the improvement of basic urban infrastructure, which includes fifteen subprojects in the following sectors: roads and transport, drainage and flood control and solid waste

96 Information on the project is derived from Project Fact Sheet, NEDA-Project Monitoring Staff.

141 management – all in Region 3 (Central Luzon). In particular, the project area covers the cities of Angeles, San Fernando and Tarlac, and the municipalities of Magalang and Mabalacat in Pampanga province and Bamban, Capas and Concepcion in Tarlac province. 97

Similar to SBMADP, a pool of different agencies comprised the implementing arm for the CAMDP. This include: the concerned LGUs, DILG, Bases Conversion Development Authority (BCDA), and Department of Public Works and Highways (DPWH).

As with the previously mentioned projects, the CAMDP had a slow start, thereby costing the Philippine government US$ 255,089.07 in commitment charges. A partial loan cancellation of US$7.32 million was imposed after the subsequent withdrawal of two participating LGUs (San Fernando 98 and Capas), the deletion of a sanitary landfill subproject, a reduction in the length of road and drainage channel, and the changes in the priorities of the LGUs . 99

Bukidnon Integrated Area Development Project (BIADP). This project is a mix of loan and a small amount of grant totalling US$18.982 million signed on June 3, 1997 and targeted for completion on June 30, 2004. The Provincial Government of Bukidnon is the implementing agency of this project that consists of an integrated package of activities aimed at improving the socioeconomic status of the poor rural communities in seven municipalities and 175 rural barangays in Bukidnon. The project embraces the integrated area development approach which undertakes the following: (a) community organizing and training activities; (b) agricultural extension services, rural livelihood, and skills training; (c) provision of agricultural credit support; (d) providing health and childcare

97 Information on the project is derived from Project Fact Sheet, NEDA-Project Monitoring Staff. 98 San Fernando waited for two years for the project. When the project started, San Fernando already has a capital sourced from its internally-generated funds. San Fernando, therefore, backed-out of the project. Capas, on the other hand, do not have a local counterpart fund to match the ADB funds. 99 Project Fact Sheet, NEDA/Project Monitoring Staff.

142 services; (e) construction of rural water supply systems; and (f) build-up of staff capability of the project management office (PMO). 100

The project is expected to benefit about 2,300 farm households directly through the investments in communal irrigation system and agricultural extension services at the five sites in the project area. The potential beneficiaries include about 500 farm families belonging to a cultural community indigenous to Bukidnon, the Lumads. The barangay health stations will serve about 9,500 households in twenty-seven barangays; the municipal health centers will serve about 19,100 households in three municipalities; and the rural water supply systems will benefit about 10,000 households. About 2,000 children will benefit from day care centers. Approximately 218,000 people (in about 38,700 households) will benefit generally from the improved road network and better access to health facilities. 101

For the farm households, the estimated income increases will range from 75 percent to 270 percent, depending on the cropping strategies adopted. The project will also generate opportunities for incremental employment for an estimated 2,700 persons at peak demand periods, amounting to 1,710 person-years. 102

The noteworthy targets notwithstanding, the Bukidnon Provincial Government requested the cancellation of US$15 million of the loan in a letter to the DOF on October 8, 2002. This letter cited the high cost of interest being charged to the Provincial Government as well as the delays and difficulties in the processing of reimbursements for project expenditures, and the cash flow implications for the provincial budget – all of which prompted the request for cancellation of the remaining portion of the loan from the ADB. The Bukidnon provincial government, however, intends to continue the project using loans from the LBP where there is less red tape. 103

100 Ibid.. 101 Ibid. 102 Asian Development Bank, BIADP Paper: 2004. p. 4 103 Project Monitoring Staff, Project Fact Sheet on Bukidnon Integrated Area Development Project.

143 These experiences of loan cancellations illustrate how intervening events – whether political or financial in nature, could affect decisions on the feasibility of ODA- supported projects over time. It also brings to fore the need for greater understanding on the part of LGUs on investment processes. These notwithstanding, the end result is that the financial and economic internal rates of return for the investments made (including subsidies from the national government) for the project diminishes greatly once an LGU backs out from a project. 104 In this regard, the national government could help minimize such situation through effective information and education initiatives among the LGUs.

A look at the users of ODA facilities for the LGUs as of June 2005 reveals that most of the implementing agencies continue to be the line agencies of the national government. This has not escaped the scrutiny of the ADB who reported that a major problem of the projects is the absence of ownership by the LGUs. Also cited was the practice of national government to dominate project conceptualization for local projects and the limited participation of the LGUs. 105 The LGUs, however, have been said to lack the necessary technical expertise to develop project proposals, particularly in the drafting of the Terms of Reference (TOR) for consultants in undertaking foreign-assisted projects. But rather than train the LGUs to acquire the necessary expertise, the national government agencies – with the concurrence of the donors, find it more expedient to do the initial documentary studies themselves to the detriment of the actual needs of the LGUs. 106

104 The same principle is applied in this situation. “The whole is always bigger than the sum of its parts.” 105 Similar to the earlier discussion on CIDSS project. 106 A senior official from the Department of Finance when asked on the possibility of LGUs directly negotiating with the donors put forward that “LGUs do not have the capacity to negotiate with the National Government, how much more with the foreign donors. ”

144

145

Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) IMPLEMEN OBJECTIVES/ TARGET REGIONS AND/OR LGUS / DURATION / TING MAIN AREAS OF ASSISTANCE ELIGIBILITY CRITERIA for ASSISTANCE STATUS OF ASSISTANCE AGENCY / DONOR DFA / UNDP PGTF’s mission is to finance cooperative projects. Following the criteria enumerated in the Guidelines for the Ongoing facility Project proposals that are national in nature are not Utilization of PGTF, the TCCP will evaluate and select projects, (call for proposals is on annual basis). eligible for funding from PGTF. which have not yet been submitted under the program, for PGTF’s funding consideration. For the Model Format for submission of The deadline for the submission of Project proposals submitted for funding from PGTF project proposals and the Summary Checklist, in addition to the project proposals to PGTF is 30 April should address the sectoral priorities Guidelines for the Utilization, please coordinate with directly with 2006. Proposals contained in the Caracas Programme of Action, that is, the TCCP Office or through website www.g77.org . should be sent to TCCP not later than trade, technology, food and 27 March 2006. agriculture, energy, raw materials, finance, and In the case of nationally executed projects, i.e., cooperative projects industrialization. carried out in a given member country, the cooperative elements of The maximum amount of funding the project should be established. This should be established by supportavailable for any given project means of written evidence of the interest of or participation by other in 2006 is developing countries as potential beneficiaries. Accordingly, estimated to be UD$40,000.00. endorsement letters should contain a clear indication of the institution, as well as name, position and signature of the person providing the endorsement. In the case of endorsements forwarded via e-mail, the letters may be sent as e-mail attachments.

As for large projects that go beyond the capacity of PGTF, the Fund may be in a position to finance only a component of these cooperative projects. All project proposals submitted should also include inputs from other sources of an amount at least equal to the resources requested from PGTF. These inputs should be secured by the sponsors prior to submission of the proposal to PGTF.

LBP / KfW The Programme’s overall goal is to improve living The loan amount shall be based on the requirement of the project, but 2006-2010 but program is nor yet effective. conditions on a national basis. The objective of sub- in no case shall it exceed the borrowing capacity of the LGU as projects is to facilitate the access of LGUs to long-term assessed by LBP. A maximum of 2 years grace period may be funds and address the long-term financing needs of LGU allowed on the principal depending on the nature of the project. The investment and development projects. proposed interest shall be fixed for the duration of the loan, based on the prevailing market rate at the time of availment, but not to exceed The LGU projects eligible for financing are the following: 13%. local roads and bridges, ports, sanitation, drainage and flood control, water supply, telecommunication and The facility would be available to LGUs nationwide but preference information technology, public markets and other income- would be given to LGUs in the Visayas and Mindanao to support the generating public facilities and other modes to be agreed focus of the German Development Cooperation Program (DCP).

145 Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) between LBP, KfW and among LGUs.

DBP / JBIC The Program's intended beneficiaries include large Nationwide. March 2000 – industries and SMEs (industry, mining and service LGUs implementing solid waste management projects. March 2006 sectors) and LGUs (for solid waste management projects only). Australian The program aims to support community-initiated Agusan del Sur, Bohol, Misamis Occidental,, Northern Samar, and 2004-2009 Agency for sustainable poverty alleviation programs and activities Surigao del Norte International and to assist capability-building initiatives of the non- Cooperation profit sector (primarily NGO's and POs) as well as the (AusAid) LGUs to provide services that meet community-initiated needs. New Zealand SPS projects should have direct relevance to NZAID's Regions 7 specifically Bohol Province, 8, 10, 12, ARMM and 2004-present Agency for country programme thematic objectives as follows: a) CARAGA. International natural resource management; b) activities concerning Development indigenous peoples including Muslim minority; and c) Eligible Philippine agencies are CBOs and other community groups, activities which seek to enhance the quality and NGOs, POs, LGUs provincial and national government agencies, sustainability of governance. religious and trade unions. Also eligible are the Philippine offices/affiliates of multilateral agencies or international NGOs.

DepEd / This is a follow-up project to the 6-year Secondary Regions 2, 3, 4-B, 5, 6, 7, 8, 9, 12, CARAGA, ARMM, CAR 1999-2009 JBIC & ADB Education Development Project which was concluded in 1994. The project aims to address the gaps w/c SEDP was not able to address. It is a complementary sequel project to TEEP. JICA GGP aims to aid self-supporting socio-economic development activities to benefit sectors at the grassroots level. Particular emphasis is placed on poverty alleviation and livelihood improvement. DILG&LBP/ The project will establish a facility that will support urban Regions 9 (particularly Zamboanga del Sur) and ARMM September 2002 - ADB development and upgrading of basic urban infrastructure (particularly Maguindanao). June 2008 and municipal services in cities and municipalities throughout the island of Mindanao based on an assessment of existing facilities and the demand of the urban population. Physical infrastructure investment includes water supply, roads, traffic management, drainage, solid waste management, markets, bus terminals sewerage and sanitation. Institutional development for LGUs will focus on financial management, infrastructure development and urban planning. DA/ADB The long-term goal of the project is to increase rural Regions 4-B, 5, 8, 9, 10, 11, 12, CARAGA, ARMM February 2002 – incomes in areas with high agricultural potential. The June 2008

146 Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) immediate objectives of the project are to remove the constraints to the improvement of agricultural productivity caused by the lack of rural infrastructure and to reduce poverty by increasing agricultural productivity and profitability. The project will have three components, namely, improved rural infrastructure, capacity building for devolved project implementation and management, and project management and coordination. DILG-LGA The capacity program, jointly implemented by the DILG ARMM LGUs June 2004 to June 2007 and UP through the LGA and the NCPAG through its research NCPAG/CLR and training arm for local governance, the CLRG shall G./ conduct training and technical assistance to participating British ARMM LGU’s in the following areas: Council - Project Development and Management; (Philippines) - Feasibility Studies Preparation; and British - Resource Mobilization Embassy’s -Project Proposal Presentation Global- Engaging with the Islamic World Programme ADB Supports small investment projects aimed directly at 1) All developing member countries (DMCs) are eligible for JFPR poverty reduction with a conceptual link to ADB-financed funding loan projects. The JFPR gives priority to innovative 2) Recipients are central and local governments or NGOs activities that demonstrate ADB's effort in fighting implementing poverty reduction activities poverty. Main areas of assistance are: - Basic economic and social services, such as community- level water supply and sanitation, small clinics, local product market facilities, skills training centers, and microfinance. - Social development fund activities - NGO activities for poverty reduction and social development - Capacity building and community development activities for sustainable and direct poverty reduction

DILG / CIDA The program provides technical assistance (TA) to ARMM 2005-2010 specific local governments to build their capacity to carry out the devolved functions of government and to plan, implement and evaluate development projects in their jurisdictions. The TA supports local government

147 Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) management, service delivery, resource generation and management and participatory governance. The program works to build alliances among LGUs, local resource providers, civil society organizations, and the private sector, and to ensure that local governments address the concerns of gender equality, environmental soundness, poverty reduction and peace and unity.

DBP/KfW The project is a special lending facility aimed at Nationwide March 2004 – implementing an improved and comprehensive SWM December 2007 services by providing financing to eligible borrowers who shall employ modern management methods, equipment and facilities with the end in view of achieving cost effectivity and technical efficiency while increasing the responsiveness of service providers and operators.

DBP/KfW The Project involves the provision of sub-loans to finance Nationwide March 2004 – SMEs and micro-enterprises’ procurement of imported December 2006 and local capital/ intermediate goods and, spare parts in wholesale and retail schemes. Working capital will likewise be provided to micro-enterprises. The facility is also available to LGUs to finance their development projects. Delegation of This project intends to support on-going reforms and Nationwide. This facility is expected to support and facilitate the 2003-2007. Currently, there is no call for European modernization of Philippine’s economy and systems of effective implementation of about nine (9) projects per year. proposals. Commission corporate governance by facilitating enhanced interaction to the of European and Filipino civil society including the Priority areas will be defined for each call for proposal. Projects Philippines private sector, the networking of its policy makers and funded may take the form of: opinion formers and linkages of Philippine and EU • Conferences, seminars and workshops; operators in business, the media and think tanks. • Training, education and capacity-building activities; • Research and studies; • Media events, media products and advocacy activities; and • Other activities that promote the image of the European Union as a model or example of best or unique practice. Delegation of The Asia-Invest II Programme is an initiative by the Eligible Applicants: (non-profit making entity) 2005-2007 European European Commission to promote and support business 1. Chambers of Commerce Commission co-operation between the EU and Asia. The Programme 2. Government agencies to the provides assistance to intermediary business organizations 3. Sector-specific trade, industrial and professional asso ciations Philippines to facilitate mutually beneficial partnerships between 4. Employers' Federation companies, in particular small and medium-sized 5. Local government units enterprises (SMEs), in the EU and South and South-East 6. NGOs Asia and China; as well as to strengthen the business 7. Universities Such

148 Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) environment to increase trade and investment flows entities would have to form partnership with a minimum of 2 between the two regions. Promoting integration of Asian European organizations in order to avail of the grants under the 4 countries into the Information Society is now one of the components objectives under Asia-Invest II. Promoting the involvement of organizations from less developed countries and regions is an ongoing priority.Asia-Invest II supports projects across all sectors and areas of industry, as long as the proposed activities clearly address the needs of the target groups (i.e. SMEs, business organizations, the EU-Asia network).

Components: 1. Asia Venture (matchmaking) 2. Asia Enterprise (matchmaking) 3. Asia Invest Technical Assistance (Asian Private Sector Development) 4. Asia Alliance (Institutional Reinforcement)

DBP / EIB The facility is intended to increase DBP's capability to Nationwide. 2004-2014 meet the financing requirements of qualified borrowers. This facility will be relent to local government units, small and medium enterprises and large enterprise in order to support projects in the following areas: (1) agro- industry; (2) infrastructure; (3) environment; (4) tourism; (5) telecommunications; (6) power generation; (7) health; (8) urban development; and (9) housing. Other sectors may be covered subject to EIB's prior clearance. The loan under the facility can be used by the end-borrowers for capital asset acquisition, working capital and the conduct of feasibility studies/technical assistance.

DBP / SIDA The proposed facility will support on-going initiatives of Nationwide government that promote environmental consciousness as well as the implementation of environmental protection and management programs. It will basically fund the following environmental undertakings: (a) establishment of environmental management systems; (b) acquisition of cleaner production technologies; (c) self-monitoring program; (d) energy savings program; and (e) environmental protection and rehabilitation. DOF/ The project aims to reduce rural poverty and Regions 5, 7, 8, 13 1998-2004 (extended until World Bank environmental degradation through support for locally- June 2006)

149 Table 3-23 OFFICIAL DEVELOPMENT ASSISTANCE (ODA) FACILITIES FOR LOCAL GOVERNMENT UNITS (as of 08 March 2006) generated and implemented natural resource management projects. The project has the following components: (1) sub-loans for LGU sub-projects; (2) MDF rural window initiative and project management; (3) planning and implementation support for LGUs; and (4) environmental technology transfer and policy support.

LBP/ The project aims to provide financing to LGUs for trunk Eligible borrowers include first to third class LGUs outside of Metro 1999-2004 (extended until Dec.31, 2006) World Bank and feeder investments in local sewerage and sanitation Manila (provinces, cities and municipalities). projects.

DOF-MDFO / The project aims to provide financing for LGU urban Nationwide 1999-2006 World Bank projects through the establishment of urban loan window/facility within the MDFO. It also aims to provide TA and institutional support to LGU borrowers.

A facility to improve tax administration of LGUs is also found under the resource mobilization component of the Project. This facility aims to help LGUs solve their problem on poor collection of taxes. Funds to be lent to LGUs will be used to improve their tax administration, specifically in the collection of real property taxes, through computerization of their recording system. This loan window is one way of helping to strengthen the financial capacity of LGUs to become more capable of raising their own funds.

DAR/IFAD To raise in a sustainable manner the standard of living of Region 10, CARAGA April 2003 – April 2008 farm and fishing households in selected areas in Northern Mindanao and CARAGA.

Source: NEDA Public Investment Staff own compilation

150

151 4. Borrowings from the Private Sector A fourth source of loans to finance LGU development initiatives is the private sector. Although the Code provides that the LGUs may contract loans, credits and other forms of indebtedness from domestic private banks, the LGUs have not been able to maximize this provision. The major reason cited is the perceived advantage of GFIs over the private banks, considering that the GFIs serve as the depository banks of the LGUs’ internal revenue allotment (IRA). Under Section 311 of the Code on the depository accounts, it is mandated that “local treasurers maintain depository accounts in the name of their respective LGUs with banks, preferably government- owned, located in or nearest to their respective areas or jurisdiction.” 107 This provision, however, does not confer exclusive authority to GFIs service LGU accounts but merely expresses preference for GFIs over private banks. The Commission on Audit (COA) has even passed a circular in 1992 requiring LGUs to maintain depository accounts with a government-owned bank in or nearest their locality. 108 In case there is no government-owned depository bank in the nearest locality of a given LGU, the private bank within or near the LGU can be the depository bank provided it is accredited by the Bangko Sentral ng Pilipinas (Central Bank). 109 The authorization of the LGU council (Sanggunian) and approval of the local chief executive, however, need to be secured first.

Despite this, the GFI’s cornered most of the LGU deposits, particularly the LBP with its extensive network of branches all over the country. As a result, the private banks have remained unfamiliar with the financing needs of the LGUs as well as local government procedures on financial operations and management. A credible lender-borrower

107 Section 311: Depository Accounts, Local Government Code. 108 COA Circular 92-382. 109 Bangko Sentral ng Pilipinas (BSP)

151 relationship was not able to take roots because of this. 110 As a result, private banks have remained cautious in lending to LGUs without the usual collateral requirements.

The private sector – not necessarily the private banks - can still provide alternative sources of financing through arrangements such as the Build-Operate Transfer (BOT) and other similar schemes, and the capital market through bond flotation.

Build-Operate-Transfer and other Schemes . BOT refers to the engagement of the private sector in public infrastructure development by both national and local governments. Since the LGUs are not familiar in financing projects through partnerships with the private sector, the result is that the BOT arrangement has remained unpopular. According to the Final Report on the Philippine Municipal Finance Study conducted by ADB, “many LGUs remain unfamiliar with the new financing techniques like BOT financing that have been made available under the Code for them to finance their projects. Thus, LGUs in general continue to remain dependent on national government for financing local projects.” 111 In addition to the lack of information among both LGUs and the private sector on BOT financing arrangements, there is the lack of capability with the former in the preparing of the required feasibility studies requiring detailed contracts. Said contracts define the relationship between the private sector and the LGUs. Only few LGUs, particularly the highly-urbanized cities, have this

110 Several studies have raised this issue. These studies include Rosario G. Manasan, “Impact of Local Government Code and Proposed Amendments on Ability to Finance Infrastructure: Towards a Framework for LGU Finance, October 1999; ADB Study on Strengthening Public Finance and Planning of Local Government Units, April 2000; and Fei Yue, “Decentralization in the Philippines and Its Implications for ADB’s Operations, 2000, the Asian Development Bank (monograph). 111 ADB, 28 February 2001, Final Report on the Philippine Municipal Finance Study prepared by Professor Emmanuel A. Leyco

152 expertise. Thus, the level of confidence among LGUs to engage in high- impact capital projects through BOT remains undeveloped.

From 1997 until 2002, there are nine BOT projects led by LGUs that were approved by the Investment Coordination Committee. These include the following: 1. Don Mariano Memorial State University (DMMSU) Integrated Education Business and Administrative Complex (DEBAC) Project 2. Privatization of San Pedro Public Market 3. Calamba Shopping Center 4. Baguio City Public Market 5. Tarlac Public Market 6. International Seaport Project in Castilla, Sorsogon 7. Muntinlupa Skywalk Project 8. Bohol Provincial Water Supply System

As indicated, the concerned LGUs which ventured to BOT are either highly-urbanized cities or high-income class province. Most of the projects are income-generating, e.g. public market, shopping center and seaport.

An example of a case study is the BOT of the Mandaluyong Public Market, which is a success story. When the main public market of the City of Mandaluyong in Metro Manila was destroyed by fire in 1991, the city decided to build the new public market through the BOT arrangement. The City shied away from bank loans due to high interest rate as well as passing on the debt service to stall owners. Mandaluyong City opted for BOTconsidering its flexible financing structure.

A seven-storey commercial center, also known as “The Marketplace” was bidded-out with difficulty due to the Gulf war. The increase in oil prices prevented the City from attracting more investors for the bidding. The City,however, persisted and completed the bidding. The winning bid amounts to P300 million, orP450 million in current prices.

153 The contract was awarded to the Macro Founders and Developers, Inc. (MFD).

The major feature of the contractual arrangement is that the Build- Transfer (BT) arrangement is coupled with Develop-Operate-Transfer (DOT) component. The DOT allows the company to develop the adjacent property aside from the public market. The BT arrangement, on the other hand, is where the MFD transfers the completed public market structure to Mandaluyong City. Fifty percent is paid by the city, while the rest is paid by the stall owners. The City, as the operator, takes care of the stall fee collection and contracted out the maintenance and security of the public market to MFD. 112

Capital Market . With reference to the capital market, Section 299 under credit financing of the Code authorizes the LGUs to “issue bonds, debentures, securities, collaterals, notes and other obligations to finance self-liquidating, income-producing development or livelihood projects pursuant to the priorities established in the approved local development plan or the public investment program.” 113 In floating bonds, LGUs need to observe the rules and regulations of both the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission (SEC). The Council (Sanggunian) of the concerned LGU, except at the barangay level, with approval by the majority of all its members also needs to pass an Ordinance indicating the terms and conditions of the bonds and the purpose for which the proposed indebtedness is to be incurred.

In response to the need of partnership with the private sector in bond flotation, the Local Government Unit Guaranty Corporation (LGUGC) was

112 Jorge Briones, Case Study Infrastructure Privatization in the Philippines: The Mandaluyong Public Market, Center for International Development , http:www.rti.org/cid. 113 Sec. 299 under Credit Financing of the Local Government Code of 1991.

154 established in 1998. The loans obtained by the LGUs from private financial institutions as well as LGU bonds underwritten by private financial institutions (PFIs) and floated in the capital market are guaranteed by the LGUGC. LGUGC is a private corporation where 51 percent of ownership is from the Banker’s Association of the Philippines (BAP). The balance (49 percent) is capitalized by the Development Bank of the Philippines (DBP). The USAID also provides a co-guaranty of 30 percent of the total cost of the project financed under this arrangement. The LGUGC is the only private corporation in Asia that guarantees loans of the LGUs.

The LGUGC has guaranteed from 1998 to 2001 the following projects: (a) Urdaneta City Abbatoir Upgrade; (b) Aklan Caticlan Jetty Port and Terminal Building Construction; (c) Puerto Princesa City Low Cost Housing Project; (d) Tagaytay City Convention Center; (e) Caloocan City General Hospital; (f) Caloocan City Hall with Commercial Center and Toll Parking; (g) Caloocan City Poblacion Public Market; and (h) Iloilo City Government Employees Housing Project. That only eight projects were guaranteed by the LGUGC in 3 years reveals that bond flotation as a means of capital financing for the LGUs remains a less attractive proposition. The perceived sophistication of conducting bond flotation has made the LGUs wary about venturing into this arrangement. By and large, flotation of bonds is an underdeveloped sector not only among LGUs but in the national government as well.

Overall, the LGUs have not maximized the borrowing limit set in the present Code: “the amount of appropriations for debt servicing shall not exceed 20 percent of the regular income of the local government unit concerned.” 114

114 Local Government Code, 1991 sec. 324, (b). As dicussed by Llanto, et al, the Code in effect increased the borrowing limit of the LGUs by 60 percent as set by COA relative to 7 percent of the aggregate assessed value of the taxable real properties in local unit’s

155

National Budget The national budget is a reflection of the government’s development priorities: it may, among others, opt to provide greater social services than high-impact infrastructure projects, or both. It serves as an engine of growth as it “pump primes” 115 the economy especially when it is under recession, and during slowdown of private sector activities. By infusing more investments in labor-based government construction or provision of social services, the government – through the national budget, intends to stimulate demand for goods and purchases as well as to create more job opportunities. 116

On the other hand, the government’s budgetary process can also slow down in spending, taxing and borrowing during economic booms. The private sector takes the center stage during high economic growth. The government through a conservatively configured budget can support private sector activities instead of competing with the latter. As a result, interest rates and prices are kept to a minimum; and overheating the economy is avoided. 117

The government’s budget is also responsible for redistributing the country’s financial resources. In particular, the Philippines as a developing country requires a substantial amount of its budget for social services considering that almost 35 percent of the population are poor. 118

jurisdiction less outstanding loans. See also discussion of Fei Yue of ADB, “Decentralization in the Philippines and its Implications for Bank’s Operations”, 1996. Yue explained that in 1995, the LGUs utilized only 6.34 percent-7.11 percent of the borrowing capacity allowed by the LGC of 1991. 115 Department of Budget and Management, Handbook on the Budget , 1990. 116 Ibid. 117 Ibid. 118 Ibid.

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The budget process involves four phases: (a) preparation; (b) legislation or authorization; (c) execution or implementation; and (d) budget accountability or review.

In preparing the budget, the government determines the budgetary priorities and activities based on national development plan within the ceilings or resource constraints imposed by available revenues and borrowing limits. 119 The determination of the overall expenditure levels, revenue projection, deficit levels and financing plan is delegated to the Development Budget Coordinating Council (DBCC). 120 Upon approval of the aforementioned data by the President and the Cabinet, a budget call is issued by DBM in order for agencies including LGUs to prepare their respective budgets according to ceilings imposed. Consultations both at the national and regional levels 121 through the Regional Development Council are initiated by DBM. After the determination of the overall budget the President submits the proposed budget to Congress.

As stipulated in the Constitution under section 24, the function of appropriation resides in Congress. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, and the Senate may propose or concur with amendments. Budget authorization or legislation involves the submission of the President of the overall budget to Congress in the form of detailed Expenditure Program with Budget of Expenditure and Sources of Financing, the President’s

119 In particular, NEDA prepares the Medium-Term Development Plan of each Administration. 120 The Secretary of Department of Budget and Management serves as Chairman, with NEDA, Central Bank Governor and DOF as members. The DBCC is assisted by and Executive Technical Board. 121 Representatives of Non-Government Organizations (NGOs) are also invited during budget hearing.

157 Budget Message and the Regional Allocation of the Expenditure Program. The Appropriation Committee of Congress or Lower House initially reviews the budget. The different national agencies 122 are summoned by Congress to justify their respective proposed budget. Once the proposed budget becomes a bill, 123 said bill goes to the Senate to be referred to Senate Financial Committee for consultations with the agencies. Once amendments have been deliberated and a common version has been agreed upon, the bill is referred to the Conference Committee of both Chambers. The common bill is subjected to the approval of both Houses voting separately. Once the President signs the budget document, said document becomes a law. 124

The process of preparing and legislating the budget takes more than a year although efforts are spent to finish this within a year. There are times when the budget could not be finished within the year and would therefore require a re-enactment of the budget of the previous year. In fact, the national budget was re-enacted in 2001 and 2004 simply because Congress missed its deadline after prolonged debates and its attention on other legislative priorities.

Internal Revenue Allotment (IRA)

Cuaresma and Ilago describe the internal revenue allotment (IRA) as a share of LGUs “sourced from the collection of national internal revenue taxes imposed and administered by the central government, the proceeds from which accrue substantively to the latter.” 125 As indicated in Section

122 The DBM determines and justifies the share of the LGUs through the aggregated IRA (according to the imposed formula), share to national wealth, grants, etc. to Congress. 123 General Appropriations Bill. 124 General Appropriations Act. 125 Jocelyn C. Cuaresma, Simeon A. Ilago, Local Fiscal Administration in the Philippines, 1996, pp.33-42.

158 362 of the National Internal Revenue Code (NIRC), these include sales tax, specific tax, contractor’s tax, tax on banks and finance companies, fixed taxes on business and occupation, tax on common carriers, charges tax, miller’s tax (except that on sugar) percentage tax on cinematographic film owners, lessors and distributors, certain mining taxes, occupation fees and rentals and water rentals. 126 In effect, the IRA is sourced merely from a portion of the foregoing collections. The IRA does not consider income from individuals. 127 In addition, revenues generated from customs, government-owned and controlled corporations (GOCCs) and other government financing institutions (GFIs) are not included in the IRA. 128

Giving shares to LGUs is not a new concept. During the American colonial period, Commonwealth Act No. 466 entitled “An Act to Revise Amend and Codify the Internal Revenue Laws of the Philippines” 129 provided for a 20 percent distribution of the National Internal Revenue for special purposes. As broken down, this includes: 5 percent for provincial allotment; 5 percent as a road and bridge allotment with the National Government Department as the implementing agency; and 10 percent municipal allotment. This is followed by Republic Act 2264 of June 1959 entitled “An Act Amending the Laws Governing Local Governments by Increasing their Autonomy and Reorganizing Provincial Governments” which granted authority to municipalities and cities to impose taxes. This was followed by Presidential Decree 231 or the Local Tax Code (June 28, 1973) and the Real Property Tax Code or PD 464 (May 29, 1974), which provides greater authority to the LGUs to impose and collect taxes. With reference to the Local Government Code of 1991, the national government gets 70 percent of the income imposed on NIRC in 1992. In 1993, it

126 Ibid. 127 Income tax is considered to be mobile, i.e. an individual may reside in a particular town but works in another town. There is a problem on attribution. 128 As earlier indicated on the trends and patterns of LGU financing. 129 Commonwealth Act No. 466, 15 June 1939.

159 receives 65 percent and starting 1994, 60 percent of the national income; with the difference given to the LGUs. In effect, the sharing of income between national government and the LGUs follows a phase or programmed approach in order for both governments to bear the cost of devolution during transition.

Of the 40 percent LGU income, 20 percent goes to the country’s =41,939 barangays; 23 percent is given to the seventy-eight provinces; 23 percent to the eighty-two cities; and 34 percent to the 1,525 municipalities. The sharing of the IRA across LGUs-led to mixed responses among LGUs. For instance, the provincial governments consider that the equal sharing of 23 percent for both provinces and cities is not equitable considering that the provinces service more constituents and carry more responsibilities, particularly the cost of running hospitals. On this basis, some provincial governments requested for the re-nationalization of hospitals, as earlier discussed in the section on functional decentralization.

The percentage sharing has also resulted in municipalities striving to convert their localities into cities so they could get more from the IRA. As a countermeasure, Congress changed the annual income classification of cities from P20 million to P100 million. Municipalities must thus meet this income ceiling before they could be converted to cities. 130 In effect, the definition of city in the Philippine context has included the city’s annual income as well as its population, aside from the existence of essential related services, such as infrastructure, banking and finance, and social services in a certain locality. 131

130 Republic Act 9009: An Act Amending Section 450 of RA 7160, Otherwise known as the Local Government Code of 1991, by Increasing the Average Annual Income Requirement for a Municipality or Cluster of Baranggay to be Converted into Component City, 24 February 2001. 131 Conversion of a municipality into a city is based on political decisions rather than economic decision. The legislature plays an active part in converting a municipality into a city. This is very prevalent in the Visayas and Mindanao areas.

160

This is also the first time that barangays have been directly provided with a share from the IRA. Again, the provinces and municipalities expressed dissatisfaction with this arrangement considering that a barangay unit has very few constituents. It is with the assumption that economic efficiency might be sacrificed in empowering the barangay financially. 132

The differences in the sharing formula notwithstanding, the LGUs face several challenges in claiming their share in the IRA. On one instance, in particular, the Union of Local Authorities of the Philippines (ULAP) raised the issue on the deduction of the IRA share of LGUs. The ULAP claimed that the Bureau of Internal Revenue (BIR), as the collector of taxes, and the Department of Budget and Management (DBM), as the manager of the coffers, have varying computations of the LGU share of the IRA. Both BIR and DBM, it said, unlawfully deducted part of the IRA share of the LGUs. Using 1996 to 1999 figures, the Union pointed out of the total IRA tax collection of P259,706.163 billion in 1996, both agencies had been deducting certain incomes from Special Accounts. 133 The contested deductions involved P3.2 billion by the BIR and P16.593 billion by the DBM. Based on its computation, the ULAP stressed that if no deductions were made by both agencies, the LGUs could have a P103.882 billion, instead of P102.591 billion as computed by BIR or P96.780 billion per DBM computation. The DBM computation has prevailed, however, since it has the authority to request for and release the budget to LGUs. Another P5 billion deduction on the total share of the LGUs was implemented in 1999

132 Equity issue was elaborated by Rosario G. Manasan as USAID-AGILE Local Government Finance consultant in her manuscript entitled, “Intergovernmental Transfers: Guiding Principles”, presented during the National Policy Workshop on Fiscal Equalization and the IRA, at EDSA Shangri La Hotel Mandaluyong City, on 14 June 1999. 133 National Policy Workshop on Fiscal Equalization and the IRA, organized by Union of Local Authorities of the Philippines (ULAP), Department of Interior and Local Government (DILG), and Special APEC Governance Project of the Australian Agency for International Development (AusAID), Mandaluyong City, Philippines, 14 June 1999.

161 under the Local Government Service Equalization Fund (LGSEF) budget item in order to equalize the expenditures of the LGUs in fully implementing devolved services.

In effect, the LGUs have not been fully realizing their share of the IRA as stipulated in section 286 (b) of the LGC: “Nothing in this Chapter shall be understood to diminish the share of LGUs under existing laws.” The 1987 Constitution, under Article X, section 6 likewise assures the LGUs of providing “a just share as determined by law, in the national taxes which shall be automatically released to them.” 134

ULAP likewise includes the computation (Table 3-26) from DBM in supporting its claim that the National Government is not providing the full share of the LGUs from the IRA.

Table 3-24: Local Government Finance - IRA Levels (in Billion Pesos)

Total Certified IRA as % Internal Tax Resulting IRA Actual Share of Revenue Base Level Current Tax Collection 1989: 80.891 1992: 24.267 (30%) 1992: 20.201 1992: 15.48% 1990: 104.911 1993: 36.699 (35%) 1993: 36.710 1993: 25.82% 1991: 116.883 1994: 46.753 (40%) 1994: 46.753 1994: 26.34% 1992: 130.465 1995: 52.186 (40%) 1995: 51.925 1995: 24.99% 1993: 142.196 1996: 56.878 (40%) 1996: 56.595 1994: 177.465 1997: 70.986 (40%) 1997: 71.049 1995: 207.811 1998: 83.124 (40%) 1998: 80.990 Source: DBM; League of Provinces; Presented during the National Policy Workshop on Fiscal Equalization and the IRA, 14 June 1999, EDSA Shangri La Hotel, Mandaluyong City

134 The 1987 Philippine Constitution.

162 It could be ascertained that the LGU share is not fully realized from 1992 until 1995 considering that DBM deducts specific amounts to satisfy the provision of certain laws as specified earlier (Table 3-24).

The conflicting views on the IRA computation have been further aggravated by the withholding of a portion of the IRA through administrative fiat. While the LGC of 1991 (Section 286) stipulates that the share of each LGU will not be subjected to any lien or holdback by the national government, another provision of the same law (Section 284) authorizes the President to adjust the IRA upon recommendation from the Secretaries of DOF, DILG and DBM and consulted with both Houses of Congress and the Presidents of the Liga 135 should the national government incur an unmanageable public sector deficit.

Based on the foregoing provision, the President in December 1997 issued Administrative Order (AO) 372, “Adoption of Economy Measures in Government for FY 1998” to withhold 10 percent of the IRA of the LGUs due to the Asian financial crisis. AO 43 signed by President Joseph Estrada in December 1998, however, reduced the portion of the IRA that would be withheld from 10 percent to 5 percent. It was assumed that the reduction is a compromise settlement between the LGUs and the concerned departments of the national government.

On July 20, 2000, the Supreme Court terminated the implementation of AO 372 and related AO withholding a portion of the IRA share of the LGUs. The Supreme Court argued that the President only has a supervisory power to LGUs and not of control. By supervision, the Supreme Court affirmed that the President’s task is merely to oversee the compliance of the LGUs of the law. The Supreme Court also reiterated that

135 Association of Local Government Units

163 the President should not deter the LGUs in performing their task by deducting the available resources, i.e the withholding of a portion of the IRA. 136 During one of the deliberation of the case, the Supreme Court argued that the Asian financial crisis is not considered a crisis caused by war or insurrection. The Asian financial crisis is a crisis caused by over- expansion of investments and graft and corruption. There may be regional crisis but there is no national crisis. The Asian crisis could be prevented and managed if done with prudence and on time. In effect, the IRA as a just share of the LGUs should not be withheld.

On May 26, 2004, the Supreme Court again upheld local autonomy in the utilization of the IRA by deciding favourably on the petition of Batangas Governor Mandanas against the constitutionality of earmarking P5 billion from the IRA for the Local Government Service Equalization Fund (LGSEF) as provided by Congress through the General Appropriations Act of 1999, 2000, and 2001. 137 The LGSEF supports the implementation of devolved activities by selected LGUs, particularly the poor income class. The national government oversight agencies formulated the criteria of distributing the LGSEF through administrative fiat. 138 The

136 Supreme Court decision, G.R. No. 132988, 19 July 2000. 137 En Banc decision G.R. No. 152774 promulgated on 26 May 2004, i.e. The Province of Batangas as Petitioner vs. the Executive Secretary and Chairman of the Oversight Committee on Devolution, Secretaries of DBM and DILG as Respondents. 138 Former President Estrada passed Executive Order No. 48 entitled, “Establishing a Program for Devolution, Adjustment and Equalization.” The Oversight Committee on Devolution likewise passed the following Resolution: (a) OCD-00-005, entitled “Resolution Adopting the Allocation Scheme for the PhP5 Billion CY 1999 LGSEF and Requesting his Excellency President Estrada to Approve Said Allocation Scheme; (b) OCD-99-006, entitled “Resolution Adopting the Allocation Scheme for the PhP4.0 Billion of the 1999 LGSEF and its Concomitant General Framework, Implementing Guidelines and Mechanics for its Implementation and Release, as Promulgated by the Oversight Committee on Devolution; (c) OCD-99-003, entitled “Resolution Requesting His Excellency President Estrada to Approve the Request of the Oversight Committee on Devolution to set Aside 20% of the LGSEF for Local Affirmative Action Projects and Other Priority Initiatives for LGUs Institutional and Capability Building in Accordance with the Implementing Guidelines and Mechanics as Promulgated by the Committee;” (d) OCD-2000-023, i.e. Adoption of the Allocation Scheme for the P5billion LGSEF for 2000;

164 Supreme Court decided that Congress cannot circumvent the essence of the LGC of 1991 as well as the Constitution which is substantive law against the passage of yearly budget through the General Appropriations Act, which is procedural law. Thus, the Supreme Court decided that the allocation made by the national government and ratified by Congress of the IRA by getting a portion to a separate fund which is the LGSEF defeats the purpose of local financial autonomy as promulgated under the Constitution and the LGC of 1991.

Almost 80 percent of LGU expenditures for administrative operations rely on the IRA. The remaining 20 percent goes to the delivery of basic services and other development programs. 139 This is only proper since the LGC of 1991 under Section 287 mandates the LGUs to appropriate at least 20 percent of their IRA share to financing local development projects.

The purpose of requiring LGUs to provide at least 20 percent, of their IRA is to ensure that aside from delivering basic goods and services the LGUs pursue their developmental objectives. The Implementation Rules and Regulations of the Code, in fact, instructs the LGUs to submit copies of local development plans to DILG for monitoring purposes.

On 23 April 1999, DILG issued Memorandum Circular 99-66 limiting the expenditure of the 20 percent development fund of LGUs to the following items:

and (e) OCD-2002-001, i.e. Adoption of the Allocation Scheme for the P5billion LGSEF for 2001. 139 This is the estimate of the Department of Budget and Management. See also Gilberto M. Llanto, et al, Local Government Units Access to the Private Capital Markets , Philippines: Philippine Institute for Development Studies, 1998.

165 a) Social development such as human and ecological security initiatives (20 percent of the 20 percent). This includes the purchase of fire trucks, patrol cars, jeeps and other relevant equipment for maintaining peace and order; tourism development promotion and other socio-development undertakings supportive of job generation and livelihood opportunities; b) Economic development such as food security program, poverty eradication initiatives, seedlings, nurseries, agricultural demonstration farms and animal breeding stations; cooperatives development; livestock dispersal and fishery development and fish culture farming; and c) Procurement of new heavy equipment only for infrastructure, agricultural and environmental management projects.” 140

With the issuance of Memorandum Circular 99-66, DILG failed to take into account that the LGUs are very diverse with different developmental needs. By enumerating the sectors that will be supported by the development fund, the DILG put forward its inclination on one sector over the other as well as which purchase including its purpose should be undertaken by the LGUs. The LGUs might buy heavy equipment not for their own use but to be rented out to the private sector as part of their resource mobilization. It is also observed that the DILG encouraged the LGUs to procure fire trucks and patrol cars under the social sector. The function of peacekeeping including firefighting however resides with DILG 141 and not with the LGUs. The DILG, in effect, would also like LGUs to share in the performance of the former’s function.

140 Memorandum Circular 99-66. 141 As the Department of the Interior and Local Government

166 Through Memorandum Circular 99-66 on June 15, 1999, the DILG allowed the 4 th and 6 th class LGUs to purchase reconditioned heavy equipment with the following condition: (a) its economic life is not less than 5 years; and (b) the LGU’s plan to purchase said equipment is subject to DILG’s approval.

On August 11, 1999, Memorandum Circular 99-144 was issued allowing the LGUs to use the development fund for peace and order council programs, projects and activities, local government internal capability- building training and related efforts. Similar to the first MC (99-66), the DILG was persuading LGUs to invest in peace and order functions, a responsibility of the former.

Lastly, the DILG effected Memorandum Circular 99-169 on September 9, 1999. In less than a month, the DILG partly revoked MC 99- 144 by again prohibiting the use of the 20 percent fund for local government internal capability building training and related efforts. In a way, the DILG has failed to recognize that improving the capability of the LGUs’ staff is part of their input to development.

The MCs issued by DILG were reinforced by Executive Order 189 by President Estrada on December 21, 1999 requiring the LGUs “to submit their respective Annual Investment Plans to DBM to insure that the 20 percent development fund is appropriated and disbursed by the LGUs for the very purpose or purposes for which such Fund was established.” 142 This administrative fiat from the Executive merely duplicated the function of the Commission on Audit in ensuring that the disbursement of funds is within the latter’s accounting parameters.

142 Ibid.

167 The issuance of the aforementioned Memorandum Circulars (99-66, 99-144 and 99-169) and Executive Order 189 by the national government had the effect of further emasculating the power of the LGUs to use their development fund for appropriate purposes set by law and circumvents the local autonomy being promoted under the new Code. Thus, the LGUs ability to determine firsthand where their development fund would be used is significantly constrained since they are pre-empted on finalizing the appropriate financing mix to achieve their specific development objectives, such as putting more emphasis on human resource investments and less on procurement of equipment and other capital needs.

Share from the National Wealth

There is already a provision in the LGC of 1991 for the LGUs to have a share in the national wealth. 143 It was only in 1994, however, that the national government – through the DBM, was able to include a budget for this provision. The national budget (GAA) in 1994 provided special shares of the LGUs from the proceeds of national taxes including the share in the gross income tax paid by all businesses and enterprise located within the economic zones. The reason cited for the late implementation of this provision was that the DBM needed time to have an accurate accounting of the LGUs’ actual share from the economic zones, the operations of government-owned and controlled corporations, and the use of natural resources within LGU jurisdiction. The case studies in Bataan and Pampanga will expound on this issue.

143 Chapter 2 – Share of Local Government Units in the National Wealth, LGC of 1991. This provision is based on Section 7, Article X of the 1987 Constitution as recommended by Commissioner Blas Ople.

168 Special Purpose Funds Originally, the IRA was supposed to integrate all national government transfers to the LGUs. The concept of the IRA as a block grant was designed not merely to provide LGUs their just share to national income but also to minimize political influence in providing funds to a particular LGU. With the decentralization policy in effect, the issue of equity was raised, specifically the inability of poor income LGUs to provide devolved services to their constituents due to inadequate resources. Thus, aside from the IRA, the LGUs were given a share in the national wealth and other sources of grants from the national government such as Special Purpose Funds, including those funds generated through ODA.

These Special Funds include: (a) Local Government Empowerment Fund; (b) Poverty Alleviation Fund; (c) Countryside Development Fund; and (d) Special Funds supported by ODA.

Local Government Empowerment Fund (LGEF). This was established in 1996 through the General Appropriations Act, or the enacted annual budget. The LGEF is intended for projects supporting national government priority programs and activities in the 19 priority provinces identified under the Social Reform Agenda, and the 5 th and 6 th class LGUs. As indicated in RA 8174 (which enacted the 1996 GAA), the amounts indicated under LGEF “shall be used to implement industrialization projects in the nineteen priority provinces under the SRA to be identified by the Presidential Council on Community Development (PCCD) in coordination with the LGUs and endorsed by the Social Reform Council (SRC) in coordination with the Representative of the legislative concerned.” 144

144 Department of Budget and Management.

169 The SRC was created in 1996 to oversee the implementation of the Social Reform Agenda which was launched on June 4, 1995. The provinces covered by the Agenda were mainly those far from the economic hubs and belonging to the country’s poorest localities. The LGEF was thus conceived as a means to advance the socioeconomic development objective of the national government. From an original list of nineteen provinces covered by the SRA, this was expanded to twenty-six, consisting of: Ifugao, Benguet, Antique, Guimaras, Agusan del Sur, Surigao del Sur, Romblon, Masbate, Negros Oriental, Leyte, Southern Leyte, Biliran, Zamboanga del Sur, North Cotabato, Abra, Mountain Province, Kalinga, Apayao, Sulu, Tawi-Tawi, Maguindanao, Batanes, Aurora, Capiz, Eastern Samar, Basilan.

Poverty Alleviation Fund (PAF). This fund was likewise established in 1996 also through the General Appropriations Act and created for the following purposes: (a) for the scholarship assistance program of Department of Education Culture and Sports (DECS) and State Universities and Colleges (SUCs); (b) hiring of 2,000 additional teachers to be assigned to 6 th class municipalities; (c) additional school desks to be released through Local School Boards for 4 th , 5 th and 6 th class municipalities and cities; (d) direct assistance to farmers in depressed municipalities and barangays; (e) reintegration assistance for returning undocumented Overseas Contract Workers (OCWs); (f) support for the operation of Family Health and Preventive Health Care Program of DOH; and (g) assistance program for distressed and disadvantaged population including slum clearance and urban development program.

EO 363 was signed in late August 1996 issuing the Guidelines on the Allocation and Release of the PAF, which amounted to P4 billion. The Guidelines also reinforced the provision of the 1996 GAA with the

170 designation of seven NGAs 145 that would oversee the implementation of the programs supported by the Fund.

The first PAF experienced low disbursement rate of 2.8 percent of the total budget allocated amounting to PhP 4 billion. Learning from this experience, the subsequent implementation periods witnessed changes in approaches, particularly with the adoption of the Minimum Basic Needs formula. 146 An assessment of the Fund, however, indicates that its effectiveness was hampered by various issues, such as: (a) the late issuance of the Guidelines and Implementing Rules and Regulation (IRR) for the Fund; (b) the poor identification of the project menu; (c) absence of a monitoring and evaluation component; and (d) insufficient preparation of basic counterpart council at the LGU level. 147

The Countrywide Development Fund (CDF). This fund is also commonly called the “pork barrel funds” of the legislators. It used to be a popular source of funding for legislators in both Congress and the Senate to finance their pet development projects in their jurisdictions. While the existence of this “pork barrel fund” is as old as the legislature itself, it was abolished during the Marcos martial law regime and integrated into the annual public works appropriations under the national public works infrastructure plan and program. 148 In effect, this fund, which had been a very contentious political issue because of the connotations of graft and corruption tied to it, was temporarily removed from lawmakers and

145 These NGAs include: Department of Education (formerly DECS), Department of Health, Department of Agriculture, Philippine Overseas Employment Agency-Department of Labor and Employment, Department of Interior and Local Government, Department of Budget and Management, and NEDA. 146 The Minimum Basic Needs approach identifies the basic services that should be delivered to the poor such as housing and resettlement, water and sanitation, health and sanitation, basic education, basic child care and livelihood opportunities. 147 Arsenio M. Balisacan , et. al, Approaches to Targeting the Poor, Diliman, Quezon City: University of the Philippines-School of Economics 2000. 148 Olivia C. Caoili, “Legislative-Executive Relations in the Philippines and the Parliamentary Alternative”, 1994 (monograph).

171 transferred to the executive branch. But this arrangement, however, was short-lived after the Marcos government was deposed in 1986.

The CDF, however, was re-established in 1990 purportedly to finance development projects in the countryside. For these projects to be financed by the Fund, however, these should be supported by the proper studies and documents and integrate the principles of management by objectives and their responsiveness to immediate needs of the people. Under the one-fund budgetary practice of the national government, the CDF becomes a funding source for projects identified by members of the legislative branch to address the priority needs of their constituents at the local level. In any case, the line agencies are the main implementing bodies of the projects.

The DILG, 149 being the supervisor of the LGUs, initially administered the CDF in 1990, particularly in the identification of projects, activities and objects of expenditures for MOOE and community capacity building programs. The capital outlays for infrastructure and other priority projects, on the other hand, were administered by the appropriate implementing agency. Prior concurrence from the President and submission of Work and Financial Plans by the line agencies operating at the LGUs were necessary before releasing the funds. Subsequently, from 1991 until 1992, the administration of the CDF disbursements shifted to the agency implementing the development project, and not just the DILG. Thus, funds for farm-to-market roads would be administered by the DPWH or the DA, rural health centers by the DOH, basketball courts by the DECS, barangay halls and offices by the DILG, and so forth.

149 Formerly the Department of Local Government.

172 The situation changed in 2003 when the function of identifying projects and activities for funding by the CDF was transferred from the line agencies, including the DILG, to the legislators and the Vice President. 150 This arrangement continues to the present. Although the appropriate implementing agencies will still implement the identified projects and activities, the decisions as to where, when and how the funds would be used belong to the lawmakers and the Vice President.

The long-standing perception that the “pork barrel” is a source of graft and corruption is tied to the belief that it also provides a source of kickbacks to the lawmakers who identify and approve local infrastructure projects. But the practice remains essentially the same: the lawmakers identify the projects they want funded from their allocations and where these would be implemented, and the national government agencies execute these.

Attempts to abolish the “pork barrel” funds through the years have been unsuccessful. Through much of contemporary Philippine history, the pork barrel has served mostly as a way for political leaders to corrupt politicians to win their loyalty and get them to support particular political agendas. In the allocation of the pork barrel, corruption is directly tolerated by the higher-ups to secure the support of politicians, especially those who are closer to the local communities from where the votes come. In 1999, President Estrada supported the view of DBM Secretary Ben Diokno that the pork barrel was an inefficient way of spending the people’s money for development and was also inconsistent with policy and practice as functionally and structurally delineated by the Constitution and related

150 For 2002, pork barrel had two sources. This includes (1) the Priority Development Assistance Fund (PDAF) and (2) the Public Works and Highways Fund of the Department of Public Works and Highways (DPWH).

173 policies. 151 Moves were thus undertaken to abolish this fund, but to no avail when the Legislature protested.

To put order in the use of the CDF, the Chief Executive instead used his veto power on three occasions on how the Fund would be processed and used. In 1997, two interdictions were made: one directed the simultaneous release of the Special Allotment Release Order (SARO) 152 and the Notice of Cash Allocation (NCA) 153 within 10 days after the publication of the list of local projects to be funded in lieu of the original process where Congress simply approves the SARO and NCA. The other Presidential order is on the use of unused appropriation or savings solely for development projects earlier identified, particularly for projects in the twenty most depressed provinces 154 in the country, rather than for preferences of legislators that were not earlier identified. This order also sought to instil accountability in the use of funds among all stakeholders, namely the legislators, implementing agencies and LGUs particularly through strict observance of accounting and auditing rules provided by law.

The third Presidential veto concerned the increase of pre- construction activities expenses especially after initial implementation activities have been done. Congress had earlier approved an increase from

151 Former President Estrada articulated that the CDF as a source of pork barrel fund encourages graft and corruption among the policymakers. (“Erap to lower boom on Congress Crooks,”Philippine Daily Inquirer, 27 May 1998, pp. 1 and 18.). 152 According to DBM, the Special Allotment Release Order (SARO) refers to a specific authority issued to one or more identified agencies to incur obligations not exceeding a given amount during a specified period for the purpose indicated. It shall cover expenditures the release of which is subject to compliance with specific laws or regulations, or is subject to separate approval or clearance by competent authority. 153 The Notice of Cash Allocation (NCA) refers to cash authority issued quarterly by DBM to central, regional and provincial offices and operating units to cover the cash requirements of the agencies. 154 The Top 20 provinces include the following: Surigao del Sur, Misamis Occidental, Biliran, Kalinga, Sulu, Antique, Palawan, Sultan Kudarat, Abra, Occidental Mindoro, Camarines Sur, Western Samar, Marinduque, Lanao del Sur Romblon, Davao Oriental, Negros Oriental;, Oriental Mindoro, Bukidnon, Tawi-Tawi (NEDA-Social Development Staff).

174 3.5 percent to 4 percent of pre-construction expenditure after detailed engineering, construction project management, testing and quality control, acquisition, rehabilitation and repair of heavy equipment and other related equipment and parts used in the implementation of the infrastructure projects were completed. The President’s disapproval said: “the increase will effectively reduce the appropriations for the projects. The overhead rate previously adopted shall, therefore, continue to be observed by the Executive Branch until such time that an adjustment becomes necessary.”

Through the years, the allocation of CDF for each legislator and the Vice President has been decreasing. From 1993 until 1996, the Vice President received P20 million a year; the senators received P18 million each; and the House of representatives, P12.5 million each. Starting 1997, the Vice President received P18 million a year; the senators received P10.8 million each; and the House representatives, P11.25 million each. An explanation for the decrease was that the legislators were not able to fully allocate their funds, thereby resulting in losses in opportunity costs. Another reason concerned the need for belt-tightening measures in the face of the fiscal deficit brought by the Asian financial crisis in 1997.

To further promote greater transparency and contribute to the judicious use of the CDF, all proposed projects for funding needs to be published in the major newspapers. Indirectly this requirement has a dual function: it encourages public support for the government since it informs the citizenry where the people’s taxes are being spent; and it supports the perception that government is spending the people’s money wisely. As political scientist Felipe Miranda 155 has noted: “the proper and effective use of the resources collected from citizens has a dual function. On the one

155 Felipe B. Miranda , “Leadership and Political Stabilization in a Post-Aquino Philippines,” Philippine Political Science Journal 33-34 (June 1991-December 1992):142- 221.

175 hand, government expenditures program enhances the support of the citizenry for the government. These two functions are mutually reinforcing. The effective use of public funds for given projects impact positively on the public perception of bureaucratic efficiency, as well as graft and corruption; it ultimately feeds into the public perception of the government’s legitimacy, and to that extent influences the political leadership’s ability to address the more general concern of political stabilization.”

A review of the Countrywide Development Fund, its uses and the procedures for its release and its administration has resulted in the following observations:

1) By providing the CDF as an across-the-board allocation to Legislators, the purpose or function of the Fund has not been served. The CDF has been created supposedly to meet the development needs of the most depressed areas particularly in the countryside. But in terms of distribution, there has been no distinction in CDF use between the more affluent LGUs and the poorer (5 th to 6 th income class LGUs) areas that need development assistance more. 156

156 According to the study on “Public Goods and Local Governments: A General Theoretical Analysis” by Pauly, ‘the provision of a public good by politically separate local governments has resulted in a number of contradictory conclusions’ 156 . Some considered it redistributive while others considered it non-redistributive. To quote, any increase of satisfaction or utility of one local community, you need to get from another local community”. Thus, Pauly proposed the following assumptions: (1) a good is provided through taxes and government expenditures in 2 politically separate community; (2) these community maximize net benefit in the sense that given the quantities of the good provided and the taxes charged, there is no change within the community that can make everyone in the community better off; (3) the marginal tax for every individual equals a measure of the marginal benefit to him of the publicly provided good; and (4) the good is produced and sold at constant cost and that it is a normal good. Mark V. Pauly, „Optimality, ‚Public’ Goods and Local Governments: A General Theoretical Analysis,“ Journal of Political Economy, University of Chicago, vol. 78, no.3, May/June 1970, pp572-585.

176 2) The arrangement on the use of the CDF clearly violates Constitutional principles on the roles of each of the government’s branches. With the CDF, the Legislative branch has a dominant say on the use of the Fund, although this role is supposed to be solely a prerogative of the Executive branch. An investigative report on the Fund has this to say: “The Constitution is clear that the executive branch shall identify the projects and prepare the budget, while Congress agrees on the priorities and authorizes the spending. But the reverse takes place on discretionary items in the budget – individual members of Congress prepare the projects while the executive screens through cash rationing.” 157

As hypothesized earlier, the determination of who will administer the CDF is influenced less by the assigned function of directly delivering goods and services and more by the assigned function of legislation; 3) This shift of roles has likewise resulted in the ambiguity of the Philippines’ position, in terms of policy orientation, specifically the devolution policy. Responsibilities have been devolved to the Local Chief Executives (LCEs) but this position is made more untenable by legislators who would like to maintain the ownership of projects and activities that were initially identified by their office to be funded from CDF; 4) On hindsight, it is probable that the orientation of the people who benefit from the infrastructure projects financed by the CDF has focused more on the legislator as administrator of projects

157 Eric Gutierrez, “The Public Purse,” Pork and Other Perks: Corruption & Governance in the Philippines, Sheila S. Coronel, ed. (QC: Philippine Center for Investigative Journalism, Evelio B. Javier Foundation, Institute for Popular Democracy, pp. 56-81, 1998.

177 and activities and less as policymaker. As proposed by von Hayek, there is a need to distinguish between legislation proper and decision-making on government spending, administration and regulation. 158 There is a need to realize that policy-making and execution are two different functions by two different departments. Although the people directly elect both branches, the existing structural functional set-up needs to be clearly delineated to strengthen the existing institutions. Moreover, the institutional arrangements should be re-affirmed by the leadership of both the Executive and Legislative branches to ensure compliance from the people; and 5) The Executive, through the exercise of its veto power, has managed to guard against probable inefficiencies in the use of CDF. This practice, however, requires paper pushing by concerned departments. Thus, additional effort is required against possible wastage, in lieu of pro-actively planning and programming future activities. In addition, it is necessary to leave the COA in carrying its task of accounting and auditing on fund disbursements, in order to lessen the administrative burden of submitting reports to the oversight agencies.

The legislators, based on the deliberation of the budget from 1990 onwards, have put it on record that they would not easily surrender their prerogatives over pork, including the CDF. While the Supreme Court has said that there is nothing legally wrong about the practice of Legislature in identifying projects and activities, the issue remains that there should be coherence between the Constitutional mandate and the other related laws and policies relative to annual budgetary practices.

158 Claus Wihlborg, Book Review on Law, Legislation and Liberty: A new Statement of the Liberal Principles of Justice and Political Economy, vol. 3: The Political Order of a Free People by Friedrich von Hayek, in Journal of Political Economy, vol. 89, no.3, June 1981, pp. 603-608.

178

Further analysis of the CDF regarding implication to decentralization policy using case studies at provincial level is discussed in the next Chapter.

Foreign grants or grants from ODA. Another external source of funds for LGU development initiatives are those special project funds financed through foreign grants or grants from ODA. The Municipal Development Fund (MDF) not only provides loans to LGUs but serves as administrator of ODA grants. There have been seven projects funded through grants with the DOF-MDFO as the main conduit. Of these seven, one project entitled Second Kennedy Round (KR-2) – a commodity grant monetized by the Philippine Government – is a pure grant from the Government of Japan through Japan International Cooperation Agency (JICA) with the Department of Agriculture as the executing agency. The rest are loans negotiated by DOF but which consist of sizeable grant components to be extended to poor LGUs, particularly those belonging to the 5 th and 6 th income classes. 159

These include: (a) Agrarian Reform Community Development Project, a loan from World Bank executed by Department of Agrarian Reform; (b) Agrarian Reform Communities Project, a loan from Asian Development Bank also executed by DAR; (c) Early Child Development Project, loans from both ADB and WB executed by DSWD; (d) Mindanao Regional Development Project, a loan from WB executed by DA; (e) Secondary Education Development Improvement Project, a loan from Japan Bank for International Cooperation executed by Department of Education (DepEd); and (f) Third Elementary Education Project, loans from both WB and JBIC are also executed by DepEd. The total amount of the loans is US$459 million. The amount channelled through MDFO to be extended to

159 Interview with Mr. Rey Gerona, In-House Consultant in Planning, Japan International Cooperation Agency (JICA), Makati City 30 July 2001.

179 LGUs as grants is US$326 million. There are 1,147 cities and municipalities, which benefited from the grants administered by DOF- MDFO and executed by national government agencies. 160

As discussed earlier, the grant facility has also been mixed the loans (also known as “financing mix” of loan-grant-equity) in order to encourage LGUs to accept the loan and undertake capability-building programs to enable them to take the responsibility to undertake devolved activities.

During the implementation of decentralization, the donors likewise adopted measures to adjust to policy changes. In particular, they initiated and supported training programs for the LGUs through grants to finance the provision of technical experts, an enabling environment for dialogues or workshops, and the supply of equipment. Four major bilateral and one multilateral, grant providers have been identified: Japan International Cooperation Agency (JICA), United States Agency for International Development (USAID), Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) and Australian Agency for International Development (AusAID) and the United Nations for Development Programme (UNDP).

The JICA, however, actually began giving grant assistance as early as 1989, particularly for the grassroots. This assistance, obtained through the Japan Ministry of Foreign Affairs and processed by its Embassy in Manila, provide grant funds amounting to US$30,000 for livelihood and other projects in the LGUs as well as NGOs in the grassroots. By 1991, the agency adjusted some of its systems to address the policy changes brought about by decentralization. It conducted regional and national orientation seminars to appraise the national government agencies, LGUs, and non-

160 From the database of NEDA-Project Monitoring Staff.

180 government organizations (NGOs) on how to avail assistance from JICA as well as Japan Bank for International Cooperation (JBIC). JICA provided grants through technical assistance and supply of equipment. JBIC 161 , on the other hand, provides loans to developing countries. Another change is in the content of the Agency’s request survey in 1995. JICA developed the document for the LGUs to ensure that documents submitted for grant assistance are quality-oriented. Proposals were solicited from the LGUs in a five-month period through DILG, in coordination with Public Investment Staff of NEDA.

Despite these efforts and intentions, the implementation arrangements are still central government-oriented. The NGAs continue to have the advantage in the packaging of technical proposals and projects that, as a result, a bulk of recipients of JICA grants came from the central government than the LGUs. One reason for this could be the JICA’s concern with the LGUs’ capacity to provide counterpart funds to address operations and maintenance needs after the projects have been implemented. The Grant-Aid Program of JICA consists of construction and the provision of equipment that is tied to Japanese suppliers and contractors.

An example of a JICA-supported project funded mainly through grants that has met problems of operations and maintenance is the supply of road equipment for the Southern Philippines Zone of Peace and Development (SZOPAD). While the LGU beneficiaries of this grant were supposed to obtain – through duty-free importation, of the heavy equipment and machineries, it could not simply do so when this privilege was suspended after the government adopted economic measures in response to

161 JBIC (Japan Bank for International Cooperation) started to package projects for LGUs only in 2002. Thus, JBIC representatives were not inclined to be interviewed for this study.

181 the Asian financial crisis of 1997. The LGUs simply could not raise the counterpart funds to pay the importation dues for the purpose. The local governments subsequently turned to the DILG for exemption from this suspension, a request that was eventually submitted to the President. 162

Another example is the supply of hospital equipment for the Benguet Medical Hospital in 2000. Again, because of the lack of funds to pay the importation and other customs duties, the hospital equipment stayed in custody of the Bureau of Customs for three to four months. Moreover, the necessary documentation took time to process before the vital equipment could be finally released.

Despite the JICA’s concern with the capability of LGU recipients of grants who come up with their equity counterparts, most of the recipients of its grant assistance are cities. The construction of the multi-purpose building for the Cebu Economic Enterprise Development is an example of grant support from JICA. The agency, however, asserts that it has no geographic preferences in terms of grant recipients. It appears, however, that the application process is more request-based and demand-driven. Moreover, the JICA seriously considers security issues, specifically on Mindanao island, as a factor that could discourage its support. The agency expressed preference for localities with fewer security risks. This explains why LGUs like Metro Manila and other cities devoid of armed conflicts are favored by the JICA for its grant releases.

After JICA, the USAID is the second highest grant provider to the Philippines. In support of decentralization, the USAID financed the Governance and Local Democracy (GOLD) Project in 1992. The GOLD

162 Interview with Mr. Rey Gerona, In-House Consultant in Planning, Japan International Cooperation Agency (JICA), Makati City, 30 July 2001.

182 Project is considered to be demand-driven where LGUs directly ask for technical assistance through short-term trainings, preparation of policy papers, and dialogues. A Project Steering Committee was created to evaluate the applications of LGUs for grants. The LGUs through the Leagues of Provinces and Municipalities were involved in the setting up of the criteria for selecting LGU beneficiaries. The GOLD-USAID consciously avoided involvement of the NGAs due to the existing tension between LGUs and national government in the early years of the implementation of decentralization. Decentralization had been still a very sensitive issue especially for the NGAs. Nonetheless, the USAID considered the NGAs as a major player in decentralization due to their existing technical capability. For the GOLD project, the NGAs cited for their important roles in project implementation included the NEDA, the DILG, and the Civil Service Commission. The NEDA, for its part, had been involved in strengthening the Project Development Assistance Council (PDACs), which should have been the role of DILG. 163 The Civil Service Commission was involved in the selection of programs on best practices in governance while the DILG coordinated the administrative aspect of the project. 164

The USAID tries to achieve a balance between geographic and sector-based factors in the conceptualization of its projects. It has, in fact, supported the Economic Governance Project with the Department of Environment and Natural Resources (DENR) as the lead implementing agency. The agency sees itself as a pioneer development assistance agency to influence other donors. It has thus initiated the annual Donors’ Forum which gathers all donor agencies – both bilateral and multi-lateral, to

163 The DILG was quite new as an institution supervising LGUs during that time. 164 Interview with Program Manager Napoleon de Sagun, United States Agency for International Development (USAID), Manila, 2 August 2001.

183 discuss overall assistance to the Philippines. The USAID alone maintains its assistance to the Philippines at around US$75 million annually. 165

The German Development Cooperation (GTZ), the third largest grant provider, also supports decentralization. It has, however, expressed concerns similar to that of other donors on the risks of providing direct assistance directly to LGUs. The GTZ has thus proposed the inclusion of risk assessment to determine the capability of the LGUs in directly accessing ODA assistance. Thus far, the agency has been channelling its resources for local projects through the NGAs. Nonetheless, the GTZ was among the first donors to respond to decentralization initiatives. In particular, it supported the implementation of Bondoc Development Program in Quezon province beginning 1990, prior to the enactment of the LGC of 1991, until 2003. Despite the security concerns in Bondoc Peninsula, which has long been a stronghold of the Maoist New Peoples Army (NPA), the GTZ continued its grant assistance to the area. The Program was eventually merged with the Integrated Area Development (IAD) program of the national government, with the Provincial Government of Quezon as the Executing Agency. Thus, even after the involvement of the GTZ ended in 2003, the national government continued to support development initiatives in the region. The Quezon Provincial Government, in order to ensure sustainability of its development initiatives in this income-poor area, came up with a new project proposal entitled “Progressive Action for Rural Development Special Project (PARuDEP).

Today, the GTZ – in order to maximize its scarce development resources, concentrates its grant assistance to the Visayas island group,

165 The USAID considers that the level of development of the Philippines is better than other developing countries.

184 particularly Regions 7 and 8. It has found it more practical to focus than to spread resources to achieve economy of scale. 166

The AusAID, the fourth largest grant provider, has assisted the LGUs through the Philippines-Australia Community Assistance Program (PACAP) and the Philippines-Australia Local Government Support Project. It has entered into a co-financing arrangement with the ADB for the Philippine Regional Municipal Development Project (PRMDP) for capacity building projects of the LGUs. While the agency foresees broader involvement with LGU concerns, it has been encouraging local governments to improve their capabilities to directly negotiate for grants and address the weaknesses in the institutional structure of the LGUs 167

With regard to the LGUs’ main multilateral donor, the UNDP has affirmed its policy support for the Philippines’ decentralization effort. Like other donors, the UNDP expressed doubts on the LGUs’ capacity to absorb ODA. In particular, UNDP considers that the current institutional arrangement with NGAs is clearer than with that of LGUs because of the UNDP’s long partnership with national government in the implementation of ODA-assisted programs and projects. Nonetheless, the UNDP is trying to look at some mechanisms on how the LGUs can directly access the funds. UNDP, however, is considering an increase in administrative cost should individual LGUs access the funds from UNDP due to the absence of economy of scale under such arrangement. Thus, the agency is proposing that the LGUs submit their proposals through their respective organizations,

166 Interview with Dr. Herwig Mayer, Decentralization Program Adviser, Gesellschaft für Technische Zusammenarbeit (GTZ), Pasig City, 3 August 2001. 167 Interview with Counselor Peter Smith, Australian Agency for International Development (AusAID), Makati City, 1 August 2001

185 such as the League of Cities, the League of Municipalities, or the appropriate group. 168

To support development initiatives in Mindanao island, the UNDP has set up a special office in Mindanao specifically to administer multi- donor assistance. UNDP is the coordinator of resources from other donors for the development of Mindanao. It has also established the Global Environmental Facility that caters to environmental concerns of LGUs and communities especially under a decentralized structure.

After reviewing the expenditure and income patterns as well as sources of income of LGUs including their relationship with the National Government income and expenditure patterns, the impact of inflation to the national revenues and the consolidated LGU income will be assessed.

As indicated in Tables 3:18.1 and 3:10.1, the revenues collected at the national level and the LGU nationwide when inflation was considered do not impact positively on real growth. This further implies that the income at the national level can not support the increase in prices. This further implies that the income at the national level and the LGUs on the average was not able to keep up with inflation. In the same manner, the national government collection for distribution to LGUs is not enough to induce real growth both at the national and local levels.

168 Interview with Dr. Emmanuel Buendia, Programme Manager Governance and Enabling Government, United Nations Development Program, 3 August 2001, Manila.

186 Table 3:18.1 : National Government Cash Budget and Real Growth Year Revenues Inflation Rate Real Growth (measured using (in Million Pesos) (in Percent) the following {Income 1/Inflation1) – (Income2/Inflation2) (in Percent) 1988 112,861 1989 152,410 1990 180,902 1991 220,787 0.16 -1,951 1992 242,714 0.085 -864 million 1993 260,405 0.070 -703 million 1994 336,160 0.076 982,967,418,546 1995 361,220 0.105 -3,636,million 1996 410,449 0.058 -1,201 million 1997 471,843 0.057 3,955 million 1998 462,515 0.107 -4,072million 1999 478,502 0.057 595 million 2000 514,762 0.066 -5,950 million 2001 563,732 0.041 -1,089 million Source: 2002 National Statistical Yearbook

Table 3:10.1 Consolidated Income 1991-2001 - Provinces,Cities, Municipalities (in Pesos) and Real Growth Income Inflation Rate Real Growth Year 1991 23,982,137,633 0.16 1992 27,703,572,094 0.085 -1,951 1993 44,346,751,731 0.070 -307,600,647,163 1994 57,353,281,069 0.076 -121,123,410,379 1995 66,489,122,473 0.105 121,418,697,272 1996 77,343,624,431 0.058 -700,281,028,212 1997 94,674,165,462 0.057 -327,439,505,206 1998 102,796,979,889 0.107 700,230,833,045 1999 121,550,241,984 0.057 - 1,171,740,947,472 2000 138,031,251,574 0.066 41,077,786,078 2001 138,609,204,126 0.041 - 1,289,329,696,145 Average 81,170,939,315 0.080 -305,478,792,013 Source: DOF-BLGF Statement of Income and Expenditure Reports

187

Evaluation of LGC and LGU Performance

The LGC of 1991 mandates Congress to review the Code at least once every 5 years and as often as it may deem necessary in order to provide a more responsive and accountable local government structure. 169 While decentralization continues to be implemented for more than a decade now, the Congress has not yet undertaken a single thorough review of the Code, except for a 2001 enactment that calls for an increase in the income of any municipality desiring to be converted into a city.

With regard to evaluation of LGU performance within the context of decentralization, the DILG – through UNDP assistance, devised the Local Productivity and Performance Measurement System (LPPMS) in 2000. This system is a self-administered instrument wherein the LGUs rate their own performances. It consists of questions pertaining to: (a) inputs and process, i.e. performance measurement; (b) outputs, i.e. productivity measurement or evaluation of service delivery; and (c) outcome, i.e. assessment of service delivery outcome. The LGUs submitted their filled-up LPPMS forms to DILG in 2000. 170 The JBIC Agricultural Sector Study shared the accompanying processed data during its final report workshop on August 8, 2003 with participants from government and non-government organizations.

Approximately 80 percent of the LGUs submitted their filled-up forms to DILG. In particular, Table 3-25 summarizes the submission of LGUs.

169 Local Government Code of 1991, Section 521: Mandatory Review Every Five Years. 170 The DILG, however, has not yet analyzed the raw data nor published a Report for the purpose.

188

Table 3-25: LGU Submission

LGU Level Number of LPPMS Percentage Submission (%) Province 61 77 City 71 76 Municipality 1,027 81 Total 1,159 80 Source: DILG, 2000; and JBIC

Agricultural Sector Study, 2003

The DILG cited in its request from LGUs that the purpose of the LPPMS form is to help LGUs to gauge themselves, particularly on measuring their performance. Most LGUs, however, claimed that they were not involved in designing the LPPMS form. The results of the LPPMS show the following,: a) on the average, 78.2 percent of LGUs claim having a 100 percent compliance with prescribed number of mandatory offices (Figure 3- 13); b) a lower average equivalent to 56.6 percent of LGUs claim that they have a 100 percent compliance in filling up the prescribed mandatory positions; c) a total of 74.3 percent of LGUs assert that they have 100 percent compliance with the prescribed local special bodies (LSB) (Figure 3-14). In particular, the compliance with prescribed membership in the Local Health Board posted the highest average of 89.2 percent followed by the Peace and Order Council, the Local School Board and People’s Law Enforcement Board. Compliance with the prescribed membership for the Local Development Council and Local Prequalification, Bids, and Awards Committees (PBAC) garnered a lower average. The LGUs therefore prefer having social and security council over economic and developmental council;

189

190 Figure 3-13: Compliance to Prescribed Offices, Positions, Local Special Bodies (LSBs)

100 97.3 Province (%) 83.6 City 82 78.3 78.2 75.4 74.3 72.6 72.5 Municiality

Total

55.8 56.6 53.4

0 100% Compliance with 100% Comliance with 100% Compliance with the Prescribed No. of Prescribed Mandatory 6 Prescribed LSBs Mandatory Offices Positions Filled Up

Source: Department of Interior and Local Government; Japan Bank for International Cooperation

190

Figure 3-14: 100% Compliance with Prescribed membership of the 6 Local Special Bodies (LSBs):

Source: Department of Interior and Local Government Japan Bank for International Cooperation

191

Figure 3-15: Inventory of Local Fiscal Administration Process Indicators

Source: Department of Interior and Local Government

192

3-16: Partial Inventory of Economic Services Indicators

100 96.7 93.5 (%) 90.6 Province Figure 3-21: Partial86.9 Inventory of Economic Services Indicators

78.7 79.8 M uniciality

56.6

9.1 5 6.6 1.6 3.5 0 P resence of P resence of LG U Inc. in M arket P ercentage of P ercentage of P ercentage of A griculture- Livelihod Prog. Fees Collected Local Roads Local Roads Local Roads

S upport Services M aintained by M aintained by M aintained by

LG U LG U LG U a) 50% and above b) Below 50% c) 0% Source: Department of Interior and Local Government, JBIC

193

Figure 3-17 Inventory of Programs and Projects Implemented by LGUs

100

(%) 88.5 Province

M uniciality 75.5

6.6 6.5

Social Dev't. Program s Econom ic Dev't. Progaram s

Source: Department of Interior and Local Government Japan Bank for International Cooperation

194

Figure: 3-18 Projects by Source of Funding

100 (%)

80.3

75 Province 69.8 66.8 City 54.8 52.5 M uniciality 50

34.4 30 28.7

25 20.3

0 P resence of grant Rcvd. By LG U Presence of Local/For eign Credit P resence of LG U -Bus. Sector Joint Financing Venture

Source: Department of Interior and Local Government Japan Bank of International Cooperation - Agriculture Mission, 2003

195 ,

172 d) 90 percent of provinces and cities, and 83.2 percent of municipalities affirmed that their annual budget was approved within the budget calendar year (Figure 3-15); e) About 68.9 percent of the provinces, 78.1 percent of the cities, and 52.4 percent of the municipalities confirm that they have an annual revenue plan; f) With regard to the existence of the local revenue code, 73.8 percent of the provinces, 91.8 percent of the cities, and 74.5 percent of the municipalities confirm having possession of copies of the code. g) A lower average was recorded for those LGUs having a computer-based financial management system: 52.5 percent of the provinces; 43.8 percent of the cities, and 16.3 percent of the municipalities; h) Majority of the provinces and cities confirmed that their expenditure is less than their income; and i) An average of 70 percent of both provinces and cities asserted that they pay their loans on time. Only 41 percent of the municipalities interviewed, however, pay their loans on time.

In terms of economic services indicators (Figure 3-16), the provinces and municipalities posted a high average in the provision of agriculture-support services as well as LGU livelihood programs. More than half of the municipalities confirmed increases in market fees collected. Only 5 percent of the provinces interviewed, however, experienced increase in market fees collected.

With regard to the inventory of programs/projects implemented by LGUs (Figure 3-17), majority of provinces and municipalities supported social development programs. LGU support for economic development programs lags behind with a 6.5 percent average. Majority of the LGUs, therefore, perform more of their traditional role, i.e. providing social services, and less on assuming the role of economic movers.

In terms of source of funding, majority of LGUs confirmed that they received grants (Figure 3-18). More than half of the provinces and cities affirmed they availed of local and foreign credit financing. Only 30 percent of the municipalities interviewed,

196 however, say they sourced funds through loans. A lower average was also posted on the presence of LGU-business sector joint venture – 34.3 percent for the provinces, 28.7 percent for cities, and 20.3 percent for the municipalities.

With regard to the efficiency of delivering devolved services, the Study of Thomas Kamffmeyer, et al affirms that overall the efficiency of delivering basic services has increased in many ways.172

As indicated in the expenditure of the Local Government Units, services have been continuously prioritized.

In terms of client satisfaction, however, the 2001 World Bank study using a report card 174 reveals varying results. In particular, these are only some the identified areas where LGUs are heavily involved. In the health sector, where majority of personnel were devolved to LGUs, indicates that the non-poor use health facilities more than the poor. Even if a big chunk of the LGU budget is dedicated to health services, the public primary facilities, which offer low cost, are noted for low/inferior quality. 175

In the elementary education, where the LGUs at the provincial level may undertake construction of school-building, indicates that public schools are low in cost but inferior in quality. The Study also affirms that drop-outs are mostly from poor families. Related to this is the confirmation that public elementary education is far from free as it involves other costs, such as miscellaneous fees and donations aside from daily allowance of students. 176

172 Thomas Kamffmeyer, et al. Financing Local Development in the Decentralization Process of the Philippines – The Case of Cebu. Reports and Working Papers 7/1998, German Development Institute, Berlin 1998. 174 A report card is a means by which citizens can provide credible and collective feedback to public agencies about their performance. www.worldbank.org/Documents/Events/2001/Report_Card_Surveys/report.pdf . 175 www.worldbank.org/Documents/Events/2001/Report_Card_Surveys/report.pdf. 176 Ibid.

197 With regard to provision of water supply - levels I 177 and II 178 as devolved activities - the water becomes contaminated since the household has to store it for a longer period of time. The rural communities and Mindanao are under-served.

From the studies cited, it can only be concluded that the poor are not fully benefiting from and satisfied with decentralization. Since the poor are primary users of the public facilities (e.g. public hospitals, schools and water utilities), upgrading of these facilities may benefit the poor.

Summary and Preliminary Analysis

From the review of the LGC of 1991 vis-à-vis its actual implementation, the following observations are put forward:

1. On personnel decentralization, the LGUs maximize their power of appointment by filling-up the mandatory positions and even go beyond what is provided in the law in order to meet the current challenges, particularly that meeting the demands of an increasing population. With regard to the number of personnel among NGAs, there has been no drastic change. The NGAs even regained the personnel after devolution. The situation might have defeated the purpose of re-engineering and/or streamlining the bureaucracy, particularly in national government.

The power of recall given to the LGUs is also an open debate, particularly on the question of legitimacy. Considering that the local chief executives are directly elected by the people, the act of delegating authority to those officials elected through the recall process over those originally elected in the regular elections, has two-pronged implications. One is that the recall process may undermine the results of the regular elections and may thus contribute to further political instability which is considerable due to the short term of office of only three years for elective local government positions.

177 Level I is a point source, e.g. spring or protected well. 178 Level II is a piped system with community faucets.

198 The other is that recall is an exercise of democratic procedures by introducing elements of plebiscitary democracy, thereby reflecting the genuine will of the people in response to poor performance by the officials.

2. On functional devolution , the LGUs prioritize personnel needs (through manpower and personnel services) in the performance of the devolved activities over other expenditure items. The local governments, in practice, have actually been apportioning more than half of their income to personnel services. The LGUs need to have motivated personnel because human resource is also part of LGU resources. On the other hand, the capital outlay and maintenance and operating expenses of LGUs run the risk of being neglected. It should thus be brought to the attention of LGUs the provision of infrastructure support enhances economic growth over the long term.

Because of less financial attention for infrastructure and other development needs, the LGUs depend largely on the national government for the provision of financial, technical or other forms of assistance. The NGAs thus maintain a strong presence at the LGU level to augment the said needs. The budgets of the NGAs, particularly those supposedly devolved to the local governments, indicate mixed trends. Some NGAs continue to maintain some of the functions that should have been devolved to LGUs while either staying out of other functions already devolved. For example, the DA maintains field or extension services despite its being a devolved activity and having supposedly devolved the extension workers.

Several legislative measures concerning supposedly devolved activities have also been adopted that eventually strengthened the NGA presence at the local level. Examples are the Magna Carta for Health Workers, the Agriculture and Fisheries Modernization Act, and the creation of the National Anti-Poverty Commission. The national government has justified these measures to integrate all efforts and avoid inefficiencies in the use of resources needed for the implementation of the devolved services and functions.

199 Conflicts have also arisen as a result of unchanged paradigms and the still unclear delineation of roles and functions, including the delivery of basic social services. The delivery of basic services devolved to LGUs is an example. Since most LGUs have long been practicing dole-outs as a result of past policies of the national government, they are now obligated to reverse such practice. Thus, by putting an economic value to public goods in order to recover costs, local executives are faced with politically unpalatable choices that may affect their terms in office.

There is also the poor analysis of certain situations that led to poorly-crafted decisions. Thus, some so-called solutions to problems brought by devolution actually did not solve such problems but either made it worse or resulted in development inertia. Examples include the re-nationalization of hospitals, and continued reliance of some LGUs on the NIA for their irrigation system needs. The NGAs’ concern focused more on observing proper procedures and less on transferring of knowledge and skills to LGUs. This situation has also led NGAs to refer to LGUs as “beneficiaries” of locally-based programs and projects, rather than as “partners,” thereby resulting in poor ownership by the LGUs over the projects. Some LGUs, therefore, have become less inclined in providing counterpart funding to ensure sustainability of projects secured for them by the national government. In terms of timing, some of the selected NGAs that devolved their activities and personnel to LGUs have been late in coping with policy changes and thus continue to maintain what should have already been carried out by the LGUs. As a result, rather than focus their energies on regulatory functions, some NGAs, including the DA, continue to perform as service providers.

3. On fiscal decentralization , substantial financial powers have been provided to LGUs by the LGC of 1991 as the enabling law. The trends in local financing, however, show that the LGUs will continue to rely heavily on external sources of revenues, particularly the IRA. In terms of expenditure, administering LGU affairs in general government, including public welfare and internal safety, is the biggest user of LGU income. In contrast, expenditure for economic development is quite meager.

200

Ironically, the LGUs –compared with or unlike the national government - often report surplus or savings after the end of every fiscal year. This could be interpreted that the LGUs are managing their fiscal resources quite well. But then, the surpluses and savings could also indicate inefficient use of resources for more productive activities since the LGUs could undertake prudent and calculated risk to invest their income on more wealth-creating activities. It could also be that the LGUs may not have available projects that are attractive enough to finance and that they are not able to disburse funds allocated to them.

Some provisions in the Code also constrain the LGUs from pursuing possible revenue-raising activities. Because of this, the local governments are unable to: (a) determine the kind of development that they like to pursue which hinge on land development which require land reclassification decisions; and (b) adjust the rates of taxes that could be imposed on businesses and properties, and other taxable sources.

The LGUs may have a share to national wealth. The LGUs, however, are also tasked to carry out the management of externalities, such as environmental degradation and other negative effects of wealth-creating activities and other investments mainly by the government, including the special economic bodies and Government-Owned and Controlled Corporations (GOCCs). The LGUs also do not enjoy the concessionary features of ODA such as the pass-on rate of government financial institutions and the Municipal Development Fund Office (MDFO) which are relatively lower than the market rates. The administrative burden of going through the Investment Coordination Committee (ICC) procedures and other administrative hurdles discourage the LGUs from participating in long- or medium-term national government projects financed by ODA. Another source of discouragement is the long gestation period for these projects that usually go beyond the three-year terms of local chief executives. Moreover, the impact of project at the local level using the national government framework is also not clear.

201 With regard to IRA intercept by the national government oversight agencies, the LGUs chose to defer to the Supreme Court as an appropriate venue of resolving challenges on local fiscal autonomy. The Supreme Court upheld the local autonomy principle through court decisions supportive of the concerns of the LGUs. The court decisions are encouraging in so far as they show that the system of checks and balances on the Philippine political system is working. Moreover, it taught the national government the lesson that a “creeping” re-centralization through gradually depriving LGUs of funding will neither be tolerated by LGUs nor by the highest judicial body of the country. The case also suggests that LGUs are well organized to defend the rights provided to them by the Local Government Code of 1991.

Some LGUs have also been lukewarm in the IRA intercept administered by Municipal Development Fund Office (MDFO) and government financial institutions and continue being so. The Memorandum of Agreement and Council Resolutions defining the relationships between the national government and LGUs have not been effective to enhance arrangements that are mutually beneficial. Some LGUs subsequently renege on their obligations to continue projects with ODA financing because of the inability to fulfil certain conditionalities such as the provision of counterpart equity. There are also disagreements between the LGUs and the oversight agencies, particularly DBM and DOF, regarding the use of counterpart funds particularly on whether to maintain unused funds for other projects or revert these back to the national government, care of the Bureau of the Treasury.

The LGUs are also constrained from developing relationships with the private sector because of administrative directives from the national government that limits deposits and other financial transaction matters to the government financial institutions. Private involvement with LGUs in the pursuit of public infrastructure and related services has rather been late. The creation of the LGU Guaranty Corporation in 1998, nonetheless, opens up possibilities of greater LGU-private sector partnerships. There is, however, the perception of national government control and interference in such partnerships

202 considering that 49 percent of the capital equity in the LGUGC is owned by the Development Bank of the Philippines, a government financial institution.

The LGUs, however, continues to look for alternatives to push their respective development agenda within the framework of the Local Government Code. One such alternative has been the conversion of municipalities – particularly those that are rapidly urbanizing, into cities. Through conversion, these LGUs can avail of larger shares of the IRA. But then, the IRA itself could be counterproductive within this context. The dependence on IRA shares may actually preclude some LGUs from looking at other means of strengthening their internal revenue structures. In addition, the current IRA formula of population, land area and equal sharing does not inculcate competition on the part of the LGUs to work hard in mobilizing other financial resources.

From the result of the Local Productivity and Performance Measurement System (LPPMS), the LGUs themselves confirm that they have not been able to transform themselves into self-reliant political units that not only provide basic services to their constituents but also develop into engines of economic growth by effectively serving as prime movers of local enterprises.

What is incorporated in this section may only be a preliminary assessment. The subsequent chapter on the cases of Bataan and Pampanga provinces may provide more specific details on specific factors affecting LGU resource mobilization.

203

CHAPTER 4

Case Studies on Decentralization: the Provinces of Pampanga and Bataan

While the previous chapter provided a macro-perspective on the effort to institute decentralization in Philippine governance, this chapter will try to discuss how decentralization has worked at the local level, with focus on the two provinces of Bataan and Pampanga. The discussion shall define whether or not the two local government units were effective in carrying out their development initiatives through the mobilization of their financial resources.

The provinces of Bataan and Pampanga were selected as this study’s cases in point for at least three reasons: (a) both provinces are considered middle-class provinces in terms of income and status, and aptly represent the median LGUs – neither affluent, nor impoverished; (c) their proximity to Metro Manila, which makes for broader and more reliable access to information relevant to the study; and (c) the presence of financial resources that are unavailable in several other provinces, specifically share to national wealth, such as special economic zones and similar bodies. The comparison also rests on the assumption that in economically more advanced regions, decentralization reforms have a better chance to succeed than in poor regions where local governments operate on severe capacity constraints.

Both provinces are part of the Central Luzon region and have generally well- developed infrastructure. Pampanga, particularly its capital San Fernando, is the seat of regional administrative government for Central Luzon and is therefore the headquarters of the regional field offices of all national government agencies in the area. It is also the host province for the Clark Area Development Authority, a special economic zone.

204

Bataan, on the other hand, hosts the Bataan Export Processing Zone which is administered by the national government through the Philippine Export Zone Authority (PEZA). Thus, both provinces enjoy more substantial share from the national wealth, unlike several other provinces with no such special economic bodies.

Both provinces also had similar experiences in re-centralization, or situations when they are forced to revert to the national government certain devolved functions or facilities. Bataan had the management of its provincial hospital re-centralized to the national government. Pampanga, for its part, re-centralize the administration of the collection of taxes and fees for quarrying and mining.

Chapter 4 is organized into four sections. The first describes the geographic context of the two provinces as well as their respective trends in the mobilization and use of its income. The second and third sections focus the discussions on each province, with a deeper examination of the experiences of selected municipalities in resource mobilization and use. The fourth section, through comparison and contrast between the provinces and among the municipalities, hopes to provide a systematic analysis on their decentralization experiences particularly on fiscal management.

The Central Luzon Region

The Central Luzon region consists of six provinces: Bataan, Bulacan, Nueva Ecija, Pampanga, Tarlac and Zambales. The geographic proximity of the region to Metro Manila has enabled the region to receive ample development benefits from the national government, particularly in infrastructure support. In fact, the transport infrastructure linking the region to Metro Manila, such as the North Luzon Expressway is one of the most modern, which cannot be said of other highways in the country.

The spill-over trend continues to this day as Metro Manila – in its attempt to decongest its already overpopulated boundaries and its physical carrying capacity - is

205

moving out its power, transport facilities like air and sea ports, and certain industries to the neighboring areas. Thus, power transmission facilities have been constructed in Pampanga and Bataan, world-class seaports in Bataan and Zambales, and an international airport in Pampanga.

The towns within the region have benefited from this situation. Aside from better transport and other infrastructure facilities, the region has vast prime agricultural lands and rich aquatic and marine resources. The good transport links provide a faster way of moving the region’s varied agricultural products to Metro Manila and its export markets. The region’s development is also attributed to their having hosted two former U.S. military bases: Clark Airbase in Angeles City and Subic Naval Bay in Bataan and Zambales. The facilities left by the U.S. military forces in 1992 provided the foundation for the development of economic enterprises in the region.

The disastrous earthquake of July 16, 1990 and the equally damaging eruption of Mt. Pinatubo in 1991 resulted in the displacement of many communities in the region, thereby increasing the proportion of poor families in the adjoining towns and cities. Unemployment was at its worst, and the continuing threat of volcanic debris, called lahar, impeded reconstruction efforts and discouraged investments. The landscape experienced a severe beating as once productive rice lands were inundated with lahar and public infrastructure facilities were destroyed.

Thus, in the effort to get the region back to its feet, the Central Luzon Regional Development Plan for 1993-1998 stressed that its development thrust would focus on: “the mitigation of further devastation by volcanic eruptions and lahar flows; rehabilitation of damaged areas and resettlement of displaced communities; and the development of new economic opportunities to replace those lost by the departure of the US military in the regions”. 1

1 Central Luzon Regional National Development Plan , National Economic and Development Authority- Region III. 206

Map of Central Luzon

The immediate goal of the region was to attain economic recovery 2 and lay the foundations for sustainable growth anchored on more productive agriculture, industrial and services efforts. The national government supported the region’s recovery efforts and, in the process, established the Mt. Pinatubo Commission, the Subic Bay Conversion Development Authority (SBCDA) and the Clark Area Development Authority. The Mt. Pinatubo Commission oversaw the implementation of infrastructure facilities in areas where damage from the eruption had been heavy. In particular, most national government agencies assisted in the efforts, particularly the Department of Public Works and

2 Ibid. 207

Highways (DPWH) which poured in substantial investments through the construction of mega-dikes in vulnerable areas and along existing waterways to deter further damage by lahar flows.

The phase-out of the U.S. military bases and the successive natural disasters contributed to the development of the region, particularly in resource mobilization activities of the local governments involved. For example, the migration of people from Pampanga province, where damage from the eruption of Mt. Pinatubo was the heaviest, to Bataan province resulted in increased income for the latter. Most businessmen in Pampanga migrated to Bataan bringing investments to the province. Bataan, therefore, opened its doors to Pampangueños. On the other hand, Pampanga, during the recovery process, was able to raise substantial revenues from quarrying activities along the lahar flow routes. The main products quarried included sand for construction activities and volcanic rocks for industrial and commercial uses.

A review of the effectiveness of the Central Luzon region in mobilizing resources from 1991 until 2001 shows that more than 60 percent of its income is sourced from the national government through the BIR allotments, or IRA (61 percent), and national aid (1 percent). In terms of internally generated income, real property tax (RPT) contributed the most 10 percent. Business taxes followed next at 9 percent with receipts from economic enterprises third with 8 percent. Other receipts contributed 5 percent of total income. Fees and charges and loans and borrowings contributed 3 percent each (Figure 4-1).

208

Figure 4-1 Sources of Region III Revenues (Average, 1991-2001)

Receipts from Economic Loans & Borrowings* Enterprises Fees/Charges 3% 8% 3% Other Receipts Business Taxes* 5% 9%

Real Property Tax 10%

National Wealth* 0%

National Aids* 1%

BIR Allotments SOURCE: Department of Finance-Bureau of 61% Local Government Finance

209

Figure 4-2. Consolidated Income of Region III (1991-2001)

12,000,000,000

10,000,000,000

National Wealth* 8,000,000,000 National Aids*

BIR Allotments Other Receipts 6,000,000,000 Loans & Borrowings* In PHP Fees/Charges Receipts from Economic Enterprises 4,000,000,000 Business Taxes*

Real Property Tax

2,000,000,000

SOURCE: Department of Finance-Bureau of Local Government Finance 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average Year

210

Table 4-1: Consolidated Income 1991-2001 - Region III (in Pesos) Internal External:Aids and Allotments Grand Total Revenue from Taxation Non-Tax Revenues SUB-TOTAL BIR National National SUB-TOTAL Allotments Aids * Wealth *

Year Real Property Business Total Receipts Fees/Charges Loans & Other Total Tax Taxes* from Borrowings * Receipts Economic Enterprises

1991 258,126,743 223,344,854 481,471,597 378,041,815 72,481,324 0 339,031,205 789,554,344.00 1,271,025,941 993,164,787 123,261,273 0 1,116,426,060.00 2,387,452,001

1992 231,036,621 226,331,199 457,367,820 335,905,152 73,853,551 30,000 99,024,734 508,813,437.00 966,181,257 1,337,223,930 28,534,493 0 1,365,758,423.00 2,331,939,680

1993 266,211,522 317,519,920 583,731,442 380,855,566 97,017,188 38,268,251 119,582,445 635,723,450.00 1,219,454,892 2,299,297,372 81,471,661 0 2,380,769,033.00 3,600,223,925

1994 385,862,715 328,833,527 714,696,242 438,289,565 108,088,799 40,805,682 364,645,617 951,829,663.00 1,666,525,905 2,421,673,344 45,058,186 0 2,466,731,530.00 4,133,257,435

1995 465,516,804 455,975,267 921,492,071 447,048,122 143,714,108 155,609,666 498,552,889 1,244,924,785.00 2,166,416,856 3,440,964,592 73,960,657 3,416,177 3,518,341,426.00 5,684,758,282

1996 565,057,415 617,310,726 1,182,368,141 554,981,669 168,038,764 62,641,851 511,353,205 1,297,015,489.00 2,479,383,630 3,760,410,531 68,629,621 0 3,829,040,152.00 6,308,423,782

1997 756,253,411 701,409,620 1,457,663,031 593,078,381 228,979,942 39,595,666 671,402,459 1,533,056,448.00 2,990,719,479 4,762,115,117 71,528,944 0 4,833,644,061.00 7,824,363,540

1998 982,287,577 710,647,273 1,692,934,850 710,976,080 238,308,237 289,386,507 703,335,075 1,942,005,899.00 3,634,940,749 5,124,245,165 81,948,352 2,321,098 5,208,514,615.00 8,843,455,364

1999 974,147,910 850,951,726 1,825,099,636 757,510,317 276,789,684 438,046,651 195,592,562 1,667,939,214.45 3,493,038,851 6,357,636,430 72,546,420 3,048,325 6,433,231,174.35 9,926,270,025

2000 1,225,069,086 920,166,996 2,145,236,083 885,337,673 253,270,799 434,909,406 264,872,843 1,838,390,721.72 3,983,626,805 7,288,782,684 34,695,422 2,120,230 7,325,598,335.92 11,309,225,140

2001 1,318,065,188 995,243,973 2,313,309,161 356,941,475 306,144,036 704,056,941 247,169,107 1,614,311,558.16 3,927,620,720 7,188,497,187 231,471,673 31,166,540 7,451,135,400.34 11,378,756,120

Average 675,239,545 577,066,826 1,252,306,370 530,815,074 178,789,676 200,304,602 364,960,195 1,240,925,345 2,387,131,436 4,088,546,467 83,009,700 3,824,761 4,175,380,928 6,702,556,845

SOURCE: Department of Finance-Bureau of Local Government Finance-Statement of Income and Expenditure Reports * For 2001, this other taxes amounting to P199,433,911.80 * For 2001, transfers is also included amounting to P68,871,699.87 * For 2001, domestic grants is included amounting to P59,818,955.90 * For 2001, this includes share in tobacco excise tax amounting to P3,368,121.00

211

The consolidated income of Region 3 from 1991 until 2001, indicate that all sources of revenues increased through the years, except for a slight decrease in IRA and national aid for 2000 (Figure 4-2 and Table 4-1). Figures show that the region’s dependency on external resources through national government block grants is rather high and reflects the general behaviour of most local governments as earlier explained. The increase of revenues on the average as well as per capita is 8 percent. Similarly, the average increase of expenditures and per capita increase of expenditures are 8 percent. It shows that there is a parallel increase in both revenues and expenditures for Region III .

With regard to the region’s expenditure patterns, an average of 34 percent has been allotted for general government, particularly the payment of salaries of the LGUs (Figure 4-3). This is followed by public welfare and internal safety with 23 percent; expenditures for Other Charges at 16 percent; and economic development at 13 percent. Expenditures for operations of economic enterprises and capital outlay, on the other hand, levelled at 8 percent and 6 percent, respectively. Thus, the LGUs in the region may not have been spending much for economic expansion by using one-third of its income to pay the salaries of their employees rather than for infrastructure support, particularly on more farm-to-market roads in order enable the far-flung agricultural areas take advantage of the improved transport infrastructure leading to Metro Manila. In addition, 23 percent of income has been provided for the social services concerns of the region’s constituents without any returns unless the LGUs are able to establish a user-pay mechanism for such services.

As with income generated, the trends in expenditures in the Region (Figure 4-4 and Table 4-2) indicate yearly increases on all types of expenditures.

212

Figure 4-4: Region III Local Government Expenditures (1991-2001)

12,000,000,000

10,000,000,000

Capital Outlay*

8,000,000,000 Other Charges*

Operation of Economic 6,000,000,000 Enterprise*

In PHP In Economic Development

4,000,000,000 Public Welfare & Internal Safety* General Government

2,000,000,000

Source: Bureau of Local Government Finance 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average Year

Table 4-2:Region III Local Government Expenditures (in Philippine Peso) Capital Year Current Expenditures Outlay * Grand Total General Public Economic Operation of Other Total Government Welfare & Development Economic Charges * Internal Enterprise * Safety *

1991 933,657,929 259,527,092 246,705,562 301,961,019 383,053,485 2,124,905,087 115,999,003 2,240,904,090

1992 967,776,218 253,629,815 292,272,448 284,379,355 297,347,054 2,095,404,890 144,883,621 2,240,288,511

1993 1,036,237,795 706,316,643 477,333,316 328,513,637 527,245,780 3,075,647,171 228,585,428 3,304,232,599

1994 1,789,070,361 1,028,037,308 508,030,176 477,966,377 636,268,850 4,439,373,072 325,047,807 4,764,420,879

1995 1,600,344,463 1,292,345,319 708,332,688 507,459,209 788,086,432 4,896,568,111 401,517,805 5,298,085,916

1996 1,785,301,367 1,460,725,120 768,143,834 578,657,079 893,596,909 5,486,424,309 366,856,925 5,853,281,234

1997 2,277,331,293 1,827,182,277 823,235,410 801,939,002 1,022,673,880 6,752,361,862 434,621,539 7,186,983,401

1998 2,591,407,811 1,865,569,225 949,042,741 705,378,797 1,288,261,024 7,399,659,598 816,521,250 8,216,180,848

1999 2,866,211,565 2,052,749,638 1,132,687,623 832,925,269 1,878,105,835 8,762,679,930 559,839,161 9,322,519,091

2000 3,143,525,398 2,603,384,170 1,111,158,728 920,465,365 2,025,873,874 9,804,407,534 1,068,531,283 10,872,938,817

2001 4,410,734,699 2,875,564,313 1,838,372,255 0 1,706,858,731 10,831,529,998 0 10,831,529,998

Average 2,127,418,082 1,475,002,811 805,028,616 521,785,919 1,040,670,168 5,969,905,597 405,673,075 6,375,578,671 Source: Bureau of Local Government Finance-Statement of Income and Expenditure Reports

*Starting 2001, a new Statement of Income and Expenditure (SIE) format is used. Capital Expenditure is incorporated in every sector.

Operation of Economic Enterprise is included in Economic Development.

*For 2001, Public Welfare and Internal Safety was broken down as follows:

Education, Culture and Sports Manpower Development: 92,314,490

Health, Nutrition and Population Control 1,377,498,586

Labor & Employment 50,023,421

Housing and Community Development 990,999,791

Social Security and Social Services and Welfare 364,728,025

Total: 2,875,564,313

*For 2001 other charges includes expenditure for debt servicing amounting to P240,396,920.75 213

Financial Decentralization in Pampanga

Pampanga Province: An LGU Profile The province of Pampanga is located in the central part of Region 3, bounded on the north by Tarlac and Nueva Ecija, on the east by Bulacan, southeast by Manila Bay, southwest by Bataan and on the west by Zambales. Its well-developed transport infrastructure contributed significantly to the growth of domestic food industry in the province. Its food delicacies – processed and semi-processed - could be found all over the Philippines as well as in the export market where large Filipino communities abound as in the U.S. West Coast and the Middle East. Aside from the transport network, the province has also the facilities that could sustain agro-industrial development, such as electrical power systems, irrigation systems, fishing ports and air ports, and a communication network.

Pampanga consists of twenty municipalities, two cities (Angeles City and San Fernando City) and 538 barangays. Although Pampanga is generally considered a middle-income class LGU, the composition of its municipalities shows asymmetry in terms of income classification. Specifically, thirteen of its municipalities are considered high-income class;3 two cities, also high-income; twenty municipalities classified as middle income; 4 and twelve municipalities as low-income. 5

Pampanga is the second fastest-growing province in Region 3 in terms of population, with its annual 2.66 percent growth rate. The leaders of the region as well as economic analysts themselves expect that unless curbed, the growth in population will

3 These consist of the following (a) 1st class municipalities: Guagua, Lubao, Mabalacat, Nasugbu, San Pascual, Sto. Tomas, Tanauan, (b) 2nd class municipalities: Apalit, Porac, Calaca, Lemery, Rosario, San Juan, and (c) 1st class cities: Angeles, and San Fernando. 4 These consist of the following (a) 3rd class municipalities: Arayat, Candaba, Floridablanca, Macabebe, Mexico, San Jose and (b) 4th class municipalities: Bacolor, Magalang, Masantol, San Simon, Santa Ana, Calatagan, Ibaan, Lian,Lobo, Mabini, Padre Garcia, Taal, Tavsan, Tuv. 5These consist of the following (a) 5th class municipalities:San Luis, Santa Rita, Cuenca, Laurel, Malvar, Mataas na Kahoy, San Luis, San Nicolas, San Pascual, Talisay, Tingloy and (b) 6th class municipalities: Santa Teresita. 214

exert pressure on the capacity of the LGUs to raise revenues to support the needs of its constituents.

With regard to the political life in Pampanga, the local chief executives under study (1991-2001) belong to different backgrounds and are not necessarily from established political families which are well-established in most areas in the countryside. For example, the governor of Pampanga in 1995, Lito Lapid, is a movie action star. He defeated Bren Guiao who has extensive connections to the political family of Estelito Mendoza which has dominated political life in the province for several decades in the past. 6 He was then a Vice Governor of Governor Guiao for two terms. When he ran for re-elections in 1998, Governor Lapid defeated former Vice Governor Cielo Macapagal- Salgado, a daughter of former Philippine President Diosdado Macapagal and sister of current Philippine President Gloria Macapagal-Arroyo.

Governor Lapid was able to establish a strong charismatic presence with the province’s population with his hands-on disaster management after the Mt. Pinatubo volcano eruption. He is known for his “heroic” acts in saving several people from the rampaging floods which ravaged the province in the middle 1990s. A giant billboard in downtown San Fernando City shows him hanging on a helicopter’s rope ladder while holding a child he rescued from a building surrounded by flood. The governor eventually became a senator of the republic. Governor Lapid was aware of his deficiencies in policy making and had wisely delegated policy-related concerns and initiatives to his provincial administrator and his highly qualified personnel.

The province has three congressional districts, and those who have represented the province in Congress come from varying backgrounds. In the third district, a non- traditional politician went on to win the congressional seat. Oscar Rodriguez was previously a Provincial Administrator in Pampanga from 1986 to 1987 and defeated the former Governor Estelito Mendoza – a known Marcos crony and lawyer during the 1987 Congressional elections. Congressman Rodriguez authored the bill on the prohibition of

6 He continues to do movies even after being elected. 215

political dynasties in an attempt to heighten the awareness of the constitutional objective that political office is not property that can be passed or inherited from generation to generation 7 but rather a public trust. His proposal, however, has remained unacted upon by Congress which is heavily populated by the progeny of veteran political families.

Ironically enough, despite Congressman Rodriguez’s efforts, the results of the 2004 elections in Pampanga reflected the re-emergence of political dynasties in the province and elsewhere. In particular, the inexperienced son of Governor Lito Lapid - Mark Lapid, won as governor while former Congressman Oscar Rodriguez settled to run as Mayor of San Fernando City. Mikey Arroyo – the son of President Arroyo, ran and won as Congressman of 2 nd district of Pampanga. The strong re-emergence of this political dynasty behaviour simply reflects the character of local Philippine politics as a politics of personalities rather than platforms and putting premium on popularity and “winnability” over competence.

Trends in Local Financing in Pampanga Pampanga relies heavily on external resources for its financing needs (Figure 4- 5). On the average, 77 percent of its income is sourced from BIR allotments or the IRA, and 2 percent from national aid. About 21 percent of the province’s income is internally generated, namely: 8 percent from RPT; 4 percent from business taxes; 4 percent from other receipts; 3 percent from loans and borrowings; 1 percent from fees and charges; and 1 percent from receipts from economic enterprises. It shows that even if Pampanga is a relatively well-off LGU, the province depends much on national government transfers.

Looking at the yearly disaggregated sources of income of Pampanga (Table 4-3 and Figure 4-6) from 1991 to 2001, the IRA has steadily increased from 1991 until 2000. The only dip in IRA was experienced in 2001 when the national government withheld 5 percent from the IRA in 2000.

7 House Bill No. 4300, ”An Act Prohibiting the Establishment of Political Dynasties”, 6 February 2001. 216

Figure 4-5: Sources of Income of Pampanga (Average, 1991-2001)

BIR Allotments 77%

Other Receipts 4% Loans & Borrowings 3% National Aids Fees/Charges Business Taxes* 2% Real Property Tax SOURCE: Department of Finance-Bureau of 1% 4% Local Government Finance 8%

Receipts from Economic National Wealth Enterprises 0% 1%

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Figure 4-6: Consolidated Income of Pampanga (1991-2001)

600,000,000

500,000,000 National Aids

BIR Allotments 400,000,000 Other Receipts

300,000,000 Loans & Borrowings In PHP In Fees/Charges

200,000,000 Receipts from Economic Enterprises Business Taxes*

100,000,000 Real Property Tax

0 SOURCE: Department of Finance-Bureau of Local Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average Year

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Table 4-3 : Consolidated Income 1991-2001 - Province of Pampanga * (in Pesos)

Internal External:Aids and Allotments Grand Total SUB- BIR National National SUB-TOTAL TOTAL Allotments Aids Wealth Revenue from Taxation Non-Tax Revenues Real Business Total Receipts Fees/Charges Loans & Other Total Property Taxes* from Borrowings Receipts Year Tax Economic Enterprises

1991 12,290,958 5,929,972 18,220,930 146,113 152,738 0 18,807,590 19,106,441.00 37,327,371 58,720,072 4,182,150 0 62,902,222.00 100,229,593

1992 20,134,166 4,826,133 24,960,299 283,667 236,202 0 32,308,638 32,828,507.00 57,788,806 84,269,768 0 0 84,269,768.00 142,058,574

1993 21,785,465 6,171,306 27,956,771 5,212,452 813,106 0 14,543,675 20,569,233.00 48,526,004 138,819,514 12,050,000 0 150,869,514.00 199,395,518

1994 22,091,563 12,382,303 34,473,866 6,408,560 587,820 0 27,139,943 34,136,323.00 68,610,189 204,171,604 0 0 204,171,604.00 272,781,793

1995 21,214,509 8,575,406 29,789,915 6,137,872 753,090 0 10,164,976 17,055,938.00 46,845,853 225,957,204 12,000,000 0 237,957,204.00 284,803,057

1996 20,836,357 12,120,754 32,957,111 6,428,205 1,264,363 0 12,984,639 20,677,207.00 53,634,318 246,502,429 19,269,350 0 265,771,779.00 319,406,097

1997 27,436,372 18,057,549 45,493,921 7,015,935 877,584 0 12,554,383 20,447,902.00 65,941,823 313,767,041 19,140,000 0 332,907,041.00 398,848,864

1998 37,384,103 15,505,174 52,889,277 7,325,606 1,164,859 104,000,000 2,340,782 114,831,247.00 167,720,524 336,785,924 12,000,000 0 348,785,924.00 516,506,448

1999 36,816,023 24,161,620 60,977,643 2,514,040 6,923,501 0 3,978,944 13,416,485.73 74,394,129 408,456,875 0 0 408,456,875.00 482,851,004

2000 49,011,077 18,691,223 67,702,300 8,332,286 1,276,970 0 7,738,929 17,348,184.84 85,050,485 456,000,142 0 0 456,000,142.00 541,050,627

2001 39,137,596 18,883,198 58,020,794 2,148,230 8,985,202 0 13,392,065 24,525,496.74 82,546,291 422,716,217 6,240,506 0 428,956,723.00 511,503,014

Average 28,012,563 13,209,513 41,222,075 4,722,997 2,094,131 9,454,545 14,177,688 31,041,747 70,583,950 263,287,890 7,716,546 0 271,004,436 342,675,872 Source: Department of Finance-Bureau of Local Government Finance, Statement of Income and Expenditure Reports

* The income of Angeles City is excluded.

* For 2001, this includes other taxes amounting to P7,700,003.80

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Insofar as transfers of national aid are concerned, such transfers made through direct cash has been intermittent. But aside from cash transfers, the provincial government was able to take advantage of the pork barrel releases from the legislators. Through initiatives from the LGU, the legislators were able to identify infrastructure projects for the province which were later on endorsed to the implementing agency (e.g. DWPH) for implementation. Even if the provincial government has the necessary equipment and manpower to construct a particular infrastructure project, it oftentimes defers to the line agencies of the national government to deliver the same activities. For instance, while the implementation of farm to market roads have been devolved to the municipalities and provinces, other line agencies like DA, the Cooperative Development Authority, and the DPWH have often exhibited the willingness to build such facilities using their own budgets and equipment.

Although there is a national policy of devolution of agricultural services to LGUs, the deliberations for the annual budget (General Appropriations Act or GAA) often provides for outputs that maintain national government allocations, through its line agencies for local activities. In other words, the spirit of decentralization is not reflected in the allocation of resources through the budget because the budget for devolved activities go to line agencies, instead of providing the funds directly to LGUs.

Local chief executives (LCEs) of Pampanga shifted their political party affiliation in order to gain support from the President in undertaking preventive infrastructure projects against lahar flows. Governor Lapid and all the mayors of local government units in Pampanga pledged allegiance to the ruling Lakas-National Union of Christian Democrats. Afterwards, in 1998, the Ramos administration approved the construction of mega-dikes to prevent further damage of agricultural, industrial and residential areas from lahar. 8

8 Interview with the Local Government Unit of Pampanga, San Fernando, Pampanga, 6 and 9 August 2001. 220

Not all of Pampanga’s development and anti-disaster initiatives have the support of the province’s officials and people. While the province is host to two major foreign- assisted projects that are funded by the Japan Bank for International Cooperation (JBIC), the province was not consulted during the project preparation and implementation. These Pampanga development projects consist of: (a) the Irrigation Component as implemented by the National Irrigation Authority (NIA); and (b) the Flood Control Component as implemented by the Department of Public Works and Highways (DPWH). Thus, as a result, some municipalities within the province claim that damages to fishponds occurred as a result of the construction of the irrigation facilities. 9 The loose coordination between the national government implementing agency and the local chief executives has had a detrimental impact on the beneficiaries when a consensus could not be obtained regarding the manner by which services could be delivered.

There are, of course, other reasons why locally-generated sources of income have been significantly lower than revenue from the national government. One such reason is that the extensive damage of properties from the eruption and the earthquake in the early 1990s has hindered greater collection of local taxes. Another reason is administrative in nature: the absence of a system to monitor the data used in land valuation even if each office has a computer for assessing lands properties.

Although the flow of lahar caused immense damages to properties, the provincial government saw the situation as an opportunity to maximize local revenues. During the summer months, when rivers and other conduits of lahar flows are dry, there has been extensive quarrying of volcanic debris for commercial and industrial purposes. Thus, in line with the Local Government Code of 1991, specifically under Section 138, 10

9 Interview with Sta. Rita Mayor Salanlila, Sta. Rita, Pampanga ,4 September 2001. 10 “The province may levy and collect not more than 10 percent of fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. The permit to extract sand, gravel, and other quarry resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the Sangguniang Panlalawigan. The proceeds of the tax on sand, gravel and other quarry resources shall be distributed as follows: (a) Province – 30 percent; (b) Component City or Municipality 221

Provincial Government of Pampanga passed Tax Ordinance No. 1 on March 2, 1992 to collect taxes from all quarrying activities. Entitled “An Ordinance Enacting the Provincial Tax Code of 1992 of the Province of Pampanga and Providing Penalties for the Violation of any Provision Thereof,” levied taxes on sand and gravel and other materials resulting from lahar. Another local law, Tax Ordinance No. 3 entitled “An Ordinance fixing the fair market value of sand, gravel and other quarry resources extracted within the territorial jurisdiction of the Province of Pampanga Pursuant to the Provisions of Tax Ordinance No.1 series of 1992 and for Other Purposes,” established the rates for all materials quarried from within the province.

The provincial administration of sand and gravel taxes has not only provided revenues through taxes but also boosted local employment. The generation of jobs in quarrying eventually became a part of the regular work program of the province.

After more than seven years of implementation, however, Pampanga experienced a re-centralization of its locally generated revenues from sand and gravel taxes when former President Estrada issued Proclamation No. 66 on January 11, 1999 entitled “Declaring the Lahar Affected Rivers and Embankment Areas in the Provinces of Pampanga, Tarlac and Zambales as Environmentally Critical Areas and as Mineral Reservation Under the Direct Supervision and Control of the Department of Environment and Natural Resources.” This Presidential directive effectively transferred the administration of the lucrative gravel and sand taxes from the Provincial Government of Pampanga to the DENR-National Resources Development Corporation (NRDC).

The justification of Proclamation 66 is that the lahar areas are restricted and reserve areas under national government jurisdiction for environmental protection and conservation reasons. Thus, the DENR-NRDC has been tasked to administer the collection of taxes and fees in said environmentally-critical areas. This action has not, however, erased the impression that it simply is a circumvention of the principle of local

where the sand, gravel, and other quarry resources are extracted- 30 perdent; and (c) Barangay where the sand, gravel, and other quarry resources are extracted – 40 percent.” 222

autonomy as promoted by the Local Government Code of 1991. The Provincial Government, however, has not strongly protested the Presidential fiat and the common perception is that it had no choice considering the administrative supervision of the central government over the LGUs. The local finance officers also perceive that President Estrada could have thought that the collection of taxes and fees from enterprises in the lahar-affected area could also be a source of revenue for the national government in its then tight fiscal situation. The provincial government, in opting not to challenge the central government’s decision to take over the collection of taxes and fees from quarrying activities could have feared a backlash if it did, particularly in the form of lesser central government transfers to the province such as the IRA and other national aid.

Nonetheless, the assertion of the national government in taking over collection of taxes and other fees due to environmental conservation imperatives can be misleading. The LGC itself has mandated the LGUs as the frontliners in efforts to protect and conserve the environment. Moreover, the national government has claimed that the Pampanga province has been charging very low taxes and fees for materials quarried from the lahar areas. In this case, the DENR-NRDC could have just trained the Province in valuation and other technical skills needed rather than just take over the entire collection operations from the province, a service that has clearly been devolved to the local governments.

Indeed, the DENR-NRDC has collected more revenues from the sand and gravel taxes compared to the Pampanga Provincial Government with its fees of P300 per cubic meter sand and gravel taxes compared to the P80 previously charged by the Province. The province was able to get P10 million as share from taxes imposed by DENR-NRDC. Fortunately, the provincial share from the collections is almost at the same level when the Province used to be the one collecting the taxes and fees. The implication of this arrangement is that the province’s share of the taxes and fees collected from the materials quarried from its properties is listed as its share from national wealth. Previously, the collections were stated as income from local economic enterprises in its book of

223

accounts. Thus, the change in accounting merely heightens the perception that the province continues to be dependent on the national government for most of its operating and maintenance expenses. 11

What happens to the collected fees? The bulk is reportedly retained with the DENR-NRDC. As a corporate entity, DENR-NRDC does not need to go through the Commission on Audit which raises more questions on where the money goes and how it is used. There is thus no way on how the Pampanga Provincial Government could determine how much in taxes and fees have been collected by the DENR-NRDC so it could claim its proper share of the collections. Moreover, the province complains that remittances representing its share from collections are often delayed.12

With the takeover of the national government in quarrying operations, the province’s domination of the job-generation activities in the lahar areas has also been adversely affected. Previously, the Provincial Government used to hire truck drivers, checkers, and haulers locally. The DENR-NRDC, however, has recruited its employees from other places.

With regard to the provincial government’s relationship with the private sector, particularly the banks, it has a single experience which provided a valuable lesson that could be improved in the future. This involved a loan contracted by the provincial government in 1998 amounting to P104 million to finance its low-cost housing with a 7- year repayment term. The PNB has then been privatized and was no longer a government financing institution. But the PNB had an edge over other private banks when it was able to secure a certification from BSP authorizing it to intercept the IRA allocation for the province as payment by LGUs for the loan. In this regard, the IRA intercept by PNB becomes a ‘de facto’ collateralization of the LGUs. This is the first time Pampanga was able to borrow from the private bank since the enactment of the LGC in 1991. As an

11 Interview with Pampanga Treasurer Rudolfo Mercado and Engineer Fernando Henson, San Fernando, Pampanga, 9 August 2001. 12 Interview with Pampanga Treasurer Rudolfo Mercado and Engineer Fernando Henson, San Fernando, Pampanga 9 August 2001.

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aftermath of this experience, the provincial government has found it more prudent to develop a project for funding first and determine its financial feasibility before securing a loan so as not to jeopardize the IRA shares of the various LGUs in case an intercept arrangement has been put into place. 13

Expenditure Trend of Pampanga The province of Pampanga spent most of its resources in general government (28 percent) and in public welfare and internal safety (39 percent) from 1991 to 2001. The province allocated a big portion of its resources 14 for social services to its constituents who are displaced by the earthquake and the Mt. Pinatubo eruption.

Figure 4-7 Pampanga Provincial Expenditures (Average, 1991-2001)

Capital Outlay* Other Charges 4% 14% General Government 28%

Operation of Economic Enterprise* 1%

Economic Development 14%

Public Welfare & Internal Safety* 39%

Source: Bureau of Local Government Finance

13 Interview with Pampanga Treasurer Rudolfo Mercado and Engineer Fernando Henson, San Fernando, Pampanga ,9 August 2001. 14 This is included in the Public Welfare and Safety. 225

Figure 4-8 Pampanga Provincial Government Expenditures

700,000,000

600,000,000

500,000,000 Capital Outlay*

Other Charges

400,000,000 Operation of Economic Enterprise* In PHP In 300,000,000 Economic Development Public Welfare & 200,000,000 Internal Safety* General Government

100,000,000

Source: Bureau of Local

0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Average Year

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Table 4-4: Local Government Expenditures - Pampanga * Province (in Philippine Peso) Capital Year Current Expenditures Outlay * Grand Total General Public Economic Operation of Other Total Government Welfare & Development Economic Charges Internal Enterprise * Safety *

1991 33,621,145 13,752,123 19,490,027 0 10,142,317 77,005,612 2,451,047 79,456,659

1992 56,347,869 11,887,745 18,803,996 0 3,685,499 90,725,109 0 90,725,109

1993 43,541,605 53,477,769 28,749,355 1,872,181 14,878,425 142,519,335 2,553,931 145,073,266

1994 55,967,846 83,878,730 38,701,851 3,983,931 14,317,010 196,849,368 3,646,161 200,495,529

1995 82,936,723 91,388,006 38,441,919 6,927,546 48,112,816 267,807,010 6,761,773 274,568,783

1996 93,869,900 115,914,604 48,680,269 0 45,826,462 304,291,235 7,147,263 311,438,498

1997 113,681,351 152,412,241 57,446,587 3,448,397 59,007,192 385,995,768 0 385,995,768

1998 108,965,751 148,984,964 59,222,003 0 44,248,619 361,421,337 105,992,450 467,413,787

1999 97,290,764 153,356,942 64,651,028 3,465,204 43,542,484 362,306,422 3,643,760 365,950,182

2000 113,660,521 174,302,371 64,051,083 9,769,540 63,496,302 425,279,817 12,621,634 437,901,451

2001 135,043,499 297,069,372 36,204,176 0 104,527,093 572,844,140 0 572,844,140

Average 84,993,361 117,856,806 43,131,118 2,678,800 41,071,293 289,731,378 13,165,274 302,896,652 Source: DOF-Bureau of Local Government Finance: Statement of Income and Expenditure Reports

* The expenditure of Angeles City is excluded.

* Starting 2001, a new Statement of Invome and Expenditure (SIE) format is used. Capital Expenditure is incorporated in every sector.

Operation of Economic Enterprise is included in Economic Development.

*For 2001, Public Welfare and Internal Safety was broken down as follows:

Education, Culture and Sports Manpower Development: 6,375,941

Health, Nutrition and Population Control 153,794,806

Labor & Employment 762,102

Housing and Community Development 126,607,502

Social Security and Social Services and Welfare 9,529,021

Total: 297,069,372

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This researcher experienced first-hand how the Pampanga province handled the needs of its constituents on August 6, 2001 upon invitation by the Provincial Administrator in a meeting attended by the provincial civil servants. 15 It was a rainy season, and the provincial government was confronted anew by requests from poor people displaced by lahar floods from Mt. Pinatubo. One of the issues raised during the meeting came from the DSWD, particularly its provincial officer who cited the duplication of assistance provided by the DSWD and that from the Office of Governor to the victims of flooding. She also raised the issue of people 16 who are not from the province who nevertheless asking for assistance from the provincial DSWD Office. 17 In this regard, the Provincial Social Welfare and Development Office (PSWDO) requested for the synchronization of assistance to both the victims of flooding and rebel returnees through a system involving the DSWD and the Office of the Governor.

The representatives of the Office of the Governor acknowledged the concern of the DSWD Provincial Office particularly in the depletion of funds for social welfare and benefits because of the surge in the number of people seeking assistance. The Provincial Administrator, for his part, cited the need to be politically sensitive in times of natural disasters. 18 Since it is common knowledge that local civil servants as well as the local chief executives directly and personally attend to the needs of their constituents, refusing requests for help for any reason may not be politically correct. The said gesture, even if economically prudent, could create “ tampo,” a Filipino trait that refers to being slighted or discourteously humiliated regardless of the reasons behind the action. Taking into account the extensive social network in Philippine society, going directly to politicians or the DSWD Office for much needed assistance is an action of last resort. The person in need will first approach his family or relatives, then to his immediate family or relatives, then his well-off friends, neighbours or godparents (“ padrino ”). When everything else is

15 This includes the Treasurer, Budget Officer, Accountant, Assessor, Planner, Engineer, Council Secretary, Auditor, Lawyer, Social Welfare Officer, Veterinarian, Cooperative Development Officer, Population Officer, Sports Coordinator, Warden, and Administrative Officer. 16 The Province call these people “illegal entrants.” 17 The DSWD Provincial Office only provides “relief goods” and not cash for the victims of flooding, and its cash assistance is intended only for so-called rebel returnees, or those formerly with the Communist New Peoples’ Army who opt to return to the folds of the government. 18 Interview with the Provincial Administrator Benalfre Galang, San Fernando, Pampanga, 6 August 2001. 228

exhausted, the person in need goes to the politician or to DSWD or any other government office. It was thus recommended during the meeting that the DSWD Provincial Officer seek assistance from the agency’s regional office, particularly its calamity funds or other possible source. While the DSWD could encounter possibilities of duplication in the granting of assistance to victims of disasters, it cannot expect the local governments to enter into an arrangement that would preclude it from granting assistance to its constituents who ask for it.

As far as general administration is concerned, the provincial government spends most for the payment of salaries and other personnel benefits as well as maintenance and other operating expenses. Specifically, the province has a total of 1,769 employees 19 consisting of fifteen elective officials, 1,754 employees of which 1,400 are regular employees, 352 casual 20 and two contractual. Compared with the national figure as indicated in Table 3-2 in Chapter 3, the province is better-off in employing only 20% of contractual employees against 60% on the national average for local government employees.

Expenditures for economic development totalled 14 percent, while that for capital outlay was 4 percent and operations of economic enterprises, 1 percent (Figure 4- 7). Expenditures for other charges reached 14 percent, most of which went to the “unforeseen” expenditures of the Province such as the interest payments for late payment of dues.

On a yearly basis, there has been a steady increase for all types of expenditures from 1991 until 2000 (Figure 4-8). In 2001, however, the expenditures for General Government as well as for Public Welfare and Internal Safety and Other Charges went up. The most visible explanation for the substantial increase in expenditures for the three items is related to the conduct of the local elections in the province. Specifically, most of the local chief executives were on their last term and it is normal under the circumstances

19 2000 Year-End Report of the Province of Pampanga , Provincial Government of Pampanga. 20 A person who receives temporary welfare relief or who works at irregular intervals. 229

that more funds are allotted for the payment of personnel services as well as other expenditures such as social welfare and benefits. This has been a regular occurrence in Philippine political life to the extent that such expenditure pattern connotes some kind of institutionalized practice noticeable in spending patterns of all LGUs.

Ironically, expenditures for Operation of Economic Enterprise and Capital Outlay are often minimal despite their importance in development. In particular, Pampanga province did not spend for the Operation of Economic Enterprise in years 1991, 1992, and 1996 (Table 4-4). Starting 2001, the expenditure for the Operation of Economic Enterprise was included in Economic Development. The accounting for the Capital Outlay, on the other hand, was included in Public Welfare and Internal Safety. Despite these changes implemented under the Statement of Income and Expenditure format, the expenditure for economic development even decreased in 2001. For its part, the expenditure for capital outlay was nil in 1992 and 1997. The province is thus investing less on its growth by maintaining the same pattern of expenditure: more on personnel expenditures and provision of social welfare to its constituents; and less on economic development and capital outlay, which are necessary for development. Table 4-5: Consolidated Income and Expenditure (in Pesos) Year Income Expenditure Income - Expenditure 1991 100,229,593 79,456,659 20,772,934 1992 142,058,574 90,725,109 51,333,465 1993 199,395,518 145,073,266 53,662,858 1994 272,781,793 200,495,529 72,286,264 1995 284,803,057 274,568,783 10,234,274 1996 319,406,097 311,438,498 7,967,599 1997 398,848,864 385,995,768 12,853,096 1998 516,506,448 467,413,787 49,092,661 1999 482,851,004 365,950,182 116,900,553 2000 541,050,627 437,901,451 103,149,176 2001 511,503,014 572,844,140.6 -61,341,125.99 Average 342,675,872 302,896,652 39,779,220 Source : Provincial Government of Pampanga

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Despite its heavily politically-influenced budget, the province always had a surplus from 1991 until 2000 (Table 4-5). It had, however, a deficit of more than P61 million in 2001 brought by massive expenses related to the fast-tracking of projects during the electoral campaign period and election proper.

This pattern of expenditure notwithstanding, the province was able to attract direct investment because of its geographic location and the availability of the necessary infrastructure earlier provided by the national government. Such investments include the construction of large shopping malls, such as those by John Gokongwei and Henry Sy who built the Robinsons and Shoemart retail malls, respectively. For the ordinary Filipino, the existence of these giant shopping malls is an indication of urbanization and development. For the province, it means bigger collection of real property and business taxes.

Depending on how the retail business in general is managed, these big malls could also put other retail groups out of business. The retail malls also do not guarantee local employment because as chain stores, Robinsons and Shoemart have central offices for personnel recruitment. The displacement of local business could also mean an increase in the expenditure of the province for social welfare and benefits for those who became unemployed. Aside from this challenge, the province needs to manage change brought by urbanization, specifically solid waste management garbage and traffic problems brought about by the increase in population as well as the increase in demand for other basic services such as power, water and education.

In the midst of the bustle that seems to reflect physical and material progress, what do the local civil servants say, particularly on decentralization of governance? Those officials of Pampanga interviewed for this study indicate that they have not seen any changes after decentralization because the national government – as in the past, continues to play a central role in the development of provinces near Metro Manila such as Pampanga and others than the local chief executives themselves. They suggested that

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decentralization might be more relevant and productive in the Mindanao areas or for LGUs located in remote areas. 21

Nonetheless, Pampanga itself appears willing and ready to face the challenges of development, particularly rapid urbanization, as expressed in its Comprehensive Land Use Plan or Physical Framework Plan. 22 In particular, the Plan has adopted a hierarchy arrangement for its towns and cities through its goal of “Rurban Development.” This consists of the integration of the rural and urban aspects of the province’s environment providing all cities and municipalities access with basic services and facilities. The settlement plan identifies three categories of communities: (a) small and medium cities, which include Angeles being a highly urbanized city and San Fernando with its existing tertiary facilities; (b) large towns such as Mabalacat with its dense population, Guagua with its well-developed facilities that could service the neighbouring small towns of Sasmuan, Sta. Rita, Floridablanca and Lubao, and Apalit with its strategic location, being the nearest to Bulacan and having the potentials for supporting small industries and commercial establishments; and (c) medium town consisting of Lubao that could serve as an alternate to Guagua, Magalang and Arayat as potential areas for agro-industrial growth. 23

The income class as well as the hierarchy adapted by the province has been considered in the selection of the city and municipalities as case studies. Specifically, the following city and municipalities will be studied: a) City of San Fernando – 1 st class/high income component city and small/medium city in the hierarchy; b) Guagua – 1 st class/high-income municipality formerly 2nd class municipality and large town in the hierarchy; and

21 Interview with Provincial Planning Officer Engineer Fernando Y. Henson, and Treasurer Rudolfo Mercado, San Fernando, Pampanga, 9 August 2001. 22 Pampanga is the first province in the region with a certification from Housing and Land User Regulatory Board (dated 10 February 1999) for its CLUP/Physical Framework Plan. 23 Comprehensive Land Use Plan/Physical Framework Plan of the Province of Pampanga, Provincial Government of Pampanga. 232

c) Magalang – 4 th class/middle-income municipality and medium town in the hierarchy; and d) Sta. Rita – 5 th Class/low-income municipality and small town in the hierarchy

City of San Fernando On August 15, 1904 the American colonial government named the town of San Fernando as the provincial capital of Pampanga, replacing the town of Bacolor. This effectively makes San Fernando’s function as the center of governmental transaction in the province 100 years old. On January 5, 2001, San Fernando became a component city under Republic Act 8990, entitled “An Act Converting the Municipality of San Fernando in the Province of Pampanga into a Component City to be known as the City of San Fernando.”

San Fernando as a small-medium city has a total land area of 6,774 hectares. It is located 67 kilometers north of Manila and 16 kilometers south of the Clark Special Economic Zone (CSEZ). The city consists of thirty-four barangays (villages). San Fernando’s population growth rate of 4.08 percent from 1990 to 2000 is way above the national growth rate of 2.47 percent, and this has been primarily attributed to migration. San Fernando has a total population of 235,474 wherein the majority are of employable age. The National Statistics Office classifies San Fernando as an urban area despite the fact that 51 percent of San Fernando’s land area is concentrated in agriculture with sugarcane as the main crop, followed by palay.

Political Dynamics With regard to political dynamics in San Fernando, it could be inferred that most of the elected local chief executives belong to landed families of Spanish lineage. The mayors are also highly educated as indicated by their titles of Doctor of Medicine or Attorney at Law. With regard to the terms of office, mayors are supposed to serve for a term of three years, for a maximum of three terms. From 1986 to 2004, the mayors during that period exhausted their tenure of three consecutive elective terms. These include

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lawyer Paterno S. Guevarra who served from 1986 to 1995; Dr. Jesus Reynaldo Aquino, 1995-2004; and lawyer Oscar Rodriguez, 2004 to the present.

Table 4-6: Mayors of San Fernando Year Mayor 2004- present Attorney Oscar Rodriguez 1995-2004 Dr. Jesus Reynaldo Aquino 1986-1995 Attorney Paterno S. Guevarra 1983-1986 Attorney Virgilio L. Sanchez 1981-1983 Attorney Vicente A. Macalino (Officer- in-Charge) 1980-1981 Colonel Amante S. Bueno (Officer-in- Charge) 1969-1971 Attorney Virgilio L. Sanchez (assumed Office after the death of Levi Panlilio) 1968-1969 Levi Panlilio 1960-1967 Dr. Jose Quiwa 1956-1959 Dr. Miguel Baluyut 1946-1955 Rodolfo Hizon 1938-1945 Vivencio Cuyugan 1934-1937 Urbano Dizon 1932-1934 Jose Valencia 1928-1931 Antonio Abad Santos 1922-1927 Jose Valencia 1917-1921 Antonio Abad Santos 1904-1907 Don Francisco Hizon Source: Provincial Government of Pampanga

At the time of interview (10 September 2001) for this study, the incumbent was Mayor Rey Aquino. Mayor Aquino,24 did not come from a political family. He is a doctor, having carried out a lucrative surgery practice in the 1980s. Before running for office, Dr. Aquino was an active leader in social and civic affairs and a member of several non-government organizations. He had his first taste in local politics when he ran and won as vice mayor of San Fernando City from 1992-1995. In 1992, he was a member of the Liberal Party, then one of the oldest political groups in the country. In 1995, he shifted loyalties to the National People’s Coalition (NPC) under businessman Eduardo Cojuangco who unsuccessfully ran for President of the Republic. Then he

24 Former Mayor Aquino is now Congressman of third District of Pampanga. 234

switched parties to the Lakas-NUCD under President Fidel V. Ramos and won his first term as mayor of San Fernando City in 1995. Like his predecessor Mayor Paterno S. Guevarra, he also served for 9 years. His constituents perceive him as a visionary leader whose concerns go beyond day-to-day operations.

Financial Performance With respect to San Fernando’s performance in resource mobilization, the Commission on Audit reported that San Fernando in 1995 had an overdraft of P12 million, as well as unremitted Real Property Tax totalling P35 million and unpaid obligations of P4.1 million. The Commission also reported a deficit involving P34.7 million. This anomaly has been attributed to the decisions made by the previous mayor 25 on the city’s fiscal matters. Although decision-making in the municipal council (or Sangguniang Bayan ) is collegial – through the parliamentary approach, the officials including the vice mayor and the council members consider that the mayor has the last “say” on issues relating to fiscal administration. The mayor may exercise his discretionary power. It appears such power has been poorly used, resulting in the negative financial condition of the city at that time.

Thus, starting 1995, the new mayor and his council looked at means of addressing the deficit. Aside from this, San Fernando had to contend with the continuing flooding of some of the city’s areas by lahar flows from Mt. Pinatubo, especially during the rainy season. Seven out of ten barangays located along the waterways coming from Mt. Pinatubo have actually been buried by lahar while the rest faced the constant threat of suffering the same fate. The people living in these places abandoned their homes and lived with their relatives. The poblacion area, or town center, was completely inundated by volcanic debris and was completely damaged.

Thus, aside from having to take care of its constituents affected by the lahar problem, the municipality instituted measures to turn around the fiscal situation of San

25 According to interview information, COA lodged a complaint to the Ombudsman against former Mayor Guevarra regarding the dismal results of its audit. Interview with City Administrator Jose de Leon, San Fernando City, Pampanga, 10 September 2001. 235

Fernando. Austerity measures have been adopted, including the firing of 336 casual employees, or 70 percent of the municipality’s workforce, from their jobs.26 While this action is not a palatable political decision, it illustrated the council’s determination to attain fiscal stability amidst the crisis situation. The office lights were turned off during lunch break as a cost-saving measure. The procurement and distribution of office supplies were centralized. Long distance and overseas calls using office equipment were banned. Moreover, the expenses of the barangays were regularly checked. Efforts to increase collections of Real Property Tax (RPT) and resident tax certificate were accompanied by a massive information campaign through posters and other media to remind the citizens of their obligations. 27 Through these cost-saving measures, San Fernando was able to turn around its fiscal deficit into a surplus. In 1999, the municipality won the Galing Pook Award, 28 a national recognition for outstanding efforts by LGUs in local governance. The award for the municipality was specifically for its project “Breaking Financial Barriers” which focused on efforts to bring about stability and growth in fiscal management. The program was cited for its measures that successfully turned around the successive financial deficits from 1992 of P7.41 million to 1994 of P34.7 million into surpluses in 1995 and onwards. 29

How did San Fernando do it? Through the leadership of Mayor Aquino and the support of its council, the following strategies were adopted: (a) mapping of tax delinquents; (b) use of brochures and other information paraphernalia; (b) the creation of a one-stop-shop system for transaction of all required documents, including the payment of taxes; (c) the issuance of business plates with stickers for the various establishments; (d) prudent expenditure management; (e) regular issuance of financial reports to improve

26 “Breaking Financial Barriers, Local Government Units of San Fernando” as presented by Mayor Rey Aquino. 27 Interview with Mayor Rey Aquino, San Fernando City, Pampanga, 10 September 2001. 28 The Department of Interior and Local Government spearheads this event with the Asian Institute of Management administering the selection of well-performing LGUs. 29 “Breaking Financial Barriers, Local Government Units of San Fernando” as presented by Mayor Rey Aquino.

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transparency; and (f) other simple but innovative ways of sourcing and managing local funds. 30

The consolidated income of San Fernando from 1996 until 2000 shows that there had been a steady increase in the income collected locally alongside the aids and allotments from the national government (Table 4-7 and Figure 4-10). On the average, there is a 10 percent increase of revenue and per capita revenue. Where sources are concerned, the municipality has been able to maintain a good balance of internal and external sources of income. In particular, 51 percent and 49 percent are contributed by internal and external sources, respectively. The IRA dominated the share of external sources at about 49 percent of the total income of the municipality with a total average of P59.29 million from 1996 to 2000 and 12 percent increase per annum on the average. For locally generated income, business taxes contributed a majority share of 29 percent, followed by fees and charges with 12 percent increase per annum, receipts from economic enterprises with 2 percent increase per annum, real property tax, and other receipts with 7 percent, 6 percent, 5 percent, and 4 percent shares, respectively. The municipality could hardly push RPT collection with only 2 percent increase per annum because of the changing landscape brought about by the yearly flooding woes in the area. The collection from business taxes with 9 percent increase per annum is understandably high considering that major business establishments are located in San Fernando, such as the Coca-Cola manufacturing plant, the warehouses and its distribution network.

Because San Fernando’s strength is its robust domestic market, it hardly felt the negative effects of the Asian Crisis of 1997. The construction of shopping malls and other commercial and industrial buildings in areas of the town safe from the lahar flows continued.

30 “Breaking Financial Barriers, Local Government Units of San Fernando” as presented by Mayor Rey Aquino. 237

Figure 4-9 Consolidated Income of City of San Fernando (1993-2000)

180,000,000

160,000,000

140,000,000

120,000,000 National Aids

100,000,000 BIR Allotments

Other Receipts In PHP 80,000,000 Loans & Borrowings

Fees/Charges

60,000,000 Receipts from Economic Enterprises Business Taxes* 40,000,000 Real Property Tax

20,000,000

1993 1994 1995 1996 1997 1998 1999 2000 Average SOURCE: City of San Fernando, Treasurer's Year Office and DOF-BLGF

Figure 4-10: Sources of Income of San Fernando (1991-2000) Loans & Borrowings Fees/Charges 0% Other Receipts 6% 3%

Receipts from Economic Enterprises 7% BIR Allotments 46%

Business Taxes* 29% National Aids 1% SOURCE: City of San Fernando Real Property Tax Treasurer's Office and DOF-BLGF 8%

National Wealth 0%

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Table 4-7: Consolidated Income 1991 - 2000 - City of San Fernando (in Pesos) Internal External:Aids and Allotments Grand Total

Revenue from Taxation Non-Tax Revenues SUB- BIR National National SUB-TOTAL TOTAL Allotments Aids Wealth

Year Real Business Total Receipts Fees/Charges Loans & Other Total Property Taxes* from Borrowings Receipts Tax Economic Enterprises

1991 5,023,168 9,049,588 14,072,756 5,365,952 1,645,168 0 0 7,011,120.00 21,083,876 9,037,856 7,329,670 0 16,367,526.00 37,451,402

1993 9,701,329 14,971,474 24,672,803 5,104,564 3,281,424 0 0 8,385,988.00 33,058,791 22,674,063 0 0 22,674,063.00 55,732,854

1994 10,161,631 22,305,838 32,467,469 4,651,944 3,900,797 0 0 8,552,741.00 41,020,210 30,137,207 0 0 30,137,207.00 71,157,417

1995 9,684,077 27,243,612 36,927,689 4,357,473 3,704,301 0 0 8,061,774.00 44,989,463 33,995,413 5,430,532 0 39,425,945.00 84,415,408

1996 5,199,373 33,129,981 38,329,353 4,036,122 6,638,796 0 0 10,674,917.47 49,004,271 37,188,943 0 0 37,188,942.68 86,193,214

1997 5,547,227 33,995,524 39,542,751 8,110,594 6,048,365 0 1,642,990 15,801,948.71 55,344,700 50,573,819 0 0 50,573,818.77 105,918,519

1998 5,859,999 35,623,678 41,483,677 8,705,007 6,430,742 0 1,768,807 16,904,555.53 58,388,232 51,923,203 0 0 51,923,203.00 110,311,435

1999 6,618,357 37,966,110 44,584,467 8,793,877 10,501,695 0 11,276,772 30,572,343.79 75,156,811 72,489,458 0 0 72,489,458.00 147,646,269

2000 7,228,138 37,402,931 44,631,070 7,945,781 11,626,032 0 9,493,657 29,065,469.55 73,696,540 84,280,798 0 0 84,280,798.00 157,977,338

Average 7,224,811 27,965,415 35,190,226 6,341,257 5,975,258 0 2,686,914 15,003,429 50,193,655 43,588,973 1,417,800 0 45,006,773 95,200,428

SOURCE: City of San Fernando, Treasurer's Office Department of Finance-Bureau of Local Government Finance-Statement of Income and Expenditure Reports

There is no data for 1992.

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With respect to its expenditures (Table 4-8 and Figure 4-11) from 1993 until 2000, San Fernando experienced a steady increase of each item of expenditure except for Public Welfare and Internal Safety under Current Expenditure item and Capital Outlay. The costs for Public Welfare and Internal Safety were high in 1996, and were cut into almost a half in 1997 and gradually increased from 1997 until 1999. In 2000, however, this expenditure item doubled as the municipality struggled to meet the socio-economic needs of its population adversely affected by lahar flooding. The expenditure for capital outlay, on the other hand, decreased from 1996 until 2000. The national government, however, undertook the construction of essential infrastructure such as the mega-dikes that aimed to prevent the annual lahar flows from causing more damage to property. Based on the average expenditure of San Fernando from 1996 until 2000 (Figure 4-12), general government ate up the bulk of the budget with its 45 percent share whose rise had rather been steady during the period. This is followed by expenditures for the operation of economic enterprise, economic development, other charges and capital outlay with their 16 percent, 13 percent, 13 percent, 9 percent and 4 percent shares, respectively.

San Fernando has not introduced any new tax nor increased its current taxes during the period. The local officials, however, increased collection efficiency through the new tax code. The deferment of any increase is also consistent with Republic Act No. 8990 which converted the municipality of San Fernando into a city and implementing a 5-year moratorium on increasing taxes in the process. The LGU had cited that the conversion into City as a long-term strategy to get more funds from the IRA considering the IRA distribution formula allots greater amounts for cities than for municipalities. 31

31 Interview with San Fernando Mayor Rey Aquino, San Fernado City, Pampanga, 10 September 2001. 240

Table 4-8: Local Government Expenditures City of San Fernando: 1991-2000 (in Philippine Peso) Capital Year Current Expenditures Outlay * Grand Total General Public Welfare Economic Operation of Other Total Government & Internal Development Economic Safety * Enterprise * Charges

1991 24,641,799 2,738,413 6,605,168 1,033,825 2,842,838 37,862,043 0 37,862,043 1993 24,644,045 13,794,935 7,327,293 7,085,000 1,067,474 53,918,747 1,258,679 55,177,426 1994 29,107,545 12,098,806 4,959,651 11,557,493 8,086,715 65,810,210 1,392,522 67,202,732 1995 32,025,552 14,394,466 2,970,989 13,603,962 8,587,735 71,582,704 586,842 72,169,546 1996 33,413,252 13,452,922 4,461,419 12,574,410 226,045 64,128,048 6,508,287 70,636,335 1997 45,187,211 7,355,820 13,265,369 16,166,667 8,599,363 90,574,431 3,325,128 93,899,558 1998 45,794,326 9,613,587 16,088,094 16,921,987 11,128,545 99,546,539 4,879,160 104,425,698 1999 52,384,846 11,536,448 19,144,771 24,144,257 10,390,314 117,600,636 2,936,850 120,537,486 2000 56,437,865 28,622,490 15,446,414 14,252,331 19,460,440 134,219,539 1,408,722 135,628,261 Average 39,874,330 13,858,684 10,029,908 14,538,263 8,443,329 81,693,655 2,787,024 84,171,009 Source: City of Fernando, Treasurer's Office Department of Finance -Bureau of Local Government Finance- Statement of Income and Expenditure Reports

There is no data for 1992.

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Figure 4-11 Expenditures of City of San Fernando (1991-2000)

160,000,000

140,000,000

120,000,000 Capital Outlay*

100,000,000 Other Charges

80,000,000 Operation of In PHP In Economic Enterprise*

60,000,000 Economic Development Public Welfare & 40,000,000 Internal Safety* General Government

20,000,000 Source: Bureau of Local Government Finance and 0 City of San Fernando, 1991 1993 1994 1995 1996 1997 1998 1999 2000 Average Treasurer's Office Year

Figure 4-12 San Fernando Expenditures (Average, 1991-2000)

Other Charges Capital Outlay* 9% 3%

Operation of Economic General Government Enterprise* 46% 16%

Economic Development 11% Source: Bureau of Local Public Welfare & Internal Safety* Government Finance 15% and San Fernando, Treasurer's Office

Experiences in External Financing In the early 1990s, San Fernando was able to secure a loan from the Technical Education and Skills Development Authority (TESDA) with an interest of 10 percent per annum when it tried to revive the operations of its new public market.32

32 Interview with City Administrator Jose de Leon, San Fernando City, Pampanga, 10 September 2001. 242

After this arrangement with TESDA, San Fernando did not venture into any similar arrangement either from private banks or from government financing institutions. It has a P65 million stand-by loan from the Philippine National Bank (PNB) but it has not yet formally availed of this arrangement. This stand-by loan, if availed of, could be repaid through intercept of its IRA share from the national government. The local chief executives, however, were not keen on availing of this loan citing their unwillingness to pay interest payments similar to the arrangement with the TESDA project. Mayor Aquino also said that in not availing of the loan, he would not be unnecessarily burdening his successor in paying the loan. 33

In 1999, however, San Fernando applied for a loan in 1999 to be funded by the Asian Development Bank through the Department of Interior and Local Government (DILG) for solid waste management. Since the approval process was delayed for more than 2 years, San Fernando subsequently backed out of the project citing that it does not need the loan anymore and pay interest in the process. The LGU was able to source other funds to address the problem of waste management. It has, moreover, considered tapping more grants rather than loans. 34

When the need for sizeable financing crops up, particularly when it concerns disaster-related solutions and programs, San Fernando has often turned to the national government, particularly through the Office of the President. Its requests for assistance have often been granted, in the light that the lahar flooding in Pampanga province has been rather massive for local governments to handle. Another strategy of mobilizing resources is to seek help from Congress and the Senate. Pampanga, being a rich source of votes, has been a regular recipient of pork barrel assistance from legislators. Senators Teresita C. Oreta and Loren Legarda have provided substantial part of their funds to help in the concreting of the roads in the municipality. 35

33 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001. 34 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001. 35 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001.

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While San Fernando once considered bond flotation as a strategy to raise funds, it did not push through with this plan upon objections from local stakeholders who perceive that such transaction could only end up as an additional expense for the city. Similarly, the LGU has hesitated in venturing into the Build-Operate-Transfer (BOT) or the Build- Lease Transfer (BLT) arrangements because of similar fears that the municipality would be at the losing end of the arrangement with only the contractors benefiting from the transaction. 36

San Fernando has expressed willingness to enter into an inter-municipality lending arrangement, provided it is able to realize surpluses in its budget. This is similar to the previous practice of Marikina City in lending to other cities in Metro Manila. Mayor Aquino acknowledged that inter-local government cooperation is needed for overall development. A proposal to group together LGUs into regional clusters, however, was discouraged as it may entail administrative funding. Mayor Aquino thus suggested that perhaps it would be better to provide assistance to recipients in need. Financial support may also be given directly to concerned barangays.37

Regional grouping has previously been done at the national government level, particularly as an economic strategy. Such strategy grouped LGUs according to their particular competitive niches in order to share in the costs of developing such niche. For example, several vegetable growing towns in the Cordillera Administrative Region were grouped together to subsequently form the envisioned “vegetable cradle” for Luzon. Nothing has come out with this proposal. This experience, or non-experience, does not mean the grouping of LGUs for the purpose of collective development should not be pursued. As provided for by the LGC of 1991, the LGUs may group together or cluster to undertake a project and this could be done with the Leagues of Provinces, Municipalities or Cities as the coordinators, or facilitators. 38

36 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001. 37 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001. 38 Interview with City Administrator Jose de Leon, San Fernando, Pampanga, 10 September 2001.

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Where procurement of goods and services to meet the development and operating needs of LGUs is concerned, San Fernando pursues its construction projects as part of its administrative functions in order to reduce costs as well as maintain quality. While it has been principally accepted that bidding functions reduce costs, it does not necessarily result in the best quality. The supplies used in governance operations, however, are bidded out in compliance to procurement rules indicated in the Local Government Code.

San Fernando experienced a yearly surplus from 1996 until 2000 (Table 4-9). The reason for this is that the municipality was able to meet its yearly collection targets as projected in its target-setting benchmarks done the previous years. It was also able to allocate its income to its priority needs prudently despite the increasing demands of a growing population and a disaster-prone environment.

Table 4-9: Consolidated Income And Expenditure (in Pesos) Year Income Expenditure Surplus (Deficit) 1991 37,451,402 37,862,043 (410,641) 1993 55,732,854 55,177,426 (555,428) 1994 71,157,417 67,202,732 3,954,685 1995 84,415,408 72,169,546 12,245,862 1996 86,193,214 70,636,335 15,556,879 1997 105,918,519 93,899,558 12,018,960 1998 110,311,435 104,425,698 5,885,737 1999 147,646,269 120,537,486 27,108,783 2000 157,977,338 135,628,261 22,349,077 Average 121,609,355 105,033,468 16,575,887 Source: San Fernando City, Treasurer’s Office, Statement of Income and Expenditures

For its successive surpluses, as mentioned earlier, San Fernando was able to win the Galing Pook Award for outstanding performance in Financial Management. This accomplishment led to assistance other than the prizes given by the national government and not for its financial management alone. The Ford Foundation, for example, granted US$85,000 to the municipality for increasing the literacy rate of its population. 39

39 Interview with San Fernando Mayor Rey Aquino, San Fernando, Pampanga, 10 September 2001. 245

The efficiency displayed by San Fernando in financial management led its officials to apply for conversion into a city in 1998. For the constituents of San Fernando, this application for cityhood should have been done earlier considering its reputation as a major thoroughfare that links all regions and for having served for centuries as a center of governmental transaction, commerce and trade in Central Luzon. This application, however, took 2 years of deliberation and politicking before it was approved by Congress. In contrast, a similar application of Balanga – the capital of nearby Bataan Province - which took only 2 months to be approved to become a city. As mentioned earlier, a major reason for urbanizing municipalities to seek conversion into cities is the threefold increase of their IRA (23 percent) share once converted. Precisely for this reason, Congress has included other criteria in the formula to determine whether an applicant municipality is ready for cityhood or not. 40

The Paradox of Centralization in Decentralization Overall, San Fernando reacted positively on decentralization efforts that started in 1992. The officials and other stakeholders interviewed for this study exhibited firm belief on good local governance as a key to progress.

These stakeholders, however, see a paradox in overall decentralization efforts, or what they perceived of governance that “is decentralized but still centralized”.

One such paradoxical example is the administration of the Philippine National Police (PNP) where the mayor has no control. The PNP continues to be administratively under the DILG and where projects on peace and order are concerned, instructions have to come from the central PNP command for such projects to be carried out. For instance, the mayor instructs a drive against illegal gambling. He cannot, however, successfully implement this drive unless he is able to get the national government and the regional office of the PNP to move. Despite this, however, San Fernando’s expenses for social

40 Interview with Congressman Oscar S. Rodriguez, San Fernando, Pampanga, 24 September 2001. 246

welfare and internal safety have been increasing from 1997 until 2000. This issue of control over the police force remains a sensitive one that the local government executives feel should be resolved in their favor. 41

Another example concerns the devolution of health and agriculture. In this case, the national government has devolved only the personnel, but not the facilities, equipment and other assets. As a result, the perception among the local stakeholders is that the problems were the things devolved, and not the solutions. In this situation, there are actually two types of personnel: the organic or permanent personnel of the national government agencies (DOH and DA, in this respect) who draw their salaries from the national government; and devolved personnel whose salaries are shouldered by the LGU. The existence of this duality reaffirms the existence of separate goals: the organic personnel view their functions in line with national health or agricultural objectives; while the devolved personnel focus on local issues and conditions. One consequence from this arrangement is that local health or agricultural personnel are not well trained as their counterparts from the national offices. Another is that the national government provides funds for projects – which are for the benefit of the local communities, to the line agencies for implementation, rather than directly to the LGUs. 42

Another practice of continued centralization concerns the distribution of the IRA shares for the LGUs. The IRA continues to be the prime source of funding for most LGUs to the extent that their viability as independent governance institutions could be compromised without it. The experience of San Fernando in financing administration shows that it could raise funds from other sources to supplement its IRA shares and sustain its growth. While other LGUs depend on IRA to fund most of their operations, San Fernando has shown otherwise with 51 percent of its funds coming for sources other than the IRA. In this case, the local stakeholders suggest that the formula in the allotment of IRA shares be re-visited to include the criteria of productivity performance. Thus, smaller LGUs could get larger IRA shares provided it meets certain standards or levels of

41 Interview with City Administrator Jose de Leon, San Fernando, Pampanga,10 September 2001 42 Interview with City Administrator Jose de Leon, San Fernando, Pampanga, 10 September 2001 247

productive performance compared with a larger LGU which gets a larger IRA share simply because of its size. City Administrator de Leon cited the case of Puerto Princesa City which had been getting a big IRA allocation simply because of its vast land area. Yet questions have been raised on whether such area has been sufficiently productive. 43

Another example of how decision-making from the national government affected LGU operations concerns the act of Congress increasing the salaries and providing bonuses to all government employees, including LGUs, in 1996. This Congressional fiat, in effect, covered all LGUs, including those with limited resources. This legislative action, which technically encroached on the LGUs right to allocate their resources according to their actual needs and judgement, has put pressure on local executives to meet expectations from their employees on matters not of their making. San Fernando’s municipal council, naturally had to abide by the decision from Congress, so as not to antagonize their local employees who tend to expect benefits equal to those from other LGUs and the national government. 44

While the local stakeholders appreciate the assistance provided by Congress for their projects through the pork barrel, they are fully aware that such assistance has political implications and may not approximate what is actually needed. For example, a Congressman may only give P200 thousand for a public slaughterhouse that actually costs P5 million to build. Such partial contribution has been interpreted as a public relations effort from the legislator who professes support for LGU initiatives. Some LGUs conclude that this and similar gestures from their Congressional representatives are merely all for show. Despite this perception, the stakeholders of San Fernando nonetheless adjudge the municipality’s relationship with the national government, including Legislature, as harmonious. But when the attention of the latter on local issues is really needed, the LGU officials make a conscious effort to really get the national government involved. This includes the need to coordinate the implementation of national government projects with concerned LGUs, including those identified by

43 Interview with City Administrator Jose de Leon, San Fernando, Pampanga 10 September 2001 44 Interview with City Administrator Jose de Leon, San Fernando, Pampanga, 10 September 2001 248

legislators for funding from their pork barrel. There have been instances where the DPWH contractor has failed to coordinate with local authorities the location of the site where the project is to be implemented. This absence of coordination leads to unwanted duplication of public services or unwanted public disturbances such as traffic and similar inconveniences among the citizenry. San Fernando’s locally elected chief executives have thus made it a point to communicate with national government agencies with existing or pending projects to avoid public inconvenience arising from uncoordinated infrastructure activities.

San Fernando’s officials, led by Mayor Aquino, have stressed the need for the greater involvement of the national government in helping LGUs, particularly those facing natural or man-made calamities. The local government’s experiences with continued lahar flooding from Mt. Pinatubo has made the LGU wiser and creative in mobilizing resources to alleviate the plight of the citizenry. For instance, they have confirmed that poor socioeconomic conditions in a particular town are not enough basis for getting funds. There are, however, other factors that should be taken into account which are not necessarily economic. These include putting into play the conveniences of political party loyalties. Mayor Aquino, for example, switched to the administration’s Lakas-NUCD party in 1998 to get the national government’s support of vital infrastructure projects, such as the mega-dike to prevent further damage to San Fernando and its possible isolation from the flow of commerce and trade. In fact, the political switch to the administration party was led by Governor Lapid, with all other local executives following suit. 45

The local government executives interviewed offer a cynical view of political parties, which they consider relevant only during elections. They see party affiliation mainly as a means to getting funds for their parochial and local-based needs and not necessarily as a means to establish long-term loyalty to political parties. 46

45 Interview with City Administrator Jose de Leon, San Fernando, Pampanga 10 September 2001. 46 Interview with San Fernando Mayor Rey Aquino and City Administrator Jose de Leon, San Fernando, Pampanga, 10 September 2001, 249

Guagua: In Pursuit of Sustainability The municipality of Guagua is located on the western part of Pampanga, coming from San Fernando City. It has a population of 96,858 as of 2000, and is considered a large town in the hierarchy of municipalities.47 It has a total land area of 4,857 hectares, the bulk of which is agricultural in nature.

Despite its agricultural character, Guagua was able to develop its tax base thereby improving its classification as 3 rd class municipality in 1986 to 1 st class in 1998 with its average internally-generated income of P13,504,168 (Table 4-10). The main reason for Guagua’s relative ascendancy to the elite class of towns is its thriving woodcrafts industry, considered one of the most creative and productive in the whole country. The town’s Betis area hums with regular activity, with small factories and backyard shops churning out finely carved furniture, religious figurines, as well as guitars which together comprise the municipality’s top exports.

47 Central Luzon Regional National Development Plan , National Economic and Development Authority- Region III. 250

Table 4-10: Consolidated Income 1991-1998 - Municipality of Guagua (in Pesos) Internal External:Aids and Allotments Grand Total

Revenue from Taxation Non-Tax Revenues SUB-TOTAL BIR National Aids * National SUB-TOTAL Allotments Wealth *

Year Real Business Total Receipts Fees/Charg Loans Other Total Property Taxes* from es & Receipts Tax Economic Borrowi Enterprises ngs *

1991 949,422 1,923,927 2,873,349 1,726,587 2,730,047 0 409,740 4,866,374.00 7,739,723 5,828,362 0 0 5,828,362.00 13,568,085

1993 1,500,126 3,985,780 5,485,906 2,726,718 3,847,254 3,000,0 0 9,573,972.00 15,059,878 13,473,889 0 0 13,473,889.00 28,533,767 00 1994 1,663,137 4,370,381 6,033,518 2,987,543 3,636,955 0 473,880 7,098,378.00 13,131,896 19,151,615 1,411,669 0 20,563,284.00 33,695,180

1995 1,491,117 4,667,218 6,158,335 3,123,250 2,630,231 0 0 5,753,481.00 11,911,816 21,520,897 316,999 0 21,837,896.00 33,749,712

1996 1,477,878 5,984,649 7,462,527 2,966,587 3,838,309 0 110,373 6,915,269.00 14,377,796 23,430,523 4,038,345 0 27,468,868.00 41,846,664

1997 2,898,545 9,494,924 12,393,469 266,422 3,494,143 0 0 3,760,565.00 16,154,034 29,046,161 16,124 0 29,062,285.00 45,216,319

1998 2,898,545 9,494,924 12,393,469 266,422 3,494,143 0 0 3,760,565.00 16,154,034 29,700,605 16,124 0 29,716,729.00 45,870,763

Average 1,839,824 5,703,115 7,542,939 2,009,076 3,381,583 428,57 141,999 5,961,229 13,504,168 20,307,436 828,466 0 21,135,902 34,640,070 1 SOURCE: Department of Finance-Bureau of Local Government Finance: Statement of Income and Expenditure Reports No information for 1992

Guagua has been a consistent recipient of outstanding LGU awards. In 1994, Guagua was one of the 20 semi-finalists in the Gawad Pang-Lingkod Pook (Galing-Pook) for its program on the propagation of sampaguita and ilang-ilang, two of the Philippine’s most popular flowers that are made into sweet-smelling leis and perfumes. In 1995, it was one of the 10 recipients of the Galing-Pook Award for its “Guagua Integrated Approach on Sustainable Development” project.

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Political Dynamics With regard to its politics, Guagua embraced continuity over change in terms of the political leadership. Like the neighbouring San Fernando City, its mayors since 1986 were able to serve out their full 3-year tenure for three electoral terms or nine uninterrupted years. With the return of democratic practices after the overthrow of the Marcos regime, Guagua’s first mayor -- Atty. Manuel Santiago, served for three terms until 1998. He was succeeded by Paterno Magcalas who was a vice-mayor for three terms before eventually becoming the mayor. Despite not belonging to any political family, Mayor Magcalas won the election through established “name recall” among his constituents while still the vice mayor. Concerns have been raised on his age (he is over 60) which may be affecting his performance. 48 The local civil servants, including those from the Municipal Planning Development Office (MPDO) have expressed fears on the future of the gains achieved by the municipality in the past years. Financial Decentralization Before 1991, Guagua did not experience any deficit in its accounts. Starting in 1991, however, the municipality had fluctuating deficits from a low of P272,706 in 1991 to a high of P4,230,642 in 1995. The only exception was in 1996 when it had a surplus of P2,011,260 which turned into a deficit in the succeeding years (Table 4-11). This surplus was attributed to the inflow of national aid amounting to more than P4 million, the IRA share of P23.43 million, and the substantial increase in business tax collections. Table 4-11: Surplus/Deficit - Municipality of Guagua Year Income Expenditures Surplus (Deficit) 1991 13,568,085 13,840,791 (272,706) 1993 28,533,767 28,872,368 (338,601) 1994 33,695,180 35,098,174 (1,402,994) 1995 33,749,712 37,980,354 (4,230,642) 1996 41,846,664 39,835,404 2,011,260 1997 45,216,319 46,289,995 (1,073,676) 1998 45,870,763 46,289,995 (419,232) Average 34,640,070 35,458,154 (818,084) Source: Department of Finance-Bureau of Local Government Finance, Statement of Income and ExpenditureRreports

48 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 252

One of the reasons cited for the successive deficits is Guagua’s absorption of the personnel devolved from the national government. While the devolution also covered the salaries of the transferred personnel, the same could not be said of the maintenance and operating expenditures (MOOE), particularly for the devolved health workers and agricultural extension workers. Providing the necessary equipment and support facilities to the devolved health workers and agricultural field workers constituted additional expense. As a result, Guagua allotted 34 percent for general government expenses, mainly for salaries of its employees and related benefits (Figure 4-13).

Figure 4-13 Sources of Revenues: Guagua (Average, 1991-1998)

Receipts from Economic Fees/Charges Enterprises 10% 6% Loans & Borrowings* 1% Business Taxes* Other Receipts 16% 0%

Real Property Tax National 5%Wealth* 0%

National Aids* 2%

BIR Allotments SOURCE: Department of Finance-Bureau of 60% Local Government Finance

The problem was made worse by the passage of Republic Act 7305 or the Magna Carta of Public Health Workers in March 1992. This law specifically provided that the salaries of public health workers, whether in the national government or in the LGUs, shall be uniform. In the case of devolved personnel, the gap in their salaries shall be subsidized by the national government.

The intent of RA 7305 is to promote the social and economic well-being of health workers and “to encourage those with proper qualifications and excellent abilities to join and

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remain in government service.” 49 With regards to the personnel’s salaries, it provides that: “the salary scales of public health workers whose salaries are appropriated by a city, municipality, district, or provincial government shall not be less than those provided for public health workers of the National Government: Provided, that the National Government shall subsidize the amount necessary to pay the difference between that received by nationally-paid and locally-paid health workers of equivalent positions.” 50

But then, this law overlooked the fact that the organic members of the municipal government of Guagua who are also serving in public health-related functions receive less compensation than the devolved personnel. This has thus led to demoralization among the organic personnel. 51

The sizeable expenditure for personnel salary notwithstanding, the situation was exacerbated particularly in 2000 when the national government unilaterally made cuts in the IRA share. 52 To appreciate how the cuts had affected the overall budget of the municipality, the share of IRA to the overall source of income of Guagua is 60 percent, practically making it the biggest among the other sources of income (Table 4-12). Any cut in the IRA can have a disastrous effect on the overall budget of the LGU.

Table 4-12: Income for 1999 and 2000 Year BIR Allotments Internally- Total (External: in Generated Income (in Peso) Peso) (in Peso) 1999 47,517,132.98 11,480,091.31 58,997,224.29 2000 55,681,633.88 6,055,668.23 61,737,302.49 Source: Guagua Municipal Development Planning Office

Table 4-12 illustrates that IRA is the major source of income of Guagua. Similarly, Table 4-13 shows that Guagua is spending more than 70 percent for personal services. It

49 Republic Act No. 7305: The Magna Carta of Public Health Workers, 26 March 1992. 50 Ibid. 51 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 52 Mentioned by Ms. Elsa Perez-Pantino is Chief of the Municipal Planning Development Office of Guagua. 254

could also be deduced that the expected income from BIR allotment, which was cut in 2000 affected the overall financial standing of Guagua as it incurred almost P10 million of deficit.

Table 4-13: Expenditure for 1999 and 2000 Year Personal Maintenance & Development Capital Outlay Total Services Operating Projects Including (in Peso) (in Peso) Expenditures (in Peso) School Including Building School Building (in Peso) (in Peso) 1999 40,597,001.61 7,679,134.24 7,234,086.49 2,068,918.83 57,579,679.50 2000 44,621,343.11 13,673,696.23 10,078,300.60 3,240,166.58 71,613,510.52 Source: Guagua Municipal Development Planning Office

Table 4-14: Surplus/Deficit for 1999 and 2000 Year Income Expenditure Surplus (Deficit)(in (in Peso) (in Peso) Peso) 1999 58,997,224.29 57,579,679.50 1,417,544.79 2000 61,737,302.49 71,613,510.52 (9,876,208.03) Source: Guagua Municipal Development Planning Office

Another source of irritation concerning the IRA aside from unilateral intervention by the national government concerns the overall distribution formula, the criteria being: land area, population and equity. This formula has been questioned in the light of the fact that the province of Pampanga and its municipalities have been affected by lahar, thereby resulting in changes in the landscape. Bacolor town, for example, receives its IRA even if it no longer has land area to speak of. The whole town was buried by lahar and has been relocated to the City of Angeles. Neither does Angeles City get anything from the IRA share of Bacolor even if its residents now reside in the City. The peculiarities of the situation have not been resolved and thus continue to be a source of conflict not only between the national government and LGUs but also among LGUs themselves. 53

Other Issues in Financial Management A source of conflict related to financial management is the segregation or separation of barangays (villages). For example, Barangay Pulongmasle separated from its mother

53 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 255

Barangay Ascomo in 1994 as a strategy of getting its IRA shares as well as income from quarrying separately. Thus, Pulongmasle has its new set of barangay officials although it receives administrative subsidy from the municipality of Guagua. Barangay Ascomo, for its part, continues to operate as in the past although its share from quarrying has been substantially reduced as a result of the creation of Barangay Pulongmasle. 54

The eruption of Mt. Pinatubo in 1991 resulted in changes in the socioeconomic profile of Guagua. In particular, the collection of real property tax (RPT) has been adversely affected. While the collection of RPT contributes only 5 percent to the total income of the municipality (Figure 4-13), it has been increasing from 1991 to 1998 as the values of land properties stabilized through time.

Recognizing the behaviour that payment of taxes is not based on initiative, i.e. people will not pay unless you ask for payment, Guagua has adopted a continuous tax information campaign. Notices of payment are delivered personally and diplomatically. This strategy has reaped high returns as the people are constantly reminded of their tax obligations. Moreover, peer pressure has proven to be effective as neighbours are mobilized to remind their other neighbours to pay the correct taxes.55

While Guagua is a high-income class municipality, some of its vital financial management offices, such as the assessor’s office has yet to be computerized. 57 With the stabilization and growth of collections of RPT and business taxes, the computerization of the system would reduce processing time, including informal negotiation ( pakiusap ) between taxpayers and the collectors. “Pakiusap ” refers to verbal requests including those for the condonation of tax debts, or reduction of tax charges, particularly if the collector is a relative,

54 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 55 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 57 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001.

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a neighbour or a close friend. Because of the personal nature of such negotiations, the collusion allowed by this system can lead to abuse, especially graft and corruption.

Guagua’s officials recognize the negative effects of the pakiusap system and they are strongly insisting on the full computerization of their operations. As a result, a system has been put into place, including the relevant software programs. The computer system was established after the conduct of a bidding process, which included prolonged discussions to ensure that the contractor with the best track record in supplying the needed facilities would be chosen. In this regard, the Regional Office of the DOF will finance the computerization of RPT and business taxes to the tune of P20 million, assistance that is significantly ample. 58

Taxation and Other Sources Aside from low RPT collection immediately after the eruption of Mt. Pinatubo, business activities also went down at the time the LGC of 1991 went into effect. The land properties could not be accepted by banks as collateral for loans, thus plunging investments to its lowest levels. But the businesses in the area showed exceptional resilience and were able to adapt to the changing physical and trade environment. While collection of business taxes was not exceptional, payment rates were able to inch up every passing year. As a result, from 1991 to 1998, business taxes were able to collectively comprise 16 percent of the overall income generated by the municipality, second only to the IRA.

After the eruption of Mt. Pinatubo, several enterprising landowners converted their lahar-covered farms into fishponds. These fishpond enterprises, incidentally, were replicated in several towns in the province particularly in areas affected by the eruption and the lahar floods. As a result, Pampanga province has risen to become the top producer of cultured aquatic products, specially tilapia, milkfish (bangus) and prawn in the region. Guagua, for its part, also prospered and was thus able to increase its collection of business taxes by 50 percent yearly (Tables 4-10 and 4-11). Through the implementation of an integrated development approach at the municipality level, Guagua was able to get recognition for its

58 Interview with Municipal Planning Chief Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001.

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efforts through the Galing-Pook Award from the Asian Institute of Management (AIM) in 1995. In line with its integrated development plan, Guagua has raised concern over the mushrooming of fishponds that could lead to possible environmental problems. Aside from the need for more strict environmental management measures, the municipality also faces the possibility of encountering economic problems since the increase in supply of fish products may outstrip actual demand, unless newer markets are found and developed. 59

While the municipality is consistently in deficit, it saw no urgent need to tap foreign- assisted projects or loans from government-financing institutions or private banks, except in 1993. Guagua borrowed P3 million from the Development Bank of the Philippines (DBP) in 1993 for the construction of its public market, which is revenue-generating. The market has provided the town with a steady source of income since then. Like neighbouring San Fernando City, Guagua has wisely tapped the nationaI government for assistance for large- scale infrastructure projects. Thus, it has not thought of borrowing from GFIs and the private sector for its infrastructure needs, unless extremely necessary.

The municipality continues to seek assistance from the national government for its infrastructure needs, including the upgrading of road networks. For construction and repairs of its public facilities, the municipality forwards its requests to the appropriate national government agency, such as the DPWH, for appropriate action. Such requests are usually granted, although no cash is given out and the assistance comes in the form of construction and related supplies. Other than this, Guagua also seeks the assistance of national legislators through their pork barrel allocations. The arrangement is similar to that with the government, where the pork allocations from the legislators are provided in the form of complete project packages, including the contractors who are usually pre-chosen. It has been observed that these projects funded out from the pork barrel of legislators reflect a political patronage relationship – to an extent, that project quality is not often stressed nor considered.

59 Interview with Guagua Chief Muncipal Planning Development Office Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001. 258

It was noted that the national government actually provided cash to Guagua starting in 1994, capping this with substantial transfers in 1996. From 1991 to 1998, national aid transfers actually comprise 2 percent of the total income of the municipality (Figure 4-13).

The municipality continues to maintain its involvement with national government activities especially that these are mostly mutually beneficial. Aside from doing the usual involvement of the municipality in the monitoring of national government-sponsored programs, the Guagua Municipal Development Planning Office (MPDO) has assisted in the acquisition of the right-of-way for the construction of the anti-lahar megadike. The harmonious relationship between the municipality and the national government is punctuated by minor problems including the coordination of projects. The contractors of the national projects usually do not observe protocol, going ahead with their implementation work without informing beforehand the local government where the projects are situated. The contractors are not to be blamed for this behaviour considering the pervasive perception that the municipal mayor would ask for something, like a “gift” or a kickback. While there are local government executives who have no qualms in doing this, there are those whose integrity remains unquestioned. The mere absence of prior consultation, however, can actually lead to coordination gaps which could end up in either duplication of projects or in the refusal of the LGU to permit or assist the project. This could also be an underlying problem in LGU-private sector partnership in the implementation of infrastructure or capital projects in the municipality. 60

Expenditure Patterns With regard to expenditure patterns of the municipality, general government – as mentioned earlier - has the highest share of expenditures in Guagua, followed by public welfare and internal safety and other charges with 23 percent and 16 percent, respectively (Figures 4-15 and 4-16). The expenditures for economic activities total 27 percent, comprised of 13 percent for economic development, 8 percent for operations of economic enterprises and 6 percent, capital outlay. While Guagua did not spend on economic

60 Interview with Guagua Chief Muncipal Planning Development Office Elsa Perez-Pantino, Municipality of Guagua, Pampanga, 4 September 2001.

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development in 1995, it spent significantly for the operations of economic enterprises in 1997 and 1998. Although these economic activities also coincided with the Asian crisis, the collections from these activities were not affected. Although prices of certain commodities increased, the municipality affirmed that generally, all other goods and activities were not adversely affected by the Asian crisis. The operations of economic enterprises are highly local in nature and do not require any import-export transactions that could affect processes and procedures.

Figure 4-15_Expenditures: Guagua (Average, 1991-1998)

Capital Outlay Other Charges 6%

16%

General Government 34%

Operation of Economic Enterprise 8% Public Welfare and Internal Safety 23%

Economic Development 13% Source: Bureau of Local Government Finance

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Figure 4-16 Local Government Expenditures: Guagua (1991-1998)

50,000,000

45,000,000

40,000,000

35,000,000

30,000,000 Capital Outlay*

Other Charges* 25,000,000

InPHP Operation of Economic Enterprise* 20,000,000 Economic Development

Public Welfare & Internal 15,000,000 Safety* General Government

10,000,000

5,000,000

0 Source: Bureau of 1991 1993 1994 1995 1996 1997 1998 Average Local Government Year Finance

While Guagua has been in continuous deficit, it subsidizes the operations of other national government offices based in Guagua despite absence of adequate funding from their central offices. The offices of the Commission on Elections (COMELEC), Bureau of Internal Revenue (BIR) and the municipal trial court, for example, occupy spaces at the municipal building at no expense on their part. These offices continuously experience budget constraints in capital outlay and maintenance and other operating expenses thereby weakening their capability to maintain their own office spaces and related expenses like electricity and water. The municipality, nevertheless, has allocated funds for these purposes. An explanation offered by the Guagua government executives is the strong bonds of “pakikisama,” a cultural norm that refers to mutual accommodation by reason of mutual benefits over time. Thus, by providing space and electricity to the national agencies, the local government executives expect to have something in return, such as assistance or connections with the offices at the national level.

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Magalang: A Profile in Growth Magalang is a 4 th class and, therefore, a middle-income municipality that is classified as a medium-town in the hierarchy of Pampanga province. It is located at the northeast of Pampanga near Angeles City. Magalang has a total land area of 9,731.2576 hectares, 74.16 percent of which is agricultural land (7,217.194 hectares). The rest of the municipality’s land is mixed-use, including the poblacion area. There is a current proposal to revise part of the land use in Magalang to expand industrial as well as settlements coverage. The population size of Magalang is 77,530. 61

Political Dynamics Where its political leadership is concerned, Magalang has experienced continuous stability by maximizing the political terms of top local officials, particularly the mayors who have, since 1986, served out their full political terms of nine years. The first mayor after the overthrow of the Marcos regime, Joey Lacson, served his first term of office after running as an independent (with no political party machinery). For his second (1991-1994) and third term (1994-1997), he ran under the Lakas-NUCD of former President Fidel V. Ramos. After serving out his third term, Lacson was succeeded by Pastor Guiao – the brother of former Governor Bren Z. Guiao, in 1998. At the time of field work, Mayor Guiao’s was in his third term of office.

Before being elected as mayor, Guiao was an administrator at the Bureau of Customs for quite some time. His managerial skills became his greatest assets to the development of Magalang, particularly in environmental management. In fact, Magalang emerged as a consistent winner in the Clean and Green Program of the government. This nationwide competition recognizes the best practices in environmental protection, conservation and sustainable management. The municipality’s Task force Kalinisan and Municipal Forest Protection Council have been cited for their outstanding efforts in environment-related concerns. For five consecutive years, Magalang was awarded the Presidential Award on Environment (Gawad Pangulo sa Kapaligiran) for its efforts .62

61 Profile of Municipality of Magalang own compilation of the Municipality. 62 Sunstar , “Magalang bags Gawad Pangulo Award for 5th time“, 9 October 2003, p.1. 262

Just after martial law, Magalang was classified as one of the poorest municipalities in the province (6 th class). Ten years later, in 1998, it was able to improve its standings to become a 4 th class municipality. By 2001, when it was included in this study and its officials were interviewed, Magalang was a candidate for upgrading to 3 rd class. The Municipal Administrator, however, expressed his concern on the physical and economic conditions of the municipality, particularly on the lack of local industries. To sustain the town’s economic development, there is the need for other activities that could complement the predominantly agricultural sector. 63

Development Strengths and Weaknesses Despite the perceived rural nature of Magalang, it has formulated its own development agenda and in the process identified its strengths that could serve as the basis for its future growth. Based on its self-administered 2001 Local Productivity and Performance Management System (LPPMS) submitted to the DILG, the municipality considered the following as its strengths in development planning: (a) the presence of an Executive Vision Statement; (b) an active Local Development Council (LDC) Members and Secretariat; (c) a productive Executive-Legislative Partnership; (d) the availability of updated planning documents like the Executive Agenda and Comprehensive Land Use Plan (CLUP); and (e) presence of support and assistance from nongovernment organizations (NGOs) and national government agencies, as well as the participation of various sectors of the community in local governance affairs. 64

The municipality, on the other hand, perceived the following factors as weaknesses that hinder its performance in development: (a) non-availability of a 100- percent computer-based data bank and high-technology GIS (Geographic Information System) project; (b) inadequate number of personnel with technical skills in planning

63 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 64 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 263

and development at the Municipal Planning and Development Office (MPDO); and (c) inadequate funds to support all programs and projects. 65

With regard to fiscal administration, the municipal council (Sangguniang Pambayan) has identified the following strengths : (a) annual executive budget prepared and approved within the budget calendar; (b) available annual revenue plan; (c) presence of a Revenue Code of the Municipality that has been revised consistent with the Local Government Code; and (d) strict adherence to the 45 percent to 55 percent limitation for personnel services. The weaknesses or performance gaps identified, however, include the following: (a) the target budget of each year is not enough to fund yearly programs and projects causing reduction or cut in budget proposal by departments; (b) limited tax base with agricultural base; (c) non- availability of 100 percent computerized tax-revenue generation and collection system, affecting tax generation and collection efficiency rate; and (d) limited number of investors on nonagriculture-based ventures. 66

Financial Performance Based on financial indicators, Magalang has exhibited fluctuating periods in its financial health from 1991 to 1998 (Table 4-15). It also confirms the town’s difficulties in mobilizing resources, whether from internal or external sources. From 1991 until 1994, Magalang experienced continuous surplus which turned into a deficit the next year, 1995, which was carried on in 1996. By 1997, the municipality crawled into a minimal surplus situation, only to slump anew in 1998. On the average, however, Magalang was on the positive side for the entire period, although minimally.

65 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 66 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001.

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Table 4-15: Surplus/Deficit 1991-1998 Year Income Expenditure Surplus (Deficit) (in Peso) (in Peso) (in Peso) 1991 4,714,116 4,375,456 33,866 1993 10,669,869 10,248,694 421,175 1994 13,978,126 12,774,713 1,203,413 1995 14,929,605 16,102,614 (1,173,009) 1996 16,987,969 17,536,080 (548,111) 1997 24,645,379 24,584,488 60,891 1998 26,561,852 26,775,225 (213,373) Average 16,069.559 16,056,753 12,806 Source: Municipality of Magalang, Statement of Income and Expenditure Reports

Several factors have contributed to this performance. For one, there was a continuous increase for all sources of income through time, save for one-time decrease for single items such as receipts from economic enterprises in 1997, and fees and charges in 1998 (Table 4-16 and Figure 4-17). The Municipality did not receive any revenues from other receipts starting in 1995 because of very few commercial establishments in its highly agricultural area. Moreover, the national government provided cash assistance only once, in 1997. From 1991 until 1998, BIR allotments constituted 80 percent of the total income of the share of the municipality. The share of business taxes has been greater than that of RPT with 7 percent and 5 percent, respectively. The share of receipts from economic enterprises at 5 percent and other fees and charges at 3 percent has continued to remain insignificant. Other sources had zero share.

As earlier mentioned, Magalang is heavily dependent on the IRA (Figure 4-18) since the predominance of agriculture in its economic mix has limited its tax base. While the town has initiated a partial computerization of its operations to increase efficiency in tax collection, real property and business taxes continue to be quite low. There is this perception that the farmers seldom pay taxes to the government whether national or local mainly because of lack of capacity to do so. The farmers’ incomes are heavily dependent on their harvest and they are usually left with little after deductions of loans for fertilizers, pesticides and other farm inputs which are provided by merchants from other places. Considering the municipality’s agricultural tax base, Magalang did not introduce any new tax. The municipality only revised its revenue structure by increasing the tax rate in 1996 and after 265

having formulated a Comprehensive Development Plan and Zoning Ordinance for 2001- 2005. It has also issued a few business permits as the environment did not auger for expanded commerce and trade.

As an aftermath of the eruption of Mt. Pinatubo, however, changes were noted in the composition of its settlement patterns. Magalang, because of its distance from the lahar- bearing waterways, became the resettlement center of choice for the municipalities of Bacolor, Minalin and San Fernando. This has put the municipality in a peculiar situation. While Magalang became host to an additional 5,600 housing units, the IRA share of the town did not change despite increases in the IRA formula is population, land area and equity. Even those municipalities from where the resettled families originated did not contribute to Magalang’s IRA. This situation has emerged into a special concern and possible source of conflict as questions were raised on who would shoulder the basic social services of the migrants. 67

Magalang has requested the settlers to pay for their residence tax certificates ( cedula ) as another means to mobilize resources. As of 2001, 8,000 persons have registered as residents but, strangely, not as voters of Magalang. Moreover, some 10,000 persons have yet to register. The registration of the settlers as residents and not as voters illustrate that migration to a certain municipality may not necessarily indicate automatic transfer of political power. 68

67 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 68 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001.

266

Table 4-16: Consolidated Income - Municipality of Magalang:1991-1998 (in Pesos)

Internal External:Aids and Allotments Grand Total Revenue from Taxation Non-Tax Revenues SUB- BIR National National SUB-TOTAL TOTAL Allotments Aids Wealth

Year Real Business Total Receipts Fees/Charges Loans & Other Total Property Taxes* from Borrowings Receipts Tax Economic Enterprises

1991 602,804 245,007 847,811 618,572 9,693 0 25,049 653,314.00 1,501,125 3,212,991 0 0 3,212,991.00 4,714,116

1993 489,780 531,296 1,021,076 635,659 128,941 0 33,381 797,981.00 1,819,057 8,850,812 0 0 8,850,812.00 10,669,869

1994 449,664 698,734 1,148,398 712,654 165,424 0 60,760 938,838.00 2,087,236 11,890,890 0 0 11,890,890.00 13,978,126

1995 591,174 858,251 1,449,425 743,909 200,056 0 0 200,056.00 1,649,481 13,280,124 0 0 13,280,124.00 14,929,605

1996 771,694 1,218,683 1,990,377 886,887 594,909 0 0 594,909.00 2,585,286 14,402,683 0 0 14,402,683.00 16,987,969

1997 1,183,398 2,086,899 3,270,297 661,435 1,293,946 0 0 1,955,381.00 5,225,678 19,410,981 8,720 0 19,419,701.00 24,645,379

1998 1,493,652 2,043,906 3,537,558 1,424,601 737,911 0 0 2,162,512.00 5,700,070 20,861,782 0 0 20,861,782.00 26,561,852

Average 797,452 1,097,539 1,894,992 811,960 447,269 0 17,027 1,043,284 2,938,276 13,130,038 1,246 0 13,131,283 16,069,559

SOURCE: Department of Finance-Bureau of Local Government Finance, Statement of Income and Expenditure Reports

No data for 1992

267

Figure 4-17 Consolidated Income of Magalang (1991-1998)

30,000,000

25,000,000

20,000,000

National Aids

BIR Allotments

15,000,000 Other Receipts In PHP In Loans & Borrowings

Fees/Charges

10,000,000 Receipts from Economic Enterprises Business Taxes*

Real Property Tax

5,000,000

1991 1993 1994 1995 1996 1997 1998 Average SOURCE: Department of Finance-Bureau of Year Local Government Finance

268

Figure 4-18 Sources of Income of Magalang (Average, 1991-1998)

BIR Allotments 80%

Other Receipts Loans & Borrowings0% 0% Fees/Charges 3% Business Taxes* National Aids 7% Real Property Tax 0% SOURCE: Department of Finance- 5% Bureau of Local Government Finance

Receipts from Economic National Wealth Enterprises 0% 5%

Experiences in Financial Sourcing Magalang, to augment its financial resources, have tried sourcing funding support from both internal and external non-tax sources. For one, the municipality applied for a loan from the Municipal Development Fund (MDF) funded by Asian Development Bank (ADB) with the DILG as the executing agency for a project entitled Clark Area Municipal Development Project (CAMPDP). This project consists, among others, of an extensive road network with flood control and related environmental protection components. Consistent with its sustainable environmental management objective, Magalang chose the solid waste management sector as the main beneficiary of the project. As a result, the municipality benefited from the improvement of a sustained garbage collection and disposal system and worked to continue and strengthen it. It was because of this project, in addition to its good working relationship with the NGOs and people’s organizations (POs), that Magalang

269

succeeded with its Clean and Green Program Campaign and thereby winning national competitions on environmental concerns. 69

Aside from this loan from foreign-assistance, Magalang also negotiated for a Build- Operate-Transfer (BOT) scheme for the construction of its public market. This arrangement, which involved private sector participation, did not succeed because of technical differences. On the part of the municipality, it was considered that constructing a second floor for the market was not viable since only the stalls at the ground floor would profit from the services. It, instead, opted for the horizontal expansion of the original plan and maintaining a single floor throughout, as has been the experience in several other municipalities. However, the private contractor demurred and insisted on a second floor, which the municipality disapproved. Ultimately, this project failed to push through. 70

Another BOT initiative was undertaken for the municipality’s solid waste management. However, fears of possible lack of support from the public who assumed double taxation in the collection of additional garbage fees made the local government executives change their minds. Thus, subsequent negotiations with the Pan-Asian-American company for the solid waste disposal did not push through. 71

While the municipality has no experience in the flotation of municipal bonds to raise necessary funds for capital projects, Magalang is looking at this option with interest as an option in sourcing funds.

While the national government provided cash assistance to Magalang in 1997 (Table 4-17), it was able to support the municipality through a total of P33.392 million worth of projects in 2002. This assistance, as broken down, include: (a) P10.109 million worth of level 2 water systems (water pumps) from the pork barrel (Countrywide Development Fund – CDF)

69 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 70 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 71 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001.

270

of Congressman Francis Nepomuceno; (b) P1.611 million for the construction of social welfare administration buildings as well as self-employment assistance from the DSWD; (c) the construction of a rural water supply system worth P1 million from the Local Water Utilities Administration (LWUA); (d) P1.5 million worth of construction for a slope protection wall at the river from the DPWH; (e) P1.5 million pork barrel assistance from Senator Teofisto Guingona for the improvement and concreting of barangay roads; (f) P1.5 from the Department of Agriculture and DPWH for the re-gravelling of farm-to-market roads; (g) a cost-sharing arrangement between the League of Municipalities and Provinces (LMP), LGU and DPWH involving P1.25million for the improvement and concreting of roads; (h) P14.8 million from the National Irrigation Administration (NIA) in Region 3 72 for a communal irrigation project; and (i) P130,000 from the Department of Labor and Employment (DOLE) for skills training in cut-flower where the municipality is competitive. The DOLE, as part of its mandate, provides assistance to LGUs though training and capacity- building. 73

Aside from these forms of assistance, the Magalang Municipal Counci1 passed nineteen Resolutions in relation to requests for funds from the national government in 2000.74

Magalang’s 2001 Annual Investment Plan indicates that 20 percent of its IRA has been set aside to finance its development projects, indirectly indicating that local development initiatives come from national government shares. These projects include: (a) small to medium scale enterprise development supported by the DA and the Cooperative Development Authority; (b) improvement of educational facilities with support from the DECS; (c) health facilities and services provided by DOH; (d) cleanliness, sanitation and beautification projects with assistance from DOH, DENR, and DA; (e) Sports and Youth Development through the Philippine Sports Commission (PSC), National Youth Commission (NYC) Technical

72 As provided under the Agriculture and Fisheries Modernization Act (AFMA). 73 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 74 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 271

Education and Skills Development Authority (TESDA) and DOLE; and (f) people empowerment initiatives of the DILG. 75

Expenditure Pattern The pattern of expenditures of Magalang shows that the municipality spends the biggest on general government with 34 percent on the average (Figure 4-19) followed by public welfare and internal safety with 23 percent. Other charges and economic development have 16 percent and 13 shares, respectively. The operations of economic enterprises and capital outlay, on the other hand, have shares at 8 percent and 6 percent, respectively.

Figure 4-19 Expenditures: Magalang (Average, 1991-1998)

Capital Outlay Other Charges 6% 16%

Operation of Economic Enterprise 8% General Government 34%

Economic Development 13%

Source: Bureau of Local Public Welfare and Internal Government Finance Safety 23%

On a yearly basis all expenditures increased except in 1997 and 1998 where public welfare and internal safety, operations of economic enterprises and other charges dropped (Table 4-17 and Chart 4-20). Capital outlay, for its part, showed an unpredictable trend: after a substantial increase in 1993 followed by a decrease in 1994, it jumped tenfold in 1995, only

75 2001 Investment Plan of Magalang. 272

to decrease the following year. A drop in 1996 was followed by an increase in 1997 and a greater hike in 1998.

Table 4-17 :Municipality of Magalang Local Government Expenditures 1991-1998 (in Philippine Peso) Capital Grand Year Current Expenditures Outlay Total General Public Economic Operation Other Total Government Welfare & Development of Charges Internal Economic Safety Enterprise

1991 3,171,957 58,680 393,754 19,932 724,233 4,368,556 6,900 4,375,456

1993 5,223,389 1,804,267 1,300,623 399,024 1,287,781 10,015,084 233,610 10,248,694

1994 6,577,955 1,523,806 1,539,286 572,637 2,528,531 12,742,215 32,498 12,774,713

1995 8,125,162 1,695,534 1,851,063 751,690 3,152,010 15,575,459 527,155 16,102,614

1996 8,367,897 2,753,290 2,317,259 834,442 3,204,352 17,477,240 58,840 17,536,080

1997 10,460,330 4,298,335 3,421,904 5,095,406 1,194,054 24,470,029 114,459 24,584,488

1998 10,915,129 3,703,892 3,894,098 1,064,237 6,456,390 26,033,746 741,479 26,775,225

Average 8,278,310 2,629,854 2,387,372 1,452,906 2,970,520 15,811,761 284,674 16,056,753 Source: DOF- Bureau of Local Government Finance, Statement of Income and Expenditure Reports

No information for CY 1992

Table 4-20: Local Government Expenditures: Magalang (1991-1998)

30,000,000

25,000,000

20,000,000

Capital Outlay

Other Charges 15,000,000

InPHP Operation of Economic Enterprise Economic Development

10,000,000 Public Welfare & Internal Safety General Government

5,000,000

0 Source: Bureau of 1991 1993 1994 1995 1996 1997 1998 Local Government Year Finance

273

It would seem that, based on the data on expenditures, the municipality could hardly finance its economic activities including capital outlay. But this problem has been mitigated by assistance from the national government and other external sources such as the projects earlier mentioned. Thus, even with minimal financial inputs from the municipality, it has managed to develop its economic capacities, even if minimally.

Insofar as inter-LGU cooperation is concerned, Magalang has not yet ventured into any cooperative arrangement with other municipalities. Its officials, however, aver that they would not hesitate to provide assistance to other LGUs if it improves its capacities through bigger surpluses. 76

Insofar as procurement of goods and services for its operations is concerned, Magalang strictly performs official bidding procedures in order to enhance the credibility of the process. It imposes penalties to suppliers for non-compliance of processes. For instance, the municipality has seized the performance bond of suppliers who failed to observe rules. The municipality, however, grants extensions of payment when requested prior to contract termination. The municipality, in observing bidding, upholds the principle where goods and services should be obtained at the best quality for the least cost. 77

Views on Decentralization The Municipality of Magalang considers decentralization a very good concept, particularly on full local autonomy. The municipal administrator who was formerly a municipal agriculturist, cited the importance of fiscal autonomy in governance, given the greater responsibility given to the LGUs in delivering basic socioeconomic services. With decentralization, the role of the local chief executives is better defined. Through decentralization, the LGUs are required to formulate development plans such as the

76 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 77 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 274

Comprehensive Land Use Plan (CLUP) which has proven very useful for tax mapping purposes. The LGC of 1991 also encourages LGUs to be self-reliant. 78

On the other hand, the municipality’s actual experiences show that much more has to be done to attain full decentralization of current practices in governance. The national government has continued to monitor the LGUs and has also issued executive orders and memorandum circulars that, while aiming for consistency in governance standards of LGUs, also provides limits on financial practices. An example is Executive Order 189 that prescribes guidelines on how the 20 percent development fund from the IRA should be used. This presidential order merely confirms the stipulation in Section 287 of the LGC of 1991 wherein LGUs are obliged to set aside 20 percent of their IRA shares for local development programs. Copies of these development programs – either the Comprehensive Land Use Plan (CLUP) or any other LGU development plan, are given to the DILG for proper monitoring purposes. The Municipality of Magalang has no problem with this, as it has its own investment plans, including an annual shopping list of projects and programs.

The constant presence of the DPWH and other national government line agencies in the local communities, particularly in the implementation of large-scale infrastructure programs, somehow provides a crippling effect on the efforts of LGUs to undertake their own construction initiatives. Magalang has argued that the provincial government of Pampanga has capabilities to implement infrastructure projects, including roads and bridges, since they have complete facilities and equipment, and technical personnel. In fact, the provincial government has assisted the town in the construction of drainage canals, farm-to-market roads and a day care center in 2000. Nonetheless, the bulk of infrastructure projects in the LGU continues to be dominated by the DPWH. 79

Magalang considers the withholding of the IRA in 1998 until 2000 as inconsistent with the LGC of 1991 which provides for the automatic release of shares “on a quarterly basis within 5 days after the end of each quarter, and which shall not be subject to any lien or

78 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 79 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 275

holdback that may be imposed by the national government for whatever purpose.” 80 The subsequent release of the withheld 5 percent IRA by the national government to all LGUs has been attributed to the efforts of San Juan Mayor Jinggoy Estrada, a son of the President and also the President of the League of Municipalities. This situation reflects the workings of personalities in the adjudication of processes rather than the demands of existing laws which, in this case, is the Local Government Code of 1991. 81

Santa Rita Although Santa Rita is near urban centers like the cities of San Fernando and Angeles and relatively prosperous towns such as Guagua, it has been classified a 5 th class LGU, or a poor income municipality. The major factor that has impeded the socioeconomic growth of the area is its largely agricultural base. The municipality has no known dominant industrial nor commercial sector to speak of and its people go to the neighbouring commercial centers for their economic needs. Based on the 2000 Census, Sta. Rita has a population of 32,780 people. Sta. Rita consists of 10 barangays with a land area of 3,296.5 hectares. Majority of which is devoted to agriculture with a land area of 2,494.41 hectares followed by residential use of 501.65 hectares and commercial use of 299.94 hectares. 82

The Politics of Santa Rita Political life in Santa Rita revolves around two perennial political contenders, engineer Arthur Salalila and Francisco D. Ocampo. Engineer Salalila won as the mayoral elections in Sta. Rita in 1991 and served until 1994. In 1995, Mayor Salalila was unseated by Ocampo following an electoral protest lodged against him. The Regional Trial Court (RTC), after entertaining the protest, proclaimed Ocampo as mayor. Engineer Salalila accepted the decision of the court and did not file any counter-protest, despite undocumented reports from the Commission on Elections (COMELEC) showing that he actually won the numbers.

80 Section 284, Chapter 1, Title 3, Book 2, “Allotment of Internal Revenue”, Local Government Code of 1991. 81 Interview with Municipal Administrator Diosdado C. Pineda, Municipality of Magalang, Pampanga, 5 September 2001. 82 www.pampangacapitol.com/pdf/Sta.Rita.pdf. (26 April 2005) 276

Nonetheless, Engineer Salalila ran for the mayoral post again in 1998, this time as a candidate of the dominant Lakas-NUCD. 83

Local electoral history was repeated when Ocampo lost the election and filed a petition protesting the results of the vote-counting, saying it is statistically improbable that he would get only 25 votes in Barangay Basilia while his opponent got 1,324 votes. The legal protest eventually reached the Supreme Court which dismissed the petition of Ocampo and eventually installed Engineer Salalila as mayor. 84 Mayor Salalila is now in his third term as Mayor of the Municipality of Santa Rita (starting 2004). 85

Sources of Income From 1991 until 1998, Santa Rita had been highly dependent on external resources particularly the IRA which contributes 89 percent to the total income of the municipality (Table 4-19 and Figure 4-21). The municipality, however, does not have any share from national aid nor national wealth particularly in terms of cash outlay. Moreover, the foreign- assisted project Pampanga Delta Irrigation Component has caused damage to a water reservoir on which some barangays of the town depended for fishpond activities. Santa Rita has protested the damage done to the water reservoir although it was assured that the project would eventually redound to the benefit of the farmers in the area. The National Irrigation Administration (NIA), which executed the project, has yet to compensate the owners of the damaged fishponds at the time of this interview. The losses were in the form of flooding and the subsequent salination of water. 86 Santa Rita also receives revenues from quarrying through the gravel and sand tax collected by the DENR-NRDC. The municipality, however, reports that the total revenue received has remained unchanged compared with the time when the municipality was the one administering the quarrying activities and collection of the gravel and sand taxes. 87 Moreover,

83 Interview with Sta. Rita Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001. 84 Supreme Court En Banc (a) [G.R. No. 136282. February 15, 2000] Francisco D. Ocampo,petitioner, vs Commission on Elections, Municipal Board of Canvasser of Sta. Rita Pampanga and Arthur L. Salalila, respondents; (b) [G.R. No. 137470. February 15, 2000] Francisco D. Ocampo, petitioner. 85 Results of Comelec elections, http://www.comelec.gov.ph/results/2001/2001local_r03.html (10 April 2007). 86 Interview with Sta. Rita Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001 87 Sta. Rita Accounting Office, Statement of Income and Expenditure Reports. 277

Santa Rita has not benefited from the re-nationalization of quarrying in terms of local employment.

The BIR allotments also increased (Table 4-18 and Figure 4-22) at an average of P8,973,181 from 1991 to 1998. Real property and business taxes, while minimal, were the biggest sources of locally-generated revenues with their shares of 4 percent and 3 percent, respectively. These taxes hardly influenced the status in the overall income of Santa Rita. To increase collection of RPT, the municipality has implemented an information campaign. 88 When the eruption of Mt. Pinatubo, with its lahar floods, devastated the municipality in 1991, the palay farmers eventually shifted to fishpond operations which form a bulk of RPT collections nowadays. Just the same, Santa Rita had few commercial establishments and has refused to borrow for its development needs for fear of not being able to meet loan repayments and interest charges.

Through the Santa Rita Sangguniang Bayan (municipal council), the local government continues to examine the possibilities of increasing its income. Imposing new taxes is not one of these possibilities due to limits set by the Local Government Code. The available option left for the municipality, therefore, would be to improve its tax collection efficiency. The Council eventually approved the imposition of surcharges to delinquent taxpayers and was rewarded with a 50-percent increase in tax collections afterwards. 89

Receipts from economic enterprises, no matter how minimal, as well as fees and charges have been increasing from 1991 until 1997. For 1998, however, it decreased by more than a half, which was attributed to the conduct of the elections and its aftermath, including the subsequent electoral protest. Shares from fees and charges sourced from the collections of the Provincial Government were erratic, increasing from 1991 until 1993, slightly decreasing in 1994, a behaviour repeated in 1997 and decreasing further in 1998. For other receipts, the municipality earned P195,389.00, zero in 1993 and only P29,000 in 1994. From then on, collection was zero.

88 During the time of interview on 4 September 2001, the local financial office was not yet computerized. The Financial Statement was provided in yellow pad and was written using pencil. 89 Interview with Sta. Rita Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001. 278

Table 4-18: Consolidated Income - Municipality of Sta. Rita:1991-1998 (in Pesos)

1991 376,949 113,329 490,278 17,498 88,091 0 195,389 300,978.00 791,256 2,056,614 0 0 2,056,614.00 2,847,870

1993 399,078 195,425 594,503 96,165 195,047 0 0 291,212.00 885,715 5,752,270 0 0 5,752,270.00 6,637,985

1994 262,494 254,902 517,396 93,735 193,071 0 29,000 315,806.00 833,202 8,271,290 0 0 8,271,290.00 9,104,492

1995 218,699 690,928 909,627 105,984 240,971 0 0 346,955.00 1,256,582 9,241,244 0 0 9,241,244.00 10,497,826

1996 254,462 345,966 600,428 137,735 471,915 0 0 609,650.00 1,210,078 10,034,843 0 0 10,034,843.00 11,244,921

1997 417,066 520,965 938,031 392,712 196,340 0 0 589,052.00 1,527,083 13,145,603 0 0 13,145,603.00 14,672,686

1998 578,738 351,676 930,414 112,440 386,106 0 0 498,546.00 1,428,960 14,310,405 0 0 14,310,405.00 15,739,365

Average 358,212 353,313 711,525 136,610 253,077 0 32,056 421,743 1,133,268 8,973,181 0 0 8,973,181 10,106,449 SOURCE: Department of Finance-Bureau of Local Government Finance: Statement of Income and Expenditure Reports

No data for 1992

279

Figure 4-21 Sources of Income: Sta. Rita (Average, 1991-1998)

BIR Allotments 89%

SOURCE: Department of Finance-Bureau of Other Receipts Business Taxes* Local Government Finance 0% 3% National Aids Loans & Borrowings Real Property0% Tax 0% Fees/Charges 4% 3% Receipts from Economic National Wealth Enterprises 0% Figure 4-22 Consolidated Income of Sta. Rita (1991-1998)

18,000,000

16,000,000

14,000,000 National Aids 12,000,000 BIR Allotments

10,000,000 Other Receipts

In PHP In Loans & Borrowings 8,000,000

Fees/Charges 6,000,000 Receipts from Economic Enterprises 4,000,000 Business Taxes*

2,000,000 Real Property Tax

1991 1993 1994 1995 1996 1997 1998 Average SOURCE: Department of Finance-Bureau of Local Government Finance Year

Expenditure Trends As with most LGUs, the bulk of expenditures of Santa Rita from 1991 until 1998 was on general government. Running the administrative day-to-day affairs ate up 34 percent of the total budget, followed by public welfare and internal safety with 23 percent (Figure 4-23). Other expenses incurred 16 percent of the budget. This item does not indicate specifically what such expenses are, whether for economic development or merely for maintaining the current expenditures for general government and public welfare and internal safety.

280

Figure 4-23 Expenditures: Sta. Rita (Average, 1991-1998)

Capital Outlay Other 6% 16%

Operation of Economic Enterprise 8% General Government 34%

Economic Development 13%

Source: Bureau of Local Public Welfare and Internal Government Finance Safety 23% Overall, the municipality invested very little in economic development as 8 percent of expenses went to operations of economic enterprises and 6 percent to capital outlay. On a yearly basis, almost all current expenditures increased. With regard to capital outlay, however, no investment was made in 1993. From 1994 until 1997, spending increased yearly. For 1998, an election year, construction spending increased by almost six-fold (Table 4-19 and Figure 4-24).

For its 20 percent development fund from the IRA in 2001, or a total of P4.976 million, Santa Rita spent P1.4 million on local infrastructure projects including the construction and rehabilitation of artesian wells, farm-to-market roads, box culvert, drainage, canals, construction and rehabilitation of municipal barangay roads. The maintenance and repair of the municipal building and other public utilities followed with P1 million. Mayor Salalila, being an engineer, oversaw these construction services thereby saving on personnel expenses.

Projects on human and ecological security garnered the third largest expenditure from the development funds with P975,351.16. These included the beautification of the public plaza, conduct of clean and green activities, and waste disposal management. Agricultural,

281

health and social welfare programs were not included in this list of priority activities funded by the IRA. development programs. 90

Table 4-19 :Municipality of Sta. Rita Local Government Expenditures 1991-1998 (in Philippine Peso) Capital Grand Year Current Expenditures Outlay Total General Public Economic Operation Other Total Government Welfare & Development of Charges Internal Economic Safety Enterprise

1991 1,513,818 227,404 0 0 830,964 2,572,186 6,900 2,579,086

1993 3,364,309 1,252,242 425,768 171,015 1,376,669 6,590,003 0 6,590,003

1994 4,508,514 1,869,153 863,122 121,625 1,730,338 9,092,752 24,000 9,116,752

1995 5,057,501 2,228,505 721,245 188,130 2,020,941 10,216,322 30,000 10,246,322

1996 8,367,897 2,753,290 2,317,259 834,442 3,204,352 17,477,240 58,840 17,536,080

1997 10,460,330 4,298,335 3,421,904 5,095,406 1,194,054 24,470,029 114,459 24,584,488

1998 10,915,129 3,703,892 3,894,098 1,064,237 6,456,390 26,033,746 741,479 26,775,225

Average 7,112,280 2,684,236 1,940,566 1,245,809 2,663,791 13,778,897 161,463 13,918,279 Source: Bureau of Local Government Finance- Statement of Income and Expenditure Reports

No information for CY 1992

Figure 4-24 Local Government Expenditures: Sta. Rita (1991-1998)

30,000,000

25,000,000

Capital Outlay 20,000,000 Other Charges

15,000,000 Operation of Economic

In PHP In Enterprise Economic Development

10,000,000 Public Welfare & Internal Safety General Government 5,000,000

0 Source: Bureau of Local 1991 1993 1994 1995 1996 1997 1998 Government Finance Year

From 1998 until 2001, the construction of roads, flood control, drainage canals and creeks, public building and public utilities and artesian wells was listed as among the major

90 List of Projects as of 2000 generated by Municipality of Sta. Rita. 282

accomplishments of Mayor Salalila. The extent of the citizens’ use of these facilities was not considered. The municipality’s 2001 Accomplishment Report apparently put more emphasis on the role of the leadership in the construction of infrastructure than the collective action of the LGU administration. 91

Experiences in Decentralization The municipality appreciates the merits of the Local Government Code. According to Mayor Salalila, the LGC “is a good law and serves as an engine for local autonomy.” 92 As a 5th class municipality, Santa Rita does not have abundant resources to speak of and thus find its share from IRA extremely helpful. He views the IRA allotment criteria as “satisfactory,” although he asserts that the municipality would like to be given time to internalize decentralization as it goes through the process.

In terms of difficulties encountered during devolution, Mayor Salalila cited the municipality’s problem in the devolution of health workers. Being a small municipality, Santa Rita could not give the same benefits given to personnel from the national government agencies as mandated by the Magna Carta for Health Workers. 93 The gap on benefits between local and national health workers was already a problem that only became worse for the LGU with the enactment of the Magna Carta for Health Workers. Even with these difficulties that the municipality has gamely addressed, it did not request for any re-nationalization of the devolved services. The payment of salaries and benefits of its people continued to be top priority of the municipality, despite increased spending for general government. Santa Rita has considered that the productivity of the local employees is dependent on the payment of their salaries and other benefits and is thus sensitive to this issue to the present. 94

Mayor Salalila has considered the mobilization of resources from political alliances, including the President (who is from Pampanga), Congressmen and Senators. 95 Santa Rita also has received assistance from the national government, through the various projects of and

91 2001 Accomplishment Report generated by the Municipality of Sta. Rita. 92 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001. 93 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001 94 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001. 95 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001 283

executed by the various line agencies. For the procurement of supplies and services, the municipality has a local Pre-qualification, Bids, and Awards Committee (PBAC). The implementation of projects is through direct administration. This practice enables the municipality to save and at the same time generate local employment.

With regard to inter-municipal cooperation, the municipality has not been able to obtain loans from other municipalities to date.

In general, Mayor Salalila admitted that while operations in the municipality, particularly financial management, it is not yet 100 percent decentralized, the doors remain open to achieve local autonomy.96 In the meantime, Magalang looks to external assistance, including that from the national government, to ensure the delivery of basic services to its people. For example, it relies on the projects of DSWD to ensure that poverty-related issues are addressed at the barangay level. The LGUs still need to go to Manila and ask national line agencies for assistance. Like traditional-thinking politicians, Mayor Salalila views political connections as essential in getting financial support for the municipality’s projects. Weak connections may only lead to greater isolation for the LGU which may have to rely on its own limited funds. 97

Bataan and Its Decentralization Experiences

Bataan occupies a noble place in international history, having been the last province in the Philippines to surrender to the Japanese forces during World War II. It is also the site of one of the most ferocious battles of the world war which resulted in the death of thousands of Filipino-American soldiers and the starting point of the infamous Bataan Death March which lasted all the way to Capas, Tarlac, which is more than a hundred miles to the northwest.

Bataan is a strategic peninsular province located at the southwestern part of Central Luzon. Its geographic location and characteristics enabled it to attract industries, not only in

96 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001. 97 Interview with Mayor Arthur Salalila, Municipality of Sta. Rita, Pampanga, 4 September 2001 284

the export processing zone of Mariveles. In other coastal areas, one could find large-scale industrial activities such as petrochemicals, pulp and paper, shipbuilding and oil refineries. Some coastal towns, with their pristine beaches, have lately been attracting weekend tourists and beach resorts have started to upgrade their facilities in the wake of an increasing number of visitors.

Going into the interior of the province, however, is a mountainous terrain with hard- to-reach settlements that have attracted the Communist New People’s Army (NPA) which once grew into a strong political force particularly during the Marcos authoritarian regime (1972-1986). The presence of the NPA at that time, particularly before the first People Power Revolution, had ushered in a relatively peaceful era where criminality was at its all-time low and the people were more disciplined for fear of possible punishment from the rebel group. Today, with a stronger police presence and an improved socio-political environment, the NPA has no longer become a force to reckon with and what remains of its members has moved deeper into the more remote interiors and other provinces.

Bataan Province: A Profile With its land area of 1,331.14 sq. km., Bataan has a population of 537,201 people with an annual growth rate of 2.7 percent which is slightly higher than the national growth rate of 2.3 percent. Aside from this, migration contributed to the rising population. Not only is the province a magnet for migrant workers, particularly the Mariveles Export Processing Zone as well as the other coastal towns with large industries and rest and recreation facilities. It has also been the resettlement site of choice for large populations from neighbouring provinces whose homes were devastated by the eruption of Mt. Pinatubo. 98

Despite the rise in its population, Bataan since 1994 has the distinction of having achieved and maintained the highest level in Human Development Index among all provinces in the country, as determined by the Human Development Network activity of the United Nations Development Program (UNDP) in cooperation with the National Economic and Development Authority (NEDA). The HDI is a collective assessment in the successful

98 Interview with the Council of Municipality of Mariveles, Bataan, 3 September 2001. 285

delivery human development indicators particularly in health, education, and income, among others. The high HDI rating has been attributed to the rich physical endowments of the province, mainly the natural resources both coastal and inland.

Bataan Province consists of one component city (Balanga), which is also its capital, two high-income 1st class municipalities (Limay and Mariveles), two middle income 3rd class municipalities (Dinalupihan and Orani), four middle-income 4th class municipalities (Abucay, Bagac, Hermosa, and Orion), and two low income 5th class municipalities (Samal and Pilar). While Bataan is classified as a 1st class province, its composition is heterogeneous with its component LGUs spread along varying income levels. For this study, the cases selected according to their income classifications are: Balanga, Mariveles, Dinalupihan, and Pilar.

Bataan’s Political Dynamics According to the National Statistics Coordination Board (NSCB), voters do elect again leaders that have governed them well but not all the time. 99 This is true with Bataan, particularly in 2004. In particular, former Governor Leonardo “Ding” Roman – who has been known for his broad managerial skills and his popularity with his constituents, lost to former Balanga Mayor Albert Garcia for the Congressional seat in the second district of Bataan.

While he was the province’s governor, however, Roman led Bataan to national and international renown for excellence in local governance. In 2002 alone, Bataan won at least four awards of distinction, namely: (a) the Anvil award for the Kontra Kalat – a Southeast Asian model for environmental protection in the seas; (b) the first Philippine Gold Quill Excellence Award given by the International Association of Business Communicators- Philippines; (c) Gold Quill Award from IABC International in Chicago for outstanding performance in governance particularly in the area of corporate and public communications; and (d) Gawad-Galing Pook Award from the Galing Pook Foundation in cooperation with Ford International Foundation for outstanding environmental management programs. 100

99 “Good Leaders get Re-elected Study Says”, N News , NEDA Publication, January 2005, p.4. 100 “Model and Leader”, Philippines Free Press , April 19, 2003, pp. 12-14. 286

Although the Romans and the Garcias are relatives, they also emerged as the main contenders for the major political positions in Bataan. Both their families came from the municipality of Pilar which, ironically, is one of the two poorest municipalities in Bataan Province. Ding Roman is the son of former Congressman Pablo Roman, who is considered the Father of Bataan for having enacted various laws that contributed to the development and progress of the province. After the People’s Power Revolution of 1986, President Aquino appointed Ding Roman as Governor in 1986, a position he retained after winning the 1988 elections. His opponent that time was his cousin Antonio Roman, who is now a third-term Congressman of the first district of Bataan. 101

From the history of competitive elections in Bataan from 1901 until 1986 (Table 4- 20), the provincial governors served only one term of 6 years at the most. Governor Ding Roman first had a 6-year term including his appointive term of one year from 1986 to 1988. In 1992, Enrique Garcia won the governorship but was removed after a prolonged recall process that ended in 1994. The recall process, which is enshrined in the Constitution to remove political leaders for lack of confidence by the electorate, requires the participation of the mayors of the province. Most of the mayors at that time belonged to the same political party as Governor Roman - the LP-PDP-LDP – a fact that expedited the outcome of the process.

At the time of his recall, Governor Garcia had been considered unconventional in his espousal of good governance, by stressing on the greater role of the youth. He also committed politically unpopular decisions, including the firing of casual employees in order to save on the administrative expense. He also implemented the automation of the salary of employees by installing an automated teller machine (ATM) system, a technology that did not sit well with several employees used to the old system of being served by cashiers. 102 These administrative changes added fuel to the fire and were used by his political opponents to vilify the provincial administration. The exchange of political accusations was not new: Governor Roman himself, after winning the 2001 elections, was subject to protests from supporters of

101 Interview with OIC Belthazar Q. de Pano, Department of Interior and Local Government of Bataan Province, Balanga, Bataan, 14 August 2001. 102 Interview with Former Congressman and now Bataan Governor Enrique Garcia, Balanga, Bataan, 8 September 2001. 287

then Congressman Garcia who cited that this was Roman’s fourth term in office. The Commission on Elections (COMELEC), however, decided that the term of Governor Roman was only his third. 103 It decided that Roman’s term from 1986 until 1988 – which is appointive could not be considered his first term. In the same manner, his term of 1994-1995 could not be considered as his first term as it was the term of Congressman Garcia, which was interrupted by recall elections in 1994. The COMELEC decreed that Roman’s first term was from 1995 until 1998 with the second in 1998-2001, and the third, 2001-2004. In spite of this decision, the case was elevated to the Supreme Court. Congressman Garcia also published in the local newspaper his intention to run as a Governor in Bataan as soon as special elections would be proclaimed as an aftermath of the supposed Supreme Court decision.104

Political alliances and agreements can happen to ensure continued dominance of the elite families in Bataan. Before the 2001 elections, in fact, there was a unification agreement between the opposing parties of Roman and Garcia just to ensure that they or their allies would continue to exercise power in their respective posts and bailiwicks. As a result of this agreement, Governor Roman, Vice-Governor Virgilio Roque, Congressmen Garcia and Antonio Roman, Mayor Albert Garcia of Balanga, and Mayor Santiago of Abucay were able to run unopposed in 2001. After this, it was back to political business as usual, with contentious issues remaining unresolved. 105

Table 4-20: Provincial Governors, Province of Bataan Term Governor 1901-1903 Goldman 1903-1905 Tomas del Rosario 1905-1907 Lorenzo Zialcita 1907-1909 Pedro J. Rich 1909-1912 Mariano Rosauro 1912-1916 Maximo delos Reyes 1916-1918 Conrado Lerma 1918-1919 Pedro J. Rich 1919-1922 Alberto Aquino 1922-1925 Manuel Aguinaldo

103 Promulgation of the Commission on Elections on 28 May 2001 (SPA No. 01-068) on the case filed by Fred S. Ramos against Leonardo B. Roman. 104 BPC Koop Vision , 11-17 August 2001. 105 Interview with Former Congressman and now Bataan Governor Enrique Garcia, Balanga, Bataan, 8 September 2001. 288

Term Governor 1925-1928 Gregorio R. Quicho 1928-1931 Gregorio R. Quicho 1931-1934 Sabino R. de Leon 1934-1937 Alberto Aquino 1937-1940 Joaquin J. Linao 1940-1941 Jose S. Manahan 1941-1945 Simeon D. Salonga 1945-1946 Teodoro Camacho 1946-1947 Joaquin J. Linao 1947-1948 Severino Manahan 1948-1951 Emilio Ma. Naval 1951-1955 Adelmo Q. Camacho 1956-1959 Emilio Ma. Naval 1960-1963 Pedro R. Dizon 1964-1967 Pedro R. Dizon 1968-1971 Guillermo Arcenas 1972-1986 Efren B. Pascual 1986-1992 Leonardo B. Roman 1992-June Enrique T. Garcia 1994 1 July 1994- Leonardo B. Roman April 2004 2004-present Enrique T. Garcia Source: Province of Bataan

Political party affiliation is an important aspect of political life in Bataan especially if long-term survival of the local officials is concerned. This survival, moreover, is predicated on the support one could get in order to provide for the basic needs of the electorate. Thus, it was not surprising that most mayors during the term of Governor Roman toed the party line of the national administration in order to maximize the benefits they could get for their respective municipalities. The only time the mayors failed to adopt the line of the dominant political party was under the administration of the current president, Gloria Macapagal- Arroyo.

Thus, from 1986 until 2001, the dominant political party at the provincial level changed in line with the dominant party at the national level. From 1986 to 1992, the major party was the Partido Demokratiko ng Pilipinas (PDP-Laban) under President Corazon Aquino; from 1994 to 1998, the National Union of Christian Democrats (NUCP)-PDP-Laban under President Fidel V. Ramos; and from 1998 to 2001, the Lapian ng Masang Pilipino (LAMP) under President Joseph E. Estrada. From 2001 to the present, the dominant political 289

party was the National People’s Coalition (NPC), which was a major opponent of President Gloria Macapagal-Arroyo’s Lakas-NUCD. 106

It is another story in the Congressional arena. Congressman Antonio Roman first ran under the Lakas-NUCD in 1988 and switched to run as an independent (no political party) in 2001. Congressman Enrique Garcia, for his part, ran in 1995 under the banner of the NPC only to switch parties to the Lakas-NUCD in 1998, then to Liberal Democratic Party (LDP) in 2001. 107

An explanation why Bataan’s ruling political party remained loyal to the NPC after 2001 can be related to an established “ utang na loob ” or a debt of gratitude principle. Before 2001, two political decisions outside the electoral arena were made which positively affected socioeconomic and political life in Bataan. One was the appointment of Isidro Camacho as Secretary of Energy in President Estrada’s Cabinet and the other was the installation of former Bataan Congressman Felicito Payumo as chairman of the Subic Bay Metropolitan Authority (SBMA).

Camacho’s involvement in government affairs is not new despite the fact that he had made himself a name as a corporate whiz kid, particularly in financial and marketing management in the private sector. He is a nephew of Governor Roman and the first cousin of a former mayor of Balanga. He led the Department of Energy during the term of Governor Roman and one of his responsibilities was to focus on the action plan on the mothballed Bataan Nuclear Power Plant (BNPP). 108

On the other hand, the appointment of former Congressman Payumo as head of the SBMA helped uplift the economic conditions in Bataan. Subic Bay, a former US naval base, had become a fast-growing industrial hub in the area due to well-maintained facilities left by its former occupants, including a deep-sea port and an airport. It became a source of e1mployment for people from Bataan. As reported by the Provincial Employment Services

106 http://www.comelec.gov.ph/stats/parties.html , (28 August 2007). 107 Interview with OIC Belthazar Q. de Pano, Department of Interior and Local Government of Bataan Province, Balanga, Bataan, 14 August 2001. 108 BPC Koop Vision , 27 January-2 February 2001, p.3 (Bataan Newsletter). 290

Office (PESO), 6,421 residents from the province, specifically from the towns of Dinalupihan, Morong and Hermosa were employed in the former base from September 1998 to November 2000. This number, while smaller than that from Olongapo City with 14,395 residents 109 , is very significant in the sense that, for the first time, employees from Bataan province breached the 1,000 mark. Previously, residents from the province found it very hard to find work in SBMA because of a perceived bias against Bataan, arising from political reasons. 110

The SBMA employs 28,313 workers coming from the various provinces of Central Luzon and has generated P48 billion in income under the Chairmanship of Payumo. While entry and exit to Subic Bay was previously limited to the Olongapo City main gate which is in Zambales Province, Payumo opened another gate in Morong, a northern municipality of Bataan. Thus, the residents from Bataan gained easier access to Subic – a benefit that was absent during the previous administration. 111

With these developments, Bataan became an “Erap” country (Erap is the popular nickname of President Joseph E. Estrada). After EDSA II in 2001 which toppled President Estrada from office because of unresolved issues of graft and corruption, the local officials of Bataan, including their Congressmen, published a “Statement of Support and Recognition from the Province of Bataan“ in the BPC Koop Vision – a weekly newsletter of the Bataan Province - to express their support to President Macapagal-Arroyo.112 This statement, however, seemed to be simply rhetoric rather than fact, for two reasons: (a) the local chief executives declined the invitation from President Macapagal-Arroyo to join her party, the Lakas-NUCD. They continued to remain with NPC; and (b) the province’s electorate – during the May 14, 2001 senatorial elections - voted Dr. Loi Estrada as the first choice in its list. Dr. Estrada is the wife of the deposed president. Moreover, the election was considered a battle between Erap and Macapagal-Arroyo. In Bataan, a majority of seven candidates from Estrada slate garnered more votes compared to only four from the administration party. Only

109 Ibid. 110 BPC Koop Vision , 27 January-2 February 2001, p.3. (Bataan Newsletter). 111 Ibid. 112 BPC KOOP Vision , 27 January-2 February 2001, p.3 (Bataan Newsletter). 291

Emmanuel “Noli” de Castro, who ran as independent, was able to get more votes than anyone in the ruling party in Bataan. 113

Trends in Financial Management Bataan’s local finance officers agree that the LGC of 1991 has provided big improvements in local governance. They say the Code encourages LGUs to transact its operations in more commercial or corporate terms because of the provision that considers LGUs as corporate entities, rather than simply bureaucracies. The local chief executives, moreover, consider themselves economic managers. On the other hand, despite the several positive aspects of decentralization, its implementation has led to the emergence and the eventual absorption of risks among the local executives. 114

While the Code has granted substantial powers to LGUs in order that they could mobilize resources, the local finance managers admit that LGU reliance on their share of the IRA has become unavoidable. For the 10 years under study, the IRA’s position as the number one source of funds with its 48-percent share of the total source of income of Bataan has remained unchanged (Table 4-21 and Figure 4-25). Since the formula for IRA allocation is not based on actual needs, the local officials argue that the sharing of this national fund is based on wrong premise for at least two reasons: one, the IRA is biased against small and least developed LGU; and two, it can actually be anti-developmental taking into account the heterogeneity of the LGUs.

113 Interview with former Governor Leonardo Roman, Balanga, Bataan 21 August 2001; and results of 2001 Senatorial elections. 114 Interview with Provincial Treasurer Pastor Vichuaco, Balanga, Bataan, 16 August 2001. 292

Table 4-21: Consolidated Income 1991-2001 - Province of Bataan (in Pesos)

Internal External:Aids and Allotments Grand Total SUB- BIR National National SUB-TOTAL TOTAL Allotments Aids Wealth Revenue from Taxation Non-Tax Revenues Real Business Total Receipts Fees/Charges * Loans & Other Total Property Taxes* from Borrowings * Receipts Year Tax Economic Enterprises

1991 8,620,299 3,332,478 11,952,777 19,198,881 711,930 0 8,598,745 28,509,556.00 40,462,333 20,620,857 5,902,062 0 26,522,919.00 66,985,252

1992 14,631,074 8,896,253 23,527,327 20,272,138 804,724 0 2,087,481 23,164,343.00 46,691,670 40,656,506 431,416 0 41,087,922.00 87,779,592

1993 16,718,362 14,938,574 31,656,936 43,412,835 499,002 4,500,000 4,713,633 53,125,470.00 84,782,406 62,738,219 23,139,143 0 85,877,362.00 170,659,768

1994 34,556,121 31,979,195 66,535,316 19,525,330 303,452 0 2,758,310 22,587,092.00 89,122,408 114,150,589 2,535,060 0 116,685,649.00 205,808,057

1995 40,947,840 43,728,932 84,676,772 26,301,782 456,169 14,249,096 23,035,772 64,042,819.00 148,719,591 124,920,186 0 0 124,920,186.00 273,639,777

1996 54,065,466 43,713,612 97,779,078 26,794,229 222,945 0 -4,133,129 22,884,045.00 120,663,123 133,387,740 0 0 133,387,740.00 254,050,863

1997 110,066,400 45,818,181 155,884,581 25,315,453 479,744 21,000,000 4,608,244 51,403,441.00 207,288,022 183,015,953 0 0 183,015,953.00 390,303,975

1998 211,858,357 18,225,596 230,083,953 30,842,393 660,228 19,685,000 3,227,108 54,414,729.00 284,498,682 189,313,839 79,623 0 189,393,462.00 473,892,144

1999 86,010,198 74,760,512 160,770,710 13,700,133 4,916,193 53,930,383 2,915,390 75,462,098.87 236,232,809 228,524,933 4,012,267 0 232,537,200.00 468,770,009

2000 242,348,186 79,161,941 321,510,128 12,715,679 43,074,063 72,034,432 46,736,972 174,561,145.50 496,071,273 554,990,409 0 0 554,990,409.00 1,051,061,682

2001 180,500,160 19,317,773 199,817,933 20,545,474 235,495 25,000,000 5,216,432 50,997,400.26 250,815,333 268,013,985 0 0 268,013,984.80 518,829,318

Average 90,938,406 34,897,550 125,835,956 23,511,302 4,760,359 19,127,174 9,069,542 57,015,474 175,453,232 174,575,747 3,281,779 0 177,857,526 360,161,858 SOURCE: Department of Finance-Bureau of Local Government Finance-Statement of Income and Expenditure Reports

* For 2001, this includes other taxes amounting to P6,029,852.97

* For 2001, this includes regulatory fees.

* For 2001, this includes transfers amounting to P13,000,000

293

Figure 4-25 Consolidated Income of Bataan (1991-2001)

1,200,000,000

1,000,000,000

800,000,000 Loans & Borrowings*

Fees/Charges* 600,000,000 Receipts from Economic Enterprises National Aids In PHP In BIR Allotments 400,000,000 Other Receipts

Business Taxes* 200,000,000 Real Property Tax

9 SOURCE: 91 94 ge 998 a Department of 19 1992 1993 19 1995 1996 1997 1 199 2000 2001 Finance-Bureau of Aver -200,000,000 Local Government Finance Year

The local officials pointed out that before the enactment of the LGC, Bataan was relatively well off in terms of cash-on-hand for disposal. The capital outlay, as a result, ranged from a robust 10 to 20 percent of the province’s total income. In contrast, the capital outlay under the LGC averaged 11 percent of the total IRA from 1991 to 2001. While the 11 percent capital outlay remains within the range, it has remained constant amidst the changing demands in the Bataan environment. As a result, the provincial government perceives that the actual administrative burden became greater and constituted a burden for the LGUs. 115 In fact, the biggest expenditure of Bataan province during the period under study is public welfare and internal safety with 31 percent, followed by general government at 26 percent. Other Charges has a 16 percent share. On the other hand, wealth-creating expenditures such as economic development levelled at 15 percent, capital outlay at 11 percent, and operations of economic enterprise, 1 percent (Table 4-22 and Figures 4-27 and 4-28).

115 The respondents also cited the case of the loss of Senator Aquilino Pimentel, the author of the LGC, in the 1995 elections as an indicator that there is no popular support for the LGC. They cited that he earned sympathy in 1998 due to his experience in the `daddag-bawas` (addition and deduction) during the 1995 elections. 294

Table 4-22: Local Government Expenditures - Bataan Province (in Philippine Peso) Capital Year Current Expenditures Outlay * Grand Total General Public Welfare Economic Operation of Other Total Government & Internal Development Economic Charges * Safety * Enterprise *

1991 23,949,665 8,808,246 10,704,772 0 18,738,191 62,200,874 4,059,949 66,260,823

1992 26,640,195 12,397,938 1,358,191 8,684,982 21,242,320 70,323,626 472,380 70,796,006

1993 27,711,700 56,616,770 52,292,786 10,036,309 9,911,463 156,569,028 1,457,280 158,026,308

1994 42,201,035 75,984,617 25,799,977 0 9,843,341 153,828,970 42,038,596 195,867,566

1995 59,973,463 113,828,258 43,110,657 0 3,929,522 220,841,900 43,674,725 264,516,625

1996 76,468,528 103,495,402 37,255,712 0 5,470,572 222,690,214 31,169,853 253,860,067

1997 74,219,517 139,158,725 55,260,635 0 76,576,933 345,215,810 31,939,729 377,155,539

1998 107,153,581 103,201,227 53,910,636 0 162,485,339 426,750,783 36,457,951 463,208,734

1999 112,038,267 69,497,516 49,565,794 0 184,535,894 415,637,471 4,310,935 419,948,406

2000 230,752,680 331,437,314 129,257,454 0 48,246,313 739,693,761 221,505,758 961,199,520

2001 163,220,732 124,018,970 93,234,150 0 36,108,057 416,581,909 0 416,581,909

Average 85,848,124 103,494,998 50,159,160 1,701,936 52,462,540 293,666,759 37,917,014 331,583,773

Source: Bureau of Local Government Finance

* Starting 2001 a new Statement of Income and Expenditure (SIE) format is used. Capital expenditure is incorporated in every sector.

Operation of Economic Enterprise is included in Economic Development.

*For 2001, Public Welfare and Internal Safety was broken down as follows:

Education, Culture and Sports Manpower Development: 1,486,775

Health, Nutrition and Population Control 60,180,896

Labor & Employment 2,734,907

Housing and Community Development 50,757,372

Social Security and Social Services and Welfare 8,859,019

Total: 124,018,970

*This includes debt servicing.

Figure 4-27 Bataan Province Expenditures (1991-2001)

1,000,000,000

800,000,000

600,000,000 Capital Outlay*

Other Charges*

In PHP In Operation of 400,000,000 Economic Enterprise* Economic Development Public Welfare & Internal Safety* 200,000,000 General Government

0 Source: Bureau of 91 92 94 95 ge 993 996 997 000 ra Local Government 19 19 1 19 19 1 1 1998 1999 2 2001 e Av Finance Year

295

Figure 4-28 Bataan Provincial Expenditures (Average, 1991-2001)

Capital Outlay* 11% General Government 26%

Other Charges* 16%

Operation of Economic Enterprise* 1%

Economic Development 15% Public Welfare & Internal Safety* 31%

SOURCE: Department of Finance-Bureau of Local Government Finance

There are instances where the actual IRA received by the province is smaller than the proposed IRA schedule for the province. Among the reasons cited 116 for this phenomenon include the following: (a) the national government has not been able to realize its planned revenues; (b) the national government’s unilateral action of withholding the IRA in 1998; and (c) the inconsistency in the actual reporting of the land size of Bataan by the Land Management Bureau (LMB) in 1997 and 1998. On the third case, the Provincial Treasurer`s Office submitted its computation that the total land area of Bataan is 1,373 square km. compared with the LMB’s 1997 estimate of only 1,073 sq. kms. This estimate thus led to the reduction of the IRA of Bataan by 6.22 percent or P2.027 million. 117

To set things straight, Bataan Province wrote to the Department of Budget and Management on December 29, 1998 stressing that there has been no known reduction in physical composition of the province. It pointed out, moreover, that there is in fact an increase in the land area because of reclamation activities in almost all municipalities which led to their expansion. This includes the expansion of boundaries in Barangay Pag-Asa in Orion, Landing in Pilar, and Puerto Rivas in Balanga. The administrative boundary between

116 Interview with Assistant Provincial Treasurer Amado Jimenez, Balanga Bataan, 16 August 2001. 117 Interview with Assistant Provincial Treasurer Amado Jimenez, Balanga Bataan, 16 August 2001. 296

Dinalupihan in Bataan Province and Olongapo City in Zambales also led to expansion in the land area of the former.118

In 1999, the issue was resolved with the declaration that the land area of Bataan is 1,331.14 square, an estimate that has stood to this day. 119

Internal Sources of Revenue After IRA, local taxes comprise the next biggest sources of income for the province. Collection has followed a continuous upward trend. The share of Real Property Tax was largest at 25 percent, followed by business taxes with 10 percent, and fees and charges, including sand and gravel tax, with 1 percent. Computerization of the province’s financial services helped the province in meeting its tax collection targets, particularly in land valuation. Thus, in 2000, Bataan ranked first in Region 3 in terms of RPT collection efficiencies, and third nationwide (Table 4-23) as evidenced by the collection reports filed by provincial and city treasury offices in Region. 120 The province has also been able to receive fees from economic enterprises and other receipts whose shares in the total income was 7 percent and 3 percent, respectively.

Table 4-23 : Real Property Tax Collection Efficiency Provinces Collection Target Actual Collection Collection Rank (in P) (in P) Efficiency (in %) Bataan 202,925,670.00 387,618,691.21 191.02 1 Bulacan 554,519,183.00 606,743,339.12 104.42 2 Tarlac 40,429,504.00 39,715,748.36 98.23 3 Pampanga 162,528,192.00 153,950,680.17 94.72 4 Zambales 49,432,735.00 34,335,512.08 69.46 5 Nueva Ecija 239,902,526.00 62,304,039.76 25.97 6

Cities Angeles City 61,223,680 62,330,645.47 134.47 1 Cabanatuan City 33,863,880.00 42,250,379.03 124.77 2 Tarlac City 44,06,200.00 45,688,705.79 104.15 3

118 Letter of Bataan Province the Department of Budget and Management dated December 29, 1998 119 1999 Profile of Bataan; and http://www.geocities.com/lppsec/pp/bataan.htm (September 2001), 120 Regional Office Memorandum No. 01-2001, 20 March 2001, Republic of the Philippines, Department of Finance, Bureau of Local Government Finance, Region III, San Fernando, Pampanga. 297

Provinces Collection Target Actual Collection Collection Rank (in P) (in P) Efficiency (in %) San Jose City 27,000,680.00 16,099,585.22 59.63 4 Olongapo City 77,066,690.00 43,735,729.86 58.75 5 Palayan City 2,045,860.00 1,071,096.29 52.35 6 Source: DOF-BLGF, Region III, Collection Efficiency of Region III.

External Sources of Revenues To augment its income, the province usually borrows from government financing institutions (GFIs) with whom it has standby loan arrangements. In 2001, Bataan borrowed P110 million from the Land Bank of the Philippines (LBP) to finance the Bataan Common Terminal, payable in seven years. The common terminal project aims to consolidate the departure and arrival venue of mass transportation like buses and jeepneys in one area for better traffic and transport management. This terminal is expected to earn from its operations in order to pay off the loan.

On the other hand, Bataan has not yet contracted any loan from official development assistance including that through the Municipal Development Fund (MDF), citing that the processing of the loan from the MDF is rather slow and cumbersome. 121

Bataan may be a first class province but it finds wisdom in continuing it ties with the national government in terms of fund sourcing. Aside from IRA, the national government has provided direct cash transfer to Bataan (Table 4-21 and Figure 4-25). During the term of President Estrada, the national government supported various projects in the province, such as the provision of assistance to 1,000 farmers through the Agrikulturang Makamasa Program 2000. During the term of President Arroyo, Governor Roman requested and got P30 million worth of assistance from the President’s Social Fund to rehabilitate and construct some road projects. 122

The province also took advantage of the pork barrel allocations of the national legislators for its programs. Aside from some senators, a big pork barrel contributor was

121 Interview with Assistant Provincial Treasurer Amado Jimenez, Balanga, Bataan, 16 August 2001. 122 Interview with Assistant Provincial Treasurer Amado Jimenez, Balanga, Bataan, 16 August 2001. 298

Congressman Garcia who supported the concreting of national roads in the province. The direct fund mobilization efforts, however, has been the results of efforts from individual local government executives, rather than through a collective action by the local leaders. But then, not all requests for funding assistance have been successful. There were even some activities that were discontinued because of the subsequent financial constraints, particularly from the end of the local governments. Some agricultural services and social welfare services that used to be implemented by the national government were discontinued by LGUs because of lack of funds. The officials of Bataan Province have thus suggested that the implementation of LGU programs needing huge funding resources be financially supported by the national government. 123

Another external source of income is the province’s share from national wealth. Getting such share, however, has not been smooth and there have been cases that eventually had to be resolved through judicial litigation. The experience of Limay Municipality concerning the operations of the Petron Corporation is one. The case involved the request of the Petron Corporation, a government-owned and controlled corporation (GOCC) filed with the Regional Trail Court against the Sangguniang Bayan (Municipal Council) of Limay to nullify the Municipal Ordinance No. 90 Series of 1992 requiring Petron Corporation to remit to the municipality its share from the latter’s utilization and development of natural fresh ground water resources. Before the enactment of the Code, Petron and other corporations were fully exempted from paying shares to the LGUs. Consequently, the Regional Trial Court of Bataan ruled in favor of the province and the municipality on April 7, 1995. In particular, the RTC ordered Petron Corporation to remit to the Municipality of Limay, Barangay Alanga and the province of Bataan a total of P1,291,456,320 from 1992 until 1994, which is equivalent to 1 percent of the gross sales of receipts. The bases for valuation of the shares were Sections 291 and 293 of the Local Government Code. The first imposes a share of 1 percent of gross sales of GOCCs while the second provides for a 2 percent interest per month of unpaid obligations – both of which will go to the LGUs. Petron Corporation was

123 Interview with Assistant Provincial Treasurer Amado Jimenez, Balanga, Bataan, 16 August 2001. 299

also asked to pay attorney’s fees equivalent to 5 percent of the total amount involved as well as the cost of the suit. 124

Petron Corporation, however, elevated the case to the Court of Appeals in 1995 where the decision is still pending. Moreover, the Court of Appeals and the Supreme Court nullified the special order of the Bataan Regional Trial Court asking that Petron advance the payment of P50 million from the award of P1,291,456,320. Both courts said the immediate release of the P50 million to Limay Municipality and Bataan Province is not so urgent that its non- release will cause a paralysis in the governmental function of the town.125 Up to now, the LGUs are waiting for the resolution of the case so they could proceed with the next steps that could include the demand for payment for their shares in the past several years.

To generate more funds for its development programs, the provincial government devised ways to maximize the use of its assets, including its idle lands. In this case, Bataan created a corporation similar in structure to a national government GOCC through Resolution No. 160, entitled “An Ordinance Creating the Bataan Development Corporation (BDC), Defining its Powers and Function, Providing Funds Therefore and for Other Purposes.” Among others, the BDC sought to manage the operation and reclamation of idle lands. For its initial activity, it implemented a housing project in the municipality of Samal, Bataan. Samal was chosen for the project for obvious reasons: it was the center of the communist-led insurgency in the province because of poverty, and it was considered physically remote from the more progressive areas in the province. It was, moreover, physically underdeveloped compared with other municipalities. 126

In a 50-hectare property in the town, the provincial government designed and implemented its housing project in partnership with the Home Mutual Development Fund, or Pag-IBIG Fund, the national government’s main socialized housing development body. Bataan thus provided the land, and the national government, the housing infrastructure as well as financial support of P200 million. The beneficiaries of the housing project were poor and

124 Civil Action No. 009-MI, Republic of the Philippines, Regional Trial Court of Bataan, Third Judicial Region, Balanga, Bataan, Branch 4. 125 GR No. 12556 July 28, 1997, Supreme Court of the Philippines. 126 Interview Bataan Governor Leonardo Roman, Balanga, Bataan, 21 August 2001. 300

middle-income families in the area, including government employees. 127 This housing project also helped provide for the housing needs of migrants. This reinforced the province’s reputation for being unselfish and hospitable, especially for people from other places seeking employment or settlement opportunities. Governor Roman also recognizes that even rich people – with their material assets, also migrate to Bataan and thereby contribute to the province’s socioeconomic development.

The provincial government has also eyed the possibility of bond flotation to raise funds and is expecting the Provincial Planning Development Office (PPDO) to prepare a project for the purpose. The idea is not merely to generate funds but also to have a specific project that will benefit the use of the generated funds for sustainability. The Provincial Council is also wary on the IRA intercept once the provincial bonds are floated, as it could not afford any cut in its IRA which have been set aside for specific purposes, including social services. Among the projects being considered is the construction of an airport for light aircraft.

On the whole, Bataan has been able to manage its resources well as it incurred savings from its budget every end of the year. It could not be discounted, however, that the lack of viable project ideas could have contributed to the savings (Table 4-24), aside from the fact that the usual public infrastructure activities such as construction of roads, bridges and schools are undertaken by national line agencies, even if the target beneficiaries are the local people. It is interesting to note that savings continue to be realized even during election years, unlike in other provinces. But there have been decreases, nonetheless, as shown in the nearly two-fold drop in income and expenditure in 2001. There is also a two-fold increase in income in 2000, which is attributed to the 30 percent increase in the collection of RPT due to full computerization, increase in collection of non-tax revenues and more than 50 percent increase in BIR allotments (Table 4-21).

127 Bataan Governor Leonardo Ding‘ Roman: With Good Leadership, Bataan has Risen, Philippines Free Press, 19 April 2003, 19-25. 301

Table 4-24: Income and Expenditure of Bataan Year Income Expenditure Savings (Deficit) 1991 66,985,252 66,260,823 724,429 1992 87,779,592 70,796,006 16,983,586 1993 170,659,768 158,026,308 12,633,460 1994 205,808,057 195,867,566 9,940,491 1995 273,639,777 264,516,625 9,123,152 1996 254,050,863 253,860,067 190,796 1997 390,303,975 377,155,539 13,148,436 1998 473,892,144 463,208,734 10,683,410 1999 468,770,009 419,948,406 48,821,603 2000 1,051,061,682 961,199,520 89,862,162 2001 518,829,318 416,581,909 102,247,328 Source: Province of Bataan, Statement of Income and Expenditure Reports

Re-centralization of the Provincial Hospital The province’s robust financial health notwithstanding, Bataan re-centralized – or reverted to the national government - one of its hospitals namely the Bataan Provincial Hospital which was renamed Bataan General Hospital. The re-centralization was made possible by Republic Act No. 8561 entitled “An Act Upgrading the Bataan Provincial Hospital in the Province of Bataan, into a Tertiary Level II Hospital, Increasing its Beds Capacity, under the Direct Control, Supervision and Management of the Department of Health, and Appropriating Funds Therefor, and for Other Purposes” dated February 26, 1998.

From the way it looks on paper, the re-centralization of the hospital appears as a positive development since it involves the upgrading of the hospital’s capacity. But it is a step backward in efforts to decentralize basic social services from the national government to the LGUs. Before the proposal to re-centralize the provincial hospital’s operations, the devolved health personnel working in the hospital staged a strike against the Provincial Government demanding their benefits, including their upgraded salaries as mandated by the Magna Carta of Health Workers. The provincial government, for its part, has always shown support for health services as indicated in its expenditure patterns. In 1998 alone, for example, health, nutrition and population control had the highest share of expenditure, with P82 million

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going to the hospital alone. The provincial government also detailed thirty-three local health workers to the Provincial Hospital. 128

Nonetheless, the devolved health workers who have been used to getting their salaries from the national government supported the re-nationalization of the hospital in order to receive full benefits promised to them under the Magna Carta for Health Workers. The Bataan Provincial Government subsequently did not object, since this would lessen its financial burdens. But it was also an act of political expediency. The provincial government could not just increase the salary of the health workers without increasing that of other devolved personnel from other agencies such as agricultural personnel and social workers. But according to the local chief executives interviewed, they were left without any choice considering the paralysis caused by the strike as well as the other expenditures that also need to be assumed. 129

Balanga: Bataan’s Lone Component City Because of its favourable central location, Balanga became the capital of Bataan when it was established as a province in 1754. It has a seaport and a well-developed road network that connects other settlements at any point in the province. Balanga is located at the eastern part of Bataan and has a total land area of 11,163 hectares. It consists of twenty-five barangays: Bagong Silang, Bagumbayan, Cabog-Cabog, Camacho, Cataning, Central, Cupang North, Cupang West, Dangcol, Dona Francisca, Ibayo, Malabia Munting Batangas, Poblacion, Pto. Rivas Ibaba, Pto. Rivas Itaas, Pto. Rivas Lote, San Jose, Sibacan, Talisay, Tanato,Tenejero, Tortugas and Tuyo. Balanga is the second most populated settlement in Bataan with an average growth rate of 2.78 percent in 1995. 130

Political Dynamics Political life in Balanga has been dominated by two families: the Banzons and the Garcias. Even after the overthrow of the Marcos regime in 1986, the Banzon family has held sway over the leadership of the town. From 1987 to 1995, Herminiano “Boying” Banzon was

128 Statement of Income and Expenditure Reports of Bataan Province; and Interview with Assistant Budget Officer Angelika Cayanan, Balanga, Bataan, 14 August 2001. 129 Interview with Vice Governor Rogelio Roque, Balanga, Bataan, 13 August 2001. 130 Profile of Bataan Province as generated by the Provincial Planning Development Office (PPDO). 303

elected mayor for three terms. After this, Albert Garcia, a son of former Congressman and now Governor Enrique “Tet” Garcia was also elected mayor for three terms from 1995 until 2004. Mayor Garcia was recognized by the DILG as one of the best mayors in the country.131 . After his third term, he defeated former Governor Ding Roman for the congressional post in Bataan’s second district. His brother, Jose, however, was defeated by Boying Banzon for Balanga’s mayoralty post. The defeat of Jose Garcia was attributed to the origins of the Garcia family, who are known to have come from Pilar town and not Balanga, where the Banzons have their roots.

On December 5, 2000, Balanga became a component city as mandated by RA No. 8984, “An Act Converting the Municipality of Balanga, Bataan Province into a Component City to be known as the City of Balanga.” This particular political decision was expedited through an alliance of the various political leaders. Balanga became a city in just three months after the proposal for its conversion was submitted to Congress, in contrast to the two years for San Fernando City in Pampanga. Enrique Garcia was considered the “Father” of RA 8984. 132

The conversion of Balanga into a city was ratified by an overwhelming 90.5 percent in affirmative votes from its residents. Opposition to the cityhood of Balanga emerged, however, with the claim that it is still heavily agricultural in character which is not appropriate for a city. Nonetheless, it was made clear that the main motivation of the town’s residents was the subsequent increase in the annual IRA share amounting to P100 million. Former Governor Roman also supported the cityhood efforts in 2001, although it also meant loss of income for the province in terms of amusement tax, professional tax and real property tax. 133

Views on Decentralization Mayor Garcia intimated that the Local Government Code of 1991 is a good start to strengthen local autonomy. Through decentralization, local development could be facilitated

131 Interview with OIC Belthazar de Pano, Department of Interior and Local Government, Bataan, 14 August 2001. 132 Interview with former Congressman Enrique „Tet“ Garcia, Balanga, Bataan 8 September 2001 and former Congressman (now San Fernando Mayor) Oscar Rodriguez, Pampanga, 24 September 2001. 133 BPC KOOP Vision , January 13-19, 2001 (Bataan Newsletter), p.1. 304

as needs and issues are better by the LGUs themselves. Moreover, the Code has given more powers and functions to the local chief executives.

He, however, considered the original IRA of 40 percent (then for Balanga as a municipality) as too small relative to the functions that have been absorbed from the national government by the LGUs.134 The need for a bigger share in IRA has thus prompted the moves to convert Balanga into a city. As a result, the IRA of Balanga City has increased five-fold. Moreover, the increase in revenues was attained without having to increase local taxes.

The only fly in the ointment was that for starters, the IRA for Balanga in 2001 was the same as that the previous years because the national budget for the year where the IRA comes from was re-enacted. This means the national budget in 2001 remained the same as in the preceding year because of the failure of Congress to approve the newer, and bigger, budget on time. The City of Balanga eventually asserted its claim for higher IRA with the DBM.

Sources of Income From 1991 until 1998, the IRA constituted 50 percent of the total income of Balanga on the average (Table 4-25 and Figure 4-29). It was followed by business taxes with 18 percent, coming mostly from trading and services that comprised 53.05 percent and 45.02 percent of all commercial establishments in the city, as of 1997. Collections from economic enterprises contributed 13 percent to total income, followed by real property tax with 11 percent. The shares of fees and charges, other receipts and national aid averaged 5 percent, 2 percent, and 1 percent respectively.

A year after the passage of the LGC of 1991, the share of all sources of income, primarily the BIR allotments, was in its peak (Figure 4-29). Although Balanga increased its dependency on the IRA, it was also able to increase its local tax collections through the computerization of its system, especially for business tax and real property tax.

134 Interview with former City Mayor (now Congressman) Albert Garcia, Balanga, Bataan, 20 August 2001. 305

The fact that real property tax remained as Balanga’s third largest source of income, Mayor Garcia cited the need for improvement in the city’s character. He pointed out that the tax base of Balanga is still agricultural and therefore not really sizeable as a revenue resource. Thus, while Balanga is a high-income class LGU after its conversion into a city, the national government agencies continue to provide development assistance to Balanga. For example, the National Irrigation Administration (NIA), through its Balikatan Program, continues to assist in increasing the productivity of the farms in the area. Balanga, of course, shares in the expenses of this and other programs, particularly in providing for a budget in the agencies’ Maintenance and Other Operating Expenditures (MOOE) and personnel allowances.

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Table 4-25: Consolidated Income of Balanga 1991-1998 (in Pesos)

1991 1,637,976 2,571,575 4,209,551 3,353,501 308,381 0 3,464,330 7,126,212.00 11,335,763 3,977,221 0 0 3,977,221.00 15,312,984

1992 17,483,864 10,121,654 27,605,518 9,522,811 5,768,652 0 728,114 16,019,577.00 43,625,095 51,272,391 1,723,100 0 52,995,491.00 96,620,586

1993 1,204,700 5,054,808 6,259,508 2,891,671 944,584 7,511 804,937 4,648,703.00 10,908,211 10,355,013 0 0 10,355,013.00 21,263,224

1994 1,820,693 5,658,104 7,478,797 3,326,201 1,312,320 0 11,342 4,649,863.00 12,128,660 13,916,787 0 0 13,916,787.00 26,045,447

1995* 1,820,693 5,658,104 7,478,797 3,326,201 1,312,320 0 11,342 4,649,863.00 12,128,660 13,916,787 0 0 13,916,787.00 26,045,447

1996 2,733,064 7,461,819 10,194,883 5,121,622 1,710,819 1,330,000 914,708 9,077,149.00 19,272,032 16,842,720 0 0 16,842,720.00 36,114,752

1997 3,657,373 7,730,322 11,387,695 6,187,811 1,897,433 0 0 8,085,244.00 19,472,939 22,384,942 0 0 22,384,942.00 41,857,881

1998 4,704,749 12,541,631 17,246,380 7,086,070 2,092,908 0 1,024,902 10,203,880.00 27,450,260 22,493,764 0 0 22,493,764.00 49,944,024

Average 4,382,889 7,099,752 11,482,641 5,101,986 1,918,427 167,189 869,959 8,057,561 19,540,203 19,394,953 215,388 0 19,610,341 39,150,543 SOURCE: Department of Finance-Bureau of Local Government Finance-Statement of Income and Expenditure Reports

*1994 Data based on DOF-BLGF

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Figure 4-29 Sources of Revenues: Balanga (Average, 1991-1998)

Receipts from Economic Business Taxes* Enterprises 18% 13% Fees/Charges 5%

Loans & Borrowings* 0% Real Property Tax 11% Other Receipts 2%

National Wealth 0%

National Aids 1%

SOURCE: Department of Finance-Bureau of Local BIR Allotments Government Finance 50%

Figure 4-30 Consolidated Income of Balanga (1991-1998)

120,000,000

100,000,000 National Wealth

National Aids

80,000,000 BIR Allotments

Other Receipts

60,000,000 Loans & Borrowings* In PHP In Fees/Charges

40,000,000 Receipts from Economic Enterprises Business Taxes*

20,000,000 Real Property Tax

SOURCE: Department of Finance-Bureau of Local

0 Government Finance 1991 1992 1993 1994 1995* 1996 1997 1998 Average Year

As with most LGUs, Balanga continues to request assistance from other sources of funds such as the President’s Calamity Fund, the Local Government Service Equalization Fund (LGSEF), and the Countrywide Development Fund (CDF) or pork barrels of Congressmen. Balanga has also appealed to the League of Municipalities of the Philippines

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for financial assistance for certain needs. In addition, it obtained supplies and equipment from the DILG) for the implementation of the President’s Bridge Program in the city of Balanga, particularly for the construction of the bridges connecting the various barangays and the city center ( poblacion ). 135

Expenditures Trends With regard to its expenditure behaviour (Figure 4-31 and Table 4-26), Balanga spends 34 percent of its total budget on the average for general government or administration. This is followed by public welfare and internal safety and other charges with 23 percent and 16 percent shares, respectively. For its expenditure for revenue-inducing activities, economic development has 13 percent share, operation of economic enterprise, 8 percent; and capital outlay, 6 percent. In 1992, expenditure for all items peaked (Figure 4-32).

Table 4-26 :Local Government Expenditures of Balanga 1991-1998 (in Philippine Peso) Capital Grand Year Current Expenditures Outlay Total General Public Economic Operation Other Total Government Welfare & Development of Charges Internal Economic Safety Enterprise

1991 5,111,612 1,673,584 1,813,689 2,000,458 4,258,691 14,858,034 488,752 15,346,786

1992 53,134,460 6,846,749 5,966,848 6,103,707 11,090,606 83,142,370 10,629,889 93,772,259

1993 5,013,479 7,694,145 1,444,568 2,633,005 3,365,127 20,150,324 630,278 20,780,602

1994 8,228,226 5,683,116 4,670,624 4,811,755 0 23,393,721 2,325,572 25,719,293

1995* 8,228,226 5,683,116 4,670,624 4,811,755 0 23,393,721 2,325,572 25,719,293

1996 9,607,665 7,844,919 7,055,053 8,454,330 0 32,961,967 4,039,202 37,001,169

1997 10,615,246 12,162,005 15,475,108 0 0 38,252,359 2,015,626 40,267,985

1998 14,706,065 11,323,593 8,155,855 7,055,133 8,339,312 49,579,958 446,430 50,026,388

Average 14,330,622 7,363,903 6,156,546 4,483,768 3,381,717 35,716,557 2,862,665 38,579,222

Source: Bureau of Local Government Finance-Department of Finance

* 1994 data based on DOF-BLGF

Balanga’s financial standing varied through the years (Table 4-27). In 1991, for example, it incurred a small deficit which transformed into substantial savings in 1992 of more than P2 million. Savings were also realized in 1993, 1994, 1995 and 1997. The deficits in 1991, 1996, and 1998 were considered manageable.

135 Interview with former City Mayor (now Congressman) Albert Garcia, Balanga, Bataan, 20 August 2001.

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Figure 4-31 Expenditures of Balanga (Average, 1991-1998)

Capital Outlay Other 16% 6% Operation of Economic Enterprise 8%

General Government 34% Economic Development 13%

Source: Bureau of Local Public Welfare and Internal Government Finance Safety 23%

Figure 4-32 Balanga Local Government Expenditures (1991-1998)

100,000,000

90,000,000

80,000,000 Capital Outlay 70,000,000 Other Charges 60,000,000 Operation of Economic 50,000,000 Enterprise In PHP In Economic Development 40,000,000 Public Welfare & Internal 30,000,000 Safety General Government 20,000,000

10,000,000 Source: Bureau of Local 0 Government Finance 1991 1992 1993 1994 1995* 1996 1997 1998 Average Year

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Table 4-27: Income and Expenditure of Balanga Year Income Expenditure Savings (Deficit) 1991 15,312,984 15,346,786 (33,802) 1992 96,620,586 93,772,259 2,848,327 1993 21,263,224 20,780,602 842,622 1994 26,045,447 25,719,293 326,154 1995 26,045,447 25,719,293 326,154 1996 36,114,752 37,001,169 (886,417) 1997 41,858,881 40,267,985 1,590,896 1998 49,944,024 50,026,388 (82,364) Source: Municipality/City of Balanga, Statement of Income and Expenditure Reports

Balanga has considered seeking grant assistance from the Japan International Cooperation Agency (JICA) for the formulation of a Master Development Plan and study grant. Mayor Garcia has envisioned the development of the city into an information and communications technology park. 136

Balanga has very minimal loans and borrowings (Table 4-25 and Figures 4-29, 4-30). An earlier loan sourced from the DOF’s PREMIUMED 137 program financed by the World Bank was used for the construction of slaughterhouse. Getting future loans has not been an attractive option for the moment as Balanga’s officials believe that the local government has to strengthen its financial soundness first before presenting a loan proposal to funding agencies. It has, however, studied the possibility of bond flotation in order to support at least two projects: the construction of a new city hall; and the rehabilitation and construction of the port area.

Migration to Balanga City is not a new phenomenon. After the eruption of Mt. Pinatubo in 1991, several households from affected areas have settled in the city. Even

136 Interview with former City Mayor (now Congressman) Albert Garcia, Balanga, Bataan, 20 August 2001. 137 PREMIUMED refers to Project for Essential Municipal Infrastructure Utilities, Maintenance and Engineering Development. It is implemented by the Department of Finance, and financed by the World Bank. The project aims to improve and strengthen the management technical and financial capacity of local governments along project planning and implementation. 311

Muslims from conflict-laden areas in Southern Philippines have migrated to the area, bringing along their businesses and helping the local economy in the process.

In response to increased globalization, the City of Balanga expressed its desire to improve delivery of social services among its residents. It also stressed the need for broader increase computer literacy to enable the population to keep pace with rapid changes in communication and information technology. It also cited the need for a solid waste disposal program in the light of the expanding population and other physical changes inherent in an urbanizing area. Another of Balanga’s dreams is to create an economic zone that could provide a sustainable source of employment for its people. Mayor Garcia has also proposed that national government consider greater development efforts outside of Metro Manila and the possible reconfiguration of the IRA formula to consider the actual needs of the LGUs. 138

Mariveles and Inter-LGU Cooperation In terms of geographic location, Mariveles is located in a cove at the southernmost tip of the Bataan Peninsula. It is bounded on the east by Manila Bay, on the South Channel, which separates the town from Corregidor Island on the west by the China Sea. Mariveles is the most populated town in Bataan with its tentative 85,779 residents and a 4.71 percent growth rate per annum. (The population is “tentative” in the light of the transient nature of the working population which comprise the bulk of the town’s residents.) The large population has been attributed to migration, mainly workers from all over the country since Mariveles is host to the Bataan Economic Zone, formerly Bataan Export Processing Zone, which is the first of its kind in the country. Mariveles has a land area of 153.9 square kilometres. 139

Politics in Mariveles Political life in Mariveles, as with most local government units, is that of stability, where the local chief executives are elected until their third term. Usually, the mayor rises from the ranks and is eventually rewarded for respectable performance by a vote of confidence by the people in more responsible positions. For instance, the incumbent mayor,

138 Interview with former City Mayor (now Congressman) Albert Garcia, Balanga, Bataan, 20 August 2001. 139 Profile of Mariveles, Bataan prepared by the Municipal Planning Development Office (MPDO). 312

Angel V. Peliglorio, first served for 5 years as a councilman in the barangay, the smallest political unit. After this, he won as a municipal councillor in 1992, and became a board member in 1995. In recognition for his performance, the people voted Mayor Peliglorio in 1998, a post he has held to the present.

Experience in Decentralization Mariveles’ Municipal Council and Mayor Peliglorio agree that the points of decentralization raised by the LGC of 1991 are satisfactory. In particular, they cited the provisions providing for the share of LGUs in the IRA and encouraging them to tap all other sources of revenue which were clearly defined. They cited, however, some issues that have remained unresolved and in the process created problems in local governance. Particularly mentioned was the devolution of both staff and line functions of national government to the LGUs.140 While there have been improvements in the delivery of basic social services, problems arose with the lack of absorptive capacity of the LGUs. This is especially true where decentralization resulted only in devolved functions, without the accompanying support mechanisms such as facilities and equipment. For example, health personnel are devolved to the LGUs, minus the required health facilities such as clinics and other essential health-related equipment.

Unlike other municipalities, Mariveles as a high-income class municipality is not too dependent on the IRA, which the local executives decry as often delayed due to slow processing. The external and internal sources of income of Mariveles contribute almost equal shares to total income (Figure 4-33 and Table 4-28). BIR allotments, or IRA, contribute 51 percent to overall income, and the rest come from other sources. Real property tax and business tax contribute 19 percent and 15 percent to the total income, respectively. Receipts from economic enterprises, fees and charges and other receipts contribute 6 percent, 5 percent and 4 percent, respectively.

140 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 313

Figure 4-33 Sources of Revenues: Mariveles (Average, 1991-1998)

Business Taxes* Receipts from Economic 15% Enterprises 6% Fees/Charges 5%

Loans & Borrowings* Real Property Tax 0% 19% Other Receipts 4%

National Wealth 0%

National Aids 0%

SOURCE: Department of Finance-Bureau of Local BIR Allotments Government Finance 51%

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Table 4-28: Consolidated Income of Mariveles 1991-1998 (in Pesos)

1991 3,442,483 854,027 4,296,510 1,283,288 516,043 0 2,601,720 4,401,051.00 8,697,561 4,484,421 0 0 4,484,421.00 13,181,982

1992 2,137,546 1,141,779 3,279,325 1,270,641 507,929 0 22,000 1,800,570.00 5,079,895 6,268,928 0 0 6,268,928.00 11,348,823

1993 3,399,645 1,487,607 4,887,252 1,233,911 525,720 0 2,724,780 4,484,411.00 9,371,663 11,339,713 0 0 11,339,713.00 20,711,376

1994 3,162,514 1,716,631 4,879,145 1,212,260 789,670 0 331,786 2,333,716.00 7,212,861 14,928,258 0 0 14,928,258.00 22,141,119

1995 2,936,186 5,246,217 8,182,403 1,348,179 783,406 0 188,551 2,320,136.00 10,502,539 16,756,287 0 0 16,756,287.00 27,258,826

1996 5,122,163 4,410,985 9,533,148 1,377,440 2,020,815 0 604,982 4,003,237.00 13,536,385 18,224,159 0 0 18,224,159.00 31,760,544

1997 4,206,823 11,179,529 15,386,352 2,233,799 1,794,070 0 230,028 4,257,897.00 19,644,249 23,116,539 0 0 23,116,539.00 42,760,788

1998 19,449,568 8,538,793 27,988,361 3,878,793 3,823,161 0 2,758,627 10,460,581.00 38,448,942 23,798,997 0 0 23,798,997.00 62,247,939

Average 5,482,116 4,321,946 9,804,062 1,729,789 1,345,102 0 1,182,809 4,257,700 14,061,762 14,864,663 0 0 14,864,663 28,926,425 SOURCE: Department of Finance-Bureau of Local Government Finance-Statement of Income and Expenditure Reports

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Table 4-34 Consolidated Income of Mariveles (1991-1998)

70,000,000

60,000,000 National Wealth

50,000,000 National Aids BIR Allotments

40,000,000 Other Receipts

Loans & Borrowings* In PHP In 30,000,000 Fees/Charges

Receipts from Economic 20,000,000 Enterprises Business Taxes*

Real Property Tax 10,000,000 SOURCE: Department of Finance-Bureau of Local

0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 Average Year

The annual income profile of Mariveles since the start of the implementation of decentralization has been mixed (Figure 4-34), either increasing or decreasing through the years. There have been, however, increases in collections, especially of real property tax and other non-tax revenues particularly in 1998 despite the economic recession caused by the Asian financial crisis of 1997-1998. The municipality, however, also felt the effect of the crisis particularly when some export-oriented industries within the Bataan Economic Zone had to lay off their workers because of depressed demand for their products in the Asian market. As a result, Mariveles increased its indigent fund 141 from P300,000 to P2 million to support the basic needs of the retrenched workers. 142

In order to efficiently collect taxes, the municipality in 1999 passed Resolution No. 179-99 adopting the use of computerized chemically treated accounting forms for use in the collections of real property and business taxes and other miscellaneous fees. This new form minimized the possibilities of non-payment of taxes by extracting commitments from the

141 Indigent fund is fund for the poor. It is equivalent to social fund for the unemployed. 142 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001.

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taxpayers to settle their obligations. The local government executives said that the average taxpayer does not intentionally evade payment of taxes, but could do so only when asked. It is quite rare that the taxpayer would initiate the payment process for taxes, a view shared by the LGU heads of Guagua in Pampanga.143 . The officials of Mariveles are also studying options on the imposition of new tax measures in line with the provisions of the revenue code and indicated in the Local Government Code of 1991. Public hearings are continuously being conducted on the issue.

As a means of further increasing local revenues, the municipality has passed Resolution No. 105-99 requesting the Philippines Port Authority (PPA) to transfer the administration, management, operation, maintenance and development of two port facilities located in Barangays Poblacion and Alas-Asin to the Municipality of Mariveles. This resolution would thus complete the requirements for the devolution of formerly national government-run functions and facilities, such as the administration of the pier, to the concerned LGU. This is also consistent with PPA Administrative Order No. 02-98 providing for the transfer of administration of government ports to LGUs, including the collection and the use of fees and charges for use of the facilities therein.

The municipality also passed Resolution 272-97, entitled “Interposing No Objection to the Application for Mineral Production Sharing Agreement (MPSA) of Robust Rocks Resources Corporation within the Territorial Jurisdiction of Mariveles, Bataan.” This resolution aims to provide additional revenues to the municipality once the mining corporation earns from its quarrying operations in the municipality. An advantage of this resolution is incorporation of the “user-pay” policy wherein users and developers of environmental resources have to pay for whatever extractive or productive activities pursued. The resolution also directly advocated environmental protection wherein the municipality will be responsible in seeing to it that “the development and utilisation of basalt in the area applied for shall not be detrimental to public interest nor shall cause adverse effect to environmental protection.”

143 Interview with Ms. Elsa Perez- Pantino, Chief, Municipal Planning Development Office (MPDO), Guagua, Pampanga, 4 September 2001. 317

The municipality also has plans to develop partnerships with the private business sector, particularly private developers or planners. The town’s officials have already been conducting dialogues with the private sector about its plans to construct a town center with a common terminal. The town center will cater to industrial and commercial establishments to enhance revenue generating industrial center. 144

The municipality is also studying bond floatation as an option to generate revenues. A consultancy firm has already undertaken studies for a financial plan for the municipality, free of charge. In return for such services, the firm would be allowed to participate in the businesses that would be put up in the town. 145

External Sources of Income The municipality has not been able to get a share from national wealth despite the fact that it is host to an export-processing zone. In order to generate revenues from this arrangement as provided for by the Local Government Code of 1991, the municipality has prepared the computations for its claim from the Philippine National Oil Corporation (PNOC) for the use of the towns water resources for industrial purposes. This claim computation goes back to 1991. In this regard, the municipality is in close coordination with the National Tax Research Center (NTRC) for the proper computation of its claims. Aside from the PNOC, the Bataan Economic Zone (BEZ) is another target of the municipality in its claims for share of national wealth. 146

Why Mariveles was not able to get income from the BEZ for several years before the promulgation of the Local Government Code in 1991 is a story in itself. The BEZ was created in 1972 by Presidential Decree (PD) No. 66 entitled “Creating the Export Processing Zone Authority (EPZA) and Revising Republic Act No. 5490”. 147 The EPZA was the first industrial enclave of its kind that was established to provide export-oriented industries with a place to manufacture their products under an incentive-filled environment, particularly their

144 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 145 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 146 Interview with Vice Mayor Vinctoriano Isip, Municipality of Mariveles, Bataan, 3 September 2001. 147 Presidential Decree 66, Creating the Export Processing Zone Authority and Revising Revising Republic Act No. 5490, 20 November 1972. 318

exemption from business taxes and licenses. This zone proved to be very successful in helping spur an export-oriented economy that other similar processing zones were put up in other parts of the country, particularly in Baguio City in Northern Luzon, Mactan in the Visayas, and Rosario town in Cavite Province in Southern Luzon. The EPZA was later renamed the Bataan Export Processing Zone and the Philippine Export Processing Zone Authority (PEZA) was created to oversee the operations of all these industrial enclaves. 148

The exemption granted to the industrial enterprises from payment of business tax and licenses was eventually removed in 1995 with the passage of RA 8748, entitled “An Act Amending Republic Act No. 7916, otherwise known as the “Special Economic Zone Act of 1995.” The special economic zones include all the export-processing zones as well as the newly-established industrial zones such as the Clark Economic Zone in Angeles City, Pampanga and the Subic Bay Freeport in Olongapo City, Zambales. This law gave the LGUs that were host to the economic zones the opportunity not only to collect real property tax but also to have a share from the gross income earned by business enterprises operating within the zones. After the enactment of RA 7916, Mariveles had shown its effectiveness in enforcing the law by monitoring EPZA enterprises to encourage them to pay 2 percent of their gross income directly to the municipality on the start of their operations. The municipality, on the other hand, provides income tax holidays as an incentive for those who pay their taxes and fees early. The municipality is closely coordinating with the Philippine Export Zone Authority and the Bureau of Internal Revenue (BIR) to ensure the proper recording of the business enterprises and their computed taxes. 149

While the municipality earns from the operations of the BEZ, the zone itself has not been so keen in giving employment priority to those from Mariveles. The PEZA hires people from outside of the municipality irrespective of an existing agreement with the Public Employment Service Office (PESO) of Mariveles. It is for this reason that a sizeable number of workers come from other places in Luzon, including Metro Manila. Mariveles has the

148 Interview with Vice Mayor Vinctoriano Isip, Municipality of Mariveles, Bataan, 3 September 2001. 149 Interview with Vice Mayor Victoriano Isip, Municipality of Mariveles, Bataan, 3 September 2001. 319

lowest unemployment rate by population but this unemployment can be high when taken in real numbers. 150

Mariveles may be a high-income municipality but this has not deterred it from seeking grant assistance from external sources, including ODA. It has already benefited from the Japan International Cooperation Agency (JICA) which provided support for the construction of two health centers for the municipality. The municipality, however, was not the one who negotiated with the JICA for the grant but the Department of Health which was familiar with the ODA processes. It is DOH which acted as a broker between the municipality and JICA.151 The historical ties between Bataan and Japan, 152 could have also helped in facilitating the release of the grant and Bataan itself has been a regular recipient of Japanese aid. The close ties are moored in the fact that thousands of Japanese soldiers died in the various battles in Bataan during the last world war.

Expenditures Patterns In terms of expenditure, general governance got the bulk, or 34 percent, of the overall budget (Figure 4-35). This was followed by public welfare and internal safety and other charges with 23 percent and 16 percent, respectively. The balance went to the wealth-creating expenditures such as economic development, operations of economic enterprises, and capital outlay.

150 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 151 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 152 During World War II, the Fall of Bataan was coined to refer to the defeat of Bataan from the Japanese invaders. 320

Figure 4-35 Expenditures of Mariveles (Average, 1991-1998)

Capital Outlay Other 6% 16%

Operation of Economic Enterprise 8%

Economic Development General Government 13% 34%

Source: Bureau of Local Public Welfare and Internal Government Finance Safety 23% On a yearly basis, the expenditures for both general government and public welfare and internal safety have been increasing steadily 153 (Table 4-29 and Figure 4-36). Improvements in the expenditures for economic development, operations of economic enterprises and capital outlay were noted in 1998 which, incidentally, was an election year.

Table 29 :Local Government Expenditures of Mariveles 1991-1998 (in Philippine Peso)

Year Current Expenditures Capital Grand Outlay Total General Public Economic Operation Other Total Government Welfare & Development of Charges Internal Economic Safety Enterprise

1991 5,622,071 2,061,238 17,775 880,545 3,548,545 12,130,174 1,469,125 13,599,299

1992 6,445,758 952,162 0 927,610 2,637,973 10,963,503 1,199,514 12,163,017

1993 6,994,807 2,643,112 1,171,553 963,965 5,199,717 16,973,154 706,216 17,679,370

1994 9,310,509 5,617,819 93,400 1,337,432 3,783,357 20,142,517 536,624 20,679,141

1995 10,612,462 6,569,977 893,138 1,719,612 4,864,632 24,659,821 697,289 25,357,110

1996 14,083,803 7,655,287 995,608 1,782,828 8,288,142 32,805,668 1,044,095 33,849,763

1997 16,750,148 12,706,226 673,823 2,163,095 0 32,293,292 4,078,284 36,371,576

1998 21,725,607 12,965,595 2,594,464 3,872,923 10,004,906 51,163,495 4,630,038 55,793,533

Average 11,443,146 6,396,427 804,970 1,706,001 4,790,909 25,141,453 1,795,148 26,936,601

Source: Bureau of Local Government Finance-Department of Finance

153 Except for Public Welfare and Internal Safety in 1992. 321

Table 4-30: Income and Expenditure of Mariveles Year Income Expenditure Savings (Deficit) 1991 13,181,982 13,599,299 (417,317) 1992 11,348,823 12,163,017 (814,194) 1993 20,711,376 17,679,370 3,031,676 1994 22,141,119 20,679,141 1,461,978 1995 27,258,826 25,357,110 1,901,716 1996 31,760,544 33,849,763 (2,089,219) 1997 42,760,788 36,371,576 6,389,212 1998 62,247,939 55,793,533 6,454,406 Source: Municipality of Mariveles, Statement of Income and Expenditure Reports

In terms of its financial standing, Mariveles, has managed to maintain a good track record even though it incurred deficits in 1991, 1992 and 1996. The municipality enjoyed savings from its collection of revenues to the extent that it was able to extend loans to municipalities of Bagac and Orion, both in Bataan province. Through the efforts of Mayor Peliglorio, Mariveles extended a loan of P1 million to Bagac for the payment of equity in the construction of the Bagac public market and for other needs of the town including rehabilitation and expansion of public facilities. The loan to Orion, also amounting to P1 million, was made on the request of the latter for its expenses in the light of the delay in the release of its IRA share from the national government. Since the bulk of Orion’s budget comes from the IRA, the loan went to the payment of salaries and benefits of its personnel. 154

The practice of Mariveles in providing loans to its less affluent neighbours has been used as fodder for criticisms against the officials of the municipal council 155 including Mayor Peliglorio during the 2001 elections by political opponents. The mayor, however, countered that lending to other municipalities is consistent with the Local Government Code of 1991 and constitute an act of brotherhood and goodwill, which is the essence of inter-LGU cooperation. Moreover, the municipality had savings for the purpose. Ultimately, the towns of Bagac and Orion were able to repay their loans on time, including the interests of 3 percent.

154 Interview with Mayor Angel Peliglorio, Vice Mayor Victoriano Isip and Councilor Joseph Pereyra, Municipality of Mariveles, Bataan, 3 September 2001. 155 See Chapter I on the list of members of the Municipal Council. 322

It is worth noting that Mariveles could actually apply for cityhood, given its population (which is larger than Balanga City) and its income status. However, its officials aver that the municipality would like to solve its problems first, particularly on settlements and improvements in the necessary infrastructure. They pointed out that almost 83 percent of the residents of Mariveles are informal settlers, or squatters, who have built their homes near the riverbanks, the coastal areas and along the national and provincial highways. 156

To address this problem on squatters, Mariveles has already asked the BEZ to put up housing programs for its workers and other settlers. It also requested the provincial government to donate 10 hectares of land to the municipality specifically for settlement purposes. 157 The LGU has endorsed Resolution No. 158-99 entitled, ”Providing Relocation Site for Squatters or Informal Dwellers in the Municipality of Mariveles,” and Resolution No. 094-2000 entitled, “Respectfully Requesting the Honorable Governor of the Province of Bataan, Leonardo B. Roman for a Possible Donation of 10 Hectares of Land in Barangay BASECO for Distribution to the Squatters Situated Along the River Banks Coastal Areas and on National and Provincial Highways.”

It may not be far from now when Mariveles will eventually apply for conversion as a city, not necessarily to obtain a bigger share of the IRA but to develop its public infrastructure for its expanding population. One constraint to its application for conversion is the unsaid principle that each congressional district should have one city. Balanga City and Mariveles, however, belong to the same district and the idea of having two cities in a single district does not sit well with political leaders and the electorate. Moreover, conversion processes require a sponsorship from Legislature, particularly by the congressman representing the district. The current congressman, incidentally, is Enrique Garcia, who has already worked for the cityhood for Balanga. In this case, he would not be willing to do the same for Mariveles.

156 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001. 157 Interview with Mayor Angel Peliglorio, Municipality of Mariveles, Bataan, 3 September 2001.

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Despite the 10-year implementation of decentralization, the local chief executives of Mariveles believe that its operations are not totally decentralized 158 In the area of political decision-making, for instance, the municipality’s officials feel obliged to align their political party loyalties with that of the governor for practical purposes, especially in getting the needed financial support for their programs. Whenever the governor changes his party affiliation and switches to the administration party, the municipal chief executives likewise follow. The LCEs thus suggested the re-implementation of the two-party system which used to be the mode before the implementation of martial law in 1971, to create more stability in party loyalties. 159

Dinalupihan: Aiming for Improved Classification The municipality of Dinalupihan is Bataan’s settlement closest to the Subic Bay Economic Zone coming from the southwest through the Olongapo-Gapan route which, in turn, branches from the North Luzon Expressway. It is located 95 km east of Metro Manila and is accessible to highly urbanized areas such as San Fernando and Angeles Cities in the southeast and Olongapo City in the west. The town has a total land area of 9,252.73 hectares or 92.52 square km. It has a population of 65,159 who live in the municipality’s fifty-six dispersed barangays.160 Despite its closeness to urbanized areas, Dinalupihan’s economy remains heavily agricultural. 161

Politics in Dinalupihan

The political life in Dinalupihan has been, for a long time, dominated by a single family. In short, it perpetuated a political dynasty. Since 1963, the Payumo family reigned supreme in the municipality. After the term of Jose Payumo Jr. during the pre-EDSA People’s Power period, his wife Lucila succeeded him and served as mayor from 1986 until

158 Interview with Mayor Angel Peliglorio, Vice Mayor Victoriano Isip and Councilor Joseph Pereyra, Municipality of Mariveles, Bataan, 3 September 2001. 159 Interview with the Local Chief Executives of Mariveles, Bataan, 3 September 2001. 160 1998-2004 Medium-Term Municipal Development Plan of Dinalupihan. 161 1998-2004 Medium-Term Municipal Development Plan of Dinalupihan. 324

1995. Mrs. Payumo was succeeded by her son, Alejandre Payumo III who served from 1995 until 2004. The incumbent mayor is his brother Joel Jaime Payumo.

There appears to be a strong spoils system in the political life in Dinalupihan, but with the consent of the constituents. For their loyalty, the people are amply rewarded with employment in the various businesses and other gainful activities in the town, including the municipal government itself. The generosity of the Payumo family in the municipality is legendary that those who are employed in the municipality can expect to hold onto their jobs until their retirement age. The residents entertain the notion that if they are not competitive enough to work in the private sector, the municipality is the only institution that could provide them with work. This idea has apparently reinforced the image of the Payumos as benefactors in an environment that rewards loyalty but stunts independent self-development. 162

Views on Decentralization Dinalupihan Mayor Alejandre Payumo III believes that after the enactment of the Local Government Code of 1991, the process of devolution was hurriedly implemented. He said the budget was not created for the purpose to effectively cover the broad scope of devolved functions and personnel. There has also been the need to strengthen the capacities of the local chief executives to handle the devolved functions and to align their respective needs to the objectives of devolution, in the light of the heterogeneity and peculiarities, of the LGUs’ environment, their capacities, and the needs of their constituents. 163

Mayor Payumo noticed that a significant number of local executives lack basic managerial skills – an essential qualification that would enable them to efficiently undertake programs related to devolution. He cited the need for the local leaders to be able to read, understand and interpret even simple reports such as day-to-day cash flow transactions and other related accounting matters. 164

162 Interview with Vice Mayor Inza Cruz, Municipality of Dinalupihan, Bataan, 20 August 2001. 163 Interview with Mayor Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 164 Interview with Mayor Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001.

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The Dinalupihan mayor says that decentralization has its good points, including that on encouraging local governments to strengthen their entrepreneurial (or corporate) capabilities. He stressed, however, that the local executives also have a role in making people understand that dole-outs have no place in self-reliant development and that people must participate in the provision of equity for the implementation of projects that would eventually benefit them. He added that decentralization empowers people by providing them with the opportunities to improve their own lives.

On the possible improvement of the LGC of 1991, Mayor Payumo suggested that the 3-year term of local government executives be changed to 4 years. He observed that, for LCEs, the first year is usually a learning period for them. The second year is for planning and administration, thereby leaving no time for actual implementation of the plans and programs because the remaining third year is set aside for political campaigns for the succeeding election. He said this short leadership term could be a reason for the delayed or non- implementation of local programs, unless the incumbent leaders are re-elected for a second or third term. 165

Dinalupihan’s top local officials say that while decentralization has provided opportunities to enhance greater local autonomy, its implementation continues to exhibit contradictions which highlight the dominance of centralized decision-making from national government on local matters. In particular, the respondents mentioned the continuing programs of the Departments of Agriculture (DA), Agrarian Reform (DAR) and Health (DOH) which these agencies continue to implement. Ideally, under the decentralization set- up, the LGUs should be undertaking these programs except that they do not have the full capacity to do so in terms of trained manpower and the corresponding budget for personnel services. The local population benefit greatly from these services and programs, nonetheless. In particular, the farmers were able to pull through the drought induced by the El Nino phenomenon through water pumps provided for by the DA. It was earlier intended that the

165 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 326

farmers would pay 50 percent of the cost for the acquisition and operations of the pumps which the DA was not able to collect. 166

The leniency of the DA in its efforts to collect the counterpart payments for pumps from the farmers has been criticized by the Dinalupihan’s officials. They argued that this has only reinforced the “dole-out” mentality among the farmers who expect that during times of natural disasters, services from the national government are free. Also criticized by the local officials was the inconsistency in the implementation of national laws, particularly at the local level. An instance concerns the agrarian reform efforts of the government, particularly on land tenancy. It was alleged that the DAR had insisted that documentation processes on land reform be handled by the LGUs, which is inappropriate. It is the DAR itself, in cooperation with other national land regulatory agencies, which is supposed to provide the farmers or tenants with the necessary documents specifically the land contracts that are necessary for eventual land ownership.167

Another example of how national government dictates on local governance includes its unilateral withholding of 10 percent and 5 percent in IRA for various reasons, specifically under the terms of Presidents Ramos and Estrada. Mayor Payumo cited the propensity of the national government to change rules in “the middle of the game” particularly when issues of national concern regarding the use of its finances occur. Fortunately, the country’s highest court of the land – the Supreme Court - has ruled in favour of the LGUs and decided that – under the Local Government Code of 1991, the LGUs deserve their IRA shares. Based on this decision, the LGUs requested President Macapagal-Arroyo to give back to them their IRA shares during the 2 years when the national budget was re-enacted. 168

The municipality’s officials reveal that another way through which decentralization could be circumvented concerns the practice of the DILG in issuing memoranda and orders that directly infringe on local autonomy. An example is the DILG’s issuance of guidelines

166 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 167 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 168 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001.

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that dictates the “priorities” on how the 20 percent of the IRA could be used for local development initiatives. In this regard, several LGUs feel that they are in the best position to determine what their development priorities are, in alignment with the actual needs of their constituents.

Mayor Payumo, in sum, concludes that the transition process for decentralization has rather been difficult. While the national government continues to struggle and to find ways to reach the grassroots, it has been unable to confidently tap the local government units. The Dinalupihan mayor suggests a further streamlining of the national government bureaucracy and that functions among the agencies and between the national government and the LGUs be clearly defined. He admits that, on the one hand, there are agencies that need to be left with the national government and that there are functions that the LGUs can best implement and undertake.169

Sources of Income

Dinalupihan is classified as a middle-income (3rd class) municipality which is greatly dependent on external resources, particularly from BIR or IRA allotments which comprises 67 percent of its total budget (Figure 4-37). The municipality, however, does not always get its IRA shares regularly and on time. When this happens, it uses its internal savings or budget surplus to pay the salaries of its employees. This has occurred once when its IRA share was delayed by the national government for 40 days. Its other sources of income include receipts from economic enterprises with its share of 11 percent, followed by business taxes and real property taxes with their shares of 8 percent each. Fees and charges and other receipts contribute shares of 4 percent and 2 percent, respectively.

169 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001.

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Figure 4-37 Sources of Revenues: Dinalupihan (Average, 1991-1998)

Receipts from Economic Fees/ChargesLoans & Borrowings* Enterprises 4% 0% 11% Other Receipts 2%

Business Taxes* 8%

Real Property Tax 8%

National Wealth 0%

National Aids 0%

BIR Allotments SOURCE: Department of 67% Finance-Bureau of Local Government Finance

Figure 4-38. Consolidated Income of Dinalupihan (1991-1998)

35,000,000

30,000,000 National Wealth

25,000,000 National Aids BIR Allotments

20,000,000 Other Receipts

Loans & Borrowings* In PHP In 15,000,000 Fees/Charges

Receipts from Economic 10,000,000 Enterprises Business Taxes*

Real Property Tax 5,000,000 SOURCE: Department of Finance-Bureau of Local

0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 Average Year

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Table 4-31 : Consolidated Income of Dinalupihan1991-1998 (in Pesos)

1991 846,184 508,765 1,354,949 1,187,168 699,569 0 1,041,559 2,928,296.00 4,283,245 4,096,718 0 0 4,096,718.00 8,379,963

1992 503,195 784,106 1,287,301 1,967,989 200,716 0 212,991 2,381,696.00 3,668,997 5,439,683 0 0 5,439,683.00 9,108,680

1993 623,382 1,042,180 1,665,562 2,160,616 316,172 0 448,060 2,924,848.00 4,590,410 9,678,426 0 0 9,678,426.00 14,268,836

1994 872,114 1,133,703 2,005,817 2,500,397 294,143 0 590,358 3,384,898.00 5,390,715 13,453,425 0 0 13,453,425.00 18,844,140

1995 1,258,174 1,252,079 2,510,253 2,833,635 315,465 0 214,433 3,363,533.00 5,873,786 15,117,350 0 0 15,117,350.00 20,991,136

1996 5,122,163 4,410,985 9,533,148 1,377,440 2,020,815 0 604,982 4,003,237.00 13,536,385 18,224,159 0 0 18,224,159.00 31,760,544

1997 2,102,087 1,858,813 3,960,900 3,397,489 1,323,447 0 191,986 4,912,922.00 8,873,822 22,071,440 0 0 22,071,440.00 30,945,262

1998 2,021,723 2,768,793 4,790,516 3,501,287 791,097 0 283,285 4,575,669.00 9,366,185 23,919,355 0 0 23,919,355.00 33,285,540

Average 1,668,628 1,719,928 3,388,556 2,365,753 745,178 0 448,457 3,559,387 6,947,943 14,000,070 0 0 14,000,070 20,948,013 SOURCE: Department of Finance-Bureau of Local Government Finance – Statement of Income and Expenditure Reports

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Because of its predominantly agricultural economy, the municipality often experienced lags in the collection of real property tax. Collection of this tax declined in 1992, 1996 and 1998 (Figure 4-38 and Table 4-31). A similar trend has been observed with the collection of business taxes which decreased starting 1997. Although the town has its own public market, it has not been a significant contributor to the municipality’s coffers. Moreover, the market got burned down in 2000, thereby contributing to lesser collections. The municipality thus asked, and received, funds from the Presidential Social Fund (PSF) to rebuild its market. Dinalupihan has also approached its provincial leaders, Governor Garcia and Congressman Roman, for assistance.

Since it is adjacent to the Subic Bay Metropolitan Authority (SBMA), a special economic zone, Dinalupihan’s municipal council passed Resolution No. 48-2000 entitled, “Respectfully Requesting Department of Budget and Management to Release 1997 1 Percent Share of LGU Covered by the Special Development Fund in the Amount of P5,809,196.20.” This Resolution was premised on Republic Act 7227 allotting 1 percent of the gross income of the SBMA to the Special Development Fund to be shared and used by the municipalities outside Olongapo City. Dinalupihan, in this case, thus qualifies for benefits under the Special Development Fund. Insofar as the accounting of such benefits is concerned, receipts from the Fund are booked under the shares to national wealth.

The municipality has also applied for a loan from World Bank and Asian Development Bank (ADB), through the SBMA, for the improvement of its water system and waste management. Dinalupihan was initially attracted to the grant portion of the loans wherein the SBMA acts as the lead implementing agency for a project intended to benefit the municipalities of Lubao and Floridablanca in Pampanga province and Dinalupihan, Hermosa and Orani in Bataan. The municipality, however, subsequently backed out of the project because of its inability to provide local counterpart funds. It has however, expressed its desire to pursue the project but through a joint venture with the private sector. Mayor Payumo

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believes that concentrating on only one scheme for the infrastructure project could be a useful strategy to save on administrative and financial costs. 170

After the failed attempt to contract grants from the SBMA-contracted loan, the municipality did not apply anymore for loans and borrowings from ODA or any other foreign lending institution (Table 4-30). But it did apply for a loan from a local bank, the Philippine National Bank (PNB), to finance the expansion of its market and put into place a waste management system. To repay this loan, the municipality expects to collect garbage collection fees once the infrastructure and system are in place. 171

The municipality has encouraged greater private sector participation in some of its projects. An example is in the tourism sector, specifically the improvement of Roosevelt Park which is a popular destination of local and foreign visitors. So far, the involvement of private businesses in joint venture arrangements with Dinalupihan has been limited to small and feasible projects. 172

Dinalupihan has considered bond flotation as an alternative way of rasing funds for its development projects. The municipality, however, is studying the concept and mechanics and how this could best serve the interests of its constituents.

Expenditure Trends

The bulk of Dinalupihan’s expenditure, or 34 percent of it’s budget, goes to general government (Figure 4-39). Expenditures for public welfare and internal safety, and other expenditures follow with 23 percent and 16 shares, respectively. Income-inducing expenditures such as economic development, operations of economic enterprises, and capital outlay have modest shares. All types of expenditures, except capital outlay, have been increasing through the years (Table 4-32 and Figure 4-40).

170 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 171 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001. 172 Interview with Jose Alejandre Payumo, Municipality of Dinalupihan, Bataan, 20 August 2001.

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Figure4-39 Expenditures of Dinalupihan (Average, 1991-1998)

Capital Outlay Other 6% 16%

General Government Operation of Economic 34% Enterprise 8%

Economic Development 13%

Public Welfare and Internal Source: Bureau of Local Safety Government Finance 23%

Table 4-32: Local Government Expenditures of Dinalupihan 1991-1998 (in Philippine Peso) Capital Grand Year Current Expenditures Outlay Total General Public Economic Operation Other Total Government Welfare & Development of Charges Internal Economic Safety Enterprise

1991 5,365,839 472,354 300,204 0 1,678,171 7,816,568 41,340 7,857,908

1992 7,225,819 28,704 424,409 36,000 912,596 8,627,528 0 8,627,528

1993 5,228,564 3,182,916 919,551 2,307,281 2,560,102 14,198,414 116,853 14,315,267

1994 6,757,279 4,450,150 1,291,754 3,053,529 2,736,685 18,289,397 93,880 18,383,277

1995 6,962,191 4,176,295 1,457,231 3,851,359 3,403,733 19,850,809 10,254 19,861,063

1996 8,550,709 5,669,246 1,579,470 3,738,959 3,356,576 22,894,960 168,802 23,063,762

1997 10,986,896 7,449,366 2,040,716 4,540,375 5,478,198 30,495,551 29,965 30,525,516

1998 12,787,460 9,248,025 2,997,700 4,434,338 4,355,490 33,823,013 46,608 33,869,621

Average 7,983,095 4,334,632 1,376,379 2,745,230 3,060,194 19,499,530 63,463 19,562,993 Source: Bureau of Local Government Finance-Department of Finance-Statement of Income and Expenditure Reports

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Figure 4-40 Local Government Expenditures of Dinalupihan (1991-1998)

40,000,000

35,000,000

30,000,000 Capital Outlay

25,000,000 Other Charges

Operation of Economic 20,000,000 Enterprise In PHP In Economic Development

15,000,000 Public Welfare & Internal Safety 10,000,000 General Government

5,000,000

Source: Bureau of Local 0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 Average Year

The municipality’s financial standing has remained healthy, as its officials and financial managers were able to manage its income and expenditure well, thereby incurring minimal deficits only twice, in 1993 and 1998, during the period 1991-1998 (Table 4-33). The municipality’s surplus in 1996 of P8.69 million is its highest for the period and has been subsequently unmatched. This situation indicates the possible absence of any long-term programming of resources vis-a-vis the possible development projects it could undertake.

Table 4-33: Income and Expenditure of Dinalupihan Year Income Expenditure Savings (Deficit) 1991 8,379,963 7,857,908 522,055 1992 9,108,680 8,627,528 481,152 1993 14,268,836 14,315,267 (46,431) 1994 18,844,140 18,383,277 460,863 1995 20,991,136 19,861,063 1,130,073 1996 31,760,544 23,063,762 8,696,782 1997 30,945,262 30,525,516 419,746 1998 33,285,540 33,869,621 (584,081) Source: Municipality of Dinalupihan, Statement of Income and Expenditure Reports

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Pilar: Bataan’s Rice Granary The municipality of Pilar is located at the southeast portion of the province of Bataan, occupying a land area of 3,760 hectares or 34.92 sq. km. Its population consists of 28,087 people who largely belong to farming households.173 Pilar is considered the rice granary of Bataan. It is classified as a 5 th income-class municipality despite being adjacent to the city capital of Balanga. The development of Balanga, however, has not spilled over at a volume sufficient to make Pilar more progressive. In fact, the opposite is happening: Balanga has acted like a vacuum, siphoning the consumer market from Pilar.

Political Life in Pilar 174 Similar to other municipalities, political life in Pilar has been one of relative stability because of the absence of intense rivalry for the town’s leadership. The local government executives, in fact, have been serving the full three terms, or a total of 9 years, after which they give way to newer leaders. After the terms of Beth Santos as town mayor, she was succeeded by the incumbent, Mayor Carlos Pizarro Jr. Pilar is politically famous for having sired some of the province’s more known leaders, including the Garcias and the Romans.175

Experience in Decentralization It is not exactly known if Pilar has benefited or not from the decentralization efforts of the national government as a provided for by the Local Government Code of 1991. The sentiments of its leaders on decentralization could not be ascertained as its top officials decline to be interviewed for this study. However, the municipality was able to provide important statistics that illustrate its financial performance within the context of decentralization. As a poor income class municipality, Pilar has remained heavily dependent on BIR allotments, or IRA for its operations. In fact, its IRA share comprises 77 percent of the municipality’s total income (Figure 4-41). Internally-sourced revenues from taxes are insignificant and that, as shown by the decisions of its municipal council ( Sanggunian ), it depends heavily on donations or assistance from external sources. In 2000 alone, for example,

173 Profile of the Municipality of Pilar, prepared by the Municipal Planning Development Office. 174 The local chief executives of Pilar declined to be interviewed for the study. 175 Interview with former Governor Leonardo Roman, Balanga, Bataan, 21 August 2001. 335

Pilar’s top officials passed a total of nineteen Resolutions requesting for donations from the Provincial Government, national government line agencies, and legislators to finance operations and important projects. 176

Pilar’s collections of real property and business taxes contribute only 7 percent and 8 percent to the municipality’s coffers, respectively. Collection of fees and charges, other receipts, receipts from economic enterprises as well as loans and borrowings is very minimal.

The town’s yearly progress reports on the collection of its revenues, nonetheless show that the income from various sources have been increasing (Table 4-34 and Figure 4-42), with the exception of other receipts. A reason for the annual increases is the computerization of its financial system which ensure a more consistent and systematic accounting of all financial transactions undertaken by the municipality.

Figure 4-41 Sources of Revenues: Pilar (Average, 1991-1998)

Loans & Borrowings 1% Other Receipts Receipts from Economic Enterprises 3% 1% Fees/Charges 3%

Business Taxes 8%

Real Property Tax 7%

National Wealth 0%

National Aids 0%

BIR Allotments 77%

SOURCE: Department of Finance-Bureau of Local Government Finance

176 Resolutions passed in 2000 . 336

Figure 4-42 Consolidated Income of Pilar (1991-1998)

18,000,000

16,000,000

National Wealth 14,000,000 National Aids

12,000,000 BIR Allotments

10,000,000 Other Receipts Loans & Borrowings

In PHP In 8,000,000 Fees/Charges

6,000,000 Receipts from Economic Enterprises Business Taxes 4,000,000 Real Property Tax

2,000,000 SOURCE: Department of Finance-Bureau of Local

0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 Average Year

337

Table 4-34 : Consolidated Income of Pilar 1991-1998 (in Pesos) Grand

Internal External:Aids and Allotments Total SUB- BIR National National SUB-TOTAL TOTAL Allotments Aids Wealth Revenue from Taxation Non-Tax Revenues Real Business Total Receipts Fees/Charges Loans & Other Total Property Taxes from Borrowings Receipts Year Tax Economic Enterprises

1991 215,151 693,712 908,863 0 72,294 0 820,744 893,038.00 1,801,901 2,029,744 0 0 2,029,744.00 3,831,645

1992 273,029 957,941 1,230,970 0 92,790 0 206,697 299,487.00 1,530,457 3,160,786 5,000 0 3,165,786.00 4,696,243

1993 326,082 1,017,233 1,343,315 182,070 393,132 0 982,999 1,558,201.00 2,901,516 5,384,150 0 0 5,384,150.00 8,285,666

1994 705,046 766,185 1,471,231 142,100 316,408 0 0 458,508.00 1,929,739 7,821,558 0 0 7,821,558.00 9,751,297

1995 452,907 671,353 1,124,260 74,840 44,187 0 12,496 131,523.00 1,255,783 8,726,172 0 0 8,726,172.00 9,981,955

1996 848,788 1,002,401 1,851,189 154,512 336,613 0 39,453 530,578.00 2,381,767 9,467,081 0 0 9,467,081.00 11,848,848

1997 1,479,878 900,934 2,380,812 197,193 573,075 600,000 30,794 1,401,062.00 3,781,874 12,328,819 0 0 12,328,819.00 16,110,693

1998 1,578,771 875,235 2,454,006 195,078 776,362 0 72,762 1,044,202.00 3,498,208 13,225,641 0 0 13,225,641.00 16,723,849

Average 734,957 860,624 1,595,581 118,224 325,608 75,000 270,743 789,575 2,385,156 7,767,994 625 0 7,768,619 10,153,775 SOURCE: Department of Finance-Bureau of Local Government Finance: Statement of Income and Expenditure Reports

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In terms of expenditure, Pilar spends the bulk of its income for general government with its 34 percent share of the total budget (Figure 4-43 and Table 4-35). This expense covers, among other things, the salaries of the town’s local government employees. Nearly a third of these employees hold temporary or casual appointments whose tenures are co-terminus with that of the local chief executives.

Figure 4-43 Expenditures of Pilar (Average, 1991-1998)

Capital Outlay Other 6% 16%

Operation of Economic Enterprise 8% Economic Development 13%

General Government 34%

Public Welfare and Internal Safety Source: Bureau of Local 23% Government Finance

Table 4-35: Inventory of Existing Municipal Employees Office Permanent Temporary Casual Mayor’s Office 8 1 4 Treasurer’s Office 7 3 3 Sangguniang Bayan 1 1 0 Assessor’s Office 1 1 0 Municipal High School 9 1 0 Total 26 7 7 Source: Comprehensive Land Use Plan and Zoning Ordinance of Pilar, 2000-2005

Aside from general government, expenditure for public welfare and internal safety is also high with its share of 23 percent of the total budget. Positive is here that the municipality has focused a substantial part of its energy on the preventive aspects of health care. It has also set aside seed capital for the training of residents for alternative employment opportunities.

339

The rest of its expenditures go to economic development at 13 percent, other charges at 16 percent, operations of economic enterprise at 8 percent, and capital outlay at 6 percent.

The pattern of Pilar’s expenditure on a yearly basis, from 1991 to 1998, has been fluctuating, except for administrative expenditures which remained constant (Chart 44 and Table 36). For instance, no expenditure for public welfare and internal safety was recorded in 1995 – an election year. On the other hand, expenditure in 1996 for the same item almost doubled. This pattern could also be noted for the expenditure in economic development which decreased substantially in 1996, but which rebounded quite substantially in 1997 and 1998 at P577,152.00 and P2,130,700.00, respectively. There was no expenditure for the operation of economic enterprise recorded in 1992, 1996, and 1997. For capital outlay, expenses were also very minimal and were practically nil in 1995, 1996 and 1998.

Figure 4-44 Local Government Expenditures of Pilar (1991-1998)

18,000,000

16,000,000

14,000,000 Capital Outlay

12,000,000 Other Charges

10,000,000 Operation of Economic Enterprise In PHP In 8,000,000 Economic Development

6,000,000 Public Welfare & Internal Safety

4,000,000 General Government

2,000,000

Source: Bureau of Local 0 Government Finance 1991 1992 1993 1994 1995 1996 1997 1998 Average Year

Table 4-36 :Local Government Expenditures of Pilar 1991-1998 (in Philippine Peso) Capital Grand Year Current Expenditures Outlay Total General Public Economic Development Operation Other Total Government Welfare & of Charges Internal Economic Safety Enterprise

1991 2,287,823 180,083 23,535 133,966 1,009,514 3,634,921 82,716 3,717,637

1992 3,375,605 235,179 84,472 0 694,694 4,389,950 69,904 4,459,854

1993 3,964,074 1,326,138 530,062 106,538 2,273,115 8,199,927 90,999 8,290,926

1994 5,151,651 1,743,053 739,403 147,827 1,611,438 9,393,372 137,785 9,531,157

1995 7,811,449 0 443,555 144,837 1,704,647 10,104,488 0 10,104,488

1996 6,584,426 3,514,984 1,743 0 1,878,074 11,979,227 0 11,979,227

1997 7,852,414 3,805,745 577,152 0 2,402,012 14,637,323 795,400 15,432,723

1998 8,469,113 3,989,111 2,130,700 103,299 2,191,588 16,883,811 0 16,883,811

Average 5,687,069 1,849,287 566,328 79,558 1,720,635 9,902,877 147,101 10,049,978

Source: Bureau of Local Government Finance-Department of Finance

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Table 4-37: Income and Expenditure of Pilar Year Income Expenditure Savings (Deficit) 1991 3,831,645 3,717,637 114,008 1992 4,696,243 4,459,854 236,389 1993 8,285,666 8,290,926 (5,260) 1994 9,751,297 9,531,157 226,140 1995 9,981,955 10,104,488 (122,533) 1996 11,848,848 11,979,227 (130,379) 1997 16,110,693 15,432,723 677,970 1998 16,723,849 16,883,811 (159,962) Source: Municipality of Pilar

With regard to the financial standing of the municipality, Pilar was apparently able to manage its income and expenditure well, and having incurred minimal deficits in 1993, 1995, 1996, 1998 (Table 4-37).

Preliminary Findings and Observations

Table 4-37 summarizes the changes in income, expenditures and their impact to real growth at the national level, Region III, and the concerned local case studies. The purpose of this section is to compare each revenue item and expenditures between the national government and the LGUs and determine whether there is real growth in the latter considering the positive changes in income, subject to inflation.

341

339

Table 4-37: Summary

Item National Consolidated/ Region Province of Province City of Guagua** Magalang** Sta. Balanga** Mariveles** Dinalupihan** Pilar** Nationwide III Pampanga of Bataan San Rita** LGU results Fernando Increase of 5 9 8 9 10 10 9 13 14 -4 11 10 10 revenues, in percent per annum (average 1991-2001) Increase of 9 9 8 6 9 8 23 27 30 7 10 10 11 expenditures, in percent per annum(average 1991-2001) Increase of per 1,061 9 8 9 10 10 10 13 14 9 11 10 10 capita revenues in percent, per annum(average 1991-2001) Increase of per 9 9 8 19 9 8 4 27 30 7 6 6 6 capita expenditures, in percent per annum(average 1991-2001) Increase of 8 8 6 15 2 9 7 4 9 11 5 14 RPT, in percent per annum(average 1991-2001) Increase of 9 7 6 8 9 13 17 9 10 15 11 2 Business Tax, in percent per annum(average 1991-2001) Increase of 4 0 8 1 2 -9 7 13 6 13 7 15 Receipts from Economic Enterprises, in percent per annum(average 1991-2001) Increase of Fees 9 7 17 5 12 2 28 12 8 8 -1 15 and Charges, in percent per annum(average 1991-2001) Increase of 12 32 0 11 0 0 0 0 0 14 0 0 342 Item National Consolidated/ Region Province of Province City of Guagua** Magalang** Sta. Balanga** Mariveles** Dinalupihan** Pilar** Nationwide III Pampanga of Bataan San Rita** LGU results Fernando Loans and Borrowings, in percent per annum(average 1991-2001) Increase of -2 -1 0 171 21 -17 -9 -17 -9 0 -7 12 Other Receipts, in percent per annum(average 1991-2001) Increase of 11 10 14 12 12 13 15 15 8 12 12 13 IRA, in percent per annum(average 1991-2001) Increase of 1 2 -13 0 -7 4 0 0 0 0 0 0 National Aids, in percent per annum(average 1991-2001) Increase of 5 25 18 0 11 11 0 0 0 0 0 0 0 National Wealth in percent per annum(average 1991-2001) Percentage 0.80 0.080 0.080 0.080 0.080 0.080 0.090 0.090 0.090 0.090 0.090 0.090 0.090 Change in Inflation Rate (average 1991- 2001) Real Growth* -1,089 -323,082 -1 -21 83 83 -21 -12.7 million -21.5 77 -21 -9 -5 in % per annum million million million (average 1991- 2001) *Real Growth is measured using the following: {(Income1/Inflation1) – (Income2/Inflation2)}1. ** Years covered are from 1991 until 1998.

1 The assistance of Mr. Edgardo Aranjuez, Supervising Economic Development Specialist of NEDA-Social Development Staff is acknowledged. Please also refer to Rudiger Dornbusch and Stanley Fischer, Macroeconomics , 1990, 5th edition, Philippines: Goodwill Bookstore (reprint with permission from McGrawHill, Inc., pp.1- 31, and 511-546. 343

As indicated, the revenues at the national level has an annual average increase of 9 percent, which is at par with Region III and the provinces and municipalities studied, except for the city of Balanga. Balanga experienced an average 4 percent decrease in revenue because of shortfalls in the collection of other receipts. Sta. Rita posted the highest increase in revenue of 14 percent attributed to a 15 percent rise in its Internal Revenue Allotment (IRA).

There is a 9 percent increase of fees and charges at the national level. Where the LGUs studied are concerned, the municipality of Magalang posted the highest collection rate followed by the province of Pampanga and municipality of Pilar. Loans and borrowings rose by 12 percent on the average at the national level which is lower than the increase in Region III with 32 percent. The province of Pampanga and rest of the municipalities under study, however, experienced zero change in loans and borrowings, unlike the Province of Bataan with its average of 11 percent increase in loans and borrowings. But only the municipality of Mariveles posted a positive change with 14 percent average increase.

With regard to external sources of revenue, the average increase of IRA at the national level is 11 percent, which is also at par with Region III and the selected case studies except Magalang and Sta. Rita. Both municipalities experienced an average increase of 15 percent in IRA. Moreover, the increase in national aids is very minimal with only 1 percent and a negative change for the province of Pampanga and San Fernando City. In the case of national wealth, a positive change of 25 percent on the average was experienced. Although lower than the national average, Region III has an average 18 percent increase in the collection of national wealth. On the other hand, only the province of Bataan and San Fernando City posted a positive change in their collection with 11 percent increase on the average.

All the provinces and municipalities under study showed positive changes in spending. Similar with the national annual average of 9 percent increase in spending, the rest of the municipalities and provinces have the same average except for the municipalities of Guagua,

344 Magalang, and Sta. Rita with an average of 23 percent, 27 percent and 30 percent increase in expenditures, respectively.

Considering the positive changes in income, the table indicates that there is no positive correlation between increase in income and real growth when subjected to inflation, at the national level, region III, Pampanga and the rest of municipalities. Only the province of Bataan and the cities of San Fernando and Balanga posted positive real growth, which means that the collected income can support the increase in prices. This further implies that the income at the national level, Region III, Pampanga and the rest of the municipalities was not able to keep up with inflation. The targeting of the internally-generated income is not also at par with increase in prices. In the same manner, the national government collection for distribution to LGUs is not enough to induce real growth both at the national and local levels.

345

CHAPTER 5

Conclusion

Chapter 1 introduced the research problem along with the hypotheses and the analytical and theoretical frameworks. It departed from the following research question: “Given a decentralized regime within a unitary presidential structure of government wherein substantial financial powers are vested in the LGUs, how effective are these LGUs in mobilizing resources to attain local financial autonomy?” Chapter 2, for its part, presented the Philippine political-legal structure, its history and its dynamics. Discussed, in particular, were the experiences in local governance as it was practiced under the pre-Hispanic period and the more than four centuries of colonial subservience to the present.

Chapter 3 discussed, from a macro point-of-view, the process of decentralization as provided for by the Local Government Code of 1991, including the local financing structures and resource mobilization practices and processes. It also provided insights on the issues and problems in the decentralization process involving certain national government agencies and the LGUs. Moreover, it looked at the phenomenon of “re-centralization,” an effect of failed decentralization wherein devolved functions are reverted to the central authority, in this case the national government. As a way of affirming the observations discussed in this chapter, Chapter 4 presented the financial management behaviors at a more specific LGU level, with the provinces of Bataan and Pampanga as cases in point. The case studies also covered sample LGU units that include a component city and three municipalities of varying economic status (rich, medium-class, and poor). Results of interviews with the local government executives of these LGUs, as well as their respective comparative financial records were also included in the narrative to establish the trends in income generation and expenditures among these local governments.

The purpose of this final Chapter, therefore, is to provide the conclusions gathered in response to the main thesis question and provide recommendations in relation to the issue studied, which is financial mobilization practices within the ambit of decentralization as provided for by the Local Government Code of 1991. 346

The Local Government Code of 1991 provides substantial powers and functions to the LGUs in the areas of personnel, functional and fiscal decentralization. These powers cover the following: delivery of basic services and facilities; regulatory functions; revenue-raising powers; and other government and corporate powers including the powers of appointment and recall. 1

This study observed that the local financing structures of LGUs showed a bias for internal sources on income before the passage of the Code in 1991. In other words, the local financial system rested on the assumption that LGUs showed could operate at a level of financial self-reliance. However, with the enactment of the Code this system was entirely discarded. Statistics on the consolidated income of LGUs indicate that after 1991 externally- sourced income particularly BIR allotments, or IRA, almost doubled at 60 percent from what they previously received, aside from the 1 percent share in national aid.

The Department of Finance foresees that the LGUs from 2002 to 2010 will continue to heavily rely on national government transfers, with BIR allotments (IRA) comprising 63 percent of the LGUs’ total income, national aid at 1 percent, and shares to national wealth at 0.24 percent.

As to the local expenditure behavior, on the other hand, the consolidated expenditures of LGUs both before and after 1991 illustrate a similar trend highlighted by the dominance of general government as the main cause of expense. The DOF likewise projects that this expenditure trend will continue until 2010. More specifically, general government includes the expenses for personnel services. Expenditures for wealth-creating activities, such as economic projects and capital outlays, have not been significant. Nonetheless, the LGUs’ expenditure priorities have not been able to prevent them from realizing surpluses in their budgets at the year-end. As a matter of fact, the consolidated budget operations statements of LGUs (income less expenditure) surpluses were experienced before and after the enactment of the decentralization law. The DOF, furthermore, projects that the LGUs will continue to

1 Manuel S. Tabunda and Mario M. Galang, Primer on Local Government Code of 1991 , Marie Jo Educational Supply, Manila, 1991, p. 10. 347

attain or even exceed their incomes over their expenditures from 2002 until 2010. Although LGUs claim that there are less funds after devolution, the presence of the year-end surpluses indicates that, at first sight, the LGUs have been able to manage their budgets well.

On the other hand, it could also be interpreted that the LGUs were able to realize savings because they lack projects to implement. Observations have been raised that the LGUs may be wary or cautious on their spending habits because they are unsure of the regularity of national transfers that may negatively impact on their financial standings. Thus, there is this fear of overspending to the point that operational paralysis may set in. From the management point of view, nonetheless, the ability of LGUs to program their expenditures in accordance with their annual budgetary objectives provides a gauge of effective and efficient LGU performance. Viewed from this perspective, the budget surplus and reserves local governments accumulate are indicative of serious inefficiencies in the budgetary process, suggesting that local governments are slow in introducing performance-based budgeting and long-.term investment planning. 2

The perception coming from the country’s economic managers that the budgetary deficits of the national government is caused, in part, by LGU operations is unfair. Available data show otherwise. The LGUs’ share in the IRA has continued to be small compared with the actual budgetary share of the national government. In other words, the expenditures of the national government for its own operations and priority development concerns, are definitely greater than those of all LGUs combined.

The case studies confirm the validity of the above-mentioned issues and observations. Despite differences in political dynamics, demography, and economic characteristics, the trends and experience in fiscal management in both the provinces of Pampanga and Bataan show similar results, not only between these two areas but among all LGUs, in general.

2 Similar problems have also been noted by the World Bank for Indonesia. See World Bank, “Chapter 7: Fiscal Decentralization and Regional Inequality,” Indonesia Public Expenditure Review 2007, Washington, DC: World Bank 2007, p. 128. 348

Within the context of the issues and observations discussed above, it would be helpful to reiterate the thesis problem. Its main objective was to explore as to what extent in the Philippines the devolution of functions has been accompanied by an adequate allocation of resources to local governments. This entailed further questions related to the effectiveness of local government units to mobilize resources, conditions conducive or constraining the mobilization of resources, motivations of local government leaders to mobilize resources and the overall developmental effects of the reform.

As mentioned earlier, decentralization offers broader opportunities for local autonomy among the LGUs. However, the Local Government Code of 1991, in defining the scope and shape of decentralization, did not promise that existing political, social and economic hierarchies or structures would be eliminated. Thus, the Philippines remains a Presidential unitary system wherein all governments – national and local - are under the supervision of the nationally-elected President. Decentralization therefore merely proposes certain institutional arrangements in order to create an enabling environment for broader community participation and decision-making at the local level. Such arrangements are inherent in the powers and functions devolved from the national government to the LGUs which could be grouped under the following categories: basic services and facilities, regulatory functions, revenue-raising powers, and other governmental and corporate powers. 3

The general context having been established, the hypotheses outlined in Chapter 1 are reiterated herein and accordingly validated in the succeeding paragraphs:

Hypothesis 1: The increasing financial dependency of the LGUs on external sources of funds, including the IRA, is determined by the power structures and relations embedded in the institutional arrangements of these sources.

It has been confirmed, through a look into the LGUs’ sources of revenues, both internal and external, that the more streamlined the organizational structure on fund

3 Manuel S. Tabunda and Mario M. Galang, 1991. 349

sourcing is, the greater the likelihood of LGUs tapping said source. The best example is the IRA. It helps that under the LGC of 1991 IRA is automatically appropriated, thereby providing a legal basis for faster release of the funds. While the national government has intervened, in some occasions, and reneged on the release and of the full amount of the IRA due to LGUs, the Supreme Court has ruled that such intervention is improper and unconstitutional.

On the other hand, a less streamlined structure in the fund-sourcing process, such as the presence of a third party or third tier, leads to less initiative among LGUs in tapping these fund sources. The most prominent example is official development assistance (ODA) or foreign loans. LGUs have not been enthusiastic in availing of foreign loans, particularly through the Municipal Development Fund (MDF).

The discussions in Chapter 3 as well as the confirmatory cases in San Fernando, Pampanga and Dinalupihan, Bataan affirm the withdrawal of the LGUs from ODA projects. Various reasons have been cited, the most significant of them being the stringent bureaucratic arrangement characterizing the process. Whatever agreement subsequently formulated is rendered inutile within the context of changing political realities. It would take at least 2 years for the negotiation and processing of loan applications to complete, despite the fact that LGU executives could serve their terms for 3 years. Often, by the time the negotiations are completed and the contract for the loans approved, a new leadership with its own agenda has been elected into office and refuse to honor the contract negotiated by the predecessor administration.

A second reason is the poor coordination among project implementing agencies from the national government with the LGUs, thereby prolonging the completion of the projects involved. Poor coordination leads to the failure of some LGUs to put up the proper amount of equity and local counterpart funds needed.

A third reason is the rather high interest rates of ODA. The interest rates of the MDF – which include foreign exchange risks - were found to be effectively higher than that of loans contracted directly from government financial institutions (GFIs), such as the Land 350

Bank of the Philippines. As a result, some LGUs pursue the financing of their projects through local funds from GFIs rather than through the MDF-ODA.

A fourth reason for the poor popularity of ODA among the LGUs is that the concessionality of the loans usually granted to the national government is not made available to the LGUs since the pass-on rate is almost at par with the prevailing market rate. While it was explained that pass-on rates to LGUs were meant to prevent market distortion in the capital market, the overall loan is considered too high, nonetheless.

In order to have the LGUs properly represented in the highest echelons of development decision-making on foreign-assisted projects (FAPs) such as the cabinet- level Investment Coordination Committee and NEDA Board, such representation is toothless. The President of the Federation of Regional Development Councils (RDC) has been designated as an observer to these bodies, with no voting power. In effect, decision- making on policies covering development concerns has effectively excluded meaningful participation of the LGUs.

Hypothesis 2: Local chief executives, mainly the elected local government officials (governors and mayors) as well as the bureaucratic managers and technocratic elite from the national government are rational actors who aim to maximize possible gains within time constraints, such as the fixed terms of office. It is, thus, inferred that this rationality perpetuates financial “dependency” of the local executives on the national government. Given the variety of possible sources of development funds, local executives will choose a funding source that can be negotiated more easily, in terms of time and other requirements. Financial decisions are thus not only based on economic feasibility but also political expediency. In other words, local government executives seek by all means to satisfy local financial needs at the lowest possible transaction costs.

The existing financial dependency of the LGUs on national government transfers for their operational and development needs is also a function of expediency, from both the political and economic points of view. Local government executives, like the bureaucratic and technocratic elites from the national government, are rational actors, who aim to 351

maximize the benefits from gains within time constraints. The local executives become financially dependent on the national government simply because, among all sources of revenues, funding is released faster and with less hassle.

The peculiarities of existing political exercises, such as local elections every after three years, also impact on financing decisions. Although local executives may be re- elected twice – and thus be able to extend their term to a maximum of nine years – short terms and frequent elections mean that they have to deliver quick results to their constituency. These pressures certainly militate against local borrowing and ODA- financed projects with their long gestation periods and complex administrative procedures. Thus only where local executives can be relatively sure that they are returned to office after elections - as ins ome of the localities studied in Batangas and Pampanga – are they prepared to engage in borrowing and ODA projects.

Another political exercise, which allows qualified LGUs to maximize receipts from external financing sources, especially the IRA, is the conversion of large urbanizing towns into cities. These have been proven by San Fernando, Pampanga and Balanga, Bataan which both applied for cityhood in order to increase their IRA shares, among others. The political aspect of the conversion process is the sponsorship of the proposal for cityhood in Congress and the subsequent ratification by the LGU’s electorate through a plebiscite.

Similarly, the creation of new barangays from larger ones is another political strategy to generate IRA income. This is the case of Barangay Pulongmasle in Guagua, Pampanga which separated from its mother Barangay Ascomo.

Where possible, LGUs will always seek financial support, including loans, which offer the best term, especially those without or with minimal interest. For example, San Fernando City in Pampanga was able to construct some infrastructure facilities through a loan from the Technical Education and Skills Development Authority with minimal interest.

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Another interest-free source of funding which is heavily political in nature is the dependence on pork barrel funds, such as the Countryside Development Fund of legislators in Congress. The pork barrel is granted free to LGUs upon intercession of the legislators. But the grant does not come without conditions: the heads of LGUs may need to transfer their political party loyalties to another, preferably the administration party, in order to get favorable endorsements of their requests. This was what exactly happened the Pampanga’s LGUs who switched their party affiliation to the dominant party at that time in order to have the anti-lahar mega-dike constructed. Santa Rita also relied heavily on the support of its political allies to release pork barrel allocations to augment its needs in governance as well as delivery of basic services.

Bataan has tried tapping all known sources of income following the changes in party affiliation of its local leaders with that of the administration. Balanga City, for one, tapped the pork barrels of legislators as well as existing national government projects with grant components for its various projects, such as the Bridges Program, and its Master Plan and Study Grant.

Hypothesis 3: There is a greater likelihood that LGUs could be effective in mobilizing financial resources if the following factors are present: (a) there is willingness on the part of the local government unit to tap alternative resources other than the Internal Revenue Allotment (IRA) and to efficiently collect taxes; (b) the LGUs can innovate using other strategies other than what is provided in the Code to mobilize resources; (c) the LGUs are able to keep cost of General Services (personnel services) at the minimum; and (d) there is inter-LGU cooperation.

The dependency of LGUs on external sources of funding notwithstanding, the existing power structures and relations that govern financial environment also present alternative possibilities in the mobilization of other sources of revenues. In other words, the political and other factors that encourage financial dependency of LGUs can also facilitate the effective mobilization of internally-sourced revenues.

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As the experiences of the LGUs in the case studies illustrate, it would take either political will or more efficient management, or both, to make the LGUs tap sources of income other than the IRA. While raising taxes is a politically-sensitive issue that could spell the doom of the political careers of local leaders, this could be avoided through other strategies, such as the institution of more efficient tax collection approaches and other sound financial management practices.

The provinces and municipalities of Bataan and Pampanga have had experiences in tapping alternative sources of revenues other than the IRA and were successful in doing so. Here are some examples:

(a) Pampanga was able to get a loan from the Philippine National Bank, a private bank, with reasonable terms that enable the province to repay such loan without incurring problems; (b) San Fernando City implemented austerity measures in order to save on unnecessary expenses and at the same time contribute to financial soundness amidst environmental instability created by the annual lahar floods; (c) Magalang participated in ADB-Clark Area Municipal Development Project and received grants in the form of beneficial technical assistance; (d) Balanga City secured a loan from World Bank PREMIUMED (Program for Essential Municipal Infrastructure, Utilities Maintenance and Engineering Development) for the construction of a slaughterhouse; (e) Mariveles entered into an agreement with Robust Rocks Corporation to engage in quarrying, with a municipal share to the income generated by the corporation; and (f) Mariveles is aggressively pursuing its bid to have a just share in the incomes generated by the Philippine National Oil Company and the Bataan Economic Zone both of which operate within the municipality’s jurisdiction. Part of this effort is understanding the cash flows of the two companies so it could determine how much it should get as its share.

The Local Government Code itself contains innovative suggestions that the LGUs could pursue to mobilize resources. This study observed such innovative approaches such as: 354

(a) The establishment of the Bataan Development Corporation by the provincial government in order to study, plan and implement development programs for the province using the LGU’s idle lands. The Corporation, as a result, has embarked on a housing project for the settlers, including local government employees, in the poor municipality of Samal. This project was pursued in partnership with the Pag-IBIG Fund, a government financial institution which provides low-cost loans for socialized housing projects; (b) The re-centralization, or re-nationalization, of devolved activities which proved a strain to the LGUs finances. While this practice has set back the process of decentralization, it also eased certain administrative as well as financial burdens from the LGUs. Thus, in Bataan, the provincial hospital was reverted to the national government, and in Pampanga, the responsibility for collecting quarrying taxes and fees was transferred to the national government; and (c) The implementation of cost-saving measures that also maximizes the use of local expertise, manpower and management know-how. San Fernando City and Santa Rita town in Pampanga, for example, administer the construction of public infrastructure utilities without having to hire external parties to do this. Only the bidding of supplies allowed the entry of external suppliers in order to widen the choice of cheaper and better-quality goods and services; and (d) Keeping the costs of general services (personnel services) at a minimum. Santa Rita did not hire a municipal engineer for its various infrastructure needs, considering the mayor himself is an engineer. Another example is the action of San Fernando which cut down its personnel by 70 percent. While this may not be politically popular, it was sound management practice in the light of financial constraints and the fact that the efficiency and effectiveness of governance operations are not adversely affected.

The importance of inter-LGU cooperation is a strategy that needs to be strengthened. Not only does this help to generate more revenues, it may also lead to improved services for the local population.

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The example of Mariveles is a case in point. In providing loans to Orion and Bagac, it was not merely doing a good public relations gambit; it also sought to earn from the interests. Unfortunately, the example of Mariveles has not been emulated. In fact, it had been criticized, especially in the political arena. Up to now, there is no indication that the provinces and municipalities under study will openly demonstrate inter-LGU cooperation through financing assistance.

The attractiveness of bond flotation as a source of LGU finance is relatively less than other options because the LGUs are not so familiar with the processes and management of this strategy. The incongruence between the long maturity of bonds vis-à-vis the term of office of local executives LGUs as well as the difficulty of the LGUs to develop projects also hinder the development of the local bond market.

There is evidence of increasing centralization (re-centralization) despite devolution of various functions and powers to the national government. These evidences include national government intervention on the budget and through related policies to LGUs and court cases that led to less effectiveness on the part of the local governments on local mobilization of resources.

There is a trend of increasing centralization as indicated in: (a) the increase of the budget of agencies whose functions and powers are supposedly devolved; (b) the increase in the number of personnel of the national government including those implementing supposedly devolved functions; and (c) implementation of activities supposedly devolved to LGUs. The national government has also intervened in LGU concerns through related policies thereby causing LGUs to be less effective in the mobilization of resources. To support the fourth hypothesis, related policies and court cases were also mentioned.

Even if Bataan is a high-income class province, Bataan requested for a re- centralization of Bataan Hospital to relieve itself of the burden of the hospital’s financially-draining operations. This development is not its own fault, as it was triggered by the Magna Charta for Health Workers issued by the national government providing for higher wages for organic health workers. Pampanga, on the other hand, had its function 356

of collecting taxes and fees for gravel and sand quarrying taken away unilaterally by the national government, specifically the DENR.

Lastly, the question is raised on how the resources vested in local governments contribute to macro-economic stability, distribution and allocation.

At the aggregate level, as explained in Chapter 3, the national government revenues and the consolidated nationwide LGU income do not result in real growth when inflation is factored in. This implies that the government – both at the national and local levels – is not able to avert the continuing unemployment. 4 The government has difficulty in meeting the demands of the growing population, including the creation of an enabling environment to attract investments to encourage employment.

These findings also imply that the LGUs are not able to project the appropriate appraised value of properties considering that the local income does not translate to real growth. For example, the value of Real Property is undervalued. The LGUs, who have the power to tax including the determination of the tax rate, are reluctant to exercise their mandate to the fullest. The LGUs are quite aware that increasing taxes is a politically sensitive issue. Thus, the LGUs implement short-term measures. These include maintaining the status quo, which is retaining the tax rate, and undermining the market value of properties.

As indicated in Chapter 4, only the province of Bataan and the cities of San Fernando and Balanga posted positive real growth, which means that there is decline in unemployment. As explained in Chapter 4, the LGUs in Bataan and both cities faced the challenge of migration as the residents from neighboring provinces who can not provide employment opportunities.

The local chief executives with positive real growth may have a greater likelihood of being elected considering that they are instrumental to the growth of their respective

4 This is based on Okun’s law. Okun’s law states that the unemployment rate declines when growth is above the trend of 2%; see Rudiger Dornbusch, and Stanley Fischer, Macroeconomics, New York: McGraw-Hill. Publishing Company, Manila: Goodwill Bookstore (reprinted)1990, pp. 18-19. 357

localities. On the other hand, a particular LGU may still vote for the same local officials even if they do not contribute to real growth; consider for example the case of the municipality of Dinalupihan. The municipality of Dinalupihan though with a negative growth rate has in fact engaged in direct recruitment of employees. The Payumo clan continues to control local government in the municipality due to the Local Chief Executives’ ability to provide employment in the municipal’s office.

The difficulty in discerning the well-performing Local Chief Executives, particularly in local fiscal administration, lies on the availability of information on whether a certain local administration contributes to the health of the local economy. The analysis of local institutions vis-à-vis the local economy also becomes complex when the mobility of individuals is taken into consideration. There is an instance where the individual works in a certain city, but lives on another town. The individual may decide to pay his residence tax to where he works instead of where he lives. Another is the case of Pampanga. Even if the people migrated to a certain locality, they continue to vote on their hometown.

Summing up, the achievements of the Philippine local government reforms have been quite ambivalent. As this study has shown, the reforms are much less radical than initially anticipated. On the positive side, the main performance of the Local Government Code of 1991 is threefold: First, it increased, at least in absolute terms, the amount of funds available to local governments. Second, it also increased the leeway of local governments regarding the use of these funds, although it had been shown in this study, that local governments pursue a highly conservative course in their spending practices. And, third, as many previous studies have shown, local government reforms have increased the scope for popular participation, 5 although the fact that here again is ample scope for abuse and major drawbacks – especially with regard to the recall mechanism - should not be overlooked.

5 See, inter alia, Gerard Clarke, “Non-Governmental Organizations and Political Institutionalization in the Philippines”, in: Philippine Journal of Public Administration , Vol. 38, No. 3, July, pp. 197-217; Gerard Clarke, “Non-Government Organizations (NGOs) and the Philippine State 1986-1993”, in: Southeast Asia Research, Vol. 3, No. 1, March 1995, pp. 67-91; and Jürgen Rüland, Politische Systeme in Südostasien: Eine Einführung , Landsberg am Lech: Günter Olzog Verlag, 1998, p. 181. 358

Yet, at the same time, local financial practices have not changed to the extent as anticipated by the reformers. Local government officials still rely very much on central government financial sources and only rarely exploit the full range of legal options made available to them through the Local Government Code to mobilize local resources. Many of these central resources are highly politicized and often part of the dynamics of party politics and political alliances that link the center with the local government level. Worse even is the fact that in some service sectors there has been an outright re-centralization, although central government interventions into the allocation of IRA has been prevented by Supreme Court rulings. This, in itself is a highly interesting finding, as it questions Faletti’s claim that in cases – such as the Philippines – where decentralization reforms were initiated by the local level, recentralization is less likely than in cases where decentralization has been launched by the center. 6 Also, as far this study could demonstrate, service standards have not decisively improved since the inception of the local government reforms. They have improved in the better-off localities, but only to a very limited extent in poor 4 th to 6 th class municipalities. Hence, also the developmental contributions of local governments have remained moderate and differing much across the whole range of local governments.

Today, more than 15 years after the inception of the local governments reforms, the Philippine polity is by no means a consolidated democracy and even less advanced in economic terms. Serious political crises such as military mutinies and aborted coups have threatened Philippine democratization and economically the country is still growing at a far slower pace than most of its Southeast and East Asian neighbors. Decentralization has thus neither been a panacea, neither for the stabilization and democratic consolidation of the Philippine polity nor in terms of development. Even with the Local Government Code and its far reaching reforms in place, much remains to be done in the years to come to transform the Philippines from a “feckless” 7 to a fully consolidated democracy and a newly industrializing economy.

6 Tulia G. Faletti, “A Sequential Theory of Decentralization: Latin American Cases in Comparative Perspective”, in American Political Science Review , Vol. 99, No. 3, August 2005, p. 343. 7 See Thomas Carothers, “The End of the Transition Paradigm”, in Journal of Democracy , Vol. 13, No. 1, January 2002, pp. 5-21

359

List of People Interviewed

Date Attendance in / Meeting with: Office

25 June 2001 Investment Coordination Committee-Technical National Economic and Development Authority-ICC Board 26 June 2001 Ms. Thelma Manuel, OIC-Chief Institutional Development, Regional Development Coordination Staff, NEDA 26 June 2001 (also 09 June Deputy Dir.-Gen. Augusto B. Santos Regional Development Office, NEDA 2001) 27 June 2001 (also 9 June Ms. Rowena Cham, Mr. Calixto Mangilin Investment Programming Division – Public 2000) Investment Staff (PIS), NEDA 28 June 2001 Director Edita Tan International Financing Group – Department of Finance (DOF-IFG) 29 June 2001 Director Rolando G. Tungpalan PIS-NEDA 04 July 2001 Undersecretary Juanita Amatong DOF-IFG 04 July 2001 Mr. Norberto Malvar, Acting Director Bureau of Local Government Finance-DOF 09 July 2001 Asst. Sec. Austere Panadero Human Resource Division-Department of Interior and Local Government 10 July 2001 Asst. Comm. Mary-Ann V. Fernandez Civil Service Commission Ms. Jessica Villanueva 10 July 2001 OIC-Director Aurora Lucas Career Planning and Development Mission - Department of Social Welfare and Development (DSWD) Dir. Ma. Suzette M. Agcaoili Social Welfare and Dev’t Institute Dir. Marina Tabamo Policy Planning and Information Management System Programs and Projects (Street Children Program) Ms. Tricia Mazo

10 July 2001 OIC-Dir. Ma. Alicia S. Bonoan Comprehensive and Integrated Delivery of Social Services (CIDSS) Presidential Flagship Program, 360

Date Attendance in / Meeting with: Office

DSWD 18 July 2001 Mr. Jose Basas, Chief Bureau of Local Health Development, Department of Ms. Risa Yapchingco, Chief Health Ms. Cecilia Pangilinan, Proj. Coordinator Integrated Family Planning and Maternal Child Health (LPP-USAID) 19 July 2001 Director Susana Evangelista-Leones Bureau of Agrarian Reform Beneficiaries and Development, Department of Agrarian Reform Project Development Management Staff, DAR Ms. Florida Romero 19 July 2001 Dir. Agnes Catherine Miranda Planning Staff, Dep. of Agriculture Ms. Rowena San Jose, Planning Off. Department of Trade and Insutry-NCR 25 July 2001 Mr. Joven Balbosa, Economist World Bank 26 July 2001 Country Dir. Manuel Minc Asian Development Bank 30 July 2001 Mr. Rey Gerona, In-House Cons. Planning Japan Int’l Cooperation Agency 31 July 2001 Mr. Jose Antonio League, Operations Officer Urban World Bank and Local Gov’t Dev. 1 August 2001 Counselor Peter Smith Australian Agency for International Development 2 August 2001 Mr. Napoleon de Sagun, Prog. Mgr. United States Agency for International Development 3 August 2001 Mr. Emmanuel Buendia, Prog. Manager Governance and Enabling Government - UNDP 3 August 2001 Dr. Herwig Mayer GTZ-BMZ 6 August 2001 Governor Lito Lapid (Courtesy call) Province of Pampanga Cluster A Meeting with Atty. Benalfre Galang, Prov’l Adm. Eng. Mar Franco, Chief – Infradiv NEDA Region III

7 August 2001 (also 2 Director Delantar Regional Office Coordinating Staff-Department of July) Asst. Director Alma Cruz Budget and Management Ms. Bing Baldano 9 August 2001 Director Mamerto Gatus Prov’l Cooperative Dev’t Office, Pampanga-PCEDO 361

Date Attendance in / Meeting with: Office

Pampanga Province Treasurer Rudolfo Mercado Accounting Office Mr. Benjamin G. Yuzon, Accountant Planning Office, Pampanga Province Eng. Fernando Y. Henson 10 August 2001 Atty. Renato Bagay, Prov’l Adm Bataan Province 13 August 2001 Vice Governor Rogelio Roque Bataan Province 14 August 2001 Asst. Budget Off. Angelika Cayanan Bataan Province OIC Belthazar Q. de Pano DILG – Bataan Province Ms. Leodivina Banzon, Asst. Chief Provincial Palnning Dev’t Office 16 August 2001 Treasurer Pastor Vichuaco Treasurer’s Office, Bataan Province Asst. Treas. Amado Jimenez Asst. Treas. Emerlinda Talento Mr. Alexander Baluyot, Chief PPDO 20 August 2001 Mayor Jose Alejandre Payumo Municipality of Dinalupihan (Bataan) Vice Mayor Manuel Inza Cruz Mun. Adm. Hernando P. Manalili 20 August 2001 Mayor Albert S. Garcia City of Balanga (Bataan) Ms. Marilyn Alonzo, Assessor 21 August 2001 Governor Leonardo Roman Bataan Province 27 August 2001 Sangguniang Panlalawigan (Session) Bataan Province 30 August 2001 Asst. Treas. Lani Penaflor Municipality of Dinalupihan 3 September 2001 Mayor Angel V. Peliglorio Municipality of Mariveles (Bataan) Vice Mayor Victoriano C. Isip Councilor Joseph T. Pereyra SB Secretary Remedios D. Timenia 4 September 2001 Mayor Arthur L. Salalila Municipality of Sta. Rita (Pampanga) 4 September 2001 Ms. Elsa Perez-Pantino, Chief Municipality of Guagua 5 September 2001 Seminar Workshop on Internalizing MTEF/OPIF at NEDA NEDA 362

Date Attendance in / Meeting with: Office

5 September 2001 Mayor Pastor Guiao (courtesy call) Municipality of Magalang Mun. Adm. Diosdado C. Pineda 7 September 2001 Mr. Bernardo J. Cureg, Coordinator City Planning and Dev’t Coordinator, Balanga City 8 September 2001 Congressman Enrique T. Garcia 2nd District of Bataan 10 September 2001 Mayor Rey Aquino San Fernando City Mun. Adm. Jose de Leon 17 September 2001 Ms. Teresita Candelario, Chief DBM-Budget Programming Service Ms. Mercy Pajarin, Chief 18 September 2001 Ms. Marilou R. Samson, Acct. Mgr. LGU Guaranty Corporation 24 September 2001 Congressman Oscar S. Rodriquez Congress of the Philippines, 2 nd District, Pampanga 14 August 2002 Senator Aquilino Pimentel Senate of the Philippines, Manila

363

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