Business World, 18 January 2012


The Local Government Code of 1991(LGC 1991) was part of a wide-ranging package of public sector reforms done by the Corazon Aquino administration. LGC 1991 was the most sweeping law changing intergovernmental structure and fiscal rules in the Philippines. It increased significantly the assigned responsibilities and taxing powers of local governments.

LGC 1991 drastically changed the grant system by first, raising sharply the transfers to LGUs; second, making the system rules-based; and third, mandating the release of the fund to be automatic. Political bargaining was taken out of the new grant system.

The Local Government Code was designed and adopted with a lot of promise. But after 20 years, what have we got to show? After a review of the facts, figures and studies, the following observations and conclusions appear warranted.

Rapid conversion from municipalities to cities: During the last 20 years, 72 municipalities were converted to cities. This move made a lot of sense since the IRA of cities could increase several times over by simply converting from municipalities to cities. This phenomenon imposes no additional financial burden on the national government. It’s a zero-sum game. But there are “losers” and “winners” among LGUs: the big winners are the newly converted cities; the big losers are the old cities that have to settle for a lower IRA.

“Creeping” reverse centralization: Most devolved hospitals were re-nationalized. Regional and lower level hospitals which were transferred to local governments during the early phase of decentralization were taken back by the Department of Health in recent years. This imposes additional costs — potentially large — on the finances of the National Government.

The big “winners” are local governments whose constituents would enjoy hospital services without appropriating local resources for the purpose. Many urban communities were benefited.

As a result of re-nationalization of devolved hospitals, and expanded coverage of national health insurance, the budgets of the Department of Health, in recent years has grown considerably.

But the creeping re-centralization is most severe in the provision of social welfare services. There has been an exponential rise in the budget of the Department of Social Welfare and Development (DSWD) to finance the Conditional Cash Transfer (CCT) Program. For 2012, its budget is P48.6 billion, three times more than what it was in 2010, and nearly five times what it was in 2008.

A big part of the costs of the CCT is the administration of the program. Why can’t DSWD work in coordination with the social welfare staffs of local governments? Why can’t elected local officials be trusted to deliver services that have been devolved to them by law?

The budgets of devolved agencies have increased rather than decreased: In terms of budget shares: the clear outlier is the Department of Social Welfare and Development. It’s budgetary allocation grew exponentially in recent years, but especially so during the last three years — 2010 to 2012.

There was little gain in reducing the staffs of devolved agencies: With a strong commitment to streamline the bureaucracy and expected efficiency gain, it was disappointing to see no significant cut in authorized personnel. The expectation was that regional offices of devolved agencies will be abolished after decentralization act of 1991. But after 20 years,regional offices still exist.

The 1991 Local Government has not been equalizing: A 2011 World Bank Public Expenditure Review finds that: “decentralization in the Philippines has not played an important role in reducing geographic disparities and instead maybe exacerbating them (p. 82).” This despite the fact that the internal revenue allotment system is mildly equalizing. To be fair, the development of backward regions is not an expressed intention of the 1991 Local Government Code.

The IRA allocation has created perverse results: The higher, predictable, formula-based, and mandatory grant system has resulted in heavier dependence of by local government units on the IRA. LGUs never had it so good. Instead of being “stimulative,” the IRA has become a substitute for raising own taxes for most local governments. To put it more bluntly, local authorities have become lazy collecting own taxes. This is true for most local communities, with the exception of some urban communities.

The reliance on the IRA is more pronounced for municipalities and provinces rather than cities. In 2010, IRA as share of total revenues were 79 percent, 75%, and 50% for municipalities, provinces and cities, respectively. Cities happen to have broader tax bases than both municipalities and provinces.

Local health services, social welfare and local public infrastructure did not get top priority spending. More were spent for general public services, that is salaries and wages for officials and employees, and in running the office of the local chief executive and local councils.

Health, nutrition, and population control accounted for less than 10 percent of total local spending. Spending for social securities, services and welfare accounted for slightly less than 2.5%.

This may be due to the loose assignment of functions and the propensity of the central government to spend for activities that were devolved to local governments. For example, national leaders and politicians continue to allocate and spend money for basic health care, social welfare and local infrastructure.

This creates an incentive structure which results in heavy dependence on central government funding. For example, why would the provincial government or city government appropriate money for a local project if senators or congressmen were willing to finance it through their pork barrel allocation?

Devolution has not improved service delivery: There are some examples of well-managed local governments. But they are more an exception rather than the rule. A World Bank study on decentralization presents a simple Human Development Index (HDI) transition matrix which indicates whether provinces grouped by their HDI scores in 1990, progressed, regressed or stagnated over the following 10 years. Of the 74 provinces analyzed only eight managed to improve their scores enough to move up to the next higher cohort while three provinces actually registered lower HDI scores.

Decentralization has not conclusively improved governance: Theory argues the gains in governance from decentralization. A World Bank study of the Philippines and Indonesia finds that: “Not surprisingly, in neither country has decentralization fulfilled the governance goal predicted by the most optimistic theories. In the Philippines, which has a longer record of decentralization, the picture is more mixed. Overall, perceptions of corruption have declined, and service delivery standards have improved somewhat. However, the link between these outcomes and improvements in the accountability of local politicians is weak.”

The central government’s direct grants to local governments have reached about P300 billion, or about one-fifth of total budget net of interest payments. Are citizens getting good value for their taxes?