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PHILIPPINES Discussion Note No. 24
Decentralization
Improving Local Governance for Better Service Delivery
Incomplete decentralization contributes to weak governance in the Philippines. A number of binding constraints in the current intergovernmental arrangements and associated institutional and structural weaknesses constrain Local Government Units’ (LGU) incentives and capacities to provide public services and serve as catalysts for dynamic and inclusive economic activities in their respective localities. These constraints include weak systems for LGU accountability, a high level of fragmentation among LGUs, and inequities in the LGUs’ resources base. Important progress has been achieved in local governance with the enactment of the Local Government Code (LGC). But the pace of progress has been too slow, and its spread too narrow, to deal adequately with the country’s enormous poverty reduction challenges. All LGUs, regardless of level or size, need to be able to provide a minimum level of basic services to their citizens. The better endowed ones need to step up to a more ambitious role of facilitating economic development within and around their jurisdictions. Evidence suggests that most LGUs are failing to adequately fulfill these roles.
A comprehensive reform of the decentralization framework could correct many of the distortions, but that may be a politically difficult proposition for which there does not seem to be a clear demand in the country at the moment. There are, however, a number of intermediate policy options that could help make decentralization work better in the Philippines. These options seek to address the problems of weak LGU accountability, fragmentation, and resource base inadequacy with the overall aim of improving local service delivery.
A. The Philippines Today: Progress and Challenges
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Decentralization has the potential to bring about significant benefits, especially to countries characterized by such diversity as the Philippines. These benefits include a more accountable and responsive handling of public affairs, and thus more adequate provision of public services that meet the specific needs and demands of each locality.
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The passage of the 1991 Local Government Code (LGC) represents a turning point in the history of Philippine governance. It promotes the lofty ideal of a more democratic state capable of serving its citizens in the rich diversity of geographic and social fabrics that characterize the country. It also entrusts local political leaders, duly elected through a democratic process, with the responsibility of guiding the development process in their respective localities, and has helped to strengthen local autonomy and provide LGUs with a significant increase in resources.
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Along with the devolution of basic local services, the Code provides LGUs with enhanced powers of taxation and enhanced access to fiscal transfers through the Internal Revenue Allotment (IRA). Both the IRA and the assignment of specific taxes have enabled local governments to increase their share of expenditures relative to the country’s Gross National Product (GNP) from 1.9 percent in 1991 to 3 percent in 2007. Furthermore, own-source revenues generated by LGUs have increased from 0.8 percent of GNP in 1991 to 1.1 percent in 2007.
Box 1: The 1991 Local Government Code
With the enactment of the Local Government Code (LGC) in 1991, the responsibility for providing and financing the following services was devolved to LGUs:
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local public buildings and structures
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solid waste disposal system
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local services and enterprises (e.g., public markets, public markets, slaughterhouses, etc.)
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local infrastructure facilities (e.g., local roads and bridges, school buildings, health facilities, housing, communal irrigation, water supply, drainage, sewerage, flood control)
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primary health care
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social welfare services
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|
|
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The available evidence suggests that devolution has failed to improve service delivery in a significant manner. Despite the strong shift towards devolution, LGUs have not fully realized their collective potential as envisioned by the architects of the Local Government Code, and while positive examples of good local governance can be found throughout the Philippines, these appear to be exceptions rather than the norm. Table 1 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 (in bold) managed to improve their scores enough to move up to the next higher cohort while three provinces (italicized) actually registered lower HDI scores. Furthermore, a recent study found that the growth in provincial income after decentralization has had a weak impact on poverty reduction, which suggests that the current intergovernmental arrangement is unable to translate growth at the provincial level into poverty reduction through more effective service delivery (Balisacan, 2007).
Table 1: HDI transition matrix
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HDI (2000)
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HDI (1990)
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≤ 0.4000
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0.401 – 0.600
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0.601 – 0.800
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0.801 – 1.000
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≤ 0.400 (n=4)
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2
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2
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0
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0
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0.401 – 0.600 (n=55)
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0
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49
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6
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0
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0.601 – 0.800 (n=14)
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0
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2
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12
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0
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0.801 – 1.000 (n=1)
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0
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0
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1
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0
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Source: Capuno (2007), HDN (1997, 2000, 2002).
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Several fundamental constraints and weaknesses in the current framework for decentralization have limited the incentives and capacity of LGUs to fulfill their primary role as basic service providers. Much of the discussion on decentralization in the Philippines highlights the weak management capacities of the LGUs and inadequacy of resources as obstacles to improving LGU service delivery. While these are important, experience elsewhere shows that capacity building is often ineffectual unless it is accompanied by incentives for local governments to do better. Likewise, simply increasing resources is not likely to result in better service delivery unless other fundamental weaknesses are addressed. Three sets of binding constraints that weaken LGUs’ performance in the Philippines, regardless of their capacity and resource endowments, are (i) weak LGU accountability for performance, (ii) a high level of fragmentation among LGUs, and the corresponding lack of effective inter-LGU coordination, and (iii) inequities in the LGUs’ resource bases, which leave a number of poorly-resourced LGUs unable to provide the most basic services adequately while allowing others to embark on projects of questionable economic and social impacts.
Constraint No. 1: Weak Systems for LGU Accountability
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The mechanisms for holding local chief executives accountable for performance are weak and frequently ineffective. Factors include the confusing and overlapping assignment of service delivery functions across levels of government, the national government’s focus on procedural compliance in monitoring LGU operations, and ineffective bottom-up accountability.
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Unclear assignment of functions. While many basic services have nominally been devolved to the local governments, national government agencies (NGAs) continue to take advantage of loopholes in the Code to continue the direct delivery of certain services. This has resulted in a multi-track system of service delivery in certain sectors that compromises the lines of accountability for these local services. Table 2 illustrates the situation in the local roads sector using case study data for seven LGUs in two provinces. Even though local roads are devolved to LGUs, the NGA share of total local road and bridge investments in 2004-07 exceeded 90 percent for one of the two provinces and for three of the five barangay road networks. Also, NGA investments in local roads were often not coordinated with local plans and were typically based on either political motivations or on direct requests from communities, bypassing the LGU itself.
Table 2: Road Expenditures by Type and Funding Source in seven LGUs (2004-07)
(Real 1985 Pesos, in ‘000 PhP)
Road Class /
Case Study LGU
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Total Road & Bridge Expenditures
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% LGU
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% NGA
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Total
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Provincial Roads
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Province A
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82%
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18%
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65,537
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Province B
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6%
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94%
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224,306
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City/Muni Roads
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City A
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87%
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13%
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13,059
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City B
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98%
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2%
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15,192
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Municipality A1
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100%
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0%
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492
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Municipality A2
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100%
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0%
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142
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Municipality B
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87%
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13%
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881
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Barangay Roads
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|
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City A
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0%
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100%
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2,042
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City B
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84%
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16%
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12,710
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Municipality A1
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2%
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98%
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2,598
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Municipality A2
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39%
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61%
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858
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Municipality B
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4%
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96%
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9,557
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Source: World Bank, Local Service Delivery Case Studies (2010, draft).
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Excessive and uncoordinated procedural requirements. LGUs are flooded with mandates and requirements from NGAs and national laws, most of which are focused on dictating LGU processes and inputs and are generally not harmonized and coordinated among the respective NGAs. These generate significant compliance costs for LGUs, although their impact in substantially improving the quality of resource management by the LGUs is doubtful. Furthermore, the NGAs themselves have little capacity to monitor and enforce LGUs’ compliance with these requirements.
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Weak social and electoral accountability. The Code introduced mechanisms to institutionalize citizen participation in the LGU planning and budgeting processes, primarily through special bodies such as the local development council and the local health and school boards. However, the functionality of these special bodies varies significantly across LGUs and the voice of non-government stakeholders in local governance is generally very weak. No systematic information on LGU performance is available to allow voters to assess their local governments’ performance and use elections to reward good performers and punish laggards. Not surprisingly, recent research suggests that local elections have been ineffective instruments for holding local chief executives accountable for their performance in service delivery. Table 3 summarizes the outcome of the 2001 election of provincial governors in conjunction with changes in the HDI scores of their provinces over the preceding six year period (equivalent to two full electoral terms). The re-election rates of the governors who presided over significant increases in HDI scores (i.e., over 10 percent) were not higher than those of governors who presided over negligible or decreasing changes in HDI scores.
Table 3: Changes in HDI Score (1994-2000) and Gubernatorial Election Outcomes in 2001
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Governors Standing for Re-election
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Change in HDI Score
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Re-elected
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Defeated
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> 20%
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1
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-
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10 – 20%
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6
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6
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0 – 10%
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24
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9
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0% (no change)
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2
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1
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< 0%
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3
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4
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Total (n=56)
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36
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20
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Source: Capuno (2007), National Statistical Coordinating Board.
Constraint No. 2: High Level of Fragmentation among LGUs
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The Philippines exhibits a hyper-division of jurisdictional boundaries, resulting in a local government system comprised of a large number of relatively small jurisdictions at each level of sub-national government. (The sub-national government consists of approximately 80 provinces, 120 cities, 1,500 municipalities, and 42,000 barangays.) This severe fragmentation reduces the efficiency of basic service delivery, particularly as each LGU demands a basic organizational structure with inherent overhead costs, and complicates inter-LGU coordination/cooperation. This problem is particularly acute in sectors where geographic coordination beyond municipal/city boundaries and economies of scale play a crucial role. Examples are the management of road networks, health referral systems, environmental management, and the provision of certain public utilities (e.g., water and electricity).
Figure 1: The smaller, the more inefficient?
The LGU size and public spending patterns
Figure 1 shows an inverse relationship between the population size of municipalities and the share of expenditures allocated for General Public Services.0 This indicates that smaller LGUs are forced to spend a larger share of their budgets on overhead administration costs – rather than on direct service delivery – compared to larger LGUs.
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The fragmentation of LGUs fosters local governance problems and inhibits inter-LGU cooperation. Smaller jurisdictions tend to be dominated by a smaller number of entrenched clans in control of local political and economic affairs. Meanwhile, neighboring LGUs are often controlled by rival clans. Coupled with the relatively short three-year local election cycle, this weakens incentives for inter-LGU cooperation and coordination in service delivery and investments. The existing system of LGU finance (particularly the automatic IRA transfer and the proliferation of congressional allocations that bypass higher levels of local government) reinforces the individualism of LGUs and creates further disincentives for cooperation.
Constraint No. 3: Inequities and Inconsistencies in the LGUs’ Resource Base
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Establishing appropriate levels of funding across levels of government in a decentralized system is difficult, though critical in designing a well-functioning inter-governmental system for effective governance. The current inter-governmental fiscal arrangement in the Philippines is sub-optimal in many ways. First, the large transfers from the center have a disincentive effect on local tax efforts, as evidenced by the continued high dependency of most LGUs on IRA and limited increase in the generation of own-source revenues over the last 18 years. Second, the current formula does a poor job of compensating for the varying levels of fiscal capacities across LGUs, often worsening the horizontal resource imbalances across LGUs. (Manasan, 2007) Figure 2 shows the average IRA transfers for the three types of LGUs classified according to the amounts of own-source revenues they generate. The data shows that on average the IRA distribution to the provinces is highly regressive, allowing those provinces with the highest own-source revenues to receive three times more IRA than those with the least own-source revenues. The distribution becomes somewhat less regressive for municipalities and progressive for cities.
Figure 2. IRA per capita vs. own-source revenues per capita (PhP), 2002-07 Average
Source: World Bank, Commision on Audit Annual Financial Reports (2002-07)
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The pattern of horizontal imbalance is also evident from expenditure data for case study LGUs. Table 4 compares the overall health expenditures over a five year period of two provinces: one that inherited a tertiary hospital from DOH after devolution in 1991 (Province B) and another that did not (Province A). While Province A’s health expenditures per capita were right in line with national averages, Province B’s expenditures were almost 2.5 times greater as a result of the higher operating costs and investment needs of the tertiary hospital. Province B has been forced to allocate much larger shares of both the total spending and the IRA to health.
Table 4: Cumulative health expenditures in case study provinces, 2003-07
(Real 1985 Pesos, 000 PhP)
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Province A
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Province B
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Total Expenditures
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95,934
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319,464
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Personal services
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77,310
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137,326
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MOOE
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16,250
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117,498
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Capital Outlay
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2,373
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64,639
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Annual Exp. Per Capita
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16
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39
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Personal services
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13
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17
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MOOE
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3
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14
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Capital Outlay
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0
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8
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Estimated Average National Annual per Capita Expenditure on Health
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16
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Health expenditure/Total Expenditure
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20.1%
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37.5%
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Health expenditure/IRA
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21.2%
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50.5%
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Source: World Bank, Local Service Delivery Case Studies (2010, draft).
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