The vertical distribution of the IRA allocation across the three main levels of LGUs is inconsistent with the distribution of expenditure responsibilities

(Real 1985 Pesos, 000 PhP)

15. 
    After nearly two decades since the enactment of the Code, it is becoming increasingly evident that the current framework is not providing the LGUs with sufficient incentives to take advantage of their de jure autonomy and become good agents of local development. A wide range of opinion leaders thinks that the Code could benefit from a “face-lift”. But this apparent consensus has not translated into actual amendments, in part because of opposing views on the specific reform path to be followed. While search on a consensus on reforming the overall decentralization framework continues among key stakeholders, there are a number of measures that policymakers can consider to address each of the binding constraints on better local service delivery that were identified above.
    

16. 
    The preceding analysis showed a confluence of factors that limit incentives for LGUs to be held accountable for their service delivery performance. No single measure is likely to be sufficient for changing these incentives and some of them may require reforms in the political institutions (e.g., the electoral system), which this note does not address. Without properly aligning LGU incentives toward better service delivery, however, it is unlikely that investments in other measures, such as capacity building or increased fiscal transfers, will produce the desired outcome of a better service delivery.
    

17. 
    The murky assignment of functions across levels of government is a common problem in decentralized states in developing countries. Although it is tempting to call for clarification of responsibilities in a law (e.g., via amendments to the Code), that is unlikely to be the most effective remedy as (a) what the Law defines may still not be fully implementable because of resource and capacity constraints at the local level, or (b) the NGA may be unwilling or unable to orchestrate a well-organized devolution process because it lacks a coherent sector policy framework (or have other incentives to retain officially devolved functions in its hands). Clarification of service delivery responsibility is therefore best approached on a sector-by-sector basis, allowing those sectors with a relatively coherent policy framework and sufficient coordination capacity in the NGA to experiment with gradual adjustments in the assignments of service delivery responsibilities.
    

18. 
    NGAs that are actively involved in the provision of devolved services need to shift their focus away from direct provision. They should instead move towards setting minimum service standards or performance targets for their respective sectors, monitoring LGU performance, and providing additional technical and financial support to LGUs, when necessary. In cases where the Code is ambiguous about the extent of the devolution of a sector, the corresponding NGAs need to establish clear criteria and agreements with LGUs on the exact assignment of roles and responsibilities across levels of government. It would be advisable to rely on pilot trials in this context. The central government might start with a sector where there are on-going efforts to introduce reforms in devolved service delivery, such as the health sector. Similar schemes will have to be worked out for each devolved sector on a sector-by-sector basis. A crucial element of this scheme is to make information on LGU performance available to the public in order to increase accountability for local service provision (see Box 2).
    

19. 
    Multiple national oversight agencies frequently impose excessive rules and regulations on planning, budgeting and financial management/reporting. Simplification and harmonization of the LGU reporting requirements currently pursued jointly by the oversight agencies could ease administrative burdens on the LGUs and improve transparency and accountability in LGU fiscal management. Additional improvements in fiscal transparency and financial accountability could be achieved with elimination of some of the legally-mandated special funds. Although some of them, such as the calamity fund, are justified as an element of prudent fiscal management, others seem to add little value to the quality of financial management while adding unnecessary complexity in the budget structure of the LGUs. The typical LGU practice of reporting on the use of these funds separately from the on-budget activities further reduces transparency. A case in point is the Local Development Fund (LDF) composed of 20 percent of the IRA which the LGUs are legally required to use to fund “development” projects and account for separately from the general fund.⁰ The definition of what constitutes “development” is inevitably open to interpretations and for those LGUs that count on significant amounts of own source revenues or borrowing for financing projects, the LDF concept is virtually meaningless as it only captures part of the LGUs’ development-related activities. Eliminating the LDF would therefore cost little in terms of expenditure prioritization and improve the quality of fiscal management by reducing complexity and increasing transparency.
    

20. 
    A similar set of constraints on LGUs’ operational autonomy (and thus accountability) arise from unfunded mandates and LGUs’ inability to own, manage or dispose of certain public assets. For example:
    

• 
  In most cities, the land classification by the Department of Environment and Natural Resources (DENR) dates from the first half of the 20^th century. Rapid urbanization has led to the occupation of land still classified by DENR as timberland. As a result, cities are not able to impose taxes on these lands because the occupiers cannot get legal titles.
  
• 
  The Land Transportation and Franchise Regulatory Board (LTFRB), under the Department of Transport and Communications (DOTC), continues to issue franchises to taxis in some highly congested LGUs despite the efforts by the city councils to impose a moratorium. As a result of these uncoordinated policies, pollution and congestion have continued to rise.
  
• 
  Some national agencies own significant portions of land in LGUs. These properties are not only exempted from the real property tax but they may sometimes interfere with the implementation of badly needed infrastructure projects or service facilities.
  

21. 
    As long as LGUs are unable to exert some degree of control over factors that affect the local economy, it will be difficult for them to improve basic service delivery and become effective facilitators of local economic development. A recommended solution would be reviews and rationalization of rigid provisions in the Code and in national government circulars which create significant compliance costs for LGUs and limit their flexibility to allocate resources to address specific local needs.
    

22. 
    Given the high level of fragmentation among LGUs, it would be desirable to amalgamate small LGUs into larger, more economically viable LGUs. However, given the expected political obstacles inherent in consolidating multiple jurisdictions into a single LGU, it will be difficult to stem this trend in the short run, other than to uphold stringent rules on conditions and procedures for allowing a community to split from an existing LGU to form a new unit.⁰ A more promising remedy would be to strengthen existing LGUs’ incentives and capacities for inter-jurisdictional coordination.
    

23. 
    In decentralized systems of governance, the intermediate levels (i.e., states, provinces) often play important coordinating roles. Following this general pattern, provinces in the Philippines could take on a more pronounced role in defining province-wide strategic priorities and in leveraging their political and financial capital to align the local activities of its component LGUs. Provinces could also serve as the primary partners of sectoral NGAs in monitoring the performance of component LGUs according to prescribed minimum service standards, and in implementing performance incentive programs targeted towards component LGUs. An alternative approach to strengthen coordination at the intermediate level would be to revamp the Regional Development Councils, transforming them into more technical bodies that are accountable to the political structure both at the local and central level.⁰ Either the provinces or RDCs could be empowered to assume this more expansive role through the additional transfer of resources. These resources could come from additional transfers from the national government (on top of the IRA) that are distributed on the basis of sector-specific and/or non-sectoral performance-based contracts. If resources are channeled through provincial governments, these could be used to enhance their own service delivery and to provide incentives to component LGUs through performance sub-contracts.
    

24. 
    The mismatch between spending/service needs and resource availability is greatest at the barangay level. Although the barangays as a whole receive 20 percent of the total IRA, this amount is hyper-divided among more than 40,000 micro jurisdictions, each with its own administrative structure. As a result, the amount available to each barangay is too minuscule to fund development initiatives of any significance, which makes the barangays heavily dependent on higher tiers of government and local members of congress for funding their long list of investment needs. Pooling these resources allocated to the barangays into a larger fund would permit their more efficient use. Integrating the resource allocation decisions at the barangay level, along with the corresponding IRA allocation, with those of the municipal/city governments, the tier immediately above the barangays, could accomplish this objective.⁰
    

25. 
    One option, though a bold one, is to incorporate barangay captains as members of the municipal/city councils, replacing the current council members. A figure traditionally invested with the executive duty to enforce local ordinances, as well as maintain public peace and order, the barangay captain also serves the role of community organizer and intermediary between the community and the local government, that is, representative functions. Because the amounts of resources each barangay receives are insufficient for the provision of much-needed services (such as barangay roads) on their own, the barangay captains are forced to expend quite a bit of effort lobbying local governments for resource allocation and service delivery in their own barangays. This, however, is supposed to be the role of local council members. Such overlap suggests that blending these positions, as well as their duties and responsibilities, might bring about several benefits to local governments.⁰
    

26. 
    An ideal solution would be to redesign the IRA formula. Fundamentally, the IRA formula needs to be refined to reflect a more explicit alignment of service delivery responsibilities and resource requirements across different levels of LGUs, and the equalization of uneven fiscal capacities among LGUs of the same level. In past years, the national government commissioned various studies to review the IRA and propose reforms to the distribution formula (the most recent being a JICA study commissioned by the Department of the Interior and Local Government in 2008). Alternative options for reforming the IRA to address the identified issues with the current formula are already available to the national government. However, the political incentives to change the current formula are weak, both among national-level legislators who would be responsible for enacting a change to the LGC, and among local government officials, many of whom are afraid of losing part of their IRA allocations.
    

27. 
    Revising the formula is politically difficult to achieve, at least in the short run. Given the possibility that some stakeholders may push for increasing the total amount of national government transfers to the LGUs, several options for utilizing additional fiscal transfers can be explored to address inequities in the existing transfer system and to leverage improved local service delivery.⁰ The most promising approach would be to identify additional resources for transfers to LGUs and design them following certain rational criteria.⁰ One possible criteria to consider as a basis for augmenting the intergovernmental fiscal transfer arrangement is to link the transfer to some measurable aspects of LGU performance. Another is to use the equalization criteria to direct additional resources to LGUs in greater need.
    

28. 
    Performance-based grant systems: From the point of view of enhancing LGU accountability and correcting vertical imbalances, performance-based grant systems that transfer additional resources to provinces and low-capacity municipalities on the basis of pre-specified performance criteria would offer an interesting option. For example, in the health sector, formal performance contracts between DOH and provinces could serve as a basis for awarding grants to provinces, particularly those that absorbed tertiary hospitals from DOH during devolution. In turn, provinces could enter into performance sub-contracts with component LGUs to provide fiscal incentives for achieving health service standards agreed in the sub-contracts. This system could be coupled with the minimum standards in service delivery defined by NGAs as discussed above. A basic set of indicators, targets and outcomes in key sectors would need to be agreed with LGUs as part of the process of setting up a performance measurement system as discussed in Box 2 on the Colombian experience.
    

29. 
    Equalization grant scheme: The current intergovernmental fiscal system does not fully take into account the divergent fiscal capacities of the LGUs, leaving poorly-resourced LGUs with inadequate capacities to provide the most basic services. Decentralizing countries have often used one of the following two options to address this common problem of horizontal inequity. The first option is to include a measure that captures differences in revenue generating capacity in the allocation formula, such as poverty incidence or percentage of land exempt from property tax, or with tax breaks (i.e., government property and certain agricultural and timber lands). The second option utilizes a set of minimum expenditure levels that ensure the provision of a basic level of services to the population. A balancing or equalizing transfer is given to those local governments that are not able to meet that minimum expenditure level (see Box 3).