There are positive developments, such as in public procurement, that provide opportunities for incremental governance reform

12. 
    The reputation and legacy of the government will be largely determined by its record on improving governance. Many other political leaders and governments around the world have faced these same challenges. This note lays out some suggested short- and medium-term priorities, drawing on successful experiences from the Philippines and other countries. Addressing the problems will require a combination of measures to restore proper checks and balances between the executive and the legislature, support a more professional and accountable civil service (including the judiciary and the statutorily independent constitutional bodies) and to strengthen public voice and oversight.
    

13. 
    In the short-term, confidence-building measures can generate much-needed credibility and public trust. It is important to send a signal to citizens who may have grown tired of hearing about one graft case after another involving high-ranking officials that the Administration is serious about holding those responsible for past offences to account while minimizing opportunities for similar wrong-doings in the future. Furthermore, history also demonstrates that conditions for reform will be favorable in the initial period of the new administration. Post-election reform momentum has been grasped in the past to push through change. Experience indicates that client-patron relationships between business interests that fund political campaigns, the politicians in question and high-level bureaucrats tend to crystallize within six months or so of an election. Thus, the “honeymoon” can be short, so the new government will need to have a set of plans in place for immediate post-election implementation.
    

14. 
    While it would not be appropriate for the President to interfere in the judicial process in specific cases, a fresh push to resolve some of the major high-profile corruption cases would garner public support and send a powerful message that the government is serious about anti-corruption. In some countries the public has the right to information on the status of ongoing corruption investigations. Coupled with systematic regular reporting by the Office of the Ombudsman on unresolved cases, this would be a useful transparency measure. Reviving once-successful programs, such as the lifestyle checks on senior government officials, would be an appropriate complement to beefed-up prosecutorial efforts.⁰
    

15. 
    Many senior public officials (elected and appointive) have business interests that are directly affected by government policies. Rightly or wrongly, this inevitably creates public perceptions of a conflict of interest. The Philippines has a solid legal framework related to conflict of interest in both the Constitution and Republic Act No. 6713. This includes the requirement for all public officials to annually disclose a Statement of Assets, Liabilities and Net Worth (SALN). However, practice suggests that irregularities in SALN are often not acted upon, despite sanctions in the law for unexplained wealth. Furthermore, restrictions on the business interests of Cabinet Secretaries are less strict than in some other countries. Ministers in the Federal and some State governments of Australia, for instance, are required to divest themselves of all shares and interests in any for-profit company, even if the company does not fall under the Minister’s portfolio. Ministers in the US, UK, New Zealand and Canada are subject to specific Codes of Conduct or Standards of Ethical Conduct that set higher standards than those which apply to regular public officials.
    

16. 
    To prevent conflict of interest, the Philippines could consider specific, stricter Codes of Conduct for Cabinet Secretaries and parliamentarians. This could include the requirement to divest all holdings in private companies, either through sale or placement in a blind trust under the control of a qualified independent financial management firm. This maintains the wealth of the official, reduces suggestions of corruption and raises the credibility of politicians in the public eye. The President could: (i) consider such action as a criterion for selection of the Cabinet; and (ii) promulgate a new Code of Conduct for Cabinet Secretaries with strict standards related to conflict of interest in the first 100 days of the government.
    

17. 
    The government could also strengthen the impact of the SALN by auditing a randomly selected set of statements each year. In Albania, for instance, the government verifies four percent of all submitted statements using a lottery system to select those to be audited. The selection is conducted in public in the presence of the media and civil society to enhance transparency.
    

18. 
    Breaking down the hold that vested interests have over governance requires action on multiple fronts. Citizens’ participation, transparency and public oversight are areas where significant gains have been made in the Philippines, drawing on the country’s strong and active civil society. The Administration could contribute significantly to governance reform by putting up for legislative approval a Freedom of Information (FOI) Act, as neighboring countries such as Thailand, Indonesia and India have done over the last decade. In addition to being an integral part of an open governance system, the Act would also send a strong signal that the government is committed to transparency. Numerous Bills have been introduced into this and previous Congresses, but none have been approved. House Bill No. 3732 and Senate Bill No. 3308 were passed by both houses but not ratified within the term of the pre-election Congress. So the passage of an FOI Act should continue to be part of the government’s priority legislative agenda. Once an FOI Act is passed, the government could commit to expedite drafting of Implementing Rules and Regulations to ensure rapid implementation of the law. Even before an FOI Act is passed, however, the President could immediately ensure the highest standards of public disclosure in the Executive branch of government through an Executive Order.
    

19. 
    Passage of an FOI Act would obviously require cooperation of the Legislature, but the executive alone could take unilateral actions to promote greater transparency in government operations. A good place to start would be voluntary disclosure of certain financial information, such as in-year transfers of appropriated funds across categories or programs. Currently, extensive transfers of funds across budget categories make it difficult for the public and auditors to know exactly how the government is spending its money. Another example would be public disclosure of information related to public procurement and contracting in high-value sectors such as public works. Full participation in the Construction Sector Transparency (CoST) Initiative and the Extractive Industries Transparency Initiative (EITI) could be an effective way to systematically improve transparency in these important areas.
    

20. 
    Many successful anti-corruption campaigns start by targeting a particular agency for reform to secure a quick win. The Medium Term Philippines Development Plan identifies the Bureau of Internal Revenue and the Bureau of Customs as potential showcases in the fight against corruption. The ambitious objective of reforming these agencies remains as valid today as in 2004. In other countries, a Customs Agency was reformed by introducing electronic clearing procedures including random searches to reduce corruption opportunities. In another, the Attorney-General’s Office was re-staffed and re-organized. Elsewhere, a supervisory unit of the Ministry of Finance was reformed, with increased wages provided to staff in return for tight scrutiny of their income and assets and strict accountability for performance. Bold moves like these demonstrate the government’s commitment to action. And when the scope of problems appears overwhelming, targeting one strategic agency provides a credible, though not necessarily easy, starting point for a government’s anti-corruption campaign.
    

21. 
    Governance reform is a continual process that has no “one-time fix” or clear end point – experimentation and constant improvement are necessary. One option that Central line agencies could consider in this regard is to use Regional Offices for the purpose of testing out new ways of doing business to improve governance. High spending agencies, for instance, could consider introducing an independent procurement agent in specific regional offices as a means of reducing corruption. Results in the pilot region could be compared with non-pilot regions in terms of reduced costs and leakage to measure benefits before considering scale-up.
    

22. 
    Medium-term reforms are needed to tackle the systemic problems. The short-term measures described above are unlikely to constitute the comprehensive governance reform that the country needs but, if credible, can provide time to launch plans for the medium-term. Identified short-term priorities, therefore, must be both achievable and of sufficient profile to generate public confidence. Reforms to reduce executive discretion and establish proper checks and balances are necessary but will undoubtedly be politically difficult. An appropriate strategy, therefore, is to pursue incremental change through a set of targeted small steps to cut back executive prerogatives over the budget and bureaucratic appointments, restore the oversight role of Congress, strengthen the role of oversight agencies to prevent and punish corruption, and enhance transparency and opportunities for citizens to participate in governance.
    

23. 
    The ways in which the government budget is used or abused for political purposes have long been known thanks to investigative reports and advocacy by some civil society organizations. However, awareness of the need to tighten regulation of national budgeting has increased lately because of recent revelations of questionable handling of the budget by both the executive and the legislature, such as the alleged abuse of “savings” by the executive.
    

24. 
    A number of bills have been filed in both houses of Congress to reform the legal framework governing different aspects of budgetary procedures, although none seem to have been pursued vigorously by either chamber. The new administration will be in an excellent position to seize post-election reform momentum and launch a serious review of the legal framework governing national budgeting and financial management. The thrust of the reform would be to increase transparency in the budget process, not only during formulation and approval, but also execution.⁰ Reform could also reduce discretion by both the executive and the legislature that facilitates motivated abuse of public money.
    

25. 
    An ideal option would be to develop and propose for passage a new law that
    

26. 
    A new law would not necessarily translate into full implementation. However, the positive experience with procurement reform suggests that a strong legal framework can clarify the subsequent reform agenda around a set of implementation challenges that stakeholders, including civil society and international development agencies, can gather around to support reformers in the government.
    

27. 
    The budget reform strategy needs to be carefully planned in view of political considerations. Once the overall reform direction is agreed upon, legislative changes could be introduced incrementally if it is not possible to muster sufficient votes in Congress for a comprehensive overhaul of the legal framework in a single attempt. The government could consider introducing specific changes through internal regulations (e.g., executive order) with proper enforcement mechanisms. Once a set of procedural changes is consistently applied, the government could then work with Congress to prepare an omnibus law that consolidates and codifies these procedural changes in a single piece of legislation.
    

28. 
    A patronage-based system of bureaucratic appointments serves short-term aims of
    

29. 
    The drafters of the 1987 Constitution recognized that accountability in the public sector would not be achieved with self-restraint and good intentions of the executive branch alone. They thus entrusted in the three constitutional bodies – the Office of the Ombudsman (OMB), the Civil Service Commission (CSC) and the Commission on Audit (COA) – the role of enforcing public sector rules. However, effectiveness of these agencies has fluctuated depending on the actual level of independence the executive has given them and the quality of leadership. The perceived variation in the quality of leadership and hence the effectiveness of these agencies is often attributed to the politicization of appointments of the agency heads. Although changing the appointment procedures for the heads of the constitutional bodies might require constitutional amendment, it may be worthwhile considering such an option to reduce executive discretion. New rules could tighten eligibility criteria in terms of conflict of interest, whether merely perceived or real. Direct participation of civil society representatives in the appointment process (e.g., finalization of short lists) could also be explored.
    

30. 
    Technical competence and political independence of agency leadership are essential, but not sufficient, for the effective functioning of constitutional bodies. The quality of the technical staff also needs to be elevated so that, for example, OMB lawyers would not be “out-gunned” by well-paid private sector lawyers in high-profile graft cases. In some countries (Indonesia’s Corruption Eradication Commission, for instance), this is done by exempting employees of the constitutional bodies from the salary standardization law and offering them pay comparable to lawyers and accountants with similar experience and qualifications in the private sector.
    

31. 
    Finally, the constitutional bodies’ oversight functions would acquire real “teeth” if their findings and recommendations are properly followed up, including through criminal prosecutions. Prosecution for corruption of high-ranking government officials is the responsibility of the Office of the Ombudsman. For other offences, the agency responsible for criminal prosecution is the Department of Justice (DOJ). The Department is often seen as technically weak and politically too close to the executive – naturally so, as it is a line department headed by a Cabinet Secretary appointed by and answerable to the President. Creation of a constitutionally independent public prosecutor’s office might be an interesting option to consider, given the potential for political interference in DOJ’s investigative efforts.
    

32. 
    Republic Act 1405 or the Secrecy of Bank Deposits Act can be a hindrance for agencies that investigate and prosecute corruption from accessing the bank accounts of suspects. This is a significant constraint on the ability of the Office of the Ombudsman to investigate and punish corruptors. The Act could be proposed for amendment so that current and former public officials charged before the Courts under the Anti-Graft and Corrupt Practices Act are considered to waive their legal right to privacy, opening up their accounts to investigating authorities. If Congressional support cannot be secured for this reform, the government could instead pass an administrative measure that obtains from government officials under investigation a document authorizing the release of bank records.
    

The World Bank

1. 
   Improving public financial management (PFM) is critical for making progress towards the Philippines’ development goals.⁰ Progress on key indicators of economic growth, poverty reduction and social development has not been as fast over the past decades as the government, the public and development partners had hoped or expected. Speeding up progress will require, among other things, effective service delivery by the government in areas such as education, health, and infrastructure development. In addition to coherent strategies and a sound policy framework in each of these sectors, a transparent and credible system to manage public resources is crucial for good decision making and adequate provision of public goods and services.
   

2. 
   An important subset of PFM reforms for improving service delivery is to strengthen transparency, accountability and efficiency in resource use at the local levels.⁰ Local government units (LGUs) are playing important roles in providing devolved services. Yet weak PFM in terms of poor coordination in expenditure planning and prioritization across levels of government, limited availability and use of modern financial management information systems and a corresponding lack of fiscal transparency hamper efficiency and accountability in LGU service delivery. Lack of coordination among national oversight agencies and limited harmonization of fiscal reporting requirements further strains the already weak PFM capacities of most LGUs.
   
3. 
   Equally importantly, PFM reform constitutes a core element of the governance reform agenda. It is widely asserted, though empirical or legal proof is often difficult, that the government budget is used for political purposes – by directing public expenditures to political allies (or denying them to rivals) in exchange for political favors with limited transparency about exactly how the funds are being utilized or reallocated. Some of the most notorious corruption scandals in the last decade, such as the Fertilizer Scam, involved abuses of discretions in budget management. Examples of poor financial governance are allegedly abundant at the local levels as well, as some local chief executives often enjoy even higher levels of discretion and take advantage of more limited transparency than at the national level. Lack of transparency in some critical aspects of PFM obscures how the government actually manages public money and feeds negative public perceptions even when no impropriety is being committed.
   

4. 
   For both of these reasons – the need to get better results from investments in social and economic infrastructure and reduce poverty on the one hand, and the need to address the governance challenges on the other – a fundamental reform of PFM has to be a high priority for the government. A comprehensive PFM reform needs to include both short-term measures that demonstrate quick improvements and medium- to long-term measures that address more challenging tasks of building the institutional capacity of the government bureaucracy. By launching such a reform and by showing some tangible early results, the government can signal a decisive break from the “business as usual” of the past to turn governance into a facilitator, rather than an obstacle, of the country’s development.
   

5. 
   Over the last decade, various aspects of the Philippines’ PFM have been assessed by the World Bank, the IMF and numerous consultants hired for TA programs by other development partners such as AusAID and ADB. The Commission on Audit (COA) also conducted its own assessment of the effectiveness of the budget allocation system of the government in 2005. ⁰ The most comprehensive assessment to date is the Public Expenditure and Financial Accountability (PEFA) assessment conducted by the Bank in collaboration with AusAID and in partnership with DBM.⁰
   

6. 
   These diagnostic studies found that some of the aspects of the national government’s PFM systems are operating reasonably well. These include:
   

• 
  Tight controls of cash releases which have allowed the government in times of crises to effectively control expenditure and keep the fiscal aggregates from getting out of control,
  
• 
  Reasonably comprehensive coverage of the budget documents,
  
• 
  A high-quality procurement law that approximates international best practice, and
  
• 
  Reasonably transparent and predictable allocation of transfers to Local Government Units.
  

7. 
   The studies have also revealed particular weaknesses in the management of the budget cycle, especially in the phases of budget execution and reporting, and in aspects related to transparency and accountability (see the Annex 1 for a summary assessment). Some of the key findings include:
   

• 
  Limited public access to financial information especially the absence of meaningful in-year and ex-post reporting on budget execution due to the absence of a modern financial management information system and the lack of harmonization between the classification used in the budget and the chart of accounts used in accounting reports;⁰
  
• 
  Insufficient institutionalization of policy-based budgeting in a multi-year perspective (medium-term expenditure framework) and the legislature’s repeated failure to enact the annual general appropriations acts (GAA) before the commencement of the fiscal year;
  
• 
  Limited predictability in fund releases which, combined with weak planning and execution capacities of most line agencies, slow down budget execution and program/project implementation;
  
• 
  Incipient internal control and audit systems, inadequate accounts reconciliation and the generally poor quality of annual financial statements, and the lack of the legislature’s interest in audit follow-up.
  

One of the most glaring weaknesses in the Philippines’ fiscal transparency is the near total absence of meaningful reporting on how the government budget is executed. Fiscal transparency is further compromised by the complex appropriation structure in the Philippines, which consists of three different types of appropriations (General Appropriations Act, automatic appropriations, continuing appropriations). Besides, the budget is appropriated not only to the twenty or so departments and their attached agencies but also to various Special Purpose Funds (SPFs). During a fiscal year, the government executes the budget through frequent transfers of funds from one appropriation category (e.g., an SPF) to another (e.g., a Department). This complexity makes it virtually impossible not only for the public to know how the funds flow within the Philippine budget but sometimes prevents even the COA from offering definitive audit opinions on parts of the budget (especially the SPFs). To make matters worse, the President has the authority to declare an unspent balance of any appropriation as “saving” and reallocate it for other purposes. Once a particular portion of the budget is declared as “saving,” it reverts to the overall “savings” account before it is reallocated to another budget item. This transaction also makes it virtually impossible for an observer to track the exact origin of fund transfers.

8. 
   Other issues often highlighted in these studies include:
   

• 
  High levels of executive discretions in budget management, which may increase flexibility in in-year resource allocation to address unanticipated situations but can also reduce transparency and accountability if they are abused;
  
• 
  The existence of a number of Special Purpose Funds (SPFs) which sit outside the departmental appropriations and whose final uses are not systematically reported;
  
• 
  The presence of multiple oversight agencies each responsible for different facets of PFM, which often complicates inter-agency coordination and weakens coherence of the government’s efforts to strengthen PFM comprehensively – the difficulty in inter-agency coordination is sometimes exacerbated by the unconventional assignment of responsibilities among the oversight agencies (e.g., putting the supreme audit institution, COA, in charge of government accounting policy).
  

9. 
   The government’s efforts to improve PFM have so far focused on enhancing the policy base and performance orientations of budgeting through introduction of a medium-term expenditure framework (MTEF) and the Organizational Performance Indicators Framework (OPIF) as part of the budget documentation. ⁰ On the budget execution side, the efforts have concentrated on developing National Guidelines on Internal Control Systems (NGICS) and piloting an application in selected line departments along with a parallel effort to strengthen the internal audit function at the agency level, and modernizing the accounting framework (NGAS) to adopt accrual accounting. Although these ongoing efforts demonstrate the government’s strong desire to strengthen the system of internal control, some provisions of the PGIAM still do not fully meet good practice and professional standards of the internal audit profession. One of the reasons cited by the government was that making the PGIAM fully in line with the internationally accepted standards would result in violation of certain national laws.
   

10. 
    These reforms have strengthened aspects of PFM. However they have yet to translate fully into a tangible difference in effective service delivery and visible improvements in fiscal governance. This is because (a) in the absence of an overarching strategy for PFM reform, the central agencies leading individual initiatives have not been able to coordinate fully with each other and the line agencies to maximize synergy; (b) the agenda has been primarily focused on budget formulation, and budget execution and financial accountability has not received as much attention; (c) implementation progress has been slow in some cases, often because the roll-out of reforms has been stymied when faced with broader systemic constraints; (d) initiatives launched have been revisited or halted in other cases;⁰ and (e) with the benefit of hindsight some initiatives were probably not properly sequenced.⁰
    

11. 
    The experience with the government’s own reform efforts so far as well as relevant international experiences offer useful lessons. First, a reform has to follow a comprehensive strategy that considers inter-linkages among constituent parts of the entire PFM systems, or the government will run the risk of developing isolated initiatives that work at cross-purposes. Second, reforms are complex and their implementation is likely to be slow and incremental. As such, effective coordination of reform efforts among the oversight agencies with active participation of at least some of the key line agencies would be essential for sustaining the reform efforts. At the same time, tackling multiple reforms simultaneously would overburden the bureaucracy’s absorptive capacity and could lead to “reform fatigue” without actually reforming PFM. Third, introduction of sophisticated PFM techniques such as performance budgeting should follow consolidation of basic architectures and practices such as sound cash management and reliable financial reporting. The absence of a modern financial management information system has become a stumbling block for a number of reform initiatives. Fourth, addressing some of the fundamental challenges may require legal or even constitutional changes – but this should not deter would-be reformers from tackling them as long-term agenda even though reforms of such magnitude would necessarily require careful consensus-building over time.
    

12. 
    Despite the recent reform efforts, the PEFA assessment suggests there is still ample scope for strengthening various dimensions of PFM.⁰ Figure 1 graphically summarizes relative strengths and weaknesses in the Philippine PFM based on the PEFA methodology on a scale from 0 to 4.⁰ It shows particular weaknesses in budget credibility and accounting/reporting, although against the method’s best practice benchmark (i.e., the highest possible score of 4), none of the six dimensions is rated particularly high.⁰