Annex 1: Decentralization in the Philippines: Selected Literature Review on Fiscal, Political and Service Delivery Aspects

HISTORICAL BACKGROUND The Local Government Code of 1991 (LGC) was landmark legislation that initiated the decentralization of governance in the Philippines and provides the overall framework for central-local relations. Enacted in the wake of the 1986 People Power revolution, the LGC consolidated and amended various existing laws that specified the parameters for local government (i.e. the Local Government Code of 1983, the Local Tax Code [P.D. 231], and the Real Property Tax Code [P.D. 464]) and laid the foundation for increased local autonomy and accountability through the assignment of service delivery and expenditure responsibilities and revenue mobilization powers to local government units (LGUs).1 The LGC also specified the basis for revenue sharing between the national government and LGUs and provided for the participation of civil society in local governance. Several factors are cited to explain the push for increased devolution of fiscal and service delivery responsibilities to LGUs that resulted in the enactment of the LGC. One explanation is the widespread sentiment to democratize after the change of government in 1986, which led to a strong determination to dismantle the mechanisms of central control instituted by Marcos.2 This coincided with an increasing demand for local autonomy from local politicians. Furthermore, decentralization has been cited as a way to respond to the armed resistance of the New Peoples Army and the separatist movements in Mindanao. As in many cases of decentralization in developing countries (e.g., Latin America, Indonesia), the primary impetus seems to be political and the desire to improve government performance (e.g., service delivery) seems to be only a secondary motive. As the following sections on expenditure and revenue assignments indicate, the current intergovernmental fiscal arrangement is hardly conducive to efficient service delivery and LGU accountability. But more than 15 years since the passage of the LGC, the data on the level and the quality of public services provided by LGUs remain scarce, which has prevented researchers from establishing a solid empirical basis for assessing the effects of decentralization on service delivery.

Manasan, Rosario G. 2007. Decentralization and the Financing of Regional Development. The Dynamics of Regional Development: The Philippines in East Asia. Ed. Arsenio M. Balisacan and Hal Hill. Asian Development Bank Institute. Manila: Edward Elgar Publishing Ltd. and Ateneo de Manila University Press. 2 Rood, Steven. 1998. Decentralization, Democracy, and Development. The Philippines: New Directions in Domestic Policy and Foreign Relations. Ed. David G. Timberman. United States Agency for International Development. Manila: Asia Society.

FISCAL DECENTRALIZATION Expenditure Assignment:3 Prior to the enactment of the LGC, the responsibilities of LGUs were limited to the administration of basic local services and enterprises such as garbage collection, public cemeteries, public markets, and slaughterhouses. The LGC formally transferred from national government agencies to LGUs the principal responsibility for providing and financing services in the following areas: o o o o o o o o land use planning agricultural extension and research community-based forestry solid waste disposal system environmental management pollution control primary health care social welfare services o o o o o hospital care local public buildings and structures local public parks local services and enterprises (e.g. public markets, public markets, slaughterhouses, etc.) local infrastructure facilities (e.g. local roads and bridges, school buildings, health facilities, housing, communal irrigation, water supply, drainage, sewerage, flood control)

Municipalities and cities are primarily responsible for the frontline delivery of local public services, such as the operation and maintenance of local health centers, the collection and disposal of solid waste, and the construction and maintenance of public school buildings. On the other hand, provinces are tasked with responsibilities for functions that involve inter-municipal provision of services, such as the operation and maintenance of district and provincial hospitals. However, the provision of basic education was not devolved to LGUs and continues to be the responsibility of the national governments Department of Education. While the national government continues to provide for and finance basic education, the responsibility for the construction and maintenance of public school buildings was assigned to LGUs. While the delineation of responsibilities between national and local governments are generally consistent with the normative assignments suggested by decentralization theory (with education being a prominent exception), the LGC includes provisions that compromise the apparent clarity of the expenditure assignments. Specifically, the LGC allows national government agencies to implement public works and infrastructure projects and supplement local service delivery when these are not available or are inadequately provided by LGUs. In addition, legislative allocations by congressmen and senators are commonly used to augment LGU spending, particularly on infrastructure. Finally, the center influences local expenditures through the enactment of laws that result in mandated
3

Manasan, Rosario G. 2004. Local Public Finance in the Philippines: In Search of Autonomy with Accountability. Discussion Paper, Series No. 2004-42. Manila: Philippine Institute for Development Studies.

increases in spending on the part of LGUs without any corresponding financial support from the national government. Examples of these so-called unfunded mandates include the salary standardization law, the Magna Carta for Health Workers, and the requirement for LGUs to pay for the health insurance premiums of their indigent residents. Revenue Assignment:4 The following table summarizes the various taxes that were assigned to LGUs by the LGC. Cities have the widest range of taxing tools available while provinces and municipalities either have no access to certain tax measures or are required to share the proceeds with sub-levels of LGUs. In addition to local taxes, LGUs are allowed to levy user fees and charges on businesses and occupations commensurate with the cost of regulation, inspection, and licensing of business entities and individuals. Several key tax bases are reserved for the national government, including the personal and corporate income tax, custom duties, the value added tax, and excise taxes on alcoholic beverages, tobacco products, and petroleum products. Local Tax Cities Provinc es X X X X X X X X X * * * * X * * Municipaliti es Baranga ys

On Real Property Transfers X On Business of Printing and X Publication On Franchises X On Sand, Gravel, and other X Quarry Resources On Amusement Places X On Professionals X On Delivery Vans and Trucks X On Real Property X On Idle Lands X On Businesses X On Community Tax X * Shares in the proceeds of the higher level

X X LGU that collects the tax.

Local tax assignment is generally consistent with the traditional criteria for assessing appropriateness: economic efficiency, equity, and administrative feasibility. However, the assignments are weak in terms of providing local fiscal autonomy for LGUs. The majority of the productive tax bases are restricted to the national government and among the local tax bases, only the real property tax and business tax bases provide substantial local revenues. The LGC also limits the power of LGUs to set tax rates by specifying floors and ceilings on the tax rates that can be imposed and, in some cases, fixed rates on local taxes. Furthermore, the LGC allows LGUs to adjust tax rates only once every 5 years and by no more than 10 percent. Importantly, cities are generally allowed to set higher tax rates compared to provinces and municipalities. The broader range of taxes and higher rates
4

Manasan, Rosario G. 2004.

available to cities coupled with the requirement for provinces and municipalities to share real property tax collections, typically a primary source of local revenues, results in wide disparities in local revenue mobilization between cities, on one hand, and municipalities and provinces, on the other. This has created a strong incentive for municipalities to convert into cities. The vertical fiscal imbalance is further exacerbated for provinces given their lack of access to business taxes, which only cities and municipalities can collect. This is illustrated in the following table, which shows the shifts in the shares of own-source revenues among the three levels of LGUs.5 Distribution of Own-source Revenues of LGUs by Level of Government, 1985-2003 (%) Year All LGUs Provinces Municipalitie s 1991 100.0 18.4 38.9 1995 100.0 14.8 31.7 2001 100.0 11.9 23.3 2003 100.0 10.1 22.1 Average 1985-91 100.0 19.9 37.1 1992-2003 100.0 12.5 27.3

Cities 42.7 53.5 64.8 67.9 43.0 60.2

Intergovernmental transfers. The LGC institutionalized the internal revenue allotment (IRA), which is the primary transfer of shared revenues from the national government to LGUs.6 In principle, the IRA is supposed to be automatically and unconditionally released by the national government to LGUs on a quarterly basis, although the LGC provides conditions for the national government to withhold a portion of the IRA during periods of national fiscal distress. The IRA is essentially an unconditional grant that LGUs can utilize at their discretion. The only restriction imposed by the LGC is for LGUs to set aside 20 percent of their IRA allocation for a local development fund. In practice, the IRA formula has been adjusted for various reasons, including the proper interpretation of the stipulated IRA formula7 and reductions in annual IRA transfers to LGUs as a result of fiscal austerity measures of the national government.8 Some of these issues have been brought before the Supreme Court, although many remain unresolved. What is clear is that the IRA represents the primary source of income for the vast majority of LGUs and research has indicated that the relatively large transfers from the center have had a disincentive effect on local tax effort.9
5 6

Manasan, Rosario G. 2007. Manasan, Rosario G. 2004. 7 Capuno, Joseph J. 2003. Philippines. Intergovernmental Fiscal Transfers in Asia: Current Practice and Challenges for the Future. Ed. Yun-Hwan Kim and Paul Smoke. Manila: Asian Development Bank. 8 Manasan, Rosario G. 2004. 9 Manasan, Rosario G. 2007. Mullins, Daniel R., Amitabha Mukherjee, Signe Zeikate, and Jung-Joo Lee. 2006. Subnational Government Finance in the Philippines: Findings on the Efficacy and Distributional Implications of the Internal Revenue Allotment, and Health and Education Spending - A Subtext for Reformed

Based on Statement of Income and Expenditure data for 2006 from the Bureau of Local Government Finance of the Department of Finance, the IRA represented 79 percent, 74 percent, and 40 percent of provincial, municipal, and city income, respectively. Furthermore, the current formula is inconsistent with the distribution of expenditure responsibilities among the three main levels of LGUs, thus exacerbating the vertical fiscal imbalance. The current formula also does a poor job of compensating for the varying levels of fiscal capacities of LGUs, often worsening the horizontal imbalance that exists within each level of LGU.10 Finally, there is evidence of uneven and distortionary effects of the IRA on expenditure on local services. Analysis has shown that disparities in health spending among LGUs are substantial and not directly related to the distribution of dependent/need populations.11 LGU structural and fiscal factors are what primarily determine levels of health spending, with spending strongly paralleling IRA allocations. Hence, rather finance following function in health spending, it is the other way around. Non-IRA Transfers: LGUs also benefit from ad hoc grants from national government agencies, legislative funds, and foreign donors and creditors to support various local services. A study conducted to analyze the quantity and composition of non-IRA transfers to LGUs in 2003 estimated that the aggregate total for these transfers represented over 20 percent of the total IRA transfer for that year.12 The largest component of this total, comprising 61 percent, was funded by Priority Development Assistance Funds (PDAF) of legislators and the funds were mainly used to finance local infrastructure. Unlike the IRA, these transfers are distributed to LGUs through a wide variety of mechanisms, ranging from ad hoc grants from legislators to matching grants from national government agencies and donors. There is generally less transparency in the non-IRA funding systems, which has adverse effects on LGU planning and budgeting, and less information available for these miscellaneous transfers. Finally, very little is known about transfers between different layers of LGUs.13 The LGC provides for revenue-sharing between levels of LGUs for various taxes, as discussed in the earlier sub-section on Revenue Assignment. Furthermore, the LGC also allows inter-local grants from one LGU to another. However, the extent of inter-local transfers and the processes these entail have not been studied in depth. An exception was a case study of the Provincial Development Council of Davao del Norte conducted in 2000, wherein the provincial government organized a multi-sectoral council (including representatives of all component LGUs) that collectively

Intergovernmental Resource Allocation (Detailed Findings). Manila: World Bank. 10 Capuno, Joseph J. 2003; Manasan, Rosario G. 2007; Mullins, Daniel R., Amitabha Mukherjee, Signe Zeikate, and Jung-Joo Lee. 2006. 11 Manasan, Rosario G. 2007; Mullins, Daniel R., Amitabha Mukherjee, Signe Zeikate, and Jung-Joo Lee. 2006. 12 Steffensen, Jesper, Ma. Cecilia G. Soriano, E.P. Makayan, and J.B. Nisperos. 2005. Assessment of NonIRA Transfers and Other Funds for Devolved Services in the Philippines. Manila: World Bank. 13 Capuno, Joseph J. 2003.

determined the unmet basic public service needs of the province and allocated provincial funds accordingly.14 Sub-national Borrowing:15 The LGC also provided LGUs with greater flexibility to utilize credit financing, including bank credit, bonds, and build-operatetransfer (BOT) arrangements. In 1996, the Department of Finance developed the LGU Financing Framework (LFF), which provides for a segmented approach to capital financing: lower-income LGUs would have access to subsidized loans and grants from the Municipal Development Fund (MDFO), those in the middle tier could access credit from government financial institutions (GFIs), while upper-tier LGUs could access private commercial finance. To improve access to private capital markets, the LFF recommended the increased use of BOT schemes, development of an LGU bond market, improved LGU access to private banks, and optimization of GFIs role in LGU financing. The progress of implementation of the LFF has been uneven.16 There has been some progress with the involvement of the private sector in infrastructure investments, mostly through management contracts, but few efforts to use BOT arrangements. The LGU Guarantee Corp. was created to guarantee debt issues of LGUs financed from private sources, but the rate of bond issues has not accelerated. While GFI credit to LGUs has substantially increased, LGUs have not yet accessed financing through private banks, primarily because these have not been allowed to become depository banks for LGUs. Furthermore, the subsidized interest rates offered by the MDFO acts as a disincentive to the relatively creditworthy LGUs to access funds from the private capital market. Finally, LGUs have generally tended to avoid debt; with resource-rich LGUs not needing to borrow while resourcechallenged LGUs not meeting requisite creditworthiness criteria. DECENTRALIZATION AND GOVERNANCE While the case for decentralization is typically rooted in the theory that it enhances the accountability of local officials by aligning government decision-making more closely to local preferences and emphasizing competition among regions to attract capital and labor,17 existing research indicates that the effects of decentralization on local governance in the Philippines is ambiguous, at best. There were positive early assessments of the impact of the LGC (based on case studies, anecdotal evidence, and local surveys) that cited the increased accountability of local officials, leading to innovations in local governance and management, increased participation of
14

Burton, E.M. 2000. Baseline Study on the Indicators of Good Governance in Davao del Norte Province. Paper submitted to the Philippine Center for Policy Studies - Governance Project. Quezon City: PCPS. 15 Manasan, Rosario G. 2007. 16 World Bank and Asian Development Bank. 2004. Decentralization in the Philippines: Strengthening Local Government Financing and Resource Management in the Short-term. Report No. 26104-PH. Manila: World Bank and Asian Development Bank. 17 Campos, Jose Edgardo, and Joel. H. Hellman. 2005. Governance Gone Local: Does Decentralization Improve Accountability. East Asia Decentralizes: Making Local Government Work. Washington, DC: World Bank.

citizens and civil society, and socio-economic benefits.18 More recent reviews of the Philippine experience have emphasized the scarcity of comprehensive empirical analysis on the long-term impact of decentralization. A wide range of quantitative indices, customer satisfaction surveys, and qualitative performance measures have been developed over the years to assess the quality of local governance.19 Yet these are not uniformly available for all regions, much less for all LGUs, and focus on various governance concerns, from inputs and processes to outputs and outcomes, that are not necessarily comparable across datasets. Hence only broad comparisons can be made. According to theories, a postulated benefit of fiscal decentralization is a better alignment of the governments policy priorities and local preferences because of the sub-national governments presumed proximity to the local residents and their realities on the ground. A survey-based analysis cast doubt on the validity of this assumption in the Philippines, at least as of the late 1990s when the study was conducted. In a statistical analysis of survey results, Azfar et al (2000) found that LGU officials were not able to predict local preferences very accurately.20 The survey asked provincial and municipal government officials and members of households in the respective jurisdictions how hypothetic extra resources should be allocated among different public service options. The municipal officials were able to identify roads as the top priority of the residents in their jurisdictions, but failed to predict other priorities.21 The preferences of the provincial officials and those of the provincial residents were negatively correlated. In addition, the same survey asked the provincial and municipal officials how they learned about local preferences but the analysis found that none of the methods had a statistically significant effect on the officials abilities to predict local preferences. The study found that peoples knowledge of local politics was limited as well. When asked to name the vice president (of the national government), the mayor and the vice mayor of their own localities in a test of peoples knowledge of national and local politics, 41 percent of the respondents were able to name the vice president but only 1 percent knew who their vice mayor was. One plausible reason for the local residents limited knowledge of local affairs is their tendency to rely on national media for information and the medias tendency to focus on national affairs in their news coverage. Households are much more likely to obtain information about local affairs from friends and family and local officials themselves, which may be relatively unreliable as sources of objective information. Overall, based on data from the late 1990s, the evidence is thin that decentralization really
18 19

Rood, Steven. 1998. Capuno, Joseph J. 2007. The Quality of Local Governance and Development under Decentralization. The Dynamics of Regional Development: The Philippines in East Asia. Ed. Arsenio M. Balisacan and Hal Hill. Asian Development Bank Institute. Manila: Edward Elgar Publishing Ltd. and Ateneo de Manila University Press. 20 Azfar, Omar, et al. 2000. Decentralization and Governance: An Empirical Investigation of Public Service Delivery in the Philippines. Department of Economics, Center for Institutional Reform and the Informal Sector. Maryland: University of Maryland. 21 Poor roads would be among the most visible public service deficiency and for those living in the locality it should be quite easy and obvious to identify them as a priority.

brought the government closer to the people, at least in the sense that the expressed preferences of the government were close enough to those of the people. Overall, improvements in local governance since the enactment of the LGC have been uneven. There has been an observed upsurge in public participation and a growing number of cases of innovative practices by LGUs.22 In addition, there was evidence of a decline in overall perceptions of corruption and improved service delivery standards during the 1990s.23 However, the link between these outcomes and the accountability of local officials is weak and local officials continue to be subject to the risks of state capture and clientelism. Despite the development of an active local civil society network, countervailing institutions at the local level generally lack the capacity and independence to mitigate these risks.24 Weak electoral accountability is evident in the existing research, though still limited in number and constrained by data limitations. Elections seem to be effective at rewarding outstanding local leaders but have clearly been ineffective at punishing poor performers. In a rare attempt at empirical analyses of these questions, Capuno (2007) shows weak correlation between LGU performance (as measured with the proxy of human development index at the provincial level) and the electoral performance of the governors standing for re-election in 2001. Furthermore, citing another empirical analysis of correlation between changes in poverty rates and the share of vote obtained by incumbent governors re-elected, Capuno also argues that in economically depressed provinces, new governors often commence their administration with a lower level of support than the re-elected incumbent governors. This indicates the difficulty of replacing incumbent provincial leaders in economically depressed areas. Together these results reflect the persistence of patronage politics at the local level (2007, p. 232). Changes in HDI Score, 1994-2000 and Gubernatorial Election Outcome in 2001 (no. of governors) Change in HDI Governors Standing for Re-election Score Re-elected Defeated >20% 1 10-20% 6 6 0-10% 24 9 0% (no change) 2 1 <0% 3 4 Total 36 20 Source: NSCB, reproduced from Capuno (2007), Table 7.7, p. 220. Other studies have cited the presence of different non-democratic modes of governance at the local level, ranging from political dynasties and clientelism
22 23

Capuno, Joseph J. 2007. Campos, Jose Edgardo, and Joel. H. Hellman. 2005. 24 Campos, Jose Edgardo, and Joel. H. Hellman. 2005.

to the use of violence and coercion termed by one political scientist as bossism. One of the most noteworthy political phenomena in the Philippines is the dominance of families as the basic organizing unit of political life both at the local and the national levels. Including some of the best-known cases of good local governance, a considerable of number of LGUs have been controlled by what are commonly called political dynasties, or a succession of local politicians and their kin who take turns to perpetuate themselves in power beyond the term limits imposed by the Constitution.25 The presence of these dynasties is popularly acknowledged (and barely disguised, if at all), but its effect on governance has not been studied systematically even though anecdotes abound of favoritism, nepotism, and cronyism resulting from this style of governance.26 However, one econometric analysis of economic growth and poverty reduction at the provincial level found that the dominance of oligarchic political regime inhibits growth and, through lower growth, hurts poverty reduction.27 Dynastic politics go hand in hand with other forms of governance. The use of violence and coercion by local politicians is said to remain common, especially during electoral periods.28 Furthermore, patron-client relationships, whereby local officials provide protection and particularistic favors to individuals and families in exchange for the political support, continue to pervade local politics 29. Either way, these are not the kinds of politician-voter relations that foster accountability for government performance. DECENTRALIZATION AND LOCAL SERVICE DELIVERY The financial infrastructure supporting LGUs has not been conducive to improving local service delivery. The misalignments of expenditure and revenue assignments often found in the decentralization frameworks in developing countries tend to undermine sub-national governments incentives and/or capacities for efficient service delivery. Sometimes subnational governments receive more expenditure assignments than the actual revenues made available can cover, as seems to be the case in the Philippines, whereas in other cases, the sub-national governments receive more revenues than justified given the expenditure assignments (e.g., Colombia). The manner in which fiscal resources are made available to subnational governments also matters. Large block grants with ambiguous
25 26

Local executives are only allowed to serve up to three 3-year terms. One recent attempt to document the extent and the modus operandi of dynastic politics is the very illustrative account of the Philippine national congress and its members in Sheila S. Coronel, et al. (2004). The Rulemaekrs: How the Wealth and the Well-Born Dominate Congress. Manila: Philippine Center for Investigative Journalism. 27 Balisacan, Arsenio M. and Nobuhiko Fuwa. 2001. Growth, Inequality, Politics and Poverty Reduction in the Philippines. University of the Philippines School of Economics Discussion Paper No. 0109. Manila. 28 Sidel, John T. 1999. Capital, Coercion, and Crime: Bossism in the Philippines. California: Stanford University Press. 29 De Dios, Emmanuel S. 2007. Local Politics and Local Economy. The Dynamics of Regional Development: The Philippines in East Asia. Ed. Arsenio M. Balisacan and Hal Hill. Asian Development Bank Institute. Manila: Edward Elgar Publishing Ltd. and Ateneo de Manila University Press.

expenditure assignments are likely to lead to weak accountability for resource use by sub-national governments, resulting in sub-optimal service delivery. Excessive tightening of the use of fiscal resources by sub-national governments (e.g. earmarked transfers, restrictions over local taxation) can under-exploit the potential of allocational efficiency presumed in the fiscal decentralization literature and stifle local innovations. In short, the design of the intergovernmental fiscal arrangement is as important, if not more, as the overall governance environment that determines the nature of local political accountability. In the Philippines, the LGUs share of total public sector expenditures is more than three times their share of public sector revenues30 and LGUs, particularly provinces and municipalities, generally struggle to provide high-quality local public services given resource constraints. As mentioned, the distortionary effects of the IRA exacerbate imbalances among and within the three levels of local government. Nonetheless, LGUs have generally been unwilling to maximize local revenues through local taxes and fees. Local revenues continue to make up a miniscule share of LGU income and the IRA has effectively substituted for own-source revenue generation. One widespread perception is that state capture of LGUs by local elites prevents local officials from taxing themselves.31 Another possibility is that local officials assess the net political trade-off of higher revenues versus greater expenditure and determine that the political costs are too high32. In any case, the absence of a substantial connection between taxation and service delivery serves to compromise the quality of local spending and undermine local accountability.33 In spite of the acknowledged financial difficulties faced by LGUs, it cannot be denied that overall income has steadily increased coinciding with the expansion of the IRA. From 1998 to 2004, a period that included the retention of small portions of the total IRA appropriation by the national government due to severe fiscal constraints, the aggregate IRA distributed to LGUs increased from PhP81 billion to PhP141 billion, representing an annual increase of 10.6 percent. IRA transfers annually comprised approximately two-thirds of total LGU income during this period (and have continued at this level up to the present). In spite of the growth in incomes, LGU spending on social services has stagnated after a sharp increase immediately after the devolution of health services in 1993.34 Spending on social services has flattened at around two pesos per capita in real terms since 1996 and this may be indicative of free-riding by LGUs on the national governments continued provision of devolved services. As proof of the continued poor quality of local health services, a nationwide survey
30

Hill, Hal, Arsenio M. Balisacan, and Sharon F. Piza. 2007. The Philippines and Regional Development. The Dynamics of Regional Development: The Philippines in East Asia. Ed. Arsenio M. Balisacan and Hal Hill. Asian Development Bank Institute. Manila: Edward Elgar Publishing Ltd. and Ateneo de Manila University Press. 31 Hill, Hal, Arsenio M. Balisacan, and Sharon F. Piza. 2007. 32 World Bank and Asian Development Bank. 2004. 33 De Dios, Emmanuel S. 2007; Manasan, Rosario G. 2007. 34 Capuno, Joseph J. 2007; Manasan, Rosario G. 2004.

conducted in 2001 revealed that the 74 percent of people were bypassing rural health units and 68 percent bypassing barangay health stations in favor of higher-level (but more distant) government and private hospitals.35 This may indicate that, beyond fiscal considerations, the governance issues raised in the previous section have also resulted in disincentives for local officials to efficiently allocate expenditures and improve service delivery. While the expected competition that would spur LGUs to improve performance has not materialized on a broad scale, award-giving bodies that recognize LGU achievements in improving service delivery and public welfare, such as the Galing Pook Foundation, have succeeded in fostering some competition. However, even though there is considerable documentation of best practices, their adoption by other LGUs has been limited.36 Research on innovative practices suggests numerous internal and external conditions behind local innovations, such as a hospitable policy environment, a triggering crisis, aggressive local government and civil society, inadequate financial resources, public demand for specific basic services, participation in training programs, and initiatives by academic institutions.37 Road Sector. The LGC assigned to LGUs the responsibility for developing and maintaining local infrastructure. For the road sector, the national government retained the responsibility for providing primary road networks while cities and municipalities were assigned the responsibility for tertiary networks. However, it is unclear which tier of government is responsible for planning investments and coordinating the development of the secondary road network, which links the local roads of cities and municipalities to the national roads and requires the use of common resources. While in principle provinces play a coordinating role, they typically have insufficient technical and financial resources to assume this role. The absence of a viable regional development council has led to a missing middle in the intermediate road infrastructure.38 The poor condition and slow development of infrastructure in the Philippines and the adverse effects on the economy and development has been documented extensively.39 Specifically, empirical analysis indicates that the quality of roads has a positive and significant effect on regional growth and that regional incomes tend to increase with an increase in the quality of road infrastructure. In fact, there is evidence to suggest that investing in road
35 36

Capuno, Joseph J. 2007. Capuno, Joseph J. 2007. 37 Brillantes, Alex B. 2003. Innovations and Excellence: Understanding Local Governments in the Philippines. Manila: National College of Public Administration and Governance, University of the Philippines. 38 Peterson, George E. and Elisa Muzzini. 2005. Decentralizing Basic Infrastructure Services. East Asia Decentralizes: Making Local Government Work. Washington, DC: World Bank. 39 World Bank. 2005. Philippines: Meeting Infrastructure Challenges. Manila: World Bank. Peterson, George E. and Elisa Muzzini. 2005.. Llanto, Gilberto M. 2007. Infrastructure and Regional Growth. The Dynamics of Regional Development: The Philippines in East Asia. Ed. Arsenio M. Balisacan and Hal Hill. Asian Development Bank Institute. Manila: Edward Elgar Publishing Ltd. and Ateneo de Manila University Press.

improvements and the construction of high-quality roads at the local level is more beneficial to the region than investing in the national road network alone.40 Nonetheless, a comprehensive assessment of the local road networks does not exist. Furthermore the absence of accurate and reliable aggregate LGU expenditure data at the sector level precludes an analysis of LGU road investments. However, it has been pointed out that local fiscal capacity remains insufficient to support significant local infrastructure expansion as LGUs have continued to rely heavily on the IRA and not maximized local revenue potentials.41 The structure of lending to LGUs for financing infrastructure, as discussed in the earlier section on Sub-national Borrowing, also remains a significant bottleneck. As discussed above, poor planning and policy coordination between the national and local governments has also stifled road development. Finally, the allocation of investments over time and space is a continuing challenge given the frequency of self-serving and short-term political objectives of politicians at all levels. In terms of other existing research in the local road sector, case studies have revealed efficiency gains and benefits from increased participation in infrastructure development at the local level.42 Local savings have been found per kilometer of road construction by LGUs compared to costs of the Department of Public Works and Highways. There is also evidence supporting the benefits of community participation in infrastructure choices and management, including higher rates of sustainability of locally selected infrastructure projects when there is direct community participation.43 Health Sector:44 Generally, the division of responsibility for health functions between the national and local governments mandated by the LGC broadly reflects efficiency principles. LGUs assumed responsibility for health services that are simple to administer or confer local benefits while the national government assumed responsibility for services with significant economies of scale or inter-jurisdictional spillovers. In practice, however, it is doubtful that decentralization has improved the quality of local health care, as discussed earlier in this section. A survey confirmed that Filipinos were more satisfied with private hospitals and clinics than government facilities.45 Perhaps due to the inferior quality of public health services, even the poor continue to selffinance their access to private health services.

40 41

Llanto, Gilbert M. 2007. Llanto, Gilbert M. 2007. 42 Peterson, George E. and Elisa Muzzini. 2005. 43 Hopkins, Richard. 2003. How Well Did Those Development Projects in Flores Work? Sustainability Planning and Monitoring in Community Water Supply and Sanitation. Ed. Mukherjee and Van Wijk. Washington DC: World Bank. World Bank. 2003. Indonesia: Selected Fiscal Issues in a New Era. Report 25437-IND. Washington DC: World Bank. 44 Lieberman, Samuel S., Joseph J. Capuno, and Hoang Van Minh. 2005. Decentralizing Health: Lessons from Indonesia, the Philippines, and Vietnam. East Asia Decentralizes: Making Local Government Work. Washington, DC: World Bank. 45 World Bank. 2001. Philippines: Filipino Report Card on Pro-Poor Services. Washington DC: World Bank.

Nonetheless, the Philippines has sustained favorable trends in overall health status after decentralization. The under-5 mortality rate per 1,000 births declined from 66 in 1990 to 40 in 2000 while life expectancy at birth increased from 66 to 69 over the same period. These favorable results have been attributed to progress in health outputs and service coverage, such as an increase in the proportion of births attended by trained health workers and increased access to clean water sources and sanitation services. These positive trends contradict the indirect evidence of poor health service quality obtained in subjective survey data cited above. The absence of sectorspecific data for LGUs, as discussed in the previous sub-section, has made it difficult to analyze local health expenditures, and thus the total public expenditures in health in the country, let alone objective quantified measures of service outputs. Finally, there do not appear to be studies that have clarified the role of LGUs in the health sector vis a vis other providers, such as national government agencies, other levels of local government, NGOs, and the private sector. Even so, decentralization has given local authorities greater leeway to adapt local innovations in health planning, service delivery, and financing. There is no systematic tally of these innovations, but the general perception among the analysts and observers seems to view these innovations as exceptions rather than the norm. Although some of these cases are in fact documented as case studies (such as those awarded by Galing Pook), LGUs in general do not seem to be in a rush to emulate these known cases of success. The lack of incentives, rather than missing models, appears to be holding back needed policy interventions by local decision-makers. Furthermore, wide variations in local revenues and the distortionary effects of the IRA have resulted in uneven access to quality health services. The IRA favors highly populated LGUs and those with large land areas, and so does not ensure an overall propoor bias in health services. Studies have also shown that other fiscal transfers, including those from the Department of Health, correlate weakly with poverty, thus reinforcing health disparities among LGUs.46 While public hospitals may collect user fees and charge for drugs, recovery rates remain low because of the inordinate volume of charity and subsidized patients. Finally, other issues faced by LGUs in the health sector include: the struggle to hire and retain physicians, nurses, and medical professionals, who are in great demand in foreign markets; the unfunded mandate posed by the Magna Carta for Health Workers, a law which provides for higher compensation and extra benefits and allowances to all health workers; and the absence of a need-responsive and cost-effective health information system at the national and local levels.

46

Mullins, Daniel R., Amitabha Mukherjee, Signe Zeikate, and Jung-Joo Lee. 2006.