Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4919-PH THE PHILIPPINES: PUBLIC EXPENDITURES AND THEIR FINANCING September 25, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Ac ronyms AA - Advice of Allotments EPZA - Export Processing Zone Authority GNP - Gross Naticnal Product HDMF - Home Develcpment MutuaL Fund HFC - Home Financing Corporation HSDC - Human Settlements DeveLopment Corp. ICC - Investment Coordinating Committee ITC - International Tax Comparison LRTA - Light Rail Transit Authority LWUA - Local Water Utilities Administration MA - Ministry of Agriculture MAR - Ministry of Agrarian Reform MECS - Ministry of Education, Culture and Sports MIP - Major Industrial Projects MLG - Ministry of Local Government MMTC - Metro Manila Trarsit Corporation MOTC - Ministry of Transport and Communications MOH - Ministry of Health MPWH - Ministry of Public Wor'-s and Housing MWSS - Metropolitan Waterworks and Sewerage System NCR National Capital Regio:a NDC - National Development Corporation NEA - National Electrification Administration NEDA - National Economic DeveLopment Administration NIA - National Irrigation Administration NHA - National Hcusing Authority NHC - National Hcusing Corporation NHMFC - N.ational Hcme Mortgage Finance Corporation NPC - National Pcwer Ccrporation NTPP - National Transportation Planning Project PNDC - Philippines National Oil Company PNR - Philippine National Railways PPA - Philippine Ports Authority PRODED - Program for Decentralized Educational Development RWDC - Ruiral Waterworks Development Corporation USAID - United States Agency for International Development CURRENCY EQUIVALENTS IUS$1.0 = P 18.0 P2 1.00 = US$0.055 FOR OFFICIAL USE ONLY Preface This report is based on a mission which visited the Philippines in August 1983, under the direction of Bruce Jones, and consisting of Regina Bendokat, Nancy Cooke, Edward Hawkins, Madhu Joshi, and Raymond Struyk. The draft report was discussed with the Government in March 1984, by a mission consisting of Norman Hicks and Regina Bendokat. The report was subsequently updated with material received during that mission, and reflects the state of knowledge as of that date. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PHILIPPINES PUBLIC EXPENDITURES AND THEIR FINANCING Table of Contents Page No. SUMMARY AND CONCLUSIONS ..................................... i-v I. OVERVIEW OF DEVELOPMENTS IN PUBLIC EXPENDITURES, 1978-83 A. Introduction . .......................................... 1 B. Recent Public Finance Trends, 1978-83 .... ............... 3 C. Public Sector Resource Mobilization ..................... 6 D. Public Expenditures and Public Sector Deficit .... ....... 6 E. Short-Term Prospects: 1984 Financial Program .... ....... 6 F. Medium-Term Prospects: 1985-87 ......................... 7 G. The Pattern of Public Expenditures ...................... 7 II. PUBLIC EXPENDITURES A. Level and Composition of Public Investment .... .......... 9 B. Government Current Expenditures ......................... 13 C. Planning and Control of Public Expenditures .... ......... 17 D. Highlights of Sectoral Programs ......................... 19 III. FINANCING THE PUBLIC EXPENDITURE PROGRAM A. National Government Revenues ............................ 25 B. Government Corporation Resource Mobilization .... ........ 34 C. Financing Public Expenditures ........................... 37 ANNEXES A. Agriculture .................. 40-45 B. Industry .................. 46-49 C. Energy .................. 50-60 D. Water Supply .................. 61-67 E. Transportation .................. 68-74 F. Education .................. 75-86 G. Health .................. 87-98 H. Housing .................. 99-108 STATISTICAL APPENDIX Text Tables I.1 Public Sector Finances I.2: Public and Private Investment and Savings II.1: Public Investment by Sector, 1978-83 II.2: Regional Allocation of Public Investment by Sector, 1978-82 II.3: National Government Current Expenditures, by Object of Expenditure II.4: National Government Current Expenditures, by Sector III.1 National Government Revenues, 1978-83 III.2 Impact of Revenue Measures, 1978-84 III.3 National Government Revenues, 1978-82 (Ratios to Total, Growth Rateas; Buoyancies) III.4 Internal Cash Generation of Government Corporations III.5 Financing Deficits of the Public Sector Annex Tables A.1: Summary Statement of Capital and Recurrent Expenditures, 1978-1987 BAe: Public Investment in Industry, 1978-84 Ce1: Primary Energy by Source C.2: Energy Investment Program C.3: National Power Corporation: Expansion Program C.4: Access to Electricity, 1980 D.l: Water Supply Coverage, by Type of Service, 1980 D.2: Water Supply and Sewerage Investment Program by Agency, 1978-87 D.3: Planned Water Supply Coverage, by Type of Service, 1987 E.1: Traffic by Mode, 1980 E.2: Transportation Investment Program F.1: National Government Expenditure on Education F.2: Distribution of National Government Expenditure on Education, by Level F.3. MECS Program Expenditures, by Level, by Category and by Object of Expenditure, 1978-82 F.4: Elementary Education: Selected Indicators G.1: National Government Expenditure on Health G.2: Ministry of Health: Selected Indicators H.1: Type Units H.2: Expenditures H.3: Actual, Planned and Probable Shelter P'rogram, 1981-1987 H.4: Match Between Plan and Needs H.5: Beneficiaries PHILIPPINES PUBLIC EXPENDITURES AND THEIR FINANCING SUMMARY AND CONCLUSIONS 1. The purpose of this report is to survey trends in public expendi- tures in the Philippines, and related issues in the operations of the public sector. During the decade ending in 1983, the Philippine economy grew rapidly (over 6% per annum), and there was a simultaneous increase in the size and scope of the public sector. Public investment increased from 1.5% of GNP in 1970 to over 8% of GNP during the 1978-82 plan period. During this period, a rapid and commendable expansion of education and health services was achieved, as well as a substantial improvement in infrastructure in ports, highways, power and water suppLy. 2. The expansion of the public sector accelerated during the 1980s, in part reflecting a countercyclical reaction to the world recession, as well as an effort to reduce imported energy requirements and expand basic infrastruc- ture. Public sector investment rose from 7% of GNP in 1978 to a peak of 10% in 1981, and is estimated to have been over 8% in 1983. Over 70% of public investment during the 1978-83 period was for infrastructure, primarily in the energy and transport areas. However, domestic resource mobilization necessary to finance this expanded program Lagged. Tax and other revenues as a share of GNP declined, as did the internal cash generation and cost recovery efforts of the semi-autonomous public corporations and agencies. As a result, the con- solidated public deficit rose sharply from about 3% of GNP in 1978 to almost 6% by 1982. 3. A large part of the growing deficit was financed from foreign bor- rowings, primarily from increasingly accessible nonconcessionary private sources. This led to a rapid build up of foreign debt which eventually proved unsustainable. The debt management problem, however, also reflected an economic management problem. Many of the projects financed with foreign bor- rowing did not produce commensurate foreign exchange benefits during the period that could be drawn on to finance debt service. The reasons for this are varied, but include the fact that much of the investment program consisted of infrastructure projects with long gestation periods and little direct foreign exchange impact, while some of the projects financed were uneconomic or became unprofitable as world conditions became more adverse. The situation became critical in late 1983 when the growing size of the public deficit and the declining access to foreign capital necessitated a sharp reduction in the level of public expenditures, particularly in the size of the 1984 public investment program. 4. The rapid expansion of investment during a period when resource mobilization was not being increased resulted in a squeeze on budgetary funds available for recurrent costs. Total recurrent expenditures, excluding interest expenses, were no higher in 1983 in real terms than they were in 1978. In per capita terms they declined by about 19%. There has been an underfunding of maintenance and personnel expenditures in such sectors as ill agriculture, education, water suoply, and transportation. As a result, new investments are often operated inefficiently or allowed to deteriorate prematurely because of inadequate maintenance. 5. The rapid expansion of investment has been accompanied by a strong regional bias favoring Luzon in general, and Metro-Manila in particular. While the data base is incomplete, it appears that roughly 46% of total investment went to Luzon, or twice as much per capita as the other regions of the country. Within Luzon, the bulk of investment appears to have gone to Metro-Manila. 6. The rapid expansion of public expenditures appears to have out- stripped the ability of the relevant public sector institutions to perform adequate planning, budgeting and monitoring of public expenditures. The public corporations have been a particular problem as they appear to have been largely outside of the central government's purview. While the Budget Reform Decree of 1977 established the legal basis for a system of planning and control and "total resource budgeting," there has been, until recently, very little progress in implementation. As a result, projects were often under- taken without careful consideration of their economic viability, their long- term finance needs, or the debt service impact on the balance of payments. The current crisis has made more evident the need to have greater centraL control over the public investment program. The role of the Investment Coordinating Committee has been strengthened and a more careful look is being made at investment priorities. Greater attention is now given to the domestic financial and balance of payments implications of projects. The reforms of the ICC are still in a nascent stage, however, and are not yet fully inte- grated with other economic decision mechanisms. 7. The Government has recently taken steps to bring the public corpora- tions within the purview of the normal budgeting and monitoring system through the establishment of a cabinet sub-committee attached to the Prime Minister's Office. The purpose of this sub-committee is to oversee both the expenditure proposals and the methods of financing of these corporations, so as to ensure that they fit the investment priorities of the Government and do not place an undue financial burden on the budget. While it is still too early to judge how effective this sub-committee will be in controlling these corporations, it represents a significant reform and a recognition by the Government of the problem of inadequate control in the past. 8. A major part of current problems stems from the fact that expendi- tures have grown faster than domestic revenues. While the level of tax revenue to GNP rose from 9% in the early 1970s to 11.5% by 1978, the level of tax effort since then has stagnated or declined. Overall, total government revenue equalled 13.5% of GNP in 1978, but only 12% in 1983. The decline in revenue effort is mainly due to the ineLasticity of the revenue and tax structure, which means that a significant revenue package is required each year to keep the revenue ratios from falling. A low proportion of direct taxes (25%) in the total contributes to the inelasticity of the system. The slow growth in revenues is also partly explained by the sluggish growth of the domestic economy and the general slowdown in international trade, upon which much of the tax system is based. Weaknesses in the tax administration system and inadequate coLlection efforts have also had their effects. - 11l1 - 9. Another important factor has been the low level of self-financing undertaken by the public corporations, which contributed only about 14% of the resources required to finance their own investment programs. Foreign borrow- ings, which financed about 60% of the total public deficit during 1978-82, also financed over half of the investment program of the public corpora- tions. These problems have been addressed, in some cases, such as in the recent program of electricity tariff increases by the National Power Corpo- ration and increases in the prices for petroleum products sold through the Philippine National Oil Corporation. However, the cost recovery effort in other sectors, such as housing, education and transport, remains low. 10. Within individual sectors, the issues of recurrent cost financing, regional balance, investment choice and cost recovery all appear in various proportions. In transport, inadequate maintenance of the highway system has reduced its effectiveness, raising operating costs and adding otherwise unnecessary reconstruction costs. It has been estimated by a government study that road maintenance expenditures should be increased by 50%. However, a large part of current expenditures in the transport sector will have to be used to continue to subsidize the Philippine National Railway and the Light Rail Transit Authority, thus limiting the availability of funds for other high priority needs. Regional balance is a particular problem in the water supply sector, where projects in Metro-Manila continue to absorb the bulk of invest- ment expenditures, despite the Government's announced commitment to rural water supply development. Part of the problem stems from the fact that only 10-20% of the cost of water supply projects are covered by water charge revenues. Because of inadequate attention to maintenance in the past, the operating efficiency of the water supply systems in many areas remains low. 11. In energy, a large investment program reduced petroleum imports and increased generating capacity significantly between 1977 and 1982. The completion of ongoing power projects will further raise capacity by 48% by the end of 1985. It seems possible that load growth will not equal the expected target of 10.5% per annum, and excess capacity will develop. Recognizing this problem, the government has already taken steps to curtail or postpone new projects in this sector. Problems of investment planning have also affected the industry sector, where a government-announced plan to invest in 11 major industrial projects exceeded likely available financial resources. In light of the deteriorating world economic climate, and because of domestic and external funding shortages, the government has postponed the majority of these projects and scaled back others. 12. While the government has accomplished much in providing universal primary education, there remain serious problems concerning regional disparities, level of service delivery and facility availability. Plans to upgrade primary education and expand secondary education appear to require large future expenditures and do not form part of a coherent plan for the sector as a whole. Likewise, while the government has made a commitment to expand rural health facilities, about half of the sector's expenditures are budgeted for hospital costs in urban areas. Plans to expand rural health facilities, however, are very ambitious, and the operational requirements and financial implications of the program are not well specified. iv 13. The balance between recurrent and investment expenditures has also been a problem in agriculture, where expenditures have been heavily skewed toward capital improvements in irrigation infrastructure. There has been inadequate funding of the recurrent costs required for the efficient operation and maintenance of the system, however, with the result that existing capital improvements have deteriorated. Part of the problem rests with the low level of water charges which do not permit adequate funding of maintenance costs or contribute significantly to the capital improvement program. Cost recovery and equity are important issues in the housing sector. While the government has developed a sensible system of institutions to regulate private sector operations, provide mortgage assistance and directly meet housing needs, most of these programs benefit middle- and upper-income families. A combination of high operating costs, a negative spread between earnings and the cost of funds, and weak collection efforts has threatenecl the financial viability of the home mortgage finance complex. Principal Recommendations 14. The following summarizes the main recommendations of this report: (a) The existing institutional arrangements; for planning and programming public expenditures need to be more effectively utilized to ensure that national priorities are respected, that expenditures are cost effective and productive, and actual expenditures can be moni- tored. The Investment Coordinating Committee machinery, together with the NEDA assignment of priorities and the Central Bank control of foreign borrowings, could provide the basis for more control over public expenditures. (b) While there have been significant imprcvements in the past year in the Government's budgetary processes, the medium-term planning and budgeting machinery for National Government expenditures needs to be further strengthened. (c) A medium-term financial planning capability would also allow the government to reverse the trends-whereby recurrent expenditures have fallen as a share of the total. A bigger share of expenditures on current costs will allow a greater utilization of the growing stock of public capital and permit it to be mnaintained adequately. Such a plan will also make it possible to project the requirements for future current expenditures on a more realistic basis. (d) A beginning has been made in shifting the regional balance of public expenditures, but more needs to be done to achieve the government's objectives in regional development, and the mechanisms outlined above could be used to promote these aims. (e) An important feature of the recent experience has been the extent to which public corporations failed to finance their investment expen- ditures from internally generated resources. This suggests that there is scope for the corporations to raise more resources through cost recovery efforts, as an alternative to increasing subsidies or equity contributions from the National Government. v (f) A similar point applies to other parts of the public sector, especially agriculture, housing, water supply, education and health, where there is also scope for raising resources by greater cost recovery, selective use of fees and charges and reductions in costs. (g) The review of public expenditures in this report is incomplete in that it does not deal fully with the activities of the public financial institutions which are an important source of funding for investment and which received large equity contributions and govern- ment deposits. A separate review of the condition of the financial institutions would facilitate more effective planning and program- ming of public expenditures. (h) Given the scarcity of funds for public expenditures, the govern- ment's actions bearing on raising additional revenues are of crucial importance. Reforms are underway with respect to the realignment of indirect taxes and increases in fees and charges. Incentives granted to industrial subsectors and to agriculture are being reviewed. To prepare a future revenue raising strategy, priority should be given to (a) early completion of the study on the introduction of a second-stage value added tax, (b) the overall review of the Philippine tax system for the purpose of tax reforms to raise the elasticity of the revenue system and to improve tax administration, and (c) a review of the corporate tax structure. (i) The planning, evaluation and monitoring of public expenditures at the national level must be supported by an appropriate capacity at the sector level. The present capacity of the sector agencies to perform those functions varies, but needs to be strengthened in all cases. The creation of better data bases, the need to take finan- cial constraints into account and to maintain a better balance between capital and current expenditures apply to all sectors. PHILIPPINES PUBLIC EXPENDITURES AND THEIR FINANCING I. OVERVIEW OF DEVELOPMENTS IN PUBLIC EXPENDITURES, 1978-83 A. Introduction 1.01 In the decade ending in 1983 the Philippines economy grew at 6% per annum in real terms. It continued the process of transformation, begun in the previous decade, from an agricultural based economy to one in which industry became more prominent. Another significant change was in the role and significance of the public sector. In an economy based on private enterprise and ownership the role of government has traditionally been limited. However, since 1970 the role of Government, the size of public expenditures, especially public investments, and the influence of the government over private sector economic decisions have all increased. This has been most noticeable in the period of the last five-year plan covering the years 1978-83. 1,02 The issue of the size, composition and effectiveness of public expenditures is now important because of the significant changes that have been accomplished in the 1970s. At the beginning of the decade the Philip- pines was notable for having a relatively small public sector. "Public Sector" is defined here to cover national and local government and pubLic corporations. The major role in the public sector was played by the national government, while a small number of public corporations and bodies were providing basic services, such as electricity, water supply and sewerage, gas and transport. By 1973 these institutions consisted of five public utility corporations, thirty-nine other corporations and self-governing boards, commissions and agencies and seven financial institutions. Their investment expenditures amounted to about 0.3% of GNP at that time. 1.03 By 1982, there were close to two-hundred public corporations and autonomous public bodies. This report covers the activities of the national and local governments and the thirteen largest public corporations. So radically has the situation changed since 1973 that in 1982, the investment expenditures of this group equalled 10% of GNP, with the public corporations accounting for half of that total. Clearly there had been a response to the widely held view that public expenditures were too low in the 1960s and early 70s. It took the form of a dramatic growth in the number and size of institu- tions and the expansion of investment expenditures. The low levels of investment were partly attributed to the absence of a system for identifying and preparing investment projects. Such a capability was developed in the first half of the 1970s which permitted the public sector to make better use of available financing, especially from overseas. 1.04 The proliferation of inscitutions and the growth of expenditures were accompanied by a number of special features which facilitated the growth of expenditures but which also raised questions as to the quality and effec- tiveness of the results. These features must be kept in mind in evaluating -2- the findings set out in this report. The first concerns the definition of the public sector. It is defined in this report in the terms set out above. How- ever, there are institutional arrangements in the Philippines which result in public revenues being used to support expenditures by institutions which are formally in the private sector. The size and nature of these expenditures are not always easy to track in the government accounts. While the purposes are often public, in the broad sense of providing facilities for public use, they are not public sector investments in the normal sense of the word. 1l05 Secondly, there are institutions which have the above charac- teristics, but which also have the right to collect revenues by means of special levies. Their expendit re decisions are often partly or wholly subject to government control.11 1.06 Thirdly, public expenditures are considerably influenced by the activities of the public financial institutions. The most important of these are the two social security institutions and two banks - the Development Bank of the Philippines and the Philippine National Bank, the country's largest commercial bank. As lending rather than spending institutions, the government financial institutions are excluded from this report. However, their influ- ence on government expenditures is included in the form of equity contribu- tions to support their activities. The government has also placed substantial deposits with the financial institutions which have become de facto equity contributions when the financial condition of the banks made it difficult for the government to withdraw them. 1,07 A fourth feature of the public sector in the 1970s was the manner in which firms and corporations moved across the boundary between public and pri- vate. In times of economic difficulty, especially after the second oil price increase in 1979 and the emergence of high interest rates, a number of private firms got into difficulties and came into public ownership and control in the course of rescue operations. Such rescues often resulted in indirect public expenditures to support the finances of those bodies which took over the sick companies. Equally important for this purpose, however, was the use of credits from the Central Bank. 1.08 The purpose of this report is to make a first attempt at assessing the size and composition of public sector expenditures. The main task is to chronicle what has been achieved during a period of rapid expansion. To this end, the principal developments in the main sectors are reviewed, with the aim of indicating those factors that have deterrmined total expenditures and iden- tifying issues with significance for the future. As this report was being completed, the Philippines was overtaken by a severe balance of payments crisis. The steps taken to deal with the crisis already have substantial fiscal implications, and the medium-term prospects will call for much less reliance on foreign borrowing than before. There has also been a sharp reduc- tion in public expenditures in response to the crisis situation. A watershed 1/ These are approximately 200 government corporations. The largest 12 account for the greater part of the expenditures. -3- in the development of the public sector, therefore, was reached in 1983. Even an incomplete review of this kind points to clear implications for future policies. Bearing in mind the very different circumstances now facing the economy in the 1980s, it is unlikely that the trends in public expenditures and the ways in which they have been financed in the recent past can continue. 1.09 Public expenditures grew in the 1970s in response to the evolution of sector programs and ad hoc requirements and in reaction to both internaL and external shocks. Much of this growth emanated from public corporations which were not under the direct control of the national government and tended to bypass the limited planning and budgetary machinery which existed to con- trol and monitor public expenditures. As a result, no complete picture of public sector expenditures has been available. The findings of this report are a first step in that direction. While they bring together material that is not easily assembled and are believed to cover the greater part of public sector activities, their limitations must be clearly recognized. B. Recent Public Finance Trends, 1978-83 1.10 The principal features of recent public finance trends have been a decline in the public sector resource mobilization performance, a decline in government current expenditures, an enlarged public investment program, and the emergence of a large and unsustainable public sector deficit (Table I.1). In the short run, however, the deficit was financed increasingly by the use of foreign borrowing. From 1973 onwards the Philippines was able to borrow growing amounts and made full use of the funds available. While it is not possible to match up exactly the data collected from public corporations and the national government with the balance of payments and national accounts, the links are clear. A fuller picture of the development of investment and savings in the years 1978-83 is given in Table I.2. The deficit on current account, or the contribution of foreign savings to investment, increased in significance throughout the period from about 16% of total investment in 1978 to 24% in 1983. The public sector was heavily in deficit throughout the whole period, the difference between investment and savings averaging 46% of public sector investments. When this is disaggregated into the central government (including local government and the social security system) and government corporations, it is apparent that the latter are the main source of the defi- cit. The savings of the corporate subsector covered no more than 10% of its investment, and less in the earlier years. The central government subsector, however, had surpluses for the years 1978-80 and then went into deficit in 1981 and 1982. New revenue measures in 1983 resulted in a central Government surplus of P 4.4 billion, but this was offset by a P 19 million deficit by the corporations. The general pattern for the private sector has been to finance only a small, but rising, portion of its investment needs with foreign capital. Thus, the private deficit as a share of private investment has risen from 8% in 1978 to 14% in 1983. -4. Table }.1: PUBLIC SECTOR FINAN'CES (Percentage of tNP) Financial Actual Est. program Projected 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 National Government Finances Revenues 13.5 13.4 13.1 11.8 11.4 12.0 11.1 12.0 12.5 13.0 Expenditures and net lending 4e7 13.5 14.4 15.8 15.7 13.8 12.5 13.5 14.0 14.5 Interest payments 0.6 0.8 0.9 0.8 1.1 1.3 170 2.2 2.1 2.0 Other current expenditure 10.2 8.5 8.4 7.9 8.1 7.7 6.7 7.8 8^2 8.6 Infrastructure and other capital outlay 2.4 2.3 3.2 4.2 3.0 2.6 2.4 2.1 2.3 2.6 Equity and net lending to 13 NFGCs 1.2 1.4 1.6 2.6 3.3 2.2 1.0 10 0.9 0.8 Other equity and net lending 0.3 0.5 0.4 0.3 0.2 0.0 0.6 0.5 0.5 0.5 Surplus/deficit -1.2 -0.1 -1.3 -4.0 -4.3 -1.8 -1.4 -1.5 -1.5 1.5 Thirteen Nonfinancial Govt. Corporations Internal cash generation 0.6 0.8 O.8 0.9 0.7 0.7 1.0 1.1 1.1 1.3 Capital expenditures 4.4 4.4 5.1 5.5 6.3 5.8 4.2 3.7 3L8 3.9 Investment saving gap -3.8 -3.6 -4.3 -4.6 -5.6 -5.1 -3.2 -2.8 -2.7 -2.6 Local Government Finances Revenues 1.8 1.8 1.9 1.8 1.8 1.8 1,8 1.9 2.0 2.1 Current expenditure 1.6 1.5 1,5 1.5 1.5 1,5 1,4 1,5 1.6 1,6 Capital expenditure 0.2 0.2 O.2 02 0.2 0,2 0.2 0,3 0.3 0.4 Surplus/deficit - 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Social Security Institutions Revenues 19 1.8 1.7 1.9 2.3 1.8 1.9 2.0 2.1 2.2 Benefit payments and other expenditure 1.3 1.0 0.9 1.1 1,6 1.1 1.2 1.3 1.4 1.5 Surplus/deficit 0.6 0.8 0.8 0.8 0.7 0,7 0.7 0.7 0.7 0.7 Consolidated Public Sector Deficit /a -3.1 -1.4 -3.0 -5.1 -5.8 -3.9 -3.2 -2.5 -2.5 -2.5 Memorandum items: Government current expenditures /b 11.3 9e5 9.4 8.9 9.1 9.0 7.7 8.8 9.3 9.7 Public investment /c 7.0 6.9 8.5 9.9 9.5 8.6 6.8 6.0 6.4 6.9 /a Sum of the four fiscal balances (national government, governreent corporations, local government, and social security institutions) less national goverrment equity contributions and net lending to the thirteen government corporations. /b National government current expenditures (net of interest payments and allotments to local governments) plus local governrment current expenditures. Allotments to local governments are about 0.5% of GNP. /c Capital expenditures of the national government on its own account, capital expenditures of nonfinancial government corporations, and local government capital expenditure. Sources: Statistical Appendix Tables 1.1, 1.7, 1.8, 1.11 and 1.16. -5- Table I.2: PUBLIC AND PRIVATE INVESTMENT AND SAVINGS (Billion Pesos) 1978 1979 1980 1981 1982 1983 Total Total investment 51.7 68.8 81.1 93.3 97.2 101.7 Gross national savings 41.5 57.7 64.8 75.2 69.7 73.5 Deficit 10.2 11.1 16.3 18.1 27.5 28.2 Public Sector Investment 12.5 15.2 22.4 30.2 32.0 32.6 Savings 7.0 12.2 14.5 14.7 12.4 18.0 Deficit 5.5 3.0 7.9 15.5 19.6 14.6 Central Government /a Investment 4.7 5.4 8.9 13.4 10.7 10.7 Savings 6.1 11.1 12.9 12.8 10.4 15.1 Deficit (-surplus) -1.4 -5.7 -4.0 0.6 0.3 -4.4 Government Corporations Investment /b 7.8 9.8 13.5 16.8 21.3 21.9 Savings 0.9 1.1 1.6 1.9 2.0 2.9 Deficit (-surplus) 6.9 8.7 11.9 14.9 19.3 19.0 Private Sector Investment 39.2 53.6 58.7 63.1 65.2 69.1 Savings 34.5 45.5 50.3 60.5 57.3 55.5 Deficit (-surplus) 4.7 8.1 8.4 2.6 7.9 13.6 Memorandum Items (% of GNP) Public investment 7.0 6.9 8.5 9.9 9.5 8.6 Public savings 3.9 5.5 5.5 4.8 3.7 4.8 Public sector deficit 3.1 1.4 3.0 5.1 5.8 3.8 Private investment 22.0 24.3 22.2 20.8 19.4 18.3 Private savings 19.4 20.4 19.0 19.9 17.0 14.7 Private sector deficit 2.6 3.9 3.2 0.9 2.4 3.6 /a Includes local government and social security system surplus. 7i Includes net lending and budgetary contributions to financial institutions. 1.11 The deficit on current account refLected the expansion of public expenditures at a faster rate than domestic resource mobilization. This was possible because the supply of foreign funds was increasing. Once this ceased to be true, and the supply of loans fell sharpLy in the second half of 1983, sharp cutbacks in public expenditures became necessary. The second important feature of these developments was the role of the government corporations. They were more important users of foreign funds to finance capital expendi- -6 tures than the National Government. The gap between their capital expendi- tures and internally generated resources was larger than the national govern- ment deficit. C. Public Sector Resource Mobilization 1.12 The ratio of national government revenues to GNP declined slowly during the first half of the 1978-82 Plan period, and then rapidly during the second half, reaching a low point of 11.4% in 1982. This reflected the inelasticity of the revenue structure, which implies that the revenue ratio declines in any year in which a substantial revenue-raising package is not enacted. During 1981-82 few revenue-raising measures were enacted, and some of the revenue measures which were adopted were revenue-eroding. In 1983 the Government succeeded at restoring the revenue ratio back to the 1981 Level, due largely to a temporary 5% import surcharge arid increases in petroleum product taxation. The ratio of local government revenues to GNP has remained stable at 1.8%, consisting of local government own-source revenues amounting to 1.3% of GNP and national government revenue sharing amounting to 0.5% of GNP. The level of internal cash generation of the government corporation sector had remained modest at 0.7% of GNP. D. Public Expenditures and Public Sector Deficit 1.13 During 1978-79, public investment averaged 7% of GNP, a level which was both consistent with the public sector resource mobilization effort, and adequate in relation to properly prioritized development requirements. During 1980-82, a large number of projects were started, and public investment increased to 9-10% of GNP. In 1983 no new projects were started, but the carryover of ongoing projects produced a continuing high level of public investment. While the national Government deficit was substantially reduced (from 4.3% of GNP in 1982 to 1.8% in 1983), the overall deficit of the public sector remained large because of the persistence of large deficits by the public corporations. The overexpansion of public investment (in relation to the resource mobilization performance) had two consequences: (a) government recurrent expenditures were compressed to an undesirably low level; (b) the public sector deficit was high in relation to the need for balance of payments adjustment. E. Short-Term Prospects: 1984 Financial Program 1.14 In order to promote balance of payments adjustment, the Government is reducing the public sector deficit sharply in 1984. Although economic ac- tivity is expected to remain weak, the revenue ratio will be maintained through an increase in the temporary import surcharge to 10%, an additional increase in petroleum product taxation, and increases in fees and charges. The tariffs charged by the government corporations are also being increased considerably in peso terms, but the impact on internal cash generation will be diluted by the devaluation of the peso, since most of the debt service of the government corporations is denominated in foreign currencies. Public invest- ment will be cut by 30% to 6% of GNP, the lowest leveL since 1977. Government current expenditures will be further compressed to 8.3% of GNP, the lowest level since the early 1970s. F. Medium-Term Prospects, 1985-87 1.15 An illustrative medium-term fiscal scenario is displayed in Table I.1. Underlying the scenario are the following principal assumptions, which appear to be broadly consistent with Government policies: (a) The public sector deficit will be constrained to the 1984 level, in order to provide more adequate credit resources to the private sec- tor while external adjustment is pursued. (b) It will not be possible to increase the revenue ratio in 1985, in view of the Government's intention to remove the temporary import surcharge no later than end-1984, and expected offset of business losses in 1984 against taxable income in 1985. However, the revenue ratio will be increased in 1986-87, reflecting economic recovery and payoff to current efforts to improve tax administration. (c) Priority will be devoted to restoring government recurrent expendi- tures to a more adequate level. (d) In order to promote improved financial performance and financial discipline on the part of the government corporations and government financial institutions, equity contributions and net lending will be held to 1.5% of GNP or less. (e) The level of internal cash generation of the government corporation sector will be raised, consistent with efficiency, equity, and re- source mobilization objectives. (f) The local government sector will increase its participation in the development process, with increases in its revenue effort and cap- ital expenditures. (g) The level of public investment will be consistent with the above. 1.16 The projection indicates that, with an increased resource mobiliza- tion effort, the expenditure austerity prevailing in 1984 can be relaxed gradually. The ratio of government recurrent expenditure to GNP would recover back to the 1979-80 level in 1986-87, but would still be far below the level prevailing in 1975-78. The ratio of public investment to GNP would not increase in 1985, but might possibly increase modestly in 1986-87. If, on the other hand, public sector resource mobilization is not increased, then the expenditure austerity prevailing in 1984 would have to be extended to the end of the Plan period, including reducing the public investment program to 5% of GNP or less. C. The Pattern of Public Expenditures 1.17 The 1970s saw a remarkable increase in public investment in the Philippines, rising from 1.5% of GNP in 1970 to over 8% of GNP during the 1978-82 plan period. This increase was a response to the identified needs for 8- more public investment in many sectors. It also reflected the development of a greater ability to plan and implement investment projects. However, as mentioned above, the growth also reflected the increased availability of foreign funds for public projects. At the end of the decade, the large program of expenditures was straining implementation capacity, bypassing longer-term priorities and was running ahead of the ability to raise domestic resources. 1.18 Almost 70% of the total public fixed investment in the 1978-82 period was for infrastructure, with energy and transportation receiving the main share. There was a bias towards larger, capital intensive projects, reflecting the nature of the required investments in the above sectors, together with other similar areas such as housing and water supply. 1.19 The period also was marked by initiatives aimed at a better regional baLance in the investment program. The data do not, as yet, permit a full analysis of public investment expenditures on a regional basis. The limited evidence availabLe shows that there are still sizable regional differences in public investment on a per capita basis. 1.20 A significant change in the pattern of public finance has been the growth of capital expenditures at the expense of current expenditures. Here the national government picture is most important. Current expenditures cover three different categories: interest on debt, expenditures on goods and services (mostly wages and salaries) and transfers to local government and other bodies. Following the big increase in foreign borrowing and the rise in world interest rates, the interest charges rose sharply by a factor of six, between 1978 and 1983, from 0.6% of GNP to 2%. Domestic transfer payments, largely to local governments, also increased both relatively and absolutely. The remaining part of current expenditures, the larger part and the most important from the point of view of development, is the expenditure on personnel, maintenance and operating expenditures. The trend has been for the rate of growth of this category to be lower than total expenditures. In real terms they have hardly grown at all, while real GNP grew at 6% per annum. 1.21 Such expenditures are necessarily linked to the pattern of past investment. The growth in public investments must have created additional demands for personnel services, maintenance and operating expenditures which are not being fully met. It appears to be the case that, given the limited growth of public revenues, the adjustment on the expenditures side has been carried by current expenditures, so that the balance between current and capital expenditures has been disturbed. -9- II. PUBLIC EXPENDITURES A. Level and Composition of Public Investment Level of Public Investment 2.01 Public investment in the Philippines grew rapidly from 1.5% of GNP in 1970 to an average of 8.4% of GNP during the 1978-82 Plan period, a level which is among the highest for middle-income, oil-importing countries. Public investment accounted for about 39% of total investment in the Philippines, which, at 30% of GNP in 1978-82, was high by international comparison-2, The high ratio of public investment since 1980 results from several factors. Project implementation, which in the late 1970s had been hampered by deLays in bidding and contract award, was built up. A large volume of new projects was started in the early 1980s, in part to support the Government's countercyclical policy. 2.02 The expansion of public investment in recent years is affecting the level of public investment in the current plan period and the magnitude of the adjustment the Philippines has to undertake. Although no major new projects had been started in 1983, the volume of public investment remained high, due to full-scale implementation of recently begun projects. To reduce the public sector deficit to more manageable proportions in 1984 and beyond, public investment is being cut drastically, from an estimated 9% of GNP in 1983 to less than 7% of GNP in 1984; public investment is projected to remain at the level of 6.5-7% of GNP throughout the Plan period. In this scenario, public investment is the main element of adjustment to resource constraints, since recurrent expenditures cannot be cut further and revenue-raising measures are being introduced only gradually. The Government would have to assess whether the resulting level of public investment is adequate to meet its development objectives or whether substantial revisions in the targets for the current Plan period are required. The adjustment needed also raises the question of the role and size of the public sector in the economy, i.e., whether the Government should continue to be involved in all its current investment areas. This question will be addressed in several of the sectoral chapters below. 2/ Data on public sector capital outlays used above include only about 85% of government corporation investment. If the remainder is added, total public fixed investment would increase to 8.9% of GNP and 38% of fixed capital formation, respectively, for 1978-82. Conversely, indications are that gross domestic capital formation has been over-estimated by as much as 30% in recent years, in particular in the private sector. Thus, the share of public investment in both GNP and fixed capital formation would have been even higher. - 10 - 2.03 The recent public resource constraints have exacerbated the problems which planning of public investment has experienced. As will be shown in the sectoral chapters, government investment plans at the macro and at the sec- toral level have been far too ambitious. These plans, therefore, became obsolete quickly, and hardly any attempt has been made to update them and thus use the considerable effort that went into preparing them. In addition, longer-term priorities, as established in the plans, frequently have been overtaken by budgetary decisions. The quantum jump of public investment has led government agencies and corporations to begin a large number of projects simultaneously, thus straining the implementation capacity. The current internal and external financing constraints, therefore, require continued reassessment of the size and composition of the public investment program and of the timing of individual projects. 2.04 The respective roles of the national Government and public corpora- tions in public investment and in the adjustment process are noteworthy. The national Government, which accounted for about 40% of public investment in the 1978-82 Plan period, was the main actor in implementing countercyclical investments in 1981. In 1983, national government fixed investment decreased almost to its pre-recession share of GNP, as part of the Philippines' short- term adjustment program. The shortage of peso counterpart funds for national government projects has also led to implementation delays. Investment by public corporations, however, which had steadily increased its share in GNP during the last Plan period, reached a peak at 603% of GNP in 1982. Expen- diture cuts are expected to reduce this to 4.2% in 1984. This cut represents a reduction of public corporate investment by about one-third in real terms, Sectoral Allocation of Public Investment 2.05 The sectoral allocation of public fixed investment in the 1978-82 Plan period was dominated by infrastructure which accounted for 70% of the total; the productive sectors received 16% and the social sectors onLy 7%. The detailed sectoral allocation is given in Table II.1 which shows energy and transportation as being the priority sectors for public investment during the previous Plan period. While public investment expenditures in real terms increased for all sectors, changes in the sectoral distribution are not con- clusive; the pattern is rather one of substantial annual fluctuations. This reflects the impact of large projects; e.g., the temporary halt of the nuclear power plant in 1980 led to a decrease of energy investments in 1980. 2.06 The sectoral allocation of public fixed investment in the current plan period faces major uncertainties. The cuts in the size of the investment program are likely to affect also its composition. Since the Government has accorded highest priority to the completion of ongoing projects, and the carry-over of these is large, there has not been any room for new projects in 1983 and 1984. Thus, large new projects, as have been contemplated in indus- try, energy, water supply, and communications, might have to be postponed for several years. Due to the 1984 budget cuts, the sectoral allocation of public investment will change. Preliminary estimates indicate that, while all sec- tors will experience a decrease of investment in real terms, cuts are particu- larly steep in energy, industry, and infrastructure. As described in the industry chapter, the National Development Company alone accounts for a 0.5% - 11 - Table II.1. PUBLIC INVESTMENT BY SECTOR, 1978-83 (% of CNP) Actual Sectors 1978 1979 1980 1981 1982 1983 Economic Services 5.7 5.4 7.0 8.0 7.2 6.8 Agriculture 0.8 0.6 0.9 0.7 0.9 0.9 Industry 0.1 0.1 0.9 0.6 0.6 0.7 Energy 3.1 3.3 2.5 2.9 2.6 2.8 Transportation 0.9 0.9 1.8 2.2 2.0 1.4 Water supply 0.1 0.2 0.3 0.5 0.5 0.5 Other Infrastructure 0.6 0.5 0.6 1.0 0.7 0.5 Social Services 0.4 0.5 0.6 0.6 0.5 0.7 Housing 0.2 0.2 0.4 0.2 0.2 0.6 Education 0.1 0.2 0.2 0.2 0.2 0.1 Health 0.1 0.1 0.1 0.1 0.1 0.0 Other 0.5 0.5 0.5 0.6 0.5 0.5 Total /a 6.6 6.4 8.1 9.2 8.2 8.0 of which: National Government 2.4 2.3 3.2 4.2 3.0 2.6 Public Corporations 4.0 3.9 4.7 4.8 5.0 5.1 Local Government 0.2 0.2 0.2 0.2 0.2 0.2 Memo item: Nominal GNP in P billion 178 221 264 304 336 377 /a Total excludes Government financial investment. Items might not add up due to rounding. Source: Statistical Appendix. GNP reduction in public investment. Sectors which have been relatively protected from investment cuts are water supply, housing, and education. Regional Allocation 2.07 In both the previous and the current Development Plan, the Government has stated its intention to address the regional dimensions of development, aiming at a reduction of regional disparities of income and public expenditures. A number of steps have been taken in the last few years to address these issues. First, a regional planning exercise was initiated; its outcome so far has been a Regional Development Investment Program covering 1980-85 for each of the 12 regions. Updating these indicative programs is 12 - currently being considered. Second, the Government has started programs with a regional focus; they include the integrated area development approach, the program of export processing zones/industrial estates and the major industrial projects, as well as a regional approach to educational and health sector planning. Third, the implementation of projects at the regional level has begun recently in the Central Visayas. All these initiatives are expected to contribute to a reduction of regional disparities in the long run. 2.08 An assessment of the regional allocation of investment in the period under review is hampered by data problems. For the 1978-82 Plan period, a regional breakdown is available only for about 40% of public investment. Generalizations, thus, have a large margin of uncertainty. However, available data, as presented in Table II.2, corroborate earlier assessments that public investment is highly concentrated in Luzon and particularly in Metro-Manila and the adjoining regions of Central and Southern Luzon. In the economic sectors for which regional data are available, i.e., agriculture, energy, transportation, and water supply, 46% of public inavestment was allocated to Luzon, 8% to the Visayas, and 7% to Mindanao. For the two sectors for which data could be generated, transportation and water supply, 75% and 94%, respectively, of public investment in Luzon was absorbed by the greater Manila area. Even on a per capita basis, expenditures in Luzon are over twice the level of per capita expenditures in the other two areas. 2.09 Adjustments currently being undertaken in the size and sectoral composition of public investment are also affecting its regional allocation. In energy, the emphasis on completing ongoing projects has led to a temporary increase of the share of Luzon in the investment program. The reduction of investments in transportation is mainly affecting Luzon, and the outcome for agriculture and water supply is unclear at this stage. Table II.2: REGIONAL ALLOCATION OF PUBLIC INVESTMENT BY SECTOR, 1978-82 (in constant 1972 P milLion) Region Agri- Energy Transpor- Water Total Investment culture tation supply P mm % per capita Luzon 1,750 6,853 1,337 966 10,906 45.8 416 Visayas 80 1,264 542 62 1,948 8.2 175 Mindanao 249 924 491 69 1,733 7.3 158 Non-regional 1,345 3,518 4,048 289 9,200 38.6 Total by Sectors 3,424 12,559 6,418 1,386 23,787 100.0 Memo item: Total public investment 37,872 Source: Agency data. - 13 - B. Government Current Expenditures 2.10 The current expenditures of the national Government amounted to P 34 billion in 1983, or about 65% of total expenditures and roughly 9% of GNP. In addition, local governments' current expenditures wilL amount to a further P 5 billion. In macroeconomic terms the size and composition of such expenditures are important. The greater part, two-thirds of these expenditures, is for goods and services. In 1983 P 13 million was for personal services and another P 13 billion for other goods and services. The other third of current expenditures by the National Government was for transfer payments: P 5 billion for interest payments on past debt and P 3 billion for transfers to local governments and other public sector entities. 2.11 The determinants of these items of current expenditures are quite different and they have tended to evolve in separate ways over the last decade, and more sharply over the period of the last five-year plan (1978- 82). Expenditures on goods and services represent the day-to-day activities of the national government and could be expected to move in line with the growth of GNP, and to reflect the changing needs of the economy. They will also be heavily influenced, over time, by the current operating and maintenance requirements of past public investments. 2.12 The trend over the last decade has been for current expenditures to grow at a lower rate than total national government expenditures. From 1972 to 1982 the GNP grew at 6.0% per annum, in real terms. Real total government expenditures grew slightly faster, at 7%, while current expenditures grew at half that rate, or 3% per annum. As a result current expenditures, which were averaging 80% of the total at the beginning of the 1970s, now account for 65% of the total. 2.13 Table II.3 shows the National Government current expenditures, by type of expenditure, and the way they have evolved since 1975. From 1978-82 the real GNP grew at 4%, total government expenditures at 7.5%, while real current expenditures hardly grew at all. If interest payments, which grew from 0.5% of GNP in 1975 to an estimated 1.3% of GNP in 1983, are excluded the remaining current expenditures are no higher, in real terms, in 1983 than they were in 1978. In per capita terms they have thus declined by about 19%. 2.14 Within the total current expenditures the changes in expenditures for personnel services have been the main source of the slow growth. In real terms these expenditures increased by about 40% from 1972 to 1978; since 1978 there has been a very small real increase in this category despite an expan- sion in government empLoyment. This relative decline in the main component of public sector recurrent expenditures was more than compensated for by a sharp increase in debt service charges which went up seven times in nominal terms between 1978 and 1983, to account for almost a quarter of total current expenditures. 2.15 The other component which is an expenditure on goods and services is "maintenance and other operating expenditures." This also has not increased in real terms since 1978. In 1983 such expenditures will be about 14% lower than they were in 1978, despite the increase in the government's stock of 14 Table II.3: NATIONAL GOVERNMENT CURRENT EXPENDITURES, BY OBJECT OF EXPENDITURE Financial Actuals Est. Program 1975 1978 1979 1980 1981 1982 1983 1984 (Billion Pesos) Current expenditures 14.9 19.2 20.6 24.5 26.4 31.0 34.0 42.4 Interest payments 0.6 1.1 1.8 2,3 2.4 3.6 4.9 10.0 Current expenditures, less interest 14e3 18.1 18e8 22.2 24.0 27.4 29,1 32,4 Personnel services ) 7.4 8,2 9.4 10.6 10.6 12.7 15.8 Maintenance and other operating )13.4 expenditures ) 9.3 8.9 10.7 11.3 12.4 13.3 12.9 Allotments to local governments 0.7 0,8 1.2 1.5 1.6 2.4 2.6 2.8 Transfers to other entities 0.1 0,6 0,5 0,5 0.5 2.0 0.5 0.9 (% of GN:P) Current expenditures 13.0 108 9,3 9,2 8.7 9,2 9.0 9.8 Interest payments 0.5 0,6 0,8 0,13 0.8 1.1 1.3 2.3 Current expenditures less interest 12.5 10,2 8e5 8.4 7.9 8,2 7,7 7.5 Personnel services ) 4.2 3,7 3-5 3.5 3.1 3.4 3.6 Maintenance and other operating )11.7 expenditures ) 5,2 4.0 4.0 3.7 3,7 3.5 2,9 Alotments 0,6 0,4 0,5 06 0,5 0,7 0,7 0.6 Transfers 0,1 0,3 0,2 0,2 0,2 0.6 0.1 0,2 (Billion Pesos9 1972 prices) Current expenditures, less interest 9.2 8,5 8,2 8.7 8.3 8.6 8.4 7.9 Personnel services ) 3,5 3,6 3,7 3.7 3.5 3.7 3.8 Maintenance and other operating ) 8.6 expenditures ) 4.4 3.9 4.2 3.9 3.7 3,8 3.2 Source: Table 1.1, Statistical Appendix Mission Estimates - 15 - capital assets. The remaining items of current expenditures are the transfers to local governments and other entities, many of which are prescribed by statute. These now amount to about 9% of total expenditures, as against 7% in 1978. In real terms they doubled in size between 1978 and 1982, but fell off sharply in 1983. The compound rate of growth has been 11% since 1978. 2.16 It appears to be the case, therefore, that in a period when the growth of public revenues has been limited, the brunt of the adjustment has been carried by government expenditures on goods and services. Given the growing need for public services, as industrialization proceeds and the econ- omy becomes more complex, such a trend can hardly continue for long without creating problems for the public sector and the economy at large. The quality of public services will be affected as the real quantity of these services declines. 2.17 The distribution of current expenditures by sector is shown in Table II.4. The social services - mainly education and health - accounted for 31% of the total in 1983, as against about one quarter at the beginning of the Plan period. Defense was the next most important, at 19%, with general public administration following with 18%. Economic services accounted for 15%, hav- ing fallen in importance since 1979, when they accounted for about a quarter of current expenditures. It is health and education which account for the significance of the social services as the most important categories of cur- rent expenditures. Within the category of economic services, expenditures on agriculture, forestry and fisheries, and utilities and infrastructure predom- inate. However, the major part of these latter expenditures are for road maintenance. 2.18 The above pattern is repeated in the distribution of employment in the National Government. In 1983 there were 936,000 regular positions in government service. Almost half of the total, 447,200, were employed in health, education and social services. Another 30% were in national defense and security. Only 7% were in economic services, most of these in agriculture, natural resources and agrarian reform. 2.19 The government's policy has been to try to maintain parity in compensation for its employees with the private sector. For this purpose bi- annual salary surveys are conducted to obtain data for a sample of key occupations. The most recent survey was in 1981, but financial stringency has so far prevented the government from adjusting salaries to the full extent of the differences that now exist. Actual comparisons are difficult, but it is clear that present government salary scales, together with other benefits and terms of service, are below their equivalents in the private sector. Any move to close the gap between private and public sector salaries, a gap which certainly increases with age and seniority, would involve substantial increases in public recurrent expenditures. To allow the gap to remain, or to grow, wiLl result in a decline in the quality of public services in the Philippines. 16 - Table 11.4: NATIONAL GOVERNMENT CURRENT EXPENDITURES, BY SECTOR (P billion' Est. %.distribution 1975/a 1979 1980 1981 1982 1983 1979 1983 Economic services 2,219 4,815 3,954 5,228 4,595 4,754 24 15 Agriculture, forestry and fishery 906 1,277 998 1,317 1,511 1,500 Industry, trade, labor and tourism 488 539 568 526 829 879 Utilities and Infrastructure 825 2,999 2,388 3,385 2,255 2,375 Social services 2,975 5,266 6,060 7,591 9,100 9,760 26 31 Education 2,272 3,289 3,855 5,081 6,135 5,748 Health 570 1,120 1,194 1,541 1,985 2,110 Other 133 857 1,011 969 1,080 1,902 Defense 2,533 4,275 4,441 4,740 5,312 5,800 21 19 General Public Administration 1,000 3,742 4,875 4,571 4,985 4,957 19 16 Interest 918 1,936 2,296 2,601 3,665 6,039 10 19 Total 1L,620 20,034 21,626 24,731 27,607 31.,310 100 100. (% of GNP) Economic and social sectors 8.4 4.7 4.4 4,6 4.7 3.8 Education 2.7 1.5 1.5 1.7 1.8 1.5 Health 0.7 0,5 0.5 0.5 0.6 06 Agricultural services 1,1 0.7 0.4 0.5 0.5 0.4 Roads (chiefly maintenance) 0.6 0.6 06 0.6 0.5 0.5 Other 3.2 /b 1.4 1.3 1.2 0.9 0.8 Defense and administrative sectors 4.1 3,8 4.0 3.3 3.5 2.9 Total, excluding interest 12.5 8.5 8.4 7.9 8.2 6.7 /a July 1974 - June 1975. 7_ Includes subsidies. Source: Ministry of the Budget and Mission estimates derived by applying percent distribution of Advice of Allotments by sectors (Statistical Appendix Table 1.4d) to national government current expenditures (cash basis). - 17 - C. Planning and Control of Public Expenditures 2.20 Public expenditures can be financed from public tax revenues, local borrowings or foreign loans. The large increase in public expenditures that took place in the period 1978-83 was increasingly financed by foreign borrow- ing. This trend could not have been continued, even if the economic crisis of late 1983 had not taken place. At the National Government level the target rate of growth of revenues was set at 17% per annum in the Development Plan for 1978-82. What was achieved was 12% rate of growth, below the rate of inflation for the period. All the major components of revenue fell, as ratios of GNP. Nontax revenues also failed to increase and fell, as a percent of GNP. The decline in the revenue effort was due to the lack of response in the revenue and tax structure to the changes in incomes and the tax base. (The reasons are discussed in detail in Chapter III.) The self-financing of the public corporations has also fallen behind their need for resources, so that they relied increasingly upon national government support, in the form of equity contributions, and upon foreign borrowing. Over the whole period 1978- 82 foreign borrowing covered about 72% of the deficits of the National Government and public corporations. Domestic financing appears to have been not so much exhausted as neglected. 2.21 How did the pattern of expenditures and its financing arise, given the institutional arrangements for the planning and control of public invest- ments and foreign borrowing? The answer appears to be that, while mechanisms existed for the planning of public expenditures, they did not give the authorities adequate control over the total public sector. In particular the factual basis required for such an overview was not complete, so that there was a lack of knowledge about the total patterns of public expenditures and how they were being financed. While five-year development plans have been produced on a regular basis, they have not been effective devices for estab- lishing priorities or limiting expenditures. 2.22 The budgetary system in the Philippines is designed to give the authorities control over national government expenditures, so as to ensure that resources are available to meet the authorizations of the National Assembly. The system is complicated and involves nine separate steps from authorization to disbursement. Within these steps, there are three points of control - an expenditure program (based on authorized appropriations), an "Advice of Allotments" program by which the Budget Ministry authorizes agencies to enter into obligations, and a "Cash Disbursement Ceiling" by which the Ministry permits payments to be made. There is nothing automatic within these systems which ensures that appropriations, obligations and disbursements will actually match. 2.23 The Budget Reform Decree of 1977 set out the appropriate princioLes for planning and controlling public expenditures. The linkages were to be established between planning, programming and budgeting; longer term budgeting was required; and government corporations were to be brought into the public investment program by "total resource budgeting." Progress towards these objectives has been slow. However, the Office of Budget and Management has begun work in 1983 on a medium term financial plan for national government expenditures. Secondly, NEDA has developed a framework for attaching - 18 priorities to projects in t-he National Government program. In addition, a new unit is to be established in the Prime Minister's office to monitor the financial operations of the public corporations. 2.24 The above are useful and necessary steps towards establishing full control over the public sector investment programi. That control must be based on adequate knowledge of investment plans and proposals for their financing. In addition, an evaluation procedure is needed to be able to assess the economic and social justification for projects and to take into account their budgetary and balance of payments implications. Secondly, the authorities must be in a position to monitor the implementation of projects and be aware of actual expenditures over time. 2.25 Much of the above would be achieved by the use of the existing machinery in a more comprehensive way. The Investment Coordinating Committee (ICC), set up in 1978, is designed to screen projects for approval within the priorities laid down in the Plan and evaluate them in terms of their fiscal and monetary implications and their impact upon the balance of payments. The ICC is a cabinet sub-committee composed of representatives of NEDA, the Ministry of Finance, the Board of Investments, the CentraL Bank, the Ministry of the Budget, and six public financial institutions. The main tasks of the committee are approving projects and setting up project priorities within the context of the national development plans. 2.26 The work of the ICC is channelled through a Technical Board composed of senior officials from the institutions represented on the ICC itself. Government agencies and public financial institutions are requested to make annual submissions of new project proposals which are finalized and ranked on a priority list for funding as part of the following year's development pro- gram. Project proponents from the private sector are also requested to make submissions for projects which cost P 300 million and above. Priority rankings are based on a combined weighting of economic rate of return, along with budgetary, foreign debt, and socio-political factors. The latter include the potential impact of the project for improving regional balance. Projects are also evaluated in terms of their consistency with the Development Plan and individual agencies' five-year investment pLans, which are revised annually. 2.27 Once projects have been cleared by the ICC, they are referred to the Office of Budget and Management for approval if they require budgetary resources, and to the Ministry of Finance and Cen-ral Bank for clearance if they have foreign borrowing implications. Final approval for projects having foreign financing must come from the NEDA Board, which is a ministerial group chaired by the President. The NEDA Board also has the power to recommend to the President projects which it deems economically desirable but which are not found on the priority list. Firms registered with the Board of Investments (BOI) receive their clearance first from the BOI and then are referred to the ICC. 2.28 Despite having been in existence since 1978, the ICC and its subgroups have only recently had an active role in monitoring investment decisions, and the procedures described above are not yet fully defined or effective. Because of the reduced access to foreign private borrowing during - 19 - the past year, most of the projects on the ICC priority list are those financed by official aid agencies, either bilateral or muLtilateral. Problems with these projects tend to stem not from their basic soundness, but from the problem of insuring that adequate budgetary resources are available to fund the local cost portion of these projects. Further improvements would also be desirable in upgrading the depth and quality of staff analysis of projects submitted to the ICC. D. Highlights of Sectoral Programs 2.29 Sector expenditure programs are set out in detail in Annexes A-H. The highlights of the discussion are given below, in summary form. Agriculture 2.30 Despite the growth of industry, agriculture remains one of the most important productive sectors in the economy. Given a mixed record of government involvement and neglect, the record in terms of output in the 1970s has been good. Government involvement has resulted in an unusually complex pattern of institutions which make it difficult to give a comprehensive view of public (including "publicly influenced") expenditures. The coverage in this report is of the three major spenders -- the Ministry of Agriculture, the Ministry of Agrarian Reform and the National Irrigation Administration. However, their contribution to total public capital expenditures is modest, ranging from P 1.5 billion in 1978 to P 3.3 billion in 1983 (about 10% of the total). 2.31 NIA with its expenditures on capital works for irrigation is the most important of the three as far as investment is concerned, while the Ministry of Agriculture has the largest recurrent expenditures. This reflects the fact that MA has a large staff, with a nationwide presence. The ministry is also in the process of reorganizing on a regional basis, and, as with the capital expenditures by NIA on irrigation, there will be a Long gestation period before these changes have any effects. The exDansion of recurrent expenditures associated with the regionalization is expected to be curtailed over the near future. The shortage of public revenues raises the question in this sector, perhaps more than in others, whether more could not be done to raise more revenues from users of the services provided. The level of internally generated funds could be increased, especially in NIA by improved water rate collections and possibly higher charges. Agriculture is a sector where the balance between current and capital expenditures is heavily skewed towards the latter. This will need to be addressed in the future. Industry 2.32 Direct public expenditures on industry have been limited in the Philippines since the sector is largely in private hands. Public influence has been considerable through policy direction, provision of credit and encouragement to particular lines of investment. Two developments towards the end of the 1970s increased the public involvement in industrial affairs. Under its structural adjustment program, the government began a comprehensive 20 reform of industrial incentives, especially tarirfs,- with the aim of promoting a more efficient and competitive industrial, structure. Secondly, the government undertook the direct encouragement of industrial investment, by establishing export processing zones and industriLal estates and by promoting a program of major industrial projects (MIPs). 2.33 Total public investment expenditures in industry grew dramatically from 1978-82, from P 132 million in 1978 to a peaik of P 2.5 billion in 1980. The growth was due to the reactivation of the Nat:ional Development Company (NDC), a government holding company used to carry out acquisitions of distressed private companies and support their subsequent activities. As a result of the recession of 1979-80 and the financial crisis of 1980 a number of firms in financial difficulties were taken over by the government and supported to keep them in operation. Secondly, the NDC was used as a channel for equity contributions to the MIPs. (Governmernt financial institutions were also involved in supporting firms in difficulties, supplying loan funds and management assistance.) 2.34 The program of MIPs was conceived of as a means of promoting the deepening of the industrial structure. The! eleven large projects originally envisaged were to make use of local raw materials, supply intermediate and capital goods to industry and support national security objectives by provid- ing domestic sources of supply. By the end. of 1983 three had started operations, three were under construction and five had been postponed in the face of doubtful market prospects and a lack of finance. By comparison with NDC expenditures the outlay on industrial estates and export processing has been modest, averaging about P 100 million a year0 Energy 2.35 The dependence of the Philippines on imported energy sources, especially imported oil, placed a heavy burden on the balance of payments after the oil price increases of the 1970s. The government's response, in the form of price changes and the articulation of an energy policy, has resulted in a substantial adjustment. Between 1979-83 energy consumption increased by 2e6% while real GNP grew by 14.4%, indicating a considerable degree of energy conservation. The dependence on imported petroleum fell from 90% of energy supply in 1973 to 68% in 1982. This was achieved largely by expanding hydro- electric and geothermal electricity generation, together with a marginal role played by domestic petroleum production. 2.36 The three public agencies involved in the expansion of domestic fuel production were the National Power Corporation (NPC), the National Electrifi- cation Administration (NEA) and the Philippines Niational Oil Company (PNOC). In the period 1978-83 these organizations have been responsible for a substan- tial share of public investment expenditures, ranging from P 5.5 billion in 1978, to almost P 11 billion in 1983. Electricity generation facilities constructed by NPC accounted for 80% of the total, PNOC expenditures for 13% and the distribution activities of NEA for the remainder. Prior to the economic difficulties of late 1983, there were plans for substantial further expansions by NPC, especially of generating capacity averaging P 11-15 billion per year. However, these plans have been substantially scaled down because of a projected slower growth in demand and the shortage of investment funds. - 21 - 2.37 NEA continues to aim at universal coverage of all rural households with electrical service, which would require stepped up investment through 1990. This target is unlikely to be reached unless the financial performance of NEA and its borrowing member cooperatives can be improved. As part of the national diversification policy PNOC is in the process of diversifying its activities. The share of petroleum related capital expenditures will fall in the future, as coal and geothermal energy are expanded. Water Supply and Sewerage 2.38 While much remains to be done, this sector has made considerable progress in the last decade in making better services available to more of the population. This has been achieved within a complex institutional framework which does, however, respond to differing needs of the population. At the apex of the system is the National Water Resources Council presided over by the Ministry of Public Works and Highways (MPWH). The most important imple- menting organization is the Metropolitan Waterworks and Sewerage System (MWSS), which serves the larger population of the greater Manila area. At the next level, the Local Water Utilities Administration (LWUA) promotes the creation of Water Districts which serve the 700 medium-size cities and munici- palities. For rural areas, a third organization, the Rural Waterworks Development Corporation, has been created recently to provide a similar service for rural water supply systems. The institutional framework for the rural areas is still under review and there remain overlapping responsibilities. 2.39 Expenditures on water supply/sewerage investments almost quadrupled in real terms from 1978-82; the share in public investment went from 2% to 8% and in GNP from 0.1% to 0.5%. The P 4.4 billion spent substantially expanded the water supply coverage to 50% of the population. While MWSS accounted for 60% of the total expenditures, there has been a gradual shift of emphasis to smaller cities and rural areas. The ambitious plans for further expansion of facilities have already been affected by the current economic difficulties and there is now great uncertainty about those plans. 2.40 Some of the proposed future projects are large and will make a big claim on financial resources. These are Likely to be much reduced in the future in light of the shortage of finance available from government and foreign sources. This sector is one in which cost recovery practices have lagged behind the expans-ion of investment. There is scope for both more direct financing within the sector, coupled with the cost reduction that would flow from better operating efficiency. As with irrigation facilities (NIA) operating expenditures are out of line with capital expenditures, raising questions about adequate maintenance of the rapidly growing capital stock. Transportation 2.41 This sector was the largest in the public investment program in the mid-1970s. It is still important, but has dropped to second place to energy as part of the response to the oil price increases. Investments in transpor- tation rose from P 1.7 billion in 1978 to an estimated P 5.3 billion in 1983, averaging slightly over 1% of GNP per year. Almost 90% of these expenditures - 22 have been for highways and ports. Road maintenance expenditures have accoun- ted for a further P 1.0 billion a year. The priority given to highways corresponds to the needs for transport links for a population which is scattered throughout a number of different islands covering a large area. A major expenditure in recent years has been the development of the Manila Light Rail Transit system, at a cost of about P 4.5 billion. Education 2.42 The Philippine education system is large and extensive, with services provided by public and private institutions. In terms of coverage of the population, the country has been relatively successful. However, the continued high rate of growth of population places a heavy burden on the system. It now faces problems that tend to undermine the quality of education. Resources are scarce, and their distribution nationally is uneven; facilities are similarly unequally distributed and have tended to deteriorate because of the lack of resources. 2.43 The Philippine Government is committed to fulfilling its goal of providing a basic education to all of its citizens. Enrollment and participation rates in the elementary subsector remain high. On the basis of National Government expenditures, the total for education averaged 2% of GNP over the 1978-83 period and about 15% of total National Government expendi- tures. Funds for education come from both public and private sources. The National Government provides almost all of the elementary level services. At the secondary level, slightly more than half of all students are in public schools, and financing is shared between the national and local governments. 2.44 The government is pursuing a "building block" strategy in education, focusing initially on improvements in elementary education and continuing through the secondary and tertiary levels later in the decade. The elementary level Program for Decentralized Educational Development (PRODED), begun in 1981, includes teacher re-training, curriculum revision, textbook production and distribution, and expanded and improved facilities. 2.45 While the PRODED program for the elementary subsector seems well designed and implemented and detailed plans for the secondary program are underway, the financial implications of this staged approach to planning for education improvements deserve attention. The elementary education subsector currently receives the bulk of the Ministry of Education's funds and more than half of the total educational expenditures of the National Government. Clearly, even the most modest program for improvements in the other levels of education will call for significant additional expenditures, yet no financial planning for education as a whole has been undertaken. 2.46 Educational finance and expenditures will present a number of different problems for the government over the next few years. To address these problems, government should set in place a system of strategic and financial planning, whereby it can allocate resources according to a sector- wide plan, better define the public sector role in the secondary and higher levels, and determine the levels of private vs public financial participation. - 23 - Health 2.47 There are many indications of the improvements in the health status of the Philippines' population in the last decade. The provision of health services is shared by the public and private sectors, but government policy has shaped the general provision of services. The policy has focussed on a commitment to decentralized basic health services. The aim is to bring low cost health care to the whole population by the year 2000. At the present time, some 70% of the population has access to primary health care. 2.48 The provision of health-related services (including population and nutrition) involves a dozen central agencies with the Ministry of Health as the primary implementing body. The private sector is also crucial, providing about half the total doctors and nurses and running most of the hospitals. 2.49 National government expenditures on health, family planning, and nutrition rose from P 1.0 bilLion in 1978 to P 2.1 billion in 1983, an annual average growth rate of 10%. The share of GNP remained at about 0.5-0.6%. About half the total went for hospitals and clinical services, suggesting that expenditures do not yet fully reflect the policy of giving priority to primary health care. Current expenditures also account for 90 to 95% of total health expenditures. In addition, local authorities contributed about 5% of total health expenditures, rising from P 154 million in 1978, to P 268 million in 1982. When private expenditures are allowed for, it is estimated that total outlays for health in 1982 were about P 10.5 billion. Housing 2.50 The period 1978-83 was a very active one for the housing sector. While the production of housing is largely in the private sector, the govern- ment has become heavily involved in establishing a set of institutions to stimulate housing production by private builders for medium and high income families, and is directly providing accommodation for low income groups. In this sector special arrangements have been made, in the form of a payroll tax and employee contributions to provide finance to support an increased output. The government's own expenditures on housing rose from P 260 million in 1978 to P 2.3 billion in 1983. About half of these amounts went as contributions and transfers to the public sector bodies acting as the operational agencies of the government in the housing sector. 2.51 These institutions are under the jurisdiction of the Ministry of Human Settlements, which supervises their activities through a National Shelter Program Secretariat. There are three organizations concerned with production: the National Housing Authority (NHA), the Human Settlements Development Corporation (HSDC), and the National Housing Corporation (NHC). There are three financial institutions: National Home Mortgage Finance Corporation (NHMFC), Home Financing Corporation (HFC), and the Home Develop- ment Mutual Fund (HDMF). Finally, there is a Human Settlements Regulating Commission, which is the regulatory arm of the Ministry. (The functions of these institutions are discussed in detail in Annex H.) 24 2.52 The financial institutions are the most innovative and the most important. They were created to provide support for a secondary mortgage market, and the financing comes from a mandatory tax on employees, with a matching contribution from the employers. The proceeds are paid into a provident fund managed by HDMF, which then lends the proceeds to NHMFC. The funds are, in principle, used to support NHMFC's other borrowing activities to enable it to purchase primary mortgages, thus creating a secondary mortgage market. This mandatory contribution, or "PAGIBIG" Fund, raised P 1.2 billion in 1983, so that substantial sums are involved. 2.53 The institutional framework represents the establishment of a comprehensive national shelter policy aimed at raising the output of housing and making it more widely available down the income scale. In many respects it has been successful, in terms of stimulating housing production, encour- aging more lower cost housing and creating the capability to produce low cost shelter and upgrading. While private efforts are still providing the bulk of housing, which is itself a policy objective, the government provides, through NHA, about half of the annual output. By 1982 the impact of the activities of NHMFC was being felt in terms of refinancing mortgages, with a sharp increase in the number of units constructed and financed in 1983. 2.54 While the system, as established, is sensible, a number of serious problems are emerging. These problems are essentially financial and, if not addressed promptly, they will threaten the viability of the institutions, and thereby frustrate the achievement of the objectives. 2.55 The HDMF-NHMFC-HFC system was designed to increase the flow of long- term financing into the housing sector. It has demonstrated the possibilities for this, but largely by becoming the main source of finance, rather than facilitating loans through other channels. Other financial institutions have become content to act as primary originators of mortgages, passing them on immediately to the NHMFC. The net increase in financing has been, therefore, less than was hoped. More importantly the system is operating under a nega- tive spread, whereby the cost of NHMFC operations exceeds its earnings by about 7% (including operating costs). This will eventually exhaust NHMFC's resources unless the negative spread can be changed. 2.56 The second general problem that threatens the program is the impact of rising costs and the tendency of the program to be unable to meet the needs of the low-income groups. While some shift in emphasis has been made, only 27% of the government's planned 5-year program is targeted on the lower half of the income distribution. The secondary mortgage facilities of NHMFC have not yet been penetrated by the lowest income groups. There are also serious weaknesses in NHA's financial position which prevent it from being fully effective in its role as the main producer of lower cost housing. - 25 - III. FINANCING THE PUBLIC EXPENDITURE PROGRAM A. National Government Revenues Revenue Measures and Decline in Revenue Effort, 1978-82 3.01 The Philippines Five-Year DeveLopment Plan for 1978-82 envisaged a substantial increase in government revenues to finance the operational and development requirements of the pubLic expenditure program. National govern- ment revenues were expected to grow at an annual rate of 18% and the ratios of total national government revenues and national government tax revenues to GNP were to reach 17 and 15%, respectively. The Plan also focussed on the resource allocative and income distribution aspects of the taxation strategy. The main elements of the tax policies included a broadening of the tax base, increasing the progressivity in the tax structure, rationalizing the fiscal incentives system, reducing the dependence on the volatile inter- national trade taxation and improving the tax administration. 3.02 As against the target growth rate of revenues, which was set at 17% a year at the beginning of the Development Plan for 1978-82, the actual achievement seems to be 12%. Both the revenue and tax efforts have gone down during the period to about 11 and 10%, respectively, as against their Develop- ment Plan targets of 17% and 15%. The overall decline in the ratios of reve- nues to GNP is reflected generally in all the major components of revenues as shown in Table III.1 below. The structure of national government taxes has remained more or less unchanged during the last five years, with direct taxes contributing about one-fourth of the total taxes and the balance being equally divided between domestic indirect taxes and taxes on international trade (Table III.2). Nontax revenues have remained stagnant at the same time. 3.03 The decline in revenue effort is mainly due to the inelasticity of the revenue and tax structure. Raising the revenue and tax effort has been a longstanding objective in the Philippines. A series of discretionary measures in the mid-1970s, together with administrative improvements, succeeded in raising the tax effort from 9% in the early 1970s to 11.5% by 1978. The ratio of nontax revenues to GNP has been raised from 1.4% to 2% during the same period. Both tax and nontax revenues ratios have steadiLy declined since 1978 to the 1982 levels of 10.1% and 1.3%, respectively. As a result, a signif- icant revenue package is needed each year to keep the revenue ratios from falling (Table III.3). Thus, the revenue effort deteriorated sharply in 1981/82, when discretionary measures did not have a positive net revenue impact. The lower growth of revenues could be partly attributed to sluggish growth of the domestic economy and general slowdown in the international markets, which in turn has resulted in depressed revenue bases such as imports, corporate profits, and petroleum product consumption, particularly after 1980. The causes for the relative decline in ratios have also to be traced to deteriorating tax administration and poor collection effort. - 26 Table III.1: NATIONAL GOVERNMENT REVENUES 1978-83 (% OF GNP) Financial Actual Est. Program 1978 1979 1980 1981 1982 1983 1984 Total Revenues 13.5 13.4 13.1 11.8 11.4 12.0 12.0 Tax Revenues 11.5 11.7 11.5 10.3 10.1 10.7 10.6 Direct Taxes (2.8) (2.9) (3.1) (2.5) (2.5) (2.1) Domestic indirect taxes (4.3) (4.5) (4.0) (4.1) (4.0) (4.3) Taxes on Inter- national trade (4.4) (4.2) (4.4) (3.7) (3.6) (4.3) Others (0.3) (0.3) (0.2) (0.3) (0.3) (0.4) Nontax Revenue 2.0 1.6 1.6 1,5 1.3 1.3 1.4 Source: Statistical Appendix Table: 1.6a. - 27 - Table III.2: IMPACT OF REVENUE MEASURES 1978-84 (millions of pesos) Financial Estimated Actuals Est. Program 1978 1979 1980 1981 1982 1983 1984 Taxes on Income and Profit Petroleum service Contractorts income tax - - 123 - - - - Inventory gains tax on oil companies - - 448/a - - 650/a - Fiscal incentives to banking system - - -196 - - - - Personal exemptions of individual income tax - - - -300 - - - Amnesty tax - - - 395/b - - - Taxes on Domestic Goods and Services Sales tax revision 233 - - - - 100 - Specific tax on cigarettes - revision 91 - 293 - - 180 - Specific tax on petroleum products revision - 332 650 409 - - - Specific tax on liquor - revision - - 90 - - - - Forest charges - increase - - 200 - - - - Minerals - increase in royalty tax - - 175 - - - - Crude oil - ad valorem tax - - 400 - - - - Taxes on International Trade Customs duty in lieu of tax free imports 292 - - - - - - Sales tax on imports - restructuring 434 - - - - - - Import duty - modification - - - -410 - - Import duty surcharge - - - - - 1,970 - Nontax Revenue Fees and charges - Increase - - - - - - 600 Total /c 1,050 332 1,735 -301 - 2,250 600 Memorandum Item Revenue/GNP ratio 13.5 13.4 13.1 11.8 11.4 12.0 12.0 /a One time gain: tax on inventory gains of oil companies 7b One time gain: amnesty tax 7 Excluding one-time gains Source: Statistical Appendix Table 1.6b - 28 - TabLe III.3: NATIONAL GOVERNMENT REVENUES, 1978-82 (Ratios to Total, Growth Rates, Buoyancies) Percent Distribution Growth Buoy- 78 79 80 81 82 rate (%) ancy lb 1978-82/a 1978-82 Direct Taxes 27.0 24.0 23.9 24.5 24.6 10.4 0.7 Personal income 16.7 12.8 11.1 12.4 11.5 4.4 0c3 Corporate income 10.3 11.2 12.8 12.1 13.1 17.5 1.1 Taxes on domestic goods and services 31.9 37.6 35.7 36.9 36.1 14.4 0.9 Sales and business 11.8 15.9 16.4 17 .2 16.6 19. 1 1.2 Excise 20.1 21,7 19.3 19.7 19.5 10.5 0.7 Petroleum prod. 10.8 8.5 8.9 8.6 8.6 7.6 0,5 Alcohol prod. 2.5 2.3 2.3 2.9 3.6 21.6 1.4 Tobacco products 4e4 4.7 4e6 4.8 4.7 13.5 0.8 Taxes on Int'l Trade 38.2 36.0 38.0 35.7 36.1 10.8 0.7 Import 36.2 33.3 36.7 34,7 35.2 11.9 0.7 Export 2e0 2.7 1.3 1,0 0.9 -14.2 -0.9 Other taxes 2.9 2.3 2.3 2.9 3.3 2.1 1.3 Total taxes 100.0 100.0 100.0 100.0 100.0 12.2 0.7 (billion pesos) (20.4) (26.0) (30.5) (31.4) (33.8) Nontax revenues (billion pesos) 3.6 3.5 4.2 405 4.4 6.5 0.4 Total Revenues (billion pesos) 24.1 29.5 34.7 35.9 38.2 11.5 0.7 /a In nominal terms, calculated by method of least squares. 7i With respect to GNP. Source: Statistical Appendix Table: 1.6a. Revenue Measures and Stabilization of Revenue Effort, 1983-84 3.04 The Five-Year Philippines Development PLan, 1983-87, continues to emphasize long term tax reform goals of improving the efficiency, equity and elasticity of the tax system. Revenue policies and strategies focus broadly on the same issues as broadening of the tax base, injecting more progressivity into the indirect tax structure, and minimizing dependence on volatile foreign trade taxation. More specifically the Plan anticipates measures to provide - 29 - the smooth implementation of modified income taxation, the realignment of tariffs and other fiscal incentives to promote industrial and financial efficiency, the adoption of more ad valorem taxes to ensure progressivity, and the improvement in revenue administration. 3.05 Revenue and tax ratios are predicted to remain under constraint in future and hence are expected to slightly decline to the level of 10.5% and 9.3%, respectively, by 1987. The scenario projected in the Plan document appears realistic in tax effort numbers but inconsistent with the broad objectives of improving the eLasticity of the tax structure. As such, the original predictions have been revised upwards and Government is now aiming at a revenue ratio of 12.0% in 1984. Although the Plan scenario has now been substantially outdated, no alternative scenario has replaced it, as the Government has been preoccupied with short-term management. Some of the recent measures like import surcharges provide only a temporary boost to revenues, and since the Government is committed to removing these surcharges by 1985, there will be a revenue gap which will need to be filled by new measures at that time. 3.06 Several efficiency aspects of taxation have also been addressed under the Government's structural adjustment program which deal with tariff reform, fiscal incentives reform, realignment of indirect taxes and taxes on petroleum products. In order to reduce the effective protection rates, a realignment of the tariff structure is underway with selective increases in below average tariff rates and the reduction of peak rates. A series of measures are also planned in sales and excise taxes to align them with the new tariff and trade regime. These are intended to eliminate the protective features of the current system of indirect taxes, increase its elasticity, simplify the rate structure, and improve the administration. Review of Major Revenue Categories (a) Taxes on income and wealth: 3.07 One of the reasons for the low elasticity in the Philippines tax structure mentioned above could be the low proportion of direct taxes, which are potentially the most income elastic of all taxes. In general, they have remained at about 25% of the total during 1978-92, which is lower than the average of 30% for other developing countries.3 What is of more concern is a significant decline in this ratio for the Philippines from about 34% during the period 1972-76, which is mainly because of a substantially lower rate of growth of personal income tax collections. While total tax collection grew at an annual rate of about 12%, personal income taxes grew at only about 4%. This is also reflected in the elasticity of personal taxes to personal income of lower than 0.3 for the period 1978-82. Part of the explanation could very well lie in the growing level of personal income tax evasion. Recently the Government introduced an important reform in direct taxation, namely, a modi- fied gross income approach in personal income taxation, which allows deduc- 3/ Alan A. Tait, et. al., "International comparisons of taxation for selected developing countries 1972-76." IMF Staff Papers, March 1979. 30 tions only for personal and additional exemptions thereby enlarging the base. This tax reform package is also likely to bring about a redistribution of the income tax burden from the lower to the upper end of the income scale, mainly because it disallows deductions frequently used by upper income groups. However, its total impact on revenue collection may be only marginal and it would have some difficulties of implementation in the transition period. 3.08 Corporate income taxes are found to have higher elasticity of about unity with respect to the corporate income base, suggesting thereby that at least taxes from bigger corporations have been more income elastic. However, even corporate taxes have stagnated since 1980. Main reasons for this poor performance include financial crisis and resulting financial market slump in the early eighties, liberal fiscal incentives to financial institutions and export industries, amendments in personal exemptions of income taxation, and poor performance of some business enterprises. Moreover, the existing range of continued exemptions and deductions in the case of more profitable business enterprises reduce corporate tax collections to a considerable extent. Other measures which have adversely affected these tax collections are: exemptions from capital gains tax, development tax, tax on accumulated profits, tax on personal holding companies, and gross receipts tax on dividends. Even the recent comprehensive reform of the industrial incentives system is not likely to have any significant effect on the revenues because the Government has estimated that the revenue impact of the new investment incentive act will be approximately equal to that under the current system. (b) Domestic indirect taxes 3.09 The only major component of taxes which, has shown a growing buoyancy during 1978-82 relates to taxes on domestic goods and services. Revenues from business taxes have grown at the highest rate of 19% a year. This is mainly due to a high nominal growth rate of industrial and services sectors of the economy and also partly due to better administration of sales and business taxes in comparison with that of the direct taxes. Restructuring of the sales tax system, which led to revision of percentage taxes and expansion of the tax base for automobiles, also contributed to larger revenues in this category. Similarly, periodic adjustments in specific taxes on tobacco, alcohol, and petroleum products have led to a high buoyancy and increased collection from these taxes, except in the case of petroleum products where the tax collection stagnated because of the reduced consumption which more than offset the increase in the rate of taxation. The measures to convert these specific taxes to an ad valorem basis will undoubtedly improve the elasticity from these sources which account for a substantial portion of the total taxes on domestic goods and services. (c) Taxes on internationaL trade 3.10 Despite the intended objective of reducing the dependence on taxes on foreign trade, these taxes have continued to provide an increasing share of the total taxes, averaging nearly 37% during 1978-82. However, the government's current plan of a major tariff reform involving a reaLignment of the tariff structure and liberalizacion of over 70% of existing import - 31 - restrictions has affected the buoyancy of import taxes substantially since 1980. The buoyancy of import duties and taxes with respect to import values, which had been well above unity until 1980, had suddenly dropped to 0.3 by 1982. This is partly because of a shift in the composition of imports to the relatively lightly-taxed raw materials and intermediate goods. This decline in import taxes is also partly explained by the ongoing recession, worsening balance of payments position, high interest rates and weakening of the foreign exchange value of the peso. The Government is monitoring the revenue impact of the recent tariff reform closely under its structural adjustment program. Export taxes remain a small portion of the total taxes on international trade and tax collection from export duties has actually declined in this period, because of the weak markets for the Philippines' primary product exports and consequent suspension of the export duty on a number of products. As a result, buoyancy of taxes on international trade with respect to GNP has been low at about 0.7. (d) Nontax revenues 3.11 Nontax revenues,4/ which have generally provided about 15% of the total revenues in the past, have remained stagnant during the period 1978-82 and declined relatively to less than 12% in 1982. A significant share of these revenues came from fees and charges collected by various government offices which have not been adjusted for inflation, and therefore declined in real terms. For example, their share in total nontax revenues fell from 72% in 1978 to 48% in 1982. This was more than compensated by increase in inter- est income which maintained the level of nontax revenues in this period. These two categories together have contributed over 86% of the total nontax revenues in 1982. As compared to other countries of the region, the Philip- pines' nontax revenues to GNP ratios, are lower than those f7r Korea and Malaysia but higher than those for Indonesia and Thailand.5 The Government has recently authorized all offices to revise their fees and charges, but action by the various agencies is rather slow and the actual revenue collec- tion in the first year, 1983, may be only 10% of the total originally expected. 4/ These include, mainly, the collection of fees and charges by various ministries, offices, agencies, and commissions of the national government including the Supreme Court and Constitutional bodies. The fees and charges are generally charged on the basis of cost recovery policy. These revenues also include interest incomes, shares in profits of government corporations, grants and other miscellaneous earnings. Of these, grants have accounted for a small share of about 6% in the last few years, whereas profits of government corporations have been steadily declining to negligible amounts in recent years. 5/ The ratios of nontax revenues to GNP for the period 1980-82 are: Philippines - 1.5; Indonesia - 0.7; Korea - 2.1; Malaysia - 4.4; Thailand - 1.2; Kenya - 4.3; Sri Lanka - 1.1 (See Statistical Appendix Table 1.6.d.) 32 - Summary Assessment 3.12 Although the ratios of taxes to GNP have to be judged in relation to both the importance of the public sector and the performance of the private savings in the economy, they appear to be 3ow compared to the average tax ratio of 16% for 63 deveLoping countries,6 As compared to other countries of the region and some other developing countries fcr which data were readily available for a more recent period, 1980-82, the Philippines' tax ratios appear to be the lowest of the group.7 3.13 A more sophisticated international tax comparison, using a compari- son between the "predicted" tax ratios from the taxable capacity equatio 7s and the actual tax ratios, uses international tax comparison (ITC) indices.8 Here again, in an international comparison of 47 developing countries, the Philippines ranked 41st and has a below-average ITC index. Whether we compare tax ratios, tax elasticities or buoyancies, or international tax comparison ratios, the Philippines appears to come out as a low performing economy on taxation matters. What is of more concern is the declining direct taxes to GNP ratio, which is also the lowest in an international comparison. 3.14 Both buoyancy and elasticity of national government revenues with respect to GNP have never been historically high in the Philippines. If any- thing, estimates for the period 1976-82 indicate a slight fall in the average tax buoyancy (Table III.3) and tax elasticity to 0.7. Disaggregation of the elasticity analysis with respect to the components of revenue is fraught with the problems of exact measurement of the revenue bases and separation of the impact on revenues due to discretionary measures. As such, these results should be interpreted with caution. The elasticity of domestic based tax revenues with respect to GNP was 0.8 while that of import duties and taxes with respect to import values was slightly less than unity. 3.15 Major revenue legislation since 1978 does not seem to have any significant impact on revenue collections or buoyancies as mentioned earlier, partly because some of these measures like t-ariff restructuring and gross income taxation were expected to have an initially decelerating impact. Similarly, measures like amnesty tax were expected to produce only a one time 6/ Alan A. Tait, et. al., "International comparisons of taxation for selected developing countries 1972-76". IMF Staff Papers, March 1979. The highest, middle and lower groups have average tax ratios of about 26, 15 and 9%, respectively. In comparison, average tax ratios for 23 developed countries in Europe and North America amounted to 26%. 7/ The average tax ratios for 1980-82 for selected developing countries are: Indonesia - 23.4%, Kenya - 20.5%, Korea - 17.4%, Malaysia - 24.0%, Sri Lanka - 17.0% and the Philippines -- 10.6%. See Appendix Table 1.6.e. 8/ Alan A. Tait, et. al. - op. cit. The international tax comparison ratios, which compare the potential tax ratios, also indicate that the Philippines collects much less taxes than the average developing country with the Philippines economic characteristics. See Appendix Table 1.6.f. - 33 - effect. Furthermore, general economic slowdown in domestic as well as foreign economies, financial crisis in local markets and possible laxity in revenue collection contributed to poor tax performance in the past five years. At the same time, the Philippines tax system has also become more regressive with a further decline in the share of direct taxes although there have been some recent measures which might improve the progressivity to some extent. In general, the Government has done better on allocative efficiency than on revenue yield and distributional equity. Need for a Revenue-Raising Strategy for the Medium-Term, 1985-87 3.16 In order to increase the tax ratios and improve the elasticity of the revenue structure in the medium term, a broad strategy will have to address four major and chronic problems: (a) low and declining revenue and tax effort, (b) structural imbalance reflected in heavy reliance on indirect taxes, (c) continued and rigorous review of generous incentive systems in various sectors, where the revenue losses quite often outweight the benefits intended to accrue to the economy, and (d) weaknesses in tax administration and tax collection, especially in the areas of direct taxation and taxes on international trade. While many of the recent measures, such as the reform of the industrial incentives system under the Government's structural adjustment program, are in the right direction, what is needed is a medium-term revenue- raising strategy based on comprehensive studies of various components of the fiscal system. Some of the relevant studies are being undertaken by different agencies independently and some reforms of the industrial incentives system are underway. What would also be useful is an integrated and cohesive approach to tax reforms, including rationalization of fiscal incentives in all areas and overall improvement in tax administration. 3.17 Tax reforms in two major areas of indirect taxation, namely, realignment of the tariff structure, and comprehensive reforms of the indirect tax structure are currently under implementation under the Government's struc- tural adjustment program. Similarly, reforms of modified gross income taxa- tion and increases in fees and charges are already under enforcement. It is necessary to integrate these measures into a broad revenue raising strategy as mentioned above. With these measures in action, three other areas deserving immediate attention for raising revenues and improving efficiency are: (a) improvements in tax admininstration and collection, (b) rationalization of the incentive system, and (c) reexamination of the corporate tax structure. 3.18 Improvements in tax administration and collection procedures are particularly effective in income tax and import duties areas. The Government has already initiated the process by using computer technology for management of the information system. It would be useful to study the causes and extent of tax evasion and provide incentives to tax administration personnel. The Government is also currently studying the impact of incentives provided by the Board of Investment for various industries. However, the recent reforms should form a part of the comprehensive review of rationalization of the entire incentives system. Finally, there is scope for improving the income tax collection through reexamination of exemptions and deductions from business income. Most of these reforms couLd be undertaken without raising the rates of taxation which might be difficult in the present adverse circum- 34 - stances. Nevertheless, a comprehensive review of the entire revenue system at this stage would provide a valuable guidance to reforms in the longer run. B. Government Corporation Resourc:e Mobilization 3.19 The widening of the investment savings gap of the government cor- poration sector to more than 4% of GNP during 1980-83 was an important factor in the widening of the public sector deficit to an unsustainable level. The increase in government corporation investment has been discussed earlier (Chapter II). As indicated in Table III.4, government corporation internal cash generation increased from about P 900 billion in 1978 to about P 2.4 billion in 1982. The ratio of internal cash generation to investment rose from 13% in 1978 to 16% in 1980, and then fell back to 13% in 1982. This low self-financing ratio has made the government corporation sector heavily dependent on government contributions and borrowings, most of which have been external borrowings, for the financing of its investment program. Tariffs have been generally low and the collection performance of those government corporations which engage in lending (i.e., NEA, LWUA, and NHA) has been generally poor. Table III.4: INTERNAL CASH GENERATION OF GOVERNMENT CORPORATIONS Financial Actual Est. Program 1978 1979 1980 1981 1982 1983 1984 1985 Energy sector NPC 308 384 794 985 829 1,691 3,001 4,143 NEA 11 13 5 4 3 4 27 7 PNOC 359 398 476 552 699 750 1,095 1,191 Transportation sector PPA 122 144 134 146 175 226 225 215 PNR -9 -27 -8 -29 -38 -6 -18 0 MMTC -12 -28 -13 1 26 6 28 33 LRTA - - - 25 0 -35 -0 -103 Water supply sector MWSS 85 171 185 244 304 298 379 529 LWUA 7 8 10 3 10 -15 -4 -3 Other sectors NIA 26 -5 47 -88 9 64 -55 -100 NHA - 8 12 17 11 14 18 15 NDC -1 -1 -1 81 413 134 -21 11 EPZA -1 -1 -1 21 21 32 6 11 Total 896 1,065 1,631 1,939 2,431 3,018 4,687 5,941 Source: Statistical Appendix Table 1.11. - 35 - 3.20 The Government has recognized the need to improve the financial per- formance of the Government corporation sector. For example, the Government's Economic Report prepared for the 1983 Consultative Group meeting stated that: "To better allocate resources to more pressing and basic needs and to improve the efficiency of public investment, the Government is stressing the review of resource mobilization and management in public corporations, includ- ing budgeting procedures, operational efficiency, and potential for greater self-financing through internal cash generation." There remains a need to translate these sound general principles into a more specific plan for improv- ing the sector's financial performance. Efficiency and equity considerations suggest that government corporation internal cash generation offers propor- tionately greater scope for additional resource mobilization (in relation to current levels) than tax revenues. As indicated in Table III.4, the government corporations are projecting substantially higher levels of internal cash generation in 1983 and 1984. However, some of these projections do not reflect the devaluation of October 1983, which will increase the operating expenses of the corporations, and the cost of interest payments denominated in foreign currencies. Following are some comments on the financial performance of some of the major corporations. 3.21 A study of the National Power Corporation's tariffs in 1979 found that, at that time, the tariffs were about 30% below the levels indicated by economic efficiency criteria, i.e., the long run marginal cost of electric power supply. Tariffs have also been low from the standpoint of resource mobilization, inasmuch as NPC's rate of return has been 5% or less and its contribution (after debt repayments) to the financing of its investment program was negligible during 1978-82. However, beginning in mid-1982, NPC has considerably improved its financial performance, with the following measures: (a) implementation of seven quarterly rate increases, of 0.75 centavos/ kWh each, beginning in mid-1982 and to be completed end-1983; (b) an additional 10% rate increase in February 1983; (c) a Fuel Cost Adjustment increase in July 1983, reflecting its upward adjustment in fuel oil prices arising from the Government's decision to abolish the petroLeum product subsidy and cease insulating petroleum product prices from the peso depreciation/devaluation; (d) a series of foreign exchange adjustments arising from the devaluation of October 1983. As a result of these increases, the average rate has increased from 46 centavos/kWh at end-1982 to 76 centavos/kwh at end-1983, an increase of 65%. As a result, NPC achieved in 1983, for the first time its targeted rate of return of 8% on net fixed assets in operation. 3.22 For the future, NPC's internal cash generation is expected to increase not only because of the the higher tariffs adopted during the course 36 of 1983, but also because of the increasing share of electricity generation arising from cheaper non-oil energy sources. NPC'S generation plant and energy sourcing mix have changed substantially since the previous tariff study in 1979, and the relationship of its present tariffs to present economic efficiency considerations is not known. However!, the Government has recently commissioned a study, scheduled for completion in 1984, which will cast light on this issue. 3.23 The products marketed by the Philippine National Oil Company and its subsidiaries are petroleum products, geothermal steam, and coal. Government pricing policy for these products has been freer of underpricing distortions than in the case of electricity, with the result that PNOC has displayed better financial performance indicators than NPC. For example, in 1982 PNOC's rate of return on equity was 14% and its self-financing ratio was 53%. The Government has commissioned a comprehensive study of petroleum product taxing and pricing; however, any adjustments arising from this study are likely to be reflected in taxes and national government revenues, rather than PNOC's take which is regulated by the Board of Energy. Geothermal steam is priced in such a way as to yield a rate of return on investment of 15%. Coal is priced in such a way as to yield an adequate margin for mining operations, while at the same time providing sufficient financial incentive for energy-intensive indus- tries, such as cement plants, to convert from fuel oil to coal. 3.24 With the exception of the Philippine Ports Authority, the financial performance of the government corporations in the transportation sector has been somewhat problematic: (a) PPA has presented a relatively healthy financial performance in 1982 with an 8% rate of return. The 22% increase in revenues in 1982 reflects a 9% increase in the volume of cargo handled and a 13% increase in port charges. As its turnaround time decreases due to improvement projects, PPA has prepared a plan for increasing port charges by 60% in 1983 and another 60% in 1985. If approved, PPA would have a creditable self-financing ratio of 25-30% during the next few years. (b) PNR's losses have been increasing in recent years. New management was appointed in May 1983 which intends to reorganize the company, introduce financial systems and controls, improve its operational efficiency by rehabilitating track and improving maintenance, achieve cost reductions, and raise fares. Regarding the latter, it should be noted that competition with the adjacent highway transport system does not allow scope for large tariff increases, and while losses can and should be minimized, the prospects for PNR to earn a profit appear remote. (c) MMTC reported a positive income of P 2.2 million in 1982, for the first time after a number of years. Fares are regulated by the Board of Transport and have to be consistent with those in the private sector, so that, despite efforts to improve operating efficiency, there do not seem to be any immediate prospects of generating sufficient funds internally to finance the company's planned investment program. -37 - (d) The operation of the Light Rail Transit Authority system in Metro Manila is expected to start some time in 1984. With a uniform passenger fare of P 1.75 and an estimated 133.6 million passengers in 1985, growing at 7% per annum, no net income from operations is expected before 1991. Furthermore, on the basis of these assump- tions, the cumulative cash balance is expected to become positive for the first time in 1994. In the meantime, the need for cash infusion by the government, both in order to finance project completion and to cover initial operating losses, will be substantial. 3.25 The Manila Waterworks and Sewerage System has enjoyed a positive and increasing net income and cash flow position over the last five years. Its internal cash generation rose from P 87 million in 1978 to P 296 million in 1982, a 240% increase. Nevertheless, the very rapid expansion of MWSS's investment program, which increased more than tenfold during the same period resulted in a decrease of its self-financing ratio to 26% in 1982. In the face of a growing investment-savings gap, tariffs were adjusted upwards in July 1982 and further again recently, after cabinet approval, when water charges will go up by 4.5 centavos per cu m of water. Substantial tariff increases of 31.5 and 24.4% have been planned for 1984 and 1985, respectively, which are expected to lead to a self-financing coverage ratio of about 40%, in spite of the continuously expanding capital expenditures program. 3.26 The financial situation of the Local Water Utilities Administration depends on the performance of and loan recovery from the member Water Dis- tricts. LWUA is presently confronted with a liquidity problem, stemming from the inability of water districts to meet their obligations. Internal cash generation in 1983 is expected to be negative. The remedial actions that LWUA is set to take in order to remain liquid and solvent are to raise lending rates to water districts, make vigorous collection efforts, adopt cost cutting measures, and review very carefully the terms on all new loans. Management is committed to the objective of attaining financial self-sufficiency and independence from Government support by 1987, implying a reduction in LWUA's planned investment program. C. Financing Public Expenditures 9/ 3.27 The consolidated public sector deficit as a percentage of GNP increased from 3.1% in 1978 to 5.8% in 1982 mainly as a result of the growing investment-savings gap of the government corporation sector. In fact, if it were not for these large deficits of the government's corporate sector, public sector accounts would have shown a significant surplus balance for the period 1978-82. As such, it would be useful to examine the financing pactern of government corporations. 9/ Refer to the total of national government expenditures and expenditures of major nonfinancial government corporations. 38 3.28 Government corporations have internally generated only about 14% of the resources required to finance their rapidly rising investment programs during 1978-82. This inadequate level of government corporations' savings created considerable pressure on alternative sources of financing, such as government revenues and borrowings. Such a pressure also imposed severe strains on the budget deficit, domestic credit creation ceiling and balance of payments, given that it coincided with a period of recession, declining fiscal effort, and deterioration in the country's terms of trade. The low self- financing level of government corporations can generally be attributed to low tariffs, poor collection performance, and large-scale investment programs with long gestation periods. There is scope for some flexibility in raising tariffs and government corporations are projecting for the future both improved profit margins and higher levels of self-financing. If fulfilled, these developments should alleviate the pressure that government corporations have been imposing on the budget deficits and current account balances. 3.29 Foreign borrowings which covered about 60% of the total public deficit during 1978-82, dominated the financing cf the public sector. Nearly two-thirds of these total foreign borrowings were for the government corpora- tions which in turn contributed to over 50% of financing of the investment program of government corporations. In addition, the National Government acts as an intermediary and transforms foreign borrowings into transfers to the government corporations in the form of equity contribution or operating subsidies. In this process, the government also bears the debt service charges and the foreign exchange risk involved. As a result, the total impact of government corporations' deficits on the balance of payment and the size of the foreign debt is considerably larger than their direct nominal borrowings. Table III.5: FINANCING DEFICITS OF THE PUBLIC SECTOR /a Actual Estimate 1978 1979 1980 1981 1982 1983 (billion pesos) Deficits National Government 2.2 0.3 3.4 12.1 14.4 6.5 Government Corporations/b 6.2 7e5 8,5 10.9 13.1 14.1 Total 8.4 7.8 11.9 23.0 27.5 20.6 Financing Foreign (net) 5.1 9.7 8.2 13.6 10.1 13.6 (for corporations) (3.0) (6.7) (6.2) (7.6) (7.3) (8.0) Domestic /c 3.3 -1.9 3.7 9.4 17.4 7.0 (for corporations) (3.2) (.8) (2.3) (3.0) (5.8) (6.1) /a Excludes local government and social security system. /b Covers the major nonfinancial government corporations only. /c Includes changes in cash balances for the national government. Source: Statistical Appendix Tables 1.1 and 1.9. - 39 - 3.30 Up to 1980, financing from domestic sources, -/ had not been used extensively by either the National Government or the public corporations. Although the National Government used this source to some extent in 1981-82, largely through the banking system, government corporations seem to have relied mainly on foreign sources as mentioned above. While the National Government was able to substantially reduce its deficit in 1983, from P 14.4 to 6.5 billion, the deficit of the corporations actually expanded, and the corporations made greater use of both foreign borrowings and domestic credit in that year. 10/ These cover many items such as use of cash balances, borrowings from banks and other institutions, changes in working capital and trade credits. 40 - ANNEX SECTORAL EXPENDITURE PROGRAMS A. AGRICULTURE Government Policy in Agriculture 1. The main emphasis of the Philippines development strategy since World War II has been industrialization, first as an import substitution exer- cise and subsequently (after 1980) as an exporter. In this context agricul- ture has implicitly played a supporting role in the economy by providing foreign exchange, producing inexpensive food and providing domestic financial and non-financial resources for industry. Explicit government objectives in agriculture were to attain self-sufficiency in rice and corn and to maintain stable (and cheap) domescic food prices. Despite the government's somewhat benign neglect of agricuLture, performance during the 70s was quite good by international standards, although rural poverty appears to have increased. Owing to the emphasis of rice self-sufficiency, mnajor expenditures in agricul- ture have been in irrigation investment and credit programs in rice growing areas. Institutional Framework 2. Within government responsibility for agriculture is divided among a number of different ministries and agencies. Because of the large number of agencies, the coverage in this report is necessarily a partial one. With regard to the three agencies reviewed here, the Ministry of Agriculture is primarily responsible for policy and planning concerning crops and livestock, for coordinating applied research and providing extension services, carrying out plant and animal breeding, cooperative development and soil testing. The Ministry of Agrarian Reform is charged with the country's land reform program, including legal aspects of land titling and development of new settlements. The National Irrigation Administration is an autonomous agency of corporate structure which develops, operates and maintains all national irrigation schemes in the Philippines and develops all communal ones before they are turned over to farmer associations. Other major agencies not discussed here include: the Ministry of Natural Resources (MNR), the National Food Authority (NFA), the Philippine Coconut Authority (PCA), the Philippine Sugar Commission (Philsucom) and the Fertilizer and Pesticide Authority (FPA). Important subsidies to agriculture are also Tmde available through government intervention in the credit system.1 3. Ministry of Agriculture. In accordance with the government's policy of decentralizing services, MA created 12 regional offices in 1980 and changed its operating bureaus into staff bureaus. However, practical implementation 1/ Philippine Rural Credit Review (Report No. 4117-PH) and Philippines: Agricultural Pricing and Marketing Policy (draft). - 41 - of the reorganization has been slow in coming. Support for agriculture in the Philippines was originally the responsibility of separate autonomous agencies handling crops, livestock, soils, etc. Even after the 1980 reorganization, these agencies retained separate budgets which were outside the responsibility of the Minister and his financial staff. In 1983 the MA budget from MOB consolidated for the first time appropriations for all bureaus and associated agencies. Despite the consolidation of the appropriation, MA still does not have a centralized accounting staff which aggregates data on actual expendi- tures by "subordinate" bureaus and agencies. 4. MA's major programs are crop and animal extension services, research, plant and livestock breeding, disease control, cooperative estab- lishment and soil testing. Of MA's total staff of 24,000, the largest number (approximately 13,000) is in extension work. Although the ratio of extension workers per farmer in the Philippines is relatively favorable for a developing country (approximately 1:300), the impact of their activities leaves much to be desired. A particular constraint for these workers is the apparent shortage of funds for travel to the farm site, lack of training and slow dispersion of technical packages. In view of the numbers of staff, MA is one of the Largest line agencies and has a greater nationwide presence than most. 5. Ministry of Agrarian Reform. By budget and numbers of staff, MAR is a relatively small ministry. By its enabling legislation, 90% of its staff must be posted outside Manila. Most of these staff are employed at settlement sites, largely in Mindanao. MAR's financial records are consolidated and are without associated agencies. As a result, financial data available to the MAR management is more readily available than in the case of MA. Much of MAR's work involves coordinating the delivery of services of other line agencies at its settlement sites. In this context budget data are somewhat deceptive, as actual amounts for capital investment in the settlements are included under budgets of other line agencies. No consolidated statement of these expenditures is available. 6. National Irrigation Administration. Through 1963 NIA was essen- tially an operating division of the Ministry of Public Works. When it was established as a separate corporation, it retained some of its ministerial character. For instance, although autonomous, NIA was not responsible to amortize its foreign loans before 1982. These borrowings remain on the books of the national Government and are passed to NIA cost free. (NIA cannot borrow domestically.) Similarly, the capacity to set water charges was retained by the national legislature, where it remains, and the government auditor has instructed NIA not to apply depreciation to its assets. Moreover, the government auditor certifies NIA's accounts on an obligation basis rather than a cash basis. Given the long processing time to credit reimbursements of foreign lenders, the resulting lag distorts NIA's published accounts, especialLy its cash flow. For instance, at present NIA's sources and uses statement underrepresents the actual foreign exchange inflow to the country as a result of its operations. 42 Public Expenditures on Agriculture 7. Real resources budgeted for agriculture remained essentially constant from 1978 through 1982; and then, owing to the overall financial situation, dropped precipitously to 50% of previous levels. Expenditures in real terms through 1987 are expected to decline further, especially as the budget for new irrigation works is pruned drastically. Total funds for agriculture rose somewhat from 1978 to 1982 owing to contributions of foreign lenders to the sector's capital investment program (mostly NIA). Real current expenditures actually decreased by 6% from 1978 to 1984 and are projected to decrease further through 1987. 8. Public Expenditures 1978-82. The high point of the governmentts budgetary flexibility was 1982. This was the last year the government was able to pursue its counter-cyclical policy of spending into the world's' economic downturn. In this context, 1982 is a watershed marking the last year of what could be called unfettered budgetary allocations. In the five year period (for the three agencies under review) nominal budgetary counterpart amounts for agriculture rose from P 1.5 billion in 1978 to P 2.5 billion in 1982. Total flows to agriculture (i.e., including internally generated funds and foreign loans) rose from P 1.8 billion in 1978 to P 3.6 billion in 1982. Whereas the domestic counterpart funding was up 66% in nominal terms, uses were up 100%. The difference between the two was made up by increased flows from foreign lenders (mostly through NIA and mostly the IBRD). In real terms (1972 pesos) counterpart resources for agriculture rose 3.9% over the period. Total expenditures in 1972 pesos in agriculture, however, rose by 24%. The difference is apparently explained by increased disbursements by foreign lenders, although, given data problems, this is not fully demonstrable. Table A.l: AGRICULTURE: SUMMARY STATEMENT OF CAPITAL AND RECURRENT EXPENDITURES, 1978-1987 (Million Pesos) Year Recurrent Capital Total 1978 807 1,116 1,923 1979 747 733 1,480 1980 746 1,953 2,399 1981 1,108 1,358 2,466 1982 1,208 2,440 3,648 1983 1,080 2,656 3,736 1984 1,170 2,890 4,060 1985 1,203 3,005 4,208 1986 1,249 3,081 4,330 1987 1,292 2,918 4,210 Source: Annex Table 3.6 - 43 - 9. Measuring the outputs of this investment is more tentative than accounting for the expenditures. Expenditures by program are not available nor are the quantifiable outputs of such programs. First, it is not possible to quantify many of the outputs of MA and MAR programs. Results of research and breeding programs are not available in a rigorous fashion and little is known about the effectiveness of extension workers fielded or frequency of farmer contact. Second, insofar as physical works under MAR and NIA are concerned, the implementation period is sufficiently lengthy that matching annual capital expenditures with annual amounts of hectares brought into settlement or irrigation presents a skewed picture. The latter is particu- larly the case for NIA where hectares irrigated may lag seven years after beginning construction of large national systems. Moreover, palay output is as much affected by on-farm technologies and number of croppings as it is by new hectares irrigated. 10. Over the past five years the real focus of MA attention has appa- rently been its internal organization. Over the period expenditures rose 74% in nominal terms and 9.5% in real terms. Most of the real increase was allo- cated to capital and equipment expenditure associated with establishment of Regional offices and support for extension. Unfortunately, data on the work of these extensionists are not available although there are anecdotal and quantitative indications that monies for travel and overheads have been under- funded in relation to need. 11. MAR's budget averages only about 20% of MA's, and the pattern of change is significantly different. Although up nominally 4% over the five- year period, its real budget decreased by 33%. Moreover, whereas current expenditures rose slightly in real terms, capital expenditures decreased precipitously. It appears that after an initial burst of support for land reform programs, the priority of MAR's work has diminished. The proportion of MAR's outlays funded by foreign sources also dropped off steeply reflecting the fact that earlier USAID programs were phased out. Expenditures under the IBRD-financed settlement program did not compensate for this, especially as much of the settlement's capital expeditures were in the budgets of other line ministries. Reflecting the fact that most new settlements are in Mindanao, MAR's expenditures are concentrated there. MAR is now administering a total of 43 settlements covering 717,000 hectares and 50,100 families. 12. NIA's financial management has been reasonably effective. This, combined with the high national priority placed on attaining self-sufficiency in rice, means that NIA has been rather favorably treated in the allocation of budget resources within the agricultural sector. Use of local counterpart funds by NIA rose from P 820 million in 1978 to P 1,459 million in 1982. This represents an increase in nominal terms of 78% and real terms of 11.5%. In addition, over the five year period NIA raised its operating income from P 49 million to P 88 million and mobilized a total of P 1.4 billion of external resources. (Externally generated funds are, as noted earlier, on government account.) Cumulative hectares of irrigated rice land rose from 464,000 to 506,000 and palay output grew from 2.014 mt to 2.690 mt. In this regard, however, it is important to note that the really large gains in hectares serviced and palay output are expected in the latter 1980's when large schemes 44 such as Magat and Chico are fully on stream. Most NIA expenditures (75% over the five years) were in Luzon. It appears that NIA's allocation for system maintenance and operation have been inadequate. Wi.der normal conditions one would expect the ratio of capital to recurrent expeniitures for an agency such as NIA would be 1:1. Even in a period of extensive construction this should not rise higher than 2:1. For NIA the actual ratio is never lower than 5:1 and it has been as high as 11:1. 13. Prospective Public Expenditures. Strategic operational and finan- cial planning for the next five years is very weak. Even in the case of NIA, which does prepare such a plan on a rolling basis, the emphasis is advocacy planning in order to obtain budget resources rather than realistic planning for financial management purposes. As a result, five year projections as presented in Table 3-5 include elements of hope and expectation as well as realism. Indeed, the current austere climate has already resulted in a cut of NIA's budget to P 480 million for 1984. The discussion of each of the agencies which follows will highlight which expectations of the future are realistic. 14. None of the three agencies under review proposes (even in the absence of budget constraints) any major new initiative through 1987. MA's prospective planning is probably weakest of the three. The broad outline of MA's operations through 1987 is to halt staff growth (perhaps, even cutting back marginally) and to build the infrastructure necessary to support its regionalization and extension staff. These intentions are probably reasonably realistic. Staffing is not a constraint in terms of numbers, although the quality of service offered is. Some improvement of services could be attained by improved physical infrastructure, although allocations for travel, training and support are probably more important. Investment in civil works for regionalized offices is also warranted. MA's key constraints are not financial, but management and policy planning. 15. MAR's current five year plan forecasts growth in both recurrent and capital expenditures. This growth is directly related to a new settlement beginning in 1983, financed by the German government and in the late years the three new settlements financed by the IBRD. All increases in staff are attri- butable to these projects. Work on the Germaan fi-nanced settlement is already underway and work on the Bank settlements should begin in the latter part of the review period. MAR's projections are, therefore, reasonably accurate. 16. NIA's corporate planning unit is well established and regularly presents Five Year plans. Its function has, however, been strongly oriented to advocacy, and only recently has work begun in a realistic program reflec- tive of the current financial crunch. Moreover, although NIA's management perceived at the beginning of the 80's a change was needed from new construc- tion to increased emphasis on operation and maintenance, the shift has not been captured in the five year plan. Given the long gestation period of NIA's projects, one would not expect a rapid change in any event. Under most cir- cumstances NIA would have had difficulty sustaining the capital expenditure program foreseen in September 1983. This program depended on drawing down bank balances in 1984, increasing access to foreign reimbursement and then obtaining real budget increase in 1985. It now is clear that previously - 45 - expected 1984 budget amounts will be cut by at least 40% and an increase the following year unlikely. Disbursements by foreign lenders will not meet expectations. Financing Public Expenditure in Agriculture 17. The budget is the main source of finance for agriculture, averaging about 83% of total sources over the past five years. Internally generated funds (made up solely of water charges for irrigation) amount to only 2%-3% of sources. It is unlikely this proportion would grow significantly, although a good case could be made for more self-financing of agriculture. The balance of funds for agriculture has been support for capital investments in agricuL- ture from international lenders. A decrease in future capital works by MIA could mean a greater relative burden on the budget to support recurrent expenditures. 18. The major issues for the agriculture sector over the coming five years are institutional and policy oriented rather than financial. Certainly, agriculture, as with other sectors, must learn to make do on lower levels of financial support. Reduced funding will likely affect NIA most, and its management will have to maintain a flexible approach to programming. A par- ticular problem will be to sustain staff morale during an era of reduced new construction. NIA's management has demonstrated its capacity to react to such challenges in the past. This, plus the willingness of foreign lenders to cushion the impact of budget shortfalls, should mean the situation is manage- able. In the case of MA, financial flows to it are adequate and likely to remain so. The difficulty is using the funds effectively and the quality of the product. This is essentially a managment issue. MAR's role in agricul- ture is sufficiently marginal that one need not be concerned with the impact of its needs on overall resource flows. 19. On a strictly financial basis there are two sectoral issues warrant- ing further attention by government. First, the level of directly internally generated funds should be increased, at least to a level to meet NIA's necessary recurrent expenses. This would require increasing water collections by a factor of about ten. To reach this level would require higher rates as well as improved collection. At present, only NIA generates revenue and its performance is weak. Not onLy should its performance be improved but con- sideration should be given to developing other "user" fees in agriculture. Second, the balance between expenditures for recurrent and capital expenses on a sectoral basis is too heavily skewed toward the Latter. This needs to be redressed if past investments are to be made maximaLly productive and maintained. 46 B. INDUSTRY Sector Situation 1. Past Performance. Manufacturing industry has not played a leading role in the Philippines' economic development; the share of manufacturing production in GNP remained constant at about 25% during 1978-82. The sector has also been severely affected by the recession. During the last five years, manufacturing output registered an average growth of only 3.4%; but the trend was downward, and the 1982 growth rate was only about 2%, primarily due to weakened domestic demand. Even growth of nontra(iitional manufactured exports, which averaged 21% in the last five years, decelerated to 2% in 1982, due to the international recession and increased protectionism by the trading partners. 2. Institutional Setting. Although private ownership is prevalent in the Philippine manufacturing sector and the Government's industrial strategy is implemented primarily through policies influencing private sector decisions, the Government also sees a role for puiblic investment. Public investment is taking place mainly through two public corporations. the National Development Company (NDC) is the governrnent arm for undertaking a program of large industrial projects; and the Export Processing Zone Authority (EPZA) is in charge of export processing zones. In addition, NEDA is developing a program of industrial estates; currently, there are nine govern- ment agencies and at least two private ones engaged in industrial estates. An extension program for small- and medium-incustries is also being provided by the Ministry of Trade and Industry. In the! last few years, when the inter- national recession and a financial sector crisis severely affected the industrial sector, Government involvement in the industrial sector expanded through financial and management support as well as ownership of ailing companies, all provided through NDC. The Government intends to sell off these investments once they become profitable. The Industrial Development Strategy for the 1980s 3. In 1980, the Government adopted a new industrial development strategy which aims at establishing manufacturing industry as a leading growth sector, at generating productive employment, improving the efficiency of investment, sustaining high growth of manufactured exports, and regional dispersal of industries. This strategy is reflected in the last and current Development Plans. The principal instruments of implementing the strategy are policy reforms in the areas of trade, investment and export incentives, and financial sector policies. 4. The strategy specifies Government investment in two types of indus- trial activities. One is export processing zones/industrial estates which are being established by the Government to promote exports, employment, and regional dispersal of industry. The other is a program of major industrial projects (MIPs) which is being implemented to deepen the induscrial structure by making use of domestic resources and reducing the heavy dependence of the industriaL sector on imports. The Government states several reasons for its investment in the MIPs. First, the magnitude of the investments and phasing - 47 - of the planned MIPs requires public support. Second, the MIPs are new industries in which the private sector is hesitant to undertake a project, e.g., because its private profitability is low, although the social profit- ability is high. Third, large projects which make use of economies of scale require direct government involvement, since the private sector is not able to mobilize the funds needed, due to insufficiently developed capital markets. Fourth, because of externalities and the interdependence of industries, the risk of an industrial investment program is lower than the risk of an indi- vidual project. Finally, there is the argument of national security, i.e., to ensure a stable supply of key inputs into downstream industries investments in specific manufacturing industries are required. Public Investment in the Industrial Sector 5. Public investment in industry has grown significantly in the last few years (Table B.1). This growth was due almost entirely to a reactivation in 1979 of NDC, the national holding company, as the main industrial invest- ment arm of the government. Many of NDC's activities were a response to the financial sector crisis as it became the holding company for private sector concerns in financial difficulties that the government wished to rehabilitate. These are not meant to remain permanent public sector investments. However, in the last few years, they absorbed an average of 8% of public investment outlays. NDC's activities have been reduced sharply for 1984. This might be an appropriate time to assess the future role of NDC, taking into account its large stock of investments and its involvement in the MIP program. (a) Major Industrial Projects 6. The basic objectives of the MIP program are to strengthen the industrial base of the country through a number of large-scale projects which process indigenous raw materials or produce intermediate goods. Since all the projects would be located outside the Metro-Manila area, they would also be regional growth poles by virtue of their linkages. The MIPs are expected to have a positive impact on the balance of payments through foreign exchange earnings or savings. Due to the inherently capital-intensive nature of the projects, their direct employment effects, however, will be very limited. 7. The size and composition of the MIP program underwent significant changes since it was first presented in the 1978-82 Development Plan. The original list of 14 projects was revised and reduced to currently 10. Two of these are capital goods and eight are intermediate goods industries. In 1983, the phasing of the program was modified further, due to foreign borrowing con- straints. Three projects started operation in 1983; a copper smelter, a diesel engine manufacturing facility (for small size engines) and the conver- sion of cement pLants to the use of coal. Three other projects are under construction: a phosphatic fertilizer plant, a coconut-based chemical plant, and a heavy engineering plant. Preparatory work for an integrated steel mill started in 1982; implementation, however, is affected by foreign borrowing constraints. The remaining projects, i.e., aluminum smeLter, integrated pulp and paper mill, and petrochemical complex, have been postponed. The status of the MIPs is summarized in Table 4.1. - 48 Table B.1: PUBLIC INVESTMENT IN INDUSTRY, 1978-84 (in million pesos) Actual Estimate 1978 1979 1980 19381 1982 1983 1984 NDC - 100 2,300 1,700 1,750 2,376 420 EPZA 90 107 164 99 100 71 62 National government /a 18 14 L4 19 1 4 - Total 108 221 2,478 1,818 1,851 2,451 482 Memo items: Total as % of public investment 0.9 1.6 1116 6.7 6.8 8.0 2.2 Total as % of GNP 0.1 0.1 0.9 0.6 0.6 0.6 0.1 /a Includes manufacturing and construction. Source: Annex Table 1.16. 8. The total investment cost of the MIP program is currently estimated at $4.7 billion. The Government's strategy' for financing the projects is to seek foreign equity investment and long-term suppliers' credits to minimize use of domestic financial resources. However, heavy dependence on external borrowings would aggravate the country's already substantial debt service burden. The cost of the projects under implementation amounts to $1.0 bil- lion, of which $123 million is government equity and $774 million foreign loans. With one exception, the coal conversion of privately-owned cement plants, alL the ongoing projects involve ownership by government institutions. 9. The Government is committed to a thorough technical, financial, and economic analysis of the program. The Philippines' comparative advantage in the production of intermediate goods based on imported raw materials, as envisaged for several projects, is not obvious and needs to be investigated carefully to ensure that these projects are more cost-effective means of strengthening the balance of payments than alternative investments. Two of the projects, the copper smelter and the phosphatic fertilizer plant, use domestic raw materials, are linked in a producticn chain - the fertilizer plant will use the sulfuric acid produced by the copper smelter - and are located close to a major source of geothermal energy. The Philippines' com- parative advantage in undertaking the diesel engine and the heavy engineering projects, however, is less obvious. The integrated steel mill which is the largest of the MIPs, involves heavy external financing and has a marginal to moderate (9-13%) economic rate of return. The implementation delay is being used for more detailed study of the project proposal. The remaining projects - 49 - deferred, which together amount to $1.9 billion project cost, have been given the lowest priority, because of their capital-intensive nature and energy- pricing issues. (b) Export Processing Zones/Industrial Estates 10. The Philippine export processing zones have been established to support several objectives of the Government's industrial development strategy: promotion of nontraditional exports, foreign investment, employment generation, and regional dispersal of industries. The last two objectives also apply to the industrial estates. The country has three operational export processing zones and two under construction. There are about a dozen industrial estates; most of them are small and related to specific projects; the only regular industrial estate is located in Misamis Oriental (Mindanao). 11. The current status of the export processing zones (EPZ) is summa- rized in Table 4.3. About two-thirds of the area developed is currently being used; the zones have been developed at a total cost of P 1.4 billion. In 1983, a total of 63 firms had located in the zones, employing about 23,000 people. The profile of companies in the EPZs reflects the Philippines' pattern of nontraditional labor-intensive exports; 75% of the firms produce electronics, garments, and leather goods. About two-thirds of total invest- ment by private companies come from foreign investors. There was a steady increase in gross export earnings of the three zones, reaching $246 million in 1982. This represented 10% of nontraditional manufactured exports. However, by international comparison, firms in the zones rely heavily on imported inputs, and net foreign exchange earnings were only about $50 million in 1982. 12. Given the low occupancy rate and the current financing constraints, the Government is taking a prudent approach towards expanding the EPZ system. Plans formulated some years ago called for the establishment of 15 additional export processing zones, mainly in regional capitals and of a smaller size than the existing ones. In 1976, the Government formulated a "Nationwide Industrial Estate Program" which proposed to develop 22 sites during the rest of the century. The Government is currently reviewing these plans. Indications are that the highest priority in the future would be to fill the remaining capacity of existing export processing zones; to achieve this, a use as combined export processing zone and industrial estate is under consideration. Except for the two export processing zones currently being developed, new zones/estates will be started at a slow pace only in the second half of the decade. 50 C. ENERGY l. The oil price increases of the 1970s have placed a heavy burden on the Philippine balance of payments, and at the same time have increased the profitability of development of alternative sources of energy. The principal objectives of public investment in energy are to reduce the dependence of en- ergy supply on imported oil, which is relatively expensive and subject to potential uncertainty of supply, and to meet the growth of energy consumption (given market-oriented energy prices) arising from the industrialization of the economy and the extension of electrification to presently unserved areas. This section briefly reviews energy consumption and supply, and then reviews the public investment program in the energy sector. Energy Consumption and Supply 2. Energy Consumption. Energy consumption grew by about 4% an ually during the period between 1973 and 1979, reaching a peak of 96 MBOE 1I in 1979. In the wake of the second oil crisis, energy consumption dipped slightly in 1980-81, and then recovered back to 96 MBOE in 1982 (Table C.1). Energy consumption in 1983 is estimated to be 98.5 MBOE. Thus, in the period 1979-83, energy consumption increased by only 2.6%, in comparison with an estimated 12.7% increase in real GNP, implying a short-term elasticity of energy consumption with respect to GNP of only 0.2, as the economy has been adjusting to the post-1979 energy prices by conserving on energy. 3. Energy consumption is projected by the Ministry of Energy to in- crease by about 2% annually during 1983-87 which is a substantial reduction from the previously projected 7% average annual growth rate for this period. The projected growth rate reflects the constraints facing the economy. It is also consisten with the Government's Energy Policy Statement adopted in January 1983,- and with the Government's pricing policies. Some of the projected increase in energy consumption can be accounted by energy-intensive industrial projects. Although these projects are scheduled to come into operation during these years, at the moment, there is some uncertainty regarding their commissioning. 4. In recent years about one-third of energy consumption has been due to electric power generation, while two-thirds has been "direct" consumption of primary energy sources, principally petroleum products, by end-users. In the period since 1979, electric power consumption increased by 17%, while non- electric energy consumption fell by 7%. This trend of an increasing share of energy consumption in the form of electric power is expected to accelerate during the 1983-87 period. 5. Energy Supply. The energy program has already reduced dependence on imported petroleum from about 90% of energy supply in 1973, to 81% in 1978 and 1/ "Million barrels of fuel oil equivalent." 2/ According to the Statement, "the energy program ... targets the growth of commercial energy demand to remain within the GDP growth rate per year." - 51 - Table C.1: PRIMARY ENERGY BY SOURCE (In millions of barrels of fuel oil equivalent) Actual Estimate Projected 1978 1980 1982 1983 1985 1987 Electric Power Generation 26.0 30.4 34.0 35.7 38.8 43.1 Oil 21.2 20.6 20.0 21.8 8.7 5.8 Coal 0.1 0.3 0.6 1.2 4.0 6.7 Hydroelectric 4.6 5.9 6.7 5.1 11.8 13.4 Geothermal - 3.5 6.3 7.0 9.8 10.5 Nuclear - - - - 2.8 6.1 Other - - 0.6 0.6 1.7 0.6 Nonelectric Energy 66.5 64.0 62.0 62.8 59.6 63.3 Oil 54.2 52.4 48.5 46.4 41.5 42.2 Coal 0.8 0.6 0.6 2.3 5.1 5.0 Other 11.6 11.0 12.8 14.1 13.0 16.1 Total Primary Energy 92.5 94.2 96.0 98.5 98.4 106.4 Oil 75.3 73.0 68.5 68.2 50.2 48.0 Coal 0.9 1.0 1.1 3.5 9.1 11.7 Hydroelectric 4.6 5.9 6.7 5.1 11.8 13.4 Geothermal - 3.5 6.3 7.0 9.8 10.5 Nuclear - - - - 2.8 6.1 Other 11.6 11.0 13.6 14.7 14.7 16.7 Memorandum items: Total Primary Energy (percent distribution) Oil 81 77 71 69 51 45 Coal 1 1 1 4 9 11 Hydroelectric 5 6 7 5 12 12 Geothermal - 4 7 7 10 10 Nuclear - - - - 3 6 Other 13 12 14 15 15 16 Total 100 100 100 100 100 100 Growth rate of energy consumption (% p.a.) 4.0 0.9 0.9 2.6 -0.1 4.0 Dependence of Energy Consumption On imported fossil fuels (%) 81 74 68 66 50 43 Of which: imported oil 81 74 68 65 49 42 Of which: imported coal - - - 1 1 1 Source: Statistical Appendix Tables 5.1 and 5.3. 52 Table C.2: ENERGY INVESTMENT PROGRAM (In millions of pesos) Actual Estimate Projected 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 National Power Corporation 4,761 S,859 4 ,959 6 ,623 6,04= 11,026 13,4 79 11,98 tuzon Grid 3.281 4,990 2,971 4,068 4,420 6,820 9.647 10,338 9,470 7.394 Oil-fired 1,100/a 8555/ - - - - - - - Coal-fired - - 2 238 284 1,743 1,355 3,003 3,049 2,595 Hydroelectric 160 532 756 686 425 618 506 973 982 1,887 .Geothermal 737 1,386 800 726 502 275 348 164 495 503 Nuclear 1,194 1,969 1,290 1,798 2,716 3,019 6,576 4,704 2,486 - Transmission 90 248 123 620 492 1,165 804 1,462 1,159 1,454. Visayas Grid 286 208 689 650 975 770 1,224 2,913 1.662 352 Oil-fired 154 33 313 119 - 9-2 24 Coal-fired 84 137 252 132 101 111 600 966 289 - Geothermal 3 3 98 335 716 138 193 1,105 902 19 Transmission 45 35 26 54 66 141 361 837 471 326 Mindanao Grid 128 258 875 705 830 2,178 1,601 864 1,387 2,772 Oil-fired 23 36 277 21 - - 13 18 22 283 Coal-fired - - - L - 151 701 1,359 Hydroelectric 55 199 450 612 602 1,530 1,053 460 483 739 Transmission 50 23 148 72 228 706 535 235 181 391 other capital outlay /b 1.066 403 424 1,200 79 1,259 952 949 960 960 National Electrification Admin. 483 387 511 595 946 813 1,045 1,196 1,804 1,898 Rural electrification /c 583 387 511 5T3 184 623 494 468 663 670 Dendro-thermal - - - 28 350 116 199 275 443 462 Mini-hydro - - - 1.4 212 74 352 453 698 766 Philiopine National Oil Company 262 852 1,044 1,209 1,250 2,0J70 2,300 2,574 2,677 2,842 PNOC Coal Corporation 23 19 55 101 127 451 684 404 636 323 PNOC Energy Development Corp. 73 125 256 408 687 1,170 1,285 1,846 1,788 2,208 PNOC Exploration Corp. 29 36 57 15 52 161 231 187 160 175 Other subsidiaries 137 672/d 676/d 665/d 384 288 100 137 93 136 Total 5,506 7,098 6,514 8,427 8,500 13,909 16,769 18,834 17,960 16,238 (4,406)/e (6,243)/e Memorandum Items CE) Share of public investment Share of GNP 3.1 3.2 2.5 2.8 2.5 3.6 3,8 (2.5)/e (2.8)/e /a Purchase of generating plants of the Manila Electric Company. 7-b Difference between "Capital Expenditures" in financial statements (Statistical Appendix Table 5.9) and "Capital Expenditures by Grid, Energy Source, and Major Project," (Statistical Appendix Table 5.7) includes surveys and investigations, engineering administration, and improvement to plants. /c Includes small amounts for NEA in-house capital expenditures. 7-d Principally expenditures on tankers and refineries. 7 Excluding purchase of generating plants of Manila Electric Company. Source: Statistical Appendix Tables 5.7, 5.9, 5.10 and 5.16. - 53 - 68% in 1982. This has been principally attributable to the initiation of geo- thermal electricity generation and the expansion of hydroelectric electricity generation. Domestic petroleum production, providing 3% of energy supply, is playing a relatively marginal role. 6. For the 1983-87 period, hydroelectric and geothermal energy produc- tion will continue to expand as ongoing projects are brought on stream. Nu- clear energy and coal will begin to play major roles for the first time. The coal projections in Table C.1, however, are optimistic in relation to the prospects for domestic coal mining, coal logistics, and coal utilization in industry and the electric power sector. The Ministry's projections imply that the dependence of the energy supply on imported fuels would be reduced to 43% in 1987, with dependence on imported petroleum reduced to 42%. While domestic energy production is unlikely to increase as rapidly as projected by the Ministry, the slower growth of energy consumption should make it possible to reduce the dependence of energy supply on imported fossil fuels to about 50% in 1987. Overview of Public Investment Program 7. The public investment program in the energy sector is implemented through the following three government corporations: (a) the National Power Corporation (NPC) is an operating utility which accounts for about 80% of electricity generation in the Philippines. NPC is primarily an electricity wholesaler, with retailing done by urban retailers such as the Manila Electric Company, or by rural electric cooperatives. However, some large industrial plants purchase their electricity directly from NPC; (b) the National Electrification Administration (NEA) is a specialized lending agency which provides loans and technical assistance to rural electric cooperatives. Most of the cooperatives draw their electricity from NPC grids; a minority which cannot be supplied from the grid have their own small-scale generating plants; (c) the Philippine National Oil Company (PNOC) is a parent company for 21 subsidiary companies engaged in various aspects of the petroleum business (exploration, transportation, refining, and marketing), and also in geothermal and coal exploration and development as welL. PNOC does not have a monopoly position; its subsidiaries account for about half of the petroleum product market of the Philippines. NPC and PNOC are attached to the Ministry of Energy, while NEA is attached to the Ministry of Human Settlements. 8. Responsibility for the planning of public investment in energy rests primarily with NPC, NEA and PNOC. At intervals their investment programs, together with related targets and incentives for the private sector, are con- solidated by the Ministry of Energy into an Energy Program document. The most recent published version is The Philippine Energy Development Program 1982- 87. The Government's Energy Policy Statement, adopted in January 1983, builds upon the Energy Development Program 1982-87 and extends it in certain areas such as pricing and resource mobilization. The Energy Policy Statement indi- cates that: "With a view to adjusting the energy program in the light of availability of resources and capacity for implementation ... regular updating of the energy program will continue to be undertaken at least on an annual ba- 54 - sis. This exercise includes matching interim accomplishments with tar- gets, and reformulating, if necessary, targets and policy experience. To ensure that investments are economic, the decision on the types, sizes, and schedules of energy infrastructure will continue to be made on the basis of providing reliable energy suppLy at the least cost to the economy." In keeping with this principle, the Ministry of Energy is presently preparing a ten-year Energy Plan 1984-93. 9. As indicated in Table C.2, public fixecl capital formation in the energy sector (i.e., excluding acquisition of previously private sector fixed assets) was in the range of 2.5-2.8% to GNP' during the 1978-1982 Plan period. In 1983, public investment in energy was also 2.8% of GNP although the higher investment cost largely reflects the depreciation of the peso, since energy investment is relatively import-intensive. In order to avoid unreasonably compressing other sectors during 1984-87, it might be necessary to reduce the energy program further. 10. During the 1978-82 period, NPC accounted for 79% of the investment program, while NEA accounted for 8% and PNOC, 132;. This intrasectoral alloca- tion was broadly appropriate in the sense that energy resource development, electricity generation, and electricity distribution were in tandem. This intersectoral allocation is expected to be maintained in the 1983-87 Plan period. National Power Corporation 11. Overview of NPC Program. The National Power Corporation is in the midst of a major expansion program (Table C.3). NPC's installed generating capacity increased from 1038 MW at end-1977 to 4323 MW at end-1982. However, more than half the increase was through the acquisition of existing oil fired plants. New capacity increased about 123% between 1977 and 1982. With the completion of ongoing projects, generating capacity will increase another 47% by end-1985. The ongoing program is consistent with "least-cost" principles for meeting projected load growth. It will contribute to reducing dependence on imported petroleum as oil-fired plants are moved to higher points on the load curve. It will also contribute substantially to regional development objectives, by bringing the Visayas' share of NPC generating plant from 3% in 1978 to 10% in 1987 (in comparison with 23% of the national population) and increasing Mindanao's share of NPC generating plant from 10% in 1978 to 18% in 1987 (in comparison with 22% of the national population). 12. Recently Completed and Ongoing Projects. During the period 1978-83, NPC's generating capacity for the Luzon grid more than quadrupled from 752 MW at end-1977 to 3510 MW at end-1983, through the following additions: (a) purchase during 1978-79 of the oil-fired generating plants (2005 MW) of the ManiLa Electric Company (MECO) following which MECO became merely a distributing utility; - 55 Table C.3: NATIONAL POWER CORPORATION EXPANSION PROGRAM (In megawatts) Installed capacity at years' end Additions to installed capacity 1978 1982 1985 1987 1979-82 1983-85 1986-87 Luzon Grid 1,902 3,510 4,720 4720 1,608 - Oil-fired 1,375 2,105 1,925 1,925 730/a -180 - Coal-fired - - 300 300 - 300 - Geothermal - 550 660 660 550 110 - Hydroelectric 527 855 1,214 1,214 328 360 - Nuclear - - 620 620 - 620 - Visayas Grid 73 263 506 625 190 243 119 Oil-fired 68 202 220 284 134 18 64 Coal-fired - 50 50 105 50 - 55 Geothermal 3 9 234 243 6 225 - Hydroelectric 2 2 2 2 - - - Mindanao Grid 213 550 1,117 1,153 337 567 36 Oil-fired 11 141 141 177 130 - 36 Hydroelectric 202 409 976 976 207 567 - Philippines 2,188 4,323 6,343 6,498 2,135 2,020 155 Oil-fired 1,454 2,448 2,286 2,386 994 -162 100 Coal-fired - 50 350 405 50 300 55 Geothermal 3 559 894 894 556 335 - Hydroelectric 731 1,266 2,193 2,193 535 927 - Nuclear - - 620 620 - 620 - Memorandum item: Philippines (% dist.) 100 100 100 100 Oil-fired 66 57 36 37 Coal-fired - 1 6 6 Geothermal - 13 14 14 Hydroelectric 33 29 34 34 Nuclear - - 10 9 /a Purchase of generating plants of Manila Electric Company. Source: Statistical Appendix Table 5.5. 56 (b) installation of steam-powered generating units at the Tiwi geother- mal field in the Bicol peninsula of eastern Luzon, and the Mak-Ban geothermal field of southern Luzon; (c) construction of the Kalayaan pumped-storage hydroelectric project in southern Luzon. In addition, the Nuclear Power Project in central Luzon, the Magat hydroelec- tric project in northern Luzon, a coal-fired plant at the port of Batangas in southern Luzon and additional geothermal steam-powered units at Mak-Ban were under construction at end-1983. These units wilL increase the Luzon grid gen- erating capacity by another 31% to 4720 MW by end-1985. The expenditures on the nuclear plant alone have accounted for one-third of NPC's capital invest- ments between 1978-82. 13. Electricity development in the Visayas has lagged behind Luzon and Mindanao because the size of the islands limits the Local market, and the small watersheds do not provide a basis for hydroelectric development. How- ever, the Visayan islands do possess coal and geothermal resources which are now being exploited for electricity generation, and the market constraint can be partly relieved by inter-island connections. During 1978-83 NPC construc- ted one oil-fired plant and one coal-fired plant on Cebu, and installed three generating units at the Tongonan geochermal fielcd in Leyte, which are now pro- viding electricity to the Leyte-Samar grid, including the copper smelter and the phosphatic fertilizer plant. The installation of three generating units at the Palimpinon geothermal field in southern Negros was also completed in 1983. There is not a sufficient market on Negros; for all of the Palimpinon electricity, but this investment will be justified by the completion of the -Negros-Panay interconnection in 1988. These geothermal units have resulted in a doubling of NPC's generating capacity in the Visayas between end-1982 and end-1983. 14. NPC's program for the Mindanao grid has been centered around de- velopment of the island's ample hydroelectric resources. During the period 1978-83, NPC installed one oil-fired plant in northern Mindanao, and initiated construction of one hydroelectric plant on the Pulangi river in central Minda- nao and several hydroelectric plants (the Agus I, Agus IV, Agus V9 and Agus VII sites) on the Agus river in northern Mindanao. As these hydroelectric units come on stream, they will result in a doubling of NPC's generating capacity on Mindanao between end-1982 and end-1985. The lack of hydroeLectric generating capacity experienced during the drought of 1983 has illustrated the risk of overdependence on this form of energy, and therefore NPC is contem- plating introducing coal-fired plants to the Mindanao grid in future years. 15. Proposed New Projects. In October 1983, NPC had programmed five new projects in 1984 and three new projects in 1985. However, because of the financial crisis, in November 1983 NPC decided not to initiate any new project in 1984, which thus becomes the second year ia a row (following 1983) in which no major new project is started. Further revisions in the investment program were made in early 1984, but there may be scope for even greater deferral. At the moment there is uncertainty regarding the future development of geothermal projects (Palimpinon 11 and Tongonan 11) in the Visayas. The Tongonan - 57 - development is linked with the proposed expansion of the Leyte industrial estate, the timing of which is uncertain, given the current financial constraints. 16. NPC presently forecasts load growth of 6.4% p.a. over 1983-87. In view of the expected persistence of the recession in 1984, and the recent upward adjustments in electricity prices to reflect the devaluation, NPC may probably experience falling load factors as new capacity is brought on stream in 1984-85. Additionally, the Government has recently commissioned a comprehensive study of electricity pricing which, inter alia, will explore the possibilities for restraining load growth and distributing load more evenly and efficiently among the generating plant, through peak-load pricing and other forms of marginal cost pricing. Although the Government has committed itself in its Energy Policy Statement to electricity tariff adjustments for "controLling the demand for power, improving equity among power consumers, encouraging dispersal of economic activity, and increasing internal cash generation," NPC has not committed itself to long run marginal cost pricing or any other efficiency pricing principles. Determination of NPC's future investment program should await the completion of the pricing study and the adoption of pricing principles, because of their implications for load growth. National Electrification Administration 17. The investment program of the National Electrification Administra- tion consists of loans to rural electric cooperatives for: (a) rural electri- fication (transmission/distribution lines to consumers from NPC grids, or for small-scale generating plants of other cooperatives) and (b) power generation by small-scale mini-hydro and dendro-thermal plants.- 18. Rural electrification. The 1980 Census found that 71% of urban households (according to a fairly broad definition which classifies 37% of the Philippines population as "urban") and 17% of rural households used electric- ity for lighting (Table C.4). The census data are broadly consistent with NEA's data showing that 1.4 million households were served by NEA member elec- tric cooperatives, since many "urban" households in the provinces are served by cooperatives. The data in Table C.4 imply that 0.5 million "urban" house- holds in the provinces were served by NEA cooperatives. Since very little of the rural population lives in areas served by non-NEA urban electrical utili- ties, the numbers of households living in NEA cooperative service areas was probably about 6.1 million (i.e., 5.4 million "rural" plus 0.7 million "urban," on the basis of the 71% urban service ratio), rather than 5.7 million as assumed by NEA. The number of households in the area served by NEA cooper- atives will probably be at least 7 million in 1990. 3/ Statistical Appendix, Table 5.7. In the past, some of NEA's "rural electrification" loans have been for small-scale diesel generation as well as distribution, but in recent years all of NEA's "power" lending has been for mini-hydro and dendro-thermal. - 58 Table C.4: ACCESS TO ELECTRICITY, 1980 (in millions of households) Served Unserved Total Census data Urban 2.3 0.9 3e2 Rural 0.9 4e5 5.4 Philippines 3.2 5.4 8.6 NEA data Cooperative 1.4 3.8 5.2 service area Sources: National Census and Statistics Office, Statistical Appendix Table 5.14. 19. Rural electrification is often considered to have substantial eco- nomic and social benefits, such as facilitating small-scale industry, pump irrigation, fish preservation, school lighting, etc. On the basis of the presumed importance of electrification in the rural development process, NEA has targeted the provision of electrical service to all municipalities (thereby completing the "backbone" system) by 1985, all barangays by 1987, and all rural households by 1990. According to NEA's projections, this would re- quire stepping up the pace of house connections from about 300,000 annually during 1978-82 to over 450,000 47 nually during 1983-90 to reach the target of 5.7 million households in 1990.- 20. However, universal coverage is unlikely to be achieved in 1990, for two reasons. First, as indicated in para. 18, the number of households in the NEA cooperatives' service area is likely to be closer to 7 million. Second, as a result of the poor financial performance of its borrowing member coopera- tives, NEA is currently experiencing liquidity problems which will result in a deceleration rather than an acceleration in the pace of its program. In 1982 the Government even had to assume service of NEA's external debt. 21. WhiLe the target of universal coverage is one of the principles on which NEA's program is based, financial viability is another important prin- ciple underlying the program. NEA's Board Policy No. 303 requires that member cooperatives achieve, between their fifth and tenth years of operation, a rate of return of 8% on net fixed assets in operation. This would be sufficient to enable them to service their loans from NEA which have a grace period of five years and an interest rate of 3%. However, the cooperatives have collectively been experiencing negative net income; in 1982 the cooperatives reported 4/ Statistical Appendix Table 5.11. - 59 - losses of P16 million, but with adequate provision for bad debts from electricity consumers, the loss figure would have been about P60 million. Only a smalL minority of cooperatives are meeting the requirements of Board Policy No. 303 and some of the cooperatives are insolvent. The poor financial performance of the cooperatives reflects high system losses, illegal connec- tions and power theft, poor bill collection, inadequate financial planning and, in some instances, inadequate tariffs. As a result of the financial per- formance of the cooperatives, NEA cllected on average between 1978-83 only 35% of the debt service due to it.5/ Consequently, NEA's internal cash flow has been insufficient to cover debt service, and it has been dependent on government equity contributions to make up the difference and to provide the - local currency component of its new lending. 22. Another factor which will influence NEA's future program is that the unit cost of connection in an electrification program typically displays a U- shaped curve, initially falling as the "backbone" is established and rural population centers are served, and then rising again as lines are extended to less populated, often hilly areas. This factor does not appear to have been taken into account in NEA's projections, which implicitly assume a constant cost of connections. It is not clear that the benefits of electrification wouLd outweigh the cost for every rural Philippine household, and there are other competing rural development priorities such as roads and sanitary water supply. All of the above factors suggest that it would be timely to recon- sider the principLes underlying NEA's electrification program to ensure their appropriateness and consistency. If the program is continued, one of the key objectives should be to improve the financial performance of the coopera- tives. This would improve NEA's internaL cash generation and enable it to finance the expansion of the rural electrification program without recourse to Government budgetary contributions. 23. The Rural Power Program. In the wake of the 1979 oil price in- creases, in 1981 NEA began lending to cooperatives for mini-hydro and dendro- thermal generating projects. The plants on which construction has started to date have generating capacities of 1-5 MW. (Government policy is for NPC to be solely responsible for generating plants of 10 MW or more.) Prior to the 1983 devaluations, the economic viability of the mini-hydro program seemed well-established, while the economic viability of the dendro-thermal program appeared uncertain. However, the devaluations may have increased the economic justification of the dendro-thermal program. Both of these programs are pres- ently being evaluated by consultant studies commissioned by the Government, which should become available in 1984 and provide an input to the review of NEA's future program. Philippine NationaL Oil Company 24. Reflecting the Government's strategy of reducing the importance of petroleum in the energy sector, PNOC is diversifying its activities in such a way as to become an "energy company" rather than an "oil company." Thus 5/ Statistical Appendix Tables 5.9, 5.10. 60 - comparing the actual capital expenditures for 1978-82 and projections for 1984-87, the share of the PNOC and Malangas Coal Corporations in the capital expenditure of PNOC and affiliates will increase from 1% to 32% and the share of the PNOC Energy Development Corporation (geothermal) will increase from 34% to 42%. Conversely, the share of petroLeum-related capital expenditures will decrease from 55% to 15%. PNOC Coal Corporation's capital expenditures will be mainly for coal mine development at Bislig and, Lalat, both on Mindanao. PNOC-EDC's capital expenditures will be mainly for development (by drilLing and installation of pipes) of the Tongonan and Palimpinon geothermal fields in the Visayas and the Bacon-Manito geothermal field in southern Luzon. However, the capital expenditures for the geothermal projects could be further revised downward, as a result of the country's financial situation and particularly the deferral of NPC projects which would consume the steam. - 61 D. WATER SUPPLY Service Coverage in 1980 1. Water Supply. According to census data, 45% of the Philippine popu- lation had direct access to safe water in 1980. This indicates a considerable improvement over the 26% coverage reported in the 1970 census. Access to safe water in 1980 remained uneven among urban and rural areas (Table D.1), covering 72% of the Metro-Manila inhabitants, 59% in other urban centers, and only 35% in rural areas.!7 The rest of the population relied largely on water sources of doubtful quality, such as open wells, lakes, and rivers. The level of service decreases from urban to rural areas, due to lower population density and ability to pay for higher distribution costs. While 52% of the Metro-Manila population had house connections, only 26% did in other urban areas and 6% in rural areas. Public faucets provided 3% of service coverage. Table D.1: WATER SUPPLY COVERAGE, BY TYPE OF SERVICE, 1980 Type of Service Metro-Manila Other Urban Rural Total Million Million Million Million people % people % people % people % House connection 3.1 52 3.1 26 1.7 6 7.9 16 Public faucet /a 0.4 7 0.2 3 1.1 4 1.7 4 Tube well 0.8 13 3.7 31 7.7 25 12.2 25 Total Served 4.3 72 7.0 60 10.5 35 21.8 45 Unserved 1.7 28 4.9 40 19.8 65 26.4 55 Total Population 6.0 100 11.9 100 30.3 100 48,2 100 /a Statistical Appendix, Table 7.1 shows 5.1 million people as drawing water from public faucets. These numbers have been adjusted downwards to make them consistent with agency data on physical investments. Source: Mission calculations, based on Statistical Appendix, Table 7.1. 1/ If, on the basis of government estimates (Rural Water Supply and Sanitation Plan, p. 39), adjustment is made for water of unsatisfactory quality, the service coverage would be only 40% instead of 45%. On this basis, coverage for other urban areas would be 50% and for rural areas 30%. 62 2. Sanitation and Sewerage. The 1980 census data showed a marked improvement of sanitary conditions during the preceding decade. Half of the Philippine households had access to water-sealed toilets in 1980, compared to only 23% in 1970. Large differences in coverage continued to exist among Metro-Manila (86%), other urban (65%), and rural households (34%), although the variance appears to have decreased in the last few years. Public sewerage systems exist only in the capital, covering about 18% of the metropolitan population, and in six provincial cities. Institutional and Planning Framework 3. The Philippines' institutional framework for water supply and sewerage consists of the following principal age:ricies: (a) The National Water Resources Council, which is chaired by the Ministry of Public Works and Highways (MPWH), is responsible for policy formulation and long-range planring. (b) The Metropolitan Waterworks and Sewerage System (.MWSS), a utility attached to MPWH, provides water and sewerage services in Metro- Manila. (c) Local corporations (Water Districts) provide water supply and sewerage service for the 700 cities/municipalities with at least 20,000 inhabitants. The Local Water Utilities Administration (LWUA), which is also under MPWH, is the technical assistance and lending agency at the apex of the Water District system. LWUA pro- motes the creation of Water Districts, provides loans to them, and assists with facility constructicn. (d) The institutional framework for rural water supply is complex, char- acterized by overLappng responsibilities, and requires a strong coordination effort.- The Rural Waterworks Development Corporation (RWDC), created in 1980 under the Ministry of Human Settlements, is the equivalent of LWUA for rural water supply. Rural Waterworks and Sanitation Associations will operate and maintain the water supply systems at the local level. Currently, MPWH is the principal imple- menting agency for rural water projects. The Ministry of Local Government (MLG) also administers a small program, the Barangay Water Program, through local government units. By charter, LWUA's service area includes about 70% of the rural population, on which the agency so far has made little impact. (e) The Ministry of Health exerts water quality control and health education functions; it is also responsible for rural sanitation. 2/ The Government is currently reviewing the organization of rural water supply. - 63 - 4. In addition to the Development Plans, two documents, prepared in the early 1980s, describe the strategy for improving water supply in the remainder of the century. The Integrated Water Supply Program 1980-2000, which was prepared by the Ministry of Public Works and approved by the National Water Resources Council, standardizes service levels, sets long-range quantitative targets, and derives investment and financing requirements. The Program specifies that the least cost principle should apply for water supply and that the local community should contribute to the investment. While the physical targets of the Program are very ambitious under current economic conditions, it is noteworthy that the focus of expenditures would shift to urban areas outside Metro-Manila. The second document is the Rural Water Supply and Sanitation Master Plan, prepared in 1982 by MPWH and RWDC. The Plan proposes a marked shift of intra-sectoral priorities to increase the coverage and level of water supply in rural areas during the next 20 years. The Plan shows relatively even regional coverage for well construction targets, and a heavy concentration for standpipe targets in the densely populated areas of Regions III and IV. The Plan includes a rural sanitation program which aims at rehabilitation/construction of 1.4 million toilets by 1986. Due to the current public funding constraints, the status of the Plan is unclear. Agency data indicate that expenditures during the first phase (1982-85) are likely to be only 50% of the ambitious program proposed in the Plan. The Development Plan 1983-87 states the principles on which the Government intends to base its water supply and sanitation program. Efficient allocation of resources, redressing regional imbalances, and rural water supply are emphasized, as well as maintenance and efficient use of existing facilities. The extremely ambitious objective of the Plan is to extend water supply to an additional 25 million people, mostly in the rural areas. This would translate into a 90% water supply coverage target. To further increase water supply in Metro- Manila, the Kaliwa source would be tapped as a new major reservoir. Reflecting the ambitious targets, the share of water supply in the NEDA infra- structure program has been increased from 5% in the last plan to 11.7% in the current plan period. Recent and Prospective Public Expenditures (a) Overview 5. Water supply/sewerage investment expenditures almost quadrupled in real terms during the 1978-82 plan period. MWSS accounted for 56% of water supply capital outlays, LWUA for 22%, and MPWH for 21%. The share of water supply in public investment increased steadily from 2.1% to 5.5% and its share in GNP from 0.1% to 0.5%. Agency numbers show that these investments achieved a substantial improvement in water supply coverage. These data, which might include some double-counting, indicate that an additional 10 mil- lion people were provided with safe water during the plan period, raising the water supply coverage to 50% of the population in 1982. About one-third of the increment accommodates population growth, while the remaining two-thirds improve the living conditions of the existing population. Thus, it appears that in the water supply sector the Philippines stayed well ahead of population growth. The regional coverage has increased substantially in non- metropolitan areas, reaching 67% in urban and 40% in rural areas in 1982. 64 6. The water supply plans discussed above aim at a gradual shift of emphasis from Metro-Manila to smaller cities and rural areas during the 1983-87 plan period. However, there is considerable uncertainty about the size and composition of the future investment program due to funding constraints. The original investment program for 1983 was reduced by 20%, the 1984 investment program shown in Table D.2 is being revised, and the programs for the remainder of the plan period are tentative. 7. Financing the planned investment for water supply and sanitation would require a further increase of the sector's share in public investment. Although data are indicative at this stage and incomplete, they illustrate diverse approaches to funding constraints. Leaving aside RWDC and MLG which had not yet finalized their plans, MPWH and LWUA have adjusted their capital outlays downward and are thinking about achieving an acceptabLe coverage at lower levels of service. MWSS, which accounts for 82% of the planned capital outlays in 1983-87, has not yet taken these steps; corporate projections indicate a significant growth of investments during the pianning period and beyond for the next phase extensions of the Manila water supply system. Table D.2: WATER SUPPLY AND SEWERAGE INVESTMENT PROGRAM BY AGENCY, 1978-87 (in million pesos) Actual Projected Agency 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 MWSS 84 151 372 669 955 1,082 2,648 2,080 3,123 3,821 LWUA 137 129 171 204 156 260 117 113 114 130 MPWH 28 69 134 237 361 346 312 317 317 317 MLG/RWDC 1 3 7 9 35 90 90 100 100 110 Total 250 352 684 1,119 1,507 1,778 3,167 2,610 3,654 4,378 Memo items: Total as % of public investment 2.1 2.5 3.2 4.1 5.5 5.8 Total as % of GNP 0.1 0.2 0,3 0.4 0.5 0.5 - Source: Tables 7.2-7.4 of statistical appendix and MLG; 1983-87 data for MLG/RWDC are mission estimates. - 65 - (b) Agency Programs 8. MWSS. The large share of MWSS in water supply expenditures during the 1978-82 plan period reflects the implementation of a P 3.2 billion project (MWS II) which will double the supply capacity to 2.5 billion liter/day. While the expansion of the water production and treatment system has been completed in 1983, construction of the distribution system is experiencing slippages. Thus, the impact of MWS II will only be felt fully in 1986. It is projected that the service coverage will then increase to 76% of the Metro- Manila population. House connections and public faucets will provide 50% each of the additional service coverage. 9. Concurrent to the completion of MWS II, World Bank- and ADB-financed sewerage and sanitation projects, amounting to P 1.3 billion, will extend the service coverage from currently 500,000 people to 2.1 million. Implementation is to begin shortly of an ADB-financed project which aims at reducing non- revenue water in the Metro-Manila system from presently 53% to 25% by 1990 through a four-year program to rehabilitate the distribution system and improve the maintenance functions in MWSS. The volume of water saved through leakage reduction will enable MWSS to serve about 1.3 million additional people and to postpone expansion of the system by about two years. 10. MWSS is preparing a large new water supply project (MWS III), involving construction of a large impounding dam, a new treatment plant, and expansion of the distribution system. The project would provide an additional 2,000 million liter/day by 1997 which would extend service to 95% of the projected 10 million population of the MWSS service area. Total project cost is estimated at P16 biLlion. Although the rapidly deteriorating ground water level in Metro-Manila, which is caused by private wells, requires an expansion of the public system, the size and timing of the project require careful scrutiny in light of the priorities the government has established for the sector and the financing constraints the public sector faces. 11. LWUA. During the 1978-82 plan period, LWUA made considerable progress in institution-building by registering an additional 181 Water Districts, bringing the total to 230. The first LWUA water project was completed in 1978; by the end of the plan period, 55 new water systems providing house connections had been built, servicing 5.3 million people. The Water Districts so far have taken out loans amounting to P 893 million from LWUA to finance the investment. The collection ratio for interest and principal has been around 80%. 12. LWUA's investment program for 1983-87 is currently under revision, due to several financing constraints. First, LWUA's internal cash generation will be negligible, reflecting a rapidly increasing interest burden and a deteriorating performance by the Water Districts in their repayments to LWUA. Second, government equity contributions have been cut drastically in 1982-84, and are assumed to remain low in the next few years. In response, LWUA considers a reduction of its investment program by as much as 50% and a review of its overall approach, including the level of service it provides. 66 13. Rural Areas. RWDC, which was created in 1980, rapidly began estab- lishing the institutional framework for rural water supply in the form of Rural Water and Sanitation Associations. MPWH provided most of the physical investment, and the 15,000 wells built in 1978-82 exceeded the ambitious plan target; however, little emphasis was put on rehabilitation of existing wells. During the last plan period, both MPWH and MLG introduced community systems with public faucets, estimated to serve an additional one million people. 14. MPWH plans to continue the rapid increase that characterized its -water supply program in the last few years. The target is to provide all of the 42,000 barangays of the country with potable water from wells by 1987. Although this is a considerable extension of previous targets - the Rural Water Supply and Sanitation Master Plan set: this target for rural areas for 1983 - it still appears ambitious under current ieconomic conditions. The largest share of new water supply would be provided by deep wells; an attempt would also be made to address most of the rehabiLitation needs. In the short term, central government assistance for maintenance by local communities remains a problem, since budgetary allocations for 1983 and 1984 have been cut significantly. (c) Impact on Water Supply Coverage 15. The mission estimated the service coverage for water supply which could be achieved by 1987 (Table D.3). These caLculations are based on the agencies' investment programs as shown in Table D.2; i.e., they are tentative and mainly for purposes of illustration. On this basis, the maximum service coverage achievable for the Philippines would be 71% in 1987; this would be a significant improvement over the 50% coverage-achieved in 1982. The water supply coverage in rural areas would increase to around 60%, which would be the most significant improvement in water supply during the plan period. Table D.3: PLANNED WATER SUPPLY COVERAGE, BY TYPE OF SERVICE, 1987 Metro-Manila Other areas TotaL million million million Type of Service people % people % people % House connection 4.4 59 7.9 16 12.3 22 Public faucet 1.5 20 3.4 7 4.9 8 Tube well 0.8 11 22.6 45 23.4 41 Total served 6.7 90 33.9 68 40.6 71 Unserved 0.7 10 15.7 32 16.4 29 Total Population 7.4 100 49.6 100 57.0 100 Source: Mission estimates, based on Table D.2. - 67 - (d) Issues 16. Investment Priorities. The Development Plan 1983-87 clearly states as a priority to improve rural water supply. However, this is not reflected in the structure/sanitation of planned capital outlays. The ongoing Manila Water Supply II and sewerage and sanitation projects require significant funding during 1983-85, and Manila Water Supply III is projected to require funding on a large scale from 1986 onward. While completion of ongoing projects has already been established as the highest priority, the Government faces difficult choices with respect to new projects. The timing and phasing of MWS III is the most important issue in this respect. Even with a 10-20% financing contribution from .MWSS' internal cash generation, most of the financing would have to come from government equity contribution, domestic and foreign loans - all of which are constrained over the next few years. Thus, there are clear indications that other projects would have to be deleted or postponed if the priority of MWS III is maintained. 17. Maintenance/Operating Efficiency. In each of the agencies, mainte- nance and operating efficiency seem to be issues. MWSS is now taking steps to improve the operating efficiency of its rapidly increasing system; this will also be important for providing adequate internal financing for future invest- ments. LWUA is providing technical assistance to the Water Districts whose decreasing debt servicing ratio indicates operating and management problems. MPWH and RWDC are aware of potential similar problems in the Rural Water and Sanitation Associations which will have to maintain the local water systems and repay their loans. A large number of wells requiring rehabilitation also indicates that past maintenance has been deficient; the budgetary cuts for MPWH's maintenance expenditures raise concern about adequate maintenance of an increased stock. It should be reviewed whether the future maintenance of existing water supply systems is adequately budgeted and catered for by local communities. 18. Level of Service. The Philippine plans opt for a rapid upgrading of the level of service in urban as well as in rural areas. Current financing constraints, however, are likely to considerably postpone achievement of these objectives. The Government might, therefore, wish to review the feasibility of planned service levels. Some agencies have begun thinking along these lines, but a fuller exploration of how to achieve high water supply and minimal sanitation coverage ratios under severe financing constraint might be useful. - 68 E. TRANSPORTATION Introduction l. The archipelagic character of the Philippines suggests that sea transportation would play a major role in the transportation sector, and that railways would play a minor role, since railways require long inland distance to be competitive with road transportation. These expectations are borne out by Table E.l, which shows that, in 1980 roaLd transport and sea transport accounted for 65% and 35% of freight traffic, with the railways accounting for only 0.1% of the traffic.- At the present time, inter-island shipping accounts for almost all of the sea transportation. The importance of coastal shipping (i.e. shipping by sea from one point to another point on the same island) diminished during the 1970s, as the improvement of the roads led to a dominant position for road transportation in intra-island transport. The transpor- tation sector grew by about 6% p.a. in the 1970s,, but then, reflecting trends in the directly productive sectors, slowed down to 4.4% in 1981 and only 2.5% in 1982. Table E.1: TRAFFIC 13Y MODE, 1980 Freight traffic Passenger traffic Billion ton - Percent Passenger- Percent kiLometers distribution kilometers distribution Road 22 65 53 90 Sea 12 35 4 7 Rail .04 0.1 0.4 1 Air - - 1.2 2 Source: NEDA/MOTC/MPWH, National Transportation Planning Project: Part I, Overall Summary and Conclusions, p.I-4. 2. With regard to responsibility for provision of transportation services, trucking, shipping, and passenger bus transportation (with the exception of one public company) are in the hands of the private sector. The Philippine National Railroad (PNR), Philippine Airlines (PAL), the Metro Manila Transit Corporation (MMTC) (a Government-owned bus company), and the Light Rail Transit Authority (LRTA) presently under construction account for public secsor transportation service deLivery.!' The principaL responsibility 1/ Philippine Airlines, which formerly was privately owned, is owned by the Government Service Insurance System rather than by the National Government itself. PAL has therefore maintained that it is legally not a government corporation. On these grounds, PAL has not been subjected to audit by the Commission on Audit, although doubts have been expressed in the National Assembly as to the appropriateness of this exemption. - 69 - of the public sector is therefore provision of transportation infrastructure, in particular, roads and ports. 3. The organization, regulation and planning of transportation in the Philippines fall under the responsibility of three government agencies: the National Economic and Development Authority (NEDA), the Ministry of Transport and Communications (MOTC), and the Ministry of Public Works and Highways (MPWH). NEDA serves as a program review and coordinating agency for all sectors and assists in defining priority areas. MOTC is charged with policy, planning, coordinating, and regulatory functions. MOTC itself is a relatively small ministry; however, the Philippine Ports Authority (PPA), PNR, MMTC, and LRTA are all attached to it. MOTC serves as the secretariat for an inter- ministerial Committee on Transport Planning; its staffing for this purpose needs to be strengthened, however. The MPWH is a large ministry with an extensive network of regional offices headed by regional directors, and provincial offices headed by provincial engineers. It is responsible for planning, design, construction and maintenance of the national highway system and for providing technical assistance to local government units. At the local government level, provincial governments, cities, municipalities and barangays are responsible for provincial, city, municipal and barangay roads as well as municipal ports (i.e., smaller ports, not operated by the Philippine Ports Authority). In the past, these local government units have generally had inadequate technical and financial resources for these responsibilities. Overview of Public Investment 4. In the mid-1970s, transportation was the largest sector in the public investment program. However, reflecting adjusted priorities in the wake of the first oil crisis, in 1977 the energy sector became the largest sector in the public investment program, displacing transportation to second place. As indicated in Table E.2, public investment in the transportation sector averaged about 1% of GNP prior to 1980, and then increased to about 2% of GNP in 1981 with the initiation of the LRTA project. During the 1978-82 Plan period, 70% of the investment program was devoted to highways and roads, with the remainder devoted to rail transportation, airports and the Manila bus ,company. - 70 Table E.2: TRANSPORTATION INVESTMENT PROGRAM (in millions of pesos) Actual Est. Projected 1978 1979 1980 19381 1982 1983 1984 Highways (MPWH) 1,498 1,786 1,916 2,688 3,838 3,588 3,500 Philippine Ports Authority 74 232 565 865 237 317 739 Philippine National Railways 78 103 1.22 128 78 42 96 Metro Manila Transit Corp. 15 0 0 166 47 0 35 Light Rail Transit Authority - - 608 2,233 1,530 135 Other /a 226 115 726 13 111 94 786 Total Investment 1,891 2,326 3,329 4,468 6,544 5,571 4,817 Memorandum items: Road maintenance expenditures 892 643 1,064 1,029 1,627 - - Share of GNP (%) Public transportation 1l1 1,1 1.3 1.5 1.9 1.5 1.0 investment Of which: Highways 0.8 0.8 0.7 .9 1.1 1.0 0.8 Road maintenance 0.5 0.3 C0.4 0.3 0.5 - - La Largely water transport and airports; 1984 are staff estimates. Sources: Statistical Appendix Tables 6.1 and 1.10. 5. A framework for transportation investment in the 1983-87 Plan period has been provided by the seven-volume National Transportation Planning Project report, completed in mid-1982 by NEDA, MOTC, and MPWH staff assisted by consultants. The principaL findings of NTPP are as follows: (a) Most transportation investment funds during the 1983-87 Plan period would have to be devoted to ongoing projects (as of 1982), which were expected to require P 15 biLlion (in 1982 prices) to complete, whereas past experience suggested that about P 18 billion pesos (in 1982 prices) might be available for transport investment during the Plan period; (b) With the national highways network reasonably complete, emphasis should shift to provincial and feeder roads; - 71 - (c) Expenditure on road maintenance should be increased by 50%; (d) With the ongoing port projects expected to require P 3.5 billion during 1983-84, all eight main ports of PPA would have good facilities by 1985; only about P 400 million would be needed for new ports projects; (e) No substantial additional investments in aviation or railways would be needed, and in view of the traffic decline on the railroad (to only 9% of historical peak volume), it was doubtfuL that the recently completed rehabilitation of the main Line would turn out to be economically justified. 6. NTPP's findings are reflected in the Development Plan for 1983-87 which, recognizing the very substantial construction and improvement of highways and ports over the past decade, devotes relatively more attention to maintenance, and to rural roads and minor ports. In the period since NTPP was completed, the economic growth forecast has been revised very substantially downward from the 6.1% assumed in NTPP. This has implications for both the supply of investment funds and the demand for transportation services. The agencies in the transportation sector are therefore revising their programs downward, strengthening even further NTPP's view that the 1983-87 period would be devoted to completion of ongoing projects and to maintenance. Highways and Roads 7. As of 1982, there were 155,000 km of roads in the Philippines, yielding a2 oad density which compares favorably with Thailand or Indonesia. / However, only about 20,000 km of roads are paved, and many roads are in poor condition due to inadequate maintenance. The road network is classified as follows: national, 24,000 km; provincial, 30,000 km; city and municipal, 16,000 km; and barangay, 85,000 km. NTPP found that road classifi- cation is "somewhat arbitrary and not based on function." For example, low- volume rural roads might be classified either as provincial roads or barangay roads. NTPP therefore recommended that "a comprehensive road classification study be made to provide a sound basis for psignment of responsibilities between the national and local governments.- 8. Expenditures on construction and improvement of national highways increased from 0.7% of GNP in 1978 to a peak of 1.6% of GNP in 1981. These expenditures have largely been devoted to foreign-assisted projects. Major projects have included the Philippine-Japanese highway which runs from 2/ The average road density of 0.5 km/sq km of land area and 3.2 km/IOO0 inhabitants in the Philippines compares with 0.2 km/sq km and 1.9 km/1000 inhabitants in Thailand, and 0.1 km/sq km and 1.3 km/1000 inhabitants in Indonesia. 3/ NTPP, Overall Summary and Conclusions, p.I.28. 72 - northern Luzon to southeastern Mindanao (with two ferry links), the third and fourth IBRD-assisted highways packages, ADB1-assisted highways packages, the USAID-assisted Bicol River Basin Project, and Australian-assisted projects in Samar and western Mindanao. Most of these expenditures were well justified; however, NTPP found that low-volume roads and bridges were often substantially overdesigned due to the lack of an efficient policy on road design and construction standards. Efforts are presently being made to adopt more cost- effective design standards. 9. For the future, NTPP has identified 6,000 km of roads potentially deserving of reconstruction or improvement during 1983-87, and another 2,000 km of roads potentially deserving of reconstruction or improvement during 1988-92. NTPP noted, however, that feasibility studies would be required to establish the justification of these improvements and that the data base for road planning was generally inadequate. 10. NTPP's suggestions with regard to new highway projects are reflected in the medium-term financial plan of MPWH, prepared in March 1983. According to the plan projections, MPWH capital expenditures for highway projects would increase from P 3.3 billion in 1983 to P 4.8 bilLion in 1984 and P 5.6 billion in 1985. These projects made some provisions for new foreign-assisted projects and locally funded projects, as well as ongoing foreign-assisted projects. For example, the 1984 highways program would have included P 3.5 billion of ongoing foreign-assisted projects, P 500 million of new foreign- assisted projects, and P 800 million of purely locally funded projects. However, with the 1984 highways capital expenditures budget since having been reduced to P 3.5 million, the 1984 program will be devoted entirely to ongoing foreign-assisted projects. Furthermore, the real value of these nominal expenditures will be less than envisaged in MPWH's plan, because of the inflation arising from the devaluation of October 1983 and related price adjustments, including the prices of petroleum products consumed in construction work. MPWH will not be able to commit itself to new foreign- assisted projects until 1985 at the earliest, ancd possibly not until 1986. 11. A major finding of the NTPP study' is that inadequate road maintenance has been contributing to the deterioration of the roads, yi7lding higher operating costs and otherwise unnecessary reconstruction costs.4 As indicated in Table E.2, road maintenance expenditures have averaged about 0.4% of GNP. In principle, road maintenance allocations are based on an Equivalent Maintenance Kilometer (EMK) system, in which MPWHi takes the highway Length as a starting point, and then applies adjustment factors for pavement width and type, length and type of bridges, and traffic volume. In praccice, road maintenance reflects the following problems: (a) despite inflation, the basic EMK allocation of 11,342 pesos/kilometer has not been increased since 1976; (b) the EMK formula does not take inco account other relevant factors such as 4/ "Many investment projects considered by NTPE' would have been avoided if the roads had been properly maintained. Shifting of funds from the recurrent to the capital budget has resulted in an inefficient use of resources." NTPP, op.cit., p.I.26. - 73 - weather, terrain, and composition of traffic; (c) accounting for, and monitoring of, road maintenance is inadequate; and (d) the Office of Budget and Management usually releases fewer funds than indicated by the EMK formula. MPWH recognizes the need to revise and update the EMK formula and is closely monitoring the cost of maintenance operations in four pilot regions with this objective in mind. NTPP estimates that road maintenance expendi- tures should be increased by about 50% above the 1981 level, to P 10 billion (in 1982 prices) during the 1983-87 Plan period, or about 0.6% of GNP. Ports 12. There are 19 major national ports in the Philippines, operated by PPA, about 500 municipal ports, which are the responsibiLity of MPWH and Local governments, and about 200 private ports. The private ports handle large- volume homogenous commodities such as petroleum, coal, ore, sugar, and coconut oil. In 1980, the private ports handled 61% of total cargo, followed by PPA ports (38%) and municipal ports (1%). 13. Philippine Ports Authority. During the 1970s PPA initiated foreign- assisted construction and improvement projects for almost all of its major ports, as follows: (a) ADB has assisted the improvement of ports facilities at Manila (South Harbor), Davao, and Cotabato; (b) IBRD has assisted the improvement of port facilities at Cagayan de Oro, Cebu, Iloilo, Zamboanga, and General Santos; (c) German bilateral aid has assisted port works at Davao and Iligan. Some of these projects are ongoing at the present time.5- As a result of the sizeable investment of the past decade, NTPP found that "There is no need for further c9llstruction before 1990 at the top ten ports that handle 80% of PPA traffic".21 PPA has, however, proposed the improvement of facilities at the Manila North Harbor. In view of the economic prospects which include a sub- stantial contraction in the volume of the Philippines' imports in 1984-85, it would appear that this project could reasonably be deferred. 14. Municipal ports. Although the volume of cargo handled by municipal ports is small, their importance lies in the fact that, in many instances, they provide the only means of movement of goods in and out of remote hinterlands. MPWH is currently preparing, on the basis of NTPP recommenda- tions, a program for the phased improvement of municipal ports. 5/ Statistical Appendix Table 6.3. 6/ NTPP, op. cit., p.I.36. 74 - Railways 15. The Philippine National Railways consists of the main line south, which extends southeast from Manila to Legaspi in the Bicol peninsula, and carries the majority of the traffic, and the main line north, extending from Manila into central Luzon. Traffic on PNR has declined continuously for the past twenty years, because of inefficient service and competition from improv- ing highways, and has fallen to only 9% of historical peak volume. RoLling stock is old and has not been adequately maintairted. PNR has been unable to cover its operating expenses from operating revenues during the last five years, and therefore is subsidized by the Government. 16. In 1976 the ADB made a loan to finance a P 500 million project for the rehabilitation of the deteriorated main line south. This project is substantially behind schedule but is expected to be completed in 1984. NTTP found that this project is unlikely to have a satisfactory economic rate of return, and that closure of PNR would be justified on economic criteria. However, on the social grounds of maintaining employment, Government intends to keep PNR in service. NTPP has found that, under these circumstances, at least the main line north, which is in poor condition, should be closed. Air Transport 17. The major project during the 1978-82 Plan period was the construc- tion of a new terminal at the Manila International Airport. For the 1983-87 Plan period, NTPP has recommended airport capital expenditures of P 600 mil- lion for improvement of minor airports, considerably less than the capital expenditure proposed by the Bureau of Air Transportation, a unit of MOTC. Philippine Airlines, which is owned by the Government Service Insurance System, expanded its fleet considerably during 1981-82 with the purchase of new aircraft. Recently it has recorded negative net income and is thus a drain on GSIS resources. Manila Urban Transit 18. The Metro Manila Transit Corporation, which operates a fleet of about 800 buses, and the commuter lines of PNR account for about 7% of the daily public transport trips in Metro Manila, with service being dominated by private sector jeepneys. MMR had significant capital expenditures in 1979-80 when it took over several private bus companies. The major investment in the urban transport sector has been the 15 km Light Rail Transit project now under construction in Manila, scheduled for completion in 1985, and having a total cost of about P 4.5 billion. The LRT is expected to require an annual subsidy of about P 100 million. -75- F. EDUCATION 1. The Philippine educational system is confronting a number of serious problems as it seeks to accommodate an increasing student population at all levels. These problems fall into three major categories: (a) resource shortages and distribution (funds/facilities/teachers/instructional materials); (b) widespread quality differentiation by region and level of schooling; and (c) deterioration of facilities at the primary and secondary levels. These problems are compounded by the lack of a clear national govern- ment policy on its financial and institutional role at the secondary and tertiary levels. Institutional Framework/Role of Government 2. The Ministry of Education, Culture and Sports (MECS) is responsible primarily for planning, developing and impLementing programs in education, including regulating the private education sector. Its principal units are: the Office of the Minister and the services of the Ministry; the Board of Education; the Bureaus of Elementary, Secondary, Higher, Continuing and Technical-Vocational Education; and Regional Field Offices. The Bureaus are responsible for planning, development and evaluation of programs and for- mulation of guidelines and standards. The Board of Education, established in 1982, functions as an advisory body to the Minister making policy recommenda- tions on the planning, management and integration of the higher education system. Educational services are provided through the regional offices which are responsible for implementation of the programs, plans and policies of the MECS. 3. Elementary. Elementary education provision has been the primary focus of the MECS to date. Government has a stated objective to provide elementary education to all those wishing to enroll. To this end, it has an extensive network of elementary schools nationwide. About 95% of all elementary school students are enrolled in public schools which are funded under the MECS budget. The role of the private sector in elementary education is marginal. On average, about 95% of all expenditures for elementary educa- tion is funded by the national government. Local government contributions and income generating activities make up the remainder. Personal services (teachers' and others' salaries) are all nationally funded except in the National C'yital Region (NCR). Tuition and fees are not charged except in Region IV.- Public elementary school building and rehabilitation is done by the Ministry of Public Works and Highways (MPWH) under its budget. 4. Secondary. At the secondary level about 60% of total schools are public; nearly 18% of these public schools are fully nationally funded; the others rely primarily on local government funding with some national budgetary assistance. About 55% of the total number of secondary school students are taught in public schools, with private and sectarian schools accounting for 1/ Philippine School Cost Study, EDPITAF, FAPE, IIEP, Manila, May 1983, Table 11, pp. 54-56. - 76 the remainder. Of the nationally funded schools, over half offer techni- cal/vocational training (about 331 schools) and the others offer general aca- demic training (about 257 schools). All public vocational secondary education is nationally funded. The MECS budget provides Eor major current and capital outlays for these schools which covers about 88% of their expenditures. The remainder comes from productive activities,, tuition fees and other charges. 5. Eighty two percent of the public secondary schools receive some funding from local sources which is provided primarily from the general fund of the local government unit (provincial, municioal, city, barangay) which is generated from local taxes, licenses and permits. National Aid to Local Schools, a separate line item in the national budget, channels supplementary funds through MECS to locally funded secondary schools. These funds are dis- tributed according to school enrollments, number of schools and local finan- cial capability and are used exclusively for teacher salary support. At the provincial/city level about 87% of the funds are from the local government coffers, 8% from tuition fees and 4% from the national government. Municipal schools are funded with 66% local funds, 19% tuition fees and 15% national funds. Barangay school funds come from the loca:L government (35%), tuition fees (18%) and national government aid (46%). The barangay schools account for over 65% of the publicly funded secondary schools. They originally were established as community "self-help" schools, although they are characterized as academic secondary institutions. 6. The private sector plays a substantial role in secondary education, educating about 45% of enrolled students, The private schools must be govern- ment accredited and must follow MECS guidelines and standards for facilities, curriculum, qualification of teaching staff, etc. These schools depend primarily on tuition fees and charges for income:; however, they are con- strained by government regulations on tuition fee hikes. 7. Higher Education. The responsibility ior higher education is shared by the public and private sectors, with approximately 70% of the institutions privately funded and the government funding about: 30%. In the public sector, non-chartered institutions (arts, trade, community colleges, agricultural and teacher training institutions) are funded under the MECS budget, while the majority of the State Universities and Colleges (SCU) are funded individually under the national budget. There does not appear to be financial or strategic planning for the higher education subsector nor any comprehensive strategy for ensuring that priority fields receive the financial and institutional support required. Except for budgetary appropriations, cdata on actual expenditures of the public higher education sector as a whole are not readily availabLe. MECS' expenditures for higher education (non-chartered institutions) are not separated from secondary expenditures (Table F.3) so it is difficult to assess expenditures in these subsectors. 8. Vocational/Technical. Vocational and technical institutions operate at both the secondary and tertiary level. About 60% of the institutions are publicly funded (including secondary level) and 40% are in the private sector. There appears to be some differentiation in types of programs offered by public and private institutes. In general, public schools focus more on technical/vocational courses (including agriculture and fisheries) while - 77 - private institutions enroll about one-third of students in technical/ vocational courses and the other two-thirds take business/commercial and beauty/fashion courses. The National Manpower and Youth Council (NMYC), funded under the Office of the President, provides vocational training for out-of-school youth. The MECS has begun to take a stronger role in management of this subsector with the establishment of the Bureau of Technical and Vocational Education in 1983. While this unit will seek to address certifica- tion and standardization of course offerings which are definitely needed, it is not clear if its mandate incLudes issues of policy on the financial role of the national government in the subsector. Overview of National Government Strategy and Expenditures in Education P 9. National Government Strategy. The national government is pursuing a "building block" strategy in education, which focuses initially on improve- ments in the public elementary subsector, now underway, and will continue through the secondary and tertiary levels later in the decade. The strategy is built around the Program for Decentralized Educational DeveLopment (PRODED) which seeks to improve equity, efficiency and quality in the system. The elementary school program, which began in 1981, includes teacher retraining, curriculum revision, provision of additional and improved facilities, texts and instructional materials and improved management systems at the regional level. The program is in the initial stages of implementation and its impact has yet to be felt. 10. MECS is now in the process of designing a similar program for the secondary sector which is slated for implementation in time to service the first graduates of the elementary program in 1987. Tertiary education improvements would be targetted for the 1990s. The vocational training subsector would be dealt with as a component of the secondary and tertiary programs, as appropriate. 11. While the elementary program is well articulated and designed, and detailed plans for the secondary program are underway, the long-term financial implications of this program deserve more consideration. This is particularly critical given the fact that the elementary subsector is already accounting for the bulk of MECS expenditures and over half of total national government educational expenditures. Clearly, even the most modest program for improve- ments in the other levels of education will call for additional expenditures in education, yet no strategic financial planning for the education sector as a whole has been undertaken. If the current type of level-by-Level planning exercise continues, the Government will be faced with substantial financial demands which in all likelihood cannot be met. This may result in educational programs being funded on an ad-hoc rather than planned basis. The size and proportion of the optimum government contribution to each of the subsectors needs to be established in line with the policies for their development. 2/ Expenditure data for this section was obtained from the Office of Budget and Management in September 1983. 78 12. National Government Expenditures. National government spending on education as a share of GNP remained at about 1.9% throughout the period, with minor fluctuations (Table F.1). As a share of rational government expendi- tures, education spending rose from 14.1% in 1978 to 15.7% in 1983, accounting for about two-thirds of total national social services expenditures. This is in marked contrast to the early 1970s when educational expenditures claimed a substantial share of total national government expenditures and a much higher share of GNP. In 1970, educational expenditures accounted for 27% of totaL national government expenditures and 15% in 1975. As a share of GNP, public educational expenditures were about 2.5% in 1973 and 2.1% in 1974. Elementary education accounted for the largest share of total educational expenditures. Table F.1: NATIONAL GOVERNMENT EXPEN'DITURE ON EDUCATION (% of GNP) (Release of AA) Prelim. Actual Actual 1978 1979 1980 1981 1982 1983 Education Expenditures Total current 1.8 1.5 1.5 1e7 1v8 1o6 Total capital 0.1 0.2 0.2 0.3 0.3 0.2 Total (% of GNP) 1.9 1.8 1.7 1.9 2.1 108 Education Expenditure as 14.1 13.4 13.4 16.2 16.4 15.7 a % of National Govern- ment Expenditure Sources: Statistical Appendix Table 1.4d for current expenditures and Table 1.16 for capital expenditures. 13. In terms of distribution of expenditures, the share of national Government expenditures on elementary, secondary and technical education declined over the 1978-1982 Plan period, while spending on general adminis- tration increased substantially (Table F.2).3 Higher education increased its share of expenditures; however, the actual amount involved was small. The projected distribution of expenditures for 1983 suggests that these trends are continuing. 3/ This large increase in general administration expenditures has several possible explanations. First, the regionalization of MECS during the Plan Period may have resulted in higher overhead costs. Second, the category also includes expenditures for National Aid to Local Schools, largely salary support for secondary school teachers. Finally, some of - 79 - Table F.2: DISTRIBUTION OF NATIONAL GOVERNMENT EXPENDITURE ON EDUCATION BY LEVEL (%), 1978, 1982 AND 1983 Preliminary Actual Actual 1978 1982 1983 Elementary 68 59 56 Secondary 17 11 11 University/College 3 8 9 Technical/Vocational 3 2 2 General Administration, 6 16 17 Research, Regulation Subsidiary Services 3 4 5 Source of raw data: Statistical Appendix Table 1.4c. 14. Aggregate current spending on education rose significantly over the Plan Period and its share in total education spending rose slightly from 82% to 86% and aggregate capital spending declined from 18% to 14% (Statistical Appendix Table 8.1). The largest increases in current expenditures occurred in 1981 and 1982. This can most likely be attributed to salary increases, to partially offset inflation in those years. Current spending for all catego- ries except technical/vocational training increased over the five years. Most of the capital outlay for education was for elementary school building and rehabilitation, with smaller amounts for secondary and university levels. Sub-sectoral Programs 4/ 15. Elementary Education. At the elementary level, six years of educa- tion is compulsory. High enrollment (number of students enrolled) and partic- ipation rates (total enrollment divided by 7-12 population cohort) have been characteristic of the system since the 1960s. During the 1978-82 Plan period, public elementary enrollment rose from 7.7 million to 8.0 million. However, only about 85% of the 7-12 age group was enrolled. The average annual growth rate for the primary school population has risen faster than the enrollment rates. During the 1978-1982 Plan Period, some improvements in educational indicators have been recorded; however, the methods for measuring these indi- cators have been refined, which makes comparisons difficult. In fact, the cohort survival rate appears to have fallen as measurement has become more 4/ Expenditure data for the following sectors was obtained from the Ministry of Education in September 1983. 80 - precise.5 As the elementary level PRODED program is just beginning to come into effect, its impact cannot yet be measured. A Household and School Matching Survey undertaken by M}CS in 1982 will measure improvements since the last national achievement test- and will provide information on school, community and household determinants of educational participation and achieve- ment. The results of this baseline survey have rtot yet been analyzed. Data suggest that there have been and continue to be significant regional dispari- ties in terms of expenditures, student performance, resource allocation and facilities. 16. Elementary Education Expenditures. Implementation of educational programs accounted for over 90% of MECS expenditures through the 1978-82 period (Table F.3). Elementary edtication programs accounted for about 75-80% of the program expenditures during the same period. MECS expenditures fall into three broad categories: (a) personal services (salaries); (b) main- tenance and operating costs, and (c) capital outlay (land acquisition and improvement, major equipment outlay, secondary/higher level construction). The elementary school building and rehabilitation program is funded and imple- mented under MPWH. The bulk of elementary expenditures went toward salaries; maintenance expenditures accounted for only 2-4% throughout the period. MECS capital outlay for elementary education was negligible. In nominal terms, expenditures per student rose from about P 287 in 1978 to P 464 in 1982. In real terms, spending per scudent rose from P 134 in 1978 to P 148 in 1982 (Table F.3). It appears likely, however, that this increased expenditure level represents higher teacher salaries rather than more spending per student on instructional materials or school maintenance as is called for under the PRODED program./ 5/ Selected Elementary Level Indicators 1978/79 1981/82 Participation rate 90% 92% Cohort survival rate (Grade I through 6) 78% 67% Percent of pupils completing 67% 68% elementary school Drop-out rate 4.8% 2.9% Teacher-student ratio 1:30 1:31 Graduates 939,231 933,863 Source: MECS Statistical Yearbooks and Annual Reports. 6/ Survey of Outcomes of Elementary Education, MECS, Manila, 1976. 7/ A recent Government study on school costs found that the structure of unit current costs in sample public schools broke down as follows: teacher salaries, 85%; other salaries; 7%; nonsalary items, 8%. Non- salary expenditures broke down as follows: maintenance, 58%; instruc- tional materials/supplies, 31%; rent and utilities, 7%; administrative supplies, 3%; other, 0.5%. Regional disparities were found to be of mag- nitude rather than structure. However, the magnitude is significant and indicates that, despite the elementary PRODED program, regional inequi- ties are considerable (e.g., expenditures on non-salary items: Region IX, P 4.6; Region III, P 39). The Philippine School Cost Study, May 1983. -81- Table F.3: MECS PROGRAM EXPENDITURES, BY LEVEL BY CATEGORY AND BY OBJECT OF EXPENDITURE, 1978-82 (P million) (obligations incurred) 1978 1979 1980 1981 1982 I. Regional FieLd Offices Programs Elementary 2,213 2,283 2,680 3,195 3,902 Personal services /a 2,154 2,244 2,590 3,063 3,661 Maintenance and operating 59 39 90 132 157 costs lb Capital outlay /c - - - - 84 Secondary/Higher 318 365 473 484 712 Personal services NA 242 343 351 389 Maintenance and operating NA 96 130 126 158 costs /b Capital outlay NA 27 - 7 22 National aid - - - - 144 Regional Office Administration 22 22 25 32 35 Personal services 18 17 18 22 25 Maintenance and operating costs 4 5 7 10 10 Capital outlay - - - - Subtotal 2,553 2,670 3,178 3,711 4,649 II. Other /d 144 296 283 215 203 Total 2,697 2,966 3,461 3,926 4,852 /a Includes excess obligations for 1978 and 1982. 7i Includes furniture and equipment. T7 Includes land/land improvement, buildings and structures/major equipment outlay; does not include MPWH School Building Program. /d Includes Office of the Minister, Bureaus of Elementary, Secondary and Higher Education, National Educational Testing Center, National Scholarship Center. Source: MECS/Financial Management Service (Accounting Division) September 1983. 17. Textbooks/Materials. During the five-year period the national govern- ment continued its program of textbook production and distribution. A total of P 242 million was spent on texts and teachers' manuals for the elementary program during the 1978-82 Plan Period. Ministry data on texts by level and subject matter indicate that the targeted textbook:student ratio of 1:2 has been accom- plished for a number of titles, particularly for grades 4, 5 and 6. For other 82 - grades, progress toward the target is quite good. Adequate textbook ratios are particularly critical as a recent World Bank study based on the Philippine experience has shown a positive correlation between the introduction of more and better texts and academic achievement. It suggests that educational quality may be improves 1by shifting funds from salary expenditures to instructional materials.- 18. Facilities. At the outset of the Plan Period (1978) there was a severe classroom deficit in all regions and facility utilization was poor. There were about 187,000 classrooms available balanced against estimated requirements of 213,000. Further, about 56% of the existing facilities were in a state requiring rehabilitation or replacement.9 The Ministry of Public Works and Highways is charged with building and rehabilitating school facilities fOr public elementary schools. During the 1978-82 period MPWH constructed 48,192 elementary classrooms and 1,281 elementary-level multipurpose buildings and rehabilitated 7,281 elemen- tary schools. No funds were allocated for maintenance during 1978 and 1979; P 20.2 million p.a. was allotted for 1980-1982. Regional distribu ion of new facilities and rehabilitation is planned according to a formula 10 which takes into account physical condition of facilities, enrollment and deficiencies in academic performance. 19. While there has been progress in the schoolbuilding pro rHPm, MPWH esti- mates show continued aggregate deficits through 1985 (Table 8.9). - As MPWH plans to add 7,000-9,000 classrooms (net) per year, through the end of the Plan Period, the aggregate deficit situation should improve. However, despice this ambitious program, there are a number of unlerlying problems. First, regional data suggest that serious classroom deficits will persist even under a low enrollment scenario in the NCR and Region X:r. Second, even in areas where over- all surpluses may be achieved, intraregionaL disparities may persist, thus requiring additional investment. Finally, some facilities are likely to remain substandard through the 1983-1987 Plan Period. While MPWH has programmed P 27 million p.a. for major repair and maincenance nationwide, MECS itself has historically programmed very little for operating and maintenance costs. Given the poor condition of many of the school facilities, this relatively small share of programmed resources for repairs raises questions about adequate maintenance of capital stock. 8/ Textbooks in the Philippines: Evaluation of the Pedagogical Impact of a Nationwide Investment, Washington, D.C., World Bank, 1983. 9/ IBRD Report 3423a-PH, May 1981, p. 15. MECS completed a School Location Plan Survey in 1981 which showed that 44% of public elementary schools were in good condition, 34% required rehabilitation and repair, 13% were incomplete and 9% condemnable, requiring replacement. 10/ Detailed guidelines on application of this formula can be found in IBRD Report 3423a-PH, May 1981, Annex 4. 11/ MPWH and MECS have different enrollment projections for the 1983-87 period. See Statistical Appendix Tables 8.6 and 8.9. - 83 - 20. It is difficult to assess the progress of the PRODED elementary program as it is in its early stages; however, recent Government studies indicate that there may still be substantial regional disparities in expenditures per pupil, class size, teacher:student ratios and non-salary item recurrent spending. MECS has not yet addressed the financial implications of this situation or made a detailed financial pLan for the 1983-87 period for education expenditures for each level. It has, however, set out estimated financial requirements on a current/capital basis.121 Using this data and Government enrollment projections, it seems unlikely that spending per student could grow significantly in real terms despite the fact that improvements in access and quality, combined with continued high growth rates, will require substantial increases in recurrent costs. Given the limited data available, it is only possible to make an illustrative financial projection for the elementary subsector (Table F.4). Using this projection, it appears that if the elementary sector program is to be successful, its expenditure share of GNP must rise between .06-.10%, depending on enrollment, by 1986. Should this be done, however, it raises questions about the adequacy of funds available for other levels of education. Table F.4: ELEMENTARY EDUCATION: SELECTED INDICATORS Low High Actual projection/a projection/b 1981 1986 1986 Enrollment ('000) 8,073.3 8,998 9,388 Student/class ratio 40.3 36/c 36/c Number of classes ('000) 200.4 249.9 260.7 Teacher/class ratio 1.30 1.07 1.07 Number of teachers 261.0 267.4 278.9 Teachers' salary bill (% of GNP) 1.00 1.02 1.06 Nonsalary recurrent expen. (% of GNP) 0.04 0.08 0.08 Total Expenditures (% of GNP) 1.04 1.10 1.14 /a From MPWH. Assumes approximately constant participation and cohort survival rates. /b From MECS. Assumes progress toward policy objectives of increased participa- tion and survival rates. /c Assumes that average class size in the bottom half of the school distribution (ranked according to expenditure per student) is reduced to average class size prevailing in the top half of the school distribution. Source: Statistical Appendix Tables 8.6, 8.7. 12/ See MECS Five-Year Education Development PLan (1983-87), Table 13. Also see Statistical Appendix Table 8.14. - 84 - 21. Secondary Education. Secondary schooling in the Philippines takes four years, and the student age group ranges from 13 to 16 years of age. Enrollments in public secondary schools rose from 1.4 million in 1978 to 1.8 million in 1982. The progression rate from elementary to secondary school remained at around 82% throughout the period. Public secondary schools are grouped according to source of financing (para. 4). 22. It is difficult to get a comprehensive view of expenditures in the secondary sector given the compLexity of the funding situation (60% receive pubLic support; 18% fully nationally funded). Limited national government resources have been used for secondary schools as the policy has been to allow local government units to bear the bulk of the burden for financing secondary schools. The national government provides teacher salary support through the National Aid appropriation. As in elementary education, personal services accounted for the largestlPare of expenditures in both nationally and locally funded secondary schools.- Maintenance and operating costs made up most of the remainder. Based on available data, secondary level capital expenditures were small. 23. Textbooks and Facilities. About P 40 million was spent during the 1978-82 period on textbook production and distribution, resulting in 1.3 mil- lion gross additions. MECS' data indicate that the textbook:student ratio is improving at the secondary level. During the 1978-80 period MPWH constructed 1,554 secondary classrooms and rehabilitated 412 secondary school buildings at a cost of P 44,2 million for construction and P 29.5 million for rehabilita- tion (Tables 8,4, 8.5). No MPWH funds were programmed for maintenance or major repairs. There appears to be no centralized inventory of existing secondary facilities comparable to the elementary school building program, nor any systematic planning for capital investment in the secondary subsector. 24. TechnicaL and Vocational Training. Little information was available on expenditures for technical/vocational education. In part, the difficulty stems from the fact that vocational and technical training is done at both the secondary and tertiary level under the auspices of MECS and the National Manpower and Youth Council. Given the complexity of the subsector it is impossible to make any assessment. The data in Table F.1 and Statistical Appendix Table 8.1 suggest, however, that only very limited national govern- ment resources are actually being channeled to the vocational/technical sub- sector. This raises questions about Government's policies and commitment to 13/ A recent government-commissioned study, Funding Systems in the Secondary Subsector (3rd draft, July 1983), found that personal services (salaries) spending is taking an increasing share of locally and nationally financed secondary school funds, resulting in inadequate funding for non-salary expenditures. While national schools are in a somewhat better position than local schools, they appear to be following the same expenditure patterns (i.e., increasing funds channeled to salaries at the expense of other items). The study also notes that the Special Education Fund and National Aid are not providing sufficient resources to reverse this trend; thus capital stock is not being maintained adequately. - 85 - skills training and manpower development. Another area which should be explored is the role of the secondary vocational schools and the general secondary schools, given that the curricula are very similar and as many as 90% of vocational high school graduates have enrolled in formal higher education programs. 25. Summary. Government has kept its commitment to provide basic edu- cation to its citizens. It has devoted substantial public resources to that end and the results are commendable. The ability to continue this in the future is questionable, however, as no detailed financial and strategic planning has been carried out for the entire sector. The "building block" approach to planning has resulted in an eLementary sector program which is utilizing the bulk of public resources devoted to education. While this may prove to be the most efficient and optimal use of funds, the fact remains that Government is not allocating resources according to a master plan for the sector as a whole. It has not defined the role which the public sector can and should play in the financing of education. More policy analysis of the issue of private vs. social costs of education and the optimal mix of public/private sector financial responsibility needs to be undertaken. While the program for the elementary sector is very well conceived and detailed, there are still problems concerning regional disparities, level of service delivery and facility availability, which cannot be dealt with adequately outside of a financial policy for the education sector as a whole. The financial requirements of the elementary PRODED program must be viewed in con- junction with the role which the government proposes to hold in the secondary sector and should, ideally, also complement a strategy for tertiary and technical education. 26. The secondary subsector is clearly the most problemmatical as Government has not yet focused on how large the public sector role should be, how the subsector should be organized, and what financial role the Government can and should hold. Issues which require attention include: the differentiation between academic and vocational secondary schools and barangay schools in terms of access, quality and internal efficiency and cost implications of the projected growth in secondary school enrollment. It is clear, however, that if a major secondary development program is to be imple- mented, it will require either a substantial increase in aggregate national funding for education or a sizeable reduction in other subsectoral expendi- tures. While Government has increased, in reaL terms, financial resources to the education sector as a whole over the past five years, education's share of GNP and total national expenditures has decLined significantly since the early 1970s. The national government will not be able to develop the secondary subsector and maintain the elementary program without significantly increasing budgetary resources. 27. Spending on vocational/technical training has declined in real terms as welL as in its percentage share of national expenditures for education. This appears to conflict with Government's policy that manpower development and skills training are priority areas for the 1978-82 period. Thus while the importance of technical training has been recognized by the Government, it appears that much of the training effort is being left to the private sector. An analysis should be undertaken to determine the optimal funding mix for this subsector. - 86 - 28. Appropriations for higher education have been fairLy high. It appears that actual releases of funds to the individual institutions have been substantially smaller than the appropriations, however, and thus it is diffi- cult to assess how well the universities and colleges are able to function. Before any analysis of financing higher education can be undertaken, Govern- ment should first seek to clarify its policies on funding higher education both under MECS' budget and through appropriations to the state universities and colleges. Alternative financing scenarios should be explored, with consideration given to a larger overall private sector role with selective Government financing for priority fields. 29. Questions related to educational finance and expenditures will pose a number of difficult problems for the Government, over the next few years. These cannot be addressed adequately until a clea'r policy defining the Govern- ment and private sector financial roles and responsibilities is in place. It is not possible in this section to address these issues but it is urgent that Government undertake studies to determine the correct mix of resourc.es (e.g., teachers' salaries, instructional materials, audio visual aids) and variables (e.g., teacher-student ratios, student-textbook ratios) which would result in the most equitable and efficient system of education. The Philippine School Cost Study and the Funding Systems in the Secondary Subsector Study provide useful starting points, but additional work on pclicies, information manage- ment and financial planning are required. It appears certain that greater financial resources must be committed to the sector over the near and medium term if the complete PRODED Program is to materialize; however, the optimal use of these funds will not be realized until a financial strategy for the entire education sector is in place. The formulation and implementation of such a strategy should be a priority. - 87 - G. HEALTH Health Status 1/ 1. Mortality. There has been considerable improvement in the health status of the Philippine people in the last decade. Life expectancy is at 64. The infant mortality rate (IMR) declined to about 51 in 1982 from 75 in the 1970s. The crude death rate also declined significantly from 10.2 per 1,000 in 1970 to 7.0 in 1982. The maternal mortality rate (MMR) has declined to 1.4 per 1,000 live births (down from 1.9 in 1970), with significant regional variations. This is most likely a result of the relatively high level of education, and disease control programs. The declining trends in IMR and MMR, while substantial in the 1970s, have apparently leveled off and warrant concern and reconsideration of health programs directed towards child and maternal health. (These health indicators are comparable or slightly better than many other countries with a similar GNP per capita.) Water supply coverage appears to be high relative to other countries in ASEAN; however, the incidence of gastrointestinal diseases is not lower than in other ASEAN countries. This suggests that either access to safe water is lower than the data indicates or that other factors (e.g. nutrition) have an adverse impact on health status, in comparison with other East Asian countries. 2. Communicable diseases (infectious, parasitic, respiratory) remain the primary cause of death (54% in 1980); however, the proportion has begun to decline. Deaths due to degenerative diseases have increased from 11% in 1970 to 15% in 1980. Inter-regional differences in mortality are pronounced, and the pattern of regional mortality variations has not changed significantly in the last decade. Eastern and Western Visayas and Northern Mindanao have con- sistently been the regions with the lowest life expectancies. A large per- centage of infant deaths are due to perinatal causes, pneumonia, gastro- enteritis, malnutrition and respiratory infections. This pattern suggests that infant death rates might be lowered if maternal and child health care were strengthened. 3. Morbidity. Respiratory infections and gastroenteritis are the most prevalent diseases, but the incidence of malaria has risen considerably. About 15 million Filipinos are exposed to malaria annually. This increase may reflect the inability of the existing malaria control program to cope with the situation. Schistosomiasis incidence also presents a sizeable problem with 4 million people living in infested areas. Filariasis affects two-thirds of the population, and leprosy, which affects some 36,000 appears to be on the increase (Table 9.10). Morbidity statistics must be treated cautiously, however, as there are significant problems with data collection. According to 1/ This section draws on IBRD Report No. 4650-PH, Population, Health and Nutrition in the Philippines: A Sector Review, January 13, 1984. - 88 WHO, "diseases which prevail when sanitation 2nd water supply services are inadequate remain a serious health problem."- 4. Fertility. Population growth remains a major problem for the Philippines despite the reduction from 3% in the 1960s to the current 2.5%. At this rate of growth the Philippines will add the equivalent of Australia's population every ten years. Regional disparities in demographic characteris- tics are significant. Population density is highest in the Visayas and the National Capital Region. Regional differences in vital rates and contracep- tive usage are also pronounced. The high population growth rate, combined with low and decreasing mortality and without decline in fertility, has given rise to a situation where over 40% of the population are age 15 or younger. This has created a tremendous dependency burden on the Government for the provision of social infrastructure and public facilities. 5. Future Prospects. Mortality and morbidity should continue to decline over the next decade as economic, social and environmental improve- ments take place. As the age structure of the population is changing, there will be a shift away from communicable diseases towards diseases of aging, trauma, cardiovascular and hypertension-related diseases. The Ministry of Health expects that malaria, schistosomaisis and filaria will no longer present serious problems; however, this appears to be an optimistic forecast. Achievement of these objectives will require substantial government investment and intervention in the areas of family planning, maternal and child health care and the reduction of infectious and parasitic diseases. Government and Private Sector Roles in Health Service Coverage and Delivery 6. The Government assumes the major responsibility for providing health services at the local levels, primarily through the MOH. The private sector supplements public health services substantially. Over half of practicing physicians are employed by the private sector, as are half of the nurses and midwives. Government has stated that it intends to rely increasingly on the private sector and local governments to provide financial and institutional support for the health sector in the 1983-87 Plan Period. 7. It is estimated that about 70% of the population has access to pri- mary health care; the remaining 30% reside in rural areas or urban slums which are inadequately served or inaccessible. About 60% of the population lives less than 5 km fr30 a Rural Health Unit (RHU) (para. 14) and 36% live within 5 km of a hospital.- In 1982 there were 1,607 hospitals in the country, about 70% of which were privately owned and generally located in the urban areas. About 60% of the 478 public hospitals are secondary level facilities. In 1982 there were 32,580 public hospital beds, 47,132 private beds and 1,288 beds 2/ WHO/World Bank Cooperative Program: Republic of the Philippines: Water Supply and Sanitation Sector Study, Geneva, April 1982. 3/ Population, Health and Nutrition in the Philippines: A Sector Review, IBRD Report No. 4650-PH, January 13, 1984. - 89 - available from other agencies.4- While the hospitals are regionally well distributed, the majority of the beds appear to be located in Luzon. Over 90% of all RHUs and Barangay Health Station (BHSs) (para. 14) are located outside of Manila, as are 10% of the privately owned primary health care facilities (Table 9.7). Data on utilization of facilities is limited; however, there are indications that it 57 fairly low and generally for curative rather than preventive services._ Government Strategies and Policies 8. The constitution of the Philippines recognizes the right of the Filipino people to adequate health care. The MOH is entrusted with the responsibility for the promotion, protection and preservation of health. The MOH began its commitment to decentralized basic health services in the 1970s through a program which improved physician and nurse utilization and delegated responsibilities to auxiliary medical personnel. This strategy has been refined over the years and is now embodied in a plan for bringing low cost health care to alL Filipinos by the year 2000.6/ This plan stresses improvements in effectiveness of health services and provision of support mechanisms and improvement in health technology and research. 9. Primary Health Care (PHC) decentralizes health program administra- tion and brings local communities into the planning and implementing pro- cesses. At the community level PHC activities include: health care promotion and awareness; recognition of treatment for emergencies and common problems; identification of high-risk clientele; referrals; monitoring of health status; and supply of essential drugs. At the national level, MOH provides the coor- dination, support and logistics for integrated rural health care. The 1983- 1987 NEDA Development Plan adopted the concept of PHC and sets out specific targets for improving health indicators. In order to attain these objectives the MOH plans to carry out programs in communicable disease control, expanded immunization, nutrition, family planning, maternal and child health care, medical care and other programs. Considerable efforts have been made at the local level to organize communities to enable participation in the program. The program is very ambitious and the operational requirements and financial implications for such a program are not well specified. The policy of focussing on primary health care, while sound, will require a substantially larger share of public funds to impLement. In order to meet its objectives, the Government must give priority to reducing the effects of infectious 4/ Bureau of Medical Services, MOH, September 1983. 5/ The Bicol Survey, MOH, 1978, found that 80% of sick people do not use outpatient services and 80% of mothers do not utilize the preventive care services available. Government and private facilities share the responsibility for outpatient care and deliveries, while only Government units appear to offer preventive care. IBRD Report No. 4650-PH, pg.51. 6/ An Organizational Strategy and Plan of Action for Achieving Health for AIl Filipinos by the Year 2000. MOH, Manila, 1980. - 90 - diseases while concurrently taking steps to prevent and control chronic diseases. This is particularly complex given the widespread regional disparities in health status. Such a program calls for a major extension of public health services into the rural areas, which in turn, requires substantial public outlays. 10. Over a dozen central agencies are engaged in population, health and nutrition (PHN) related activities; however, the Ministry of Health (MOH) is the primary health policy making and implementing agency of the Government. Health services are also provided by other government agencies. The Ministry of Education sponsors in-school health education and school feeding programs. The Ministry of Social Services and Development also provides health and nutrition services. The Commission on Population. (POPCOM) is responsible for the formulation of population policy and family planning outreach programs. The Ministries of Agriculture and Labor have health and nutrition-related roles in extension services and in factories, respectively. The Ministry of National Defense provides health care for the armed forces. A number of semi- government and private agencies are engaged in providing health services, such as the Medicare Commission, the Nutrition Foundation of the Philippines and the Institutes of Family and Community Health, and Child and Maternal Health. National Government Expenditures on Health (1978-82) 11. National government expenditures on health 7- rose from P 955 mil- lion in 1978 to P 2,100 million in 1982 (Table G.l). In real terms expenditures showed an average annual growth rate of 10%. Health related expenditures rose only marginally as a percentage of GNP from 0.5% in 1978 to 0.6% in 1982. Its share of national government expenditures remained relatively small although it rose from 3.5% to 4.1% over the Plan Periqd. These expenditure shares are roughly comparable to those of Thailand.' MOH accounted for over 70% of total national expenditures on health, with the Ministry of Defense a distant second. The Ministry of Public Works and Highways accounted for only about 2% of total national expenditures for its health infrastructure building program. 12. The distribution of national expenditures did not change signifi- cantly over the 1978-82 period. About 90% of the total went towards health related expenditures, 8% for population and 3% for nutrition. About half of the total national expenditures were devoted to hospital and clinical services throughout the period which suggests that despite the policy commitment to primary health care, curative rather than preventive care is being funded at a constant level. Expenditures on individual health services, of which field 7/ Includes family planning and nutrition programs. 8/ In 1982 Thailand's estimated spending of health was 0.7% of CDP, 1.8% of total public expenditure and 3.5% of central government expenditure. It should be noted, however, that the health sector was given a relatively low priority in Thailand during the 1977-81 plan period. (Thailand Economic Report, pp. 282 and 286.) - 91 - health services comprises the largest part, decreased slightly from 27% to 24%. Family planning activities received an increased share of total health spending, rising from 7% to 10%. Expenditures on general administration and Table G.1: NATIONAL GOVERNMENT EXPENDITURE ON HEALTH (million of pesos) (obligations incurred basis) ActuaL Proj. Budget 1978 1979 1980 1981 1982 1983 1984 Ministry of Health 708 1,114 1,135 1,309 1,698 Field health services /a 113 182 197 251 441 Hospital services /b 427 604 619 766 917 Projects /c 45 48 51 67 86 Other 98 146 229 153 188 Capital Outlay 25 134 39 72 66 Ministry of Public Works and Highways/d 21 25 45 33 42 52 8 MOH and MPWH Total 729 1139 1180 1342 1740 Share of GNP (%) 0.4 0.5 0.4 0.4 0.5 Budgetary Releases for Health /e 955 1,239 1,305 1,625 2,100 2,773 Share of GNP (%) 0.5 0.6 0.5 0.5 0.6 0.7 Share of National Government Expenses (%) 3.5 3.8 3.5 3.6 4.1 5.2 Source of data: Statistical Appendix Tables 1.4c, 9.2, 9.3, 9.5. /a Statistical Appendix Table 9.3. lb "Hospital services" from Table 9.3 plus "special hospitals" from Table 9.2. /c "Special Projects" from Table 9.2 (includes malaria, schistosomiasis, cancer programs, etc.). /d Table 9.5. /e Table 1.4c. (Includes greater agency coverage for all health related expenditures and an earlier stage of expenditure - release of advise of allotment from OBM to ministries/agencies). special programs dealing with specific health problems such as malaria each accounted for about 8% of total health expenditures throughout the five-year period. Current expenditures rose from 90% to 95% of total health expendi- tures throughout the period. Total current expenditures on health increased in real terms 8.2% p.a. from 1979 to 1982 (Table 9.1). Capital expenditures had declining share of total health expenditures, decreasing from about 10% in - 92 1979 to only 5% in 1982. Total capital expenditures fell between 1979 and 1982 averaging a -13.6% annual growth rate after inflation (Table 9.1). 13. Provincial, city and municipal authorities also incurred health related expenditures. The share of local government spending on health has remained at about 5% of total health expenditures throughout the 1978-82 period. Total local government allocations for health rose i nominal terms from P 154 million in 1978 to about P 268.5 million in 1982.- Most of the private spending in the sector is for health services. The principal sources are payments by individuals (directly or through insurance schemes), payments by employers (industrial and agricultural firms) and voluntary organiza- tions. In 1980, health service payments by individuals were P 4.99 billion, more than triple the national government expenditures for that year. A 1975 survey suggests that the structure of private expenditures was roughly as follows: 45% xor drugs and supplies, 30% for hospital fees, 25% for profes- sional care.10 It is estimated that the total of national, local government and private household outlays for health in 1982 was about P 10.5 billion - about P 25,?7r capita. These figures are comparable to other mid-income countries.- The Ministry of Health 12/ 14. Overview. The bulk of PHC service delivery is carried out at the local levels under MOH auspices. The Provincial Health Office (PHO) is responsible for preventive, curative and rehabilitative health care within the province and is the focal point of decentralized health service delivery. The PHO oversees the district hospitals which serve as front line referral units. The district hospitals use the Rural Health Units (RHUs) as outpatient units and the Barangay Health Stations (BHSs) serve as extensions of the RHUs. There were about 2,000 RHUs in service in 1980, about 75% owned by the MOH. The remainder are owned by the local government or are rented. Each RHU serves between 20,000 and 30,000 clients. It is headed by a municipal health officer and has a staff of about 6 professionals. Over 7,000 BHSs were in service in 1980, 44% government-owned and 56% locally owned. Each BHS has a catchment area of 3-4 barangays (villages), each having a population of 3,000 to 5,000. A midwife heads the BHS and supervises volunteer barangay health workers. The physical condition of over half of the field facilities is very poor, thus making maximum utilization difficult. 9/ Population, Health and Nutrition in the Philippines: A Sector Review, IBRD Report No. 4650-PH, pg. 80. 10/ Family Income and Expenditure Survey, 1975. Discussion in IBRD Report No. 4650-PH, page 81. 11/ Ibid, page. 81. 12/ The remainder of this annex deals with the MOH as the principal policy- making and implementing agency. - 93 - 15. The MOH doctors, who account for about 42% of the total, are highly concentrated in Luzon. Of the 20,000 nurses, about half are employed by the MOH, with a disproportionate number assigned to Luzon. About half (10,000) of the country's midwives are employed by the MOH. Despite the substantial increase during the Plan Period of number of positions for health profes- sionals in the region , a large number of vacancies persists, particularly in the outlying areas.- This suggests that better salary and benefits packages may be required to attract professionals to the rural areas. The Government believes that community health care is the shared responsibility of the public and private sectors. To this end, the MOH is implementing a program which relies on volunteer barangay health workers (BHWs). A major training program for about 150,000 BHWs has been completed with a resultant average national ratio of 1:43 households. This strategy of using BHWs, while admirabl e4 may not be sustainable in the long run, as experience elsewhere indicates.- 16. The MOH is facing the basic issue of whether priority should be given to increasing access to care or improvements in quality and utili- zation. No clear policy decisions have been taken. However, as the basic health infrastructure is in place (although considerable attention to the conditions of the facilities is necessary) and PHC programs rely on an efficient health network, the major issue seems to be increasing efficiency. This means efforts are needed to increase utilization of RHUs and BHSs, to improve the health outreach system, to strengthen health service management, and to consolidate the logistics system. Health facilities are concentrated in the urban areas and more developed regions. While there do not appear to be gross inequities in regional distribution of facilities, intraregional distribution appears to be uneven. More attention needs to be given to location planning to reach underserved groups (para. 21). There are indica- tions that poor maintenance of facilities may also contribute to reluctance on the part of the clientele to use the RHUs and BHSs. Staff morale is also a problem in some field units, resulting in part, from inadequate facili- ties.l5/ Concerning manpower, while there is no shortage of trained medical manpower in the country, deployment to the rural areas has been a problem. Government should review the salary and incentives for health personnel in order to alleviate maldistribution and shortage problems. In addition, there should be more attention paid to management training of intermediate and lower level MOH staff who must carry out the field services. MOH should also consider developing an in-house training capacity and promote greater collabo- ration with other agencies engaged in health-related activities, particularly POPCOM. Concerning medical supplies and pharmaceutical procurement and distribution (para. 20), the problems stem from poor inventory management, 13/ Statistical Appendix Table 9.10 and IBRD Report 4650-PH, pages 56-58 and Annex 37. 14/ A full treatment of this issue may be found in Population, Health and Nutrition in the Philippines: A Sector Review, IBRD Report No. 4650-PH, November 1983, pg. 59-61, and 82. 15/ IBRD Report 4650-PH, pg.57. 94 overcentralized procurement, inadequate storage facilities and lack of a policy on production of essential drugs. Finally, Government must make a decision on the proper balance of urban curative medicine versus greater preventive efforts in the rural areas. 17. MOH Expenditures. The MOH, as befits its role as lead agency in the health sector, was responsible for over 70% of total national expenditures on health. The bulk of MOH's expenditures were current, mostly for hospital and field services, which accounted for 70-80% of the total during the 1978-1982 Plan Period (Table G.l). The remainder was spent on special hospitals (10- 15%), special projects including malaria, schistosomiasis, cancer, nutrition and family planning services (about 5%), bureau expenditures (about 2%) and administration (about 2%) (Table 9.2). 18. Total MOH expenditures rose from P 708 million in 1978 to P 1,698 million in 1982 (Table 9.2). In real terms expenditures increased, averaging a real annual growth rate of 12.4%. Program impLementation (hospital and field health services) rose from P 491 million to P 1,283 million over the period, averaging an annual growth rate of 15% after inflation (Tables Go2 and 9.4). Field health services expenditures rose from P 113 million to P 441 million; its share of total MOH spending jumped Erom 16% to 27% in 1982 which suggests that field service delivery has become more important as the PHC approach becomes operationalized (Table G.2). In real terms, field health service expenditures had an average annual growth rate of 27%. Hospital and clinical services rose from P 324 million to P 744 million in 1982, averaging a real annual growth rate of 11%. Surprisingly, personal services (salaries) share of field health services decreased significantly over the 1978-82 period, from 71% to 44% despite the decentralization of the Ministry and increases in regional MOH staff positions (Table G.2). This may be due, in part, to the Ministry's strategy of volunteer barangay health workers. The significant number of vacancies in its regional offices may also be a factor (para. 15). Supplies/materials and maintenance expenditures rose from P 32 million (27%) to P 246 million (48%) over the samne period. The proportional breakdown between supplies and maintenance expenditures was not available; however, given the poor condition of many BESs and RHUs, it is likely that maintenance has been underfunded (para. 19). Further, given the inefficient system for drugs and medical supplies procurement and distribution, coupled with the increase in field health facilities over the Plan Period, expendi- tures on supplies were likely to have been inadequate to keep regional units well stocked (para. 20). For hospital servrices, personal services also received a decreasing share from 47% to 36%; supplies and maintenance maintained about a 50% share throughout the period. 19. A regional breakdown of actual expenditures was unavailable; however, regional data for 1981 show the ratio of regional expenditure distri- bution in favor of six regions (NCR, I, II, III, V, VIII, X). There is a - 95 - similar inequity for the regional distribution of expenditures rel vive to the share of low income population, favoring NCR, I, II, III and XII.16- 20. Logistics services in the Philippines have been fairly poor. The system has been characterized by duplication of efforts and inadequate inven- tory and control. This has resulted in a system whereby excessive stocks of such drugs as coagulants and cardio-vascular medicines are available in the Table G.2: MINISTRY OF HEALTH: SELECTED INDICATORS Actual 1978 1979 1980 1981 1982 Facilities /a Hospital beds (public) - - - - 32,580 Rural health units - - 1,991 - - Barangay health stations - - 7,353 - - Health Personnel /b 19,863 - - - 27,008 Physicians (positions) 6,157 - - - 7,064 Nurses (positions) 7,467 - - 10,225 Midwives (positions) 6,239 - - - 9,719 Expenditures (current prices, P mln) 7c Field Health Services 113 182 197 251 441 Salaries/wages 81 99 118 170 195 Supplies/maintenance/other 32 83 79 81 246 Hospital Services 324 466 489 622 744 Salaries/wages 153 172 195 255 265 Supplies/maintenance/other 171 294 294 367 479 Expenditures (constant prices, P mln) /d Field Health Services 53 80 77 87 138 Salaries/wages 38 43 46 59 61 Supplies/maintenance/other 15 37 31 28 77 Hospital Services 152 203 190 216 233 SaLaries/wages 72 75 76 88 83 Supplies/maintenance/others 80 128 114 128 150 Sources: /a Statistical Appendix Tables 9.7, 9.8. /b Statistical Appendix, Table 9.10 7 Statistical Appendix, Table 9.4. d Government consumption deflator 1972 = 100. 16/ Population, Health and Nutrition in the Philippines: A Sector Review, IBRD, Report No. 4650 (p. 84). - 96 outlying areas while there are shortages of essential antimalarial, anti- diarrheal and antianemia drugs. The procurement system for drugs is ineffi- cient and does not exploit economies of scale. It is highly centralized and does not offer flexibility to field staff to take decisions which would ensure that essential drugs are available, particularly for treating communicable and infectious diseases. Over 70% of pharmaceutical distribution outlets are in the NCR. The government is setting up small village pharmacies with 20 essential drugs to reach the rural population; however, the logistics system for this have not been established as yet. This area requires immediate attention. Public sector drug factories have insufficient production capacity; vital vaccines for polio and measles are entirely imported. Total public sect r expenditures on drugs range from P 475 to P 500 million annually.17 Field services and hospital services account for about P 225 million each, with local governments, other ministries and parastatals accounting for the remainder. This does not include about P 25 million of vaccines or other drugs and contraceptives received from donor agencies. Budget funds for drugs are part of operating and maintenance expenditures. Generally, hospitals spend 20-25% of their total operating budget on drugs. Health Infrastructure 21. Over the 1978-82 period the Ministry of Public Works and Highways spent P 156 million on health facilities and P 10 million on repair and maintenance (Table 9.5). Fifty nine hospitals, 203 RHUs and 396 BHSs were built nationwide. While regional breakdown appears to be fairly evenly distributed, it is impossible from the avaiLabLe data to ascertain whether the new facilities are serving previously underserved areas or if they are replac- ing dilapidated structures. The MOH has built about 500 BHSs and 75 RHUs under its IDA-assisted Population Project. Another 150 BHSs are under construction and the remaining 165 are scheduled for 1984 and 1985 Population Projects. Unit costs for the MOH-built facilities are substantially lower than the MPWH-built units. The MOH built BHSs for P 70,000 each in 1983 while MPWH facilities cost P 120,000. This considerable difference in costs raises the question of whether the primary role in infrastructure might better be left to MOH. Government shouLd review both programs and see what alternatives make the optimal use of resources. In addition, although the location of the health facilities under the MOH program has been planned, it appears that there is no comparable physical plan for infrastructure built by MPWH. Thus it is difficult to ascertain how well the MPWH program is making progress in reaching underserved areas. 17/ Ibid, p. 54. - 97 - 22. MPWH has a P 104 million con struction and repair program for health facilities over the 1983-87 Period.18' There is no program planned for 1984, other than P 8 million allocated for maintenance due to budgetary constraints. No hospital facilities are scheduled to be built during this period which is in line with the policy to focus on the primary health care facilities during 1983-87. The program calls for 230 RHUs and 391 BHSs to be constructed. There are no funds allocated for rehabilitation despite the fact that this has been cited as one of MOH's priorities. Repair and maintenance allocations are fairly small given the need, about P 8 million annually, and appear to be fairly evenly allocated by region. However, given the lack of an inventory and master physical plan, it is difficult to assess whether this even distribution is the optimal allocation of rehabilitation funds. The emphasis on construction of RHUs and BHS, rather than hospitals is consistent with the thrust towards decentralization and primary health care. However, the lack of significant funds for rehabilitation is disturbing, particularly as over 53% of the BHSs and RHUs have been characterized as dilapidated. It seems clear, however, that a master physical plan is a critical element to the success of any strategy for primary health care. 1983-87 Period 23. There is no financial plan for the 1983-87 period which has attempted to look at requirements for sustaining existing services and meeting planned initiatives based on detailed cost estimates. The MOH Five-Year Plan provides estimates for the direct costs of individual programs such as the malaria program but does not have a consistent overall financial plan. Although total health-related expenditures have kept pace with population and inflation growth over the 1978-82 period, it seems likely that substantial resources will be required to achieve government's ambitious objectives for the sector. In order to achieve these goals, additional public funding must be provided for strengthening health management and administering a more decentralized public health network. This calls for a shift from urban cura- tive care, which has claimed over half of total health expenditures in the past, in favor of rural-based preventive medicine. MOH's recent initiative in integrating hospital and rural health services administration is a welcome development. However, effective implementation of this policy will be hampered without the building up of adequate management capacity at each operational tier, from the region downward. Although primary health care is the focus of the MOH, no clear cut targets of what PHC should provide nor an operational strategy for servicing all areas of the Philippines has been devised. Until this is done, it is impossible to estimate the financial requirements of the program. Without realistic estimates, it is improbable that the MOH's strategy for the sector would be successful. Other areas requiring attention are: (i) the revision of prices for health services to mobilize additional resources, particularly as demand for adult outpatient 18/ MPWH Health Infrastructure Program 1983-87. The MPWH Medium Term Infrastructure Program only has P 95 million programmed; the difference occurs in 1983 - the Health Infrastructure Plan calls for P 44 million and the MPWH Medium Term Plan calls for expenditures of P 35 miliion. - 98 - and distribution. Concerning population, no financial plan has been prepared for the family planning program, despite the fact that attainment of offi- cially projected population totals may require a substantial increase in resources for the population program. The population growth consequences must be taken into account in public financial planning, particularly in terms of providing adequate health services for the growing population. A recent study has shown that while national government aLlocations to family planning have exceeded expectations, local government contributions have fallen short./19 It is unlikely that local governments will be abLe to bear the increasing costs of a family planning program given competing demands for scarce local funding. Thus a successful program will depend increasingly on improved resource use and mobilization of alternative sources of funding (private sector community-based insurance, differential cost recovery, etc.). 24. MOH expenditures have had a 12.4% real average annual growth rate over the 1978-82 period; however, the 1984 budget shows a nominal decrease in MOH's appropriation./20 This is an alarming trend, more so as historically only 66-76% of the appropriated funds have been released to MOH. This sug- gests that it is not only highly unlikely that Government's stated objectives for the sector can be achieved given these limited financial resources, but in fact, the progress which has been made may be eroded. Finally, Government's desire to rely increasingly on local governments, the private sector and the medical insurance funds for financing health care is not likely to be success- ful until a complete strategic and financial plan for health has been devised and costed. This is all the more critical given the decentraLization of MOH's operations and the primary health care thrust. Without such a plan, the outcome will be either poor performance on priority objectives or erosion in service delivery levels. /19 Population, Health and Nutrition in the Philippines: A Sector Review IBRD Report No. 4650-PH, p. 86. /20 The 1983 Appropriation for the MOH was; P 2,660 million; the 1984 Budget appropriates only P 2,328 million. - 99 - H. HOUSING Background 1. Since 1975, when the Philippine Government initiated active involvement in the housing sector, a comprehensive national shelter policy has evolved in the Philippines. Prior to 1975, shelter problems were handled by ad hoc establishment of organizations with overlapping responsibilities, competitive mandates, and poor coordination. The establishment and maturation of a rationalized network of agencies charged with implementing shelter policy has been a major achievement of the past decade. More recently, the National Shelter Program Central Secretariat (NSPCS) was established within the Ministry of Human Settlements (MHS) to ensure sectoral coordination - a crucial element in an increasingly sophisticated, volume-oriented delivery network. The first five-year shelter sector plan was set forth in the Philippines 1983-1987 Development Plan. 2. The question confronting government is whether the 1983-87 National Shelter Program is delivering value for money. The following review of the plan will focus on its economic context and institutional delivery system, government's overall shelter strategy for the '80s and an analysis of the 1983-87 Program in terms of the number/types of units, total expenditures, a comparison of actual, planned and probable production levels, match with needs and beneficiaries. Finally, it takes up the issues facing government in placing the delivery system on a sounder footing in the '80s. Economic Environment 3. The current economic climate in the Philippines will have at least four important implications for shelter sector policy and operations. First, with the decline in public resource mobilization, public expenditures will have to be reduced. Less money will be available for equity contributions and for subsidies. Cost recovery and financial self-sufficiency will therefore become imperative. Second, inflationary pressures have been building since the October 1983 devaluation and if they continue, they will exacerbate the serious interest rate problems being experienced in the sector (para. 18). Negative spreads would worsen, further weakening the already precarious financial positions of several key sectoral agencies. Third, increases in construction costs, which typically rise faster than the overall CPI, would accelerate the erosion of families' ability to afford shelter. Increases of up to 20-30% in some building materiaLs since October 1983 have already occurred. Finally, recessionary conditions will slow the pace of implementation. These environmental factors must be taken into account in setting a realistic five-year program. Shelter DeLivery System 4. Housing expenditures come from both public and private sources, involving seven agencies engaged in three critical functions: regulatory, production and finance. All these agencies are parastatals under the Ministry of Human Settlements. - 100 - A. Financial Agencies.. The core of the shelter finance system involves a new trio of agencies established in 1979/80 to create a secondary mortgage market: (1) Home Development Mutual Fund: HDMF or "PAGIBIG" is a mandatory provident fund (essentially refundable payroll tax) for all formal sector employees and employers. About 85% of stipulated "contributions" are passed on to the National Home Mortgage Finance Corporation (NHMFC) which in turn purchases primary mortgages granted to HDMF's members from loan originating institutions. NHMFC currently pays 12% interest to HDMF for use of its funds. This covers HDMF's operating expenses and dividend payments on member accounts, currently 10%. (2) National Home Mortgage Finance Corporation: NHMFC is a secondary mortgage institution which purchases first mortgages from loan originating institutions. NHMFC invests HDMF trust funds in short- term time deposits and government: securities, and floats bonds to raise additional resources. Bonds are currently offered at 15%. The mortgages it purchases yield 9% and 16%, depending on lending criteria. (3) Home Financing Corporation: HFC insures all residential mortgages purchased by NHMFC and housing construction loans. Other mortgages can also be insured by HFC, but these represent only a small percentage (perhaps 10%) of home loans originated in the Philippines. B. Production Agencies (1) National Housing Authority: NHA currently is the only government agency engaged in volume production of low income housing projects, largely with World Bank loans ancd government equity and subsidy contributions. Serviced sites and slum upgrading constitute most of NHA's program, with some resettlement, new construction and small *business loan activity. The agency produces over 17,000 units per year. NHA originates long-term mortgages which to date the NHMFC has not yet purchased. (2) Human Settlements Development Corporation: HSDC is primarily involved in the shelter sector through its wholly owned subsidiary, the BLISS Development Corporation, which constructs about 2,000 subsidized apartments and high- to medium-cost units per year. The BLISS program was established to demonstrate to the private sector that moderate-cost housing could be profitable. The private sector has responded by starting to build both moderate-cost and mixed income housing, currently putting BLISS, in direct competition with the private sector. (3) National Housing Corporation: NBC procluces and warehouses building materials, which it sells to government agencies and private developers. Currently, NHC's major uncLertaking is the production of - 101 - "flexihomes," pre-fabricated units which the government hopes to produce at low cost for low-income families. NHC's goal is mass production to reduce materials costs. C. Regulatory Agency (1) Human Settlements Regulatory Commission: HSRC implements all laws and regulations relating to housing development and construction, including zoning, land use and subdivision requirements. Until recently, the regulatory process for approval of housing projects was lengthy, but HSRC has successfully cut the processing time from six months to as little as two weeks. HSRC's most important accomplishment has been to revise the building code and subdivision standards to make them more compatible with sites and services projects, enabling private developers to legally penetrate lower cost markets. 5. In addition to the above agencies which come directly under the authority of MHS, the Government Service Insurance System (GSIS) and the Social Security System (SSS) offer mortgage loans to their members at low interest rates and for smaller amounts than the HDMF-NHMFC-HFC system. In turn, they are reaching somewhat lower income groups than the MHS finance system, although not as low as the beneficiaries of the National Housing Authority's projects. The GSIS and SSS are not, however, major contributors to shelter finance. Experience to Date 6. The 1975-80 reorganization of the shelter delivery system was largely directed at mobilizing private sector initiative and financial resources, and reducing public expenditures. In many respects it has been successful. Long-term mortgage finance has been provided at affordable rates through the PAGIBIG provident fund, overcoming what had previously been a principal constraint to shelter development. New housing production has been stimulated, institutional overlap and thus wasted expenditure reduced, and limited private finance attracted downward from high-cost units into moderate- cost housing. Squatter demolition policies have been largely abandoned, and production capability for low-cost shelter and upgrading has increased dramatically through NHA. 7. Serious problems have arisen as well which require government's attention. These are taken up under "Issues" (para. 18). These, however, involve the pace, balance and financial mechanics of the system, rather than a fundamental redirection of course. The system as established is sensible, if not entirely viable. 8. Total production by the new government shelter system and private formal sector developers from 1976 to 1980 was roughly between 150,000 - 200,000 of the 900,000 units built. Clearly informal private efforts are still housing the majority of people. In 1981, the government system produced about 33,400 units with NHA supplying 18,700, or well over half, followed by the SSS with 4,700, or 14%. The new NHMFC began to make an impact in 1982, - 102 - financing 5,200 units (vs. 1,300 in '81), or 15% of the 34,000 total. NHA remained the production leader, however, supplying 15,800 units, or 46%. Total construction output slipped in 1982 by 16% to about 18,600 units, compared to 22,000 in 1981. Refinancing, however, increased by 36%, from 11,300 units to 15,500 (Table 3, para. 14). A gradual shift is occurring from public to private construction. Government Shelter Strategy for the '80s 9. Shelter strategy in the '80s as laid o-it in the 1983-87 National Shelter Program is therefore expected to continue building private sector participation with government involvement Limited to lowest income programs. Its central vehicles are to be mortgage purchases under secondary market facilities (NHMFC-HDMF-HFC) and regulation of private developers (HSRC). As outlined, the program expenditure principally by NHA on lowest income families is de-emphasized, and a continuing tussle for increasingly scarce resources can be expected between these agencies. The 1983-87 National Shelter Program 10. Quantitative targets for the government's 1983-87 program are shown in Table 10-1 of the Statistical Appendix. This covers the anticipated number of units, and sources of both construction finance and long-term mortgages purchased by government agencies. It excludes uniits built and financed by the private sector. 11. Number/Type of Units. The program called for government financing of about 120,000 units annually, predominantly in urban areas. Construction finance would be overwhelmingly supplied by the private sector (83%), with government budgetary appropriations including equity contributions limited to 16%. Once units are completed, however, NHMFC is expected to provide long- term financing for fully 72% of their cost through sales or placements of mortgage-backed bond instruments. NHA long-term financing is projected at a relatively low level of only 5% of total requirements. 12. A rough breakdown of unit types is shown in Table H.l. Only 17% of the units in the Program are earmarked for serviced sites and slum upgrading, the only kind of program proved affordable to the lower two-thirds of the population. The MHS hopes to bring completed "flexihomes" within range of families down to the 30th income percentile, but this ambition has yet to be realized. On the basis of proven track records, 83% of the plan is therefore clearly targeted on middle- and upper-income families. - 103 - Table H.1: TYPE UNITS Units p.a. Low income High income % total Slum upgrading 15,000 - 13 Serviced sites 5,000 - 4 Completed dwellings - 100,000 83 (single family dwellings and apartments) Annual Total 20,000 100,000 100 13. Expenditures. Total public expenditure for the 1983-87 period is planned at about P 4,770 million, excluding provident fund contributions, as shown below: Table H.2: EXPENDITURES Total 1983 1984 1983-87 National Budget Equity contribution 448 802 2,106 Budgetary appropriations 628 628 2,666 Subtotal 1,076 1,430 4,772 Payroll Tax (provident fund) coLlections by HDMF 1,220 1,620 N.A. Total 2,296 3,050 N.A. 14. Actual, Planned and Probable Shelter Production. Government's plan is highly ambitious and it is unlikely these targets will be reached. An out- put of about 50,000 units per year totalling 250,000 units over the plan period would seem more feasible. Even this represents a significant increase of 8% p.a. over the 34,000 units built in 1982 and will be difficult to achieve under the prevailing economic climate. Table H.3 illustrates several other important points about the five-year plan. 104 - (a) The growth assumptions between 1982 and the plan's base year, 1983, embody a fundamental flaw. While actual growth in 1982 was 2%, the implied 1983 expected increase is over 200%. This is most unLikely to have been achieved; (b) The underlying design is to significantly expand financing facili- ties (mortgage purchases by NHMFC-HDMF) and halt growth in direct government production. The ratio of mortgage financing to direct production is 1:2 in 1981, 1:1.2 in 1932, estimated at 1:0.6 in 1983, and at 1:0.4 by 1987. This relies on projected increases of over 900% in 1983 for HDMF and HSDC, both of which are unlikely to have occurred. Expansion of mortgage financing is not expected to happen this rapidly, since a substantial portion of the rapid 1982 expansion represented sales by private banks of existing mortgage portfolios, rather than new originations; (c) Under the plan, MHA's established production capacity would be significantly underutilized. NHA's own projections show a capacity for about 27,500 units by 1987, well over the 19,991 planned. The agency's actual capacity in 1982 was three times that of the HDMF- NHMFC system. Government's plan reverses this by 1987, with HDMF- NHMFC financing four times NHA's output. This dramatic a reversal is also unlikely to occur, and undesiraible as well since, as noted earlier, NHA is the only significant producer of low-cost shelter; and (d) The official plan implies a government bailout of NHMFC - or its guarantor HFC. Negative yields have seriously eroded NHMFC's finan- cial position (para. 18) and it is unlikely the agency could raise the volume of funds required by the plan without radical transforma- tion of its finances. Table H.3: ACTUAL, PLANNED AND PROBABLE SHELTER PROGRAM, 1981-87 Actual Planned Probable % increase % increase % increase % increase p.a. over p.a. over Agency 1981 1982 over 1981 1983 over 1982 1987 1983 1987 1982 Mortgage Financing HDMF-NHMFC 1,328 5,202 +290% 55,710 +970% 82,260 +10% 13,500 +21% GSrS 1,959 3,212 +63% 3,600 +12% 3,600 NONE 3,600 +2% SSS 4,663 5,956 +28% 4,527 -24% 2,239 -15% 2,200 -15% DBP 3,417 1,096 -68% 4,780 +336% 9,220 +18% - Withdraw Subtotal 11,367 15,466 +36% 68,617 +343% 97,319 +9% 19,300 +5% Direct C Government Construction NHA 18,677 15,883 -15% 19,991 +25% 19,991 NONE 27,500/a +12% tlSDC (BLISS) 2,498 1,593 -36% 16,000 +904% 16,000 NONE 2,000 +5% Ministry of Agrarian Reform 883 1,139 +29% 2,000 +75% 2,000 NONE 2,000 +12% Subtotal 22,058 18,615 -16% 37,991 +104% 37,991 NONE 31,500 +11% TOTATL 33,425 34,081 +2% 106,608 +212% 135,310 +6% 50,800 +8% /a From NIIA's five-year plan. 106 15. Match Between Plan and Needs, A total program of 50,000 units per year will meet about one-third of the expected increase in urban households realistically be built. Under these circumstances, continuation of upgrading programs by NHA is vital. Table H.4: MATCH BETWEEN PLAN AND NEEDS Plarned shelter Probable shelter production p.a. production p.a. Anticipated no. additional hh per year 1983-87 (Need) 150.000 (100%) 150,000 (100%) Shelter production 120,000 (80%) 50,000 (33%) Formal sector private units built outside government- associated agencies 15,000 (10%) 15,000 (10%) Total Production 135,000 (90%) 65,000 (43%) Annual shortfall 15,000 (10%) 85,000 (57%) 16. Beneficiaries. The five-year plan appears strongly oriented toward the third income quartile, as shown below: Table H.5: BENEFICIARIES Percentage of Income quartile plan beneficiries Highest 10.6 Third 62.0 Subtotal - over 50th percentile 72.6 Second 18.4 Lowest 9.0 Subtotal - under 50th percentile 27.4 This is based on the income profiles of beneficiaries of Loans purchased by NHMFC, and the beneficiaries of the NHA's programs, which together comprise 75% of the program,. Higher income households can afford market rates and - 107 - mortgage funds are readily available to them from private institutions. There is therefore little need for scarce government finance. Recognizing this, the plan correctly attempts to move government finance down the scale to lower income groups. 17. The substantial government penetration of the third quartile is commendable. Still, only 27% of beneficiaries are in the lower half of the income distribution, where the needs are greatest. Clearly a disproportionate share of government resources is going into the 50+ percentiles. Issues 18. To make the new institutional system viable, a number of serious problems require government's urgent attention: (a) Negative Yield on HDMF-NHMFC-HFC Financial System. The operating costs of the government's mortgage purchase system - the kingpin of the five-year plan - exceed its income by approximately 7%. The NHMFC pays 12% for HDMF funds and 15% on bonds, with an average borrowing cost of about 13%. Average portfolio earnings are only about 10%, leaving a 3% negative spread on interest rates aLone. To this must be added operating costs of approximately 4%, totaling 7%. By December 1983, NHMFC was expected to incur a sizable operating loss, and by mid-84 might be forced to call upon HFC insurance or utilize HDMF's trust funds, jeopardizing the integrity of the entire system. If NHMFC were able to reduce its operating costs to 2%, more in line with comparable institutions, it might be viable with a 15% average lending rate. This assumes borrowing costs do not rise, and inflation does not exceed current levels. A 15% rate for moderate-income housing would also appear reasonable in relation to NHA's 12% rate for lower income families; (b) Reduced Housing Costs. Average unit costs need to be brought down significantLy to spread government resources farther and increase the number of participants in shelter programs; (c) Opening the Mortgage Market to Low Income Groups. Secondary mort- gage facilities of NHMFC are presently inaccessible to lowest income groups. Neither low income PAGIBIG members nor NHA beneficiaries have yet penetrated the system. The MHS should devise appropriate mechanisms to ensure a larger portion of these resources reach the lower income half of the population. NHA should be released from long-term financing and concentrate on mortgage initiation for Lower income groups; (d) NHA Initiatives. NHA should take several actions to improve its financial positions: - Cost Recovery. Significant improvement is needed in cost recovery performance by NHA. Collections performance is necessary to penetrate the secondary market, which is under- standably nervous about Low income mortgages. Foreclosures 108 must be demonstrated to be feasible, and NHA should begin proceedings against defaulting borrowers, to preserve its own financial position as well as to establish the credibility and therefore saleability of its low income portfolio; and - Lending Terms. Other lending terms and conditions should be reviewed with the objective of improving NHA's liquidity posi- tion. Higher down payments and introduction of front-end charges represent two possible mechanisms which should be explored; and (e) Government Initiatives to Assist NHA. Government assistance is needed to resolve two other issues: NHA Equity Contributions. NHA is the only agency producing or financing shelter for the lowest income half of the population. Government cannot afford to allow this existing production capacity to wither away for lack of resources. Its produc- tivity should be fully exploited. The GOP needs to develop with NHA an agreed moderate term program and commit the corres- ponding resources to ensure that the program is sustained; and NHA Infrastructure Policy. Government assistance is also needed to ensure that the assets developed by NHA on behalf of other agencies are either paid for or transferred out of NHA's portfolio together with the assoc.ated liability. NHA has built considerable offsite and other infrastructure on behalf of other agencies, but has encount:ered serious difficuLties in obtaining payment from these agencies. Carrying these liabilities ties up NHA's capital and has eroded the institu- tion's financial position. - 109 - PHILIPPINES PUBLIC EXPENDITURES AND THEIR FINANCING STATISTICAL APPENDIX Table of Contents 1. PUBLIC FINANCE Table No. National Government Cash Operations 1.1 National Government Cash Operations 1.1a National Government Cash Operations (Percentage of GNP) 1.2 Distribution of National Government Cash Balances National Government Expenditures 1.3 Reconciliation of Obligation and Cash Budgets 1.4 Gross and Net National Government Expenditures (Obligation Basis) 1.4a Gross National Government Expenditures, by Sector (Obligation Basis) 1.4b National Government Contributions and Transfers to Other Public Sector Units, by Sector (Obligation Basis) 1.4c Net National Government Expenditures, by Sector (Obligation Basis) 1.4d Net National Government Current Expenditures, by Sector (Obligation Basis) 1.4e Net National Government Capital Expenditures, by Sector (Obligation Basis) 1.5 Gross and Net National Government Expenditure (Cash Basis) 1.5a National Government Transfers, Equity Contributions, and Net Lending to Government Financial Institutions and Corporations (Cash Basis) 1.5b National Government Current Transfers by Recipient (Cash Basis) National Government Revenues 1.6a National Government Revenues 1.6b Major Revenue Legislation, 1978-83 1.6c Summary of Tax System, 1982 1.6d Ratios of Revenues to GNP: International Comparison 1.6e Ratios of Tax Categories to Total Taxes: International Comparison 1.6f International Tax Comparison (ITC) Ratios for Selected Developing Countries Local Government Finances 1.7 Consolidated Revenues and Expenditures of Local Governments Social Security Institutions 1.8 Operations of Social Security Institutions E-FEY1/DB-527/06-22-84/hp/afr/rmj2 - 110 - Government Corporation Finances 1.9 Major Nonfinancial Government Corporations: Consolidated Financial Statements 1010 Major Nonfiaancial Government Corporations: Capital Expenditures by Sector 1.11 Major Nonfinancial Government Corporations: Internal Cash Generation by Sector Consolidated Public Sector 1.12 NEDA Infrastructure Program by Sector 1.13 NEDA Infrastructure Program by Region 1.14 Public Investment and Public Savings 1.15 Public Sector Fiscal Balances 1.16 Public Fixed Investment by Sector 2. PRICE, MONETARY ANID DEBT STATISTICS 2.1 GNP and Price Statistics 2.2 Monetary Survey 2.3 External Debt Outstanding and Disbursed, Classified by Type of Borrower 2,4 External Debt Transactions, Classified by Type of Borrower 2.5 External Debt Commitment, Classified by Type of Borrower 3. AGRICULTURE 3.1 NLA Capital Expenditures by Region and by Project 3.2 NIA Cumulative Ha Serviced and Palay Output 3.3 MAR Capital and Current Expenditures 3.4 MA Capital and Current Expenditures 3.5 Summary Statement of Capital and Current Expenditures 3.6 Sector Expenlitures (1982) by Region 3.7 Agriculture Sector Cash Flow 3,8 NIA Sources and Uses Statement 3.9 NIA Balance Sheets 3.10 NIA Consolidated Income Statement 4. INDUSTRY 4.1 Major Industrial Projects: Costs, Schedules, and Financing Plans 4.2 Export Processing Zone Authority: Financial Statements 4.3 Status of Export Processing Zones, 1982 5. ENERGY Energy Sector-General 5.1 Primary Energy by Source 5.2 Energy Utilization by Sector 5.3 Dependence on Imported Energy and Imported Fossil Fuels 5.4 Electricity Generation by Entity E-FEY1/DB-527/06-22-84/hp/afr/rmj3 - 111 - National Power Corporation 5.5 National Power Corporation: Installed Capacity at Year's End, by Grid and Energy Source 5.6 National Power Corporation: Additions to Installed Capacity, by Grid, Energy Source, and Major Project National Electrification Administration 5.7 National Electrification Administration: Investment Program 5.8 National Electrification Administration: Financial Statements 5.9 National Electrification Administration: Financial Results of Member Cooperatives 5.10 National Electrification Administration: Loan Recovery from Member Cooperatives 5.11 Status of Rural Electrification Philippine National Oil Company 5.12 Philippine National Oil Company: Financial Statements 5.13 Philippine National Oil Company: Capital Expenditures by Subsidiary 6. TRANSPORTATION 6.1 Expenditures of the Ministry of Public Works and Highways 6.2 Philippine Ports Authority: Financial Statements 6.3 Philippine Ports Authority: Capital Expenditure by Project 6.4 Philippine Ports Authority: Volume of Cargo and Berth Length, by Port 6.5 Philippine National Railway: Financial Statements 6.6 Light Rail Transit Authority: Financial Statements 6.7 Metro Manila Transit Corporation: Financial Statements 7. WATER SUPPLY 7.1 Source of Water Supply, by Urban and Rural, 1980 7.2 Metropolitan Waterworks and Sewerage System: Financial Statements 7.3 Local Water Utilities Administration: Financial Statements 7.4 MPWH: Water Supply Program 8. EDUCATION 8.1 National Government Current/Capital Expenditures on Education 8.2 MECS Expenditures by Program, Nominal and Real (1978-82) 8.3 MECS Expenditures, per Student, Elementary Level (1978-82) 8.4 MPWH School Infrastructure Program (1978-82) 8.5 MPWH School Infrastructure Program, by Region (1978-82) 8.6 Actual and Projected Elementary School Enrollment, by Region 8.7 Government E'-mentary School Teachers, by Region 8.8 Elementary School Classes, by Region 8.9 Estimated.Elementary School Classroom Requirements (1978-82) 8.10 Elementary Teacher-Student Ratios 8.11 Government Secondary School Enrollment, by Region E-FEYI/DB-527/06-22-84/hp/afr/rmj4 - 112 8.12 Government Secondary School Teachers, by Region 8.13 Selected Indicators for Sample Elementary and Secondary Schools, 1982 8.14 MECS Estimated Financial Requirements, 1983-87 9, HEALTH 9.1 National Government Expenditures on. Health, by Category, 1978-1983 9.2 MOH Expenditures, by Category, 1978-1972 9.3 MOH Program Trplementation Expenditures, 1978-1982 9.4 MOH Program Implementation Expenditures, by Object of Expenditure, 1978-1982 9.5 MPWH Health Infrastructure Program, 1978-1987 9.6 MPWH Health Infrastructure Building Program, by Region, 1978-1987 9.7 Health Facilities in Service, by Region, 1980 9.8 Hospital Facilities, 1982 9.9 Philippine Health Indicators, 1978 and 1982 9.10 MOH Health Personnel, by Region, 1978 and 1982 9.11 Morbidity and Mortality Indicators 10. HOUSING 10.1 National Shelter Program: Numbers of Units and Sources of Funds, 1983-87 10.2 National Housing Authority: Financial Statements 10.3 Human Settlements Development Corporation: Financial Statements 10.4 NHMFC: Overview of Activities, 1980-1983 -113- Table 1.1: CASH OPERATIONS OF THE NATIONAL GOVERNMENT, 1978-84 (in billion pesos) PRELIM. - ACTUAL========= ====== ACTUAL ====Pro1ec 1978 1979 1980 1981 1982 1983 1984 /a VENUE 24 29.5 34.7 35.9 38.2 45.5 52.3 Tax Revenue 20.4 26 30.5 31.4 33.8 39.3 40.3 Taxes on Income and Profit 5.5 6.2 7.3 7.7 8.3 8.8 9.3 Individual 3.4 3.3 3.4 3.9 3.9 4 Corporate 2.1 2.9 3.9 3.8 4.4 4.8 Taxes on Goods and Service 6.5 9.7 10.9 11.6 12.2 12.9 14.7 Sales and business taxes 2.4 4.1 5 5.3 5.6 5.6 6.? Excise taxes 4.1 5.6 5.9 6.3 6.6 7.3 a.s Taxes on Intern'l Trade 7.8 9.5 11.6 11.2 12.2 15.9 15.1. Import duties 7.4 8.7 11.2 10.9 11.9 15.6 14.4 Export duties 0.4 0.7 0.4 0.3 0.3 0.3 0.3 other Taxes 0.6 0.6 0.7 0.9 1.1 1.7 1.2 Nontax Revenue 3.6 3.5 4.2 4.5 4.4 6.2 5.4 SXPENDITURES AND NET LENDING 26.2 29.8 38.1 48.1 52.6 52 58.9 Current Expenditures 19.2 20.6 24.5 26.4 31 34 42.4 Personnel services 7.4 8.2 9.4 10.6 10.6 12.7 15.8 Maintenance/other operating expenditures 9.3 8.9 10.7 11.3 12.4 13.3 12.9 Interest payments 1.1 1.8 2.3 2.4 3.6 4.9 10 Allotments tO local gov'ts 0.8 1.2 1.5 1.6 2.4 2.6 2.8 Transfers to other public sector entities 0.6 0.5 0.6 0.5 2 0.5 0.9 Current Surplus 4.8 8.9 10.2 9.5 7.2 11.5 9.9 Capital Expenditures. 4.3 5 8.4 12.7 10 9.9 9.1 Infrastructure 3.6 4.3 7.3 l 7.5 6.6 5.4 Other capital outlays 0.7 0.7 1.1 2.7 2.5 3.4 3.7 Equity Contrib.and Net Lend. 2.6 4.2 5.2 9 11.6 8.1 7.3 Equity contributions 2.4 3.4 4.5 8.1 9.4 5.7 4.3 Net Lending 0.2 0.8 o.7 0.9 2.2 2.4 3 DEFICIT -2.2 -0.3 -3.4 -12.2 -14.4 -6.5 -6.5 FINANCING 2.2 0.3 3.4 12.2 14.4 6.5 6.5 Externallnet) 2.1 3.2 2 6 2.8 5.6 3.4 Domestic(net) 2 -0.6 1.7 8.8 7.8 5.6 3.1 Bank 0 4.8 7.1 0.7 1.5 Nonbank 1.3 4.5 2 1.r CHANCE IN CASH BALANCE -1.9 -2.3 -0.3 -2.6 3.8 -4.7 0 l-=increase) Totals maY not add up due to rounding. a/ Total revenue includes P 6.6 billion additional revenue from discretionary measures. Source: Ministry of Finance - 114 Table 1.la: CASH OPERATIONS OF THE NATIONAL GOVERNI1ENT AS A SHARE OF GNP 1978-85 PRELIim. = = ACTUAL - ACTJA. === Pro 1979 1979 1980 1981 1982 1983 1984 REVENUE 13.5 13.4 13.1 11.8 11.4 12.0 11.1 Tax Revenue 11.5 11.8 11.5 10.3 10.1 10.6 8,7 Nontax Revenue 2.0 1.6 1.6 1.5 1.3 1.F 1.2 EXPENDITURES AND NET LENDING 14.7 13.5 14.4 15.8 15.7 15.3 12.5 Current Expenditures 10.8 9.3 9.3 8.7 9.2 9.0 9.0 Capital Expenditures 2.4 2.3 33.2 4.2 3.0 2.6 1.9 Equity Contrib. and Net Lend 1.5 1.9 2.0 3.0 3.5 2.1 1.6 DEFICIT -1.2 -0.1 -:L.3 -4.0 -4.3 -1.7 -1.4 GROSS NATIONAL PRODUCT 178.1 220.9 2654.4 303.7 336.1 377.4 468.2 (in billion pesos) Numbers may not add up due to rounding. Source:Table 1.1 - 115 - Table 12: DISTRIBUTION OF NATIONAL GOVERNMENT CSASH BALANCES AT YEAR-END. 1978-83 (In million pesos) Depository Bank 1978 1979 1q80 1981 1982 1983 /a Development Bank of the 3629 4406 5862 7986 8029 5554 Philippines Philippine National Bank 1865 3394 3332 3143 1961 4903 Other commercial banks 1635 2513 3148 3511 3168 4339 Other depositories 2172 2244 1652 2673 2264 2710 Total 9301 12557 13994 17315 15422. 17506 Change in cash balance 2195 3256 1437 3321 -1892 2083 of which: Budgetary funds 2030 2968 122S 2615 -1222 2488 Budgetary trans. 1904 3505 403 2633 -3818 4718 Non-Budgetary trans. 126 -537 825 -17 2596 -:2230 Non-Budgetary funds 165 288 209 705 -670 -405 /a Preliminary Source: Bureau of Treasury, March 1984 - 116 - Table l.3: RECONCILIATION OF OBLIGATION AND CASH BUDGETS, 1982-84 (In million pesos) ACTUAL EST. PROJ. /a 1982 1983 1984 Release of AA by OBM 50672 53246 55500 Mlinus: Unutilized AA 3357 2635 1750 Equals: Utilized AA 47315 50611 55407 Minus: AA uncovered by CDC n.a. n.a. n.a. Equals: Release of CDC n. a. n. a. n. a. (current budget) Plus: Release of CDC to 2116 3218 2944 liquidate prior year obligation (acots payable) Equals: Total current year 49431 53829 57847 release of CDC by O0rM /b Minus: CDC unutilized in 2634 1095 2322 current year Equals: Utilized current- 46797 52734 56307 year CDCx (check issued by agencies) [inus: Checks outstanding 0 0 692 at year' s end Equals: Cash disbursements 46797 52734 55625 arising from current year' s CDCs Plus: Cash disbursements 3595 1036 1529 arising from prior- year CDCs /c Plus: Net lending 2218 1800 2:500 Equals: Total cash disburse- 52610 55570 594553 ments (Bureau of the Treasury) a/ Budget Message, Annex 3 l.4a. bl 'Cash Authorization Programw. 0/ Including cash disbursements arising from checks outstandin5g at year' s beginning. The effectivity of CDCs extends one quarter beyond the close of the calendar year, except for the infrastructure program for which the effectivity extends two quarters (until June 30). Source: Office of Budget and management. - 117 - Table 1.4: GROSS AND NET NATIONAL GOVERNMENT EXPENDITURES ,1978-83 (in million pesos. obligation basis) Prelim. -------------------- Actual -------- Actual 1978 1979 1990 1981 1982 1983 35 NAT'L. GOVT. EXPENDITURE 27573 33001 38383 46217 48792 51849 llotments to Local Govt's. 1103 1071 1078 1743 2297 2589 .quity Contributions 2470 3768 5515 10037 8sa3 4640 current Transfers and 4et Lending 788 1215 S1S 625 -468 377 r NAT' L GOVT. EXPENDITURES 23212 26947 31275 33812 38380 44243 urce:Tables 1.4a and 1.4b - 118 Table 1.4a: NATIONAL GOVERNMENT EXPENDITIRES BY SECTOR, 1978-83 lIn million pesos, obligation basis) Prelim. -------- -- Actuall--- Actual Sector 1978 1979 1930 19R1 1982 1933 ECIONOMIT SERVICES 11427 13370 15721 18353 10534 59'. Agrltcull, Forestry & Fishing 3324 2431 2475 2982 374 , .qS4 Gen. admin., regulation & 531 424 537 441 1151 1-55 research Agriculture 2431 1599 1451 19r8i 1999 1337 Stabillaztlon of farm 127 121 199 313 159 l06 prices and income Extension Programs 376 517 1656 224 37 40 Irrigation /b 1661 f55 737 938 1540 1n34 other agriculture 267 306 3419 493 263 157 Forestry & hunting 256 278 325 406 430 431 Flshing 106 130 162 166 156 2:13 IrLdustry,Trade,Labor & Tourism 790 797 1424 2839 .2067 1722 Labor,wage & emplymt. progms 71 82 84 116 109 l1ri Mining 45 60 45 59 58 S4 Manufacturing 71 119 1'l0 186 u1s 109 Cornstr uction* 1 5 11 14 Tourism 87 151 177 106 159 74 Comimerce 314 123 168 142 22n 245 Other 202 262 819 2223 1394 1100 lltl litliq and Infras.trticturp 7313 10142 11822 1 2 32 1n721 1087O7 Gen. admn., regulation & 826 2244 17615 2031 2133 2F670 research FllectrIcity 2258 2981 2843 3934 1830 1620 Water supply 401 965 1135 1194 989 5s9 Roads and road transport 2936 3234 4636 4593 4548 4952 Other transport 566 393 920 394 80fi 574 Water transport 194 157 115 107 306 307 Air transport 279 117 648 129 136 152 Railways 93 119 157 158 364 215 Communications 277 274 341 364 392 392 Other urilities and 49 51 111 22 23 30 infrastructure SOCIAL SERVICES 5397 6879 7577 9537 10724 1268S Edunatlon 3283 3616 4204 5491 6531, 6265 Gen. admin., regulatlon & 181 514 723 817 961 1085 research Schools 2788 2762 2874 3861 4635 4228 Primary and intermediate 2221 2329 2418 3249 3910 3553 Secondary 567 433 456 612 725 675 Universities and colleges 92 103 357 459 522 548 Technical,vocational & other 99 103 57 84 105 108 Subsidiary services 123 134 193 270 308 296 Housing & Commun. Amenities 620 1443 1331 1633 1346 2317 Housing 257 1036 900 1437 1116 2272 Community development 363 407 431 3.96 230 45 Health 955 1239 1333 1668 2157 2445 Gen. admin., regulation & 78 97 105 131 16.3 200 research Hopital & clinics 475 607 662 793 1060 1197 Individual health services 259 331 344 417 525 638 Family planning 67 75 120 164 221 210 Other 76 129 102 163 ISP 200 Social Security & Welfare 386 410 442 448 367 1251 Other Social Services 153 171 267 297 323 408 DEFENSE 4394 4738 4750 r.-25 5552 6262 GENERA. PUBLIC ADMINISTRATION 4263 5554 6763 9183 10771 85?1. DEBT SERVICE (Irt. & repaymts) 2092 2460 3562 4019 5325 942w TOTAL 27573 33001 38383 46217 58792 57 .3 Source: Office of Budget and Mnagement, March 1984 - 119 - Table 1.4b: NATIONAL GOVERNMENT CONTRIBUTIONS AND TRANSFERS TO OTHER PUBLIC SECTOR UNITS, BY SECTOR. 1978-83 (in million pesos, obligation basis) Frelim -=-=-=-=====--=====-Ai.tual-=====--==-- =====--=- ActuAl Sector 1978 1979 1980 0 1981 1982 1983 ECONOMIC SERVICES 2512 3737 5030 6869 7024 ;88 Agricult-.Forestry & Fishing 409 324 695 1056 13993 855 Gen. adinin., regulation & 106 32 67 49 63 ro research Agriculture 288 282 606 9f62 Q05 772 Stablliaztion of farm 0 117 195 311 159 100 prices and income Extenslon Programs 0 0 0 0 n 0 Irrigation 233 125 371 546 1)i60 591 Other agriculture 55 40 40 105 192 81 Forestry & Hunting 0 0 0 0 0 0 Fishing 15 10 22 51 25 24 Industry,Trade,tLabor & Tourism 346 195 815 2249 1346 630 Labor,wage & emplymt. progms 0 0 0 0 0 0 Manuifacturing 34 62 86 134 96 R7 Construction 0 0 0 0 0 0 Tourism 0 0 0 50 92 4 Commerce 200 0 50 0 65 83 Other 112 133 679 ?065. 094 - 456 Utilities and Infrastructure 1757 3218 3520 3564 3685 2q22 Gen. aImn., regulation & 0 5 60 67 118 347 resear ci Electricity 1421 2602 2372 23S1 1737 1498 water supply 179 390 771 843 587 69 Roads and road transport 25 10 sn 25 0 7 other transport 1(1 180 158 248 566 4n1 Water transport 10 26 1 90 202 18i, Air trarnsport 2 39 0 0 n0 RaIlways 89 119 157 5!8 64 21 5 Other urilitirs & ii,frastt-uc 31 31 79 o 0 0 SOCIAL SERVICES 235I 733 573 12R4 1034 714 Etlucatl on (seco-ndiary schorils) 1 1 1 1 2 2 Housing & Commun. Ame-nties 225 730 533 1220 954 455 Housing 222 730 539 122n 954 45F, Community development o 0 0 0 n Health (hosp1tals & olilncs) n 0 28 43 57 2?8 Social Securitv & welfare 1 1 1 0 0 :2 Other Social Strvice6 8 1 10 ?n 21 l8 DEFENSE 0 0 n 1 0 1 GENERAL PUBLIC ADMINISTRATION 1614 1584 1505 4251 1775 2128 Of whilch: Sharing of nat l 1103 1071 1078 1743 2297 299 revenue ?.qth local *rov' ts TOTAE. 4861 6054 7108 1240R 'i3 '3 7650 Source: Office of Btudget and Management,March 1984. - 120- Table IL4c: NATIONAI GOVERNMENT EXPENDITURES ON ITS O`N ACCOUNT, BY SECTOR. 1978-63 (In million pesos, obligatlon basis) Pr e Iam. ====5=======Actua1 - ---====-==============_== Actual Sector 1978 1979 iSBo 1981 1982 1983 ECONOMIC SERVICES 8915 9533 10691 11484 10587 12145 Agricult- Forestry & Fishing 2915 2107 1780 1926 2153 2498 Gen. admin. regulation & 425 392 470 399 1088 1295 research Agriculture 2143 1317 845 1006 494 565 StabiliaZtion of farm 127 4 4 2 6 6 Prices and income Extenslion Programs 376 517 166 224 37 40 Irrigation lb - 1428 530 366 392 380 443 Other agriculture 212 266 309 388 71 76 Forestry & hunting 256 278 325 406 430 4.1 Fishing 91 120 140 115 141 207 Industry,Trade.Labor & Tourism 444 602 609 590 721 1092 Labor.wage & emplymt. progms 71 82 84 116 109 116 Mining 45 s0 45 59 58 . 4 Manufacturing 37 57 44 52 20 22 Construction 1 5 11 14 Tourism 87 151 177 58 67 70 Commerce 114 123 118 142 155 162 Orher 90 129 140 158 301 644 Utilities and Infrastructure 5556 6924 8302 9968 7713 8555 Gen. admn., regulation & 826 2239 1726 1964 2015 2323 research glectricity 837 379 471 1553 93 122 Water supply 222 575 414 351 402 470 Roads and road transport 2911 3224 4556 4568 4548 4945 Other transport 465 213 762 146 240 273 Water transport 184 131 114 17 104 121 Air transport 277 82 648 129 136 152 Railways 4 Communications 277 274 341 364 392 392 Other utilities and 18 20 32 22 23 30 infrastructure SOCIAL SERVICES 5162 6146 7004 8253 9920 12017 Education 3282 3615 4203 5490 6529 6263 Gen. admin., regulation & 181 514 723 817 961 1085 research Schools 2787 2761 2973 3860 4633 4226 Primary and intermediate 2221 2329 2418 3249 3910 3553 Secondary 566 432 455 611 723 673 Untversities and coJlleges 92 103 357 459 522 548 Trechnical,vocational & other 99 103 57 84 105 108 Subsidiary services 123 134 193 270 308 296 Housing & Commun. Amenities 395 713 798 413 622 1906 Housing 35 306 367 217 392 1861 Community development 360 407 431. 196 230 45 Health 955 1239 1305 1625 2100 22n7 Gen. admin., regulation & 78 97 105 131 163 200 research Hopital & clinics 475 607 634 750 1003 959 Individual health services 259 331 344 417 525 6s3 Family planning 67 75 120 164 221 210 Other 76 129 102 163 189 200 Social Securtty & 'Welfare 385 - 409 441 448 367 1251 Other Social Services 145 170 257 277 302 ssn DEFENSE 4394 4738 4750 5124 5',52 625l GENERAL PUBLIC ADMINISTRATION 2649 3970 5258 4932 6996 5393 DEBT SERVICE (lnt. & repaymts) 2092 2460 3552 4019 5325 8427 TOTAL 23212 25947 31275 33812 38.fiG 44-43 Source, Office of Budget and Management - 121 - Tr.;h.le ].4t: NATIONAL GOVERNMMEST RfC11RRENT EXPENDIOTURE- ON -TS t)W11 ACC:H:i1 BY S3CTOR. 1979-83 In m;l 12cr pesos. :.riq*r10fl rasc, *-- - ACTIAT -1
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Philippines - Public expenditures and their financing
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