Philippines - Fiscal decentralization study

Report No. 10716-PH The Philippines Fiscal Decentralization Study January 7, 1993 Infrastructure Operations Division MI CROF I CE CcOPY Country Department I East Asia and Pacific Region Report No.:107 15-PHI Type: (SEC') 'I t1 : rI FISCAL DECFNTROLIIZTICJN ;-,TUIDY (titithc.r: ICH1IMUNR, Y FOR OFFICIAL USE ONLY Ext BQ452 Room:18021 DPt. :L1 10 Document of the World Bank 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.  CURRENCY EOUIVALENTS fas of June 1992) US$1.00 - Peso 25 ABBREVIATIONS AND ACRONYMS BALGU - Budgetary Assistance to Local Government Units BC - Bicameral Committee BOT - Build Operate Transfer DA - Department of Agriculture DECS - Department of Education Culture and Sports DENR - Department of the Environment and Natural Resources DBM - Department of Budget and Management DILG - Department of the Interior and Local Government DOF - Department of Finance DOH - Department of Health DPWH - Department of Public Works and Highways DSWD - Department of Social Welfare Development EO - Executive Order GAA - General Appropriations Act CDP - Gross Domestic Product GFI - Government Finance Institution GOCC - Government Owned or Control Corporation GRP - Gross Regional Product IRR - Implementing Rules and Regulations IRA - Internal Revenue Allotment INP - Integrated National Police LDC - Local Development Council LGC - Local Government Code LGRSF - Local Government Revenue Stabilization Fund MMA - Metro Manila Authority MMC - Metro Manila Commission MWSS - Metropolitan Water and Sewerage System NALGU - National Assistance to Local Government Units NCR - National Capital Region (Metro Manila) NGO - Non-Governmental Organization NIA - National Irrigation Authority NPC - National Power Corporation PD - Presidential Decree PNP - Philippine National Police RA - Republic Act RDC - Regional Development Council SEF - Special Education Fund STA - Specific Tax Allotment GOVERNMENT FISCAL YEAR January , to December 31  FOR OMCIUL USE ONLY PHILIPPINES FISCAL DECENTRALIZATION STUDY Table of Contents EXECUTIVE SUMMARY ......................I........................ i 1. INTRODUCTION ............................. 1 II. LOCAL GOVERNMENT IN THE PHILIPPINES A. Local Government Structure ...................... 3 B. Budgetary and Operational Autonomy .............. 6 C. Local Government Expenditures .......................... 7 D. Revenue Raising Powers ......... ........................ 15 E. National Assistance to Local Governrents ..... .......... 27 III. THE DECENTRALIZATION PROGRAM: 1987-91 A. The Rationale for Decentralization ...... ............... 51 B. Regional Autonomy ........... ........................... 52 C. The 1990 General Appropriations Act ..... ............... 54 D. Other Measures ............... .......................... 58 IV. THE REVISED LOCAL GOVERNMENT CODE A. Definition and Functions of Local Governments .... ...... 59 B. Devolution of Central Government Functions ..... ........ 65 C. Revenue Sharing ............. ........................... 70 D. Local Government Taxation ........ ...................... 79 E. Credit Financing ............ ........................... 87 F. Local Fiscal Administration ............................ 92 G. Conclusions . ........................................... 96 V. IMPACT OF DECENTRALIZATION A. Analytical Framework ......... .......................... 99 B. Cost to the Central Government ......................... 100 C. Local Government Fiscal Balance ........................ 104 D. Composition Effects .......... .......................... 108 E. Increases in Local Fiscal Autonomy ..................... 112 F. Local Resource Mobilization .......... .................. 115 G. Technical Efficiency .................................... 116 H. Issues with the Government's Decentralization Program .. 120 VI. DECENTRALIZATION: OPPORTUNITIES AND RISKS A. Possible Benefits of Decentralization ...... ............ 122 B. Potential Risks in the Government's Decentralization Program ............. ......................... 123 C. Furth#: Actions that the Government Can Consider .... ... 124 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.  TEXT TABL 2.1: Distribution of Provinces, Cities and Municipalities By Income Class: Average 1983-86 ............................. 5 2.2: Distribution of Local Government General Fund Expenditures by Function: Average 1986-1988 ............................... 8 2.3: Average Per Capita Expenditures - 1986-1988 .... ............... 9 2.4: Linear Regression of Per Capita Local Government Expenditures on Selected Independant Variables .... ........... 11 2.5: Trends in Local Government Expenditures ....................... 13 2.6: Trends in Per Capita Local Government Revenues .... ............ 14 2.7: Share of Own Source Revenues and Average Per Capita Own Source Revenues - 1986-88 .................................... 17 2.8: Indicators of Real Property Tax Performance - 1986-1988 ....... 18 2.9: Reil Property Tax Collection Efficiency - 1986-1988 .... ....... 19 2.10: Ordinary Least Squares Estimates of the Determinants of Variations in Property Tax Revenues .......................... 20 2.11: Property Tax Performance and Tax Mapping: Municipalities ...... 22 2.12: Indicators of Other Local Tax Performance 1986-1988 .... ....... 23 2.13: Ordinary L;ast Squares Estimates of the Determinants of Variations in Per Capita Local Government Non-Property Tax Revenues ................................................. 25 2.14: Trends in Local Government Revenues ........................... 27 2.15: Budgetary Allocations for National Assistance to Local Government Units 1990-1992 ................................... 28 2.16: Revenue Sharing Grants in Real Terms - 1980-1990 .... .......... 32 2.17: Share of Revenue Sharing Grants ............................... 33 2.18: Distribution of Central Government Expenditures .... ........... 34 2.19: GDP Elasticity of Internal Revenues and Allotments .... ........ 35 2.20: The Distribution of Allotments By Regions ..................... 37 2.21: Simple Correlation Between Per Capita Allotments and Selected Characteristics of Provincial and Local Governments .... ...... 39 2.22: Linear Regression on Per Capita Total Allotments: Povincial Aggregate Data ............................................... 41 2.23: Linear Regression on Per Capita Total Allotments and Collection Efficiency: Provincial Governments .... ............ 42 2.24: Linear Regression on Per Capita Total Allotments and Collection Efficiency: Cities ................................ 43 2.25: Linear Regression on Per Capita Total Allotments and Collection Efficiency: Municipalities ........................ 44 2.26: Linear Regression on Per Capita Local Revenues: Provincial Aggregates ................................................... 47 2.27: Linear Regression.on Per Capita Local Revenues: Provincial Governments .................................................. 48 2.28: Linear Regression on Per Capita Local Revenues: Cities ........ 49 2.29: Linear Regression on Per Capita Local Revenues: Municipalities ............................................... 50  TEXT TABLES 3.1: Comparison of Per Capita. National and Local Revenues and Expenditures by Region, 1985 ................................. 52 3.2: Mandated Transfers: Estimated Amounts for 1986-1988 .... ....... 55 3.3: Regression Estimates of the Determinants of Variations in Mandated Transfers: Cities ................................... 56 3.4: Regression Estimates of the Determinants of Variations in Mandated Transfers: Municipalities ........................... 57 4.1: Minimum Requirements by Type of Local Governmert .... .......... 60 4.2: Basic Services to be