Philippines - Public expenditure management for sustained and equitable growth (Vol. 2 of 2) : Volume two

Report No. 14680-PH Philippines Public Expenditure Management for Sustained and Equitable Growth (In Two Volumes) Volumne II September 5,1995 Country Operations Division Country Department I East Asia & Pacific Region Doc- mnt of the World Banw   PHILIPPINES PUBLIC EXPENDITURE MANAGEMENT FOR SUSTAINED AND EQUITABLE GROWTH Volume II Table of Contents Page No. PMLIPPINES: PUBLIC EXPENDITURE MANAGEMENT FOR SUSTAINED AND EQUITABLE GROWTH VOLUME II - SECTOR ALLOCATION ISSUES .................. 1 Introduction ......................................................................1 6. TRANSPORT SECTOR ...................................................................... 3 Road Transport ................................................. . ................ 3 Network ................................................................... 3 Service Levels ................................................................... 4 Organization and Staffing ................................................................... 5 Capital Expenditures ................................................................... 5 Maintenance ................................................................... 6 Equipment ................................................................... 9 Private Sector Involvement ................................................................... 9 Revenues ................................................................... 10 Recommendations ................................................................... 10 Rail Transport ................................................................... 12 Network and Organization ................................................................... 12 System Performnance.................................................................1.............. ...... 12 Investment ...... 14 Siaffing .4. . Financial Position................................................................. 15  - 2 - Private Sector ................ 16 Recommendations ................... 17 Light Rail Transit Authority ................... 18 Organization .......1......................8........... 18 System Performance ........... 18 Staffing ........... 19 Investment ........... 19 Financial Performance ........... 20 Recommendations ........... 22 Maritime Ports ........... 23 Organization and Network ........... 23 System Performance ........... 23 Investment ........... 24 Staffing ........... 24 Tariffs and Cross-Subsidies ........... 25 Private Sector ........... 26 Financial Position ........... 26 Recommendations ........... 28 Air Transport ........... 28 AIRPORTS - Network and Organization ........... 28 Performance Level ........... 29 Staffing ........... 29 Investments ........... 29 Financial Position ........... 30 Recommendations ........... 34 *hilippine Airlines - Organization and Performance ........... 34 Financial Position ........... 36  - 3 - Recommendation ............................................................ 38 7. POWER DEVELOPMENT ............................................................ 39 Introduction ............................................................ 39 Current Sector Structure ............................................................ 39 Realities and Constraints ............................................................ 41 Proposed Structure for the Power Sector ......................... ................................... 43 Planning Regulation, Competition, and the Role of Government ................. ........................... 46 Recommendations to Enable the Environment for Competition .................... .......................... 50 Conclusion ............................................................ 51 8. WATER AND SANITATION SECTOR ............................................................ 52 Sector Institutions ............................................................ 52 Expenditure Patterns ............................................................ 53 Major Issues ............................................................ 63 Existing Reform Strategy And Its Problems . ............................................................ 65 Recommendations ............................................................ 69 9. AGRICULTURE, NATURAL RESOURCES, AND ENVIRONMENT ........... ...................... 73 B ackground ............................................................ 73 Sectoral Public Expenditure Level And Composition .......................................................... 75 Level and Composition ............................................................ 75 Impact of Devolution ............................................................ 81 Planned Level and Composition of Public Agricultural Expenditures .................................. 81 Major Issues In Resource Allocation ............................................................ 86 Development Strategy ............................................................ 86 Level and Composition of Public Expenditures ............................................................ 86 Role of the Private Sector and Privatization ............................................................ 92 Spatial Balance in Resource Allocation ............................................................ 92 Role of Local Governments ............................................................ 92  - 4 - Agricultural Incentives ........................................ 93 Budgetary Releases ........................................ 93 Institutional Issues ........................................ 94 Cross-Sectoral Issues ........................................ 94 Sector-Specific Issues ........................................ 95 Conclusions And Recommendations ........................................ 96 10. EDUCATION SECTOR ........................................ 98 Central Government Financing ........................................ 98 Recent Trends ........................................ 99 Expenditure Patterns ........................................ 100 Intra-sectoral Distribution of Expenditures ........................................ 102 Functional Distribution of Expenditure .................................... 104 Recurrent Expenditure Per Student .................................... 106 Local Government Financing .................................... 110 Private Financing .................................... 112 Private Education .................................... 112 Private Financing of Public Education .................................... 113 Synthesis .................................... 114 Major Issues .................................... 117 Education and Poverty .................................... 117 Fiscal Decentralization and Equity .................................... 121 Special Education Fund (SEF) .................................... 122 General Funds .................................... 122 Social Targeting ................................. 123 Other Educational Inputs ................................. 125 Government Assistance for Private Education ................................. 126 Public Versus Private Education ................................. 128  - 5 - Comparative Unit Recurrent Costs ............................................................ 128 Cost Sharing in Public Education .................... ........................................ 132 Cost-Effectiveness in Public Education . ............................................................ 135 State Universities and Colleges ............................................................ 136 DECS Staff Deployment Norms and Practices ............................................................ 137 School Construction ............................................................ 139 Statistical Annexes ............................................................ 140 Relerences ............................................................ 156 LIST OF TABLES AND FIGURES CHAPTER 6 TABLES 6-1 Philippine Road Network by Type and Jurisdiction ....................... ............................... 3 6-2 Philippine Road Network Statistics .................................................................... 4 6-3 DPWH Appropriations and Allotments ................................................................ 5 6-4 Funding Required For Maintenance of Arterial and Secondary National Roads ....... .............. 7 6-5 PNR Operating Statisitics 1990-1992 ................................................................. 13 6-6 PNR Consolidated Balance Sheet 1989-1993 .............................................................. 16 6-7 Investment Costs for the Expansion of Line 1 and for Line 2 ........................................... 19 6-8 LRTA Income Statement 1991-1993 ................................................................. 21 6-9 LRTA Consolidated Balance Sheet . ................................................................ 22 6-10 Operating Income for PPA Base Ports for 1993 (Millions of Pesos) ............. .................... 25 6-11 PPA Liabilities and Net Worth .............................. .................................. 27 6-12 ATO Income Statement (000's Pesos) ................................................................ 30 6-13 M IAA Consolidated Income Statement ................................................................ 31 6-14 MIAA Consolidated Balance Sheet ................................................................ 32 6-15 ATO Consolidated Balance Sheet ................................................................ 33  - 6 - 6-16 Philippine Airlines Income Statement ........................................ 35 6-17 PAL Balance Sheet..37 FIGURES 6-1 Change in Value of EMK 1972-1994 .................................. ........................... 6 6-2 DPWH Maintenance Program Allocation ............................................................. 9 6-3 Revenues, Expenses, Subsidies PNR 1981-1993 .......................................................... 15 6-4 LRTA Ridership and Fares 1985-1993 ............................................................. 18 6-5 Cargo Volumes for PPA Base Ports ........................... .................................. 24 6-6 Philippine Port Authority Revenues and Expenditures, 1981-1993 ........... ......................... 26 6-7 Distribution of PPA Revenues by Source for 1993 ....................................................... 27 6-8 PAL Revenues and Expenditures 1980 - 1993 ............................................................. 36 CHAPTER 8 TABLES 8-1 Medium Term Public Investment Program, 1987-92 (In Million Peso) .......... ..................... 54 8-2 Public Investment in W ater Supply (1987-1993) .......................................................... 55 8-3 MWSS Operational Performance ............................................................. 56 8-4 MWSS Consolidated Income Statements ............................................................. 57 8-5 MWSS Consolidated Balance Sheets .............................. ............................... 58 8-6 MWSS Financial and Operational Ratios ............................................................. 59 8-7 LWUA Programs and Fund Releases ............................................................. 60 8-8 LWUA Income Statements ............................................................. 61 8-9 Other Financial and Operational Indicators ............................................................. 62 8-10 DOH's Statement of Expenditures ............................ ................................. 63 8-11 Government Infrastructure Program, 1993-98 (In Million Pesos, Current Prices) . .66  - 7 - CHAPTER 9 TABLES 9-I Public Sector Expenditures in Agriculture 1991-94 (Billion Pesos in Current Prices) ...... ........ 76 9-2 Current and Capital Appropriations of the DA and DENR, 1993 and 1994 (Million Pesos in Current Prices) ............................................................................ 78 9-3 Coverage of Comprehensive Agrarian Reform Program (CARP) .......... ............................ 79 9-4 Medium-Term Public Investment Program for Agriculture, NR and Environment (1993-98) (Million Pesos in Current Prices) ............................................................................ 83 9-5 Medium-Term Agricultural Development Program (MTADP), 1993-98 Required Funding (Billion Pesos in Current Prices) ......................................................................... 85 CHAPTER 10 TABLES 10-1 Central Government Education Expenditure .............................................................. 98 10-2 Evolution of Government Education Financing 1985 -95, by Category of Expenditure ........... 101 10-3 Government Financing, by Level and Type of Education ............. ................................. 103 10-4 Functional Distribution of the 1994 DECS Budget ...................................................... 105 10-5 Actual Versus Budgeted DECS Expenditure Obligation/Allotment Ratio (1991-93 Average) .... 106 10-6 Evolution of PER Student Recurrent Expenditure by Level of Education ........ ................... 107 10-7 Evolution of PER Student MOOE in Basic and Tertiary Education ......... ......................... 109 10-8 LGU Education Financing by Expenditure Category (% Distribution) ........ ...................... 111 10-9 Total Expenditure by Level of Education and Source of Financing (1994) .......................... 114 10- 10 Changing Patterns of Education Financing, 1986-94 ..................... ............................. 116 10- I I Family Income, School Participation, and Completion ............................. 118 10-12 Reasons for Not Attending School (Lowest 30% P.C. Income Group) . ................... 119 10-13 Comparative Nutrition & Health Indicators ............................................................... 120 10-14 School Performance: Eastern Visayas Region vs. NCR ..121  - 8 - 10-15 DECS Resource Allocation: E. Visayas Region vs. NCR ............... ............................. 124 10- 16 School Staffing Characteristics: E. Visayas vs. NCR .................................................. 126 10-17 Unit Recurrent Cost of Public and Private Schools by Level of Education (1994) ....... ........ 129 10-18 Unit Costs as Percent of GNP Per Capita: Philippines Versus Regional Comparators ........... 130 10-19 Private/Public Unit Cost Ratios .................................................................. 131 10-20 Comparative School Performance Indicators in Basic Education (Private/Public Performance Ratios) ..132 10-21 Cost Sharing in Public Education, 1986-94 (Government and Private Shares in % of Total Unit Cost) ..134 10-22 Teaching Versus Non-Teaching DECS Staff in 1992, by Level of Education (Percent of Distribution) ..137  PUBLIC EXPENDITURE MANAGEMENT FOR SUSTAINED AND EQUITABLE GROWTH: VOLUME 11 SECTOR ALLOCATION ISSUES Introduction This volume discusses major public expenditure management issues in transport, water, power, agriculture, and education'. In each sector, the relative roles of the public and private sectors are reviewed carefully in view of the expanding private activities in the Philippines. The main public sector functions are: (i) to provide services that the society needs and yet the private sector does not provide at all, or does not provide efficiently in the market place; and (ii) to provide services that the private sector provides less than or at higher cost than the Govemment considers desirable for equity reasons. The diagram below is a schematic example of these two points: when services are needed but there is no provision of such services in the market (defense, rural roads), the public sector will have to provide them. For other services which markets could provide, the Govemment needs to take an initiative in providing services when equity or extemalities considerations dominate, for example, in the areas of preventive health care and basic education. Public and Private Split of Existing Government Functions Preventative Small irrigation health Basic education Agricultural Rural roads extension Secondary education Ii I ligher education .... Large imgation _ G -- t---Defense, Diplomacy, Law and Order 1Teleconm. . - . - Power generation /. I'oll roads | 4 l | E \ Curative health Health is not reviewed here as the entire health sector was devolved to local govermnents. Thus the past expenence is not directly relevant as a lesson for the future, and also we do not yet know what sort of expenditure patterns are emerging from various local governments since the devolution is only a few years old. Moreover, the NG expenditure issues on health have been reviewed in World Bank (1993).  -2 - The role and capacity of LGUs are also an issue in many sectors. The Govemment has started the process of fiscal devolution in 1991 to improve local service provision. Local govemment officials are believed to be more aware of different local situations and preferences of local residents and thus better equipped to provide local services efficiently. While this assumption is generally correct, in the Philippine context, there are two issues: (i) the administrative capacity of LGUs to provide services and satisfy local needs; and (ii) LGUs' willingness to allocate resources on activities benefits of which spill over to other jurisdiction may be limited. Given these two sets of considerations, chapters in this Volume recommends the following. * in the transport sub-sectors, the GOP needs to shrink the networks the NG maintains to high standards. Local roads and small ports should be devolved to local govemments and, where feasible, the private sector should provide services (either building toll facilities or through management contracts). For all transport modes, the Govemment needs to maintain strong network planning and a regulatory framework; * for utilities (power and water), the GOP's focus on privatization "production" of power and water services is in the right direction. The GOP can increase efficiency further by taking advantage of scale economies through consolidating distribution systems; * in agriculture and natural resources, the GOP can focus on productivity increase in rural areas by investing in rural infrastructure and research. Also, the uncertainty regarding how and when the Agrarian Reform will be completed has allegedly reduced private investment because of the ban on changing land use in the areas designated by the reform program. Reduction of this uncertainty will thus likely contribute to increased private rural investment; and