LGUs Under Radical Devolution: The Biggest Losers : QC IMC

Such moves by the national government appear long overdue—the Local Government Code having been enacted 15 years ago. Nonetheless, as the following sections will show, they are problematic because they fail to consider the existing constraints and varying capability levels of LGUs in fulfilling their mandate. Instead of empowering LGUs, a 'radical' devolution as implied by the government's 'no grants' policy will erode whatever gains have been achieved thus far.

EO 444 and the ‘no grants’ policy

To relieve the national government from the burden of financing devolved services as well as discourage LGU dependence on NG funds, a joint Investment Coordination Committee-Development Budget Coordination Committee (ICC-DBCC) memorandum was issued on August 30, 2004 that specified a ‘no grants’ policy with respect to activities devolved to LGUs. The memorandum specifies that the national government will no longer provide grants or subsidies to LGU-devolved programs, activities, and projects (PAPs). In cases where LGUs need additional resources in implementing the devolved PAPs, they are directed to avail of loans from the Municipal Finance Corporation (MFC) or other government financial institutions (GFIs). This policy applies to all proposed PAPs, irrespective of financing source and superseded the NG-LGU cost sharing arrangement adopted on November 2002.

Prior to the issuance of the ICC-DBCC memorandum, the NEDA-ICC formulated a policy that aimed to provide a limited subsidy for specific projects to selected LGUs. In contrast to the memorandum, the NEDA-ICC policy recognizes that the continued involvement of the national government in devolved activities is warranted when there are externalities, economies of scale or equity considerations. Externalities comprise the indirect effects of projects on parties not directly involved in the investment undertaking. If benefits extend beyond the borders of an LGU, it may not allocate enough resources, hence the risk of under-investment or under-provision (projects on reforestation and watershed management are some examples). Economies of scale, on the other hand, are cost reductions that are generated as the scale of an investment increases. When the services area required by a particular service to be cost-effective is larger than an LGU’s jurisdiction, intervention by a higher level of government may be necessary. Fully devolving such activities may result in wasteful overlapping of service areas, excess capacity and unnecessary investments. Examples include the provision of secondary education, communal irrigation, and sewerage trunk lines. The guidelines also recognize that national government intervention might be needed in the case of LGUs who are constrained by limited financial resources from meeting the minimum service levels of their constituents. An NG-LGU cost sharing policy following these principles was approved by the NEDA Board in March 2003.

In addition to the ‘no grants’ policy, the NG has also initiated a review of the decentralization process, with the aim of identifying additional functions and services that can be devolved to LGUs (Villamente 2005). Executive Order 444 directs the DILG, in partnership with the leagues of local governments, to conduct this review as a precursor to the implementation of a rationalization program to transform the bureaucracy into an ‘efficient and results-oriented structure’. The devolution covers agencies with functions, services, programs, projects and activities that overlap or duplicate those exercised by LGUs ‘without undermining their core services and consistent with the provision [sic] of the Local Government Code.’ Agriculture (DA), environmental management (DENR), social services (DOH, DSWD), and local financing (DBM, DOF) comprise the specific areas falling under the review, with the various local leagues assigned different sectors.

LGUs’ position

Pursuant to EO 444, the various LGU leagues have come up with their respective reviews of the state of the decentralization process in terms of the identified NG agencies1. The position papers reflect the LGUs’ recognition of constraints to further devolution, especially in terms of capacity and financial resources to support additional responsibilities. In the case of the DOH, for instance, one recommendation was for the NG to share in financing the benefits and salaries of public health workers. A similar proposal was echoed for the DENR for its field personnel who would be under the direct supervision of LGUs, with the NG shouldering their full salaries and benefits for up to five years, with a gradual downscaling of support after this period (25 percent for every year thereafter, with the balance to be shouldered by the host LGU). Moreover, the continued role of NG agencies, especially in terms of policy-setting, technical assistance and capacity-building, was stressed as a necessity even with further devolution of NG functions to LGUs.

The negative impact of the current ‘no grants’ policy was also highlighted in the position paper on local government financing. The League of Cities pointed out that the policy resulted in suspended LGU projects, including those that were supposed to be part of foreign-assisted projects. It also lobbied for a resumption of the NG-LGU cost sharing policy approved by the NEDA Board in March 2003 that provided grants up to a maximum of 50 percent of project cost (depending on project type and LGU type and income class), with the rest comprising the LGU’s equity counterpart and a long-term fixed rate loan from the MDFO (Municipal Development Fund Office), a facility under the Department of Finance for local government units (LGUs) that utilizes funds from local and international assistance for the implementation of various social and economic development projects.

A more nuanced approach towards decentralization

Currently, there is still some confusion regarding the implementation of the 'no grants' policy. Staff from the LOGOFIND (Local Government Finance and Development Project, under the Department of Finance) and a former DOF official assert that the 2004 ICC-DBCC memorandum was not authorized by a board resolution and that a reversion to previous policy is warranted (if this has not occurred yet). There also appears to be exceptions to the zero subsidy rule, as in the case of ODA-funded projects such as the Mindanao Rural Development Program Phase II (MRDP II) of the World Bank. Given the lessening noise regarding the fiscal deficit problem as well as the apparent ease with which the presidency utilizes government resources to curry favor with public officials and politicians in order to stay in power, it would certainly not be surprising if such exceptions to the rule eventually become the norm.

Nonetheless, the presence or absence of such a policy still does not address the need for a more nuanced approach in addressing the needs of both LGUs and the national government. The NEDA guidelines are noteworthy in the sense that they represent a more rational approach in giving LGU support (based on need) as well as a means of augmenting limited government resources via cost-sharing. The expanded role of LGUs under this set-up may also lead to more efficient and effective project implementation, arising from the use of local knowledge and resources. The guidelines also recognize the various service delivery constraints at the local level- some LGUs may not necessarily have the capacity nor the willingness to deliver such services and incentives are needed to encourage such investments to be made.

A radical devolution framework fails to recognize such constraints. The argument that LGUs should instead raise taxes to fund service provision does not take into consideration the limited revenue-generating potential of many areas. In addition, LGU capacities to undertake expanded roles would at best be limited, especially at the start. Assuming that local self-sufficiency can immediately be developed is foolhardy, to say the least. Moreover, other disincentives towards developing LGU self-sufficiency (such as a distorted IRA formula, pork barrel funds as a source of patronage) also need to be addressed. New processes and skills require time and the appropriate institutional framework to develop.

Thursday, 23 November 2006

http://www.ipd.org.ph