The Philippines using fiscal and administrative decentralisation to balance the regions

Economic growth and business activity has been historically centred in the National Capital Region (NCR) or Metro Manila, a narrow strip sprawling between Laguna Lake on the east and Manila Bay on the west that accounts for nearly 37% of GDP and 13% of the country’s population. As a result, the metropolis, consisting of 16 independent cities and one municipality, has positioned itself as a national hub for transportation, commerce, culture and education. The NCR includes the capital City of Manila, which has served as the seat of government during the Spanish colony, the American occupation up until the Second World War and after the Philippine independence. In 1948, Quezon City, the nation’s most populous city, similarly situated within the NCR, was declared the nation’s capital until 1976, when former President Ferdinand Marcos transferred the title back to Manila, along with the country’s governance.

A Fine Balance

Given the disconnect between national versus provincial priorities, issues have arisen over time, and this has been a source of tension for the country and driven advocacy for a more federalist system of government. Although most of the members of the House of Representatives are already elected locally, senators are elected by national vote and do not necessarily represent specific regions. As the NCR’s congestion intensifies and both the labour pool and real estate market approach saturation, investors are increasingly looking to reverse the flow of migration into the metropolis and move into the provinces to capitalise on untapped labour pools and lower costs.

The Philippines has been a pioneer in decentralisation for Asia, having commenced its local governance reforms in 1991 through the formulation and implementation of a Local Government Code (LGC), which served as the operating framework for the local government system. As early as the administration of President Marcos, various laws and presidential decrees intended to improve the operation of sub-national administration by strengthening local governance and stimulating citizen involvement. However, it was not until after the return to democracy, and creation of the LGC, when the system to increase local government autonomy and accountability was designed by assigning functions and revenue generating powers to local government units (LGUs).

For example, LGUs are allowed to craft their own budgets, subject to legal review by the national government, and are responsible for the delivery of basic social services including health, education, agriculture, environmental protection, natural resource management and local public works. The Department of Interior and Local Government has primary central government responsibility for LGU oversight, regulation and support, while a number of other national agencies – including the Department of Budget and Management, the National Economic and Development Authority, Department of Finance and the Commission on Audit (COA) – also play an important role in LGU affairs.

Organisation

LGUs in the Philippines are organised into four main groups; autonomous regions, provinces and independent cities – the latter being politically and legally independent from provinces – municipalities and component cities, and barangays (villages). Currently only one autonomous region exists, the Autonomous Region of Muslim Mindanao (ARMM), comprising the provinces of Maguindanao, Lanao del Sur, Basilan, Sulu and Tawi Tawi, all of which are predominantly Muslim provinces. Autonomy in the ARMM was motivated by crisis and the escalating hostilities between revolutionary groups and the national government, the former primarily led by the Moro National Liberation Front (MNLF), an insurgency group seeking independence for the Moro people in Mindanao, the indigenous Muslim population in the Philippines. Despite an original law to establish an autonomous Cordillera Region, comprising the provinces of Abra, Benguet, Igufao, Kalinga, Mountain Province and Apayao in Luzon, voters in the region have rejected the plan twice in plebiscites held in 1990 and 1998.

Governance

The sub-national level of government in the Philippines comprises 81 provinces, 145 cities (105 component and 40 independent cities), 1489 municipalities and 42,036 barangays. Provinces are the largest LGUs with their own administration, many of which are grouped together for governmental purposes into regions. The Philippines has 18 regions, with the latest addition being the Negros Island Region in the Visayas, created in 2015. Regions in the Philippines do not possess their own LGU. Each province is divided into cities and municipalities, with these in turn divided into barangays, the smallest LGU. Provinces are headed by governors, cities and municipalities by mayors and barangays by barangay captains, all of whom are chosen through direct elections every three years, with a maximum of three consecutive terms.

The LGC has established a solid basis for civic participation in local governance, with legislative functions at this level being provided by the Sangguniang Panlalawigan for provinces, Sangguniang Panlungsod for cities and Sangguniang Bayan for municipalities, each with a number of council members determined by LGU status and population size. Barangays have their own elected council, the Sangguniang Barangay, in addition to a youth legislature called Sangguniang Kabataan (SK). Although many critics of the SK advocate for its abolition, recent reforms by President Benigno Aquino III have sought instead to improve efficiencies in youth representation by enacting anti-dynastic provisions, requiring formal leadership training and raising age requirements.

Economic Performance

The Philippine economy posted a 5.8% growth rate in 2015, a slowdown from 7.1% and 6.1% in 2013 and 2014, respectively. NCR’s economy posted a 5.9% year-on-year growth in 2014, a slowdown from its 9.2% growth rate in 2013. This trend was mirrored in the growth in the country’s overall economy, which accelerated rapidly from 2011 to 2013. As the economic centre for the country, the NCR takes the lead as the largest economy among the other 17 regions of the country. In 2014 NCR contributed more than one-third to the country’s GDP – at 36.3% – while both Calabarzon and Central Luzon followed in contribution with shares of 17.2% and 9.3% respectively. Central Visayas came in at fourth place as contributor to national GDP with a share of 6.5%. The rest of the regions posted less than 5% each.

Performance of the regions in terms of growth in 2014 positioned Davao as the fastest growing at 9.4% growth. The Davao region led a group of nine regions whose economies outperformed the country’s 6.1% growth. On the other hand, NCR joined the other eight regions whose GRDP growth rates were lower than the national GDP growth. Only the Eastern Visayas region experienced negative growth in 2014. At 2.1 percentage points (34.4%), NCR registered the highest contribution to the country’s GDP growth rate of 6.1% in 2014.

The remaining regions contributed less than 1 percentage point each to the national economy. NCR also registered the highest per capita GRDP estimated at P203,106 ($4509) in 2014, nearly three times higher than the country’s per capita GDP of P71,726 ($1592). In addition to NCR, Calabarzon and the Cordillera Administrative Region (CAR) were the only other regions with per capita GRDP higher than the national per capita GDP. The per capita GRDP growth rate of NCR contracted to 4.1% in 2014, which is slightly lower than the national per capita GDP growth rate of 4.3% Among the regional economies, Davao Region’s per capita GRDP growth rate was also the highest at 7.6%. Luzon’s economy (excluding NCR) accelerated from 5.9% in 2013 to 6.1% in 2014, maintaining the island group as the largest share contributor to the Philippine economy at 36.8% in 2014. Luzon contributed 2.3% to the country’s GDP growth of 6.1% in 2014, slightly higher than its contribution of 2.2% in 2013. The economy of the Visayas island group maintained its growth of 5.6% in 2014, while its contribution to the country’s economy declined slightly from 12.5% in 2013 to 12.4%in 2014. The Visayas also once again contributed 0.7% points to the country’s GDP growth in 2014. Finally, the economy of Mindanao accelerated from 6.3% in 2013 to 7.4% in 2014, with its contribution to GDP increasing from 14.3% to 14.4%. Mindanao contributed 1.1% to the country’s GDP growth in 2014, higher than its 0.9% contribution in 2013.

Fiscal Decentralisation

Fiscal decentralisation has posed challenges for the Philippines, given limited available resources and issues with inadequate capacity for spending at the local government level. The LGC provided LGUs with authority over revenue and expenditure functions, turning the collection of property and local business taxes into primary sources of revenue, with taxes on property transfer, quarries and leisure contributing to a lesser extent. Whereas cities are authorised to impose the full set of allowable taxes, provinces and municipalities are granted more limited access. Cities and provinces are also required to share some of their revenues with the municipalities and barangays. Given low collection performance, LGUs have not been able to survive by local taxation alone. In fact, over the 2010-14 period, this source of income grew by an average of 11.64% per annum, however, its contribution as a share in total LGU income held steady at a constant 29% for the same period. In 2014 these taxes and fees accounted for only 35% of the total income of all LGUs. Although the LGC is specific about certain functions for LGUs, existing provisions allow central agencies to provide public works and supplement local public services that LGUs are not able to fund. This has created some ambiguity in functional assignments and accountability channels. Additionally, Congress has established a programme known as the Priority Development Assistance Funds (PDAF) that allows congressmen to access a large pool of discretionary resources to finance priority projects in their constituencies. The PDAF was a source of scandal in 2013 when funds were revealed to have been misused by lawmakers, having been diverted into fake foundations and non-governmental organisations, creating significant public outrage across the country.

IRA: The Internal Revenue Allotment (IRA) consists of the funds for LGUs remitted from the national government. The revenue share of each province, city and municipality is determined on the basis of their population and land area. At least 40% of the country’s internal revenue income has been allocated to the LGUs, dedicating 23% to provinces, 23% to cities, 34% for municipalities and 20% to barangays. Despite efforts to decrease LGU dependence on the national government, the IRA has grown by 10% to P428.62bn ($9.5bn) for 2016, from a P311.9bn ($6.9bn) allocation for 2015 and 14% higher compared to the P341.54bn ($7.6bn) in 2014. The largest recipient in 2016 is set to be Region IV-A, also known as Calabarzon, which is composed of Batangas, Cavite, Laguna, Quezon, and Rizal, with a P47.32bn ($1.1bn) allocation, up nearly 10% from P43.03bn ($955.3m) in 2015. On the other hand, the smallest IRA in 2016 is earmarked for the Cordillera Administrative Region (CAR) with P13.21bn ($293.3m), up from a P12.03bn ($267.1m) budget in 2015.

Areas outside the NCR have historically relied more on the IRA, with the poorest income areas depending on it for as much as 90% of their income. In Metro Manila, where there is a larger volume of high-income earners, the local tax revenue is higher than the IRA, thus making them less IRA-dependent. In 2014 the IRA’s share of Metro Manila was only around 19.7% of total income whereas on the average, cities rely on IRA by about 60% to 70%; provinces by 80% to 85%; while municipalities depend on IRA by around 85%% to 90%. To ensure the release of the IRA on time, lawmakers added a provision that it shall be automatically released to the LGUs on a quarterly basis. These resources are considered a block or unconditional grant, although there are certain guidelines LGUs must follow in using their resources. To improve the local revenue collection performance, the government monitors and provides technical assistance to LGUs, improving collection efficiency and instituting performance standards and targets for LGUs.

Incidence Of Poverty

Levels of poverty remain concentrated in the southern part of the Philippines and in rural areas. The incidence of poverty in the Visayas and Mindanao regions is double that in Luzon, and two-thirds of the poor live in rural areas. The highest levels of poverty are found in the ARMM provinces, which despite their IRA support, continue to be afflicted by threats to peace and order, an absence of investment and limited employment opportunities. The latest study of the National Anti-Poverty Commission (NAPC) in 2012 revealed that 48.7% of families in the ARMM are poor. Meanwhile, the poorest province with 67.3% living in poverty, Lanao del Sur, received a P1.4bn ($31.1m) IRA in 2015, and P1.2bn ($26.6m) in 2014. Based on the NAPC poverty threshold, a family with an income of less than P10,534 ($234) a month is considered poor. Provincial poverty disparities are even larger, with several provinces in Eastern Visayas and Mindanao reporting rates of over 40%, while the incidence of poverty in several southern provinces of Luzon remains below 10%. Similar disparities are found in terms of access to services. The ARMM has the highest infant mortality rate in the Philippines with 55 deaths per 1000 births as of 2015 based on a report by Save the Children.

Regional Disparities

Regions, provinces and cities in Luzon are the richest while the poorest LGUs are from Mindanao, according to the latest 2014 Annual Financial Report of the COA. The ARRM remains at the bottom of the country’s wealth hierarchy with only P4.43bn ($98.3m) in equity, while the NCR heads the list with P137.65bn ($3.1bn), followed by the Central Visayas region, which includes Cebu, the province with the highest in assets and total equity at with P28.18bn ($625.6m). The volume and type of investments are the major drivers for increased equity of an area, with provinces and cities strengthening their investment proposition by developing infrastructure, transport, communication systems and raising the educational attainment of their human resources. Highly urbanised cities like Cebu, considered the largest and most progressive urban centre outside NCR, have a substantial number of investors because of its better infrastructure, paved roads, efficient information technology and high number of skilled workers.

Disaster Resilience

Due to its location in the Pacific Ring of Fire, the Philippines is afflicted by earthquakes, volcanic eruptions and visited on average by 20 typhoons every year, with 2013 experiencing Typhoon Hayian, the strongest typhoon ever recorded to hit land. LGUs are expected to be at the frontline of emergency measures in the aftermath of disasters. In accordance to the LGC, whenever a disaster hits the country, LGUs must be equipped with the necessary disaster risk reduction and management (DRRM) capacity to ensure welfare and safety of their constituents. Their functions typically include disaster preparedness, response, prevention and mitigation, in addition to rehabilitation and recovery. At the national level, the National Risk Reduction and Management is responsible for developing a framework for DRRM and monitors preparations and responses of LGUs to calamities, with the latter then localising their own framework through a Local Disaster Risk Reduction and Management Plan to be implemented in every province, city and municipality in the country. As the governor of Albay province, Joey Salceda, told OBG, “Institutional procedures should be a sustainable part of local governance with disaster planning coordination needed with all levels of local government to then engage in the capacity building of our constituents. Under this framework, Albay province has maintained a zero casualty rate in 20 out of the past 22 years.”