What have local governments done?

In 1991, the Local Government Code of the Philippines was passed, paving the way for the most sweeping fiscal decentralization reform in the country. Eighteen years later, what have we learned? At best, there has been no serious deterioration in the delivery of local public services; in fact, there were a few well-performing ones among the 45,000 local government units. But, by and large, local governments have become more dependent on the central government for their finances.

As far as I know, there has been no systematic and comprehensive review of how local governments have done in delivering basic services. There were isolated, foreign-funded, studies identifying the well-performing ones. But there is no total comprehensive review of local government performance.

Has the nearly two decades’ decentralization experiment resulted in better delivery of public services? Has it helped the central government in its efforts to promote economic development, promote employment, and reduce poverty? Has the intergovernmental fiscal grant system, called internal revenue allotment (IRA), been equalizing? These are some of the questions that need rigorous answers.

The vision of the 1981 Local Government Code (LGC 1981) is to create self-reliant communities. Local governments are granted “the power to create [their own source of revenue and levy taxes, fees and charges.”

At the same time, local governments were given a generous, largely unconditional grant, in the nature of the internal revenue allotment (IRA). It is 40% of the total internal revenue taxes collected three years before the current year. It is huge by any standard, and is estimated at close to P300 billion in 2010 alone.

More ira dependent

But an unwanted consequence of the IRA funding mechanism is that local governments have become more dependent on the national government for financing their operations. The numbers do not support a picture of self-reliant municipalities and provinces. Cities are less dependent, but the ratio of IRA grant to total receipts has been on the rise during the last few years.

Provinces and municipalities have become more and dependent over time. During the last three years (2008-2010), IRA shares of total receipts for municipalities are 76.5%, 78.7%, and 78.6%, respectively. For provinces, the corresponding ratios are 73.6%, 79.7%, and 74.5%, respectively.

For cities, their dependency ratio is relatively lower, but it is increasing in trend. In 2008, the ratio of IRA shares to total receipts was 43.3%; it rose to 46.2% in 2009, and is estimated to increase to 49.6% in 2010.

With higher taxing powers, one would expect that LGUs would raise more taxes from local sources. Wrong. Instead, they became more dependent on central government grants.

Such poor local tax effort is attributed to several reasons. First, the high unconditional grant, the IRA, has created an adverse incentive. The formula is based on population, land area, and equal sharing. It does not include revenue-raising effort.

The second reason is poor revenue administration. High administrative costs, unqualified personnel, inadequate resources, and failure to computerize are some of the reasons of poor revenue administration. A joint study by the World Bank and the Asian Development Bank in 2005 identified the following constraints to local tax administration: (1) low capacity to perform the taxpayer registration function; (2) infrequent exercise of LGU audit and enforcement; (3) limited taxpayer services; (4) low professional qualifications of staff; and (5) inadequate support from the national government.

Taxpayer services such as direct question and answer time with LGU offices, posting of information in public places, and use of mass media are virtually nonexistent.

The lack of support of and coordination with national government agencies such as the Bureau of Internal Revenue (BIR) and the Bureau of Local Government Finance (BLGF) has negatively contributed to revenue administration performance at the local level. BIR does not share its information with LGUs ostensibly for confidentiality reasons. While the BLGF has given support to LGUs such as the RPT enhancement program and updating of the local treasurer’s manual, further support has been limited because of insufficient resources.

Third, the real property tax collection efficiency of provinces and cities is on the decline.

Fourth, lack of political will of politicians. Scared of political backlash, weak politicians prefer to rely on the IRA rather than raise local taxes. Some examples would be the failure to exercise the authority of LGUs to revise real property assessments every three years or few revised local tax codes, owing to the resistance of the local chief executive or the local Sanggunian or both.

Finally, poor local revenue administration is due to its high administrative and compliance costs. Because of the decentralized nature of Philippine local government tax administration, the presence of many small-scale tax administrations collecting revenues is a reason for high administrative and compliance costs. In addition, small local governments have difficulty attracting and maintaining qualified personnel and access to information technology.

Reduce Wasteful Spending

Three hundred billion pesos are such an important resource for development. And they shouldn’t go to waste. A challenge for the cash-short Aquino administration should be to tap this huge source of public funds. The central government should influence its local counterparts to reduce waste and spend public monies judiciously.

Local government authorities should be real partners of the central government in the country’s development effort. They should spend their 20% of the IRA — estimated at 60 billion pesos — for hard infrastructure (communal irrigation, local roads, local water projects, etc.) rather than fritter it away for some low-priority projects such as beautification of the plaza or construction of new municipal hall or lakbay aral program for favored teachers, and so on.

In an era of shrinking public resources, every peso counts. Every public sector entity — national, corporate, and local — should be expected to contribute. –Core — By Benjamin E. Diokno, Businessworld