The Philippines is an early leader in the move towards decentralized local governance and fiscal decentralization in Southeast Asia. As early as the 1970s, it explored various institutional and legal arrangements for central–local fiscal relations. In 1991, it passed the Local Government Code, providing an ambitious mandate for local governments to deliver public services. Notwithstanding this mandate and the fact that LGUs had been accounting for a considerable chunk of government expenditures, decentralization at program appraisal still had to make a dent in reducing poverty and inequality.
Improving public services delivery, a pivot for local poverty reduction and economic development, continued to be challenged by equity and quality issues. Regional and urban–rural disparities remained significant, and were most manifest in the poverty rates that varied greatly and were particularly high in Mindanao and Eastern Visayas. Behind the disparities were several issues, including flaws in the design of the LGU revenue base, weak public financial management (PFM) systems, poor local accountability and governance systems, and deficient local government fiscal framework.
To address the challenges, the government engaged in a major review and reform of central–local fiscal relations in the Philippines and adopted a PFM roadmap that provides a comprehensive reform agenda to ensure that the national government can maintain fiscal discipline, allocate funds efficiently, and provide efficient service delivery. While improving PFM has been a core component of the government’s reform efforts, initiatives to improve local governance, strengthen citizen voice and accountability, and promote transparency and responsiveness in the delivery of public services have also been important priorities.
In support of the government’s commitment to improve LGU service delivery and address the challenges faced by LGUs in achieving the priorities set out in the Philippine Development Plan 2011–2016, the Asian Development Bank approved the Local Government Finance and Fiscal Decentralization Reform Program. The policy-based program cluster basically aimed to develop adequate LGU financial capacity to fund the improvement of service delivery. It consisted of two subprograms, the first of which was approved in February 2013 for a loan of $250 million, and the second in December 2016 for another $250 million loan.
Subprogram 1 strengthened the demand side of decentralized governance by introducing performance-based monitoring systems and grant mechanisms, as well as developing a fiscal decentralization roadmap. Building on the foundation established by subprogram 1, subprogram 2 served as an umbrella to anchor ADB support for broader PFM reforms and expand LGU engagement. Specifically, subprogram 2 operationalized new measures to incentivize service delivery performance and supported the implementation of the medium-term LGU PFM reform strategy. It helped LGUs better access their own-source revenues and improved the regulatory framework for intergovernmental fiscal relations. Three technical assistance (TA) packages were also provided by ADB in 2014−2017 to enhance program implementation.
At completion, the program successfully achieved its planned outputs across four reform areas: development of resource framework for fiscal sustainability; strengthening PFM systems to enable efficient LGU service delivery; establishment of local governance, transparency, and accountability systems; and creation of a fiscal framework for inclusive growth. Successful output deliveries gave rise to meaningful contributions to higher level outcomes. Measures such as the development of a local taxpayer database, issuance of guidance manuals, and capacity development for local tax assessors and property tax valuation directly contributed to growth in real property tax collection. Introducing a weekly tax watch report created strong incentives for local government officials to improve tax collection performance. Tax information sharing between the Bureau of Internal Revenue and LGUs helped strengthen compliance management and reduce avoidance schemes by taxpayers. Increased revenues along with PFM reforms have increased both the volume and quantity of public spending on key services, resulting in the near doubling of social services spending between 2010 and 2016. Overall operating expenditures for LGUs grew at an average of 5.8% per year during the period.
Implementation of a full disclosure policy for local budgets and finances, bids, and public offerings has improved local PFM transparency and accountability, especially in local procurement. The development and pilot of the Seal of Good Local Governance, with its associated financial incentives, dramatically improved LGU governance across key dimensions like public finance, citizen responsiveness, business friendliness, and environmental sustainability. Review of the 1991 Local Government Code Book II identified several shortcomings in the existing law and paved the way for preparing amendments toward a new vision of decentralized local governance with greater autonomy and accountability for PFM. It significantly helped improve the quality of local PFM through assessment scoring and contributed to overall citizen satisfaction in the quality and responsiveness in local government.
Overall, the program thus was able to achieve its intended outcome, exceeding targets in allindicators. Real property tax collections surpassed the target a full year earlier. By 2017, real property tax collections by LGUs were more than 50% higher than the target. Local government recurrent expenditure likewise increased by more than 20% higher than targeted. As measured by the LGU PFM assessment tool, LGU PFM performance markedly increased from a baseline score of 2.34 in 2013, covering 550 LGUs, to a score of 2.78 by 2016, covering 1,404 LGUs, an increase of approximately 20%. The government gradually rolled out the citizen satisfaction indicator system across 140 cities or 97% of all cities in the Philippines. Using a weighted average of cities surveyed in 2013, 2014, and 2015, the national average score rose from a baseline of 58.85% in 2013 to 61.02% in 2015.
The program had the Department of Finance (DOF) as executing agency. Its implementing agencies included the DOF, the Department of the Interior and Local Government, the Department of Budget and Management, and the National Economic and Development Authority.
