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Business

Bumpy road ahead for LGUs

BIZLINKS - Rey Gamboa - The Philippine Star

Considered a landmark win by local governments in their struggle for more financial resources from the national government is the 2019 Supreme Court decision upholding the argument that internal revenue allotment (IRA) from the national government comes from all tax collections, not just from the Bureau of Internal Revenue.

This court verdict is now more popularly called the Mandanas Ruling in reference to the legal challenge filed in 2013 by then Batangas Governor Hermilando Mandanas together with other local elective officials. The SC ruling was made effective starting 2022, and was estimated to increase IRA by an average of 27.61 percent on the first year.

Getting a bigger share of state tax collections, of course, does not come free. By midyear 2021, then president Rodrigo Duterte issued an executive order for the full devolution of certain executive functions of the national government to local government units (LGUs) within a two-year period until end-2024.

The objective was to defray national government costs for programs and projects roughly equivalent to the additional tax money that had to be allocated resulting from the Mandanas Ruling. This year, the Department of Budget and Management said that IRA would reach P1.08 trillion, or P234 billion more than last year’s.

For many local governments, a double-digit increase in budgetary allocation from the national government may sound like a lotto winner’s dream, but as one Senator has warned, the amount needed to take responsibility for devolved projects and programs may not be commensurate to the additional revenue allocations.

Losing economies of scale

A simple explanation for this mathematical discrepancy comes with economies of scale. The national government has the muscle and efficiency to oversee certain projects and programs at lower cost, but this is lost when work is apportioned to the local bureaucracies starting from provincial down to barangay levels.

Many times too, the national government can be likened to a well-oiled machine, having been functioning for many years, even decades. Many local governments lack this quality despite the passage of the Local Government Code (LGC) more than three decades ago.

As to be expected, the professional caliber of civil service employees at the national government level, especially those at top positions, more often are far more competent than those at the LGUs, and this could make a difference in the quality of work.

One big problem will be in the LGUs’ absorptive capacity, or their ability to spend money, on the additional funds that had been dropped on their laps. Even before the promulgation of the Mandanas Ruling, LGUs often failed to spend all of their annual IRAs, clearly a deprivation of government resources on their constituents.

Another cause of concern would be in the diverse and differing management styles employed by local governments, which makes coordination by the national government more challenging given the bigger amounts of budget allocations.

Of course, such variances in governance styles are the perfect environment for graft and corruption, making transparent accountability of local officials more difficult to demand.

Stronger local governance for inclusive growth

Strengthening local governance, however, is still seen as the right move that would push for inclusive growth at the grassroots level. Focus therefore should be in recognizing the problems that local governments face, and finding solutions.

One of the major recommendations was a thorough review of the 1991 LGC that would update the government’s current legal and policy framework so that it would become consistent with the goal of increased local autonomy and devolved delivery of services.

Already, 21 amendments have been identified that could strengthen the accountability and autonomy of local governments. This includes a better definition of what responsibilities are being devolved and what are going to be shared.

The previous economic team has been adopting measures that would institutionalize good public finance management, as well as introduce tools and mechanisms like the LGU Integrated Financial Tools (LIFT) platform for integrating and harmonizing local government planning and fiscal reporting systems. Other initiatives include the strengthening of local revenue administration and the professionalization of local core public finance functions.

Pushing for sustainable countryside wealth

One critical area for improvement that has been identified is the LGUs’ capacity to generate its own revenues on a sustainable level. This is regarded as rich source of income that could bring wealth to people in the countryside, but is not being adequately tapped.

LGUs are often constrained from raising funds for their own projects from capital markets or other financing sources. According to a report by the Asian Development Bank, LGUs are restricted from using nongovernment financial institutions or face too-strict administrative barriers.

Because of an uncertain legal and regulatory framework, LGUs find it difficult to raise private sector equity for infrastructure projects often delisted in the national government’s priority list, but which could become catalysts for local economic growth.

Local real estate tax collections have to be improved, but invested interests have kept land valuations unrealistically low for decades. The Department of Finance (DOF) has argued that the government could have raised P26 billion more in 2016 if land values were updated. The DOF is proposing to bring back property valuation to the national government, but this is facing stiff resistance in Congress.

The above are just some of the major issues local officials are facing during transition where the goal is increased local autonomy and devolved delivery of services. Will the current crop of elected LGU officials measure up to the task?

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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