Philippines: Designing a Local Government Enhancement Fund

Publication | October 2011

The main transfer instrument from the central government to local government units (LGUs) in the Philippines, the internal revenue allotment, has been criticized for: its inability to equalize sufficiently, especially regarding the poorer municipalities and provinces, and its funds not having been spent efficiently. For some time, LGUs have petitioned the Government of the Philippines to expand the funding of the IRA. However, there appears to be ample consensus that any additional funding needs to be distributed in a manner that addresses the design flaws of the IRA. In this paper, options for the design of a possible new transfer, the Fiscal Equity and Expenditure Performance Fund, separate from the IRA, are outlined. Such design faces four major challenges: (i) how to define the origin and computation of the additional funding, (ii) how to divide the additional funding among the different groups of LGUs (provinces, cities, municipalities, and barangays), (iii) what formula to use for the distribution of the additional funds for qualifying LGUs in each particular group of LGUs, and (iv) how to ensure that LGUs will use the additional funds to improve their service delivery performance. The transfer mechanism suggested as a result offers a bridge toward the eventual review and reform of the IRA.

Contents 

  • Executive Summary
  • Introduction
  • Defining the Origin and Computation of the 10% Additional Funding
  • Apportioning the Additional Funding among the Different Groups of Local Government Units
  • Alternative Formula for the Distribution of the Additional Funds to Qualifying Local Government Units
  • Performance-Based Evaluation of recipient Local Government Units
  • Summary and Conclusions
  • Appendixes
  • References