Philippines Social Expenditure Priorities

Transcription

1 Report No PH Philippines Social Expenditure Priorities November 13, 1998 Managing Unit: Philippines Country Management Unit East Asia and Pacific Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank

2 CURRENCY EQUIVALENT (as of November 10, 1998) Currency Unit = Peso (PhP) US$1.00 = P40.49 FISCAL YEAR January 1 - December 31 CHED CIDSS CO COA DBM DECS DOH DSWD DPWH FAPs GAA GASTPE GDP GOCCs EDCOM IRA IRRs JICA LGC LGUs MBN MFIs MOOE NAPC NCA NCC NEDA NGOs NLSF O&M PAGCOR PAF PCFC PCFP PDTF PhP POs R.A. SARO SRA SRC SUCs TA TESDA ABBREVIATIONS & ACRONYMS Commission on Higher Education Comprehensive and Integrated Delivery of Social Services Capital Outlay Commission on Audit Department of Budget and Management Department of Education, Culture and Sports Department of Health Department of Social Welfare and Development Department of Public Works and Highways Foreign-Assisted Projects General Appropriations Act Govermment Assistance for Students and Teachers in Private Education Gross Domestic Product Government Owned and Controlled Corporation Education Committee Internal Revenue Allotment Implementing Rules and Regulations Japan Intemational Cooperation Agency Local Government Code Local Government Units Minimum Basic Needs Microfmance Institutions Maintenance and Other Operating Expenses National Anti-Poverty Commission Notice of Cash Allocation National Credit Council National Economic and Development Authority Non-Government Organizations National Livelihood Support Fund Operations and Maintenance Philippine Amusement and Gaming Corporation Poverty Alleviation Fund People's Credit and Financial Corporation Presidential Commission to Fight Poverty Peoples Development Trust Fund Philippine Peso Peoples Organizations Republic Act Special Allotment Release Order Social Reform Agenda Social Reform Council State Universities and Colleges Technical Assistance Technical Education and Skills Development Administration Vice President Country Director Sector Manager Task Team Leader Mr. Jean-Michel Severino, EAPVP Mr. Vinay K. Bhargava, EACPF n.a. Mr. Bernard Funck, EACPF

3 PHILIPPINES: SOCIAL EXPENDITURE PRIORITIES TABLE OF CONTENTS Page No. FOREWORD EXECUT'IVE SUMMARY... i 1. O'VERVIEW.I Revisiting the FY 1997 Government Budget.1 The FY 1998 Expenditure Program.2 Austerity Measures in the FY 1998 Expenditure Program. 2 Impact of Fiscal Austerity on Expenditure Priorities.4 Proposed Policies for Overall Fiscal Stance.6 Allocation and Spending Priorities.7 Overall Assessment and Recommendations.9 2. EDUCATION.1 Execution of the 1998 Budget.14 Proposed 1999 Budget for Education.16 Primary and Secondary Education.16 Tertiary Education.18 Vocational Training.18 Recommendations HEALTH.20 Health Expenditures Before the Financial Crisis.20 The Budget for 1998 and Its Execution in the Wake of the Financial Crisis. 24 Impact of the Crisis.24 Impact of Fiscal Austerity.25 The Proposed 1999 DOH Budget.26 Recommendations.29

4 Page No. 4. TARGETED SOCIAL INTERVENTIONS Department of Social Welfare and Development Mission and Activities Impact of Fiscal Austerity Proposed Budget National Anti-Poverty Commission Microfinance Recommendations TABLES 1.0 Summary Fiscal Impact of Selected Recommendations...v 1.1 Unliquidated Obligations of Selected Department Shortfalls in Revenue Collections Expenditure Program of National Government Departments, FY Indicators of Cash Rationing, January-June Sectoral Allocation of National Government Department Expenditures Allocation of National Government Department Expenditures by Object Notice of Cash Allocation by Sector and Object Fiscal Surplus (Deficit) Major Increases in the Proposed 1999 Budget Increase in Proposed 1999 Budget on Account of Foreign-Assisted Projects Distribution of National Government Expenditures by Sector Education Expenditure in Selected East Asian Countries Trends in Maintenance and Other Operating Expenditures Education Budget by Level of Education DECS Budget by Category of Expenditure Budget of SUCs by Category of Expenditure Evolution of Public Health Expenditures, National Government Health Expenditures, Distribution of National Government Health Expenditures by Budget Components, Functional Distribution of DOH Budgetary Expenditures,

5 Page No. 3.5 Distribution of DOH Budget by Object, Distribution of LGU Actual Expenditures by Level and by Function, Selected Health Indicators, Allocation of Mandatory Reserves on Public Health Programs Allotment Releases, Cash Releases and Obligations National Government Health Expenditures and DOH Budget, Funclional Distribution of DOH Budgetary Expenditures, Appropriations for Selected Public Health Programs, Main Activities of DSWD DSWD 1998 and 1999 Budgets LGU Allocations for Social Welfare Programs/Services DSWD Special Financing ANNEXES Annex I Report of a Mission to the Philippines on "The Socioeconomic Impact of the Financial Crisis in the Philippines" - Foreword and Summary Annex 2A Textbooks Elementary -- Cost Estimates for 1999 Annex 2B Textbooks Secondary -- Cost Estimates for 1999 MAP

6 FOREWORD This report follows up on a Social Impact Assessment of the Crisis which the Bank carried out in the Philippines in February One of the main recommendations emerging from that assessment was for the Government to "protect health, education, and other social sectors from budget cuts relative to other sectors. Across these sectors, (to) identify and protect the most effective programs and those that the poor use disproportionately (for example, lower levels of services, such as basic education, rather than higher ones; basic public health facilities, rather than urban-based hospital care). Within any sector, (to) protect key inputs such as textbooks, sonne important drugs that are used more by the poor than by others (in particular restore funding for immunization programs to 100 percent), rural infrastructure, irrigation, and livelihood and employment generation programs" (see summary and recommendations of the social impact assessment in Annex 1). Following this initial assessment, the purpose of the present report is to take this analysis one step further, assess in more detail how social expenditure priorities are being met in the present context of fiscal austerity, and develop specific recommendations in this respect. The report summarizes the findings and recommendations of a World Bank Social Expenditure Review, carried out from August 24 to September 4, The review focused particularly on the budgets of the Department of Education, Culture and Sports; the Commission of Higher Education; the Technical Education and Skills Developments Authority; the Department of Health; the Department of Social Welfare and Development; the National Anti-Poverty Commission; as well as other expenditures covered by the Social Reform Agenda, related special purpose funds (including, for instance, the Poverty Alleviation Fund), and, to some extent also, local government expenditures on similar or related items. The World Bank team comprised Bernard Funck (mission leader), Jayshree Balachander, Malaika Stoll, Joven Balbosa, Arben Bakllamaja and Louis Charles Viossat. Ms. Araceli Tria assisted in document processing. The team wishes to express its gratitude to the departments and agencies mentioned above, as well as to the Department of Budget and Management, the National Economic Development Authority, the Commission on Audit, the National Credit Council, the Philippines Institute of Development Studies, and the Congressional Planning and Budget Office for their warm cooperation.

7 EXECUTIVE SUMMARY Overview i. The execution of the 1997 and 1998 General Appropriation Acts (GAA) have been marked by a growing discrepancy between expected and actual revenues, and therefore between authorized expenditures and resources to fund them. In a bid to contain the fiscal deficit, the authorities had to cut as much as 15 percent of the 1998 appropriation for national government departments, an amount equivalent to 38 percent of their non-personnel appropriations. ii. Even that did not prove enough, and the authorities had to resort to cash rationing to balance the government books on a day to day basis. As a result, cash allocation to spending agencies has been rationed to levels below their spending authority, leading first to a build up of arrears to suppliers, then to growing execution difficulties as suppliers responded to government impecuniosity by tightening their payment terms. In 1998 in particular, cash releases to many agencies were often barely sufficient to pay for personnel serviices, and those suppliers' bills, which for one reason or the other, have proven most pressing. In the circumstances, a department such as the Department of Education, Culture and Sports (DECS) has so far been incapable of placing the 1997 textbook purchase orders (not to mention the 1998 ones). iii. The social sectors have been comparatively protected. In part as a reflection of government policy commitments (one of the first decisions of the new administration was to restore funding for the most essential social programs), in part as a result of the absolute priority given to wages and salaries (which account for a comparatively larger share of expenditures in the social sectors), the share of social services in national government expenditure is expected to rise to 44 percent in 1998 from 39 percent last year, and 32 percent earlier in the decade. iv. Even if lighter than in other sectors, the fiscal difficulties have exacerbated long-standing structural problems in the social sectors, and made it all the more urgent to address them once and for all. Some of the sorer ones are: inefficient procurement, poor deployment of teachers, severe underfunding of textbooks and school maintenance, public health programs, and welfare institutions, creeping renationalization of devolved hospitals, proliferation of low quality universities and colleges. In these sectors, lack of money is only half of the problem. v. The proposed 1999 budget essentially reflects the continuation of the same policies, with two notable improvements: (i) the non-indexation of wages (for the second year in a row) should create room for Operations and Maintenance or O&M expenditures; and (ii) the proposed budget seeks to accelerate the implementation of foreign-assisted projects (FAPs). The creation of a Poverty Alleviation Fund (PAF-4) is also welcome, and should back up the departments (and supplementheir meager resources) in their efforts to address the needs of the poorest and most vulnerable groups. By contrast, the proposed 33 percent increase in Internal Revenue Allotment (IRA) transfers to local government units or LGUs seems perhaps overly generous in the present context, especially if it would precede the overdue review of the local government code. vi. The current episode has also graphically illustrated the needfor better instruments to control the execution of the budget. Until the government is able to better calibrate the release of allotments to macroeconomic and revenue developments, it would not be prudent to renounce the use of reserves, as government has, perhaps prematurely, announced. When all is said and done, the latter instrument is certainly preferable to the cruder methods of cash rationing.

8 - ii - Recommendations: vii. At the overall level, the best course of actionfor the rest of the year would appear to be: * not to seek further lifting of reserves (to a few exceptions, see below) beyond those already approved on July 10, 1998 which already cover most essential social expenditures (e.g., public health, retained hospitals, textbooks, school desks, Comprehensive and Integrated Delivery of Social Services or CIDSS); * but rather, to actually implementhe said decision, by notifying agencies of correspording allotment releases; and * most importantly, to release the notice of cash allocation (NCA) necessary to settle all due payments on 1997 and 1998 expenditure obligations -- perhaps even through special targeted cash releases. To mark government commitment to social development, health, education, and social welfare expenditures might be settled as a matter of priority. The Government is now proceeding to implement the said allotment releases and has announced its intention to include DECS, DOH, and DSWD in its priority program of arrears settlement. viii. To ensure that resources are indeed available for social expenditure priorities in 1999, overall priorities should be to: * hold the line, as planned, on salary and payroll increases; * set aside part of the proposed 33 percent increase in IRA allocation until completion of the mandatory review of the Local Government Code (e.g., revision of the grant formula, and introduction of mechanism to force LGUs to assume responsibilities devolved to them whenever they fail to do on their own); * actively use the timing of the Special Allotment Release Orders (SARO) to adjust departments' spending authority to expected cash availability and arrange for an early release of counterpart funds for FAPs, so foreign funds can be mobilized in a timely manner; * do not preclude the use of reserves, but exempt again (this time, ex ante) the priority programs identified in the presidential decision of July 10, 1998; * direct agencies to establish a rational and transparent payment queuing system; and, * improve budget monitoring by introducing monthly report on obligation and outlays by agency and by program, and expedite the ongoing budget execution computerization. ix. In the education sector, the report proposes the following combination of budget and structural measures for immediate action in 1998: * as soon as NCAs are released, place the still pending 1997 textbook purchase orders; * release NCA to the Department of Public Works and Highways or DPWH to settle payment arrears on the 1997 school construction contracts. Whenever contractors have already demobilized their teams, fund local communities to complete unfinished works; and, * proceed with the planned procurement reform in time for the 1998 textbook purchase. x. This initial effort should amplify in 1999, along the following lines: * increase textbook appropriation to PhPI.35 billion; * direct DECS to first exhaust all possibilities for teacher redeployment before proceeding to any new hiring;

9 - iii - * review Government Assistance for Students and Teachers in Private Education with a view to improving targeting and/or reallocation (GASTPE) to public secondary education; * veto lunding for the 4 new State Universities and Colleges (SUCs) included for the first time, in the proposed budget, as well as the creation of any new ones; * urge Commission on Higher Education (CHED) to undertake without delay its planned review of government policy on SUCs with a view towards rationalization in the sector; and, * compel LGUs to assume financial responsibility for school buildings devolved to them under the local government code; and encourage them to mobilize foreign funding for both primary and secondary classrooms in target provinces. xi. In the health sector, immediate prioritiesfor 1998 involve: * as soon as NCAs are released, speed up the pace of expenditure commitment, particularly for public health programs; and * release "frozen" appropriations for hospital equipment. The government has now expressed the intention to do so. xii. On this basis, structural reforms should proceed in 1999 to: * cancel the re-nationalization (and funding by the national budget) of 2 devolved hospitals and upgrading of 5 others; * reallocate the resources budgeted for them to maintain funding for vaccines and micronutrients programs to at least the level of 1998 GAA in real terms; * reformri drugs procurement, including by introducing international competition; * give fiscal and management autonomy to retained hospitals (pari-passu for devolved ones); and * introduce socialized pricing in public hospitals. xiii. With the intensification of the crisis, the programs of targeted social intervention, under the Department of Social Welfare and Development (DSWD) and the National Anti-Poverty Commission (NAPC) face are on the front-line to shield some of the most vulnerable groups from social hardship. Unfortunately, if NAPC is holding out the promise the next year's budget would provide for a fourth Poverty Alleviation Fund (PAF-4), DSWD can only, on present plans, expect its resources to shrink further. The latter situation should be reversed. xiv. For DSWD, the recommendation would be to: * lift remaining reserves affecting the department in 1998, particularly those on welfare institutions (e.g., orphanage, rape centers), children and youth, as well as nutrition programs. The governmnent has now expressed the intention to release reserves affecting the operation of welfare institutions; and * raise DSWD fundingfor 1999 to at least the 1998 GAA level and allocate the additional resources to DSWD centers and for an expansion of CIDSS coverage. xv. As to NAPC, the priorities would appear to be to:

10 - iv - * actually set up the NAPC council before the end of 1998, so that the latter can adopt the institution's implementation and regulation as well as guidelines for the utilization of PAF-4; and * provide funding for NAPC initial setup as well as its operational requirements to assume the monitoring and coordination roles assigned to it by law. xvi. This would allow the 1999 PAF- 4 to become a critical instrument to dispatch supplemental funding on a need basis for department interventions in favor of vulnerable groups, following the highly consultative program/project identification process inaugurated under the Social Reform Agenda (SRA). xvii. Implementation of the recommendations would allow the country to reap significant social benefits. They would allow, for instance, to: * ensure that at least one textbook is available for every two pupil in the core subjects, as compared to one for every eight at present; * get the school construction program back on track; * reverse the decrease in the coverage of public health programs (targeted coverage: malaria control, schistosomiasis: +33 percent, TB control: +59 percent); - restore the coverage of the immunization program (targeted coverage: basic (OPV/DPT) immunization, +43 percent; Hepatitis B: percent) and the micronutrient program (targeted coverage: iron and iodine supplementation +33 percent, vitamin A: +66 percent); - offset the impact of the currency depreciation on the cost of drugs; - keep the national hospitals functional, pending a broader reform of the sector; - put welfare institutions in a better position respond to the needs of vulnerable groups (e.g., orphans, handicapped people); * offer an effective buffer to a larger number of poor communities affected by the crisis by expanding the reach of the Comprehensive and Integrated Delivery of Social Services; and more generally; and v provide that supplemental resources can be dispatched from the Poverty Alleviation Fund to address priority minimum basic needs identified through broad social consultation. xviii. Best of all, these sizable benefits would come at a reasonable fiscal cost. As Table I indicates, the largest cost would arise from cleaning up the books, i.e., from the need first to make social sector agencies current again on their payment obligations for past expenditure if their current programs are to get back on track. Beyond that, efficiency measures could substantially if not entirely offset the cost of the proposed program expansions.

11 Table 1.0: Summary Fiscal Impact of Selected Recommendations (in PhP million) Backlog 1M Budget 1f99 Budget Measure Amount Measure Amount Measure Amount EDUCATION Settle overdue +1,800 Implement Increase payables for lifting of reserve textbook O&Ma already appropriation approved Settle overdue +? Fill teachers' payables for vacancies partly school constr. through redeployment Release cash +516 Release Veto funding for for 1997 allotment for new SUCs textbook school purchase construction HEALTH Settle overdue 3,500 Implement Veto hospital payablesa lifting of reserve nationalization already and upgrading approved Lift reserve on Cancel subsidies - 70 hospital to LGUs for equipment Magna Carta Restore funding for public health SOCIAL Settle overdue 325 Implement Raise funding to WELFARE 1997 lifting of reserve 1998 GAA level payablesa/ already in real terms approved Lift remaining reserve, particularly on centers and institutions ANTI-POVERTY Provide + 10 COMMISSION additional operating budget TOTAL +6,141 +3, a - (excl. school constr.) a Estimates as of June 30, 1998

12 I 1. OVERVIEW Revisiting the ]FY 1997 Government Budget 1. The origin of current fiscal difficulties can be traced back to the execution of the 1997 budget, and the abrupt change in economic environment under which it took place. Previously buoyant, revenues all of a sudden turned scarce. But expenditure commitments carried on for a long while on their own momentum, before hitting liquidity constraints. 2. Before the start of the financial crisis in July of 1997, the Philippines was on its sixth year of accelerating growth. The outlook then, looked very optimistic for the country. The optimism was evident in the preparation of the 1997 budget, where the underlying macroeconomic assumptions called for a GNP growth forecast of 7 percent year on year, and a stable exchange rate of ground PhP26 to the US dollar, among others. President Ramos' 1997 proposed budget to Congress was consistent with this highly optimistic scenario. Congress, on the other hand, increased further the budget allocation to reflect their own priorities and projects. Confident abouit fiscal prospects, the Department of Budget and Management (DBM) released expenditure allotments early in the fiscal year. 3. Sufficient cash resources did not materialize to back these ambitious expenditure commitments. As the financial crisis unfolded in the second half of 1997, tax and duty collection of the government began to deviate from target. As it turned out, actual revenue tax collections fell PhP37 billion short of target for the whole year (the overall revenue performance would actually have been worse, had the government not extracted early dividends from government corporations). Thus, the accounts payable of government began to pile-up. Although no precise figure is currently available, it is likely that the national government would have accumulated at least PhP40 billion of arrears (on a net basis) during fiscal year of As a result, the official presentation of the fiscal outcome (on a cash basis) dissimulated the true financial situation of the national government (measured, as it should be, on a commitment basis): rather than a small surplus, the national government had actually incurred a deficit of, perhaps, 1.5 percent of Gross Domestic Product (GDP). 4. Such delaying tactics may have been understandable at a time when the crisis was expected to be of short duration. In practice, they only served to delay the moment of reckoning. The amounts unpaid in 1997 had to be settled in 1998 when cash was even tighter. Settling them together with other 1997 obligations becoming due and demandable, spilled over to 1998, and crowded out the 1998 expenditure program. As of June 30, 1998, the unliquidated obligations carried over from previous years by all departments (all of which, let it be noted, may not be immediately payable) still amounted to PhPI08.5 billion (see Table 1.1).

13 2 TABLE 1.1: UNLIQUIDATED OBLIGATIONS OF SELECTED DEPARTMENT (IN PHP BILLION) Balance Settled in Balance as of Dec. 31, 1997 Jan to June 1998 as of June 30, 1998 Dept. of Public Works and Highways Dept. Education, Culture and Sports Dept. of Agrarian Refonn Dept. of Agriculture Dept. of Health All departments Source: DBM The FY 1998 Expenditure Program 5. The 1998 budget itself was excessively ambitious. It had been formulated before the crisis hit, and rested therefore on similarly optimistic assumptions as its predecessor. Again, Congress jacked up the budget some more to reflect their own priorities and projects. While the executive department had requested PhP320 billion for national government departments, Congress actually appropriated PhP361 billion. Meanwhile, revenue collection has been deteriorating rapidly, widening the gap between budgetary obligation and cash outlay. As of July this year, government revenue projections estimated the tax collection shortfall to reach PhP87.6 billion for the full-year, 17 percent of the original target (Table 1.2). TABLE 1.2: SHORTFALLS IN REVENUE COLLECTIONS (IN PHP BILLION) ACTUAL SUBMITTED PROJECTION SHORTFALL/ TO CONGRESS EXCESS Tax Non-tax Total Revenues % of GNP Source: DBM Austerity Measures in the FY 1998 Expenditure Program 6. In a bid to contain the fiscal deficit, the authorities proceeded to cut by as much as 15 percent of the 1998 appropriation for national government departments, an amount equivalent to 3 8 percent of their non-personnel appropriations. This was achieved through a combination of selective and across the board measures (see Table 1.3), as follows: (a) (b) Cancellation of Selected Items, Through Vetoes and Other Measures. This was initially essentially limited to President Ramos vetoing line insertions by Congress in the 1998 budget. Upon assuming power, the new Estrada administration enacted deeper cuts, including suspension of the Armed Forces modernization plan, the Countrywide Development Fund and Congressional Initiatives (otherwise known as the pork barrel funds), Public Works Act, among others. Partial Across-the-Board Freeze of Departmental Appropriations. From the beginning of the year, the government directed spending agencies to set aside

14 3 (i.e., freeze, or "reserve") an amount equivalent to 25 percent of their appropriations for maintenance and other operating expenditures (MOOEs) and capital outlays (COs), leaving it to the discretion of the spending agencies which expenditure item could await better times (as contained in Administrative Order No. 372). A 10 percent reserves was also imposed on IRA transfers to local government units (LGUs). (c) (d) Although the revenue outlook actually turned worse than anticipated at the time these reserves were imposed, the outgoing administration proceeded to a partial Linfreezing of hospital maintenance expenditure; however, the new administration decided on July 10, 1998 to selectively lift reserves on other critical social programs, as a show of commitment to its pro-poor agenda. The latter decision concerns essentially the operation and maintenance of public health programs, national hospitals, and schools, the purchase of textbooks and c[esks, and the Comprehensive and Integrated Delivery of Social Services (CIDSS). This round of reserve lifting has not yet been operationalized. Concerned departments still need to be notified of the release of their allotments. TABLE 1.3: EXPENDITURE PROGRAM OF NATIONAL GOVERNMENT DEPARTMENTS, FY 1998 (IN PHP BILLION) SEMESTER I MEASURES SEMESTER 2 MEASURES Conigress Impositio Suispensioni of Carry- Operating Removal of Other Meas. Other Adjusted approved n of 25% Congressional Over Program Congressional Approved by Adjustmlents Program (i) Reserves Insertions froin (5)=( 1 )-(2)- Insertions the Pres. (8) (9)=(S)-(6)- (2) (3) 1997 (3)+(4) (6) (7) (7)+(8) (4)_ = = := _ All Depts ,502 10, ,237 7,802 11,679 10, ,387 olw: DECS 83,826 2, , ,492 82,851 SUCs 15,260 1, , ,574 DOH 13,374 1, , ,508 DSWD 1,858_ , ,472 Source: DBM 7. In many cases, however, these limits put on the spending authority of government departments have not constituted the most binding constraint on expenditure. The real constraint often came from cash rationing, arising from a slow down in the release of Notice of Cash Allocation (NCA), which after a while actually constrained departmental expenditure program below the commitment authority given to them. Since NCAs are provided as a lump sum amount, the departments have the prerogative to liquidate the NCAs according to their priorities. Given the absolute priority given to paying wages and salaries, the squeeze actually fell on operations and maintenance (O&M) and investment expenditures. 8. Cash rationing, after causing first a build-up of arrears to suppliers, led to growing execution difficulties as suppliers responded to government impecuniosity by tightening their

15 4 payment terms. In 1998 in particular, cash releases to many agencies were often barely sufficient to pay for personnel services, and those suppliers' bills, which for one reason or the other, have proven most pressing. Table 1.4 illustrates the problem in the case of Department of Education, Culture and Sports (DECS) and Department of Health (DOH), and shows (Column 6) that cash available to them covers only 28 percent and 48 percent, respectively, of their spending authority on MOOE and capital outlays (CO). TABLE 1.4: INDICATORS OF CASH RATIONING, JANUARY-JUNE 1998 (IN PHP BILLION) Effective NCA released Arrears Total NCA Cash Available for'98 Ratio 1998 for PS Settlement Released Non-Pers. Allotments Expenditures (1) (2) (3) (4) (5)=(4)-{(2)+(3)} (6)=(5)/{(l)-(2)} DECS % DOH % Source: DBM Impact of Fiscal Austerity on Expenditure Priorities 9. In this overall climate of fiscal austerity, the social sectors have been comparatively protected. Indeed, Table 1.5 shows that the share of social services in national government department expenditure is expected to rise to 44 percent in 1999, from 39 percent last year, and 32 percent earlier in the decade (1992). TABLE 1.5: SECTORAL ALLOCATION OF NATIONAL GOVERNMENT DEPARTMENT EXPENDITURES (OBLIGATION BASIS, PERCENT SHARE) Economic Services Social Services Defense General Public Services Total This is in part a reflection of the country's policy commitment to social welfare. The shift in expenditure shares results also from a clear desire on the part of government to remain current on wage and salary payments. As a result, the share of personnel services is expected to jump from about 52 percent to about 60 percent of national government department expenditures between 1997 and The flip side of that coin unfortunately is that investment and maintenance expenses are being squeezed out.

16 5 TABLE 1.6: ALLOCATION OF NATIONAL GOVERNMENT DEPARTMENT EXPENDITURES BY OBJECT (OBLIGATION BASIS, PERCENT SHARE) _ % SHARE 1997 % SHARE 1998 % SHARE 1999 % SHARE PS MOOE CO Total II. A look at the pattern of NCA confirms the view that social sectors are being comparatively lightly treated. Table 1.7 shows the increase or decrease in NCA releases for the first semester of 1997 to the first semester of 1998.' Overall NCA releases for the period was only 3.9 percent. Accounting for price increases, the amount of real services that the government could provide over the period may have actually shrunk. It is worth noting that relative to other departments, the MOOE and capital outlays of the social sector departments have actually increased whil[e other departments have contracted. This would give us an indication that, indeed, some degree of protection was afforded the social sectors. T'ABLE 1.7: NOTICE OF CASH ALLOCATION BY SECTOR AND OBJECT (PERCENT CHANGE, FIRST SEMESTER ) PS MOOE/CO TOTAL Social Services olw: DECS DOH DSWD CHED SUCs Other departments Total Source: DBM 12. As already noted, the other side of the cash rationing story pertains to the private suppliers and contractors of government projects and procurement. Aware of the cash rationing going on in government departments, they may now limit their provision of services and supplies to the departments, for fear of piling-up their receivable, or demand payments before services will be restored. The slowdown in the provision of government services, in general, has exacerbated thie underlying structural problems commonly associated with the social sectors; for example, the need for more textbooks in elementary schools, school buildings, teachers' training, child feeding programs, reduction of scholarship grants for deserving poor students, reduction of the coverage of the anti-tuberculosis program, non-programming of low cost housing units for the poor, among others. 13. Equally worrisome, cash rationing opens up new opportunities for corruption (e.g., suppliers seeking to jump the payment line) or fraud (when suppliers demand -- and obtain -- Note, however, that using NCA releases as an indicator of the trend in actual cash releases of governmento departments is highly indicative. The lump sum nature of NCA releases and the total discretion given to departments when to liquidate their NCAs, clouds the exact nature of cash releases of government.

17 6 advance payment, it is notoriously difficult to control whether services are actually rendered in full). Proposed Policies for 1999 Overall Fiscal Stance 14. The message from the fiscal sector is clear: to tolerate deficit spending in 1998 and 1999 but target drastic improvements in 1999, such that the budget deficit is contained at below I percent of GNP for the national government and 2 percent for the consolidated public sector (Table 1.8). TABLE 1.8: FISCAL SURPLUS (DEFICIT) (AS PERCENT OF GNP) Original Revised NG (1.42) (0.56) PSBR (1.56) (1.48) (3.45) (I 93) Consolidated Public Sector (0.95) (0.91? (2.61) (1.47) 15. Even that might be too optimistic. The proposed targets are actually extremely vulnerable to the following factors. On the one hand, revenues (excluding new measures) are likely to fall short of targets with lower than expected growth, among others. Even granting that the macro economic projections are met, the growth in tax revenues may likely not be far more than 12.2 percent, the growth in nominal GDP (the revenue growth estimate is 15.9 percent). Debt service expenditures, on the other hand, will automatically; rise if the exchange rate and interest rate increase further. 16. This being said, it would have been very difficult to trim down the proposed spending level given that the total budget growth of 9.7 percent is slower than GDP and national government capital spending has been consistently declining over the past two years. The PhP579.5 billion budget proposal for 1999, is therefore, a smaller proportion of GDP (18.2 percent in 1999 compared to 18.7 percent in 1998). Fortunately, a higher portion (16.6 percent in 1999 compared 14.9 percent in 1998) will be channeled to public goods and services other than debt servicing. 17. Still this budget is very tight, if one considers that: (a) (b) (c) Locally-funded projects subsumed in agency budgets will decline by PhP9.26 billion or 32.5 percent. The 1999 level is PhP19.25 billion, the lowest in the past three years. Of the PhP38.1 billion budget increase in 1999, PhP14.4 billion (37.8 percent) is on account of higher personnel costs, while PhP23.9 billion (another 62.7 percent) will accrue to the IRA of local governments. Special purpose funds (lump sum appropriations outside regular agency budgets) will decline by PhP3.85 billion or 10 percent of the 1998 level. This excludes IRA and interest payments.

18 7 (d) (e) (f) Total capital expenditures of the national government, excluding IRA transfers, will likewise decline by PhP8.7 billion or 12.9 percent. Compared to 1997, the reduction is 37.6 percent. Except for a handful, most agencies will be operating at budget levels lower than their 1997 or 1998 operating levels in nominal terms. The proposed 1999 budget does not provide for any overall wage adjustment in the light of present inflation over the statutory merit increases. The salary standardization program done in the past years may have softened the need to hike wages for next year. 18. This certainly demonstrates that further spending cutbacks can be absorbed only with great difficulty, in case revenue fall again short of expectations. The alternative, to be sure, is to accommodate a higher budget deficit, or at least a part thereof. Depending on what measures are taken, the implication could be any or a combination of the following: (i) further cuts in capital spending, eating a large portion of capital investments that could further hurt the economy's longer term development prospects; or (ii) negation of earlier statements to spare the appropriation from future reserves. 19. This promise of "no reserves" in 1999, while undoubtedly popular to agencies, is ill advised and irnpractical under existing circumstances. Given the nature of budget control instruments available to the authorities, reserves constitute one of the only mechanism available to modulate the pace of expenditure commitments in the face of macroeconomic and fiscal fluctuations. Even in the face of further expenditure cutbacks or reserves, however, the programs of key agencies in the social services sector should be protected, consistent with the thrust of the administration in the sector. Allocation and Spending Priorities 20. In view of the heavy constraints under which it has been formulated, it is little surprise that the proposed 1999 budget would essentially reflect, with only few innovations, the continuation of the same policies. Expenditure priorities in 1999 appear nevertheless in the following areas (see Table 1.9): (i) full restoration of Internal Revenue Allotment to local governments; (ii) acceleration of the implementation of foreign-assisted projects; (iii) priority allocation to agriculture and agrarian reform; and (iv) resumption of the Poverty Alleviation program. TABLE 1.9: MAJOR INCREASES IN THE PROPOSED 1999 BUDGET {IN PHP BILLION) REVISED INCREASE IRA Foreign Assisted Projects or FAPs (excl. grants) Agriculture, agrarian reform (net of FAPs) PAF Others (0.2) Total Budget (excl debt service) Transfer to Local Governments. The 32.8 percent increase in the Internal Revenue Allotment (IRA) is due to the full provision of the mandated 1999 revenue taxes. Without the 10

19 8 percent reserves imposed in the 1998 IRA, the growth would have been a lower 19.5 percent. If anything, the proposed 33 percent increase in IRA transfers to LGUs seems perhaps overly generous, in the present context, especially if it would precede the overdue review of the local government code. It might be safer to wait for the outcome of that review, and insist that it should result in a more sustainable and equitable transfer formula. 22. Foreign Assisted Projects. The bigger allocation for FAPs stems from a deliberate effort to accelerate availments from existing foreign fund sources. Availments from project/program funds are expected to grow by 52 percent, from US$360.8 million to US$548.7 million in This arises largely from some 20 new project starts, and the scheduled acceleration in the implementation of major projects (e.g., Third Elementary Education Project, Air Navigation Facilities Modernization Project, Davao International Airport Project, Mount Pinatubo Flood Control project, major road projects of DPWH, Small Coconut Farms Development Project, etc.). To some extent, the increase in the budget of major agencies can be accounted for by increases in their FAPs budgets, particularly in the case of DPWH, DOTC, DA and LGUs (Table 1. 10). TABLE 1.10: INCREASE IN PROPOSED 1999 BUDGET ON ACCOUNT OF FOREIGN-ASSISTED PROJECTS INCREASE IN BUDGET INCREASE IN FAPS _ DA DECS DPWH DOTC LGUs* * excluding mandated shares 23. Sector Thrusts. The 1998 budget has been described as market-friendly and "pro-poor". The "market-friendly" aspect is attributed to: (i) improvement in governance through a campaign against criminality and promotion of peace and order; (ii) sustained infrastructure; and, (iii) higher industry productivity and competitiveness. The "pro-poor" campaign, on the other hand, banks on the 9.7 percent increase in social services expenditures in 1999, particularly in the comprehensive agrarian reform program, education, health, employees' welfare, social welfare, and the poverty alleviation program. 24. The thrust to support agriculture and agrarian reform is particularly evident in both the budget and in several policy pronouncements. The share of agriculture and agrarian reform is targeted to rise to 3.93 percent, from 3.6 percent in the only notable growth among the sectoral groups (Table 1.1 1).

20 9 TABLE 1.11: DISTRIBUTION OF NATIONAL GOVERNMENT EXPENDITURES BY SECTOR Actual Planned Proposed Economic Services Agri/Agra Social Services Education Health Social Welfare Defense General Administration Interest/Net Lending Total The PhP3.8 billion increase in the agriculture and agrarian sector represents a 20 percent rise in the sector's budget, 58 percent of which are due to foreign-assisted projects. To a large extent, the decision to accommodate the requirements of existing and new foreign-assisted projects in the budget contributed to the apparent jump in the allocation for agriculture. Among these projects are the Small Coconut Farms Development Projects, Fisheries Resource Management Project, Acquisition of Marine Vessels, Casecnan Multipurpose project and other irrigation projects. 26. Poverty Alleviation Program. With the creation of the National Anti-Poverty Commission, the poverty alleviation program under the Social Reform Agenda which started in is now institutionalized. The 1998 fiscal crisis temporarily sidetracked the momentum of the program. ODnly PhP750 million of the original PhP2.5 billion appropriated in 1998 will be implemented. In 1999, however, the entire PhP2.5 billion is proposed to be restored under the Poverty Alleviation Fund (PAF). Overall Assessment and Recommendations 27. The execution of the 1998 budget encountered crippling problems arising from a widening resource gap between expenditures and tax and non-tax collections, and accounts payable carried over from the previous year. The problems resulted in a squeeze in the 1998 budget, thus, the imposition of mandatory cuts and a rationing of cash releases by the government. The effect has been felt across all departments, including (if more lightly) the social sector departments. 28. In reaction, the government tried to make some adjustments by focusing and revising the programs that would lean towards the social sector. Thus, some cuts in the social sectors were lifted. The question is whether this is enough. To date, the intention of government to lift 1998 mandatory cuts has not yet been formally communicated to the line departments for execution. The best course of action for the rest of the year would therefore appear to be the following: (a) not to seek further lifting of reserves on social sector appropriations (to a few exceptions, see next chapters) beyond those already approved on July 10, 1998 which already cover most essential social expenditures (e.g., public health, retained hospitals, textbooks, school desks, CIDSS);

21 10 (b) (c) to actually implement the said decision by notifying agencies of corresponding allotment releases; and most importantly, to release the NCA necessary to settle all due payments on 1997 and 1998 expenditure obligations -- perhaps even through special targeted cash releases. To mark government commitment to social development, health, education, and social welfare expenditures might be settled as a matter of priority. The Government is now proceeding to implement the said allotment releases and has announced its intention to include DECS, DOH, and DSWD in its priority program of arrears settlement. 29. For 1999, there is a strong intention in government to protect social expenditures over otl.er program expenditures. Hopefully, good intentions will be supported by concrete action, in the form of increased availability of cash outlays and improvement in enforcement efficiencies. To ensure that resource is indeed available for social expenditure priorities in 1999, overall priorities should be the following: (a) (b) (c) (d) (e) (f) hold the line, as planned, on salary and payroll increases; set aside part of the proposed 33 percent increase in IRA allocation until completion of the mandatory review of the Local Government Code (e.g., revision of the grant formula, and introduction of mechanism to force LGUs to assume responsibilities devolved to them whenever they fail to do on their own); actively use the timing of the Special Allotment Release Orders (SARO) to adjust departments' spending authority to expected cash availability and arrange for an early release of counterpart funds for FAPs, so foreign funds can be mobilized in a timely manner; do not preclude the use of reserves, but exempt again (this time, ex-ante) the priority programs identified in the presidential decision of July 10, 1998; direct agencies to establish a rational and transparent payment queuing system; improve budget monitoring by introducing monthly report on obligation and outlays by agency and by program, and expedite the ongoing budget execution computerization.

22 11 2. EDUCATION 1. More than overall funding, the main issues facing education in the Philippines has traditionally concerned quality and equity in the use of available resources. These include the intra-sectoral allocation of resources, regional distribution, and the composition and efficiency of government expenditures. The current fiscal difficulties are now compounding these longstanding problems. They have resulted in only partial provision of key educational inputs (textbooks, school buildings, desks and teacher training) budgeted in 1997, and little or no provision to date of inputs planned for If the financial constraints continue in 1999, the backlog would extend to three years. This cannot but have serious consequences for the quality of service and educational outcomes. 2. Overview of Public Financing of Education. Constitutionally, education is guaranteed the highest priority in the inter-sectoral allocation of the Government budget. And indeed, the national budget for education takes up the lion's share (about 28 percent in 1998) of that of all national government departments, and absorbs about 60 percent of resources allocated to social services. However, once the burden of debt service and IRA is taken into account, the share of the national budget going to education ranges between percent ( ), and as low as 2.7 percent as a percentage of Gross Domestic Product (GDP). This suggests that education in the Philippines is underfunded relative to other countries in the region (see Table 2.1). TABLE 2.1: EDUCATION EXPENDITURE IN SELECTED EAST ASIAN COUNTRIES (IN PERCENT) SELECTED %of %of EAST ASIAN COUNTRIES GOVERNMENT EXPENDITURE GDP Philippines Indonesia Malaysia Thailand Source: IMF 3. At the, same time, the expansion of the public education system and a number of congressional initiatives have increased the total financing needs of the sector. These needs have been met in two ways detrimental to quality and equity in education financing: (a) a gradual erosion in the per capita funds available for non-personnel expenditures or Maintenance and Other Operating Expenses. (Table 2.2); and, (b) increased cost-sharing by households for public education, particularly at the primary level. Households now meet 30 percent of total cost of public education at the elementary level and 42 percent of the costs of public secondary education.

23 12 TABLE 2.2: TRENDS IN MAINTENANCE AND OTHER OPERATING EXPENDITURES (MOOE) (PER STUDENT, AT CONSTANT PRICES OF 1993) YEAR BASIC TERTIARY N.A , , , , ,387 Source: Philippines: Education Financing and Social Equity, World Bank, Although budgetary allocations to basic education have increased, most of the increase has been absorbed by a rapid increase in personnel costs. Between 1985 and 1995, teachers' compensation increased four-fold, bringing the share of Personnel Services (PS) in the DECS budget up from 80 percent in 1990 to 88 percent in In the process, budget allocations for MOOE have shrunk to 8 percent of the budget and are at levels incompatible with the delivery of quality education. Accumulated problems include (a) dilapidation of school buildings; (b) severe shortage of teaching materials, particularly textbooks; (c) shortage of school desks; and (d) serious backlog in teacher training. 5. In addition to national authorities, local governments have traditionally played a role in the financing of public education in the Philippines. Although this role declined after nationalization of village high-schools in 1988, it resumed officially again after 1991 with the enactment of the Local Government Code (LGC). According to the LGC 1991, the central government should devolve to Local Government Units or LGUs, school building construction and maintenance Although rising (from 6 percent of DECS' budget in 1992 to 9.6 percent in 1997), the LGU contribution to total financing of education is still far from commensurate with the responsibilities assigned to the local levels, particularly as concerns school building maintenance. This situation has forced national authorities to maintain funding flows for items beyond their own responsibilities. 6. Equity. There are significant differences in the regional distribution of available public resources and consequently, in educational outcomes. For example, while the National Capital Region has around 10 percent of the country's enrollment in all public educational institutions, it received 34 percent of the education budget in The poorest regions have the highest proportion of inexperienced teachers, schools without principal and school districts without supervisor. Correspondingly, completion rates are near universal in the most affluent areas, but less than 30 percent in the poorest provinces, e.g., ARMM in Mindanao. These differences are likely to be exacerbated as education financing is de facto being devolved to local governments in the face of resource constraints, as richer LGUs are more likely to be able to support public schools. At present, there is no coherent strategy for actively targeting resources to the most disadvantaged areas. The only significant efforts in this area come from large donor funded projects (e.g., Non-Formal Education Project, Third Elementary Education Project, or Secondary Education Improvement Project) targeted at the poorest provinces. 7. Efficiency. Similarly, while intra-sectoral allocation favors basic education, (see Table 2.3) and in particular, elementary education (which accounts for the largest share of public spending), this share has declined sharply in recent years (from 81.4 percent in 1987 to 59 percent in 1997). Tertiary education has been the main beneficiary of that shift. This is mainly as a result of the rapid conversion, at the initiative of Congress, of higher education institutions

24 13 previously under the direct supervision of the Commission on Higher Education (CHED) into State Universities and Colleges (SUCs). As a result of this trend, higher education's share has increased sharply (from 2.4 percent in 1987 to 15 percent in 1997). The number of SUCs increased frorm 76 to 104 in ten years. Personnel costs increase as a result of the conversion. Unfortunately, the performances of SUCs are uneven: a large number of them fail to train students to a level necessary to pass Board exams. Worse, the number of SUCs continues to grow relentlessly -- even increasing from 104 to 107 between the beginning and the end of the preparation of the 1999 budget. TABLE 2.3: EDUCATION BUDGET BY LEVEL OF EDUCATION (IN PHP MILLION) GAA or Expenditure Program Percent Actual Revised Proposed Exp \a l Elementary 43,804 56,637 57, Secondary \b 13, , Tertiary \C 13,800 16,200 16, Vocational \d , Other\e 2, Total 74,324 96,236 98, So.rcc: DBM b proposed budget for 1999 \b represents allocation at regional level, including GAS1'PE and school building program \c SUCs and CHED \d vocational education is under Technical Education and Skills Development Authority (TESDA) since 1998 \C pre-school and non-formal programs after Secondary education has been the main victim of the resulting resource squeeze. Its share in education expenditure had initially risen from 13.2 percent in 1987 to 34.5 percent in 1990, when the policy of free public secondary education was introduced in the late eighties and the Department of Education, Culture and Sports (DECS) took over the operation of village high schools previously funded by LGUs. But that share has since fallen back to about 18 percent in Meanwhile, the share of technical/ vocational education fluctuated between I percent and 3 percent. 9. Crowding Out of the Private Sector. Meanwhile, as a result of the new directions taken in the late 19bOs toward universal free education, enrollment in public schools has been growing at a faster rate than in private schools. Correspondingly, the proportion of students enrolled in private institutions has fallen during the 1990s at all education levels, except for primary. This trend is particularly significant in the case of secondary education (from 64 percent in 1986 to only 31 percent in 1995). Private enrollments have fallen in response to the elimination of all fees in public secondary schools, and, at the tertiary level, in response to the proliferation of SUCs which charge little or no tuition fees. 10. Assistance for Private Education. To curtail this trend, the Government set out to subsidizing students who attend private schools through the Government Assistance for Students and Teachers in Private Education (GASTPE) program. This does not do much however to address the equity issues raised above. GASTPE is channeled through two different schemes: (a) the Tuition Fee Supplements (TFS), which provides a PHP290 subsidy to help families cover a small fraction of the fees in private high schools; and the Educational Contracting Service (ECS), which is designed to enable students to enroll in private schools where no public school exists or

25 14 where there is excess enrollment in the public school. 11. An evaluation by DECS of the two programs has shown them to be of little help for poor families. The annual subsidy granted under ESC is PhPI,700, or only about 68 percent of the fee ceiling of private secondary schools participating in the program. Poor students are therefore unlikely to benefit much from the program. Similarly, the TFS covers only 5 percent of costs. This is too low to lure additional students from poor families to private schools. Worse, there is a backlog in the release of funds payable under ESC since Meanwhile the Congress has expanded GASTPE to include the provision of subsidy for teachers' salaries and a textbook allowance. A detailed review of the GASTPE program to better target children from poor families or to reallocate GASTPE to provide funding to public secondary education needs to be conducted. 12. Budget Management. Weaknesses in budget execution exacerbate the structural problems just discussed. A particular concern is the extent to which budget appropriations are eventually used for the intended purpose. For example, the Commission on Audit (COA) report points out that, in 1997, no portion of the budget for teaching materials was spent on textbooks, despite a severe shortage of textbooks in schools. In another example, funds available in 1998 for about 7,000 new teachers were reallocated towards payment of a centennial bonus for DECS employees, equivalent to the total budget for textbooks for 1996, 1997 and Furthermore, monitoring of budget releases expenditures to the regional offices (more than 90 percent of the budget) is weak, as is monitoring of education expenditures by other departments, e.g., implementation of the school building program by the Department of Public Works and Highways (DPWH). Finally, there is an apparent lack of prioritization of expenditures against available cash releases. For instance, politically sensitive Congressional Initiatives received priority in the allocation of cash releases in the first half of 1998, over such important items, as textbooks. Execution of the 1998 Budget 14. The impact of fiscal crisis has been badly felt in the education sector. Contrary to the expectations which the 1998 budget had given rise to, the combination of program carryover and accounts payable from 1997, reserve imposition and limited availability of cash for nonpersonnel expenditures in 1998 have meant that key educational inputs will be largely unavailable to the public school system for the current academic year. TABLE 2.4: DECS BUDGET BY CATEGORY OF EXPENDITURE (IN PHP MILLION) 1997\a 1998\b _ 1999\c % Personnel Services 65, , , MOOE 6, , ,095 9 Capital Outlays 1, TOTAL DECS 73,135 82,750 87,891 School Building Programn 4, , ,500 3 Total 77, , , actual a adjusted proposed

26 The budget appropriated for DECS in 1998 was PhP82.8 billion, or 13 percent higher than the 1997 budget in nominal terms. By category of expenditure, the increase in the 1998 budget went mainly for personnel services which increased by 14.7 percent. MODE rose by a modest 7.3 percent, while capital outlay (including the DECS School Building Program) is 50 percent lower than in 1997 (Table 2.4). 16. However even the modest increase in MOOE did not materialize as a result of the 25 percent reserve declared by the Government on non-personiel expenditure approved for 1998, in the aftermath of the financial crisis. In July, the reserve was ordered (by the President) to be lifted for a number of social sector expenditure items including for elementary and secondary education. However, the Department of Budget and Management (DBM) has not so far issued the corresponding operating rules and regulations to the departments, rendering the release ineffectual in practice as far as this school year is concerned. Even if such authority were to be granted immecliately, the earliest delivery of items such as desks and textbooks, for instance, can now be made only in Since the reserve applies only to noni-personnel expenditures, the share of the DElCS budget for financing important educational inputs will effectively further reduce from an already small share of 9 percent in 1998 to 7 percent in The real constraint, however, has come not from the limits on allotments, but from the rationiing of cash releases. The amount of cash available to DECS for non-personnel expenditures, and after meeting pressing obligations for accounts payable, has been a mere PhP2 billion, or 28 percent of the allotments for 1998 MOOE and Capital Outlays. This does not include an additional bill for obligations as yet unpaid of about PhP 15.2 billion. 18. These financial constraints have had serious repercussions for three key educational inputs: the schiool building program, textbooks, and school desks. (a) (b) School Building Program. The whole school construction program is currently jammed. To start with, as a result of inadequate cash releases in 1997, large account payables remain outstanding, and a number of works are incomplete. This has had a ripple effect in Although a Special Allotment Release Order (SARO) was issued in April 1998 for PhPI.4 billion covering Batch I of the 1998 School Building Program, little work has taken place. Another million under the Batch ll program has only now been released. Up to September, however, only about 60 percent of the 1998-Batch I allotment had been obligated and actual signing of contracts was on hold as contractors are awaiting adequate cash payments. But DPWH has not allocated any cash for the program, in the absence of supporting Notice of Cash Allocations (NCAs). It now looks like the whole program will slip into Textbooks. Even before fiscal austerity, a crisis had been developing in the textbook situation in the Philippines as a result of the delays and difficulties in implementing the privatization program mandated by Congress. One of the most serious problems being faced was that the price of privately produced textbooks is often more than double the estimated costs of the former government published texts, not including distribution and management overheads. To make things worse, as a result of the financial crisis, DECS has so far been unable to execlte the textbook program for 1997, not to mention The funds

27 16 appropriated in 1997 for textbooks amount to PhP516 million, but DECS did not allot any cash from its NCA releases for the item in 1997, nor so far in Conversely, publishers are reluctant to fulfill orders, given the limited availability of cash. If unobligated, the allocation will lapse at the end of For 1998, a tender is only expected to be launched in October On that schedule, the 1998 books will not be delivered to schools before the next school year, at best. (c) School Desks. The allocation for the school desks for 1998 is around PhP285 million, but procurement has similarly been delayed. At this stage, even if cash was available quickly, the new school desks would not be available to schools for the academic year , given the time frame required for procurement, production and delivery of the desks to schools (at least six months). Proposed 1999 Budget for Education Primary and Secondary Education 19. The proposed DECS budget allocation for 1999 offers only limited hopes for improvement. It is 8 percent higher than the expenditure program of 1998 in nominal terms, but the increase in the budget is largely due to higher personnel costs (PhP4.7 billion or 81 percent of the increase). The net additional provision for non personnel costs is a marginal PhPI billion. The budget reflects some efforts in favor of secondary education for which a nominal increase of 11 percent (as compared to 4 percent for primary education). With this budget, DECS hopes to: (a) improve student-textbooks ratio on average from 8:1 to possibly 4: 1; (b) construct new classroom (about 29,000); (c) hire about new 7,000 teachers; and (d) provide in-service training to about 100,000 teachers. These targets will be impossible to achieve within the proposed budget for Given the financial constraints it faces, it would be necessary for DECS to prioritize its objectives more carefully, and seek first to improve efficiency in the use of available resources, wherever possible. Some of the top most priorities in this respect would be as follows: (a) (b) Optimizing Teacher Deployment. According to DECS, the growth in the costs of personnel services will slow down during the next three years as there will be no salary increases. This is a positive trend. Of the additional cost of PhP4 billion budgeted for personnel services, PhPI billion would go towards filling new positions (about 7,000 new teachers) vacant since Before proceeding to recruit, however, there is considerable scope for improving the current deployment of teachers. The latter is both inefficient and inequitable. The regional distribution of teaching staff, the numbers of teaching versus nonteaching staff, and the diversion of teaching staff for clerical and other duties are all sources of inefficiency. Barriers exist to the redeployment of teachers which must be addressed. This could entail additional costs as incentives are needed for teachers to move, but it could generate cost-savings in the long run. Prioritizing Operating Expenses. The reduction in the rate of growth of personnel services should increase the availability of funds for MOOE. This in turn could have a real positive impact on the quality of education. Another way

28 17 to get more out of the limited MOOE resources is to prioritize expenditures. Four items identified as key educational inputs include textbooks, school desks, teacher training and school repairs. A breakdown of the MOOE budget for 1999 by components shows that these four items together account for only about P2.5 billion or 30 percent of MOOE. On the other hand, the payment of retirement of gratuity of P2.3 billion is almost equal to the allocation for the four priority inputs. Grants, Subsidies and Contributions is another item in the MOOE for: (i) scholarship programs for pupils to go to private education (primary) under the education service contracting (about PhP450 million); (ii) support to National Social Action to implement programs in education (about PhP350 million); and (iii) other programs/projects (PhPI70 million). The relevance of some of these items in the MOOE is arguable, and their share is very high compared to the four core items that contribute directly to quality. (c) (d) (e) Improving TextbookAvailability. DECS' target is to reach the textbook-pupil ratio 1:1 against the current average ratio of 8:1. At a ratio of one textbook per child, DECS/(IMB) has estimated its total requirement of textbooks for 1999 at about 120 million textbooks or about PhP7.2 billion (at an average cost of PhP60 per book), for all subjects. A realistic approach might be to first target the four core subjects of Filipino, English, Math and Science for elementary school and including Social Studies at the secondary level, using a ratio of one book for every two students, the requirement for textbooks in 1999 is estimated to be about PhP I billion for elementary education and PhP350 million for secondary education. (See Annex 2A & 2B). Protecting Priority Programs and Most Disadvantaged Areas and Groups. In the event reserves would again be imposed in 1999, programs of DECS targeted at poor or vulnerable groups -- such as (i) the Third Elementary Education Project; (ii) the Secondary Education Improvement Project; (iii) the Non-formal Education Project; (iv) Easy and Affordable Secondary Education; (v) Drop-out Intervention Program; and (vi) Multigrade Program -- should be exempt. Better Targeting the School Building Program. Gaps undoubtedly exist in the availability of schools: the number of barangays without schools currently stands at 4,231. But DECS' strategy of having one elementary school in every barangay and one high school in every municipality may be both unaffordable and inefficient, if one takes into consideration that a number of barangays or municipalities that do not have the requisite number of pupils.. DECS intends to undertake a school location planning exercise to determine which areas actually require new schools and to explore altemative means of construction including build-operate-transfer arrangements. Given the limited availability of funds for the school building program, the following measures should also be pursued: (i) (ii) enforcing the existing legislative mandate charging LGUs with the implementation of the school construction program (LGU cost of construction per classroom is around PhP180,000, while DPWH cost is around PhP305,000); giving priority to the construction of unfinished schools;

29 18 (iii) (iv) speeding up the mobilization of donor funding for school construction; and examining the possibility of subsidizing or capitalizing financing a school bus program for barangays remote from existing schools, as an alternative to adding new schools. Tertiary Education 21. The proposed budget for SUCs and CHED may be signaling the beginning of an overdue effort on the part of the government to hold spending in tertiary education. Table 2.5 indicates a sharp slow down in the rate of increase to about 3 percent from 1998, compared to 17 percent from 1997 to However, four new state colleges have been approved in 1999 at a cost of PhPI77.6 million. The full financial implication of the conversions is usually felt only in the succeeding years as institutions begin to revise staff pay scales. There is agreement among CHED, Education Commission (EDCOM), National Economic and Development Authority (NEDA), and DBM that the policy of rapidly expanding the number of colleges and universities has been detrimental to the quality of higher education. A strategy for the rationalization of SUCs is urgently required and will be formulated under an upcoming study jointly funded by the World Bank and the Asian Development Bank. Meanwhile, the creation of new SUCs should be vetoed and cost-recovery measures must be pursued urgently to limit the current high subsidies to students at the tertiary level. TABLE 2.5: BUDGET OF SUCS BY CATEGORY OF EXPENDITURE (IN PHP MILLION) I 1997\a jiw Personnel 8, , , Services MOOE 2, , , Capital , Outlays I l Total 11, , , \ actual \b adjusted "proposed Vocational Training 22. One of the problems that the Technical Education and Skills Development Administration (TESDA) is facing is the transfer of a large number of vocational schools from DECS, most of which offer regular secondary education programs. Against that, TESDA has received a modest budget of about PhP2 billion for last three years. There is no increase proposed either in the 1999 budget of TESDA. In this situation, TESDA would need to pursue alternatives to running vocational schools, such as sourcing out some training activities to the private sector and other government agencies including local governments. Rationalization of responsibilities between SUCs, DECS and TESDA would also need to be pursued.

30 19 Recommendations 23. The present fiscal difficulties have brought forward the moment of truth for education. Given prevailing resources const.aints, the sector can not any longer postpone the day when structural weaknesses must be addressed. As discussed above, some of the key priorities in this respect for the next two years are as follows. 24. For immediate action in 1998, this report recommends the following measures: (a) (b) (c) as soon as NCAs are released, place the still pending 1997 textbook purchase orders (before their allotment lapses at the end of the year); release NCA to DPWH to pay DECS 1997 school construction contracts. Whenever contractors have already demobilized their teams, fund local communities to complete unfinished works; and proceed with the planned procurement reform in time for the 1998 textbook purchase. 25. For the 1999 budget, this report recommends the following: (a) (b) (c) (d) (e) (f) (g) increase textbook appropriation to PhPI.35 billion; reallocate MOOE to priority inputs; review GASTPE; compel LGUs to assume responsibility for the supposedly devolved School Building Program; rationalize teacher deployment, teaching and non-teaching staff and review reassignment of teachers in non-teaching positions; veto four new SUCs and institute cost-recovery measures in existing SUCs; and undertake the planned rationalization of SUCs; and improve financial management and particularly the monitoring of the budget, including prioritization of expenditures in DECS.

31 20 3. HEALTH 1. The execution of the 1998 budget has severe consequences for the budget of the Department of Health (DOH). It is increasing the structural lack of resources of public health programs and hospital facilities and exacerbating the structural weaknesses of the DOH budget, in particular a bias towards personal health c. re. The 1999 budget is a budget of austerity, in continuity with the execution of the 1998 budget. If approved as is, similar consequences can be expected. Besides, some discretionary choices of DOH have made the situation worse for important public health programs. Health Expenditures Before the Financial Crisis 2. Already before the crisis hit, total (public and private) health expenditures were inadequate to secure comparable health conditions as in other countries with similar levels of income.i Indeed, total health expenditures -- although larger than the US$12 needed to finance an essential package of health services in low-income countries -- remained relatively low in US$ and on per capita basis compared to similar countries in the region and to guidelines for middleincome countries. Furthermore, these expenditures did not increase during the 80s,2 and nor most probably during the 90s. Note also that a substantial portion of total health expenditures (38 percent in 1991) remains financed by direct out-of-pocket payments by consumers. This leads to inequitable access of the poor to health care, and even of part of the middle-class. To make matters worse, the price of health care is high: for instance, the cost of a normal delivery usually ranges from PhP 10,000 in the pay section of a public hospital to PhP20-25,000 in a private hospital. The price of medicines is also considerably higher than international levels, due in large part to restrictions to competition. 3. The level of public health expenditures itself is notably low. It may well have increased from 0.7 percent of GDP in 1980 to I percent of GDP in But much of this increase is due to the improvement of health workers' salaries, more than to enhanced service or coverage. At US$12 per capita, public health expenditures remain below standards. Furthermore, this level of per capita expenditure has hardly improved over the last twenty years (see Table 3. 1), even if the distribution of roles between national and local authorities changed markedly as a result of the decentralization of 1991:3 local governments now finance almost 45 percent of public health expenditures, as compared to about 15 percent before decentralization. Until 1997, the national government had been able to maintain its level of expenditure on those health functions that it had retained more or less stable at constant prices and per capita (see Table 3.2). With the onset The latest aggregated data available are only the National Health Accounts of 1991 with very partial estimates for the year The latest data on overall public health expenditures are available for Health care was estimated at 2.28 percent of GNP in 1980 and at 2.45 percent in 1985 and at PhP29.5 billion or 2.35 percent of GNP and US$17 per capita in 1991 according to the latest National Health Accounts. The organization of the health system radically changed with the introduction of the 1991 Local Government Code (LGC). The latter transferred management and financial responsibilities, including facilities and personnel, from central governmento the 78 provinces, 81 cities and 1,526 municipalities. The DOH retains the mandate to promote and safeguard the health of the population, by supporting policies that improve health and nutrition and reduce health risks, managing government health spending and establishing a technological, regulatory and public finance framework. DOH also remains directly in charge of 55 retained hospitals (22,530 beds), essentially at the provincial level, and in charge of some public health programs, such as malaria and schistosomiasis. Nevertheless, DOH has in practice remained involved in other various public health programs in order to compensate the weakness of the LGUs or to help mobilize their efforts.

32 21 of the crisis, however, the latter has fallen sharply. TABLE 3.1: EVOLUTION OF PUBLIC HEALTH EXPENDITURES, (IN PHP MILLION) Total public sector 1,764 3,559 8,022 14,491 20,632 25,643 as % of GNP 0.7% 0.6% 0.8% 0.8% 0.9% 1% per capita at constant 1985 prices National Govt. 1,421 3,113 7,338 7,947 11,254 14,154 as % of total 80% 87% 91% 55% 55% 55% as % ofgnp 0.5% 0.5% 0.7% 0.5% 0.5% 0.6% Local Govt. Units ,544 9,378 11,490 as % of total 20% 13% 9% 45% 45% 45% as% of GNP 0.2% 0.1% 0.1% 0.3% 0.4% 0.4% Source: W. Nuqui (I 991, Unicef), Department of Budget and Management (DBM) and Commission on Audit (COA). TABLE 3.2: NATIONAL GOVERNMENT HEALTH EXPENDITURES, (IN PHP MILLION) at current prices at constant prices As % of total As % of at constant prices NG EXP. GNP per capita ,962 4, ,178 4, ,908 4, ,984 2, ,947 2, ,384 2, ,254 2, ,154 3, adj budget 13,743 2, prop. budget 14,108 2, Source: DBM, World Bank and calculations by the mission 4. There aire long-standing structural weaknesses in DOH expenditure patterns. 4 The DOH budget is: (a) low in absolute terms, if one considers that (i) retained hospital facilities are overcrowded, with rates of occupancy often above 100 percent, and underfunded (an average PhP600 per patient and per day in tertiary hospitals for maintenance and other operating expenses or MOOE, instead of DOH standards of PhP 1,300); or that (ii) DOH has been unable to finance essential public health programs that should be affordable for a middle-income country, such as a 5-year eradication plan for TB, costing only a total PhP3.5 billion, or US$17 million a year. It does The rest of the discussion focuses essentially on the DOH budget (Office of the Secretary and Dangerous Drugs Board) which accounts for around 80-85% of total national government health expenditures. The rest is distributed among subsidies to 5 health centers, organized as Govern.nent corporations (Lung Center of the Philippines, National Kidney and Transplant Institute, Philippine Children's Medical Center, Philippine Health Insurance Corporation and Philippine Heart Center), and various other items including institutions managed by several other departments, in particular, Department of Agriculture (National Nutrition Council), Department of National Defense (Armed Forces of the Philippines Medical Center and Veterans Memorial Medical Center), Department of Science and Technology (Food and Nutrition Research Institute, Philippine Council for Health Research and Development), National Economic and Development Authority (Commission on Population).

33 22 not help that DOH appear unable to utilize much more than its present allocation, as its high rate of unobligated allotments (22 percent in 1996 and 10.6 percent in 1997 for MOOE) seems to indicate. The problem of "absorption" at DOH has several causes: (i) the relatively large amount of centrally managed items in its budget; (iii the inherent difficulty of implementing centralized programs through independent local governments units; as well as (iii) difficulties and delays in the procurement process. In 1998, a lack of cash exacerbated the situation (see below). TABLE 3.3: DISTRIBUTION OF NATIONAL GOVERNMENT HEALTH EXPENDITURES BY BUDGET COMPONENTS, (IN PHP MILLION) 1996 ACTUAL 1997 ACTUAL 1998 GAA DOH budget 9,357 12,121 13,060 Subsidies to GOCCs Other items ,365 2,072 inc. hospitals 810 1,028 1,272 Total 11,254 14,153 15,896 DOH/Total 83% 86% 82% DOH/NG expenditures 2% 2.1% 2.2% Source: GAA 1998 (b) biased towards personal health care, especially hospital. Even though it is well established that preventive care interventions should have the first claim on public resources, because of the substantial externalities they involve for society, as much as 50 percent of the DOH budget in 1998 General Appropriations Act (GAA) is spent in "health facility maintenance and operations" (Table 3.4) and only 12.2 percent in "public health services, "primary health care programs" and "regional funds to assist primary health care." Specialty hospitals (Government Owned and Controlled Corporations or GOCCs) and Army and Veterans hospitals included, the share of hospitals amounts to 51.4 percent of overall national government health expenditures.5 TABLE 3.4: FUNCTIONAL DISTRIBUTION OF DOH BUDGETARY EXPENDITURES, 1998 (GAA) PhP million _ General administration and support to operations 1, % Hospitals (health facility maintenance and operations) 6, % Public health 1, % Other operations % Locally funded and foreign assisted projects 2, % Total 12, % Source: GAA 1998 (c) underinvesting, compared to the estimated value of the infrastructure assets of the ministry, which include high value items such as large hospital facilities (Table 3.5). Less than 20 percent of the DOH budget is allocated to capital There is no uniquely correct way of allocating the various budget items to summary categories and other studies, notably by Dr. Orville Solon, indicate a much higher share for hospitals in the total DOH budget.

34 23 outlays (CO), including supply of medical equipment and investment in infrastructure. Preventing deterioration of infrastructure and medical equipment should be a major concern for the future quality of health care provided by public hospitals. TABLE 3.5: DISTRIBUTION OF DOH BUDGET BY OBJECT, (IN PHP MILLION) 1996 ACTUAL 1997 ACTUAL 1998 GAA Personal Services 3,459 4,488 4,968 As % of total 37% 37% 38.3% MOOE 3,837 5,372 5,436 As % of total 41% 44.3% 42% Capita' outlays 2,061 2,261 2,539 As % of total 22% 18.7% % Total 9,357 12,121 12,943 Source: GAA 1999 and GAA 1998 (d) inefficient in its inter-regional allocation of resources. The provincial d,istribution appears to be both inefficient and detrimental to the poorest part of the population. 5. It is unclear whether the situation of LGUs health expenditures is any better. According to a study covering 1993 and 1994,6 "LGUs have underspent on health and social welfare relative to levels prevailing before devolution." It is difficult to confirm this judgment for the years 1995 to According to the latest Commission on Audit data, local government health expenditure had risen to 0.45 percent of the GNP by Of this, only slightly over a third was devoted to the devolved hoslpitals and as much as 60 percent was going to public health services (see Table 3.6).8 This may, lhowever, also reflect the fact that (i) according to a recent study, MOOE allocations of devolved hospitals were severely cut, by 50 percent after devolution; or that (ii) LGUs have registered some success in pressing for a renationalization of devolved hospitals. 6. Given the above, it is hardly surprising that, if the health status of the population has improved since thie 1970s (see Table 3.7), it remains unsatisfactory compared to other middleincome countries in the region. In particular, there are large provincial differences in health status, a continuing threat of morbidity from infectious and communicable diseases and a resurgence of some unattended diseases, notably tuberculosis (195,867 cases reported in 1997 and 183,586 in 1993).9 Besides, uncontrolled urbanization and industrialization and related environmental and occupational health hazards add a significant load of non-communicable diseases Philippine Huiman Development Report, Social and Human Priorities and Budget Allocation Patterns: Yardsticks for Governance. In 1996, provinces accounted for slightly less than half of LGUs health expenditures (46 percent), municipalities for around the third (30 percent) and cities for about the quarter (24 percent). 8 Provinces financed 75 percent of hospitals expenditures and municipalities 50 percent of health services. A serious outbreak of Dengue Fever (more than 300 cases), with a series of deaths, was reported by the DOH during the period of the mission. In the Conception district hospital (province of Tarlac) visited by the mission, 10 out of 50 inpatients were suffering from Dengue Fever.

35 24 TABLE 3.6: DISTRIBUTION OF LGU ACTUAL EXPENDITURES BY LEVEL AND BY FUNCTION, (IN PHP MILLION) PROVINCES MUNICIPALITIES CITIES TOTAL Health Services ,551 2,530 1,411 5, ,983 3,228 1,677 6,888 Hospitals , , , ,918 Others Total ,293 2,796 2,289 9,378 as % of total 46% 30% 24% 100% Total ,188 3,563 2,739 11,490 Source: Commission on Audit TABLE 3.7: SELECTED HEALTH INDICATORS, Fertility rate Tetanus toxoid coverage 64% 69% Prenatal care coverage 83% 86% Infant mortality (per 1,000 live births) Under-5 mortality rate (per 1,000 live birth) Prevalence of diarrhea among children under 5 years 10% 7% Source: National Demographic and Health Survey 1998, Preliminary Report, National Statistics Office, July 1998 The Budget for 1998 and Its Execution in the Wake of the Financial Crisis Impact of the Crisis 7. The financial crisis in a country is putting the health sector under a double bind. (a) (b) The price of drugs and medical equipment is rising. According to the Pharmaceuticals and Health Care Association of the Philippines, the depreciation of the peso has resulted in (i) an increase of percent of the price of drugs in pesos, (ii) an increase of percent of the price of small medical equipment; (iii) a decrease of 5-6 percent in volume; (iv) a shift of the middle-class clients from branded products towards generic products; and (v) a shift of the poor from the generics toward herbal drugs and altemative medicine. The rise in the price of drugs paid by devolved and retained hospitals (presumably generics) has ranged between +30 percent and +100 percent, probably depending on the quality of the bidding process and on quantities involved. 10 There is, however, so far no clear and aggregated evidence of a resulting shift of patients from the private sector to the public sector. Public resources for health are shrinking, aggravating the impact of price developments. This is the topic of the next sections. ' According to DOH, the price of Hepatitis B vaccine has risen by 78%.

36 25 Impact cf Fiscal Austerity 8. As for the rest of the government, the 1997 budget of DOH had been generous, because constructed in a period of high growth of the economy. Allotments had also been released early. Faced with the onset of fiscal difficulties, however, the government began to curb expenditures during the fourth quarter of 1997, by dramatically cutting the amount of cash released to DOH. As allotments had been already released in January 1997 for the whole year and had already translated in a steady stream of expenditure obligations, the decision of the government led to a large build up of accounts payable. The 1998 GAA budget was also based on similarly optimistic assumptions as thie 1997 budget. It included an increase of 12 percent in current pesos and 3 percent in real pesos in resources compared to actual 1997 expenditures. Reality proved different. 9. The impact of the reserves imposed in the first semester of 1998 was felt particularly acutely at DOH. As a consequence of them, DOH, like other departments, has been left in a state of great uncertainty since the beginning of the year and unable to efficiently manage and finance the various programs. Besides, they have increased the bias of the budget of DOH towards personnel services as this category of expenditures has been exempted from reserves. But beyond that, and confronted with the pressing demands of curative care, it had little option but to require the various public health programs to scale down their service targets, sometimes dramatically and with serious consequences for public health outcomes. For instance, the malaria control program modified its target for case findings from 162,000 smears to 117,000 smears, the schistosomiasis control program revised its target from 400,000 patients to 296,000 patients and the TB control program assumed that around 90,000 patients could not be treated. Indeed, Table 3.8 indicates that some very important public health programs, in particular EPI and TB programs, were imposed disproportionately high level of reserves. TABLE 3.8: ALLOCATION OF MANDATORY RESERVES ON PUBLIC HEALTH PROGRAMS PUBLIC HEALTH PROGRAMS Schistosomniasis Tuberculosis EPI APPARENT RATE OF RESERVES 45 percent 38 percent 31 percent 10. The situation quickly proved untenable, and the mandatory reserves imposed on MOOE had to be gradually lifted: (a) to 12.5 percent in May 1998 for retained hospital facilities and services; and, (b) on the basis of a presidential decision issued on July 10, to 0 percent for hospital facilities and services, by PhP337.8 million on public health services, and by PhP23.9 million for Non-Communicable Disease Control Program. In practice, however, the lifting decided in July has not yet been notified to the DBM regional offices and to DOH and, consequently, is not implemented. Moreover, capital outlays are apparently, to a certain extent, always affected by high mandatory reserves (50 percent) as well as some other specific classes of expenditures (for instance, traveling and training). 11. In fact, the lack of cash availability remains, as it was at the end of 1997, the major constraint for DOH in Close to half of total allotments have generally been covered by cash releases but with an apparent priority to regional offices which finance hospital facilities (see Table 3.9). After deducting the settlement of unliquidated obligations carried over from 1997 (PhP646 million, or 9 percent of total unliquidated obligations as of the end of 1997), the ratio is only 38 percent. Given the importance of personnel services, actual cash releases were only

37 26 available to cover about 40 percent of DOH spending authority for non-personnel expenditures for the first half of the year. This low availability of cash explains in part why DOH was unable to utilize better its budget, probably due to the reluctance of suppliers to execute orders. TABLE 3.9: ALLOTMENT RELEASES, CASH RELEASES AND OBLIGATIONS (AS OF JUNE 30, 1998, IN PHP MILLION) REGIONAL OFFICE OF THE TOTAL DOH OFFICES SECRETARY, SPECIAL HOSPITALS AND STAFF BUREAUS 1. Total allotment releases 2,491 7,495 9, Total cash releases 2,056 2,413 4, Cash releases/allotment releases 82.5% 32.2% 44.7% 4. Payment of unliquidated 1997 expenses = (2.-4.)/ % 6. Obligations N/A 1,915 N/A 7. Obligations/Allotment releases 25.6% Source: DBM and calculations of the mission. TABLE 3.10: NATIONAL GOVERNMENT HEALTH EXPENDITURES AND DOH BUDGET, (IN PHP MILLION) 1998 GAA 1999 GAA 1999/1998 Total amount in current pesos: - National government health expenditures 15,896 14,107-11,3% - DOH budget 13,059 11,802-9,6% Total amount in pesos 1998: - National government health expenditures 15,896 13,002-18,2% - DOH budget 13,059 10,877-16,7% Total amount as % of overall National government expenditures: - National government health expenditures 2.6% 2.4% - DOH budget 2.5% 2.0% Total arnount as % of GNP: - National government health expenditures 0.5% 0.5% - DOH budget 0.4% 0.4% Source: GAA GAA 1999 and DBM The Proposed 1999 DOH Budget 12. The 1999 budget is in the continuity of the execution of the 1998 budget (see Table 3.10). It does not include any new important initiative, beyond the inclusion of a subsidy to local governments to cover the provisions of the Magna Carta for Public Health Workers of devolved hospitals. The proposed DOH 1999 budget approved by the President and proposed to Congress amounts to PhP1 1,802 million. Even though it represents a 2.5 percent nominal increase compared to the 1998 adjusted budget, the 1999 DOH budget actually drops by 9.6 percent in current terms and by near 17 percent in real pesos compared to the 1998 GAA. I I This represents also a serious reversal after a period of regular and important increase of the budget during the second part of the 90s. Moreover, as the major impact of the financial crisis will come through a " Given official forecasts of 9.5% for the inflation rate in 1999.

38 27 dramatic rise in the price of medical equipment and drugs, the decrease in the budget in real terms, given the inflation rate and the depreciation of the peso, might be even greater. 13. This situation is a source of serious worries, in particular as: (a) (b) Projects would suffer the greatest losses (about -100 percent and - 50 percent for locally funded and foreign assisted projects, respectively). The dramatic decrease in the locally funded projects may not be entirely inefficient if one considers that the bulk of these expenditures may have been used as "pork barrel" for members of Congress. The sharp diminution of foreign assisted projects is more worrisome and is in contrast to the budget-wide increased allocation for foreignassisted projects; Functional misallocation would worsen compared to 1998 GAA, as more resources (plus PhP23 1 million) and a higher share of the budget (+6.8 points) would be spent on hospital facilities 12 and less (minus PhP127 million) would be spent on public health programs and services (see Table 3.11); TABLE 3.11: FUNICTIONAL DISTRIBUTION OF DOH BUDGETARY EXPENDITURES, (IN PHP MILLION) (1) 1998 (2) 1999 (2)-(I) in % (3) 1999 proposed (2)/(3) GAA GAA by DOH General administration and support 1,483 1, ,455 63% +4.7% Support to operations % Public health services primary health care 1,445 1, ,818 72% as % of Total 11.1% 11.1% -8.8% Hospitals (health facilities and operations) 6,469 6, ,568 46% as % of Total 50.0% 56.8% +3.5% Other operations 766 1, N/A N/A +45.3% Locally funded projects N/A N/A -98% Foreign assisted projects 1, ,478 34% 1 ~~-49.1% _ Total 12,943 11,802-1,141 27,850 42% -8.8% Source: 1998 GAA, DOH and calculations of the mission This inefficiency is compounded by a trend towards re-nationalizing devolved hospitals. Congress recently renationalized 13 devolved hospitals for a total cost estimated at PhP2,611 million (including extension and upgrading). Two renationalized hospitals and 5 upgraded hospitals have been budgeted in 1999 for more than PhP 100 million. If this re-nationalization process goes on, the longterm budgetary room for maneuvering of DOH will be farther reduced. This threat is really serious as it appears that some LGUs are already preparing to stop financing hospitals likely to be re-nationalized. 12 In total national government health expenditures, hospitals will represent close to 60% in 1999 compared to 51% in 1998.

39 28 (c) A number ofpublic health programs would not be properlyfunded Table 3.12 indicates an apparent budgetary priority for Family Health and Nutrition Welfare services and programs in general, and in particular for family planning, and a low priority for Non-communicable Disease Control programs in general and also apparently for Tuberculosis, which is a serious concern. At such low level of funding, several public health programs will not be sufficiently funded to meet their targets. According to DOH itself, (i) (ii) (iii) (iv) the tuberculosis proposed budget would have covered only 28 percent of expected 279,000 cases and the approved budget will cover less; the rabies program will suffer from insufficient supply of immunizing agents (vaccine and immunoglobulin) to meet the increasing demand; the filariasis control program will not be implemented despite newly discovered areas of filariasis incidence; and the budget for dengue control is inadequate to cover travel and training expenses of field health workers and hospital physicians. (d) Personnel services would crowd out other categories, rising to 45.8 percent and leaving only 7.6 percent of total DOH budget for capital outlays, which is not sustainable and endangers the quality of health care in public facilities. TABLE 3.12: APPROPRIATIONS FOR SELECTED PUBLIC HEALTH PROGRAMS, (IN PHP MILLION) /98 in % Family Hlealth and Nutrition Welfare: % - Extended program of immunization % - Nutrition Service % - Maternal and Child care % - Family planning % - Control of ARI % - Control of diarrheal diseases % Communicable Disease Control Program: % - Tuberculosis % - AIDS/STD % - Rabies % - Malaria % - Schistosomiasis % - Dengue % - Filariasis Non Communicable Disease Control Program: % - Cardiovascular diseases % - Cancer % - Preventive nephrology program % - Smoking Cessation % Community Health Program % Source: GAA 1999 and DOH

40 29 Recommendations 14. For the remainder of 1998 and for the health sector specifically, this report recommends (i) lifting of any remaining mandatory reserves on appropriations for hospital equipment [The government has now expressed the intention to do so]; and (ii) as allotments and National Cash Allotments (NCAks) are effectively released, to speed up the pace of expenditure obligation, in particular for pul)lic health programs. If this is not done, the vicious circle described above would worsen. 15. The major recommendations of this report concern the year Regarding the 1999 budget itself, it would be advisable to realign the proposed budget with a view to maintaining funding for public health programs, in particular for vaccines and micronutrients, at the level of 1998 GAA level at least for MOOE and in real terms (around plus PhP200 million). This reallocation could be partly financed -- within the ceiling of the proposed 1999 budget -- by canceling the renationalization and the upgrading of the hospitals already included in the 1999 budget (PhP120 million). Considering that full IRA is expected to be provided to LGUs in 1999, the rest could be financed by the cancellation of a part of PhP128 million of subsidies to LGUs and local hospitals (Magna Carta for devolved health personnel: PhP69.5 million, and Drugs and Medicines: PhP58.6 million). Although the use of reserves may be needed for the 1999 budget, it is highly recommiended there be no mandatory reserves on public health programs next year. 16. The financial crisis and the strict constraints imposed on DOH budget and the health sector offer a rare opportunity to accelerate the implementation of health sector reforms in the Philippines. As far as public health expenditures are concerned, it is particularly recommended to speed up actual operationalization of National Health Insurance, including the indigent program, and to introduce socialized pricing in public hospitals in order to improve their financial position and recovering costs from those who can afford to pay. 17. The progressive crowding out of the DOH budget by the retained hospitals should be also contained and even reversed. This would be more feasible if a clear distinction was established between the DOl-I budget, entirely devoted to public health and support to operations, and the budgets of the retained hospitals. Therefore, it is recommended to give a form of budget autonomy to retained hospitals. DOH could examine the different legal and technical solutions available to give ithem an autonomy similar to the state universities or to create a new category of institutions. This may perhaps involve transforming the retained hospitals into GOCCs. The budgetary autonomy would be also a strong incentive for the acceleration of the pace of hospital reforms. At the local government level, it is also highly recommended that LGUs give financial and management autonomy to devolved hospitals and, in particular, to allow them to keep an important percentage (at least 50 percent) of their revenues. 18. Within DOH, the reform of drugs procurement, with a clear emphasis on international competition, stricter controls of the quality of the products, is a priority.

41 30 4. TARGETED SOCIAL INTERVENTIONS 1. With the intensification of the crisis, the programs of targeted social intervention under the Department of Social Welfare and Development (DSWD) and the National Anti-Poverty Commission (NAPC) are on the front-line to shield some of the most vulnerable groups from social hardship. Unfortunately, if NAPC is holding out the promise, the next year's budget would provide for a Fourth Poverty Aileviation Fund (PAF-4), DSWD can only, on present plans, expect its resources to shrink further. The latter situation should be reversed, including by channeling some of the PAF-4 resources to support critical DSWD programs. Department of Social Welfare and Development 2. DSWD has a particularly important role to play at the present juncture. DSWD is tasked with assisting the most economically disadvantaged populations, such as poor women, senior citizens without income or private support networks, abandoned children and adults who are unable to work because of severe disabilities. These people, who struggle even in prosperous times, are most vulnerable during periods of economic crisis. DSWD also targets people who face difficult circumstances that may not be solely related to income, such as rape and child abuse victims. As a result of the crisis, DSWD must be able to contend with and serve a larger disadvantaged population. El Nifio has also taken its toll, further increasing the number of people who are struggling simply to make ends meet. Even with some of its funding reinstated (lifting of reserves on CIDSS, see below), DSWD will suffer a 13 percent reduction in overall resources as a result of fiscal austerity. The combination of greater demand for services and less available resources would adversely affect not only the coverage of DSWD programs, but their quality as well. Thus, in the interest of equity, efficiency, and those segments of the population with the greatest need, this is one of the only budget items for which this report recommended that the remaining reserve requirement be lifted for Mission and Activities 3. Social welfare and development activities are quite varied and are classified into seven broad categories, as seen in Table 4.1. Priority areas for DSWD expenditure (see Table 4.2) are: (a) the assistance to distressed populations which includes coordination of disaster and relief mechanisms; (b) the operation of welfare centers and institutions (e.g., orphanage, centers for the handicapped); (c) support to victims of rape and child abuse and the flagship program of the Social Reform Agenda (SRA); and (d) the Comprehensive and Integrated Delivery of Social Services (CIDSS) for which DSWD is the lead agency. 4. The goal of CIDSS is, "empowerment of disadvantaged families, communities and sectors so that they can access basic services and manage their resources." While the objectives of the CIDSS project mirror those of DSWD at large, the project utilizes resources from a number of government agencies and departments. Some of the accomplishments and strengths of the CIDSS program include widespread implementation of the Minimum Basic Needs (MBN) framework, targeting of poor areas whereby complete focus is given to 5th and 6th level municipalities, a community/demandriven approach to designing activities and a system for monitoring the effectiveness of interventions using the MBN and other tools. In effect, CIDSS serves to mobilize government and community resources and direct them to the most needy. Some specific examples of activities carried out under the CIDSS project are:

42 31 * Supplemental feeding for infants and children * Recorlstruction of day care centers as public work programs * Potable water system rehabilitation * Toilet construction * Construction of bridges and roads as public works programs * Emergency shelter assistance * Seed capital for self-employment * Specialized projects in schools * Capability training of LGU/NGO workers. TABLE 4.1: MAIN ACTIVITIES OF DSWD CATEGORY BENEFICIARIES ACTIVITIES Livelihood Targets largely ultra poor women.' Actually Self Employment Activities, Practical Skills Devt., reaches both the ultra poor, but mainly the Business Mgnt. Services, Skills Enhancement Devt. near poor. Program (Kabuhayan 2000), Capital Assistance for Income Generation. Family and Disadvantaged families and communities. General activities in support of community mobilization. Community Welfare Outreach to disadvantaged families. Child and Youth Poor infants and children, orphans, Operation of day care centers, honorarium for volunteer Welfare malnourished and abused children. day care workers, support for childhood supplemental. feeding. Women Welfare Rape and abuse victims, poor women, other Economic/job counseling and assistance and personal Program disadvantaged women support/counseling. Disabled and Elderly Disabled and elderly without support Social Reform Program for Senior Citizens, Social networks. Security for the Elderly. Emergency Assistance Victims of crisis, calamities and natural Cash and in kind assistance to individuals in crisis disasters situation, Emergency Shelter Assistance, Core Shelter Assistance, Food for Work. Others Various disadvantaged populations Includes Special Social Services program for squatters, implementation of general social welfare and development activities, human resources development within the Local Govemment Units or LGUs, Training, Universal Children Festival, Youth and Physical Fitness and Sports Devilment, Aid to Provincial Nutrition Program, Monitoring services, Capability Building, Minimum Basic Needs training and activities. Source: DSWD internal documents Some studies have found DSWD's livelihood programs to be the best among government credit programs in terms of targeting poor populations. However, the cost benefit ratio of these programs remains high. See references in footnotes (2) and (4).

43 32 TABLE 4.2: DSWD 1998 AND 1999 BUDGETS 1998 REVISED % CHANGE 1998 % CHANGE APPROPRIATIONS BUDGET APPROPRIATIONS ORIGINAL VS 1999 VS (25% Non PS REVISED ORIGINAL Reserves) 1998 Office of the Secretary 1,776,156,000 1,550,243,750 1,512,234,000-13% -25% A. Programs 1. GAA 437,916, ,993, ,015,000-8% 3% II. Support to Operations 83,868,000 70,166,000 61,123,000-16% -46% 1. Family and Comm. 12,441,000 Welfare 2. Child and Youth Welfare 14,104, Women's Welfare 14,288, Disabled Person's Welfare 10,018, Emergency Assistance 10, Operations 489,855, ,756, ,401,000-21% -26% a. Assist. Distressed Pop. 118,388,000 88, ,757,000-25% -71% 1. to Victims of disasters 36,767, to Disabled/Seniors 11,861, Women, Child in Diff 25,129,000 Circumst. b. TA to LGUs, POs, NGOs 8,224,000 6,168,000 7,524,000-25% -16% c. MO of Centers/Institutions 363,243, ,797, ,120,000-19% -l16% Subtotal Programs 1,011,639, ,916, ,539,000-15% -13% B. Projects 1. Locally Funded 702,517, , ,000,000-9% -41% a. CIDSS 439,295, ,471, ,000,000 0% 7% b. Domestic Adoption 14,471,000 10,853, % c. Families First 3,251,000 2,438, % d. Pov. Mapping 5,000,000 3,750, % e. Self Employment SEA 10,000,000 7,500,000 10,000,000-25% -6% f. Family Welfare Fund 3,000,000 2,250, % g. Rape Victims Assistance 157,500, ,125, % h. Mt. Pinatubo Assistance 70,000,000 52,500,000 20,000,000-25% -272% 11. Foreign Assisted 62,000,000 52,440,000 26,695,000-15% -147% a. Women/JICA grant/ 62,000,000 52,440,000 26,695,000-15% -147% counterpart funds Subtotal Projects 764,517, ,327, ,695,000-10% -46% TOTAL 1,776,156,000 1,550,243,750 1,512,234,000-13% -25% Sources: 1999 Expenditure Program, 1998 Appropriations, DBM.

44 33 5. LGU P?riorities. DSWD has also systematically adapted its operations to support decentralization/devolution. Since a significant portion of funding for social welfare and development programs actually comes from LGUs, it is instructive to examine the breakdown of program expenditure that reflects, in part, the priorities of LGUs and their perceptions of DSWD program effectiveness. TABLE 4.3: 1998 LGU ALLOCATIONS FOR SOCIAL WELFARE PROGRAMS/SERVICFS a/ FAMILY & CHILD & WOMEN DISABLED & EMERGENCY LIVELIHOOD COMMUNITY YOUTH WELFARE ELDERLY ASSISTANCE OTHERS TOTAL WELFARE WELFARE PROGRAM 16% 2% 24% 2% 3% 40% 13% 100% Source: DSWD internal documents. \a based on 35 percent reserve rate among LGUs 6. Table 4.3 indicates that emergency assistance, receiving 40 percent of LGU social welfare and development funding, is the area in which LGUs are most likely to utilize DSWD services. This is also the sector that has been protected, to the greatest degree, from the implications of budgetary cuts by the use of special funds. The second highest local level expenditure after emergency assistance is Child and Youth Welfare, which includes nutritional programs, day care activities and in a few cases, services for abused children. Recognizing the importance of these types of programs, the DSWD has directed funds -- both from donations and through interagency re-allocations -- to maintain them. 7. Speciall Financing Mechanisms. Several special funding sources are finally available to the DSWD primarily for emergency assistance (see Table 4.4). The most important are the Calamity Fund, the Quick Response Fund and the PAF. Although the original appropriations for PAF III in 1998 were PhP2.5 billion, actual funding has been reduced to PhP750 million of which only PhP'200 million has been disbursed. Of this, PhP50 million was given to DSWD for food distribution to regions affected by El Niflo. Additional funding sources include Senate and Congressional Spouses Funds that typically benefit those with intense needs such as children from highly disadvantaged families. 8. In order- to meet the needs of sectors of the population who have "fallen through the cracks" as a result of financial constraints, the leadership of DSWD, most notably the Secretary and Vice President, has launched a fund-raising campaign. The latter has mobilized funds from the private sector and donor community in the form of donations. To date in 1998, PhP42 million has been raised and for the remainder of the year and 1999, a total of PhP 142 million has been pledged.

45 34 TABLE 4.4: DSWD SPECIAL FINANCING SOURCE OF PURPOSE BENEFICIARIES TOTAL AMOUNT DSWD: 1998 PROPOSED FUNDS (DSWD RELEASED/ RELEASED TO/ DISBURSED 1999 PORTION) PROGRAMMED PROGRAMMED AS OF 8/ Quick Response Support for El Affected Regions 15/15 15/ Fund Niilo Emergency Field Offices 6,7 Operations Calamity Fund Support for El Affected Regions 750/1500.6/ Niflo Calamity Fund Food Field Offices Distribution 7,10,11,12 PAF III Food El Niho affected 200/750 50/ distribution regions I Donations Cash/In Kind Various-primarily total amount programmed=? pledged= aid for Disaster centers and received = Assistance institutions Sources: 1998 and 1999 National Appropriations; intemal DSWD documents Impact of Fiscal Austerity 9. DSWD has been hit particularly severely by fiscal austerity. On current plans, its level of spending in 1998 would actually be 13 percent lower than in In 1998, expenditures on personal services will increase by 13.4 percent, while maintenance and other operating expenses (MOOE) and capital outlays and net lending would contract by 17.5 percent and 47 percent, respectively. On the face of it, it has however been better protected than other departments from the impact of cash rationing (with Notice of Cash Allocations or NCAs totaling of PhP737 million were issued to DSWD as of July 1998 with personnel services accounting for PhP245 million). Most of this however was for emergency assistance and other urgent programs for victims of El Nifio, rather than for the mainstream operations of the department. 10. To its credit, the DSWD has responded to the constraints placed on it by taking a fresh look at its activities and prioritizing programs and departments rather than cutting funding across the board. Intradepartmental priorities are set based on the perceived urgency of program recipients. Generally, activities with long-term benefits such as technical assistance to LGUs, NGOs and so forth are being sacrificed for programs that address urgent needs, such as care, relief and support centers for disadvantaged populations. Certain program areas and projects are hit particularly hard, with budget cuts translating to a full 25 percent funding reduction. 11. In terms of expenditures related to programs, inajor budgetary cuts are being made within the Human Resources Bureau of DSWD. Some examples of services that are affected are capacity building of LGUs to support devolution, technical training/assistance for profession.ls such as medical and court social workers, and networking with NGOs that deal with children and the disabled. To an extent, LGUs have made up for the lack of national government funding and are contributing more for certain services. However, the inequality of IRA allotments and the disparity between the resources of localities suggests that the areas in the greatest need of assistance are the ones that will be unable to afford service. The DSWD attempts to mitigate this result by reallocating resources across municipalities so that poorer areas receive more national support.

46 Projects are heavily affected by the 25 percent reserve requirement because funding within project budgets is primarily for MOOE. Of particular concern is the Rape Victims Assistance because this type of intervention is unique to DSWD. If JICA does not reduce the counterpart funding requirement for its grant (which primarily targets women), funds should be reinstated in order to leverage this outside assistance Proposed Budget 13. In the absence of a radical economic turn around, vulnerable populations will continue to be seriously impacted by the crisis next year. The proposed budget allocation for DSWD is inadequate for the department to meet this challenge. In real terms, it is 25 percent less than the original 1998 appropriation, and is also less than the 1998 budget with reserves. Furthermore, some important items such as Rape Victims Assistance and Domestic Adoption, have been completely eliminated from the budget. While it is advisable to evaluate and selectively discontinue inefficient programs 2, DSWD needs a larger budget in 1999 in order to fulfill its basic functions. 14. The recommendation is that 1999 DSWD appropriations equal those originally set out for 1998, in real tetms. Elevating the level of funding for CIDSS in 1999 is one of the measures to be considered. It is a particularly strong program with the capacity to absorb increased funds. Similarly, additional funding is critical for the centers and institutions operated by the Department. National Anti-Poverty Commission 15. NAPC lhas the potential to make a tremendous contribution towards poverty reduction if it delivers on its mandate of agency coordination, policy oversight and advocacy for the poor. NAPC was created to support policies outlined in the National Poverty Alleviation Act (Republic Act or R.A. 8425). The Presidential Commission to Fight Poverty (PCFP), the Social Reform Council (SRC) and the Presidential Council for Countryside Development (PCCD) were abolished as separate organizations and subsumed under NAPC which is given the powers and functions of all three former entities. 16. Among other responsibilities, NAPC is tasked with implementing the Social Reform Agenda, coordinating the social reform and poverty alleviation programs of all national government agencies, exercising policy oversight in social reform and poverty alleviation, and ensuring efficient and prompt delivery of basic services to the poor. 17. One of NAPC's key assets is its membership. As outlined in the legislation, NAPC gives a voice and a vote to members of disadvantaged and poor populations including the landless rural poor, farmers, fisherfolk, indigenous communities, informal sector workers, youth, disabled, the urban poor, victims of disasters and senior citizens. In this spirit, representatives from 18 government agencies and at least 12 basic sectors are identified for NAPC membership. It will benefit from their depth and breadth of perspective to promote sound and coherent anti-poverty policies. Input from these groups would be extremely valuable during the current period of budget evaluation and realignment. Were it more fully operational today, NAPC could serve as 2 See footnote (3). The SEA might be a candidate for phase out.

47 36 an extremely valuable input to decisions being made about present and future social sector expenditures. 18. It is critical that NAPC be given the support it needs to get up and running. The Poverty Alleviation Act states that PhP 100 million "is hereby appropriated as the initial operating fund in addition to the un-utilized funds of the rationalized commission and councils." NAPC's requirements should be modest, being a "coordinating and monitoring body" and not an implementing agency. They are quite real nonetheless. As of now, unfortunately, NAPC is operating on the remnants of the budgets of its predecessors, the SRC, PCFP and the PCCD, totaling just PhP25 million. The funds currently available are inadequate for the costs associated with supporting and merging three entities, formulating Implementing Rules and Regulations (IRRs), and organizing the new governing council. NAPC should have access to some operating funds so that it can tackle its current administrative challenges and move on to addressing poverty. 19. One of the first substantive tasks of the Council will be to formulate specifications for the usage of PAF funds. The role of PAF is clear. The Presidential address to Congress clarifies that it is a "funding supplement for department and agencies' programs intended to meet the minimurbasic needs of our poorest communities." PAF funds should be channeled directly to sector agencies and sectors, based on the consensus of NAPC's proposed interagency /intersectoral leadership, and used to "fill in the gaps" that exist within existing programs and operations. The Fund also benefit from the rich experience with participatory mechanism (including the MBN approach), accumulated during the PAFI and 2, which should be brought to bear when formulating new utilization guidelines. Microfinance 20. Public resources being scarce as they are, other instruments will also need to be relied upon and developed to reach out to the poor in those times of crisis. Microfinance is one of them. With sound technical assistance, existing MFIs and rural/cooperatives banks can better meet the financial needs of poor segments of the population. The Philippines Coalition for Microfinance Standards and others have examined MFIs at the institutional level, focusing on effective strategies for outreach, targeting, appropriate lending instruments and policies, financial management, cost-containment, institutional development and so forth. Addressing these important issues is outside the scope of a Social Expenditure Review, and this discussion makes recommendations only about the role that government should consider taking on. 21. Microfinance programs that have the greatest outreach and that reach the poorest segments of the population tend to be those that are neither administered by, capitalized by nor otherwise controlled by governments. However, the government should provide an appropriate regulatory framework for MFIs, as it does for all financial institutions, and should support the costs of training that will allow MFIs to become efficient lenders and eventually arrive at financial self-sufficiency Both the National Credit Council (NCC), through an Executive Order, and NAPC, through legislation, are tasked with leadership roles in promoting national policies and programs that affect microfinance. With donor assistance and as a result of expertise within the 1 See Llanto, G Garcia, E and GlIanta R (1996)