Expenditure Policy Reforms

The key challenge in the area of expenditure policy is how to substantially increase productive expenditures, such as those for infrastructure and social services (e.g., education and health) - and catch up with the accumulated investment deficits in these areas - while at the same time aggressively reducing wasteful and inefficient expenditures. Public expenditure on infrastructure, as a share of GDP, went down from an average of 2.4 percent in 1995-2000, to an average of 1.8 percent in 2001-2011. By comparison, China, Vietnam, and Thailand spent upwards of 7 percent, 8 percent, and 14 percent of GDP, respectively, on public infrastructure during the last decade. Similarly, public spending on basic education was 3.4 percent of GDP in 1998, but decreased to 2.9 percent in 2002 and continued to slip reaching 2.2 percent in 2008. In other East Asian countries public expenditure on education averaged 3.9 percent of GDP in 2007.5

In order to address this challenge, the Plan envisions the implementation of several major public expenditure management reforms not only to help narrow the fiscal deficit over the medium term but also ensure that resources are allocated to priority investments, such as human capital and infrastructure. Toward this end, expenditure reforms that have been introduced in the recent years will be strengthened and in some cases, revitalized, in order to improve resource allocation and build results-orientation into the government service. Among these reforms are the following:

1. Medium-Term Expenditure Framework (MTEF). The continued adoption of the multiyear budgeting system (the MTEF) will improve the predictability of funding, and integrate policy with resource allocation. The main components of the MTEF are the Paper on Budget Strategy (PBS) and the Forward Estimates (FEs).

• The Paper on Budget Strategy will link budget allocation with the national agenda of the government to identify the priority areas for spending, and to incorporate the sectoral and regional implications in the dimension and distribution of the budget; and

• Forward Estimates (FEs) are the estimated annual costs of ongoing programs and projects. These will help ensure the continuous funding of program requirements beyond a given fiscal year, and help provide a sound basis of future years' budget trends. In order to adopt more rigid and realistic FEs, the government will pursue automation that is linked to existing budget application systems and to the PDP and PIP.

2. Organizational Performance Indicator Framework (OPIF). This enables the channelling of resources to where it best produces the desired results and outcomes, as indicated by agreed upon performance indicators. The implementation of the OPIF will be cascaded to the operating units of the agency, in order to sustain the restructuring of government expenditures to the priority sectors. The linking of the OPIF and Performance Management System-Office Performance Evaluation System (PMS-OPES) being spearheaded by the Civil Service Commission, will allow the institution of a performance-based compensation system.

3. Fiscal Responsibility Bill (FRB). The DBM and DOF shall work together to revive the FRB initiative dating back to 2004 and shall push for its approval. The bill aims to strengthen fiscal discipline in the public sector by prescribing principles of responsible fiscal management, establishing control mechanisms on spending, and adopting preventive measures against the erosion of the tax base of the government. One of its prominent features is ensuring that proposals to grant fiscal incentives or permanent increases in national government expenditures must be offset by permanent increases in revenue or permanent reductions in other expenditures.

4. Government Rationalization Program (RP). Executive Order (EO) No. 366 issued on October 4, 2004 aims to build a smaller bureaucracy and improve public service delivery through the strategic review of the mandates, operations, organizational structures, functions, programs and activities of national government agencies; the elimination of overlapping or duplicating functions; and the focusing of government efforts and resources towards its core or vital functions. Given the current progress in rationalizing half of the agencies in the Executive Branch, its continuation is expected to lead to the elimination of 12,549 regular positions, saving the government some PhP2.4 billion in annual salaries and compensation.

5. Procurement Reforms. Significant progress was made in reforming the procurement system through the passage in 2003 of Republic Act (RA) No. 9184 or the Government Procurement Reform Act. Aside from standardizing and modernizing the procedures in government purchasing, the law also requires the use of the Philippine Government Electronic Procurement System (PhilGEPS) by all government entities, which serves as the sole portal hosting sources of information on all government procurement. From 2011, the following functionalities in the PhilGEPS will be implemented: (a) virtual store for electronic purchasing; (b) expanded supplier registry as a centralized electronic database of all manufacturers, suppliers, distributors, contractors and consultants registered in the system; (c) introduction of charges and fees to sustain operations and maintenance of the system; (d) e-payment system to enhance the functionality of the virtual store; (e) e-bid facility for electronic bid evaluation of all types of procurement for goods, infrastructure projects and consulting services; and (f) uploading of the individual Annual Procurement Plan (APP) of each government procuring entity. Public procurement in the country shall continue to adapt to improvements in modern technology through introduction of future functionalities in the PhilGEPS that will facilitate service delivery, transparency and competitiveness in the public procurement system

6. Stronger Internal Control System (ICS). Along with procurement reforms, the internal control system of government entities is being strengthened to reduce waste and corruption. The DBM, in partnership with the Office of the President-Internal Audit Office has issued the National Guidelines on Internal Control System (NGICS). The NGICS serves as a guide to departments/agencies in redesigning, installing, implementing and monitoring their respective ICS, taking into consideration the requirements of their organization and operations. A government Internal Audit Manual (PGIAM), consistent with the NGICS, will soon be finalized in order to assist the government in establishing fully functioning internal audit offices in the public sector.

The government will find more ways to further strengthen public expenditure management with the following expenditure reforms and initiatives:

7. Zero-Based Budgeting (ZBB) Approach. Anchored on the good governance thrust of the Aquino administration, the Department of Budget and Management (DBM) led the review and evaluation of ongoing programs and projects through the ZBB approach in preparing the 2011 Budget. Complementing the MTEF and the OPIF, the ZBB approach is geared towards assessing the continued relevance and priority of programs; ascertaining whether the program objectives and outcomes are being achieved; identifying alternative or more effective and efficient ways of achieving the objectives; and guiding decisions whether the resources for the program or project should continue to be provided at present levels, increased, reduced, or discontinued.

Initial findings and recommendations from the conduct of ZBB exercises during the preparation of the 2011 Budget include:

• Termination of programs no longer delivering intended outputs and outcomes;

• Holding of the funding for some programs pending removal of bottlenecks in project implementation and procurement;

• Expansion of well-performing programs to alleviate or mitigate critical gaps in social and economic services;

• Recommendation on the implementation of difficult reforms in GOCCs;

• Stricter controls in the use of lump-sum funds following master plans and government priorities; and

• Deactivation of selected agencies and GOCCs.

In succeeding budget processes, the government shall widen the scope of the evaluation of the major programs/ projects under the ZBB approach to build up capacity, and to institutionalize program evaluation in the government.

8. Transparency and Accountability Safeguards in the Budget Process. The overarching goal is to enhance transparency and enforce accountability in government operations by incorporating general and special provisions in the General Appropriations Act (GAA). Under the 2011 GAA, all departments and agencies, including those enjoying fiscal autonomy, are required to post their approved budgets on their websites and the status of their programs/projects starting 2011. Special provisions in the budgets of agencies and GOCCs with key programs and projects require the posting of the details of program beneficiaries and locations of projects on their websites for better information and appreciation of the public. This practice also allows the public to verify agency outputs vis-à-vis targets.

9. Public Financial Management (PFM) and the Government Integrated Financial Management Information System (GIFMIS). This initiative aims to harmonize and integrate the budgeting, accounting, and auditing systems of the government. Reforms in the PFM system will make it more transparent, accountable, and performance-oriented. A Memorandum of Agreement (MOA) has been executed between the DBM, Commission on Audit (COA) and BTr to develop the GIFMIS.

Table 2.5 Selected Fiscal, Monetary, and External Medium-Term Targets

a/ Approved under DBCC Resolution No. 2009-10 dated 27 November 2009.

b/ Approved under DBCC Resolution No. 2010-3 dated 09 July 2010. The BSP shifted from a variable annual inflation target to a fixed medium-term inflation target of 4 ± 1 for 2012-2014.

c/ Approved by the Monetary Board on 24 March 2011.

10. Contingent Liability Management (CLM). Considering the fiscal impact of realized contingent liabilities (CL) from existing BOT and GOCC projects that are guaranteed by NG, a joint ICC-DBCC resolution will be issued to strengthen CLM through the preparation of the CLM Plan by implementing agencies, training for value analysis/ value engineering and CL assessment, evaluation by the DOF of CL for every financing/procurement option, and full disclosure of required budget for CL that will become real liabilities and will thereby need funding.

11. Timely Approval of the Annual Budget. Addressing the urgent needs of agencies in a timely and predictable manner is the main reason that the government pushes for the passage and approval of the GAA before the fiscal year starts. To be able to do this, the government revised its budget schedule in anticipation of early budget preparation activities to give ample time for the DBM and the agencies to conduct consultations with sectoral groups, civil society organizations (CSOs), and Regional Development Councils (RDCs). The new schedule, coupled with improved budget documents submitted to Congress, will facilitate the budget legislation process, hence ensure timely enactment of the annual budget.

12. Rationalization of GOCCs and GFIs. To better streamline the budgetary support given to GOCCs/GFIs, the government has embarked on instituting reforms to reduce their financial vulnerability and improve service delivery. The DOF and the DBM are collaborating in the passage of a law to strengthen oversight functions on GOCCs/GFIs, and to create a Government Corporate Council that will effectively manage and supervise the operations of these entities. Administrative and legislative measures will also be proposed to amend or restructure GOCC charters. A review of the compensation granted to board members, officers, and employees of GOCCs and GFIs will also be undertaken to control costs of personal services in GOCCs and make compensation equitable relative to that in the National Government.

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5 In the health sector, the country's public expenditure per capita on health was US$39 in 2006, compared to the median of US$88 per capita expenditures for comparable East Asian countries. Overall, the Philippine NG spending on social safety net programs was a mere 0.3 percent of GDP in 2007 and 0.8 percent of GDP in 2008, which is less than half of the mean expenditure on social welfare programs of 1.9 percent of GDP in a group of 87 countries.