Towards Strengthening the Fiscal Capabilities of ARMM - A Policy Paper

A Policy Paper

Towards Strengthening the Fiscal Capabilities of ARMM: a policy paper

Towards Strengthening the Fiscal Capabilities of ARMM

Towards Strengthening the Fiscal Capabilities of ARMM A Policy Paper

Towards Strengthening the Fiscal Capabilities of ARMM INCITEGov Policy Paper

by Local Government Support Program in ARMM (LGSPA) 2007 Project Leader Prof. Emilia T. Boncodin Project Team Members Teresita Quintos-Deles – Policy Adviser Atty. Suharto Ambolodto – Senior ARMM Specialist Ms. Miraflor Villanueva – Fiscal Resource Specialist Ms. Rosalie Romero – Research Coordinator Editing Surveys, Training, Research & Development Services (STRIDES), Inc. Cover Art and Layout Regine Abos Language of Report English

Copies of this report may be obtained from: International Center for Innovation, Transformation and Excellence in Governance (INCITEGov) 8/F Prestige Tower, F. Ortigas Jr. Road, Ortigas Center, Pasig City Telefax: 634-1334 • Email Address: incitegov@yahoo.com

CONTENTS

List of Tables 5 Foreword 7 Preface 13 Acronyms and Abbreviations Used 19 1 Introduction 21 2 Regional Autonomy and National Government Fiscal Policy on ARMM 23 2.1 The Evolving Muslim Mindanao Autonomy 23 2.2 Poverty Situation in ARMM 25 3 ARMM Fiscal Situation 30 3.1 ARMM Fiscal Powers 30 3.2 Inventory of Funds made Available to ARMM for FY 2001-2005 36 3.3 Locus of Funds Control 40 3.4 Distribution of Fund Use 44 3.5 Fund Utilization - by Sector 46 3.6 Comparative Analysis 47 4 Analysis 55 4.1 Weak ARMM Revenue Mobilization 55 4.2 Fiscal Dependence on the National Government 56 4.3 Personnel / Overhead Burden 57 4.4 Limited Program Administrative Capacity 58 4.5 Dispersed Resource Control and Accountability 58 5 Policy Options / Recommendations 60 5.1 Revenue Generation 60 5.2 Fund Utilization 62 5.3 Sustaining Mechanisms 66 6 Conclusion 68

Towards Strengthening the Fiscal Capabilities of ARMM

TABLES

TABLE 1 Summary of Incidence of Poor Population in the Component Provinces of ARMM, 1997–2000 (in percentage) 25 TABLE 2 Summary of Incidence of Poor Population By Region, Rank 1994–2000 26 TABLE 3 Magnitude of Poor Population and Incidences of Population by Region, 1991 and 1994 27 TABLE 4 Gross Domestic Product and Magnitude of Poverty By Region Compared 28 TABLE 5 Fiscal Inventory FY 2001–2005 (In Million Pesos) 37 TABLE 6 Funds Available to the ARMM According to Source, Appropriation and Disbursement Fiscal Years 2001–2005 41 TABLE 7 Funds Available to the ARMM, Locus of Control,

By Allocation, Fiscal Years 2001–2005 42 TABLE 8 Funds Available to the ARMM, Locus of Control,

By Disbursement, Fiscal Years 2001–2005 43

Towards Strengthening the Fiscal Capabilities of ARMM

TABLE 9 Fund Utilization – by Expense Class (in million pesos) 45 TABLE 10 Fund Utilization – by Sector (in million pesos) 47 TABLE 11 Comparative Regional Allocation of the National Budget, FY 2002 – 2005 49 TABLE 12 Comparative Regional Allocation of the National Budget, by Year, FY 2002 – 2005 50 TABLE 13 Regional Allocation Education, FY 2002 – 2004 51 TABLE 14 Comparative Literacy Rate, FY 2003 52 TABLE 15 Regional Allocation Agriculture, FY 2002 – 2004 52 TABLE 16 Ginintuang Masaganang Ani (GMA) – Rice, Output Report 2004 53 TABLE 17 Ginintuang Masaganang Ani (GMA) – Corn, Output Report 2004 54

Towards Strengthening the Fiscal Capabilities of ARMM

FOREWORD

“Towards Strengthening the Fiscal Capabilities of ARMM” is an incisive report that examines the fiscal environment of the Autonomous Region in Muslim Mindanao (ARMM).

The report is a product of rigorous research conducted by a multidisciplinary team of experts from the International Center for Innovation, Transformation and Excellence in Governance (INCITEGov), a policy think-tank composed of former Cabinet officials who have the privilege of insight into the development issues of ARMM as well as the fiscal realities of the Government of the Philippines.

For some time, the issue over the adequacy (or lack) of funds in ARMM have elicited debates among political actors from the national government to the ARMM Regional Government in the face of poverty and human development indicators showing ARMM provinces lagging behind the rest of the country.

The INCITEGov study puts to rest some of these questions. By moving beyond “mere anecdotal assumptions” and using empirical data based on an inventory of national government funds transferred to ARMM, including the Internal Revenue Allotment to LGUs. The findings of the study call for serious reflections particularly in the way funds are utilized and appropriated in the region.

The Local Governance Support Program in ARMM (LGSPA) of the Canadian International Development Agency (CIDA) has been extending technical assistance support to the ARMM Regional Government and ARMM LGUs. LGSPA commits to support the ARG to work for much needed reforms and increasing capacities particularly in the critical areas of revenue generation and fund utilization.

Towards Strengthening the Fiscal Capabilities of ARMM

LGSPA hopes that this study will serve as a road map for the ARMM Regional Government as a basis for political action towards enhanced governance in ARMM. It is also the hope of LGSPA that other stakeholders in the region will be able to take the challenge to support the ARMM Regional Government’s efforts to develop innovative strategies to translate the study’s findings into policies and programs towards transformative governance in ARMM.

The Local Governance Support Program in ARMM (LGSPA), Canadian International Development Agency (CIDA)

Towards Strengthening the Fiscal Capabilities of ARMM

The INCITEGov study entitled “Towards Strengthening the Fiscal Capabilities of ARMM” is the first of its kind in the country. It is a groundbreaking work that will hopefully establish the foundations of fiscal autonomy for ARMM and will serve as a primary reference on the actual flow of government funds for ARMM. This study would not have been possible without the continuous support of the Local Governance Support Program in ARMM (LGSPA) funded by CIDA, which has been in the region since 1991. In keeping with LGSPA’s continuing efforts of improving governance in ARMM, the study explores ARMM’s fiscal or budgetary situation, an often identified waterloo in good governance. Without a clear picture of the fiscal situation of ARMM, we cannot even begin to design a program to promote good governance. A common economic truism is that incentives matter just as much as, if not more than, sanctions or penalties. By tracing fund flows, hopefully incentives can be put in place for good governance in ARMM. The study confirms what most observers have said about ARMM—that is, ARMM is completely dependent on the National Government for its funding. As presented by the study, only a statistically negligible P6 million was raised internally by ARMM through taxes in 2005. The study also confirms what the World Bank has said: Central control of the bulk of ARMM expenditures underlines the governance issue of a ‘legally autonomous’ regional government that has no more real or practical autonomy in deciding the level and allocation of funds intended for its politically distinct mandate than other non-autonomous administrative agencies of the National Government. (Human Development for Peace and Prosperity in the Autonomous Region in Muslim Mindanao, World Bank, 2003, p. 17).

While this study says that ARMM has the opportunity to use its autonomous powers for revenue mobilization,

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Towards Strengthening the Fiscal Capabilities of ARMM

it does not make an actual inventory of such powers and it does not assess if such powers are actually relevant in making ARMM fiscally autonomous. As the Organic Act of ARMM or Republic Act No. 9054 highlights, the bulk of taxing powers still remains with either the National Government or local government units (LGU). While the ARMM Regional Government (ARG) has the power to add-on to LGU taxes, this has not been feasible. ARG cannot implement innovative tax policies because the National Government continues to be the main collecting agency of all taxes in the region. This kind of fiscal study must be undertaken as a follow-up to the current study.

Nevertheless, this study presents a true picture of the state of fiscal autonomy of ARMM. In stark terms and statistics, the study emphasizes that pouring more money into a problem without thoughtful analysis will not really address the problem of autonomy. As Benedicto Bacani writes that: The ARMM, which is supposed to be the vehicle for Moro selfdetermination is recognized right now as less autonomous than local governments such as cities, towns and provinces, and more subservient and dependent on the national government than any other political subdivision in the country. (Bacani, B., “Should ARMM Dance the Cha-Cha?”, Autonomy and Peace Review, Vol. 1, Issue 1, October-December 2005, p. 46).

Bacani asks us the relevant questions regarding ARMM, the answers to which the InciteGov study provides an inkling, to wit: Is ARMM merely a development body, an employment agency for Moro leaders or is it supposed to be an instrument for Moro self-determination? The string of ineffective and uninspired leadership in the autonomous region emboldened the [perception of] the autonomous region as a milking cow of Moro interest groups than as a vehicle for Moro empowerment. This brand of autonomy is not in accord with the spirit and letter of peace agreements and fits well the national government’s short-sighted policy of co-opting Moro insurgent leaders. This misplaced yet dominant ARMM identity

Towards Strengthening the Fiscal Capabilities of ARMM

flourishes because it advances the selfish agenda of interests groups in the national government and the autonomous region.” (Ibid, pp.

48-49) What then is the role of the National Government in a meaningful autonomy? The Harvard Project on American Indian Economic Development suggests some solutions: “In the nation-building approach, Central Governments move from a decision-making role in indigenous affairs to a resource role. In practical terms, that role involves the following: • A programmatic focus on institutional capacity-building, assisting Native nations with the development of governmental infrastructure that is organized for self-rule, respects indigenous political culture, and is capable of governing well.

• A shift from program funding to block grants, thereby putting decisions about priorities in [indigenous] hands.

• The development of program evaluation criteria that reflect the needs and concerns not only of funders but of Native nations as well.

• A shift from consultation to partnerships in which Native nations and outside governments make joint decisions where the interests of both are involved.

• R ecognition that self-governing nations will make mistakes, but what does sovereignty mean if not the freedom to make mistakes and learn from them?” (Cornell, 2005)

The Harvard Project on American Indian Economic Development concludes that: One of the most difficult things for non-indigenous governments to do is to relinquish control over Native nations. But this control is the core problem in the standard approach to development and a primary hindrance to reservation prosperity. As long as non-indigenous governments insist on calling the shots in Indian Country, they must bear responsibility as well for continuing poverty. Only when they are willing to let go will the development potential within Indian communities be released. (Cornell, S. and Kalt, J., “Two Approaches to Economic Development in American Indian Reservations: One Works, the Other Doesn’t” JOPNA No. 2005-02)

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Towards Strengthening the Fiscal Capabilities of ARMM

There are some parallels in the situation of ARMM and American Indians in fiscal control and autonomy. We hope that the INCITEGov study will begin the process of making possible real autonomy for the Bangsamoro people and that whatever this political-economic structure might look like, that it will finally benefit the masses of Moro people, who are the ultimate stakeholders in the experiment of Moro autonomy.

Atty. Ishak V. Mastura DTI-ARMM Secretary (2002-present) 15 March 2007, Cotabato City

Towards Strengthening the Fiscal Capabilities of ARMM

preface

*The National Government Appropriations for the ARMM Regional Government came to PhP 5.193 Billion in 2003 and to P/5.510 Billion in 2004.

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The idea of undertaking an empirical study to assess the fiscal capabilities of the Autonomous Region in Muslim Mindanao (ARMM) emerged from the contentious discussions which arose every time people gathered to discuss the state of peace and development in Muslim Mindanao, especially as the tenth anniversary of the signing in September, 1996, of the Final Peace Agreement between the Philippine Government and the Moro National Liberation Front (MNLF) drew near. Any discussion on the state of continuing poverty and armed conflict in the ARMM would inevitably lead to a debate on the adequacy-or the lack thereof-of the fiscal resources needed to fuel autonomous governance and critical development outcomes in the region which continued to register the lowest human development indicators in the country through the two ARMM administrations which followed the signing of the 1996 peace accord.

And, always, the question, which never failed to draw impassioned assertions and unresolved cycles of charges and counter-charges, would be raised: Who was at fault?

For Emy Boncodin and myself, who served, respectively, as Project Leader and Co-Project Leader of this initiative, the process of laying out the empirical data, moving beyond the simple repetition of anecdotal assumptions, started while we were in government. As Lead Convenor of the National Anti-Poverty Commission (NAPC) in 2001-2003 and Presidential Adviser on the Peace Process (PAPP) in 2003-2005, I was witness to the unending complaints, primarily from ARMM officials but echoed by other stakeholders, regarding the insufficiency of funds and the lack of fiscal powers to address the many problems of ARMM. The mantra at the time that I moved to OPAPP was – “How can ARMM survive and develop on a measly Five Billion Pesos?” * It seemed that no meeting convened to discuss any problem in ARMM

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Towards Strengthening the Fiscal Capabilities of ARMM

could meaningfully rise above this assertion of fiscal deprivation. On the other hand, there would be equally firm statements—although sometimes muttered under the breath—among the government bureaucrats present at these meetings that the problem was not the lack of funds but management of available resources.

As the National Government set about preparing the proposed 2005 national budget for submission to Congress and aware that 2005 marked an election year for ARMM, then-DBM Secretary Boncodin and I decided to jointly undertake a factual and technical rendering of the region’s fiscal realities that would, hopefully, move us beyond the cycle of contending assertions towards common actions.

With modest funding support from OPAPP and the technical expertise of DBM, the effort initially involved a rigorous review and search to mark out and document items in the 2004 General Appropriations Act (GAA) which were intended for disbursement in ARMM. These figures and documentary proofs were then presented back to the concerned agencies for validation. Beyond the issuance of written instructions from the Budget Secretary, the validation process involved meetings convened and co-chaired by the two Secretaries where concerned agency representatives, including Cabinet Secretaries and heads of agencies, were asked to verify or otherwise correct the figures, affirming that the stated amounts had not just been recorded in the GAA but had actually been released in ARMM, whether through the Regional Government or through other mechanisms.

Then-ARMM Regional Governor Paruk Hussin was present at each of these meetings and was given the opportunity to dispute any of the recorded figures.

Furthermore, in February, 2005, the two Secretaries flew to Cotabato City to present the results of the study to the Regional Cabinet en banc. We were told then that it was the first time ever for the highest official of DBM to pay such a visit to the Regional Government.

Towards Strengthening the Fiscal Capabilities of ARMM

The result of the study at that time disclosed that the actual funds disbursed in the region was much larger than the figure indicated in the GAA line item for the ARMM Regional Government. But ARMM officials, led by the Regional Governor, complained that they did not know about these other fund sources and had no control over these additional resources entering ARMM. In response, then-Secretary Boncodin and I undertook, first, to establish the budget baseline for 2005, following the template already established for the 2004 budget; and, second, to issue a Joint Circular to all national government agencies henceforth to earmark at the start of the year the intended share of ARMM in their respective budgets and to ensure that the funds so indicated were transferred to the Regional Government for it to implement the designated project.

This was to discourage, if not eliminate, the prevailing practice among the majority of national agencies of implementing projects in the autonomous region through their regional offices in Regions IX and XII, whichever was contiguous to the affected ARMM constituent-province.

Accordingly, this provision was included as an explanatory note in the 2005 GAA. In addition, in our meeting with the ARMM Cabinet, then-Secretary Boncodin, raised the possibility of the National Government treating the national appropriations for ARMM as a lump sum, with the Regional Government deciding on how the collective fund would be distributed among its different instrumentalities and programs.

While the National Government faced constraints in increasing specific budget allocations especially in the face of its serious budget deficit at that time, she said it was possible to provide the Regional Government the authority to decide the sectoral allocations of the regional budget, instead of these being set in the GAA. This would, however, require the Regional Government to first submit its proposed use and allocation of this lump sum, requiring some hard decisions in terms of setting regional policy and program priorities.

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Towards Strengthening the Fiscal Capabilities of ARMM

These moves to change the fiscal parameters of ARMM governance would be met with reservations by some parties, both in the National Government as well as in ARMM itself. We were very much aware that there could be no short-cuts towards the achievement of fiscal reform and autonomy. However, even before we could see the fruits of these fledgling steps, these efforts would be sidelined as the temper and tempo of partisan maneuvers in the run-up to the 2005 regional elections began to heat up. The exercise would eventually get buried in the wake of the political crisis that broke out in May 2005.

Thus, it was a highly propitious development for us when the Local Government Support Program in ARMM (LGSPA) of the Canadian International Development Agency (CIDA) expressed its interest in supporting a study that would factually assess the state of fiscal resources in ARMM. LGSPA recognized that, in order to succeed, the effort towards governance reform and meaningful regional autonomy needed to be fully cognizant of the state of its fiscal capacities.

In partnership with LGSPA, we have been able to extend the coverage of the study to five years, 2001-2005, under the current administration. The present study constitutes not just an inventory of fiscal resources; it also provides an analysis of how these resources are appropriated and utilized and offers recommendations towards strengthening the fiscal capacities of the country’s only autonomous region. The results of the study were presented initially to the ARMM Regional Government in meetings held in Davao and in Cotabato City; and then at a public forum held in Makati, which was attended by representatives from the ARMM Regional Government, Bangsamoro civil society, the National Government, the international donor and diplomatic community, civil society organizations, the academe, and media.

Thereafter, we were invited to present our findings to a network of peace advocates in a forum held in Davao

Towards Strengthening the Fiscal Capabilities of ARMM

City. Our final write-up of this report has been guided and energized by our interaction with these different stakeholders.

The limitations of this study, however, must be noted.

To ensure the reliability of its findings, the study covers only the funds that were listed in the GAA and could be validated by government records as actually having been released. Appropriations which were not validated or could not be determined specifically by the implementing agencies or conduits were therefore not considered.

Among the excluded items were the allocations of the Department of National Defense, which provides a portion of its budget to ARMM because of its military camps and soldier deployment in the region. The study also does not include disbursements from the Calamity Fund for aid relief and rehabilitation services in the area, the releases of which are made in accordance with the recommendation of the National Disaster Coordinating Council (NDCC) and upon approval of the President.

Releases from the Presidential Social Fund or from Government-Owned and Controlled Corporations (GOCCs), such as PAGCOR, PCSO, and others, which do not go through DBM, were also excluded. And, finally, the project does not cover Official Development Assistance from international donors, which projects are directly implemented in ARMM, either by an international agency, the Regional Government itself, or non-governmental organizations (NGOs). Thus, the fiscal picture that has been recorded is still incomplete.

As an organization espousing sustained governance reform, recognizing the boom-and-bust cycle which has come to characterize reform efforts in the Philippines, the International Center for Innovation, Transformation and Excellence in Governance (INCITEGov) is intent that its efforts do not just end up as academic study. We wish our analysis and recommendations to stir reflections, more thoughtful discourse, and determined actions.

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Towards Strengthening the Fiscal Capabilities of ARMM

The recommendations we offer here are not just about crunching the numbers and improving regional resource collections. They are also about setting priorities, envisioning legacies, leveraging performance, and galvanizing stakeholder claims and hopes. In the end, as we always knew it would, the pursuit of fiscal outcomes must link with good governance and political action to become effective and sustainable.

We are grateful to CIDA-LGSPA for our partnership in this endeavor and hope that future joint efforts can enable some of our recommendations to be realized. We acknowledge the valuable cooperation and support of DBM in providing us access to documented and reliable data which were the basis of our analysis and recommendations. We express special thanks to the ARMM Regional Government under the leadership of Gov. Zaldy Ampatuan for the openness and candor of key regional officials in tackling the emergent fiscal issues and in expressing their intent to put this new knowledge to good use for the welfare of the residents in the autonomous region. We invite civil society and other stakeholders in ARMM to undertake common actions to build on these findings and contribute to recreating a fiscal environment that is truly conducive to the pursuit and achievement of regional autonomy, prosperity, and peace.

Teresita Quintos Deles Project Team Co-Leader/Policy Adviser INCITEGov

Towards Strengthening the Fiscal Capabilities of ARMM

Acronyms & Abbreviations Used

ARG ARMM CAR CO CY DA DBM DILG

DOTC

DPWH

DSWD

EDSA EVAT FY GDP GFI GMA GOP GRDP GRP

INCITEGov

IRA LGC LGSPA

LGU MNLF

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ARMM Regional Government Autonomous Region in Muslim Mindanao Cordillera Administrative Region capital outlay Calendar Year Department of Agriculture Department of Budget and Management Department of Interior and Local Government Department of Transportation and Communication Department of Public Works and Highways Department of Social Welfare and Development Epifanio de los Santos Avenue Expanded Value Added Tax Fiscal Year Gross Domestic Product Government Financial Institution Ginintuang Masaganang Ani Government of the Philippines Gross Regional Domestic Product Government of the Republic of the Philippines International Center for Innovation, Transformation and Excellence in Governance Internal Revenue Allotment Local Government Code Local Governance Support Program in ARMM Local Government Unit Moro National Liberation Front

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Towards Strengthening the Fiscal Capabilities of ARMM

MOOE MT NGA ODA

OPAPP

PDAF PS RCPC RPDO

SARO SOA VAT

maintenance and other operating expenses metric tons National Government Agencies Overseas Development Assistance/ Agency Office of the Presidential Adviser on the Peace Process Priority Development Assistance Fund personnel services regional crop protection center Regional Planning and Development Office special allotment release orders schools-on-the-air Value Added Tax

Towards Strengthening the Fiscal Capabilities of ARMM

1

INTRODUCTION

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Poverty is a stark reality in the Autonomous Region in Muslim Mindanao (ARMM). From 1994 to 2000, ARMM registered the highest poverty incidence across all regions in the country. A slight improvement in its poverty conditions was apparent in 2003 when ARMM ranked second to Caraga. Notwithstanding this, the pervasive reality of poverty in ARMM over the years has not escaped notice. Rather, it has intensified the need for governance stakeholders to focus on trying to bring development to the region. Along this line, the issue of whether national government funds have been sufficient in propelling such development has also been raised. This, in fact, has been the subject of a raging debate between national government and the ARMM regional government. It has also underscored the need for an empirical study that would assess the fiscal capabilities of ARMM. In order to move beyond the debate on the adequacy (or lack) of funds towards finding real solutions to addressing poverty in ARMM, mere anecdotal assumptions must be replaced by a technical and factual rendering of the region’s fiscal realities. The ARMM Inventory of Fiscal Resources and Utilization Project, undertaken

by INCITEGov, was designed to address this gap. The project aimed to create a database that could serve as a starting point for future researches in the area. Thus, an inventory of funds given to ARMM from 2001–2005 was conducted, using official figures of the Department of Budget and Management (DBM) that had been validated by recipient conduit agencies. An analysis of ARMM fund sources and utilization was further undertaken. The study yielded baseline data on the fiscal position of ARMM, which then became the basis for making a number of

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Towards Strengthening the Fiscal Capabilities of ARMM

policy recommendations towards improving ARMM‘s resource mobilization and utilization.

The paper is organized as follows. Section 2 provides some background information on ARMM to serve as a context for the study. This section includes a discussion on the origins of autonomy in ARMM and how this is closely linked to the peace process in Muslim Mindanao and describes the poverty situation in the region. Section 3 starts out with an overview of the authority and powers vested on the ARMM Regional Government, zeroing in on its fiscal powers and the fiscal situation of ARMM from 2001 to 2005. Then, it presents the results of the fiscal inventory undertaken by the project. This includes a description of the locus of funds control of ARG, the distribution of fund use, and a comparative analysis of fund allocation and performance in the Agriculture and Education sectors among ARMM and three other similarly-situated regions namely, the Cordillera Administrative Region, Eastern Visayas (Region 8), and CARAGA. Section 4 provides some analysis on the results of the fiscal inventory, which then becomes the basis for the policy options and recommendations in Section 5. The paper ends with a Conclusion.

Towards Strengthening the Fiscal Capabilities of ARMM

2

Regional Autonomy and National Government Fiscal Policy on ARMM

23

2.1 The Evolving Muslim Mindanao Autonomy The emergence of regional autonomy in Muslim Mindanao is the product of decades of struggle and negotiation. Following many years of military offensive against the Moro National Liberation Front (MNLF), a Muslim secessionist group, the Government of the Republic of the Philippines (GRP) under President Ferdinand E. Marcos initiated peace talks with MNLF in the early 70s. Peaceful and principled negotiations were re-defined and reinvigorated under the Aquino administration and finalized under the Ramos administration. These efforts brought forth regional autonomy envisioned as a first step to realizing the aspirations and entitlements of the Bangsamoro community in Muslim Mindanao.

On 23 December 1976, the GRP and the MNLF signed the Tripoli Agreement, which provided for the establishment of a regional autonomous government in Muslim Mindanao with a legislature and an executive council. A plebiscite on 17 April 1977 resulted in 10 provinces and seven cities voting for inclusion in what would later become the Regional Autonomous Governments 9 and 12.

President Marcos organized the Sangguniang Pampook under Batas Pambansa Bilang 20 (implemented by Presidential Decree No. 1618), which served as the charter of the autonomous regions.

After the EDSA uprising of 1986 ousted President Marcos, his successor, Corazon C. Aquino decreed the drafting of another constitution. The 1987 Philippine Constitution provided for the establishment of autonomous regions both in Muslim Mindanao and the Cordilleras, with the intention of granting autonomous governance to geographical areas sharing common and distinctive

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Towards Strengthening the Fiscal Capabilities of ARMM

historical and cultural heritage, economic and social structures, and other relevant characteristics. It tasked Congress to pass laws on the autonomous regions within eighteen months from the time of the creation of the 2 Houses.

The Organic Act for the Autonomous Region in Muslim Mindanao (ARMM) was created with the passage of Republic Act No. 6734 in August 1989. It provided ARMM with the basic structure of government within the framework of the Constitution and national sovereignty and the territorial integrity of the Republic of the Philippines. On 19 November 1989, a plebiscite was held and four provinces in Mindanao voted for inclusion in ARMM - Lanao del Sur, Maguindanao, Sulu and Tawi-Tawi. The signing of the Final Peace Accord to Implement the Tripoli Agreement of 23 December 1976 by the Philippine Government and the MNLF on 2 September 1996 resulted in the amendment of R.A. 6734 and the consequential enactment of Republic Act No. 9054, An Act To Strengthen And Expand The Organic Act For The Autonomous Region In Muslim Mindanao. The region was expanded to include the province of Basilan and the city of Marawi that voted favorably to be included in the expanded autonomous region during the 14 August 2001 plebiscite.

1 Section 15, Article X, 1987 Constitution 2 Section 19, Article X, 1987 Constitution 3 Section 2, Article I, R.A. 6734, An Act Providing For An Organic Act For The Autonomous Region In Muslim Mindanao 4 Section 1, Article II, R A No. 9054, An Act To Strengthen And Expand The Organic Act For 5The Autonomous Region In Muslim Mindanao.

A similar Organic Act was passed to establish the Cordillera Autonomous Region through Republic Act No. 6766 on 23 October 1989. In the plebiscite held on 30 January 1990, only Ifugao voted in the affirmative.

Another Organic Act was passed to create the Cordillera Autonomous Region through Republic Act No. 8438 dated 2 December 1997. The plebiscite held on 9 March 1998, however, resulted in only the province of Apayao voting for autonomy while six provinces voted against it.

The Supreme Court later ruled that one province could not constitute an autonomous region. This ended attempts

Towards Strengthening the Fiscal Capabilities of ARMM

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to form an autonomous region in the Cordilleras and left ARMM as the only autonomous regional government in the Philippines.

Subject to the provisions of the constitution, the ARMM Regional Government (ARG) is provided with powers and functions that are expressly granted in the Organic Act, as necessary or incidental to the proper governance and development of the autonomous region. It has an almost plenary authority over the autonomous region and its development for the benefit and promotion of the general welfare of its people.

5 Section 1, Article IV, R A No. 9054.

6 Section 3, Article IV, R A No. 9054.

7 L anao del Sur, Maguindanao and Sulu have been in the top ten poorest provinces both in the old 2000 and the revised 2000 surveys. Tawitawi was no.8 in the old survey, but became no 13 in the new survey.

8 Technical Notes on the 2003 Poverty Estimates, Posted 27 April 2005, http://www.nscb.gov. ph/technotes/poverty_tech2003.asp

2.2 Poverty Situation in ARMM Today, more than fifteen years since the establishment of ARMM, the promise of prosperity remains elusive. National statistics reveal an unbroken thread of deep poverty in the region. The component provinces of ARMM have consistently posted high poverty incidence ratings, with three of them making it to the top ten poorest provinces in the country in the 2000 Poverty Incidence Survey7.

(Refer to Table 1). Moreover, ARMM as a region consistently had the highest poverty incidence rating from 1994 to 2000 (Refer to Table 2), improving slightly when it ranked second to Caraga in 2003.

Table 1: Summary of Incidence of Poor Population in the Component Provinces of ARMM (in percent) 1997 – 2000 Province

1997

2000

2000*

2003*

Philippines

33.0

34.0

33.0

30.4

ARMM

55.6

62.9

59.8

53.1

Basilan

25.5

32.7

39.1

42.0

Lanao del Sur

62.2

61.9

61.6

44.6

Maguindanao

47.1

61.3

65.1

68.10

Sulu

70.0

67.7

63.3

53.5

Tawi-tawi

39.2

60.2

57.2

40.2

* Poverty statistics were computed based on the new poverty estimation methodolog y of the NSCB approved in January, 2003. 8

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Towards Strengthening the Fiscal Capabilities of ARMM

Table 2: Summary of Incidence of Poor Population By Region, Rank 1994 – 2000 Region

1991

1994

1997

2000

ARMM

4

1

1

1

Bicol

2

2

2

2

Central Mindanao

1

3

3

3

Western Mindanao

7

7

8

4

Northern Mindanao

3

5

4

5

Western Visayas

8

8

7

6

Eastern Visayas

11

10

6

7

Southern Mindanao

9

9

9

8

Cordillera Administrative Region

5

4

5

9

Central Visayas

12

12

11

10

Ilocos

6

6

10

11

Cagayan Valley

10

11

12

12

Southern Luzon

13

13

13

13

Central Luzon

14

14

14

14

National Capital Region

15

15

15

15

In 1991, only 56% of the ARMM population were considered poor. Four years following the establishment of ARMM, poverty has increased by 9.3 %.From 910,003 inhabitants living below poverty threshold, an additional 252,420 of the population fell into the poverty group, showing an increase of 27.74%. (Refer to Table 3)

Towards Strengthening the Fiscal Capabilities of ARMM

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table 3: Magnitude of Poor Population And Incidences Of Population By Region 1991 and 1994 Region

9

1991

1994

Magnitude of Poor Population

Incidence of Poor Population

Magnitude of Poor Population

Incidence of Poor Population

Philippines

28,119,758

45.3

27,274,205

40.6

NCR

1,439,613

16.7

975,263

10.5

CAR

674,718

55.4

746,562

56.4

1

1,928,391

55.3

1,971,779

53.6

2

1,156,072

48.9

1,093,828

42.1

3

2,239,856

35.5

2,046,167

29.2

4

3,579,228

43.2

3,058,537

34.9

5

2,707,612

61.3

2,869,319

60.8

6

2,964,722

52.9

3,011,027

49.9

7

2,071,808

46.7

1,801,745

37.5

8

1,532,526

47.1

1,563,152

44.8

9

1,347,962

54.4

1,360,155

50.6

10

2,092,823

57.4

2,143,280

54.1

11

2,240,911

51.6

2,198,352

45.6

12

1,233,513

63.1

1,272,616

58.7

ARMM

910,003

56.0

1,162,423

65.3

The initial period following the signing of the 1996 Final Peace Accord witnessed worsening poverty in ARMM. From 1994 to 2000, poverty incidence in ARMM increased by 47%. This occurred at the same time that the region posted Gross Regional Domestic Product (GRDP) growth rate of about 24%. The figures show that the magnitude of poor population grew two times more than the GRDP. In stark contrast, from 1994 and 2000, poverty incidence in Regions 1, 2, 3 and the Cordilleras abated by 9, 10, 13 and 16% respectively, as their regional GRDPs increased. Compared to the national average of 25% GRDP growth, those in the Cordilleras and Cagayan increased by 40%, while Ilocos grew by 26%. Likewise, the magnitude of poor population dropped by 13% in Central Luzon at the same time that its GRDP grew by 13%. (Refer to Table 4)

9 Source: National Statistical Coordination Board, Table T3-29, 2001 Philippine Statistical Year Book.

28

Towards Strengthening the Fiscal Capabilities of ARMM

Table 4: GROSS DOMESTIC PRODUCT10 (in million pesos, constant at 1985 prices) and MAGNITUDE OF POVERTY BY REGION COMPARED11 Region

1994

2000

Gross Domestic Product (in Millions)

Magnitude of Poor Population (in thousands)

Gross Domestic Product (in Millions)

Magnitude of Poor Population (in thousands)

Philippines

766,368

27,274

954,962

31,283

NCR

227,348

975

296,859

1,410

CAR

15,928

747

22,278

626

1

22,295

1,972

30,326

1,793

2

15,428

1,094

21,600

981

3

75,371

2,046

84,970

1,782

4

120,155

3,059

144,996

3,605

5

23,087

2,869

25,918

3,660

6

57,050

3,011

67,001

3,192

7

49,663

1,802

65,031

2,449

8

18,387

1,563

22,956

1,846

9

21,125

1,360

27,001

1,655

10

39,726

2,143

36,515

2,316

11

52,570

2,198

60,275

2,689

12

20,815

1,273

25,721

1,572

ARMM

7,420

1,162

9,179.35

1,708

10 Source: National Statistical Coordination Board, Table T3-29, 2001 Philippine Statistical Year Book.

11 S ource: National Statistical Coordination Board, Table T2-11, 2001 Philippine Statistical Year Book.

ARMM stakeholders grew more concerned as poverty in the region worsened. Previous leaderships of ARMM had attributed lack of development in the region to the inadequacy of resources for poverty alleviation programs and projects. This gave rise to the issue of sufficiency or lack thereof of national government funds for ARMM. Political leaders including those from MNLF who managed ARMM for more than eight years alleged that the national government reneged on its commitments in the autonomy deal, claiming that it specifically failed to provide the necessary funding to support ARMM. National government, on the other hand, has claimed that it has delivered most of its commitments under the Peace Agreement but that the ARMM leadership failed to do their part. By their estimations, substantial financial resources had been disbursed to ARMM but the resources were not judiciously

Towards Strengthening the Fiscal Capabilities of ARMM

utilized. While the region appeared to have prospered as shown by its GRDP growth, the number of poor people continued to rise. Thus, while ARMM enjoyed some degree of prosperity, it did not translate to improvements in the general welfare of its people.

29

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Towards Strengthening the Fiscal Capabilities of ARMM

3

Fiscal Situation

The ability of ARG to properly govern and develop the region for the benefit of its people is largely dependent on its financial capacity. Autonomy, granted to ARMM by virtue of the peace agreement, was expected to usher in peace and economic development in the region. Part of the peace dividend under the 1996 GRP-MNLF Final Peace Agreement was also the promise of resources from national government and donor agencies. With the peace agreement being implemented through the Organic Act, the ARMM Regional Government was guaranteed adequate powers and resources to manage the region and improve the welfare of its people.

3.1 ARMM Fiscal Powers

12 Section 7, Article III, R A No. 9054.

13 Section 11, Article III, R A No. 9054.

14 Section 2, Article IX, R A No. 9054.

The Organic Act shows national government’s resolve to enable and mobilize ARG as the principal institution for promoting the collective welfare of its constituents.12 The national government mandated ARG to devote its resources towards improving the wellbeing of all its constituents.

It was tasked to provide, maintain, and ensure the delivery of, among other things, basic and responsive health programs, quality education, appropriate services, livelihood opportunities, affordable and progressive housing projects, as well as water resource development. 13

The Organic Act decreed fiscal autonomy for ARMM. It could generate and budget its own revenues, its share of internal revenue taxes, block grants and subsidies remitted to it by the national government or by any donor.14 ARG was given wide fiscal powers that included revenue generation, expenditure, and debt creation.

Towards Strengthening the Fiscal Capabilities of ARMM

3.1.1 Revenue Generation Under its revenue generation powers, ARG is authorized to levy taxes, fees, and charges, and accept donations.15 It can source its revenues from, but need not be limited to the following:16 a) Taxes, except income taxes, imposed by the Regional Government; b) Fees and charges imposed by the Regional Government; c) T axes, fees, or charges for the registration of motor vehicles and for issuances of all kinds of licenses or permits for the driving thereof, except tricycles which shall be registered with the city or municipality within whose territorial boundaries they are operated; d) Shares in the revenue generated from the operations of public utilities within the autonomous region; e) Appropriations, shares in the internal revenue taxes, block grants, and other budgetary allocations coming from the national government or national government; and f) Block grants derived from economic agreement or conventions entered into or authorized by the Regional Assembly, donations, endowments, foreign assistance, and other forms of aid, subject to the pertinent provisions of the Constitution.

The Regional Assembly is also given the power to enact a regional government tax code. However, since a tax code has yet to be created in the region, the pertinent provisions of Republic Act No. 7160, the Local Government Code of 1991, apply to tax ordinances of the provinces, cities, municipalities, and barangay within the autonomous region.17 Corporations, partnerships, or firms directly engaged in ARMM need to pay their corresponding taxes, fees and charges in the province or city, where their businesses are physically located. Likewise, corporations, partnerships,

15 Section 1, Article IX, R A No. 9054.

16 Section 8, Article IX, R A No. 9054 17 Section 3, Article IX, R A No. 9054

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32

Towards Strengthening the Fiscal Capabilities of ARMM

or firms whose central, main, or head offices are located outside the region, but are conducting business within its territorial jurisdiction by utilizing natural resources in the region are required to, pay taxes to corresponding LGUs for incomes realized from their business operations. 18 Exemptions to regional taxes may be granted by a vote of absolute majority in the Regional Assembly. 19 The Regional Assembly is likewise mandated by the Organic Act to promulgate a law regulating the exploration, utilization, development, and protection of natural resources – including mines and minerals on which regulatory fees may be imposed to replace those previously imposed by national government. 20 This does not include strategic minerals such as uranium, petroleum and other fossil fuels, mineral oils, all sources of potential energy, as well as national reserves and aquatic parks, forest and watershed reservations already delimited by national government.

18 19 20 21

Section 6, Article IX, R A No. 9054 Section 13, Article IX, R A No. 9054 Section 8, Article XII, R A No. 9054 Section 7, Article IX, R A No. 9054

The taxing power of ARG and of ARMM provinces, cities, municipalities, and barangays does not extend to the following: 21 a) Income tax, except when levied on banks and other financial institutions; b) Documentary stamps tax; c) Taxes on estate, inheritance, gifts, legacies, and other acquisitions mortis causa, except as otherwise provided by law; d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of custom fees, charges, and dues except vessels which registered their owners with the Regional Government and wharfage on wharves constructed and maintained by the Regional Government or the local government unit concerned; e) Taxes, fees, or charges and other impositions upon goods carried into or out or passing through the territorial jurisdictions of the provinces, cities, munici-

Towards Strengthening the Fiscal Capabilities of ARMM

palities, or barangay of the autonomous region in the guise of charges for wharfage, toils for bridges, or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise except toll bridges or roads constructed and maintained by the provinces, cities, municipalities or barangay concerned or by the Regional Government. f) Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fisherfolk; g) Tax on business enterprises certified by the Board of Investment or by the Regional Assembly as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; h) Excise taxes on articles enumerated under the national internal revenue code, and taxes, fees, or charges on petroleum products; i) Percentage or value-added tax (VAT) on sales, barters, or exchanges or similar transaction on goods or services except as otherwise provided by law; j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land, or water except as provided in the Organic Act; k) Taxes on premiums paid by way of reinsurance or retrocession; l) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided by law enacted by congress; m) Taxes, fees, or charges on countryside, barangay business enterprise and cooperatives duly registered under Republic Act No. 6810, the “Magna Carta for Countryside and Barangay Business Enterprise” and Republic Act No. 6938, the “Cooperatives Code of the Philippines”, respectively, and n) Taxes, fees, or charges of any kind on the national government or national government, its agencies and instrumentalities and local government units except on government-owned or–controlled corporations or entities that are primarily organized to do business.

33

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Towards Strengthening the Fiscal Capabilities of ARMM

ARG may also accept donations or grants for the development and welfare of the people in ARMM. Donations may come from private individuals or entities and grants from foreign governments. Donations or grants that are used exclusively to finance projects for education, health, youth and culture, and economic development, may be deducted in full from the taxable income of the donor or grantor. 22 ARG may also develop a system of economic agreements and trade compacts to generate block grant for regional investments and improvements of regional economic structures. 23

3.1.2 Expenditures Allocation ARG is vested with fiscal autonomy to budget its own sources of revenue, its share of internal revenue taxes and block grants and subsidies remitted to it by national government or by any donor. 24 This means that all funds coming into ARMM – internally collected or remitted by national government or some donor government or private entity – will be budgeted and allocated by the regional government. The form, content, and manner of preparation of the budget are prescribed by a law enacted by the Regional Assembly. 25 Pending the enactment of a regional budgetary law, the budgeting process of ARG is governed by pertinent rules and regulations prescribed by DBM. 26

22 23 24 25 26

Section 12, Article IX, R A No. 9054.

Section 11, Article IX, R A No. 9054.

Section 2, Article IX, R A No. 9054.

Section21, Article VII, R A No. 9054.

S ection21, Article VII and Section 6, Article XVIII, R A No. 9054.

27 Section 20, Article VI, R A No. 9054 28 Section 24 (a), Article VII, R A No. 9054.

The annual budget of ARG is enacted by the Regional Assembly. 27 No money is allowed to be paid out of the Regional Treasury except in pursuance of an appropriation made by regional law.28 The regional governor is required to submit a budget of expenditures and sources of financing, including receipts from existing and proposed revenue.to the Regional Assembly not later than two (2) months before the beginning of every regular session, as the basis of the regional appropriations bill.

Towards Strengthening the Fiscal Capabilities of ARMM

Its sources of financing include those from its own sources of revenue, its share of internal revenue taxes and block grants and subsidies remitted to it by the national government or by any donor. This ensures that all funds pass through the ambit of ARG for greater coordination.

There are instances, however, as will be seen later, when national government or donor agencies dedicate funds for special purposes. In these cases, required funds are paid into a trust fund and disbursed by the Regional Treasury only for the specified purpose. 30 To find ways of strengthening ARG’s fiscal autonomy in budgeting its own resources, a study on ARMM’s fiscal autonomy, and the accompanying responsibility of fund use and accountability has to be undertaken.

3.1.3 Debt Creation In addition to the revenue generation powers of the regional government, it is also empowered to seek and contract foreign or domestic loans. For this purpose, authority may be granted to the regional governor by the Regional Assembly.31 Likewise, the Organic Act empowers ARG to issue treasury bills, bonds, promissory notes, and other debt papers or documents pursuant to a law enacted by the Regional Assembly. 32 The borrowing power of ARG is subject to existing national laws. ARG, for example, is not allowed to borrow directly from foreign creditors; however, it can borrow from domestic sources.

29 30 31 32

Section 21 (c), Article VII, R A No. 9054.

Section 24 (a), Article VII, R A No. 9054.

Section 14, Article IX, R A No. 9054.

Section 10, Article IX, R A No. 9054.

35

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Towards Strengthening the Fiscal Capabilities of ARMM

3.2 The Study: Inventory of Funds made Available to ARMM for FY 2001-2005 In July 2004, the Office of the Presidential Adviser on the Peace Process (OPAPP) and DBM agreed to undertake an inventory of resources going to ARMM for fiscal years 2003 and 2004, in an effort to establish a baseline data on ARMM fiscal resources. The initial set of data was compiled and presented several times to national government agencies and to ARG for review and validation. In late 2005, INCITEGov, as part of its good governance advocacy, decided to expand the study to cover a 5-year period to enable a closer look into ARMM’s resource policy options.

The study involved the review of funds released directly to ARG from 2001 to 2005, through various national government agencies, and to local government units (LGUs) in ARMM. Figures were validated through (a) DBM records of special allotment release orders or SARO, (b) reports submitted by the national agencies to DBM, and (c) interviews with finance directors, budget officers from national government agencies and ARMM regional agencies.

For the fiscal period 2001-2005, a total of PhP 76.3 billion was made available to ARMM from various sources.

(Refer to Table 5). These funds represented subsidies or transfers from national government to ARMM as well as to local governments under ARMM. The inventory likewise included revenues collected by ARG under the authority granted by the ARMM law. Specifically, the PhP 76.3 billion of fiscal resources came from seven (7) sources, namely: 1. National government appropriations for ARMMRegional Government (RG); 2. National government appropriations for ARMM public works; 3. Congressional allocation; 4. ARMM-RG’s share in Internal Revenue Collection in ARMM;

Towards Strengthening the Fiscal Capabilities of ARMM

5. I nternal Revenue Allotment of ARMM Local Government Units; 6. National Government Agency Funds Disbursed in ARMM; and, 7. Regional revenues raised by ARMM-RG

Table 5: FISCAL INVENTORY FY 2001 – 2005 (In million pesos) SOURCES OF FUND

2001

2002

2003

2004

2005

TOTAL

A. National Government Appropriations for ARMM – RG

4,768

4,953

5,193

5,510

6,467

26,891

B. National Government Appropriations for ARMM Public Works

-

149

261

261

650

1,321

C. Congressional Allocation

311

584

545

572

560

2,572

D. ARMM-RG Share in Internal Revenue Collection in the Autonomous Region

195

187

285

405

704

1,776

D. IRA of LGUs in ARMM

4,589

6,148

6,460

6,490

7,037

30,724

E. National Government Agencies Funds disbursed in ARMM

1,777

2,322

3,020

2,878

2,956

12,953

F. Regional Revenues Raised by ARMM-RG

6

2

7

11

6

32

TOTAL

11,646

14,345

15,771

National government appropriations for ARMM-RG. This pertains to direct appropriations made by national government for ARG’s annual operational requirements. About PhP 26.9 billion representing 35 percent of ARMM resources in the last five years funded the operations of the Office of the Regional Governor, Vice-Governor, the departments and other executive agencies, as well as the Regional Legislative Assembly from 2001-2005. These funds constituted the base funds of ARG in compliance with law. It covered regular operating costs of national government agencies created under the regional government. The funds were generally used to pay salaries and related personal costs, maintenance, other associated expenses, some equipment and other capital outlays.

16,127

18,380

76,269

37

38

Towards Strengthening the Fiscal Capabilities of ARMM

National government appropriations for ARMM public works. National government likewise appropriates funds specifically for public works. For this purpose, national government disbursed PhP 1.3 billion to ARMM from 2001-2005.

While fund utilization is restricted to infrastructure, the Regional Assembly is empowered to allocate funds for their specific uses. In practice, part of the fund covers region-wide projects or critical public works, while another part is divided among the districts to fund priority projects as identified by Regional Assembly representatives.

The Regional Assembly enacts a Regional Public Works Act after Congress passes the General Appropriations Act each year.

Congressional allocation. The national budget incorporates “lump sum” appropriations that are equally distributed among congressional districts and used for priority projects identified by representative of the district concerned. There are two components of the so-called congressional allocation funds, namely, public works, and the Priority Development Assistance Fund or PDAF. The public works component is included in the budget of the Department of Public Works and Highways and finances infrastructure projects in the district. PDAF funds priority social services projects such as education, health, social welfare, livelihood, and microfinance projects implemented by national government agencies or by the local government units. PDAF can also be used to fund infrastructure projects.

The PhP 2.6 billion from congressional allocations essentially represent the budgetary disbursements made by national government for projects identified by ARMM district representatives in the House of Representatives. It likewise includes a minimal amount from allocations of senators and sectoral representatives that benefited ARMM. ARG’s share in Internal Revenue Collection. Under the ARMM charter, national internal revenues collected within

Towards Strengthening the Fiscal Capabilities of ARMM

ARMM shall be distributed as follows: 35% to local government units; 35% to ARG; and 30% to national government. However, from FY 2003 to 2007, the national government’s share is given to ARG as additional funds. Consequently, 65% of internal revenue collections in ARMM are actually earmarked to ARG. ARG’s share from 2001-2005 was PhP 1.8 billion. After 2007, the 30% will revert back to the national government.

Internal Revenue Allotment of ARMM Local Governments. Internal revenue allotment (IRA) is the largest source of funds for ARMM, comprising 40% of resources accrued to the region. The PhP 30.7 billion shown in the table represents internal revenue allotments (IRA) disbursed by national government to provinces, cities, municipalities and barangays in ARMM pursuant to the Local Government Code.

These funds are completely within the disposition of individual LGUs and generally cover their operating expenses and programs.

National Government Agency Funds Disbursed in ARMM. National government agencies undertake programs and projects across the country. While funds remain within the control of national government agencies, these are either actually disbursed to the region or spent by the agency to benefit the region. From 2001-2005, PhP 12.6 billion was actually spent for the benefit of ARMM through various programs and projects directly implemented by national government agencies. Under the concept of ARMM autonomy, the funds should have been transferred to ARG for implementation, contractual and related considerations prevented the direct transfer of funds. The largest disbursements were made by the Department of Education, and the Department of Social Welfare and Development.

Including public works projects, this component totalled to about PhP 14.2 billion. The public works expenditures, however, are included in “Congressional Allocations” in as much as these are under congressional control.

39

40

Towards Strengthening the Fiscal Capabilities of ARMM

Regional revenues raised by ARMM-RG. A measly PhP 32 million was reportedly collected by the regional government from regional sources during the five-year period. These basically came from motor vehicle fees and other charges made from certifications or authentication of papers. This finding suggests that more work needs to be done to mobilize regional revenues given the minimal funds provided by regional revenue sources.

Clearly, ARMM funds from 2001 to 2005 essentially came from national government direct fund transfers. Furthermore, such transfers have steadily grown over the last five years corresponding to growth in the basic operational costs of ARG. In addition, the national government has strengthened its efforts to market ARMM as an investment opportunity along with Mindanao, resulting in the inflow of more overseas development assistance from foreign donors and creditors to the region in the last five years.

The PhP 76.3 billion captured in the inventory is a conservative figure given the fact that this amount includes only those collected from primary resources, and validated by records of DBM, as well as national government agencies implementing projects in ARMM. In fact, additional resources amounting to at least PhP 3 billion are estimated to have been made available to ARMM during the period from sources that need to be validated or figures from transfers-in-kind.

3.3 Locus of Funds Control While the amounts reflected in the inventory appear substantial, it is also noteworthy to mention that not all funds made available to ARMM are within the direct control of the ARMM Regional Government.

Fiscal resource control, or the authority to determine how much of public funds can be spent for what particular use by particular units of government, is critical in assigning

Towards Strengthening the Fiscal Capabilities of ARMM

responsibility over the actual utilization of funds. In the case of ARMM, an analysis of the locus of funds control shows that a substantial portion of funds did not actually pass through ARG. In fact, local government units in ARMM had more resources under their control than ARG. Table 6 shows the different levels of government exercising control over funds made available to ARMM, based on where the funds came from (source), who had authority to allocate the funds (allocation), and who had authority to disburse them (disbursement).

Table 6: FUNDS AVAILABLE TO THE ARMM According to Source, Appropriation and Disbursement Fiscal Years 2001-2005 Particulars

% To Total

Source

Allocation

Disbursement

A. National Government Appropriations for ARG

35.3

National Government

National Government

Regional Government

B. National Government Appropriations for ARMM Public Works

1.7

National Government

Regional Government

Regional Government

C. Congressional Allocation

3.4

National Government

National Government

National Government

D. ARG Share in Internal Revenue Collection in the Autonomous Region

2.3

National Government

Regional Government

Regional Government

E. IRA of LGUs in ARMM

40.3

National Government

Local Government Units

Local Government Units

F. National Government Agencies Funds disbursed in ARMM

17.0

National Government

National Government

National Government

G. Regional Revenues Raised by ARG

*

Regional Government

Regional Government

Regional Government

41

42

Towards Strengthening the Fiscal Capabilities of ARMM

Source. About 99.96% of ARMM’s funds are sourced from national government, with only about 0.04% directly raised by ARG. For all intents and purposes, ARG is not dependent on revenues collected by ARMM and its local government units. Therefore, funds allocated to ARMM by the national government are constrained by resource limitations of the national budget.

Appropriation. National government allocates 55.6% of ARMM funds, including those for regional government administration and operation, congressional allocations, and national agencies funds disbursed in ARMM. Thus, the distribution of funds to programs and projects effectively remains under national control. On the other hand, local government units in the region control 40.25% of ARMM’s fiscal resources. These funds represent the IRA directly released to LGUs by the national government.

Only a negligible 4%, representing ARMM’s share in internal revenue collection, regional revenues, and the public works fund is completely within the control of ARG.

Table 7: FUNDS AVAILABLE TO THE ARMM Locus of Control, By Allocation Fiscal Years 2001-2005 LOCUS OF CONTROL (in million pesos)

Amount % of Total

42,417

55.7

National Government Appropriations for ARMM-RG

26,861

35.3

Congressional Allocation

2,572

3.4

National Government Agencies Funds Disbursed in ARMM

12,953

17.0

3,129

4.1

National government appropriations for ARMM public works

1,321

2.4

ARMM-RG share in Internal Revenue Collection in ARMM

1,776

2.5

Regional revenues raised by ARMM-RG

32

0.04

30,724

40.2

30,724

40.2

76,270

100.0

National Government

ARMM-RG

ARMM Local Government IRA of LGUs in ARMM TOTAL

Towards Strengthening the Fiscal Capabilities of ARMM

Disbursement. In terms of the control on actual disbursements, 39.3% of the total funds are under the autonomous region’s disposition, (Refer to Table 8). This is a significant improvement from the mere 4% allocation authority granted to ARG. The higher percentage is accounted for by the inclusion of national budget appropriation for ARG in the list. In the latter, while appropriated by the national government as funding assistance, it is disbursed

by ARMM agencies. As a consequence, only two items are actually disbursed by national government, comprising about one fifth of the total. These items are congressional allocations, which are generally implemented by national agencies, using their own funds for programs / projects in ARMM. The rest of the funds are disbursed by local government units.

Table 8: FUNDS AVAILABLE TO THE ARMM Locus of Control, By Disbursement, Fiscal Years 2001-2005

National Government

Locus of Control (in million pesos)

Amount % of Total

15,526

20.4

Congressional Allocation

2,572

3.4

National Government Agencies Funds disbursed in ARMM

12,953

17.0

ARMM-RG

30,020

39.3

National Government Appropriations for ARMM-RG

26,891

35.3

National government appropriations for ARMM public works

1,321

2.4

ARMM-RG share in Internal Revenue Collection in ARMM

1,776

2.5

32

0.04

30,724

40.2

30,724

40.2

76,270

100.0

Regional revenues raised by ARMM-RG ARMM Local Government IRA of LGUs in ARMM TOTAL

43

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Towards Strengthening the Fiscal Capabilities of ARMM

3.4 Fund Utilization – by Expense Class Actual distribution of funds is a significant indication of fund use effectiveness and efficiency. It also clarifies some issues commonly raised in relation to fund adequacy, such as insufficiency of funding support for infrastructures and similar claims. Table 9 shows where funds from 20012005 actually went, in terms of the types of expenditures.

Notably, some two-thirds of resources were spent for personnel services; the rest was used for operating expenses and capital outlays.

Personnel Services. (PS) Some PhP 48.4 billion or 64% of funds going to ARMM were spent to pay salaries and related benefits of employees. This includes salaries and benefits of LGU employees funded under the IRA. Around 84% of funds for ARG administration and operation and 63% of the national agencies disbursement to ARMM were dedicated to personnel services. Furthermore, about 60% of local government funds were allocated for personnel services. The substantial amount spent for personnel services seems to confirm that only a small amount of funds was left for operational expenses and capital investment purposes in the ARMM budget.

There may therefore be a need to review funds allocation, and/or to find ways of increasing the pie to secure more resources for developmental purposes. More important, there may be a need to rationalize existing staff duties and responsibilities to improve personnel deployment and effectiveness.

Towards Strengthening the Fiscal Capabilities of ARMM

Table 9: Fund Utilization - by Expense Class (in million pesos) SOURCE

PS

MOOE

CO

TOTAL

A. National Government Appropriations for ARMM – RG

22,499

4,056

336

26,891

B. National Government Appropriations for ARMM Public Works

0

0

1,321

1,321

C. Congressional Allocation

0

0

2,572

2,572

D. ARMM-RG Share in Internal Revenue Collection in the Autonomous Region

0

1,776

0

1,776

E. IRA of LGUs in ARMM

18,434

6,145

6,145

30,724

F. National Government Agencies Funds disbursed in ARMM

7,907

2,057

2,989

12,953

G. Regional Revenues Raised by ARMMRG

0

32

0

32

TOTAL

48,840

14,066

13, 364

76,270

The largest personnel resource base in ARG is in education. Understandably, complaints such as delays in the payment of salaries and other benefits are usually heard from this sector. In addition, due to its special status, ARG includes in its payroll the personnel who have actually been devolved to local governments under the devolution program of 1991 – 1992. The local government units contributed 38% of the amount for personnel services during the five year period. National government agencies in the region contributed the remaining, a sixth of the pie (16%).

Maintenance and Other Operating Expenses (MOOE). Within the same program period (FY 2001-2005), PhP 14.0 billion or 18% of the funds were spent for Maintenance and Other Operating expenses (MOOE). Of this amount, PhP 5.8 billion or about 41% represented expenses incurred by ARG. Local government units in the region actually spent more, (i.e., 43.4% of the entire MOOE). The national government agencies in ARMM share the remaining 15%.

MOOE expenses generally consist of office supplies, utilities, travel, purchases of goods and services used in regular operations, and related costs generally consumed

45

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Towards Strengthening the Fiscal Capabilities of ARMM

during the year. Given the personnel base, the MOOE allocation can hardly be considered sufficient for ARMM to operate effectively. Therefore, the efficiency of fund use also needs to be looked into.

Capital Outlay. (CO). The provision for capital outlays in the autonomous region appears minimal. Including local government units, only about 7% of funds in the region were spent for capital outlays. Excluding local government units, ARMM actually spent about 16% of its budget for capital investment. While apparently small, these percentages compare favorably with that of the national government where only approximately 12% of the budget is spent for capital investment due to resource constraints. At the national level, the budget is constrained by huge requirements for debt servicing, thus, the relatively limited allocation for capital spending. ARMM, on the other hand, is not burdened by such concerns. There is therefore some scope for improving the allocation to favor capital outlays in the ARMM budget. This can be done through a serious review of programs funded, including earmarking some funds for investment and mobilizing untapped resources for the purpose.

3.5 Fund Utilization – by Sector In terms of use by sector, the inventory shows that the biggest share (28%) went to education. Excluding funds allocated from internal revenue allotment of local government units, about 2/3 of the entire allocation for the region was actually used for this sector. Education has the highest fund use because this is the biggest department in ARMM, essentially reflecting national reality (Refer Table 10).

Towards Strengthening the Fiscal Capabilities of ARMM

Table 10: Fund Utilization - by Sector (in million pesos) SECTOR (in million pesos)

Amount % of Total

Education

21,597

28.3

Infrastructure (Capital Outlays/PDAF/DOTC/ DPWH)

7,943

10.4

Agriculture, Agrarian Reform and Fisheries

2,247

2.9

Health

2,362

3.1

Environment and Natural Resources

706

0.9

Trade, Industry, Tourism

281

0.4

Social Welfare

418

0.6

Labor and Employment

118

0.2

Science and Technology

63

0.1

34,736

45.5

Interior and Local Government* Others

5,799

7.6

TOTAL

76, 270

100.0

Second to education is the infrastructure sector with about PhP 8 billion or 10.4% of the total. This came from specific appropriations devoted to public works projects from the national government, the congressional allocations, and other allocation from national agencies.

Other notable recipient sectors were agriculture and health, understandably so because of the focus given by the national government on these sectors in the past five years. The other sectors listed in the table, while relatively small, comprised sizeable amounts in absolute terms and could be tapped for further assistance in the future.

About 45% represents the internal revenue allotment of LGUs in ARMM. The rest of the funds was spent for general overhead of ARG including the regional governor’s office, as well as the regional legislative assembly.

3.6 Comparative Analysis To provide a broader basis for analysis of ARMM’s resources and its utilization, a comparative analysis has been undertaken using national and selected regional

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data. While the analysis is cursory, it provides an insight into the relative standing of ARMM in terms of allocation in the national budget, as well as on the region’s effectiveness in fund utilization.

3.6.1. ARMM and other Regions In terms of absolute amounts made available to all regions from the national budget from 2001 to 2005, ARMM ranked 14th out of the 15 regions in the country, a disappointing situation for a region with the highest poverty incidence. However, the per capita expenditure allocations (i.e., absolute amount over population) shows that ARMM was actually among the favored regions in the country.

ARMM ranked second to Cordillera Administrative Region (CAR) in the comparative regional allocation data for the period FY 200 – 2005 (Refer to Table 11). Thus, the ARMM regional allocation has actually not lagged behind other regions. Furthermore, if one considers that CAR suffers from some factors that actually increase the cost of development relative to other regions (i.e., natural terrain, population density, etc.), ARMM seems to be enjoying the highest per capita allocation in the national budget.

Towards Strengthening the Fiscal Capabilities of ARMM

Table 11: Comparative Regional Allocation of the National Budget FY 2002 – 2005 Region

Allocation

Per Capita

Amount (in million pesos)

Rank

Rate

Rank

Autonomous Region in Muslim Mindanao

50,701

14

21,590

2

National Capital Region

154,835

2

14,045

12

Ilocos

80,194

8

18,312

6

Cordillera Administrative Region

48,373

15

32,092

1

Cagayan Valley

61,863

10

20,590

3

Central Luzon

118,229

3

14,410

11

Southern Luzon

166,592

1

13,481

13

Bicol

86,115

6

17,078

9

Western Visayas

118,033

4

17,574

8

Central Visayas

87,178

5

14,752

10

Eastern Visayas

80,900

7

20,142

4

Western Mindanao

61,193

12

17,937

7

Northern Mindanao

61,726

11

12,856

14

Southern Mindanao

71,638

9

11,472

15

Central Mindanao

57,773

13

20,072

5

It is notable that in 2002, ARMM ranked only 7th in per capita terms, but jumped to second place, in 2003 presumably as a direct result of government’s deliberate policy to pour more resources into ARMM (Refer to Table 12).

The continuing interest in sustaining funding support in the region is expected to continue as a major part of the government’s overall development strategy. It is therefore imperative on the part of ARMM to demonstrate improvements in its resource generation and utilization capabilities.

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Table 12: Comparative Regional Allocation of the National Budget, by Year FY 2002 – 2005 Region

Per Capita

Rank

2002

2003

2004

2005

2002

2003

2004

2005

ARMM

4,846

5,203

5,491

6,017

7

2

2

2

National Capital Region

3,902

3,714

3,235

3,214

11

10

12

14

Ilocos

4,987

4,613

3,657

5,061

6

6

9

6

CAR

7,772

8,074

9,217

7,040

1

1

1

1

Cagayan Valley

5,375

5,089

4,991

5,143

3

4

3

4

Central Luzon

3,876

3,490

3,437

3,614

12

12

11

11

Southern Luzon

3,647

3,398

3,222

3,231

14

13

13

13

Bicol

4,402

4,240

4,096

4,343

9

9

7

8

Western Visayas

4,642

4,343

4,102

4,493

8

8

6

7

Central Visayas

3,984

3,549

3,479

3,747

10

11

10

10

Eastern Visayas

5,535

4,807

4,602

5,210

2

5

5

3

Western Mindanao

5,051

4,538

4,074

4,304

5

7

8

9

Northern Mindanao

3,086

3,170

3,078

3,510

15

14

14

12

Southern Mindanao

3,729

2,701

2,589

2,496

13

15

15

15

3.6.2 ARMM and Selected Regions To gain deeper insights into ARMM’s fiscal capabilities, a comparison of its fund allocation and performance was undertaken relative to three regions in the country that have close to comparable state of development, namely– Cordillera Administrative Region, Eastern Visayas and Caraga. The analysis covered fund allocation and reported performance in two sectors, namely, agriculture and education. The following data from 2002-2004 were subjected to a comparative analysis: (a) annual aggregate resources, (b) per capita expenditures and (c) performance based on national agency reports.

3.6.2.1 Education When comparing ARMM to the three regions, Table 13 shows that the amount made available to ARMM for education, was lower in absolute terms as well as on a per capita basis. The comparatively high allocation for Eastern Visayas can be accounted for by the size of the region, both in terms of land area and provincial

Towards Strengthening the Fiscal Capabilities of ARMM

coverage. On a per capita basis, however, ARMM is not lagging behind. While lower than the other regions, the difference in per capita spending for education between ARMM and the other regions is essentially due to reach (i.e., provincial coverage in the case of Eastern Visayas), and initial start – up costs (i.e., newly created region in the case of CARAGA).

Table 13: Regional Allocation: EDUCATION FY 2002 – 2004 Region

Amount (in million pesos)

Per Capita

2002

2003

2004

2002

2003

2004

ARMM

2,690

2,666

2,705

1,176

1,145

1,142

Eastern Visayas

5,854

5,777

5,952

1,501

1,452

1,468

CARAGA

3,175

3,120

3,270

n.a.

n.a.

n.a.

CAR

2,435

2,345

2,447

1,666

1,572

1,607

The performance of the regions in education spending was gauged using comparative data on literacy rates. For this purpose, simple and functional literacy measures were used. Simple literacy essentially translates to the ability to read and write, and to understand a simple message in any language or dialect. Functional literacy on the other hand is a significantly higher level of literacy that covers not only reading and writing, but also arithmetic or numeracy skills--the ability to count and process numbers. It also means the ability to use those skills in daily functions, in participating in community activities, and self-improvement.

Table 14 shows that ARMM appears to be lagging behind when compared to the national average and other regions.

The difference is most significant in simple literacy rate with ARMM lagging behind by more than 20%. The same observation holds true in terms of functional literacy: Philippines’ overall index is 84% while ARMM’s is 63%. Functional literacy rates in the three regions on the other hand, approximate the national average. The Cordillera Administrative Region in fact has a higher rate compared to the national average, while ARMM is behind by

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21%. This clearly shows that education is a major area of concern in ARMM, indicating the need for serious policy measures to upgrade the educational system in the region.

Table 14: Comparative Literacy Rate FY 2003 Region

Simple Literacy Rate33

Functional Literacy Rate34

Philippines

93.4

84.1

ARMM

70.2

62.9

CAR

91.6

85.4

Eastern Visayas

90.1

76.7

CARAGA

92.1

81

3.6.2.2. Agriculture In agriculture, the absolute fund allocation and per capita indicators for ARMM are much better than those in education. In absolute amounts, ARMM is the biggest fund recipient compared to the three other regions. The amount allocated to ARMM was double that of Eastern Visayas, four times that of CAR, and six times that of Caraga. Consequently, per capita figures clearly show the favorable bias for ARMM in funding agriculture programs. (Refer to Table 15)

33 S imple Literacy of the Population 10 Years Old and Over, 2003, http://www.nscb.gov. ph/secstat/d_educ.asp 34 F unctional Literacy Rate of Population 10 to 64 years old, by Region, 2003, http://dirp. pids.gov.ph/eismain.html

Table 15: Regional Allocation: AGRICULTURE FY 2002 – 2004 Region (in million pesos)

Amount Per Capita

2002

2003

2004

2002

2003

2004

ARMM

193

202

203

84.5

86.8

85.5

Eastern Visayas

96

97

91

24.6

24.5

43.1

CARAGA

29

32

31

n.a.

n.a.

n.a.

CAR

46

47

45

11.3

31.7

29.5

Towards Strengthening the Fiscal Capabilities of ARMM

53

In terms of actual performance however, the report of the Department of Agriculture on the Ginintuang Masaganang Ani (GMA) Program on rice and corn showed that a lot needs to be done to improve agricultural output and productivity. Considering that ARMM is essentially an agriculture area, and weather conditions are generally better here compared to selected regions, there is a need to improve the utilization of agricultural funds to approximate the accomplishments reported by the other regions. Tables 16 and 17 provide a summary of the accomplishment reports of the three regions.

Table 16: Ginintuang Masaganang Ani (GMA) – Rice, Output Report35 2004 CAR

Eastern Visayas

ARMM

• 13,460 bags of hybrid rice were distributed to 8,770 farmers planted to 12,340 hectares.

• 11,057 hectares were already planted with hybrid rice seeds

• Rice production decreased from 319,096 MT in 2003 to 280,139 MT in 2004

• harvested was 8,892 hectares with 55,418 MT production averaging a yield of 6.23 MT/hectare;

• 68 techno demo showcasing the latest hybrid rice technologies and performance of different hybrid rice varieties were established.

• DAF-ARMM responded to affected farmers through the provision of assorted vegetable seeds, planting materials and OPV corn seeds.

• 16,297 certified seeds bags were distributed to 14,616 farmers planted to 20,188 hectares.

• 4,153 bags of certified seeds were • Covering the period of 2004, procured and distributed under the area planted to rice was reduced 50:50 scheme. to 75,814 hectares, down by 16.9 percent as compared to rice areas planted in 2003.

• Area harvested was 19,992 hectares with production of 96,059 MT recording an average yield of 4.8 MT/hectare;

• conducted eight (8) credit assistance referrals to Government Financial Institutions (GFIs) and assisted in the maintenance of four (4) irrigation systems/canals and four (4) seed warehouses

• Distributed 485 bags of organic fertilizer, 90 packs of Kocide, and 63 bags zinc sulfate to inbred rice farms while 2,127 bags of inorganic fertilizers were distributed to areas planted with hybrid; and • Completed 52 techno-demo projects for hybrid rice varieties and 21 technodemo projects for inbred rice benefiting a total of 73 farmer-cooperators

• rice production decreased from 319,096 MT in 2003 to 280,139 MT in 2004 representing about 97 percent of the total target for the period.

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Towards Strengthening the Fiscal Capabilities of ARMM

Table 17: Ginintuang Masaganang Ani (GMA) – Corn, Output Report36 2004 CAR

Eastern Visayas

ARMM

• Two (2) Bio-N mixing plants were constructed and operationalized.

• 119,570 bags of certified OPV seeds were produced/procured and positioned

• Corn production increased from 208,108.65 MT in 2003 to 416,737.65 MT in 2004, posting an increase of 100.25 percent.

• 2,430 packets were produced and distributed benefiting 405 farmers.

• Regional Crop Protection Center (RCPC) produced 42,430 Trichogramma cards benefiting 887 • 2,550 bags of hybrid corn at 18 kg. per farmer-beneficiaries both in the bag were distributed to 2,550 farmers · cluster and non-cluster areas.

• 33 bags of hybrid corn seeds were also distributed to farmers who were victims of typhoon in Paracelis, Mt. • Two (2) schools-on-the-air (SOA) activities were conducted in Alfonso, Ifugao with 146 participants / graduates; and • 75 groups were assisted to avail of loan from Quedancor with a loan amount totaling PhP 20.2 million.

• accelerated its campaign on the use of Bio-N • necessary equipment and facilities for the Bio-N mixing/processing plants (already procured and positioned • two (2) cooperatives in the cluster municipalities constructed the buildings (as part of their equity) to house the said facility • eight (8) marketing agreements were consummated generating a total sales value of PhP 1.2 million.

35 Department of Agriculture performance reports 36 Department of Agriculture performance reports

• A total of 172,463.15 hectares were planted to corn with only 154,721.85 hectares harvested for the year and accomplishing about 103 percent of the total sectoral targets

Towards Strengthening the Fiscal Capabilities of ARMM

4

Analysis

55

This inventory confirmed several facts already reported in the past. It also revealed other interesting trends that could help explain some of the problems that persist in ARMM. These trends can be categorized into five (5) key themes, namely: a) weak ARMM revenue mobilization; b) fiscal dependence on the national government; c) personnel / overhead burden; d) limited program administration capacity; and e) dispersed resource control and accountability

4.1 Weak ARMM Revenue Mobilization While the Organic Act provides ARG with sufficient taxing powers, the use of such powers has not been evident.

This is due to the inherent difficulty of taxing a local economy that has high poverty incidence. The absence of a good data base which could provide information on the tax revenue potential of the region can also be a contributory factor. Given that ARMM has full fiscal autonomy over revenue collections imposed by the ARMM Regional Government, this should serve as an incentive to dramatically improve revenue mobilization.

Poor revenue collection can also be the result of the absence of a unit dedicated to improving regional revenue mobilization. The existing internal structure is not equipped, technically as well as organizationally, to undertake revenue mobilization as a serious reform agenda.

Improving the revenue generation effort significantly will require strengthening ARG’s capability to design and implement a revenue reform program.

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Towards Strengthening the Fiscal Capabilities of ARMM

4.2 Fiscal Dependence on the National Government The inventory clearly showed that ARG is almost totally dependent on national government for funds. For the period of 2001-2005, close to all (99.96%) of ARMM funds were provided by the national government, and only .04 % was generated by ARG. In terms of actual control, ARMM was only able to allocate 4% of its total funds, while local government units appropriated and allocated 40.3%. The national government had control over programming and allocation of 55.7%, including the appropriation for regional government administration and operation, and the funds spent by national government agencies operating in ARMM. Thus, notwithstanding the provisions of the Organic Act to the effect that ARG shall enjoy fiscal autonomy in budgeting block grants and subsidies remitted to it by national government or any donor,37 local government units are better situated than ARMM in terms of flexibility in the allocation of funds. Local government units have the power to program, allocate and appropriate their finances while ARG is generally restricted by provisions in the General Appropriations Act. Hence, ARG still has to propose and defend its appropriation for administration and operation to the national government. ARG acts and is treated just like an agency of national government, giving the appearance that the ARG is merely an agent of national government in the administration of the region.

37 Section 2, Article IX, R A No. 9054 38 Section 3, Article III, R A No. 9054

The national government is mandated by law to provide ARMM with a proportionate and equitable share in the annual national budget and foreign assisted projects in addition to other financial assistance, support, and subsidies to accelerate its development. While this legal obligation is recognized, national government’s capability to accomplish this has been hampered by fiscal difficulties arising from a deteriorating national revenue effort. Consequently, national government has actually determined ARMM’s

Towards Strengthening the Fiscal Capabilities of ARMM

“proportionate and equitable share in the annual national budget” by setting a ceiling on ARG’s administration and operation budget. 38 Presumably, such share could have been appropriated in a lump sum and remitted to the Regional Treasury to be appropriated and disbursed in accordance with the Organic Act and its implementing regional rules and regulations.

4.3 Personnel and Overhead Burden The fiscal dependence of ARMM on national government is aggravated by the fact that appropriations for ARG administration and operations are mostly dedicated for personnel services. This includes national government personnel operating within ARMM who were absorbed by the Regional Government, and not personnel positions created and determined by the region itself. Some of these positions and their respective functions should have been devolved to LGUs by virtue of the Local Government Code. Because the ARMM Organic Act was enacted before the Local Government Code, however, these personnel remain an integral part of ARG. A clear illustration of this reality is the city of Marawi and the province and municipalities of Basilan, which opted not to join the autonomous region in 1991. Before becoming part of ARMM, these local government units were financing devolved NGA functions and responsibilities, including devolved personnel, mandated by the Local Government Code from their respective internal revenue allotments (IRAs). LGUs in ARMM, however, do not carry the same burden since the ARMM Regional Government has not devolved the same functions and responsibilities to LGUs. This arrangement is particularly significant considering that LGUs in ARMM are being allocated their internal revenue allotment using the same formula as those out-

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Towards Strengthening the Fiscal Capabilities of ARMM

side the autonomous region. As such, LGUs in ARMM, are in a better fiscal situation than their non-ARMM counterparts.

Apart from the burden caused by non-devolution of some functions to LGUs, there may be other areas of improvement within the Regional Government that could contribute to a more efficient allocation of resources. This calls for the adoption of a Rationalization Program, similar to that currently being undertaken by national government.

4.4 Limited Program Administrative Capacity ARMM suffers from the same problems that regular national government agencies complain about with regards to insufficiency of funds for operating and developing programs. This is not surprising in as much as both face tight financial constraints aggravated by huge personnel cost.

Funds for maintenance and operating expenses, and capital outlays, obviously limit ARMM’s operational flexibility and program administrative capacity. Furthermore, it creates a vicious cycle where existing personnel are virtually rendered immobile and non-productive, further contributing to the non-provision of goods and services crucial to the development of the region. This vicious cycle must be stopped through the implementation of reforms in revenue mobilization and utilization.

4.5 Dispersed Resource Control and Accountability

39 Section 2, Article IX, R A No. 9054

Again, the issue of fiscal autonomy in budgeting funds received from national government 39 is raised. While local government units have fiscal autonomy, ARG appears to have less control over its allocated funds. Such constraint

Towards Strengthening the Fiscal Capabilities of ARMM

on the participation of ARG in fiscal resource programming denies ARMM the power to exercise its basic powers in term of determining how resources should be allocated and spent.

More specifically, while local government units are given lump sum grants in the form of internal revenue allotments, ARG’s budget is generally treated in the same manner as that of national agencies. As such, ARG needs to request an annual appropriation from Congress under the General Appropriations Act. Aggravating this is the fact that substantial amount of ARMM funds are still outside of ARG’s control. To deny ARG the authority to appropriate its public funds withholds from it the opportunity to more effectively deploy its fiscal resources. Consequently, it has acted like a plain instrumentality of national government, such that it is the latter’s tempo that determines the rhythm of governance in ARMM.

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5

Policy Options / Recommendations

This section presents several major policy options and recommendations based on the findings of the study. While not exhaustive, the recommendations suggest specific areas of intervention towards resolving and improving the fiscal situation of ARMM. 5.1 Revenue Generation 5.1.1 Improve Regional Revenue Collection Given its poor regional revenue performance, ARMM needs to seriously consider supplemental revenue sources to fund critical projects that will be undertaken in the region. If ARMM wants to exercise fiscal autonomy, it must endeavor to raise funds on its own; apart from those allocated by national government. The ARMM law has given ARG definite powers by which resources can be mobilized and these powers must be maximized.

One way this can be done is by making an inventory of potential revenues that can be raised by the regional government from authorized sources, as provided by law. It can likewise look at some local resources imposed by local government units in ARMM and explore the possibility of partnering with LGUs in revenue generation under a sharing scheme.

If a serious revenue mobilization effort is to be undertaken, ARMM will have to establish a revenue unit. The existing Regional Treasury will have to be restructured to include, as one of its major functions, the identification of revenue measures that may be adopted to generate funds for ARMM. This will entail strengthening the capability of the Regional Treasury to undertake a critical and potentially unpopular function.

Towards Strengthening the Fiscal Capabilities of ARMM

5.1.2 Leverage Improvements in Regional Revenue Generation for Increases in National Government Appropriation ARG must explore the possibility of leveraging a more substantial increase in appropriations from national government. In exchange, it can commit to making dramatic improvement in its revenue generation efforts. The national government policy in relation to its catch-up plan for Muslim Mindanao can provide the basic negotiating platform for ARMM. To do this, ARG will have to design a viable program of action that will ensure the accomplishment of ARMM revenue targets. If attained, this could trigger the creation of a more stable resource base for ARMM, at the same time, forge better funding arrangement that is performance-based.

5.1.3 Leverage Good Governance Initiative with Overseas Development Agency (ODA) Partners The strong interest of the ODA community to support development initiatives in ARMM has been demonstrated in many concrete ways. This interest should be nurtured through measures that will strengthen good governance practices in the region. ODA partners will take kindly to genuine efforts towards improving or setting up mechanisms for promoting transparency and accountability and ensuring the effective and efficient use of resources in the region. This in turn can be used as leverage for securing more ODA funds for ARMM. A program loan may be explored that may be drawn when certain specific targeted improvements have been substantially undertaken.

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5.2 Fund Utilization 5.2.1 Shift in Fiscal Resource Programming 5.2.1.1. Rationalize Maintenance and Other Operating Expenses Over Capital Outlays Ratio to Personnel Services (MOOE/CO Ratio to PS) The provision for personnel services (PS) without appropriate provision for MOOE and capital outlay renders the human resource base immobile and non-productive.

Any increase in the ARMM budget should, therefore, go into increasing MOOE and capital outlays in order to achieve a more reasonable PS to MOOE/CO ratio .

A good indicator could be the PS limit imposed on LGUs under the Local Government Code. Thus, ARG may target a 55% limit on personnel services in relation to the ARMM budget, to be achieved over a given period of time. ARG should then explore the devolution of particular functions to local government units pursuant to the spirit of MMA Act No. 25 on the devolution of certain functions, responsibilities and personnel to LGUs. This will optimize the mobilization of resources available to local government units; at the same time distribute the burden of governance by alleviating the personnel services burden in ARG. In addition, ARG should seriously consider rationalizing its operations with a view towards focusing on programs and projects that will best contribute to alleviating poverty over the medium term. It can take its cues from the program of the national government on strengthening public institutions for more effective delivery of public goods and services pursuant to Executive Order No. 136.

5.2.1.2. Dedicate ARMM Share in Internal Revenue Collection to Infrastructure ARG can further enhance its capital outlay position by dedicating its share in internal revenue collection

Towards Strengthening the Fiscal Capabilities of ARMM

to infrastructure and related interventions. Currently, ARG is utilizing the same to supplement the budget of ORG, the Regional Assembly, and regional agencies, with the residual distributed to ARG created agencies.

The devolution of some offices, functions and powers to the local government unit would provide sufficient fiscal space for infrastructure and similar programs.

This will substantially augment development funds and can complement resources under the regional public works fund and congressional allocations, which are already largely dedicated to infrastructure. In addition, the ARMM Regional Government could also look into strengthening its linkage with local government units to facilitate, coordinate, and integrate public works initiatives from the barangays, municipalities and provinces with the initiatives of the Regional Government 5.2.1.3. Integrate CO/Infrastructure Investment Programming The Organic Act has provided for the institution and mechanism of integrating capital outlays, infrastructure and investment programming through the Regional Economic Development Planning Board. 40 (RDPB). The RDPB has been tasked to: a) s erve as the planning, monitoring, and coordinating agency for all development plans, projects, and programs intended for the autonomous region, b) evaluate and recommend for approval of the Regional Assembly, the annual work programs and comprehensive development plans of the autonomous region and c) f ormulate a master plan for a systematic, progressive, and total development of the region. The master plan shall take into account the development plans of the province, city, municipality, and barangay concerned as mandated by Republic Act No. 7160, the Local Government Code of 1991.

40 Section 10, Article XII, R A No. 9054.

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It is clear from these provisions that a comprehensive plan that will serve as the development road map for the region must be agreed upon by the regional leadership.

This regional master plan, should consider resources available not only to ARG but also local government units and national government agencies in the autonomous region. The specific responsibilities of each level of government within ARMM in accomplishing the plan must be delineated to ensure synchronized implementation and clear tracking of accountabilities. More significantly, the use of substantial resources made available to the region can be maximized. To do this, all stakeholders including the regional government, local government units, national government agencies in ARMM, and national legislators representing ARMM in Congress, must lend their collective support.

In public works, for instance, LGU’s annual investment plans as well as projects of national legislators and national government agencies operating in ARMM must be generally synchronized with those of the ARMM Regional Government. This would mean strengthening the bottom-top regional investment planning and programming system.

5.2.2 Enhance the Role of ARG in Fiscal Resource Programming The autonomous region should intensify its representation in national government to gain more flexibility in the appropriation of fiscal resources intended for ARMM. This flexibility however, entails added responsibility. ARMM will have to show some indication of improvements in its system of accountability to convince legislators, if not national government agencies, to relax existing rules.

All infrastructure funds, for instance, may appropriately be fully allocated by the regional government such that funds for infrastructure in ARMM allocated by national government should be appropriated through a Regional Assembly Public Works Act. Unless approved by the Regional Assembly, no public works funds allocated by national government or national government for the Regional

Towards Strengthening the Fiscal Capabilities of ARMM

Government or allocated by the Regional Government from its own revenues may be disbursed, distributed, realigned, or used in any manner. This move may face stiff opposition from national legislators representing ARMM. Such opposition may be tempered if ARMM is able to come up with a viable and widely accepted Infrastructure Investment Plan that can be updated periodically.

Considering that national government provides almost the entire public funds to ARMM, it is only necessary that ARG engages national government leadership in appreciating the governance directions and fiscal requirements of ARMM. It should persuade national government to comprehend the rigidity of the fiscal situation of ARG and generate as much support for the promotion of its fiscal autonomy.

The National legislators from ARMM are the primary representatives of ARMM and ARG in the national government. Engaging national government and its leadership to promote the fiscal autonomy of ARMM can be made more efficient and effective if sufficient legislative support can be generated. Moreover, legislators control congressional allocation funds. Had this been linked and integrated into the programming of local development funds, regional public works fund and other capital outlay resources, the infrastructure requirements of the region can be met more effectively. Local government units in ARMM remain a very potent fiscal resource base for regional fiscal mobilization. It can raise substantial MOOE and capital outlay support to the regional government agencies.

5.2.3 Establish Key Focus Areas for Governance ARG should establish key areas that will serve as governance themes which will be the focus of its funding efforts. These themes will underlie all major activities of the region and should galvanize stakeholder support towards a concrete program of action. Examples of these governance themes are infrastructure and education. The infrastructure theme for instance, can map out regional connectiv-

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ity in ARMM with projects such as road networks and increased access to maritime or air transportation.

The current ARMM regional leadership that has just started its term of office is in a good position to establish such a thematic legacy for ARMM. It can be a platform to showcase ARMM’s vision of development and progress.

It will likewise promote better accountability among all stakeholders. This definitive agenda will have to be developed and adopted as well as monitored and assessed.

5.3 Sustaining Mechanisms While the recommendations discussed earlier seek to enhance ARG’s fiscal position and capabilities, measures must also be undertaken to ensure sustainability. This will provide policy stability and consistency that will enhance the chances of successfully pursuing ARMM’s development goals over the medium and long term.

5.3.1 Maintain and Utilize the Fiscal Resource Inventory Database The fiscal inventory, developed by this project, provides an objective platform for analyzing the course of development in ARMM and exploring policy options to improve ARMM’s fiscal resource mobilization and utilization.

It is imperative that the database already established under the project be pursued and made part of the permanent records of ARMM. A continuing inventory would provide ARG with an appreciation of its current fiscal situation. Such database can also present a clear picture on funds utilization and can help develop benchmarks of effective utilization. These benchmarks can be periodically reviewed in terms of fund performance, and sufficiency. For instance, the database can easily identify how much fund can be conserved by devolving some of its functions to LGUs, and further rightsizing personnel complement of ARG.

Towards Strengthening the Fiscal Capabilities of ARMM

Thereafter, it can establish measures to see if funds are appropriately expended, and indicate the necessary levels of expenditures ( i.e. how much PS, MOOE and CO are really needed by particular agencies? How much productivity is expected for every expenditure?). There is also the collateral revenue benefit of every public expenditure in the ARMM. The compensation income, sales, service, contractor’s taxes, and such other potential revenue sources can actually be estimated and monitored using the database. Such information can render ARG more efficient in the administration of its fiscal resources. It can also enhance its revenue generation.

For this purpose, there is a need to enhance the capacity of the Regional Assembly, the Regional Planning and Development Office and the Regional Treasury not only in tracking the movement of funds from sources, but also the effectiveness of its utilization and the collateral benefit of the autonomous region in the expenditure of these funds.

5.3.2 Establish Fiscal Resource Multi-Stakeholders Monitoring Systems The fiscal viability of ARMM is in the interest of all ARMM and human development stakeholders – including ARG, government agencies, official development aid providers, development organizations and the general public. The fiscal resource inventory database provides a good starting point for stakeholders to interact. Stakeholders should also develop their respective monitoring systems and mechanisms. ARG, for one, can develop its own evaluation and monitoring system founded on its development and governance framework. National government can also develop its own monitoring system based on its particular interests. The same is also possible for ODA providers and civil society groups. The interface of such monitoring systems can provide interested parties with a more concrete appreciation of the fiscal situation of ARMM and generate more productive ideas on improving the same. Of course, a more efficient system would be one that is integrated and accessible to most stakeholders and to the general public.

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Towards Strengthening the Fiscal Capabilities of ARMM

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Conclusion

The funds that have been channeled to ARMM from 2001 to 2005 have not been insignificant. Given the resource constraints that the national government faced during the period, the budgetary allocations to the region, including those directly made to LGUs in ARMM, showed national government’s commitment in pursuing ARMM’s development agenda. Several measures however need to be undertaken to improve ARMM resource mobilization and utilization. Foremost of these are (a) improving the revenue generation efforts of ARG, (b) providing ARMM with greater control over the utilization of its resources and (c) enlisting the support of ARMM’s partners in the creation of an integrated development framework that can be supported by available resources.

Some specific recommendations have been advanced by this study. Others may have to be fleshed out in future research projects.

A Policy Paper

Towards Strengthening the Fiscal Capabilities of ARMM: a policy paper

Towards Strengthening the Fiscal Capabilities of ARMM