The increase in internal revenue allotment (IRA) allocations to local governments next year represents a significant risk to local development if not managed properly, a report released by the World Bank said.
According to the Philippine Economic Update released earlier this week, the Mandanas ruling, which will raise IRA transfers to local government units (LGUs), has prompted the national government to revisit its approach towards decentralization and paves the way for the country to address long-standing structural challenges which have limited the full potential of decentralization.
“However, while the Mandanas ruling provides an opportunity to strengthen decentralization, a poorly managed implementation of the Mandanas ruling represents a significant risk to local development,” the report said, with the special chapter on the impact of the Mandanas ruling discussed in a virtual briefing yesterday.
“Local governments are likely to face issues on weak budget execution, while the transition towards re-devolution could lead to gaps in service delivery,” the report said.
The World Bank said overcoming these structural challenges while managing the transition towards increased decentralization requires several short- and long-term policy recommendations focused on building capacity, improving horizontal equity through strong fiscal equalization, and improving transparency and accountability.
The World Bank said as a result of the Mandanas Ruling by the Supreme Court, the IRA is programmed to increase by 55 percent in the 2022 budget, reaching P1.08 trillion or 4.8 percent of the country’s gross domestic product (GDP) compared to 3.5 percent of GDP in 2021.
Albay Rep. Joey Salceda, who was present at yesterday’s event, said LGUs would have received P848.88 billion next year if not for the Mandanas ruling, thus the higher IRA shares would result in a 27.61 percent increase from the said figure.
“We look at the implementation of the Mandanas Ruling not just as a transfer of resources but an opportunity to strengthen decentralization and improve social service delivery in the Philippines,” said Ndiame Diop, World Bank country director from Brunei, Malaysia, Philippines and Thailand.
“If this ruling leads to better coordination in planning and implementation across levels of government, taking into account the capacity and needs of LGUs, it could improve the lives of people and communities especially those that are far from the country’s economic growth centers,” he added.
Diop said decentralization encourages prompt responses and better matching of government services to local needs.
To lessen the fiscal impact of having to transfer more financial resources to LGUs, the World Bank said the national government has started to identify spending responsibilities for select devolved mandates to be transferred back to local government. But it said some local governments have started to raise concerns regarding their financial and technical capacity to absorb re-devolved mandates, while maintaining full autonomy in planning and managing the additional resources from the Mandanas ruling.
Underspending by local governments may worsen, as many LGUs do not have the capacity to absorb a significant increase in revenues, the World Bank said.
“As a result, the government faces a significant risk that the transition process could lead to a large gap in service delivery, as a lack of coordination between the national and local government and weak implementation capacity could delay the transition towards increased decentralization,” the Washington-based agency said.
Kevin Cruz, World Bank economist, said addressing weaknesses in planning and coordination is a first step towards managing the transition and improving decentralization.
“The national government should clearly define re-devolved functions and communicate these clearly to both national government agencies and local government units. The authorities need to ensure the development goals of the national government and local governments are well-aligned, and that service delivery gaps are minimized, particularly during this unprecedented crisis,” Cruz said.
“This will require the national government and local government units to review the division of labor between national government agencies and local government units in re-devolving functions, while keeping fiscal and absorptive capacity in mind,” he added.
Mercedita Sombilla, National Economic and Development Authority undersecretary, who delivered the keynote address during the briefing, said while the government is still reeling from the huge expenses for COVID-19, the already limited fiscal space of the national government will become even tighter starting in 2022.
“To manage the fiscal impact of the Supreme Court ruling, the government will implement a full devolution policy through Executive Order No.138 series of 2021 which was signed recently by the President. Full devolution entails that the LGUs shall be primarily responsible for the delivery of services and performance of functions devolved under Section 17 of the Local Government Code and other relevant laws,” Sombilla said.
“The national government, on the other hand, will assume more strategic and steering functions to address persistent development issues as it discontinues implementing programs on the devolved functions and services,” she added.
“On the part of the LGUs, cohesive development plans, and multi-year investment and budget programming are critical. These must take into account the expected lower national tax allotment for LGUs in 2023 (because the base year will include the 2022 which is really down) resulting from the large drop in national revenues in 2020 as a result of the pandemic,” Sombilla said.
Meanwhile, Salceda said the impact on the economy is modestly negative in the short- to medium-term due to loss of scale, as the Mandanas ruling accounts for 20 percent of the current capital outlay.
“There will be lower fiscal space for capital expenditure on spatial convergence. It will reduce national government capital outlays, therefore it is negative for capital formation,” Salceda said.
“(There will be) lower national government borrowing space due to reduced primary surplus. LGUs can borrow, but they cannot go into deficit under the current rules. They can borrow, but they cannot borrow from ODA (official development assistance),” he added.
