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State of Local Public Enterprises in the

I. Issues

The main objective of Republic Act 7160, otherwise known as he Local government Code
(LGC) of 1991, is local autonomy and self-reliance in all aspects of local governance and
administration. Collaterally, the code mandates the devolution and decentralization to local
government units (LGUs) certain functions and responsibilities undertaken by the national
government. The idea being that these together with the other local responsibilities can best be
carried out by the LGUs.

A major aspect of local administration that is expected to effectively attain autonomy and self-
reliance is in the delivery of public services, utilities and economic enterprises. The same code
grants powers and authority to LGUs to undertake necessary ways and means to carry out this

Public utilities and economic enterprises are commonly treated separately by the local
government units (LGUs), the latter being primarily concerned with markets, slaughterhouses
and bus terminals; the rest are utilities and services. For practical purposes these could be
collectively called local public enterprises (LPEs), which are enumerated in section 17 of the

A cursory assessment of the performance of the LGUs, after i5 years of the implementation of
the LGC, shows that there are many issues that have to be addressed regarding the LPEs.
However, this paper will focus on two major issues, especially with respect to local autonomy
and fiscal administration.

First, the LPEs have been traditionally considered political obligations and administrative
functions of the LGUs rather than investments for economic growth and development.
Second, they are part of the mainstream bureaucracy and operate subject to government
regulations and procedures.
These situations limit the capability and potential of the LPEs to be autonomous and self-reliant.

What then are the possible policy options and measures that the LGUs can adapt to achieve the
LGC objectives?

In the mid-eighties, there were attempts to make some LPEs (markets, bus terminals, water
supply, solid waste management) self-liquidating investments. Pioneered by the World Bank
(followed by ADB) funds were extended to LGUs as sub-loans by the national government. Cost
recovery schemes were devised to cover amortization, operations and maintenance. The loans
were guaranteed by the national government or by IRA intercept. Unfortunately, many LGUs
failed to completely implement the cost recovery schemes and ended up paying their loans from
IRA intercept or budgetary appropriations. Some might have been condoned by the NG.
Success stories of LGUs are not wanting. Bislig (Surigao del Sur), Bogo City (Cebu) and Bauan
(Batangas) experience rapid economic gtoeth and unprecedented increases in municipal revenues
from business fees and real property taxes brought about by their loans invested in lecal
economic enterprises. They were quite successful in their cost recovery schemes. There were
reports, however, that the profitable operations of the LPEs are not sustained. These need
confirmation, though.

Lessons learned from successes and failures of LPEs will serve as models and warning posts,
respectively in formulating and undertaking policies and measures for delivery of LPEs.

II. Implications of the Issues to the Country

Undoubtedly, efficient and effective delivery of LPEs will redound to the greater benefits of the
country. Dr. Alex Briliantes aptly pointed out in his policy paper, The efficiency and
effectiveness of local government units to deliver public services at the local level have a great
impact to human development outcomes and national economic growth.

Republic Act 2425 directs the LGUs to provide the minimum basic needs (MBN) of their
citizens. The Social Reform Agenda (SRA) defines MBN as the needs of Filipino family
pertaining to survival (food and nutrition, health, water and sanitation, clothing), security
(shelter, peace and order, public safety, income and livelihood) and its enabling needs (basic
education). Evidently, the MBN, especially the highlighted ones, can be provided adequately
through the public utilities and economic enterprises. This, of course, is easier said than done,
because of the proverbial constraint limited or lack of funds.

When the LGC was passed, more public services and responsibilities were devolved to the
LGUs, some of which are expensive to undertake, such as hospitals and primary health care,
public education, environmental management. Lately, solid waste sanitary dumpsite is added.
These devolved functions are capital intensive and are heavy burdens to the LGUs, financially
and administratively. They depend on budgetary appropriations for their administrative and
technical operations. Poor provinces and municipalities cannot afford to provide these basic
services which are the primary concerns of the MBN and the LGC. Rich provinces and
metropolitan cities may be able to operate them. Question is, for how long? More alarming than
budget constraints is the imminent exodus of technical and professional personnel doctors,
nurses, therapists, lab technicians, even teachers.

The LPEs are authorized to collect fees and charges to cover costs of administration and
operations. Unfortunately, almost all of them operate at a loss except for a few that is properly
managed, e.g., markets, bus terminals, water supply. Even these, in due time, will be unprofitable
and too costly to maintain.

They are always part of the regular annual budget, rather than as multi-year economic and
financial investments. Historical records show that 70-80% of LGUs annual appropriations go to
administrative and recurrent expenditures. The remaining 20% is competitively shared by capital
expenditure, economic investments, human resource development, and the surplus, if any, to
research and development.
Almost all of the existing economic enterprises are subsidized by local budget which are always
limited. Thus these LPEs are unsanitary, congested, fire hazards, poorly maintained conditions
that fall short of the required standards public health and safety. These are more evident in 4th
and lower class LGUs. For example, many have no legitimate slaughterhouses. Butchering is
done in a space near the market. Backyard butchering is common. While the required hygienic
and sanitary standards are high, ironically the allowable maximum user charges are quite low.
Even big cities and highly urbanized municipalities are having difficulties to sustain such
standards. And while cost of maintenance and prices of commodities are increasing, the user
charges and fees remain constant due to legal constraints and procedural compliance. It takes
time before the rates can be increased as it will go through the legislative mill and public
consultation, even through court proceedings. This constraint is true to all LPTs. The implication
is, these unhealthy conditions might lead to health problems of epidemic proportions requiring
national government actions.

The internal revenue allotment (IRA) has made the LGUs dependent on and subservient to the
central government. The national government can defer, reduce or regulate the IRA releases. The
IRA formula is inequitable and biased toward big and densely populated LGUs. The policy paper
of Director Erlito Pardo, Revisiting the IRA Formula substantially describes the defects and
inequities of the IRA. The small LGUs are victims of this inequity. Consequently, the delivery of
public services suffers the most. Meantime, economic development is stunted.

The rich and highly developed LGUs will enjoy the superfluous benefits from the defective IRA
formula. The poor and undeveloped LGUs, will become poorer and less capable to deliver the
basic services. Inevitably, this disparity and imbalanced economic growth of LGUs would lead to
urban pull-rural push syndrome, because of better services, job opportunities, good environment
and availability of social amenities in urban areas. While this situation might be good for the
urbanizing LGUs, in the sense that their IRA will grow big, this will lead to increasing demand
for public services accompanied by problems of flooding, housing, peace and order, traffic, solid
waste disposal, water supply, unemployment, urban blight. There will be rising criminalities,
drug trafficking`prostitution, moral decadence, sex abuse. These are actually being experienced
now by the highly urbanized and metropolitan LGUs. The problems may become so acute that
adequate solutions might need central government intervention at prohibitive cost

These negative and adverse impacts to the country, in general, and the LGUs in particular, are
too close for comfort. Unless given attention soon, these will grow to magnitudes too difficult
and costly to handle. The LGUs, rich and poor, will be hit hard by these negative impacts. While
the poor LGUs may become poorer because of the rural push, the severity of socio-economic
problems and administrative shortcomings will be a reat burden on cities and urban LGUs,
because of the urban pull.

III. Policy Options

Various policy options are available to LGUs and national government to effectively address the
issues. Most of them are immediately and easily doable. The LGUs have adequate authority and
power under LGC and MBN/SRA to execute these policies.
A.Primary Policy Options

The underlying consideration in coming up with major policy options are twofold, first, that
LPEs should be treated as financial investments rather than mere public service and secondly, as
investments, they should be engine and propellant of economic growth rather than just political
obligation and administrative responsibility.

Option 1 Unarguably, the LGC mandates the delivery of public services, or LPEs, as a political
commitment and primary governmental functions of LGUs. The same code, however,
emphasizes that carrying out these functions should enhance autonomy and self-reliance in local
governance and fiscal administration as envisioned by the LGC, There is a need, therefore, to
exercise the authority and power of LGU as a corporation under sections 15 and 22 of the Local
Government Code to achieve this goal. Economic enterprises shoull be incorporated as stock
corporations; shares are open to public and private investors. The LGU could be the majority
holder; or majority owned by private sector.

Option 2 Privatization as authorized in sections 3, 17 & 18, LGC

Full Privatization profitable LPEs, i.e., markets, water supply, bus/transport terminals,
slaughterhouses, solid waste management, post harvest facilities, hospitals/primary health care
and whatnot.
Partial privatization sale, lease, rent facilities, structures, and lands to private investors; sale,
lease, contract management to private groups.
Semi-privatization - economic enterprises as cooperatives, e.g., market vendors cooperative,
water supply distribution, post harvest facilities.

Option 3 Activate and put into operation inter-local government cooperation (ILGC). The inter-
local government cooperation and resource sharing authorized in the LGC have been inoperative
and remain untapped. It appears no effort has been made to draft memorandum of agreement or
operating procedures and mechanics to activate this powerful tool for especially in districting of
services and LPEs. regardless of political or legal jurisdictions. For example, water supply
system, school, hospital and primary health centers, servicing residents of two or three
contiguous barangays of different municipalities or provinces.

B.Institutional Options/Measures

1.Detach the LPEs from the mainstream bureaucracy, i.e., separate units with own accounting,
auditing, administrative system. Being part of the local government bureaucracy cramps and
impedes the capacity and capability of the LPEs as propellant of economic growth.
Corresponding legislation would be needed to ensure that the revenues generated shall accrue to
the LPEs without passing through the general fund.

2.The potentials of the Leagues of LGUs have not been fully tapped. There is a need however, to
strengthen and empower them as more of socio-economic institutions with a bit of corporate
functions and authority to raise its own revenues and not to rely solely on LGU contributions. Dr.
Gaudioso Sosmena in his paper Functionality of the Leagues: An Analytical Framework
presents interesting recommendations to improve operations of the LGU leagues, especially as
effective means for inter-local government sharing of resources.

3.Operating system shift delivery of basic services by district rather than by political
jurisdictions The present practice of delivery of basic services and LPEs is by municipalities,
provinces and cities servicing only their respective constituents. The most practical and efficient
way of delivery of services is to put up trans-municipal district schools, district health care
centers, and the like.

C.Local Options/Measures

4.Deregulate fees and user charges make the rates flexible rather than rigid; let the market
forces dictate the rates

5.The present set-up and practices on public utilities, services and economic enterprises need to
be restructured. Since time immemorial, local economic enterprises are limited to public
markets, slaughterhouses and bus terminals. Under the LGC, the scope of economic enterprises
can be expanded to include the public utilities and services listed in section 17. earlier
collectively called LPEs. These can be grouped into 3 categories.

Type A: Economic Enterprise those that operate as real business establishments and generate
revenues at a profit, i.e., markets, bus terminals, slaughterhouse, water supply, post-harvest
facilities, electric distribution and the like.

Type B: Pseudo-Economic Enterprise those that are partly subsidized by LGU budget and can
collect user charges, such as, public cemeteries, fish landing, sports facilities, hospitals/health
centers, livestock trading/fattening centers. Some of these LPEs may generate revenues on a
break-even basis, but if there is net profit, then the LPE becomes an Economic Enterprise.

Type C: Free Public Enterprise those that are provided to the public free of charge, such as,
parks and playgrounds, educational facilities, libraries, museums, tertiary heath center and lying-
in (delivery) center. Some of them, may to a certain extent, be operated as pseudo-economic
enterprises, that is, collect token charges, like libraries, museums, etc

6.Similarly, shift from supply-driven to demand-driven delivery of services, i.e. provide services
where and when needed.

IV. Summary and Overall Analysis of the Issues and Policy Option

The two issues raised in this paper are not difficult to resolve. Infact, theyre more apparent than
real. This is because the policy options are available in the form of legal mandates and authority
ready for execution at the beck and call of the LGUs. They are easy to transform into actions. In
fact a number of them are immediately doable. So what are the next steps/

Option 1 is a must and top priority. All LGUs rich and poor are entitled to exercise this option, of
coursae, in varying degree or magnitude. Also not all LPEs can or need to be corporatized.
Similarly, option 2, privatization is good alternative or supplement to option 1. For some LGUs
and particular types of LPEs this may even be the most appropriate choice.

In both cases, there is a need to conduct a seminar on salient features and viability of both

Option 3 can be immediately implemented without tedious preparations. The LGUs, through the
Leagues or ULAP can form a technical working gro8up to draft the mechanics and operating
details of inter-governmental cooperation and sharing of resources. This option will benefit most
the poor LGUs.

On the institutional and local levels, options 2, 3, 4, and 5 should given immediate attention.
These can be readily implemented. These will then solve substantially the issues and problems
presented above while the major policy options I and 2 go through lengthy process of

V. Potential Users of the Policy Paper

Local Government Elected Officials

Department of Interior and Local Government
Leagues of Local Government Units
Private Investors/Business Sector
National legislative bodies
Regional Authorities
Peoples Organizations, e.g., Market Vendors Association


Brillantes, A. Strengthening Devolution through Meaningful Financial Decentralization:

Improving Fiscal Transfers to LGUs, Local Government Development Foundation and Konrad
Adenauer Stiftung, 2005

Guilliermo, M. Community Empowerment and Local Governance, Local Government

Development Foundation and Konrad Adnauer Stiftun, 2005

Pardo, E. Revisiting the IRA Formula: In support of Local Autonomy, Local Development
Foundation and Konrad Adenaer Stiftung, 2005

RA 7160 The Local Government Code of 1991: General Primer, 1992

Sosmena, G. Functionality of the Leagues: An Analytical Framework. (A Recommended

Framework for the LeaguesSelf-Assessment), Local Government Development Foundation and
Konrad Adenauer Stifftung, 2005
Sosmena, G. Introductory Paper Public Policy Analysis: What and Why, Local Government
Development Foundation and Konrad Adenauer Stiftung, 2005

Published: 2007-03-17
Author: Apolo Jucaban
About the author or the publisher
Filipino, male, married,2 children, two grandsons.Education: A.B. English,in Literature; B.S.
Geology; Master in Environmental Planning all taken from the University of the Phillipines post-
graduate in Groundwater Development, Hebrew University, Jerusalem, Israel.
Profession: More than 15 years in the government as project manager/director; about 25 years in
as consultant,local & foreign assignments. Have various unpublished & published papers,
technical reports, seminar papers