State of Local Public Enterprises in the Philippines

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 mandate.

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 LGC.

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 options.

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 materialization.

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

References

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