D E V E L O P E D B Y : P U P C S S D D E PA R T M E N T O F E C O N O M I C S

PART A
INTRODUCTION
Learning Outcomes
This chapter discusses the meaning and importance of public finance, fiscal functions, and interaction
of public and private sectors. At the end of the chapter, the students will be able to define public
economics and public finance, demonstrate awareness on and appreciation of the functions of the
government for the provision of public goods and services by the respective sectors, explain how the
government manages to stabilize the economy through its policy instruments, and discuss the types and
arrangement between one or more public and private sectors.

Definition 4. And finally, why do governments choose to

Public economics is the study of government
policy focused on economic efficiency and
equity. It provides a framework for studying if
the government should be involved in the market
economy and the extent of its role. It also deals
on the study how government policies affect
the economy and how policies are designed to
maximize welfare through provisions of public
goods and services.
Public finance on the other hand, is the study
of the role of the government in the economy.
It is the branch of economics that assesses the
revenue and expenditure of the government and
the adjustment of one or the other to achieve
positive effects and avoid the negative ones.
Public finance looks into the threefold functions of
the government namely, 1) efficient allocation of
available resources, 2) the distribution of income
among citizens and 3) the stability of the economy.
According to Economist Jonathan Gruber, the
framework to assess the broad field of public
finance covers the following four central questions:
intervene in the way that they do? This question
is centrally concerned with the study of political
economy, theorizing how governments make public
policy.
Along this framework, the study of public
economics broadly covers how the government will
use the limited resources efficiently and equitably
within the purview of how it will perform its
functions using its policy measures. These policies
are aimed to stabilize the economy and ensure the
welfare of the people through the participation of
all stakeholders and institutions in the society both
in the public and private sectors.
The public sector is a specific part of the national
economy composed of the institutions and
organizations that are in whole or in part funded
by public funds and are connected with the fiscal
system. Other specific characteristics include their
ownership, management system, provision of
public goods to the people. The public sector fills
the gap unoccupied, for various reasons, by private
companies within their business activities.

1. When should the government intervene in
the economy? To which there are two central
motivations for government intervention: market
failure and redistribution of income and wealth.
2. How might the government intervene? Once the
decision is made to intervene the government must
choose the specific tool or policy choice to carry
out the intervention (for example public provision,
taxation, or subsidization).
3. What is the effect of those interventions on
economic outcomes? A question to assess the
empirical direct and indirect effects of specific
government intervention.
On the other hand, the private sector is the
segment of a national economy that is owned,
controlled, and managed by private individuals
or enterprises. A private sector organization is
created by forming a new enterprise or privatizing
a public sector organization. A large private sector
corporation may be privately or publicly traded.
The public and private sectors permanently
influence each other with respect to both size and
activity. The state strongly influences the private
sector through various public-private partnership.
The Government Sector
According to Abraham Lincoln, “government is
of the people, by the people, and for the people”.

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 I N S T R U C T I O N A L M AT E R I A L F O R P U B L I C E C O N O M I C S
The prime duty of the government is to serve and
protect the people. The power of the government
emanates from the people. The people put into
office who will govern the government and look
after the people. Public office is a public trust.
Hence, every institution in all branches and levels
of government is accountable for the resources
including revenues from taxation that they have
to spend for the people in the provision of public
goods.
In a mixed economy, the government is part of the
public sector together with all publicly controlled
or publicly funded agencies, enterprises, and other
entities that deliver public programs, goods, or
services. In order for the government to be able
to exercise its mandate, it has to perform three
major fiscal functions, namely: resource allocation,
resource distribution, and stabilization.
Government resources are generated from a)
taxation, b) sale of government assets, c) income
from operations of government agencies and
government owned and controlled corporations,
d) grants and aids and, e) borrowings. The grants
and aid may come bilateral (from one country to
another country) or multilateral (from institutions
with many member countries to recipient country)
as well as domestic or foreign sources. In case of
deficit budget, the government may source needed
financing for implementation of policies, programs
and projects through borrowings which may come
from domestic or foreign borrowings from bilateral
or multilateral sources.
Restrictive measures. One of its control tools
is public finance. Therefore, the public finance
measures must be analyzed and examined,
including how this impact the private sector.
When the government intervenes and takes action
within the economy, the outcomes are classified
into one of three categories: economic efficiency,
distribution of income or macroeconomic
stabilization. These three are the functions of the
government.
Functions of Government
Three functions of Government:
1. Resource Allocation
The allocation function involves government tax
and expenditure policies which are concerned with
influencing the provision of goods and services
in the economy. The government provides certain
public goods and services which the private sector
fails to provide because there exists no market for
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them. The government can allocate resources by
rationing, by provision of funds for their purchase
by others, or by direct expenditure on their own
account.
Resources are channeled by the government for
the provision of public goods and services into five
sectoral allocations namely:
a. Social services sector including health, nutrition,
education, social welfare
b. Economic services sector including agriculture,
tourism, transportation, energy
c. General public services for running the
operations of the government
d. Defense for national security and maintenance
of peace and order
e. Debt servicing of government borrowings
In the case of the Philippine, the resources
appropriated by Congress for expenditures for
2020 involves Php 4.1 Trillion proposed budget
allocated to the following by sector: (DBM, 2019)
Social Services PhP 1,525.2 B (37.2%)
Economic Services PhP 1,183.7 B (28.9%)
General Public Services PhP 734.5 B (18.0%)
Debt Burden PhP 461.0 B (11.2%)
(includes net lending)
Defense Php 195.6 B (4.8%)
The provision of public goods and services along
the five sectoral allocation for the citizens is lodged
to the responsible implementing agencies of the
government and among them are the following
top ten Departments to implement the program
interventions.
1. Department of Education (including SUCs, CHED,
TESDA) PhP 673.0 B
2. Department of Public Works and Highways
(DPWH) PhP 534.3 B
3. Department of the Interior and Local
Government (DILG) PhP 238.0 B
4. Department of Social Welfare and Development
(DWSD) PhP 195.0 B
5. Department of National Defense (DND) PhP
189.0 B
6. Department of Health (DOH) PhP 166.5 B
7. Department of Transportation (DOTr) PhP 147.0
B
8. Department of Agriculture (DA) Php 56.8 B
9. The Judiciary PhP 38.7 B
10. Department of Environment and Natural
Resources (DENR) PhP 26.4 B
 D E V E L O P E D B Y : P U P C S S D D E PA R T M E N T O F E C O N O M I C S
The yearly budget is appropriated by law under
the annual General Appropriations Act. Any
government expenditure that is not covered
by the GAA is not allowable. Hence, in case of
emergencies such as the COVID 19 pandemic,
normative economics dictated realignment of
the budget as it necessary to prioritize the health
security of the people. “Bayanihan to Heal as One
Act” was enacted on March 23, 2020 to “authorize
the President to exercise powers necessary to
carry out urgent measures to meet the current
national emergency related to COVID-19 only for
three months unless extended by Congress.”
The act allowed President Duterte to “reallocate,
realign, and reprogram” a budget of almost ₱275
billion ($5.37 billion) from the estimated ₱438
billion ($8.55 billion) national budget approved for
2020, in response to the pandemic, enable him
to “temporarily take over or direct the operations”
of public utilities and privately owned health
facilities and other necessary facilities “when the
public interest so requires” for quarantine, the
accommodation of health professionals, and the
distribution and storage of medical relief; and
“facilitate and streamline” the accreditation of
testing kits.
2. Resource Distribution
Government policies on taxation and expenditures
are aimed at equitable distribution of income.
The government transfer payments from one
citizen to other through taxation policy. Those with
higher income are paying higher taxes through
progressive income taxation policy. These taxes
can be on income, goods and services purchased,
or property owned. Businesses also pay these
taxes through the payroll of their employees and
the sale of their goods. The government spends
and redistribute the income for social sector
initiatives for the poor and vulnerable sector of
the population, the old age and individuals who do
not have any source of earnings. Redistribution of
income may take in two forms:
a. Income support in the form of monetary
payments like unemployment benefits, social
security payments and conditional cash transfer
program such as the 4Ps (Pantawid Pamilyang
Pilipino Program) which provide cash assistance
for health, nutrition and education services subject
to compliance to conditions set by the program.
Social pension to Senior Citizens and Persons with
Disabilities are also provided by the government for
those who do not receive social security pensions
as benefit from contributions when they were still
active in the labor force.
With the current COVID 19 pandemic, income
support was provided for unemployment benefits
covered by the Social Amelioration Program that
provided cash assistance to individuals affected
by lockdown of businesses during the Enhanced
Community Quarantine period.
b. Redistribution in-kind which involves public
provision of goods and services such as health
care, education, housing, and food for certain
individuals and families. An example of programs
implemented in the past was the Accelerated
Hunger Mitigation Program in 2005-2008 where 1
kilo of rice everyday was given to families through
the school child in public elementary schools in
54 targeted priority provinces and in the National
Capital Region. Supplemental Feeding Programs
in Day Care Center and vaccines and medicines in
barangay health centers are provided by the Local
Government Units. During the current COVID 19
pandemic, grocery packs are being distributed to
families during the ECQ period.
3. Stabilization
The stabilization function of the government is
to maintain a steady pace of economic growth
and to stabilize prices. The policy measures for
stabilization involve fiscal policies and monetary
policies. Fiscal policy uses government spending
and tax policies to influence macroeconomic
conditions, including aggregate demand,
employment, and inflation. These policies may
have expansionary or contractionary effects in the
economy.
For example, an expansionary fiscal policy in the
form of tax cuts is imposed by the government.
When there is a tax cut like in personal income
tax, the disposable income increases that leads to
increased consumption and reduces government
spending. Hence, aggregate demand shifts to the
right. Contractionary fiscal policy does the reverse.
It decreases the level of aggregate demand by
decreasing consumption.
On monetary policy, the Bangko Sentral ng Pilipinas
is mandated to be responsible in ensuring price
stability and the management of money supply in
the economy. The monetary policy instruments
either to contract or expand the money supply in
the economy include 1) reserve requirements, 2)
rediscounting, and 3) open market operations.
The contractionary and expansionary monetary
policy instruments work the same way as the fiscal
policy contractionary and expansionary measures
affecting aggregate demand and the general level
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of prices. For example, policies to increase interest

rates and slowing the growth of money supply
is a contractionary monetary policy. This action
will bring down inflation. This can slow economic
growth and increase unemployment, but is often
required to tame inflation

Effect of Contractionary and

Expansionary Policy to Macroeconomics
Indicators

Expansionary monetary policy works by expanding

the money supply faster than usual or lowering
short-term interest rates. Monetary and fiscal
policies may work in tandem in order to expand the
activities of the economy. If the government needs
funds to finance government projects but lacks
the necessary revenues, it may resort to domestic
borrowings through the open market operations
by selling treasury bills and treasury bonds. This
policy measure will contract money supply by
crowding out private investment and expand
government expenditures.
To ensure price stability is a two-pronged approach
to address the causes of inflation. The demand
side could be addressed by monetary policy by
contracting the supply of money while the supply
side could be addressed by fiscal policy through
expansionary measure of providing subsidy to
producers to lower the cost of production.

STUDENT EXERCISE / ASSESSMENT

Exercise. Identification.
Indicate to which sectoral allocation the following services belong to. Use ES (Economic Sector), SS
(Social Services), GPS (General Public Services), ND (National Defense), DS (Debt Servicing)

__________ 1. Expanded Immunization Program

___________2. Development of Instructional Materials for Offline Learning Modality
___________3. Build, Build, Build Program
___________4. Credit Assistance for Farmers Cooperatives
___________5. E-Jeepney Modernization
___________6. Construction/Rehabilitation of bridges
___________7. Housing and Community Development
___________8. Irrigation Support to Farmers
___________10. Pantawid Pamilya Pilipino Program (4Ps)
___________11. Conduct of Monitoring and Evaluation of Local Level Plan Implementation
___________12. COVID 19 Health Protocol Campaign
___________13. Alternative Energy Development Project
___________14. Procurement of PPE for health frontliners
___________15. Supplemental Feeding for Day Care Center Children

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Interaction of Public and Private Sectors
The private sector is the part of the economy
that is run by individuals and companies for profit
and is not state controlled. The public sector is
composed of companies and corporations that
are government run. While the provision of public
goods and services is the responsibility of the
government, production is done by the private
sector.
Public goods are goods that are both non-
excludable and non-rivalrous, in that individuals
cannot be excluded from use or could benefit
from without paying for it, and where use by one
individual. In contrast, a private good is a product
that must be purchased to be consumed, and
consumption by one individual prevents another
individual from consuming it. A private good is
considered as rivalrous and excludable. Examples
of public goods are street lights, flood control
systems while private goods are those that are
bought in the market system with a price. Since
the government does not produce the public
goods by itself, partnership with the private sector
is undertaken under different modalities and
arrangements.
Public Private Partnership
Public-Private Partnership (PPP) can be broadly
defined as a contractual agreement between the
government and a private firm targeted towards
financing, designing, implementing and operating
infrastructure facilities and services that were
traditionally provided by the public sector. It
embodies optimal risk allocation between the
parties – minimizing cost while realizing project
developmental objectives. Thus, the project is to
be structured in such a way that the private sector
gets a reasonable rate of return on its investment.
PPP offers monetary and non-monetary
advantages for the public sector. It addresses the
limited funding resources for local infrastructure or
development projects of the public sector thereby
allowing the allocation of public funds for other
local priorities. It is a mechanism to distribute
project risks to both public and private sector.
PPP is geared for both sectors to gain improved
efficiency and project implementation processes in
delivering services to the public. Most importantly,
PPP emphasizes various elements such as Value
for Money – focusing on reduced costs, better
risk allocation, faster implementation, improved
services and possible generation of additional
revenue.
Depending on the cost of the PPP project as
integrated in the Philippine Investment Plan and
the Philippine Development Plan, the Public-Private
Partnership Center follows the Process Framework
for PPP project according to the different
modalities. The process is in synchrony with the
annual budget preparation process as well as the
NEDA-ICC Guidelines.
General Forms of PPP
There are two common forms of PPP structure,
namely: availability and concession-based PPPs.
These could be distinguished from each other
based on what the public or private parties assume
within the partnership, e.g. rights, obligations, and
risks.
1. Availability PPP
A form of PPP wherein the public authority
contracts with a private sector entity to provide
a public good, service or product at a constant
capacity to the implementing agency (IA) for a
given fee (capacity fee) and a separate charge for
usage of the public good, product or service (usage
fee). Fees or tariffs are regulated by contract to
provide for recovery of debt service, fixed costs of
operation and a return on equity.
While there are no usage fees in this project, an
example is the PPP for School Infrastructure
Project (PSIP) Phase I wherein the private sector
is responsible for making available classrooms
(consisting of design, financing, construction
and maintenance) for a contract fee with the
Department of Education (DepEd).
2. Concession PPP
A form of PPP wherein the government grants the
private sector the right to build, operate and charge
public users of the public good, infrastructure or
service, a fee or tariff which is regulated by public
regulators and the concession contract. Tariffs are
structured to provide for recovery of debt service,
fixed costs of operation, and return on equity.
An example of a concession PPP is the Ninoy
Aquino International Airport (NAIA) Expressway
(Phase II) wherein the Department of Public Works
and Highways (DPWH) granted the private sector
the right to build and operate the expressway.
Under the contract, the private sector was given the
right to collect a toll (user charge) from the users
of the expressway.
PPP Contractual Arrangements
There are various PPP contractual arrangements
reflecting how risks are shared and the roles
between the government and the private
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The path every PPP Project takes

The Philippines established its own Public-Private Partnership (PPP) Center to facilitate all projects under the PPP
framework. Each project undergoes four (4) stages: development, approval, competition, and cooperation. Source:
https://ppp.gov.ph/wp-content/uploads/2015/02/PPP-Project-Cycle-Infographic.jpg

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proponent. Build-operate-and-transfer (BOT) arrangement is approved by the President. Other

projects and its other variants can be structured as
either a concession or availability agreement.
Partnership between the government and private
sector for infrastructure and development projects
can be made possible through a broad spectrum
of modalities. The following are the contractual
arrangements which may be undertaken under
the amended Philippine BOT Law and its Revised
Implementing Rules and Regulation:
contractual modes recognized as PPPs are
concession and management contracts.
Advantages of PPP
In general, governments tap public-private
partnership (PPP) for the following reasons:
1. PPPs encourage the injection of private sector
capital.

• Build-and-transfer (BT) National Budget and official development

• Build-lease-and-transfer (BLT)
• Build-operate-and-transfer (BOT)
• Build-own-and-operate (BOO)
• Build-transfer-and-operate (BTO)
• Contract-add-and-operate (CAO)
• Develop-operate-and-transfer (DOT)
• Rehabilitate-operate-and-transfer (ROT)
• Rehabilitate-own-and-operate (ROO)
The enumeration of contractual arrangements
in the BOT Law is not exhaustive. Other forms
of contractual arrangements may qualify as
a PPP under the BOT Law, provided that such
of assistance are limited and are subject to
government prioritization. Private sector funding,
on the other hand, is readily available. It may be
tapped to augment ODA funds and the government
budget to implement critical government projects.
In the case of big ticket infrastructure projects,
PPPs utilize the financial capital of the private
sector. Through it, project construction and
service delivery is accelerated. For example, the
NAIA Expressway Phase II project will be financed
through private sector funding. On top of this, the
government has received an upfront payment of

Spectrum of Private Sector Participation in Infrastructure and Development Projects

Depending on the cost of the PPP project as integrated in the Philippine Investment Plan and the Philippine
Development Plan, the Public-Private Partnership Center follows the Process Framework for PPP project according
to the different modalities. The process is in synchrony with the annual budget preparation process as well as the
NEDA-ICC Guidelines. Source: https://ppp.gov.ph/wp-content/uploads/2015/01/What-is-PPP_Spectrum-of-Private-
Sector-Participation-in-Infrastructure-and-Development-Projects-768x459.jpg

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11 billion pesos even before the actual project
construction.
2. PPPs make projects affordable.
Government spending will be less if the project
is undertaken as a PPP, since the private sector
funds their share of the project (including operation
and maintenance) during the duration of the
concession. PPP projects consider the whole of life
costing approach (whole lifecycle costing) which
ultimately lowers capital and operating costs.
All PPP projects undergo a competitive, transparent
bidding. PPP project proponents usually provide
the most cost-effective capital goods necessary
for the project.
3. PPPs deliver value for money.
Value for money (VfM) is achieved when the
government obtains the maximum benefit from the
goods and services it both acquires and provides.
It is the best available outcome after taking into
account all the benefits, costs, and risks over the
entire project life, which may not necessarily be the
lowest cost or price.
For the PPP for School Infrastructure Project
(PSIP) Phase 1, the PPP scheme was identified
as the most optimal financing option available for
the government to address the current classroom
backlog in the country. Under this scheme, the
government will be able to deliver the needed
classrooms in the shortest time possible.
4. In PPPs, each risk is allocated to the party who
can best manage or absorb it.
In PPPs, risks are assumed by the party that is best
able to manage and assume the consequences of
the risk involved.
PPPs enable the government to take on fewer
risks due to shared risk allocation. Generally, the
private sector takes on the project’s life cycle cost
risk, while the government assumes site risks,
legislative and government policy risks, among
others.
5. PPPs force the public sector to focus on outputs
and benefits from the start.
Project preparation activities are more rigorous in
public-private partnerships. This ensures that the
project is highly bankable and can stand public
scrutiny. Better project preparation and execution
will result in adherence to project design within the
agreed timelines.
In PPPs, the government focuses on providing
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quality infrastructure and services by setting each
project’s minimum performance standards and
specifications (MPSS).
6. With PPPs, the quality of service has to
be maintained for the entire duration of the
cooperation period.
In PPPs, project execution will be more rigorous
as project ownership belongs to the project
proponents. The public sector only pays when
services are delivered satisfactorily.
During the implementation stage, an independent
consultant is hired to ensure that both public and
private parties adhere to the terms of the contract/
concession agreement. This is true in the case of
projects presently undergoing construction—the
PSIP Phase 1 and the Daang Hari- SLEX Link Road
project.
7. PPPs encourage innovation.
PPPs maximize the use of private sector skills. It
utilizes higher levels of private sector efficiency,
specialization, and technology.
In the case of the PSIP and the Daang Hari-SLEX
Link Road projects, private proponents were given
flexibility in coming up with the project design
that is most efficient, taking into consideration the
MPSS set by the government.
Solicited proposal
A solicited proposal refers to projects identified
by the implementing agency (IA) from the list of
their priority projects. In a solicited proposal, the
IA formally solicits the submission of bids from
the public. The solicitation is done through the
publication of an invitation for interested bidders to
submit bids, and selection of the private proponent
is done through a public competitive process.
Unsolicited proposal
In an unsolicited proposal, the private sector
project proponent submits a project proposal
to an IA without a formal solicitation from the
government. An unsolicited proposal may be
accepted for consideration and evaluation by
the IA, provided it complies with the following
conditions:
1. It involves a new concept or technology and/
or it is not part of the list of priority projects in the
Philippine Investment Program (PIP) [Medium Term
Public Investment Program, Comprehensive and
Integrated Infrastructure Program (CIIP)] and the
Provincial/Local Investment Plans;
 D E V E L O P E D B Y : P U P C S S D D E PA R T M E N T O F E C O N O M I C S

2. It does not include a Direct Government

Guarantee, Equity or Subsidy; 4. After successful negotiation, proceed to
publication and request for competitive proposals
3. It has to go to ICC for the determination of according to Swiss Challenge Rules.
reasonable Financial Internal Rate of Return
(FIRR) and approval to negotiate with the Original
Proponent; and

Mactan Cebu International Airport

One of the successful PPP projects is the renovation of the Terminal 2 of Mactan-Cebu International Airport.
GMR-Megawide Cebu Airport Corporation (GMCAC), a private-public partnership between the GMR Group of India
and the Megawide Construction Corporation, facilitated the project. Photo Source: https://www.sunstar.com.ph/
article/417495/Local-News/Mactan-Cebu-International-Airport-your-gateway-to-the-world

Read more about PPPs in this 2018 Report: https://ppp.gov.ph/wp-content/uploads/2019/09/PPPC_REP_-Annual-

Report-2018.pdf

STUDENT EXERCISE / ASSESSMENT

Exercise. Assess Existing PPP Projects in the Philippines
• Choose an existing infrastructure project from the Medium-Term Philippine Investment Plan and
assess what kind of PPP modality it is categorized.

• Read about the related legal and regulatory framework that govern the PPP undertakings in the
Philippines and track the historical background that led to the establishment of the PPP Center as well
as its functions.

• For more information about PPP in the Philippines, you may visit this website: https://ppp.gov.ph

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