Fiscal and Monetary Policies

FISCAL AND
MONETARY POLICIES
AS CONTRAINTS TO
DEVELOPMENT
(LEONOR MAGTOLIS BRIONES)
Fiscal and Monetary Policies:
A Clarification
While the phrase “fiscal and monetary policy” is commonly used as a single concept, it actually refers to
different aspects of economic policy which have different but related impacts.
Public finance refers to the income and outgo of governments in the pursuit of national objectives. It
involves the inflow of financial resources in the form of taxes and other revenues, and the outflow of
such resources in the form of expenditure to finance goods and services.
The public finance cycle involves a five-step process:
1. The formulation of fiscal policy*;
2. The generation of revenue from taxation and other sources;
3. The expenditure of funds through the national budget;
4. Public borrowings;
5. Accountability
It is recognized that these processes have effects on the economy which can either constrain or
accelerate development.
*Fiscal policy – is understood to mean the mix of policies on taxation and other revenue, expenditure,
and borrowing, which is intended to promote the stabilization and development of the economy.
A Clarification
The national budget embodies the development goals of the
country. It explains how these goals can be attained through revenue
raising, spending, and borrowing activities of the government. The
national budget specifies the sources of revenue, including tax and
non-tax revenues, as well as proposed expenditure for government
programs and projects. The budget likewise indicates the level of
borrowing which is expected to close the gap between revenues and
expenditure. Thus, the budget articulates, in a very real sense, the
fiscal policies of a country like the Philippines.
Budget Process
A Clarification
On the other hand, monetary policy is generally understood to be that which
influences the level of money supply in the economy, again for the attainment of
economic and development objectives.
While fiscal and monetary policies are different from each other, they are
closely interrelated and need to be coordinated. This means that the attainment
of fiscal policy goals can be wiped out by monetary policy effects and vice versa.
Fiscal Policy as Constraint
If there is any policy area dominated by orthodox theories, it would be that of fiscal
policy. Much rethinking is necessary on government policies relating to taxes and
revenue, expenditure and borrowing.
Since the 1950s, fiscal and monetary policies have been crafted in response to
requirements of stabilization, and subsequently, in accordance with the structural
adjustment programs (SAPs) negotiated with the International Monetary fund (IMF).
Another major influence on fiscal policy is Presidential Decree No. 1177 (PD 1177)
which prescribes the budget process and provides for the automatic appropriation of,
among other things, the debt service. This decree, promulgated by the late President
Ferdinand E. Marcos during his autocratic regime, continues to dictate fiscal processes
even under the present democratic system.
Fiscal policies premised on these two major influences are the core objects of the
continuing opposition being waged by the Freedom from Debt Coalition (FDC).
Is the Debt Crisis Over?
The matter of debt, both domestic and external, and its management is a
major arena of debate not only in the Philippines, but also across the globe.
The government claims that the debt crisis is already over for the Philippines.
Economists, however, are careful to note that while it may be true that debt as a
foreign exchange problem is becoming manageable, debt as a critical part of a
fiscal crisis is far from resolved. The debt issue remains a fiscal policy problem, in
view of the fact that debt payments continue to be a terrible burden on the
budget.
The government cites the following as indicators that the country’s debt no
longer poses a problem:
1. Total debt stock as a percentage of the Gross National Product (GNP) and
as a percentage of exports has been reduced;
2. The share of concessional debt to total debt stock has increased;
3. Foreign exchange reserves have reached a comfortable level.
 The abovementioned indicators are the standard measures normally utilized
by institutional leaders, particularly the IMF, in assessing foreign debt. If the
numbers are favorable, it is assumed that debt is no longer a problem. This is the
orthodox view. However, this favorable picture does not reveal the festering sore
underneath the seemingly healthy sheen of debt management: the fiscal crisis.
Firstly, the ratios do not show the massive human and financial costs involved
in attaining the favorable numbers. The human cost of paying the debt in full is
too high. This is because economic and social development services are
sacrificed for debts, a good amount of which have been shown to be fraudulent
and non-productive.
Secondly, the process of paying the foreign debt in full has put pressure on the
domestic debt which has ballooned to unmanageable proportions. Heavy
domestic borrowing is resorted to in order to purchase dollars to service the
foreign debt. At present, debt service continues to wreak havoc on the budget
and throw development objectives into disarray. Even as the government claims
that the debt crisis is over, at least 30% of the budget is still allocated for debt
service. This explains why debt service is presently considered as more of a fiscal
crisis than a foreign exchange problem. We may have enough dollars to pay the
debt, thanks to remittances from overseas contract workers and heavy domestic
borrowings; but we have a budget with an unmanageable debt service
component which competes with and marginalize urgent development needs.
Finally, the persistence of the debt crisis is also seen when we consider the
country’s debt to Japan. International financial newspapers have been making
much out of the fact that the continuing strength of the yen vis-à-vis the US
dollar has the effect of pounding Asian debt to Japan with impunity.
Right now, Japan is our number one bilateral creditor. Nearly 70% of the total
official debt to of the country is owed to Japan. Philippine debt to Japan is
growing rapidly not so much because of new loans, but because of revaluation.
As a summary of the issues on debt policy, the following observations are
made:
1. The honorable debtor policy may have resulted in flattering debt ratios, but
the costs to development are very high;
2. The prevailing debt policy has resulted in a fiscal crisis, with debt service
continuing to be a major drain on the budget, thereby crowding out
expenditure for economic and social development;
3. Negative resource transfers continue unabated; and
4. Debt to Japan is uncontrolled and should pose serious problems unless
measures are undertaken to reduce it.

What is budget surplus?
The notion of a balanced budget, i.e., with surpluses and not deficits, is
standard in orthodox theories regarding the budget. If the budget of a
developing country is balanced or reflects a surplus, this is considered a very
good thing. However, attaining a surplus for its own sake is not necessarily a
good prescription for a country raring to march to the third millennium. The
process of attaining a surplus can entail high human and development costs.
To illustrate, the government claims that in 1994, a surplus of P12.3 billion was
attained. This claim was considered worthy of front page newspaper coverage
and praise from columnists and TV commentators. The claim has been repeated
so often that many assumed it to be correct.

In a Senate hearing on the debt service for 1994, the FDC pointed out that the
claimed surplus is a mirage. The purported surplus did not reflect the debt
service payments for Central Bank (CB) liabilities assumed by the national
government. The expenditure was treated as an “off-budget” item. If these
payments amounting P21.3 billion were considered as a budget item, a deficit of
P9 billion would have been incurred, instead of the much touted surplus (FDC
Memorandum to the Chairman, Senate subcommittee on the Debt Service
1994)
A similar observation was made by Dr. Benjamin Diokno of the U.P. School of
Economics, the former Undersecretary of the department of Budget and
Management (DBM). He described the situation as “failure masquerading as
success” (Diokno 1995)

Underspending for infrastructure and social service cannot be sustained by a
country with ambitious development targets like the Philippines. The claimed
budget surplus was achieved at the expense of low public investment
expenditure. The ratio of public investment to GNP for the Philippines is 4.5
percent, as compared to the NIC’s 8.5 percent. It was estimated that in order to
attain the NIC level, public investments would have to reach P40 billion for 1994
alone (FDC Discussion Paper on Government Fiscal Policy 1995). True, an
accounting surplus was attained, but targets for public investment were not;
thus, economic and social development objectives were negatively affected.
Budget Priorities and the Budget
Process
The real priorities of the government are declared not so much in rousing political speeches as
in the national budget. The Philippines is already rushing towards the end of the millennium,
and yet, its budget priorities are still dictated by PD 1177.
Debt service remains the number one priority item in the budget, consistently exceeding
allocations for economic and social services since 1983.
While expenditures for social services have been rising, the social allocation ratio, i.e., the
share of the social services sector in the national budget, of 30.1 percent in 1993 is still low
compared to the UNDP target of 40 percent and to the ratio of many Asian countries.
Accomplishments in the area of health services are understandably a source of pride and
satisfaction for the government. Nevertheless, the per capita general government expenditure
of $7.22 for health services, as of 1993, is still much lesser than the $12.61 estimated by the
World Bank to cover a minimum package of basic health interventions as of the same year
(Manasan and Llanto, 1994).
Policies on Tax and Non-tax
Revenues
Government has two major sources of revenues:
1. Tax
a. Direct – based on income, wealth, and property, as exemplified by income &
property taxes
b. Indirect - e.g. sales and excise tax
2. Non-tax – include grants, user charges, income from government owned and
controlled corporations (GOCCs) and proceeds from privatization. At present,
privatization proceeds from the bulk of non-tax revenues.
Revenues
As in the case of the budget and the debt, things on the revenue front are not
necessarily what they seem. Much has been said about the fact that revenues of
the government have been increasing. What is generally unnoticed, however, is
that targeted tax revenues have not been actually attained. Reports from Bureau
of Treasury indicate a shortfall of 1.58 billion for 1994 (Business World, 14
February 1995). What accounts for the impressive increase in revenues is not
taxes but non-tax revenues from privatization. While the tax effort in 1994
improved by only 2.6 percent in nominal terms, the increase in proceeds from
privatization comprised 53.8 percent of the total revenues generated from new
measures implemented by the government (FDC Discussion paper on
Government Fiscal Policy, 1995).
Revenues
As a policy, dependence on revenues from privatization is definitely not
sustainable. The privatization program is winding up; once the government runs
out of assets to sell, revenues from this source will subsequently dry up.
Let us now take a closer look at the government’s tax policy. One aspect of tax
policy which needs rethinking in a hurry is the traditional dependence on
indirect taxes as the main source of tax revenues. As of 1994, indirect taxes
accounted for 65.6 percent of total taxes collected, with 34.4 percent raised
from direct taxes (Business World 1995). The issue raided here is that of equity.
It is a policy which has been in force since the Marcos years, and even earlier;
nevertheless, the government appears unable to enforce a progressive system
of taxation, despite all the moving speeches about equity, justice, and
democracy. No matter how attractive the government packages it, a regressive
system of taxation will never gain popular support and commitment.
Revenues
Tiger economies idolized by our policymakers all have progressive systems of
taxation. The trend in these countries to increase revenue from indirect taxes is
based on the framework of a tax system which is already progressive. In the case
of the Philippines, a VAT and EVAT system is being imposed on a tax system
which is already dominated by indirect taxes, thus enhancing the regressiveness
of the system.
tax-changes-you-need-to-know.p
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Monetary Policy as
Constraint
Like fiscal policy, monetary policy is tailored to the orthodox requirements of
the IMF. Under stabilization programs and SAPs inked with the IMF, money
supply is zealously monitored. The rate of inflation is continuously watched.
Deviations from money supply targets are considered major sins. The constant
fear is that if money supply is not rigidly controlled, inflation might spiral.
The rigid imposition of monetary ceilings or limits on money supply exacts an
upward pressure on interest rates. As a result, productive investments contract,
thereby hampering development and growth in the process.
Recent studies show that the correlation between high money supply and high
inflation does not exist. In 1992, when money supply was restricted to 11
percent growth, inflation was high at 8.9 percent. On the other hand, when
money supply was allowed to grow by 24.6 percent in 1993, inflation was only
7.6 percent.
Monetary Policies:
Challenges to the
Government
The major challenge to government is to extricate fiscal and
monetary policies from the vise-like grip of stabilization programs
and SAPs presided over by the IMF and multilateral institutions. For
the past two years, the FDC has challenged the government to do
just this. We have consistently maintained that the Philippines does
not need the IMF and its orthodox policies. The global, regional, and
national economies are experiencing rapid changes. Flexibility in
policies will allow innovation and creativity in meeting the challenges
of the 21st century.
Monetary Policies:
Challenges to the
Government
The second major challenge to government is to do away with an
anachronistic fiscal policy structure which traces its roots to Marcos’ PD 1177.
The provision on automatic appropriation for debt service is just one of the
‘jurassic’ features of this decree.
The third major challenge is for government to recognize that the
formulation and implementation of fiscal and monetary policies is an
indispensable part of the democratic process. It is not the exclusive domain of
technocrat. The process of agreeing on objectives and choosing among
alternative policy measures is essentially political. Until recently, fiscal
policymaking was dominated by technocrats, multilaterals, Congress, and the
business sector. Citizens had to demand that they be heard.
Monetary Policies:
Challenges to the
Government
Fifty-seven years ago, the writer of a classic work on fiscal policy
stated that “formulation of fiscal policy lies at the dead center of
democratic government” (E. Pendleton Herring 1938). It can be said
that this proposition is even more valid at this time that it was
before. One of the global trends in governance is citizen
participation. All over the world, more and more people are
demanding that they participate in the making of decisions on what
taxes they are to pay, the services they are to get, and the debt
burden they are to assume.
Rethinking Fiscal Policy
Options
 Assuming that government repeals PD 1177 and tells the IMF to get off its
back, the following fiscal options are advanced.
Go beyond the debt cap and debt moratorium alternatives.
1. Policies intended to lower domestic interest rates have to be adopted. Since
the government is the largest domestic debtor in the economy, a reduction in
interest rates will result in the lowering of the debt service. As of the first
quarter of 1994, domestic debt stood at over P661 billion. Lowering interest
rates by one percent will result in a reduction of P6.6 billion in debt service.
Options
2. The government must take steps to restructure the huge domestic debt. It
has already been pointed out that the domestic debt grew as a consequence
of the foreign debt crisis. At present, the government is also funding
development projects in the budget through domestic borrowing.
Restructuring the domestic debt can be done by the government since the bulk
of domestic creditors are government financial institutions themselves.
Options
3. Negotiate for the reduction of Philippine debt to Japan. However, reduction
should be limited only to the increase in the debt stock brought about by
revaluation. It should not affect the original debt stock. Two Japanese
senators who visited the Philippines and had talks with Finance and CB
officials endorsed the idea.
A reduction in debt to Japan will have a big effect on the foreign debt stock,
considering the fact that Japan is the number one creditor country of the
Philippines.
Options
4. Relax tight fiscal targets in terms of the magnitude of expenditure and the
level of deficit. Development expenditures are crowded out of the budget by
the monstrous debt service burden. Expenditure for economic and social
services should be judiciously expanded to respond to the needs of our
rapidly growing population and meet minimum standards suggested by the
UN.
5. The issue of behest loans must be pursued relentlessly. Sanctions must be
imposed on responsible parties. The government must send a strong signal
that it will penalize those responsible for the terrible burden of fraudulent
debt now being borne by Filipino taxpayers.
Options
Orient priorities of public spending toward development.
1. The urban bias growth must be corrected through budget and expenditure
policy. While the government boasts of its countrywide development policies,
actual public spending negates such a claim. Severe underspending in
infrastructure has already been mentioned before. Still, much of this limited
spending goes to the National Capital Region. Ex: GATT safety nets
Options
Orient priorities of public spending toward development.
2. Development should not only be brought to the rural areas through
deliberate public spending; it can be sourced from the rural areas too. This
can be done by:
a. Building mass transportation and telecommunications infrastructure;
b. Increasing access to credit by strengthening rural banks through added
capitalization;
c. Encouraging the formation of cooperatives; and
d. Overcoming the irrigation backlog
Options
Rethink the current tax policy
1. The government must build the trust and confidence of the taxpayers in its
capacity to collect existing taxes. Economists note that “vast opportunities
exist for collecting more taxes without raising the rate of existing taxes or
imposing new taxes” (Manasan and Llanto 1994). They estimate that if only
half of the amount of taxes evaded can be collected, about P17.6 billion can
be raised yearly from income taxes and the mother VAT.
2. In implementing tax reform, priority should be given to the correction of the
regressive character of the tax system. New indirect taxes such as the EVAT
will not fly so long as the public knows that not enough direct taxes are being
collected.
Options
Rethink the current tax policy
3. The following measures and direct taxes on income, wealth, and property should be in the
government’s tax reform agenda:
a. Expansion of the 20% excise tax on nonessential goods;
b. The 2% affluent consumption tax as specifically applied to the sale of residential buildings,
townhouses, and condominium units worth P5 million or higher, as well as memberships in
golf and other exclusive clubs;
c. The land conversion tax on every conversion of agricultural land to nonagricultural use at
25% of the fair market value;
d. Increase in the tax imposed on high-priced private motor vehicles; and
e. Improvement of real property tax collections through improvements in property valuation.
Options
tax-changes-you-need-to-know.pdf
Options
Relate a tax policy to environmental objectives
 A fresh option to tax policy is to link it with environmental objectives. On one
hand, higher rates of taxes can be imposed on industries which depend
excessively on limited natural resources. Moreover, penalties can be imposed on
industries which are inefficient in the use of power and energy, or on those
which pollute the environment. On the other hand, tax incentives can be
granted to those who use resources efficiently, reduce power consumption, and
use pollution-free technology. Such approaches to tax policy have been adopted
before and successfully implemented in Europe.
Rethinking monetary policy
As in fiscal policy, the government does not need the IMF to set its monetary
targets. A restrictive monetary policy is incompatible with the demands of rapid
growth and development. Monetary targets must be relaxed to allow expanded
expenditure for economic and social development. Such a policy tack will
likewise give monetary authorities leeway in influencing foreign exchange rates.
Rethinking Alternatives to Fiscal and
Monetary policy: Challenges to
Progressive Groups
Even as government needs to reinvent fiscal and monetary policies to cope with
the drive towards social and economic transformation, progressive groups must
also reexamine alternative proposals.
1. There is a need for progressive groups to take a second look at dearly held
theories about budget deficits and surpluses, money supply and inflation,
foreign exchanges rates and devaluation. Deficits may not necessarily be bad;
surpluses may not necessarily be good. High money supply does not
necessarily indicate growth; it might even indicate a moribund economy. The
context within which alternatives are formulated has changed tremendously
since the 1960s and 1970s.
Progressive Groups
2. Alternative debt policies need to be continually reexamined in the light of
rapid changes in the debt profile of the country and global developments. For
example, in its 1993 Strategic Plan, the FDC broadened its analytical
framework to include not only a narrow study of the external debt, but also
an analysis of SAPs and related development issues. This led to changes in
policy alternatives and campaign thrusts. The shift was accomplished amid
vigorous debates among the member organizations.
Progressive Groups
3. Rigorous discussion and debate need to be continued in the area of monetary
and foreign exchange policy. Many progressives, particularly the working
classes, cannot forget the country’s traumatic experience with devaluation
during the 1960s. The lessons of past experience are undoubtedly valuable.
Nevertheless, there is a need to look closely at the present complexities of
the monetary and foreign exchange debate.
Progressive Groups
One angle which must be considered is the fact that we have a large OCW
sector whose dependents are affected by foreign exchange policy. Another area
of reexamination is the role of the expert sector vis-à-vis the forex rate. Is a large
export sector necessarily bad for the economy? Does a ‘strong’ currency
necessarily denote a strong economy? How come Japan’s economy is in trouble
as a consequence of its ‘strong’ currency?
Again, progressive groups must continue to hold dialogues with other
organizations and experts on the technical, as well as social, implications of this
critical issue. New insights and knowledge should be gained from these
exercises.
Progressive Groups
Finally, progressive groups must keep a continuing balance between analytical
rigor and pro-people objectives; between what is technically feasible and what
is politically correct.
As the Philippines moves onto the third millennium, debates on the directions
it must take will not be lacking. For sure, one area of debate will be public
finance, particularly fiscal policy. Monetary and foreign exchange policy will be
another area of contention. The debates will not, and must not be limited to the
policymakers and their technocrats. The people who will bear the massive costs
of financing development need to be heard- and listened to.
GOVERNANCE AND INSTITUTIONAL
REFORMS
IN THE PUBLIC SECTOR
(EMILIA T. BONCODIN)
REFORMS
INTRODUCTION
Governance – the manner in which power is exercised in the management of a
country’s economic and social resources. It is allocated between the public and
private sector. It has given birth to two offspring – public sector governance and
corporate governance.
Whenever people talk about governance, discussions about corruption
invariably arise. It is because bad governance leads to corruption. More
specifically, corruption, or the perception of it, has come to be the barometer
for judging the quality of governance in the public sector.
REFORMS
INTRODUCTION
Corruption = Monopoly + discretion – Accountability (C = M + D – A) by Prof.
Robert Klitgaard at the International Conference on Governance Innovations
In the public sector, there are countless decision points where the individual
decisionmaker exercises substantial monopoly power, considerable discretion,
and very little accountability. Under such circumstances, it is very easy to divert
public money for private gain and it is very easy to detect bad governance.
Monopoly power and discretion emerge usually because the rules governing
public desicionmaking are not transparent and predictable.
REFORMS
Take, for instance, our procurement processes. Very few people in government
truly know and fully understand what the rules are. A study conducted by the
Department of Budget and Management (DBM) in 1999 revealed that there are
more than 100 laws and regulations that govern public procurement and that
there are volumes of circulars, memos, and the like in the Commission on Audit
(COA) that pertain to public procurement. Not surprisingly, confusion reigns in
our procurement process. The rules cannot possibly be transparent since there
are so many of them that no one can really have a full grasp of their
implications. Nor can they be predictable since they contain inconsistencies that
in turn can be easily manipulated to turn decisions in favor of some parties. As a
result, the bids and awards committees of government agencies have
considerable monopoly power and discretion over the awarding of contracts. It
is, therefore, not surprising that procurement scandals often make it to the
headlines.
REFORMS
REFORMS
The quality of public sector governance can be captured by three features of
public decision making: transparency, predictability, and accountability.
Dysfunctions in the public sector lead to a lack of transparency, a high degree of
unpredictability, and weak accountability. The result: bad governance and
concomitantly high levels of corruption.
The Need for Institutional
Reforms
The Philippines has not fared well on the governance front. The most recent
“Corruption Perception Index” of Transparency International ranks the country
below countries like Peru, Malawi, El Salvador, and Lithuania and lumps it
together with countries like Mozambique, Zambia, and China.
However, it is not just the international community that has this perception.
Our people perceive this as well, and very strongly, as reflected by the powerful
outcry of EDSA II. EDSA II has pushed good governance to the forefront of
political discourse and to the top of the priority of this government’s agenda.
The Need for Institutional
Reforms
The DBM has long recognized the need for institutional reforms in the public sector. These are
reforms that address dysfunctions in the public sector that are essential to improving the quality
of public sector governance. With EDSA II having raised the ante considerably, the Department
will push harder on ongoing reform initiatives and prepare to launch others. These reforms will
essentially cover two broad areas namely: public financial management and public
administration.
Institutional Reform
Initiatives: Public Financial
Management
The public sector is fraught with many dysfunctions, which confront the reform minded
government with a gargantuan task. Given its limitations, both in manpower and in funds, the
government must prioritize and lay out a sequence of reforms that can be reasonably managed.
For this administration, and most possibly the next, the priorities are not difficult to identity. We
are today confronted with a huge budget deficit which, if not reduced, will surely derail our
economy, hinder growth, and constrain our poverty reduction efforts. While some may say that
controlling and managing the deficit is simply a macroeconomic problem, it is undoubtedly
much more complex than that. Our budget deficit problem is effectively a problem of tax
administration, i.e., collecting revenues, and of public expenditure management, i.e, making
sure the revenues are spent wisely.
Reforms in Tax
Administration
Our low revenue effort is a problem of tax structure as well as of tax
administration.
The usual knee jerk response of governments to a revenue crisis is to introduce
new taxes or raise tax rates. However, either one has the unfortunate effect of:
1. Reducing take home pay – which means reduced consumer spending – and
private investment – which means less job opportunities and potentially
higher unemployment and
2. Creating distortions in the tax system.
 Given the lethargic state of our economy, this approach is very likely to worsen
the economic situation. Thus, the implication is obvious: we need to reform
revenue administration, which means we must reform the Bureau of Internal
Revenue (BIR) since it provides about 60 to 65 percent of the government’s
revenue.
Procurement Reforms
There have been reports that losses could run to about P20 billion per year
from public sector procurement alone. If one includes procurement involving
build-operate-transfer (BOT) type operations, and local government
procurement, the loss is likely to be significantly more. While these are
estimates, they give us a good idea of how much our public coffers lose from
corruption in government procurement.
Department of Budget and Management (DBM) – spearheaded a reform to the
public procurement process. In collaboration with:
a. National Economic Development Authority (NEDA)
b. Commission on Audit (COA)
c. Department of Public Works and Highways (DPWH)
d. Department of Education, Culture and Sports (DECS)
e. Department of Health (DOH)
Procurement Reforms
The Departments formed an inter-agency technical working group to prepare
and introduce changes in the administrative rules that govern the procurement
of goods, supplies, materials, and civil works. These changes are now embodied
in the revised implementing rules and regulations for Presidential decree 1594
(on the procurement of civil works and consulting services) and Executive order
No. 262 (on the procurement of goods, supplies, materials and contractual
services). The changes have altered key steps in the procurement process,
namely:
Procurement Reforms
1. A shift in emphasis from pre-qualification of potential bidders to a simple
eligibility screening at the beginning of the process combined with an
extensive post-qualification towards the end;
2. A shift in the criterion for contract award to what is called the “Lowest
Calculated Responsive Bid”, and
3. An elimination of bracketing in evaluating bid prices and the adoption of the
approved budget for the contract as the ceiling on bid prices.
These three major changes will increase competition, reduce delays, and limit
the discretion of bids and awards committees, all of which will help reduce
corruption.
Procurement Reforms
But we have not stopped here. The DBM will likewise shepherd a bill in
Congress, the Government Procurement Reform Act that will solidify the above
changes and introduce more far-reaching reforms in the process.
In addition, the government has now introduced an electronic procurement
system whereby a market is created for procuring agencies to register their
procurement requirements. In this system, suppliers register their products and
services, and a record of transactions is made available for everybody’s scrutiny.
Procurement Reforms
Apart from the reforms in procurement, the government is likewise
undertaking a number of related reforms in public expenditure management.
These include:
1. A reorientation of the budget process towards the medium term
2. The introduction of a performance focus to budgeting
3. The development of a mechanism for incorporating government contingent
liabilities into the budget process
4. A rationalization and streamlining of the budget execution process, and
5. A shift in public sector accounting towards an accrual based system.
All five are designed to increase transparency, accountability, and predictability
in the budget process.
The Medium Term
Expenditure Framework
The introduction of a medium-term framework (MTEF) will link planning,
which has a medium term (3 to 5 years) outlook, with budgeting, which
generally has a one-year horizon. Planning establishes the strategic priorities of
the government over the medium term. Budgeting is supposed to allocate funds
to programs and activities that help meet those priorities. However, to do this,
the budget must consider expenditure allocations and implications beyond the
typical one-year period within which budgets are made. And it must do this
within the confines of binding annual ceilings.
With an MTEF, the sustainability of the government’s economic plan and
corresponding expenditure program can be reasonably assured over several
years beyond the current budget year. Moreover, expenditure allocations can be
better aligned with the planning priorities and thus the real needs of society.
More importantly, spending agencies will become conscious of the implications
of spending decisions they make at present on the configuration of their future
The Organizational
Performance Indicator
Framework
Corollary to the MTEF is the Organizational Performance Indicator Framework
(OPIF).
OPIF – is a system designed to induce government agencies to focus their
efforts and activities on delivering higher priority programs at reasonable cost
and quality. It introduces the concept of performance indicators and links these
with organizational performance such that government agencies will be
encouraged:
1. To allocate and reallocate resources towards higher priority
programs/activities/projects (PAPs) and
2. To provide each PAP in a cost effective manner.
In short, it states more clearly and directly what government agencies are
accountable for their delivery of services to the public.
The Organizational
Framework
The OPIF is linked to the MTEF through the planning priorities. The MTEF
requires that PAPs be prioritized in accordance with their linkages to the
planning priorities (and their implied societal outcomes). The OPIF, on the other
hand, requires each agency to define its final output and link it to its PAPs.
Outputs linked predominantly to higher priority PAPs are then designated as
major final outputs (MFOs) and the budget of the agency is allocated
accordingly to these MFOs. Performance indicators are designated for each of
these MFOs. The performance of the agency can then be judged on the basis of
these indicators with their budgets adjusted accordingly.
The Organizational
Framework
With the OPIF, we expect the reorientation of budgeting towards outputs and
outcome, rather than inputs. Thus, we will be evaluating agency performance
on, for instance, the performance of a licensing agency in expediting the
issuance of licenses, given a certain cost, rather than in scrutinizing how much
they spent for paper in issuing license.
One critical aspect of the OPIF is the use of client feedback surveys,
alternatively referred to as report card surveys. The DBM plans to introduce
report card surveys in evaluating the allocative efficiency of public expenditures.
In particular, it intends to use the surveys to evaluate the extent to which
budgetary allocations actually translate into the delivery services to the poor.
Contingent Liabilities
The policy and treatment of contingent liabilities is another area that is ripe for
reform. Government guarantees have come to haunt the budget in the last few
years. In the past, guarantees have been used to attract private sector funding
into government activities such as BOT projects. While they do not put an
immediate call on the budget, they potentially impose a heavy burden on
government finances. For example, the government now has to pay private
energy generators for unused energy capacity under take or pay contracts
signed in the early and mid-1990s; the government essentially guaranteed these
firms a revenue flow regardless of whether they actually managed to sell their
capacity. Such payments have not been included in budgetary estimates, and
the guarantee calls are now beginning to further stress the expenditure program
of government.
Rationalizing the Budget
Execution Process
In the area of budget administration, we will rationalize the budget process such that
1. Budget formulation is strengthened and
2. The release of funds is fast, timely, predictable and transparent.
 For these purposes, we will institute the following measures:
1. To tighten the budget allocation criteria to focus the agencies on their core functions and to
ensure strategic funding of key programs.
2. The computerization of budget release procedures in order to eliminate discretionary factors
in the release of funds
3. The provision of information not only on the national budget but also on the actual release
of funds up to the most reasonable detail on the DBM website.
 The quest for greater transparency, accountability, and predictability will be the driving force
in the reform of budget execution processes.
Accounting Reforms
The accounting system in the public sector leaves much to be desired. Ideally
the public sector accounting practices should be more or less consistent with
practices in the private sector. This way, the public sector financial accounts are
understood by ordinary accountants, if not the general public and, therefore, are
more transparent. Unfortunately, this is not the case at the moment. Private
accountants find it rather difficult to analyze government accounts. Anyone who
has bothered to take a look at the accounting reports of government must have
experienced some sense of discomfort at not readily comprehending the
meaning of the reports. It is not because of some lapse of intellectual capacity. It
is because the accounts are truly not friendly to ordinary comprehension.
Accounting Reforms
Both the DBM and the COA are determined to change this. In particular they
are determined to move the public sector accounting system to an accrual basis,
which is the standard in the private sector. In addition, it will be geared towards
showing how much it costs the government to perform an activity or deliver a
service, and not just how much it costs to run a bureaucracy. More significantly,
the importance of accounting reports in decisionmaking cannot be
overemphasized. Therefore, the reports must not only be reliable, they must be
timely as well.
Institutional Reform Initiatives
– Public Administration
Reforms are also ongoing on the administrative side. One of these is the
Reengineering of the Bureaucracy Program (REBP). This initiative aims to
strengthen the government’s management capacity to deliver public services
more efficiently and effectively. Its thrust is to focus the role of government
agencies on tasks for which they are best suited and to restructure them
accordingly.
This reform is proceeding on two tracks – administrative and legislative. The
first track pursues the streamlining and rationalization of government agencies
within the confines of the power of the President and existing legal statutes. The
second track involves a comprehensive restructuring of the Executive Branch,
either wholesale or sequentially, i.e. one sector at a time. This requires a new
legal mandate.
Institutional Reform Initiatives
– Public Administration
To guide both tracks, the DBM has initiated strategic sector reviews to prepare
blueprints for the reengineering of sectors and the departments in those
sectors. To date, three such reviews have been started – agriculture sector (DA,
DENR, DAR), social sector (DECS, DOH, DSWD, CHED, TESDA), and infrastructure
sector (DPWH, DoTrC).
Three cross-cutting reforms are being contemplated to support the
streamlining and restructuring efforts. These are:
1. The rationalization of the compensation and the human resource
development system
2. Development of impact mitigation measures
3. The institutionalization of a more effective individual performance
accountability system
Concluding Remarks
The institutional reform agenda on governance is extensive and daunting. I
have talked about the initiatives that are ongoing and those planned for the
executive branch at the national level. There are other reforms focusing on the
judiciary and local governance, which for the lack of time I have not been able to
talk about. In fact, on the latter, there are many little initiatives scattered
throughout the provinces and municipalities, which we only hear about
anecdotally. Whatever the case, it is clear that there is a fruitful and healthy
fermentation of institutional reform efforts in government. This administration is
bent on supporting and sustaining this effort. (by Emilia T. Boncodin)

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