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Public Utilities and Econmic Enterprises in the Philippines: Issues and Prospects

local government losses, privatization, institutional reforms,legal instruments

I. Issues

In the Philippines, public utilities and economic enterprises are commonly treated separately by the Local Government Units (LGUs), the latter being primarily concerned with public markets, slaughterhouses and bus terminals; the rest are utilities and services. Under the 1991 LGC, Section 17, this separate treatment is observed. However, in the ssme section, apart from markets and slaughterhouse, the phrase “and others” is added, which connotes that any other utilities or services can be considered as economic enterprise, provided they can generate income or revenues. For practical purposes these could be collectively called “local public enterprise” (LPE) which will include public market, transport terminals (bus, jeepney, parking, piers), slaughterhouse, livestock trading and cattle fattening centers, fish landing & cold storage facilities, post harvest facilities (grain storage, drying, milling) water supply and sanitation (local drainage, sewerage, solid waste collection and disposal), public parks, sports and recreational facilities and public cemeteries.

• These LPEs are authorized to collect fees and other charges as sources of revenues. Under this concept it is supposed to be understood that these LPEs should be self-sustaining, that is, they should be able to generate revenues to cover costs of administration and operations. Sad to say all of them operate at a loss and are subsidized by the local government, except for a few that are properly managed. Among these are markets, bus and jeepney terminals, water supply and fish landing. The rest are either provided by the LGUs free or partly operated with minimal user charges, which means fully or partly subsidezed by budgetary appropriation. This free public service has been traditionally practiced by the LGUs, even to the present.

• When the LGC was passed, more public services and responsibilities were devolved to the LGUs some of which are complex and expensive to undertake, such as hospitals and primary health care, public education (partly), environmental management. Lately, solid waste sanitary dumpsite is added to the mandatory public service of LGUs. At present, These capital intensive functions, aside from being complex, are budget dependent and have no direct sources of revenues to finance their administrative and technical operations. They can collect fees and charges to a certain extent though, but barely enough even to pay the salaries of personnel and related administrative costs, let alone procurement of supplies and materials, capital improvements, etc.

• Republic Act 2425 on the other hand directs the LGUs to see to it that the minimum basic needs (MBN) of the citizens are provided for. 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). It will be noted that the implementation of the MBN, especially the highlighted ones, can be effectively carried out through the public utilities and economic enterprises. This is of course easier said than done because of one major constraint – limited and/or lack of financial resources, the proverbial and traditional scapegoat of LGUs for failing to adequately, if not effectively, carry out the delivery of local public utilities as mandated by the LGC and MBN/SRA.

• The LPEs have been treated since time immemorial as political obligations and administrative functions of the LGUs rather than as a tool or means of economic growth and development. Thus, they were always included as part of regular budget, annual at that, rather than as multi-year economic development or financial investments plans. Historical records show that 70-80 percent of annual expenditures of the LGUs are for administrative and recurrent maintenance activities. The remaining 20% is competitively shared by capital expenditure, economic investments, human resource development, and the surplus, if any, to research and development.

• The inter-local government cooperation and effort sharing as authorized in the LGC have not been exercised nor even initiated yet by the LGUs. There is no effort on the part of the LGUs, it appears, to draft memorandum of agreements or operating procedures and mechanics to activate “dormant potential” tool for economic development and delivery of services, especially LPEs.

• Some LGU executives and elected officials have still the misconception that effective governance is equal to have savings in the local treasury; the bigger the savings, the higher their performance. They are afraid to invest public monies for public purpose.

• The internal revenue allotment (IRA) has made the LGUs dependent on the national government especially the poor municipalities and provinces. But worse than this, the LGUs become subservient and hostage to the central government, since the release and use of such allotment are subject to national government decisions and control. The national government can withhold or reduce or regulate the releases. On the other hand, the formula for the amount of IRA entitlement is questionable and biased toward big and densely populated LGUs while the poor and small LGUs are victims of this inequity. Consequently, the delivery of public services suffers the most at the same time economic development is stunted.

II. Implications of the Issues to the Country

In general, and without doubt, the efficient and effective delivery of local basic services as mandated by the LGC and R.A. 2425, will redound to the great benefits to the country. The primary principle of devolution and decentralization is very clear – to unburden the national government of responsibilities of attending to the basic needs of the people by shifting the responsibilities down to the LGUs where such needs can best be carried out, Thus, as Dr. Alex Briliantes and Jose Tiu Sonco II have aptly pointed out In their policy paper on strengthening devolution, “The efficiency and effectiveness sof local government units in deliver public services at the local level have a great impact to human development outcomes and national economic growth.”

On the part of the LGUs, if the issues above have not been adequately addressed, the problems they are encountering regarding the delivery of LPEs will not only continue to occur but will grow into unmanageable proportion. It goes without saying then that consequently the whole country will be affected; worse, the LGC will prove to be a dismal failure.

Almost all of the existing economic enterprises all over the country operate at a loss, revenue collection efficiency is very low. They are oftentimes subsidized by local budget. Consequently, these LPEs are unsanitary, unhygienic, congested, fire hazards, deteriorated and poorly maintained, conditions that fall short of the MBN requirements on health and public safety. These deplorable conditions are more evident in 4th and lower class LGUs. Many of them have no legitimate slaughterhouses. Butchering is done in adjacent space near the market, while backyard butchering is also commonly practice. The major cause of this predicament is the lack of funds to put and maintain an abattoir. While the required hygienic and sanitary standards are high, ironically the allowable maximum user charges are quite low. Although, big cities and highly urbanized municipalities are able to cope with the required standards of maintenance most of them are having difficulties to sustain the standards. It is distressing to note that while cost of maintenance and prices of commodities are increasing the user charges and fees remain constant due to legal constraints and procedural compliance. And although some are not charging below the allowavle ceiling, it takes time before the rates can be increased as it will go through the legislative mill and public consultation process, sometime even through court proceedings.

A major burden to the LGUs both financially and administratively is the devolution and transfer of the hospitals and primary health services. Rich provinces and metropolitan cities may be able to operate them but for how long? They do not only have budgetary and administrative problems but the greatest imminent threat is the exodus of technical and professional personnel – doctors, nurses, lab technicians and the like. Undoubtedly, poor provinces and municipalities cannot afford to provide these basic services which are the primary concerns of the MBN and the LGC.

The existing Internal Revenue Allotment (IRA) formula will continue to make the LGUs dependent on the national grants and budgetary assistance. The rich and highly developed LGUs will enjoy the bountiful benefits from the inequities of a defective IRA formula. The poor and undeveloped LGUs, 4th to 5th class will become poorer and less and lees capable to deliver the basic public services. The undesirable outcome of this imbalance and inequitable economic growth of LGUs would of course lead to urban pull-rural push syndrome, because of better services, greater job opportunities, good living environment, availability of social amenities and security in urban areas. While this situation might be good for the urbanizing LGUs in the sense that this will increase their IRA, in the final analysis this will lead to increasing demand for public services, quality wise, and more alarmingly quantity wise. The demand may become so competitive and even cutthroat, that adequate solutions might need central government intervention. Examples of these problems would be flooding, environmental degradation, housing, peace and order, traffic, solid waste disposal. water supply unemployment, urban blight and the like. Corollary to these are increasing criminalities, drug trafficking` prostitution, moral degradation, sex abuse and violence, etc. These economic ills and social decadence are actually being experienced now by the highly urbanized and metropolitan LGUs.

III. Policy Options

Various policy options are available to LGUS and th national government to effectively address the issues and mitigate, if not totally avert the negative impacts. Most of them are immediately convertible into concrete courses of actions and easily doable.

1. Primary Policy Options

a) Exercise the authority and power of LGU as a corporation undersections15 and 22 of the Local Government Code. Economic enterprises to be incorporated as stock corporations; stocks and shares for sale to public and private investors. The LGU could be the majority holder; or just a minority shareholder, majority owned by private sector.

b) The present concepts or practices on public utilities, services and economic enterprises need to be clarified and reoriented. Traditional concepts of local economic enterprises are limited to public markets, slaughterhouses and bus terminals. Under the LGC of 1991, the coverage and scope of economic enterprises can be expanded to include the public utilities and services that can generate revenues to cover operating and maintenance costs plus a certain margin of profit. Following this concept, all public utilities and services could be collectively called “Local Public Enterprises (LPE) grouped into 3 categories, to wit:

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

(ii) Pseudo-Economic Enterprise – those that are partly subsidized by LGU budget and can collect user charges or fees out of their operations, among these are, public cemeteries, fish port/landing, gyms/sports facilities, hospitals/health centers, dairy dairy/breeding farms, livestock trading/fattening centers. Some of these LPEs may generate revenues on a break-even basis, but if there is net profit gained, then the LPE becomes an Economic Enterprise.

(iii) Free Public Enterprise – those that are provided to the public free of charge, such as, parks and playgrounds, school and educational facilities, libraries, museums, nutrition, tertiary heath center and lying-in (delivery) center, etc. Some of them, though, may to a certain extent, be operated as pseudo-economic enterprises, that is, collect minmal charges, like libraries, museums, etc.
These LPEs however, are still part of the local government bureaucracy and operate subject to government regulations and procedures. This situation limits the effectiveness of LGUs both in management and revenue generation capacity, e.g., there are ceilings on how much a market or a slaughterhouse can impose user charges or fees, constraints on budgeting and expenditures, etc.

c) Paradigm shift, i.e.

(i) LPE as financial investment rather than mere public service; as engine or propellant of economic growth and development rather than just obligation and responsibility to the constituents.

(ii) The delivery of services is supply driven rather than demand driven, i.e. funds are available, have money – will put projects, hence provide the services even if the demand is low.

(iii) From savings conscious LGEs to development investment oriented managers. This tendency to accumulate savings rather than invest the money is bolstered by the accompanying fear of failure. Savings in the treasury does not help the people. On the contrary it deprives them of what hacve been the benefits from money invested in projects and economic development. This is because of lack o appropriate knowledge and information on public investments and corporate operations.

(iv) There is a need to conduct an orientation seminar for LGEs on local public enterprises as investments and corporate bodies, on privatization, leasing and management contracts, etc. To strengthen the necessity of this orientation-seminar, the rationale and objectives should be focused on the encompassing policy of decentralization, autonomy and devolution.. The bilateral grants

2. Corollary Policy Measures

(a) Legislative

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

ii.Detach from bureaucratic procedures – distinct operating and administrative system separate from the mainstream bureaucracy, i.e., separate accounting, auditing, administrative, management combined with deregulation. The LPEs however, are still part of the local government bureaucracy and operate subject to government regulations and procedures. This situation limits the effectiveness of LGUs both in management and revenue generation capacity, e.g., there are ceilings on how much a market or a slaughterhouse can impose user charges or fees, constraints on budgeting and expenditures, etc.
iii. Corresponding legislation would be needed that once the LPEs are detached from the LGU bureaucratic processes the revenues generated shall accrue to the

(b) Existing Legal Authority

(i) Privatization – sections 3, 17 & 18 LGC
• Full Privatization – profitable LPEs, i.e., markets, water supply (distribution and/or source development), bus/transport terminals, slaughterhouse, solid waste management (dumpsite and/or collection), post harvest facilities, hospitals/primary health care and the like
• Partial privatization – sale, lease, rent facilities, structures, lands to private business groups; sale, lease, contract out management to private groups.
• Semi-privatization - economic enterprises as cooperatives, e.g., market vendors cooperative, water supply distribution, post harvest facilities and the like.
Section 3(h)

(ii) Activate and put into opration inter-local government cooperation (ILGC) as authorized in the LGC. The ILGC can be very useful and effective in the district concept of local public services, i.e., delivery of public services within contiguous areas regardless of political or legal jurisdictions. For example, water supply system, school, hospital and primary health centers, servicing residents two or three contiguous barangays of different municipalities or provinces.

iii. The potentials of the Leagues of LGUs have not been fully tapped and exploited. There is a need however, to strengthen and empower them as more of socio-economic agency with semblance of a corporate entity and with some authority to raise its own revenues and not to rely solely on LGU contributions. These leagues of lLGUs could be a good venue or means for inter-local government cooperation.
iv. districting of public services

The present concept and practice of delivery of LPEs are based on political and geographical boundaries or territorial coverage, i.e., markets, water supply, slaughterhouse, health facilities, schools, etc. are put up and operated by municipalities, provinces and cities. Hence, these LPEs are supposed to service only the constituents of the LGUs where the LPEs are located. For example, residents of a barangay cannot enroll their children in a nearby public school located in adjacent barangay that is under another town. The children have to go to a public school in the town where they reside even if the school is located far from the barangay. This is the sad reality of delivery of services by political jurisdiction.

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

The policy mandates regarding provision of public utilities and services under the LGC and MBN/SRA are clear and complete. The LGUs have adequate authority and power under the same legal frameworks to execute these policies. The problems appear to be in the interpretation and application of the pertinent provisions of the LGC.

The policy issues on local public enterprises cannot be ignored. Their negative implications and adverse impacts to the country, in general, and the LGUs on particular, are too close for comfort. Unless these issues are addressed soon these negative impacts will grow to an unmanageable magnitude that may be too difficult to resolve, if ever at prohibitive cost. The LGUs, rich and poor, would of course be the immediate victims and will be hit hard by these negative impacts. While the poor LGUs may suffer most, becoming poorer especially because of the rural push, in the final analysis the magnitude and severity of socio-economic problems and administrative shortcomings will be much greater in cities and urban LGUs, particularly because of the urban push.

The policy issues are not difficult to confront. This is because the policy options available are easy to adopt and transform into actions. In fact a number of them are immediately doable since there are existing legal instruments and authoritative mandates, available to LGUs, particularly, the LGC, the MBN/SRA, and the Constitutional mandate and empowerment to LGUs.

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
Peoples Organizations, e.g., Market Vendors Association
VI. Pertinent and applicable provisions of LGC for the above policy options and alternatives
• section 3 (c) “. . . power to create and broaden their own sources of revenue . . .”
• section 3(f) “. . . group themselves, consolidate or coordinate their, services and resources for purposes commonly beneficial to them.”
• section 3(h) “. . . continuing mechanism to enhance local autonomy not only by legislative enabling act but by administrative and organizational reforms.”
• section 3(l) “The participation of the private sector in local governance, particularly in the delivery of basic services, shall be encouraged to ensure the viability of local autonomy as an alternative strategy for sustainable development.”
• section 12 Government Center as fublic enterprise, explore possibility.
• section 15 LGU as corporate entity representing the inhabitants.
• section 16 General welfare, economic prosperity, employment, comfort, convenience
• section 17(a), (b), & (j) “To ensure the active participation of the private sector in local governance, local government units may, by ordinance, sell lease, encumber, or otherwise dispose of public economic enterprises owned by them in their proprietary capacity.” “Cost may also be charged for the delivery of basic services or facilities mentioned in this Section (17)”
• section 18 – Power to Generate and apply resources, to wit, “. . . to create their own sources of revenue . . . which shall accrue exclusively for their use and disposition and which shall be retained by them . . . to acquire, develop, lease encumber, alienate, or otherwise dispose of real or personal property held by them in their proprietary capacity and to apply their resources and assets for productive, developmental, or welfare purposes . . . thereby ensure their development into self-reliant communities and active participants in the attainment of nationa, goals.”
Section 22 Corporate Powers – LGUs as a corporation: (a) 6 – “To exercise such other powers as are granted to corporations subject to the limitations provided in this code and other law.” Establish subsidiary corporations.
section 313 (c) para 3 “Profits or income derived from the operation public utilities and other economic enterprises, after deduction fro the cost of improvement, repair and other nrelated expenses . . . shall first be applied for the return of the advances or loans made therefor. Any excess shall form part of the general fund of the LGUs” This has to be reviewed and possibly revised.

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.

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