National Economic and Development Authority Amber Avenue, City of Pasig, Metro Manila INVESTMENT COORDINATION COMMITTEE POLICY

FRAMEWORK FOR NATIONAL GOVERNMENT ASSISTANCE FOR THE FINANCING OF LOCAL GOVERNEMNT PROJECTS WITH ENVIRONMENTAL AND/OR SOCIAL OBJECTIVES Background The Local Government Code of 1991 mandates the transfer of considerable powers and responsibilities from the national government (NG) to local government units (LGUs). The LGUs transfers the primary responsibility for the provision and delivery of basic services to communities heretofore performed by national agencies such as the Department of Health (DOH), Department of social Welfare and Development (DSWD), Department of Environment and natural Resources (DENR), and the Department of Agriculture (DA). While this change is envisioned to improve the design and effectiveness of devolved activities, it also introduces risks in connection with the efficient and equitable delivery of public services. With the increase of LGU expenditure responsibilities, the share of local governments in total revenues, the Internal Revenue Allotment (IRA), has also been increased. The Local Government Code (LGC) increased the IRA share from 30 percent in 1991 to 40 per cent in 1994. This effectively raised the share of local governments to toal revenues from P12 billion in 1991 to P46 billion in 1994. With more resources at their disposal, LGUs can exercise more autonomy in channelling resources to investments in accordance with local priorities. Even in the post-devolution period, however, the NEDA Board s Investment Coordination committee has allowed national line agencies to package, finance and even implement devolved programs and projects on a case by case approach on the basis of sectoral justifications and observed patterns of underinvestment by LGUs. This has effectively increased the role of national line agencies in devolved activities clearly contradicting the intention of the LGC to shift the role of central agencies to policy-making, research and monitoring and technical assistance for LGUs. With the growing number of such exceptions to the devolution policy, the transition of LGUs and national agencies to their new roles may take an unnecessarily extended period of time. Moreover, the fiscal effects of such decisions have been exerting pressure on the national budget like a double-edged sword as budgetary requirements have been growing for both line agencies and LGUs for the same set of functions and sectoral objectives. The above considerations indicate the need to define appropriate financing policies and assignment of roles in government to facilitate the transition towards new arrangements mandated by the LGC. Case for Selective NG Intervention The continued involvement of the national government in selected devolved activities may be warranted where there are externalities, economies of scale, or equity considerations. Externalities refer to the indirect effects of projects on parties (individuals or communities) not directly involved in the investment undertaking. There is usually a disincentive to invest in a project which provides indirect benefits to other parties who have no intention to contribute to the investment. Projects on reforestation and watershed management are useful examples. If benefits extend beyond the borders of an LGU, it may not allocate enough resources, hence the risk of underinvestment or underprovision.

Economies of scale refer to cost reductions that can be generated as the scale of an investment increases. When the services area required by a particular service to be costeffective is larger than an LGU s jurisdiction, intervention by a higher level of government may be necessary. Fully devolving such activities may result in wasteful overlapping of service

areas, excess capacity and unnecessary investments. The provision of secondary education, communal irrigation, and sewerage trunk lines are some examples where economies of scale may be observed. Investments in social services and livelihood enhancement that are undertaken as poverty alleviation strategies are forms of the public sector s redistributive function is best overseen by the central government. Statement of Policy It shall be the policy of national government to support the financing of devolved activities with social and/or environmental benefits in line with efforts to promote the goals of the Medium-Term Philippine Development Plan for sustainable human development and social development anchored on poverty alleviation. Such support may, as necessary, provide financial and other forms of assistance to complement or augment resources of LGUs coming from internal revenue allotments (IRA) and local revenues. However, the assistance to be provided under this policy will be limited and temporary, performance-based, and targeted at selected groups of LGUs. In particular, central government can intervene in the financing and management of devolved functions through sponsorship of national government agencies provided they meet one or more of the criteria explained below: (a) EQUITY, IF LGUs that are faced with tight budgetary constraints are unable to provide the minimum level of services to their constituents, national government intervention may be warranted. The eligibility of LGUs will be based on income class and on economic class (as may be measured by poverty incidence). Programs of assistance sponsored by a national government agency should be able to give priority to the needs of relatively disadvantaged LGUs in the allocation of resources. However, the intervention should be designed to be transitory and limited to as not to discourage sound fiscal management and prudent use of resource. (b) EXTERNALITIES. Intervention by national government is justified by spatial externalities, or when benefits and/or costs of public services provided by an LGU are realized by non-residents. The jurisdiction providing the service does not consider the benefits accruing to non-residents and may therefore give low priority to such investments. (c) ECONOMIES OF SCALE. The provision of some services can be made more cost-effective if designed for a service area larger than the jurisdiction of a single LGU. A national agency can help LGUs with small jurisdictions to jointly undertake investments with adjacent LGUs to realize such economies of scale. However, it this criteria is the only basis for N intervention, NG share of the cost will be very limited. Nature of National Government Assistance Providing grants to LGUs under this policy shall be in the form of MATCHING, SPECIFIC and CLOSED-ENDED grants. The matching feature means that the provision of grants will be conditional to LGUs putting up their share of the cost and preparation work. The grants are specific in that they are for authorized expenditures in line with the intentions of the national program (they cannot be used to finance deficits of LGUs arising from spending decisions that are outside the scope of the program). The grants will be closedended because they are meant to be temporary and limited where costs are well known to both LGU and the national agency at the outset. Programs of national government agencies that involve devolved functions, particularly those that have social and/or environmental objectives, will be implemented through a costsharing arrangement between the national agency and LGUs. This shall be the main

mechanism for ensuring goal congruence between national agencies, whose primary role shall be to develop and enforce minimum standards for service delivery, and the LGUs, who will be responsible for planning and implementation of field activities. Implementation of such a program in a site will be preceded by a Memorandum of Agreement (MOA) to be negotiated and contracted by the national agencies with each participating LGU. To ensure that the projects to be covered by these agreements truly reflect local needs and priorities, the share of LGUs will be about 50 percent. The NG share may be set on a graduated scale to consider nature of project (less NG grants for projects with revenue-raising possibilities for the LGU) and the economic class of LGUs (more NG share to LGUs with higher investment needs relative to local resources). Investment proposals which do not satisfy the above criteria will continue to be governed by the standing ICC policy on LGU access to ODA loan funds. Under this policy, ODA loans for devolved activities are to be channelled as loans to LGUs through either of two conduits, namely the Municipal Development Fund or through a government financial institution under relending terms to be determined by their respective policy-making bodies. Upholding the Basic Intentions of the Devolution Policy Even as the policy recognizes conditions that call for shared responsibility of national line agencies and LGUs for achieving the desired quality and quantity of basic public services, it should not dilute but uphold the principles of devolution, as follows: 1. Accountability of elected officials. The ultimate responsibility for the public service should rest with the local chief executive. As such, national government agencies providing support should not be allowed to intervene in implementation except in cases where LGU reneges on its commitment under a project agreement with such national agencies. Ideally, the national line agency develops mechanisms for transparently and objectively monitoring the performance of local governments in these critical programs in a way that can reflect on their performance as elected officials. 2. Autonomy of Local Governments. NG-assisted programs should allow local governments to exercise independence and flexibility in setting their own priorities. NG should not resort to promises of grant financing to influence the selection and identification of investment proposals. NG, however, may assist in the preparation of proposals once the LGU has identified its priorities. 3. Consideration of Local Needs, Resources and Preferences. The planning and implementation of field activities should provide sufficient opportunities for consultation and participation by beneficiaries in the communities being assisted. This not only lessens wasteful use of resources for unsuitable interventions but also fosters the commitment of and sense of ownership by beneficiaries. Principles for Designing NG Assistance for Devolved Programs In the design of NG interventions and the appropriate formula for co-financing with LGUs, some recurring themes and principles mentioned in economic literature on and country experiences with decentralization and intergovernmental transfers are worth noting: 1. Importance of Community Involvement In order to propel LGUs to higher levels of effectiveness, national programs should strive to raise the awareness of communities of their needs. The use of nongovernmental organizations (NGOs) to organize people s organizations to reach target members of the community may be a good option. NGOs have also been effective for information, education and communication activities at the community level. Consultation of communities ensures that programs are need-based and appropriate for the local resources and capabilities. This has been documented to lead to lower project cost per beneficiary, less implementation delays, better maintenance of the facility and better cost recovery from user charges.

2. LGUs are in principle better Implementors of local projects than national line agencies because they have a closer feel of people s needs. LGUs do better than national line agencies in targeting interventions at specific communities and households. National programs should allow LGUs to make such decisions based on their awareness of the different conditions and preferences of communities within its jurisdiction. The role of national agencies may extend to defining general criteria for selection of target communities if only to ensure that the intentions of the program are made clear to LGUs. LGUs are also more accountable to the communities being served as local chief executives may be voted out of office for poor performance. National agencies who are responsible for the overall program can capitalize on this by promoting transparency in the monitoring and evaluation of projects. Objective and timely information on how LGUs have fared with respect to their management of program resources and with respect to a national standard of service performance can be very powerful in this regard. 3. Community equity contributions and LGU counterpart are essential to the quality of project outcomes. Imposing local counterpart induces a degree of local involvement and accountability for the spending even s it is being supported by national government. It is important for the following reasons: (i) it would make the recipient a major stakeholder in the project, (ii) it can be a good indicator of the LGU s need for the project, and (iii) it can influence the LGU s spending priorities to activities with such positive externalities. The counterpart would have to be large enough to force the LGU and the community to decide for themselves if the project is the best investment for their own resources. Counterpart from the community can be in-kind resources that can be supplied by its members such as labor, local materials and right-of-way. LGU counterpart can also be constituted by loan proceeds from another funding facility or under a relending scheme that can be coupled with or run in parallel to the grant facility. 4. Cost recovery through user charges is encouraged; recurrent operation and maintenance expenditures shall be given low priority for national government grants. National programs should develop mechanisms to enable LGUs to collect user charges to raise revenues for the operation and maintenance of local public facilities. If the LGUs end up with bigger operating losses as a result of the project, the program will lead to increasing dependence on national government grants for operation and maintenance contradicts the intentions of the devolution policy. For services that cover more than one LGU, mechanisms for cost-sharing should be fair and transparent so that user charges can be evenly applied by the different LGUs. 5. Implementing arrangements will promote inter-agency coordination. Inter-agency coordination will be needed for programs that may overlap in target areas and target beneficiaries. National agencies should endeavor to harmonize their prioritization criteria in order to convey consistent NG policies for supporting LGU investments. Likewise, coordination with local non-governmental organizations should be done to generate maximum participation of communities in the project and planning consultants. 6. Private sector participation should be elicited whenever feasible.

Even as responsibility for service provision may be assigned to specific levels of government, it should not be taken to mean that those government units should be directly engaged in its production. Private sector participation can and should be harnessed in production at all levels of government through competitive bidding, buildoperate-transfer schemes, franchising, and volunteerism, among others. The advantage of using the private sector derives from their track record in some sectors, e.g. basic education, health services, and community organizing where they generally outdo their government counterparts in quality and cost-effectiveness of services. Moreover, the private sector has less difficulty than an LGU in raising user charges and enforcing exclusion if there is a need to cut off services to delinquent clients. 7. The grantor s objectives will be safeguarded. Ultimately, co-financing programs will monitor implementation against stated national objectives for the sector. This will be drawn from the lead role of national line agencies in the sponsorship such programs and the sectoral justification that will usher the program through the investment appraisal process to the mobilization and release of funds for them. National agencies will monitor delivery and outcomes, undertake joint review of progress and provide technical assistance during implementation to make sure that their objectives for the program are being met. Grantors also include the oversight agencies, i.e. Department of finance, the Department of Budget and Management, and the National Economic and Development Authority, who are expected to see to it that co-financing programs with LGUs are consistent with fiscal policies and targets. The Department of the Interior and Local Governments will also be recognized as an important stakeholder as the agency that is tasked to oversee the process towards full devolution of functions as mandated by the LGC. Procedural Guide for the Establishment of a Co-Financing Program 1. Formulation of a Proposal in the Context of a Sector Program As part of their role in overseeing the development of their sector, central line agencies can take the initiative in the formulation of a co-financing program. It should be preceded by the development and adoption of a strategic plan for the sector and for the agency which would specify, among others, sectoral targets at the national and regional levels and the activities needed to achieve those targets. The strategic plan should incorporate relevant policy developments such as the Social Reform Agenda or the passage into law of a Philippine Agenda 21. It continues to be the responsibility of national agencies as proponents to do the usual steps in program development. This includes consultation with target beneficiaries and LGUs to determine local needs, appropriate roles for the different levels of government and whether there are prospects for joint implementation. The central agency will need to process the information to identify the activities within the program where, in view of equity and efficiency objectives, NG participation would be needed. 2. Program Approval Process The central agency submits to the NEDA Board through the ICC its proposal following the usual procedure and information requirements for a NEDA staff appraisal. At this point, the ICC evaluation process will confirm the proposed role assignments and whether these are consistent with devolution policy. It will also determine the budgetary provision and the funds flow mechanism, for which concurrence from other agencies may be needed (e.g. Bureau of Local Government Finance). Program policies and procedures and project approval criteria should be firmed up at this time.

The ICC will decide on the form and level of NG support for the devolved activities. This will be based on the cost-sharing formula as proposed by the central agency. Components that are not suitable for grant assistance will have to negotiate with an appropriate loan conduit. 3. Program Management Arrangements After approval by the ICC, national government assumes the responsibility for financing and securing the needed budgetary appropriations for the program. The central agency would then set up the appropriate program management arrangements. It may be useful to set up a mechanism at the regional level to which the central agency can delegate some of the project selection and monitoring responsibilities. Such a mechanism should ideally be part of a local planning or administrative body such as the Regional Development Council or even a provincial government. The program management mechanism of the central agency is best constituted by existing personnel with a view to the integration of its functions in the regular operations of the agency. The PMO can be used to demonstrate and pilot-test that agency s new role in accreditation of LGUs, monitoring delivery and outcomes and providing technical assistance to LGUs. The capacity building needs of the agency for this new role should also be adequately addressed by the program activities. 4. Project Identification and Planning Based on the principles of local autonomy that have been cited in earlier sections, LGUs should be allowed to take the initiative in identifying local projects and program activities within their priorities and local plans. Program resources at the national level can be used to do promotional activities so the information reaches the intended LGUs. LGUs which have done prior local planning or recent landuse planning activities will have a headstart. It is suggested that LGUs in need of special assistance be given such assistance in support of local planning rather than project packaging that is driven by the expectation of national government support. 5. LGU Project Approval Process The central agency may opt to set a maximum allocation for each region to achieve a geographical impact in line with the sector objective that the program is addressing. Project approval through the regional program management mechanisms will take into account such regional or geographical allocations. Approval of subprojects submitted by LGUs will conform with guidelines and criteria set at the national level. The regional representative of the national agency that is sponsoring the program can perform the role of technical oversight at this project approval stage to make sure that performance standards are well understood. To the extent possible, programs should elicit proposals from LGUs rather than PMO field units doing them for LGUs. A competitive system for selecting eligible proposals from LGUs is ideal and should be explored by proponent agencies. Approval of a sub-project for an LGU will be manifested by a formal agreement, preferably a signed Memorandum of Agreement (MOA), between that LGU and the national agency that is sponsoring the program. 6. Project Implementation Project implementation for the devolved activities will be the responsibility of the LGU to the extent that the technical requirements of the project will allow. Channelling of resources can be done through the national agency or through the Department of

Finance. The implementing capacity of the LGUs will be ascertained through eligibility requirements or technical assistance. Monitoring of project progress will be done by the same regional program management mechanisms. Such a monitoring function should be useful for providing a direct feedback into subsequent programming decisions. The regional representation at this level can make sure that agreements in the MOAs with LGUs are accomplished and sanctions for emerging are enforced.

I. NG-LGU financing arrangement For the Rural Infrastructure Sector With the rapid developments in the international trade environment such as the establishment of the World Trade Organization, liberalization/deregulation and facilitation initiatives under the Association of Southeast Asian nations (ASEAN) and the Asia Pacific Economic Cooperation, the country has to pursue more aggressively the measures to attain international competitiveness. In the agriculture sector, these measures include the provision of rural infrastructure facilities that shall boost farmersproductivity and enable them to compete in the international market. At the same time, the national government recognizes the need to ensure food security in the country, particularly in staples such as rice and corn. Investments in rural infrastructure necessary to achieve this objective shall thus be given priority. In support of the objectives cited above, the national government (NG) shall provide technical and financial assistance to local governments for the implementation of already devolved rural infrastructure projects. NG financial assistance shall be in the form of grants and/or credit extension to the local governments. The provision of grants shall be guided by the ICC policy on the financing of Local Government Projects with Social and/or Environmental Objectives approved in May 1996. On the other hand, access to credit shall be governed by a separate ICC policy. National Government Assistance to LGUs Under this sector, the activities can be classified into three groups, depending on the potential for cost-recovery from user charges, its inter-LGU spillover effects and its local impact visibility. Please refer to Table 1. The first group includes those projects which have low-inter-LGU spillover effects, have high local impact visibility and have high potential for cost-recovery. Examples of projects under this group are public markets, bus terminal and slaughter houses. For this group of projects, the national government will not be providing grant assistance. NG assistance, if any, would be limited to the provision of credit. At the same time, NG shall encourage LGUs to actively explore private sector participation in the provision of these facilities. To support the LGUs initiatives toward privatization , the NG will be providing technical support in project development, preparation of feasibility studies and tender documents and, in negotiations with the private sector. The second group includes those projects which have low potential for cost recovery, medium inter-LG spillover effects and high local visibility impact. Examples of projects belonging to this group are provincial and municipal roads. Although these projects have spillover benefits to other LGUs and the potential for cost recovery from these projects is low, these projects usually top the list of projects that would be financed from local resources because of its high impact visibility. Taking this into account, NG shall not provide grant assistance to this type of projects. As in the first group, NG assistance shall be limited to the provision of credit and technical assistance. The third group includes infrastructure facilities which have medium potential for cost recovery medium inter-LGU spillover effects and with low local visibility impact. Communal irrigation systems belong to this group. Since the devolution, virtually no new communal irrigation project has been developed by LGU. This may be attributed to the fact that communal irrigation projects require very high investment costs. This is also partly due to the low local visibility impact of such facilities. In support of the Generalized Agreements on Trade and Tariffs (GATT) commitments of the government and the objective to ensure food security in rice and corn, NG may provide the following assistance to communal irrigation projects: (i) selective provision of grants, (ii) access to credit and, (iii) provision of technical assistance.

The grants shall be distributed among LGUs based on the Department of Agriculture recommendation of target LGU beneficiaries considering optimal areas for rice and corn production. The maximum cost-share of the national government is 50 percent of the capital investment cost. Per the General Guidelines, the cost-sharing shall be graduated based on the income class of the LGU beneficiaries. Below is a suggested schedule for a NGLGU/Farmer IrrigatorsAssociation (FIA) cost-sharing arrangement for capital investments in 1 a community irrigation project. The graduation is based on the distribution of projected net paying capacity of average 2 municipalities using the Commission on Audit Definition , using 1991-1995 LGU financial data. Income Class st 1 class nd rd 2 and 3 class th 4 class th th 5 and 6 class NG Share 20 30 40 50 LGU/FIA Share 80 70 60 50

As for the operation and maintenance cost, this shall be fully covered by farmersirrigation associations, with the beneficiary farmers paying service charges to their respective FIA that would be sufficient to fully cover the O & M cost. The fees charged to the farmers shall be by their FIA.
1 2

1 2

Results of the Second Irrigation Sector Preparatory Technical Study shall be considered. Estimated in the PIDS Study, Local Government Units Access to the Private Capital Markets, December 12, 199 Commission On Audit Definition: Net Paying Capacity (NPC) = Adjusted Gross Paying Capacity (AGPC) Outstanding Loan Balances (D) where, AGPC=Gross Revenue Current Expenditure Requirements

II. NG-LGU Financing Arrangement for the Water Supply Sector For the remainder of the medium term 1997-1998, the national government has set a target to increase the proportion of the population served with potable water to 76.4 percent nationwide. In particular, the government aims to increase the service coverage to 81.6 percent in Metro Manila and outlying areas, 68.8 percent in other urban areas, and about 79 percent in the rural areas. To a large extent, the attainment of these targets rests on local government units who have been given the primary responsibility for the provision of domestic water requirements, as a result of the Local Government Code of 1991. Given the national commitment to provide universal access to potable water, and the fact that financially weaker LGUs may be unable to provide adequate services, the national government retains an interest in the selective provision of assistance. National Government Assistance to LGUs National support to LGUs for the water sector takes the form of technical and financial assistance. The NEDA Board Resolution Number 4 (series of 1994) delineates the responsibilities of national agencies in the water sector. The participation of the Department of the Interior and Local Government (DILG) consists of general administration and institution building, such as assistance in the formation of Rural Waterworks and Sanitation Association (RWSA) or Barangay Waterworks Service Associations (BWSA). On the other hand, the DPWH together with the DILG and the Department of Health, are mandated to provide technical assistance in planning, implementation, and operation and maintenance of water supply facilities. Finally, LWUA is mandated to implement financially viable Level III water supply projects. Financial assistance is extended to LGUs at varying terms depending on the strength and capabilities of local government units and communities, the nature of the investment, as well as the cost at which funds are obtained by the national government or government financing institutions. Financial assistance is channelled to LGUs in the form of loans, grants, or a mixture of both. The financing arrangements for national and local government cooperation, as detailed herein, refer specifically to the provision of grant financing to LGUs. NG-LGU Cost Sharing Arrangement The provision of national government grant funds for water supply projects is premised on equity considerations and is therefore limited to fifth and sixth class LGUs as classified by the Department of Finance Bureau of Local Government Finance. LGUs that are classified as third class or higher are eligible for assistance in the form of credit financing which is to be governed by a separate policy of the NEDA Board. The selection of the appropriate level of water system to be financed will be based on the commitment of target beneficiaries, and determined according to their willingness and capacity to pay user charges. Grant assistance will be extended only for Level I (point source) systems. The share of the national government should be within a range of fifty percent of the total capital cost, inclusive of the cost of labor and land. The magnitude of the national share will be applied on a caseto-case basis, depending on the assessment of LGUsrevenue generating capability. The remaining 50 percent should be provided as equity by LGUs, communities, or BWSAs/RWSAs. All costs pertaining to operation and maintenance after the system has been put in place should be shouldered by the LGUs or communities.

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The terms set forth in this policy implementation plan shall apply to all water supply projects financed through national government grants, regardless of the nature, source, and terms at which the national government obtains the funds.

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III. NG-LGU Financing Arrangement for the Health Sector Under the Local Government Code of 1991, practically all health expenditures have been devolved from the National Government (NG) to local government units (LGUs) for basic health services. Nonetheless, the NG, through the Department of Health (DOH), has continued to finance devolved health programs within the context of national priorities. The proposed financing arrangement between NG and LGUs is based on an assignment of responsibilities for health programs and activities. Categories of Health Programs Category 1 consists of program/activities which were not devolved and would thus be implemented by DOH out of its regular funds. These are: health administration (i.e., health information system, local government assistance and monitoring, health care financing, district health systems/hospitals as centers of wellness), disaster preparedness, voluntary blood service, continuing education and training for health workers, and community health insurance. Category 2 consists of devolved programs/activities which NG perceives as deserving of national support. NG involvement in a devolved health program/activity will be based on the presence of: a) externalities (i.e., whether the devolved activity or the absence of it has significant national impact): and b) equity considerations. These programs/activities would be: On externalities 2.1. health programs that address health problems of a national scope, where the LGU capacity is weak, and where LGU failure can have disastrous consequences (e.g., resulting in an epidemic); these include STD/AIDS prevention and control, malaria control, TB control, quarantine services and control of filariasis, dengue and schistosomiasis; 2.2. health programs strongly supportive of national development goals, i.e., family planning, and On equity 2.3. health programs with clear redistributional or social amelioration objectives, i.e., control of acute and respiratory infection, expanded program for immunization and TB control; and Category 3 consists of devolved activities which do not merit NG support. These are the activities not listed in the above categories. NG/DOH role in these LGU-assigned health programs are recommended to be focused on standard-setting, training and information dissemination. Cost-Sharing Arrangement for Projects under Category 2 1. NG assistance to LGUs is guided by the ICC policy that only matching, specific and closeended grants shall be extended. Requiring an LGU to put-up a matching fund for a project and allowing only specific activities of the project as eligible for assistance, will help insure that the activity is accorded priority by the LGUs. The close-ended principle is meant to convey that the assistance is temporary so that LGU efforts to self-sustain the project will be encouraged. 2. NG assistance to local health activities are justified on efficiency and equity grounds, since provision of basic health services is perceived as a form of income redistribution. Thus all LGUs may avail of NG support for programs listed in Category 2. To reflect an equitable cost-sharing arrangement, NG support will be graduated, based on LGU income class. The lower the income class, the higher the national support will be. However, LGU

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share should not be lower than 50 percent of the total capital cost of the program or project. The proposed cost-sharing arrangements are shown in the table below:

Proposed Ng Share for health Programs LGU Class st nd 1 /2 rd th 3 /4 th th 5 /6 NG Share 50% 70% 90%

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Table 1: Characteristics of Devolved Rural Infrastructure Activities and the Required NG Intervention: Devolved Activity Potential for cost Recovery from User Charges Low Inter-LGU Spillover Effects Local Impact Visibility National Intervention Government

Group

Multipurpose hall/plaza/ pavement Public Market

- Technical Assistance Low High - Credit Assistance - Technical assistance High Low High - Credit assistance - Technical assistance

Bus Terminal

High

Low

High - Credit assistance - Technical assistance

Provincial Roads

Low

Medium

High - Credit assistance - Technical assistance

Municipal Roads

Low

Medium

High - Credit assistance - Cost Sharing Arrangement -Credit assistance - Technical Assistance

Communal Irrigation Systems

Medium

Medium

Low/Medium

A ceiling on the grant per hectare would also be specified by the national government, to ever__ the grant across LGUs who would have varying capital investment requirements. It should however be noted that in many areas of the country, shallow tubewells, low-lift pump and hand tubewells appear promising from both financial and technical considerations. Grant financing shall not be made available for this type of irrigation systems. For this type of project the role of NG and/or LGU may have to be limited to improving the access of farmer irrigators credit and providing technical assistance to them.

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PROPOSED NG-LGU COST SHARING SCHEME Sector Activity 1. Water Supply (only for Level I) LGU Income Class 1st 2nd 3rd and 4th 5th and 6th
th

Revised NG Share (%) 0 0 0 50%

Remarks No NG grants for Level 2 and 3 water systems

II. Rural Infrastructure A. Public Market Bus Terminal B. Provincial Roads Municipal Roads 1st-6 1st-6th
th

0 0

Revenue generating projects will not be provided NG grants

NG support only possible for access roads, farm-tomarket roads covered by approved national programs (e.g., environment or agrarian reform) The cost-sharing arrangement applies only to capital costs

1st-6 1st-6th

0 0

C. Communal Irrigation

1st 2nd and 3rd 4th 5th and 6th 1st and 2nd 3rd and 4th 5th and 6th

20 30 40 50 50 70 90

III. Health

The cost-sharing arrangement applies only to capital costs

IV. Environment A. Blue

Watershed protection, municipal fishery mgt., coastal resource mgt., mangrove protection/rehabilitation

1st 2nd and 3rd 4th 6th

20 50 70

Cost-sharing based on total project cost (PS and MOOE included in the NG grant)

B. Green
Reforestation and forest related activities, soil conservation, protected area mgt., wildlife conservation

1st 2nd and 3rd th 4th 6

20 50 70

Cost-sharing based on total project cost (PS and MOOE included in the NG grant)

C. Brown
Solid waste mgt., vehicular emission control, water pollution control, traffic engineering

1st and 2nd 3rd and 4th th 5th and 6

0 0 0

NG will shoulder costs pertaining to rehabilitation of ecosystems. LGUs shall shoulder all other costs (i.e., enforcement investment, O & M).

D. Sanitary Support
Facilities for Public Markets and Slaughterhouses

3rd and 4th th 5th and 6

50 70

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IV. Ng-LGU financing Arrangement for the Environment Sector The 1991 Local Government Code clearly delineated the environmental activities that should be undertaken between the national government and the local government units. Section 17 (Basic Principles) under the General Provision of the LGC as well as the Addendum on Memorandum Circular No. 30 clearly defines the responsibilities of the LGUs under the environment and natural resources sector. The planning, financing and implementation of local environment projects have been devolved to the LGUs. Even with the LGC, the NG through the Department of Environment and Natural Resources has continued to finance local environmental activities. NG financing support for environment projects has been justified by the following: the presence of externalities, high transaction costs, information asymmetry, absence of property rights and proper pricing of natural resources. National Government Responsibilities 1. The NG shall be responsible for providing overall policy direction for the sector. Towards this end, a national environmental plan is necessary to clearly identify the major thrusts of the government and to determine which projects should be of NG or LGU concern. It will also help guide LGUs into activities which support these thrusts. 2. The NG through the DENR shall be responsible for the setting-up and enforcement of appropriate policies and standards concerning the sector. These in turn will serve as basis for LGUs to set up their own local standards for local environmental projects. To enforce these standards, the national and local governments may levy, in accordance with existing laws and regulations and in consultation with the public, user charges and penalties accordingly. 3. The NG will provide technical assistance to LGUs to improve their capability in undertaking the devolved functions of the sector. Information, education and communications, not only on technical expertise in project development, but also on appropriate land use, environmental considerations, etc. shall be provided through the DENR and other agencies. 4. The responsibility for organization, coordination and management of communities concerned/affected by environmental projects will be accorded at the appropriate government level (the NG shall be responsible for environmental projects included in the national environmental program while local environmental projects shall be implemented by the LG concerned). Inter-LG negotiation, cooperation, financing and implementation of projects may arise due to the spillover effects and externalities of environmental projects. In such cases, the role of the NG, through the DENR, is to facilitate, in coordination with the concerned local government and bodies, the participation of all affected communities with the project. NG-LGU Cost Sharing Arrangement Local environment projects as a rule should be undertaken at the LGU level. National government support may be warranted where there are externalities and equity considerations. NG equity contribution shall be limited to a percentage of the investment cost. Personnel and MOOE shall be shouldered by the LGUs. Externalities in environmental activities may be spatial or temporal in nature. There are instances wherein it is more cost-effective for projects to be designed to cover a number of LGUs. Before a decision is made to extend financial assistance however, NG explore the potential of inter-LGU in the financing, implementation and monitoring of projects. Externalities also arise from the expectation that environmental benefits are generated much later than the time the investment is undertaken. As a result, LGUs may be discouraged from investing in environment projects.

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The provision of national government support to local environmental projects is also premised on equity considerations. The eligibility of LGUs to access funds from the NG will be based on the income class of the LGU. Poorer LGUs will be eligible for higher grants. The maximum support that LGUs can receive from the NG for the environment sector is 70 percent of the investment cost (see Table below). No grant support will be extended to environmental activities falling under the brown sector. Further, NG support will be time bound. This strategy will enable LGUs to plan for the eventual absorption of such expenditures within their budget. NG-LGU Cost-Sharing Formula for Environmental Projects
1

LGU Class 1 class nd rd 2 and 3 Class th th th 4 , 5 and 6 Class

3 st

Environmental Sector Blue and green Blue and green Blue and green

NG Share of Investment Cost (%) 20 50 70

Blue sector includes such activities as municipal fishery management, coastal resource management, mangrove protection; Green sector includes such activities as reforestation, soil conservation, wildlife conservation, and protected area management; Brown sector includes such activities as solid waste management, vehicular emission control, pollution control.

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