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National Economic and Development AuthorityAmber Avenue, City of Pasig, Metro Manila

INVESTMENT COORDINATION COMMITTEE

POLICY FRAMEWORK FOR NATIONAL GOVERNMENTASSISTANCE 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 powersand responsibilities from the national government (NG) to local government units (LGUs).The LGUs transfers the primary responsibility for the provision and delivery of basic servicesto communities heretofore performed by national agencies such as the Department of Health(DOH), Department of social Welfare and Development (DSWD), Department of Environmentand natural Resources (DENR), and the Department of Agriculture (DA). While this change isenvisioned to improve the design and effectiveness of devolved activities, it also introducesrisks in connection with the efficient and equitable delivery of public services.

With the increase of LGU expenditure responsibilities, the share of local governmentsin total revenues, the Internal Revenue Allotment (IRA), has also been increased. The LocalGovernment Code (LGC) increased the IRA share from 30 percent in 1991 to 40 per cent in1994. This effectively raised the share of local governments to toal revenues from P12 billionin 1991 to P46 billion in 1994. With more resources at their disposal, LGUs can exercisemore autonomy in channelling resources to investments in accordance with local priorities.

Even in the post-devolution period, however, the NEDA Board’s InvestmentCoordination committee has allowed national line agencies to package, finance and evenimplement devolved programs and projects on a case by case approach on the basis ofsectoral justifications and observed patterns of underinvestment by LGUs. This haseffectively increased the role of national line agencies in devolved activities clearlycontradicting 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 ofLGUs and national agencies to their new roles may take an unnecessarily extended period oftime. Moreover, the fiscal effects of such decisions have been exerting pressure on thenational budget like a double-edged sword as budgetary requirements have been growing forboth line agencies and LGUs for the same set of functions and sectoral objectives.

The above considerations indicate the need to define appropriate financing policies andassignment of roles in government to facilitate the transition towards new arrangementsmandated by the LGC.

Case for Selective NG Intervention

The continued involvement of the national government in selected devolved activitiesmay 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) notdirectly involved in the investment undertaking. There is usually a disincentive to invest in aproject which provides indirect benefits to other parties who have no intention to contribute tothe 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, hencethe risk of underinvestment or underprovision.

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

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areas, excess capacity and unnecessary investments. The provision of secondary education,communal irrigation, and sewerage trunk lines are some examples where economies of scalemay be observed.

Investments in social services and livelihood enhancement that are undertaken aspoverty alleviation strategies are forms of the public sector’s redistributive function is bestoverseen by the central government.

Statement of Policy

It shall be the policy of national government to support the financing of devolvedactivities with social and/or environmental benefits in line with efforts to promote the goals ofthe Medium-Term Philippine Development Plan for sustainable human development andsocial development anchored on poverty alleviation. Such support may, as necessary,provide financial and other forms of assistance to complement or augment resources of LGUscoming from internal revenue allotments (IRA) and local revenues. However, the assistanceto be provided under this policy will be limited and temporary, performance-based, andtargeted at selected groups of LGUs.

In particular, central government can intervene in the financing and management ofdevolved functions through sponsorship of national government agencies provided they meetone or more of the criteria explained below:

(a) EQUITY, IF LGUs that are faced with tight budgetary constraints are unable toprovide the minimum level of services to their constituents, national governmentintervention may be warranted. The eligibility of LGUs will be based on incomeclass and on economic class (as may be measured by poverty incidence).Programs of assistance sponsored by a national government agency should beable to give priority to the needs of relatively disadvantaged LGUs in the allocationof resources.

However, the intervention should be designed to be transitory and limited to as notto discourage sound fiscal management and prudent use of resource.

(b) EXTERNALITIES. Intervention by national government is justified by spatialexternalities, or when benefits and/or costs of public services provided by an LGUare realized by non-residents. The jurisdiction providing the service does notconsider the benefits accruing to non-residents and may therefore give low priorityto such investments.

(c) ECONOMIES OF SCALE. The provision of some services can be made morecost-effective if designed for a service area larger than the jurisdiction of a singleLGU. A national agency can help LGUs with small jurisdictions to jointly undertakeinvestments with adjacent LGUs to realize such economies of scale. However, itthis criteria is the only basis for N intervention, NG share of the cost will be verylimited.

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 ofgrants 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 intentionsof the national program (they cannot be used to finance deficits of LGUs arising fromspending decisions that are outside the scope of the program). The grants will be closed-ended because they are meant to be temporary and limited where costs are well known toboth LGU and the national agency at the outset.

Programs of national government agencies that involve devolved functions, particularlythose that have social and/or environmental objectives, will be implemented through a cost-sharing arrangement between the national agency and LGUs. This shall be the main

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mechanism for ensuring goal congruence between national agencies, whose primary roleshall be to develop and enforce minimum standards for service delivery, and the LGUs, whowill be responsible for planning and implementation of field activities. Implementation of sucha program in a site will be preceded by a Memorandum of Agreement (MOA) to be negotiatedand contracted by the national agencies with each participating LGU. To ensure that theprojects to be covered by these agreements truly reflect local needs and priorities, the shareof LGUs will be about 50 percent. The NG share may be set on a graduated scale toconsider nature of project (less NG grants for projects with revenue-raising possibilities for theLGU) and the economic class of LGUs (more NG share to LGUs with higher investmentneeds relative to local resources).

Investment proposals which do not satisfy the above criteria will continue to begoverned 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 twoconduits, namely the Municipal Development Fund or through a government financialinstitution 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 nationalline 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 shouldrest with the local chief executive. As such, national government agencies providingsupport should not be allowed to intervene in implementation except in cases where LGUreneges on its commitment under a project agreement with such national agencies.Ideally, the national line agency develops mechanisms for transparently and objectivelymonitoring the performance of local governments in these critical programs in a way thatcan reflect on their performance as elected officials.

2. Autonomy of Local Governments. NG-assisted programs should allow local governmentsto exercise independence and flexibility in setting their own priorities. NG should notresort to promises of grant financing to influence the selection and identification ofinvestment proposals. NG, however, may assist in the preparation of proposals once theLGU has identified its priorities.

3. Consideration of Local Needs, Resources and Preferences. The planning andimplementation of field activities should provide sufficient opportunities for consultationand participation by beneficiaries in the communities being assisted. This not onlylessens wasteful use of resources for unsuitable interventions but also fosters thecommitment 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 withLGUs, some recurring themes and principles mentioned in economic literature on and countryexperiences with decentralization and intergovernmental transfers are worth noting:

1. Importance of Community Involvement

In order to propel LGUs to higher levels of effectiveness, national programsshould strive to raise the awareness of communities of their needs. The use of non-governmental organizations (NGOs) to organize people’s organizations to reach targetmembers of the community may be a good option. NGOs have also been effective forinformation, education and communication activities at the community level.

Consultation of communities ensures that programs are need-based andappropriate for the local resources and capabilities. This has been documented to leadto lower project cost per beneficiary, less implementation delays, better maintenance ofthe facility and better cost recovery from user charges.

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2. LGUs are in principle better Implementors of local projects than national lineagencies because they have a closer feel of people’s needs.

LGUs do better than national line agencies in targeting interventions at specificcommunities and households. National programs should allow LGUs to make suchdecisions based on their awareness of the different conditions and preferences ofcommunities within its jurisdiction. The role of national agencies may extend todefining general criteria for selection of target communities if only to ensure that theintentions of the program are made clear to LGUs.

LGUs are also more accountable to the communities being served as local chiefexecutives may be voted out of office for poor performance. National agencies whoare responsible for the overall program can capitalize on this by promotingtransparency in the monitoring and evaluation of projects. Objective and timelyinformation on how LGUs have fared with respect to their management of programresources and with respect to a national standard of service performance can be verypowerful in this regard.

3. Community equity contributions and LGU counterpart are essential to the quality ofproject outcomes.

Imposing local counterpart induces a degree of local involvement andaccountability for the spending even s it is being supported by national government. Itis important for the following reasons: (i) it would make the recipient a majorstakeholder in the project, (ii) it can be a good indicator of the LGU’s need for theproject, and (iii) it can influence the LGU’s spending priorities to activities with suchpositive externalities. The counterpart would have to be large enough to force the LGUand the community to decide for themselves if the project is the best investment fortheir own resources. Counterpart from the community can be in-kind resources thatcan 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 fundingfacility or under a relending scheme that can be coupled with or run in parallel to thegrant facility.

4. Cost recovery through user charges is encouraged; recurrent operation andmaintenance expenditures shall be given low priority for national governmentgrants.

National programs should develop mechanisms to enable LGUs to collect usercharges to raise revenues for the operation and maintenance of local public facilities. Ifthe LGUs end up with bigger operating losses as a result of the project, the program willlead to increasing dependence on national government grants for operation andmaintenance contradicts the intentions of the devolution policy.

For services that cover more than one LGU, mechanisms for cost-sharing shouldbe fair and transparent so that user charges can be evenly applied by the differentLGUs.

5. Implementing arrangements will promote inter-agency coordination.

Inter-agency coordination will be needed for programs that may overlap in targetareas and target beneficiaries. National agencies should endeavor to harmonize theirprioritization criteria in order to convey consistent NG policies for supporting LGUinvestments. Likewise, coordination with local non-governmental organizations shouldbe done to generate maximum participation of communities in the project and planningconsultants.

6. Private sector participation should be elicited whenever feasible.

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Even as responsibility for service provision may be assigned to specific levels ofgovernment, it should not be taken to mean that those government units should bedirectly engaged in its production. Private sector participation can and should beharnessed in production at all levels of government through competitive bidding, build-operate-transfer schemes, franchising, and volunteerism, among others. Theadvantage of using the private sector derives from their track record in some sectors,e.g. basic education, health services, and community organizing where they generallyoutdo their government counterparts in quality and cost-effectiveness of services.Moreover, the private sector has less difficulty than an LGU in raising user charges andenforcing 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 statednational objectives for the sector. This will be drawn from the lead role of national lineagencies in the sponsorship such programs and the sectoral justification that will usherthe program through the investment appraisal process to the mobilization and releaseof funds for them. National agencies will monitor delivery and outcomes, undertakejoint review of progress and provide technical assistance during implementation tomake sure that their objectives for the program are being met.

Grantors also include the oversight agencies, i.e. Department of finance, theDepartment of Budget and Management, and the National Economic and DevelopmentAuthority, who are expected to see to it that co-financing programs with LGUs areconsistent with fiscal policies and targets. The Department of the Interior and LocalGovernments will also be recognized as an important stakeholder as the agency that istasked to oversee the process towards full devolution of functions as mandated by theLGC.

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 lineagencies can take the initiative in the formulation of a co-financing program. It shouldbe preceded by the development and adoption of a strategic plan for the sector and forthe agency which would specify, among others, sectoral targets at the national andregional levels and the activities needed to achieve those targets. The strategic planshould incorporate relevant policy developments such as the Social Reform Agenda orthe passage into law of a Philippine Agenda 21.

It continues to be the responsibility of national agencies as proponents to do theusual steps in program development. This includes consultation with targetbeneficiaries and LGUs to determine local needs, appropriate roles for thedifferent levels of government and whether there are prospects for jointimplementation. The central agency will need to process the information toidentify the activities within the program where, in view of equity and efficiencyobjectives, NG participation would be needed.

2. Program Approval Process

The central agency submits to the NEDA Board through the ICC its proposalfollowing the usual procedure and information requirements for a NEDA staff appraisal.

At this point, the ICC evaluation process will confirm the proposed roleassignments and whether these are consistent with devolution policy. It will alsodetermine the budgetary provision and the funds flow mechanism, for whichconcurrence from other agencies may be needed (e.g. Bureau of Local GovernmentFinance). Program policies and procedures and project approval criteria should befirmed up at this time.

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The ICC will decide on the form and level of NG support for the devolvedactivities. This will be based on the cost-sharing formula as proposed by the centralagency. Components that are not suitable for grant assistance will have to negotiatewith an appropriate loan conduit.

3. Program Management Arrangements

After approval by the ICC, national government assumes the responsibility forfinancing and securing the needed budgetary appropriations for the program. Thecentral 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 centralagency can delegate some of the project selection and monitoring responsibilities.Such a mechanism should ideally be part of a local planning or administrative bodysuch as the Regional Development Council or even a provincial government.

The program management mechanism of the central agency is best constitutedby existing personnel with a view to the integration of its functions in the regularoperations of the agency. The PMO can be used to demonstrate and pilot-test thatagency’s new role in accreditation of LGUs, monitoring delivery and outcomes andproviding technical assistance to LGUs. The capacity building needs of the agency forthis 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 earliersections, LGUs should be allowed to take the initiative in identifying local projects andprogram activities within their priorities and local plans. Program resources at thenational level can be used to do promotional activities so the information reaches theintended LGUs.

LGUs which have done prior local planning or recent landuse planning activitieswill have a headstart. It is suggested that LGUs in need of special assistance be givensuch assistance in support of local planning rather than project packaging that isdriven 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 toachieve a geographical impact in line with the sector objective that the program isaddressing. Project approval through the regional program management mechanismswill take into account such regional or geographical allocations. Approval of sub-projects submitted by LGUs will conform with guidelines and criteria set at the nationallevel.

The regional representative of the national agency that is sponsoring theprogram can perform the role of technical oversight at this project approval stage tomake sure that performance standards are well understood.

To the extent possible, programs should elicit proposals from LGUs rather thanPMO field units doing them for LGUs. A competitive system for selecting eligibleproposals 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 thenational agency that is sponsoring the program.

6. Project Implementation

Project implementation for the devolved activities will be the responsibility of theLGU to the extent that the technical requirements of the project will allow. Channellingof resources can be done through the national agency or through the Department of

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Finance. The implementing capacity of the LGUs will be ascertained through eligibilityrequirements or technical assistance.

Monitoring of project progress will be done by the same regional programmanagement mechanisms. Such a monitoring function should be useful for providinga direct feedback into subsequent programming decisions. The regionalrepresentation at this level can make sure that agreements in the MOAs with LGUsare accomplished and sanctions for emerging are enforced.

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I. NG-LGU financing arrangementFor the Rural Infrastructure Sector

With the rapid developments in the international trade environment such as the establishmentof the World Trade Organization, liberalization/deregulation and facilitation initiatives underthe Association of Southeast Asian nations (ASEAN) and the Asia Pacific EconomicCooperation, the country has to pursue more aggressively the measures to attaininternational competitiveness. In the agriculture sector, these measures include the provisionof rural infrastructure facilities that shall boost farmers’productivity and enable them tocompete in the international market.

At the same time, the national government recognizes the need to ensure food security in thecountry, particularly in staples such as rice and corn. Investments in rural infrastructurenecessary to achieve this objective shall thus be given priority.

In support of the objectives cited above, the national government (NG) shall provide technicaland financial assistance to local governments for the implementation of already devolved ruralinfrastructure projects. NG financial assistance shall be in the form of grants and/or creditextension to the local governments. The provision of grants shall be guided by the ICC policyon the financing of Local Government Projects with Social and/or Environmental Objectivesapproved in May 1996. On the other hand, access to credit shall be governed by a separateICC policy.

National Government Assistance to LGUs

Under this sector, the activities can be classified into three groups, depending on the potentialfor cost-recovery from user charges, its inter-LGU spillover effects and its local impactvisibility. Please refer to Table 1.

The first group includes those projects which have low-inter-LGU spillover effects, have highlocal impact visibility and have high potential for cost-recovery. Examples of projects underthis group are public markets, bus terminal and slaughter houses.

For this group of projects, the national government will not be providing grant assistance. NGassistance, if any, would be limited to the provision of credit. At the same time, NG shallencourage LGUs to actively explore private sector participation in the provision of thesefacilities. To support the LGUs initiatives toward “privatization”, the NG will be providingtechnical support in project development, preparation of feasibility studies and tenderdocuments and, in negotiations with the private sector.

The second group includes those projects which have low potential for cost recovery, mediuminter-LG spillover effects and high local visibility impact. Examples of projects belonging tothis group are provincial and municipal roads. Although these projects have spillover benefitsto other LGUs and the potential for cost recovery from these projects is low, these projectsusually top the list of projects that would be financed from local resources because of its highimpact visibility. Taking this into account, NG shall not provide grant assistance to this type ofprojects. As in the first group, NG assistance shall be limited to the provision of credit andtechnical assistance.

The third group includes infrastructure facilities which have medium potential for cost recoverymedium inter-LGU spillover effects and with low local visibility impact. Communal irrigationsystems belong to this group.

Since the devolution, virtually no new communal irrigation project has been developed byLGU. This may be attributed to the fact that communal irrigation projects require very highinvestment 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 thegovernment and the objective to ensure food security in rice and corn, NG may provide thefollowing assistance to communal irrigation projects: (i) selective provision of grants, (ii)access to credit and, (iii) provision of technical assistance.

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The grants shall be distributed among LGUs based on the Department of Agriculturerecommendation of target LGU beneficiaries considering optimal areas for rice and cornproduction. The maximum cost-share of the national government is 50 percent of the capitalinvestment cost. Per the General Guidelines, the cost-sharing shall be graduated based onthe income class of the LGU beneficiaries. Below is a suggested schedule for a NG-LGU/Farmer Irrigators’Association (FIA) cost-sharing arrangement for capital investments ina community irrigation project.

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The graduation is based on the distribution of projected net paying capacity of averagemunicipalities using the Commission on Audit Definition

2, using 1991-1995 LGU financial

data.

Income Class NG Share LGU/FIA Share1

stclass 20 80

2nd

and 3rd

class 30 704

thclass 40 60

5th

and 6th

class 50 50

As for the operation and maintenance cost, this shall be fully covered by farmers’irrigationassociations, with the beneficiary farmers paying service charges to their respective FIA thatwould be sufficient to fully cover the O & M cost. The fees charged to the farmers shall be bytheir FIA.

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1Results of the Second Irrigation Sector Preparatory Technical Study shall be considered.

2Estimated 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

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II. NG-LGU Financing Arrangementfor the Water Supply Sector

For the remainder of the medium term 1997-1998, the national government has set a target toincrease the proportion of the population served with potable water to 76.4 percentnationwide. In particular, the government aims to increase the service coverage to 81.6percent in Metro Manila and outlying areas, 68.8 percent in other urban areas, and about 79percent in the rural areas. To a large extent, the attainment of these targets rests on localgovernment units who have been given the primary responsibility for the provision of domesticwater 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 thatfinancially weaker LGUs may be unable to provide adequate services, the nationalgovernment 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 financialassistance. The NEDA Board Resolution Number 4 (series of 1994) delineates theresponsibilities of national agencies in the water sector. The participation of the Departmentof the Interior and Local Government (DILG) consists of general administration and institutionbuilding, such as assistance in the formation of Rural Waterworks and Sanitation Association(RWSA) or Barangay Waterworks Service Associations (BWSA). On the other hand, theDPWH together with the DILG and the Department of Health, are mandated to providetechnical assistance in planning, implementation, and operation and maintenance of watersupply facilities. Finally, LWUA is mandated to implement financially viable Level III watersupply projects.

Financial assistance is extended to LGUs at varying terms depending on the strength andcapabilities of local government units and communities, the nature of the investment, as wellas the cost at which funds are obtained by the national government or government financinginstitutions. Financial assistance is channelled to LGUs in the form of loans, grants, or amixture of both.

The financing arrangements for national and local government cooperation, as detailedherein, 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 onequity considerations and is therefore limited to fifth and sixth class LGUs as classified by theDepartment of Finance – Bureau of Local Government Finance. LGUs that are classified asthird class or higher are eligible for assistance in the form of credit financing which is to begoverned by a separate policy of the NEDA Board.

The selection of the appropriate level of water system to be financed will be based on thecommitment of target beneficiaries, and determined according to their willingness andcapacity to pay user charges.

Grant assistance will be extended only for Level I (point source) systems. The share of thenational government should be within a range of fifty percent of the total capital cost, inclusiveof the cost of labor and land. The magnitude of the national share will be applied on a case-to-case basis, depending on the assessment of LGUs’revenue generating capability. Theremaining 50 percent should be provided as equity by LGUs, communities, orBWSAs/RWSAs.

All costs pertaining to operation and maintenance after the system has been put in placeshould 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 projectsfinanced through national government grants, regardless of the nature, source, and terms atwhich the national government obtains the funds.

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III. NG-LGU Financing Arrangementfor the Health Sector

Under the Local Government Code of 1991, practically all health expenditures have beendevolved from the National Government (NG) to local government units (LGUs) for basichealth services. Nonetheless, the NG, through the Department of Health (DOH), hascontinued to finance devolved health programs within the context of national priorities. Theproposed financing arrangement between NG and LGUs is based on an assignment ofresponsibilities for health programs and activities.

Categories of Health Programs

Category 1 consists of program/activities which were not devolved and would thus beimplemented by DOH out of its regular funds. These are: health administration (i.e., healthinformation system, local government assistance and monitoring, health care financing,district health systems/hospitals as centers of wellness), disaster preparedness, voluntaryblood service, continuing education and training for health workers, and community healthinsurance.

Category 2 consists of devolved programs/activities which NG perceives as deserving ofnational support. NG involvement in a devolved health program/activity will be based on thepresence of: a) externalities (i.e., whether the devolved activity or the absence of it hassignificant national impact): and b) equity considerations. These programs/activities wouldbe:

On externalities

2.1. health programs that address health problems of a national scope, where the LGUcapacity 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, dengueand schistosomiasis;

2.2. health programs strongly supportive of national development goals, i.e., familyplanning, 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 andTB control; and

Category 3 consists of devolved activities which do not merit NG support. These are theactivities not listed in the above categories. NG/DOH role in these LGU-assigned healthprograms are recommended to be focused on standard-setting, training and informationdissemination.

Cost-Sharing Arrangement for Projects under Category 2

1. NG assistance to LGUs is guided by the ICC policy that only matching, specific and close-ended grants shall be extended. Requiring an LGU to put-up a matching fund for aproject and allowing only specific activities of the project as eligible for assistance, willhelp insure that the activity is accorded priority by the LGUs. The close-ended principle ismeant to convey that the assistance is temporary so that LGU efforts to self-sustain theproject 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 anequitable cost-sharing arrangement, NG support will be graduated, based on LGU incomeclass. 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 orproject. The proposed cost-sharing arrangements are shown in the table below:

Proposed Ng Share for health Programs

LGU Class NG Share1

st/ 2

nd50%

3rd

/ 4th

70%5

th/ 6

th90%

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Table 1: Characteristics of Devolved Rural Infrastructure Activities and the Required NGIntervention:

GroupDevolvedActivity

Potential forcost Recoveryfrom UserCharges

Inter-LGUSpilloverEffects

Local ImpactVisibility

National GovernmentIntervention

1Multi-purposehall/plaza/pavement

Low Low High- Technical Assistance

- Credit Assistance

PublicMarket

High Low High- Technical assistance

- Credit assistance

BusTerminal

High Low High- Technical assistance

- Credit assistance

2 ProvincialRoads

Low Medium High- Technical assistance

- Credit assistance

MunicipalRoads

Low Medium High- Technical assistance

- Credit assistance

3CommunalIrrigationSystems

Medium Medium Low/Medium- Cost SharingArrangement

-Credit assistance

- Technical Assistance

A ceiling on the grant per hectare would also be specified by the national government, toever__ 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 pumpand hand tubewells appear promising from both financial and technical considerations. Grantfinancing shall not be made available for this type of irrigation systems. For this type ofproject the role of NG and/or LGU may have to be limited to improving the access of farmerirrigators credit and providing technical assistance to them.

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PROPOSED NG-LGU COST SHARING SCHEME

Sector Activity LGU IncomeClass

Revised NG Share(%)

Remarks

1. Water Supply(only for Level I)

1st2nd

3rd and 4th5th and 6th

000

50%

No NG grants for Level 2and 3 water systems

II. Rural Infrastructure

A. Public MarketBus Terminal

1st-6th

1st-6th00

Revenue generatingprojects will not beprovided NG grants

B. Provincial RoadsMunicipal Roads

1st-6th

1st-6th00

NG support only possible foraccess roads, farm-to-market roads covered byapproved national programs(e.g., environment oragrarian reform)

C. CommunalIrrigation

1st2nd and 3rd

4th5th and 6th

20304050

The cost-sharingarrangement applies only tocapital costs

III. Health 1st and 2nd3rd and 4th5th and 6th

507090

The cost-sharingarrangement applies only tocapital costs

IV. Environment

A. BlueWatershed protection,municipal fishery mgt.,coastal resource mgt.,mangroveprotection/rehabilitation

1st2nd and 3rd

4th –6th

205070

Cost-sharing based on totalproject cost (PS and MOOEincluded in the NG grant)

B. GreenReforestation andforest related activities,soil conservation,protected area mgt.,wildlife conservation

1st2nd and 3rd

4th –6th

205070

Cost-sharing based on totalproject cost (PS and MOOEincluded in the NG grant)

C. BrownSolid waste mgt.,vehicular emissioncontrol, water pollutioncontrol, trafficengineering

1st and 2nd3rd and 4th5th and 6

th

000

NG will shoulder costspertaining to rehabilitation ofecosystems. LGUs shallshoulder all other costs (i.e.,enforcement investment, O& M).

D. Sanitary SupportFacilities for PublicMarkets andSlaughterhouses

3rd and 4th5th and 6

th5070

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IV. Ng-LGU financing Arrangementfor the Environment Sector

The 1991 Local Government Code clearly delineated the environmental activities that shouldbe 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 onMemorandum Circular No. 30 clearly defines the responsibilities of the LGUs under theenvironment and natural resources sector. The planning, financing and implementation oflocal environment projects have been devolved to the LGUs.

Even with the LGC, the NG through the Department of Environment and Natural Resourceshas continued to finance local environmental activities. NG financing support for environmentprojects has been justified by the following: the presence of externalities, high transactioncosts, information asymmetry, absence of property rights and proper pricing of naturalresources.

National Government Responsibilities

1. The NG shall be responsible for providing overall policy direction for the sector. Towardsthis end, a national environmental plan is necessary to clearly identify the major thrusts ofthe government and to determine which projects should be of NG or LGU concern. It willalso help guide LGUs into activities which support these thrusts.

2. The NG through the DENR shall be responsible for the setting-up and enforcement ofappropriate policies and standards concerning the sector. These in turn will serve asbasis for LGUs to set up their own local standards for local environmental projects. Toenforce these standards, the national and local governments may levy, in accordancewith existing laws and regulations and in consultation with the public, user charges andpenalties accordingly.

3. The NG will provide technical assistance to LGUs to improve their capability inundertaking the devolved functions of the sector. Information, education andcommunications, not only on technical expertise in project development, but also onappropriate land use, environmental considerations, etc. shall be provided through theDENR and other agencies.

4. The responsibility for organization, coordination and management of communitiesconcerned/affected by environmental projects will be accorded at the appropriategovernment level (the NG shall be responsible for environmental projects included in thenational environmental program while local environmental projects shall be implementedby the LG concerned). Inter-LG negotiation, cooperation, financing and implementationof projects may arise due to the spillover effects and externalities of environmentalprojects. In such cases, the role of the NG, through the DENR, is to facilitate, incoordination with the concerned local government and bodies, the participation of allaffected communities with the project.

NG-LGU Cost Sharing Arrangement

Local environment projects as a rule should be undertaken at the LGU level. Nationalgovernment support may be warranted where there are externalities and equityconsiderations. NG equity contribution shall be limited to a percentage of the investmentcost. Personnel and MOOE shall be shouldered by the LGUs.

Externalities in environmental activities may be spatial or temporal in nature. There areinstances wherein it is more cost-effective for projects to be designed to cover a number ofLGUs. Before a decision is made to extend financial assistance however, NG explore thepotential of inter-LGU in the financing, implementation and monitoring of projects.Externalities also arise from the expectation that environmental benefits are generated muchlater than the time the investment is undertaken. As a result, LGUs may be discouraged frominvesting in environment projects.

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The provision of national government support to local environmental projects is also premisedon equity considerations. The eligibility of LGUs to access funds from the NG will be basedon the income class of the LGU. Poorer LGUs will be eligible for higher grants. Themaximum support that LGUs can receive from the NG for the environment sector is 70percent of the investment cost (see Table below). No grant support will be extended toenvironmental activities falling under the brown sector. Further, NG support will be timebound. This strategy will enable LGUs to plan for the eventual absorption of suchexpenditures within their budget.

NG-LGU Cost-Sharing Formula for Environmental Projects

LGU Class Environmental Sector1

NG Share of Investment Cost (%)

1st

class Blue and green 202

ndand 3

rdClass Blue and green 50

4th, 5

thand 6

thClass Blue and green 70

3

1Blue sector includes such activities as municipal fishery management, coastal resource management, mangrove

protection; Green sector includes such activities as reforestation, soil conservation, wildlife conservation, andprotected area management; Brown sector includes such activities as solid waste management, vehicular emissioncontrol, pollution control.