Only 1.5% of national budget spent on local infrastructure

by Cai U. Ordinario, Business Mirror

Posted at Oct 26 2010 10:52 PM | Updated as of Oct 27 2010 05:19 PM

MANILA, Philippines - The government allots only 1.5% of its total expenditures to local infrastructure, despite the growing need to boost the roads and bridges in the rural areas.

As a result, income inequality in the rural areas has worsened.

This, according to a recent study conducted by the government’s think tank, the Philippine Institute for Development Studies (PIDS) titled “A review of the build-operate-transfer for infrastructure development." The study was conducted by Dr. Guillermo M. Llanto, PIDS senior research fellow and former National Economic and Development Authority deputy director general.

The study said the 1.5% allotment, coupled by the 6.5% earmarked by Local Government Units (LGUs) for local infrastructure services and the subsequent underinvestment of the private sector in local infrastructure, have contributed to the widening income inequality in the Philippines.

“The lack of access to adequate infrastructure services can be attributed to the uneven pace of growth among regions in the Philippines, which is reflected in their respective contribution to [Gross Regional Domestic Product] and, to some extent, the relative size of financial resources available to the regions,” it added.

The study said that based on a 2005 report of the Commission on Audit, the total expenditure for infrastructure amounted to P19.8 billion with almost half or 48% coming from LGUs.

Llanto noted that infrastructure expenditures were the highest in the National Capital Region (NCR), which reached 26.06%; Region IV, 15.56%; and Region III, 11%.

The lowest contribution was in the Autonomous Region of Muslim Mindanao (ARMM), which only accounted for 1.73%.

“In general, the more rapidly growing regions endowed with better and more infrastructure facilities with the NCR producing around 40% of gross domestic product and thus, it leads the pack, so to say,” Llanto said.

Llanto said that as of July 2007 and excluding ARMM, there are around 29,288 kilometers of national roads nationwide, which represent only 15% of the total road network. Local roads administered by local governments account for as much as 85%.

This is why there is a need to increase rural infrastructure support. But this may pose a problem particularly for LGUs since, Llanto said, not all of them have access to infrastructure financing like build-operate-transfer (BOT), official development assistance, and other instruments like bonds and credit guarantees.

Most LGUs, Llanto said, rely on their Internal Revenue Allotment (IRA) and local-tax revenues to finance projects, particularly capital intensive ones like infrastructure projects.

“To promote the development of regional infrastructure, the financial and technical capability of the local governments should also be improved,” the study stated.

“A review of the allocation formula for the IRA is timely considering the great need of LGUs to have substantial resources for delivery of local-public services and infrastructure development. Another area for improvement would be the access of LGUs to other financing sources so that they may not be too dependent on IRA transfers,” it added.

While rural infrastructure can also be financed through BOT, the study said there was a need to make changes in the BOT Law. These changes should include third-party evaluation and ex-post evaluation and the creation of a project-development facility for project preparation and bidding.

But Llanto said one particular change that could significantly improve BOT is for the BOT Law or any official policy pronouncement to allow the private sector to levy user charges that provide returns that are commensurate to the cost of proponent’s investments.

“This will ensure project viability and will reduce or minimize the amount of subsidy that the government provides. It seems unfair to use revenues from general taxation to finance or provide subsidy or support to a BOT project, which is availed of by particular segments of the population, that is, the users,” Llanto said.