Crossroads (Toward Philippine economic and social progress)
Philippine Star, 22 July 2014


The recent overflow of discussion concerning DAP (disbursement acceleration program) of the government which the Supreme Court declared unconstitutional highlights for me two major issues.

First is that our system of public expenditure is broken and we need to fix it, a subject that I will focus on today.

The second issue is the implication of fiscal flexibility for all governments to become effective in terms of the state of our democracy, its implications on the powers of the presidency, and on the overall system of government.

The public expenditure system is broken.  The biggest sign that the public expenditure system is broken is that the nation does not get the full benefits from public spending for the common good.

In general, we find that there are functions of the government that deliver inferior and costlier services than what the private sector provides. In fact, experience – at the national level and also supported by global experience – shows that the private sector can delivers some of these services better.

Examples we can relate to. We have many examples that are salient to the common experience of all regarding public expenditure and what private citizens and institutions can do.

Most of us can fix our houses and roofs quickly once they get damaged.

Try to do this in the government in the case of a broken public building. Unless there is an ongoing project that takes care of repairs, it would entail time, expense, paperwork and undertaking public bidding procedures before a decision is made.

By then, the cost of the project would have escalated with a lot of time already lost, not to mention further damage or deterioration that may have been sustained by the structure in the meantime.

This explains why many public facilities are poorly maintained and deteriorate much more easily. (Try the same problem for the repair of a broken office machine).

By the same token, try disposing of some obsolete or broken pieces of office equipment in the government. It has to go through a difficult process.

This is why we observe a great amount of useful space in public buildings which become depositories of unwanted junk, making these offices not only useless but also depressing sights for the general public being served.

Sometimes we see newly finished buildings, undertaken from government financing. But it is marred by poor landscaping and waste of space where garbage or unusable junk or detritus from inside the building lie piled up, unattended from day to day.

Or try riding elevators in government buildings and compare them with those we would find among private establishments. The difference in the maintenance, upkeep, and comfort of service would easily be felt.

Some remedies could lead to perverse outcomes. The response of the government to this system — which is fear of corrupt practices creeping in — is to device alternative methods of control.

A common outcome has been to develop rules and procedures that are distinctly different for specific sizes of projects. An excuse often heard is that the Commission on Audit would not allow the straightforward solution.

The prescription – that of complex checks and balances and the existence of numerous supervisory channels – has in many cases discouraged taking responsibility and has choked initiative among those in charge.

Projects that require much more public money would have more complex rules of bidding and requisition compared to smaller projects. An outcome of this method has been to favor the splitting of large contracts into smaller ones. Such practice leads to loss of inherent economies of scale in the project.

Another perverse outcome is the outsourcing of projects to outside contractors. The outsourcing has led toward syndicating the process. Middle-men and transit rent-seeking institutions including politicians and bureaucrats get in the way. Thus, a lot of the money is filtered into the pockets of others, not the intended project beneficiaries.

The pork barrel institution (remember PDAP and the other names given to it) has led to some of the most perverse outcomes in this experience. In earlier times, most of it went to the whimsical or political allocations of the benefiting elected official.

Later controls put on the pork barrel system required that it be spent or assigned toward public works and other constituency defined needs. This often meant public works projects – roads, buildings, and local infrastructures.

But a common figure mentioned among knowledgeable people is that at least 40 percent of the pork is lost to corruption. Thus, the actual expenditure on the projects reaches only at most 60 percent of what is allotted.

It appears that, in the case of the Napoles type operations, the figure that went to the real projects could even be nothing, because the residual went to private pockets.

Outsourcing has spawned the growth of NGOs (non-governmental institutions) that relied mostly on government funding for their work. From this development, it was just a short way toward enterprising or corrupt owners of NGOs to devise mechanisms to channel government resources into profit churning activities.

And from such a mechanism, it became even easier for the likes of Janet Lim Napoles to operate and defraud the government, with the help of consenting politicians and public officers.

Tip of the iceberg or the whole caboodle? The accidental discovery of the Napoles operations and the political convulsions it has caused afterwards leads me to this question. Is the expenditure misallocation as divulged in the Napoles scam just the tip of the iceberg or is it the whole or most of the whole problem?

I often muse on this. I come to the notion that there are many more NGOs that have operated on the basis of this flimsy and corrupt model that have failed discovery. If all could unravel, what would be the size of all Napoles-like scandals?

An outcome of the Napoles scandal, however, is that while the tip of the iceberg might just have been shown, that iceberg itself could melt in size if appropriate reforms based on disclosure, reward, and punishment are adopted.

Perhaps, the government could eradicate the system through penalties that fit the crime and through rewards for good work. It would seem possible that improved, if not better, times could emerge from these reforms. This is the optimistic, if not quixotic, view.