November - December 2001
Vol. XIX No. 6
What's Inside 4 5 6 7 12
Questioning de Soto: the case of land and governance in Uganda Will shift to gross income taxation help? A letter from Japan On turning 65 VSO volunteer shares environment database program
ISSN 0115-9097
New forms of financing the fiscal deficit* Rosario G. Manasan**
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n 2002, the proposed President's Budget estimates the fiscal deficit of the national government to reach P130 billion or 3.1 percent of the gross national product (GNP). Considering the spate of recent devel-
opments in the macroeconomic environment, however, this target does not seem
Editor's Notes
to be realistic at this point. An analysis of the country's fiscal system also reveals its incapacity to generate revenues. As such, in all probability, a more realistic fiscal The Department of Finance's (DoF) focus on coming up with innovative and creative ways to finance the national government 's fiscal deficit rather than on its regular revenue generation function is the subject of the issue's main article, which is reprinted from PIDS Policy Notes No. 2001-13 authored by Dr. Rosario G. Manasan, a senior research fellow at PIDS. For the government to fulfill its role as the overseer of development, it must first and foremost collect sufficient resources to finance its numerous programs. At present, the Arroyo administration is committed to wage a battle against poverty, and thus, resources must be allocated efficiently and equitably to the various sectors of Philippine society, e.g., housing, health, education, national security, agriculture and fisheries, and good governance, among others. Thus, the article implies that more attention should have been given to
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deficit would be much higher than P130 billion. Recently, however, the government appears to have focused not so much on improving its revenue performance and, thereby, reducing the deficit. Rather, a disproportionate amount of energy seems to have been put into searching for innovative and creative modes of financing the fiscal deficit. A more careful examination of these new approaches indicates that they have rendered the orthodox way of measuring the fiscal deficit less meaningful. Thus, their evolution highlights the need for greater transparency in the fiscal accounts.
[Creative] financing 101 Among the new forms of financing taken up by the government in the past few years are the following: * arrearages and accounts payable, * zero coupon bonds, * securitization, and * partnering with the private sector and GOCCs.
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* This article is a reprint of PIDS Policy Notes No. 2001-13 entitled "New Forms of Financing the Fiscal Deficit: Examining the Effects on the Fiscal Accounts" by the same author. ** Senior Research Fellow, Philippine Institute for Development Studies (PIDS).
DEVELOPMENT RESEARCH NEWS
Arrearages and accounts payable The build-up of accounts payable was first brought to the public's attention in 1998 when the Department of Budget and Management (DBM) estimated the value of outstanding accounts payable to reach P151.1 billion as of the end of that year. To appreciate the evolution of the accounts payable, it is necessary to understand the relationship between appropriations and obligations as well as between the obligation expenditure program and the cash expenditure program. The obligation program is simply the sum of current appropriations (the one found in the General Appropriations Act), continuing appropriations and automatic appropriations (which include interest payments and the payment of retirement and life insurance premiums of government employees). For instance, in 2002, the obligation program amounts to P780.8 billion, broken down as follows: current appropriations (P419.6 billion) + continuing appropriations (P0) + automatic appropriations (P361.2 billion). Meanwhile, the cash expenditure program is obtained by first subtracting unpaid obligations for the current year from the obligation program and then adding payments for prior years' accounts to the program. It is but normal that some obligations for the current year would not require payment in the same year. This is so because the delivery of the goods/services involved may not have been completed in the current year or even if they were, billing may come in after the end of the current year. Conversely, obligations in previous years' accounts may require payment in the current year. In general, there is no one-to-one correspondence between the obligation expenditure program and the cash ex-
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Table 1. Reconciliation of the National Government expenditure program and the cash program (in billion pesos) Year
Cash
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
218.10 247.14 258.68 282.30 319.87 350.15 404.19 470.28 512.50 590.16 648.97 703.22 754.31
Obligations
220.54 247.66 256.95 276.04 327.77 372.08 416.14 491.78 537.43 580.39 682.46 699.88 780.79
Cummulative difference 1976-1989 1990-1998 1976-1998
Difference
Percentage to Obligation
2.45 0.52 -1.73 -6.25 7.89 21.94 11.95 21.50 24.94 -9.78 33.49 -3.34 26.48
1.11 0.21 -0.67 -2.27 2.41 5.90 2.87 4.37 4.64 -1.68 4.91 -0.48 3.39
2.61 85.81 88.42
0.15 2.06 0.90
Note: Difference = Obligations — Cash
penditure program. However, the difference between the two is not large in a typical year. That is, unpaid obligations for the current year and payments of prior years' accounts tend to wash each other out. Moreover, if the difference is large in one direction in any given year, it should go in the other direction in the next year. A look at Table 1, however, shows that from 1995 to 1998, obligations have consistently exceeded cash expenditures by substantial amounts. Moreover, one will note that while the cumulative difference between the two was only P2.6 billion in 1976-1989 (a period of 13 years), the difference was a huge P85.8 billion in 1990-1998, a period of just eight years.1 A further examination of the figures shows that in the period 1994-1997 when the government was officially posting fiscal surpluses, the ac-
counts payable were rapidly building up. Moreover, the difference between the obligation program and the cash program in 2002 is P26.5 billion (or 3.4% of obligations) even as the national government professes to retire P60 billion in accounts payable that were incurred in the earlier years. These figures raise the possibility that arrearages
1 It is recognized that the difference between commitments (or obligations) and payments (or cash disbursement) may overestimate arrears to the extent that goods/services contracted for in the current year may not have been delivered in the same year and to the extent that the processing of outstanding invoices require material time (usually referred to as the "float"). However, if commitments consistently exceed payments for a number of years, then accounts payable are undoubtedly being accumulated.
DEVELOPMENT RESEARCH NEWS
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would once again figure in the financing of the fiscal deficit in 2002. What is the implication of all these developments? The primary problem with arrearages is that they do not show up in the fiscal accounts and, thus, are not reflected in the fiscal deficit figures. As such, they diminish the transparency of the fiscal accounts and make policy analysis more difficult. The second is that although no explicit interest payments are made to private contractors and suppliers, anecdotal evidence indicates that most contractors and suppliers, including those who are not adversely affected, adjust the prices they charge government upwards to reflect the cost of money that they might have to shoulder because of delays in payment. In addition, when the problem is particularly acute, some may even resort to bribAerial view of the Malampaya Onshore Gas Plant in Tabangao, ing the agencies concerned so as to Batangas City be put on top of the waiting list of arrears (Schiavo-Campo and Tommasi 1999). And the third problem is that line agencies that have to does not have to pay interest yearly for deal directly with government contrac- the bonds issued. Instead, the investors' tors and suppliers have been observed interest earnings are imputed in the fito wait for the release of the notice of nal payment and the government makes cash allocations (NCAs) prior to con- a balloon payment equal to the face tracting out projects even if the obliga- value of the zeroes at the maturity date. tion authority is already with them.2
Zero coupon bonds Recently, the Bureau of Treasury issued 10-year zero coupon bonds (or 10-year zeroes) with a face value of P35 billion. What are zero coupon bonds? It is a debt instrument whereby the borrower (the government in this instance)
2 From the perspective of the DBM, such action is considered dysfunctional. However, the implementing agencies consider the same as a rational and appropriate reaction to the situation. 3 This is a feature that is not shared by nonzero coupon bonds.
On their first issuance, these zeroes generated P10 billion in cash for the government. Ten years from now, the government will in turn make a balloon payment of P35 billion. On one hand, coupon bonds and other long-term bonds issued by the government are important in helping establish a yield curve for the domestic bond market that is essential to its development. On the other hand, depending on how the interest payments are treated in the fiscal accounts, zero coupon
November - December 2001
bonds may create less pressure on the budget if interest payments are recognized when they are disbursed rather than when they accrue3 or if the interest payments that are implicitly part of the balloon payment are not even recognized as interest payments at all. As such, they may unduly weaken fiscal discipline either by shifting the burden of the interest payments to the future or by not recording the implicit interest payments above the line as they accrue (and therefore part of fiscal deficit) but rather below the line as amortization payments. And while the amount of the zero bonds issued—P35 billion—is not large enough at the moment to really make a significant impact on the fiscal accounts, there are statements attributed by the media to key fiscal managers that suggest that zero coupon bonds may account for a substantial portion of the national government's borrowing requirements in 2002.
Securitization Many proposals have been raised in various fora calling for the securitization of future earnings from government assets (e.g., royalties that government expects to receive from the Malampaya Deep Water Gas-To-Power Project, Subic Bay Metropolitan Authority, Clark Air Base Development Authority). Contrary to the impression that may have been created in many public discussions, however, securitization does not provide the government with income. It simply provides financing. Securitization is therefore just another form of debt that needs to be paid back in the future and on which interest is paid. Thus, it does not reduce the fiscal deficit although it is admittedly one way of financing the fiscal deficit. In essence, securitization allows the government to spend
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DEVELOPMENT RESEARCH NEWS
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November - December 2001
Questioning de Soto: the case of land and governance in Uganda
T
he regulation of land is a key concern in the study and practice of governance and development. In recent times, it has drawn more interest as a result of the popularity of Peruvian economist Hernando de Soto's book entitled The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.1 In essence, de Soto stresses the overriding importance of property rights and contract enforcement in economic growth. He notes that people in poor countries have lots of assets in the form of land but since they rarely hold formal titles to such land, they cannot use them as collateral to raise cash. As such, de Soto terms them as "dead" capital and estimates them to value a staggering $9.3 trillion, 20 times the total of foreign direct investment into developing countries between 1989 and 1999, and 93 times the amount of development assistance from all rich countries to the third world in the past three decades. He points out that the formalization of land ownership, i.e., provision and contract enforcement of property rights, can turn this "dead" capital into growth capital.
Dr. Raewyn Isabel Porter of the Royal Melbourne Institute Technology University (RMITU) shares 100 years of Uganda's experience on informal land ownership and distribution system.
One may readily agree and take de Soto's statements at face value. How-
ever, Dr. Raewyn Isabel Porter, with her 15 years of research, advocacy and policy practice on land, housing rights and entitlements, access and affordability of marginalized peoples in Australia and developing countries, disagrees.
De Soto, Hernando, 2000. Basic Books, 276 pages. Ph.D. dissertation, 2001. "100 Years of Contest: Land and Governance in Uganda," Social Science and Planning, Royal Melbourne Institute Technology University, Melbourne, Australia. 3 No Title. The Economist. 31 March-6 April 2001.
The Uganda case: debunking de Soto? Discussing her dissertation findings and conclusions2 in relation to the Uganda land situation from 1900 to 2000 during a Pulong Saliksikan session at the PIDS, Dr. Porter said that her the-
1 2
sis does not support de Soto's claims. For instance, she noted that de Soto's term "dead" capital, which an article in The Economist3 (March 31- April 6, 2001) refers to as "there are trillions of dollars all ready to be put to use," presumes that outside of the globalized capitalist system and its parallel circulation of securitized debt, the assets held by the poor have no use nor secondary purposes. Yet, Dr. Porter claimed, in the reality of Kampala's
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DEVELOPMENT RESEARCH NEWS
T
he fiscal outlook for 2001 and 2002 highlights the urgency of improving the revenue performance of the national government. Since the onset of the Asian financial crisis in 1997, the revenue performance has shown signs of weakening. From 18.7 percent of the gross national product (GNP) in 1997, the revenue effort slipped to 14.7 percent of GNP in 2000. In addition, nontax revenue also showed signs of weakening following the decline in domestic interest rates. For year 2002, the fiscal health of the nation does not look sustainable either. Fiscal deficit, for example, is projected by Manasan to reach P157.3 billion in 2002 as seen in Table 1 (P27 billion higher than the Budget Expenditures and Sources of Financing [BESF] target of P130 billion). In this regard, the Department of Finance (DOF) has put forward a number of proposals aimed at having a positive impact on revenue generation and at improving the overall tax system. One such proposal is to shift the current system of taxation to gross income taxation.
What is gross income taxation? The DOF's proposal for gross income taxation to generate tax revenue has two components: * to tax corporations and self-employed individuals based on their gross income at a uniform rate of 15 percent annually, and * to amend the individual tax on salaries and wages (compensation) to a wider range of 0 to 32
*This article is an excerpt from PIDS Policy Notes No. 2001-12 entitled " Will Shift to Gross Income Taxation Help Generate More Revenues?" authored by Dr. Rosario G. Manasan, PIDS Senior Research Fellow.
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Will shift to gross income taxation help?* Table 1. National Government Fiscal Position for 2002 (in billion pesos) Particulars
BESF Program
Manasan's Projection
Revenues Tax Revenues
624.3 571.3
600.2 533.8
24.1 37.5
BIR BOC Other Offices
447.6 115.1 8.6
418.6 110.4 4.8
28.9 4.7 3.8
Nontax Revenues
53.0
66.4
-13.4
Disbursements Current Optg Exp
754.3 673.8
757.5 677.0
-3.2 -3.2
80.5
80.5
-130.0
-157.3
Capital Outlays SURPLUS/Deficit
Difference
27.3
Note: Difference = Target in Budget Expenditures and Sources of Financing (BESF) less author's projections Source: Table 1 of PIDS Discussion paper No. 2001-19 entitled "Analysis of the President's Budget for 2002: Accounting for New Modes of Financing the Fiscal Deficit"
percent and disallow individuals to claim personal exemptions in their income tax computations. At present, corporate income tax is 32 percent of net income. Individual income from salaries and wages is taxed based on the tax table depending on gross income while individual income from business and exercise of profession is taxed based on the same tax table depending on net income.
What are the expected gains? The proposal has the potential to broaden the tax base as it eliminates (a)
opportunities for taxpayers to claim excessive deductions of their tax liabilities and (b) the discretion on the part of tax collectors on which deductions to allow when they audit tax returns, especially of corporations. The proposed taxation on gross income clearly seeks to plug these leakages in the system arising from the overstatement of deductions. Revenue gains are expected from improvements in compliance with the corporate income tax and the individual income tax on the self-employed. +11
DEVELOPMENT RESEARCH NEWS
November - December 2001
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The Corporate
NEWS
The Corporate News section includes brief accounts of inhouse PIDS activities, staff trainings and workshop results. It is intended to inform both the readers and PIDS staff members of the various activities participated in by the latter. There are stories that document the staff's effort to improve their knowledge and skills through trainings. Other stories highlight the personal interaction among the staff in the process of carrying out their individual tasks. Most of the time, the stories focus on serious matters while on certain occasions, they simply talk about the PIDS staff having fun. Whatever the topic is about, the objective is to show that each activity is meant to help the staff become better persons and performers in their respective fields so that they can contribute more to the attainment of the Institute's overall mandate.
A letter from Japan Mari-Len Reyes-Macasaquit*
Where we love is home - home that our feet may leave, but not our hearts.
K
Oliver Wendell Holmes Sr.
onnichiwa! Greetings from the Land of the Rising Sun.
I have been in Tokyo for more than a year now. If you can still remember, I left the Philippines in September 2000 to pursue graduate studies in International Development at the newly established National Graduate Institute for Policy Studies (GRIPS). I felt so privileged to be accepted in this program and be part of the pioneer batch. This was also the first time that the IDS program was launched under the auspices of the Foundation for Advanced Studies in International Development, GRIPS, the Ministry of Foreign Affairs of the Government of Japan and the Japan International Cooperation Agency (JICA). It seemed like a long time ago when my boss, Mr. Mario C. Feranil, encouraged me to
*Project Evaluation Officer, Project Services Department, Philippine Institute for Development Studies (PIDS).
apply to this program. Little did I know that the gesture would signify the start of my journey toward professional and personal growth. While my application was being processed, I was both excited and sad. I knew this was an opportunity of a lifetime given the competitive nature of getting scholarships abroad. At the same time, I had no desire to leave my boys (Bobet, my husband and Andre, my three yearold son). But when the PIDS Scholarship Committee approved my application and JICA officially notified me that I was accepted in the program, there was no turning back. Friends who had been to Japan were telling me that studying there would be a breeze. They could not be more wrong. Studying under the direction of one of the most prominent development economists, Dr. Yujiro Hayami, was no walk in the park. It was his dream to establish a graduate program that would someday parallel those offerred by reputable universities in the West. Dr. Hayami pushed, challenged and made us work harder than we had ever worked before. You might be wondering why I never came home for a short vacation last year. You would now understand why. As a Public Administra-
tion graduate of the University of the Philippines in Diliman, I only had three units of Economics. So you could imagine the difficulties I had in a program that used economic theories and models as framework for the study of development processes. Yet beyond the course requirement of 38 units, I was able to complete 44. I thought it would really be worthwhile to take those additional courses especially when the professors are from reputable institutions like the Institute of Development Studies, University of Sussex, ADB Institute and the World Bank. I had the choice to simply audit the courses and not sit for exams and submit papers but having invested much time and effort, I thought it best to go all the way. I must have acquired this attitude from my training at PIDS where every task, every effort should not be half-baked. When I received my course completion certificate last September, I felt all my hard work and sacrifices paid off. Certainly I had my share of fun too! Our Japanese classmates were gracious enough to orient us about their culture and traditions. They have several holidays spread over a year to celebrate different cultural and religious festivities. Despite the continuous and incessant intrusion of Western influence, the Japanese were able to preserve most of their tradi+8 tional practices and way of life.
DEVELOPMENT RESEARCH NEWS
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November - December 2001
On turning 65 All the world's a stage And all the men and women merely players They have their exits and entrances As You Like It (1598) William Shakespeare
F
or almost 15 years, Mang Ores had driven Miss Jennifer Liguton, director for research information, to her various appointments and meetings. As he turns 65 years old this December 11, Mang Ores the driver will retire from government service and the Philippine Institute for Development Studies (PIDS). He will be the first employee of PIDS to reach 65 and go on mandatory retirement. The man called Ores
It is not everyday that one gets to meet an individual who will be remembered among the multitude. Mr. Federico D. Ulzame, or Mang Ores to everyone at PIDS, is one fine example. Mang Ores has become the lead in a number of office anecdotes. Mostly because of his love for highfalutin words. Do most employees know what "unregenerate" means? Look in the dictionary for yourself. Only Mang Ores can introduce such a word and be actually "blamed" for its discovery. It is not a wonder that Mang Ores reads the Reader’s Digest from cover to cover. Most people do. What is surprising though is that he could take out a word or a story and use it in ordinary conversations. His talent for a wide range of vocabulary never fails to amaze most of his fellow employees. Indeed, his age is not a barrier to his quest for knowledge and selfimprovement. About life At 65, Mang Ores is proud that he has acquired a rowhouse unit at City Homes in Dasmariñas, Cavite. Through sweat and tears,
he was able to provide a home for Leonida, his wife, and his only son’s family of eight. His home may seem cramped for 10 people but this is the home he has dreamed of for years. He also takes pride in having sent his grandchildren to school, however financially difficult this may have been for him. These achievements, nevertheless, cannot hide his disappointment of not having a college degree because his father could not afford to continue his high school education after his second year. What happened afterwards was a process of self-education through reading and constant listening to the radio. His ambition was to become a teacher. But it seemed that family tradition was stronger. His father was a taxi driver, his brother was a personal driver to a lawyer and most of his uncles and male cousins were also drivers. Although he wanted another profession then, he could not deny the possibility that someday, he would also be a driver. And so he joined the driving profession and it became his main source of income. Driving mister and miss Mang Ores has driven a number of individuals and helped them reach their dreams at a smooth pace. Before he worked for NEDA under Mr. Pablo Samson, Mr. Elpidio Macanas, Mr. Romeo Reyes and Ms. Liguton, he drove for film actress, Miss Celia Rodriguez, to her show business appointments. In 1986, while working for Mr. Reyes, he remembered driving Ms. Liguton to her apartment in Manila. She was then with her friends including Mr. Reyes and Mr. Mario Feranil in a SanMig restaurant. He admired her simple beauty and wished that someday he could work for her. In February 1988, Mang Ores joined PIDS after eight years in NEDA and soon after was driving for Ms. Liguton whom he now fondly calls "Miss Jenny."
Mang Ores only had kind words for Ms. Jenny. He rates his immediate supervisor as “second to none.” He even shyly admitted that Ms. Jenny had made a significant impact on his life. While driving for her, Ms. Jenny regularly filled his days with pieces of advice, one of which is to live within one’s means. As an employee, Mang Ores aimed to finish whatever job had been assigned to him. He made sure that every instruction was followed right down to the last letter. Most of all, he strived to remain calm and compose, at the same time, render an excellent work performance in carrying out his tasks. +8
DEVELOPMENT RESEARCH NEWS
A letter from Japan...from page 6
With JICA’s sponsorship, I was able to visit the majestic Mt. Fuji, Hokkaido up north, Eichigo Yuzawa ski resort in Niigata for snow viewing (twice!). I also visited the mountainous region of Hakone famous for its lake, inactive volcano and onsen (spring baths). I was also fortunate to witness the blossoming of the famous sakura or cherry blossoms in all its glory. Of course, I went to Tokyo Disneyland and to various aquarium facilities when my boys came over in June. It was a wonderful feeling to finally meet Mickey and Minnie Mouse in person, not to mention Cinderella, Winnie the Pooh, Snow White and other Walt Disney characters. As a regular churchgoer, I also met many of our kababayans who were either working or studying here and had a chance to talk to a few who shared their colorful experiences with me. I have been working as an intern at the Research Department of the Asian Development Bank Institute (ADBI) in Tokyo since October of last year. Like PIDS, ADBI lives and breathes on research and capacity building activities. The internship is an integral part of the program, which I have to complete before I get my full degree in March.
On turning 65...from page 7
Lessons in life In the midst of life’s cycle of poverty, Mang Ores never forgot his father’s words: be honest and never do wrong. As a disciplinarian and a practicing Seventh-Day Adventist, his father had taught Mang Ores never to stray from the right path. Even in the face of poverty. “It is not a sin to be poor,” he concludes, “so long as you protect your name.”
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November - December 2001
My internship at ADBI allowed me to experience how it feels to be an ordinary office worker in Japan. I regularly take the METRO—a daily adventure for me. It is the subway train that runs from Marunouchi and Ginza towns and is jampacked with commuters during rush hour. For sure when I am back in Manila I would not have any problems pushing fellow commuters and squeezing myself inside the MRT. There are wonderful things that the Japanese have done for themselves but I could also pinpoint the areas where we have performed at an equal level, even better. And I guess you would come to appreciate and realize how precious your own country is when you are away. With less than three months to go, all I could think of are Fort Bonifacio and PIDS, my two homes. As I prepare for my return trip, I contemplate on how I can best share what I have learned in Japan, both inside and outside the classroom, and how I can best contribute to PIDS. I feel I should give back something of myself because I had gained much from this experience, professionally and personally.Well, I guess three months would be enough time to think this over. Until then, best regards to everyone and see you all soon! DRN
Dignity is important to Mang Ores. He may lack the bills and coins to fill his pocket but his character is rich with goodness. In his own words, Mang Ores is trustworthy and polite. And he wanted to be remembered by his peers this way. Ores at 65 Mang Ores celebrated his 65th birthday with the members of the PIDS Management Committee (ManCom) at a lunch at Kamayan Restaurant. Being the first compulsory retiree from PIDS, the ManCom especially PIDS President Dr. Mario B. Lamberte, thought it befitting to treat Mang Ores to a fine lunch.
Ms. Mari-Len Reyes-Macasaquit
In return, Mang Ores expressed his thanks to the ManCom members for making his birthday celebration and his stay at PIDS very pleasant and memorable. Officially Mang Ores becomes a retiree starting December 12, 2001. With his retirement benefits from PIDS and GSIS, he hopes to spend his retirement pay wisely—by keeping the money in the bank or by starting a small business. Without a doubt, Mang Ores will remain in the pages of PIDS' history and in the hearts of his fellow employees. GJE
DEVELOPMENT RESEARCH NEWS
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New forms of financing...from page 3
der will go to the development of housing projects for those who can afford.
now the stream of income that it expects to earn in the future from its assets by borrowing from the market with said income stream as collateral. Securitization thus involves the issuance of assetbacked financial instrument. In the corporate sector, asset-backed securities are largely viewed as an enhancement that enables them to obtain financing at lower rates of interest. In this sense, securitization is the same as collateralized borrowing. However, from the perspective of the government, it is not clear that such added enhancement over and above the sovereign guarantee that is normally applied to government debt would matter or is necessary.
Partnering with the private sector (build-operate-transfer schemes) and GOCCs In the President's State-of-the-Nation Address (SONA) last July, a number of programs were mentioned as priority areas. However, the budget support found in the President's budget is not sufficient to finance many of these programs, e.g., infrastructure and housing. In this regard, the present government proposes to fund these programs from outside of the national government budget. Two modes of financing are specifically mentioned. One is the buildoperate-transfer (BOT) scheme for major infrastructure projects. Another involves the delegation of the responsibility to government-owned and -controlled corporations (GOCCs). For the latter, for instance, it is envisioned that P20 billion can be raised from housing bonds to be issued by Pag-ibig, the Government Service Insurance System (GSIS), Social Security System (SSS) and the National Home Mortgage Finance Corporation. Part of the proceeds of the bonds will be used for housing subsidies to the poor while the remain-
These two modes (BOT and partnering with GOCCs) share a common feature. They both create contingent liabilities that government may have to shoulder in the future. It is interesting to note that the contingent liabilities associated with some BOT projects that were implemented in the not-so-distant past have already been realized. One example is the Metro Rail Transit (MRT) project for which the government is shelling out some P3 billion yearly in 2001 and 2002. There is widespread agreement that the total amount of outstanding contingent liabilities of the government is large. However, these guarantees are not disclosed in the national government accounting system. The amount of guarantees in default are only shown as "contingent" liabilities in the notes to the financial statements (SGV Consulting and Cowater International, Inc. 1999). In the case of the housing bonds, meanwhile, the concerned GOCCs will surely be generating losses equal to the subsidies that will be required for socialized housing. This will then necessitate transfers from the national government to the GOCCs in the near future. The question is: would it not be better if only the pure market-type activities are assigned to the GOCCs so that the country will not experience once again a return of an unmanageable GOCC sector that was prevalent in the early 1980s? Moreover, the designation of the SSS and GSIS as issuers of the housing bonds raises additional questions. Under normal circumstances, pension funds are the lenders (not borrowers) in the long-term bond market since they are precisely the institutions that have surplus long-term funds. For instance, in Singapore and Malaysia, their pension funds are the largest investors in government securities. However, under the proposal, both the SSS and the GSIS
November - December 2001
stand to lose money by borrowing (by issuing bonds) at market rates and lending below market rates. Eventually, these losses will have to be shouldered by the national government or the members of the SSS and GSIS themselves. A more prudent role for the SSS and GSIS in housing finance is actually one where they buy or invest in long-term bonds issued by the national government (thereby matching the maturity structure of their assets with that of their liabilities). In this manner, the viability of the pension funds is not unnecessarily compromised.
Summary and conclusion The hard budget constraint faced by the government and the equally critical need to fund programs that will stimulate growth and promote poverty alleviation have focused attention to the use of innovative forms of debt financing like arrearages or the build-up of accounts payable, zero coupon bonds, securitization of government assets, and partnering with the private sector and GOCCs. The analysis suggests that these new forms of financing tend to make the conventional measure of the fiscal deficit less reliable in showing the actual change in the government's liabilities and fiscal sustainability. Thus, to the extent that said measure is no longer able to provide a realistic picture of the government's fiscal position, the use of these new forms of financing suggests the need for a more careful analysis of the fiscal accounts. DRN References Campo-Schiavo and D. Tommasi. 1999. Managing Government Expenditure . Mandaluyong City, Philippines: Asian Development Bank. SGV Consulting and Cowater International, Inc. May 1999. Assessment of National Government Accounting System. Final Report submitted to UNDP .
DEVELOPMENT RESEARCH NEWS
Questioning de Soto...from page 4
(Uganda) urban and peri-urban dwellers, plots and dwellings are used intensively 24 hours a day for activities that range from cropping, raising pigs, ducks, rabbits. . .brewing alcohol, renting rooms or beds, preparing food for sale, sewing, hairdressing to childcaring—activities that have an economic function and produce income that can be used for consumption of goods and services and/or investment. Dr. Porter then traced the history of Uganda in the past 100 years, in particular, the epochs that have had significant impact on the kind of land ownership and distribution system that it now has. She argued that contrary to de Soto's basic tenet of the poor not being able to use their house and land as security for getting credit since they have no proof of their ownership, the poor do have contracts signed by local chairmen. This contract is their proof of ownership and security. And the fact that a commercial bank may not accept it as collateral because it is not secured by the state and guaranteed by law does
Editor's Notes ...From page 1 efforts to improve revenue collection than to financing the fiscal deficit. In relation to improving the tax system of the government, the DoF proposes the new scheme of gross income taxation in order to generate more revenues. However, Dr. Manasan cautions
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not undermine the proof of ownership. Other participants in Uganda's informal land market accept and recognize said contract as proof of ownership. As such, the poor are able to use them for various purposes, including for raising capital.
New instruments = good governance and development? As to the assertion implied in de Soto's thesis that the adoption of new instruments of land governance and administration such as titling and the enactment of an enforceable set of laws may lead to a more "mature" system and may be the only option for poor countries lest they choose to stay poor, Dr. Porter countered that legally sanctioned forms of ownership do not necessarily mean absolute rights or the absence of contesting claims. For one, land titles are no guarantee that an accurate and complete record or picture of landholdings and their associated rights may be given. In some countries like the Philippines, she also noted that the problem of fake titles when buying land in Metro Manila and other parts of the country arises from unscrupulous activities of some people in collusion with government officials who fake surveys and deeds of conveyance and/or tamper with previ-
against its implementation as a closer look would show that the negative impacts offset the expected positive gains from the new scheme. A special feature in this issue is the Pulong Saliksikan of Dr. Raewyn Isabel Porter of the Royal Melbourne Institute Technology University (RMITU). Dr. Porter is currently working on a research study on land governance in Uganda and interestingly finds similarities in the case of Metro Manila. She looks into how the informal system works in developing countries vis-à-vis
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ously issued titles or surveys. Thus, the instruments of secure property rights do not always conform to the principles of good governance, transparency and accessibility.
Hybridization of 'what is' and 'what ought to be' In conclusion, Dr. Porter argued that de Soto's theory that the assets of the world's poor cannot function productively as capital since they are not "paperized" in the formal documents and legal structures common in the West, may not be as simple as that. She noted that historical analysis, as may for instance be gleaned in Uganda's case, points to a "pulling down" of de jure (what ought to be) and de facto (what is) practice. In other words, there is a hybridization or "in-betweens" of the de jure and de facto. People do not simply live "inside of" or "outside of" the law or legal structure. More so, the multiple meanings of land found in a country like Uganda cannot simply be collapsed into a singular value—a money relationship —arbitrated by the market. Otherwise, people will find it difficult to articulate the plethora of political, social and personal identities based on land that are critical to their securing and sustaining access to land. DRN
the theory espoused by Hernando de Soto, Peruvian economist, in his book “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” regarding formal property rights. Meanwhile, Dr. Richard D. Alexander, a Voluntary Service Overseas (VSO) volunteer, shares his expertise with the Information and Database System (IDS) staff of PIDS on the GIS-based Natural Resources Database which he developed for the province of Bohol. DRN
DEVELOPMENT RESEARCH NEWS
Gross income taxation...from page 5
Once the government is able to capture all the leakages that existed prior to the proposed reform, it expects to generate an additional revenue of P45 billion from corporate income taxes and P13 billion from income taxes of self-employed individuals.
Reality check Based on the above, the proposal appears to be attractive at first blush. Further analysis, however, shows that revenues from tax on compensation income will decline by P33 billion in 2002 if the gross income tax is implemented. This revenue loss is highly probable to happen since the tax on compensation income is covered by the withholding system. With respect to corporate and business taxation, the proposal will have to allow for the deductions of other costs that are directly related to the conduct of business, e.g., marketing/selling expenses and overhead expenses; otherwise, it will introduce an unparalleled inequity in the system given the wide variation in the cost structure of various activities and sectors. In the case of "sales of services," for instance, delineating what constitutes cost of services is not straightforward. These very considerations, however, will put "discretion" back in the equation. As such, the simplicity, ease of administration and increased compliance that gross income taxation is expected to bring may not materialize at all. Other inefficiencies and inequities may also arise from the proposal. One, the proposal tends to discriminate against families with children as well as families with only one income earner. This comes about because the tax system will no longer differentiate taxpay-
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ers according to status. Two, the proposal tends to discriminate against professionals and individual business income earners (assuming there is no evasion). Thus, it is expected that the proposal will drive hard-to-reach taxpayers further out of the tax net.
Will gross income taxation help in generating revenue? The results of Manasan's analysis indicate that the proposal to shift to
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gross income taxation entails great risks given the extremely weak fiscal position of the national government at present. Although it may potentially yield high revenue returns, the scheme has accompanying implications that may negate the good intent of government. Moreover, the expected gains are associated with a small probability. As such, it will be prudent for the government to reconsider the gross income tax proposal and study further its effects. DRN
Development Research News Vol. XIX No. 6 November - December 2001 ISSN 0115-9097 Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, Vice-President; Mr. Mario C. Feranil, Director for Project Services and Development; Ms. Jennifer P.T. Liguton, Director for Research Information; Ms. Andrea S. Agcaoili, Director for Operations and Finance; Atty. Roque A. Sorioso, Legal Consultant. Staff: Jennifer P.T. Liguton, Editor-in-Chief; Liza P. Sonico, Issue Editor; Sheila V. Siar, Genna J. Estrabon, Jane C. Alcantara, Edwin S. Martin and Gizelle R. Gutierrez, Contributing Editors; Valentina V. Tolentino and Rossana P. Cleofas, Exchange; Delia S. Romero, Galicano A. Godes, Necita Z. Aquino and Federico D. Ulzame, Circulation and Subscription; Liza P. Sonico, Layout and Design.
DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Reentered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P200.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.
DEVELOPMENT RESEARCH NEWS
November - December 2001
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VSO volunteer shares environment database program
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s part of its continuing effort to improve its database system, the Philippine Institute for Development Studies (PIDS) recently held a training on database development and management for its staff. The training was conducted by Dr. Richard D. Alexander of the Voluntary Service Overseas (VSO). Dr. Alexander was invited to help develop a GIS-type of software package for the storage and management of the Institute's various databases. At the same time, he was asked to share his experience in developing the Natural Resources Database (NRDB) of the province of Bohol, of which he is the principal author. The NRDB is a joint project between the Bohol Environment Management Office, the Provincial Government of Bohol, and the VSO. The natural resources database that Alexander developed for the province of Bohol contains data for all sectors covered by the Bohol Environment Code, namely, forest, mineral, water and coastal resources, air and noise pollution management, integrated solid waste management, ecotourism and environmental impact assessment. According to Alexander, the NRDB was developed to aid in the decisionmaking and planning process in Bohol through the provision of standardized and reliable observations, collation of data from different sources and crosscorrelation between disciplines. It also seeks to assist in the collation and dissemination of data to and from national government agencies, local government units, nongovernment organizations,
Dr. Richard D. Alexander of the Voluntary Service Overseas (VSO) trains the Information and Database System (IDS) staff of PIDS
and the academe working in the field of natural resource management. PIDS President Mario B. Lamberte noted that Alexander’s experience in setting up the NRDB would be a good model for the Institute in its effort to have all the PIDS socioeconomic databases and different studies systematically organized so that online research would be simpler and less cumbersome for researchers. At present, the Institute is working toward the integration of its two major databases—the Information and Database System (IDS) and the Geographic Information System (GIS). The IDS contains an economic and social database section composed of the Philippine database and the International database. The Philippine database features key economic indicators such as GNP growth and inflation
rate; economic statistics such as balance of payments and foreign exchange rates; and social statistics such as health, education and poverty data. The International database contains economic statistics of China and other neighboring Asian countries as well as Canada and the United States. The IDS allows users to make queries and simple manipulations on data such as graphs, percentage share, running mean and merging facility, among others. The GIS, on the other hand, provides a unique way of viewing and analyzing spatial data in a geographical format. It allows users to compare and analyze the relative performance of different regions and provinces using colorcoded maps. Maps on this site contain socioeconomic indicators such as gross regional domestic product (GRDP), unemployment rate and poverty incidence, among others. GJG