Performance Challenge Fund for Local Government Units

Concept Note

INTRODUCTION

1. The passage of the Local Government Code in 1991 has put the spotlight on Local Government Units
(LGUs), particularly on the huge responsibility that was entrusted to them as well as the amount of
resources that are now at their disposal to effectively discharge the devolved functions.
2. LGUs’ share in national internal revenues called the Internal Revenue Allotment (IRA) has been
increasing since 1991. For the period 2001–2008, the IRA accounted for 16.6 % of the total national
government budget. For 2010, LGUs stand to receive P265.8 billion which accounts for 20.3% of the
total national government budget.
3. Under the LG Code, 20% of IRA should be set aside for development projects to be used for specific
programs, projects and activities in furtherance of the development agenda of the government. For
CY 2010, the 20% development funds of LGUs amounts to P53Billion.
4. On February 20, 2009, the Development Budget Coordinating Committee (DBCC) approved the
Performance Based Incentive Policy (Annex 1) which provides for an incentive framework to
rationalize national government intergovernmental transfers to LGU towards improving LGU
performance in governance and delivery of basic services.

DESCRIPTION/ OBJECTIVES

The Performance Challenge Fund for Local Government Units (PC Fund) is an incentive fund to
LGUs in the form of counterpart funding to high-impact capital investment projects in the Annual
Investment Program and funded the 20% Development Fund consistent with national priorities . It
shall seek to rationalize national government intergovernmental transfers to LGUs, and encourage
alignment of local development initiatives with national government development agenda and
priorities.

Specifically, the PC Fund aims to:

1. Recognize good governance performance particularly in the adoption of “good housekeeping”

governance areas of planning, budgeting, revenue mobilization, financial management and
budget execution, procurement, and resource mobilization;
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2. Seek improvements in LGU performance by linking incentives/financial grants with performing

LGUs based on an established set of requirements and condition,
3. Encourage alignment local development programs with national development goals and priorities,
and
4. Stimulate LGU and private sector investments in sectors prioritized by the national government.

TARGET LGUs

The PC Fund shall be open to all provinces, cities and municipalities awarded with the Seal of Good
Housekeeping provided that the LGU shall allocate counterpart fund to implement capital investment
projects aligned with the national development agenda and priorities.

LGUs may be targeted based on income class or alternative indicators of fiscal need (e.g.,
income/IRA per capita, poverty incidence) or level of LGU. Coverage will be limited by the volume of
grants that are sizeable enough to be attractive to the targeted LGUs.

GRANT CONDITIONS AND ELIGIBILITY CRITERIA

Target LGUs must comply with the following criteria as seal of good housekeeping in key governance
areas of planning, budgeting, revenue mobilization, financial management and budget execution,
procurement, and resource mobilization in order to qualify for the grant.

Area Indicator

1. Good Planning 1. Updated and approved Comprehensive

2. Sound Fiscal Management
Land Use Plan (optional)
2. Updated and approved Comprehensive
Development Plan
3. Updated and approved Annual Investment
Plan
4. Presence of Executive- Legislative Agenda
1. Result of COA Audit (acceptable level)
2. LGU Annual Budget approved and
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compliant to legal and statutory

3. Values Transparency and
Accountability
4. Valuing of Performance
Monitoring
requirement
3. Percentage of cost to collect revenues to
total local revenues (50% or less)
4. Growth in local revenues over 3 years
5. Presence of Updated Revenue Code
(every 5 years)
6. Presence of updated Schedule of Market
Values (every 3 years)
7. Regular submission of Statement of
Receipts and Expenditures (quarterly)
1. Functionality of Local Special Bodies
2. Transparency of the procurement process
3. Compliance to the Anti-Red Tape Law
4. Full disclosure of local budget and finances,
and bids and public offerings through
posting in conspicuous places within public
buildings in the locality, or in print media of
community or general circulation, and in
their website
1. Performance Monitoring Tool or Scorecard
System being utilized
2. Published State of Local Governance
Performance Report, State of Development
Report, and Financial Report
3. Awards Received for Exemplary
Performance

After passing the eligibility criteria, qualified LGUs will selected on the basis of their equity funding
from the LGU 20% development fund on investments it would finance using the grant. Priority shall be
given to LGUs with partnership agreement and counterpart support with other LGUs and/or private
sector.

ALLOCATION OF GRANT
OPTION
Option 1: P5M grant each
for 100 qualified
municipalities
Option 2: P10M grant each
for 50 provinces. This will
benefit 50 of 80 provinces.
Option 3: P10M grant each
for 50 cities. This will benefit
50 of 130 cities.
Performance Challenge Fund for Local Government Units 3
PROS CONS
 More LGUs can access  A province may have to
(100 municipalities with counterpart more than 1
counterpart from 100 municipality
provinces)  Less coverage 100/1500
municipalities = less
impact
 With more multiplier effect  Prone to political
- 50 provinces with partiality/bias
counterpart from
atleast150 municipalities if
each province will have at
least 3 component
municipal/city partners
 Strengthens the oversight
function over component
cities and municipalities
 The province can
influence their component
cities and municipalities to
align their projects with
provincial and national
priorities
 In view of having denser  Cities are in less need of
population, more financial subsidy that
constituents to benefit provinces and
from project municipalities, in view of
higher IRA share
No counter-parting from
provinces
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Option 4: By Auction  Encourage competition  Would still require

3 grants of P 20M among LGUs to align identification of level of
40 grants of P10M projects under DF with LGU as grant
This will benefit 43 national priorities (ranking beneficiaries
LGUs. shall be based on LGU
equity funding from the
20% DF)

UTILIZATION OF GRANT

The grants may support capital investments from a menu of investment projects that support national
priorities, particularly Pnoy priority programs on:

1. Improving Social Services (e.g. school buildings, hospital and health centers, housing and
settlements),
2. Providing Public infrastructure (e.g. local roads and bridges, railways, ports and wharves),
3. Enhancing Economic Services (e.g. tourism facilities, irrigation systems, post harvest facilities,
cold storage facilities, and other economic infrastructures and growth enhancing projects such as
market, slaughterhouses, and water supply system)
4. Adapting to Climate Change and Preparing for Disaster (e.g. flood control, reforestation, solid
waste management facilities, evacuation centers, early warning and devices and rescue
equipment)
5. Promoting Good Governance (Anti-Red Tape/ Anti-Corruption Systems)

In financing projects, the PC Fund may be used for the following:

1. as counterpart funds for foreign-assisted projects of the LGUs,

2. as co-financing for joint projects with other LGUs, and
3. as counterpart for projects of the LGUs with the private sector in the context of public partnership
in establishing more economic activities.

However, FC Fund can not be used to finance the following:

1. Tax payment,
2. Salaries and recurrent cost, and
3. Micro credits and loans.
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PROCEDURE FOR ACCESSING FC FUND

FUND MANAGEMENT

The DILG with the DBM shall jointly administer the PC Fund subject to policy and implementation
guidelines which shall be formulated by the PC Fund Management Board. The PC Fund Management
Board shall be headed by the DILG and composed of the DBM, DOF, and League(s) of LGUs. The
Fund Management Board shall prescribe the policy guidelines for the effective implementation of the
PC Fund including fund utilization and project implementation, and focusing on the following:

1. Mechanics for the availment of grant and utilization of fund,

2. Evaluation guidelines for assessing LGU applications for grant
3. Monitoring & evaluation mechanism to track the progress in the implementation of PC Fund
funded projects
4. Post audit procedures of the program.

The DILG shall as act as the Technical Secretariat of the PC Fund Management Board.
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INSTITUTIONAL ARRANGEMENT

BUDGETARY ALLOCATION

An amount of P 500M is being requested for implementation of the project for CY 2011.