CHALLENGES AND OPPORTUNITIES FOR FISCAL AUTONOMY in MUSLIM MINDANAO:

CHALLENGES AND OPPORTUNITIES FOR FISCAL AUTONOMY in MUSLIM MINDANAO:A Report on the Workshop conducted by the Philippine Center for Islam and Democracy (PCID) and the Foundation for Economic Freedom (FEF) sponsored by the Australian GovernmentPresented by Amroussi Rasul during the third series of Muslim Mindanao Autonomy Roundtable Discussions held at the Committee Room 1 of the Senate of the Philippines (July 13, 2015). The series is organized by the Institute for Autonomy and Governance (IAG), Local Government Development Foundation (LOGODEF), Senate Economic Planning Office (SEPO), and Senate Muslim Advocates for Peace and Progress (Senate-MAPP)Achieving fiscal autonomy will be critical for overall autonomy to be effective. But this will not be enough. Institutions and capacity need to be in place to ensure that fiscal resources are:

mobilized efficiently and with transparency and accountability; and

spent wiselyalso with transparency and accountabilityand reflect the needs for sustainable and inclusive growth in the region.

Weak fiscal management has been a principal underlying factor in the failure of Autonomous Region of Muslim Mindanao (ARMM) to effectively perform as an autonomous region . This is attributed to:

little control over fiscal resources from the National Government and how they are spent weak governance and accountability in ARMM.

While the Organic Act provided ARMM-Regional Government (RG) with certain taxing powers, the use of such power has not been evident. But even if these powers were exercised to the full extent possible, it is questionable whether the revenues generated would be of any significant magnitude because of:

the constraints imposed on collecting taxes in a conflict and war-torn and weary economythe inherent difficulty of taxing a local economy that has a high poverty incidence and is dependent on a largely underground and informal undocumented economy; anda bureaucratic structure that has not been equippedtechnically and organizationallyto undertake revenue mobilization as a serious reform agenda.

The politics of local tax collection is a handicap. local politicians are often seen as givers of funds, and that imposing of taxes is unbecoming for many of these leaders and could lead to a negative back-lash on their standing. personal and family relationships also get in the way. And many areas are controlled by war-lords with their own agendas and income base, making it difficult for a legitimate and concerted tax collection effort.the lack of information and documentation to collect local taxes is likewise a handicap.

Budget processes in the ARMM are fragmented and complicated. According to the DFAT Australia-World Bank Report 2014, there is no single budget document or process [that] comes close to including the bulk of resources to be used in ARMMmaking it difficult to integrate the ARMM-RG budget processes with the national budget processes and making it difficult to promote a coherent set of policy goals through budget allocationsthese weaknesses apply to budgetary execution arrangements, as well as to planning.The fragmentation also makes it difficult to integrate the budgets with the overall development plan for the ARMM region.Budget processes in the ARMM are fragmented and complicated. Aside from the mismatch in the ARMM-RG linkage to the NG budget process, there is a lack of:a regional budget law or a department responsible for budget preparation and management;sound budgeting processes among the ARMM institutions; andskills and institutional capacity for effective program and project design, and budget preparation and execution.and as also apparent at the national level, procurement processes are often long and tedious, and the budget release processes complicated.

ARMM has a history of poor governance and accountability.

this is shown in the misuse of funds and the lack of effective expenditure control systems and reporting. In addition, public accountability is sorely lacking.the lack of qualified staff for budget management in ARMM-RG is also apparent.appropriate capacity building to enable the ARMM-RG and its agencies to meet national fiduciary and budget accountability requirements has not taken place.

ARMM has a history of poor governance and accountability.

however, as pointed out in the DFAT Australia-World Bank Report, the failure of fiscal autonomy in ARMM is not simply the result of insufficient autonomy and poor governanceit is also the result of incomplete implementation of the Expanded Organic Act, such as the establishment of an effective regional budget and management institution.thus the willingness and capacity to implement what is provided for in the law is crucial.

ROAD MAP FOR AN ACTION AGENDA FOR FISCAL AUTONOMY AND MANAGEMENT

A three pronged strategy is required:

a more serious effort to ensure fiscal autonomy within the Bangsamoro through appropriate revenue and other financial resource mobilization measures;

putting in place a budgetary system which leads to more efficient, accountable and transparent fiscal management; and

a systematic effort to build institutions and capacities to underpin the resource mobilization and budgetary system measures.

Improved Revenue MobilizationImproved Revenue MobilizationReal and lasting autonomy can only be achieved through establishing a strong revenue base in the Bangsamoro. The proposed BBL provides for taxing powers of the Bangsamoro-RG for this to be achieved. These powers include:

levying taxes and charges as per those already devolved to ARMM;haring of central government taxes, fees and charges collected in Bangsamoro (other than tariff and customs duties) 75% (100% for limited time);sharing of revenues from natural resources (100% non-metallic, 75% metallic, 50% fossil fuels);

Real and lasting autonomy can only be achieved through establishing a strong revenue base in the Bangsamoro. The proposed BBL provides for taxing powers of the Bangsamoro-RG for this to be achieved. These powers include:the ability to impose flat lump sum tax on small and medium enterprises (SMEs); andthe receipt of grants and donations, income from government-owned corporations, contract loans and Official Development Assistance (ODA), and Build-Operate-Transfer (BOT)/ Public-Private Partnership (PPP) arrangements.Zakat (alms giving or charitable contribution) offers another potential source of revenue.

Improved Revenue MobilizationA serious effort by both the Bangsamoro-RG and LGUs to generate own-source revenues through these tax and non-tax measures is warranted. In pursuing this course, the Bangsamoro-RG should look to partner with the LGUs in a revenue generation and sharing scheme, and adopt a Local Revenue code which:recognizes the most appropriate tax structures and collection methods for the region, reflecting the differing cultural characteristics of the population and geography of the region;clearly delineates Bangsamoro-RG and LGs revenue- raising responsibilities;demystifies tax collection and simplifies tax collection procedures; andgrants discounts and incentive for prompt payment.the adoption of flat taxes instead of progressive taxes and the unification of all taxes in a one-stop agency could be considered.

Improved Revenue MobilizationThe Bangsamoro-RG should also explore with LGUs:the most appropriate use of tax and non-tax incentives (within the scope delegated to the Bangsamoro-RG and LGUs) to encourage investment and job creation, recognizing the need to keep this transparent, performance based, and temporary, given their fiscal implications;means to improve land administration and updated valuations, providing the basis for increased revenue through property taxes;ways to simplify business procedures to encourage currently unregistered businesses to enter the formal sector, and thus expanding the potential tax base;the adoption of a more open trade policy and investment policy to legalize informal trade;Improved Revenue MobilizationThe Bangsamoro-RG should also explore with LGUs:mechanisms to institutionalize the implementation ofZakat for those who can afford it, perhaps making it tax deductible; andmeans to foster a culture of paying taxes, which could include the conducting of pulong-pulongs in barangays to help them better understand taxes and how they are used.A directory of available non-tax funding sources (including ODA), and the conditions under which these fund could be accessed, would be helpful. Improved Revenue MobilizationThe principal focus of the Bangsamoro-RG and LGUs over the near future should be on spending their Internal Revenue Allocations (IRA+) from the National Government and other available fiscal resources wisely -supplemented with policy actionsso as to enhance investment and stimulate growth, particularly by the private sector. This focus will ultimately lead to:more jobs and reduced poverty;a more robust, formal, private sector; and an expanded tax base.As the tax base expands, so will local revenues, and so will the potential for fiscal autonomy. Underpinning the wise spending of fiscal resources will be sound and transparent budgetary and accounting processes.

Improved Revenue MobilizationThe exploitation of natural resources, particularly mining, offers an opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.The Bangsamoro-RG will have to clearly articulate its position on mining (and oil and gas) exploration and development. This will require the formulation of an appropriate policy framework, which should be a joint exercise with the National Government, to set the basis a legislative and institutional agenda.

The exploitation of natural resources, particularly mining, offers an opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.In formulating the policy framework, the Bangsamoro-RG should:emphasize its commitment to responsible and sustainable mining, and articulate clearly the environmental and other critical guidelines for the sectors development;spell out the responsibilities of the National Government, Bangsamoro-RG, and Bangsamoro LGUs in the identification and approval of mining projects, ensuring the harmonization of policies and procedures while recognizing the respective legal mandates;clearly differentiate the approach to exploration and exploitation of mineral resources;The exploitation of natural resources, particularly mining, offers an opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.In formulating the policy framework, the Bangsamoro-RG should:indicate its intent to engage the private sector in both the exploration and exploitation of the mineral resources, recognizing that different parties may be involved in each of these stages;specify steps to regulate small-scale mining;consider creating an agency mandated to overseeing the development of natural resources, and a separate agency to take care of environmental protection; andconsider a Bangsamoro sovereign wealth fund for stabilizing mineral revenues and sovereign wealth bonds.

The exploitation of natural resources, particularly mining, offers an opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.As also highlighted in the workshop on land and property rights, the challenge will be to set or negotiate terms that reflect the true value of the resources, while recognizing:the costs and risks to potential investors associated with their extraction in a post-conflict region; the need to ensure responsible management of environmental and social impacts; and the necessity to ensure that impacted areas get a fair share of mining revenue.

The exploitation of natural resources, particularly mining, offers an opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.Sound and Transparent Budgetary and Accounting ProcessesSound and Transparent Budgetary and Accounting ProcessesThe Bangsamoro-RG needs to strengthen and realign the budgetary processes currently in place so that they integrate more effectively with other plans for the region for the mobilization and use of financial resources, and ensure transparency and accountability in the use of funds.

This re-orientation needs to build in a longer-term orientation to the budget process, so that it is not focussed purely on the short-term as has been the common practice. It should also clearly link revenue, expenditure and debt.

Programs of the sector agencies, as reflected in their expenditure programs and budget requests, should support the Bangsamoro regions plans and relevant national requirements, and reflect a programmatic approach to budget preparation. Sound and Transparent Budgetary and Accounting ProcessesThe regional and national budget systems should be integrated as appropriate through the adoption of a regional performance budgeting framework suitable to the Bangsamoro region and acceptable to the national government.This could be a modification of the current national OPIF framework to ensure a simple and limited results-based program budgeting framework that integrates the activities budgeted by the Bangsamoro-RG and its agencies and appropriate national agencies, and relates them to an agreed set of indicators. Such performance indicators will also be a requirement of national and international funding institutions supporting projects in the Bangsamoro. This framework should be extended to include responsibilities and reporting requirements of the regional LGUsSound and Transparent Budgetary and Accounting ProcessesDelineated accounting and auditing systems should be put in place to promote transparency and accountability in the receipt and utilization of funds from all sources. This will require:putting in place transparent and simplified procedures for procurement and fund disbursements;developing a framework for a unified accounting structure, and horizontal and downward monitoring and accountability in the use of public funds and service quality, which would include public reporting and citizen scrutiny; and establishing a Bangsamoro auditing body staffed with competent officials and adopting transparent procedures, with auditing responsibility over the utilization of public funds within the Bangsamoro, ensuring appropriate relationship to the National Commission on Audit on the use of national funds. In all aspects of budget preparation and execution, advantage should be taken of the benefits of information technology in service delivery, process improvement, and transparency.The implications of the Islamic business transactions and use of Islamic financial tools will also have to be considered once these take hold within the Bangsamoro economy

Sound and Transparent Budgetary and Accounting ProcessesThe role of GOCCs, PPPs and Economic Zones in the BangsamoroGovernment owned and controlled corporations (GOCCs), public-private partnerships (PPPs), and Special Economic Zones (SEZs) will also have a role to play in the Bangsamoro. There may be scope for a limited number of Bangsamoro-RG GOCCs in some critical niche areas where they can:

meet a critical supply chain gap in which the private sector is hesitant to engage; andprovide a means for Bangsamoro-RG participation in public-private partnerships (PPPs), particularly in the transition stage where the perceived risks to the private sector are still high and these would prevent them investing fully on their own account.

The role of GOCCs, PPPs and Economic Zones in the BangsamoroThere will be scope for PPPs in a number of areas, but these should also be approached with caution.

Some of these could be in critical infrastructure projects, such as airports and seaports. Innovative approaches will be required in some sectors, particularly where it involve Islamic financing and/or interacts with critical private sector projects, such as those in large commercial plantations and mining. Some may be quasi-private, in that they are projects that in normal circumstances would be purely private sector, but require a transitional period with government involvement until the security situation stabilizes and throughput enables them to be self-standing. These could be critical commercial supply chain projects (such as cold storage and post-harvest facilities) for certain crops.

Special Economic Zones (SEZs) offer an immediate means of providing streamlined procedures and incentive to private enterprises in the Bangsamoro. Further, security can be more-or-less assured and basic infrastructure can be more readily put in place in these zones. And these zones can be expanded as security improves.

The ARRM-RG has already enacted its own law pertaining to SEZs. Only one SEZ has been designated to date - Polloc Port and it has had difficulty in attracting investors.

The role of GOCCs, PPPs and Economic Zones in the BangsamoroEffective Institution and Capacity BuildingEffective Institution and Capacity BuildingDesigning and implementing all the above the actions hinges on the ability to have in place the necessary institutional and manpower capacity. In this respect, it is critical to have:enlightened and competent leadership;a lean and mean government;an empowered and competent bureaucracy with clear responsibilities and accountability;transparent and streamlined procedures;results based management systems; andgovernance enhancement of the private sector and general public.

While the focus in the near term should be on maintaining the momentum of ongoing capacity building support, some very basic actions relating to the organization and governance structure should be undertaken:establish the basis of the cabinet structure and plans for expansion, such as by first assessing the institutional needs and choosing only those Ministries and other official entities deemed appropriate to meet these needs;determine the public service provision roles and responsibilities of the Bangsamoro-RG (i.e. ask whether to provide alone, through GOCCs, through PPPs);review existing national government systems and regulations and revise to suit the local context and ARMM experiences (especially for accounting audit); determine the role and responsibilities of organizations/offices that will be set up in the Bangsamoro vis--vis counterparts in in the national government and LGUs;establish an ODA/FAP management office to ensure these are complementary and avoid overlaps, and ensure that the Bangsamoro-RG remains in the drivers seat; andestablish regulatory structures for the inflow of private financing.

Effective Institution and Capacity BuildingMaraming Salamat!